Learning from the past: Public finance and democratic control are key to achieving the SDGs

15 July 2015
Article

The question of how to finance water and sanitation is crucial. Leading international institutions emphasise the role of private finance despite major concerns. The idea that private finance can bring the needed investment is remarkably persistent in global policy circles and leads to a dangerous lack of attention to the far more realistic option of mobilising public finance for infrastructure to provide essential services for all.

Grafitti on the topic of water and sanitation problems, Recife, Brazil / Photo credit Waterlat Gobacit / Flickr

The world’s countries are expected to adopt new Sustainable Development Goals (SDGs) at the September 2015 United Nations General Assembly to guide global and national policies for the coming 15 years. It is estimated that developing countries will require between $3.3 and $4.5 trillion a year to implement the SDGs – which range from universal education, public health care and sustainable energy provision to universal access to clean drinking water and adequate sanitation – in a context where they already face a $2.5 trillion annual investment gap. [1] In the water and sanitation sector alone, the annual financing gap is estimated at $26.7 billion. [2]

The question of how to finance water and sanitation is crucial. Leading international institutions emphasise the role of private finance in achieving the SDGs [1], despite major concerns. The idea that private finance can bring the needed investment is remarkably persistent in global policy circles and leads to a dangerous lack of attention to the far more realistic option of mobilising public finance for infrastructure to provide essential services for all.

From privatisation to “financialisation” of essential services

Policies to increase the role of the private sector in infrastructure have been pushed since the early 1990s by institutions such as the World Bank and the Organisation for Economic Co-operation and Development. Despite disappointing results[3], these powerful players stubbornly continue to promote the approach as illustrated by the 2014 launch of the Global Infrastructure Facility [4], which aims to unlock billions of dollars of private investment in infrastructure in the developing world. The G20 also callsfor an “enabling environment” for private investment in infrastructure and public services, whereby countries are encouraged to implement public-private partnerships (PPPs).

 This private sector bias has been embraced in the SDG political process too, as shown in the New Global Partnership report by the UN High-Level Panel of Eminent Persons on the Post-2015 Development Agenda. While this report acknowledges the role of domestic public finance and argues for stronger tax systems, it claims that private capital is the most important source of long-term finance. [5]

 Researchers warn that in order to attract private capital to finance development projects (e.g. from pension funds, insurance companies or sovereign wealth funds), these PPPs will likely be bundled into new financial instruments and sold by financial intermediaries to institutional investors. This risks boosting the trend toward the “financialisation” of essential services, creating great excitement in the financial community but allowing dangerous speculation on services such as water delivery. [6]

Public finance is the real solution

The reality is that PPPs provide only a tiny portion of infrastructure investment in the world, as a recent report by the Public Services International Research Unit demonstrates. [7] Public finance remains the overwhelmingly predominant model worldwide, providing for well over 90 per cent of infrastructure investment. By way of example, according to World Bank data private sector contributions to water and sanitation infrastructure between 2001 and 2006 was almost nil in Sub-Saharan Africa while the public sector and household self-finance contributed $7.56 billion per year. [8] History also shows that universal water and sanitation in rich countries such as the US, the UK or South Korea were achieved largely through public finance. [9]

Citizens reclaim their water systems

There is strong evidence particularly in the water sector that both investment and operational performance by private water multinationals have failed to deliver clean and affordable water. [10] That is why PPP projects in the water sector are often highly contested by local communities.

 In March 2015 the Central Jakarta District Court annulled the city’s privatised water contracts finding that the PPPs were negligent in fulfilling the human right to water of residents. [11]

 Mysore, a city in southern India, was deeply disappointed with the outcome of the local PPP project that was supposed to extend water access and decided to reverse it in May.[12]

 In Argentina, 9 of 18 water concession contracts were terminated between 1997 and 2008 as a result of disputes over investment, performance and rates between private companies and public authorities. [12]

Remunicipalisation

This widespread dissatisfaction of local authorities and citizens takes shape in the global wave of remunicipalisation, which refers to the return of previously privatised water supply and sanitation services to municipal authorities – or to the regional and national level in some cases. From 2000-2015, 235 cities ended privatisation contracts and returned water services to public hands. [13] In fact, the pace of remunicipalisation is accelerating dramatically, doubling in the 2010-2015 period compared with 2000-2010.

 The reasons why local authorities made such decisions are similar from Jakarta, to Mysore to Buenos Aires: poor performance, under-investment in infrastructure, degrading water quality, disputes over operational costs and price increases. In addition, PPPs are incredibly complex contracts, inherently secretive, which contribute to increased monitoring and legal costs for governments.

Democratic control over public finance

Governments can generally borrow money at better rates than private companies because of the lower risk of defaults. [7] A simple question is why aren’t governments able to borrow sufficient money to invest in public infrastructure directly then? Structural adjustment programmes imposed by the IMF since the 1980´s in developing countries and other austerity policies elsewhere continue to constrain government borrowing.

 The above-mentioned UN High-Level Panel report states that the money is already there – world savings this year will likely be over $18 trillion. [5] Instead of entering complex and risky PPP contracts, national governments could borrow via bonds for long-term public investment in water and sanitation works. It is high time for the international community to focus on this common sense solution: creating an enabling environment for governments to mobilise public finance in order to make sustainable and long-term investment for public infrastructure to achieve the SDGs.

 Essential elements of this agenda should be building efficient and fair tax systems as well as fighting corruption, tax evasion, and illicit financial flows. International aid can be strategically targeted to support improved taxation systems, including the ability to tax foreign investors. Finally, good governance is a precondition for public finance to be used efficiently and benefit the whole population. 

 The global community cannot afford to repeat the mistakes of the past. PPPs are inherently ineffective in serving the most vulnerable communities. In the view of the authors, it is not only opportunistic but also irresponsible for policy makers to continue to refer to private finance as the solution for achieving universal access to water and sanitation. UN agencies and the global community should start focusing on building democratic public finance systems to achieve the SDGs.