PCM approaches increase access to new financing sources for development projects and are highly relevant to achieving the SDGs. PCM approaches channel investors’ capital to developing countries and investee firms for the financing of large infrastructure and finance projects, in turn increasing access to energy, finance, and other services for households and firms. Many important operations relevant to the SDGs (for example, building dams to generate renewable energy) require investment that governments of developing countries cannot meet with public funding only. An important secondary benefit of PCM is that it saves Bank Group financial resources to channel to operations in sectors, such as social protection or health, that are not conducive to private sector investment. It thereby increases the efficiency with which Bank Group financial resources create development impact.
Bank Group approaches to PCM have been relevant and mostly effective for client countries. They partially meet investors’ expectations. Bank Group instruments were largely effective. World Bank guarantees had positive outcomes. IFC syndicated loans had positive effects on client firms’ access to finance. IFC debt and bond mobilization platforms, namely the MCPP and the GCBF, were effective in meeting client and investor expectations. Equity platforms such as AMC showed mixed results in meeting IFC’s development objectives (based on IEG’s 2018 meso evaluation of the IFC Asset Management Company). PPP advisory projects have resulted in a substantial role for domestic and South-South bidders from other emerging markets. MIGA has positioned itself well among the MDBs in addressing PCM thanks to its products (political risk insurance, nonhonoring guarantees) and the use of reinsurance.
Both external and internal constraints limit PCM. Several business environment constraints limit PCM, including poor governance and regulatory barriers to investors. Internally, IBRD PCM targets have not cascaded down to the Regional teams and Practice Groups: World Bank memorandums of understanding between Regional vice presidencies and GPs—and related scorecards—do not include PCM targets. Use of PCM instruments is limited by the amount of economic capital available and the risk appetite of the Bank Group institutions, by the complexity of design, and by the skills and knowledge of the staff.
Enabling environment reforms are often success factors for PCM and should be sustained. Bank Group–supported reforms that address both sector and macroeconomic constraints are more successful than other, less comprehensive reforms. However, PCM opportunities also arise in lightly regulated environments and in the absence of extensive upstream reform efforts by the Bank Group.
There are opportunities to scale up PCM, especially among LICs and LMICs. IEG’s efficient frontier analysis suggests that, given investment climate and income levels, private capital flows (including FDI, portfolio, and private sector borrowing) are at only 50–80 percent of their potential. This suggests that there are opportunities to increase PCM across all client countries.
COVID-19 may dim the prospects for certain traditional PCM instruments, like the B loan program, but increase the potential for other PCM instruments and platform approaches. In view of COVID-19, World Bank guarantees will likely be in greater demand to support new project financing or refinancing efforts. Treasury advisory efforts in support of client governments’ pandemic responses will become a priority. A pandemic crisis response that includes issuances of World Bank and MIGA guarantees, expansion of short-term liquidity facilities, IFC’s Distressed Assets Recovery Program, and innovative forms of local currency facilities and rescue financing efforts through PCM approaches would be highly relevant to the COVID-19 response. Similarly, as equity valuations drop, investor and client interest for long-term commitments to private equity could increase (BlackRock Investor Pulse Survey, March 2020), leading to greater demand for PCM platform approaches. At the same time, traditional PCM instruments such as the B loan program would face reduced demand as commercial banks and investor partners reduce their EMDE exposure.
For the Bank Group to increase the relevance and effectiveness of PCM approaches, IEG recommends the following:
Recommendation 1. To meet the 2030 PCM targets, prioritize client countries for PCM approaches, with corresponding targets cascading to the Regional units and GPs (for IBRD). Country strategies can be used to discuss PCM opportunities and priorities, including in LMICs and LICs. Given the variation in the roles that different types of private capital play in different income groups, it is important to tailor programs to countries’ individual characteristics and target mobilization efforts at specific types of private capital flows. In many countries, upstream sector and policy work to support legal and regulatory reforms for financial sector deepening remain critical to PCM and investors’ interest. Ensuring that reforms are supported over time—including after private capital is mobilized—is essential to ensuring sustainability of the PCM approaches, replication, and demonstration effects. The Bank Group needs to respond flexibly and quickly as development opportunities arise. Furthermore, ensuring that the World Bank includes PCM targets in its Regional and GP scorecards is important for the institution to reach its 2030 targets. IBRD needs to cascade PCM objectives to the Regions and Practice Groups, with clear incentives for operational units to meet them.
