Research Report: Innovative Deals in Development Finance: Originate to Demonstrate
Research commissioned by MOBILIST and produced by Risk Control Limited examines how transactions by development finance institutions (DFIs) can remove or mitigate informational or other barriers to trigger follow-on or ‘copycat’ transactions by other financial institutions. These follow-on transactions—where the DFI is no longer directly involved—can increase the ultimate development impact of the original transaction.
The sheer scale of the SDG financing gap means that it cannot be closed without attracting private capital. In response, development finance institutions (DFIs) have identified their ‘mobilisation’ of private sector finance as a key part of their impact.
As conventionally defined, mobilisation refers to financing contributed by private sector investors to transactions in which DFIs have participated. But this direct mobilisation is only part of the story.
The impact delivered by development financing could be considerably greater if DFIs focused on deals that remove or mitigate informational or other barriers for other financial market participants. Transactions that reduce informational barriers in this way, eliciting follow-on transactions in which the original DFI is not involved, may be described as having ‘demonstration effects.’
This report aims to lay the groundwork for the ex-ante assessment of demonstration effects in DFI transactions. It proposes a structured scorecard that DFIs could use to evaluate the potential for a transaction to generate demonstration effects, similar to the type of structured, judgmentally-based decision rules that rating agencies apply to assess credit quality.
By using this kind of scoring approach to prioritise transactions that could have significant demonstration effects, DFIs can prioritise deals that increase the impact of their investments. The report examines several questions about how this can be achieved, including the following:
- How have demonstration effects been conceptualised, measured, and evaluated by market participants and DFIs?
- What information generated by pioneering transactions is most salient to market participants, including both issuers and investors?
- How is this information transmitted to and used by different types of investors?
- Are ‘positive’ and ‘negative’ demonstration effects equally influential over behaviour?
- Does the visibility of development finance affect behaviour change among market participants and other development finance actors?
- How do different structures and strategies used by development finance actors compare to one another in transmitting risk and return information?
- What metrics and methods should be used in the future to capture additionality in terms of direct mobilisation through co-investment as well as mobilisation through demonstration of follow-on transactions?
To shed light on these questions, it studies a set of innovative transactions, focusing on how these transactions were innovative, the effect that they had in stimulating follow-on transactions, and the factors that contributed to their success or otherwise. The following transactions are used as case studies:
- HBOS Structured Covered Bonds – 2003
- BRAC microfinance securitisation – 2006
- Climate Awareness Bonds (EIB) – 2007
- IFC’s Managed Co-Lending Portfolio Program (MCPP) – 2013
- Trade MAPS multi-bank trade finance securitisation – 2013
- Seychelles debt conversion for marine conservation – 2016
- AfDB Room2Run – 2018
- Guaranteed Green Certified Local Currency Bond in Nigeria – 2022
- Bayfront Infrastructure Capital IV (BIC IV) – 2023