United Nations: ODA, blended finance insufficient to achieve SDGs

Official development assistance (ODA) and blended finance alone are insufficient in both quantum and nature to enable the finance needed to achieve the Sustainable Development Goals (SDGs), according to the UN Conference on Trade and Development (UNCTAD).

This is one of the main conclusions highlighted by UNCTAD in a Secretariat Note presented at the third session of the Intergovernmental Group of Experts on Financing for Development taking place from 4-6 November.

Definitional and measurement inconsistencies contribute to an increasingly blurred picture on the ability of ODA in combination with blended finance to make a sufficiently substantive contribution to achieving developmental goals, including the SDGs, said UNCTAD.

"On current trends towards leveraging public funds to attract private finance, low-income developing countries and the least developed economies seem to be losing out, alongside efforts to ensure environmental protection through longer-term investment in developing countries routinely affected by natural disasters."

This requires concerted efforts in the North to meet their original commitments and reinvigorate international development cooperation through transparent and effective non-concessional resource transfers to the South, said UNCTAD.

South-South cooperation can, and increasingly has, backstopped fledgling North-South development cooperation, but does and should remain complementary to this, it added.

The theme of the third session of the Intergovernmental Group of Experts is "International development cooperation and interrelated systemic issues".

The agreed guiding questions for this third session are:

(a) How can the commitment by the Addis Ababa Action Agenda (of the Third International Conference on Financing for Development) to reverse recent declines in ODA be met, and how can ODA play a more effective role in efforts to scale up development finance required to achieve the Sustainable Development Goals?

(b) How can the quality and impact of both concessional and non-concessional official flows be improved and coordinated to support these efforts, including through innovative financing models and tools?

(c) What institutional, policy and regulatory changes at the international level will be helpful to ensure that global economic governance appropriately supports effective international development cooperation, to facilitate domestic public resource mobilization?

Ongoing Malaise of ODA?

According to the UNCTAD Secretariat Note, the year 2015 was a landmark year for multilateralism and international decision-making that intended to fundamentally shape the post-2015 policy agenda for development.

Member States reached consensus on several major development agreements that include the Addis Ababa Action Agenda (July 2015), the 2030 Agenda for Sustainable Development (September 2015) and the Paris Agreement under the United Nations Framework Convention on Climate Change (December 2015).

These agreements substantially established and expanded the work of the United Nations to pursue a bold global development agenda.

In particular, the 2030 Agenda identified 17 Sustainable Development Goals, spanning 169 targets, which aim to end poverty, improve education and health, reduce economic inequalities, spur economic growth and tackle climate change, among others.

The expansion of the international agenda has significantly increased the estimated costs and total investment needs in developing countries.

UNCTAD estimates that the average annual financing gap to achieve the Sustainable Development Goals amounted to approximately $2.5 trillion per year from 2015-2030.

But the boldness of the Addis Ababa Action Agenda has not yet begun to reflect in development outcomes, with time running out rapidly.

While the Development Assistance Committee countries committed to donating 0.7 per cent of their annual GNI to ODA in developing countries, and 0.15-0.20 per cent of their GNI to ODA in the least developed countries, apart from a handful of countries, the target has not been reached.

Instead, ODA has remained at less than half of that commitment, with Development Assistance Committee donors reaching 0.31 per cent of GNI, on average, in 2017.

While ODA flows drifted upwards marginally in 2016, they moderated in 2017 and the latest OECD estimates for 2018 suggest that at $153 billion, the ODA flows are only marginally above their 2013 levels, with 32.5 per cent of this flowing to the least developed countries.

UNCTAD noted that official development assistance includes grants, soft loans (where the grant element is at least 25 per cent of the total) and the provision of technical assistance.

There has been a gradual shift in the direction of concessional loans rather than grants, with concessional loans and long-term capital accounting for 16 per cent of ODA in 2008, growing to 23 per cent in 2017.

Like non-concessional loans, concessional loans need to be repaid, albeit at a favourable (below-market) interest rate. For some time, there has been a debate regarding the extent of concessionality related to such loans, as the full-face value of the loan is considered ODA, even if only 25 per cent of the loan has concessional terms.

