1) What is your assessment of the effectiveness, consistency and synergies of current flows and instruments for financing sustainable development?
a. What are the biggest challenges?
Declining ODA and neglect of Least Developed Countries and conflict-affected and fragile states
The Committee’s report should:
• Make a clear case for the continued importance of official development assistance (ODA) within the wider development financing landscape.
• Make recommendations for ODA to be targeted more effectively for countries that have limited access to other sources, particularly least developed countries (LDCs) and conflict-affected and fragile states (CAFS).
• Make recommendations - linked to existing aid effectiveness principles – to maximise the impact of aid in CAFS, including by investing long-term in re-building public service delivery.
• Make recommendations on the use and purpose of ODA – its purpose is poverty reduction. There is therefore a continued role for aid in MICs, although its role and the modalities through which it is delivered may be different to in LDCs and CAFS
ODA continues to be a major source of financing for social and economic development in many low and middle-income countries around the world. Positively, aid spending rose for most of the MDG period, reaching a record high of $128.7 billion in 2010, when OECD countries gave 0.32% of their collective Gross National Income (GNI). Since 2010 though, as a result of the economic crisis and a series of austerity programmes, ODA has fallen to 0.29% of OECD countries’ GNI, as of 2012. This represents the largest fall in real programme expenditure since 1997.
Disconcertingly, aid to Sub-Saharan Africa and to least developed countries (LDCs) has fallen faster still, with a real terms decline of 7.9% in aid to Sub-Saharan Africa in 2011 alone, and aid to LDCs falling by 12.8% in the same year. The OECD DAC suggests that this trend will continue over the long term with donors shifting concentration from the poorest countries to middle income, in particular towards the Far East and South and Central Asia (especially China, India, Indonesia, Pakistan, Sri Lanka, Uzbekistan, and Vietnam). And, aid will increasingly take the form of soft loans rather than grants. Most likely, this shift is the result of new evidence that suggests the majority of the world’s poor live in middle-income countries, as well as geopolitical interests.
This is an alarming trend, given that low-income countries (and in particular the least developed countries) have access to few other sources of international finance, accounting for only 2.5% of FDI to developing countries and 7% of remittances (tantamount to only 1.6% and 4.9% respectively, of LIC’s GDP). As such, ODA remains essential, currently accounting for an average of 10% of LICs’ GDP.
Particularly important is to maintain and increase aid to LICS that are conflict affected and/or fragile states (CAFS); 23.7% of LICs in 2010. According to the World Bank 8 out of 10 of the most aid dependent countries in 2008 were CAFS. In total, fragile states are home to one fifth of the population of developing countries but contain a third of those living in extreme poverty, half of those children not in primary school, and half of all children who die before the age of five.
And yet delivering ODA effectively in these contexts is both challenging and costly, as Save the Children has experienced first hand. Nearly half of all Save the Children’s programmes are in fragile states. These programmes juggle three types of activities: disaster response, essential service delivery, and system strengthening. Common issues raised by our programme staff include;
1. Too many donors consider conflict-affected and fragile states to be too insecure and to have too many governance challenges to be provided with development funding. This results in a tendency to rely on short-term, humanitarian interventions at the expense of longer-term programmes, despite the fact that longer-term commitments are necessary to help people build resilience to future shocks. Our experience in Somalia and elsewhere shows that families would much rather receive long-term assistance, not simply handouts, to meet their immediate lifesaving needs.
2. Short-term programming can lead to gaps in services such as health, education, water and sanitation and social services. In this scenario, it is the people who desperately need these services that suffer. For example, pregnant women who miss out on antenatal care that could have identified life-threatening complications, or children who are deprived of the chance to go to school. This is because state- provided or -administered services tend to be weak or non-existent in fragile states. Service delivery is commonly subcontracted (in large part to non-governmental organisations), yet donors often prefer to fund short-term humanitarian contracts for service delivery rather than longer term programming, in part because of concerns about the risks to their funding in contexts of fragility.
