In 2015, world leaders committed to the Sustainable Development Goals an ambitious agenda that seeks to end poverty, protect the planet, and ensure peace and prosperity for all by 2030. To meet these ambitious goals, countries around the world will need to mobilize trillions of dollars in new investments at a time when global growth is slowing and overseas development assistance is declining.
The role of the private sector in meeting the SDGs has come into sharp focus at recent global conferences, including the Addis Ababa Forum, SDG Summit, G-20, and World Economic Forum, as governments and institutions, including the World Bank Group, increasingly seek to tap private capital, know-how, and capacity for development projects.
At this month’s International Monetary Fund and World Bank Group Annual Meetings, IEG hosted a high-level expert session to discuss how countries and multilateral institutions can scale up their engagement with the private sector.
The discussion was timely, given expanded efforts by the World Bank Group to engage the private sector. Earlier this year, the World Bank Group announced the Maximizing Finance for Development initiative (also known as the cascade), which seeks to prioritize private sector solutions and investments to achieve development goals, and, thereby, reserve scarce public finance for other more pressing needs or areas where private capital is unlikely to invest sustainably. Similarly, IFC’s new “3.0 strategy “seeks to reposition the institution toward a more proactive stance in creating markets and mobilizing private sector resources to a greater scale.
So what can we make of this push toward increased private sector engagement?
First, we must recognize that leveraging the private sector to achieve development goals is, of course, not new. The World Bank Group has a long-standing history of promoting private sector development — for example, by improving the competitiveness of the private sector, boosting trade, enhancing investment climate, developing and deepening financial markets, providing policy advice to help governments implement the regulatory and institutional reforms needed to allow the private sector to engage, and structuring and financing public-private partnerships. What is new is the explicit commitment toward a more structured approach to considering private sector options and the level of ambition in the attempt to mobilize private sector capital — moving from billions to trillions.
Second, given the World Bank Group’s history, there is a wealth of experience in private sector engagement already available. Looking at projects over the past decade, we found that more than two-thirds of the projects we evaluated had private sector development aspects, and more than half of the recommendations from our evaluations addressed issues related to private sector options. Examples include IEG’s 2013 evaluation on the World Bank Group’s support for public-private partnerships, and IEG’s more recent evaluations on competitiveness and jobs (2016), capital markets (2016), SMEs (2013), and reform of business regulations to improve investment climate (2014). In its efforts to maximize finance for development, the World Bank Group can benefit from the many lessons of experience from its past approaches to ensure that it builds on what works, and avoids what doesn’t.
Third, a common finding from IEG evaluations is that private sector involvement in not a “silver bullet.” While many of IEG’s reports do advocate for a stronger role of the private sector in a range of sectors (including infrastructure, agriculture, and forestry), engaging the private sector requires improving upstream conditions for investments to take place. For this to happen, countries need to both have clear objectives about where and how they would like to involve the private sector, and possess the skills to identify these projects and structure them. Other prerequisites for tapping the private sector are access to finance (including functioning capital markets), the rule of law, and macro stability.
In this context, our evaluations point out that government champions or dedicated units are often critical to kickstart the process of engaging the private sector and keep this progress on track. But from our evaluations, we know that capacity gaps within national agencies frequently hamper the identification of projects in which the private sector could invest.
Another challenge referred to in the panel discussion last week relates to policy stability and sector reform. Private investors prefer countries with stable policy frameworks that set out predictable taxation, business regulations, and tariffs. Sector reforms are often a prerequisite for private sector engagement, but they frequently encounter political resistance. The unbundling of the energy sector, the corporatization of public utilities, or reform of energy tariffs are often necessary steps to get the sector fundamentals right. For example, sound “off-takers” in an energy supply agreement, such as reformed utilities, are needed to attract the private sector for investments in independent power producer projects. However, these measures often face stiff political opposition. IEG evaluations show that these reforms often take longer than expected; spanning multiple legislative periods, meaning sustained political commitment is often a challenge. Early and comprehensive stakeholder involvement, including civil society organizations, are needed to secure commitment, not only by the government but also by the public at large.
Broadening the participation level of the private sector also requires innovation. Markets are often not served because of high transaction costs or lack of adequate technologies. Our evaluation findings suggest that multilateral institutions such as the World Bank Group can lead the way by convening policymakers and in piloting innovative approaches in an evidence-based manner.
Scalability of so-called “de-risking” warrants a careful look. The public discourse around “maximizing finance for development” often refers to de-risking of projects. This is understandable as private investors have an intrinsic interest in obtaining an adequate return, adjusted for the risk they take by investing in frontier regions. Partly, project returns can be made more predictable by working with governments upstream on policy and reform issues, effectively reducing project risk downstream. First-loss guarantees in project finance operations can meet the risk-reward profile that institutional investors require, transferring the risk to third-party agencies. For example, IFC and the Swedish International Development Cooperation Agency launched the Managed Co-Lending Portfolio Program in 2016 as a platform to mobilize private funds for infrastructure investments in emerging markets. However, the question remains: How many agencies are willing to take a financial loss under such agreements?
Given these realities, it will require a comprehensive and sequenced set of measures to mobilize private sector support to achieve the SDGs. Private sector potential is real, but the path requires a strategic approach informed by experience.
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