The Paris Summit for a New Global Financing Pact held in June sought to address the key issues currently facing development finance. The mobilisation of private finance for development outcomes formed a central part of the discussions during the two day event. While this focus is not new, it has been somewhat reconfigured with emphasis placed on the need to mobilise “at scale”. However, without improved measurement and increased transparency, it will be impossible to tell whether or not these new commitments deliver on their promises.
It is also critical that any new commitments – and the metrics used to measure them – do not incentivise investments with greater mobilisation potential at the cost of those which have the greatest impact. More granular transparency would help to minimise this risk and keep the focus on development and climate impact.
“A key question in the mobilisation debate is how stakeholders will be able to monitor progress and hold MDBs and DFIs to account. There is currently far too little transparency around mobilisation rates.”
New pact, old solutions
One of the central outcomes of the summit has been a (re)commitment to mobilise private finance to meet global financing gaps. The summit’s official communique calls on greater efficiency in mobilisation where “Each dollar of lending by MDBs should be complemented by at least one dollar of private finance. Based on this, we expect from them to leverage at least 100 billion dollars of private money each year in developing and emerging economies”. Similarly, a group of thirty countries called on multilateral development banks (MDBs) “to develop relevant and harmonized metrics for private capital mobilization and set quantified targets that reflect their ambition, while also establishing incentives for staff to mobilise international and local private capital”.
If this commitment doesn’t sound particularly new, it is because it isn’t. MDBs ambitiously targeted high levels of mobilisation in a 2015 declaration that financing for development needed to be transformed from “Billions to Trillions” and that the mobilisation of private finance was a key element of achieving this. The leverage ratios implied in this old objective appeared unrealistic to many, and indeed proved to be so. Analysis of mobilisation from the Overseas Development Institute found that leverage ratios from MDB and development finance institution (DFI) investment ranged from $1.06 for every $1 invested in lower middle income countries, to $0.37 for every $1 invested in low income countries. Meanwhile, Charles Kenny declared the Billions to Trillions narrative to be “still dead” in an analysis of the limited mobilisation achieved by the International Development Association (IDA) Private Sector Window (PSW). In comparison to the previous goals, the new target of leveraging $1 for each $1 invested by MDBs appears more realistic, although it still implies an increase from current rates.
What’s different this time?
One of the key changes in the narrative surrounding the mobilisation of private finance that emerged from the summit was an emphasis being placed on the need to mobilise “at scale”. To date, much of the focus on mobilisation has been through the lens of transaction-level mobilisation, in effect co-investment of MDB resources with private capital. This is reflected in the current methodologies for measuring and reporting mobilisation; both the OECD approach and the MDB joint approach only capture mobilisation that occurs in individual investments. However, the summit notably focussed on a broader array of tools that may mobilise private finance. The thirty-country vision statement called for “expanding the use of innovative risk-sharing tools and platforms with a strong leverage effect”, reflecting a recognition that to mobilise at scale would require solutions and products that are more attractive to investors that are seeking larger participation such as institutional investors and pension funds. These proposals have strong synergies with recent work from British International Investment and from Neil Gregory that have argued for a reconceptualisation of mobilisation to include mechanisms that occur at levels or stages in the investment cycle that are not currently captured by the existing measurement methodologies.
A note of caution is required when treating mobilisation in this way. MDBs and DFIs have long deployed many of the tools and leveraging mechanisms that are now being hailed as pathways to increasing mobilisation. Given that leverage ratios are currently significantly below those required to close finance gaps for achieving the SDGs and in climate finance, it is necessary for these mechanisms to be deployed at greater volume. Otherwise, there remains a risk that we begin accounting for existing mobilisation that to date has been unaccounted for, while failing to change the absolute amounts of private capital that are mobilised.
The need for new data and more transparency
A key question in the mobilisation debate is how stakeholders will be able to monitor progress and hold MDBs and DFIs to account. There is currently far too little transparency around mobilisation rates. Publish What You Fund’s inaugural DFI Transparency Index found that none of the institutions included in the assessment systematically disclosed disaggregated mobilisation data. While MDBs and DFIs have reported aggregate mobilisation data through a joint report, and the OECD maintains a database and periodic reporting on mobilisation, none of these sources contain detailed, disaggregated data. Without such data it is impossible to see which tools and investments are effectively mobilising private capital, which are less effective, and where future efforts should be focused. One of the key outcomes of the summit was a call for “Multilateral Development Banks to examine and possibly adopt relevant and harmonised metrics for private capital mobilization and to set quantified targets at the institutional level within their Key Performance Indicator (KPI)”. While this call is to be welcomed, if the metrics are to be of real use they must also be transparently disclosed.
Publish What You Fund is currently working on the issue of mobilisation transparency. The work has two aims:
- To improve measurement of mobilisation to better capture the totality of mobilisation efforts at MDBs and DFIs.
- To introduce a new framework for reporting mobilisation for adoption by the leading MDBs and DFIs.
We are currently holding many discussions with MDBs and their stakeholders as we work towards these goals. Our discussions have indicated that there is a recognition of the need for both better and more data that can help MDBs and DFIs and their stakeholders better understand what works, and what doesn’t, in the drive to mobilise private finance for better development outcomes.