G20-led efforts to recruit private capital to finance international development have in the main disappointed. Any new initiative must leverage private sector expertise more effectively, reflect the common interests of G20 members and respect the agency of beneficiary countries.
Context
Since its inception as a finance ministers’ group in September 1999, the G20 has grappled with the challenge of how to achieve high and sustained financial flows, both public and private, to emerging economies and low-income developing countries in order to underpin growth and human development.
The epicentre of the global financial crisis in 2008–09 lay in the advanced economies, but the establishment of a leader-level version of the G20 combined with the experience of successful cooperation in response to that crisis gave the group’s accompanying efforts to enhance development finance a strong boost. In particular, the overarching instrument shaping the G20’s efforts after the crisis, the Framework for Strong, Sustainable and Balanced Growth launched by G20 leaders at the 2009 Pittsburgh summit, was in large part intended to provide precisely the policy environment required to stimulate high and sustained financial flows to the developing world.
The framework itself has not delivered on its early promise, but G20 summits since Pittsburgh have included a number of complementary initiatives designed to leverage international cooperation to strengthen investment flows to the developing world. These have typically drawn on the core features of the G20 process: leader-level endorsement of commitments; a consensus-based, ‘country-led’ approach to policy formulation; reliance on the leading international financial institutions (IFIs) for technical support and delivery; and outreach to and engagement with other stakeholders, including non-member countries and the private sector.
The post-Pittsburgh initiatives have also reflected the founding context of the G20. Thus, in the early years after 2009, nearly all leading G20 members acknowledged the importance of private finance in international development. They also acknowledged that international cooperation was vital to address many global threats to prosperity, and that – once the immediate financial crisis had abated – it was important to use the new system to continue tackling the underlying causes of financial instability and prevent future economic crises.
This chapter looks in detail at two specific but related cases in which G20 presidencies have sought to use new initiatives, introduced at G20 summits, to boost investment flows to the developing world. The first is the Compact with Africa (CWA), launched by the German G20 presidency in 2017, and designed to boost private investment in Africa. The second is the Global Infrastructure Project Pipeline, one of the outputs of the Global Infrastructure Hub (GI Hub), established under the Australian G20 presidency in 2014, and designed to improve the micro-level bankability of infrastructure projects.
Both initiatives were led by effective and well-resourced G20 presidencies. They were central to those presidencies’ summit deliverables, and both also specifically envisaged enhanced cooperation between the official and private sectors. While the Australian presidency took place against the backdrop of Russia’s 2014 annexation of Crimea and territorial aggression in eastern Ukraine, and the German presidency in 2017 had to work around US president Donald Trump’s rejection of many key principles of multilateralism, the level of trust and willingness to cooperate among G20 members was nonetheless substantially higher than it is today.
After briefly describing the two cases and considering what worked and what did not work, this chapter will seek to apply the resulting lessons to the present-day situation facing the G20. We will offer recommendations on how the G20 may yet be used as a vehicle to drive progress in international development and related policy areas. We do not argue for wholesale reform of the G20, essentially because we do not see this as a realistic option in the present circumstances. Instead, our aim is to suggest how the existing institution can best be deployed to unlock greater private development finance.
G20 initiatives: two case studies
A. Compact with Africa: an investor-friendly, ‘de-risked’ environment
In 2017 the Compact with Africa (CWA) was launched under the auspices of the German G20 presidency with a mission ‘to increase attractiveness of private investment through substantial improvements of the macro, business and financing frameworks’. The CWA represented a thematic continuation of the work of previous G20 presidencies. This activity included the first Multi-Year Action Plan on development, announced in Seoul in 2010, which prioritized public–private partnerships and efforts to enhance domestic investment climates for infrastructure in low-income countries. It also included the creation of a study group, unveiled in Moscow under Russia’s G20 presidency in 2013, to explore ‘obstacles and limitations delaying long-term financing’.
The creation of the CWA took place against the backdrop of growing Western concern over China’s bilateral economic and political influence in the developing world, particularly in Africa, underpinned by extensive lending under the Belt and Road Initiative (BRI). The CWA also served as a launchpad for Chancellor Angela Merkel’s bilateral focus in German–African diplomacy on business and investment. This was embodied by the Pro! Africa initiative, which sought to increase the participation of German firms in African economic development.
