trade and development report, 2015 · 156 trade and development report, 2015 sector increased by...

UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENTGENEVA

TRADE AND DEVELOPMENTREPORT, 2015

UNITED NATIONSNew York and Geneva, 2015

Chapter VI

LONG-TERM INTERNATIONAL FINANCE FOR DEVELOPMENT: ChALLENGES AND POSSIbILITIES

Making the international financial architecture work for development

Long-Term International Finance for Development: Challenges and Possibilities 153

Aconcernthathasemergedrepeatedlyintheprevious chapters is the apparent inability of thecurrent globalmonetary andfinancial systems tomake available long-termfinance for growth anddevelopment.This chapter considers someof thepossiblestrategiesforensuringtheprovisionofsuchfinance.Thefocusisonthefinancingofproductivecapitalformation,includingforinfrastructure,whichhelps,directlyand indirectly, toaccelerategrowthandstructuralchange.Thiseffectivelyrequireschal-lenging the rationale underlying private financialflowsthataredrivenbyshort-termprofitsandrents,and strengtheningmechanisms formobilizingandallocating both domestic and external finance forvaluecreationanddevelopmentoveralongertimehorizon.Whiledomesticresources(bothprivateandpublic)arelikelytoremainthemostimportant(TDRs 2008 and2013), internationalfinance canplay animportantrolewhendomesticfundingisnotavail-ableorisinsufficient,particularlywhenacountryisinneedofforeignexchangetoimportcapitalgoodsandproductioninputsbeyondwhatitearnsthroughitsexportsofgoodsandservices.

itiswellknownthatprivatefinancialmarketscannotbereliedupontofullyfundlong-terminvest-mentprojects.Thisisbecauseassociatedinvestmentstypicallyinvolvelongergestationperiodsandentailgreaterriskanduncertaintyabouteventualoutcomes,

evenwhiletheycreatesignificantpositiveexternali-tiesfortherestoftheeconomyandcomplementaryinvestmentprojects.These factorsgeneratediffer-encesbetweenprivateprofitabilityandsocialreturnsonsuchinvestment.itisalsorecognizedthatprivatefinancialmarkets,lefttothemselves,seldomdirectfinance to such classes of borrowers as small andmedium-sizedenterprises(SMes)orstart-ups,ortoactivitieswhosereturnsarenotimmediatelyevidentand cannot be readily calculated.This negativelyaffects activities that could be crucial for futuregrowthandwhichcouldproduceconsiderablesocialbenefits,suchasinnovation,technologicalprogressand environmental protection.These features areequally characteristic of global financialmarkets.Thus, greater financial integration of developingcountrieshasnotdeliveredonexpectationsofeasieraccesstothekindoflong-termfinancingneededtoboostgrowthanddevelopment.Consequently,thereappearstobeaneedforStateactiontoensuretheprovisionofbothexternalanddomesticlong-termfinanceforthesepurposes.

ThenatureofsuchStateinvolvementcanvaryaccording to the types of activities that are to befunded.Financingforpurelypublicgoodsnecessarilyrequiresappropriatepublicdomesticrevenues,andinthecontextofexternalfinancingthisismostlikelytobesupportedbyofficialdevelopmentassistance

Chapter VI

lONg-TERM INTERNATIONAl FINANCE FOR DEVELOPMENT: ChALLENGES AND POSSIbILITIES

A. Introduction

Trade and Development Report, 2015154

(oDA)orotherformsofdevelopmentcooperation.inthecaseofmeritgoodsandservices,aswellasother activitieswith large positive externalities, amixofpublicandprivatearrangementsisconceiv-able,typicallyinvolvingsomedegreeofexplicitorimplicitgovernmentsubsidies,whichinturnwouldrequireeitherinternalorexternalresources,usuallychannelledthroughthepubliccoffers.Recentinitia-tivesbasedonpublic-privatepartnerships(PPPs)areonepossibleresponse.Finally,there are some activities thatgeneratechangesinproductivestructures and are potentiallyprofitable(suchassomekindsof infrastructure investment),whichareneverthelessavoidedbyprivateinvestorsbecauseofuncertainties associatedwithlumpyinvestmentrequirementswith large initial costs, longgestationperiodsandassociatedrisks.Thesecallforagreaterrolebyfinancialinsti-tutionsthatarespecificallygearedtomakingsuchlong-terminvestments,suchasdevelopmentbanks.

inthischapter,eachofthesetypesofexternalfinancingforlong-termdevelopmentisconsideredinturn.insectionb,itisarguedthat,whileofficialfinancinghasincreasedinthepastdecade,itisstill

well belowdesired levels, and there remain someconcernsaboutitseffectivenessandconditionalitiessometimesincorporatedinoDA.Asaresult,somedeveloping countries seeking long-term externalfinancefordevelopmentpurposeshaveresortedtootherarrangements,mostnotablythroughagreateremphasisonprogrammesandprojectsthatinvolvePPPs, as examined in sectionC.However,whiletheseprovideopportunitiestoinvolveprivatefirms

in infrastructure investment,there are also risks associatedwiththem,particularlyintermsof fiscal costs,which can bemuch greater than anticipatedandmayextendoveraverylongtimehorizon.SectionDexam-inestheroleofsovereignwealthfunds. Some of them controlsignificant amounts of capital,andcouldconceivablyplayanimportant role in providing

somelong-termdevelopmentfinance;but,thusfar,theirinvolvementinthisareahasbeenextremelylim-ited.Sectioneanalysestheuseofnational,regionalandinterregionaldevelopmentbanks,whichremainaneffectiveoptionformobilizinglong-termfinance.Recentnewinitiativesinthisareaareencouraging,butwillneedtobescaledupsubstantiallytomeetcurrentandfuturedevelopmentgoals.

Financing productive capital formation requires challenging the rationale underlying private financial flows that are driven by short-term profits and rents.

B. Financing through official cooperation

official development financing refers toexpenditures directed at strengthening produc-tive capacities, promoting structural change andenhancingsocialwell-beinginrecipientcountries.itdoesnotincludehumanitarianormilitaryaidofvarious types. it involves the provision of eithergrantsor loans,whichcanbedeliveredbilaterallyorchannelledthroughmultilateralagenciesandnon-governmentalorganizations(NGos).Grantsdonotrequirerepayment,whereasloansareextendedwithsome element of subsidybutmust be repaid, and

thereforeimplyareturntothedonorinsomeform.Thisdistinctionisimportanttonote,becausediffer-entformsofdevelopment-relatedexpenditureshavedifferenteffectsoncountries’debt-servicingcapaci-ties,andthereforetheuseofloansthatarepartofdevelopmentassistanceshouldgeneratetheincomeneededtorepaythedebt.

officialfinancinghastraditionallybeenseenasaflowfromdevelopedcountriestothedevelopingones, particularly the poorest countries.However,


recent trends indicate the growing importance ofemergingdevelopingcountriesasdonors,althoughtheyprovidedifferentformsofdevelopmentcoopera-tionandassistancethanthemoretraditionaldonors.

1. Officialdevelopmentassistancefromdeveloped countries

What is currentlyknownasofficial develop-mentassistance is a subsetofexternalofficial aidprovided by developed to developing countries.TheneedforestablishingastableflowofoDAwasalreadydebatedinthe1950sand1960s.NegotiationswithintheUnitedNationssystemeventuallyledtodevelopedcountriescommittingtoanannualtransferofatleast0.7percentoftheirgrossnationalincome(GNi)asforeignaidtodevelopingcountries.1

Followingaperiodofdeclineandstagnationinthe1990s,registeredoDAflowstodevelopingcoun-triesincreasedsignificantlyinthe2000s(chart6.1A).NetdisbursementsbymembersoftheDevelopmentAssistanceCommittee(DAC)oftheorganisationfor

economicCo-operationandDevelopment(oeCD)rose from$89 billion in 2002 to $134 billion in2014(inconstant2013dollarterms)−a51percentincrease,thoughanamountslightlybelowtherecordlevelsin2010and2013.However,thisstillrepresentsonly0.29percentoftheirGNi,whichisfarshortoftheircommittedtargetof0.7percentofGNiandislowerthanthesharesintheearly1990s.2Moreover,thispercentagehasbeenonadecliningtrendsince2010,bothfortotaloDAandforoDAtotheleastdeveloped countries (lDCs) (chart 6.1b).AroundonethirdofoDAhasbeendirectedtowardslDCs,where,onaverage,itaccountsforover70percentof external financing (UnitedNations, 2014a). inconstantdollarterms,itmorethandoubledbetween2000and2010,butithasbeenfallinginrecentyears.indeed,bilateralaidtolDCsdeclinedby16percentin2014(oeCD,2015).Moreover,spendingplansbymajordonorssuggestthatthereisunlikelytobeasignificantgrowthofoDAflowsin themediumterm(oeCD,2014a).

Agrowing proportion ofoeCD-DACassis-tancehasbeendirectedtothesocialsector–partlyasaconsequenceof theefforts towardsachievingtheMillenniumDevelopmentGoals.oDA to this

Chart 6.1

ODA PROVIDED by DAC COUNTRIES, 1990–2014

Source: UNCTAD secretariat calculations, based on OECD.stat database.

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B. As a share of DAC countries’ GNI at current prices (Per cent)

Total ODA ODA excluding debt relief ODA to LDCs

2014


sector increasedby117per cent (in constant dol-lars)between2000and2008.AsimilarincreasewasrecordedforoDAtoeconomicinfrastructureandtheservices sector,while aid to theproduction sectorregisteredasmallerincreaseof78percent.Viewedfrom another perspective, the share ofoDAori-entedtothesocialsectorintotaldevelopmentalaid3increasedfromlessthan50percentinthe1990stoover60percentin2008,andhasremainedrelativelystablesincethen.Conversely,theshareofoDAflowstoeconomicinfrastructureandtheservicessector,aswellastotheproductionsectors,declined(chart6.2).

The effectiveness of oDA4 in supportingdevelopmentvaries considerablydependingon itsmodalities,whether it consists of grants or loans,whether it isdeliveredbilaterallyor throughmul-tilateralagenciesandwhether it takes the formofbudgetsupport(notearmarkedforanyspecificpur-pose)orprojectfinancing.Donorcountriesgenerallypreferprojectfinancingthroughbilateralproceduresbecausetheycanbettercontroltheuseofthefunds,

includingbytyingtheirdeliverytotheprocurementofgoodsandservicesproducedby thecompaniesofthedonorcountry.ithasbeenestimatedthattiedaidraisesthecostofgoodsandservices,andreducesthe potential for local development.5Multilateralaidandbudgetsupportareingeneralbetteroptionsfor recipients because they reduce the possibilityofdonorpreferencesexertingdistortinginfluences,andthereforeincreasetheownershipofaidbytherecipient country.Theymay alsohelp to improvepredictability,coherence,transparencyandaccount-ability of aid (UNCTAD, 2006).Multilateral aidrepresented39percentoftotaloDAin2011−2012(oeCD,2014b).Also,aidprovidedonamulti-yearbasisismorepredictablefortherecipient;whenitisunpredictableandvolatile,thevalueofaidcanfallbyasmuchas15−20percent.6

besides themodality ofoDA, the nature ofsome of its components also influences its effec-tiveness.indeed,someoftheflowsincludedintheoeCD-DACdefinitionprovideonlylimiteddevelop-mentaid.Forinstance,formanyyearssomecreditdeliveredatmarketinterestratescouldberegisteredasoDAeventhoughitdidnotreallyreflectadonoreffort,justbecausethereferenceinterestrateof10percentwasexcessivelyhigh.othercomponentsofoDAdonotimplyatransferofresourcestodevelopingcountries,suchasin-donorexpenditures,includingtechnical assistance, administrative costs, costs ofeducatingforeignstudentsandcostsofhostingrefu-gees(CharnozandSeverino,2015).Moreover,debtreliefisincludedasasignificantelementofoDA,evenincaseswhereithaslittleornoimpactintermsofnetfinancialflows(seechart6.1A).Someloansmight evenbe counted twice asoDA:when theyare delivered, and againwhen they are cancelled.AccordingtoActionAid(2005),in2003only39percentofoDAwas“realaid”.7

oeCD-DAChas responded to this criticismbydistinguishingbetween totaloDAandcountryprogrammableaid(CPA),alsoknownascoreaid.CPAexcludesfrombilateraloDAthoseactivitiesthatareinherentlyunpredictable(suchashumanitarianaidanddebtrelief),thatdonotinvolvecross-borderflows,andthatarenotpartofagreementsbetweengovernments (oeCD, 2014a). it is estimated thatbetween2009and2013CPAaccountedfor57percentofgrossbilateraloDA.However, totaloDAremainedthetargetinDACcountries’commitments.Furthermore, inDecember 2014 theoeCD-DAC

Chart 6.2

COMPOSITION OF DEVELOPMENTAL ODA By MAIN CATEgORIES, 1990–2013

(Per cent)

Source: UNCTAD secretariat calculations, based on OECD.stat database.

