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Moving support to developing countries from billions to trillions cannot be done through official grants and lending alone. The bulk of the additional money must come from the private sector. While relatively high yields on projects in developing countries should attract international capital flows, the trends are not positive, and amounts are not at the magnitude needed. MDBs and DFIs are the key intermediaries in accelerating the flow of these funds as they offer to the private sector substantial expertise in finding, framing, financing and evaluating projects in developing countries.
CGD is working with both the private sector financiers and MDB/DFI officials to gather information, formal and informal, to 1) uncover the blockages to increased international capital flows for development; 2) propose concrete changes to MDB/DFI policies and procedures that could facilitate these flows; and 3) open new pathways for the public and private sectors to interact so that private investment in developing countries accelerates.
A key element of the scaling up is how DFIs will use blended finance—traditional market-term financing combined with concessional finance—to speed up investment in riskier projects with more development impact. In this area, the primary questions are:
There is an urgent need to change PSW business models to maintain their financial sustainability while doing much better on mobilization and development impact. Two factors are critical for meeting this challenge: enhanced risk management capability and greater flexibility regarding risk-adjusted returns.
Last year the World Bank adopted a new “cascade” approach that intended to maximise finance for development by prioritising private solutions wherever possible. In what world would this “cascade” algorithm make sense? Without a good answer to that question, the cascade risks looking like ideology rather than sound development finance advice.
Since the 2015 financing for development agreement, donor governments and their development finance institutions have all been singing from the same hymn sheet: we must do more to mobilize private investment. Here I will argue that setting leverage targets in isolation might not get us what we want: more investment in developing countries. Overall investment volumes in chosen markets may make a better target, but any incentives must be soft to minimize the temptation to put public money where it is not needed.
Development finance institutions (DFIs) have long resisted the idea that they ought to support coordinated national development strategies in the countries that they invest in, but if conversations around private roundtables at the recent World Bank/IMF meetings are anything to go by, that’s where they may be heading. And if so, it may be the private sector itself that leads them there.