11.06.2015 | Righting Finance

Regulatory framework fails to match hope placed on private companies, new studies say

By Aldo Caliari

Negotiations towards the Third International Conference on Financing for Development, to be held in Addis Ababa (Ethiopia) on July 13-16, are in full gear. In line with ongoing trends in the landscape of development assistance, deliberations thus far have shown a strong promotion, especially by Northern countries, of increased reliance on private sector sources for development funding. Two new studies set out to interrogate what does this mean for the language on human rights accountability of the private sector that we should expect to see negotiated in the conference, and whether expectations are being met by reality.

As put by the High Commissioner for Human Rights, “As businesses assume an ever-expanding role in the development and economic spheres their adherence to the human rights responsibilities outlined in the UN Guiding Principles on Business and Human Rights becomes increasingly critical.”, So, the fact that the current draft for negotiations shows limited interest in increasing frameworks to hold the private sector accountable, is one that should be seen as in striking discordance with the greater role the private sector is called to play in the agenda. In fact, it is one that could revolutionize governments’ responsibilities in the area of human rights as we know it. For even the Guiding Principles on Business and Human Rights are barely a minimal safeguard to hold companies accountable for human rights abuses, their  insufficiency becoming manifest in the renascence of efforts to create stronger, binding frameworks for transnational corporations in regards to human rights.

A briefing paper “Delivering sustainable development: A principled approach to public-private finance,” authored by several organizations, including Eurodad and the UK-based charity CAFOD, focused on the increasing trend by donors to “leverage” private sector funding – that is, use aid as an incentive to attract private sector funding to a project.

While the practice sounds on paper like a very efficient way to use public finance, in practice it presents many challenges that the paper describes regarding how to ensure that the projects deliver sustainable results, ensure participation, accountability and redress for affected communities, are transparently-run, linked to national development priorities, additional and channeled through the appropriate vehicles.

For instance, it is challenging to show the projects financed with these modalities have impacts on poverty reduction, women or marginalized groups. “A 2014 review by the Bank’s Independent Evaluation Group looking at 128 World Bank-financed Public-Private partnerships (PPPs) found that the main measure of ‘success’ is profitability – other factors are rarely considered,” says the study. While some of the donors engaged in these practices have safeguards to mitigate harm, recent studies have shown these are often poorly implemented and enforced.

According to the paper, dialogue with affected communities and civil society both in donor and beneficiary countries, “is insufficient, in particular in seeking consent and in the establishment of grievance mechanisms to resolve and remedy disputes.” It refers also to challenges that are being created by the Project Preparation Facilities (PPFs) the Group of 20 is asking all multilateral development banks to put in place. In order to compress the time for project preparation, expediting land acquisition, and standardizing bidding, procurement and other processes, such facilities risk reducing the possibilities to properly identify and involve stakeholders in development initiatives, opening the possibility of negative human rights impacts.

The paper recommends a series of principles against which to benchmark governments’ application of best practice, international standards and learning more systematically to help ensure best outcomes for sustainable development. The proposed principles draw on existing practice, such as standards and safeguards, and information from interviews with donors. It is rooted in accepted global standards and legally binding principles, such as the UN’s sustainable development principles, development  effectiveness principles as well as the human rights obligations of both the state and the private sector is reflected in the UN Guiding Principles on Business and Human Rights.

Center for Research on Transnational Corporations (SOMO) and the Norwegian Forum for Environment and Development released another paper: “Making financing for development more accountable?”  This paper also argues that the private sector is being assigned an increasingly prominent role in the Financing for Development process, as well as the post-2015 development agenda and the Conference of the Parties of the UN Framework Convention on Climate Change.  “However, it is also widely documented that business activities can have adverse impacts on the full spectrum of human rights, from labour rights abuses to environmental destruction that threatens the right to health,” it states.

This report delves into the history of the Financing for Development process to show it has largely neglected measures to ensure that reliance on the private sector to deliver development outcomes does not come at the expense of human rights. “The 2002 Monterrey Consensus primarily emphasises the positive development impacts of the private sector and prioritises the promotion and protection of foreign investments, without any accompanying commitments to prevent any adverse impacts from private sector activity,” the paper reads. Similarly, the 2008 Doha Declaration, as a result of the second conference on FfD, reflects very weak language regarding the responsibilities of private actors, merely “welcoming” efforts to promote corporate social responsibility and good corporate governance.

The study outlines the normative developments that advanced the human rights framework for business since 2008, namely, the adoption of the UN Guiding Principles on Business and Human Rights and the revision of the OECD Guidelines on Multinational Enterprises so its human rights section mirrors such guiding principles. It then proposes ways in which such normative developments can be recognized in the current text being negotiated at the UN, in its Preamble, sections on domestic public finance, domestic and international private business and finance, trade; and systemic issues.

Recommendations could be summed up as focusing on: (1) the state duty to ensure that fiscal policies, incentives or tax treaties do not undermine human rights and sustainable development; (2) operationalization and implementation of the [UN Guiding Principles on Business and Human Rights], including mandatory reporting and access to remedies; (3) making trade and investment agreements consistent with human rights by assessing their impact on people and the environment; and finally (4) the state duty to ensure that human rights due diligence is undertaken when financing the operations of the private sector through a Development Finance Institution or otherwise.

In its concrete language recommendations for the negotiating text, and in line with its key messages, the Office of the High Commissioner for Human Rights has echoed several of these concerns, as has the UN Special Rapporteur on Foreign Debt and Human Rights.

Proposals at the moment to address these issues in the revised text for the negotiations do not bode well for the outcomes. The text (Paragraphs 35 and 36) emphasizes voluntary initiatives on corporate social responsibility and regards calls for public policies and regulations as only pertinent to complement such initiatives, instead of the other way around. Moreover, it includes among the voluntary initiatives controversial ones such as the Principles on Responsible Agricultural Investment and Food Systems, whose lack of consistency with human rights led to strong civil society concerns and resulted in a lack of civil society endorsement.

Although a number of Special Rapporteurs recently voiced joint concern about the coherence of trade and investment agreements with human rights, a proposal in earlier drafts for revising investment agreements, including dispute settlement systems in line with some human rights obligations, is present only in a much weaker form (Paragraph 78), and its survival is by no means assured.

Only in a tangential form does the draft address public agencies leveraging aid for development finance, (through references to “blended finance” in Paragraph 48). It says such vehicles “should be transparent, share risks and rewards fairly, and be implemented following feasibility studies that demonstrate that they are the most effective modality.” Earlier drafts included references to the need for environmental and social safeguards and a call for these vehicles to avoid generating contingent liabilities. While the former reference has been entirely struck out, the latter morphed into a mere call for building capacity for their “budgeting and accounting” of such liabilities, as some countries criticized the language for being “too negative.”

With a few weeks left before the conference, there is still hope that civil society advocacy could help correct these issues, so that the framework for development finance to emerge from Addis Ababa will consistent with existing human rights and corporate accountability standards.