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Production sectorsEconomic infrastructure and servicesSocial infrastructure and services


High-levelMeetingdecidedtorevisethedefinitionandmeasurementofoDAinorderto“modernize”it(oeCD,2014c).ThemainchangerelatestothewayinwhichconcessionalloansarereportedasoDA.

Since the turn of themillennium, the inter-national community has progressively focusedonimprovingthewayaidisdelivered.ThisindicatesagrowingrecognitionthatitisnotonlythevolumeofoDAthatmatters;thequalityofoDAisalsocriticalformaximizing itsdevelopment impact.8Thishasledtothedevelopmentofanumberofprinciplesforimprovingaideffectiveness,includingownershipofnationaldevelopmentstrategies,alignmentofdonorstothosestrategies,harmonizationamongdonors,afocusonresults,mutualaccountabilityandtranspar-ency.ithasalsoresultedinperiodicassessmentsoftheevolutionofoDA.Anassessmentofdevelopmenteffectivenessmadein2010indicatedthattherehadbeenveryslowprogressinmeetingmostofthetar-getssetintheParisDeclaration(UNCTAD,2011a).ThebusanPartnershipagreementin2011resultedin the establishmentof theGlobalPartnership foreffectiveDevelopmentCo-operation,which helditsfirstHigh-levelMeetinginMexicoin2014.Theassessmentofprogressonaideffectivenesspreparedforthismeetingshowedthattheresultsweremixed(oeCDandUNDP,2014).

2. Developmentcooperationamongdeveloping countries

Apotentially important new trend in globaldevelopmentassistanceisthegrowingsignificanceof developing-country donors.According to theUnited Nations (2014b), in2011 the total valueofSouth-South cooperation was esti-matedatbetween$16.1billionand$19billion,anditsshareintotal development cooperationwas10percentin2011,upfrom6.7percentin2006.However,thismaywellbeanunderesti-mate, especially as definitionsofdevelopmentassistancevary,and there are no systematic and comparable dataacross countries. Formany developing countries,developmentcooperationiscloselylinkedtotrade

andinvestmentrelationships,anditisoftenhardtodistinguishbetweenpublicandprivatecomponents(Zhou,2010).

one study has suggested that South-Southfinancialassistancerepresentedaround15percentofDACrealaidin2008,withthelargestdeveloping-countrydonorsthatyearbeingSaudiArabia,China,thebolivarianRepublicofVenezuela,theRepublicofKorea,Turkeyandindia, though inotheryearsbrazilhasalsobeenasignificantdonor(TheRealityofAidManagement Committee, 2010). Sincethen,theamountoffinancialassistancehasgrownsubstantially,ledbyChina.itshouldbenotedthatnotallofthisfinancialassistancewouldqualifyasoDAinthesenseusedbyDACmembers.Financialassistance fromnon-DACcountries has taken theformofgrants,concessionalloans,non-concessionalloansanddebtrelief.Themixoffinancialassistancevaries from country to country, but loans are thepredominantform.

officialChinesesourcesexplicitlydistinguishbetween three categories of financial assistance:grants, interest-free loans and concessional loans.Thefirsttwoarefundeddirectlybythegovernmentexchequer,while the third is fundedby theeximbankofChina (seesectione).A largeproportionis tied aid,which requires that at least half thepurchasesmadeunder the assistance programmesbe forChinese goods, and, in several cases, forChineselabouraswell.Nevertheless,sinceasub-stantial proportion of suchChinese assistance isdirectedtowardsinfrastructuredevelopment,itcancontributesignificantly to transformingproductivecapacitiesoverthemediumandlongterm.Wolfetal.(2013)estimatethat,duringtheperiod2001−2011,latinAmericareceivedthelargestamountofsuch

Chineseassistance(muchofitforamulti-countryprogrammeoriented to natural resources),followed byAfrica (amix ofnatural resource and infra-structure programmes), SouthAsia (infrastructure andfinan-cialaidforbudgetarysupport)and South-eastAsia (mostlyinfrastructure).

indianfinancial assistance takes the formofcredit,concessionalloansandgrants.ithasbeenusedtofinanceinfrastructuredevelopment(e.g.railway

A potentially important new trend in global development assistance is the growing significance of developing-country donors.


reconstructioninAngola),thepurchaseofagriculturalmachineryandequipment,developmentofinforma-tion and communications technologies (iCTs), thesettingupofprocessingcompanies(cashewnutsintheUnitedRepublicofTanzania)andforhealthandhumanitarianpurposes.Mostofitisprovidedbytheindiaexport-importbank.TheRepublicofKoreaandSaudiArabiaprovidegrantsandconcessionalloans.Assistancebytheformersupportshealth,iCT,educationandagriculture.ThroughthePetroaméricaProject launched in2005, thebolivarianRepublicofVenezuela has been providing oil under veryfavourablefinancial conditions tolatinAmericanandCaribbeancountries(TDR 2007).AnumberofWestAsiancountriesprovideassistancetoproduc-tivesectors(e.g.transportation,telecommunications,energyandagriculture).Mostoftheirfundingcomesfrom their financeministries and a small portionfromtheSaudiFundforDevelopment,inadditiontoassistanceprovidedthroughmultilateralchannels.Turkey’sassistancetakestheformofgrants,exportcreditsandloanstosupporttheeducationandhealthsectors, and the development ofwater resources,infrastructure, agriculture and culture (Kragelund,2008).

brazilcanbesingledoutasthecountryinwhichco-financingisthemostprevalentformofassistance,delivered trilaterallywith the involvement of itsowngovernmentagency,ahostgovernmentagencyandadeveloped-countrydonor (Kragelund,2008;UNCTAD,2010); it has targeted in particular theagriculture,education,healthandfisheriessectors,aswellasreconstruction(Gottschalketal.,2011).Also, its national development bankhas providedanincreasingnumberofloans,particularlyforlargeinfrastructureprojectsinAfricaandlatinAmerica.

3. Challengesofofficialcooperation

Proponentsof increasedaidagree that,whileitisnotapanaceaorengineofgrowth,itcanworkasacatalystfordevelopment,forexamplebysup-portinginfrastructuredevelopment.Scepticsofaid,ontheotherhand,pointtovariousdownsiderisks,suchaslimitedabsorptivecapacitiesofsomerecipi-entcountries,Dutch-diseaseeffects,crowdingoutofothersourcesoffinance,reductionoffiscaleffortsand corruption.However, someof these concerns

areoftenexaggerated (UNCTAD,2006), andoth-erscanberesolvedbyproperaidmanagementandmacroeconomicpolicies,aswellasthroughappro-priateproceduresforaccountabilityandmonitoring.Theconditionalitiesassociatedwithaidareclearlyimportantinthisrespect,andcanhaveeitherpositiveornegativeeffectsdependingupontheirtermsandhowtheyareimplemented.

SincetheMonterreyConsensusof2002,whichemphasizedtheneedforincreasingoDAasapre-conditionforachievingtheMillenniumDevelopmentGoals, therehavebeensomeimprovements in themanagementofaidflows.Theseincludeeffortstountieaid,reportingofoDAinnationalbudgetsofrecipient countries and the use of country admin-istrativesystemsinthemanagementofaid-fundedprogrammesandprojects(UnitedNations,2014b).Forinstance,in2012,79percentofDACbilateraloDAwasreportedasuntied,upfromabout50percent at the start of themillennium (oeCD andUNDP, 2014).9However, “conditions attached tooDA remain too numerous and detailed in somecases,(and)proceduresremaincomplexandinsuf-ficientlyflexible”.Moreover, fragmentationof aidremains high, and is increasing,with emergingdonorsandactors,whichposessignificantcoordina-tionchallenges(UnitedNations,2014b:8).Mostofall,despiterecentincreases,thistypeoflong-termdevelopmentfinancingstillremainswellbelowbothcommitmentsandrequirements.

Animportantareaofofficialfinancingthathasremainedrelativelyneglectedrelatestothefinanc-ingofprogrammesforglobalpublicgoods.Thisisparticularlyevident in theareasofclimatechangemitigation and adaptation.Major global agree-mentsonclimatechangehavestressedtheneedforclimatefinancetobe“newandadditional”.UndertheCopenhagenAccord, developed countries col-lectivelycommitted toprovide“fast start”financeofabout$30billionfortheperiod2010–2012,withabalancedallocationbetweenadaptationandmiti-gation.Theyalsocommitted to thegoalof jointlymobilizing$100billionayearby2020toaddresstheneedsofdevelopingcountries(UNFCCC,2009).An assessment of fast-start finance between2010and2012foundthat$35millionwasmobilizedinthisperiod.However,80percentoftheseresourceswereestimatedtohavealsobeencountedasoDA(Nakhoodaetal.,2013).Pledgesmadebydonorstomobilize$10.2billion(UNFCCC,2014)representan


importantsteptooperationalizingtheUnitedNationsGreenClimateFund,althoughtheyonlyamounttoabout10percentofthecommittedtargetfor2020.

