Aid subsidies for companies: a formula for leaving no-one behind?

Added 23 Nov 2017

Many donor agencies argue that part of the solution to financing the Sustainable Development Goals lies in using aid money to incentivise – or subsidise – the use of private commercial finance for development purposes. This is often referred to as blended finance, or blending.

Yet a growing body of independent analysis shows that the links between blended finance and the achievement of sustainable development objectives are more complex and problematic than they may first appear. Nowhere is this clearer than in the assertion that blended finance can contribute to the objective of leaving no-one behind.

Next week the 5th African Union-European Union Summit will take place in Cote d’Ivoire, and blending is likely to be centre stage. In September, the European Union launched the new European Fund for Sustainable Development, a 3.35 billion Euro fund designed to stimulate up to 44 billion Euros of investments whose objective is ”to contribute to the Sustainable Development Goals”.

Ahead of next week’s Summit, Eurodad has released a new briefing that unpacks what blending is likely to mean for the most excluded, focusing on marginalised women, and persons with disabilities. The briefing highlights two particular risks.

First is opportunity cost: every Euro invested in blending is a Euro taken away from other uses. Leaving no-one behind requires dedicated public investments, without which the ‘furthest behind’ are likely to be excluded further still. For example: investments in public services that are equitably accessible to all; in institutions such as the judiciary that can challenge discriminatory norms; and in representative civil society organisations that elevate marginalised voices. Yet none of these investments lend themselves naturally to blended finance. So an increase in blending is also a missed opportunity to support some of the things that matter most to marginalised people.

The opportunity cost of blending is made even more acute by the fact that blending tends to redirect aid money to middle income countries, at the expense of least developed countries where alternative financing options for essential public services are especially scarce.

The second risk is in the execution of blended finance projects. If private sector actors are to receive the benefit of public subsidy through blending, they should be required to ensure that the ‘furthest behind’ are the first to benefit from blended finance projects, in line with the ambition of Agenda 2030.

Yet the reality has sometimes been very different. An independent evaluation of seven major European Union blending facilities between 2007 and 2014 found that “gender was rarely targeted”. Tellingly, the same evaluation did not even mention disability. The new European Fund for Sustainable Development Regulation contains some better language on gender, but stops well short of full set of checks and balances that we would hope to see. Disability is omitted once again.

What is more, some blended finance-funded projects have not only exacerbated inequalities: they have also been associated with direct infringement of other rights – from the imposition of unaffordable hospital user fees, to forced evictions - with redress sometimes elusive. Where blended finance infringes the rights of communities living in poverty, it is likely to be the most marginalised who suffer most.

Until the complex realities of marginalisation are fully factored into all stages of the blended finance project lifecycle – including the initial decision on whether to use blending at all – there is a risk that, far from living up to its rhetoric on leaving no-one behind, blended finance will leave some people further behind than ever before. Eurodad recommends that:

  • The decision on whether to use blending should be made by citizens of countries in the global south, not by donors – and the voices of those who have been ‘left behind’ should be heard loudly in the decision process. Only if southern citizens have determined that blending is the best way for aid to support the human rights of all, including the most marginalised, should blending go ahead. 
  • If blending does go ahead, blending projects must be executed in a way that fulfils human rights obligations, including the rights of marginalised groups. This means tackling exclusionary barriers, and overhauling transparency and accountability.

The Sustainable Development Goals Declaration says the process of developing the Goals “paid particular attention to the voices of the poorest and most vulnerable.” Decisions on financing the Goals must follow the same principle. Unless those on the frontline of poverty and marginalisation have ownership over the way that aid money is spent, aid will never fulfil its potential to deliver a more equal world by 2030.