What’s in the G20 road map to transform multilateral development banks?

There is a new playbook for reforming the multilateral development banks. The leaders of the world’s largest economies have endorsed a plan to change MDBs and to make institutions such as the World Bank “better, bigger and more effective” through a concrete set of actions. The road map — led by Brazil within its presidency of the Group of 20 largest and emerging economies — consists of 13 short- and medium-term recommendations and 44 actions. Heads of state endorsed the plan at the G20 summit in Rio de Janeiro on Monday. It represents the final output of the group’s work on MDB reform. “There’s no question that this is a major achievement,” said Nancy Lee, director for sustainable development finance at the Center for Global Development, a think tank based in Washington, D.C. “The success of Brazil’s presidency rests, to a substantial degree, on the production of this document.” The framework aims to tackle several challenges, from streamlining the slow, often bureaucratic processes of MDBs, to leveraging private capital to boost resources, to enhancing the role MDBs play in climate change financing. It also emphasizes the need for greater collaboration among these institutions, urging them to align and simplify their lending processes to reduce the burden on their clients. “There’s been a lot of momentum around how the G20 could use its political clout to push the banks to do more,” Ivan Oliveira, deputy secretary for sustainable finance at Brazil’s Ministry of Finance, told Devex. “As much as possible, we wanted to do something that could really change and move the needle.” Part of what makes the road map unique is that it represents the first G20-owned vision for the MDB reform agenda, where previous recommendations originated from expert groups or external reports rather than a negotiated agreement. And unlike a communiqué, it is an agreed-upon plan of action. “We cannot underestimate how difficult it was for the Brazilian presidency to get agreement,” Chris Humphrey, a senior research associate at ODI Global, told Devex. “There is a clear, concrete plan of action to move forward and that’s helpful” to keep pushing the agenda forward, even if — during a Donald Trump presidency — the U.S. Treasury Department is no longer playing a leading role in pursuing reforms. This plan reflects ongoing collaboration between the G20 and the banks. On April 20, 2024, the largest MDBs published their own set of commitments on how they plan to work together. That document, which committed the banks to lending an additional $300 billion to $400 billion over the next decade, ultimately helped inform the G20 road map. “It was an unprecedented process, and it came about because of the need for us to step up our cooperation,” Ilan Goldfajn, the president of the Inter-American Development Bank, told Devex. “The perception both within the MDBs and outside is that we need to do more, we need to do better, and we need to be more efficient.” The strategy is divided into three pillars: Bigger, better, and more effective, following the now-familiar mantra that has been used to describe MDB reform. “It’s really not an exaggeration to say that the future of these institutions hangs in the balance,” Lee told Devex. “The reform agenda that is on the table is the right agenda.” Still, not everyone agrees. Some approaches have been criticized, including the focus on mobilizing private finance — which detractors say has not proven to be successful. On top of that, many borrowing countries are not represented at the G20, despite calls for those nations to have more of a voice in the reforms, María José Romero, policy and advocacy manager at Eurodad, told Devex via email. “While the effort to promote greater alignment and a better MDB system is welcome, the ambition does not correspond with the rethink that is needed,” she said. “A focus on a human rights-based approach and greater accountability to communities continues to be a major blindspot of the G20 reform agenda.” Bigger Much of the focus on MDB reform has centered on significantly increasing their financing, including a proposal by an independent expert group that MDBs should triple their financing. That, along with recommendations from another independent report on how these banks can manage risk and balance their finances, have spurred the institutions to stretch their balance sheets in several ways. Existing plans to implement some of those capital adequacy reforms will put the MDBs on track to generate between $300 billion to $400 billion in new financing over the next 10 years, according to recent research from Boston University. The stakes, however, could not be higher. Today, more than 3 billion people live in countries paying more to service their debt than on education or health care — and the financing gap that’s required to reach both the Sustainable Development Goals and the Paris Agreement has risen by 56% since 2020, according to research by Boston University commissioned by the G20. “Given that we have a huge challenge ahead — we need to be financing for more development, more climate — we’re in a situation that is an urgent one, especially in developing countries,” said Marina Zucker-Marques, a senior academic researcher at Boston University’s Global Economic Governance Initiative. “Multilateral development banks are the institutions that provide lower interest rates, and that’s why we need them to fill in the gap.” To do so, the road map laid out three recommendations and nine actions, most of which are expected to be fulfilled within three years. These include exploring the use of “innovative financial instruments” to increase MDBs’ financial capacity, such as hybrid capital mechanisms — a blend of debt and equity that allows MDBs to increase their financial resources — and portfolio guarantees to transfer investment risk. Another recommendation — one that Lee was most encouraged by — centers on valuing callable capital, the pool of funding that governments commit to providing only in extreme circumstances, such as if the institution faces collapse. Callable capital serves as a financial backstop, enabling MDBs to undertake more projects and provide more support without reducing lending capacity. Several MDBs have already released reports assessing their callable capital, and discussions are underway with credit ratings agencies about how to evaluate that resource. “I do believe that these institutions are best placed to actually be the central actors in supporting countries’ development and climate strategies,” said Lee. “They have all the right tools, and I think the strategy with the highest possibility of success is to transform these institutions rather than create new ones.” Better The road map’s most extensive to-do list focuses on enhancing the institutions themselves, encompassing more than half of the road map’s recommendations