Taking Development Finance Public
The application of development finance is an essential tool in the global toolkit to achieve both the 2030 sustainable development goals (SDGs) and the ‘climate transition.’ The use of development finance as also a tool to mobilise new sources of capital has been steadily growing in importance given the relatively limited pools of Official Development Assistance (ODA) funding available to address pressing developmental needs.
As the world emerges from the COVID-19 pandemic and unwinds pandemic polices, an unprecedented strain has been placed on global public finances and on nations in the global south. These pressures have added further impetus to calls to mobilise private sector actors and harness the enormous scale of global capital markets.
This evolution towards greater private capital mobilisation in the development finance sector can be readily observed in the public statements of international financial institutions. One would have to look very hard indeed to identify a multilateral development bank (MDB) or development finance institution (DFI) that does not proclaim to incorporate the mobilisation of private capital as a key strategic objective.
Operationally, mobilisation can mean different things to different institutions and thus a variety of approaches have been adopted, from targeting co-investors in PE deals like British International Investment (BII, formerly CDC), to launching new funds with private capital like Dutch development bank FMO, to the facilitation of the synthetic securitisation of balance sheet assets like the African Development Bank (AFDB).
However Such mobilisation strategies are only suitable for investors that can commit to privately held and often illiquid structures, thus excluding the largest global pools of capital.
The logic behind private capital mobilisation on the part of MDBs and DFIs is self-evident, given that the decades of experience such institutions have in deploying capital in developing countries is unmatched by private investors. Simply put, the dramatic scaling up of the investment activities of MDBs and DFIs is essential to solving what is an increasingly pressing problem.
However, there exists an absence of deep connectivity and understanding between the development finance sector and global capital markets. If mobilisation is to occur at scale, and in time, it is essential that its implementation is carefully considered.
Development finance is largely defined by the deployment of capital directly into private assets in emerging and frontier markets. MDBs and DFIs have, through their specific expertise and experience, built up formidable portfolios of assets and developed deep global networks. Over time this activity has formed functioning and development-oriented private assets markets across the developing world.
However, this is where the development finance journey too often ends. Compared with the established private asset markets of the US and Europe, where the ability to exit an investment through public markets is an essential part of the continuum, the development finance sector has been slow to follow suite.
Of course there are differences, some of which are germane. For example, the relative underdevelopment of local public markets. Arguably, other differences stand up less well to scrutiny. The often-heard concern amongst development professionals that the selling of an investment to a non-development buyer might run the risk of sending negative signals, and that the development institution would lose control of the over the governance of the investment, to the detriment of ESG or impact frameworks. Putting in place the right safeguards, through partial or intermediated exits, synthetic securitisations and thinking creatively about new governance mechanisms are all solutions that can mitigate these concerns.
It goes without saying that markets cannot function efficiently without established exit routes.
At its best development finance is a system of institutions that can leverage scarce patient capital, deploy it where it is most needed, and then recycle it by selling those investments that they have supported to a commercially viable position. If this system is to function – and if it is to mitigate risks related to asset pricing and investor protections among others – it must proactively seek to build bridges to the capital markets in ways that make its assets more available to private sector investors.
The better utilisation of public listed markets is a clear opportunity. These markets can provide sorely needed exit routes for DFI and MDB assets and they can do so in ways that make development-orientated assets accessible to far deeper pools of private capital – most notably institutional investors whose allocation models place severe limitations on their ability to invest in developing country private assets. Moreover, in the context of the broader interconnectivity of ODA activities, public markets also have the capacity to mobilise local private capital and to provide domestic investors and savers with exposure to economic growth in their domestic economies.
There is reason for optimism. Government development agencies and departments that have oversight of MDBs and DFIs are demonstrably beginning to recognise the opportunities inherent in undertaking such actions.
The collaboration, through MOBILIST, of the UK’s Foreign, Commonwealth & Development Office (FCDO), with the Norwegian Agency for Development Cooperation (Norad) and the United States Agency for International Development (USAID), demonstrates a material and firm confidence in the approach being pioneered by the MOBILIST programme.
While it is true that narratives are shifting, the pace of change remains too slow. MOBILIST seeks to stimulate and facilitate greater private capital participation in ODA qualifying assets.
To this end, MOBILIST works directly with key global stock exchanges and the intermediaries in their respective markets to ‘source,’ ‘select,’ and ‘support’ scalable, replicable, and genuinely developmental products that are seeking to list. We look forward to seeing where this momentum leads and to building MOBILIST into a shining example of what can be achieved through cooperation and action.