In April 2017 Jim Kim, the president of the World Bank Group (WBG), announced that the institution would become an “honest broker” focused on catalysing commercial capital for infrastructure development. This paradigm shift provides a new impetus for the redeployment of scarce public funds to leverage private investments, including in the poorest, riskiest countries. If realized, the WBG repositioning would mark a significant step in the current transition in development finance. It has the potential to transform the balance sheets of Multilateral Development Banks (MDBs) and to unlock infrastructure markets in developing countries.
In the next few years, the WBG will aim to mainstream its mission as a “facilitator of capital” in addition to maintaining its historic function as a “provider of capital.” To this end, the WBG will scale up the preparation of bankable projects, deploy new facilities and instruments for private sector participation, and increase support for institutional, policy, and regulatory reforms in developing countries. These efforts will result in an evolution of WBG operations, rather than in the transformation of its model. They will facilitate private investments in frontier economies but nowhere near a level sufficient to bridge their infrastructure gaps.
- Scaled-up WBG operations in frontier economies will mobilize and catalyse more private investments, including in fragile and conflict-affected states
- New WBG facilities and instruments will channel more capital from institutional investors to the infrastructure sector in developing economies
- WBG repositioning may be emulated by regional development banks, thereby changing the landscape of development finance
In 2015, the WBG estimated that $550 billion is invested in infrastructure in Emerging Market and Developing Economies (EMDEs) every year. Of this total 80% is financed by the public sector, 10% of which by Official Development Assistance. By contrast, basic infrastructure needs in these countries range from $850 billion to $2 trillion annually for the period 2017-2030, with an additional $1 trillion required to meet the Sustainable Development Goals.
The public sector faces tight fiscal constraints that make it unable to bridge this financing gap. In the meantime, institutional investors such as pension funds, insurance companies, and sovereign wealth funds hold an estimated $70 trillion in assets that on average yield low returns. The long-term, high-yield profile of infrastructure investments in EMDEs seems well-suited to their mandate. However, an unfavourable business environment and a dearth of bankable projects have prevented these investors from allocating significant resources to this sector.
This situation has long been recognized by MDBs. Since 2011 and under the leadership of the G20 they have increased their efforts to address these bottlenecks.
Establishing project preparation facilities has been part of this agenda. For instance, in 2015 the WBG created the Global Infrastructure Facility (GIF), a $100m platform that helps governments prepare and structure complex public-private partnerships in infrastructure. During the 3-year pilot phase, the GIF aims to support 15 to 20 projects to be financed by institutional investors.
The MDBs have also scaled up pooled investment vehicles that channel third-party capital. For instance, the International Finance Corporation (IFC) – the WBG’s private sector arm – recently launched the Managed Co-Lending Portfolio Program that allows institutional investors to passively participate in IFC’s lending operations.
Standardization and Replication
In parallel, the WBG has developed standardized and replicable models for private participation that aim to reduce risks and transaction costs in order to achieve scale. For instance, in 2015 the IFC launched Scaling Solar, a one-stop-shop program for the development of private, grid-connected solar photovoltaic plants. Scaling Solar is based on standardized procurement, contracting, and financing documents in an effort to go beyond the traditional project-by-project approach.
In the run-up to the 2017 Spring Meetings, WBG President Kim declared that the WBG would take a more systematic approach to leveraging commercial capital in the infrastructure sector. He pledged to turn the WBG into an “honest broker” that sits between commercial capital and potential investments in EMDEs.
If the ambition and the narrative are new, the idea of facilitating capital is not. The WBG, like other MDBs, already:
- Mobilizes capital, by co-financing projects and providing guarantees and other instruments for risk mitigation; and
- Catalyses additional capital, mainly by supporting institutional, policy, regulatory reforms to enable private participation.
This function complements the primary role of the WBG as a provider of capital.
However, President Kim’s statement of intent inverts this ontological hierarchy. By doing so, it heralds potentially far-reaching consequences for the operations of the WBG. This paradigm shift has already been translated into a new priority: de-risking markets and projects, with an emphasis on frontier economies, including fragile and conflict-affected countries.
When de-risking projects, the WBG will maintain a focus on additionality. Its intervention will aim to enable additional commercial capital – not to replace or compete with existing private solutions. This condition means that the WBG’s future operations will increase the flows of private investments into EMDEs, with limited market distortion effect.
The WBG repositioning will be operationalized by the “cascade,” a new modus operandi for the preparation of projects supported by the WBG. This set of guidelines will be first applied to infrastructure financing, and later extended to finance, education, health, and agribusiness.
When preparing a project, WBG staffers will have to consider private solutions first. If they are not feasible, they will have recourse to public options.
Project preparation will be carried out according to the following procedure:
Source: WBG, author
The WBG repositioning will be enabled by changes at several levels. Their scope and the pace of implementation will determine the impact of the WBG’s strategic shift on its model and on private investments in EMDEs.
The “cascade” approach calls for a change of mindset and incentives for WBG staffers, who will have to think simultaneously like private investors and public reformers. It will also necessitate more collaboration between the WBG’s public and private sector windows, building on the “One World Bank Group” plan launched in 2013.
In addition, the WBG’s strategy to use public funds only as a last resort will require active cooperation with other MDBs and bilateral donors to avoid WBG operations being undercut. International financial institutions often compete to finance projects, especially those that could be financed commercially and that present an equivocal case in term of additionality.
“3.0,” the IFC’s long-term strategy was endorsed in December 2016 and followed by an institutional reorganization. The new direction aims to adjust IFC’s business model to increase its capacity to leverage commercial capital in frontier economies.
The WBG is expanding its suite of tools to de-risk markets and projects. In April 2017, the WBG established a $2.5bn Private Sector Window (PSW) with the International Development Association (IDA) – its concessional arm.
The PSW is composed of four facilities that provide and support project-based guarantees, currency risk-sharing, and blended finance, with a focus on infrastructures in frontier economies. This new window will allow IDA to support the operations of the IFC and the guarantee arm of the WBG by limiting their exposure and carrying part of the risks on its balance sheet. A pipeline of projects is currently under development.
The WBG is also working on other tools, such as indices and bonds, to support the development of infrastructure as an asset class.
The WBG repositioning, and the associated focus on frontier economies, will require stronger financial capacity. Extensive efficiency and leveraging measures have recently been implemented across the WBG.
Nonetheless, at the Annual Meetings in October 2017 the WBG will introduce a new package of proposals that is likely to include a strengthening of the equity base of the International Bank for Reconstruction and Development (IBRD) – its non-concessional public sector arm – and the IFC. However, there is very limited appetite among member countries for a general or selective capital increase, especially within the United States government.
This is an electronic, unedited version of an article published in the Oxford Analytica Daily Brief