Private Finance and the Post-2015 Development Agenda

Proposals for development financing in the post 2015 era highlight a major role for private finance. The Third International Conference on Financing for Development in July may run counter to the original vision of the sustainable development goals.

At the end of this year the Millennium Development Goals or MDGs, which have provided the overarching framework for international development for the last fifteen years will be succeeded by a new Sustainable Development Goals (SDGs) framework.

The idea of the SDGs came out of the “Rio+20” UN Conference on Environment and Development conference, held in Brazil in June 2012 twenty years after the landmark 1992 Earth Summit : which established an "inclusive and transparent intergovernmental process open to all stakeholders, with a view to developing global sustainable development goals to be agreed by the General Assembly".

While the process of formulating and agreeing the SDGs has been UN-led, the World Bank Group has taken a lead in developing recommendations for financing the post-2015 development agenda , in the lead up to the Third International Conference on Financing for Development, to be held in Addis Ababa in July.

The key message is that Financing for Development (FFD) in the post-2015 era, needs to go ‘beyond aid’, to include domestic resource mobilisation, ‘smarter’ aid (drawing lessons from private philanthropy, for example) and the mobilisation of private finance. In the case of private finance, the public sector is to play a ‘catalytic role’ in attracting the resources of the private sector.

Financialisation as development?

If adopted, these proposals will represent a significant shift in donor policy. Development funding in the MDG-era was ODA driven, and included a central role for the Heavily Indebted Poor Countries (HIPC) Debt Relief programme, which ends this year. In contrast, many developing countries, notably in Sub Saharan Africa are now borrowing directly from international capital markets, prompting concerns about an impending debt crisis. For example Ghana, the first sub Saharan African nation after South Africa to borrow from international capital markets after South Africa, has a debt-to-GDP ratio of 60.8 per cent.

Proposals to ‘unlock the potential of private finance’ for development are framed in terms of a shift from ‘isolated pilot activities’ to a ‘broad transformative agenda’. Such pilot activities include conventional public private partnerships, promoted since the 1990s by international finance institutions (IFIs) ‘as a way around the fiscal limits which the same IFIs were imposing on developing countries’. However these financing arrangements have proved inefficient and expensive in the long run, often the result of a lack of transparency inherent in negotiation processes that privilege commercial confidentiality over the public interest. Today, an emerging trend of de-privatisation underway in the water sector suggests a re-evaluation of this approach, rather than its acceleration, would be timely.

The World Bank publication outlines a range of ‘emerging, inclusive and innovative sources of finance’, for example bond financing, sovereign wealth funds and advance marketing commitments. The strategy of financial sector development in developing countries is also highlighted. Using ‘trickle down’ reasoning, it is assumed that a combination of financing deepening (liberalising financial markets, developing capital markets and introducing more complex financial instruments) and financial inclusion (extending access to financial products and services) will ‘accelerate private sector growth, an important driver for poverty reduction and shared prosperity‘.

The International Finance Corporation (IFC), the private sector arm of the World Bank Group, is already active in this area, channeling funding directly to financial intermediaries in developing countries. A recent report from the Bretton Woods Project highlights the scale of investment to date: ‘Between July 2009 and July 2013 the IFC invested $36 billion in FIs. This is three times as much as the rest of the World Bank Group invested directly into education and 50% more than into health care’. This means that ‘just five years after a major financial crisis, the financial sector is now the largest beneficiary of World Bank Group investment.

New frontiers: food, farming and farmland

The channelling of funds directly into financial sectors in emerging markets (by institutions such as the IFC) is a strategy whose clear goal is to advance processes of financialisation. In ‘non-financial’ sectors such as the agri-food sector, however, processes of financialisation underway can be more difficult to identify, as they blur the boundaries between financial and ‘real’ sectors. Nevertheless, this ‘new frontier of financialisation’ has implications for developing country agriculture, and for donor programmes purportedly designed to support smallholder farming in Sub Saharan Africa.

Financialisation in the agri-food system was made possible by the deregulation of markets in agricultural derivatives, beginning in the late 1970s with the ‘New Financial Architecture’ and culminating in the Commodity Futures Modernisation Act (CFMA), in 2000. The CFMA removed ‘position limits’ for speculators, and allowed additional investors (e.g. hedge funds, pension funds, insurance companies, sovereign wealth funds and investment banks) to enter these markets, tipping the balance from a market shaped primarily by hedging to one driven by speculative betting. New types of product, such as the commodity index funds (CIF) pioneered by Goldman Sachs - which bundled derivatives for a variety of commodities into a single value - became the investment vehicle of choice for institutional investors who had limited knowledge of commodity markets.

