-The following is an extract from the Unlocking Investment and Finance in Emerging Markets and Developing Economies (EMDEs) World Bank program with Federica Dal Bono
Hi! We’re gonna talk today about the IDA private sector window. The International Development Association or IDA is the part of the World Bank group that helps the world’s poorest countries. Overseen by one under seventy three shareholder nations IDA aims to reduce poverty by providing loans called credits and grants for programs that boosts economic growth of reduce inequality and improve people’s living conditions. IDA delivers a long term financing through three year capital replenishment from its development partners Credit with payments from IDA clients and internal resources. Recognizing the critical role of private sector in achieving the sustainable development goals by two thousand and thirty as part of the IDA eighteen replenishment IDA donor countries and the word bank group created a two point five billion private sector window called PSW. As an innovation in the development finance the IDA private sector window two is a tool to catalyze private sector investment in the poorest and most fragile countries.
The PSW provides an option when fully commercial solutions are not yet possible and when none of the other World Bank group financial instruments are sufficient to advice the decrease constraints faced by the private sector in IDA only and IDA eligible fragile and conflict affected countries or so called FCS. Since inception the private sector window resources are supported that are being committed to support equity funds bonds smaller businesses renewable energy infrastructure housing development and other job generated sectors. The pipeline of proposed IFC and MIGA investment guarantees seeking as IDA P. S. W. support to strong and growing. So how does it work? Typically IFC and MIGA invest in emerging markets and developing economies in project at the time risk return profiles within their normal risk acceptance criteria. Often projects in the poorest and the more fragile countries do not meet IFC and MIGAs risk acceptance criteria as they are considered too risky.
So the PSW allocation allows IFC and MIGA to invest that and guarantee private sector into the riskier markets so by improving the risk return profile of the projects. The two point five billion is not transferred to IFC and MIGA respective capitals a rather a source of co-investment co-funding co-insurance to the risk projects and enable IFC and MIGA to support projects outside of the normal risk acceptance criteria. In IDA only and IFC country both IFC and MIGA make investments and provide guarantee from their own capital at the same time in these projects. So they’re always part of the project themselves. PSW is used judiciously to improve the risk reward profile of private sector project that otherwise would not be possible and have the potential for high developmental impact. Both IFC and MIGA look for commercial solution before requested PSW support consistent with the maximized finance for development or cascade approach. Project need to meet a few strict criteria to be eligible for PSW. This criteria include the following First there has to be a strong rationale for blended concessional finance and additionally. Second the project must crowding-in other investments along with those of IFC and MIGA and the concessional must be kept to a minimum.
Third the project must be commercially sustainable – meaning it should not be dependent on PSW after the initial investment period or along the life of the investment itself. Fourth the project must create or reinforce market. For instance several PSW investments are creating a mortgage market enabling affordable housing for low and middle income population in IDA countries something that is unprecedented in these countries. Last the project should promote high standards including social environment and governance. PSW includes four distinct facilities or instruments address in different types of investment constraints in the most difficult markets.
The first is a blended finance facility which includes loans subordinated debt equity guarantees and risk sharing facilities for high impact project and pioneering investments.
Second is the local currency facility which provides local currency denominated loans to private sector clients who operate markets where there are limited currency hedging capabilities for high impact investment with currency risks?
Third is the MIGA guarantee facility which offers MIGA political risk in short PRI products to private sector investment in markets currently underserved by political risk insurance and reinsurers. Fourth is the risk mitigation facility which provides project based guarantees without concurrent indemnity sign to between IDA because government took and provide coverage of off-taker termination payments or breach of contract risks over a specific period of time and they supply normally to large infrastructure investments and public private partnerships. Examples of projects that are being undertaken by the private sector window.
A very interesting project in Afghanistan supported by the MIGA guarantee facility with the support of the world bank group if allow the family owned company re-created a food processing company to be in the state of the hot process the planting the kabul province. It is expected to nearly double the country raisin processing capacity in a house three thousand small scale raisin farmers to improve yields and incomes.
The IDA P.S. W. MIGA gurantee facility will cover a portion of MIGAs exposure to the project enabling this investment that for to go forward. The processing plant will use laser-sorting technology never before available in Afghanistan to produce raisins that are calibrated to fit the size and colour specification that are important for international buyers. This will help boost export to the wholesalers and retailers and important markets like Eastern in European and central Asian countries which is also unprecedented for Afghanistan raisins. And now that example of the private sector going to support the project is through the blended finance facility that is helping a SME ventures fund attract more private sector investors and reach more SMEs so small and medium sized enterprises in this very difficult market.
So across much of the Sahara and sub-Sahara in Africa the SME financing copies are enormous especially in the region’s poorest and more fragile economies. IFC help in address this program by providing access to risk capital and helping to create local private equity markets for SMEs. As through it’s a SME ventures program and IDA private sector window we are investing seven point five million in investisseurs and partenaires and Afrique Entrepreneurs.
These businesses typically too large to be served by a microfinance institutions yet too small and too new for support from commercial banks will be in a range of sectors including on the business transport and construction. Access to capital will help them expand and improve their operational efficiency and profitability allowing them to contribute to job creation and economic growth. This investments help in promote the new generation of African entrepreneurs. Let’s go now to another example of the project supported by PSW under the local currency facility.
We’re looking at the project to improve the mortgage finance market in West Africa. The issue of affordable housing continues to present an increasing challenge in West Africa economic and in the area of the UEMOA or West African economic and monetary union countries in the region face a shortage of about three point five million housing units only less than seven percent of households in that region can afford to do own their home. Ninety four percent of people do not have access to housing finance and an estimated sixty two percent of the population live in urban slums. IFC and IDA have been working with the housing sector in UEMOA through strategic engagement with the Caisse Regionale De Refinancement Hypothecaire or CRRH in mortgage refinance company indeed was established to albeit the private sector led housing finance marketing in all the eight countries or the UEMOA union. The private sector window provided the local currency finances for this investment which aims to help overcome many challenges associated with expanding the mortgage finance marketing West Africa. To conclude this session the IDA the private sector window plays an important role in mobilizing the much needed domestic and international private investments in the poorest and most Fragile markets.
It supports IFC and MIGA strategy to create markets and mobilized private sector where it is needed most. For priority such as infrastructure jobs and more equitable growth and that the private sector window complements existing instruments were the World Bank Group already provides to public and private sector clients alike including the creative markets advisory window which helps company become investment trendy. So in conclusion the private sector window is IDA own take at maximizing finance for development. In an international environment though where the amount of the development assistance are not expected to increase in the coming decade. The utilization of a blended finance resources so such as the private sector window can have to mobilize this so much needed investments in the most difficult environment to reach out to the poorest people by providing goods and services that otherwise will be missing.