Ongoing Work Streams
Financial Capacity of Multilateral development BankS
Multilateral development banks - in particular, the World Bank and four major regional MDBs - are key players in turning “billions to trillions” and bringing the Sustainable Development Goals (SDGs) into reality. MDBs are critical to design best-practice projects, crowd in other investors, transfer knowledge and establish standards on quality and development impact.
The MDB financial model is extremely powerful way to leverage private resources for public policy goals. For example, with only US$20 billion in capital from shareholder countries from 1944 to 2020, the World Bank's main lending window has supplied about $750 billion in development financing (and counting), almost all of it coming from private investors buying World Bank bonds.
Because of the unique attributes of MDBs compared to commercial banks, deciding how much an MDB can prudently lend based on its capital is not obvious. The financing capacity and capital needs of MDBs is a critical part of the puzzle to achieve global development goals, and an increasingly high-visibility issue on the international agenda. It was the central question addressed by the G20-named Independent Review of Multilateral Development Banks Capital Adequacy Frameworks, of which I was a member.
To support implementation of a key recommendation of the G20 CAF report, I lead a project investigating MDB callable capital in collaboration with Chris McHugh, Eamonn White and Bianca Getzel. The project is supported by the MDB Challenge Fund (with resources from the Rockefeller Foundation, Bill and Melinda Gates Foundation and Open Society Foundation) and channeled through the ODI think tank. We presented preliminary findings at a side event at the World Bank/IMF Annual Meetings in Marrakech, Morocco in October 2023, and our final report is due in April 2024. See here for more project information.
With the support of the Bill and Melinda Gates Foundation and ODI think tank, I initiated a research project between Dr. Steven Ongena and Thea Kolasa of the University of Zurich Department of Banking and Finance and myself at ETH Center for Development and Cooperation on the access of MDBs to bond markets.
Earlier research in this area includes two articles (from 2015 and 2018) for the G24 on the methodologies used by credit rating agencies to evaluate MDBs, as well as an academic article on the same topic; six proposals to strengthen MDB financial capacity; how MDBs could expand financing in response to the Covid-19 crisis; and the potential to include new shareholders to strengthen MDB capital base, a co-authored article with G20 panel colleagues on the CAF report recommendations and a second on MDB callable capital, among other work.
Key themes in this work stream include:
MDB capital adequacy
Relationship to credit rating agency methodologies
Preferred creditor status
Callable capital
Portfolio concentration risk
Options to build MDB equity, including:
New shareholders
Net income policy
Subordinated debt instruments
Leveraging concessional window equity
Options to bring in external resources, including:
Co-financing arrangements
Loan syndication
Guarantee instruments
Options to reduce MDB portfolio risk, including:
Securitization of MDB loan portfolios
Credit portfolio insurance
Portfolio guarantees
non-traditional development financiers
The panorama for development finance is undergoing a tectonic shift. The post-World War II era dominated by the Bretton Woods institutions and a handful of G7 countries is eroding, and new dynamics and relationships are being constructed before our eyes. Many emerging and developing nations (EMDCs) are growing in economic strength and confidence in defining their own development path. The days when EMDCs simply accepted the development prescriptions handed down from Washington are long gone.
New institutions are rising to the fore in this fast-evolving international development finance ecosystem. Most notable are the two new MDBs created in 2016, the Asian Infrastructure Investment Bank (AIIB) and New Development Bank (NDB), as well as the massive China Export-Import Bank and China Development Bank. Other MDBs - some of which have existed for decades - are growing rapidly, including Andean Development Corporation (CAF), Central American Bank for Economic Integration, Trade and Development Bank, West African Development Bank and the Black Sea Trade and Development Bank.
With the support of a grant from the Rockefeller Foundation, I am leading a 15-month research project at ETH Center for Development and Cooperation to examine the obstacles facing and development potential of a set of smaller, borrower-led MDBs. The first paper from the project has been published, and two more will be released by early 2024.
I’ve written a number of papers on China’s role in the multilateral system, including one with Yunnan Chen of ODI on China’s multilateral strategy; one reviewing the first years of operation of the AIIB and NDB for the G24; and an earlier piece on prospects for AIIB and NDB at the time of their creation.
What do the rise of these MDBs mean for international development finance? Key issues include:
Development impact and knowledge value-added
Accessing funding via capital markets and official financing sources
Project quality standards and environmental/social safeguards
Competition with traditional DFIs
Geopolitical strategy
Infrastructure for Development
The international development agenda has in recent years increasingly focused on ramping up investment in basic infrastructure in emerging and developing countries (EMDCs). Estimates of infrastructure needs vary, but most coincide on a gap of at least $1 trillion per year to 2030 between the current investment rhythm and the level needed to keep pace with economic growth, generate opportunities for a fast-growing global population and shift our planet onto a sustainable path.
In the face of constrained EMDC public sector budgets and limited risk appetite from private investors, how will this gap be filled? Unquestionably, development finance - and in particular multilateral development banks - will need to play a leading role, as has been recognized by the G20, OECD, United Nations and other leading international fora in recent years. MDBs are the only actors able to act at the financial and geographic scale necessary, and at the same time keeping economic, social and environmental sustainability concerns at the forefront. To do so, MDBs need to shift their operational model from direct investors to catalysts: MDB financing must be used judiciously to crowd in much greater levels of public and private investments.
This requires substantial changes in MDB policy and operational culture, including in the following areas:
Supporting the shift of EMDC infrastructure to become an asset class for institutional investors.
Directly finance EMDC projects with high potential public goods provision that cannot obtain private financing.
Ramp up support for project preparation, a key bottleneck currently.
Streamline bureaucratic requirements that limit demand for MDB infrastructure support, while not lowering quality standards.
The international community also should look to non-traditional development financiers as partners in this effort. That includes growing and new MDBs such as the Andean Development Corporation, the Asian Infrastructure Investment Bank and New Development Bank, as well as national development banks and export agencies from middle-income countries like China, Brazil, Korea, India and elsewhere.
Written work in this workstream includes articles written as part of a series of studies for the G24 and Global Green Growth Institute on MDBs and national development banks in infrastructure provision and an evaluation of how MDBs can scale up infrastructure financing for ODI.