Updated: Mar 1
Author: Isha Bhasin
Bio: Isha Bhasin is a Master’s Candidate pursuing Development Studies at the Graduate Institute with a specialization in Environment and Sustainability.
In the world of development finance, the onus for mobilizing resources and incentivizing private sectors by creating leverage points and markets often rests on the public sector. Governments achieve their objectives through either policy or public financing mechanisms. The public sector’s potential in mobilizing resources can be illustrated by an example where the public guarantees, issued between 2012 and 2017 globally had mobilized the largest amount of private capital worth US$62 billion out of US$152 billion needed in the LMICs (Runde et al, 2020).
However, the pressure on public sectors has significantly increased as the covid-19 pandemic has limited national economic growth rates and regressed revenues. The pressure is especially paramount for LMICs. Although the LMICs were expected to spend 8% of their GDP (US$2.74 trillion) on SDG infrastructure by (when? for a decade or a certain year?), almost three-quarters of the LMICs were forced to cut their public spending by 8% due to pandemic, whilst this decision amplified developmental challenges in these countries (Doumbia et al, 2019; UNICEF, 2021).
Given the dependence of developmental finance on resource mobilization by the public sector, it is challenging to grasp how financial and institutional obligations of the public sector can be diversified to reduce its work strain and limitations given that the public sector is projected to be weak in the covid recovery context. Another complication to development finance is that financing SDGs often deal with high-risk perceptions and low confidence in returns by the private investors.
Exploring this challenge to reduce strain on the public sector is crucial because the private sector, which has the potential to be a core funder of the SDGs, is unlikely to invest without substantial public guarantees and assistance to offset risks in low-return SDG-oriented sectors. If the public sector is weak and incapable of providing such guarantees, the ambition of mobilising finance from the private sector becomes difficult and SDGs will be an unattainable cause.
On a related topic, I conducted a project for the Sanitation and Hygiene Fund (SHF). The SHF relies heavily on public investments in LMICs with weak governments and regressing revenues. Therefore I explored how public sector burden can be mitigated. Through research and conversations with SHF board members, grant funding appeared to be the most feasible solution to partially substitute public finance for development in LMICs. These include two sources namely, official developmental assistance (ODA) and philanthropic grants (Harris et al, 2017).
However, it is to be noted that between 2010 and 2020, ODA grants to LMICs witnessed a decrease of 11% whereas, loans increased by 6% (Dodd et al, 2020). On the other hand, by 2021, philanthropic donations from foundations reached US$88.5 billion, reporting a 17% increase from 2019 (Hrwyna, 2021). So, another viable option to supplement public finances is through philanthropic grants, particularly from family foundations which tend to be more diverse regarding the SDGs but demonstrate a trend of increased financing towards climate projects (OECD, 2019).
Through the project for SHF, there was an interesting discovery that certain factors have to be taken into account to limit LMICs’ over-dependence on ODA and philanthropic grants despite its advantages. For instance, ODA loans tend to increase the risk of debt distress in LMICs and are often invested in economic sectors relative to social sectors (Tew, 2015). Additionally, philanthropic donations chasing philanthropic donations could lead to inconsistent financing as all foundations have different and often ambiguous criteria when approving projects.
Nonetheless, these solutions are not satisfactory by themselves because they only help mitigate financial strain on the public sector. In the end, the responsibility to create infrastructure and a pipeline of investment-worthy projects in high-risk sectors continue to linger. Since most LMIC public sectors are oftentimes inefficient and ill-equipped, capacity building and technical assistance are crucial to realize returns on investment into the development and create the desired impacts.
Furthermore, many international organizations and funds exist to be able to provide technical support, guidelines, conscientious risk management and rigorous project evaluation methods to LMICsto ensure returns (GISD, 2020). Institutions like UNDP and the Private Infrastructure Development Groups (PIDG) have reported positive results in pipeline building in several LMICs (Valahu, 2017).
Conclusively, a combination of both solutions seems satisfactory. The public sector is the key to developmental management, but an inefficient and overburdened public sector, without the technical and financial expertise, may create more problems than it solves. So, due to the limited revenues in LMICs, considering other sources of debt-free financing is reasonable, especially given the upward trend in philanthropic donations. Additionally, to further reduce the institutional burden on ill-equipped public sectors, transparent partnership with organizations driven by SDGs is necessary to achieve sustainable development being limited to scarce domestic resources.
Conclusively, the public sector is the key to developmental management, but an inefficient and overburdened public sector, without the technical and financial expertise, may create more problems than it solves.
Author: Isha Bashin
Editor: Khaliun Purevsuren
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