Reported ODA clearly falls short of the internationally agreed targets but obtaining a clear picture as to the extent to which ODA reaches the recipient country is complicated by how it is spent, said UNCTAD.

For example, the OECD Development Assistance Committee definition of ODA allows a significant portion of ODA to be spent in the donor country itself, such as housing for refugees and costs associated with their integration.

Data for the last three years show that in-donor country refugee costs make up a full 10 per cent of Development Assistance Committee country ODA.

In a similar fashion, the cost of scholarships for students from developing countries studying in a donor country is reported as ODA, although there are no consistent data on how many of those students return to their country of origin and contribute to the future development of the country.

There is also a grey area of administrative costs of delivering aid, which includes items such as vehicles for consultants in the field and various other expenditures whose developmental impact cannot be measured.

The data suggest that the diversion of ODA to in-donor costs may have a significant impact. This figure stood at $103.7 billion in 2018 (down from $105.6 billion in 2014), compared with $153 billion of overall ODA.

The long-standing problem of double-counting ODA funds has not still been resolved. While at the onset it was mostly the practice of providing debt relief and reporting those figures as ODA flows that raised concerns, at present the problem mostly revolves around accounting for funds earmarked for climate finance, said UNCTAD.

The ODA delivery system also remains misaligned with national budgeting processes that reflect domestic policy priorities.

Despite various international commitments to reinforce country ownership of development priorities, such as the Paris Declaration on Aid Effectiveness, few donor funds are channelled through domestic public finances.

For instance, between 2013 and 2017, less than 25 per cent of external support, including aid, was allocated through the national budgets of the least developed countries.

Thus, not only are the actual volumes of aid below internationally agreed targets, but the actual use of the existing amounts is sub-optimal from the point of view of recipient countries.

About one third of ODA from Development Assistance Committee countries flows to the least developed countries, which is estimated to account for some two thirds of all external finance flowing to such countries.

In States where capacity to mobilize domestic resources through increased tax revenue from a narrow tax base is constrained, and where access to international capital markets remains non-existent or capricious, grants and concessional loans through ODA are crucial to financing for development and productive capacity.

But if the total ODA flows are stagnating and falling, it is the neediest countries that are most affected, and achievement of the Sustainable Development Goals becomes even less likely, said the Secretariat Note.

At the same time, while foreign direct investment flows to all developing countries have remained relatively stable over the past decade, the OECD Global Outlook on Financing for Sustainable Development 2018 notes that the committed and anticipated surge in financing for the Sustainable Development Goals has not materialized, and the overall supply of sources of financing for development to developing countries is in decline.

Moreover, the share of foreign direct investment flows to the least developed countries is still miniscule. In the ten-year period under review, the share of total foreign direct investment flows to the least developed countries has only breached the 4 per cent threshold twice, and has been highly volatile, said UNCTAD.

Blended finance coming to the rescue?

According to UNCTAD, the current narrative on ODA and development finance is that given the inadequacy of official resources - whether national or international - to meet the Sustainable Development Goals, the private sector needs to provide assistance through financial innovation - broadly described as blended finance.

In essence, this has come to mean that in order to meet the financing requirement of billions and trillions of dollars in guarantees, sureties and co-financing from development banks, donors and the recipient countries themselves will create the necessary private sector subsidies and incentives to generate the required finance.

The general aim of the approach is de-risking the investment environment to overcome the inhibitors that exist, so that private sector financial institutions and investors from both within and without the recipient countries will utilize innovations such as lines of credit, securitization and special-purpose vehicles to unlock finance for development.

This expectation is sometimes referred to as the billions-to-trillions narrative, said UNCTAD.

Blended finance lacks a common definition, and different definitions can have substantive implications for the implementation of blended financing programmes, said UNCTAD.

For example, while most definitions refer to concessional finance as the public blending component, others include non-concessional public development finance.

Similarly, blended financing can refer simply to the combination of public with private financial resources, while others more specifically reflect the concept of additionality, such that ODA or public funds more generally, should provide only specific inputs and services that will not crowd out those delivered by market-based and private finance.

