WASHINGTON — The World Bank’s ambitious strategy to use its public finance to unlock trillions in new private capital to deliver the Sustainable Development Goals is “completely unrealistic,” according to a new report.
New research from British think tank the Overseas Development Institute, released Wednesday, finds that the multilateral development banks are failing to meet expectations when it comes to catalyzing additional private finance into low-income countries, mobilizing just $0.37 of additional capital for every $1 of public money invested.
“Our research shows that an urgent reality check on blended finance is needed. The current approach is not leveraging significant amounts of private investment overall and very little for low-income countries,” Samantha Attridge, senior research fellow at ODI said.
Instead of going as planned to low-income countries, most concessional finance being provided to blend with private money is going to middle-income countries. And instead of addressing market failures and taking on more risk, the funds are directed toward relatively low-risk investments, the report finds.
Furthermore, while there are disputes over how blended finance volumes are measured, even the most generous estimates reveal flows are way below what is needed to fill the estimated $2.5 trillion annual SDG financing gap in developing countries, the report and experts say.
Released during the World Bank Spring Meetings, which got underway in Washington, D.C., on Tuesday, the ODI report appears to throw cold water on the “billions to trillions” agenda, first announced in 2015 by the bank’s former president Jim Kim.
The agenda promised to drastically ramp up financing for development by blending public and private financing in order to unlock more private capital, as well as increasing domestic resource mobilization, in the wake of stagnating public aid flows.
Donors have welcomed the blended finance plan, seeing it as an opportunity to make their aid budgets go further. However, the report calls for a major rethink, warning that if unchecked, blended finance could end up steering aid away from low-income countries where it is most needed.
The report also highlights a lack of transparency, data, and accountability around the development banks’ use of blended finance, raising questions about accuracy and efficacy of numbers being reported.
“We don’t know how much blended finance is costing us and we don’t understand what the poverty impacts are … There could be cheaper and more impactful ways for donors to achieve their development objectives, especially in the poorest countries,” Attridge told Devex.
“The ‘billions to trillions’ mantra is completely unrealistic without significant changes to the system,” she added.
The World Bank’s role in catalyzing private finance for development, especially in low-income countries, has been a hot topic this week. On Tuesday, U.S. lawmakers raised concerns about the World Bank’s efforts to catalyze private investment in low-income countries through its “private sector window,” a blended finance instrument.
The Center for Global Development also hosted an event on the topic on Wednesday. Talking specifically about private finance for infrastructure in low-income countries, CGD senior policy fellow Nancy Lee said that private flows were falling instead of rising and that despite their potential to act as catalysts, multilateral development banks had only played a “marginal role.” She called for “significant changes” to the MDB’s financial models, and also greater collaboration, to make them more effective catalysts of private finance.
All eyes are now on the institution’s new president, former U.S. Treasury official and investment banker David Malpass, to see whether he will embrace his predecessor’s private sector strategy or go in a different direction.
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The World Bank’s private sector arm, the International Finance Corp., is one of the biggest and most influential blended-finance actors, and is projected to dramatically increase its blended finance investment thanks to a $5.5 billion capital injection, announced in April 2018, and also through the creation of the $2.5 billion “private sector window” in 2017.
According to its own estimates, IFC is the biggest mobilizer of private sector finance compared to other development finance institutions, mobilizing $20 billion in 2016. However, the Organisation for Economic Co-operation and Development puts the total at closer to $5 billion. The ODI report also flags that the French and American bilateral DFIs have mobilized more private finance in low-income countries compared to IFC even though it makes larger overall commitments in those countries.
These discrepancies can be explained by differences in the way that OECD and IFC define and calculate blended finance, Martin Spicer, IFC’s director of blended finance, told Devex in an email. IFC leads the MDB Mobilization Task Force, which calculates and jointly reports on private investment mobilization by the major MDBs.
“The OECD DAC [Development Assistance Committee] methodology is not aligned to the MDB methodology largely due to different approaches [and] mandates,” Spicer said.
The IFC director also said that his institution would be doing more blended finance in low-income countries going forward, thanks in part to the additional resources made available through the private sector window and in response to increasing demand from donors.
“Before the establishment of the IDA [International Developmnet Association] private sector window, most of the blended finance resources [that] IFC had under management were in the climate space, with a focus on climate mitigation, where MICs play a key role. Over time, donors wanted to see greater use of blended finance in low-income countries,” Spicer wrote.