OFFICIAL-SECTOR NON-CONCESSIONAL LONG-TERM FINANCING The Role of Multilateral Development Banks 1

Transcription

1 1 OFFICIAL-SECTOR NON-CONCESSIONAL LONG-TERM FINANCING The Role of Multilateral Development Banks 1 Official bilateral and multilateral financial institutions contribute to the financing of long-term investments by providing direct financing through loans and equity investments, attracting other sources of financing to projects, and/or offering indirect support through risk mitigation, knowledge, and assistance in creating favorable conditions for private investment. The motivation for official sector 2 involvement generally stems from the need to address market failures, particularly when the broader social benefits of a project exceed private returns. This notably applies to infrastructure, an area in which public-sector involvement also derives from the public sector s responsibility for the underlying regulatory framework. In recent years, official sources of financing have come under increasing pressure, as many shareholders and providers of official financing face major budgetary challenges. Given these constraints and the considerable demand for investment financing in developing countries, the official sector continues to work to enhance its catalytic role in order to maximize the impact of scarce official resources on growth and employment. Section I reviews the current landscape for official sources of long-term financing for growth and development, focusing on multilateral development banks (MDBs) and their role in the provision of longterm financing, particularly in the wake of the global financial crisis. Section II presents a typology of ways in which the official sector contributes to investment financing. Section III reviews the primary channels through which official entities provide direct long-term financing for growth and job-enhancing investments. Section IV describes how official-sector entities help mobilize and/or catalyze long-term financing from other public and private sources. Finally, section V concludes by identifying challenges faced by official entities, particularly MDBs, in sustaining and enhancing their role in the mobilization of long-term financing. I. The Role of the Official Sector in Mobilizing and Catalyzing Resources For the majority of investments, the private sector is the main source of capital. However, the official sector has much to contribute given its ability to leverage resources from various sources while simultaneously enhancing investment impact. While the magnitude and nature of this contribution varies across institutions and sectors, the official sector can help clients through a combination of: a strong financial position;; preferred creditor status;; technical expertise;; prudent risk management policies;; credible application of well-understood standards in project design, execution, and corporate governance;; a long-term perspective;; and cross-country experience. Moreover, the official sector is often able to provide and leverage financing counter-cyclically, lending or retaining positions when private investors pull back. The rationale for official rather than private financing is grounded in the view that under certain circumstances, without official-sector involvement, private financing for socially-productive investments would be either insufficient or entirely unavailable. The reluctance of private-sector agents to provide financing is often attributable to market failures, such as problems arising from asymmetric information. Furthermore, private sector financing is not always forthcoming for public goods. Additional issues stem 1 Prepared by Jeff Chelsky and Claire Morel of the World Bank Group, with input from the African Development Bank, Asian Development Bank, European Bank for Reconstruction and Development, Inter-American Development Bank, Organization for Economic Cooperation and Development, and the United Nations. This note is part of the G20 Work Program on Long-Term Financing for Growth and Development, prepared for G20 Finance Ministers and Central Bank Governors at their meeting of February 15-16, 2013 in Moscow, Russia. 2 In the context of this note, official sector refers to bilateral and multilateral agencies that provide either direct non-concessional long-term financing or help mobilize long-term financing from other sources, either by partnering with other investors and lenders through risk sharing or by helping to enhance the bankability of projects by improving their quality or the underlying environment for investment. Annex 1 contains an indicative list of these entities which include multilateral development banks, bilateral funds, and guarantee agencies that provide private financing. In many countries, national development banks are also an important source of long-term investment financing (Annex 2). However, the focus of this note are those entities whose mandates are largely international (i.e., cross border), with particular attention to the role of multilateral development banks (MDBs).

