Developing nations need an additional $2.5 trillion if they are to achieve the United Nations Sustainable Development Goals. That far exceeds anything developing countries can afford from their own resources. Now a group of experts, convened by the World Economic Forum, has produced a guide to closing that funding gap.
Developing nations need to move away from funding - where countries simply ask for more aid - to financing, where countries create the right environment to attract private investment.
The report - From Funding to Financing: Transforming SDG Finance for Country Success - recently published by the Global Future Council on Development Finance lists key reasons why projects fail to attract enough funding, as well as suggesting some principles to ensure success.
The answer, according to the report, is to invite countries to make a paradigm shift towards a holistic consideration of all the sources of capital that can be mobilized towards sustainable development, and move from traditional “funding” to a “financing” approach.
The report says that the principles of engaging the private sector are broadly understood by governments but points to a lack of understanding about the mechanics of how to do so at each step of the country planning and project cycle, with a view to identifying and financing a pipeline of relevant projects.
“This is fundamentally both a capacity/skill set gap and a behavioural gap,” the report says.
Rising to the challenge
These are some of the key difficulties when it comes to attracting investors:
1. Some developing nations lack the practical tools to meet the requirements of capital providers. These include the standardization of proposals for investors, for example.
2. The landscape of finance has changed and keeps evolving. And there are numerous development finance institutions with specific remits which do not always take the same approach.
3. Although the basic principles of engaging the private sector are well understood across development finance institutions, there are gaps when it comes to implementation. The report highlights challenges in many countries when it comes to fostering a business-enabling environment. This can increase the perception of risk to investors.
4. Some recipient governments are still inexperienced in how to blend financing sources. Some countries need to think more holistically about a range of public, private, domestic and international financing sources, as well as the traditional funding model.
5. Some countries are unable to field a pipeline of development projects that are suitable for private financing. A lack of well-prepared projects is “a critical challenge” to attracting private investment, according to the report.
Preparing for success
Addressing the development finance challenge requires four elements:
1. National sustainable development goals and plans must be well developed and aligned to national government policies.
2. Nations must have a well-articulated pipeline of projects. “National efforts to translate a country’s sustainable development priorities into a well-articulated pipeline of projects that enable a country to achieve those priorities remain perhaps the most significant gap that exists at the country level,” the report says.
3. Countries must have a national financing allocation process linked to their development goals. This means engaging with the private sector to classify their pipeline of projects according to which investment types are ready to support individual projects. Countries may need to “tweak” projects to attract appropriate capital, it says.
4. Countries need a national strategic financing plan for their development goals based on a strategic assessment of sustainable development needs. With a project pipeline to achieve its goals and a strategic allocation and plan for financing those goals, it will be better prepared to engage sources of funding and financing.
By adhering to these principles - and equipping developing nations with the right tools and capacity to avoid the above pitfalls - the world could see a successful shift from the funding toward the financing model.