Can Addis start a Domino Effect for Raising Multilateral Ambition in 2015?

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Introduction

The year 2015 could go down in history books as the landmark year for turning around the world’s “business-as-usual” economic and financial system in ways that could lead to a sustainable future.  Or, it could be a year of cascading multilateral failures, signaling a further decline of UN-led efforts for sustainable development. When world leaders meet from July 13-16, in Addis Ababa, Ethiopia for the third UN Conference on Financing for Development (FfD-3), the stakes are high to address the “business-as-usual” discourse and decision-making which put people and the earth at the service of mCaarkets.  This has led us down a path to potentially catastrophic climate change, biodiversity loss and growing inequality with still too many people, the majority of them women, left in extreme poverty.

The Addis Ababa FfD-3 conference will play a crucial signaling role for whether it is possible to change course, raise global ambition, create hope and restore the North-South trust, which is at the heart of global cooperation.  

The conference is so crucial because it is the first of three major UN events within just six months. After the Addis Ababa conference in July, the UN convenes the Special Summit on Sustainable Development in September (New York), which is also known as the “Post-2015 Framework.”  Whereas the Millennium Development Goals guided policy from 2000-2015, the Sustainable Development Goals (SDGs) are milestones for achievement by 2030. [1] Just a few months later, the Climate Change Conference in December (Paris) is tasked with crafting an ambitious international and legally-binding climate agreement that can help avert climate disaster.

A weak outcome at FfD-3 in Addis could have a “domino effect” that undermines the two subsequent UN events.  Many countries, including Germany, want the FfD-3 outcome to be a strong influence on the other two events – namely, the key pillar for financing as a crucial means of implementation (MOI) of the post-2015 framework and the goals for climate adaptation and mitigation.    

Yet, based on the latest not yet officially released draft outcome document, many critical observers see the prospects for positive outcomes for the Addis FfD already dimming.  Already some mock versions of the official Addis logo are circulating that decry the process as “failing to finance development” and the Addis gathering as “time for global inaction.” With the last week of negotiations on the outcome document for Addis just concluded in New York, many observers deplore the latest text’s lack of urgency or sense of peril if “business as usual” continues.  They also criticize what they perceive as substantial weakening of text passages they championed over the course of the negotiation sessions, for example on corporate accountability or key institutional reforms for global economic and finance governance.

An earlier draft did express concerns – particularly related to the challenges of least developed countries (LDCs), increased inequalities and the rapid transmission of shocks and diseases in our highly interconnected world.  It also acknowledged that “Environmental degradation, climate change, and other environmental risks threaten to undermine past successes and future prospects.”[2]

However, its tone is in marked contrast to the 2008 Doha Declaration on Financing for Development (FfD-2) adopted amidst alarm as the global financial crisis was breaking.  The Doha Declaration warned that “the international community is now challenged by the severe impact on development of multiple, interrelated global crises and challenges, such as increased food insecurity, volatile energy and commodity prices, climate change and a global financial crisis…”

Of course more important than tone is the substance of the three UN events this year. Looking at the magnitude of the challenges faced by the world community, the latest draft FfD outcome document clearly neglects important systemic changes that are needed in the global financial, trade, and investment system.  Specifically, in parallel with the UN negotiations, a new investment model is being designed by the Group of 20  (G20) and several development banks, which could put “business as usual” on “steroids” by strengthening market fundamentalism.  If Addis is not to start a negative “domino effect,” leaders at the upcoming FfD Conference must shift direction and amend the current draft outcome document.

The World in 2030: A Promise or a Threat?

In the three UN events this year, starting with the Addis Ababa FfD Conference, it will be crucial to see how strongly the declarations and agreements not only define the threats and challenges, but also identify powerful solutions.  Such solutions should specify ways in which a revamped systemic model for finance, trade and investment can uphold people-centered, inclusive, equitable and sustainable development.  Equitable and sustainable development supports human rights, gender equality, and earth rights as ends in and of themselves.

The Rio Principle of “common but differentiated responsibilities” (CBDR) pertaining to states’ actions to support sustainable development has to be maintained as an expression of international solidarity and respective countries’ obligations despite the fact that it is rejected by most developed country negotiators for the FfD context and as an overarching guidance for the SDG process and has an uncertain future in the  Paris climate negotiations.

