Questions surfacing about possible success of PPP scenario

MUHAMMAD ZAMIR

Oct 08, 2023 09:21 PM

After largely failing to provide 0.7 per cent of their Gross National Income (GNI) in aid to developing countries for almost half a century since making the commitment, donor countries then promoted Blended Finance (BF) as a solution to the financing for development challenges.

Blending refers to combining public development funds (in the form of grants, technical assistance or interest indemnification) with loans from private lenders. Following adoption of Agenda 2030 for the Sustainable Development Goals (SDGs), the OECD and the World Economic Forum (WEF) pointed out that “blended finance represents an opportunity to drive significant new capital flows into high-impact sectors, while effectively leveraging private sector expertise in identifying and executing development investment strategies”.

This also led the OECD and WEF to launch the multi-year Re-designed Development Finance Initiative (RDFI) in 2013 to promote public-private cooperation for sustainable development. The RDFI defined BF as “the strategic use of development finance and philanthropic funds to mobilize private capital flows to emerging and frontier markets”.

In this context the RDFI promoted BF at the Third International Conference on Financing for Development in Addis Ababa in July 2015. A BF pioneer also claimed there that BF had been effective in targeted development interventions and would complement traditional overseas development aid (ODA) such as grants.

The European Council also endorsed BF as a tool of development cooperation in 2014, with other donors following suit. Similarly, Multilateral Development Banks (MDBs) also enthusiastically supported BF, and claimed that measures would be undertaken to ensure “the best possible use of each grant dollar” as an example of mixed finance. The OECD in its 2017 Report also claimed that BF can help bridge the US$2.5 trillion annual investment gap for SDGs in developing Countries.

Such a positive evolving scenario greatly encouraged the Developing Countries and also the Least Developed Countries.

However, insufficient information was revealed to the public about the developing dynamic. There was a lack of transparency and required accountability and this created some confusion. This also led OXFAM-EURODAD to argue that BF can be problematic and that it was proving to be not necessarily pro-poor and mainly directed itself towards middle-income countries. It was also noticed that the distribution of funds tended to favour donor country private corporations, as with tied aid. While relying on external private finance, BF not only often crowded out host country financial sectors but also at times was not aligning with national development plans. There was also little possibility of involvement through stakeholder participation, thereby undermining country ownership.

It was also noted by some economic analysts that BF tended to target investment areas where the business case was clearer-such as energy, growth, infrastructure, climate action and, to a lesser extent, water and sanitation. BF was also much smaller for areas such as ecosystems. It was also observed that BF was diverting aid from social programmes and essential services.

Socio-economists have since 2018 observed that as a variant of ‘tied aid’, developed country governments have been persuaded to use their aid or overseas development assistance (ODA) budgets to promote their own national corporate – interests, e.g., by providing ‘blended finance’ on concessional terms to secure PPP contracts, or to otherwise advance the interests of such businesses. On the other hand, aid-recipient governments have been encouraged to replace government procurement with PPP arrangements to undertake infrastructure and other projects despite the mixed records of PPPs, not least in developed countries themselves.

Such a scenario has forced those in need of securing financing for needed infrastructure to create a strong institutional capacity to manage and evaluate PPPs.

Analyst J.K. Sundaram has been following the evolving scenario very clinically, particularly the emerging negative dimensions. In this context in one of his articles he had correctly observed that “strong institutional capacity to better cope with PPPs requires having a dedicated competent service loyal to the government and public priorities and concerns in order to do as needed. Responsible and accountable developed and developing country governments must also work together to ensure that they are all better able to cope with this growing trend of state-sponsorship of private corporate expansion, mainly by the North. However, most low-income and many-middle income developing countries do not have the capacity, let alone the capabilities needed to be able to effectively evaluate and respond to such proposals. Hence, most developing countries need international technical support for the necessary accelerated capacity-building”.

