The Role of Private Finance in Financing for Development
Economy, Opinion, Strategy

–Unlocking Private Finance and Investment in EMDEs With Jay Collins

The new SDGs are bold they are large and the estimated shortfall of funding is somewhere around three trillion dollars a year. That’s a lot of money. And with the success necessary and we’ll talk later about some of the specific financial solutions. But it really requires a paradigm shift and I’d give for is that first is there is a change in the world of an attitude that is that you can do good and do well at the same time. What I mean by that is that we used to think that financial returns and social returns were two separate things. The truth is if we’re going to achieve the objectives we have to think that financial returns and social returns can call in system back there it’s imperative that they do. The second recipe for success is a new era of public- private collaboration.

The fiscal constraints of the governments of the world will not allow them to fund the development objectives on the back of government’s balance sheets. So the private sector has to stop up into its role but more than that the public sector has to bear hug and embrace the private sector in a way that enables the private sector to achieve risk adjusted returns and many of these objectives. Three we have a game changing revolutionary technology in the world that can change everything from the environmental paradigm to the financial inclusion paradigm and we have to transfer that to the development challenge of our time. So these technologies exist whether they are big data whether they are broadband whether they are payment and collection electronic systems of the banking system digital mobile these technologies need to be applied to the development challenges of our time and finally and very importantly we need new models.

We need innovation and finance we need to try new things and be willing to come up with creative structures because three trillion dollars is an enormous gap annually and if we’re going to get that then we have to be innovative and very creative together. So the reason city talks about infrastructure as a paradox I often times call it a Rubik’s cube because we have an enormous demand for infrastructure investment the world right now could use some estimates as much as six trillion dollars a year and infrastructure investment yet we are only investing somewhere around three trillion a year in infrastructure. The worse than that the private sector component in an age of budget challenges of government balance sheets is only about four hundred billion. So the rest is done on the back of pure public sector without the cooperation support and financial capability of the private sector.

So the paradox is that we have governments all over the world that need growth capital and they need to grow their economies faster and infrastructure is a key component to it. And there are concept papers and ideas all over the world to get more done and yet not enough is happening and when we look at initiatives like power Africa and banks struggle with bankable deals in the power Africa initiative. The paradox is really how do we get this done and one of the most important complexities to this is the new regulatory environment. So Basel three with the purity of its objective to prevent another financial crisis for the banks actually to finance on their balance sheets or long duration weaker credit project finance structures. And that means we have to turn to the capital markets we have to turn to pension funds and insurance communities that may not have the expertise that the bank market particularly in Europe had in the structuring and the taking of risk.

The risk needs to be segmented we need to place components of infrastructure risk to those that will take it and this isn’t easy. The paradox or the challenge of the Rubik’s cube is to be able to take what fits best on the bank’s balance sheet and in the bank market and give it to them what is best for development banks to them what is best for capital markets insurance companies pension funds to them and to really be able to segment risk and distribute it accordingly. This isn’t easy we have a world where local capital markets have yet to be developed with the depth and the sophistication that’s necessary to finance long duration local currency infrastructure projects. So we’re working on this and the great thing is that on the back of power Africa which was really a catalyst to the developmental institutions and others to think more about infrastructure.

We’ve had some other announcements we’re partnering with GIF which is the world bank’s global infrastructure facility and that’s designed to help take many of these projects that are in the early stage of development and help governments get them going and put additional finance into them were part of the sustainable development investment fund which is somewhat a misnomer because it doesn’t have infrastructure in its name but it’s highly geared toward infrastructure and put ourselves in a room brainstorm specifically where projects have moved far enough along to have the financial institutions the banks at the table structure is developed and prepared but where we can’t seem to get it done and to try and figure out together by putting smart people in the room around specific projects how we can get more done and we think this initiative is huge and can be game changing.

So infrastructure is a challenge that will not be met without capital markets. So of the four hundred billion at the private sector is actually doing only fifty the billion give or take is actually getting down through the capital markets and as I said earlier with Basel three challenges we need the capital markets not the banks to take us to a much larger amounts. so our structures as we play with this rubik’s cube you have to encourage the capital markets the project bond market to actually take more infrastructure risk and that’s gonna enable us to get much more done which is again going to be critical to meeting the SDGs.