2 2 from lack of experience with particular types of investments or economic activities (e.g., infrastructure). In the wake of the global financial crisis, financial fragility and the need to rebuild balance sheets significantly constrained the ability of many private-sector entities (e.g., European banks) to provide long-term financing or reduced their risk tolerance and lending horizon. As discussed in several of the papers prepared as part of the G20 s diagnostic study of long-term financing, accessing long-term finance has become more challenging for many borrowers following the global financial crisis. While the availability of long-term finance has recovered to an extent, it remains limited for many countries and investments in higher-risk sectors, such as infrastructure. Here, the official sector can play an important role, including by helping to sustain productive investment and job creation when private finance on appropriate terms becomes scarce. (Figure 1 illustrates the countercyclical role played by the MDBs after the 2008 global financial crisis.) Figure 1: Non-Concessional Financing from Multilateral Development Banks, (Policy-based and Investment Lending) Source: Congressional Research Service, using data from MDB Annual Reports. N.B. Definitions of concesssionality differ among MDBs so the above figures are not fully comparable. No effort has therefore been made to sum amounts across institutions. Outlook for MDB Lending Looking forward, MDBs will continue to play a role in assisting countries and firms in mobilizing financing for productive investment. The extent to which they are able to provide direct financing will depend on, among other things, the commitment capacity associated with existing capital, current exposures, and prudential policies. Annex 5 illustrates the projected commitment capacity of selected MDBs from 2013 onward. In nominal terms, the picture is heterogeneous, with some MDBs (e.g., EBRD and AfDB) set to expand lending over the near term, and others showing either flat or declining lending capacities. However, as a share of client GDP, most MDBs expect to see a decline, making it increasingly important that MDBs seek and develop new and better ways to leverage their resources. Figure 2 compares global growth with MDB commitments (rising in the wake of slowing growth), and IMF growth forecasts with MDB estimates of future lending capacity. 3 In aggregate, commitment capacity is projected to return to the nominal level of pre-crisis commitments. 3 Lending capacity represents the maximum that can be loaned given current prudential policies rather than a projection of what will be loaned to clients.

3 3 Figure 2: Total MDB Lending Commitments, Projected Commitment Capacity, and Global Growth Source: World Bank staff estimates based on data and projections provided by the staffs of the AfDB, AsDB, EBRD, IDB, and IBRD. Totals are rough aggregations given the different fiscal years used by the respective MDBs and different definitions of non-concessional financing. EUR/USD exchange rate for 2013 to 2015 as of January 24, 2013 (1 EUR = USD), WEO forecast for October II. Typology of Official Sector Additionality A key concern with official-sector investment financing is the risk of crowding out, rather than catalyzing, other sources of finance. It is difficult to assess where and when this is the case - i.e., whether a project would have gone ahead without official-sector involvement -- but maximizing the impact of public resources on growth and financial and private sector development requires demonstrating meaningful additionality. Figure 3, derived from Spratt and Collins (2012), presents a useful typology of official sector additionality 4. Figure 3: Official Sector Additionality Financial Additionality Official Sector Engagement Design and Policy Additionality More and Better Infrastructure and Investments Growth,Jobs, and Poverty Reduction Demonstration Additionality Source: Spratt and Collins, Development Finance Institutions and Infrastructure: A Systematic Review of Evidence for Development Additionality, January Using a wide range of direct financing and mobilization instruments, the official sector contributes funding and helps builds the confidence necessary to attract commercial funding. This results in financial additionality, which can take several forms. At the simplest level, it is the financing that the official sector is able to bring in from other sources as a result of its involvement in a project (e.g., through direct financing, risk mitigation, or concentrated involvement in the early, riskier stages of an investment through feasibility 4 Their work focusses on the additionality of Development Finance Institutions (DFIs) but the taxonomy remains relevant for the official sector more generally.

