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. For example, with only US$16 billion in capital from shareholder countries since 1944, the World Bank's main lending window has supplied nearly $700 billion in development financing (and counting), almost all of it coming from private investors buying World Bank bonds.
To function properly, however, MDBs need to maintain the confidence of bond investors, and that task is becoming increasingly difficult. It is no longer so obvious how to evaluate the lending "headroom" of MDBs or what to do if they are not able to get more shareholder capital. As a result, the financial capacity of MDBs is becoming an increasingly high-visibility issue on the international agenda. Key issues include:
- Credit rating agency methodologies used for MDBs
- MDB capital adequacy
- Leveraging MDB concessional window equity
- Options to build MDB equity, including:
- Net income policy
- Shareholding changes
- Subordinated debt instruments
- Callable capital
- 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
- Portfolio guarantees
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 coincided 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.
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 and New Development Bank, as well as the massive China Export-Import Bank and China Development Bank. Other bilaterals and MDBs - some of which have existed for decades - are growing also rapidly. Examples include Andean Development Corporation, Central American Bank for Economic Integration, Trade and Development Bank, West African Development Bank, Development Bank of Southern Africa and Brazilian National Development Bank.
What do the rise of these DFIs mean for international development finance? Key issues include:
- Development impact and knowledge value-added
- Project quality standards and environmental/social safeguards
- Loan financial terms, indebtedness and conditionality
- Procurement and labor practices
- Competition with traditional DFIs
- Geopolitical strategy