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It is now a well-established model. A bright-eyed new World Bank president, current Mastercard CEO Ajay Banga, promises to harness judicious injections of public money to unlock the vast private sector cash reserves eager to invest in infrastructure developing countries. The plan is hailed as a bold new market-driven approach to help poor countries become rich. And then it doesn’t really happen.
This model extends to David Malpasspresident of the bank from 2019 to 2023, Jim Yong Kim (2012-2019), Robert Zoellick (2007-2012) and ultimately to the 1990s, when James Wolfensohn, one of the bank’s most influential presidents, sought to harness the gushing floods of capital in the context of post-war globalization cold.
The challenge of securing private finance to build infrastructure is even more acute today due to the green transition to renewable energy and low-carbon technologies. Traditionally generous donor countries – UNITED KINGDOM, France, Norway – reduce aid budgets. Instead, they often focus on “development finance institutions” (DFIs) such as the British bank. British international investment business. The World Bank’s International Finance Corporation (IFC) is by far the largest DFI. DFIs lend or take equity stakes in companies in developing countries and aim to “attract” private capital.
The results were always disappointing. A upcoming book by former World Bank economist James Leigland, on the rise and decline of public-private partnerships (PPPs), notes that private contributions to infrastructure projects in developing countries peaked at a low level in 2012 – with only 10 percent going to the lowest income countries. nations – and have since fallen. They have had relative success in some sectors, such as renewable energy production, but have struggled in others.
An independent expert group on multilateral development banks mandated by major G20 economies suggests reach $240 billion in private capital mobilization by 2030. The last figure is only $71.1 billionof which only 10 percent went to the poorest countries. DFIs aim to raise substantial multiples of the money they invest, but in practice the ratio of private to public capital has increased. struggled to get past 1:1.
Institutional investors such as pension funds are notable for their almost total absence. While Australian and Canadian pension funds are active in financing infrastructure in advanced economies, for developing countries they have historically had a paltry share of total investment. less than 1 percent.
For what? There are undoubtedly solutions that could be tried. Avinash Persaud, special advisor at the Inter-American Development Bank (IDB) who worked on the Bridgetown Initiative to increase capital flows to developing countries, advocates the creation of a mechanism to reduce foreign exchange risk for investments.
Investment managers say there is a deeper problem: DFIs essentially act as private investors, not catalysts for other investments, and their bureaucratic processes deter rather than attract other funds. Infrastructure investment is inherently tricky. It is usually a long-term project that involves political and commercial risks, particularly for essential utilities like electricity and water, and therefore requires detailed information and precise regulation in the recipient country .
The Publish What You Fund aid transparency initiative has published a report advocating for granular disclosure of project-level data to inform private investment decisions, something she says the IFC and DFIs have been slow to do. Institutional investors such as AllianzGI and Africa Investor support the PWYF’s findings.
Hubert Danso, Managing Director of Africa Investor Group, says: “A stable legal and regulatory framework and better data are far more important than multilateral development banks, which are often more effective at crowding out private capital than at attract. » He and PWYF reject the IFC’s argument that publishing such data threatens commercial confidentiality.
Development banks and their shareholders have long tended to judge themselves by how much money they withdraw rather than what they do when it comes in. For DFIs, this is a particularly unfortunate mentality since they are supposed to open the door for others.
But even more fundamentally, official lenders and governments should be more realistic about what private financing can achieve in infrastructure. It is somewhat ironic that the UK in particular has been so keen to promote PPPs in developing countries, since its own experiences in this area have not been exactly joyous.
A decades-long experiment, the Private Finance Initiative, had extremely mixed results and was halted by the Conservative government in 2018. Drafting contracts that incentivized investment and truly transferred risks to private investors proved very difficult .
This week’s summit in London to encourage private investors to refinance Britain’s infrastructure was overshadowed by questions about the lack of clarity and the UK’s business climate, with the government weakly resorting to the hackneyed old mantra of the elimination of administrative formalities.
Encouraging private investors to invest in infrastructure in both low- and high-income economies is admirable in principle. But continually announcing bold initiatives and talking about hundreds of billions of dollars without creating appropriate incentives will only breed cynicism. If the world is to achieve its green transition goals, there will likely be no magic alternative to public money doing much of the work. Pretending otherwise does no one any favors, least of all the developing countries themselves.
alan.beattie@ft.com
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