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16th Oct 2021

EU pushes private finance as report casts new doubt on costs for poorest

  • The EU wants to plug the developing world's infrastructure needs with private finance, ahead of a UN summit on development funding. (Photo: Colin Crowley)

The EU is pushing plans to expand the role of private finance in development policy, despite a new evidence suggesting that public/private partnerships (PPPs) are the most expensive ways to finance projects in the world’s poorest countries.

Finance ministers will gather in the Ethiopian capital Addis Ababa next Monday (13 July) to discuss how to finance the soon-to-be-agreed Sustainable Development Goals (SDGs) intended to cut poverty and develop infrastructure in the world’s poorest countries.

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The SDGs are intended to replace the Millennium Development Goals which will expire this year and were focused on halving the number of people living in extreme poverty and dramatically increasing access to education by 2015.

A paper published Thursday (9 July) by Eurodad, the pan-EU agency for debt and development, argues that PPP’s “are, in most cases, the most expensive method of financing, significantly increasing the cost to the public purse.”

It adds that post-construction costs for PPPs are on average 24 percent more expensive than publicly funded infrastructure projects.

According to documents seen by EUobserver, ministers could agree a communique stating that “blended finance instruments including PPPs serve to lower investment specific risks and incentivise additional private sector finance across key development sectors”.

It adds that “projects involving blended finance, including PPPs, should share risks and reward fairly, include clear accountability mechanisms and meet social and environmental standards.”

The language has been made more positive on the role of private finance at the instigation of the EU and other wealthy countries, sources involved in the negotiations told this website.

The World Bank has identified poor quality or a lack of infrastructure, particularly relating to transport and energy networks, as the main barrier to economic growth for low and middle income countries. However, few countries have the fiscal space needed to self-finance an estimated $1-1.5 trillion annual infrastructure spending demand, while European and other wealthy countries are anxious to reduce their spending on development.

As a result, governments are increasingly looking to so-called ‘blended finance’, under which a donor country or development bank puts up a small grant or loan guarantee which is then used to leverage private-sector capital to fund the rest of the project.

The EU-taxpayer funded European Investment Bank, together with the French and German development banks, are among the main players in project finance in the developing world.

For its part, the EU has eight regional Blending Facilities, including for Africa, Latin America and Asia, which pool money from bilateral donor agencies and help fund large-scale infrastructure investments.

“We see private sector engagement much more along the lines of major development policy goals than along the lines of pure profit,” EU development commissioner Neven Mimica has said.

Accountability

However, critics of blended finance contend that there is insufficient accountability to such schemes, making it difficult to track which companies secure contracts, and for national parliaments to maintain local control over the development of projects.

Others argue that the profit-motive means that blending projects take place in middle-income countries rather than nations most in need of development aid.

A group of countries, including Belgium and Ireland are known to be more critical of the lack of accountability in blending projects.

The Addis conference “will be the point where blending becomes stamped as being internationally acceptable,” says Tove Ryding, secretary general of Eurodad.

International tax standards are also set to be a hot topic of discussion. South American and African countries are unhappy that the Organisation for Economic Co-operation and Development, a Paris-based think tank composed of 34 member countries almost exclusively from Europe and North America, has again been proposed as the arbiter for international tax standards, despite having no African countries as members.

Developing countries are particularly vulnerable to money laundering and tax evasion, a problem compounded by a combination of weak financial regulation and limited law enforcement.

For example, the African continent is estimated to lose more than $50 billion per year in illicit financial outflows, according to a report released in February by an African Union working group.

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