A Global Public Good Push for the World Bank
Key Points: The World Bank Evolution Roadmap includes expanding focus to include climate change and pandemic response and changing operations to mobilize more private capital. Ideas for the latter, most being revisited, include expanding what can be considered WBG equity capital, diversifying from providing senior debt and selling off loans to recycle capital.
The World Bank issues Evolution Roadmap Paper to broaden its mandate. In early January, the press reported seeing a leaked World Bank Group (WBG) document called the Evolution Roadmap Paper. This strategic and operations review, which was prompted by its government shareholders, considers (more formally) including in its mandate (1) broader poverty alleviation (beyond extreme levels) and (2) funding investment in “Global Public Goods” including climate change and pandemic preparedness and response.
Multilateral Development Bank (MDB) watchers appear to generally agree with the strategic shift to include these global challenges. On climate funding, however, some have raised concerns about the WBG’s historical inefficiency, i.e., greenhouse gas reduction per dollar spent, and that climate-related financing to middle income countries might “win out” over poverty eradication in poorer countries. Regardless, changing incentives for MDBs to provide more (and more effective) climate finance, which can include being measured on transformation (and climate impact), is a critical starting point.
Operationally, much of the emphasis is on mobilizing more private capital. The WBG paper points to a shortcoming in legacy MBD concessional lending in terms of attracting private capital (i.e., catalyzing or mobilizing private investment). This shortcoming has been recognized for years, including by the MDBs themselves.
The Evolution Roadmap offers several ideas to mobilize more private investment without spreading WBG capital too thinly and thus sacrificing its strong credit ratings. Suggestions include giving explicit value to contingency capital that is callable from shareholder governments, innovation in mechanisms to provide concessional support (e.g. issuing debt that is subordinated to private lenders, greater use of guarantees, etc.), mechanisms to bring in private capital into MDBs and selling off/syndicating loans (for more on these last two, see below).
Multilateral Development Banks (MDBs) mobilize capital indirectly and directly. The late-2022 announcements of JET partnerships illustrate the potential indirect impact of public/MDB funds: if they support local government institutions, it can unlock private capital. This can involve technical education/support — for example assistance in loosening power market regulations that might give new renewable energy (RE) generation more commercial opportunities. Or it might be infrastructure-related — such as helping to fund a national utility expand transmission and distribution capacity to accommodate new RE generation.
MDBs can also have a direct catalytic impact through co-financing: with an MDB providing a tranche of lower cost debt and perhaps some form of risk assumption (e.g., taking losses first), it supports private entities co-financing the project at (reasonable) market rates.
Selected ideas include new types of investment opportunities for private capital. We note three ideas, which include recommendations of an Expert Panel tasked by the G20 to boost MDBs’ investment capacity, that explicitly involve deploying private capital. The first two allow MDBs to do more of what they do today; the third ties with an indirect/facilitator role.
- Introducing non-voting capital. This is envisioned as equity or perhaps hybrid/interest-bearing instruments provided to WBG (and so is not project-specific) by private investors. Such investments could help these private actors boost/meet ESG or sustainability commitments in their portfolios.
- Selling off loan portfolios/securitization. WBG would continue to originate and administer loan portfolios but would either sell off parts of the loans or engage in some form of (synthetic) securitization. This has been trialed successfully by the African Development Bank.
- Support development of VCM, including being a “trusted intermediary.” WBG is currently sponsoring a blockchain-based ecosystem for warehousing credits registered in various markets and is supporting development of a centralized, digital infrastructure that connects various registries’ systems.
January 17, 2023