The world economy has changed considerably since the creation of the Multilateral Development Banks (MDBs), mainly due to globalization and the evolution of country-driven development strategies. These transformations have led to the general acceptance of the private sector and private international finance as the key to economic development. Thus, MDBs will need to form partnerships with the private sector to catalyze private finance for development into the 21st century.
An evolving development landscape
From an initial focus on finance, MDBs have evolved into institutions that deliver cutting-edge development knowledge products at global, regional, national and local levels, and help build capacity to manage development processes. interdependent. Traditionally, the MDBs have focused on the implications of global policies in developing countries in areas such as trade, debt relief, poverty reduction, economic growth and environmental protection by working directly with governments and government agencies. MDBs play a key role in promoting economic and financial stability and championing global public goods in several international fora, including the Group of 20 (G-20) and the Group of 7 (G-7). Therefore, MDBs play a vital and well-suited role in helping countries achieve the goals. Sustainable Development Goals (SDGs) and address the challenges posed by the 2030 Agenda.
Achieving the SDGs requires a mountain of resources that cannot be mustered by traditional sources of finance, whether it is official development assistance or MDB resources. Billions of dollars are needed each year to achieve the SDGs by 2030. This is far beyond the capacities of international financial institutions, including the MDBs. To implement Agenda 2030, the role of MDBs must shift from transferring resources to mobilizing them. Therefore, private sector financing and investments are essential for the implementation of the 2030 Agenda and the achievement of the SDGs.
Affluence in the private sector
The role of the private sector has grown and a major challenge for MDBs is to provide them with opportunities. MDBs are able to act as intermediaries between countries that need to invest in development projects and private finance. They have a proven track record of helping countries build national capacity in public projects and investments, and they also provide assurance that disputes are resolved impartially.
The MDBs could involve the private financial sector through ex ante and ex post engagement as a financier or co-financier of projects. Both ex ante and ex post approaches involve innovative and new types of partnerships between MDBs, governments and the private sector. To be successful in this endeavor, MDBs will need to change their operational approaches and internal staff incentive structures.
Two channels that MDBs can use to increase the role of the private sector are to help governments create the conditions for appropriate market-driven growth, and to collaborate with the private sector and increase private capital flows. by becoming participating investors. Conversely, to successfully partner with the private sector, MDBs must improve their expertise in various aspects of international banking, adapt to the flexibility and confidentiality required of private sector operations, and develop a new culture of risk and the knowledge base for business risk analysis.
The comparative advantage of MDBs in this partnership is that they have a capital structure that allows them to operate in high-risk environments, and their relationship with developing country governments enables them to reduce political risks of in a way that the private international financial sector seems incapable of doing. Governments tend to trust a project more when there is a partnership between the private sector and an MDB, which has a duty to protect the interests of its members. Successful MDB collaboration with the private sector requires careful design and implementation, as well as the allocation of intertwined risks (political, regulatory and commercial).
Cascading and maximizing financing for development
The World Bank Group has pioneered an approach of seeking private sector solutions to achieve development goals while reserving public finance for critical areas where private sector participation is not optimal or available. . In order to strengthen its commitment to Maximize Financing for Development (MFD), the World Bank introduced (in March 2017) the “waterfall approach”, a concept that leverages private sector financing and solutions. If public debt and contingent liabilities are limited, then private solutions are encouraged, and if not, the public finance option is pursued while respecting environmental, social and fiscal standards, and the criteria of good governance.
The cascade approach serves as a complement to domestic resource mobilization and improves the efficiency of public finances. The MFD harmonizes with the World Bank Group Private Sector Group, the International Finance Corporation (IFC) strategy to “create markets” as well as the risk guarantee arm of the World Bank Multilateral Investment Guarantee Agency Strategy 2020. MFD strengthens regulatory or policy frameworks, defends competition and develops local capital markets. Operationalizing the waterfall approach requires effective coordination between the WBG and systematic efforts to provide staff with advice, resources, training and monitoring to develop and integrate the MFD into World Bank operations and engagement with clients. The MFD approach has been tested in nine countries: Cameroon, Côte d’Ivoire, Egypt, Indonesia, Iraq, Jordan, Kenya, Nepal and Vietnam. The waterfall approach, if implemented in all MDBs, will facilitate a paradigm shift in the way MDBs operate.
Portfolio approach and risk management
Margins for institutional investors are often so slim that the cost of acquiring the knowledge and expertise needed to analyze and evaluate development projects could make development finance less attractive, if not impossible. Therefore, to ensure that institutional investors participate in development finance, the cascade approach must be complemented by a mechanism allowing the private financial sector to enter the MDB portfolio, ex ante, or before preparation and implementation. implementation of the project, and / or ex post, or after the project has been fully disbursed. This “portfolio approach” is a method by which MDBs can mobilize and catalyze the financial resources of institutional investors.
Bankable projects do not appear out of nowhere. MDBs should intensify the use of in-house expertise to prepare and implement projects while transferring this expertise through technical assistance to country governments. Technical assistance can also be provided to the private sector in developing countries (through, for example, IFC advisory services) to prepare projects of interest to foreign investors, whether they are investments financial or physical.
Investments require risk reduction for the private sector but also for the public sector. Part of risk reduction will consist of quality project preparation and implementation, but also through good management of the exposure, including contingent liabilities, which are created through the different forms of public partnerships. -private. In the cascade approach, these will emerge directly between governments and the private sector. In the portfolio approach, the risks will appear on the balance sheets of the MDBs. The recent capital increase for IBRD and IFC will help greatly in this matter.
Indeed, developing countries should not underestimate the risks associated with waterfall and portfolio approaches. Thus, MDBs should actively assist developing countries in project management, including project preparation, implementation and supervision. They should also provide assistance in public investment management and risk management, including guarantees and the implications of public-private partnerships for debt management. In addition, MDBs should take the initiative to prepare the asset classes that may be offered under the portfolio approach to financial markets.
The MDBs must collectively take ownership of the 2030 Agenda to mobilize private finance for development, failing which the achievement of the SDGs will not be possible. The partnership between MDBs, governments and the private sector holds great promise, and if each stakeholder does their part, we are moving closer to achieving the ambitious SDGs.