The European Parliament has just released a major report with a clear message for all those engaged in the growing debate about the role of external private finance in development: quality matters far more than quantity. As the post-2015 debate on financing development continues, and the UN gears up for a major Financing for Development conference in 2015 or 2016, this timely paper – co-authored by Jesse Griffiths and three other experts - gives clear recommendations on how European governments can ensure that fighting poverty stays at the heart of this agenda.
The current picture
Firstly, here are the main findings of the report’s review of all available data on global private finance flows:
- Domestic private investment is significant and growing. Public and private investment, taken together, have grown as a proportion of GDP, from 24.1 % in 2000 to 32.3 % in 2011.
- Outflows of private financial resources are extremely large. Most are not productive investments in other countries but repayments on loans (over USD 500 billion in 2011), repatriated profits on foreign direct investment (FDI) (USD 420 billion) or illicit financial flows (USD 620 billion).
- Figures greatly overstate the real net financial private flows to developing countries. Foreign Direct Investment (FDI) is the largest resource flow to developing countries, but outflows of profits made on FDI were equivalent to almost 90% of new FDI in 2011. In addition, FDI includes the reinvestment of earnings from within the ‘destination’ country: not an inflow.
Things to remember about private finance
The report argues that three facts about external private finance should be at the top of policy-makers minds:
- It predominantly flows towards higher income countries.
- It has proved very difficult to target it towards micro, small and medium enterprises (MSMEs), which provide the majority of employment and GDP in developing countries.
- Its for-profit nature means it cannot tackle several key issues, including much public service provision which is vital for private sector growth.
Given this, efforts to incentivise or ‘leverage’ increased private investment in developing countries by development finance institutions (DFIs) and others have been disappointing. The report finds that DFIs have:
- Difficulties in designing programmes that work for MSMEs in low-income countries (just 0.4 % of the portfolio of the European Investment Bank’s portfolio).
- Little success in generating ‘additional’ private sector investment, with external evaluations showing that many publicly-backed investments replace or supplant pure private sector investments.
- Low developing country ownership over the institutions and programmes of DFIs.
- Significant problems in providing adequate transparency and accountability.
- Increasing debt risks, and very expensive financing, particularly through public-private partnerships, which have proved the most expensive source of finance for developing country governments.
There’s a lot of confusion surrounding the term PPPs – in the classical sense, PPPs involve a private investment in a ‘public’ service area where the private investor gets repaid over a number of years, either through revenues or – very commonly – by the government. In this latter case, as the killer chart below from the report shows, PPPs are really just an extraordinarily expensive method of government borrowing. (...)
Read the full blog post here:
http://eurodad.org/Entries/view/1546189/2014/04/10/Major-new-report-on-private-finance-urges-post-2015-focus-on-quality-not-quantity
Read the full EP report here: http://eurodad.org/files/pdf/5346a6b10e9a4.pdf
Source: Eurodad.
