This chapter examines the evolution of concessional and non-concessional operations of multilateral development partners by institution, sector and instrument. It aims to elucidate the characteristics of each multilateral group and the global trends in the multilateral development finance architecture. It analyses how multilateral development partners are contributing to the 2030 Agenda. This includes: supporting country governments, working in vulnerable contexts, supporting developing countries to mitigate and adapt to climate change, providing global public goods, mobilising private finance for development and supporting private sector development, particularly through infrastructure development. Further, the chapter examines how the operations of multilateral development partners will need to change to respond to the new development agenda. The chapter concludes with lessons for good multilateral co-operation in the era of the 2030 Agenda.
Multilateral Development Finance
Abstract
Multilateral development finance is growing in volume, but on increasingly harder terms. This points to the difficulty of finding appropriate concessional resources for operations that are particularly hard to finance. In particular, the chapter finds that financing volumes from multilateral organisations are growing through increased lending for infrastructure and production from multilateral development banks (MDBs). They can tap into capital markets and loan repayments to expand the size of their operations, including in fragile contexts. However, while increased finance from MDBs is boosting resources, it is also hardening the terms of financing, particularly through non-concessional loans. Moreover, the boost of multilateral development finance has not gained traction in concessional operations. Beyond health and humanitarian assistance, concessional resources are growing slowly. In this context, the United Nations Development System (UNDS), which is predominantly supported through grants from sovereign states, is experiencing funding challenges. These affect its capacity to contribute to a complex and ambitious development agenda through highly concessional operations.
This chapter provides hard evidence to examine the areas where multilateral development partners are more prominent in the development finance architecture. First, multilateral development partners provide larger amounts of financing to country governments compared to bilateral providers – including for policy and institutional development. Second, multilateral development partners are increasingly implementing bilateral development partners’ programmes in fragile contexts, although more for short-term humanitarian assistance than for long-term development programmes. Third, multilateral development partners play an important role in supporting the climate agenda as conveners, financers and project implementers, even though they have a low share of climate-related financing in their portfolios. Lastly, multilateral development partners, particularly MDBs and the European Union, lead the advance of private sector development activities, especially through infrastructure development. They also lead the mobilisation of private finance for development, compared to most bilateral development partners, at least in terms of overall volumes of financing mobilised.
Finally, this chapter identifies a move from transaction-based to system-wide financing approaches as a priority for multilateral development partners. In particular, multilateral development partners need to adapt to a crosscutting development agenda and working more cohesively. They can do this by focusing on the drivers of development both globally, by supporting global public goods (GPGs) (e.g. climate change, financial stability, conflict prevention, orderly migration, etc.) and within specific countries by mainstreaming crosscutting issues in country programmes (e.g. environment, gender equality, etc.) based on local needs.
Multilateral development partners have started aligning with this new development paradigm but need to demonstrate the results, as these efforts are at early stages. Moreover, multilateral development partners need to increase support in the most challenging contexts as increasingly expected by their members and the broader international community. The associated increased operational risks need to be managed and appropriate streams of resources obtained. Moreover, multilateral development partners need to encourage co‑operation and build on comparative advantages to promote institutional coherence. This is needed both internally, among institutions of the same group, and externally, through joint programmes and initiatives with other organisations. Multilateral development partners play a central role in facilitating collective action on global development and in providing GPGs. However, they need to ensure a clear division of labour and find sufficient financing for these activities. Furthermore, multilateral development partners, particularly MDBs, need to diversify the financing strategies for private finance mobilisation, moving from being mainly lenders to mobilisers. This involves using different instruments and financing structures to increase their ratios of private finance mobilised. Finally, multilateral organisations need to lead restructuring funding mechanisms, in collaboration with other providers, to reverse the decrease in quantity and quality of concessional finance. While not a perfect solution, multilateral pooled-funding mechanisms (MPFM) could be explored. These could provide a way to both promote donor interest and promote coherence among several providers.
The volume of concessional and non-concessional resources committed by multilateral organisations significantly increased over the last decade; from USD 109 billion in 2008 to USD 162 billion in 2016 (+49%). MDBs account for two-thirds of this increase.
While non-concessional finance from MDBs is growing strongly, concessional finance from multilateral development partners only increased from USD 73 billion in 2012 to USD 80 billion in 2016 (+10%). This was mainly due to a boost of earmarked grants from bilateral providers for humanitarian assistance, an increase of grants from the Global Fund and Global Alliance for Vaccines and Immunisation (GAVI) and loans from International Development Association (IDA) for health programmes.
From 2012 to 2016, the value of multilateral development operations in fragile contexts increased from USD 42 billion to USD 59 billion. Much of this increase was due to increasing non-concessional loans.
Funding to the multilateral system earmarked for humanitarian programmes by DAC countries and other bilateral providers reporting to the Development Assistance Committee (DAC) doubled in the period 2012-2016. It increased from USD 5 billion in 2008 to 10 billion in 2016.
One-fifth (20%) of annual financing flows of multilateral development partners in 2015-2016 was for operations with climate objectives or that had climate components.
Multilateral organisations account for two-thirds of the amounts mobilised from the private sector by bilateral and multilateral development partners. These are through syndicated loans, credit lines, shares in collective investment vehicles, direct equity participation and guarantees.
This section provides an overview of the major financing trends shaping the operations of multilateral development partners. Financing measurements include concessional and non-concessional amounts sourced from the budget of multilateral organisations and funding earmarked by bilateral providers reporting to DAC. Multilateral funding earmarked by bilateral providers is considered bilateral development finance in the DAC reporting system. However, this section considers it as multilateral in order to examine the magnitude of the operations of multilateral organisations that are mostly financed though earmarked funding, such the UNDS. Overall, the section finds that multilateral development finance is increasing in volume but on increasingly harder terms. This raises the question how to find appropriate resources for operations that are particularly hard to finance, such as those in risker and more vulnerable contexts or for GPG.
The multilateral development system is a complex and diverse web of international organisations which finance and implement development and humanitarian programmes in developing countries. Some organisations act more as providers of financing, particularly the MDBs and the vertical funds. Others mainly have an intermediary role, particularly the UNDS, which means that they implement operations financed by other development partners – bilateral, multilateral or philanthropic. While financing channelled by bilateral donors through multilateral organisations is generally counted as bilateral finance, this chapter considers these resources to be multilateral. This helps reflect the magnitude of operations of multilateral organisations that are mainly sourced through earmarked funding, mainly UNDS entities.
Overall, operational characteristics and the independence of multilateral organisations are reflected in the way these organisations fundraise. In particular, the share of the budget and operations financed by member states shapes the features of the operations of multilateral organisations. It also affects the degree of dependence with respect to bilateral providers. As MDBs get significant shares of their financing from capital markets and internal resources, such as loan repayments, they need to carry out operations that are less concessional, such as loans. In fact, about 90% of financing provided by MDBs is in the form of loans, two-thirds of which are non-concessional. These are mainly for infrastructure and production. At the same time, significant differences exist among MDBs, with some having concessional agencies providing high shares of grants, such as the African Development Fund or the Inter-American Development Bank (IADB) Special Fund, which are mainly financed by members.
Conversely, as mentioned in Chapter 2, the European Union, UNDS and vertical funds receive most of their resources as grants from bilateral donors in the form of core and earmarked contributions. This means that they are more dependent on donor support and behaviour. However, it also allows them to carry out highly concessional operations in the poorest countries. Areas include humanitarian assistance and social sectors, which have less ability to mobilise financial and technical resources than infrastructure and production sectors. Among these multilateral groups, the European Union focuses more on infrastructure, production and governance; UNDS on humanitarian assistance and social sectors; and vertical funds on social sectors and the environment.
