Private capital and the SDGs: The Urgent Need for Scale
The total investment need in developing countries for basic infrastructure (roads, rail and ports; power stations; water and sanitation), food security (agriculture and rural development), climate change, health, and education is estimated at somewhere between US$3.3 trillion and US$4.5 trillion a year. At current levels of investment, this equates to an annual funding gap of US$2.5 trillion each year. The bulk of this investment gap is for infrastructure, which is critical to delivering the 2030 Sustainable Development Goals (SDGs). Public capital cannot meet this funding need alone, so mobilising local and international private investors is key.
While there is no shortage of capital worldwide, the private sector is often unable to make SDG-related investments due to the associated project- or country-related risks. Hence the rationale for “blended finance”, which involves the strategic use of development funds to improve the risk-return profile of investments in order to attract private capital (using instruments like guarantees, risk insurance, currency hedging, syndicated loads, collective investment vehicles, subordinate capital, technical assistance funds etc.) It is unclear exactly how much development finance is currently “crowding in” private investment for the SDGs. However, with the investment gap in the trillions, the message is clear: public and philanthropic funds need to crowd in significantly more private capital for every dollar in order to fund the SDGs.
The Challenge and the Opportunity
There is a major business opportunity for the private sector to invest in the SDGs (at least US$12 trillion in investable opportunities and 380 million new jobs by 2030), and there are big pools of long-term capital currently on the sidelines which could be invested. But mobilising an extra US$1 trillion of private capital a year (about 10% of annual net inflows into global savings pools) will require better deployment of blended finance and a focus on achieving scale to increase the public to private leverage ratio. This presents a major challenge, but also contains an enormous opportunity for the private sector, which led to the creation of the Blended Finance Taskforce.