Sincethereappearstobenoproperdefinitionofwhat“newandadditional”means,noranyinter-nationally agreeddefinitionofclimate finance and how it istobedelivered,“muchclimatefinance is currently sourcedfromexistingaidcommitmentsandflowsthroughadecentral-ized system dominated by alarge number of bilateral aidagenciesandaseriesofmulti-lateralfunds”(Pickeringetal.,2015:149).Thereforemuchoftheclimatefinancehasnotbeenadditional,andhas alsomade the aid fragmentationproblemmore complex. Further, the aid provided thus farhasbeenmainlydirectedtomitigationefforts,whichdisproportionatelybenefitmiddle-incomedevelopingcountries.Financingforadaptationpurposes,whichis crucial for the poorest countries, remains inad-equate (UN-DeSA,2015;Nakhoodaetal.,2013).Thismakesastrongcaseforagreaterfocusonofficialfinancingbytherichercountries–andothercountriesinapositiontodoso–forclimatechangemitigationandadaptationinthepoorercountries.

inrecognitionoftherelativelysmallamountofofficialfinancingthatiscurrentlyavailable,thereareongoingdiscussionsonthepotentialuseof“blendedfinance”, inwhichoDAwouldbeused to“lever-age”private capital for long-term investment.Forexample,oDAcouldprovidesubsidiesonloansandequityinvestments,orguaranteestoprivateinvestorsor for co-financing arrange-ments.Thisapproachofusingaidasalevertoattractprivatefinance is already part of theexternalassistanceprogrammesofseveraldevelopingcountries,includingChina,asnotedabove.itisalsonowbeingencouragedbyotherdonors,andisstronglypromotedbyinter-nationalorganizationssuchastheWorldbankandtheoeCD.10

inasense,sincedevelopment-orientedinvest-ment necessarily generates externalities and com-plementaritiesbetweenthepublicandprivatesec-tors,andeffectiveinvestmentfinancemixespublic

andprivate initiatives, all developmentfinance isblended;thegreaterissueistoaddresswhoisdoingtheblending,howandtowhatend.Suchinitiativesmayhaveadvantagesintermsofincreasingresourcemobilization,11 but also have some drawbacks,as highlighted in recent research.12 in particular,

they risk allowingoDAflowsto reinforce the inequalitiesthat privatemarkets generatein termsof geographical, sec-toralandinstitutionalcoverage.Aidthatislinkedtoexpandinginvestmentbytheprivatesectorismorelikelytogotomiddle-income countries and bypass

the low-income countries. Furthermore, there istypicallyinadequatesupportforSMesindevelopingcountries.ManyattemptstoutilizeoDAtosupportprivate investment do not adequately capture thediversityintheprivatesector;forexample,theydonotalwaystakeintoaccountthedifferencebetweendevelopment-oriented spending to support smallfarmerswith input purchases and investments indevelopingcountriesbytransnationalcorporations(TNCs) that are simply seeking better returns. inaddition,where thebenefits accrue toTNCs fromthedonorcountries,bypassingdeveloping-countryfirms,thereistheriskthat,increasingly,aidwillbetiedtothedeliveryofgoodsandservicesofdonorcountries’companies.

inviewof thesedrawbacks, the internationalcommunity should consider further exploring thefunctioningofthesemechanismsandtheirpotentialdevelopment impactbeforemakingpolicy recom-mendations in this regard.There should be an ex

ante evaluation to ensure thattheadditionalinvestmentfundswill support companies thatwouldnototherwiseinvestforthestatedpurposesandactivi-ties,andtoascertainthatthosecompanies donot have accesstoanyotherfunds.Theimpacts

on poverty reduction and development should beclearlydemonstrable.Moreover,theopportunitycostofusingoDAtoattractprivatefinancemaybetoohigh.instead,itmightbepreferabletodirecttheoDAflowstowardsbuildingtheproductiveprivatesectorofdevelopingcountriesbysupportingtheirdomesticSMesandsmallholderfarmers.itisalsoimportantto prevent such aid frombecoming amechanism

Despite recent increases, ODA still remains well below both commitments and requirements.

The opportunity cost of using ODA to leverage private finance may be too high.


fortransferringrisksfromtheprivatetothepublicsector,withthelatterpayingincaseoffailureofaproject butwith potential profitsmainly reverting

totheprivatesector.Finally,thefundsleveragedinthismannershouldbebasedonthesameprinciplesofeffectivenessasrelatetooDAingeneral.

APPPisacontractbetweenagovernmentanda private company underwhich the private com-panyfinances, builds and operates some elementof a servicewhichwas traditionally considered agovernment domain.13 in some forms ofPPP, theprivatecompanyeven“owns”theunderlyingassetsneededtoprovidetheserviceforaperiodoftime.Thecompanyispaidoveranumberofyears,eitherthroughchargespaiddirectlybyusers,orbypay-ments from thepublicauthority,oracombinationofboth.Sincetheprivatepartnerisnotnecessarilyaforeigninvestor,anddoesnotnecessarilyobtainfinancing fromexternal sources, PPPs themselvesdo not only represent a vehicle for internationalfinancing.indeed,asillustratedbelow,severallargecountries frequently have sizeable domesticfirmsthatareabletoimplementlarge-scaleinvestmentininfrastructureandoperatethePPPs.

PPPshavebeenusedwidelyindevelopedanddevelopingcountriesoverthepast20years,andarecurrentlyseeingarevivalofinterestinthecontextofnegotiationsonfinancefordevelopmentandtheSustainableDevelopmentGoals.There are hopesthat“harnessing”theprivatesectorinthiswaycanhelpmultiplymillionsofdollars intobillions,andbillionsintotrillions.

PPPsmay appear to be effective in termsofgeneratingandimplementinginfrastructureprojectswhenpublicbudgetsareconstrained,andtherearecertainlysomesuccessstoriesinthisregard.ifprop-erlymanaged,theycanalsoimprovetheefficiencyofthepublicservicethroughthetechnicalexpertiseprovided by the private sector (eClAC, 2015).However, there is also evidence ofmany pitfalls

andunexpectedfiscal andother costs, and rarely,ifever, is theirperformanceproperlycomparedtootheravailablemechanismssuchastraditionalpub-licprocurementanddeliverysystems.Theevidenceacross decades and countries suggests that publicsectorfinancewillstillhavetodotheheavylifting.AcautiousapproachisneededifPPPsaretodelivertheexpecteddevelopmentbenefitsandtoavoid,orminimize,thepotentialcostssuchpartnershipscangenerate(ieG,2014).

1. Scale, scope and use of PPPs

in 2013, PPP funding for infrastructure pro-jects in developing countries amounted to about$159billion,having recoveredafter theeconomicandfinancialcrisisin2008−2009butfallingsharplyfromapeakin2012.14evenwiththerecentdownturn,theuseofPPPshasincreasedmarkedlysincetheirintroduction in the1980s (chart6.3A), recoveringfrom setbacks following thelatinAmerican andAsiancrises,aswellasenronandothercorporatescandalswhich affected even those countries thathadpreviouslybeensuccessfulinattractingcapital(Worldbank,2009).Theiruseindevelopedcountrieshasalsoshownabroadoverallincrease,andagainreflectssensitivitytoexternalshocksandthebroadereconomiccycle.However, ineurope,thevalueofPPPswasaround13billioneurosin2012,thelow-estinatleast10years.Theserecenttrendspointtothechallengesthatlieahead.Neverhasthecostofdebtbeen lowerandyet it is increasinglydifficulttofinancenewinfrastructureinvestment,especially

C. Public-private partnerships for development


whenequitycommitment isa requirement (Helm,2010).

PPPinvestmenthasbeenconcentratedinrela-tivelyfewcountriesandsectors.Almost60percentofthetotalprivateparticipationinprojectsrecordedin developing countrieswas inChina,brazil, theRussianFederation, india,MexicoandTurkey (byorderofmagnitude).ThisisanindicationthatPPPinvestorsarenotdissimilarfromotherinstitutionalinvestors,preferringlargeanddynamicmarketstothemorevulnerableeconomieswherefinancingneedsaregreatest.ofthedevelopingregions,latinAmericahastraditionallyhostedthelargestshareofPPPsandstillaccountedfor45percentofthetotalin2013.only10percentofthetotalwenttoAfrica,althoughinsub-SaharanAfricainvestmentshavebeensteadilyrising(primarilybecauseofinvestmentsintelecoms).

Also,PPPinvestmentshavebeenconcentratedinrelativelyfewsectors,withtelecomsaccounting

for37percentofthetotal,or$58billion,in2013,andenergyfor37percentofthetotal,or$59bil-lion (chart 6.3b).Water and sanitation are amongthemost needed infrastructure services to relievehumansuffering,andyettheyaretheleastlikelytobefinancedthroughthismethod,havingreceivedamere$3.5billionin2013(seealsoUNCTAD,2013).indeed,mostcommercialinteresthasbeendirectedtoiCTsandenergy-relatedactivities,whilesociallychallengingsectorsattractedalmostnoprivateactiv-ity(AiCD,2010).PPPsalsoappearmorelikelytoemergeinbrownfieldprojects(changingownershipofassetsthatalreadyexist)thanincompletelynewgreenfieldprojectsorriskytransformativeactivitiessuchasthoserelatedtoclimatechange(WeF,2014).

Unsurprisingly,therefore,thegrowthintheuseofPPPshas not relievedState responsibilities forinvestment in infrastructure development, and thepublicsector’scontributioncontinues tobeessen-tial,especiallyattimesofuncertainty.estimatesof

Chart 6.3

PRIvATE SECTOR PARTICIPATION IN INFRASTRuCTuRE, 1985–2013(Billions of current dollars)

Source: UNCTAD secretariat calculations, based on World Bank, Private Participation in Infrastructure Project Database (as on July 2015).

Note: Country groups in chart A are those of the source. Investments refer to the year of implementation.

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EnergyTelecomTransportWater and sewerage

2013


theshareofpublicinvestmentininfrastructurevaryfromanywherebetween75percentand90percent(estache,2010;briceño-Garmendiaetal.,2008;Hall,2015).evenintheeuropeanUnion,PPPs,onaverage,contributeaverysmallsharetototalinfrastructureinvestment,withsomecountriesdecidingnottousePPPsatall(chart6.4).indevelopingcountries,gov-ernmentsfinancedaround70percentofinfrastructureinvestmentduring theperiod2000−2005, rising to90percentforthelowestincomecountries.15Toalargeextent,thisreflectstheverynatureofinfrastruc-ture.AstheWorldbank(2009:78)hasnoted,“manygovernments see the private sector as a solution.However,privatefinancing,whileofferingadditionalresources,doesnotchangethefundamentalsofinfra-structureprovision:customersortaxpayers(domesticorforeign)mustultimatelypayfortheinvestments,andcost-coveringtariffs(andwell-targetedsubsidies)remainthecentre-pieceofallsustainableinfrastruc-tureprovision,publicorprivate.”

As a result, evenwith PPPs, public financeremainscritical.ofthetotalinvestmentindeveloping

countriesbroadlydescribedby theWorldbankasPPPs,publicdebtandequityaccountedfor67percentandprivatedebtandequityaccountedfortheremaining(Mandri-Perrott,2014).Moreover,thesedata relate only to the phase before projects areoperational, afterwhich contingent liabilities andotherchargesgenerallyaddconsiderablytothetotalpubliccosts.

Historically,privateparticipationininfrastruc-turehasbeendominatedbylargeTNCsdomiciledinoeCDcountries(oeCD/NePAD,2005),especiallyforlarge-sizedprojects.DatafromtheWorldbankPPiDatabasefortheperiod2010−2014suggestthatforeignactorsarestillasignificantpresenceinmanydevelopingcountries,accountingforaround58percentofPPPinvestmentsinMexicoand35percentinChina(calculatedastheshareofinvestmentswitheitherfullorpartialforeignsponsorship).oneimpli-cationofthisfordevelopingcountriesisthatitaddssomeof the risks associatedwith private externalfinancing discussed in previous chapters, in addi-tiontotheotheraspectsofinfrastructureprovision.Projectsmaybefinancedthroughinternationallend-ing,involvingforeigncurrencyexposureforbothdebtrepaymentsanddividends,whilethereturns(profits,if thereareany)areintheweaker, localcurrency.Suddenexchangerateshockscandramaticallyaffectprofitability,aswasexperiencedinlatinAmericaandSouth-eastAsiaduringthe1990s,which“helpstoexplainthediminishedenthusiasmforsuchprojectsonthepartoftheinternationalinvestmentcommu-nity” (oeCD/NePAD,2005: 171).16Therefore, insomecountries, thecurrencyrisksofPPPprojectsarebornebythehostgovernment.However,duringtheperiod2010−2014,forfourofthesixdevelop-ing and transition economies that account for thelargestshareofPPPs,thePPidatabasesuggeststhatdomestic firms aremore significant than foreignones.inindia,81percentofprojectshaddomesticsponsorship only, inChina the sharewas around60percent,inTurkeyitwas55percentandinbrazil39percent(comparedwith14percentattributedtoforeignfirmsactingalone).17inparticular,domesticsponsorshipappearstobelinkedwithsmallersizedprojects,butitistooearlytotellwhetherthisisapermanentchangeinfinancingsourcesoracyclicalone related to the post-crisis environment. in anycase,iffundsareborrowedinternationally,foreign-exchangeconcernsremainthesameregardlessofthenationalityofprojectpartners.

