-Unlocking Private Finance and Investment in EMDEs With Hans Peter Lankes
By adopting the sustainable development goals the SDGs in two thousand and fifteen all countries have committed to tackle global challenges and to improve the lives of the poorest citizens of the world. But countries know that to do this will require going well beyond traditional financing models which are heavily focused on grant assistance. At IFC we are convinced that the private sector needs to play a much bigger role in delivering and financing development solutions. The challenge is creating the right conditions to catalyze private finance. The World Bank group has over seventy years of experience working with governments and with the private sector globally to facilitate private investment.
We do this through a comprehensive set of products and services. The World Bank group institutions that includes the IBRD IDA IFC and MIGA work in contract. They help countries transform sectors to support growth improve services and reduce poverty and inequality. We help to improve the enabling environment to develop regulatory conditions build capacity put in place standards finance first mover or innovator and reduce risks. Private finance can become without support for reforms an option for countries that have not been able to access it without the right institutions or markets.
We help countries strengthening their policy and regulatory environments and to develop to develop their private sectors and find private sector solutions where viable. At the national level the bank group helps governments implement changes to improve their investment climate. World Bank group also supports small and medium sized enterprises SMEs through tools to improve their access to finance and markets as well as unlock new sources. IFC has also developed new approaches to create markets and scale up investment in emerging markets in developing economies for financial and developmental impact. Creating markets requires a detailed understanding of the constraints to private sector solutions and a deliberate strategy of interventions across the World Bank group.
Over the past two years IFC has invested heavily in strengthening its analytical capacity deploying several new diagnostic tools including country private sector diagnostics CPSDs country strategies and sector deep ties. Another tool that supports IFCs creating markets strategy is new as new as well the anticipated impact measurement and monitoring framework AIMM which is strengthened IFC’s ability to assess and select projects with the biggest creating market potential. Specifically creating markets is IFC’s approach to enable the development of new markets or systemic changes to existing markets to deliver sustainable development impact. More competitive resilient integrated inclusive and sustainable markets are created by either putting in place frameworks that enable markets to function by promoting competition which can cause other market players to up their game by innovation or leveraging of demonstration effects replication and the general spillover of ideas and creation of new productive networks.
And fourth by building capacity and skills that open new markets opportunities. World Bank Group offers several insurance and guaranteed mechanisms to help mitigate the risks for private investors and make projects bankable. For example IBRD. And IDA offer guarantees to help attract all forms of commercial financing to developing projects by protecting financiers against defaults by a government its political and administrative subdivisions and all other public sector entities. And MIGA guarantees cover project equity and other forms of financing mainly to promote cross border investments. And IFC’s guarantee tools mostly cover debt products issued by its private sector clients.
They include partial and full credit guarantees as well as risk sharing facilities. Finally the managed co-lending portfolio program MCPP creates loan portfolios that mimic segments of IFC’s own future portfolio like an index fund. To date eight investors have pledged over seven billion US dollars to the program with about four point eight billion US dollars already allocated. Blended concessional finance is one approach we are using to encourage private sector investment in more risky markets. This is done by blending concessional funds typically from a development partner with IFC’s commercial funds. Blended finance enables investment in potentially transformative projects in sectors that were otherwise unable to attract commercial funding but have the potential to become commercially viable.
Concessional funds are deployed selectively and to avoid distorting markets IFC uses a disciplined and targeted approach. We follow five principles for blended finance which have been agreed by most development finance institutions. First there must be a clear rationale for blended concessional finance and additionally. Second there must be additional private investment crowded in and the minimum possible use of scarce concessional funds. Third the investment must be commercially sustainable. Fourth it must reinforce markets and fifth it must include and promote high standards including in the areas of corporate governance environmental impact integrity transparency and disclosure.
One example is the new IDA private sector window known as IDA PSW. In two thousand seventeen two and a half billion dollars was allocated to the private sector window to allow IDA to take direct exposure for the first time to private projects to support pioneering investments in low income countries. In Cameroon IFC and the World Bank have worked for several years with the government and with private sector partners to deliver a privately financed hydro power plant the largest in Africa that took many years of work in in order to get the regulation straight in order to ensure that environmentally and socially everything was in order to ensure
that the government at the risk taking capacity to do that and to provide instruments such as those from blended finance that gives the comfort to private investors to take that step. Let me take another example in Madagascar a very small project Bovima in which we have invested to enable Madagascar’s life for livestock sector to enable Madagascar’s life for livestock sector to meet higher standards and start exporting it has that potential. With the instruments that we now have with our collective willingness with our capabilities we are able to mobilize the private sector for development. We are able to achieve the sustainable development goals that we have all set for ourselves. We can make it.