Sida is Sweden’s government agency for development cooperation. We strive to reduce poverty and oppression around the world. In cooperation with organisations, govern ment agencies and the private sector, we invest in sustainable development for all people.

Introduction

Officially, the world has a working plan to root out poverty. The 2030 Agenda and its Sustainable Development Goals (SDGs) represent the plan of action for people, planet and prosperity, while the Addis Ababa Action Agenda (AAAA) provides the framework for financing these collective ambitions.¹ However, in reality the plan has been running into difficulty. International cooperation, including development cooperation, is increasingly hampered by a loss of trust between high-income countries and the Global South. A sense of indignation, strongly linked to the intrinsically unequal power relationship between giver and receiver, has grown alarmingly during the last few years.

The Global South has witnessed how wealthy countries spent trillions to mitigate the economic effects of the COVID-19 pandemic and the rising cost of energy in their own countries but have been reluctant to share COVID-19 vaccines. More recently, high-income countries have swiftly delivered enormous sums to support Ukraine in defending itself from the Russian invasion. Simultaneously, acute issues pertinent for the Global South, such as responding to climate change-related loss and damages, humanitarian crises in the Sahel, the Horn of Africa and Yemen, and the general pace of financing for development, have received relatively little attention and almost every part of the 2030 Agenda is severely underfinanced from a Global South perspective.

The solution to changing this unfortunate and unproductive momentum is multi-faceted. We argue that it should include re-building trust through bold, actionable plans agreed between parties that address institutional and market weaknesses, with strong financial backing – not with loose commitments. To address these problems of both perception and action, donor countries must clearly signal they are responding to the developmental needs identified by their partners.

Donors need to refine their offer to partner countries. Financing discussions need to recognise the importance of country ownership and country context, taking the development challenge as the starting point and seeing financing instruments or a specific actor as part of the solution. This means shifting the current conversation about mobilising capital from the supply-side to the demand-side and looking at it from the perspective of partner countries. Domestic and international private sectors must be integrated into the conversation if the world is to achieve private investment at scale to meet financing needs – needs that far exceed the world’s combined overseas development assistance (ODA).

The Integrated National Financing Frame-work (INFF) facility

The Swedish International Development Cooperation Agency (Sida) supports the Integrated National Financing Framework (INFF) facility because it contributes to precisely this set of needs. INFFs are a tool that countries use to strengthen their planning and delivery processes and overcome obstacles to financing action for the SDGs at the national level (Box 1).² INFFs, which are developed at country level, also provide a platform to forge the necessary reforms and institutional strengthening needed to attract both public funding and private investments.

The INFF facility supports country-owned and -led INFF processes. A country’s INFF lays out how the priorities ident-ified in a country’s national sustainable development strategy will be financed, and where the financing will be mobilised from among the full range of public and private sources. It also identifies capacity needs, institutional weaknesses, market failures and policy gaps, as well as how to address these constraints. The resulting framework provides partner countries with a strong basis for taking the lead in talks with potential donors, private sector partners and financiers.

With a country’s INFF in hand, donors and other financiers are in a better position to understand ongoing reforms, take stock of the realistic costing of development plans and make concrete commitments to realise those plans. Mutual account-ability is a further byproduct of a well-constructed INFF.

Mobilising domestic and global resources to support sustainable development remains a key challenge for many partner countries. To achieve the SDGs, countries need increased financing, as well as fit-for-purpose national and international institutions that can enable economic, social, political and environmental stability and sustainable development.

It is Sida’s contention that institutional development, which has always been at the heart of the development agenda, is still very much in focus. However, the way we look at and approach institutional development must be adapted to new and emerging priorities. Understanding the interaction between institutions and financing is fundamental to maximise the quantity of financing and its development impact.

Building institutions and capacity are integrated throughout the AAAA, but these themes are too often discussed separately in the context of the 2030 Agenda. The 2030 Agenda recognises that sustainable development cannot be realised without peaceful, just and inclusive societies that are based on respect for human rights, effective rule of law, and transparent, effective and accountable institutions.

Correspondingly, the AAAA underlines effective, accountable and inclusive democratic institutions at the subnational, national and international levels as central to enabling the effective, efficient and transparent mobilisation and use of resources. In addition, it explicitly emphasises systemic issues related to for example the need for non-financial means and an enabling environment for trade, research and development, capacity building and institutional strengthening.

Development financing challenges

Looking at financing for development on an aggregate level, there are two immediate challenges pointing in the same direction. Both challenges reference the need to take institutions into account, as these are essential for increasing the quantity and quality of development finance – that is, the ability to turn increased financing into spending that efficiently moves the SDG agenda forward.

• Challenge 1: Decreasing financial flows. Total external financing to developing countries declined by 10% between 2013 and 2021 according to Organisation for Economic Co-operation and Development data. While there are several factors behind these patterns, weak institutions and capacity at both the global and national level have been identified as major constraints.
• Challenge 2: Poor targeting of financing. Most capital flows, including global trade and foreign direct invest-ments, do not go to those most in need. A country’s available financing depends on the presence and quality of its institutions, which to a large extent correlates with the country’s income-per-capita level. Not only does private investment not flow to the countries most in need, but international development cooperation is in some respects exacerbating the discrepancy by improving business climates mostly in countries that already receive more investment.

Functioning institutions and an enabling environment are fundamental both for maximising the quantity of financing flows and ensuring the quality of flows. Effective use of financial and other resources – public or private – is contingent on functional financial institutions at both the global and country level.

At the global level, this enabling condition includes the need for well-functioning finance regulators, rating agencies and development finance institutions (DFIs), as well as more general institutions such as international agreements (the World Trade Organization provides a good example). At the country level, this enabling condition includes institutions in the business and financial sector, such as central banks, tax authorities, investment promotion institutions and credit bureaus.

In addition, business service functions such as accounting, project design and feasibility studies are crucial for creating a conducive business and investment environment, as well as strong demand for capital – in other words, the elusive pipeline of investible projects. Functional public institutions are necessary for the efficient use of public money, overseeing private service providers, and regulating and monitoring investors and their externalities. The enabling environment at country level also includes – in the broadest of terms – a peaceful, stable and open society, with institutions ranging from educational systems and efficient customs to functioning rule of law and anti-corruption, as well as the actual implementation of policies.

Conclusion

We at Sida remain convinced that in many countries, there is significant scope for making structural reforms aimed at lifting unnecessary barriers to trade and private investments in support of the SDGs and developing accountable and efficient service institutions.

As described above, the system supporting development finance and institutions is self-reinforcing. It is possible to create a virtuous circle of interaction and mutual adaptation between all partners. Multi-stakeholder dialogues, which act as a feedback loop from the private sector and investors

to partner countries and donors, are key. Such dialogues are at the heart of the INFF process. Building linkages and interdependencies between sources of additional resources and necessary institutional strengthening efforts can generate a perpetually reinforcing movement of people, engagement and, ultimately, financial flows.

But, in a situation where waning trust and stagnant resources for development and capacity building are predominant, the risk of creating a vicious circle that exacerbates the declining trends noted above is very real.

Action is therefore urgently needed to deliver on all aspects of the AAAA and rebuild trust between all parties in the global SDG partnership. For partner countries, avoiding negative scenarios involves working out robust, implementable and credible reform agendas. In the case of donors, it requires rethinking and revitalising their approach so that they are simultaneously looking at catalysing additional private financing while also extending support for institution strengthening. The one cannot happen without the other, and both sides have work to do – which is why the new INFF tool has the potential to be an important contribution to achieving the flip from vicious to virtuous circle.