The multilateral challenges that these three 2015 summits seek to address are enormous: By 2030, the global population is projected to reach some 8.3 billion (from 7 billion in 2011). As the ranks of the middle classes expand, consumption is expected to surge – especially in the seven emerging economies – China, India, Brazil Indonesia, Mexico, Russia and Turkey – that are likely to  overtake the growth levels of the G7.  Urban populations will rise rapidly from roughly 50 percent of the population today to 60 percent in 2030.  By 2030, demand for food, water, and energy will grow by 35, 40, and 50 percent, respectively.[3] However, globally, the benefits of growth and accumulation of wealth are shared unequally.

Strikingly, the poorer half of the global population collectively own less than 1 percent of global wealth, while the richest 10 percent of adults own 87 percent of all wealth, and the top 1 percent account for almost half of all assets in the world.[4]  This is inevitable as, for instance, the growth of a deregulated financial sector rachets up levels of wealth inequality (which is far more skewed than levels of income inequality). February 2015 research by the Bank of International Settlements and June 2015 OECD research confirms these trends. 

Demand for food is set to rise by more than 35 percent by 2030, but global productivity gains have fallen from 2.0 percent between 1970 and 2000 to 1.1 percent today and are still declining[5], including due to climate change.  According to the UN projections, with the existing climate change scenario, almost half the world's population will be living in areas of high water stress by 2030, including between 75 million and 250 million people in Africa..

On the current course, the world looks set to miss the carbon target to keep temperature rises to 2°C (above pre-industrial levels).[6]  A dramatic U-turn is required to achieve a low/no carbon world “on the basis of equity for present and future generations and in accordance with common but differentiated responsibilities and respective capabilities,” as UN Secretary General Ban Ki-Moon last year demanded in his synthesis report on the post-2015 agenda.

Currently, world greenhouse-gas (GHG) emissions from energy production and use are double the level of all other sources combined, meaning that action to combat climate change must come first and foremost from the energy sector.[7]   Crucial steps include: increased energy efficiency and investments in renewable energy technologies; banning the construction of new fossil-fuel fired power plants and taking the least efficient and most polluting plants off-line.  In addition, fossil fuel subsidies must be phased out, which, according to a recent paper by the IMF are more significant than the nearly $ 550 billion generally quoted: “Post-tax energy subsidies are dramatically higher than previously estimated—$4.9 trillion (6.5 percent of global GDP) in 2013, and projected to reach $5.3 trillion (6.5 percent of global GDP) in 2015... Eliminating post-tax subsidies in 2015 could raise government revenue by $2.9 trillion (3.6 percent of global GDP), cut global CO2 emissions by more than 20 percent, and cut pre-mature air pollution deaths by more than half. After allowing for the higher energy costs faced by consumers, this action would raise global economic welfare by $1.8 trillion (2.2 percent of global GDP).”

As long as fossil fuel subsidies remain in place, renewable energies will be at a competitive disadvantage.  It is therefore imperative that all three upcoming UN events demand the elimination of these subsidies. But a further step is needed: Following the “polluter-pays principle,” the globally largest carbon emitters – the 90 “carbon majors” of the biggest oil, gas and coal producers, and cement manufacturers, to which 63 percent of global carbon emissions can be traced – should pay for the loss and damage they are causing to poor communities due to climate change via a levy with proceeds going to an International Mechanism for Loss and Damage.

Financing for Development-3: A New Model of Investment?

The costs of averting interrelated catastrophes (e.g., climate, food, water, and energy) and of addressing the accompanying challenges of persistent inequality and poverty are enormous, but the costs of ignoring them are greater. The investment needed to realize the set of Sustainable Development Goals (SDG) that the UN Special Summit seeks to agree on in September is estimated at $2 trillion to $3 trillion per year of public and private money over 15 years.[8]  However, this amounts to only half of the $89 trillion, which the World Bank estimates as necessary infrastructure investments across cities, energy, and land-use systems. And the International Energy Agency warns that in order to limit global warming to 2°C (above pre-industrial levels) and avoid the worst effects of climate change, some $53 trillion in cumulative investment in energy supply and in energy efficiency is required by 2035. Stronger climate policies such as those sought in Paris could and should leave around $300 billion in fossil-fuel investments stranded by stronger climate policies.

In other words, infrastructure is a cross-cutting issue that is required to achieve many SDGs, but it must not crowd out investments in other areas crucial for sustainable development – from gender equality to fisheries to small holder agriculture and support for domestic micro, small and medium enterprises in developing countries.