4 4 studies and project design). It can also take the form of securing improved terms--lower rates or longer maturities--from other sources of financing relative to those available without its involvement. 5 Design additionality derives from the technical expertise that some official-sector entities can contribute to projects to improve their bankability or attractiveness to private-sector investors. This can occur through ensuring efficiency, transparency, and adherence to accepted standards in project design, including environmental standards. Policy additionality refers to the support that MDBs and similar entities provide to governments to improve the policy and regulatory environment for investment and mitigate the risk of significant policy reversals. According to Buiter and Fries (2002), MDBs have unique characteristics that afford them a comparative advantage in providing finance related to the design and implementation of structural reforms and institution-building programs adopted by governments. Moreover, MDBs generally enjoy greater access to policymakers than do their private counterparts, and commitments made to MDBs are less likely to be reversed because of longer-term relationships between MDBs and their clients. This suggests that MDB engagement can have the biggest impact in sectors where the returns to private investment are strongly dependent on government policies and practices. Demonstration additionality refers to the potential for projects supported by official-sector entities to illustrate the possibilities of success (e.g., by improving private-sector perceptions of the risk/return trade-off for certain types of investments). The greatest potential lies in frontier markets and innovative, riskier sectors and technologies. Buiter and Fries (2002) argue that this form of additionality is particularly valuable in economies where businesses are often more focused on seeking rents than on undertaking the innovation and investment that is necessary to exploit newly created profit opportunities and to expand 6. However, as Pratt and Collins (2012) note, when projects fail, the demonstration effect can also work against subsequent private-sector engagement. Selection additionality, while not part of the Buiter and Fries framework, could be considered a fifth form of additionality: the support that official entities provide through better project selection. Because of their governance and accountability structures, many MDBs systematically require clear demonstration of impact in project selection. This helps to identify, prioritize, and mobilize financing for investments with the highest payoff in terms of growth and development, and can mitigate undue political influence in the selection of projects to be supported. III. Official Sector Financing for Investment The official sector has a comparative advantage in meeting some investment financing needs, enabling longterm foreign and local currency financing at more affordable rates. While MDBs do lend at interest rates that adequately reflect risks, as noted, they generally offer relatively longer maturities and grace periods than the private sector, and are sometimes the only entities willing and able to provide finance of the appropriate maturity. With high credit ratings--since backing by shareholder governments can reduce, if not eliminate, default risk-- and higher levels of liquidity, MDBs can often hold riskier portfolios than private investors, enabling them to intervene where private actors would be reticent to come in. Official sector entities provide direct financing for investment lending through several modalities, including investment and project loans, equity investments, and guarantees. Investment and Project Loans 5 The importance of some of these factors is well illustrated by the results of a 2012 IFC Client survey which asked respondents for their top reasons for working with IFC. The top responses were (in descending order), Long-term partners, Financing not available elsewhere, loan maturity, stamp of approval and resource mobilization. 6 Page 6

5 5 Investment loans represent a significant portion of the long-term financing directly provided by the official sector for investment projects, including infrastructure (Annex 3). Between 2000 and 2013, on average, investment and project lending accounted for 75 percent of AfDB lending, 76 percent of AsDB lending, 79 percent of IDB lending, and 64 percent of IBRD lending. Equity Investments Many MDBs have mandates to engage directly with the private sector, rather than exclusively through governments. This allows them to purchase equity in firms in strategic or catalytic sectors. While the provision of equity finance has its own benefits, MDB participation is often accompanied, through representation on corporate boards and by knowledge of global good practices, including sound corporate governance standards. This in turn can provide a higher degree of comfort to other investors, encouraging them to also purchase equity in those firms. Most MDBs have internal or external (via separate private sector operations) mechanisms for making direct equity investments. The IFC, EBRD, and AsDB have been the most engaged in the direct provision of equity finance, with the AfDB ramping up its involvement in 2007 (Annex 4). Certain official sector entities also promote equity investments by supporting private equity funds, such as the IFC through its Asset Management Corporation. Risk Mitigation: Guarantees Official entities like MDBs often have an edge over private actors in that their official status and financial structures enables them to absorb more risk both default risk and political interference risk making them particularly useful in the early stages of a deal. MDBs frequently play an important role in drawing private capital into long-term projects in destinations where the market perceives high risks associated with inexperienced institutions and regulatory and judicial weakness. MIGA (WBG), AfDB, AsDB, EBRD, IDB, and several other MDBs insure cross-border investments (see Annex 6) for both new and existing projects with a clear development impact. MDB risk mitigation arms provide coverage often jointly with other public and private insurance providers - to projects that, although financially and economically viable, would have been challenging at best, if not impossible, without protection against non-commercial risks. This enables investors to obtain access to funding sources on more advantageous terms and conditions. Box 2: Types of Political Risk Eligible for MDB Insurance Currency inconvertibility and transfer restriction losses arising from an investor s inability to legally convert local currency into foreign exchange and/or to transfer local currency or foreign exchange outside the country where such a situation results from a government action or failure to act;; Expropriation when government actions reduce or eliminate ownership of, control over, or rights to the insured investment;; War, terrorism, and civil disturbance damage to, or destruction or disappearance of, tangible assets or total business interruption caused by politically motivated acts of war or civil disturbance;; Breach of contract in the event that the government breaches or repudiates a contract with the investor, including contractual obligations of state-owned enterprises in the certain circumstances;; and Non-honoring of sovereign financial obligations losses resulting from a government s failure to make a payment when due under an unconditional financial payment obligation or guarantee related to an eligible investment. Source: MIGA Investment Guarantee Guide, 2012 IV. The Official Sector as a Catalyst for Long-Term Finance The official sector catalyzes additional financing in several ways. The most direct demonstration of the catalytic role (the core catalytic role) involves actively bringing financing partners into deals, for example, in the form of syndications or through co-financing arrangements. In some cases, (e.g. syndications), this can provide partners with a similar level of creditor status vis-à-vis official creditors, in the event that the

