Efficient Use of Public Development Finance to Encourage Private Investment in Developing Country Markets Richard Manning Workshop on New Models of Private Participation in Development Finance Brussels, 2 February 2017

Talk Outline The Broad Context Two Core Problems Why Public Development Finance and Private Investment need one another Some Lessons from Experience

We live in a still very unequal world (Source: Thomas Piketty)

We need to adapt to changing population dynamics (Medium-Variant Projection) Population (millions) 2015 2030 2050 2100 World   7349 8501 9725 11213 Africa 1186 1679 2478 4387 Asia 4393 4923 5267 4889 Europe 738 734 707 646 LAC 634 721 784 N America 358 396 433 500 Oceania 39 47 57 71 UN Population Division, 2015

Does Aid Matter to Middle-Income Countries? (% of GNI: Source, ODI)

Does Aid Matter to Low-Income Countries? (% of GNI: Source ODI)

First Core Problem: Public Development Finance is a Scarce Resource, and may well become scarcer The welcome rise in Official Development assistance in the first decade of the century is over; Traditional Donors: ODA essentially flat since 2010: OECD predict this will continue to 2019. Hard to see what might increase this, and serious possibilities that it could decline; South-South Co-operation and other non-DAC: ‘Emerging economies’ should continue to outpace DAC economies and their loan-based programmes for now are still growing. Their grant programmes are staying quite tight, so traditional donors remain key source of grants; Conclusion: grants and highly concessional loans have to be focused on development outcomes that cannot support finance on harder terms.

Second Core Problem: Risk Perceptions severely Limit Flow of Private Finance to Developing Countries Private capital relatively abundant, as long-term bond rates (less affected than short-term by monetary policy) still very low by historical standards But FDI flows to developing countries are relatively slow growing and heavily concentrated on Asia And few institutional investors are ready (or in some cases able) to accept perceived risks of investing in at least the less advanced developing country markets Most poorer developing countries have limited ability to borrow on commercial terms, or to give sovereign guarantees

So, can we find Positive Synergies between these two Sources? Use most of the scarce public development finance for activities that market flows cannot address Use relatively small amounts of public development finance (typically, a mixture of technical assistance and some form of financial comfort) to crowd in private capital into areas that at present are seen as too risky And do so in a way that is sustainable and effective Value of today’s reflections on European External Investment Plan and other innovative approaches

Lessons of Experience (1) Of course, using public development finance to reduce perceived risks to investors is not new: basic World Bank 1940’s model a key initial step Many experiences with combining public development finance (not just ODA) with various types of private finance, eg: Co-financing; Blending; Guarantees; Insurance….. Many different categories of investor with different risk and return appetites. ‘Crowding in’ needs to be done in ways that reflect these different markets Obvious limitations for using private finance where there is neither a sovereign guarantee nor a revenue stream that can be reliably captured. However, good evidence that involvement of the official finance institutions seen as very positive factor in many cases.

Lessons from Experience (2) 1. Tackle home country regulations that un-necessarily discourage institutional investors from investing abroad or in suitable asset classes (such as well-regulated utilities). 2. Help developing countries build institutional capacity to access domestic and foreign investment on an effective and sustainable basis, and address basic problems in the environment for local as well as foreign business 3. Find models of co-operation appropriate to the very different types of investor 4. Concentrate public interventions on reducing perceived risk 5. Standardize what can be standardized, to help create competition and the establishment of asset classes

Lessons of Experience (3) 6. Recognize that very high ‘leverage’ will limit the type of activities that can be financed 7. But recognize also the risks over over-generous provision of support, substituting soft public funds for available private capital, and ‘spoiling the market’ or giving the investors un-necessary windfall profits 8. Don’t allow economic or political interests to incentivize ‘bad development’

MDB Principles, 2012 Five common core Principles to guide MDBs’ engagement with, and support of, the private sector, so as to achieve development (transition) goals consistent with their individual mandates: Additionality Crowding-in Commercial sustainability Reinforcing markets Promoting high standards

THANK YOU!

Risks in more detail [if needed] Undermine the formation of sustainable markets; Provide low value for money (waste of public funds); Misallocate resources in the economy (distortions), when concessional finance diverts scarce investment resources towards excessively risky, unviable or otherwise weak projects. Reduce overall funding available for targeted areas through crowding-out larger volumes of existing or potential private and development finance; Discourage or delay commercial replication of underlying projects by entrenching expectations that they are not commercially viable (because subsidies are needed); Delay market transformation if concessional finance is seen as a substitute for the policy reforms that address the root cause of market and/or institutional failures and barriers; Encourage entrepreneurs to engage in activities that may not be productive from the perspective of their core business (e.g. writing grant applications rather than improving efficiency and competitiveness of products); Cause negative distributional consequences if rich rather than poor households and regions capture the benefits; Create conflict of interest for funders themselves.