Chart 6.4

INFRASTRUCTURE SECTOR FINANCING IN ThE EUROPEAN UNION,

by CATEGORy, 2009–2011(Per cent of GDP)

Source: European Investment Bank, 2012.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2009 2010 2011

Government CorporatePPP Other


SomeofthelargercompaniesinvolvedinPPPsarequasi-publicmonopoliesintheirhomecountries;othersshareculturalorlinguisticlinkswiththehostlocation.18This concentrationmeans that govern-mentsnegotiatingthetermsofprivateparticipationinPPPsdonotnecessarilydealwithanumberofcompetingatomistic suppliers.For example, theretend to be nomore than two or three bidders intransporttenders(estacheandSerebrisky,2004),andcompetitioncanbefurtherlimitedbymulti-stagebid-dingprocesses,wherebyacompanyisselectedinthefirstroundwithouthavingtospecifycontractdetailsuntilthesecondroundfromwhichcompetitorshavebeenremoved.Furthermore,agovernmentmaybedealingwithacorporateentitywithmarketpowercomparabletoorevengreaterthanitsown(oeCD/NePAD,2005).Notonlycanthiscreateimbalancewhenthetermsofcontractsareagreedupon,itcanalsoaffectconflictresolutionifthingsgowrong,asthepartner companiesmaybe large andpowerfulenoughto“takeontheregulators”incaseofconflict(Shaoul,2009).19

2. Assessing the contributions and costs of PPPs

one of themost common reasons for gov-ernments to choose PPPs over their own directinvestmentandprocurementisthattheyareexpectedtobringadditionalfinance,beyondwhatgovernmentscanprovide.Howevertheresultsareatbestambigu-ous.Someobservershavearguedthatadditionalityismorelikelytooccurindevelopingcountriesthanindevelopedones(Winchetal.,2012),especiallyifcapitalisraisedfromoutsidethecountry.butafterreviewingtheWorldbank’sdecade-longexperienceofsupportingPPPsintransition,developingandleastdeveloped countries, the independentevaluationGroup(ieG)concludedthat“contrarytointuition,PPPsgenerallydonotprovideadditionalresourcestothepublicsector”(ieG,2014:6).ifPPPsweremoreefficientthanthepublicsectorandcouldoffsettheirhigherfinancingcosts,theycouldprovideaddition-alityinthesenseofcreatingsavings.However,theresults in termsof improved efficiencyhavebeenmixed.

Moreover, theexperienceindevelopedcoun-triesisthatthebenefitsofadditionalitycanonlybe

realizedunder very specific conditions. in reality,somemaybeaformof“pseudo-additionalityfacili-tatedbyaccountingrules”(Winchetal.,2012:15),wherebyPPPsbecomeameansofavoidingadmin-istrative (as opposed tomacroeconomic or real)constraints,suchasfiscalresponsibilityrequirements.implementingprojectswithoff-budgetfinancefromthe private sector is oneway to avoid such con-straints.However, insofar as there areotherfiscalcostsemergingovertimethathavetobeincludedinthebudget,suchassubsidiesorotherincentivesthatmustbeprovidedatalaterdate,eventhisaccounting“advantage”maybe–andtypicallyis–short-lived.

AnotherargumentinfavourofPPPsrelatestotheirgreaterefficiencyandabilitytodeliverbettervalueformoney.Accordingtomeasuresofbusinessperformanceduringtheconstructionphase,mostofthePPPssupportedbytheWorldbankweresuccess-fulinthesenseofbeingcompletedontimeorwithinbudget,with62percentof thosereviewedbytheieGratedsatisfactoryorbetter.However,broadermeasures that indicate longer term sustainabilityoverthelifetimeofaprojectarenotestimated.outof128projectsstudied,only10recordedresultsofservicequality,8recordedresults intermsofeffi-ciency,and1reportedfiscalresults.improvedaccesstoservicesforthepoorcouldbeconfirmedinonlyabout10percentofcases(ieG,2014).owingtothescarcityofdata, it isdifficult todrawconclusionsabouttheimpactofPPPsonend-users.

ithasbeennotedthatPPPsaregenerallymorecostlythantraditionalprocurementorprovisionofservices through thepublic sector if onlybecausegovernmentscanborrowmorecheaplythanthepri-vatesector.20AnoeCDsurveyofthe18countrieswithsufficientinformationtoreportonthepercentageofPPPs’contributiontopublicinfrastructurefoundthat,“thereislittleinformationtoassessempiricallywhetherPPPsoutperformTiP[traditionalinfrastruc-tureprocurement]projectsoverthelifetimeoftheproject.Thiscontrastsstronglywith thepurportedmotivationofgoingthePPProute,namelythemaxi-mizationofwhole-of-lifevalueformoney”(burgerandHawkesworth,2013:69).

Therearealsorelativelylittledataonthedevel-opmentimpactofPPPs.TheirperformanceovertimetendstobegreatlyaffectedbythefactthatmorethanhalfofallPPPcontractshavebeenrenegotiated,onaverage every twoyears (ieG, 2014).New terms


havetypicallyfavouredtheconcessionaire,withtar-iffsrising,feesfallingorobligationsbeingpostponed,thusagainaddingpotentially to theburdenon thegovernmentpartnertoensurethatanadequateserviceisprovided(inquality,priceandcoverage).ThisisnotlimitedonlytoWorldbank-supportedprojects;theoeCDsurveyofmembercountriesusingPPPsfoundthatwhencontractrenegotiationstookplaceattherequestoftheprivatepartner,therewasahighprobabilitythatthegovernmentlostvalueformoneycomparedwith the originallynegotiatedcontract(burgerandHawkesworth,2013).

AllthishasmeantthatthescaleofobligationsandliabilitiesthatgovernmentshaveincurredthroughtheuseofPPPshasbeensurprisinglyhigh,andthusmeritsgreaterattention.liabilitiesmaybeexplicitorimplicit,contractualornon-contractual.Someareevidentfromtheoutset.Forexample,inChina,foreigninvestorsusuallyrequestaguaranteedfixedorminimumreturn;intheRepublicofKorea,theofferofaguaranteedminimumrevenueplayedasignificantroleinattractingprivatecapital,butalsocausedmoralhazardproblems(Winchetal.,2012).other liabilitiesmay emerge over time,which ispotentiallyabigproblemforgovernments,giventhatprojectshavealifespanof30yearsormore.

Forthe128PPPsinitssample,theWorldbankconcludedthatitwasnotpossibletoshowhowmuchriskwasbeingbornebytheprivateorpublicpart-nersbecause“downstreamcontingentliabilitiesarerarelyquantifiedattheprojectlevel”(ieG,2014:40).Thisispartlyduetoalackofstandardizedfinancialreporting,whichmakesitdifficultforbothinvestorsandgovernmentstojudgetherisksinvolvedinPPPprojects.ChinahassharplyreducedtheuseofPPPsbecausetheywerefoundtobecreatingliabilitiesthatweredifficulttomanageatlocallevels;followingapeakofupto6percentofgovernmentexpenditureand0.8percentofgrossdomesticproduct(GDP)duringtheperiod1995−1997,theyhavefallenswiftly(Ahmad et al., 2014).brazil introduced exposurelimitsforstateandlocalgovernmentsandsomestateshavealreadyreachedthelimit,promptingcallsforfederalassistance.

Thiscouldbean issuenotonlyforcountriesthatarenewtoPPPs,butalsoforthosecountrieswith

PPPsalreadyinplace.AnoeCDsurveyfoundthatmost countries rely onmedium-term affordabilitywhenmakingadecisionaboutwhethertousePPPsortraditionalinfrastructureprocurement.However,thelongertermviewcanbeverydifferent,andgovern-mentsneedtobudgetthefullcapitalcostsupfront(burgerandHawkesworth,2013).evenifthecostofaprojectisexpectedtobefullycoveredbyusercharges,ratherthanthroughgovernmentrevenues,plannersneedtobeawareofthefiscalimplications

inthefutureif,forsomereason,paymentbyusersdoesnotworkout, for example if demand islowerthananticipated,orifcon-sumersareunwillingorunabletopay.oncefuturegovernmentcommitmentsarereportedoverthe lifetime of a project, thiscan significantly increase theactualfiscalcost.intheUnited

Kingdom,forexample,concernsaboutthescaleoftheunitarypaymentstheGovernmentisrequiredtopayeachyear(around£9billionperannumforthenext fewdecades) prompted theUnitedKingdomTreasurytoreviewallPPPsandissuenewguidelines.

Governmentliabilitiescanariseinvariousways,whetherfromformalcommitmentsthroughcontractsorinformally,stemmingfromthesimplefactthatgov-ernmentsaretheprovidersoflastresort.Whenthingsgowrong,thefiscalcostscanbehigh,asexemplifiedbyinfrastructure-relatedexperiencesinMexico.intheearly1990s,Mexicoinitiatedanambitiousroad-buildingprogrammeinvolvingmorethan50PPPs(concessions)tobuildandmanage5,500kmoftollroads.Theconcessionswerehighlyleveraged,withloansprovidedatfloatingratesbylocalbanks,whichwereownedbysub-nationalgovernmentsandwereunderpressuretosupporttheprojectthroughlend-ing.Usertollswereexpectedtoprovidetherevenuesthatwouldnotonlyrepaythedebt,butalsoprovidetheprivatepartners’profits.However,costsprovedtobehigherandtrafficvolumeslowerthanantici-pated,interestratesroseovertime,andthebankingsystemabsorbedtheincreasedliabilities.Thesystemhadalreadybeenstrugglingwhenamacroeconomicshockmademattersworse.TheFederalGovernmentsteppedin,eventhoughtherewerenoexplicitguar-anteescompellingittodoso.itrestructuredtheentireroadprogramme,bailingoutconcessionaires,takingover25ofthem,andassumingcloseto$8billionindebt(ehrhardtandirwin,2004).

The scale of obligations and liabilities that governments have incurred through the use of PPPs has often been much larger than anticipated.


inseveralcountries,unsatisfactoryoutcomesofPPPprojectsmeantthatsomeschemesweregivenupearly.Specificallywithregardtowater,morethan180citiesandcommunitiesin35countrieshavetakenbackcontroloftheirwaterservicesinthelast15years(WaterJustice,2014).Such“re-municipalizations”haveoccurred for threemain reasons:widespreadproblems affectingwater privatization, seeminglyindependentofthecountryorregulatoryregime;theequalorgreaterefficiencyofpublicwaterservicesandlowerpricesthatcanbeachievedwhendividendsorprofitsdonotneedtobepaidtoprivateoperators;andthecomparativeadvantageofthepublicsectorinprovidingforhumanwelfareandrealizingsocialandenvironmentalobjectives(lobinaandHall,2013).

3. Policy implications

PPPsmayremainausefulsourceoflong-termfinancingfordevelopment,giventhepaucityofotherexternalresources,particularlyifrealandperceivedfiscalconstraintspersist,whichpreventgovernmentsfromdirectly undertaking public procurement forlong-termdevelopmentneeds.However,itisimpor-tantforgovernmentstofullyunderstandthevariousconsequencesandramificationsofsuchmechanisms,andbemindfulof thepotential costs andbenefitsovertheentirelifeofaprojectsoasnottoexperienceunpleasantfiscalshockssubsequently.