The CWA was inherently high-level in its design, and featured multiple amorphous policy streams. It aimed to improve macroeconomic conditions, reform business environments, boost intermediation in the financial sector, and thus drive a significant increase in private investment in Africa. Risk mitigation (or ‘de-risking’) was central to the CWA’s strategy of establishing risk–return profiles attractive to investors. Instruments to achieve this, outlined at the creation of the CWA, focused on promoting blended finance through increased collaboration between development institutions, public finance institutions and private funds. Specific proposed tools included the provision of guarantees for infrastructure and debt projects, and the use of credit tranching and bundling to appeal to more risk-averse investors. A key feature of the CWA was the enhancement of country-level cooperation – both among IFIs, and between IFIs and recipient governments – to increase the coherence of IFI advice and lower transaction costs.
Five years on, it is apparent that the CWA’s de-risking instruments have not delivered the wide-scale mobilization of private finance that was hoped for. The most recent CWA Monitoring Report in May 2022 stressed the need for development partners across the G20 to provide further de-risking instruments, and found that ‘reforms (or the promise of reforms) may not be sufficient to attract private investors which are often faced with the risks and costs of being first movers’.
There is unease around the possibility of recipient governments burdening themselves with unreasonable risk to incentivize private sector investment.
A clear challenge inherent in the CWA’s approach to risk mitigation is its heavy and consistent reliance on public institutional capital from multilateral development banks (MDBs) and development finance institutions (DFIs). This is understandable given the political influence of MDBs within challenging development contexts – influence which private sector banks lack. One potential solution would be for G20 members themselves to allow more efficient use of existing MDB capital and/or to provide more capital to MDBs, which could make it easier for the latter to increase their own offers. However, this approach could prove hard to deliver given geopolitical shifts towards bilateralism – including, notably, among long-standing champions of multilateral approaches, as seen with the UK’s commitment to reduce foreign aid funding to multilateral institutions.
Other criticisms of the CWA take specific issue with the de-risking approach, citing ‘moral hazards’ in the compact’s perceived subsidization of unsuitable or excessively risky projects. There is also unease around the possibility of recipient governments burdening themselves with unreasonable risk to incentivize private sector investment. In reference to infrastructure financing in particular, the European Network on Debt and Development (Eurodad) argues that de-risking through the standardization of projects threatens infrastructure quality, reduces public oversight and compromises compliance with environmental standards.
Notwithstanding such misgivings, there is also evidence of successes in some CWA partner countries, such as Ghana. Supported by the African Development Bank (AfDB), a system has been established to ‘de-risk agricultural lending from financial institutions’, while reforms to company registration in Ghana have made it easier to set up businesses.
The remit of the CWA also brings certain fundamental challenges. Its sheer breadth, despite operating in just 12 partner countries, has unavoidably delayed delivery and led to a level of policy paralysis. This has been compounded by the disparate nature of measures introduced under the programme, and by its involvement of a multitude of state and non-state actors. In 2019, the CWA was judged by one initial advocate to have evolved into a ‘bureaucracy-driven proliferation of support measures’ that led to general inaction without sufficient understanding of its benefits from private or institutional investors. Ironically, bureaucracy is one of the very constraints on private sector investment which the CWA seeks to address, and was identified as a key concern by participants at the Africa Investment Forum in 2019.
Finally, the CWA has been criticized for failing to emphasize African agency in its approach. A consistent tension remains between the priorities of private investors recruited into CWA mechanisms and meaningful development of the target countries themselves. The reality is that both sides need to co-exist. As Paul Collier, an academic at Oxford University, asserts: ‘Changes happen not by reluctant governments being coerced, but as successful pioneers get emulated.’
B. Global Infrastructure Project Pipeline: improved ‘bankability’ and micro-level interventions
Improvement of the macro environment and effective de-risking are only part of the battle against a scarcity of ‘bankable’ projects on the ground – i.e. those that are viable and attractive for private investors. The issue has become acute as sustainable finance gathers momentum. Growing the pipeline of bankable projects in infrastructure can be done through non-regulatory micro-level interventions such as improved information sharing and early-project approaches.
Effective sharing of information on project pipelines can ensure that a diverse range of investors accesses opportunities in emerging economies. The G20 has focused on developing tools for such coordination in relation to infrastructure investment. In 2016, the G20’s Global Infrastructure Hub (GI Hub) introduced the Global Infrastructure Project Pipeline, a ‘one-stop shop’ that integrates national and multilateral databases of investment opportunities. However, the creation of the Global Infrastructure Project Pipeline does not necessarily reduce the significant procedural burden on the investor or funding recipient. Confusingly, a variety of other institutions established or endorsed by the G20 have similar functions to that of the GI Hub, and in some cases partner with one another. These include the Global Infrastructure Connectivity Alliance (GICA), the Global Infrastructure Facility (GIF) and the Multilateral Cooperation Center for Development Finance (MCDF). Given the significant complexity this presents in terms of project visibility and the potential duplication of project opportunities in multiple databases, it is understandable that donors continue to streamline their engagement across fewer bodies, and that they consolidate resources and project pipelines where possible to ‘drive scale and competition in opportunities for private finance’.