Blended finance is a concept of mixing public sector social return objectives into financial return objectives of the private sector and mitigating risk by the public sector in a way that allows the private sector to participate and to achieve the kinds of financial returns that will allow them to achieve their financial objectives and to participate. So let’s take something like MIGA support structures so MIGA has been one of the largest if not the largest single component of a blended finance solutions in the world and it’s been largely guarantee structures right so putting MIGA guarantee into an infrastructure project that enables it to get done that type of financing city group for example in cooperation with OPIC has done two point six billion dollars’ worth of sixteen some different programs again OPIC comes in and takes rest guarantees some component of the funding structure and then citi and other banks participate that’s old school we still need that it’s critical and we will have concessions and we will have guarantees structures.

But a lot of what people are talking about with Addis is taking pure grant money think ODA and blending of that into private sector funded structures. That’s more ambitious and it’s more ambitious one because as you bring official development assistance with additionally parameters and complexities into the Max of highly sophisticated financial structures where financial participants are demanding returns risk adjusted returns on Addis complex but that’s really the blended finance options of the future. So if we can find situations where there is a demand for and the need for the ODA but that by putting ODA to work that we can actually bring in to a project into a structure may think social infrastructure.

The IFC’s progress and project in Bangladesh for example where the garment industry with the horrific experiences that they’ve had of we construction IFC was able to use a blended finance structure to actually help rebuild some of the real estate and buildings of the garment industry in Bangladesh. Those types of projects are going to be critical my own view of how we’re gonna get there though is going to be measuring the Development Bank community differently and by that I mean a multiplier of what capital the development bank community puts to work so that the scorecard of the departments or of the individuals in the development banks is actually about the mobilized capital not the amount of plates.

We have to have mobilized capital as the and objective and to understand that actually a smaller amount of riskier capital perhaps grant capital injected inter project can be the catalyst for several multiples of that capital actually being mobilized and that is the trick and the necessity if you will of the blended finance solution being achieved. One example if a developmental institution goes into a hundred million dollar project and in the old days may have considered putting a hundred million dollars to work itself. Well shame on you. There’s not enough developmental capital and with the constraints on actually the Development Bank capital itself we can’t get to the three trillion dollars a year in objectives if the development of community takes the four hundred million.

What the developmental community should do is say okay we’ll put seven ten twenty into that project and let the private sector do the rest. That’s going to crowd in the private sector and we need the private sector crowded in and we need the Development Bank community to be very specific about its limited capital and the use of it that allows a multiplier to happen and that’s why it’s actually going to be better to take a riskier component for seven or ten million in a structure and let the ninety three million be done by the private sector so as we talked a lot about how capital markets can help us get to the trillions of dollars necessary for development and it’s clear that the banks’ balance sheets the development banks balance sheets together aren’t enough we need capital markets and we need capital markets as I said in infrastructure the project bond market has to be there in the environment we’ve talked about green bonds the capacity of the capital markets will be billions as opposed to hundreds of millions.

We’ve talked about going beyond green bonds to thematic bonds. So Inter American Development Bank for example did with us and Eye bond focused on education youth and employment those types of thematic bonds targeted at SDG needs can allow us to raise multiples of what we would have been able to do before. We’re also talking about catastrophic bonds and what we’ve seen is an enormous success in catastrophic bonds in the natural disaster space and how we can actually fund or mitigate risk for countries around the world that are suffering from the impact of natural disasters.

We want to take that to the pandemic space and Dr. Kim of the World Bank has been talking about the Ebola fact and WHO and the next potential pandemic challenges of the world how are we going to finance that are how are we can get money quickly to prevent a pandemic from developing and stop it short by immediate funding. Again capital markets and concepts the deployed of natural disaster catastrophic bonds to the pandemic space are absolutely there. We just need to be creative with those solutions but again the capital markets will provide the kind of scale and size replica ability that we need to meet these objectives.

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