G20 Finance Ministers focus on private financing of infrastructure

Jesse Griffiths, Guest Blogger

Jesse Griffiths is Director of the European Network on Debt and Development (Eurodad).

Last weekend, G20 Finance Ministers had their penultimate meeting before the G20 Leaders summit, scheduled for December in Turkey. Despite the current instability in stock markets and currencies in many countries, the focus of the communiqué is on the continued push, led by multilateral development banks and the OECD, to radically change the way infrastructure is financed by trying to draw in private finance, though this method has a weak recent track record. Discussion of ongoing efforts to combat tax evasion and reform the financial sector were slated for the next meeting in October, while the G20 continued to complain about the failure of IMF governance reform, but offered no hope that an IMF governance crisis can actually be avoided.

This was the Finance Ministers’ third meeting of the year, with one more slated to coincide with the World Bank/ IMF annual meetings in Lima in October. Detailed analysis of the outcomes of the meeting has been hampered by the fact that almost all of the large number of background papers were not put in the public domain until some days after the summit ended.

The stock market problems in China, and related currency problems of many other emerging markets were at the centre of the discussions, but monetary policy coordination has been a major area where the G20 has failed to have any impact in the past. The communiqué underscores this fact by noting that “monetary tightening is more likely in some advanced economies” – effectively endorsing anticipated raises in interest rates in the United States, which many expect will lead to a significant outflow of capital from developing countries.

Private infrastructure top of the agenda

Instead, as Eurodad predicted earlier in the year, the big focus this year is on “boosting investment,” which the ministers proclaim as “a top priority.” This is nothing new – infrastructure was a major theme of the Australian G20 presidency in 2014, though outcomes were limited – but the sheer scale of the preparatory work suggests the international institutions that act as the secretariat for the G20 have moved into overdrive, with multiple background papers from the OECD, the World Bank and others.

The communiqué highlights the main continuing themes: a focus on public private partnerships (PPPs) and capital markets (such as bond or stock markets) as mechanisms for increasing private financial investment in infrastructure. As Eurodad pointed out, the agenda to mobilize private finance for infrastructure is an attempt to bend the arc of history, as public finance has historically been the major player in infrastructure investment in developing countries. There is no reflection in the communiqué on how one underlying assumption of this agenda – that there are large supplies of untapped or misallocated private finance – will be affected by the current, and likely future, global financial instability.

The Ministers welcome the World Bank Group and OECD guidance on PPPs, which are long term contracts given to private firms to provide finance for a public asset or service, and to receive payment for this, either from the users of the service, or the government. However, as a recent Eurodad report highlighted, PPPs often end up proving very risky and expensive for the state, there is limited evidence of any impact on efficiency, and the low transparency of PPPs is particularly worrying given the major social and environmental impacts of big infrastructure projects.

One important background paper considered by the G20 Ministers is the World Bank Group’s “Framework for Disclosure for PPP Projects.” Lack of transparency is a major flaw of most PPP models, and developing a framework for disclosing documents would be a useful step, were it based on the principles of the right to information and a presumption of disclosure of all documents, with a limited regime of exceptions. However, according to a source, the draft framework has a worrying list of broad areas of redactions including commercially sensitive information, trade secrets, strategic/public interest related confidential information, suggesting that, in practice, very little could end up being disclosed.  This impression is confirmed by the World Bank Group’s major Report on Recommended PPP Contractual Provisions which recommends language to address key issues that emerge when countries have to negotiate a PPP contract, including transparency and dispute resolution. The purpose of this extensive document is clear: “… by encouraging consensus-building around these provisions, infrastructure will become more attractive as an asset class for a variety of investors, including institutional investors such as pension funds.”

This second major infrastructure proposal is highlighted by the Ministers’ communiqué which focuses on “examining possible capital market instruments,” “in recognition of major financing needs for long term investments.” The idea is to find a way of getting pension funds and other major institutional investors to push their money into infrastructure. Again, this is a long-standing theme, and again there is little current evidence that this could actually work.  A previous OECD survey of large pension funds found that, “direct investment in infrastructure projects of all types accounted for only 1% of their asset allocation in 2013.”

