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It’s a well-established pattern now. The new World Bank president (currently Ajay Banga, former CEO of Mastercard) is looking to unleash vast amounts of private sector capital itching to invest in infrastructure in developing countries. , committed to leveraging a prudent injection of public funding. The plan has been hailed as a bold new market-led approach to helping poor countries get rich. And that doesn’t really happen.
This pattern was adopted by David Malpass, who served as bank president from 2019 to 2023, Jim Yong Kim (2012-2019), and Robert Zoellick (2007-2012), before it was finalized. The idea dates back to the 1990s, when James Wolfensohn, one of the bank’s most influential presidents, sought it out. This is to take advantage of the river of capital that has sprung up amid the rise in globalization after the Cold War.
With the green transition to renewable energy and low-carbon technologies, the challenges of raising private finance and building infrastructure are now even more acute. Traditionally generous donors such as the UK, France and Norway are cutting their aid budgets. Instead, they often concentrate on ‘development finance institutions’ (DFIs), such as the UK’s British International Investment Company. The largest DFI so far is the World Bank’s International Finance Corporation (IFC). DFIs aim to “concentrate” private capital by lending or taking equity in companies in developing countries.
The results have been consistently disappointing. A recent book by former World Bank economist James Leigland on the rise and fall of public-private partnerships (PPPs) finds that private contributions to infrastructure projects in developing countries peaked at a low level in 2012, and It points out that only 10% was donated to the national government. the country with the lowest income, and has since fallen. While it has been relatively successful in some areas, such as renewable energy generation, it has struggled in others.
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The Independent Expert Group on Multilateral Development Banks, commissioned by the G20 major economies, suggests achieving $240 billion in private capital mobilization by 2030. The latest figure is just $71.1 billion, of which only 10 percent went to the poorest countries. Although DFIs aim to leverage large multiples of the capital they put in, in practice they struggle to achieve a ratio of private to public capital of more than 1:1.
It is notable that institutional investors such as pension funds are almost completely absent. Pension funds in Australia and Canada have been active in infrastructure finance in developed countries, but in developing countries they have historically accounted for less than 1% of total investment.
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why? There are definitely some fixes you can try. 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 system to reduce the currency risk of investments.
Investment managers say there is a deeper problem. DFIs essentially act like retail investors rather than facilitating other investments, and their bureaucratic processes discourage other funds rather than attracting them, he said. Infrastructure investments are inherently difficult. This is usually long-term and involves not only political but also commercial risks, especially when it comes to essential utilities such as electricity and water, and requires detailed information and precise regulation in the recipient country. .
The aid transparency initiative Publish What You Fund has released a report advocating for granular data disclosure at the project level to inform private investment decisions, but IFC and DFIs say this has been slow. It is said that Institutional investors such as Allianz GI and Africa Investor support PWYF’s conclusions.
“A stable legal and regulatory framework and better data are far more important than multilateral development banks,” said Hubert Danso, CEO of Africa Investor Group. are often better at keeping private capital out than pushing it in.” He and PWYF reject IFC’s argument that releasing such data would threaten commercial confidentiality.
There is a long-standing tendency for development banks and their shareholders to judge their money by how much money comes out, rather than what they do with it when it arrives. For DFI, this is a particularly unfortunate line of thinking. Because they are supposed to open doors for others.
But more fundamentally, public financial institutions and governments need to become more realistic about what private finance can achieve in infrastructure. It is somewhat ironic that the UK is so keen to promote PPPs in developing countries, especially since its own experience in the region has not been a pleasant one.
The Private Finance Initiative, a decades-long experiment, had very mixed results and was halted by the Conservative government in 2018. Writing contracts that create investment incentives and truly transfer risk to private investors has proven extremely difficult.
A summit held in London this week to encourage private investors to provide new funding for Britain’s infrastructure rests feebly on the well-worn mantra of government breaking through bureaucratic red tape. It was clouded by a lack of transparency and questions about the UK’s business environment.
Encouraging private investors in infrastructure in low-income countries as well as high-income countries is laudable in principle. But continually announcing bold initiatives and talking about hundreds of billions of dollars without creating the right incentives only breeds cynicism. If the world is to meet its green transition goals, there will be no magical alternative to doing much of the work with public funds. Pretending otherwise does no good to anyone, especially not developing countries themselves.
alan.beattie@ft.com
