When you think about Multilateral Development Banks (MDB) like the IDB, you normally think about public sector investment. But can the public sector arm of an MDB also mobilize private investment? The answer is yes. Here is how:
Global challenges, changing demographics, and investment decisions
If you had to go back in time to 1980 and had some extra cash to invest, you would most likely choose to put your money where it made the highest returns. Fast forward to our hyper-connected 21st century, chances are that you are aware of and sensitive to many of the world’s problems, and what they mean for future generations: hurricanes, heatwaves, income inequality, refugees with no place to go. Shareholders are also requiring more transparency from corporations. Knowing this, today, if given the chance, you would probably choose to put your money where it would not only grow, but also where it could make a difference.
If you think like this, you are not alone. Global challenges and changing demographics are steadily influencing investment decisions. Millennials and generation “Z” are increasingly concerned with “impact” activities that promote, for instance, climate change resilience, equality and inclusion. At the same time, the traditional focus of private sector investors intent on maximizing shareholders’ equity is evolving into an emerging and growing trend of investors focused not only on maximizing stakeholders’ equity through investments that offer high returns, but ALSO higher impact.
Investors in development finance
This is good news. Attaining the Sustainable Development Goals (SDGs) is likely to cost trillions of dollars per year that public financing alone will not be able to cover. The financial gap is in the range of billions of dollars a year. But here is the opportunity: financing available in private markets is in the hundreds of trillions of dollars annually.
In fact, all MDBs including the IDB are seizing this opportunity and, since 2016, agreed on a joint methodology to calculate how much private finance they can mobilize individually and collectively. Private investment mobilization is a natural activity for the private sector window of MDBs as this is part of their mandate (e.g. IDB Invest, European Bank for Reconstruction and Development (EBRD)). But what about the traditional public sector windows of MDBs (i.e. sovereign-guaranteed operations, such as at IDB or at the Asian Development Bank (ADB))?
Over the last couple of years, the IDB has improved its ability to track private mobilization in sovereign-guaranteed interventions by introducing changes to its internal operations’ registration system to account for co-financing activities. Thanks to this, in the latest joint report Mobilization of Private Finance by Multilateral Development Banks and Development Finance Institutions 2018, it turns out that private finance that accompanies, or results from IDB’s sovereign-guaranteed window shows a growing trend having reached almost US$3 billion, a record figure in the history of IDB’s public sector window.
Now, volume AND impact
From an impact perspective, what is the effect that this record mobilization is having on sovereign guaranteed interventions besides the additional financing? Specifically, what happens in projects where private parties or investors are mobilized to participate or co-finance with the public sector? Are these projects more effective than others when they are not present? Do these projects have higher impact?
These are not easy questions, particularly as no two projects are completely alike. We performed a preliminary analysis of the IDB’s entire sovereign guaranteed portfolio from 2016 to 2018 of all projects that had mobilization components by design. We grouped them by sectors and, to make comparisons, we matched them with projects in the same sectors, but that had no co-financing elements.
We then used one of the IDB’s tools to measure development effectiveness, the Project Completion Report (PCR), which assesses results in terms of outputs and outcomes achieved by a project, its long-term sustainability, and lessons learned to improve the design and execution of future operations. PCRs are an objective measure of results because they comply with core MDB best practice standards and are validated by independent evaluation.
Without attempting to establish a causal relationship, we observed that relatively comparable projects in key impact sectors of the IDB portfolio—energy (SDG 7), social (SDG 1), technology (SDG 9)—that have mobilization components tend to score higher than projects without them in terms of PCR’s grading ranges, which reflect the development effectiveness achieved.
/* PCR grading ranges from 1 (worst) to six (best)
/**For simplicity, we are using co-financing/co-investment and mobilization as equivalent, per the joint methodology to report private investment mobilization agreed by MDBs.
/*** source: IDB PCR database, with calculations from the Office of Strategic Planning and Development Effectiveness.
Mobilization as a win-win proposition in sovereign-guaranteed operations
Besides the additional financing and higher impact, these preliminary observations that hint of a possible win-win proposition from mobilization in sovereign-guaranteed operations could also be explained by taking a different perspective: mobilization enables these kinds of interventions to increase their environmental sustainability and social scope, to enable new technologies, to reach more remote regions, smaller clients and secluded populations, among others.
For instance, the Argentina Conditional Credit Line for Investment Projects in Technological Innovation allowed SMEs to receive financing of more than 50% of the investment required to develop clean technology projects and patents that would otherwise not have happened.
Another example is the 3×1 Program in México, which supported the initiatives of Mexicans living abroad, giving them the opportunity to become private investors of social infrastructure in their home communities, where every dollar they put in was matched with US$3 extra dollars from the government.
Likewise, the Barbados Sustainable Energy Investment Program channeled private co-financing through a structured fund to implement renewable energy and energy-efficiency programs to reduce the island’s fossil fuel dependency and carbon emissions.
The region’s potential
According to the joint MDB Mobilization Report 2018, MDBs and DFIs have mobilized US$20 billion in total private mobilization in 2018 in Latin America and the Caribbean, an increase of over 18% compared to 2017. Of this amount, the IDB Group contributed US$8.2 billion—of which US$6.7 billion went to infrastructure—or 41% of the total.
But the big story of 2018 is on the sovereign-guaranteed side: with almost US$3 billion—all of which went to infrastructure (SDG 9)—the IDB emerged as the largest regional mobilizer of private investment that accompanies or results from operations under the public sector window. Most of this has been driven by making use of the IDB flexible guarantee instrument, one project in Ecuador and another in Argentina. As projects like these come to maturity, we will report on their impact in future issues of the joint MDB report.