In 2015, World leaders committed to the sustainable development goals (SDGs) – an ambitious agenda that seeks to end poverty, protect the planet and ensure peace and prosperity for all by 2030. To meet these 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. As a result, many governments are turning to the private sector as a source of new investment to support infrastructure and other development projects. The World Bank Group is taking a similar approach and recently launched a new initiative that aims to raise trillions in development financing, including through through partnerships with the private sector.
IEG recently hosted a high-level panel where we asked our panelists to share their thoughts on the opportunities that exist for businesses when it comes to the SDGs and what needs to be in place. The panel included Bambang Brodjonegoro, Minister of National Development Planning of Indonesia; Anne-Marie Chidzero, Managing Partner, Alitheia Identity, and Board Member, Africa Enterprise Challenge Fund; Susan Lund, Partner, McKinsey Global Institute; Hans Peter Lankes Vice President of Economics and Private Sector Development, International Finance Corporation (IFC), Matthew T. McGuire, Managing Director at the Abraaj Group; and Caroline Heider, Director-General at IEG.
Caroline Heider: You all bring different perspectives to the question of how best to mobilize the private sector in support of the sustainable development goals. I am curious to see where your views coincide and whether we can actually come to some common ground on what works to bring the private sector to help finance the sustainable development goals. The role of the private sector has been highlighted again and again. But we have to ask. Is it just a matter of how to get money from the private sector or is there a much broader role as some have suggested?
Bambang Brodjonegoro: The idea of the sustainable development goals is how to make development environmentally sustainable, economically sustainable, as well as socially sustainable. From my prospective and for the needs in Indonesia, we feel that infrastructure development will be the area in which the private sector can make the most significant contribution. Of course, this goes beyond just acting as a contractor doing public projects. More importantly, we are looking to see the private sector coming in as investors. We need to enhance public-private partnerships. But from a planning perspective, we must make clear at the same time, what should be the private sector’s role and what should be the part of the public sector.
Susan Lund: First of all, we should think about the private sector broadly. So, there is the private sector, meaning foreign investors and foreign companies bringing money to the table. But there's also the private sector in developing countries. The work we've done in Africa points to the critical role that large domestic African companies are playing. Then there are, of course, small firms, entrepreneurs, and startups. Indeed, in many countries, a majority of job creation, which is necessary for inclusive growth in fact comes from small companies. I think that for any private sector actor, investment climate is critical - whether you measure it by the doing business indicators or other measures having clear regulations, clear tax policy, reasonable court systems, rule of law, access to finance – these things are critically important for any country and for any private sector.
Now, if you want to narrow the question to leveraging private sector funding for development, then I think it's a narrower set of conditions. One is to, first of all, have the bankable projects that have clear revenue streams, that have attractive risk and adjusted returns. Often, as we know, in fact in low income countries the risk profile versus the returns just isn't there. That’s where the new products that can be developed by the IFC and other institutions becomes very important whether it's the first loss type products or loan guarantees, political risk. Those things are going to be essential, if in fact we want to go as the saying goes, from bills to trillions of dollars for development.
Anne-Marie Chidzero: SME's play a key role in us achieving the SDGs. If I focus on the African continent, ninety percent of businesses in Africa are SMEs. If I go down a layer lower to look at what percentage of those businesses are women-owned, about twenty to twenty-five percent are led by women. Yet, there is a huge gap in their ability to access capital. For me, SME's and in particular women play a critical role in us achieving the SDGs. What we're finding as opportunities in the markets, are women businesses that are looking at employing more women, bringing more women into their supply chains. They're looking to source their inputs from women, small scale farmers -- and when you put more money into the hands of women, and when you give them that economic decision making power, that translates into benefits to their communities and to their households.
So, as an investment fund management company, we are very focused on supporting the growth of SMEs with this gender diversity lens because we believe that we can also have that impact without having the financial trade-off. So, for us key is focusing on how you invest in the economic potential of women, because that will then allow you to have that impact on the SDGs.
Matt McGuire: I think there are three things that we need to do to bring more businesses and more investors into a lot of the markets we care about that will achieve the SDGs. The first thing I would say is articulate the opportunity. What I mean by that is we often look at all the deficits or all the challenges. Let's be really clear. The Business and Sustainable Development Commission which is a group of CEO's and civic leaders that were convened by the UN recently put out a report identifying twelve trillion dollars of opportunities that can be created through achieving the SDGs. Twelve trillion. That's an extraordinary amount of money, an extraordinary amount of opportunity for businesses around the world. So really articulating that and making it very clear what the opportunity is, I think is hugely important.
