The magic pony of private finance fails to fund the global green transition

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By now it’s a well-established pattern. A bright-eyed new World Bank president, the current one being the former Mastercard CEO Ajay Banga, comes in promising to leverage judicious injections of public money to unlock the vast reserves of private sector cash itching to invest in infrastructure in developing countries. The plan is hailed as a bold new market-led approach to helping poor countries get rich. And then it doesn’t really happen.

This pattern stretches back through David Malpass, the bank’s president from 2019-2023, 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 tap the gushing rivers of capital in the post-cold war surge in globalisation.

The challenge of getting private finance to build infrastructure is even now more acute because of the green transition to renewable energy and low-carbon technologies. Traditionally generous donor countries — the UK, France, Norway — are cutting aid budgets. Instead, they often concentrate on “development finance institutions” (DFIs) such as the UK’s British International Investment company. By far the largest DFI is the World Bank’s International Finance Corporation (IFC). The DFIs lend or take equity stakes in businesses in developing countries and aim to “crowd in” private capital.

The results have been consistently disappointing. A forthcoming book by the former World Bank economist James Leigland on the rise and fall of public-private partnerships (PPP) notes that private contributions to developing-country infrastructure projects peaked at a low level in 2012 — with only 10 per cent going to the lowest-income nations — and have fallen since. They have had relative success in some sectors such as renewable energy generation but had difficulties in others.

An independent expert group on the multilateral development banks commissioned by the G20 leading economies suggests achieving $240bn in private capital mobilisation by 2030. The latest figure is just $71.1bn, of which again only 10 per cent went to the poorest countries. The DFIs aim to leverage substantial multiples of the money they put in, but in practice the ratio of private to public capital has struggled to rise above 1:1.

Institutional investors like pension funds are notable by their almost total absence. Whereas Australian and Canadian pension funds are active in infrastructure finance in advanced economies, for developing countries they have historically had a pitiful share in total investments of less than 1 per cent.

Why? Undoubtedly there are some fixes that could be tried. Avinash Persaud, special adviser at the Inter-American Development Bank (IDB) who worked on the Bridgetown Initiative to increase capital flows to developing countries, argues for creating a facility to reduce currency risk for investments.

Investment managers say there is a deeper problem — that DFIs at heart act like private investors, not catalysts for other investments, and their bureaucratic processes deter rather than attract other funds. Infrastructure investment is intrinsically tricky. It’s typically long-term and involves political as well as commercial risk, especially with essential public utilities like power and water, and hence requires detailed information and precise regulation in the recipient country.

The aid transparency initiative Publish What You Fund has released a report arguing for granulated disclosure of data at a project level to inform private investment decisions, which it says the IFC and DFIs have been slow to do. Institutional investors such as AllianzGI and Africa Investor back the PWYF conclusions.

Hubert Danso, chief executive 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 better at crowding out private capital than crowding it in.” He and PWYF reject the IFC’s argument that publishing such data threatens commercial confidentiality.

Development banks and their shareholders have a long-standing tendency to judge themselves on how much money they get out of the door rather than what it does when it arrives. For DFIs, that is a particularly unfortunate mentality since they are supposed to be opening the door for others.

But even more fundamentally, official lenders and governments should be more realistic about what private finance can achieve in infrastructure. It’s somewhat ironic that the UK in particular has been so keen to push PPP in developing countries, since Britain’s own experiences in the area have not exactly been joyful.

A decades-long experiment, the Private Finance Initiative, had extremely mixed results and was terminated by the Conservative government in 2018. Writing contracts that created incentives to invest and genuinely shifted risk to private investors proved to be very difficult.

A summit held in London this week to encourage private investors to fund British infrastructure anew was clouded by questions about lack of clarity and the UK’s business climate, with the government feebly resorting to the tired old mantra about tearing up bureaucratic red tape.

It’s admirable in principle to encourage private investors into infrastructure in lower-income as well as higher-income economies. But continually announcing bold initiatives and talking in the hundreds of billions of dollars without creating appropriate incentives will only breed cynicism. If the world is to achieve its targets for the green transition, there is likely to be no magic alternative to having public money doing a lot of the work. Pretending otherwise does few favours to anyone, least of all developing countries themselves.

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