SDGs: What will it take to fix flailing SDG funding?

UNITED NATIONS – The international community is not acting fast enough to mobilize finance for the Sustainable Development Goals, experts gathered at the Financing for Development Forum told Devex.

“Are we doing enough? Clearly, the response is no,” said María Fernanda Espinosa, president of the U.N. General Assembly, in a speech.

Stakeholders at the forum in New York sounded the alarm on a lack of progress nearly four years after world leaders gathered in Addis Ababa, Ethiopia, to hash out how to fund the 17 goals that would be adopted later that year.

U.N. Secretary-General António Guterres called 2019 a defining year in implementing the SDGs, adding that “so far we are not keeping pace” and that “possible upticks” in financial volatility are complicating implementation.

Developing countries must meet their commitments to improve domestic resource mobilization and increase tax revenue, but the international community must also step up to help fight tax evasion, money laundering, and illicit financial flows, he said.

Domestic resource mobilization

One of the central calls in the Addis Ababa Action Agenda was for countries to focus on domestic resource mobilization: issues of governance, improving tax collection and transparency, and examining how tax incentives are used. According to many of the experts gathered at the forum, there has been little progress on this front.

While a majority of countries have created and submitted national development plans aligned with the SDGs, a majority have no investment strategy to reinforce priorities through the budget process, according to the U.N.

Of 107 SDG plans analyzed by the U.N., some 79 lacked an investment strategy, said Navid Hanif, director at the U.N. Department of Economic and Social Affairs’ Financing for Sustainable Development office.

Countries need to develop integrated national financing frameworks; the U.N. Development Programme has already conducted financial assessments in some countries to aid in this process, said Shari Spiegel, chief of the policy analysis and development branch at U.N. DESA’s Financing for Sustainable Development office.

The plans will help to ensure that budgets are allocated to priority areas and serve as a tool that countries can take to development finance institutions or investors to talk about what investments might work best to help meet country needs, she said.

Some countries are already making changes and trying to mobilize additional domestic revenue.

Indonesia has made structural reforms to improve its tax policy and compliance. And it’s paying off: Domestic revenue grew 13.24% in 2018, according to Bambang P.S. Brodjonegoro, Indonesia’s minister for development planning.

In Costa Rica, the ministry of finance is working with the ministry of economic development to refine planning instruments, so strategic projects will have necessary financing through public and private resources, said Luis Daniel Soto, Costa Rica’s vice-minister of planning and economic policy.

“When we talk about financing for development, we talk about two paths: seeking resources and using the ones already available wisely,” he said.

Tax and investment treaties and instruments need to be fixed to enable better domestic resource mobilization, Hanif told Devex. One place to start is with official development assistance, he said. While donors push for countries to fund through domestic resources, donors also seek tax exemption, which could amount to 2-3% of some countries’ tax revenue, he said.

Illicit financial flows

While individually, countries can improve tax systems, there needs to be an effective global effort at cracking down on illicit financial flows that take money out of developing countries, several of the experts said.

The Addis Ababa Action Agenda and resulting process committed to curbing illicit financial flows, but no progress has been made so far, said Dereje Alemayehu, executive coordinator for the Global Alliance for Tax Justice. The process was not meant to be a fundraising exercise, but create a policy space for financial sustainability and international tax cooperation, he said.

“To expect developing countries to enhance domestic resource mobilization without stopping resource leakages in their economy is like expecting them to collect water with a sieve,” Alemayehu said.

There is an expectation — that countries create a financing network. But governments should be responsible and accountable for leakage and corruption and reconsider tax giveaways that serve to subsidize private sector profit, Alemayehu added.

One issue that emerged in the latest discussions is that current international efforts on tax rules related to base erosion and profit shifting have not dealt sufficiently with the poorest countries, and developing countries have been left out of discussions about international tax policy.

“Developed countries are blocking developing country efforts to be part of the discussion on multinational corporations and tax,” said Tove Maria Ryding, head of advocacy at Eurodad.

In some countries there is confusion about international financial flows, which results in governments being complicit in adopting policies that are eroding the tax base or disproportionately affecting the poor and women, said Mae Buenaventura, deputy coordinator at Jubilee South Asian Peoples’ Movement on Debt and Development.

Buenaventura called for the U.N. to establish an intergovernmental body or commission to look at tax rules in the hopes that it would be a more democratic and transparent approach.

Private finance

Much of the recent development finance conversation has focused on bringing in private finance to help fund the SDGs. Those discussions were evident at last week’s meetings, with dialogues about whether blended finance leaves no one behind, and a discussion of how a Swedish Alliance is bringing together pension funds and banks to tackle SDG-related investments.

The SDGs are now in the consciousness of most investors, but they want measurable metrics to govern how impact is communicated, Celia Wong, director of sustainable investments at DWS, told Devex.

“Everyone wants a standardized approach,” Wong said. “Investors are so used to a standard for metrics, so they’re looking for standard social or impact metrics to compare investments or investment options to consider.”

Wong was also quite frank about where banks may not be able to go, namely low-income countries where there is instability. Those countries face anti-money laundering regulatory challenges along with insufficient infrastructure, while small deal sizes may make investing either challenging or impossible, she said.

Unless there are “other forces or maybe regulatory changes,” the financial industry will likely only continue to allocate a small portion of its total funds to SDG-related investments, Wong said.

But private sector financing is about more than attracting investments from U.S. or European pension funds that are aligned with the SDGs, or getting more mainstream investors interested in developing countries, said U.N. DESA’s Spiegel. It is critical to build domestic private sectors in developing countries, she said. Local companies have always been the primary vehicles for growth and play a critical role in reducing risk which is necessary to bring in foreign investment, Spiegel said.

What’s next?

Looming over the discussions was the potential for another recession and rising debt levels, particularly in developing countries.

The SDGs were to provide a vision to revolutionize thinking and change the ways global systems worked, but that’s not happening “because the system is not designed for this approach and neither are national budgeting systems,” Hanif said.

What’s needed now, is to nudge governments and stakeholders to start taking action, and encourage them to come up with initiatives to announce and launch at the high-level dialogue on financing for development in September, Hanif said. There also needs to be some political action on the issue of debt and illicit financial flows and better integration between the development agenda, the financing agenda, and the climate agenda, he continued.

While the financing for development process has helped build consensus around several issues, the challenge is that very little about it is binding, said Eric LeCompte, executive director of the financial-reform focused alliance Jubilee USA. Addis brought up illicit financial flows but created no mechanism to support countries in retaining their resources, he said. The Addis agreement also called for debt restructuring to be improved, which needs to be done, especially with growing indebtedness.

“Across the board — particularly with tax, transparency, debt policies — we are at a point where we need to move beyond voluntary mechanisms because we don’t have the ability to reach the SDGS,” LeCompte said.