Advancements in early-stage project preparation and related approaches will increase the scalability of projects, improve take-up from private investors and reduce the burden on public institutional capital.
Another method for ensuring the bankability of projects is to improve their quality and reduce the cost of design and preparation phases. (This brings additional benefits, by reducing the corruption risks associated with the artificial inflation of project costs.) In 2016, several MDBs launched SOURCE: a global initiative, in response to the G20, to provide assistance in project preparation, boost the crowding-in of private finance, and increase the number of bankable infrastructure projects. However, SOURCE relies on limited public institutional capital to achieve these quality goals, and it has insufficient engagement with private sector expertise to improve the suitability of infrastructure projects. Equally, a 2020 study found that the G20 needs to reform its policy and institutional frameworks, as these ‘rarely leverage private sector expertise to improve project development’. The integration of the private sector into the improvement of project development will also help with misaligned risk expectations in sustainable finance. The Asian Development Bank’s Asia Pacific Project Preparation Facility (AP3F) shows promise: this $73 million multi-donor trust fund aims to improve early-stage projects, for example by soliciting technical input from private sector experts.
Advancements in early-stage project preparation and related approaches will increase the scalability of projects, improve take-up from private investors and reduce the burden on public institutional capital. This would help deliver on part of the ‘billions to trillions’ ambition laid out by MDBs in 2015, when they endeavoured to catalyse support for project preparation to ‘shorten timelines, ensure project structures are appealing to investors and financiers active in the sector, and help address regulatory and policy environment issues important to potential investors’.
Lessons for future G20 initiatives
For analysts and scholars in the area, the fact that annual G20 summits repeatedly propose greater recourse to private sector capital has elements of ‘groundhog day’. Earlier initiatives from the 2010s overlap significantly with recent proposals – also of limited impact – from summits in the 2020s. The G7 London Impact Taskforce has warned that ‘today’s glaring gap between rhetoric and delivery not only feeds public skepticism, it also prompts existing risks to grow in size and severity’.
Notwithstanding these persistent doubts over political will and commitment to implementation, a number of lessons for future G20 initiatives in this area may be drawn from the two cases discussed above:
- First, keep things simple. Devising bureaucratic mechanisms to deliver complex goals drawing on contributions from varied actors is a key role of the G20, but it is critical that any new mechanism be straightforward to use. This means pushing back against one of the disadvantages of the ‘country-led’ approach: the tendency for each G20 member to advance its own policy perspective or regional interest in any given initiative.
- Second, avoid overreach. The two case studies demonstrate that communicating a strong need and clear vision is critical for any initiative to gain traction. But it is also important to start with an objective that is plausibly within reach of the available political commitment, resources and bureaucratic capabilities – even though some element of ‘stretch’ is desirable. Setting a goal, however well justified, that has no chance of delivery is likely to be counterproductive. On the other hand, success in one initiative can quickly build the trust, commitment and capabilities to take on bigger goals.
- Third, listen to those you are trying to help. A key strength of the G20 (compared with both the G7 and BRIC groupings) is the greater legitimacy its broad-based membership and economic weight bring to its actions. But when the beneficiaries of G20 policies are non-members, as is the case with the CWA, it is essential to listen to what the beneficiaries themselves want and build in genuine participation and agency from the outset. One must also avoid a one-size-fits-all approach. Any G20 initiative designed to work at country level needs to be developed with sufficient flexibility to be adapted to local circumstances and, where appropriate, integrated with national development plans.