What sources of investment can meet the SDGs and address wider systemic changes?  Public and private resources from developing countries accounted for about 84 percent of total development finance in 2010, private international finance accounted for 14 percent and all forms of public international finance for about 2 percent. [9]  The latter – also known as official development assistance (currently about $135 billion annually) – still stands only at just about 0.31 percent of Gross National Income (GNI) for all OECD donor countries, although it has grown over the past 50 years. This falls far short of reaching the long-standing promise of providing 0.7 and 0.2 percent of GNI to Developing and Least Developed Countries, respectively.

Likewise, the developed countries’ pledge from the 2009 Copenhagen climate summit to raise $100 billion per year by 2020 in “new and additional” climate finance for developing countries (with developing countries and civil society demanding that “additionality” has to be defined as money provided on top of existing ODA commitments) falls far short of actual climate financing needs. For adaptation finance alone, which addresses already severe climate impacts in developing countries disproportionally affecting the poorest countries and population groups the worst, up to $300 billion per year by 2050 could be needed – and this is if global warming is kept to a 2°C increase. Fulfilling the Copenhagen pledge is the bare minimum requirement for unlocking the current climate negotiations. However, just months before the Paris summit, there is still no agreed credible pathway on how to reach this amount, although some latest suggestions from a commission tasked by the French COP 21 presidency has been put forward.

In the Addis FfD negotiations, developed countries downplay the core role of public finance provision for global public goods, citing budgetary constraints at home and a changing global landscape with stronger emerging market economies. Not only do they respond negatively to any call for an increase in public resources, but several key developed countries have also blocked further progress in the application of innovative sources of financing, including a more than regional implementation of a financial transactions tax (FTT), currently restricted to 11 countries in the EU, or global levies on maritime and air transport applied in a way that developing countries would not be burdened disproportionally. A carbon levy on the biggest fossil fuel producers should also be considered.

Instead, developed countries promote a focus on using scarce public resources for leveraging and blending with private sector resources, including the estimated $93 trillion in holdings by long-term institutional investors (e.g., pension, insurance, mutual funds). To tap into such massive sources, the FfD process will likely call for an enabling environment of deregulation for the business sector and stress an “increase in the fungibility” of public money, that is using the same pool of ODA for both development and climate action through a focus on leveraging and blending.

The May draft FfD outcome document states: “We recognize that public investment has a key role to play in infrastructure financing, including through development banks and other development finance institutions. Blended finance, which pools public and private resources and expertise, offers significant potential to contribute resources, expertise and technology transfer in support of sustainable development.[10]

This represents a landmark change in the global investment model.  At the first Financing for Development Conference in Monterrey, Mexico in 2002, the world relied on the model of using public investment as a means of fulfilling governments’ social contract with its citizens.  At the upcoming FfD-3, leaders will outline a new model, which significantly relies upon public investment as a support for private investment in an effort to shift trillions of dollars into toward sustainable development and climate goals.  The shift from Monterrey to Addis signifies not only a transformation of the partnership between developed and developing countries, but also of the roles of public and private finance.  Taken to an extreme, the model promoted by the draft Addis Ababa Declaration can undermine the states’ role as duty bearers to citizens as the holders of inalienable rights.

The landmark change is evident not only in the draft FfD outcome document, but also in the approach to “Financing for Development” of seven international financial institutions[11], describing how they would increase financing for development “from billions to trillions”  by transforming the multilateral development finance model. With regard to infrastructure, the platform of these institutions was announced in November. In contrast to the UN system, which has been stripped of most of its financial and economic coordination functions over the past decade, the IFIs command considerable financial clout. 

Among other things, the paper presented at the IMF/World Bank Spring Meetings calls for a paradigm shift to “mobilize resources and co-investment from both existing and nontraditional sources of capital such as pension funds, sovereign wealth funds, and insurance companies.” Pooled vehicles (or co-investment platforms) will finance portfolios of public-private partnerships (PPPs), especially in social and economic infrastructure.  As noted above, in theory, this approach would help achieve the sustainable development goals (SDGs) by, for instance, “reaching under-served populations in financially sustainable ways at the `base of the pyramid,’ representing an annual $5 trillion market …with over 4.5 billion people.”[12]

