“Doing Good While Doing Well” is the Mantra for SDG Success
By Jay Collins, Vice Chairman, Corporate & Investment Bank, Citi July 18, 2016 01:30 PM
Global and local capital markets have powerful potential as development funding tools and offer the world the ability to move beyond traditional development assistance and philanthropy to structures and solutions that leverage public funding and crowd-in the private sector (OECD/WEF, 2015). With myriad structures, themes and formats, capital markets have the scale, depth and potential to reach far beyond the current multi-billion dollar development funding level. Largely because of their size, they can drive the move called for by World Bank’s President Jim Yong Kim (2015), “from billions to trillions”.
Perhaps the most important example of the underutilised potential of capital markets lies in the infrastructure funding gap, which exists in both emerging and developing economies. The world spends approximately USD 3.3 trillion per year on infrastructure (Dobbs et al., 2013: 10), with the bulk of this funded directly by governments on their balance sheets, despite debt and deficit limitations; only some USD 400 billion is contributed annually through project finance markets, in the form of non-recourse loans and/or bonds that are paid from cash flows from the project rather than the balance sheets of its sponsors (Dealogic, M&A Analytics database). With Basel III and Solvency II constraints, which impose more stringent capital requirements on financial institutions and insurance companies, this predominantly bank-funded market will not grow meaningfully unless solutions are found to push more infrastructure financing into global and local capital markets. Currently, only USD 30-50 billion of project bonds are completed annually, which makes global bond markets only a small fraction of the infrastructure funding pie (ibid.).
This has to change. To achieve rapid growth in the infrastructure project bond market, governments and development institutions must innovate and develop new structures involving the private sector – structures that distribute risk differently. As the private sector embraces instruments that combine social returns with risk-adjusted financial returns, the development community will need to focus on blending more of its public resources into risk-adjusted return structures. This includes using development capital to create guarantees and other financial solutions that make infrastructure projects “bankable” – or viable for the private sector.
The concept of blended financial solutions is not new. For years, Citi has been partnering globally with institutions such as the World Bank Group’s Multilateral Investment Guarantee Agency and the US Overseas Private Investment Corporation through a variety of risk-sharing arrangements. The challenge – and the imperative – going forward is for development finance to better incorporate grants and concessional financing, including official development assistance (ODA) and philanthropic capital, to catalyse and crowd-in more private sector capital. Global ODA stands at roughly USD 135 billion per year and philanthropic giving is holding relatively constant at about USD 30 billion (OECD, 2014). By better leveraging these funds, much more can be mobilised (OECD/WEF, 2015). For example, an injection of ODA as first-loss equity in a project with positive development impact could go a long way in making a previously un-bankable deal bankable.
To promote innovative solutions and put theory into practice, Citi is participating in public-private partnerships that are developing new blended finance solutions, such as the Sustainable Development Investment Partnership. With partners that include USAID, the OECD, the World Economic Forum and the Swedish International Development Co-operation Agency, this partnership aims to mobilise USD 100 billion in private financing over five years for infrastructure projects in developing countries in support of the SDGs. It will do so by using official funding to better mitigate risk and attract private sector capital (OECD/WEF, 2015).
Yet unless development institutions measure their performance based upon amounts leveraged or “mobilised”, rather than public funds committed, the behavioural change necessary to create capital market and blended finance solutions will simply not happen. At the same time, global for-profit institutions – banks, corporations and institutional investors – must embrace a paradigm that measures social and financial returns and builds those metrics directly into core businesses. As capital markets will likely be the dominant tool to fund the SDG gap, “doing good while doing well” must be the mantra for SDG success.
This piece originally appeared in the Development Co-operation Report 2016: The Sustainable Development Goals as Business Opportunities, published by the OECD.
*Tagged as: Global