I'll just offer two other things along those lines. One is that we talk not about emerging markets, but about growth markets, because that is where the growth is. And if you look across the world, you know that OECD countries are getting doubled in terms of their growth rates by so many countries where the World Bank Group operates, IFC operates and so on. It's where the population growth is. It's where the economic growth is. And importantly, when it comes to the SDGs, as you see these rising middle classes and this increase of urbanization, you have to realize that eighty percent of people's income in most of these markets are going to go in four areas, food, housing, education and health care. If that’s not an opportunity for businesses to come in and try to provide those services or some component of them, in partnership with government, then business people are just not seeing the trees in front of them.
Number two, I would say in terms of where government sits, I think it's important that we support private capital as opposed as trying to steer private capital. That is a very hard horse to force to drink. And I think very often we look around and we say, well, this is the area we want more private investment or we want more businesses to go. I think a more productive route is to say how do we look to partner more effectively so that we can accomplish some of the goals hand in hand with business instead of determining it.
Hans Peter Lankes: The SDGs provide a framework for all of us, public and private, to anchor our activities. IFC invests with the private sector. We invest roughly twenty billion dollars, including mobilization right now. We are building a framework for project assessments that provides a clear line of sight to the areas we would want to invest with the private sector in order to achieve the SDGs.
As for critical factors, it is important that the environment is right. When the policy environment is distorted, we can get counterproductive results for the climate, for the environment, or for inequality. We need to work on the business environment so business can do what it does best, follow the demand. Secondly, we need to assist the private sector in particularly risky environments and where there is low capacity. And finally, we should tap into that enthusiasm for SDGs and impact investing. For instance, IFC recently launched a social bond, which is specifically directed at pooling investments into high impact SDG type situations.
Heider: What role should the World Bank Group or other multi-lateral development banks play? Is there a need for these institutions to adapt their approaches to fit the SDGs or work differently with the private sector?
Brodjonegoro: Multilateral development banks, including the World Bank Group have an important role to play. In my experience, the World Bank, IFC and MIGA have been complementing each other when it comes to enhancing PPP implementation in member countries. In Indonesia, the World Bank has provided capacity building to government bureaucrats and domestic private sector companies participating in PPPs. On the other hand, IFC is in a good position to help us attract foreign direct investment in infrastructure. MIGA, at least when it comes to PPPs, can provide co-guarantees that will give potential investors confidence to invest and bid for PPP infrastructure projects in Indonesia.
As a country, we need more entrepreneurs. We need more private sector involvement. That's how the World Bank Group can support their member countries.
Chidzero: When we talk about growing or supporting SMEs, everybody thinks about finance. Yes, that is part of the problem, but it is not the whole problem. What we're seeing, with respect to woman-led SMEs, is yes, the capital is important, but they tend to be very conservative in the manner in which they're running their business. What they also need is the ability to see beyond what they're currently doing, to be able to see the other markets to which they can expand their products to. And it's really about helping them with the strategy, the skills to kind of come out of their box and understand what the opportunities are for them to grow.
When it comes to them accessing finance, what we're also seeing is that there needs to be a change in the way in which one deals with this particular market segment. I think there is a role for the World Bank Group to support more women fund managers, to support some of these accelerators, these incubators, to help these businesses become investment ready. I think there's also a role for catalytic funding and for patient capital. So those are some of the issues that I think would help address the problems.
Lund: The private sector clearly has a very important role to play in achieving the SDGs, but I think that we need to go down several layers in more detail from that. When you look at where the private sector investment goes today, investment is more common in transportation, roads, airports, telecom, and energy. Much less common in water in developing countries, and that's because in Sub Saharan, Africa, for instance, seventy percent of water is either unmetered or leaked or essentially stolen. There's no revenue model. So when you think about the SDGs, I think that private sector participation could be very strong in some areas. And there are going to be other SDGs that are going to be a much tougher fit. In education, for examples, it is less clear what the private sector role in providing education is. Health care, I think is split. Clearly, you can imagine private sector investment in hospitals, but when you're talking about public health, probably not. We need to think more critically about which gaps can the private sector fill and which ones they won't fill. For the World Bank Group and other MDB's, it's interesting because it would mean that their portfolio over time would actually shift, with the private sector being leveraged in some types of investments but not in others.
So overall, look, I think there's a big role for the private sector, but we should be realistic and target the private sector where we think it will be successful.