Blended financing also encompasses a myriad of financing instruments and mechanisms (investment grants, technical assistance, loan guarantees, structured finance, and equity investment).

This further complicates measuring both the size and developmental impact of blended finance, said UNCTAD.

It is thus unsurprising that there remains an evidence gap as to how effective blended finance has been to date, underlining the need for greater transparency and accountability relating to blended finance.

Insofar as empirical evidence has been gathered, available data estimates of the mobilization of private funds within and without developing countries range from $26 billion to $52 billion per year.

A 2015 OECD survey of blended finance instruments found these had mobilized an estimated $36.4 billion over three years (2010-2014) of private capital, as against the UNCTAD estimate of the annual financing gap for the Sustainable Development Goals in the region of $2.5 trillion per year.

This broad picture is confirmed by a recent report by the Overseas Development Institute that suggests that leverage ratios are not encouraging.

They show that for low-income and upper-middle-income countries, a dollar invested in aid or concessional finance does not even mobilize itself again.

Specifically, every $1 invested by multilateral development banks or development finance institutions in low-income countries mobilizes only $0.37 of private sector finance.

The comparison is $1 to $0.65 in the case of upper-middle-income countries. It is only in lower-middle-income countries that the investment looks slightly more encouraging, with $1 mobilizing $1.06.

This is a far cry from the leverage ratio of 1:7 that is still claimed for blended finance, said UNCTAD.

Blended finance is intended not only to mobilize foreign, but also domestic, sources of private finance for development, it noted.

Less than 6 per cent of the blended finance flows measured between 2012 and 2017 have made their way to the least developed countries.

The OECD data suggest a shrinking share from year to year, so that by 2017, the least developed country share represents only 4.8 per cent of all blended finance.

"This is alarming, considering the stagnant ODA flows in general and the fact that ODA may be diverted to encourage blended finance," said UNCTAD.

The OECD data show that for the blended finance mobilized between 2012 and 2017, the upper-middle-income countries received the lion's share of 43.1 per cent, followed by lower-middle-income countries (28.5 per cent).

Guarantees are the instrument of choice in the blended finance originated over this period, regardless of income group.

Guarantees represent over 41 per cent of all private finance mobilized, followed by syndicated loans, which accounted for 17.4 per cent of all mobilized finance mobilized.

Guarantees feature prominently in the least developed countries and low-income countries and were used in 35 least developed countries to mobilize private finance over the period.

However, five such countries - Angola, Bangladesh, Myanmar, Senegal and Zambia - received over half of all private finance mobilized through guarantees.

While this may be seen as de-risking, there is currently not enough information to assess whether this is merely a shifting of the risk to the parties offering the guarantee, which may be the public sector of the developing country concerned.

Additional estimates suggest that this is, in fact, the case, with the public sector on average having picked up 57 per cent of the cost of blended-finance investments so far and as much as 73 per cent of the cost in low-income countries.

That the least developed countries are missing out is apparent when viewed from the perspective of the sectors and relative amounts that are attracting developing flows.

Only in the case of water and sanitation (33 per cent), communications (23 per cent) and agriculture, forestry and fishing (14 per cent) does the share of flows to these countries exceed 10 per cent of the mobilized flows.

However, in two of these cases, the total flows to developing countries taken together are so low (less than $5 billion) that the least developed country share is relatively large.

In the case of government and civil society, for example, while the least developed countries attracted 17 per cent of the total flows, the value was just over $200 million.

From a sectoral perspective, most blended finance goes to infrastructure (with a high bias towards energy and information and communications technology) and banking and finance.

A more detailed breakdown suggests that blended finance is directed towards certain kinds of commercial activity that is attractive enough for private sector buy-in but may not be prioritizing the development needs of the least developed countries, said UNCTAD.

Blended finance appears to be flowing to middle-income countries, in particular to upper-middle-income countries.

According to OECD, 71.7 per cent of blended finance flows to middle-income countries, with the bulk - 43.2 per cent - flowing to upper-middle-income countries.

Data insufficiencies also affect insights into the extent to which blended finance contributes to meeting the 2030 Agenda, said UNCTAD.

"Overall, available data suggest that claims on the developmental achievements of blended finance need to be made cautiously and that more evidence on its effect on the poorest and most vulnerable groups needs to be gathered."