- Fourth, rethink the G20’s method for engaging with the private sector. While each G20 presidency is responsible for devising its own means for soliciting the views of the private sector, there is now a fairly settled approach under which a formal ‘B20’ advisory group is established. This group is typically led by one of the host country’s leading business executives, and often also involves business federations from other G20 members. The B20 typically comes up with a free-standing set of recommendations that are formally presented ahead of that year’s G20 summit. Much effort goes into making these recommendations succinct and practical, but there remains a high risk that neither the B20’s outputs nor the agendas of its participants will align with the priorities of the presidency or of leading member states. A G20 presidency may also undertake extensive bilateral consultation with domestic businesses that have expertise on a particular initiative that the presidency is pursuing. However, in these cases there is typically a strong desire on the part of the presidency and/or leading G20 members to avoid the appearance of giving disproportionate weight to one or more businesses in the design of proposed initiatives. Otherwise this can lead to the suspicion that the initiative has been designed only to serve a narrow interest group. Finding a way to engage with the international private sector on G20 initiatives in a way that recognizes these sensitivities is therefore a priority if more effective use is to be made of public–private partnerships both in the investment arena and more widely. To get this right a presidency may have to invest quite a bit of time and effort, but the results could well pay off. Key elements should include: defining and agreeing with other G20 members at the outset specific questions for the private sector group to answer; consulting other member countries on the selection of participants but not following the route whereby each country gets to choose its own representative; and insisting on participants having widely recognized expertise in the focus area and independent standing.
Next steps?
In addition to the lessons from past initiatives, it is important to take account of the changed political circumstances in which the G20 is operating today. There is a contrast between the spirit of cooperation that prevailed in the years shortly after the 2008–09 global financial crisis and the more confrontational atmosphere that exists today. A range of contemporary or recent developments have lowered trust among the G20. These include the legacy of the Trump administration’s rejection of multilateral approaches to addressing global problems; Russia’s full-scale invasion of Ukraine in early 2022, and the subsequent disagreement between the West and other G20 members over whether Russia should be suspended from the G20; and US–China tensions over Taiwan.
It is important to focus G20 initiatives on areas in which a genuine common interest can be found. Fortunately, mobilizing development finance is one of these.
In these circumstances, more than ever, it is important to focus G20 initiatives on areas in which a genuine common interest can be found. Fortunately, mobilizing development finance is one of these. And whereas the G20 initiatives on private finance discussed in this paper have to some degree been in the ‘nice to have’ category, the critical need to finance the transition to a carbon ‘net zero’ economy over a very short space of time now makes this an emergency on a scale comparable to, or even greater than, the global financial crisis.
A further challenge is that views have changed over the past decade on the role of the private sector in providing global public goods. China, for one, is working to reduce the power and influence of its domestic private sector, while the COVID-19 pandemic has illustrated the importance of governments giving the private sector clear direction in times of crisis. On the other hand, Western leaders, at least, remain clear on the critical importance of private sector finance. In addition, the movement on corporate adherence to environmental, social and governance (ESG) values, and the debate over ‘profit with purpose’, demonstrate a greater recognition among many international business leaders of the need to go beyond simply ‘complying with all relevant domestic laws’ of the countries in which they operate. This diversity of views on the inherent utility of private sector engagement makes it challenging to design G20 initiatives focused on stimulating and enhancing private finance.
With this context in mind, a priority for the G20 should be to establish a new initiative to support the mobilization of private finance for development. Such an initiative must work at both a technical and political level, and be clearly seen to do so, on the grounds that success will make more ambitious proposals possible. And while the focus should continue to be on addressing the core challenges of the business environment and the bankability of investment projects in recipient countries, it will be important – particularly in the present political context – for the presidency to take enough time to fully consult other G20 members and stakeholders. This is a task for the Indian G20 presidency in 2022/23.
Preparatory work at the start of the Indian G20 presidency should focus on the following questions:
- Where does the G20 consensus now lie on the role of the private sector and public institutional capital in development finance? How far does this align with the latest research findings, and how have things changed – compared with previous G20 initiatives – as a result of the climate emergency? Given this, what practical steps can be taken and gaps filled through G20 action?
- What initiatives in particular can be developed to enhance private development finance which do not rely on increased public institutional capital? While a capital increase or more flexibility in capital use for the IFIs may be agreed in the coming months, this is very unlikely to be on a scale that addresses the fundamental constraints on investment flows.
- How should a new initiative to generate additional private finance – whether for green infrastructure or other policy priorities – deal with the fact that many potential recipients in low-income countries already have too much debt?
- What generic factors apply across all regions and can be incorporated in a G20 initiative? In so far as there are critical variations across regions, how can these variations be built into the initiative?
- What mechanisms need to be put in place from the outset of the presidency to ensure more effective and genuine consultation with recipient countries and the private sector?
Armed with the outputs of this work, the new G20 initiative should seek to break with typical previous practice by explicitly building on and reinforcing – rather than duplicating or overlapping with – pre-existing G20 initiatives in the same policy space. This will do much to ensure such an initiative is effective and long-lasting.
