18.08.2015 | UNRISD

Investing in the SDGs: Whose Business?

by Aldo Caliari, Project Director at the Washington DC-based Center of Concern

The role of foreign investment in financing development has been a matter of considerable debate in the negotiations leading up to all Financing for Development (FFD) conferences. But deliberations towards the one which took place in Addis Ababa in July 2015 have seen a definite tendency to propose a greater reliance on foreign investment in financing development. It will be important to watch how the Addis Ababa conference frames the regulatory role of the state, and the practices of using aid as an incentive to attract private sector funding, and Public Private Partnerships (PPPs) and institutional investors’ role in closing the infrastructure finance gap. With the transnational corporate sector more involved than ever in defining policies around sustainable development, winning the struggle for the narrative around the contribution of private capital flows to development is a crucial prize at stake in the Financing for Development negotiations in Addis Ababa and beyond.

This contribution was published as part of UNRISD's Think Piece Series The Road To Addis and Beyond, launched to coincide with the third and final drafting session of the outcome document of this summer's Third International Conference on Financing for Development. In this Series, global experts discuss a range of topics complementary to the UNRISD research project on the Politics of Domestic Resource Mobilization on how to fund social development and raise provocative or alternative perspectives that can generate further ideas and debates.


The role of foreign investment in financing development has been a matter of considerable debate in the negotiations leading up to the Third International Conference on Financing for Development. An example of this is the ongoing dispute between Northern and Southern countries on how to frame the chapter that deals with foreign investment in the conference Outcome Document. Developing countries opposed the inclusion of both domestic and international private finance in the same chapter, arguing that this blurs the lines between two different flows that should be treated in different ways.

Foreign investment was already debated in the preceding Financing for Development (FFD) conferences. The Monterrey Consensus in 2002 came on the heels of strong anti-globalization demonstrations and a raging backlash against the Washington Consensus, which was seen as the culprit in the Argentinean debt crisis and default in 2001. The FFD Review (Doha 2008) took place against the backdrop of the eruption of the worst global financial crisis since the Great Depression;a crisis which called into question the role of the private sector in general and assumptions about its efficiency and ability to maximize development outcomes. But deliberations towards the post-2015 development agenda have seen a definite tendency to propose a greater reliance on foreign investment in financing development. This may be associated with the fact that the Addis conference also aims to support the Means of Implementation for the Sustainable Development Goals (SDGs), which will replace the Millennium Development Goals (MDGs)when they expire at the end of 2015. As the upcoming SDGs will be more ambitious than the previous development goals, there is general agreement that they require a several-fold expansion of current investments. However, dramatic expansion of public finance can be ruled out: several donor countries have cut their aid budgets and are implementing austerity measures. So, the argument goes, the several-fold increase will have to come mostly from private sources.

Therefore, the ways in which the Addis Ababa conference frames two key variables—the regulatory role of the state, and blended finance and Public Private Partnerships—will be important to watch.

Reconciling state and private interest in promoting foreign investment

While private capital inflows can help finance development, their contribution depends crucially on the specific conditions under which the investment takes place. Investments can generate jobs, bring technological and managerial capacities, and foster demand for local producers via backward and forward linkages between the foreign companies and local ones. Countries that have been able to make foreign investment play such a development role are those that have succeeded in unpacking and absorbing these investment-related benefits into the national economy. The challenge in this is that the host government’s objective of unpacking these benefits of foreign investment will frequently clash with the private companies’ objective of making a profit and achieving or maintaining a position of market dominance. To give a very simple example: the national government should be able to capture a fair share of the increased economic activity that the private sector generates. But if the government has to provide generous tax breaks to attract the investment in the first place, then its purpose is—at least partially—defeated. Likewise, the company will often teach local workers some new skills, but it may refuse to transfer selected, critical skills because it fears creating a trained workforce for potential future competitors, thus frustrating absorption of that part of the package into the local economy.