Private Donations

UNCTAD noted that philanthropy has increasingly attracted attention. While this represented 1.9 per cent of ODA in 2009, it increased to 3.7 per cent of ODA in 2017.

According to OECD data, private foundations provided $13.9 billion for development from 2015 to 2017.

In specific sectors, the relative size of philanthropic funds makes them a crucial source of funding. These private resources appear to target social issues more than other private international flows, with philanthropic activities toward the Sustainable Development Goals focused mainly on general health and education (62 per cent of the total), followed by agriculture, forestry and fishing (9 per cent), and government and civil society (8 per cent).

Africa is the main beneficiary region of philanthropic giving (28 per cent of the total), followed by Asia (17 per cent), Latin America (8 per cent) and Europe (2 per cent).

Lower-middle-income countries and the least developed countries have been the main recipients of philanthropic flows. On average, 47 per cent of the flows went to lower-middle-income countries and 37 per cent, to the least developed countries between 2009 and 2017.

About 57 per cent of the funds cumulatively went to middle-income countries, with a noticeable shift of these funds going towards upper-middle-income countries in 2017, while the least developed countries' share fell to 34 per cent of the total.

Despite its growing influence, philanthropy in financing for development raises a number of questions, including the high concentration from a few foundations and data transparency, said UNCTAD.

Not least in response to muted progress in North-South development cooperation, with commitments and expectations not being matched by actual North-South resource mobilization through ODA or blended finance for the 2030 Agenda, South-South development cooperation has gained renewed attention, it noted.

A survey by the Department of Economic and Social Affairs in 2017 found that 74 per cent of developing countries provided some form of South-South development cooperation, confirming a rising trend.

However, for the vast majority of developing countries, these expenditures remain below $1 million, with only 16 per cent of countries reporting higher expenditures on South-South cooperation.

The Belt and Road initiative of China, now including over 100 developing countries, clearly is the dominant driver of South-South cooperation today, with India also approving nearly $28 billion in concessional credits, including about $10 billion for approximately 40 African partners, with a special emphasis on partnerships with the least developed countries and small island developing States, said UNCTAD.

Some Conclusions

The analysis of ODA and the state of blended finance available from several sources creates an impression of disquiet, said UNCTAD.

This in part is a consequence of the lack of transparency and accountability associated with these flows, the quantum and the parties involved, the lack of information relating to the share of concessional and non- concessional finance employed, the link between the flows and development needs and strategies, the debt implications for developing countries and the longevity of development benefits.

"To the extent that the data permit, it is fair to say that ODA is not living up to its promises, private investment flows are unreliable and falling, and much less blended finance is being mobilized than hoped for."

The clear urgency in terms of meeting the financial shortfall for development needs to be tempered with a hard look at the developmental needs, on a country basis, and aligned with development strategies.

Ideally, a holistic view should be taken where the development needs of each country are evaluated in terms of the full range of development finance options, and an evaluation is made of the most effective use of grants, concessionary loans, non-concessionary loans, private investment, public investment and debt in terms of their capacity to achieve the Sustainable Development Goals.

The lack of a common official blended finance framework presents challenges in terms of data collection, analysis and comparability of data.

There is a need to protect existing ODA and put in place mechanisms to ensure that the risks and trade-offs associated with investing ODA in blended finance do not fall on the intended beneficiaries of aid.

This is particularly important, as the pressure to incentivize blended finance may result in more aid being used in this way. In addition, aid and blended finance need to be managed by developing countries in the broader context of development finance and management of domestic resources.

Even effectively increased aid and blended financing flows for sustainable development may achieve little if developing countries continue to face systemic failures of the global economy that undermine their external debt sustainability and divert their resources to prop up internal reserves for self-insurance against external capital flow and commodity price shocks.

More effective, long-term and non-conditional international development cooperation will also be required to mitigate the impact of climate change on developing countries, disproportionally affected by natural disasters, and more generally, promote environmental protection, UNCTAD concluded.

By Kanaga Raja.

Source: SUNS - South North Development Monitor, SUNS #9013 Wednesday 6 November 2019.