Tobeginwith,thisrequireseffortstoimprovetransparencyandaccountabilityinPPPs,includingstandardizingtheprocessforcoveringandreportingonpublic transactions,and, inparticular,adoptingaccrualaccountingsystemsthatconsiderlong-terminvestmentsandliabilities.evenwhentherearenoexplicitguaranteesbygovernments,itislikelytheywillhavetoassumeasignificantshareofliabilities.Aparticularconcernisthatmanycountriesstilldonothavethebasicaccountingsystemsneeded.ironically,thosecountriesthatmayhavethehighesthopesforPPPsmaybetheoneswiththeleastcapacitytoman-agethemproperly.

it is also necessary to improve the decision-makingprocesseswithrespecttoPPPs.Asamecha-nismforensuringlong-terminvestmentswithsocialgoals,PPPsmaynot be appropriate in all circum-stances.Therefore,aproperassessmentneedstobeconductedbeforetheyareselectedinpreferencetoothermeansofprovidingpublicgoodsandservices.Thisalsoinvolvesbetterpre-projectplanning,carefulcomparisonwithothermeanssuchasprocurement,improved transparencywith respect to contractualterms−includingrenegotiationsandoptionsforexitorbreakingofcontracts−aswellasidentifyingandquantifyingthefiscalimplications.itfurtherrequiresthatgovernmentsdisclosedocumentsandinforma-tionrelatingtoPPPsandtheircontractstoencouragehonestandtransparentprocessesthatarealsosociallyaccountable.itmayalsobeusefultocreateaforumforthesharingofexperiencesandexpertise,andbuildnetworksofdevelopingcountriesforthispurpose.

Manynationalgovernmentsorregionalauthori-ties that have been accumulating large amountsof foreign assets in recent years have establishedsovereignwealthfunds(SWFs)asamoreprofitablewaytousesuchassetsinsteadoffurtherincreasingtheirinternationalreserves.Thetotalvalueofthesepublicassetscurrentlystandsatmorethan$7tril-lion.This has raised hopes in somequarters that

SWFs could complement the existing sources ofdevelopmentfinance, particularly sincemore than40ofthe52SWFsestablishedsince2000arebasedindevelopingcountriesand32ofthemholdmorethan $10 billion in assets.Their total assetswereestimated to be nearly $6 trillion inMarch 2015(SWF institute, 2015), 87per centofwhichwerefundsfromSWFsinonlysevendevelopingcountries

D. Can sovereign wealth funds make a difference?


(China,Kuwait,Qatar,theRepublicofKorea,SaudiArabia,SingaporeandtheUnitedArabemirates).

Apartfromthefundsheldformacroeconomicstabilization purposes only (which therefore holdswiftlydeployable,highly liquid instruments suchas government bonds or cash),many SWFs aremandatedtobuildupcapitalreservesforfuturegen-erations,andcanthereforeconsiderdeployingtheirremainingfundsforequityand“alternativeinvest-ments”thatareilliquidandlongterm.Someareevenexplicitlyexpected to supportnationalor regionaldevelopmentthroughinvestmentsininfrastructure.SWFstypicallyhavemorefreedomintheirchoiceof asset classes comparedwithmore risk-aversefundsoperatedbycentralbanks,pensionfundsandotherfunds.HintsofportfoliochoicescanbegleanedfromexamplesofrecentdecisionsbyvariousSWFs:theNorwegianGovernment’s SWF recentlymadeaclimate-change-relatedpledgetoexitglobalequi-tiesincoal,Singapore’sTemasekhasinvestmentsinnationalandregionalinfrastructure,andtheFundforProductiveindustrialRevolutioninthePlurinationalStateofboliviahasinvestmentsinmedical,cementandfoodindustries,amongothers.

inpractice,fewSWFstakeadvantageofthisfreedomtoinvestinwaysthatwouldsupportdevel-opingcountries’long-terminvestmentneeds.Rather,their investment decisionsmirror those of private

marketplayers,favouringsomecountries(e.g.China,theUnitedKingdomandtheUnitedStates)andwhattheydeemtobelow-riskandshort-termmarketsec-tors (inderst andSteward,2014; iPeandStirling,2013).AndwhilemorethanhalfofallSWFsinvestsomeresourcesininfrastructure(typicallyinenergy,transportandtelecommunications),theseinvestmentsareagainmostlyindevelopedcountries(inderstandSteward,2014).

SWFs’decision-makingprocessesarenotwellknown,asfewer thanhalfdisclosedetailsof theiractivities(bauer,2015).Somefundsareconstrainedbytheirlegalstructures.Forexample,severalfunds,suchasthebotswanaPulafund,arenotallowedtoinvestdomestically,butothershavemandatesthatallowinvestingbothdomesticallyandininfrastruc-ture.Technical assistancemayhelp boost projectmanagement capabilities in developing countries,thus responding to criticism that someSWFs areunwillingtoinvestinthosecountriesbecausetherearetoofewlarge-scaleprojectstoattractthem.Somemechanismsforriskmitigationmayhelp,suchaspre-projectappraisalsorcontingentguarantees.However,sincethedeclaredaimofSWFsistypicallytosavefor their country so that future generationsmaybenefitfromtoday’s(possiblywindfall)successes,this necessarily requires an emphasis on low-riskinvestments thatyieldpositive returns,whether insocialorfinancialterms.

1. Distinctivefeaturesofdevelopmentbanks

Multilateral development banks have playedandcancontinuetoplayacrucialroleasprovidersoflong-termfinancingthatisnotdeliveredbyprivatelenders.21Typically, transformative developmentrequires,amongotherthings,large-scaleprojectsoflongmaturity,whichinvolverisksthatprivatebanks

areunwillingtoassume,especiallywhentheirownliabilitiesareshortterminnature.inaddition,manylarge-scaleprojectsgeneratepositiveexternalities,andthereforesocialreturnsthatarebiggerthanpri-vatereturns.Developmentbanks(bothnationalandmultilateral) are specifically designed to compen-satefortheseshortcomingsofprivatecapitalflowsandmarkets.Theyhaveaclearmandatetosupportdevelopment-orientedprojectsthattypicallyrequirelong-termfinanceandafundingbasewhoseliabilities

E. Development banks: Their evolution and potential for supporting development


arepredominantlylongtermandthusalignedwiththeirmandate.Their capital is, for themost part,ownedbyhighly rated sovereigns,whichpermitsthebankstoborrowlongterminfinancialmarketsatrelativelylowcosts.22inadditiontotheirprovisionoflong-termfinance,developmentbanksactas“marketmakers”bycreatingandprovidingfinancinginstruments that better spreadrisks, both between creditorsand borrowers and over time,includingthroughco-financingwithprivateinvestors.

Development banks canalsohelptoovercomesomeofthe informational deficienciesfacingtheprivatesectorbyassistinginthescreening,evaluationandmonitoringofprojects.Unlikeprivatebanks, development banks tend to have in-housetechnical andmanagerial expertisewhich allowsthemtoparticipateindecisionsinvolvingchoiceoftechnology,scaleandlocation.Thisreinforcestheirabilitytoleverageresources,astheycanattractotherlenders that donot have the same technical capa-bilitiestoassessaproject’sviabilityandpotential.Developmentbanks,therefore,haveuniquefeaturesthatgivethemastrongcomparativeadvantageoverprivate financial institutions, including the toolstomitigate specific risks that the private sector isunwillingto takeon,andtheability toexploit thecomplementaritiesbetween themand theirprivatepartnerseffectively(buiterandFries,2002).

Thesebanksaregenerallymandatedtoprovidecreditontermsthatrenderindustrialandinfrastruc-turalinvestmentviable.Theyprovideworkingcapitalandfinanceforlong-terminvestments,sometimesintheformofequity.Tosafeguardtheirinvestments,theyoftencloselymonitortheactivitiesofthefirmstowhichtheylend,sometimesnominatingdirectorstotheboardsofthosefirms.

Nationaldevelopmentbankshavelongpredatedmultinational banks. inGermany, for example, inthe nineteenth and twentieth centuriesGermanGrossbanken or universal banks became heavilyinvolved inmaturity transformation. Since suchactivitiessometimesresultedinthesebanksexperi-encingilliquiditysituations,theyrequiredconstantand reliable access to last-resort lending by theReichsbank,orcentralbank.ithasbeenarguedthat

this represented “a clear case of planned institu-tionbuilding”, tofinance the necessary long-terminvestments.The universal bankswere private,limited liability, joint stock banks, but theywerealso instruments of theState, actingon its behalf

inreturnforlarge-scaleliquid-ity support (DeCecco 2005:355). Following theGermanexperience, togetherwith theexperience of themain-banksystem in Japan that financedexport-led industrial expan-sion with support from anddirectionbythebankofJapanandtheJapaneseGovernment,manydevelopingcountrieshavechosentoestablishstand-alone

developmentfinanceinstitutionsexpresslygearedtospecificfinancingobjectives(Chandrasekhar,2014).

Morethanhalfofthedevelopmentfinanceinsti-tutionsinthedevelopingworldarerelativelysmall,withassetsoflessthan$10billion.However,about5percentaremega-bankswithassetsgreaterthan$100billion, including institutions like theChinaDevelopmentbank (CDb)and theNationalbankforeconomicandSocialDevelopment(bNDeS)ofbrazil(Chandrasekhar,2014).

Clearly, internationalormultilateraldevelop-mentbankscanplayevenmoresignificantrolesifthey also assist in reducing developing countries’foreign-exchange gaps, and if they provide loansatevenlowerinterestratesbecauseoftheirgreaterability to access global capitalmarkets.As notedabove, these financing gaps arise because of thepublicnatureofsomeinvestmentprojects,thelim-itedfinancingcapacityofnational(andsub-national)governments to undertake large projects, and theprivatesector’sunwillingnesstoundertakelong-term,large-scaleprojectswhichtheyperceiveastoorisky.Sincepublicinvestment,bynature,typicallydoesnotgeneratedirectfinancialreturnsoninvestment,butonlyindirectandlong-termreturnsintermsofhighergrowth,fromwhichdebtservicecaneventuallybepaid,thiscanbe,andtypicallyis,amajorobstacletocommercialfinancing.

oneareainwhichfinancinggapsremainhugeis infrastructure, with an estimated current gapgreaterthan$1trillion(bhattacharyaandRomani,2013).AswasevidentinsectionC,eveninnovative

Development banks have a clear mandate to support development-oriented projects that typically require long-term finance and a funding base whose liabilities are predominantly long term.


mechanisms tomeet this gap throughPPPs havethusfarbeeninadequate,andfurthermore,theyhavetendedtoinvolveverysubstantialfiscalcosts.ithasbeenestimatedthatinordertomeetthegrowthanddevelopmentneedsofdevelopingcountries, infra-structurespendingwouldhavetoincreasefrom3percent to 6−8 per cent of developing-countryGDP.However,privatesectorinfrastructureinvestmentisnotonlyrelativelysmall,butalsoveryconcentratedin the energy, transport and iCT sectors (estache,2010).Thelackofprivatesectorinvolvementispar-ticularlymarkedforregionalinfrastructureprojectsduetothecomplexityoftheregulatoryframeworkforcross-borderprojectsandthepoliticalrisksinvolved.Multilateraldevelopmentbanks,especiallyregionalones,canplayaleadingroleinprovidingfinanceforregionalinfrastructuredevelopment,sincetheycantacklecollectiveactionandcoordinationproblemsdue to their internationalor regionalnature,accu-mulatedknowledgeandaccesstodifferentfinancingandimplementationinstruments.

international development banks canprovidelow-income countrieswith loans for developmentprojectsat subsidized interest rates. in2013, theirconcessionallendingamountedtoalmost$20billion,whichrepresented30.4percentoftheir total loanportfolios.23inaddition,bothnationalandmultilat-eraldevelopmentbankscanplaycountercyclicalroles,providingproject finance to fill in gapswhen private lenders reducecredit during recessions andcrises (ocampo et al., 2007).Theymayalsobeabletosustainorevenincreaselendingduringeconomicshocks,suchassharpchangesincommoditypricesornatural disasters.This in turncan help a country sustain itslevelofincomeandeconomicactivity,aswellasitscapacitytoimportaftersuchashock.Thiswasevi-dentduringtheglobalfinancialcrisis,forexample,when lendingbyboth theCDbandbNDeSwassufficientlylargetooffsetsomeofthelikelydeclinesininvestmentduringthecrisis(Ferraz,2012).Someregional banks such as theeuropean investmentbank (eib) have the explicitmandate to providecountercyclical lending,24whichdemonstrates thatinternational/regionaldevelopmentbanks,alongwiththeirnationalcounterparts,candirectlyhelpsupportincomeandemploymentaspartoftheirpolicygoals.