McGuire: I think we're on the right path. We've seen a huge shift in the way people talk about investing around the world. Part of this is driven by search for yield. In a low interest environment people are looking to a broader set of opportunities out there to get the returns that they want. But part of it very importantly is the articulation of the SDG's. Part of what we've seen is the SDGs are really providing a vocabulary and a framework that many, many people are embracing. So I think we're on the right path here. I think where we need to go from here is on realizing that we're all really interested in solutions. We talk an awfully lot about partnership capital at Abraaj. The point there is let's figure out how we can best partner, who needs to be involved. So one quick example is we have a health care fund that is partnered up with the Gates Foundation, Metronic Phillips, and then us as a private equity firm, because we realize each one of us brings something to the table. IFC incidentally is an investor. Think about the suite of actors that I just mentioned. That's a very powerful collective that have real experience and what we've realized, and I think what a lot of others realize, is that no one's going to do it by themselves, but you need to think about ways we can truly partner and leverage one another's talents.
Watch the event: Harnessing the Power of the Private Sector in Support of Sustainable Development
Heider: Experts have suggested we should also be reaching out to the wealthiest individuals in the world. Any thoughts on this?
Mcguire: I know Jeffery Sachs has been making this point for a while. If you can access the top several hundred billionaires, you have this enormous pool of capital and so on. I don't think that's the path to go down. Again, it's very hard to steer the capital. Let's support the capital that's out there. Right now there are about nine trillion dollars in negative yielding debt that are held by institutional investors. Nine trillion dollars of negative yielding debt means an awful lot of institutional investors have looked around and said, "I want to guarantee a loss on my money." How can that be if you're a fiduciary? But the point is that I think what we need to do is illustrate the opportunity, make the case that there is a lot of money to be made in many markets where perhaps people haven't been invested so much. Then see what portion of that nine trillion will say, "All right, I see the opportunity now". Humans love stories. Right? We consume stories. I think we need to tell the story much more effectively. And we need to convince people just what the opportunities are and then some of that money hopefully will flow in the right direction.
Heider: Let me turn to you Hans Peter Lanke. Can you describe this new approach that the World Bank Group is pursuing? Some refer to it as the cascade. and could you talk about what's new about that?
Lankes: Perhaps worth kind of describing what the cascade is and in situating it within the broader objective that we have. So the cascade at the project level is a set of questions that we are committing ourselves to asking when we get a project proposed. We ask, is this a project that needs to be done in the public sector? Is this a project that could be done in the private sector? What are the conditions under which this project could be done in the private sector in a sensible way meeting all the objectives and the standards that we have, limiting contingent liabilities? And if we can create these conditions, is it maybe still too risky for the private sector? Are there ways to de-risk these operations?
So we have a set of questions that around projects that are meant to test where it is that the funding should ideally come from; where it is that the project solution should ideally come from, or could sensibly come from? We can also take a sector view of the cascade and I often prefer that actually. If you look at the development of the power sector, what are the elements here which public support, public financing is particularly well suited to provide, the regulatory environment, policy? But then you can also ask what is it that the private sector can provide? Well, power generation is something which usually, given the right conditions, can be done in the private sector today.
We want to maximize financing for development. We see these enormous gaps in financing. And we know that the public sector -- the public institutions, the MDBs are not going to be sufficient to fill these gaps. The private sector has just -- it has to step in big time. This is really one of the key and novel premises of the SDGs.
But that means that we -- given the scarcity of public funds in view of the challenge, we need to make sure that we use these very precious public funds where they are really necessary. And there are a lot of areas where you can only work with public funds or wok in the private sector would not do a good job in meeting requirements.
That is the core of the cascade approach.
Heider: So what I'm hearing is really creating an enabling environment that makes it attractive for the private sector to come in. On the other hand, there has been backlash against globalization, against private sector in many countries. How do we reconcile this tension? Can the private sector demonstrate that it is making genuine contributions to a broader good rather than pursuing profits?
McGuire: I think the phenomenon you're describing is very much a “north” conversation. In terms of South-South investing and what we see in an awful lot of the markets we operate, there's not that same backlash against globalization. You're seeing actually some places where there's increased capital flows. Now, we know cross border capital flows have been reduced dramatically in the last 10 years, but an awful lot of that is the western banks that have pulled back and some of the western investors, but on the south-south basis, I would actually argue there's a very different dynamic going on right now and there are many who are taking advantage of that pull back on the part of some the more traditional investors and businesses and are saying, this is the opportunity for us to think more regionally, for us to think more about how we can actually expand.
And the final point I'll make is, this is one of the opportunities we see as we invest, let's say very strong companies in a particular region who are looking around -- in a particular country, are looking around and saying, "How do I become a regional player?" Or, "How do I become a global business even if I'm based in Lagos or Jakarta or somewhere else," and that's a new phenomenon. So I think we have to really specify where some of those trends are having the impact and where perhaps there's a different dynamic at play.