There is also a growing body of voluntary standards which try to align business interests with government objectives. Since the Doha FFD Review a number of new voluntary guidelines have been approved. For instance, in 2011, the Human Rights Council adopted the UN Guiding Principles on Business and Human Rights. In 2012, the Food and Agriculture Organization adopted guidelines on Responsible Governance of Tenure of Land, Fisheries and Forests, and in 2014 the World Committee on Food Security adopted the Principles for Responsible Investment in Agriculture and Food Systems (RAI). However, none of these instruments is beyond reproach. The ongoing difficulties in demanding accountability for human rights abuses under the Guiding Principles have already prompted negotiations in the Human Rights Council towards a binding instrument on the matter, and civil society has resoundingly refused to endorse the RAI. But even in the best case scenario, Guiding Principles should be considered complements to regulatory initiatives; they are no substitute for them.

At the same time as this body of voluntary standards addressing corporate accountability emerges, a body of binding standards on investment that creates rights, but not obligations, for corporations has also been growing rapidly. According to UNCTAD, more than 3,000 investment agreements have been signed.1

However, investment agreements have been questioned because they constrain the policy space states could use to make foreign investment work for development. Typical clauses in investment agreements limit or remove altogether the ability of the host state to screen investments, to regulate their behaviour in the public interest and to set conditions for investors (for example requiring foreign companies to purchase inputs from local producers). The agreements not only create rights for the investors, but also have brought with them a speedy international jurisdiction to enforce them. Special dispute settlement systems allow investors to sue governments before an arbitral tribunal for alleged infringements of their rights under the agreement. Lawsuits of this kind also have a chilling effect on states’ willingness to regulate, as losing a suit may lead to multi-million or billion dollar awards.

Assessing the merits of blended finance and PPPs

Another issue that is central to the Addis Ababa outcome is the practice of “leverage” of financial funds. A growing number of donors have, in the last few years, increased modalities under which they “leverage” private sector funding—that is, use aid as an incentive to attract private sector funding to a project. This is often referred to as “blended finance”—the combination of some amount of concessional public finance with non-concessional private finance.

While the practice may, on paper, seem like a very efficient way to use public finance, in reality it presents many challenges. How can leverage practices guarantee that private finance is not wasted to mobilize investment that would go to that project or sector anyway (or additionality in economics terms)? How is one to ensure that the projects are geared to support underserved segments of the population? Research has found that only a limited portion of leveraged finance benefits small and medium enterprises.2

In the lead up to the adoption of the post-2015 agenda, there is also debate on the “infrastructure gap,” and how to close it, as several of the goals essentially require investing in particular infrastructure sectors. While there is a real gap in all countries, in developing countries it is estimated to run to more than USD 1 trillion per year.3 A controversial area of the discussion is the role that Public Private Partnerships (PPPs) and institutional investors can play in closing this gap.

Essentially, PPPs are arrangements by which a government hires a private company to design and build and/or operate a certain infrastructure facility, in exchange for promise to pay with a mix of government transfers and levies to be exacted from the users. In theory PPPs could be a great way to transfer the risks of investments in infrastructure to the private sector while benefitting from private companies’ ‘state-of-the-art’ capacity for efficient and low-cost implementation. This requires, however, two things: first, well-crafted contracts that actually strike a fair balance of risks and benefits; and second, sufficient institutional capabilities, including transparency and checks and balances, during the negotiation and monitoring of contracts to ensure that the public interest—especially that of citizens and taxpayers in the host country—is adequately protected.

Unfortunately, that has proven to be setting the bar very high—not only for countries in the South with short-staffed and precarious administrations, but also for some countries in the North that one may have expected to be better prepared. An OECD report refers to the example of OECD economies in which “the extensive use of PPPs led to overinvestment in domestic infrastructure, contributing to the countries' financial crises.” It continues “However, it is not clear whether most DAC members link their domestic experience in private participation in infrastructure with their views and approaches towards supporting private investment for developing country infrastructure.”4 IMF researchers also found that PPPs are frequently subject to several renegotiations whose outcomes tend to further tilt the balance towards the private sector operator.5

Arcane and complex contracts have proven a fertile ground for overly generous public guarantees, some that create liabilities that may not be applicable until years in the future and, therefore, are not scrutinized by parliament. Such public guarantees may indulge a lazy private sector, one prone to overruns and rent-seeking behaviour, rather than one interested in making the most efficient use of available resources.