As an economist he also touched on a sensitive connotation correctly. He pointed out that using private consultants to fill the gap in the interim before national capacities are sufficiently developed can be attractive in the short term, but it is often forgotten that most such consultants tend to be mainly oriented to serving ‘better paymasters’ from the private sector”. We have seen such a scenario evolving in many South Asian countries, including Bangladesh.

On the other hand, some analysts during the latest examination of PPPs have observed that this method of cooperation has helped in promoting different denotations of the means to finance and deliver infrastructure, social services and, increasingly, climate-related projects. Advocates with such belief have also claimed PPPs would not only help overcome other problems besides funding but would also help improve project selection, planning, implementation and maintenance.

It has also been claimed by some advocates of PPP that only the private sector can deliver high-quality investment and efficiency in infrastructure and social service delivery. It was similarly mentioned that private financing reduces budget-constrained governments’ need to raise funds upfront to finance, develop and manage projects. A belief has gained ground from lobbyists of the private sector that increased private financing supposedly also overcomes public sector incapacity to deliver high-quality infrastructure and public services. This appears to be partially true as evident from what is taking place in many countries in Africa. Undoubtedly, many government capacities have been diminished there by decades of structural adjustment due to less public finance.

Nevertheless, as was revealed and re-asserted during the UNGA Session there has been a worsening of the situation because many developed countries and rich countries failed to meet commitments to contribute 0.7 per cent of national income as official development assistance (ODA) on concessional terms. The global North has also been unwilling to effectively stem illicit financial outflows, e.g., due to tax dodging.

At this juncture, one needs to remember that PPP promotion has involved many means– media and institutions, including ‘donor’ agencies, multilateral development banks (MDBs), UN agencies, international consultants, transnational accounting firms, and the World Economic Forum (WEF). The World Bank and the Asian Development Bank have long promoted private financial investments in development, as well as ‘blended finance’ and PPPs more recently. In 2022, the influential WEF correctly proclaimed PPPs as essential for pandemic recovery.

However, it is also generally agreed that such promotion of private finance has implications far beyond the actually modest amount of funds raised through ‘blended finance’ and PPPs. Almost every project so funded is touted as proof that private finance should be privileged, including by guaranteeing returns using public finance. The World Bank and other MDBs are devoting considerable effort to advise governments on the use of PPPs but they do not appear to have put enough efforts into improving the quality and effectiveness of publicly financed infrastructure and social services. This is a must and needs to be implemented as a course of action.

At this point one also needs to refer to Sundaram’s assertion that over the years, the World Bank Group has produced different tools – including model language for PPP contracts, which favour private sector interests – often to the detriment of the public partner-governments in need of financing. It has been suggested that the World Bank might consider taking note of what many Regional development banks- such as the Asian Development Bank, the African Development Bank and the Inter-American Development Bank are doing. These institutions have created strategic frameworks, networks and dedicated offices to support countries implementing PPPs. This is helping them.

It has become clear that from the manner in which the PPP promotion scenario is working, its advocacy needs to have re-examination and possible changes in laws, regulatory frameworks and policy environments at international, national and local levels. What we could probably have is more discussion among developing countries – to scale up infrastructure and public service provision – in national development plans pertaining to PPPs.

Such an inter-active and proactive scenario is already taking place in many developing countries who have enacted laws enabling PPPs and set up ‘PPP Units’ to implement PPP projects. The World Bank, International Monetary Fund (IMF) and regional development banks are also working closely with private partners to provide policy guidance advising governments on how best to enable PPPs. Such an equation is also a must for Bangladesh and particularly pertinent for projects related to energy, transport, water and sewerage.

We need to remember that the major setbacks towards achieving adequate financing for both the SDG goals, adaptation and mitigation measures related to climate change are challenges but they can be overcome. We need to believe in discussion as knowledge in the making and that the glass is not half empty but half full. Being positive is the only course of action for developing countries.

Muhammad Zamir, a former Ambassador, is an analyst specialised in foreign affairs, right to information and good governance.

muhammadzamir0@gmail.com

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