How to get the most possible development effect from international aid - which, despite its size, is a limited resource? So-called mixed financing is a form of development cooperation that donor countries look at differently, writes Mats Hårsmar. He has project-led a new report on the topic from the Expert Group for Development Aid Analysis.
To achieve Agenda 2030 and the global sustainability goals, the usual assistance is not enough. Massive funding is required. Aid, on the other hand, can play an important role by being used "catalytically", ie attracting private funding to support the agenda. This is already happening today through the use of loans, guarantees and other instruments to stimulate investment from the private sector. Public funds can cover some of the risks, which enables investments that would otherwise hardly be made.
A recent report from the Expert Group on Development Aid, Mobilizing Private Development Finance: Implications for Overall Aid Allocation, relates to development assistance's efforts to attract additional funding for private sector development, through so - called mixed financing. The report shows that donor countries are increasingly planning to use their aid in this way. It also shows that flows from most rich countries in the OECD Economic Cooperation Organization have so far mostly gone to middle-income countries, largely missing both the poorest countries and the more vulnerable groups.
The rules for what may be counted as assistance when the funding comes partly from the private sector are unclear. The study's authors advocate clearer rules. At the same time, they open up a discussion on whether tax-financed aid, which is a limited resource, should perhaps rather be targeted at the most vulnerable in low-income countries.
Critics of the report's views point out that it is not possible to compare mixed financing with ordinary donations. The purpose is to generate further resources for important purposes by directing a small proportion of all the world's private investment towards development purposes. A gift krona is not worth as much as a krona used in mixed financing, as the latter generates "new" and more kronor.
Suddenly opens up basic questions about how development takes place and the role of development assistance in this. Is it mainly private investments that provide jobs, tax revenues and thus build functioning societies? Do such private investments presuppose that there is a certain state or social structure in order for them to lead to development? How do you reach the poorest countries with constructive private investment? Where the structures are weak.
In countries where development assistance is highly questionable, but governments are still bound by legislation or other commitments to a certain level of disbursement, the unclear regulations create a risk of mixed funding by using too generous an interpretation to reduce actual aid volumes. For example, some countries report the entire guaranteed loan amount as development assistance. Other countries only include the costs incurred for non-repayable loans, ie the actual costs of a guarantee.
Sweden belongs to the latter group. Through clear governance, all Swedish actors involved are also focused on ensuring that the interests of private investors are not promoted at the expense of the development effects of the business. The discussion on co-financed development assistance is necessary and crucial for how development cooperation is designed in the future.
Seminar on mixed financing
Do you want to hear more about mixed financing and the conclusions in the report Mobilizing private development finance: implications for overall aid allocations? Then you can come to EBA's seminar now on Thursday 12 March at 13.30 in Stockholm.