Low income countries have limited access to international bond markets for raising sovereign debt finance. Low credit ratings are inevitable, in light of inadequate legal and physical infrastructure, combined with weak economic indicators.
Multilateral development banks, such as the World Bank and the African Development Bank, exist for the purpose of stepping in with debt finance, where normal commercial terms are either unavailable or unaffordable. These concessionary loans for the poorest countries typically fund infrastructure projects or build targeted capacity for economic development. For example, special economic zones are created to attract foreign direct investment, lured by favourable tax and regulatory environments.
In the aftermath of the 2008 global financial crisis, a period of low interest rates has enhanced the attraction of both concessionary and commercial debt finance. Many of the world’s poorest countries have increased their national debt significantly in recent years. And some of the more robust African economies have been successful in global bond markets.
Access to greater financial resources by this means can become a double-edged sword. There are concerns about a resurgence of the debt crisis, especially in Africa. Falling commodity prices, the strong value of the US dollar and the increasing share of aid provided as loans rather than grants are the prevailing negative influences on capacity to service debts.
For example, a quarter of Nigeria’s budget for 2017 will be swallowed up by sovereign debt servicing. The IMF has warned that 30 countries are at high risk of debt distress, more than double the number in 2013.
Mobilisation of private sector finance is perceived by many observers as the essential tool to fill the funding gap for development in the world’s poorest countries. The role of public-private partnerships for sustainable development is to exercise public sector resources in breaking down whatever barrier prevents private finance from tackling a project alone.
Often described as “blended finance”, the most common example involves a donor government or development bank guaranteeing a commercial loan that would not otherwise be granted. The reduction in risk is sufficient to suck in private investors.
This model of private sector involvement is integral to the UN’s 2030 agenda. The Sustainable Development Goals include a target to “encourage and promote effective public, public-private and civil society partnerships. The World Bank has indicated that it is becoming more interested in leveraging private sector finance than in making loans.
Agencies which encourage this path argue that private corporations have unrivalled access to capital and expertise necessary to deliver value for money in projects designed for social or development benefit. Opponents point to the irreconcilable conflict between business goals to maximise return on capital and the duty of government to provide essential services to all, rich or poor. They allege that blended finance increases government debt and raises prices for users.
The public-private model for development finance has a mixed track record, especially in its tendency to veer towards provision for the more affluent households. According to the OECD, the $36.4 billion of private finance leveraged by aid in the period 2012-14 was mostly destined for energy and banking projects in middle income countries. There are limits to the reach of altruism into business models.
The ultimate inspiration for a private sector development model is the global market penetration of mobile phones. Distributors have created business models to reach even the poorest households with virtually no support of public finance.
Could this success be repeated for other products beneficial to livelihoods and health – household solar installations, clean cookstoves, safe sanitation – if necessary with the helping hand of public sector funds?
The thirst for the public-private partnership model within the traditional donor community extends even to the challenge of global hunger. The New Alliance for Food Security and Nutrition announced by President Obama in parallel with the 2012 G20 summit in Mexico invited international agribusiness corporations to participate in programmes within some of Africa’s poorest countries.
Shortly after that summit, the landmark Rio+20 Conference on Sustainable Development brought a rash of announcements of public-private partnerships designed to support Sustainable Energy For All, the initiative championed by the UN Secretary-General.
In one of those announcements, the European Union aims to leverage about EUR 30 billion of energy investments in developing countries by deploying EUR 3.5 billion of aid. Such promises may depend on interpretation of the eligibility conditions for foreign aid. European governments are controversially lobbying for changes to the rules.