Combining development assistance with commercial capital - so-called mixed financing - is an important method of increasing private investment in sustainable development. But there are times when mixed financing is inappropriate. For example, it should not be allowed to influence decisions on privatizations in healthcare and education. This is one of the conclusions in a new report by the Church of Sweden Act.
The issue of the role of private actors in development cooperation has had a central place in the development assistance debate for several years. Mixed financing - where aid is used as a lever to mobilize commercial capital for investment in development - is an important part of this. Through loan guarantees, for example, the risk for business investors is reduced, so that they can and dare to invest more in developing countries.
The loan guarantees that Sida offers today are an important part of this development. The EU has long lacked guarantee instruments, but plans to set aside large resources for such in the aid budget currently being negotiated (the so-called EFSD + funds).
The debate on co-financing is polarized. The World Bank and other donors who invest heavily in mixed financing argue that this is needed to increase private investment as much as is needed to achieve the global goals of Agenda 2030 in developing countries.
At the same time, critical civil society organizations point out that today's strong focus on mixed financing risks leading to less aid going to the most vulnerable people and areas. A very small proportion of co-financed investments are made in low-income countries, and the leverage effect has proved to be significantly smaller than expected. There is no evidence that co-financed projects provide clear development results. It is also difficult to follow up and demand responsibility because a lot of information is considered trade secrets.
All development financing needs to increase
Act The Church of Sweden's starting point is that all forms of development financing need to increase if the global goals are to be achieved. The question is not whether mixed financing is an important tool, but how and in what context it should be used.
In the report Finding its place published today, we discuss the contexts in which mixed financing is appropriate. The question is basically about when a government subsidy or guarantee is justified, and about which activities are to be financed publicly and privately. This is not a specific issue for development cooperation, but basically a central economic policy issue.
All donors working with mixed financing need to address issues such as:
- Does the investment need support to provide a sufficient return?
- How much support does the private investor need to get rid of the investment?
- Is public funding necessary for the investment to get rid of?
We believe that donors also need to consider in a conscious way if private financing is appropriate. Are there other than purely financial reasons for preferring to finance a certain investment with public funds?
An obvious reason for an investment to be financed publicly rather than privately is that it may be necessary to live up to the Agenda 2030 commitments that do not leave anyone outside and to reduce inequality.
Privatizations can leave people out
Privatization of social sectors such as health care and education are examples that risk leading to people being left out. Private schools can be profitable, but risk excluding low-income people. At the conference World Economic Forum It was recently highlighted that privatizations and cuts in public education budgets are important reasons why many children and young people do not receive an education today.
As donors, one must avoid creating incentives for the privatization of social sectors through offers of mixed financing. The balance between private and public is a political issue that must be decided at national level - without pressure from international donors.
In practice, most mixed financing takes place in the energy and finance sectors. Among others, the OECD believes that this should encourage increased efforts to obtain mixed financing in more sectors that can contribute to meeting all 17 global goals. But the conclusion should rather be that mixed financing is not suitable in all contexts.
In order to meet the central social goals 1-4 on poverty, hunger, health and education, above all, more public funding is required. Aid must contribute here, also by strengthening the building of efficient and progressive tax systems.
Mixed financing is a good tool in many sectors and contexts. It needs to be developed in order to really be able to mobilize investments in activities that give great results in terms of sustainable development - for example cooperative agricultural companies.
Sweden can contribute to good practice
Sweden has good opportunities to contribute to the development of international standards for mixed financing and to the development of good practice. One reason is that Sweden uses the state's finances as security for Sida's guarantees, while other donors fund aid funds for this. This means that the risk is small that Swedish mixed financing takes place at the expense of traditional donations to, for example, public health care.
We therefore urge Minister for Development Aid Peter Eriksson and Sida to in all contexts where mixed financing is used and discussed:
- Establish that mixed funding is neither possible nor appropriate in all sectors and contexts and that increased mixed funding must not lead to a reduction in grants for social initiatives.
Apply and advocate assessment criteria as to whether mixed financing is an appropriate form of financing. Pay particular attention to the risk of undermining the commitment that no one should be left out.
- Advocate that resources other than development assistance are used to cover loan guarantees.
This is a debate article. The author is responsible for analysis and opinions in the text.
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