3. Ideally, donors should fund service provision (by NGO or other development actors) at the same time as efforts are being made to strengthen national systems for service delivery, so there is a self-reinforcing cycle. This often entails strengthening state capacity, advocating for improved governance, and developing the demand for accountable public services.
Domestic resource mobilisation
Developing countries’ capacity to finance their future growth has improved dramatically since 2000. Their tax revenue has increased substantially, from $1.5 trillion in 2000 to $7 trillion in 2011. Indeed in many developing countries, particularly in Africa, progress has been made in parallel with a movement towards self-reliance and domestic ownership. As Nobel Laureate President Johnson Sirleaf of Liberia put it "Liberia should not need aid in 10 years ... we've got the resources ... We're going to go from dependency to self-sufficiency."
A focus on self-sufficiency is a welcome trend, but it will take time as many developing countries still face considerable hurdles in expanding their national tax base. In many low-income countries tax revenue is still below 15% of GDP – the conventional threshold for satisfactory tax performance. And, on average the IMF predicts only a very small increase in tax revenues as a share of GDP in LICs, from 22% in 2010 to 23% in 2017.
Tax policy administration in developing countries is often hampered by lack of capacity, weak organizational structures, and lack of modern, computerized risk-management techniques, for example recent research by the Nigerian government estimates that tax leakages due to unpaid real estate rentals amount to about $ 250 million per annum. While there has been progress in recent years, some developing countries' VAT “gaps” are estimated to be around 50-60% of expected revenues, compared to developed country estimates of about 13%.
The rules and architecture of the international tax system also undermine the potential for domestic resource mobilization to raise funds for sustainable development. The system needs urgent reform. Challenges include:
• Multinational firms ‘transfer pricing’ - assigning profits to branches located in lower tax jurisdictions. Although this is a challenge for both developed and developing countries, transfer pricing schemes can result in larger tax revenue losses for developing countries because of their to weaker tax administration capacity.
• Raising resources from the informal economy - the informal economy makes up about 40% of GDP in many developing countries and the lack of formal financial records for businesses operating in the informal sector presents numerous challenges for tax authorities. In Nigeria, for example, when the official registry of companies was compared to the official taxpayers’ database, it was found that about 75% of “registered” firms were not in the tax system.
b. What are the biggest opportunities?
The leveraging power of ODA for domestic resource mobilisation
As highlighted in 1a, developing countries have made considerable progress in raising domestic revenue since 2000 and political discourse, particularly in Africa, suggests an eagerness to change the development narrative, from poor countries as recipients of aid to emerging nations leading their own development.
High savings rates in many emerging economies are another part of the domestic resource mobilisation picture, with the savings rate for developing countries as a whole projected to peak at 34% of national income in 2014 and to average 32% annually until 2030.
There are considerable institutional and regulatory challenges to overcome if the bulk of LICs are to further increase their tax revenue and eventually finance their own development (as outlined above), but considerable opportunity lies in using ODA as a catalyst for building and strengthening tax systems. ODA can play a vital role strengthening developing countries’ fiscal chains, including the capacity of their national revenue authorities to encourage greater tax compliance, and by supporting advances in public financial management, including budget transparency. Positive examples of ODA helping to strengthen tax compliance were cited at the 2013 Global Partnership for Effective Development Cooperation meeting, including a USD $15 000 project to support Colombia’s tax authority on transfer pricing matters, which led to an increase in revenue of around USD 2.5 million. Advice provided to Kenya at a cost of around USD 10 000 led to a recent transfer pricing adjustment resulting in additional tax revenue of USD 12.9 million.
Cracking down on illicit financial flows and tax avoidance:
The examples cited above, of tax authorities working to prevent a practice known as ‘transfer pricing’, leads us to the issue of global tax justice. One of the most promising sources of additional finance, which could be harnessed through global cooperative action, is capital that is earned and transferred illicitly out of a country, either through tax avoidance, evasion or theft. This money is intended to disappear from any record in the country of origin, denying sovereign governments their rightful income and robbing them of their ability to improve their economies and the lives of their poorest people.
