Second Finance in Common Summit: Still steering Public Development Banks down the same privatisation path
On 19-20 October, the 2021 Finance in Common Summit (FiC) brought together more than 500 Public Development Banks (PDBs) from around the world. Following the first FiC summit last year, this year’s summit was also focused on the role of PDBs in mobilising financial resources to achieve the 2030 Agenda and the Paris Agreement. Key themes of this year’s summit included the goal of transforming food systems, adaptation to climate change and the preservation of biodiversity.
The significance of these PDBs in steering Covid-19 recovery efforts is huge. In 2019, PDB investments surpassed US$ 2.2 trillion, contributing around 10 per cent of global investment. The large scale of these funds and the diverse nature of PDBs around the world – including national, multilateral and sub-regional institutions – could potentially play a crucial role in Covid-19 recovery efforts by strengthening public finance and expanding the provision of public services.
However, in practice, the FiC continues to move away from the public mandate of these institutions. This is evident when reviewing the Progress Report from the First Year of Life of the Finance in Common Coalition, as it indicates the persistent push towards market-based finance and private sector participation in the delivery of public goods. With this aim in mind, the PDB coalition launched at last year's summit strengthened its dialogue and collaboration with the private investors and other private sector actors in this first year of work. This led to the Global Impact Investing Network (GIIN) and the Long Term Infrastructure Investors Association (LTIIA) signing the 2021 PDB Joint Declaration. To follow is a brief overview of the highlights, agreements and mechanisms that underpin the key themes.
Food security, climate change and biodiversity through the market
Investment in sustainable agriculture food systems was the most dominant theme of this summit, calling for a clear role for PDBs to de-risk agribusiness and private sector investments in the food value chain. In particular, the summit provided space for International Financial institutions (IFIs), Development Finance Institutions (DFIs), the UN’s International Fund for Agricultural Development (IFAD) and PDBs to reach a general consensus on coordinating, centralising and institutionalising efforts to elevate the inclusion of agribusinesses in the name of ensuring food security.
Similarly, the focus on biodiversity continued to put the spotlight on the role of innovative and private sector finance as affirmed in previous initiatives such as the International Development Finance Club’s (IDFC) commitment to biodiversity. Beyond market-based initiatives, the emphasis on climate change was largely rhetorical, without any actual commitment to ending fossil fuel investment, which has been a strong ask by civil society groups around the world. On the whole, the FiC Summit advocated for a more active role by the PDBs to address market failures, create incentives for private actors and manage risks.
In reality, these strategies are not simply antithetical to the goal of achieving food security, protecting biodiversity and mitigating against climate change. In fact, they have served as major accelerants for the contemporary socio-economic and ecological decay. Market creation and the privatisation of food value chains, enabling the dependency of local food systems on international financial markets, was a major driver of the food crisis in the wake of the 2008-09 global financial crisis. As painstakingly documented by a joint statement endorsed by Eurodad and more than 280 civil society organisations, agribusinesses and private sector interests have exacerbated the problem of food insecurity and the loss of biodiversity. Examples show that financing agribusinesses by PDBs has resulted in the destruction of local food systems, ecological destruction, the commodification of land and seeds, dispossession of communities and corruption. A group of UN independent human rights experts recently warned that financial speculation trends, including in food markets, are exacerbating the risk of human rights violation.
PDBs and the new mantra of financing small businesses
As part of the FiC Summit, the European Development Finance Institutions (EDFI) organised a thematic discussion on the need to strengthen the domestic private sector in developing countries. Ad hoc coalitions consisting of philanthropic organisations, the UN, the World Bank’s International Finance Corporation (IFC) and PDBs are focusing on ways of using public finance to support Micro, Small and Medium Enterprises (MSMEs) and Small and Medium-sized Enterprises (SMEs) in developing countries. The goal is to expand the space for domestic entrepreneurship and capacity building, with a particular focus on Africa.
PDBs are well-placed to finance the development of the domestic private sector, thereby ensuring formal and informal employment for millions of people in developing countries. However, the mechanism propagated in the FiC Summit needs critical attention, especially as these proposals are being formulated as part of the Covid-19 recovery response that is underway.
A first observation is that the ad hoc coalitions governing the SME financing model – a combination of public and private partners – are in a unique role of brokership wherebyh power dynamics and decision-making are not equally distributed. In the case of SME financing, some notable stakeholders include the Word Bank’s IFC, the African Development Bank (AfDB), the Tony Elimelu Foundation, the Islamic Corporation for the Development of the Private Sector (ICD) and others. The role of non-state actors in such development initiatives raises concerns about moving decision-making away from states. The role of philanthropic organisations that are part of big domestic businesses also remains unclear and requires more analysis.
A second concern is that PDBs continue to implement lending operations through private commercial financial intermediaries, such as commercial banks, private equity and hedge funds. These intermediaries, which operate on profit and absorb a share of investment for beneficiaries, have been extensively criticised for failing on transparency issues and lack of developmental impact.
National and regional PDBs are best suited when it comes to understanding the domestic context of developing countries. Empowering these PDBs to strengthen the operation of small businesses is a better alternative than contributing to the proliferation of multi stakeholder partnerships, whose decision-making evades accountability, which effectively takes decision-making power away from the state and local stakeholders.
PDBs in the global financial architecture – beyond de-risking
PDBs can be a major source of engineering recovery and resilience in countries around the world, especially in crisis recovery, if they strengthen public financing and foster the regeneration of essential public services. The pandemic has shown that states and state-funded institutions are in the best position to respond to domestic needs. The goals of achieving food security, preventing the loss of biodiversity and climate change, strengthening the domestic private sector and the provision of public goods can be best addressed through design and implementation with national and sub-regional PDBs in charge, supported by PDBs and MDBs from the Global North.
Unfortunately, however,the 2021 FiC Summit was yet another iteration of the on-going trend among international financial institutions of reorienting public institutions and states towards de-risking private capital. Instead of learning from the failure of private financial markets when it comes to delivering long-term finances, the emphasis of privatising the public mandate of PDBs is actually reproducing the problems of short-term profit generation.
The third edition of the FiC Summit will be hosted in 2022 by the AfDB and the European Investment Bank (EIB). As the EIB moves towards institutionalising its own Development Branch and the AfDB continues on course with balancing contested multilateral interests, the scope of FiC as a transformational platform in the public interest remains to be seen. What is clear is that, given the importance of these institutions, civil society organisations need to actively maintain engagement and keep up the pressure.