Closing the SDG Financing Gap — Trends and Data

How big is the financing gap to achieve the 2030 Sustainable Development Goals (SDGs)? Can private capital fill the gap? This note provides an updated overview of estimates of SDG financing in lowand middle-income countries and gives an analytical and data-based foundation for discussion. Based on a review of recent studies, as well as IFC’s own calculations of cross-border flow trends, the note documents the ongoing and significant SDG financing gap. Raising taxes to expand public spending is an option for many middle-income countries to fill the gap, but it will be insufficient for low-income countries. Private financing, especially of infrastructure, can also contribute to bridging the gap, but it will depend on the availability of investable projects. Capital market development and improved domestic financial systems can help intermediate more private capital into available investment opportunities.

Meeting the Sustainable Development Goals (SDGs) will require the global community to increase development financing from "billions" to "trillions," which implies a substantial financing gap.In addition to much needed increases in domestic revenues, getting to "trillions" will also require significant contributions from cross-border inflows, including private capital inflows (Figure 1).

Financing Requirements to Meet the 2030 Agenda
A key reference for SDG financing needs over the last five years has been UNCTAD's World Investment Report (2014). 1 UNCTAD estimates that to meet the SDGs by 2030, total annual investments in SDG-relevant sectors in developing countries will need to be between $3.3 trillion

About the Authors
Djeneba Doumbia, Economist, Thought Leadership, Economics and Private Sector Development, IFC; and Morten Lykke Lauridsen, Principal Multilateral Engagement Officer, Development Partnerships and Multilateral Engagements, IFC.Their emails are ddoumbia@ifc.organd mlauridsen@ifc.orgrespectively.and $4.5 trillion.Such estimates mean there is an annual financing gap of some $2.5 trillion between current funding and what is required. 2closer look at the sectoral level reveals significant investment gaps, with some of the largest funding needs related to economic infrastructure.At up to $950 billion, power infrastructure carries the greatest financing need, followed by climate change mitigation ($850 billion) and transport infrastructure ($770 billion).There are also sizeable investment gaps in social infrastructure, ranging from $140 billion in health to $250 billion in education (Figure 2).In a recent paper, the IMF estimated that meeting the SDGs in five priority areas-education, health, roads, electricity, and water and sanitation-by 2030 will require additional private and public annual spending of $528 billion for low-and lower middle-income countries and $2.1 trillion for emerging countries (Figure 3). 3 These estimates are comparable to those from UNCTAD for similar sector grouping (roads, electricity, and water and sanitation). 4oking at the infrastructure financing gap, a 2019 World Bank report found that the costs for new SDGrelated infrastructure could range from $637 billion (or 2 percent of GDP) to $2.74 trillion (8 percent of GDP) in low-and middle-income countries (LMICs) depending on the spending efficiency and the quality of services delivered (Figure 4). 5 Investments of 4.5 percent of GDP will allow LMICs to reach the infrastructure related SDGs and stay on track to limit climate change to 2 degree Celsius.In addition to new infrastructure spending needs, LMICs would need to spend between 1.9 and 3.8 percent of GDP (2.7 percent using the preferred scenario) per year to maintain their existing and new infrastructure. 6onsequently, with the preferred spending scenario, the overall investments required would be on the order of 7.2 percent of GDP.
The 2019 World Bank report provides the first consistently estimated data set on infrastructure investments and finds that meeting infrastructure investment requirements in all regions except Asia will require much higher spending levels. 7LMICs spent between 3.4 percent and 5 percent of GDP in 2011, with a central estimate of around 4 percent.These estimates vary by region, ranging from 2.5 percent of GDP in Sub-Saharan Africa to 5.7 percent in East Asia and Pacific, using the central estimates.The East Asia and Pacific region also spends the most in absolute terms.The region accounts for more than half (54 percent) of total LMIC spending on infrastructure, with China alone accounting for 48 percent.In contrast, Sub-Saharan Africa accounts only for 4 percent of total LMIC infrastructure spending.Zooming in on country-specific contexts and gaps, in a recent blog Kharas and McArthur (2019) show that the lowestincome countries tend to have the largest SDG financing gaps. 8For instance, the estimated gaps in terms of GDP per capita for Burundi and South Sudan are approximatively $310 and $530, respectively.These figures are more than 100 percent of GDP per capita in those countries.
Improving the efficiency of infrastructure investment is an important element that will facilitate meeting the SDGs, especially in low-income countries where resources are limited.As illustrated by the Public Investment Management Assessment (PIMA) overall index, the efficiency of capital spending tends to be lower for less developed countries.For instance, the average PIMA score is lower for low-income developing countries than for emerging economies (Box 1).
According to a 2017 McKinsey report, there is significant scope to improve the effectiveness and efficiency of how infrastructure investment is spent.Up to 38 percent of global infrastructure investment is not spent effectively because of bottlenecks, lack of innovation, and market failures.Efficiently spending infrastructure investment (fact-based project selection, streamlined delivery, and the optimization of operations and maintenance of existing infrastructure) can reduce spending by more than $1 trillion a year for the same amount of infrastructure delivered and can help close the existing financing gap. 9hieving the SDGs will require significant contributions from both private and public sectors, including cross-border inflows.However, the challenge is not only quantitative, it is also important to use public funds more sparingly, ensure a better mobilization of private capital and spend more efficiently.