6 6 borrower runs into repayment difficulty. Generally, the official sector s (particularly MDBs ) stamp of approval and role as an honest broker in disputes can help to reassure investors and contribute to a project s viability. To ensure sufficient financial additionality, some official entities, such as the IFC, impose a maximum amount (e.g., 25 percent) of a project to finance directly. More significant, but harder to measure, is the indirect mobilization of finance. Sometimes, given the standards and due diligence they require, the mere involvement of a major official entity is enough to give other financiers the level of comfort needed to participate. This could be a function of design additionality or the result of a sense that the official sector may be well-positioned and/or have the resources necessary to defend its interest in the event that the terms of the investment are not respected. In other cases, the support that official sector entities can bring to the underlying policy or regulatory environment attracts other sources of finance. Core Catalytic Role As mentioned, given that the official sector is not, and will never be, equipped to meet the entire investment financing needs of EMDEs, its role as a catalyst to increase the flow of domestic and foreign private capital into productive private investments is growing in importance. Neither the public nor private sectors can separately finance and develop investment projects at the necessary level, pointing to a need for more and better developed public-private partnerships (PPPs). MDB resources cannot cover the costs of entire projects nor would this be desirable but MDBs often initiate or develop projects in sectors or countries in which private investors would be reticent to invest without some form of official involvement. Particularly in higher-risk countries and sectors, the official sector is a key player in helping to respond to certain market failures. Quantifying this role entails methodological challenges, due to the absence of consistent reporting standards and universally accepted definitions. For this reason, the OECD Development Cooperation Directorate initiated an exercise in 2011 to improve the coverage and policy relevance of statistics on resource flows to developing countries beyond traditional Official Development Assistance (ODA). In-depth reviews of bilateral and multilateral development finance institutions portfolios have highlighted that new financial mechanisms, including those developed to mobilize private investment (e.g. guarantees and other risk mitigation instruments, equity investment, investment in funds), are either not covered or cannot be easily tracked in the current statistical framework. In 2013, concrete proposals will be elaborated to (i) update the typology of external development finance beyond traditional ODA and (ii) better track the extent to which official development finance can mobilize/catalyse private capital investment for development. For the latter, thorough analysis will be required to develop a robust methodology that avoids double-counting activities cofinanced by several institutions. Proposals will be shared and discussed with national and multilateral DFIs and other key actors providing debt and investment financing with a developmental motive. Syndicated lending Syndicated loans by MDBs are perhaps the clearest example of core catalytic financing, with a lead entity assuming responsibility for mobilizing financing from other lenders. Figure 4 shows the significance of international finance institution (IFI) participation to the syndicated loan market with IFIs playing an increasingly important role at higher maturities across most country groups. Nearly every MDB engaged in private-sector operations offers syndicated loans in two forms: B loans and parallel loans. For the former, the institution retains a portion of the loan for its own account ( A Loan ), and sells participations in the remaining portion to participants ( B Loan ). This arrangement, in which the institution is the sole contractual lender/lender of record, entails a number of advantages for the borrower, namely a longer tenor than what would otherwise be available 7, full exemption from withholding taxes, simplified administration and documentation, and potential for new banking relationships. Parallel loans are an option available to 7 For example, average final maturity of IFC B loans in FY2012 was 5 years, 9 years in FY2011 and 6 years in F For parallel loans, maturities were 11 years, 11 years and 9 years, respectively.