In terms of instruments and sectors, loans are mostly used for infrastructure and production, whereas grants prevail in humanitarian assistance (see Figure 3.1). This is because costs for infrastructure and production investments are high, but can be recovered by the increase in tax revenues from higher economic growth and future cash flows from profit-making activities (e.g. fees, tolls, etc.). The range of instruments used in other sectors is more mixed. Social sectors and governance receive grant finance from EU institutions, UNDS entities and vertical funds as these multilateral development partners concentrate more on the poorest countries. In contrast, MDBs use concessional and non-concessional loans in social sectors for policy reforms in countries that are more developed. This is in line with the Addis Ababa Action Agenda (AAAA), which states that the most concessional resources need to be prioritised for those with the greatest needs and least ability to mobilise other resources (United Nations, 2015[1]).
USD value of multilateral development operations (concessional and non-concessional) by agency, instrument, sector and country (annual average, 2012-2016)
Note: USD commitments (2016 prices). Includes imputed shares for fragile countries, LDC and other LICs for unallocated official development finance.
Source: Authors’ calculations based on (OECD, 2018[2]), “Creditor Reporting System” (database), https://stats.oecd.org/Index.aspx?DataSetCode=crs1.
The volume of concessional and non-concessional resources committed by multilateral organisations has increased significantly in the last decade, from USD 127 billion in 2012 to USD 162 billion in 2016 (+ 28%, see Figure 3.2). This increase was mainly due to MDBs, which account for two-thirds of the increase. The World Bank Group and other MDBs are the largest providers of concessional and non-concessional finance, accounting for two-thirds of total resources from multilateral development partners. Large volumes of financing from MDBs are used to support infrastructure and production sectors, including large-scale projects. For example, more than one-quarter of large infrastructure projects in developing countries involve MDB support in the form of direct loans, syndication, equity investment, partial credit guarantees and political risk coverage (Gurara et al., 2017[3]).
USD value of concessional and non-concessional operations of multilateral development partners (2008‑2016).
Note: USD commitments (constant 2016 prices). Data includes earmarked funding from DAC countries and bilateral development partners. Amounts include estimates derived from annual reports. Data only include amounts from bilateral and multilateral development partners reporting to the DAC. See statistical methodology.
Source: Authors’ calculations based on (OECD, 2018[2]), “Creditor Reporting System” (database), https://stats.oecd.org/Index.aspx?DataSetCode=crs1 and annual reports.
While flows from multilateral organisations have grown steadily, exceptionally large amounts were committed in 2009-2010. These were mainly non-concessional loans from the International Bank for Reconstruction and Development (IBRD; World Bank’s non-concessional arm) and the IADB to counter the effects of the financial crisis (see Box 3.1). After the peak in 2009-2010, non-concessional finance by multilateral organisations decreased significantly to about half of total funding from multilateral organisations. This took the ratio between concessional and non‑concessional finance by multilateral organisations back to its average value for the pre-2009 period.
International Financing Institutions, particularly MDBs, are important in providing policy loans in developing countries in times of financial shocks and crises. This role is expressly recognised by the AAAA which states that “Multilateral development banks can provide counter-cyclical lending, including on concessional terms as appropriate, to complement national resources for financial and economic shocks [...]” (United Nations, 2015[1]). In fact, since the 1970s multilateral institutions have provided balance of payments support in times of shocks due to geopolitical events, e.g. commodity price changes or financial crises. That is, shocks which reduce space for public and private investment due to reduced public domestic revenues or increased risks for the private sector.
Economic upturns and downturns can deteriorate the quality of banks’ assets, which affect the ability of banks to take risks, in turn easing or reducing their lending capacity. This is more evident when it comes to financing long-term investments, such as infrastructure, as these projects bear high risk, particularly in developing countries. For instance, long-term syndicated lending, which is particularly important for infrastructure, dropped significantly after the global financial crisis (Chelsky, Morel and Kabir, 2013[4]).
During the financial crisis, MDBs and the International Monetary Fund (IMF) co‑ordinated at the level of the G20 to respond to shrinking private financing and tighter public budgets. MDBs played a counter-cyclical role during and after the crisis, mainly through non-concessional loans from the IBRD and IADB in large emerging economies, such as China, India and Brazil. For example, the World Bank implemented 67 Development Policy Operations, which provided loans to these countries on the condition that they carried out fiscal consolidation measures. This, however, produced mixed results (World Bank, 2017[5]).
While non-concessional resources of MDBs are growing strongly, the level of concessional finance is growing much more slowly. In fact, concessional finance from multilateral development partners only grew from USD 73 billion in 2012 to USD 80 billion in 2016. The increase of concessional finance was mainly due to a boost of earmarked grants from bilateral development partners for humanitarian assistance, an increase of grants from Global Fund and GAVI and loans from IDA for health programmes. While smaller than other sectors, concessional finance for humanitarian assistance is the fastest-growing area funded through concessional finance. It accounted for 17% of concessional finance from multilateral development partners in 2016, up from 11% in 2012 (see Figure 3.3). Conversely, concessional finance for infrastructure and production decreased in both absolute and relative terms in the same period, from 43% to 35% of total multilateral concessional finance.
USD value of concessional and non-concessional operations of multilateral development partners (2012‑2016)
Note: USD commitments (constant 2016 prices). Data includes earmarked funding from DAC countries and bilateral development partners.
Source: Authors’ calculations based on (OECD, 2018[2]), “Creditor Reporting System” (database), https://stats.oecd.org/Index.aspx?DataSetCode=crs1.
Of the concessional finance provided by multilateral development partners in 2012‑2016, 60% is grants (mainly for social sectors, humanitarian assistance and governance). This is mostly sourced from bilateral providers as core and non‑core finance to and through the EU, UNDS entities and vertical funds in the health sector. The remaining 40% is concessional loans from MDBs for infrastructure and production (i.e. 65% of concessional loans) and, to a certain extent, to social sectors (i.e. 17% of concessional loans). While grant-funded operations of multilateral development partners are mostly in least developed countries (LDCs), other low‑income countries (LICs) and somewhat in lower-middle-income countries, grants to upper middle‑income countries (UMICs) increased in 2016. This was due to high levels of earmarked funding channelled to Turkey through the European Union and to Iraq and Lebanon through UNDS agencies, mainly for humanitarian purposes (see Figure 3.4).
USD value of grant-funded operations of multilateral development partners by income group of recipient country (2012-2016)
Note: USD commitments (constant 2016 prices). Data includes earmarked funding from DAC countries and bilateral development partners.
Source: Authors’ calculations based on (OECD, 2018[2]), “Creditor Reporting System” (database), https://stats.oecd.org/Index.aspx?DataSetCode=crs1.
In terms of concessional loans, support for infrastructure and production decreased steadily. In contrast, loans for social sectors increased from 2013 to 2014, and decreased steadily afterwards. In the other sectors, the level of concessional loans provided remained stable. In terms of recipients of concessional loans, the trends remained stable from 2012 to 2016. LDCs (including other LICs) and LMICs received 40% of concessional loans each, and UMICs receiving the remaining 20%.
A boost of MDB finance is increasing the amounts available for the most vulnerable countries but at terms that are increasingly hard. Concessional and non-concessional funding from multilateral development partners to fragile contexts – which include LICs, LMICs and UMICs – increased from about USD 42 billion in 2012 to roughly USD 59 billion in 2016 (see left chart in Figure 3.5). A large part of this growth was due to an increase of non-concessional loans. These rose from 14% to 31% of total funding from multilateral development partners in fragile contexts. This involved major increases in infrastructure and production sectors, particularly energy, transport and banking in large middle-income countries (see centre and right charts in Figure 3.5).