Domestic Revenue Mobilization
Domestic revenue mobilization is one of the most critical development priorities and is essential to financing sustainable development investments.
Over the last two decades, many developing countries have achieved substantial progress in revenue mobilization.For the median low-and lower middle-income countries, total revenues excluding grants increased from 15.5 percent of GDP in 2000 to 18.5 percent in 2017 (Figure 5).For the median upper middle-income country, total revenues excluding grants rose from 20 percent of GDP in 2000 to 26 percent in 2017.In contrast, over this period total revenues excluding grants to GDP have shown a slightly downward trend for the median high-income country (from 34 percent in 2000 to 33 percent in 2017).Notwithstanding recent progress, tax revenue mobilization continues to underperform in developing countries.For instance, tax revenues for the median low-and lower middle-income country increased from 11 percent of GDP in 2000 to 15 percent in 2017 (Figure 5).Even though the 2017 figures are higher for the median upper middleincome country compared to the median low-and lowermiddle income country, tax revenue as a percent of GDP falls short of the desired level and remains below that of the median high-income country (21 percent). 10 a 2019 report the IMF estimated that, assuming efficient public spending, raising tax revenue by 5 percentage points of GDP could finance about $170 billion in new infrastructure, or a third of the total additional needs for low-and lower middle-income countries.As such, domestic revenue mobilization will not be sufficient to finance outlays needed to meet the SDGs.However, for most emerging countries, the extra tax revenues-if effectively realized-could be sufficient to finance an additional $2.1 trillion required to deliver on the SDG agenda (Figure 3).
In addition to government revenues, private savings can be tapped through the financial sector to provide resources for the SDGs.Notwithstanding progress in financial development (both financial institutions and markets) in low-income countries and emerging countries, the IMF financial development index is much lower in these countries (0.15 in LICs and 0.33 in emerging economies) compared to advanced economies (0.64 in 2017). 11Capital markets-which help intermediate funds directly from savers to governments and firms seeking financingalso remain underdeveloped or are nonexistent in many developing countries.