2. The changing landscape of development banks

overmorethanhalfacentury,theWorldbankand various regional development banks such astheAsianDevelopmentbank (ADb), theAfricanDevelopmentbank (AfDb), the inter-AmericanDevelopmentbank (iADb),eib and the islamicDevelopmentbank(iDb),haveplayedavitalroleinfinancinglong-termprojectsaroundtheworld.Theyhavehelpedtofillsomefinancinggaps,especiallyinlarge-scaleinfrastructureprojects,and,morerecently,insocialandenvironmentalprojects.Despitetheirpresence,however,giventherelativelymodestsizeoftheirloans,theyhavebeenabletoonlyslightlyreducethesegaps.25

other subregional development banks havealsopartiallycoveredthesefinancingneeds.inthelatinAmerican and theCaribbean region, theseinclude theCentralAmericanbank foreconomicintegration, theCaribbeanDevelopmentbankandtheAndeanDevelopmentCorporation(CorporaciónAndina de Fomento, or CAF). The latter, nowknownastheDevelopmentbankoflatinAmerica,was createdwith amandate to promote sustaina-bledevelopmentandregionalintegrationamongits

foundingmembercountries,thePlurinational State ofbolivia,Colombia, ecuador, Peru andthebolivarianRepublicofVene-zuela.Membership has beengradually expanded since thebank’screationtoincludemostlatinAmericanandCaribbeancountries, aswell as PortugalandSpain.The bank supportsthe strengthening of itsmem-bers’nationalproductivesectors,

particularlythedevelopmentofvalue-addedproductsandservices,aswellasjobcreationandthepromo-tionofaccesstosocialservices,includingeducation,health,waterandsanitation.in2013,loanapprovalsbytheCAFsurpassed$12billion,whichwasasimilaramounttothetotalloansoftheiADb.26AlthoughtheCAFisownedmostlybydevelopingcountries,thebankhasafairlylargecapitalbase,which,togetherwiththeexcellentrecordofrepaymentonitsloans,hascontributedtoitsinvestmentgradestatusfromtheinternationalratingagencies−aratingthatishigherthan that ofmost latinAmerican countries. The

In recent years, some national development banks have become increasingly significant international players, providing external financing as part of their international operations.


bank’sclearandfocusedmandate,leanmanagementstructure,rigorouseconomicevaluationofprojects,rapid approval process and loans grantedwithoutconditionalityhelptoexplainitssuccessandconsist-entlyhighcreditrating(Griffith-Jonesetal.,2008).

inAfrica, theAfDb is an important sourceof external long-term finance.Africa also has alargenumberof subregionalbanks, including: theeastAfricanDevelopmentbank,theWestAfricanDevelopment bank, the CentralAfrican StatesDevelopmentbank,theeasternandSouthernAfricanTradeandDevelopmentbank,commonlyknownasthePreferentialTradeAreabank(orPTAbank)andtheDevelopmentbankofSouthernAfrica(whollyowned bySouthAfrica but serving theSouthernAfricanDevelopmentCommunity,withafocusonlargeinfrastructureprojects).However,thesebankshave limited capacity to providefinance for largedevelopment-orientedprojectsonascalethatmeetstheneedsoftheirrespectivesubregions.27Thismaybe explained by their small capital base, and bythefactthatmostoftheirshareholdersarethebor-rowing countries themselves,which have limitedfinancial resources to expand these banks’ capitalbasessubstantially.inAsia,theADbplaysamajorrole in financing long-termprojects, including ininfrastructure,asthereisalackofsubregionalbanks.

in recent years, some national developmentbankshavebecomeincreasinglysignificantinterna-tionalplayers,providingexternalfinancingaspartof their international operations.Themost activeinternationallendershavebeenChinaDevelopmentbank(CDb),theexportandimportbankofChina(Chinaeximbank),brazil’sbNDeSandtheGermanDevelopmentbank,Kreditanstalt Für Wiederaufbau(KfW).Theinternationaloperationsofthesemajordevelopmentbanksaccountforasignificantpropor-tionoftheirtotalassetsandloans,whichcanbequitelarge(chart6.5).

TheCDbandChinaeximbankaretwoofthethree“policy”banksthatChinacreatedin1994tosupportspecificdevelopmentgoalssetbytheChineseGovernment.TheCDb is a primary provider oflong-termfinance for infrastructure projects, suchasrailways,roadsandtelecommunications,andforlarge-scaleinvestmentsinbasicandheavyindustries,suchaspetrochemicals.Chinaeximbank’smandateistosupportChina’sexportsandimportsofmechani-calandelectronicproducts,equipmentandhigh-tech

products,aswellasoverseasinvestmentsofChinesecompanies.ThebankalsoactsasthefinancingarmofChina’sinternationalcooperationprogrammesbyprovidingconcessionallendingabroad(Poon,2014;Chinaeximbank,2014).

Since the early2000s, bothof theseChinesebanks have been active providers of internationalfinance to developing countries.Their loans havesupportedChina’s “going out” strategy as part ofits new role as an emerging superpower on theglobalstage.Recentinitiativesincludetheirplannedcontributionsto thenew“SilkRoad”strategythatinvolveslargeinfrastructureinvestmentsacrossAsia,alongwithcontinuingfinancinginAfrica,AsiaandlatinAmerica through South-South cooperationagreements.

in 2014, theCDb’s foreign currency loanstotalled$267billion,accountingforabout22percentofitsentireloanportfolio.Theygenerallysupportinfrastructuredevelopment indifferentdevelopingcountries,while facilitatingChina’s access to raw

Chart 6.5

TOTAL ASSETS AND LOANS, SELECTED NATIONAL DEVELOPMENT bANkS, 2014

(Billions of dollars)

Source: Banks’ annual reports.

0

200

400

600

800

1 000

1 200

1 400

1 600

1 800

BNDES CDB China’s EximBank

KfW

Total assets Total loans


materialsat lower transportationcosts.28Thebankalsoprovidesfinancingthroughothermechanisms,suchastheChina-AfricaDevelopmentFund(CADFund),towhichthebankwasthesoleproviderofcapital funds in its phases i and ii. in 2014, theCADFundcommitted$3.1billionof investmentsin80projectsinarangeofareas,includingregionalaviation,ports,electricity,pharmaceuticalsandvehi-cleassembly(CDb,2014).

TogetherwiththeCDb,ChinaeximbankhasstronglysupportedChina’sstrategicpartnershipwithotherdevelopingcountries.ithasmadepreferentialloancommitmentstodifferentcountriesandregions,includingAfrica,AsiaandthePacific,CentralandeasterneuropeandtheCaribbean(Chinaeximbank,2014). in2014, itsactualexport seller’screditdis-bursementsreached$287.8billion,ofwhich15.2percentwasspentonoverseasconstructioncontractsand7.9percentonoverseasinvestmentprojects.Recently,thebankhasprovidedsupportto“thedevelopmentofhigh-speedrailway,expresswayandregionalaviationnetworks(the‘ThreeNetworks’)inAfrica”throughloans(partoftheseconcessional)andotherassistancemechanisms(Chinaeximbank,2014:9).

inadditiontotheseChinesenationaldevelop-mentbanksthathaveaninternationalreach,anotherprominent national development bank isbrazil’sbNDeS,which has been providingfinancing fordevelopment,bothnationallyandabroad,inrecentyears.Createdin1952withaninitialfocusonfinanc-ingdomesticinfrastructuredevelopmentaspartofthecountry’sstrategyofmodernizationandindustriali-zation,itsubsequentlybroadeneditsfocustofosterbrazil’scapitalgoodsindustryandotherindustrialsectors.Sincethe1990s,ithasalsobeenprovidingfinancingtoexportingsectors.inthe2000s,thebankexpandeditsinternationaloperations,reflectingthewillingnessofbrazil’sGovernmenttoplayagreaterroleontheinternationalstage.Thisnewstrategyhasincludedsupportingregionaleconomic integrationandthereforeinvestmentpromotioninneighbouringcountries,aswellasstrengtheningbrazil’seconomiclinkswithfast-growingdevelopingregions,particu-larlyAfrica.Thebank’sloanshavealsobolsteredtheinternationalizationoflargebraziliancorporations.

in2014,14percentofthebank’stotalloanport-foliowasinforeigncurrency.SincebNDeSfiguresamong the largest national development banks intheworld,withatotalloanportfolioof$245billion

in 2014 (chart 6.5), its provision of foreign loansis significant, especially for smaller countries thatlack funding for large-scaledevelopmentprojects.inSouthAmerica,forinstance,thebankhasplayeda very important development-supporting role bylendingtosmallcountriessuchasecuadoraswellaslargeronessuchasArgentina,tofinanceeconomicinfrastructure. inAfrica, it has extended loans tolargenationalconstructioncompanies investing ininfrastructureandotherprojects.

An example of a national development bankfromadevelopedcountryisKfW.ithasbeenplayinganincreasinglyimportantroleinternationallyasthelendingarmofGermany’sdevelopmentcooperationprogrammes.itpromotesdevelopmentprogrammesinalldevelopingregions.Attheendof2014,itsloanportfoliototalled$536billion(chart6.5),and10percentofitsbusinesspromotionactivitieswererelatedtodevelopmentprogrammesaround theworld. itsmandateistoimprovelivingconditionsinGermany,europeandaroundtheworldsustainably,suchasbypromotingclimate-friendlyeconomicdevelopment,includingindevelopingcountries.itsprojectsincludepowersupplylinesinindia,asolarthermalpowerplantinChileandsustainablehousingconstructioninAfrica(KfW,2014).Partsofthesefinancingpro-grammesarelinkedtothebank’sparticipationinavarietyofclimateprotectioninitiatives,suchastheinitiativeforClimateandenvironmentalProtectionandtheinternationalClimateinitiative.ithasalsocreatedaClimateinsuranceFundaimedatsupport-inglocalinsuranceandreinsurancecompanies,anditisexpectedtocontributetothenewUnitedNationsGreenClimateFund (GCF) forclimateprotectionandadaptation.inaddition,theGermanGovernmentchannelsfundsthroughthisbankfortheprovisionof grants and highly concessional loans tolDCs(KfW,2014).

