DFIs mobilise $175bn of private finance for SDGs

Multilateral development banks (MDBs) and other development finance institutions (DFIs) mobilised $175 billion of private finance in 2019, an increase of 9% on the previous year, a joint report from 27 DFIs has revealed.

The results were particularly impressive considering the challenging investment environment in which the DFIs were operating, with total investment flows declining by 6% worldwide over the course of the year. The group mobilised $63.6 billion of private finance in operations in middle- and low-income countries. While this amount represents a disappointing decline of 8% on 2018, it includes $6.7 billion mobilised for low-income countries – a 21% year-on-year rise. Mobilisation in high income countries also increased 22% from 2018 levels.

“Some people in the development finance space think this is going to be the key to unlocking everything,” says a senior executive at an Africa-focused development bank, who asked to remain anonymous. “Particularly on the African side, where there’s a $170 billion financing gap for key infrastructure investment, people think this is one of the liquidity pools that will help us fund that shortfall.”

Pension funds, insurance companies and investment funds hold assets estimated close to $100 trillion worldwide. DFIs play an important facilitating role in helping stimulate this investment for sustainable development purposes through their operations in developing countries. Since the Third International Conference on Financing for Development in Addis Ababa in 2015, and reinforced in subsequent forums, there has been increasing drive by the DFIs to mobilise more private investment toward financing needs of the sustainable development goals (SDGs). Since 2016, the DFIs have reported on the success of these efforts in the Mobilisation of Private Finance by Multilateral Development Banks and Development Finance Institutions joint report.

“There have been questions for a while as to why we’re not leveraging more of the institutional investor liquidity there is out there,” says the development banker. “And not just for a funding perspective on the bonds and liabilities side, but really just getting them to invest in projects and deploying all that capital that is clearly floating around.”

“Over the last two or three years,  the subject has gained more prominence at the Heads of MDBs conference because the previous chair of the Heads of MDBs, president of the African Development Bank Akinwumi Adesina, stressed that it was a priority for MDBs as a whole. So on the back of that, there was a more concerted effort in recent years by MDBs to mobilise more private sector funding. That’s helped push the agenda along.”

New products and the rise of impact investors

The global investment environment has become even more challenging in 2020 and 2021 with the world reeling in the wake of the Covid-19 pandemic. With their traditional counter-cyclical role, the DFIs are stepping up their operations to fill key financing gaps—which also calls for closer DFI cooperation on the mobilisation of private investments.

The report noted the DFIs have identified new ideas and insights to help scale up those mobilisations efforts. There is early data to confirm that increased mobilisation from private sector investors matters for development – with more developmental impact from projects that have more mobilisation. In 2019, the Inter-American Development Bank (IDB) conducted a first-approach analysis at effectiveness using Project Completion Reports (PCRs) on projects that mobilised private financing. The reports assign a grade to projects that range from one to six, where the higher the number the higher the percentage of outcomes achieved. The result was that a comparison between similar projects with and without private mobilisation showed that the former scored higher. In other words, projects with private co-financers had a higher level of effectiveness.

New products also appear to be driving new areas of growth in mobilisation, and innovations are expanding the universe of investors. One example is unfunded risk transfers. These transfer the risk on a certain amount of DFI own-account investment, and increase mobilisation from untapped investor pools such as commercial insurers. The International Finance Corporation (IFC), for example, reported a greater amount of unfunded risk transfers in 2019 than in previous years, growing from negligible amounts in 2016 to over 10% in 2019.

And perhaps most significantly, impact investing has moved from being a boutique product to becoming a mainstream option for investors, with standardised definitions, and growth in both funds dedicated to impact and impact-oriented allocations from institutional investors. According to the Global Impact Investor Network (GIIN), assets under management in the impact investment industry were $715 billion as of the end of 2019, representing a 42% year-on-year increase.

The impact investment industry remains mostly invested in developed markets, with approximately 30% of assets under management focused on emerging markets. And therein lies an important role for DFIs going forward, who “are significant financing partners in efforts to mobilise private capital toward emerging markets to help countries achieve the SDGs and will continue to play this important role during the COVID-19 pandemic and beyond,” the report concludes.