Mobilizing private finance towards development

To progress towards meeting the Sustainable Development Goals, multilateral development banks help mitigate risk and pave the way for other investors to enter new markets.

Mobilizing private finance towards development

It is no secret that the world is playing catch up when it comes to financing the Sustainable Development Goals (SDGs). A new UN report is warning of the pressing need to revamp the global financial system in order to reach the SDGs. Globally, an estimated US$5-7 trillion is needed annually to meet these ambitious targets by 2030. SDG 17 itself includes a target to “mobilize additional financial resources for developing countries from multiple sources”. However, at current levels of public and private investment, developing countries fall short of this projection by US$2.5 trillion a year.

How can we fill this funding gap?  Much has been said about the need for the private sector to step up to this immense challenge. After all, with an estimated US$79 trillion in global assets under management alone, for example, there is no shortage of private capital. The challenge lies in connecting private investors’ risk and return expectations with investment opportunities in sectors such as infrastructure in developing markets, which is no small feat.

Mitigating risk, paving the way

This is where multilateral development banks (MDBs) come into play, helping to mitigate risk and pave the way for other investors to enter new markets. But how successful have they been in this regard? Are MDBs up to the task of mobilizing more private investment towards meeting the SDGs?

We believe the answer is yes. A recent study developed jointly by economists from the IDB Group and the International Monetary Fund estimates the mobilization effects of MDBs. In other words, when MDBs lend to a private borrower in a given country or sector, does private investment follow, either directly in the same deal or indirectly by responding to market signals?

To answer this question, the study used loan-level data on syndicated lending (e.g., loans provided by a group of lenders that share risks by pooling capital together) to a sample of over 100 developing countries from 1993 to 2017. The sample covers nine sectors, with the majority of loans going to finance, infrastructure, and manufacturing. This approach made it possible to pinpoint new loans in a given country and sector that came in after an MDB had already provided co-financing in a syndicated loan in the same country and sector.

The results indicate that the number of loans, the amount of syndicated lending, the average number of lending banks per loan, and the average loan maturity all increase following the presence of a syndicated loan with MDB participation in a given country-sector-year combination.

The average effects are also economically sizable and last for at least up to three years. For example, having at least one syndicated loan supported by at least one MDB is associated with a cumulative increase of syndicated loans amounting to 0.16% of GDP over a three-year period. In other words, private creditors were providing more and bigger loans in developing countries, with the average size of their syndicated loans increasing by 1.5 times following MDB participation in a syndication.

Additionally, in the infrastructure sector, the mobilization effect spurred by MDB participation increases the average maturity of syndicated loans by 0.81 years. This finding is particularly relevant given the sector’s long-term financing needs, and these results are substantial even in subsequent years.

What studies say

To address concerns about other factors that could possibly affect the results, the study includes a series of tests to verify the veracity of the findings. For example, no evidence was found of anticipation effects causing MDBs to go into markets that were already receiving more and larger syndicated loans.  And, it was confirmed that the mobilization effects observed were indeed driven by MDBs and not by other players in the syndicated loan space, such as large global banks, Chinese lending, or aid flows.

All in all, while these results confirm that MDBs have played a key role in mobilizing private investment, much more can be done to enhance their catalytic abilities. As international commercial banks continue to rationalize their use of capital in developing countries as a result of tighter regulations, the focus is shifting towards mobilizing funding from institutional investors. Though these investors often look for greater risk-sharing from MDBs or blended finance sources. So perhaps MDBs should start taking on more risk than they typically do in order to get more institutional investors on board.

Ongoing efforts are also underway across MDBs to design and deploy new financial and non-financial tools capable of channeling more private finance towards development, such as bond products, specialized investment vehicles, and unfunded credit protection products.

Surely, as the World Bank Group-IMF Spring Meetings kick off next week, enhancing mobilization approaches to meet the SDG financing challenge will be top of mind.■

Authors

Alessandro Maffioli

Alessandro Maffioli is head of the Development Effectiveness Division at IDB Invest. During his years of at the IDB Group, Alessandro has coor

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