Recommendation 2. Expand PCM platforms, guarantees, and disaster risk management products commensurate with project pipeline development (for the World Bank Group).
- Expand existing PCM platform approaches (in IFC). Much of the internal narrative on PCM has been about bankability of projects, which favors a debt approach. However, the heterogeneity of clients and investor constituencies suggests that a strong pipeline of investable and insurable projects is required to expand the scope and scale of current PCM approaches,, including IFC platforms such as the AMC, the MCPP, and the GCBF. For example, the insurance industry has the capacity to fund long-term infrastructure projects (given the asset-liability match) and support green initiatives. Private capital raised through the AMC or the MCPP platforms meets the necessary condition to mobilize private capital. However, the necessary condition is met only when a healthy pipeline of projects is developed in proportion to the private capital raised in the form of funds and those projects achieve their development outcomes.
- Expand PCM approaches to support policy reforms and disaster risk financing, leveraging Treasury and advisory capabilities (in IBRD). For IBRD, guarantees have been the primary instrument for PCM. There is room for them to grow, especially instruments tied to client reforms. World Bank disaster risk management products and programmatic PPP solutions are experiencing a renewed demand and could be scaled up with support from the World Bank Treasury and Infrastructure, Public-Private Partnerships, and Guarantees units.
Recommendation 3. Develop new products and improve product alignment with the needs of new investor groups and partners (for IFC and MIGA).
- Simplify products for most institutional investors. Although IFC has developed complex instruments and platforms to mobilize private capital, it has not fully developed its approach to institutional investors. To engage with institutional investors, IFC needs to accept their investment objectives, project parameters, decision-making processes, and industry best practices. These may stand in contrast to those on which IFC has achieved the current platform deals with the MCPP and the GCBF. Most institutional investors lack the capacity to work with complex Bank Group instruments and platforms and develop custom portfolios. Simpler products with solutions comparable to their existing portfolios but with exposure to EMDEs are relevant to these investors.
- Maintain leadership in products for sophisticated investors. A small group of sophisticated investors prefers complex products, such as securitization of EMDE projects. Hence, scaling up Bank Group PCM operations requires making trade-off decisions within and across the various instruments and platforms. IFC can continue to maintain its leadership in this space if it staffs and resources these platforms appropriately, for example, by adding IFC advisory services offerings to increase capacity and knowledge in new EMDE issuers.
- Continue to innovate instruments. Global and regional clients also seek innovative instruments, for example, to better support local currency financing through pooled currency facilities. Certain innovative approaches require projects to engage with credit rating agencies. Green financing and new instruments addressing climate change require working with international consortia, research and rating agencies, and data providers. There is market demand for political risk guarantee solutions that offer comprehensive coverage or support collective investment vehicles targeting LMICs and LICs. Such opportunities can be translated into innovative new MIGA products. MIGA’s latest strategic business outlook provides an outline for six new applications. Pilot approaches using innovative instruments and better investor alignment can help scale up PCM and improve outcomes.
- Conduct regular reviews. Risk assessments of each instrument and platform, analyzing implications for the three institutions’ balance sheets and determining the corresponding financial needs, are required before scaling up. PCM instruments and platforms’ alignment with investors’ risk appetite, internal capacity, and engagements over time need to be reviewed, as they are for client countries and client corporates.
Implementing these recommendations will increase the likelihood that the Bank Group will meet its PCM corporate targets and make significant contributions to meeting the SDGs and development more broadly.
- Investable projects are those seeking equity investments.
- Insurable projects are those with insurable risk.