Opinion: 5 quick wins to mobilize private capital for development

Everyone agrees that private sector finance is critically needed to address global development challenges, but mobilizing this money is difficult. We see opportunities for quick wins that can enable multilateral development banks and development finance institutions to increase private capital mobilization while preserving their triple-A ratings, with little or no need for additional capital. To crowd in more private capital, especially for climate change mitigation in lower-income and emerging countries, MDBs, DFIs, and the private sector must work together differently and with purpose to address capital constraints and redesign governance, products, and incentive structures. The world faces overlapping crises — the repercussions of the COVID-19 pandemic, the war in Ukraine, and the climate crisis — against a backdrop of high inflation and slowing growth. Central banks and ministries of finance in both high- and lower-income economies cannot provide the scale of financing needed to address these crises. While G20 expert panel suggestions on MDB reform are valuable, more capital deployed in traditional ways will be woefully insufficient. The funding gap to reach the U.N. Sustainable Development Goals alone is simply too large for public sector capital to solve with existing tools. While reforms can seem daunting given the scale and nature of MDBs/DFIs, certain measures can be taken to kick-start increased private capital mobilization, stimulate debate, and act as a catalyst to demonstrate that more wide-ranging reforms are possible. These short-term reforms/actions can be categorized into five buckets: 1. Product reforms MDBs/DFIs can adapt their risk posture and/or assume incremental risk in their product offerings to take on aspects of risk that are difficult for private sector debt capital to bear, such as currency, convertibility, and construction risk. MDBs/DFIs can take on temporary structurally subordinated positions, expand the use of mini-perm financings (short- to medium-term loans) to allow for debt capital market takeouts, and broaden the availability of political risk insurance, partial risk guarantees, and nonhonoring products. They could take anchor and junior positions in individual projects or debt and equity funds managed by external fund managers, which can tap into new investor pools. 2. Program expansion MDBs/DFIs should consider adding to their toolkits. They could build a portfolio of own-account securitizable assets to be packaged for sale and increase their use of blended finance. They should help drive the development of voluntary carbon markets and develop equity and equity-linked products to scale proven technologies critical to the energy transition. MDBs/DFIs must also push for better private sector-enabling environment reforms and mechanisms at both the sector and country level to de-risk private sector capital as a priority. 3. Shareholder and regulator-driven reforms There are several easy wins that can be driven by MDB/DFI shareholders and regulators in high-income markets. Shareholders should insist that their institutions provide access to the Global Emerging Markets risk database as a global public good, which would enhance commercial institutions’ risk analyses. They should also work with other stakeholders to standardize, align, and limit critical project key performance indicators. Shareholders should provide additional funding for MDBs/DFIs to expand the size of their project preparation units so that they can provide more technical assistance, develop feasibility studies, and increase the bankable project pipeline. Increasing the supply of funding by MDBs/DFIs or the private sector will serve little purpose without a commensurate increase in the bankable project pipeline. Perhaps most importantly, shareholders should urge regulators to clarify language on Basel III compliance, the international regulatory framework for banks set up in response to the financial crisis of 2007-09. They should also work to harmonize national regulation across the G7 to create safe harbors for banks to utilize MDB/DFI preferred creditor status, export credit agency cover, political risk insurance, and breach of contract coverage across the global south. 4. Enhance access to donor funding More donor funding for MDBs/DFIs is needed for them to expand project preparation resources, scale blended finance, and subsidize their products. Given debt challenges in many lower-income economies, more MDB support for development and climate finance will need to come in the form of grants. Access to the Global Environment Facility, the Green Climate Fund, and the Global Infrastructure Facility should be streamlined, and GIF should be given funding to operationalize and/or implement the private sector window. 5. Staff incentives for private capital mobilization Adjusting incentives can help mobilize capital. MDBs/DFIs should replace their KPIs based on own-account lending volumes with KPIs that focus on total capital raised and incorporate private capital mobilization, i.e., including private financial flows catalyzed through co-financing and de-risking, and private capital enabling, which relates to reforms and public investments. In addition, incentives should be put in place to increase the use of guarantee structures. MDBs and DFIs have achieved a great deal in the 70 years they have operated. However, development, sustainability, and climate funding needs have grown exponentially in that time, especially since the turn of the millennium. If the world’s challenges are to be addressed effectively, these institutions must evolve beyond capital efficiency improvements. The measures described above are far from exhaustive. But they offer early, easy wins to set the stage for broader MDB/DFI transformation. Implementing these to demonstrate the power of private capital mobilization and to accelerate the implementation of projects that alleviate poverty, tackle climate change, and address the SDGs will require one other quintessential thing: the building of more durable, trusting relationships between the public and the private sector. Each has pieces of the puzzle, but only by acting collaboratively together will the funding needed to tackle the world’s most difficult challenges be brought to bear.