Statement by Eurodad representative María José Romero at the Informal Interactive Hearing for Civil Society – Third Conference on Financing for Development, 9 April 2015

Added 16 Apr 2015
Statement by Eurodad representative María José Romero at the Informal Interactive Hearing for Civil Society – Third Conference on Financing for Development, 9 April 2015

Many thanks for inviting me to take part in this panel discussion and thank you very much to the government representatives who agreed to be here with us this evening. I now turn to issues that will lie at the heart of the debate during the Addis Ababa conference. As we move towards the conference, we must support a balanced approach towards international private financing, as it is this very financing that allows us to work towards achieving a fair sustainable development agenda. We are however concerned that this focus is not the main focus of the zero draft, which places strong emphasis on promoting the role of the private sector without also considering the regulatory role that the public sector has to play. 

There are two major areas of concern: firstly, the limited impact of international private capital flows on sustainable development, and secondly, the use of public money and institutions to leverage the private sector. Let us take first of all the case of international private financial flows. These come with both advantages and disadvantages, and must be regulated appropriately. If they are not, they can generate instability, increase inequality, and negatively impact the most vulnerable sectors of society and the environment. Evidence indicates that Foreign Direct Investment (FDI) scarcely reaches the least developed countries (with the exception of those exporting natural resources), that it is very difficult to direct it towards small- and medium-sized enterprises, and that it is often linked to significant capital outflows via the repatriation of profits and illicit capital flows. Given its lucrative nature, FDI cannot be used to fund basic services such as healthcare and education. What is more, foreign investors often pressurise governments to create favourable conditions such as tax exemptions and more lax employment, social and environmental regulations. These conditions have a negative impact on a local level. What matters, therefore, is the quality and contribution that Foreign Direct Investment brings to development, rather than the quantity of it. The United Nations must exercise leadership on this issue. A clear framework must be developed and adopted to bring together the existing regulations regarding responsible financing, to identify and close loopholes, and to strengthen the mechanisms and incentives that promote compliance with the regulations. The evidence also indicates that short-term flows (particularly portfolio equity) can be highly volatile and lead to major crises in the foreign exchange market and the financial sector, with a damaging impact on the real economy. It was this type of capital "panic" that triggered the 1997-1998 Asian financial crisis. It is vital that we recognise capital account regulation as a fundamental political tool. It should be part of the package of instruments drawn up by every country that wishes to avoid the crises caused by "hot money" flows, particularly developing countries. The obstacles to capital account regulation, including trade agreements and investment treaties, must be removed. 

The second issue revolves around the risky use of public money and institutions to leverage private financing. Here I am referring to the activities of multilateral development banks (the World Bank's International Finance Corporation), European bilateral financial institutions and blending mechanisms, which combine official development aid with loans from public or private institutions. Using public money and institutions to leverage the private sector is risky for at least five reasons: 1) there are significant problems when it comes to demonstrating positive results on development, reducing poverty and inequality, and promoting women's rights and the rights of the most vulnerable groups; 2) it does not guarantee adequate participation, accountability and transparency; 3) it does not empower developing countries or ensure a real link between national development projects and priorities – these institutions' decision-making structures and existing mechanisms are seriously biased in favour of developed countries; 4) there are major problems in demonstrating the added value of public aid – there is a high risk that private companies will be subsidised for investments that they would have made anyway. This then contributes to increasing their profits, widening the gap between other companies that do not have the same advantage, and displacing, rather than attracting, other investors; and 5) to a large extent, these institutions and mechanisms benefit companies in the donor countries, which raises the risk of increasing tied aid. This goes against international commitments made under development cooperation strategies. As such, the United Nations' framework needs to revise the role of the institutions and the existing mechanisms for leveraging private financing. This must be based on its contribution to sustainable development and its alignment with the principles of effective development cooperation: transparency, accountability, results-based, and ownership. We also need a process that allows us to settle upon sustainable development criteria for those public funds that are used to leverage private finance. These criteria must be based on the existing principles on development effectiveness, the environment and human rights. 
In summary, the zero draft needs to be revised in light of these concerns. A serious funding agenda should start by recognising the need of developing countries to regulate private financial flows and the way in which they contribute to development. 

Thank you

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