7 7 ineligible B Loan participants. Here, the MDB uses its existing syndication platform, deal-structuring expertise, and global presence to identify investments, perform due diligence, and negotiate loan documents in cooperation with parallel lenders. Borrowers enjoy enhanced access to financing, as well as time and cost savings over the life of the loan. With some MDBs, partners in syndications are able to share in MDB preferred creditor status. This means that, among other advantages, they receive some combination of preferred access to foreign exchange in the event of a country foreign exchange crisis, are excluded from country debt rescheduling, not subject to mandatory new money obligations under general country debt rescheduling, and can be exempt from mandatory country risk provisioning. Indirect Catalytic Role As discussed, the impact of official-sector engagement resonates well beyond direct financing and core catalytic resource mobilization. Indeed, the indirect catalytic impact is probably the most significant impact of official-sector interventions. Although direct financing and the core catalytic role of the official sector are somewhat less problematic to quantify, the indirect catalytic role--how much financing official-sector engagement mobilizes-- is nearly impossible to measure accurately. Nevertheless, experience suggests that investment partners, particularly in the private sector, value this type of support from the official sector. That said, MDBs understand the importance, particularly to their shareholders, of demonstrating additionality in operations and continue to work to address the methodological challenges of impact and additionality measurement. Gaps between investment needs and the availability of appropriate financing often arise not only from a lack of financing but also of bankable projects. Inadequate investment climate, lack of planning and institutional capacity on the part of governments and the private sector, and the absence of strong regulatory frameworks (particularly in the power sector) pose significant barriers. 8 As centers of knowledge and capacity-building and facilitators of peer learning, official institutions like the MDBs can help to ensure that public resources are used efficiently and effectively to finance productive investments, including in infrastructure, as well as to raise the comfort level of other providers of financing, thus promoting more effective PPPs. By bringing enhanced transparency, sound practices, and internationally-accepted standards to projects, these interventions address some of the information asymmetries faced by potential investors, helping to reduce investor risk and attract investment. While difficult to quantify, IFIs can also mobilize capital even beyond the specific projects they invest in by demonstrating the viability of new projects and new markets, and thereby allowing additional investments to progress without the direct involvement of IFIs. MDB policy-based lending can contribute at a macro or sectorial level, to the enhancement of the environment for productive investment, thereby attracting incremental financing, particularly from the private sector. A considerable part of the impact of official engagement on the mobilization of long-term financing also derives from the advisory services and technical assistance provided to borrowers. This type of support can be project-specific or more general in nature. MDB advice and borrower capacity building can improve project design, management and implementation, and establish internationally-accepted standards for a project. Furthermore, it can improve the investment climate (including competition policy, consumer protection, property and creditor rights, trade facilitation, judicial reform, budget and debt management capacity-building, or market reforms), providing a foundation for the creation of PPPs. Technical assistance in dealing with the complexities of PPPs can also foster the mobilization of major sources of long-term financing, particularly for infrastructure investment. Figure 4: International Financial Institution Participation in Commercial Syndications 8 See, for example, Restoring and Sustaining Growth, prepared by the staff of the World Bank Group for G20 Finance ministers and Central Bank Governors, June 2012