Increasing of supply and demand of non-concessional financing for infrastructure explains this growth of financing. First, an increase in financing was particularly noticeable by the IBRD, Islamic Development Bank (IsDB) and Asian Development Bank (ADB) to large economies. Second, a relaxation of non-concessional borrowing policies of the African Development Bank (AfDB) allowed creditworthy LICs to access non-concessional loans [ (IATF, 2018[6]); (Prizzon and Mustapha, 2014[7])]. Moreover, the increasing demand for loans reflected a wider interest in boosting investment. Developing countries – including LDCs and other LICs – increasingly gained access to loans beyond traditional development partners. New lenders included international bond markets and bilateral loan agencies, lending at semi-concessional terms, notably China EXIM and the Chinese Development Bank.
Concessional resources increased for governance, health, humanitarian assistance and social infrastructure, and plateaued or decreased in the other sectors. Egypt, Iraq, Pakistan, Cameroon, Bangladesh, Syrian Arab Republic, Burkina Faso, Rwanda, Mali, United Republic of Tanzania, South Sudan, Myanmar, Niger and Nigeria account for the vast majority of the increase of total concessional and non‑concessional resources from multilateral development partners to fragile contexts between 2012 and 2016. Increases were mainly due to growing levels of loans for infrastructure and production, a mix of grants and loans for governance and health, and increased levels of grants for humanitarian assistance.
Concessional and non-concessional funding from multilateral development partners to fragile contexts (2012‑2016)
Note: USD commitments (constant 2016 prices). Data includes earmarked funding from DAC countries and bilateral development partners.
Source: Authors’ calculations based on (OECD, 2018[2]), “Creditor Reporting System” (database), https://stats.oecd.org/Index.aspx?DataSetCode=crs1.
The increasing levels of loans, particularly those that are non-concessional, to vulnerable countries raises two issues: the risk of unsustainable debt accumulation and debt distress; and the future of highly concessional resources, such as grant-funded operations for humanitarian and development objectives in the most challenging contexts. The international community should reflect on the use of multilateral organisations’ concessional resources and the future of concessional windows. These issues are relevant to the operations of MDBs which, being increasingly financed through higher borrowing from capital markets, could feel constrained in using grant resources to preserve financial sustainability (Gottschalk and Poon, 2017[8]). Furthermore, as more countries approach higher levels of income per capita, they graduate from concessional finance from MDBs. However, there is a growing recognition that per capita income – an indicator for access to concessional finance – does not capture the multi-dimensional nature of developing countries’ financing needs. Graduation from concessional finance limits, for instance, the eligibility of middle-income countries to receive grants or concessional loans from MDBs even if specific circumstances, such as shocks, crises and disasters (e.g. refugee crises in Jordan and Lebanon), demand them (see the “In My View” piece by Annalisa Prizzon).
For a recipient country, “graduating” from soft (concessional) windows to hard (non-concessional) windows of MDBs is often considered something of a milestone. Terms and conditions evolve when moving from soft to hard windows of MDB lending: loan maturities and grace periods get shorter, interest rates get higher. Becoming a middle‑income country is often confused with graduation from concessional assistance. With some nuances, surpassing the threshold of around USD 1 000 income per capita triggers the graduation process. “Graduated” countries are those that have been assessed to be in a position to borrow from international capital markets and afford more expensive financing options (i.e. they have successfully passed a so-called “creditworthiness assessment”).
But what challenges are associated with graduation from MDBs’ soft windows and what are the solutions to them?
First, a country’s public resources fall continuously as a share of GDP until it is well into the middle-income country bracket, as international assistance falls faster than tax revenues grow. Kharas, Prizzon and Rogerson (2014[9]) call this the “missing middle” of development finance for countries joining the lower-middle-income group. Just when many countries start to emerge from low per capita income, their growth is constrained. Domestic taxes, and foreign private and market-related public borrowing fail to expand fast enough (and in some cases, fail to expand at all) to compensate for the loss of concessional assistance. A way for MDBs to fill the “missing middle” of development finance involves boosting market-based lending, either by using receivables from concessional windows, or by general capital increases. The IDA and the IDA and IBRD achieved this through both approaches, while the ADB did so using concessional window receivables.
Second, several shareholders challenge the rationale for lending to middle-income countries at lower than market rates. This is indeed the case for lending from hard windows as countries can in principle borrow from capital markets but at far higher rates than those applied by MDBs. There are at least two approaches and motivations that would justify continued engagement with middle-income countries that have graduated from concessional assistance. For example, borrowing terms and conditions can be tailored to each country reflecting their repayment capacity, i.e. by applying differentiated pricing. This would be instead of defining approaches by operational category and would move away from graduation to gradation (Rogerson, 2017[10]). Such a proposal would undermine the co-operative nature of MDB lending by penalising success – creditworthy borrowers should be charged less because they are perceived as being less risky. However, there are a series of advantages. MDB lending is still less expensive than a market-based option; lending can help to generate income to subsidise soft window lending and help to smooth the transition to fully market-based lending (Prizzon, 2017[11]).
Furthermore, lending should help middle-income countries to tackle global and regional challenges. These include tackling climate change mitigation, global pandemics, regional integration and migration crises, actions that usually are underfunded. One such example is the Concessional Financing Facility buying down IBRD conditions to IDA terms for Jordan and Lebanon to host refugees. As well as creating ad hoc measures, such an approach should be mainstreamed within MDB facilities for GPGs in middle-income countries (or, more precisely, in countries eligible for hard window lending only). Smoothing borrowing terms and conditions, expanding lending volumes and helping to finance global challenges in “graduated” countries are key areas for MDBs both to support these countries in their transition away from aid and to avoid future setbacks undermining results achieved so far.
1. Annalisa Prizzon is a Senior Research Fellow at the Overseas Development Institute (ODI)
With an increasing number of development actors, multilateral organisations should demonstrate their value added by identifying their role and building on comparative advantage. This sub-section will first provide a brief exploration of real and perceived comparative advantages of multilateral organisations. Findings from the OECD/DAC “2018 Survey on Policies and Practices vis-à-vis the Multilateral Development System” highlight the perceived comparative advantages of multilateral development partners over their bilateral counterparts.
This sub-section also highlights specific areas where multilateral development partners play a prominent role compared to bilateral providers, at least in terms of financing volumes provided. These areas are: supporting country governments; working in fragile and humanitarian contexts; supporting climate change mitigation and adaptation; mobilising private finance for development; and supporting private sector development, particularly infrastructure.
As discussed in Chapter 2, the development co-operation landscape is bringing new actors, new resources and new ways of thinking and operating. This is good news as the 2030 Agenda requires increased financing and knowledge. However, it also creates risks of fragmentation and competition, which run against the policy coherence needed to achieve a crosscutting and integrated development agenda. In this context, multilateral organisations need to demonstrate their comparative advantages and to build on their added value. This is not only true within multilateral organisations themselves, but also in finding a complementary role with other major development partners, particularly bilateral ones.
Despite the evident difficulties in defining comparative advantages for a broad and diverse group of institutions, the following can be attributed to multilateral development partners:
Expertise in mobilising resources from public and private sources;
Specialised knowledge in policy reforms and specific sectors, e.g. social sectors (UN agencies and vertical funds) and infrastructure and financial services (MDBs);
Extensive country presence and political knowledge, including in fragile contexts;
Convening power for collective action in development matters;
Delivery of GPGs in thematic areas (e.g. peace and security, climate change, pandemics, migration, etc.) or through provision of norms, standards and principles that shape “the rules of the game” in various sectors.