Cross-Border Inflows
To assess the options for SDG financing, it is also critical to consider the trends in cross-border flows.In addition to domestic revenue mobilization, other sources of financing can help close the financing gap and help meet the 2030 agenda.Total cross-border flows to developing countries increased by 32 percent from 2015-the year of adoption of the Addis Ababa Action Agenda (AAAA)-to reach $1.6 trillion in 2017. 12This increase was mainly driven by greater portfolio investment.
Total 2017 cross-border flows to low-and lower middleincome and upper middle-income countries are estimated at $0.234 trillion and $0.819 trillion, respectively (Figure 6). 13irecting a portion of these flows to SDG related sectors could presumably make it easier to meet the SDGs in upper middle-income countries by lowering the need for greater domestic revenue mobilization through taxation.For lowand lower middle-income countries, assuming that the potential for higher domestic revenue mobilization is fully realized ($170 billion), cross-border flows will still need to increase by more than 60 percent (from $234 billion to $358 billion) to close the financing gap in order to meet the SDGs by 2030. 14e trends and needs for cross-border flows differ significantly across regions, with the greatest need to scale up in Africa.Cross-border flows to Sub-Saharan Africa rose by 9 percent between 2016 ($143 billion) and 2017 ($157 billion).During the same period, FDI inflows to the region decreased by 27 percent to $27 billion, primarily due to the lasting macroeconomic impacts of the 2014-2016 oil price decline (Figure 6). 15While other official flows also decreased during this period, portfolio investment almost tripled and remittance inflows and multilateral loans exhibited an upward trend.Hypothetically, increasing PPI investments eightfold in low-and lower middle-income countries from $46 billion to $368 billion could bring SDGs closer within reach when combined with higher domestic revenue mobilization efforts and increased cross-border flows. 16wever, this would imply a significant scale-up of private sector engagement in low-and lower middle-income countries.which in turn could be facilitated by an enabling business environment.Here the International Finance Corporation (IFC) is scaling its upstream support to help creating markets including attracting private investment and helping viable projects get started.
Recent trends in PPI investments in developing countries show greater private sector participation in transport and energy (Figure 7). 17More than half of PPI investments in H1 2018 were in transport and less than two-fifths in the energy sector.Information and communications technology (ICT) and water and sanitation represent a small portion of PPI investments in developing countries.
A closer look at income levels reveals some disparities in sectoral PPI investments.
In H1 2018, investments in the energy sector represented about two-thirds of total PPI investments in low-and lower middle-income countries, while they were only one-fourth in upper middle-income countries (Figure 8).
Existing large needs for energy and transport infrastructure in most developing countries indicate room for additional investments in these sectors.In addition, the still embryonic ICT sectors in most developing countries-in light of the rapid digitalization of economies across the world and the associated economic gains-point to great potential for increased investment in this sector.
There is significant room for the private sector to crowd in more investment into SDG-related sectors with high development impact, which is crucial to the World Bank Group's focus on Maximizing Development Finance.
Financing for sustainable development requires better orchestration of all private and public resources. 18The project of universal electrification in Myanmar by 2030 is a concrete example of such coordination.Here the World Bank Group (WBG) used a coordinated and comprehensive approach to mobilizing resources.

Looking Forward
There is no time to waste in increasing the level of development finance from billions to trillions to address the SDG financing gap.Making progress toward the SDG 2030 goals will require comprehensive solutions to support stronger co-investment platforms, to enable business environments in low-and middle-income countries, to advance financial deepening, and to increase the efficiency of public spending.

FIGURE 1 FIGURE 2
FIGURE 1 Potential sources of financing for the SDGsSource: Authors' own elaboration.

FIGURE 5 FIGURE 6
FIGURE 5 Trends in Domestic Revenue MobilizationSource: Authors, using International Monetary Fund Government Finance Statistics Yearbook and data files, and World Bank and OECD GDP estimates.

The role of the private sector
FDI inflows Remittances inflows Portfolio investment ODA grantsOther official inflows Bilateral loans Multilateral loans 19 2017, the WBG introduced a new way to maximize development finance to Trends in investments in infrastructure projects with private participation, developing countries Source: Authors, using World Bank PPI database.Note: H1 and H2 indicate first half and second half.The latest data available is for the first half of 2018.PPI data record commitments rather than actual spending.Samples may vary by year.fullyleverage the private sector for sustainable development and only rely on public funds in areas where private sector engagement would not be feasible.19Trendsin investments in infrastructure projects with private participation, developing countries Source: Authors, using World Bank PPI database.See https://ppi.worldbank.org/data.Note: H1 2018 indicates first half of the year 2018 which is the latest period available.PPI data record commitments rather than actual spending.Samples may vary by year.