The OECD had previously argued that this reluctance could be overcome by ‘mitigating’ risks – or rather transferring risks from the public to the private sector. This time, the OECD’s report on implementation of G20 principles on long-term investment financing by institutional investors goes further, calling on governments to consider “credit and revenue guarantees, first loss provisions [that limit the amount the investor will lose if things go wrong], public subsidies, and … direct loans” to reduce the risks for institutional investors. They also call for using national and multinational development banks and agencies as the mechanism for ‘pooled’ financing, using “project bonds or securitised assets” for example – in effect recognizing that institutional investors are likely to want to remain at arms-length from actual investment in infrastructure, preferring liquid assets that they can sell easily should markets turn against them.

Placing multilateral development banks (MDBs) at the center of this agenda is being enthusiastically promoted by the MDBs themselves. The significant scale of the joined-up working now happening across the MDBs on this agenda is shown in the background paper “Partnering to Build a Better World: MDBs’ Common Approaches to Supporting Infrastructure Development.” According to a source, it reveals that there are already about 100 separate MDB working groups. The agenda they have set themselves to collaborate and drive forward this agenda is significant, including: co-financing; catalyzing private financing, including in post-conflict areas; leveraging support for PPPs upstream and downstream; harmonizing project preparation, including of big transformational projects; sharing a set of common core indicators to measure the impact of private investment; strengthening project preparation facilities (PPFs); sharing knowledge; and engaging in exposure exchange agreements.  The scale of the work done by these institutions begs the question of who is leading who – the G20 or the MDBs?

Tax decisions expected in September

As expected, the G20 Ministers promised to finalize the delivery of their Base Erosion and Profit Shifting (BEPS) initiative with a draft of the “final package of all 15 action items” to be discussed at the Ministers’ next meeting in Lima in October. The BEPS initiative is supposed to reduce multinational tax dodging, and is led by the OECD, so the real decision point is the OECD’s Committee on Fiscal Affairs meeting on 21-22 September. Previous Eurodad analysis has noted the major flaws in the BEPs project – it lacks transparency, contains significant loopholes, and favours OECD countries over developing countries. In fact, the majority of the world’s countries have been excluded from decision-making.

A major push by developing countries, backed by a strong campaign from civil society groups, to get a new intergovernmental body on tax at the UN to give all countries a say on global tax rules, was defeated by an alliance of powerful rich countries at the Financing For Development Summit in Addis Ababa in July this year. The strength of the developing country push on this issue suggests, however, that the days of the OECD’s dominance in this area may be numbered.

One developing initiative mentioned in the OECD’s background paper is the plan to create a multilateral instrument to update tax treaties, with an ad hoc group, led by the United Kingdom, holding its first meeting this November, and aiming to finish its work by the end of 2016. The aim is to “allow interested countries to rapidly update the existing global network of over 3,000 bilateral tax treaties”.  The fact that discussions of this critical issue will take place behind closed doors, in a group that currently only includes a minority of the world’s countries is a worrying sign. A recent Eurodad report highlighted how the OECD’s model tax treaty can unfairly disadvantage developing countries. The scale of the existing problems with tax treaties is shown, for example, by one estimate highlighted in the Eurodad report, that treaties with the Netherlands alone led to foregone revenue for developing countries of at least EUR 770 million in one single year.

The other major area where this year’s G20 aims to wrap up a number of ongoing initiatives is financial sector reform. Previous Eurodad analysis has highlighted that underlying problems are not really being fixed by the G20 initiatives, and the current global financial instability may yet cause the G20 to re-examine this area. Detailed analysis of the impacts of the existing reforms is due to be presented to the G20 by the Financial Stability Board shortly.

Finally, the G20 Ministers made their usual plaintive plea on IMF governance reforms – the 2010 reforms are approaching the end of their final deadline this year and are still blocked from ratification by the United States. The aggressiveness of the language has been turned up a notch, with the U.S. “strongly urged” to ratify, with this being “essential for the credibility, legitimacy and effectiveness of the Fund.” As Eurodad has previously pointed out, the ratification looks extremely unlikely, and a governance crises at the IMF could dominate the headlines at the end of the year.

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