Evidence from the literature shows that donors delegate responsibility to multilateral organisations for both policy and political reasons. According to (Greenhill and Rabinowitz, 2016[12]) policy reasons mainly concern supporting GPGs and organisations that share similar objectives. Political reasons include the capacity to influence a multilateral organisation and path dependency from earlier decisions. Similarly, (Gulrajani, 2016[13]) suggests that donors use bilateral channels when motivated by the need to control and be visible. Multilateral channels are chosen when motivated by the donor imperative of pooling and advancing a common global cause.
To gather more evidence on this issue, the 2018 OECD Survey asked DAC members their opinion on the comparative advantages of multilateral organisations with respect to bilateral channels. The three most-cited comparative advantages identified by respondents were: expertise and knowledge; the ability to contribute to global norms and GPGs; and convening power (see Figure 3.6). Moreover, the survey revealed that DAC donors assign considerable weight to the extensive presence and reach of multilateral organisations in the field. Their ability to operate in fragile and risky environments, where it could be difficult for bilateral donors to intervene in a prompt, co-ordinated and efficient manner, was also important. Finally, survey responses suggest that DAC donors consider multilateral institutions’ financing capacity and ability to mobilise additional public and private resources as a comparative advantage.
Source: OECD/DAC “2018 Survey on Policies and Practices vis-à-vis the Multilateral Development System” (unpublished).
While bilateral development partners move away from supporting country governments due to real or perceived risks associated with these operations, support from multilateral development partners is growing. MDBs are increasing their sovereign lending to middle‑income countries for infrastructure and production, and the Global Fund is boosting grants for health to LDCs and other LICs.
Beyond support for infrastructure, production and health, multilateral development partners allocate important shares of their resources to support policy and institutional reforms. Support for policy and institutional development include project and budget support. These are provided at different levels of conditionality and different levels of alignment to national strategies.
The 2030 Agenda calls for holistic approaches for development, which require support for initiatives that are crosscutting, coherent and integrated. National governments have traditionally played the primary role in supporting system-wide approaches by laying down the overall development policy of a country, implementing projects within and among sectors, and providing public goods and services. However, mixed results in public financial management of developing countries – including the real and perceived risks of corruption and misappropriation of resources – have led development partners to move away from system-wide financing to governments. Instead, they allocate their resources through other channels (Orth et al., 2017[14]). Conversely, multilateral development partners have assumed a prominent role in this area, providing large amounts of concessional and non-concessional development finance to support country governments. This is intended for policy and institutional development or for investment projects, such as in physical infrastructure, agricultural development, etc.
Overall, multilateral development partners provide more financing to country governments than do bilateral development partners. Bilateral partners channel high amounts of their financing through their own agencies, civil society organisations (CSOs) and multilateral organisations (see Figure 3.7). In fact, while multilateral development partners channelled between half and two-thirds of their resources to governments between 2012 and 2016, bilateral providers only channelled a third. Moreover, while financing from bilateral development partners to country governments stagnates, multilateral development partners are increasing their support both in absolute and relative terms. In particular, support from multilateral development partners to country governments increased from USD 66 billion in 2012 to USD 82 billion in 2016. In contrast, support from bilateral development partners to country governments only increased from USD 41 billion to USD 45 billion in the same period (see Figure 3.7).
Concessional and non-concessional development finance from multilateral and bilateral providers through governments and other channels (2012-2016)
Note: USD commitments (constant 2016 prices). Earmarked funding from bilateral development partners through multilateral organisation is considered as financing from bilateral development partners. Bilateral development partners only include DAC countries.
Source: Authors’ calculations based on (OECD, 2018[2]), “Creditor Reporting System” (database), https://stats.oecd.org/Index.aspx?DataSetCode=crs1.
Much of this increase in financing was due to a boost of non-concessional loans from MDBs to middle-income countries for infrastructure and production. These are sectors where governments are strongly involved because of the importance of infrastructure as a public good in promoting economic growth to maximise public resources. Moreover, a large share of financing to middle-income countries reflects performance allocation systems of MDBs. These allocate more to countries with larger GDPs and better institutional quality, which are generally middle income countries.
Multilateral development partners also provide large volumes of support to country governments for social sectors. This increased from USD 12 billion in 2012 to USD 17 billion in 2016, with a peak of USD 19 billion in 2015 (see Figure 3.8). However, this financing was provided at different levels of concessionality. Part of this increase was due to a boost of grant finance for health from the Global Fund to LDCs. A more significant contribution was a boost of MDB loans to UMICs for health and social services.
Concessional and non-concessional finance from multilateral development partners to country governments by sector and income group (2012-2016)
Note: USD commitments (constant 2016 prices). Earmarked funding from bilateral development partners through multilateral organisation is considered as financing from bilateral development partners.
Source: Authors’ calculations based on (OECD, 2018[2]), “Creditor Reporting System” (database), https://stats.oecd.org/Index.aspx?DataSetCode=crs1.
Multilateral development partners allocate large shares of their resources to policy and institutional reforms. For example, a quarter of the World Bank’s resources is provided for development policy lending (World Bank, 2015[15]). Multilateral development partners provide grants, loans and technical assistance to support:
State reforms and capacity building on general public administration, including strengthening the rule of law, public financial management and decentralisation; domestic revenue mobilisation;
Public reforms in social sectors, such as in health, education, housing;
Improvement of the investment climate, such as investment laws, business environment reforms, financial sector regulations and, privatisation;
Supporting economic development and competitiveness within production policies, e.g. structural adjustment, macroeconomic reforms, poverty reduction strategies, rural development strategies, agricultural and industrial policy;
Policies, laws and regulation in key infrastructure sectors, e.g. energy, transport, water and communication policies, to improve the investment climate or ensure the provision of public goods and services;
Counter-cyclical lending to withstand financial crises, which includes policy conditionality, such as fiscal consolidation and other macroeconomic reforms to promote economic development (see Box 3.1 above).
Support for policy and institutional development is provided at project and budget levels. These have different levels of conditionality and alignment to national strategies. In budget support, providers and recipient countries negotiate overarching principles of reforms and a performance assessment framework that sets indicators for monitoring the implementation of reforms. Budget support can be both general and sectoral. It has less conditionality than project loans, although there may be broad conditionality on macroeconomic reforms or fiscal consolidation measures. In particular:
General budget support is provided for the overall country budget with policy conditionality not related to specific sectors or to specific projects but including broad macroeconomic reforms or overall development policy objectives (e.g. poverty reduction strategies);
Sector budget support is provided for the implementation of national sector strategies of recipient countries (e.g. energy, health, education, etc.) with policy conditionality at a broad thematic level but not on specific projects;
Project loans can be within or beyond of existing general and sector strategies of countries and provide more detailed conditionality.
The vast majority of policy loans are provided by MDBs, particularly the World Bank Group and the IADB Group (see Figure 3.9). While half of the amount is for projects, about a third is for general and sector budget support. The World Bank Group and the IADB Group are also the largest providers of sectoral budget support. The IMF and the AfDB are the largest providers of general budget support.
While the MDBs are the largest providers of policy loans, the European Union is large provider of grants for policy and institutional development. In 2016, the European Union provided about USD 7 billion for policy and institutional development. About half of the EU’s grant support of policy and institutional development is given as project support and a third as general and sector budget support. This makes the European Union the largest provider of grants for general and sectoral budget support among all multilateral development partners. For instance, the European Union provided Mali with a grant budget support of EUR 615 million for the period 2014‑2020. This was to support state reform and consolidation of the rule of law, rural development and food security, education and road transportation in addition to other projects scheduled in Mali’s northern regions (European Union, 2016[16]). Other important actors of grant finance for policy and institutional development are the United Nations Development Programme (UNDP), the Global Environment Facility (GEF) and the World Bank.
