The challenges facing the G20
As the G20 meet in Buenos Aires Dr Celine Tan, Associate Professor in the University of Warwick's School of Law, assesses how the presidency of Argentina has focussed the summit and examines the challenges they face.
A key priority for Argentina’s presidency of the G20 is the mobilisation of private investment for social and economic infrastructure and public-private partnerships in food and agricultural production, primarily through the deployment of public resources towards the facilitation and promotion of so-called ‘innovative’ hybrid financing mechanisms.
This includes the use of official financing to de-risk infrastructure projects through the use of equity investments, guarantees, insurance and other financial instruments (known as ‘blended finance’); standardising financial products and pooling institutional capital from multilateral development banks (MDBs) to encourage commercial investors to funding infrastructure and other SDGs. The G20 is especially keen to developing infrastructure as a tradeable asset class and increasing the securitisation of infrastructure financing to entice institutional investors to meet the infrastructure financing gap estimated at USUS$5.5 trillion from now until 2035.
Engagement of private actors
This focus on the engagement of private actors, both commercial and non-profit, in the financing of investments in global public goods, is a hallmark of the financing agenda for the Sustainable Development Goals (SDGs) that is seeking to overcome resource gaps in the financing of the SDGs from the ‘billions’ currently available through official or public resources to harnessing the ‘trillions’ of dollars potentially available through private investors. These proposals represent a broader reorientation of the role and function of public financial institutions, such as MDBs and development finance institutions (DFIs), including the UK’s CDC, away from direct lending towards risk mitigation for the purposes of mobilising private capital.
There are several concerns with the speed in which the new financing agenda is being implemented and new instruments for financing sustainable development are being introduced. From a governance and regulatory perspective, the expansion of private financing of global public goods, such as infrastructure and food and agricultural production, and the use of ‘blended finance’ to support such investments without careful thought is problematic in several ways.
Mapping, tracking and accounting
First, the dispersal of development finance across different financing platforms will complicate efforts by the international community to map, track and account for the financial flows aimed at meeting the SDGs with implications for monitoring decision-making processes, transparency of financial disbursements (especially where official resources are mixed with private investments) and procurement of goods and services, and overseeing the implementation of policies and projects. It will also be difficult for public financiers, such as MDBs, to monitor and address social and environmental impacts of privately funded or blended project when public resources have been blended with private resources and repackaged as securities.
Second, the move towards public-private financing brings development finance into closer contact with global economic governance frameworks typically associated with commercial activities, creating new challenges for the interface between development policy and other arenas of international economic law and governance. For example, as my co-author, Lorenzo Cotula and I have argued previously, the complex structure of PPPs and blended finance instruments can increase the number of private actors potentially eligible to claim under international investment agreements should investments run into difficulties, thereby expanding the potential pool of claimants against states.
Third, the creation of new financial instruments and heavy reliance on financial markets for funding infrastructure and other SDG needs may not be a reliable or sustainable model of long-term financing when regulatory structures remain inadequate for ensuring the financial stability of such models in the longer term. The G20 is championing a financialised model for financing critical social and economic infrastructure and investments in food security and agriculture while at the same time acknowledging that there remains a need to address volatility in international capital markets and that there remains regulatory gaps in the international financial system that can lead to financial crises. Moreover, recent experiences in industrialised countries, such as the high-profile collapse of Carillion in the UK, have highlighted the precarity of relying on private investors to finance and deliver public services.
Technically complex reforms
Lastly, the introduction of new forms of financing public goods must be accompanied by wide ranging and complex policy, legal and regulatory reforms that will safeguard beneficiary and host country interests. These reforms are technically complex and difficult, and many developing countries have limited capacity to design and provide the requisite political and institutional oversight necessarily to supervise these investments. Among other things, these new mechanisms create increased layers of intermediation and creates new administrative and regulatory challenges for both donor and recipient countries.
In short, the G20’s proposals for financing sustainable development must be treated with caution and must be considered in light of their broader implications for regulatory framework of international development finance. Without such considerations, these mechanisms will serve to undermine rather than meet the substantive objectives of the SDGs.
Published: 30 November 2018
Celine Tan is an associate professor in the School of Law at the Univesrity of Warwick.
The Risks of Using Blended Finance in Development (2018), GLOBE Centre Policy Brief#4, October 2018 - Celine Tan
Regulating Development Partnerships: PPPs, Blended Finance and Responsible Investment Provisions, Celine Tan and Lorenzo Cotula
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