G20 expert group presents roadmap for ‘bigger, bolder, better’ MDBs | Latest News India - Hindustan Times
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G20 expert group presents roadmap for ‘bigger, bolder, better’ MDBs

Oct 13, 2023 08:38 AM IST

Volume one of the report, submitted to the G20 ministers in July in Gandhinagar, recommended tripling the annual lending levels of MDBs to $390 billion by 2030

To meet the objective of having bigger, better and bolder multilateral development banks (MDBs), the G20 independent expert group on the subject has laid out a vision where, by 2030, MDBs channel support through multi-year country platforms, process operations in half the time, work together as a system on regional and global approaches to global public goods (GPGs), triple lending volumes, quintuple private finance mobilisation, expand its use of guarantees, ensure simplified financing mechanisms, and provide automatic liquidity through debt and loan contracts in case of a disaster.

NK Singh, veteran Indian policymaker and chair of the 15th Finance Commission, is part of the expert group. (File Photo)
NK Singh, veteran Indian policymaker and chair of the 15th Finance Commission, is part of the expert group. (File Photo)

The independent expert group, which was led by former US treasury secretary Lawrence Summers and veteran Indian policymaker and chair of the 15th Finance Commission NK Singh, submitted volume two of its report, titled The Triple Agenda: A Roadmap for Better, Bolder and Bigger MDBs, to the ongoing fourth G20 finance ministers and central bank governors meeting in Marrakech during the annual meetings of World Bank and International Monetary Fund. HT has seen the report.

Volume one of the report, submitted to the G20 ministers in July in Gandhinagar, had recommended tripling the annual lending levels of MDBs to $390 billion by 2030; adopting a triple mandate for MDBs of eliminating extreme poverty, boosting shared prosperity and contributing to global public goods; and expanding and modernising funding models.

The final report has focused on three broad sets of recommendations — converting MDB operating models to support transformational investments, placing the engagement with the private sector at the center, and scaling up financing at an affordable cost.

An ideal MDB by 2030, according to the report, should see its processing time from concept note to first disbursement shrink from 25 months (the average in 2017 for World Bank Group) to 12 months; it should enhance private capital mobilisation from 0.6 dollars (the average in 2019) for each dollar they lend to 1.5-2 dollars; and it should enhance its commitments related to GPGs from five per cent to 41%.

The New Delhi G20 Leaders’ Declaration, in September, had a detailed section on reforming multilateral institutions in general, but MDBs in particular, that recognised and appreciated the work of the expert group and committed to examining both volumes in conjunction.

The context

Laying out the context, the group said that the world was on fire, literally and figuratively, and a world on fire required MDBs to accelerate new investments in emerging markets and developing economies (EMDEs), which should be investing $3 trillion by 2030 to transition on to the path of “low-carbon, equitable, resilient and rapid economic growth”.

This had to come through a reorientation of existing spending and incremental spending financed by domestic ($2 trillion) and external ($1 trillion) resources. “A tripling of MDB financing support to $390 billion by 2030, plus their role in mobilizing and catalysing private investment, is essential to meeting these financing needs,” the report said.

With the G20 Leaders’ Declaration calling for full and effective implementation of the 2030 agenda on sustainable development (the world has fallen behind in meeting SDGs), acceleration of efforts and enhancement of resources to meet Paris Agreement goals, and reforms for better, bigger and more effective MDBs, the expert group focused on how to realise these commitments and called for a significant push on reform and funding fronts.

“The challenge we address in this report is how to move from individual sustainable projects to systematic programs of transformative change by 2030, matched with the right type and scale of financing,” the report declared. This cannot happen with a business-as-usual approach, with the expert group categorically calling for “a sharp discontinuity in the financial scale of the MDBs and in their operational models –the way in which they operate internally, with their clients, with the private sector and with each other”.

Better MDBs

Building on Brazilian president Luiz Inacio Lula da Silva’s call for MDBs to invest in structural things that change countries, the G20 expert group has said MDBs must rediscover where they add value, become more client-responsive, move faster, become cheaper, join hands with each other, and serve both middle-income and low-income countries with a different set of instruments.

The report calls on MDBs to adapt to multi-year country programmes by playing a supportive role, offering policy and regulatory advice in a focused manner, and investing in institutional capacity and local consultation with an eye on the “comparative advantage” that MDBs can offer. The report offers an example of an energy transition system, where MDB financing can focus on areas with solid economic returns, long-lived assets, long spillovers such as transmission and storage of power, low-emission public transport and just transitions.

Pointing out that the largest external financing gaps are in low and middle income countries, the expert group recommends that banks focus on non-concessional lending in these regions in climate action, while concessional finance can be centered on SDGs.

To do all of this, however, in the backdrop of longstanding concerns about the bureaucratic processes and delays in MDBs, the expert group has recommended a change in the operating model of MDBs with a focus on five areas.

These include redesigning delivery of policy and institutional support and knowledge and learning agenda; “radically” speeding up project and programme approvals and simplifying rules and procedures by using a “risk based tailored approach”; scaling up national transformations by integrating them with regional or global programmes; engaging local communities and civil society; and deepening collaboration across MDBs and national development banks.

“We recommend that MDBs agree on a range of key performance indicators, for each institution individually as well as for MDBs as a system, covering these 5 areas, including client assessments of MDB performance that should be measured through a survey administered by an independent body reporting back to the G20,” the report said.