USD value of policy loans from multilateral development partners by largest provider (annual average) and sector (2012-2016)
Note: USD commitments (constant 2016 prices). Only purpose codes related to policy and institutional development. See Statistical methodology.
Source: Authors’ calculations based on (OECD, 2018[2]), “Creditor Reporting System” (database), https://stats.oecd.org/Index.aspx?DataSetCode=crs1.
Sector and general budget support from multilateral development partners increased markedly from USD 13 billion in 2012 to USD 19 billion in 2016, with a peak of USD 25 billion in 2015 (see Figure 3.10). Conversely, budget support from bilateral development partners fluctuated within a small range of USD 1-2 billion in the same period. A comprehensive review of donors’ evaluations of general and sector budget support suggests that overall this type of support improves public financial management and the provision of public goods and services (Orth et al., 2017[14]). However, this is dependent on institutional capacity and political will for reform in the recipient countries. Multilateral development partners are preferred partners for these activities. However, they need to ensure that measures supported are aligned with national development strategies of recipient countries and achieve the desired results.
Concessional and non-concessional finance from multilateral development partners for budget support and other types of interventions, including by sector (2012-2016)
Note: USD commitments (constant 2016 prices).
Source: Authors’ calculations based on (OECD, 2018[2]), “Creditor Reporting System” (database), https://stats.oecd.org/Index.aspx?DataSetCode=crs1.
The increase in number and intensity of shocks, crises and disasters is compromising development progress in the most fragile and humanitarian contexts. This is affecting the international community’s efforts to achieve the 2030 Agenda, including poverty eradication and leaving no one behind. In this context, bilateral development partners are increasingly delegating responsibility to multilateral organisations to both implement humanitarian programmes and carry out development programmes in fragile contexts.
While the increased recurrence of shocks, crises and disasters is compromising development achievements almost everywhere, it is more compelling in the poorest and more vulnerable countries. This is because of their increased exposure to conflicts, pandemics, environmental disasters and knock-on shocks from price changes, trade and monetary policies and financial crises occurring beyond their borders, as well as their limited capacity to cope with these events [ (UNHCR, 2017[17]); (ILO and UNDP, 2017[18]); (Kreft, Eckstein and Melchior, 2016[19])]. For instance, environmental shocks and disasters more frequently and severely affect LDCs and Small Island Development States (SIDS), which are more constrained in anticipating and responding to these events. This puts 26 million people into poverty every year [ (IMF, 2017[20]); (Hallegatte et al., 2017[21])]. Another example is the volatility of global food prices, which increased after 2010. This put an additional 44 million people into extreme poverty, as poor people spend high proportions of their income on food (UNCTAD, 2017[22]).
Vulnerability to systemic issues can partly explain why poverty reduction is stagnant in fragile contexts – particularly LDCs and in sub-Saharan Africa (see Figure 3.11). Two‑thirds of the extremely poor live in fragile contexts. This share is likely to increase to 82% by 2030, mainly due to high demographic growth in sub-Saharan Africa, particularly in Nigeria, Democratic Republic of Congo, Tanzania and Madagascar (OECD, 2018[23]).
Number of poor people in the world by country (2014-2035)
Note: Calculation by the authors using list of fragile contexts from (OECD, 2018[23]).
Source: Projections by (International Futures, n.d.[24]) database, www.ifs.du.edu/ifs/frm_MainMenu.asp.
The intensification of shocks, crises and disasters is also pushing development partners to increase the share of resources for humanitarian responses. This involves a shift away from longer-term developmental assistance. In fact, the share of ODA from bilateral and multilateral development partners reporting to DAC for humanitarian crises, (i.e. in-donor refugee costs and humanitarian assistance) doubled from 10% to 21% in 2012-2016. In contrast, the ODA to the LDCs and/or fragile contexts, beyond humanitarian assistance, is stagnating (OECD, 2018[23]).
Bilateral donors are increasingly delegating responsibility to multilateral organisations, particularly agencies from the UNDS, to implement humanitarian programmes. Funding earmarked for humanitarian programmes by DAC countries doubled from USD 5 billion in 2008 to 10 billion in 2016 (see Figure 3.12). About 90% of these funds earmarked for humanitarian programmes are channelled through the UNDS. This illustrates the importance of this multilateral group in the humanitarian field. Among the various channels that bilateral providers use for humanitarian assistance, multilateral organisations are by far the most prominent (Figure 3.12). This resonates with the 2018 OECD Survey, which suggests that DAC countries attribute a comparative advantage to multilateral organisations when it comes to operating in fragile contexts. This can be explained by their political neutrality (especially in the case of the UN), a greater capacity to absorb risks and the ability to release funds more rapidly.
While the increase of these resources was particularly prominent for short-term responses to humanitarian crises, earmarked support for development projects in fragile contexts plateaued. This highlights the issues of providing sufficient resources targeting both the consequences and causes of fragility; causes which are political, economic, societal, and environmental and security related (OECD, 2018[23]).
Bilateral ODA from DAC countries by channel of delivery (2012-2016)
Note: USD commitments (constant 2016 prices). Humanitarian assistance includes food aid.
Source: Authors’ calculations based on (OECD, 2018[2]), “Creditor Reporting System” (database), https://stats.oecd.org/Index.aspx?DataSetCode=crs1.
Fighting climate change in the long term (i.e. climate change mitigation) and adapting to negative climate impacts in the short term (climate change adaptation) require an important focus on developing countries. Developing countries, particularly large and more advanced economies (e.g. China and India), are large emitters of global greenhouse gases, accounting for two-thirds of global emissions (Center for Global Development, 2015[25]). They therefore need to quickly transition to a low-carbon development path to keep global warming below 2°C above pre-industrial levels, in accordance with the Paris Agreement. Developing countries, especially LDCs and SIDS, suffer the most from the increased occurrence of extreme climate events. They lack capacity to anticipate and cope climate disasters, and appropriate infrastructure. Their geographical positions further increase their exposure to risk. This requires increased resources for disaster risk reduction, climate change adaptation and climate‑resilient infrastructure.
In this context, the role of multilateral development partners cannot be overstated:
As conveners, multilateral development partners, particularly the UN, have been at the forefront of facilitating major environmental agreements. The United Nations Framework Convention on Climate Change (UNFCCC), for example, which led to the adoption of the Kyoto Protocol and the recent Paris Agreement;
As financers, MDBs and multilateral climate funds are key in supporting low‑carbon and climate-resilient infrastructure and production investments;
As implementers, UN programmes and agencies carry out general environment programmes, disaster risk reduction and climate change adaptation projects. These prepare the poorest countries and people for climate disasters.
Despite the crucial role of multilateral development partners in promoting the climate agenda in developing countries, only a small portion of their resources is allocated for climate-related projects. In fact, a fifth (20%) of their annual financing flows in 2015‑2016 was for operations with climate objectives. Compared to their bilateral counterparts, multilateral development partners provide more resources for projects that are principally for climate change – especially MDBs for low-carbon infrastructure. Bilateral development partners provide more support for projects that mainstream climate objectives among sectors (see Figure 3.13).
Bilateral and multilateral climate and non-climate finance by type of provider, annual av. 2015-2016 (left chart) and multilateral climate finance and non-climate finance by multilateral group, annual av. 2015-2016 (right chart)
Note: Partly climate” refers to financing of projects that have a significant climate objective. In the right panel, “climate” refers to the climate components of projects financed by MDB as well as the financing for projects with both principle and significant climate objective. The right chart includes both core-funded multilateral outflows and bilateral funding earmarked through multilateral organisations. Multilateral organisations only include those that report climate data to the DAC. Climate finance is both concessional and non-concessional development finance for development. See Statistical methodology.