Thus, the new framework aims to re-engineer development finance by, among other things, using public money (e.g., taxes, pensions, user fees) to attract trillions of private investment dollars into new “asset classes,” such as social, economic and energy infrastructure.  These “pots of gold” would come from long-term institutional investors (e.g., pension, mutual, insurance funds) which control roughly $93 trillion[13], a sum much greater than global GDP of $75 trillion. The same approach is also seen as the best way of mobilizing the financing at scale needed for transformative climate action, including through substantial financial inputs of those actors in the new Green Climate Fund (GCF).  At the highest level, UN Secretary-General Ban Ki-moon has endorsed this new framework, stating: “Urgent action is needed to mobilize, redirect, and unlock the transformative power of trillions of dollars of private resources to deliver on sustainable development objectives.”[14]

While the declarations and outcomes of the UN events will emphasize the role of all states and firms to maintain high environmental and social standards and support gender equality, the fact is that “the rules that govern institutional investors—such as fiduciary duty, stewardship, risk management and accountability— still do not effectively incorporate long-term environmental and social related risks,” according to the UN Environment Program and others. [15]  Moreover, private investors seek to sustain the rate of return on their investments through guaranteed revenue streams and ensure that laws and regulations (including environmental and social requirements) do not impinge on profits.  Global consulting firms such as KPMG see consumer protection as a risk to investor protection.[16]

As Charles Kenny writes, “…there are surely questions about the development impact and opportunity costs of a private infrastructure investment requiring a 20 percent annual rate of return that is provided in some or considerable part through aid support as opposed to a public infrastructure investment borrowing money at IBRD or equivalent rates. And for both private and public market-rate financing, it is questionable that we really want to mount up debts for infrastructure before we know it will be maintained (and so able to pay back and deliver development outcomes).”[17]

Civil society activists urge that the shift of approach from Monterrey to Addis be challenged in two ways.  First, they claim that there is insufficient evidence of the good performance of public-private partnerships (PPPs) to scale them up – especially in sensitive sectors, such as health care, education, water, and electricity.  Whereas PPPs may succeed in returning an investment to private partners, they often fail to invest in poor communities or provide affordable services.    

While some have advocated for “PPPPs”, or “public-private-people partnerships,” as a more inclusive way to conduct business, there is no fleshed out proposal on how to desgin them.  In such a model, civil society should have genuine participation in governance and oversight to ensure that risks and rewards of such projects are shared fairly.  Moreover, true PPPPs would seek to prioritize domestic micro-, small- and medium-sized enterprises, include clear accountability mechanisms and meet social, gender equality and environmental standards.  This approach, which can however only be one piece in a wider toolkit of approaches, will require more than “guidelines and documentation for the use of PPPs, and to build a knowledge base and share lessons learned through regional and global fora”, which is all that the current Addis draft promises. Instead, governance and accountability systems over multi-stakeholder partnerships in the UN must be established before more such partnerships are sanctioned and carried out.

Second, civil society activists warn that pooling PPPs in portfolios or turning development sectors, such as infrastructure, into asset classes for investment runs many risks.  As with individual PPPs, portfolios of PPPs will raise significant problems with transparency and accountability as well as result in hidden debts (off-budget liabilities) that are not fully quantified or understood.  Having distant investors as beneficiaries of community development and infrastructure risks “privatizing gains and socializing losses” on a massive scale.  This new investment model also risks undermining democracy, since even governments may have little leverage over institutional investors, much less citizens.

Addressing Key Systemic Issues

The new investment framework must not become a pretext for a race between the “West and the rest” to control natural resources and penetrate markets.  Instead, a race is required to change the rules or the rule-makers to ensure that the investment framework for the next 15 years serves crucial sustainable development and climate goals in a context that is centered on the fulfillment of human rights and the promotion of gender equality.  In 2002 , the Monterrey Consensus highlighted the centrality of “gender-sensitive, people-centred development” and urged to mainstream gender considerations into development policies at all levels and in all sectors. For Addis to be the starting point for such a race to the top, the FfD 3 outcome document needs to be more than just the ”one and only MOI pillar” for the post-2015 process, as it is perceived by many developed countries.  Moreover, it must revamp its current proposals in terms of PPPs and pooled finance. 

