Private finance – a means or an end?

Before leaning into the “private finance first” agenda, shouldn’t we understand whether, and under what terms, it could contribute to social justice?

Private investment has long played a role in the development of economies around the world. But if we look beyond economic growth to environmental, equity and social justice goals, is it the solution to the current polycrisis?

That public funds are limited and private finance is plentiful is, of course, true. But abundance does not equal effectiveness. The duty to turn a profit binds private investment, and public funds can do things that private finance cannot. The foreign secretary reflected this at the Labour conference when he said:

…the lesson of history is that we cannot leave it to corporations to put in place the guardrails to serve the public interest. It is neither their purpose nor their motive. Theirs is to maximise profits.

Yet results for the current private finance paradigm are being measured by the quantity of investment delivered, not by their impact on social goals.

These questions are as relevant in the field of gender justice as elsewhere. Mounting attacks on the rights of women and girls have increased the need for resourced interventions just as aid disappears. Private finance is increasingly proposed as the solution.

Can private finance deliver?

Flows of private investment into an economy can certainly stimulate economic growth and create jobs. But the evidence for scalable, positive impacts on equity, climate and social justice is less clear. And theoretical foundations are thin, with those closest to finance delivery warning of its limitations.

And private finance is not plentiful for everyone. The increasing consensus among experts, if not politicians, is that funds will never flow in the quantities required to the sectors and countries most in need. The profit imperative sees to that.

But the more important question is whether, once mobilised, private finance can deliver, and how. Regulatory frameworks that align investment with national development goals are essential. These should include environmental standards, labour laws guaranteeing decent work, and fair tax systems. Not just guardrails to prevent abuses – but frameworks that create tangible social benefits.

Yet the drive to attract private finance has, as Jayati Ghosh puts it, been all carrots and no sticks.

The result is bleak, as the Financing for Development 4 Civil Society Forum concludes:

The ‘private finance first’ approach has failed to deliver on its promises and remains woefully inadequate to deliver sustainable development outcomes, to protect peoples’ rights to basic services and the environment.

What is the problem with private finance?

The paradox is that, to keep the private sector happy, governments are encouraged to increase incentives and minimise regulation. Not only does this undermine the potential benefits of private investment. It feeds into a broader anti-state agenda and constrains governments’ options. Borrowing then increases sovereign debt, a situation the World Bank chief economist describes as “government creditors bearing nearly all the risk and private creditors reaping nearly all the rewards”.

Meanwhile, Professor Mariana Mazzucato, Founding Director of the UCL Institute for Innovation and Public Purpose, warns that decades of learnings on what works are in jeopardy. Investors like to fund “bankable” projects, which promise profits with minimal risks. Fair enough. That’s their job. But proven projects that deliver more equitable, sustainable and transformative change may then go unfinanced.

Worse still, as Eurodad warns, scarce public money from official development assistance and host government budgets is used inefficiently to incentivise private investment. Money that could have been spent on effective projects or public services.

Meanwhile, the overwhelming focus on private finance distracts political attention away from the need to stop resources draining from the Global South. Action on debt, international tax rules and illicit financial flows is long overdue. Instead, the promotion of private capital risks reproducing colonial relationships.

Put simply, we are rapidly constructing a new development paradigm based on almost no real evidence of the conditions and interventions needed to achieve social justice. Success is too often measured on the amount of funds mobilised, rather than the impact on people’s lives.

So what next?

The UK government’s “investor to donor” approach appears a pretty blunt instrument, perhaps originating more from the need to justify aid cuts than from a realistic view of the role of private investment.

This approach needs some rapid sharpening. Here are some ways to get there.

Clarify the goal

We need a clear reminder from the UK and other governments that economic, social and environmental justice is the goal. Mobilising private finance matters only in so far as it serves these nationally defined objectives.

Understand the prerequisites for positive impact

The UK should take a lead in developing a far more nuanced and evidence-based approach that understands when, whether and under what conditions private investment can contribute to social justice. Then ensure these conditions are in place before mobilising more private investment. An array of recommendations exist, many collated by the Gender and Development Network.

Assess impact

The UK could promote better – independent – impact assessments (marking your own homework is happening a lot at the moment). More meaningful criteria would help. Success indicators for gender equality, for example, currently focus too narrowly on women-led businesses.

Learn from experience of delivering social justice

The debate is dominated by finance experts. But if investment is a means for achieving social goals, those who understand how to deliver social change should be at the table.

Taking such action can help us to stop treating private investment as an end in itself, so we can start interrogating whether, and under what conditions, it might be a means to social justice.

Join the Bond Working Groups