While most of us are aware of the dominance of large supermarket chains, less visible has been the involvement of financial actors who, together with large retailers, have come to dominate agri-food value chains at the expense of agricultural producers and labourers, and suppliers. In this case, financialisation of food retailing has ‘blurred the boundaries’ between financial and ‘real’ sectors. While financiers have gained a stake in food sales (the takeover of Somerfield Supermarkets by a private equity consortium being just one example), food retailers earn more revenues from financial activities, either by redirecting cash flows into financial (rather than productive) investments or by diversifying their own activities into financial services such as credit cards, insurance products, etc.

Similar dynamics can be found in the food manufacturing and processing and grain trading sectors. Ryan Isaksen’s analysis of strategies of the ‘ABCDs’ (the four largest grain traders - ADM, Bunge, Cargill, Louis Dreyfus illustrates how these large conglomerates blur the boundary between finance and food. While these businesses have always hedged against price movements there has been a clear shift towards speculative activity. Since they are often the first to know about supply conditions, the ABCDs’ financial products are sought after by investors wanting to speculate on agricultural derivatives. Meanwhile, financial actors are becoming active in food trading, not only by investing in grain traders’ funds, but in physical storage and transport of commodities. So they benefit from fees charged for services and access to market information.

This blurring of financial and ‘real’ assets and activities is also illuminated by Madeleine Fairbairn’s research on investment in farmland. Previously an ‘investment backwater’, farmland has become increasingly attractive to investors looking for more secure and profitable places to put money following the commodity price spikes and collapse of the US housing bubble, leading to an escalation of ‘land grabs’. Importantly, while the ‘turn to farmland’ may appear to indicate a shift away from financialisation, towards investment in ‘real’ assets, developments in the farmland sector point to the emergence of a ‘new form of financialisation’. A new type of institution is emerging, across the financial and agri-business sectors, which allows financiers to ‘use land as a productive asset, while operators are using land as a financial asset’. Farmland is fast becoming a ‘quasi-financial asset’ (‘like gold with yield’ ): or a productive asset that ‘moonlights as a financial asset’.

Inducing food insecurity?

A focus on processes of financialisation in the global agri-food system reveal how new risks and uncertainties are being generated, particularly for smallholder farmers. Nevertheless, an emerging consensus among donors positions corporate agri-business investment as the actor best placed to reinvigorate smallholder agriculture in the region and “raise 50 million people out of poverty in the next decade” These developments present new challenges to civil society organisations engaging in debates about the future of sustainable agriculture and development.

The role of speculation in agricultural derivatives in the global food price supply spikes of 2008/9 - vis-à-vis conventional explanations in terms of a mismatch of supply and demand - have been much debated. While the causal connection between speculative activity and global food price volatility is contested, there is convincing evidence that speculation influenced prices by shaping expectations. The impact on farmers, particularly smallholder farmers, has been particularly severe, as they receive ‘wrong price signals’ and experience higher levels of uncertainty.

Nevertheless, international donors continue to promote derivatives and other financial instruments as development tools for addressing poverty and food insecurity, particularly among smallholder farmers. Members of the World Bank Group have been key agents in facilitation of investments in ‘frontier’ markets, for example farmland in Latin America and Africa. The Multilateral Investment Guarantee Agency (MIGA), for example, provides contracts that guarantee FDI against ‘non-commercial’ risks. The IFC has 'launched a US$500 million fund that protects investors with an exit option from funds operating in emerging markets, thereby making their investments more liquid. Taken together, these initiatives have facilitated financial actors’ acquisition of low-priced farmland in the South, while reducing the risks of doing so’. As the Third International Conference on Financing for Development approaches, there is a danger that it may become a vehicle through which these emerging practices are endorsed and legitimised, rather than subjected to closer scrutiny.

How has this been possible? Jennifer Clapp’s analysis of the ‘distancing’ effect of financialisation in the global food system sheds light on this question. This arises from the diversity of new actors that populate the food system, together with the proliferation of complex financial instruments, which both abstract the commodity from its physical form, and reconnect with physical markets in new and complex ways. The effect of this ‘distancing’ is that the role of financial actors is obscured, and this obscuring effect ‘shapes the political context’, in ways that enable financial actors that contributed to global crises to be presented ‘as providers of solutions rather than causes of problems’.