Meeting the Sustainable Development Goals (SDGs) requires raising trillions of dollars on an annual basis. Public resources and Official Development Assistance (ADA) will not be enough to finance the SDG agenda. Now there is the additional challenge of finding the resources to cope with the multiple consequences of the Covid-19 pandemic. Mobilizing private capital has a critical role to play in filling the investment gap.
In 2015, Multilateral Development Banks (MDBs) committed to adopting a financing framework capable of unlocking, leveraging, and catalyzing more public and private financial flows. A framework where financing from private sources, including capital markets, institutional investors and businesses, has become paramount to mobilize the trillions in investments needed.
In 2017, the World Bank Group (WBG) adopted a definition of private capital mobilization (PCM), jointly agreed with other MDBs and Development Finance Institutions (DFIs).
The WBG’s Independent Evaluation Group (IEG) released its first systematic assessment on how relevant and effective the Bank Group has been at channeling private capital for development, the factors that have driven results, and opportunities for the future.
IEG’s evaluation finds that the WBG has deployed efforts across its institutions (IBRD, IFC and MIGA) to mobilize private capital either through project level co-financing and/or through pioneering mobilization instruments and platforms. Bank Group PCM approaches have proven to be relevant and have delivered results. In fact, the WBG remains one of the largest contributors to PCM, with about $32 billion mobilized in low- and middle-income countries in 2018.
What factors have been driving results?
Several WBG instruments and platforms have been effective in achieving development objectives through PCM.
For example, World Bank Guarantees have achieved positive outcomes by reducing risks and improving projects’ bankability at the commitment stage. Creating the right conditions to attract private investments has led to increased financing for key infrastructure and services, benefitting people around the world when these projects reach maturity.
IFC syndicated loans have increased client firms’ access to finance and debt, and bond mobilization platforms have been effective in meeting client and investor expectations. MIGA has also been successful and has positioned itself well among MDBs in addressing PCM thanks to its new products (e.g. Credit enhancement) and the share of its exposure that gets reinsured allowing MIGA to offer more guarantees. These new products and guarantees have successfully mobilized private investments for projects ranging from power generation in Sub-Saharan Africa to capital optimization projects in Latin America and the Caribbean.
Bank Group client countries have large untapped potential to crowd in private capital. IEG modeled estimates suggest most Bank Group client countries are attracting only 50-80 percent as much private capital as they could. Unlocking this potential will be especially important to fund the recovery from the pandemic and get back on track to the SDGs.
Evidence shows that projects with domestic investor participation, MDB involvement, and World Bank–IFC–MIGA collaboration have better PCM project outcomes.
Domestic investors boost project success by engaging actively in the design and implementation stages and by bringing knowledge of the local market and regulations. Projects with domestic investor participation had greater success (80 percent) than those with overseas investors only (60 percent).
When other MDB’s are involved, more resources become available and there are shared environmental, social, and governance compliance requirements and monitoring systems to ensure greater quality of outputs and outcomes.
Evidence from energy sector projects indicates that concomitant World Bank, IFC, and MIGA interventions have a positive effect on PCM outcomes. These joint interventions involve either working sequentially as a project’s de-risking needs and financing needs evolve.
IFC and MIGA PCM approaches have created a demonstration effect, attracting repeat clients and increasing PCM levels. However, it is not easy to sustain private investment flows in the long term.
This demonstration effect of IFC and MIGA PCM approaches happens when IFC or MIGA support the expansion of an ongoing project or the involvement of an existing client in a new project. Investors’ repeat engagement indicates that they trust the Bank Group’s PCM approaches and believe that projects developed through the Bank Group will be sustainable.
It takes time and sustained investment, however, to generate sufficient levels of PCM to trigger a demonstrable increase in countries’ overall private capital flows. It is also essential for governments and the Bank Group to continue to support business environment reforms post-PCM and to address constraints that may limit private investments in the long term.
What opportunities lie ahead for PCM in the future?
Bank Group client countries have large untapped potential to crowd in private capital. IEG modeled estimates suggest most Bank Group client countries are attracting only 50-80 percent as much private capital as they could.
Unlocking this potential will be especially important to fund the recovery from the pandemic and get back on track to the SDGs. Both traditional Bank Group PCM solutions (for example, World Bank and Multilateral Investment Guarantee Agency guarantees, trade finance, and short-term liquidity facilities) and countercyclical approaches (for example, the Distressed Assets Recovery Program) can continue to play important roles in mobilizing private capital in light of the ongoing pandemic.
The Bank Group has the potential to help create a more attractive environment for private capital by supporting public policy changes, addressing the lack of a pipeline of bankable projects, and increasing collaboration with other MDBs and DFIs on PCM efforts. This requires the Bank Group to expand existing PCM platforms and approaches, to support policy reforms and disaster risk financing and to continue to innovate and develop new products aligned with the needs of new investor groups and partners.