3. Thepotentialfinancingroleof South-led multilateral banks

Asystemofdevelopmentbanksthatprovidesinternationalfinancingtosupportgrowthanddevel-opmentshouldincludeSouth-ledmultilateralbanks,alongsidemultilateral, regional and subregionalbanksandnationalbankswithinternationalopera-tions.Recent initiatives todesignand setup such


banksareaimedataddressingtheshortageoflong-termcapitalforinvestmentincrucialinfrastructuralareas and capital-intensive industries essential fordevelopment.These initiatives include the newlycreatedNewDevelopmentbank(NDb)setupbythegroupofcountriesknownasthebRiCS(brazil,theRussianFederation,india,ChinaandSouthAfrica),theAsianinfrastructureinvestmentbank(Aiib)andthebankoftheSouth.Thedecisionstocreatetheseinstitutionsarepartlymotivatedbythedisillusion-mentofdevelopingcountrieswith thegovernancestructures,patternsoflendingandtheconditionali-tiesassociatedwithlendingbythebrettonWoodsinstitutions and by some of the leading regionaldevelopmentbanks.

TheNDbwasestablishedatthebRiCSFortalezaSummitofJuly2014,withthespecificmandatefor“mobilizingresourcesforinfrastructureandsustaina-bledevelopmentprojectsinbRiCSandotheremergingand developing economies” (bRiCS, 2014, para-graph11).Thisfocusisclearlyjustifiedinthelightofthelargeunmetneedsintheseareas, as highlighted above. ithas been establishedwith aninitialauthorizedcapitalof$100billion(andasubscribedcapitalof$50billion).Accordingtothedeclaration of theViibRiCSSummit in July 2015 inUfa(RussianFederation),theNDbisexpectedtostartapprovingitsfirst investmentprojectsat thebeginningof2016(bRiCS,2015a).Thequalityofitsloanstoinfrastructureandotherprojectsshouldbeanimportantprioritysoastomaximizethedevel-opmentimpactsofsuchprojectsandminimizerisksofdefault.Moreover,theabilitytomakeprofitswillhelpthebankexpanditscapitalbase,andthereforeincreaseitslendinginthefuture.

intermsofgeographicalcoverage,itwouldbeimportantfortheNDbtohaveabalancedportfolioofloansthatincludebothmiddle-andlow-incomecountries, since thismixwould generate benefitsofgeographicaldiversificationandmake thebankmorecreditworthy.inordertolendtolow-incomecountries, thereisacasetobemadeforincludinga subsidy element,making loans to this group ofcountriesconcessional.Thecreationofatrustfund,fundedbydevelopedcountries,couldsupportsuchloans(Griffith-Jones,2014).

TheAsian infrastructure investment bankwas established inoctober 2014 inbeijing,with33foundingmembersfromwithintheAsianregionand 17 (including several developed countries)fromoutside the region; an additional seven pro-spectivemembers have yet to sign on.29Most ofthebank’sauthorizedcapitalstockof$100billionwillbecontributedbyChina.inordertoreflecttheregionalcharacteroftheAiib,itsregionalmemberswillbethemajorityshareholders,holdingapproxi-mately75percentofshares.Thebank’screationisaresponseto therecognitionof theimportanceofinfrastructure to thedevelopmentofAsia, and theneedforsignificantadditional long-termfinancingforbuildinginfrastructureintheregion.WhiletheADbestimatesAsia’sinfrastructurefinancingneedstobearound$720billionperannumovertheperiod2010−2020,itsownannualloanapprovalamountsto only $13billion (Junio, 2014).TheAiib aimstofinancebothnationalandregionalinfrastructureprojects.Thelattershouldaimtosupporttradeandfurtherdevelopmentoftheregion’sproductionnet-

works.Themainfundingmech-anismwillbethroughtheissu-ingof bonds, both in regionalandglobalmarkets.

inlatinAmerica,thebankoftheSouth(bancodelSur)isasubregionalentitywhosefound-ingmember countries are allfromSouthAmerica:Argentina,thePlurinationalStateofboli-

via,brazil, ecuador, Paraguay,Uruguay and thebolivarianRepublic ofVenezuela.established in2009withapromisedinitialcapitalof$20billion,itaimstopromoteeconomicdevelopmentandregionalintegrationintheSouthAmericansubregion.

Noneofthesethreebanksisinoperationyet,buttheyarepromisingsignsofarenewedinterestbothindevelopmentbanksandintheneedtofinanceinfrastructure creation for social and economicdevelopment.Theyalsoadd toanenvironmentofhealthycompetitionwithotherdevelopmentbanks;forexample,partlyasaresponsetothesedevelop-ments, theWorldbankhas decided to stepup itspresence in theareaof infrastructuredevelopmentbysettingupaGlobalinfrastructureFacility(GiF),which it defines as “a global open platform thatwill facilitate the preparation and structuring ofcomplex infrastructure PPPs tomobilise private

A system of development banks that provides inter-national financing to support growth and development should include South-led multilateral banks.


sector and institutional investor capital.”30This isanambitiousstep,giventheWorldbank’srelativelylimitedspendingon infrastructuredevelopmentsofar−about$24billionin2014,upfrom$16.7bil-lionin201331−anditsmixedrecordonsocialandenvironmentalstandards.Nevertheless,itpointstothepossiblecatalyticrolethesenewinstitutionsmayplayinchangingboththeconditionsandtheapproachofexistingmultilateralfinancinginstitutions.Further,theycouldbecomeadrivingforceforcollaborationinanetworkofdevelopmentbanks,creatingsynergiesandcomplementaritiesamongthem.

inthisnetwork,thenewSouth-ledbankscouldworkcloselywithnationaldevelopmentbanks,par-ticularlyfromthebRiCScountries,suchasbrazil’sbNDeS,theDevelopmentbankofSouthernAfricaandChina’sCDb,aswasproposedattheViibRiCSSummit in July 2015 (seebRiCS, 2015b).Whilemultilateralbanksmayhavegreaterexpertiseintheengineeringandfinancingaspectsofloans,nationaldevelopment bankshavegreater local knowledge,therebyhelpingreduceasymmetriesofinformationatthenationallevel.

ThesenewSouth-ledbanks are expectednotonly to supplement the amount of financing for

long-term investments that are on offer globally,but also to better serve the interests of economicdevelopment,alongwithgreaterconcernforsustain-abilityandinclusiveness,thanmultilateralbanksthataredominatedbydevelopedcountries.Thiswoulddependonseveralfactors.oneisthedegreetowhichtheemergenceofthesebanksisabletosignificantlyaltertheglobalfinancialarchitecture,andperhaps,therefore,thebehaviouroftheinstitutionsthatcur-rentlydominateit.Anotherrelatestowhethertheywoulddifferintheirlendingpracticesfromtheestab-lishedinstitutions−notjustincreasingthequantityof financing for long-termdevelopment, but alsochangingitsqualitytofocusmoreoninclusiveandsustainable economic transformation.Thus,whilegreater diversity in the internationalfinancial andmonetary landscape is certainlywelcome, and theadditionalresourcesthatthesenewinstitutionspro-videcanhaveasignificantpositiveimpactintermsofgeneratingmorelong-termfinancingfordevelop-ment,itdoesnotnecessarilyfollowthattherewillbemajorchangesinthetermsandconditionsofsuchfinancing.Forthistohappen,governmentsandcivilsociety indevelopingcountrieswillneed toplacegreateremphasisonmonitoringthefundingpatterns,termsandconditionsinthelendingactivitiesofthenewdevelopmentbanks.

inaworldeconomyinundatedwithliquidity,themainobstacle tofinancingdevelopment isnotthelackoffinancingcapacity.Rather,thequestionis how tomove resources fromhighly leveragedinstitutionswith short-termfinancial horizons toeconomicagentswishingtofinancelong-terminvest-mentprojectsthatgeneratelargepositiveexternalitiesandthereforeencourageadditionalinvestment.Thisreport stresses that this cannot be ensured simplythroughtheworkingsofmarketmechanisms,eithernationally or internationally.This is because pri-vate financial institutions are naturally driven byaprofitmotive,wherebyduringaboom,theytendtoproducetoomuchcreditanddebt,whileduringa bust, credit ceases and a debt deflation sets in.

Asaconsequence,andlefttoitself,privatefinancefinds it difficult to incorporate social or develop-ment benefits in its calculations.Where there areexternalities,aswithpublicgoods,privatefinanceisinsufficientforsocialneeds.inaddition,privatefinancehastendedtobegeographicallyconcentratedinhighandmiddle-incomecountriesandinsectorsinwhichprofitabilityismoreassured,ratherthaninriskyprojectsorprojectswithlonggestationperiodsthatmaybemorenecessaryforindustrializationanddevelopment.Withincountries,privatefinancetendsto provide lessfinancing toSMes, to sectors thatarecharacterizedbydifferentformsofrisksuchasagriculture,toprojectswithbulkyupfrontinvestmentrequirementssuchaseconomicinfrastructureandto

F. Conclusions


necessarysocialinvestmentsinhealth,sanitationandeducation,amongothers.Yetsufficientspendinginalloftheseareasisclearlyessentialforasustainedandinclusivedevelopmentprocess.

Therefore,ensuringfinanc-ing for development requiresspecialized agents andmecha-nisms designed specificallyfor this purpose, inwhich therole playedby the public sec-tor iscrucial.Thischapterhasreviewed themost importantpotentialsourcesofinternationalfinancethat,hav-ingsomedegreeofpublicinvolvement,maybeusedfordevelopmentfinance.Relatedmechanismsmayresultdirectlyfrompublicspending,aswithoDAandotherformsofcooperation,mayinvolvechangingthetermsofprofitabilityandtheincentivesavailabletoprivateinvestorstoconsiderexternalities,aswithPPPs,ormayemergefrompublicinstitutions,suchasdevelopmentbankssetupforthispurpose,whichareeffectivelyunderwrittenbythegovernment.

oDA remains the only existingmechanismwhose central aim is to redistribute incomeat thegloballevel.Despiteitspotential,theamountofoDAhasremainedfarshortofbothneedsandexpecta-tion.inthepastfewyears,therehasbeenprogressregarding both the amount of assistance providedandeffortstoimproveitseffectiveness.inaddition,South-South cooperation has been significantlyincreasing.However,mostoDAstillreflectsflowsfromdevelopedcountries todevelopingcountries,and closing the gap between the current level ofsuchoDA(0.29percentofGNiofdevelopedcoun-tries)andthecommittedlevelof0.7percentremainsoftheutmostimportanceforsustainingdevel-opmentstrategies,particularlyinlDCs.inthiscontext,thereisanincreasingfocusinthedebateonfinancingfordevelopmentonthepotentialuseofoDAtocatalyseadditional resourcemobiliza-tion, both public and private.However,theuseofpublicaidforleveragingprivatefinanceshouldbeconsideredwithcaution,toavoidtheriskofprivat-izingbenefitsandsocializinglosses.TheopportunitycostofusingoDAforthispurposemaybetoohigh.

This chapter has also shown that, despitetheir recent popularity, experiencewithPPPs hasbeenmixedandratherlimitedintermsofgenerat-ingadditionalprivate investment indesiredareas.

Aswithother blendedfinanceinstruments,PPPsmay“lowerinvestment specific risks andincentivize additional privatesectorfinanceacrosskeydevel-opmentsectors”(AddisAbabaActionAgenda of the Thirdinternational Conference onFinancing forDevelopment in

2015).However,thescaleofobligationsandliabili-tiesthatgovernmentshaveincurredthroughtheuseofPPPshasoftenbeenmuchlargerthananticipatedand, therefore, thefiscal costs haveoftenbeen sohigh as to suggest that governments could havemoreeffectivelyandefficientlyengaged inpublicinvestmentintheseareasdirectly.Therefore,thereisaneedtoimprovepre-projectplanningprocesses,increasetransparencyandaccountabilityandidentifyfiscalimplicationsforthedurationofsuchprojects.