Bigger MDBs

The expert group has pointed out that the MDB’s role as financiers for EDMEs has shrunk; if it was contributing roughly 0.5% of their GDP in 2000, in 2021, this was down to 0.2% of the GDP even as the needs for more financing had only grown. By 2023, the group has estimated, MDBs may be collecting as much money from middle-income countries as they are disbursing in loans.

“At a time when the world is looking to, and needing, middle-income countries to sharply increase spending on development and GPG-related areas, it is unacceptable that the major international financial institutions find themselves unable to provide supportive levels of net transfers,” the report said, adding that it was time for MDBs to sharply increase disbursements which required them to disrupt the ways in which they funded themselves.

Reiterating its call for a tripling of the lending capacity of MDBs by 2030, the group laid out a variety of instruments to achieve this aim.

For one, the report said that while measures already being discussed could unlock $200 billion of lending capacity over the next decade or $20 billion annually, the group felt that further balance sheet optimisation could take this figure up to $40 billion by 2030. But balance sheet optimisation itself would not be enough, with the group saying it was both necessary and feasible to expand the financial capacity of MDBs.

In terms of additional instruments, the expert group recommended pooled portfolio guarantees, “under which participating donors provide first-loss coverage for default on specified portions of the MDB portfolio”, which can result in an additional annual lending of $11 billion. Hybrid capital can tentatively generate another $29 billion a year.

The report also suggests a Global Challenges Funding Mechanism (GCFM) to target investors “that are seeking a vehicle to earn a financial return while also supporting SDGs, GPGs and other impact areas”. In addition, the expert group suggests a mechanism for institutional investors to purchase hybrid capital bonds. “These two mechanisms are mutually supportive, though the latter could result in greater leverage than the former. In both instances, the GCFM would support projects nested in the activities of the MDB, using the project selection, governance, and quality assurances of the institution. The on-lending platform route would lead to a direct transfer from private investors to borrowers, while the hybrid capital route could result in at least a 1:6 leverage ratio, enabling MDBs to lend $6 over a decade for every $1 of hybrid capital raised.”

Entering the most controversial terrain in the domain of additional financing, which would require richer countries to support MDBs more, the report emphasises that the greatest expression of shareholder support is an increase in capital support. This was because without this capital increase, EMDEs would have not have enough affordable finance; without access to MDB finance and guarantees, they wouldn’t be able to meet their climate and growth aims; without meeting those objectives, the risks of tipping point for climate action become larger, humanitarian needs increase and long term investments get tougher. While recognising the complexity of capital increases, the report has called for an initiation of the process.

The expert group has also called for tripling MDB concessional finance, which required more donor pledges for the International Development Association (another arm of WBG). “There is no scenario where IDA reaches the level of ambition needed to serve its eligible countries properly without at least a tripling of donor contributions. By 2030, IDA replenishments over a three-year period should reach $279 billion, requiring around 0.04 percent of IDA donor gross national income in annual contributions.”

Bolder MDBs

Suggesting that risk was a major reason for limited private investments in EDMEs, the expert group has said that MDBs can play a role in partnering governments to mitigate and allocate this risk in global capital markets, particularly sovereign credit risk and policy/regulatory risk.

Given that only 10% of sustainable bond finance went to developing countries besides China, the report says it is time for the public and private arms of MDBs to “co-create” markets suitable for private investment, including developing pipelines through a revamped and expanded global infrastructure facility (GIF), and mobilise much higher levels of private finance.

The starting point of MDB engagement with the private sector, the expert group suggests, should be the cascade principle; this refers to the public sector part of the banks refraining from financing what can be done by the private sector. MDBs should also agree on common rules of the game to help guide risk management. “The only way an MDB can have a catalytic impact is if it has a clear logic as to why the project would not have happened absent its intervention. Using this logic would reshape MDB culture and ensure viable private solutions are given preference over approaches that add to public debt,” the report said.

But to do this, the group says that the key obstacle that needs to be overcome is the risk aversion embedded in MDBs reflected in a culture of avoiding rather than managing risk, mixed shareholder signals on risk tolerance, financial tools that compete with rather than complement commercial finance actors, internal silos, weak private sector participation in formulating country plans.

This, the group says, needs to change. MDBs can “intervene in ways that build markets and lower risks and the cost of capital for all market actors, not just transaction participants; be fully transparent on their own operations to permit a better assessment of actual risk; target demonstrable gaps in capital markets for maximum additionality; and focus on comparative advantage, by taking on costs and risks that are especially hard for the private sector to manage, like early-stage costs and risks, and macroeconomic or country level risks like sovereign credit risk, policy risk and currency volatility”.

More specifically, the report has laid out a variety of instruments and institutional structures that need a reboot to enable MDBs to leverage private finance. These include how MDB participation in itself reduces risk for private partners by ensuring standards, improving government policy and regulatory decisions and planning projects better; strengthening of GIF to service all MDBs and client countries; making the global emerging markets (GEM) database, a credit performance database, more transparent; offering sovereign and project guarantees; empowering the multilateral investment guarantee agency (MIGA) which has “effective and standardized insurance products, a globally diversified portfolio, the ability to partner with sovereigns, municipalities, state-owned enterprises and the private sector, authority to work across the MDB system, a demonstrated track record, and excellent access to private reinsurance”; facilitating systematic and comprehensive support for local currency risk management; and having disaster and pandemic contingency clauses in debt contracts as other measures to manage risk and made MDBs bolder.

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