Source: (OECD, 2018[26]), “Climate Change : OECD DAC External Development Finance Statistics”, http://www.oecd.org/development/financing-sustainable-development/development-finance-topics/climate-change.htm.
MDBs are the largest providers of climate finance in terms of volume. However, multilateral climate funds, such the Green Climate Fund, the Green Environment Facility (GEF) and the Clean Investment Funds, have the highest shares of climate finance in their portfolios. Climate finance is distributed mainly to the infrastructure (particularly energy) and production sectors, followed by multisector projects. Multisector projects mostly include general environmental protection and urban development projects (see Figure 3.14).
Climate financing in the humanitarian sector includes disaster risk reduction and climate resilience programmes. This is in the form of concessional and non-concessional loans from MDBs to LMICs and grants to LDCs, other LICs and LMICs by the EU, climate funds and UN programmes (mainly the World Food Programme) as earmarked funding from bilateral providers.
Multilateral climate and non-climate finance by group of sector, annual average 2015-2016 (left panel) and multilateral climate finance by group of sectors and multilateral group 2015-2016 (right panel)
Note: Climate finance includes climate components of projects financed by MDB as well as financing for projects with both principle and significant climate objective by other multilateral development partners. See Statistical methodology.
Source: (OECD, 2018[26]), “Climate Change : OECD DAC External Development Finance Statistics”, http://www.oecd.org/development/financing-sustainable-development/development-finance-topics/climate-change.htm.
Multilateral development partners are important in supporting development directly or indirectly through concessional and non-concessional financing to companies and financial institutions. Multilateral development partners, particularly MDBs, provide the largest volumes of financing for these operations among all development partners. They also mobilise more resources from the private sector. However, the portfolios of multilateral development partners are still dominated by debt instruments, particularly loans. For example, instruments such as equity investment only make a small portion of their financing available for development, despite their importance in supporting market-based solutions.
Increasingly, both bilateral and multilateral partners are using concessional resources to reduce the risk of investments or structure returns to mobilise finance from the private sector. This is achieved through blended finance arrangements and other financial innovations. OECD (2017[27]) defines blended finance as “the strategic use of development finance for the mobilisation of additional finance towards sustainable development in developing countries”, where additional finance is from private resources. Concessional and non-concessional instruments have been used to attract private finance, especially in sectors with clear commercial opportunities. Providers have also contributed technical assistance and absorbed the costs of project preparation.
For multilateral development partners, blended finance operations can be part of their regular activities. They can also be ring-fenced in private sector windows or dedicated blended finance programmes that they manage on behalf of bilateral and multilateral providers. Multilateral blended finance funds have increased sharply, as demonstrated by the long list of blended finance funds established to support small and medium-sized enterprises (SMEs) and low-carbon infrastructure. Data from the OECD Survey (OECD, 2018[28]) on 74 blended finance funds and facilities shows that a third of these funds are managed by MDBs and other multilateral organisations. This accounts for half of the total size of these funds and facilities examined.
MDBs are increasing mobilisation efforts collectively, including at the G20 level. In the G20 in Hamburg in 2017, the MDBs’ Joint Principles on Crowding-In Private Finance were endorsed. These aim to enhance private sector instruments and mobilisation efforts (G20, 2017[29]). MDBs aim to increase private finance mobilisation by 25-30% between 2017 and 2019 (AIIB et al., 2017[30]). A common principle framework has been established to guide MDBs in this:
expanding and standardising credit enhancement;
prioritising commercial financing not guaranteed by governments;
blending concessional resources and private capital;
reviewing incentives for crowding-in private sector resources.
To follow up on these commitments, the World Bank Group is increasing the amount of resources for private sector projects. For instance, the new IDA18 replenishment created a Private Sector Window of USD 2.5 billion in collaboration with the International Finance Corporation (IFC) and Multilateral Investment Guarantee Agency (MIGA) to mobilise private sector investment in IDA-only countries, including in fragile contexts. More recently, World Bank Group shareholders agreed a capital increase for the IFC, which will increase its borrowing from capital markets for private sector projects.
These increased efforts will further reinforce the role of MDBs in mobilising private finance. According to data from the OECD Survey, multilateral organisations account for two-thirds of the amounts mobilised from the private sector by bilateral and multilateral development partners. This is achieved through a set of official development finance interventions (i.e. syndicated loans, credit lines, shares in collective investment vehicles, direct equity participation and guarantees) (Benn, Sangaré and Hos, 2017[31]). Development partners mobilised USD 18 billion from the private sector in 2015, up from USD 8 billion in 2012 (see Figure 3.15). Guarantees and syndicated loans collectively mobilised two-thirds of total, followed by credit lines, which mobilised a fifth. The institutions mobilising most resources were MIGA and the IFC, collectively mobilising half the total amount from the private sector.
USD value of amounts mobilised from the private sector by official development finance interventions of multilateral development partners (2012-2015)
Note: Amounts mobilised from syndicated loans, credit lines, direct investment in companies, shares in collective investment schemes and guarantees.
Source: (Benn, Sangaré and Hos, 2017[31]), “Amounts Mobilised from the Private Sector by Official Development Finance Interventions”, http://dx.doi.org/10.1787/8135abde-en.
Private sector operations of multilateral development partners are dominated by debt instruments. These include single and syndicated loans or credit lines. These debt instruments represent about 60% of total support for private sector projects by all multilateral development partners. Much of this support is concentrated in a few providers, mainly the IFC and the European Bank for Reconstruction and Development (EBRD). For MDBs, while debt instruments are mostly non-concessional, they are usually provided on better terms and conditions than alternative options available in the market. Debt instruments from MDBs to the private sector cover:
large syndicated loans for infrastructure, including public-private partnership (PPP) models;
senior and subordinated loans to both SMEs and large companies in manufacturing, agriculture and mining and construction;
credit lines to financial institutions that on-lend to SMEs in various industries;
project bonds from infrastructure companies and funds.
Some MDBs provide loans through co-investment platforms. For instance, IFC’s Managed Co-Lending Portfolio Program is a syndicated loan platform. Investors provide capital on a portfolio basis, which can be deployed by IFC in individual investments to all regions and sectors in accordance with IFC’s strategy and processes. An extension of this programme specifically targets infrastructure projects. This enables institutional investors to take advantage of IFC’s ability to originate and manage a portfolio of bankable infrastructure projects. Similarly, the African Financing Partnership is a collaborative, co-financing platform of the AfDB, EIB and IFC, which finances private sector infrastructure projects in Africa.
Unlike loans, equity investments represent only a small share of total resources committed by multilateral development partners. Most is committed by the IFC and, to a lesser extent, the EBRD. This is because equity investments are generally riskier than loans.
Equity investments can have an important development impact by supporting both business innovation for development and paving the way for the growth of high potential companies. First, equity participation of a multilateral development partner in a company can boost the confidence of private investors, in turn attracting commercial investors and reducing the cost of capital. This is in the case in the European Commission’s concessional equity investment in the Kenyan Lake Turkana Wind Power project via the Africa Infrastructure Trust Fund (OECD, 2018[28]). Second, investing in private equity funds that support companies in developing countries can promote market-based solutions for development, especially when positive social and environmental impact programmes are targeted (e.g. seed funding or growth capital for SMEs; supporting funds investing in sustainable infrastructure, etc.).
