Private finance

Private finance and public-private partnerships (PPPs) are often seen as a way to fill the ‘funding gap’ in developing countries, but this is based on the assumption that this is an effective way to support development, regardless of the terms and conditions under which they take place.

A vibrant private sector is crucial for development – it creates jobs, provides essential goods and services, and is a source of tax revenue. However, not all private sector activities have a positive impact in development terms.
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THE PROBLEM WITH PRIVATE FINANCE

Rich countries and international financial institutions continue to promote a new development finance orthodoxy, pushing the use of public funds to mobilise private capital. But the risks that this approach poses to debt sustainability in developing countries is often neglected.

Research shows that public money supporting private sector investments have failed to deliver positive development outcomes in the past. All too often development finance institutions, such as the World Bank, support investments by large transnational companies from rich countries as opposed to smaller companies in poor countries.

These institutions also fail to ensure that the companies they invest in comply with a minimum set of responsible finance standards, which would ensure they pay their fair share of taxes in the developing countries where they operate.

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What is a ‘PPP’?

Public-private partnerships (PPPs) are arrangements between two or more public (government bodies) and private enterprises to fund a public infrastructure project such as a new gas line or power plant. The ‘public’ partner could be local, state or national government.

Quantity over quality

Even if international private investment flows can deliver the quantity of finance, there are real concerns about its “quality”. Development impacts from this kind of investment can vary significantly. Even with limited data, a recent review suggests a bias at work: donors may too easily assume that such funding adds value that would not otherwise have been realised, increasing productivity and contributing to local development. But this is not always the case, and it may also replace other domestic investment or undermine opportunities for small and medium-sized enterprises.

International investment can cause direct harm. For example, the UK Foreign and Commonwealth Office has used aid money to establish the Prosperity Fund. Recent research found that it is financing 16 fossil fuel projects. At a global level, the chaos-inducing effects of these industries on our climate are already capable of obliterating any development gains – or investor returns – many times over.

WHAT WE’RE DOING

Citizens for Financial Justice believe that certain conditions need to be put in place to make sure that private investments have a positive impact on the poor. We want:

  1. Do no harm
    An absolute minimum requirement that investment should respect human rights and the environment. This is the core foundation of good investment, but it is not enough to ensure that investment is good.
  2. Develop resilient and diverse national economies
    Good investment results in progressively higher-value goods and services being produced within domestic economies, and increases tax revenues which can be used to fund essential public services.
  3. Tackle inequalities
    Good investment helps to ensure that the benefits of economic development are fairly shared. It enables poor and marginalised women and men to participate in the economy on fair terms by creating decent work and addressing different kinds of inequality.
  4. Build a low-carbon, environmentally sustainable economy
    Good investment supports structural changes to production and consumption patterns, so that economic development can happen in a way that is consistent with maintaining the environmental life-support systems on which we all depend.
  5. Accountable governance of investment
    Good investment is subject to careful scrutiny to ensure that it does not undermine national development priorities. Investors can be held to account to ensure that when something goes wrong, people who are hurt can get justice.

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