MDBs reinvented

The forces of globalization are changing. And some populations remain at dire risk of being left behind. Can development banks and agencies mobilize their capabilities, capacity and capital to catalyze more equitable development?

Over the years, Multilateral Development Banks (MDBs) have played a critical role in helping developing economies address structural challenges and development goals. Now, many of the world’s leading MDBs and development agencies are rapidly evolving to meet the changing needs of their clients and the changing dynamics of the global marketplace.

Perhaps the most obvious change has been the shift towards catalyzing private finance and investment. “The AfDB believes that the mobilization of private capital is critical to closing the infrastructure financing gap in Africa. Developing markets know they need to attract private investors to their projects, especially given the limited fiscal space of African governments. And we are focused on supporting those efforts,” noted Solomon Quaynor, Vice President for Infrastructure, Industrialization and Private Sector with the African Development Bank (AfDB) at a recent KPMG Africa webinar on innovative infrastructure finance.

Many believe that the need for private capital to drive infrastructure development will only increase over the coming year. “The economic crisis has hit developing markets particularly hard. Governments will be forced to check their priorities and rethink how they can attract long-term private capital. I think all MDBs are now thinking about how they can be much more supportive of the private sector. AIIB plans to play a catalytic role in increasing private and other investors’ appetite for investing in emerging market infrastructure,” added Rajat Misra, Director General with the Private Sector Operations at the Asian Infrastructure Investment Bank (AIIB).

Many development organizations are now rethinking the way they achieve their mandates, interact with their clients and the private sector, and deliver solutions and services. “We have essentially modified our approach to encourage private sector participation in infrastructure to make it more comprehensive and holistic. There is now a lot more coordination between the IFC and the World Bank on country strategies, upstream reforms to unlock private investment and downstream innovation to produce solutions,” said Richard Cabello, Manager of Infrastructure Advisory at the International Finance Corporation (IFC), part of the World Bank Group.

Suzanne Gaboury, Director General of the Private Sector Operations Department at the Asian Development Bank (ADB) also notes increased internal collaboration. “Our One ADB approach is all about integrating solutions and combining our sovereign and non-sovereign operations with the objective of delivering better results for our clients. The approach has already proven to be very effective in quite a number of transactions.”

MDBs recognize that there is a lot of private capital sitting in global markets. And, while our recent report on the changing face of infrastructure in LATAM (PDF 5.5 MB) suggests there are a variety of cultural and institutional barriers to effective cooperation between public and private sectors, the bigger challenge is about creating bankable projects that meet the investment criteria to attract private investors in the first place.

“I don’t see capital as a limitation. Right now, the limitation is good projects. If you have a project with comprehensive technical studies, including environmental and social aspects, balanced risk allocation and bankable transaction structure, the capital will be there,” argued the IFC’s Richard Cabello.

Some are working to enhance specific capabilities in client markets. “We created Africa50 to provide leadership in developing bankable infrastructure projects. We also have several project preparation facilities within the institution that look at infrastructure project development at a national and regional level,” noted Solomon Quaynor with the AfDB.

At the same time, many MDBs also acknowledge it will require policy reform and regulatory change to improve the investment environment for private participants. “Markets with developed and transparent regulatory environments tend to attract more private sector investment. We want to help build that enabling environment that creates opportunities for the private sector and sustainable development for the countries themselves,” added the ADB’s Suzanne Gaboury.

Innovation has also been spreading into financial instruments and models. “In the short space of five years, we’ve done almost everything – bonds, equities, funds, pure credit finance, partnerships, standalones and, of course, nationals. I would say we are open to all kinds of new products,” noted Rajat Misra at AIIB.

“We’re looking deep into our toolbox to come up with innovative solutions. We’re working closely with member governments, donors and DFI partners to look at how we can work together to find new ways to assess and manage those risks that the private sector is often unwilling to take,” added Gaboury.

For the AfDB, a significant part of the focus is on unlocking local currency sources of capital. “They are often ignored, but Africa’s pension, life insurance and sovereign wealth funds represent important pools of capital that can be unlocked through credit-enhanced local currency bonds, for example,” said Quaynor. “That, in turn, can help reduce the currency risk that often challenges local projects.”

Looking ahead, some MDBs are starting to explore the advantages of taking a ‘platform’ approach to catalyzing investment into markets and sectors. “The idea is really to create a good PPP model within a specific sector, test the model in few projects, standardize transaction documents and then leave it to the government and private sector to replicate in future transactions,” noted Cabello. “That’s what we did in Colombia’s Fourth Generation Roads program and what we are doing in the roads program in Brazil.”

“As much as you may want to, you can’t do everything at once. We’ve been working with governments to choose certain sectors and then helping them to create the right risk environment in which private investors can participate. Once it gets to the appropriate stage, the private sector would step in to start financing those projects on their own,” added Gaboury. “It’s something we are keenly exploring.”

Ultimately, interactions and conversations with MDBs suggests that the sector has put tremendous effort into rapidly evolving, modernizing and enhancing their approaches to achieving their mandates in infrastructure. Yet, as Suzanne Gaboury noted, “there is always room for more work and innovation.”

MDBs know they must reinvent themselves if they hope to address not only the existing emerging market challenges, but also the opportunities being created by the new global economic order. Clearly, MDBs have a critical role to play in catalyzing private investments and being an effective bridge between the public and the private sector.