B3W initiatives all promote mobilization and partnership with the private sector to achieve both funding goals and implementation objectives. Less clear, though, is how conditions for private investment in developing economy contexts will be different under these new regimes, and to what extent private institutions are factoring these initiatives into their medium- to long-term strategies.
Risk management and a lack of ‘bankable’ projects are commonly cited as obstacles to activating private sector funding from North American and European financial institutions. However, venture capital funds working in developing contexts, such as in Africa, express frustration that investors from developed countries expect to apply the same investment strategies to developing-country contexts, despite different needs. It begs the question of whether there is a shortage of bankable projects or whether the investment solutions are fit for purpose.
Historically, MDBs, DFIs and other agencies have fallen short in both the ambition and action needed by the market to provide guarantees for critical but difficult projects. In practice, such agencies often seek deals that allow for market returns, take less risk and offer few concessions, which runs counter to mandates to unlock and support providers of private capital. Such practices do not inspire participation and risk-taking from private sector actors. DFI representatives interviewed for this project stressed that private sector institutions should not be seen as unilateral ‘solvers’ of development problems, and that public sector institutions and states still need to lead, whether that be through funding or facilitating a healthy, enabling environment.
DFIs and the multilateral financing system are becoming aware of the need for urgent reforms. Key informants of this project from G7 governments have acknowledged the need to transform the incentive structure for multilateral financing bodies, taking on more risk to incentivize greater return on investment and connected development outcomes. At the 2022 IMF annual spring meeting, development finance leaders convened a Strategic Dialogue on Development Finance Innovation, calling for comprehensive reform of the multilateral development finance system to mobilize financing to developing countries in the face of multiple global crises. Innovative financing instruments, activating private funding and reallocating Special Drawing Rights are highlighted as possible ways forward. Opportunities exist for DFIs to lead in this area by structuring various capital sources to deploy and unlock financing more efficiently in developing countries, in both increased pace of delivery and overcoming regulatory barriers. However, they need to be supported by a reimagining of institutional reforms and further increased ambition.
There has been no better time in recent history to engage and direct private funding towards sustainable development objectives. However, B3W appears so far to be failing to provide the leadership, budget mobilization and action-oriented attitude necessary to address current challenges.
Meanwhile, the private sector has been stepping up development commitments to an unprecedented level – particularly on climate change. Climate finance from government and private sector sources offers new momentum and models for clean infrastructure development. At COP26, over 450 companies across 45 countries committed a total of $130 trillion in capital via the Glasgow Financial Alliance for Net Zero. The adoption of environmental, social and governance (ESG) metrics in investing is at an all-time high, as major funds divest from fossil fuels and as clients, investors and retailers alike vote with their dollars. Although this shift is still in its early stages — and is under increasing scrutiny amid accusations of ‘greenwashing’ – the trend is building momentum and is becoming impossible for the private sector to ignore. There has been no better time in recent history than now to engage and direct private funding towards sustainable development objectives. However, B3W appears so far to be failing to provide the public sector leadership, budget mobilization and more urgent and action-oriented attitude necessary to address current challenges.
The various G7 development visions also lack a complete strategy for engaging with private sector actors in recipient countries. Enabling private funders in recipient countries allows for local capital markets to assess contextual risk. It acknowledges agency and builds capability for local actors to develop solutions to local problems. Some promising homegrown solutions, supported by donor agencies, offer models to be further expanded. For example, USAID supported the activation of local pension funds in Kenya and South Africa to invest in local services and long-term infrastructure projects via its Prosper Africa initiative. In 2022, the UN Economic Commission for Africa (UNECA) launched ‘Team-Energy Africa’ to mobilize African private sector participation and investment in clean energy investments, while in 2021 UNECA supported PIMCO in launching a major green bond in South Africa valued at ZAR 3 billion – it is significant to note that this bond was denominated in local currency. There is a need to prioritize, seed and grow similar initiatives that unlock sustainable financing and enable local capital markets to shape the direction of investments.