According to one estimate illicit financial outflows amount to ten times annual global aid flows and may represent as much as 4% in developing countries’ lost GDP.
In 2007, the World Bank and UNODC estimated that between US$20 and US$40 billion of funds has been looted by corrupt leaders in low-income countries and kept in safe havens abroad. The Tax Justice Network has estimated that the value of assets held offshore could lie in the range of US$11 - 12 trillion, whilst global revenue loss resulting from wealthy individuals holding their assets untaxed offshore may be as much as US$255 billion annually.
Protecting these resources could dramatically increase government revenues in many developing countries. Accessing these resources and recouping stolen assets will require concerted global cooperation. As the High Level Panel on Post-2015 recognized, developed countries will need to ‘put their own house in order’, shutting down tax havens and penalizing corporations known to partake in such activities. Similarly developing countries will need to strengthen their tax systems, particularly the capacity of their national revenue authorities to encourage greater tax compliance. And they will need to improve the efficiency and effectiveness of public spending, through domestic governance reform to help ensure that additional resources translate into equitable public investment that responds to the needs of citizens.
To capitalize on this opportunity and considerably scale up resources for development, urgent actions include;
• Domestic policy reform: Developing countries need to take concerted steps to strengthen their fiscal chains, including the capacity of their national revenue authorities, to encourage greater tax compliance. Donors should be ready and willing to provide the catalytic funding to support these reforms.
• A Global Transparency Agenda: Corporates and all country governments need to work to facilitate better exchange of information, to give developing countries the information and power to enforce tax laws. The UK has recently taken a stand on beneficial ownership transparency, committing to create a public registry of who really owns and controls UK companies. It must now take concrete steps to implement this commitment, working with corporates, government partners and multilateral organisations (such as the World Bank who have also launched an Open Company Data Index) to ensure that corporates accurately report to the registry and that developing countries are able to access and interpret the registry data.
• Normative Changes in the International Tax System: Taxation has historically been seen as the prerogative of national sovereign governments and as such, there are wide variations between states. Under any system of taxation it is possible to shift or recharacterize income in a manner that reduces tax - most commonly this results in shifting income among commonly controlled parties or ‘transfer pricing.’ Multinational corporations, with armies of highly-paid taxation lawyers and consultants, are most able to exploit these rules resulting in a system whereby the poorest countries, most in-need of tax revenues, are the most hard done by. The Post-2015 agenda presents an opportunity for the global community to consider normative changes in the international tax system; examining national and international legal statutes to challenge complicated tax avoidance schemes.
• Strategically supporting civil society organizations (CSOs) in developing countries to promote greater dialogue on tax-related issues. CSOs can demand greater transparency in the operations of tax authorities, require more accountability from government authorities on the use of tax revenues, and monitor performance indicators to assess the progress of their national revenue authorities.
Private sector investment
The private sector is already a dominant source of development investment in most countries and the potential for the private sector to positively contribute to development objectives is huge. Not all private sector investment necessarily contributes positively to economic, social and environmental objectives and more sustainable development outcomes, and companies should be encouraged in the sustainable development agenda to be responsible development partners. To maximise their impact on sustainable development, all businesses should:
• apply a ‘do no harm’ approach to their core business(through evaluating and disclosing social impacts of their products, such as breast milk substitutes); to practices (such as labour standards or tax strategies); and to indirect impacts (such as their environmental footprint);
• shape core business strategies to contribute to global and national sustainable development goals; and
• advocate for change at the national and global level.
A requirement for all large companies to include information on their environmental and social impacts, as well as their corporate governance, with their annual reports and accounts is fundamental to unlocking the resources of the investment community for sustainable development. Investors have a vital role to play in helping to develop a sustainable economy. The role of capital markets is to channel capital to the most productive uses. However, if the information available is only short term and thin, then these characteristics will shape investors’ definitions of markets. To include sustainability in investment decisions, investors need information about the sustainability of companies. In addition, a well-managed, responsible business will perform better and create more sustainable value over the long term. The production of a sustainability strategy will create the right kind of discussions within boardrooms, throughout firms and encourage investors to think about the sustainability of the firm as well as analysing risks and opportunities presented by environmental, social and governance factors. This will help capital to be allocated to more sustainable, responsible companies and strengthen the long term sustainability of the financial system.
