Building Back Better? Dubious Strategies to close the SDG Financing Gap
By Isadora Jahanfar Tholin*
With less than eight years left to 2030, countries around the world are struggling to even come close to fulfilling the Sustainable Development Goals (SDGs) and a huge part of why has to do with financing. More specifically, USD 3.3-4.5 trillion per year is needed to close the so-called financing gap. There are several reasons why this massive gap exists. First, states are not living up to their commitments of contributing 0.7% of their GNI towards Official Development Assistance (ODA) – a type of financing aimed at economic development and welfare of developing countries. Second, when the SDGs were being negotiated in 2015, Member States agreed that the private sector too would have to contribute to financing development. But here is where it gets tricky: private capital owners are not accountable to anyone if they choose to not invest, and as University of London professor Ulrich Volz, among others, highlighted at a meeting on financing for development during this year’s HLPF “hoping for private capital” to finance the gap, will not be enough, instead there needs to be structural change. While little can be done to combat the accountability problem of private investors, efforts have been made to stimulate private corporate actors to invest in sustainable development anyway through – the buzzword at this year’s ongoing HLPF: social impact bonds (SIBs).
What Are Social Impact Bonds?
If the name sounds confusing it’s probably because it is. In fact, they are not bonds in the traditional sense of government or corporate-issued instruments, but actually ‘pay for success’ contracts in which a socially conscious investor can choose to invest from a portfolio of projects to boost development in a wide range of areas, including education, social welfare, employment, health, environment and food security. The project relies on set project-based measures of success which an independent evaluator will monitor throughout the set timeframe. If and only if, the project has met the agreed goals set by the end of the project timeline, the investors receive their initial investment together with agreed upon returns from the government.
So what is the problem with SIBs? First of all, many of these projects are tackling issues that fall within the category of human rights, specifically economic and social rights. Robust sustainable development is contingent upon states being able to invest in their social infrastructure, not owing money to private investors looking for profit. SIBs are part of a trend that is contributing in doing the opposite. Second, there is a real issue in trying to quantify progress related to economic and social issues, such as welfare and education, because these are intangible and complex processes. Relying on a set of metrics to measure social development has already been widely criticized. Third, we need to remember that even the most compassionate private capitalists in the end are driven by profit, not goodwill. In free market logic, it is therefore only rational for investors to be investing in projects with a track record of reaching the pre-set goals. By implication, this means that stakes are high for the most vulnerable groups in society which might require an ‘unattractive’ project investment with little chances of reaching the set goals in a given time period.
Financializing Rights—A Contradiction in Terms?
As many critics have pointed out, these social bonds are essentially fictitious commodities and a way to depoliticize social welfare and financialize rights. Framed in this market logic, access to education and health care now become commodities and transfers power from sovereign states to private investors (mostly) based in the Global North. This financing instrument threatens countries’ right to choose which development strategies are best for them.
Finally, the looming paradox lies in that while various UN agencies, such as United Nations Development Programme (UNDP), encourage SIB implementation to finance the SDGs, the instrument itself reinforces the existing power relations that the SDGs and the 2030 Agenda supposedly seek to change, with their transformative dimensions and risk putting into further debt the many developing countries that already struggle with a debt crisis that has worsened since the pandemic.
It is unsustainable and dangerous to assume that private capital benevolently will step up and bridge the financing gap in debt ridden countries and SIBs as a financing instrument are a step in the wrong direction. What is needed is robust public capital, as well as reform and the re-focus of the multilateral development banks in order to achieve long-term robust sustainable development. Structural change is needed, and reliable, public capital is our best chance to fulfill the 2030 Agenda and for developing countries to achieve sustainable development.
* Isadora Jahanfar Tholin is a graduate student in International Affairs at The New School.