Opinion: How MDBs can unlock private finance for development

Financing the Sustainable Development Goals is a huge challenge that will not be met through public money alone. Dramatic increases in private investment — both domestic and foreign — are needed. Multilateral development banks have a key role to play in unlocking this funding.

The Asia and Pacific region’s development needs are vast. In addition to SDGs, we must address infrastructure deficits and climate challenges. For infrastructure, recent ADB research estimates that $1.7 trillion is needed annually over 2016–2030 to maintain growth, eradicate poverty, and respond to climate change.

So how can MDBs help countries attract the private funds they need? I see several key actions.

The first is to expand MDBs’ private sector operations of lending and equity investment to the private sector to maximize leveraging impact. These operations can be both for infrastructure investment such as renewable energy, transport, and water, or in social sectors such as technical education and aged care by private service providers. ADB’s private sector operations have doubled in the past 10 years to $2.5 billion in 2016. This was about 16 percent of ADB’s total approvals of $17.5 billion.

Through ADB’s private sector operations last year, an additional $5.8 billion in commercial co-financing was mobilized. ADB helps to: make projects viable through its participation; improve the risk profiles of projects via credit enhancement products such as guarantees; and pilot new approaches and technologies. ADB is expanding political risk and partial risk guarantees and supporting local currency project bond issuances by the private sector through credit enhancement.

Second is to support the growth of public-private partnerships. When well designed and well delivered, PPPs can tap the significant funding and management expertise of the private sector for infrastructure and social services. ADB is supporting PPPs by helping countries enact laws and establish PPP offices, better preparing projects for the market, including through its Asia Pacific Project Preparation Facility, and by providing transaction advisory services. ADB also finances private sector participants in PPPs.

One example of ADB’s support for PPPs is the Mactan-Cebu International Airport in the Philippines, where we helped the government prepare a PPP deal to expand terminal services. Our private sector operations provided commercial financing of $75 million to the operator, which was co-financed by a syndicate of seven Philippine banks for $450 million. ADB’s PPP office is providing transaction advisory services for the Port Moresby International Airport in Papua New Guinea, a teaching hospital in Kazakhstan, a solar park in Cambodia, and many others.

We should admit that project finance in developing countries is not so easy in practice, because of various risks related to land acquisition, projection of revenues and costs, and regulatory changes. In addition, for foreign investors there are risks involved in converting to foreign exchange and remitting returns abroad. But there are still large opportunities for PPPs, especially for mobilizing domestic resources. I also believe that ADB’s involvement in PPPs, including through use of its credit enhancement products, can effectively reduce investors’ risks and promote bankable projects.

The third is to explore new options to mobilize finance, such as management of third-party funds. ADB manages one such fund, the Leading Asia's Private Sector Infrastructure Fund, established in 2016 with $1.5 billion of equity investment from the Japan International Cooperation Agency. As other MDBs are doing, ADB will explore opportunities to manage funds from private sources, such as pension funds, insurance companies, and asset managers.

In these three areas ADB is making serious efforts to mobilize additional resources from the private sector. But at the same time, I would emphasize that ADB’s operations, including sovereign, have always been about mobilizing private resources. One of the most important reasons for creating ADB in 1966 was to attract resources from international capital markets including the United States and Europe. At that time, Asia was poor, savings were limited, and foreign exchange was scarce. ADB successfully issued bonds in Germany in 1969, Austria and Japan (through the first yen-denominated Samurai bond) in 1970, and in the U.S. (with a AAA rating) in 1971.

ADB’s sovereign operations helped countries build essential infrastructure to entice private investment in industry, and strengthen education and health sectors, which not only benefit people’s welfare but also set a basis for strong private sector activities. Policy-based lending to countries promoted structural reforms to enhance the business climate. It was also used to provide budget support during financial crises, helping governments maintain essential social expenditures and avoid a collapse of the market.

The combination of lending, whether sovereign or nonsovereign, with expertise in preparing and implementing projects has made an important contribution to the region’s development. ADB’s tradition of working together and closely with governments on the ground is appreciated. At the same time, we are increasing efforts to speed up our work by streamlining business processes, including for procurement. We are also incorporating more advanced and innovative technologies into our projects.

It is my belief that ADB’s lending operations should keep pace with the development needs of the region. To secure our financing capacity, ADB took the innovative step of merging its Ordinary Capital Resources (ADB’s main window to borrow from capital markets and lend with a certain spread) and concessional lending from the Asian Development Fund (which will continue to provide grants to low-income developing member countries). The merger, effective the beginning of this year, will increase annual loan and grant approvals by more than 50 percent to more than $20 billion by 2020. This balance sheet optimization based on existing capital contributions from shareholders and donors presents a useful example to other MDBs.

On the funding side of our lending operations, we are also increasingly using innovative instruments such as green bonds, water bonds, and gender bonds. We are issuing more local currency bonds to support our local currency-denominated private sector operations.  

In order to achieve the SDGs, meet infrastructure needs, and address climate challenges, MDBs must play a critical role. Their own financing will continue to be important, especially by incorporating expertise and new technology. But MDBs should become more innovative and dramatically enhance their efforts to mobilize resources from the private sector.

Update, Dec. 5, 2017: This article has been updated to clarify Austria's involvement in the first yen-denominated Samurai bond.

Read more Devex coverage on the Asian Development Bank.