Voluntarism in corporate reporting has failed. Of roughly 20,000 companies that Bloomberg has examined, over three quarters still do not publish even one datapoint on business sustainability performance issues . Without legislation it will be decades before sustainability reporting is common practice. In the meantime, investors are unable to play their part in contributing to sustainable development.
South-South Cooperation and new sources of development finance
Growing South-South cooperation and new development cooperation agencies in a range of middle-income countries are creating more and greater resources for technical assistance, knowledge transfer and financial investments for development in low-income countries. There is potential for these approaches to reinforce nationally-driven development agendas and priorities and will be a key source of technical and financial support for sustainable development beyond 2015. In some cases, such resources lack transparency and it will be critical to a more ambitious, comprehensive and open global partnership to support the post-2015 sustainable development agenda that such flows are as open and accountable as other flows such as traditional ODA. The Committee should make clear recommendations for how development cooperation effectiveness principles should be upheld by new and emerging donors, and how to ensure alignment and coordination between the SDG financing agenda and the Global Partnership for Effective Development Cooperation.
There is great potential for innovative sources of financing, including innovative taxes, to raise considerable sums to finance the future of sustainable development, as was highlighted by the discussion on innovative taxation at the 2011 G20 Summit.
The International Health Partnership’s High-Level Taskforce on Innovative International Financing for Health Systems has estimated that innovative taxes could raise an additional US$10 billion annually for global health. In Gabon a new 1.5% levy on the post-tax profits of companies that handle remittances and a 10% tax on mobile phone operators’ turnover raised the equivalent of US$30 million for health in Gabon in 2009.
Three forms of innovative taxation which we believe are impressive and replicable models, which the Expert Committee may wish to consider as key components for a future development financing plan are:
Financial Transaction Taxes. A levy on foreign exchange transactions could raise substantial sums in some countries. India, for example, has a significant foreign exchange market, with daily turnover of USUSD 34 billion. A currency transaction levy of 0.005% on this volume of trade could yield about USUSD 370 million per year. Options for having the sector pay more include taxing Financial Transaction Taxes (FTTs); taxing profits and remunerations – the Financial Activities Tax (FAT); or taxing bank balance sheets, the Bank Levy. A minute tax of 0.05% (on average) on transactions such as bond and share sales could globally raise as much as USD409 billion annually. This additional revenue could alleviate as much as 84% global estimated resource gap for health. This is estimated to be USD 488 billion from 2009- 2015.
The International Finance Facility for Immunisation (IFFIm). The IFFIm uses pledges from donor governments to sell bonds in the capital markets, making funds immediately available for GAVI programmes. Funds raised by IFFIm are used by the GAVI Alliance, a public-private partnership which aims to reduce the number of vaccine-preventable deaths and illness among children under five. So far IFFIm has raised more than US$3 billion for the GAVI Alliance’s immunisation programmes. A total anticipated IFFIm disbursement of US$4 billion is expected to protect more than 500 million children through immunisation.
Sin Taxes. At the national level, it is often easier for governments to garner political support for taxes on products that are harmful to health (‘sin taxes’), although they cannot generate resources on the same scale as financial transaction taxes. Although support for these will vary by country and we are not advocating for them in all contexts, such taxes do, however, have the dual benefit of improving the health of the population through reduced consumption while raising more funds. For example, a 50% increase in tobacco excise taxes would generate US$1.42 billion in additional funds in 22 low-income countries for which data are available.
2) What are the key factors in the domestic and international environment that should be taken into account by the Committee?
African calls for ‘economic transformation’
There is a clear desire from many African countries for a sustainable development agenda that supports economic transformation across Africa, toward more productive, equitable and sustainable economies. This vision, highlighted in the UNECA and AU-led debates to date and by African members of the UN High Level Panel, would result in, amongst other things, more inclusive economic growth, greater investments in infrastructure and expansion of the productive sectors. This vision would help to unlock funds for development finance from domestic growth, allowing countries to be less dependent on ODA and other flows.