Finally,multilateralandregionaldevelopmentbanks that are dedicated to the special challengesinherentininfrastructurecouldplayagreaterrole,delivering technical assistance aswell asfinance.indeed,existingandnewdevelopmentbankshaveaprimaryroleasprovidersoflong-termfinancing,vis-à-vis privatefinancial institutions. Since theyhave a clearmandate to support developmentallyorientedprojectsandafundingbasewhoseliabilitiesare predominantly long term, aswell as in-housetechnicalexpertisethatallowsthemtoparticipateindecisions involving choices related to technology,

scale and location, they haveuniquefeatures thatgive themastrongcomparativeadvantageover private financial institu-tions.internationaldevelopmentbankscan,inaddition,playanimportant countercyclical rolethroughtheirprovisionofcrisisfinancing to individual coun-tries,inresponsetoaneconomicshock (e.g. commodity-pricerelated) or a natural disaster,

which canhelp sustain levels of income and eco-nomic activity and the capacity to import duringdownswings.

Private finance finds it difficult to incorporate social or development benefits in its calculations …

… therefore, ensuring finance for development requires specialized agents and mecha nisms designed specifi-cally for this purpose, in which the role played by the public sector is crucial.


1 A target of official flows equivalent to 0.75 percentofeachdevelopedcountry’sGNPwasinitiallyadoptedat thesecondconferenceofUNCTADinNewDelhi in 1968.This proposalwas acceptedbymost, but not all, developed countries.Afterfurthernegotiations,thisinitiativewasapprovedbytheUnitedNationsGeneralAssemblyofoctober1970, although the targetwas lowered to 0.7 percentofGNP.ThiscommitmentwasendorsedbythemembersofoeCD-DAC,whichdefinedoDAas“thoseexternalfinancialflowswhichareprovidedbyofficialagencies,havethepromotionofeconomicdevelopmentandwelfareofdevelopingcountriesasitsmainobjective,andareconcessionalincharacter.”

2 onlyfivemembersexceededthetargetof0.7percent of GNi: Denmark, luxembourg, Norway,SwedenandtheUnitedKingdom(oeCD,2015).

3 DevelopmentaloDAincludessocialinfrastructureandservices,economicinfrastructureandservicesandproductionsectors,whichin2013representedabout63percentoftotalregisteredoDA.

4 Forempiricalevidenceontherelationshipbetweenaidandgrowth,seeTDR 2008andUNCTAD,2006.Formorerecentreviewsontheliteraturerelatingtothis,seeAlonso,2012;edwards,2014;GlennieandSumner, 2014;Morrissey, 2015;Qian, 2014; andQuibria,2014.

5 Suchcostsincreaseby15–30percent,onaverage,andbyasmuchas40percentormoreforfoodaid(DiiS,2009).

6 onaidpredictability,seeoeCDat:http://www.oecd.org/dac/aid-architecture/(accessed21July2015).

7 Theremaining61percentwas“phantomaid”−aidwhichwasnottargetedforpovertyreduction,orwasdouble-countedasdebtrelief,overpricedandinef-fectivetechnicalassistance,tiedtothepurchaseofgoodsandservicesfromthedonorcountry,poorlycoordinated andwith high transaction costs, toounpredictabletobeusefultotherecipient,spentonimmigration-relatedcosts in thedonorcountryorspentonexcessiveadministrationcosts.

8 evidence of this can be found in the high-levelforumsonaideffectivenessheldinRome(2003),Paris(2005),Accra(2008)andbusan(2011).

9 evenwiththerecordedincreasesinformal,untiedaid,somepartofitmaystillbe“defacto”tied.Thismaybeduetodonorregulations,lackoflocalcapac-ity,difficultiesforlocalandregionalcontractorstocompeteinternationally,unequalaccesstoinforma-tion,potential riskaversionon thepartofdonorsandpressureforspeedyimplementation(UNCTAD,2011b).

10 Similarly, theAddisAbabaActionAgendaof theThird internationalConference onFinancing forDevelopment(13–16July2015)stressesinitspara-graph54:“Animportantuseofinternationalpublicfinance, includingoDA, is to catalyse additionalresourcemobilization fromother sources, publicandprivate.itcansupportimprovedtaxcollectionandhelpstrengthendomesticenablingenvironmentsandbuild essentialpublic services. it canalsobeusedtounlockadditionalfinancethroughblendedorpooledfinancingandriskmitigation,notablyforinfrastructure and other investments that supportprivatesectordevelopment.”

11 However,“evaluatingblendedprojectsisnoteasyanditcanbedifficulttodemonstratekeysuccessfactors,suchasadditionality,transparencyandaccountabil-ityandtoprovideevidenceofdevelopmentimpact”(UNCTAD,World Investment Report 2014:169).

12 See for instance,Griffiths et al. (2014),UKAidNetwork(2015),Concord(2014),ActionAid(2014),brettonWoods Project (2012), eurodad (2012),ActionAid,eurodad andoxfam (2015),eurodad(2013),KwakkenbonsandRomero(2013).

13 Definitions of PPPs vary considerably, reflectingdifferentinstitutionalarrangementsandconceptualunderstandings, but they nonetheless sharemanysimilarities.intheirsimplestform,PPPs“refertoarrangementswheretheprivatesectorsuppliesinfra-structureassetsandservicesthattraditionallyhavebeenprovidedbythegovernment”(iMF,2006:1).Suchadefinitioncanencompassexistingassetsandtheacquisitionofnewones,anduser-paysservices,or free-to-user systemswheregovernments pay aunitarychargetotheprovider.otherdefinitionsfocusonriskandhowitisintendedtobeallocatedbetweenthepublicandprivatepartners.Forexample,one

Notes


definitionstatesthatPPPsare“anagreementbetweenthe government andoneormoreprivate partners(whichmay include the operators andfinancers)accordingtowhichtheprivatepartnersdelivertheserviceinsuchamannerthattheservicedeliveryobjectivesofthegovernmentarealignedwiththeprofitobjectivesoftheprivatepartnersandwheretheeffectivenessofthealignmentdependsonasuffi-cienttransferofrisktotheprivatepartners”(oeCD,2008:17).inpractice,muchofthecurrentdebateconcernstheperceivedimbalanceofriskbetweenpublic andprivate partners; in particular that thepublicsectorcarriestoomuchrisk,especiallyinthelong-termoperationalphasesofaprojectasopposedtothefirstcoupleofyearsduringwhichconstructiontakesplace.

14 Mostofthedatausedinthissectionaredrawnfromthe Private Participation in infrastructure (PPi)Database, produced jointly by the infrastructurePolicy Unit of theWorld bank’s SustainableDevelopment Network and the Public-PrivateinfrastructureAdvisoryFacility(PPiAF),whichisamulti-donortrustfund.Thedatabaserecordscontrac-tualarrangementsrelatedtoinfrastructureprojectsinlow-andmiddle-incomecountries(asclassifiedbytheWorldbank),inwhichprivatepartnersassumesomedegreeofoperatingriskthroughownership,financeoroperationalactivities.itfocusesonsectorswithadegreeofmonopolisticoroligopolisticchar-acteristics, including energy, telecommunications,transport andwater. Such “private participation”should not be equatedwith private investment ininfrastructure.First, it doesnotnecessarilycorre-spondtorealinvestment,asitalsoincludesmanage-mentand leasecontracts,concessionprojectsanddivestitures;second,recordedinvestmentreferstowhatwascommitted(notnecessarilymade)forthewholeproject;and third,whenprojectcompaniesareownedbybothpublicandprivateparties, thedatabasepresents the investment by both parties,notbyprivateinvestorsalone.

15 SeeWorldbank(2009).Notableexceptionsweremiddle-incomecountries,andtheiCTandtelecomssector, where private sector financewasmoreforthcoming.

16 Forexample,theFrenchcompany,Suez,pulledoutofawaterconcessioninArgentinaafterthepesofellsteeplyin2002andtheauthoritiesdidnotagreetoincreasechargestooffsetthedevaluation.largelyasaresultofthedevaluation,therewere28proceedingsagainstArgentinaundertheinternationalConventionforSettlementofinvestmentDisputes(iCSiD)byearly2004(oeCD/NePAD,2005).

17 TheothertwocountriesareMexicoandtheRussianFederation.

18 ofthetopfivedevelopingcountrieshostingPPPs,Spain and theUnitedStates together account for

almost30percentofprojectswithuniquelyforeignsponsorship,potentiallyreflectinglanguageorprox-imityfactors.

19 on thechallenges that thismaypose tocompeti-tionpolicies,seehttp://unctad.org/en/Pages/DiTC/Competitionlaw/ResearchPartnership/Contact4114.aspx.

20 AreviewbytheUnitedKingdom’sNationalAuditoffice(2015)foundthatprivatefinancedealswerechargedaninterestratethatwasdoublethatofallgovernmentborrowing.Thistrendhasbeenconsist-entovertime:in2010Infrastructure UKestimatesthatthecostofcapitalforpublicfundingwas3.9percent,comparedwithcostsofupto6.9percentforfirmsoperatinginregulatedmarkets(e.g.privatizedwaterorelectricityutilities)and10.9percentforfirmsinunregulatedmarkets(e.g.concessionsforuser-payservices).

21 This has been reaffirmed in theAddisAbabaActionAgenda,which states in its paragraph75:“Developmentbankscanplayaparticularlyimpor-tantroleinalleviatingconstraintsonfinancingdevel-opment,includingqualityinfrastructureinvestment.”

22 RegionaldevelopmentbankswithexcellentrecordsofcreditrecoverycanhaveevenbetterratingsthantheStatesthatownthem.

23 This refers to the totalmultilateral lending bytheWorldbank, theAfricanDevelopmentbank(AfDb),theAsianDevelopmentbank(ADb),theinter-AmericanDevelopmentbank(iADb)andtheeuropeanbankforReconstructionandDevelopment(ebRD).

24 Sincetheglobalcrisis,theeibhasplayedastrongcountercyclical role to help sustain income andinvestment levels acrosseurope and protect theregion’s infrastructure and productive capacityfrom the effects of the deep economic downturn.Thebank’sprovisionoffinanceisenlargedbyitsleveragingandbycombiningresourcesfromothersourcesoffinancing(e.g.theeuropeanUnionbudgetandtheprivatesector),whichimpliesalargemul-tiplier effect (http://www.eib.org/about/index.htm,accessed9March2015).

25 in2014,grossdisbursementsbyeib($78billion)and theWorldbank($44billion)werebyfar themostsignificant,comparedtoiDbandADb(about$10billion)andAfDb(almost$5billion),asnotedinthebanks’annualreports.

26 SeeCAFFactsheet2014at:www.caf.com.27 ThetotalassetsoftheDevelopmentbankofSouthern

Africaamountedto$6billionasofend-March2014.ThoseoftheWestAfricanDevelopmentbank,PTAbank,CentralAfricanStatesDevelopmentbankandeastAfricanDevelopmentbankwere $3billion,$2.5billion,$0.5billionand$0.2billion, respec-tively,asofDecember2013,asnotedinthebanks’annualreports.


28 Forexample,someforeignprojectstheCDbcur-rentlysupportsincludethelasbambasCopperMineinPeru,towhichithascommitted$3.5billion(anddisbursed$2.6billionbytheendof2014),acoal-firedpowerplantinbali,indonesia,towhichithascommitted$473million(anddisbursed$367mil-lion),andtheupgradingoftheMansa-luwinguRoad

inZambia,towhichithascommitted$175million(anddisbursed$65million)(CDb,2014).

29 Seehttp://www.aiibank.org/.30 Seehttp://www.worldbank.org/en/programs/global

-infrastructure-facility.31 See http://www.worldbank.org/en/news/press-

release/2014/07/18/world-bank-group-infrastructure-spending-increases-to-24-billion.

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