and actions. The category revolves around improving the banks’ financing, policymaking, and advisory activities. Among the recommendations for a better MDB system are strengthening country systems through capacity building, mapping policy and implementation differences in the MDBs’ environmental and social frameworks, procurement and review processes, and harmonizing standards to streamline processes for borrowers. Many of these institutions share similar goals, but their differing operational procedures and requirements can be challenging for borrowers to navigate, Humphrey said. So MDBs should strive to better align their policies, he added. While progress has been made on procurement, more work is needed to expand in other areas, including safeguards or environmental and social assessments, Humphrey said. One of the main proposals is supporting country-owned and country-led platforms to help MDBs coordinate at a local level and respond more effectively to country priorities. This approach may require operational reforms to enhance collaboration among MDBs and to identify which institution has the comparative advantage in what areas. There are several country platform pilots underway that will be announced soon, Goldfajn said. That’s something Brazil has already taken on, announcing its own multibillion-dollar, climate-focused investment platform just last month. “Some large countries are coming forward, including Brazil, to create platforms that really work for them,” said Lee. “So now, the question is will the MDBs come together in a proactive way to support those strategies?” Another recommendation is around enhancing project pipelines or helping to design and develop bankable projects. That could include incorporating project preparation costs in MDB financing, sharing information to scale co-financing, and working on policy legal and regulatory frameworks to build markets in countries. It could also mean greater consolidation and coordination of existing efforts such as the Global Infrastructure Facility. Better also means improving how these institutions mobilize private capital, including policy work, exploring originate-to-distribute models, and guarantees. The road map encourages MDBs to revise their methodologies around private capital mobilization, provide more comprehensive data on the topic, and support client countries in strengthening their domestic resource mobilization efforts. “We need to triple the finances or expand the lending capacity of the MDBs but we also need to ensure that there are projects in place. If you are tripling the finances of MDBs without projects in the pipeline it’s like building a bridge to nowhere,” said Annalisa Prizzon, a principal research fellow at ODI Global, which provided research to support the creation of the road map. The recommendations under the better pillar that may prove most challenging include those centered on addressing foreign exchange risk, including scaling up local currency lending and supporting currency hedging solutions. Goldfajn told Devex this would be one of the hardest issues to address, and World Bank President Ajay Banga has also highlighted the complexities of tackling such risks. “Can we offer solutions for domestic currency and foreign exchange? We’re doing our best,” Goldfajn said. He pointed to a foreign exchange hedging platform created by Brazil that IDB supported earlier this year as an example and said the bank will explore scaling the model to other countries. Other challenges include creating clear guidelines and targets for nature and biodiversity, tackling foreign currency risks, and private sector mobilization, Goldfajn added. “It’s very easy to say let’s mobilize, let’s invite them,” he said, referring to the private sector. “However, one thing is to invite them, and another thing is to actually see large sums reallocating from one place to another — which is exactly what we are asking for.” But progress is well underway on some of these recommendations, including advancing the country platforms approach and pushing ahead on a co-financing platform launched earlier this year. That effort now features some 100 projects that MDBs can jointly support, according to Goldfajn. More effective The effectiveness pillar is divided into three parts, with recommendations for strengthening impact measurement, expanding MDBs’ geographical and gender makeup, and creating incentives for MDBs to coordinate with one another. Recommendations include strengthening local capacity for data collection, ensuring evaluations are independent, and making greater use of those evaluations’ findings. The road map also pushes MDBs to “promote more balanced female representation” across their executive boards, management, and staff, and to implement “concerted action, financing, and programs at scale to support female equality.” Lastly, there is a recommendation on MDB cooperation, with the road map encouraging the banks to develop internal incentives to encourage collaboration at both a system and country level, co-developing new financial instruments, and considering different banks’ country strategies to do so. Moving forward Implementation of the road map falls to South Africa, which will hold the G20 presidency next year, along with the G20’s International Financial Architecture Working Group. But a specific timeline has been laid out: 26 of the actions should be implemented within three years, and the rest within six years, according to Brazil’s Oliveira. “We have a clear agenda ahead of us,” he said. “So what we need to do now is to push, and continue to push, for implementation.” Part of what South Africa will need to take on is establishing a framework for monitoring and reporting to ensure that the road map is implemented. “Designing the indicators, having regular reporting for the MDBs will help keep the momentum and ensure that the recommendations within the road map and all of the efforts around the MDB reform agenda are actually followed through,” Prizzon said. That will be crucial because, while the road map is specific, it needs to be “more concrete,” in part by defining specific numbers and targets that will determine success, Humphrey said. While comprehensive, not everything made it into this road map as debt and institutional governance are notably absent. South Africa will have to decide where it wants to focus the agenda. At some of these MDBs, especially at the World Bank, there are “imbalances in the way countries are represented,” Humphrey said, adding that he doesn’t believe these organizations need sitting boards and for every deal to get board approval. The road map, however, focused intentionally on the nuts and bolts so that all G20 countries could agree to support the plan. “It’s a pragmatic set of issues to address, and that makes sense. Especially in the current context, maybe now is not the time for big-picture governance reform,” Humphrey added.