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The Importance of Public Private Partnerships in Accomplishing True, Lasting Global Development

September 27, 2017

The World Bank Group: A case in point

By Kirtika Challa

In 2016 the World Bank Group committed nearly $64.2 billion in loans, grants, equity investments and guarantees to its members and private businesses [1]. On the other hand, as of 2016, total GDP for Emerging markets and developing economies (EM), based on Purchasing Power Parity, totaled $69.67 trillion, compared to $50.22 trillion for advanced economies [2]. The EM GDP passed developed GDP for the first time in 2008 and the gap has only continued to widen with the IMF forecasting EM GDP to compose more than 60% of the global GDP by 2020. It is evident then, that the need significantly outweighs the scale of the resources that the World Bank has at its disposal to achieve its dual mandate of ending extreme poverty and promoting shared prosperity.

On a more granular level, annual infrastructure investment needs in emerging markets total approximately Given the scale of the need it is apparent that for the World Bank to have a significant impact on development in the world, it must be able to leverage its own resources through the crowding in of private capital. This is the basis of current World Bank President Jim Kim’s “cascade” approach to the group’s development goals and why the WBG’s two institutions focused on private sector development. The International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA), are at the center of this strategy.

Figure 1: The World Bank Group Cascade approach.

Figure 1: The World Bank Group Cascade approach.

Since 1956, the IFC has leveraged about $2.6 billion in capital from member governments to deliver more than $245 billion in financing for development [3]. In 2016, IFC’s clients provided 2.4 million jobs, helped educate 4.6 million students, and treated nearly 32 million patients. They generated power for 48 million people, distributed water to nearly 22 million, and provided gas to more than 50 million [3]. This level of impact is only possible through leveraging of private markets. As an example of IFC’s ability to crowd in investment, a few years ago IFC provided financing for an investment in cell phone towers in an emerging market country; a key infrastructure investment important to increase access to mobile data service where it doesn’t exist. IFC provided project financing in the form of a 9-yr loan to the client. Just recently, the company was able to refinance the loan using private capital, reducing the interest rate on the loan by 400 basis points relative to the IFC financing. Thus, IFC’s willingness and ability to successfully invest in more frontier markets clearly gave private capital the confidence to enter these markets, providing investors with good returns while also reducing the financing costs of the incumbent. Further, it frees up IFC capital to invest in regions or projects that do not yet have access to capital, to hopefully repeat the outcome.

The benefits from Public Private Partnerships can also be clearly seen at MIGA. As of FY 2016, MIGA’s outstanding gross exposure was $14.2bn [4] of which 45% was in IDA-eligible countries [5], 10% were in FSC countries [6] and $7.5Bn of this exposure was syndicated out to the private market, clearly demonstrating the ability of MIGA to leverage its capital. Furthermore, just in 2016 MIGA issued $4.3Bn in guarantees, which catalyzed $27.3Bn of investments, providing access to $787mm of financing for SMEs, g 24.2 million people with power, and providing employment to approximately 24,000 people.

Figure 2: MIGA Gross Issuance for FY 2016 by region.

Figure 2: MIGA Gross Issuance for FY 2016 by region.

 Figure 3: MIGA's ability to leverage shareholder equity.

Figure 3: MIGA's ability to leverage shareholder equity.

As the political dynamic of the world shifts and larger member nations of the World Bank shift away from a global approach to progress and growth towards a more nationalistic view, the importance of the public private partnership becomes even more important. The only path forward for development then lies in creating markets and environments to incentivize capital inflow and the creation of bankable projects. More importantly, although aid and grants are important to achieve development goals, the more sustainable path forward is to create marketplaces where return is also achievable. Only then will development be lasting and self-sustaining. The World Bank Group’s ability to truly meet its dual mandate relies on these public private partnerships.

References

  [1] Annual Report, The World Bank, 2016

  [2] IMF DataMapper, http://www.imf.org/external/datamapper/PPPGDP@WEO/OEMDC/ADVEC/WEOWORLD

  [3] EM Compass Quick Take – Infrastructure Financing Trends, IFC, April 2016

  [4] Annual Report, IFC, 2016

  [5] Annual Report, MIGA, 2016

  [6] The International Development Association (IDA) is an international financial institution which offers concessional loans and grants to the world’s poorest developing countries. As of 2012, to borrow from the IDA’s concessional lending programs, a country’s gross national income (GNI) per capita must not exceed US$1,175.

  [7] Fragile and Conflict Situations

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