Trillions for the SDGs? Time for a Rethink

January 22, 2019


This article was originally posted on the OECD’s Development Matters blog.

In 2015, the world enthusiastically signed on to the challenge of transforming billions to trillions of dollars of private finance for the Sustainable Development Goals (SDGs). The idea was to use public and private development aid to unlock much more commercial private finance for sustainable growth and poverty reduction in developing countries. Four years later, the hoped-for trillions are nowhere in sight. In fact, we have reached the stage where we need to decide whether to change the goals we set in 2015 or take a hard, critical look at the institutions we rely on to propel mobilisation of private finance for sustainable development.

The shortfall in private finance is pervasive, but nowhere is it more evident than in low-income countries (LICs). For them, official development assistance remains a critical pillar, but it’s not enough.  Forty percent are in, or at risk of, debt distress as governments borrow heavily from private lenders to fund social spending and infrastructure. Many have worked hard to strengthen their tax systems to boost revenue, but sometimes at the risk of raising the tax burden on the poor if revenue increases largely depend on consumption taxes. They still attract only a trivial share of cross-border private capital flows, including what little private finance flows into infrastructure in developing countries.

Other critical capital market gaps persist across the developing world. Finance for early stage firms and early stage infrastructure projects remains scarce at best. Infrastructure developers and small and medium enterprises (SMEs) often cannot access long-term finance in their local currency. Women SME owners are still usually last in finance lines, and gender gaps in entrepreneurship are the norm rather than the exception. Finance at scale for small farmers and their producer-groups remains frustratingly elusive.

But the world does not lack tools or finance to meet these challenges. Numerous development finance institutions (DFIs), operating domestically and across borders, use public funding to crowd in private finance. Multilateral DFIs like the World Bank’s IFC and the regional development banks commit roughly USD 40 billion per year in finance for the private sector, but catalyse only about USD 60 billion in private finance. Still, USD 100 billion is less than a tenth of annual SDG financing gaps estimated in the trillions.

For a development community fascinated by innovation, including financial innovation, the reluctance to pursue “disruptive” models for DFIs to boost their mobilisation is odd. DFIs, at least western DFIs, are essentially built on a commercial bank financing model: They fund themselves through the spreads between their borrowing costs and their returns. Grafting impact investor aspirations onto that model does not fundamentally change how it works in practice. It should come as no surprise that DFI risk-return preferences are broadly the same as those of private commercial banks. Nor is it hard to understand the limited use of equity (a more catalytic instrument than loans) as a share of the operations of many DFIs.

So far, inefficient “patches” to the system in the form of special donor funds where DFIs can offload risk appear to be the extent of the response. The creation of new multilateral institutions like the Asian Infrastructure Investment Bank (AIIB) and the New Development Bank (NDB) is also a response, but their approach relies mostly on finance for governments. They will not lead the way in boosting mobilisation of private finance.

So, what is the way forward? Scaling back the SDGs, especially in countries and sectors facing great challenges, is of course an option. Nevertheless, it is hard to argue for less ambition where the distance to reach the SDGs is the greatest. The recent report to the G20 of the Eminent Persons Group that proposes steps to make multilateral development banks (MDBs) work as a system for more scale and impact is an important call to action. However, it would be folly to stop there. Rather, this is a time to explore further questions of fundamental change: How can DFI business models be adapted to target a broader spectrum of risk-adjusted returns? Can private and public development actors combine their capital in common institutions for greater impact and scale? What structural changes would knit together the policy and project finance departments of MDBs in powerful platforms for mobilising private finance? What shareholder governance arrangements and strategic oversight would not just incentivise, but also mandate, MDB collaboration? Efforts have been made to bring great rigor and transparency to the blended finance market through the recently agreed Tri Hita Karana Blended Finance Roadmap, where all the main stakeholders are encouraged to work together under one framework.

Ultimately, these questions go beyond the purview of DFI managers and staff. Shareholders, of course, must lead. However, as in any institution where the challenges are fundamental, external stakeholders often have to supply much of the impetus, reality checks and fresh ideas. This is especially the case because the major multilateral shareholder — the G20 and the G7 — do not include the critical voices of LICs or private development actors. That is why the need is urgent for more outreach, broader discussion and innovative proposals — with the OECD as one of the crucial conveners. It is time to face reality; tinkering around the edges will not suffice.


CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.

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