Lund: I agree that the backlash against globalization is felt much more keenly in the United States and in Europe where you've had loss of jobs due, frankly, in large part to technology, but also, to global trade. I think that when you look at developing countries, the private sector is where growth is. Public sector productivity doesn't really increase. So when you talk about raising living standards and having more GDP per capita, it only comes through productivity growth and that comes through private sector enterprise and innovation and investment in R&D. So I think that the message should be that the private sector is essential to growth. You're never going to achieve the SDGs if economies don't grow and grow actually fairly rapidly. That's sort of a precondition to even hoping to achieve the SDGs by 2030.
Heider: Minister Bambang – Is this the case in Indonesia? Has there been a backlash against globalization or are you seeming more a fear that if the U.S. and Europe are turning against globalization, that will affect also your economy?
Bambang: In our case, we would like to focus first on how we improve ourselves domestically. When we're talking about emerging economies like Indonesia, this is where private investors can look for a higher yield environment. Because again, we are still growing, the population is huge, and the middle class is getting bigger.
Heider: Let’s turn to another aspect of private sector engagement – the role of small businesses and women-owned enterprises. Marie – from your perspective, what role can SMEs play in supporting the SDGs, and what obstacles do they face?
Chidzero: First, I would like to observe that there is a change that we're seeing in Africa around the issue of impact -- of social and economic impact. For example, the Africa Venture Capital Association has begun to track across our industry the impact that private equity is having for jobs creation, for women, jobs for women, et cetera. There is that consciousness of change. Coming down to the enterprise-level, what we're seeing particularly among the small enterprises, is a growing social consciousness where entrepreneurs are looking at the opportunities that their markets represent to serve poor households, rural households, et cetera. I'll give you an example of a business that our firm invested in, which is an Uber of domestic workers in South Africa. And what this business does is it connects domestic workers, who are mostly poor women living in townships to employers living in urban areas. And what the business does is it formalizes employment providing these domestic works with rights and providing the employers with some protection on terms of, you know, identification, et cetera, et cetera. And so we're finding entrepreneurs that are seeing failures in the market from a social economic equality perspective and finding the solutions from a business perspective to address those failures. That’s really very exciting. But the social entrepreneurs are clearly challenged because they are faced with a lot of regulatory barriers. If you're looking at growth, our markets tend to be small, so growth strategies need to be regional. There is certainly an important role for government and for the World Bank Group to begin to address these barriers to growth.
Heider: Is there a role of the World Bank Group and other development institutions? What can these institutions do differently in order to fully harness the potential of the private sector, and to mobilize more private capital in support of the SDGs?
McGuire: I think the World Bank Group needs to keep doing what it has been great at over the years – and that is thinking about financial innovating and continuing to adapt so that you're putting forward products and tools that allow others to come in and see opportunities. Let me give you a couple of quick examples of what the World Bank Group has done over time.
The Bank Group created the term emerging markets some 30 years ago and focused people on this set of countries, this set of markets that were really opportunities that were emerging and becoming bigger. That drove a lot of capital in that direction. Just in the last five to 10 years, it created offshore local currency bonds, Masala bonds and Panda bonds and so on. It's been a leader in harnessing the green bond movement and bringing more capital into thinking about environmental investments in various sorts.
My point is that there's a great track record already, and the question is let's keep looking around the corner. Let's keep figuring out what are the new tools, because what private sector investors and businesses are always looking for is what's out there. The thing you have to do is be okay with failing and realizing that some of this may not work.
Lund: Well, I think I'd build on what Matt said, keep doing what you're doing, but you're going to have to do it at a far, far greater, faster agile scale. So today, for every $5 of official development assistance to developing countries, there's $1 of private sector investment. To go from billions to trillions, by definition, you're talking about $1 of public money leveraging $10 of private. So you're going from five to one, to one to 10, that's a 50x change. I think the products are here. The ideas are here, but now, it's doing everything at a much faster larger scale than what's been done. It can be done, but it's building on the successes and amplifying it in just a very massive way.
Lankes: Yeah, I think is a very good question. We're talking about all of the money that might be available to finance projects, but very often, the real problem bottleneck is the availability of good projects to invest in. And that is something that's been recognized in recent years as a very pressing concern. It's been recognized in the G20 context. There was the creation of several funds to support upstream project preparation, the global infrastructure facility is one such response from a couple of years ago.
We have many tools that enable us both to work more hands-on with clients and governments in preparing projects and working on the environment for projects and in de-risking projects themselves. It doesn't mean that the problem has been resolved, but there definitely is far more going on. Can we do more? We probably would all have to do more and more of that in the future if we want to go from billions to trillions because it is not just about the availability of funds. It's about the availability of projects.
Watch interviews with event panelists Anne-Marie Chidzero, Matthew T. McGuire, and with moderator Caroline Heider.