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Private Sector Mobilization: Turning a Pipe Dream into Reality

October 23, 2024

Achieving the Sustainable Development Goals (SDGs) and climate targets will require unprecedented levels of private investment, particularly in developing countries. The bulk of the financing must come from the private sector. Ever since the international community gathered in Addis Ababa for the third Financing for Development Conference, it has had lofty ambitions. The dream was to mobilize private sector investment on a scale of “billions to trillions.” But so far, these expectations have been a pipe dream.

It is good to see that, more recently, the international community has reenforced its efforts to mobilize private financing. At the Hamburg Sustainability Conference earlier this month, the German government launched a multi-stakeholder initiative that focuses on executing SDG investments on a significant scale through standardization.

Many experts, including the G20 Independent Experts Group, agree that there needs to be a greater focus on increasing the mobilization rate, i.e. mobilizing more private finance for each dollar of concessional finance. There is also broad agreement that a renewed, concerted effort must be made to improve market conditions for private sector investments, in particular related to green investments. Most experts also agree on the key elements of such an approach: development institutions must work more “as a system,” both by using all available support instruments in a coherent way and by aligning this support as much as possible with the policies of partner governments. They must also use blended finance more efficiently, taking risks in a smarter way, for example by developing new (aggregated) financial products.

In a new discussion paper published by IDOS, the German Institute of Development and Sustainability, I outline the state of the discussion.

The paper also outlines the main challenges linked to implementation of experts’ recommendations, including how to function more “as a system” (e.g., between sovereign and non-sovereign lenders), how to align donors more closely with the policies and investment programmes of partner governments, and how to better balance blended finance approaches with the support for policy reforms enabling private sector investment. The paper also explores how to strengthen blended finance policies and how to increase the lending capacity of development banks through smarter risk taking.

It is essential to acknowledge that the proposals outlined in this paper are not intended as a prescriptive blueprint. While undoubtedly ambitious, they should be adopted selectively, based on available opportunities and specific country context. They are particularly relevant for the many countries in fiscal and debt distress. Higher debt levels, combined with global interest rate hikes in 2022 and 2023, have increased debt servicing costs, especially for low-income countries (LICs). The median LIC spends more than twice as much as it did a decade ago on debt service to external creditors as a share of income. Mobilizing private capital is particularly difficult in such an environment. Tackling the debt crisis is therefore crucial to enable the mobilization of private capital but new borrowing must not add to high debt servicing costs. Therefore, countries must borrow prudently, and development institutions must provide more funds on highly concessional terms and in a way which creates more fiscal space. Donors and multilateral development banks (MDBs) may assist by providing more support through policy-based lending, thereby boosting growth and revenue collection without incurring new spending. Support for fossil fuel subsidy reform is a good example here. As many countries currently embark on such reforms, they need help from MDBs to do this in a way which is socially balanced and politically acceptable.

The discussion paper indicates how shareholders can take this agenda forward in the boardrooms of their national and the international development banks, in particular. Managements and shareholders should agree on an implementation plan with key reform steps to be taken. The Annual Meetings are a good occasion for the governors of the World Bank to ask for such a plan.

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CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.

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