Multilateral development banks (MDBs) have, over the years, played a critical role in helping developing economies address structural challenges and development goals, particularly as some populations remain at dire risk of being left behind.
Many of the world’s leading MDBs and development agencies are now rapidly evolving to meet the changing needs of their clients and the changing dynamics of the global marketplace, says KPMG Africa transport and infrastructure head James Woodward.
African Development Bank (AfDB) infrastructure, industrialisation and private sector VP Solomon Quaynor adds that, perhaps the most obvious change, has been the shift towards catalysing private finance and investment.
“The AfDB believes the mobilisation 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,” he notes.
He explains that many believe 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 really check their priorities and rethink how they can attract private capital. I think all MDBs are now thinking about how they can be much more supportive of the private sector,” adds Asian Infrastructure Investment Bank private sector operations principal Rajat Misra.
Many development organisations 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 reassessed and reorganised how we encourage private sector participation in infrastructure. There is now a lot more coordination between the International Finance Corporation (IFC) and the World Bank on counterstrategy, upstream reforms to unlock private investment and downstream innovation to produce solutions,” says IFC infrastructure advisory manager Richard Cabello.
Asian Development Bank (ADB) private sector division director-general Susanne Gaboury, meanwhile, 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,” she says.
Overall, however, MDBs are recognising that there is a lot of private capital sitting in global markets. And, while KPMG’s recent report on the changing face of infrastructure in Latin America suggests there are a variety of cultural and institutional barriers to effective cooperation between public and private sectors, the company says 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 structure a good transaction, balanced with comprehensive technical studies, the capital will be there,” argues Cabello.
Some are working to enhance specific capabilities in client markets, while many MDBs also acknowledge it will require policy reform and regulatory change to improve the investment environment for private participants.
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,” notes Misra.
“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,” adds 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,” says Quaynor, adding that “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 catalysing investment into markets and sectors.
“The idea is really to create a good model within a specific market and sector and then leave it to the government and private sector to get on with the transactions,” notes Cabello.
Ultimately, however, interactions and conversations with MDBs suggest that the sector has put tremendous effort into rapidly evolving, modernising and enhancing their approaches to achieving their mandates in infrastructure.