The usual difficulties associated with PPPs may be compounded by resorting to institutional investors. It is true that these investors—mutual funds, private equity funds, pension funds, insurance companies and the like—have more than USD 80 trillion assets under management.6 Achieving only a tiny increase in the proportion of such funds that goes into infrastructure investment could have a huge impact. But these investors are extremely risk-averse. The issue then is: will the enabling environment created for these investments shift more risks to consumers and taxpayers in host countries, taking advantage of the opacity, complexity and monitoring challenges of PPPs?

SDGs: Harnessing corporate power or enthroning it?

Determining the narrative built around the contribution of private capital flows to development was a crucial prize at stake in the Financing for Development negotiations towards Addis Ababa and continues to be relevant.

It cannot be seen as a mere coincidence that the transnational private sector is being called upon to play a greater role at a time of heightened influence by the transnational private sector in the design of policies at the UN and elsewhere. A recent study documented the rise of transitional corporate influence on the post-2015 agenda: “Numerous corporations and business associa¬tions active in the Post-2015 Agenda are indeed proposing a radical transformation, by putting business at the centre of sustainable development and redesigning global governance on voluntary, multi-stakeholder terms.”7

From this perspective, designing the post-2015 agenda reveals itself as a historic opportunity and a seismic moment that the transnational corporate sector is trying to seize to its advantage. The SDGs can be seen, in a secondary role, not only as development goals but also essentially as market segments that transnational corporates are trying to capture. The contradictions involved in trying to market goals to the private sector that, in many cases, do not lend themselves to profit-making have not yet been fully explored.

The greater reliance on foreign investment also plays to the needs of traditional donors. The MDGs were part of a Global Partnership for Development that was clearly defined as one between governments from the North and the South. In the last few years, there has been a clearly noticeable trend of traditional donors attempting to redefine the terms of that partnership in a way that would essentially dilute their commitments. The partnership would now be, in their view, one that includes emerging donors, philanthropic institutions and, more relevant for our topic here, the private sector. In the recent FFD negotiations this took the form of a strong and repeated assertion that “the world has changed” and references to a North-South divide were a “thing of the past”.

It is hard to deny that the significant upscaling of funds needed to meet the new goals will require resorting to more private investment. However, it is precisely this factor that calls for more vigilance in strengthening frameworks to hold the private sector accountable and give States enough policy space to ensure that the private sector contributes to development. The fact that this is not happening should ring alarm bells. In the Addis Ababa narrative, the struggle for the soul of sustainable development may have just begun.

1 UNCTAD 2012. World Investment Report: Towards a New Generation of Investment Policies, p. 84.
2 Eurodad 2012. Private profit for public good? Can investing in private companies deliver for the poor?, p. 17-18.
3 Bhattacharya, Amar, Jeremy Oppenheim and Nicholas Stern 2015. Driving Sustainable Development through Better Infrastructure: Key Elements of a Transformation Program. Brookings Global Economy and Development Working Paper No. 91, July, p. 9.
4 OECD 2014. OFFICIAL SUPPORT FOR PRIVATE INVESTMENT IN DEVELOPING COUNTRY INFRASTRUCTURE. Advisory Group on Investment and Development. March 21, p. 27-28.
5 Queyranne, Maximilien 2014. Managing Fiscal Risks from Public-Private Partnerships (PPPs). March, slide # 9.
6 UN Task Team Working Group on Sustainable Development Financing 2013. Challenges in raising private sector resources for financing sustainable development. Background paper prepared for the Intergovernmental Committee of Experts on Sustainable Development Finance, p. 8-9.
7 Pingeot, Lou 2014. Corporate influence in the post-2015 process. Global Policy Forum, p. 29.