8 8 Source : IFC, International Financial Institutions and Development through the Private Sector, based on analysis from Loanware data. Note: BRICT = Brazil, Russia, India, China, and Turkey. Additionally, MDBs and other international agencies provide advisory support for the development of domestic capital markets (including local currency bond markets) in developing countries. By helping to build the institutional and regulatory support for domestic capital market development, establish and strengthen market infrastructure, and facilitate the regionalization of securities markets where appropriate, domestic savings can be more readily mobilized and made available as long-term financing to support local investment. Similarly, though technical and policy support for the development of domestic pension systems and life insurance and mutual fund industries, the official sector facilitates the development of important domestic sources of long-term financing. Another form of support involves fostering domestic bond market development through direct issuance by MDBs of local currency denominated investment products. V. Challenges to Official Sector Contribution to Mobilization With fiscal resources increasingly constrained, the official sector, particularly MDBs, are under increasing pressure to maximize and sustain the impact of the resources it allocates to investment. The need to stimulate sustained growth and job creation has put a premium on finding new and more effective ways to leverage resources from underutilized sources, including the private sector. The G20 s potential role in helping to facilitate this goes beyond the scope of this paper, but ongoing efforts to leverage and measure impact have already resulted in significant enhancements. Resources, whether loaned directly or leveraged in innovative ways, are clearly an integral part of the solution. However, the answer does not lie exclusively in increased lending volumes or more creative financial enhancements to leverage funds. Much can be done to enhance the impact of public funds that are spent on investments that can have a valuable demonstration effect, drawing in financing from other sources on terms more appropriate to the needs of long-term investment. Several of these for instance, building capacity and institutional structures to improve project selection are discussed in the other papers prepared for this G20 project 9, and the G20 may wish to consider how best to scale up support for these efforts through officialsector entities like the MDBs. Finally, it is also accepted that the case for mobilizing additional resources, either for lending or to finance technical and advisory assistance, is strengthened, particularly in a climate of fiscal stress, by improvements in the evidence base on impact. MDB emphasis on assessing impact and demonstrating results reflects the importance of increasing the evidence base in this evolving external environment. 9 See for example, Long-Term Financing of Infrastructure: A Look at Non-Financial Constraints, World Bank

9 9

10 10 Annex 1: Indicative List of International Finance Institutions with Private Sector Operations African Development Bank (AfDB) Asian Development Bank (ADB) Black Sea Trade and Development Bank (BSTDB) Council of Europe Development Bank (CEB) Development Bank of Latin America (CAF) European Bank for Reconstruction and Development (EBRD) European Investment Bank (EIB) Inter-American Development Bank (IDB) Inter-American Investment Corporation (IIC) International Finance Corporation (IFC) Islamic Corporation for Development of the Private Sector (ICD) Multilateral Investment Guarantee Agency (MIGA) Nordic Investment Bank (NIB) OPEC Fund for International Development (OFID) Examples of Bilateral Private Sector Development Finance Institutions Belgian Corporation for International Investment (SBI-BMI) Belgian Investment Company for Developing Countries (BIO) CDC Group (British Development Finance Institution) COFIDES (Spanish Development Finance Institution) Danish Industrialization Fund for Developing Countries (IFU) DEG (German Development Finance Institution) Development Bank of Austria (OeEB) Entrepreneurial Development Bank of the Netherlands (FMO) Finnish Fund for Industrial Cooperation (Finnfund) French Investment and Promotions Company for Economic Cooperation (Proparco) Japan Bank for International Cooperation (JBIC) Norwegian Investment Fund for Developing Countries (Norfund) Overseas Private Investment Corporation (OPIC, US) SIMEST (Portuguese Development Finance Institution) Swedfund Swiss Investment Fund for Emerging Markets (SIFEM)