The level of equity participation changes among multilateral development partners. For instance, the IFC generally invests between 5% and 20% of a company’s equity. In contrast, the EBRD does not fix a specific limit, although it has to take a minority position and have a clear exit strategy. The choice between direct investment in companies and investment in private equity funds depends on a variety of factors. These include: the degree of control and engagement; the volatility and return profiles; expertise with the required corporate governance skills; country knowledge; and industry experience (IADB, 2017[32]). Examples of innovative equity investments include the Global Energy Efficiency and Renewable Energy Fund (GEEREF), which is advised by the EIB Group. GEEREF is an innovative fund-of-funds. It supports private equity funds that provide financing in return for shares in private companies that conduct commercial projects in renewable energy and energy efficiency in developing countries.
Multilateral development partners’ operations and strategies have a strong focus on private sector development (PSD). This supports private-sector-led growth in developing countries, such as:
investment and production policies;
market functioning (e.g. physical infrastructure, financial sector, business development services);
enterprise resources (see Box 3.3).
Policies and institutions. Multilateral development partners support public institutions to make policy and institutional reforms that can improve the investment climate and production policies (e.g. industrial policies) of developing countries. These include providing loans and technical assistance to support: 1) macroeconomic stability, including public financial management; 2) business environment reforms, such as improving business laws and regulations; 3) policies and regulatory frameworks in infrastructure sectors, labour markets and trade; 4) production policies and strategies to increase competitiveness in agricultural and various industries.
Market functioning. This area involves supporting infrastructure and economic services to facilitate business activity and productivity growth. This means financing physical infrastructure in order to increase the connectivity of companies to energy, transport, communication and water systems. It also includes promoting value chain integration through market platforms or industrial clusters. This means supporting providers of business intermediary services, such as training providers and incubators, as well as supporting financial institutions, such as banks and investment funds, in order to expand financial access for local companies, particularly SMEs.
Enterprise resources. Multilateral development partners support local and foreign companies directly with technical and financial assistance in agriculture and other production sectors, such as manufacturing, mining, construction and tourism. Technical assistance is provided to improve managerial skills of entrepreneurs, including SMEs. Advice is given on structuring complex transactions, such as mergers and acquisitions; or helping companies enhance productivity, e.g. by improving energy and water efficiency, business development plans, etc. Moreover, large portions of financial support is provided through non-concessional loans and equity investment in companies operating in various production sectors, such as manufacturing, mining and construction, and tourism.
Source: (Miyamoto and Chiofalo, 2017[33]), “Development Co-operation for Private Sector Development”, http://dx.doi.org/10.1787/ded2028f-en.
While PSD operations support both public and private institutions that promote economic growth, large amounts are channelled to companies and financial institutions for infrastructure, financial services and production sectors (see Figure 3.16). These activities include:
investing in, and providing technical assistance to, companies in manufacturing and agriculture, which helps to increase jobs and promote private sector-led economic growth in developing countries;
providing loans for large-scale physical infrastructure or equity to infrastructure funds, mainly in energy, which is essential for companies’ productivity;
extending credit lines to banks or financial institutions that on-lend to local companies (mainly SMEs) in developing countries, increasing financial services for local PSD.
Concessional and non-concessional development finance provided to the private sector (estimate, 2016)
Note: USD Commitments (constant 2016). It includes estimates from the authors based on annual reports of multilateral organisations and other secondary literature. See Statistical methodology.
Source: Authors’ calculations based on (OECD, 2018[2]), “Creditor Reporting System” (database), https://stats.oecd.org/Index.aspx?DataSetCode=crs1.
Among multilateral organisations, MDBs and EU institutions are in the lead on PSD financing. MDBs have laid out a number of joint principles and statements that set strategies and quantifiable targets on supporting PSD. In particular, the G20 Hamburg Action Plan called on MDBs to step up efforts to support private-sector-led growth by:
mobilising more private finance for development;
increasing the level of PSD operations thanks to balance sheet optimisations;
boosting investment in infrastructure;
investing in local currency bond and capital markets;
supporting the resilience of domestic economic and financial systems (G20, 2017[34]).
The emphasis on PSD is increasingly recognised in the policy document and strategies of multilateral development partners. For example, the recently adopted World Bank Group’s “Maximising Finance for Development” strategy, sets PSD as the main goal of the Group. The strategy builds on a “cascade approach” for investment decision making, whereby the Group will facilitate commercial solutions in order to avoid the accumulation of public debt and liabilities (World Bank, 2017[35]). If commercial solutions are not viable, then market failures will be dealt with by supporting the policy and regulatory framework and through credit enhancement. Public financing is considered as a last-resort option. The Maximising Finance for Development strategy dovetails with IFC’s “Create Markets” strategy and MIGA’s 2020 strategy creating a whole-of-group plan. This encourages investment policy and regulatory frameworks, with the objectives of improving competition and developing local markets.
Beyond the MDBs, the European Union developed an External Investment Plan (EIP) to encourage investment in Africa and other developing countries. Priority investment areas include: encouraging sustainable infrastructure; expanding SME finance; and promoting sustainable agriculture and rural development. This PSD strategy aims to both support an investment climate, such as market-based regulatory policy and governance reforms. It will also create a European Fund for Sustainable Development (EFSD) to channel downstream support for public and private PSD projects.
Multilateral development partners’ interest in PSD – mainly the MDBs and the European Union – is reflected in the high shares of financing provided for these types of operations. Conversely – with the exception of Japan, Germany and France, who invest large amounts of resources in infrastructure – bilateral providers’ contribution is more modest, at least in dollar terms. In fact, while for bilateral development partners’ support for areas relevant for PSD account for two-fifths of total resources, for multilaterals the share is more than two-thirds (see Figure 3.17). Larger volumes for PSD areas for multilateral development partners reflect large amounts of loans for infrastructure and production sectors. These are less supported by most bilateral development partners as they concentrate more on social sectors.
Bilateral and multilateral development finance for PSD (annual average, 2012-2016)
Note: USD commitments (constant 2016 prices). PSD definition and clustering based on (Miyamoto and Chiofalo, 2017[33]). See Statistical methodology.
Source: Authors’ calculations based on (OECD, 2018[2]), “Creditor Reporting System” (database), https://stats.oecd.org/Index.aspx?DataSetCode=crs1.
Bilateral partners channel large shares of their finance for PSD through:
public institutions in various infrastructure sectors;
donor agencies and development finance institutions (DFIs) for legal and judicial development, agriculture, banking and infrastructure;
private companies in various PSD areas, such as infrastructure and production.
Individual bilateral partners may focus a small part of their ODA portfolios on PSD as an implicit recognition of multilateral institutions’ comparative advantage in this area. For instance, most European DAC countries channel small amounts of resources towards PSD. At the same time, they finance EU institutions, which are large supporters of PSD. In particular, the European Commission and the European Development Fund allocate about half of their support for PSD operations and provide financing to the EIB, which focuses principally on PSD. EU institutions support physical infrastructure and sector budgets for various policy and institutional reforms in PSD sectors, such as energy policy, public financial management and agricultural policy.
Over the three levels of PSD assistance identified in (Miyamoto and Chiofalo, 2017[33]), multilateral support for PSD largely concentrates on market functioning (57%). This is mostly about physical infrastructure and to some extent financial services. Multilateral development finance for physical infrastructure grew from USD 31 billion in 2012 to USD 43 billion in 2016, mainly through non-concessional loans from MDBs in middle‑income countries (see Figure 3.18). The World Bank Group and regional MDBs provide most of this financing and have specialised knowledge in these areas. Evidence shows that MDB involvement in project selection, preparation and oversight in infrastructure projects generally increases its chances of success (Gurara et al., 2017[3]).
Concessional and non-concessional multilateral development finance for physical infrastructure (2012‑2016)
Note: USD commitments (constant 2016 prices). Physical infrastructure only. See Statistical methodology.
Source: Authors’ calculations based on (OECD, 2018[2]), “Creditor Reporting System” (database), https://stats.oecd.org/Index.aspx?DataSetCode=crs1.
