IEG Findings and Conclusions Country strategies can be used to discuss private capital mobilization (PCM) opportunities and priorities, including in lower-middle-income and low-income countries. 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 World 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 Global Practice (GP) scorecards is important for the institution to reach its 2030 targets. The International Bank for Reconstruction and Development (IBRD) needs to cascade PCM objectives to the Regions and Practice Groups, with clear incentives for operational units to meet them.
IEG Recommendations 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).
Acceptance by Management Disagree (IBRD).
Management Response Management does not agree with IEG’s recommendation that “IBRD needs to cascade PCM objectives to the Regional units and GPs, with clear incentives for operational units to meet them.” The volume of private capital mobilized could fluctuate significantly year to year, owing to its opportunistic nature as well as whether projects supporting country programs are well suited for PCM efforts. The World Bank’s corporate target for PCM has been set as an average over fiscal year (FY)19–30. Within this context, both the target stated in the IBRD capital increase and the World Bank’s commitment to the MFD approach has been inculcated in the Regions and Practice Groups, and Country Partnership Frameworks are being used to discuss opportunities for private sector involvement and MFD. In relation to strengthening staff incentives, we acknowledge the need to continue improving the tracking system for private indirect mobilization and to recognize private capital and other funds mobilized along with IBRD and International Development Association (IDA) resources. That said, it is neither practical nor advisable to cascade down the corporate target for PCM to the Regions and the GPs owing to the nature of PCM described above; doing so could even be counterproductive to development as it could favor one approach over another.
IEG Findings and Conclusions a. 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 Asset Management Company (AMC), the Managed Co-lending Portfolio Program (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.
b. 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.
IEG Recommendations Recommendation 2. Expand PCM platforms, guarantees, and disaster risk management products commensurate with project pipeline development (Bank Group).
Acceptance by Management Agree (IFC); Agree (IBRD).
Management Response IFC response. IFC management acknowledges IEG’s conclusion that mobilization platforms are in place to channel third-party mobilization and that the successful deployment of that mobilization capacity is a function of the pipeline that IFC generates. Whether recently through the Asset Management Company (AMC), the Green Cornerstone Bond Fund (GCBF), or the MCPP or six decades ago starting with the B Loan, IFC has demonstrated its ability to customize products and pioneer platforms that meet the needs of different types of investors and to create the conditions necessary for actually delivering capital from new investors to its clients at scale.
IBRD response. World Bank management agrees that it is beneficial to consider enhancements to the PCM platforms. However, it is not clear how IEG has identified and defines “room to grow” when referring to the use of these instruments and platforms as the statement is general and not contextualized. Nonetheless, the World Bank has consistently demonstrated appropriate and informed use of the PCM platforms to effectively and efficiently address client needs. Efforts have already been made in response to the coronavirus pandemic (COVID-19), and medium term and sustainable options have been considered. One such example is use of the disaster risk management product. The Bank Group has learned that after a disaster, quick access to predictable financing is critical for emergency response, as even small delays may cost lives and livelihoods. This is how the World Bank’s development policy financing with catastrophic deferred drawdown option (Cat DDO) instrument was developed. In FY20, Cat DDOs were triggered in eight countries, providing over $1.2 billion in immediate financing for countries responding to COVID-19. Another example is public-private partnership (PPP) arrangements. To provide governments with strategic short-term advice on the impacts of the pandemic, the Public-Private Infrastructure Advisory Facility, in collaboration with the World Bank’s Infrastructure Finance, PPP, and Guarantees Group, established a rapid response program. Phase 1 has already been deployed. Through this program, national PPP units, ministries of finance, sector ministries, and utilities can request short interventions of remote, targeted technical advice to undertake a fast assessment of the impact of COVID-19 on their PPP programs. It is important to note that these efforts and the manner in which they were structured was in response to demonstrated need and based on in-depth knowledge of the specific markets and institutional contexts for which they were designed. Expansion of these products in response to critical need was achieved through innovation, selectivity, and coordination. Management will therefore encourage the most effective and appropriate use of available PCM products and platforms to address client needs.
IEG Findings and Conclusions
- 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 emerging markets and developing economies 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 emerging market and developing economies 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 emerging markets and developing economies 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 lower-middle-income and low-income countries. Such opportunities can be translated into innovative new MIGA products. 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.
IEG Recommendations Recommendation 3. Develop new products and improve product alignment with the needs of new investor groups and partners (for IFC and MIGA).
Acceptance by Management Partially Agree (IFC); Agree (MIGA).
Management Response IFC response. Recommendations with regard to product development and investor engagement would have been more instructive if set in a demand-driven context, including specific consideration of the nature of the investor and the context of the asset class. The rationale for recommendations focusing exclusively on institutional investors is not clearly articulated or explained, nor is there any definition provided to help segment different forms of institutional capital (there is no definition of a “sophisticated investor” or what it means to “prefer complex products”).
IFC suggests that the challenge is not to develop “simpler products with solutions comparable to their existing portfolios” but to create mobilization products that are designed to specifically enable investors to channel financing to the types of projects financed by IFC and to provide comfort to enable greater investment in the markets in which IFC is strategically focused. Such a process would not lend itself automatically to simplified products. In fact, IFC’s experience suggests the opposite: that crowding new investors into new asset classes in markets that are aligned with IFC’s strategy is a complex undertaking, requiring proactive engagement with a wide range of partners and long-term research and development.
Finally, IFC management acknowledges IEG’s conclusion that appropriate staff resourcing is an essential condition for mobilization. IFC emphasizes that financial structuring skills predominate at IFC and would further note that it has created focused resources to specifically support its major mobilization activities. It also reflects a commitment to continue to innovate and develop products to support additional investor participation and maintain its market leadership.
MIGA response. MIGA agrees broadly with the recommendation. MIGA recognizes that to deliver on PCM, and more broadly its FY21–23 strategy focused on IDA countries or fragile and conflict-affected situations and climate finance, the Agency will need to increase its innovation and new product applications. The market for supporting foreign direct investment is limited—foreign direct investment itself is flat or shrinking—and MIGA already has a significant share of its addressable market, especially in its core priority areas. The Agency is already exploring opportunities for six product application innovations, although these will progress at different speeds, especially in a post–COVID-19 context, and not all may be ultimately scalable for impact. MIGA is already developing product application innovations in the areas of capital markets, local currency, trade finance, and support for local investors. To help foster innovative approaches, as well as to continue to grow its existing PRI and nonhonoring product opportunities, MIGA will closely and systematically collaborate with the World Bank and IFC, including to leverage their expanded upstream work, which is expected to generate more investable transactions. In addition, MIGA will strengthen its partnerships and collaboration with other MDBs, as well as export credit agencies, to offer more complementary and comprehensive products and solutions.
- Referred to in this report. “Bank Group PCM instruments and platforms fall into five broad categories. They are (i) debt mobilization, (ii) equity mobilization, (iii) bond mobilization, (iv) guarantee-linked mobilization, and (v) advisory mobilization (primarily via public-private partnership [PPP]). . . . Both instrument approaches and platform approaches require a pipeline of development projects.”