11 11 Annex 2: National Development Banks for Long Term Financing 10 Historically, in the absence of sufficient long-term private sector financing, many countries have used public funding through national development banks 11 to support domestic long-term investment. When managed properly these institutions have been shown to generate positive externalities. Most national development banks (NDBs) are second-tier banking entities that complement the financial sector by intervening in cases of market failure, to support domestic economic activity. As such, their function is to act in those credit market segments in which commercial banks do not act, or do so only partially. Recent studies have also shown that NDBs have played a valuable countercyclical role, especially in cases of crisis when private sector entities become highly risk-averse 12. This is similar to the way the World Bank and regional development banks have played a countercyclical role internationally. Table 1: Financial indicators for NDBs in selected G20 countries a/ b/ Country Institution Total assets Total loans Credit rating (Foreign, Long-term) USD billions circa 2011 MOODY'S STANDARD & POOR'S Fitch Brazil BNDES Baa1 BBB Canada BDC Aaa AAA China CDB Aa3 AA- A+ France Caisse des Dépôts et Consignations Aa1 AA+ AAA Germany KfW Aaa AAA AAA India IDBI Baa3 BBB- Italy Cassa depositi e prestiti Baa2 BBB+ A- Japan DBJ Aa3 AA- Mexico BANOBRAS Baa1 BBB BBB Russia Vnesheconombank 71.3 Baa1 BBB BBB South Africa IDC of South Africa Baa1 South Korea KDB Financial Group Aa3 A AA- Turkey Kalkinma BBB- United States Ex-Im Bank of the US AAA AA+ AAA Source: UN DESA calculations based on Annual Reports. a/ This Table includes institutions devoted mainly to domestic economic activity. A clear cut definition is not available, so the list includes institutional investors as well as second tier public banks and banks that take deposits from the public. b/ Data provided is indicative as of end 2011 and includes all assets, not only those related to their role as national development banks. Many G20 countries have some form of national development bank, with combined assets amounting to more than US$3,500 billion (see Table 1). In addition, France recently created a public investment bank (Banque publique d investissement, BPI) with a capital of over 20bn 13, and the United Kingdom announced the creation of the UK Green Investment Bank. Other national development banks such as l Agence Française de Développement (AFD) and other development banks oriented mainly to official development assistance, national overseas development and fostering economic activity in developing countries and emerging economies 14 also provide guarantees and funding to foster private sector activity and sustainable development. A majority of NDBs are State-owned, but within public ownership models the structure varies. 10 Prepared by United Nations, Department of Economics and Social Affairs 11 This note focuses on institutions devoted mainly to foster internal economic activity. These include institutions of varied characteristics in terms of sources of funding and structure. Accordingly, the list of specific institutions is meant to be indicative of this variety and is not necessarily exhaustive. 12 Brei, Michael and Alfredo Schclarek (2013), Public Lending in Crisis Times, Journal of Financial Stability, Available at 13 BPI builds on preexisting institutions (Oseo and Fonds Stratégique d Investissement, FSI) and it is jointly owned by the Caisse des dépôts and the French State. More information can be found at 14 See European Development Finance Institutions (EDFI) members at

12 12 Some banks have mixed federal and state ownerships, such as the German Bank of Development Kreditanstalt für Wiederaufbau (KfW). Similarly, funding models are varied, including pensions, savings, as well as public funds. The mandates of NDBs can be: sectorial, with a focus on sectors, such as agriculture or SMEs;; universal, with a focus on a wide range of development banking, such as BNDES or DBSA, which offer a wide array of lending and non-lending services to many sectors of the economy;; or export-import banks, which facilitate trade with foreign countries by providing financing or insurance for exports and imports. Germany s public national bank, KfW, has assets of US$ 640 billion and occupies a wide spectrum of productive project financing, complementing private and cooperative banking on a large scale, as it is the second largest commercial bank in Germany. KfW deals mainly with those business areas that are considered less profitable in the short term, such as renewable energy, environmental and climate protection. Brazil s 55 year-old entity, BNDES, provides domestic long-term industrial credit, with a high participation of credit to large enterprises (See Table 2). Furthermore, for some high risk investments where the market has not provided adequate financing, such as in innovation, BNDES has begun to use structures based on equity investments. This has the advantage of allowing taxpayers to profit from the upside, rewarding the risk assumed by them. Canada s Business Development Bank supports entrepreneurship, focusing on subordinated financing for high-potential growth-oriented SMEs, venture capital to support innovation, consulting and securitization. Table 2: Business characteristics of NDBs in selected G20 countries Source: UN DESA based on Annual Reports. There are two set of challenges that should be given proper consideration regarding NDBs. First, there can be fiscal costs associated with setting up NDBs, as most NDBs were created through public funds, followed by a process in which financing is complemented by funding from multilateral institutions, specialized agencies and/or capital markets. However, the leverage provided by the fact that loans are a multiple of capital provided, and that there is often co-financing with private loans, provides an efficient use of public resources. Second, provisions -including good governance- should be in place to ensure the efficient administration of the institutions concerned. Public-private partnerships are being increasingly used as mechanisms for risk-sharing, particularly in financing infrastructure. The institutional design of NDBs should incorporate a view of the role of development banks as complements to the private sector, as well as an instrument of helping finance national development strategies.. Country Institution Loans bias Guaranty operations Main sectors Brazil BNDES LEs Low Industry, Infrastructure, Trade/services Canada BDC SMEs Low ICT China CDB LEs/SMEs High Infrastructure, highways, Electric power France Caisse des Dépôts et Consignations LEs/SMEs High social housing, regional and local development Germany KfW LEs/SMEs Low Energy India IDBI SMEs Low Infrastructure Italy Cassa depositi e prestiti SMEs High Infrastructure Japan DBJ LEs Low Transportation, Energy, Urban development Mexico BANOBRAS Infrastructure Russia Vnesheconombank LEs/SMEs High Infrastructure, Agro-industrial complex, Chemical and petrochemical industry South Africa IDC of South Africa SMEs Low Petro-chemicals, Minerals beneficiation South Korea KDB Financial Group LEs Low Export, Infrastructure Turkey Kalkinma SMEs Services, Manufacturing United States Ex-Im Bank of the US SMEs High Export