In addition, in Addis leaders should not shy away from confronting and agreeing to act on some of the systemic changes needed that today hinder the achievement of sustainable development for all in a climate-constrained world. A few crucial systemic shortcomings that need to be tackled in Addis include: 

  • The reregulation of the financial market, including its outsized derivative segment (which reached $605 trillion in 2008) by separating investment and commercial banking; speculation facilitated by derivatives has led to greater volatility of commodity pricing, including on food grains;
  • the break up and regulation and supervision of “too big to fail” systemically important financial institutions, such as large international banks and credit rating agencies, under an independent multilateral supervisory agency;
  • the establishment of an international body on international tax cooperation that tackles corporate tax dodging and transfer pricing abuses; the UN should challenge the OECD/G20 dominance on tax standard-setting to the detriment of developing countries. 
  • a sovereign debt restructuring mechanism, ensuring a fair and inclusive debt workout which acknowledges creditor co-responsibility, provides human needs based assessments of governments’ capacity of serving debts and ends the role of vulture funds;
  • a comprehensive human rights review of all trade and investment agreements, specifically also on intellectual property rights restrictions; current investment and trade treaties often undermine or “freeze” developing country states’ ability to carry out public interest policy regulation, especially on natural resource and social and environmental protection issues, through investor-state-dispute settlement mechanisms that put the corporate interest over the public one;
  • a correction of the existing balance of power in global financial and economic governance with reforms in the Bretton Wood Institutions that give developing countries more voice and vote and bring the institutions under a wider UN control, for example though a new UN Global Economic Coordination Council advocated by many civil society observers; and
  • lastly, a mandatory arrangement for a strong follow-up process for example through an autonomous intergovernmental UN body with the power to hold governments to account on failures to comply with their promises; this is necessary to move beyond verbose intent only and to avoid the pattern of the first FfD conference in Monterrey where a rich outcome document yielded only weak implementation. The World Trade Organization and international investment treaties have such compliance regimes. People-and human-rights centered fair and inclusive commitments to sustainable development and climate protection deserve the same enforcement power.

Without significant improvement in terms of the tone and substance of its draft outcome document, the Addis Ababa Declaration clearly risks being upstaged by the Pope’s recently released ‘Laudato Si’ encyclical which warns that blindly trusting in the power of technology and markets, including carbon markets, will not address the unsustainable production and consumption patterns that leave too many of the world’s people deprived of their basic needs and disenfranchised and could just lead to new forms of speculation. “Rather, [carbon trading] may simply become a ploy which permits maintaining the excessive consumption of some countries and sectors” and distract from “the radical change which present circumstances require.”[18] The encyclical puts morality and equity back into global crisis management and declares that “A true ecological approach always becomes a social approach; it must integrate questions of justice in debates on the environment, “so as to hear both the cry of the earth and the cry of the poor.”

ENDNOTES:

[1] See sustainable development goals.  https://sustainabledevelopment.un.org/sdgsproposal)
[2] FfD 3 outcome document revised draft, May 7, 2015, para. 4.
[3]  See U.S. National Intelligence Council’s “Global Trends 2030
[4] Global Wealth Report, Credit Suisse, October 2014.
[5] Ibid., p. 30.
[6] According to the IEA, World Energy Outlook 2014, The investment path traced in the report falls well short of reaching climate stabilisation goals, as today’s policies and market signals are not strong enough to switch investment to low-carbon sources and energy efficiency at the necessary scale and speed: a breakthrough at the Paris UN climate conference in 2015 is vital to open up a different investment landscape. 
[8][8] The Economist Magazine, March 28, 2015
[9] OECD as quoted in: Charles Kenny. 2015. "Finding Cash for Infrastructure in Addis: Blending, Lending, and Guarantees in Finance for Development." CGD Policy Paper 066. Washington DC: Center for Global Development. http://www.cgdev.org/publication/finding-cash-infrastructure-addis-blending-lending-and-guaranteesfinance-development
[10] FfD 3 Revised Outcome Document, May 7, 2015, para. 48.
[11] The African Development Bank, Asian Development Bank, European Bank for Reconstruction and Development, European Investment Bank, Inter-American Development Bank, International Monetary Fund, and World Bank Group in the “Development Committee Discussion Note,” April 2015.
[12] “From Billions to Trillions…”, p. 16.  See p. 22 for a graphic of the new financing model.
[13] These investors allocate capital across all asset classes, notably bonds, listed equities, property, private equity, and infrastructure, as well as hedge funds and derivatives.
[14] “The Road to Dignity by 2030”, para. 92.
[15]Pathways to Scale: Aligning the financial system with sustainable development,” Inquiry: Design of a Sustainable Financial System,” UN Environment Program, January 2015.
[16]10 Emerging Trends for 2015,” Foresight Special Edition, KPMG, January 2015, p. 4.
[17] Op cit.
[18] Laudato Si, para 171.
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