To decide on the scope of a PSE collaboration, the SDC will increasingly use the cascade approach, originally developed by the World Bank Group. This approach entails a reversal of the current financing logic when facing a development challenge: instead of starting with an intervention that is fully financed by the SDC as standard, the question should first be asked as to whether or not the private sector could provide the required service (fully or partly) in an effective way. If so, there is no or less need for public funding – in line with the principles of additionality and avoidance of market distortions. If the private sector does not do so on account of the high risks, an assessment should be carried out as to whether activities financed through official development assistance (ODA) funds could influence the risk profile in such a way as to make an investment more attractive to the private sector. Hence, next to other considerations, the cascade approach seeks to assess the extent to which ODA funds are needed to engage the private sector and trigger additional funds for sustainable development. It must be mentioned that the cascade approach does not seek to reduce the role of the state in partner countries. In fact, in many cases, development interventions must remain within the realm of the public sector. For these cases, development agencies can support partner countries in adopting sustainable policies in order to create a fertile ground for leveraging additional private investments without jeopardizing the overall responsibility of the state (see Annex VI for more information on the cascade approach).
Achieving the 2030 Agenda and the Paris Climate Agreement requires investments of trillions of dollars. New sources of finance are therefore needed to increase the capital available to meet these goals without pushing the public sector into unsustainable levels of debt and contingent liabilities. The private sector has invested over USD 200 trillion in global financial markets; redirecting a fraction of this capital would bridge the financial gap for meeting development challenges. The cascade approach was therefore adopted by the World Bank Group in 2017 to maximise finance for development by systematically looking for and acting upon opportunities to create markets.
Definition:
The cascade approach offers a framework for deciding whether ODA funds should be spent or whether private sector actors can (partially) address the development challenge at hand. The approach is structured around three sequential questions which help to identify the extent to which the private sector should be able to address the challenges on its own or whether a donor involvement is required. This way, scarce public resources can be channelled into those interventions most in need of such resources, i.e. where no other actor can help.
Cascade approach
Implications for the SDC:
Considerations:
The cascade approach in practice
How can the SDC apply the cascade approach?
Methodological approach:
Once the SDC has identified an unresolved development challenge, the selection and design of an appropriate intervention is crucial. When considering a potential role by the private sector, the following steps are recommended: 1) analyse the local context to understand who the private sector actors are and what role they currently play, 2) understand which role the SDC could play and through which measures it could act. The decision tree enables the SDC to assess these two steps.
Cascade approach – Decision tree
Context analysis
Intervention assessment & selection
Design of an SDC intervention with potential private sector (PS) involvement
Four examples of the cascade approach in practice
Description of the four examples:
