Private enterprise, public good?

Three years ago, world leaders came together to agree on a global framework to tackle underdevelopment and poverty. Signed under the auspices of the UN by more than 190 countries, the Sustainable Development Goals (SDGs) provide a 15-year roadmap for international development efforts to 2030.

The SDGs are the successor to the Millennium Development Goals, eight anti-poverty targets adopted at the turn of the century. But while the earlier goals focused primarily on developing countries, the 17 SDGs are more ambitious. They are global in scope, aiming to tackle the structural constraints on development embedded at the heart of the international system.

Who foots the bill?

But ambition comes with a hefty price tag – one that the world’s public financing alone cannot hope to meet. Investment of $3900bn annually is needed to meet the goals by 2030, while current investment into developing countries only amounts to about $1400bn per year. This means there is an annual shortfall of $2500bn, according to estimates from Unctad. 

Shortly before the SDGs were signed at the UN’s headquarters in New York, world leaders met in Addis Ababa, Ethiopia, to tackle a more practical problem: where was the money going to come from? The groundbreaking conclusion was that development could no longer remain the sole responsibility of governments and donors. The only way to get investment of the scale needed was to harness the power of the private sector.

“We may look back on [the] Addis Ababa [agreement] as a watershed because it shifted the focus to private sector financing,” says Colin Buckley, chief operating officer of the CDC Group, the UK’s development finance institution.

Thus, for the past three years, leaders in government and in business have been working to put into practice the principle of “[leveraging] the billions of dollars in official development assistance to trillions in investment of all kinds, whether public or private, national or global”, as World Bank president Jim Yong Kim said in 2015.

Capital flow shift

It is here that FDI has an important role to play. Traditionally FDI was envisioned as a flow of capital from the so-called political 'north' to the less developed 'south' through big multinationals that were often interested only in extractive sectors. For the SDGs to be fulfilled, this could no longer be the case.

However, with the rise of China and other south-to-south investors as major foreign investors and providers of development capital, a shift has been under way since the 1990s. And as the value of companies and entire industries shifts towards intangibles, so technology and knowledge transfer has become as important for development as capital allocation.  

Most crucially, these shifts mean that FDI no longer exists in isolation. Globalisation means that FDI and trade are now interlinked, and so bringing underdeveloped economies into global supply chains requires both of these elements. The World Bank says: “Investors have become traders and vice versa. FDI is now not only carried out by only big multinationals, but also from relatively smaller firms from developing countries that are investing in countries beyond their home countries.”   

For developing countries, attracting FDI is key to transforming economies – if the investment can be brought into productive sectors that create jobs and enable domestic industries to capture value at home. For countries such as Nigeria, “investing in SDGs is investment, period”, says Yewande Sadiku, CEO of the Nigerian Investment Promotion Commission.

Benefits for business

Given this broad consensus on what needs to be done to achieve the SDGs, and on the role of private investment in financing them, why is there still an annual investment gap in the trillions of dollars?

For investors, the business case is spelled out. A study by think tank Brookings identified a $12,000bn market opportunity for businesses tackling just four of the goals: food and agriculture, cities, energy, and health. As much as achieving the goals requires private sector investment, companies have much to gain as well. “Factoring the SDGs into business strategies will open new business opportunities, introduce efficiencies and innovation, and improve reputations,” the Brookings study says.

Within the private sector, there is an appetite for becoming more involved in SDG investment. Pension funds are a case in point; many see unlocking institutional investment into development as a silver bullet. Pension assets among OECD member countries reached $40,000bn in 2017 – capital that has to be deployed somewhere by fund managers. At the same time, a 2014 study found that 100% of pension funds could not meet their infrastructure investment targets.

The SDG investment gap is also not due to lack of funds. “From the supply side we know that we have trillions of dollars that are in the hands of pension funds and private equity funds that are in the holding of multinationals. But they are not investing in SDGs in other countries,” says James Zhan, director of investment and enterprise at Unctad.

The rise of China and its willingness to devote billions to infrastructure and energy projects in challenging markets reinforces the idea that the SDG shortfalls have little to do with lack of money. “There’s a lot of new capital coming online. Now we have to face other blockages,” says CDC Group’s Mr Buckley.

Bankable projects

A fundamental problem appears to be culture. There is a “misalignment of theories of change” between the private and public sectors, particularly at the level of multilaterals, according to Aron Betru, managing director at the Milken Institute think tank.

However, when two sectors that have rarely worked together in the past find themselves pulled together, as happened three years ago with the announcement of the SDGs, this is perhaps unsurprising. Different jargon is a problem, as are different expectations for how projects should unfold, and different risk appetites.

“It is very difficult for the private sector to vocalise what the risks associated are; they feel that it’s expensive even to start a conversation about the [SDG] project. They take a quick look at the project and say ‘not bankable’ and turn away,” says Mattia Romani, managing director for economics, policy and governance at the EBRD.

Meanwhile, multilateral development banks often “just do not understand how the private sector operates”, he adds. Private sector investors look for standardised products and so far developing countries are not delivering a convincing pipeline for them. “The margins are so slim in many of these sectors that you can’t afford to have a team work on a project for a year,” says Mr Romani.

For investors, not having a pipeline of available, bankable projects is a huge constraint, particularly when looking at smaller or more frontier markets. “Ninety-five per cent of investors are passive and lazy, 5% will really go searching for deals. There aren’t enough active intermediaries,” says Thierry Deau, CEO of infrastructure investment and management firm Meridiam. 

Here, the role of IPAs is crucial. At the national and subnational level, these public entities need new strategies in order to focus “on the preparation and marketing of pipelines of bankable projects and the development of new partnerships,” according to Unctad.

“Investors and companies actually want to invest in SDG projects. So the cash is there, but the constraint is on the recipient side. There’s a lack of bankable projects. So the onus is on IPAs to help unlock this capital and put it to productive use,” says Unctad’s Mr Zhan.

Heeding the call

Organisations including the World Association of Investment Promotion Agencies and the Caribbean Association of Investment Promotion Agencies are heeding this call, and are developing programmes and tools to support their members in building project pipelines. National IPAs such as Apex Brazil are identifying key sectors for SDG development, such as agribusiness, biofuels and renewable energy.

Apex Brazil president Roberto Jaguaribe points out that encouraging outward investment is as important as bringing it into the country, in order to help exports and support growing domestic industries. Argentina is thinking along the same lines: in July 2018 the country launched Exporta Simple, a simplified one-stop-shop platform for goods exporters. Under the programme, SMEs are excluded from duties.

Ultimately, many of the constraints on SDG investment into developing countries are the same issues that have made getting FDI at scale into these markets difficult for decades. The idealism of the SDGs is now coming up against the hard realities of poor business environments, weak institutions, high political and country risk, and low capacity in recipient countries.

“There will be no trillions in investment if there are no people on the ground who can deploy it,” says Mr Deau, underlining the importance of capacity building both for local governments as well as for investors unfamiliar with operating in less straight-forward markets.

The challenges for financing the SDGs remain immense. Having reached agreement on what is needed, the real work for global leaders is just beginning.