13 13 Annex 3: MDB Non-Concessional Lending by Type, IBRD (USD million) AsDB (USD millions) 50,000 12,000 40,000 10,000 30,000 20,000 8,000 6,000 4,000 10,000 2,000 AfDB (SDR millions) IDB (USD billions) 6, , , , , , These figures are not strictly comparable as some institutions provided data by fiscal year, others by calendar year.

14 14 EBRD (EUR millions) EIB (EUR million) 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1, ,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 3,000 2,500 2,000 1,500 1, CEB (EUR million) IFC (USD billion)

15 15 Annex 4: Equity Investments, EBRD (EUR million) AfDB (USD million) 1, ,600 1,400 1,200 1, AsDB (USD million) IFC ($ million) ,500 3,000 2,500 2,000 1,500 1, ,123 1,586 2,154 2,069 2,974 2,282 1,968

16 16 Annex 5: Projected Annual MDB Commitment Capacity, IDB (USD billion) IBRD (USD million) AsDB (USD million) AfDB (USD billion) 10,500 10,400 10,300 10,200 10, EBRD (EUR million)

17 17 Annex 6: MDB Guarantees, AsDB (USD million) IBRD (USD million) AfDB (USD million) EBRD (EUR million) MIGA (USD million) IDB (USD billion) 3, , ,

18 18 7,000 6,000 5,000 4,000 3,000 2,000 1,000 4 IFC ($ million) 2,479 1, ,932 5,167 6,402

19 19 References Asian Development Bank, PPP Financing Arrangements: Building in Credit Enhancement and Mitigating Risks, October Brei, Michael and Alfredo Schclarek (2013), Public Lending in Crisis Times, Journal of Financial Stability. Buiter, W. and S. Fries, What Should the Multilateral Development banks Do?, Working Paper No. 74, European Bank for Reconstruction and Development, June Griffiths, Jesse. Leveraging Private Sector Finance: How Does It Work and What Are the Risks?, Bretton Woods Project, April International Finance Corporation, International Financial Institutions and Development through the Private Sector: a Joint Report of 31 Multilateral and Bilateral Development Finance Institutions, Miyamoto, Kaori, and Biousse, Kim, Support to Enhance Private Investment for Infrastructure in Developing Countries, Organization for Economic Cooperation and Development, December Multilateral Investment Guarantee Agency, MIGA Investment Guarantee Guide, July Nelson, Rebecca M. Multilateral Development Banks: Overview and Issues for Congress, Congressional Research Service, April Organization for Economic Cooperation and Development, Support to Enhance Private Investment for Infrastructure in Developing Countries: Issues Paper, December PricewaterhouseCoopers and World Economic Forum USA, Paving the Way: Maximizing the Value of Private Finance in Infrastructure, August Spratt, Stephen, and Collins, Lily Ryan, Development Finance Institutions and Infrastructure: A Systematic Review of Evidence for Development Additionality, Institute of Development Studies and Engineers Against Poverty, January World Bank Group, Transformation through Infrastructure, Infrastructure Strategy Update FY , World Bank Group, World Bank Group Innovations in Leveraging the Private Sector for Development: A Discussion Note, April 2012.