The Committee’s report should acknowledge this and make recommendations for how this vision and greater domestic resource mobilisation can be supported, for example through international policy coherence for development, ODA as a catalyst for local market development.
A conducive atmosphere for action on global tax justice
Right now, there is momentum and a unique opportunity to take action on illicit financial flows, stolen assets and tax havens. As highlighted by the Lough Erne G8, by the G20 Finance Ministers Meeting and in ongoing debate about a potential post-2015 development agenda, global tax justice is becoming an ever more pressing topic of discussion in various international forums. At the G8 leaders recognized global tax justice to be ‘essential to fairness and prosperity for all. ’
The High Level Panel on Post-2015 gave specific recognition to the issues of illicit capital flight, tax havens and stolen asset recovery in their report, including a target in their illustrative goal framework on reducing illicit flows. African Panel Members were particularly supportive of this, recognising the substantial financial resources lost every year to illicit financial flows and to corruption and stolen assets, which are desperately needed for their social and economic development.
The UK has taken bold steps of late, with their commitment to develop a public registry of beneficial ownership- the owners and controls of UK companies. Now the UK must work with other developed countries to ensure similar standards are implemented across the board and to ensure corporates do not move records to other jurisdictions.
The need for efficient and equitable resource allocation
With an increasing focus on aid effectiveness and value for money at the same time as domestic resources are becoming ever more important, the effectiveness of all sources of financing must be scrutinised to ensure development objectives are being met. As highlighted in Save the Children’s post-2015 report Ending Poverty In Our Generation, any post-2015 sustainable development framework must be underpinned by a robust financing plan, with detailed financing strategies developed in every country context. The financing plan should identify potential sources of funding for planned, costed progress on each goal; these are likely to include a mix of taxation, stable foreign and domestic private investment, private philanthropic flows and ODA. As well as identifying finance sources, the strategy should consider the equitable distribution of those resources and other proposed policy changes to support the strategy, such as an inclusive growth strategy, or a proposed strengthening of transfer pricing rules. To ensure that the financing plan is implemented in an equitable and sustainable way, it should be underpinned by moves towards more open, accountable and inclusive governance where information about policy-making and budgeting is available to the public in a timely and accessible format, where the public has the freedom and power to engage in policy-making and budgeting processes and where governments are held accountable for the effective and equitable provision of public goods.
ODA’s limited bandwidth
Official development assistance (ODA) that flows to developing countries is still a very important source of financing: 55 cents of every dollar of foreign capital that comes into low-income countries is ODA. Nevertheless, the current development finance landscape is very different than when the MDGs were agreed. Slow growth, particularly in OECD countries, means that traditional ODA is under intense pressure. Meanwhile other actors in development finance are mushrooming, including non-OECD Development Assistance Committee (DAC) donors, philanthropists and providers of climate finance.
Given this changing landscape it is vitally important to reconsider the role of ODA in supporting global development. It is unquestionable that ODA still has a pivotal role to play; for example, it has been estimated that another US$17.5 billion is needed every year in order to meet the MDG target for maternal, newborn and child health in 49 low-income countries. However, given the potential for increasing sources of complementary finance the Expert Committee should critically evaluate:
• How ODA can be best used in conflict affected and fragile states, which cannot attract other forms of investment;
• How ODA can be best used to catalyse or leverage other forms of investment in LICs and MICs e.g. domestic and foreign private investment and private philanthropy;
• What aid modalities are most appropriate in countries with increasing domestic resources but high burdens of poverty, such as India;
• How ODA can best encourage national ownership (in accordance with aid effectiveness principles ), whilst also helping to build strong state systems, including for revenue mobilisation and service delivery;
• How new sources of ODA, for example from new middle-income country donors, fit within the international development architecture; and
• The effectiveness and transparency of assistance from all development partners, including the private sector, South-South and triangular cooperation.
(For references please see the attached word document)