Increasing support for infrastructure reflects the growing need to close financing gaps in this sector. Infrastructure needs are significant (over USD 2 trillion per year) and are mostly unfunded, particularly in energy and water (see Figure 3.19). Moreover, aggregate financing volumes hide the challenges the international community faces in filling these gaps in developing countries. If volumes alone were considered to measure efforts to finance infrastructure, attention would shift towards large-scale projects in large emerging economies, particularly China and India, rather than poorer countries, such as those in sub-Saharan Africa. However, while much smaller in volume, infrastructure needs in the poorest countries are more difficult to fill due to budget constraints of these countries and poor investment climates for private sector participation.
Annual investment and financing gaps in infrastructure in developing countries (left panel) and shares of financing needs in infrastructure in developing country by country (right panel)
Source: Authors’ calculations based on (UNCTAD, 2014[36]), World Investment Report 2014, http://unctad.org/en/PublicationsLibrary/wir2014_en.pdf and (McKinsey, 2017[37]), Bridging Infrastructure Gaps: Has the world made progress?, https://www.mckinsey.com/industries/capital-projects-and-infrastructure/our-insights/bridging-infrastructure-gaps-has-the-world-made-progress.
Large financing gaps for infrastructure in developing countries explain why enhancing financial support is high on the agenda of multilateral development partners, including at the G20 level. In 2016, within the G20, MDBs issued a joint Declaration of Aspiration on Actions to Support Infrastructure Investment, which sets targets to increase infrastructure finance. For instance, the EBRD committed to increase the level of infrastructure finance by 20% over the period 2016-2018 compared to 2015 levels and the IFC by 5-10% (Miyamoto and Chiofalo, 2016[38]).
To increase the finance available for infrastructure, multilateral and bilateral partners have been working on attracting the private sector. For example, they have acted to develop infrastructure as an asset class (see Box 3.4), and to mobilise institutional investors. Facilitating long-term investment by institutional investors, such as pension funds and insurance companies, would help to channel global savings into productive investment. Realising this potential will require, however, removing both regulatory obstacles and market failures, and reviewing prudential regulation for institutional investors. To attract long-term financing, including from institutional investors, MDBs are supporting the G20 Global Infrastructure Hub and the World Bank’s Global Infrastructure Facility. These are platforms that help prepare and structure complex infrastructure projects.
Increasingly, multilateral development partners are using Public-Private-Partnerships (PPPs) to support large-scale projects in infrastructure. PPPs can involve a variety of arrangements with different degrees of public and private participation in terms of financing, building and operation of the infrastructure. Multilateral development partners, especially MDBs, support countries to build their regulatory and institutional framework, including by helping to create or enhance PPP laws and units. However, unlike projects that are fully private and therefore involve minimal financing effort for countries, PPPs might be costly, especially for the poorest countries. These projects are complex and require capacity from the public sector as well as good investment climates, which are both generally limited in the most vulnerable countries. Moreover, these projects are usually backed by the country through guarantees. While offloading the cost of the project from domestic budgets, this leaves the country exposed to the same financial risk of cost overruns. Moreover, high costs from private sector developers and the subsidies provided by the country to promote PPPs make these operations particularly expensive compared to traditional procurement.
Policy and industry initiatives have been launched to build a better understanding of infrastructure at the macro and micro level. Taken together, the data sources and methods used in these initiatives may be applied to help close the data gap in infrastructure. This will chart a course that better describes investment expectations for both policy makers and investors. The G20 could play a key role in helping to advance the proposed agenda for research, building on countries and multilateral organisations’ contributions.
The aim of the OECD report “Breaking silos: actions to develop infrastructure as an asset class and address the information gap” is to develop proposals to fill the main gaps in information (OECD, 2017[39]). It has a particular focus on infrastructure financing and the role of the private sector. The proposals build on two Workshops on Data Collection for Long Term Investment held in 2017. There supported the G20/OECD Taskforce on Institutional Investors and Long Term Investment Financing and the OECD and Long-term Infrastructure Investor Association Joint Forum on Developing Infrastructure as an asset class on 18 October 2017.
A new project, the “Infrastructure Data Initiative”, on data gathering and filling data gaps was presented at the last Taskforce meeting in May 2017. This jointly developed project by the MDBs, Global Infrastructure Hub and OECD is supporting the Argentinian G20 presidency for 2018 and the Japanese one for 2019 (see www.oecd.org/finance/lti).
This initiative aims to create a centralised repository of historical long-term data on infrastructure at an asset level. The aim is to ensure a collective effort mobilising the existing information held by MDBs, DFIs, the private sector and governments to create a centralised repository. This will make the information accessible, as a public good, in an appropriate way to policy makers, regulators, investors and researchers.
The data collected will be used in different interrelated areas of research:
Financial performance benchmarks: new benchmarks on investment profitability metrics such as return on assets, return on equity, and dividend yield, analysing also risk (i.e. default rates and recoveries) measured over project life-cycle;
Economic and financial viability: impact evaluation at project/asset level, including utilisation performance (ex-post and ex-ante analysis), construction costs and delivery performance (ex-post and ex-ante analysis);
Environmental, social and governance performance: sustainability and inclusive growth impacts and climate-related risks (i.e. transition risk).
Digital solutions, e.g. enhancing the role of technology in building standardisation and improving performance measurement through better data and information management, are key areas. These will be explored under the roadmap and through the Infrastructure Data Initiative. The OECD is considering how blockchain and more broadly distributed ledger technology could be create much-needed standardisation and data transparency in infrastructure markets.
This initiative to be launched under the G20 Argentinian Presidency will be discussed in November 2018 at the next G20/OECD Taskforce on Long term Investment in Paris.
The 2030 Agenda calls for a paradigm shift in terms of financing practices and approaches. This will require moving from transaction-based to system-wide financing approaches that build on comparative advantages of multilateral organisations and realise the potential of public and private resources for development. In particular, multilateral development partners need to: 1) adapt operational strategies and approaches with a crosscutting and integrated development agenda; 2) support GPGs and steering discussions to divide roles and resources for providing these functions; 3) promote co-operation and build on comparative advantages for institutional coherence; 4) increase support in fragile contexts and manage operational and financial risks; 5) promote the climate agenda; 6) boost contributions of the private sector, while ensuring that these operations are aligned with national priorities, do not harm developing countries and increase development gains; and 7) improve resource mobilisation for concessional resources, including through more and better pooled funding mechanisms.
With a development agenda shaped by systemic (e.g. climate change, financial crises, conflicts, etc.) and local issues, development partners need to adopt holistic approaches. This means promoting development both globally, by supporting GPGs, and within specific countries, by mainstreaming crosscutting issues in country programmes based on local needs. For example, overcoming growing poverty and development challenges in fragile contexts will require tackling the causes of fragility, which are political, societal, economic, environmental and security related [ (OECD, 2018[23]); (Kharas and Rogerson, 2017[40])].
Given their technical, financial and political resources, multilateral organisations have an important role to play in supporting an interconnected and multi-dimensional development agenda that requires collective action. A multilateral system that is aligned and responsive to this evolving agenda is essential to the solution. Moreover, multilateral development partners can support and complement the work carried out by bilateral development partners. For example, as suggested by the 2018 OECD Survey, DAC countries believe that multilateral organisations can contribute in a way that complements their bilateral efforts. They can do this by shifting their sectoral and thematic focus more towards global promoters of development, such as peace, security, climate change mitigation and adaptation, global health and other GPGs (see Figure 3.20).
Source: OECD/DAC “2018 Survey on Policies and Practices vis-à-vis the Multilateral Development System” (unpublished).
Multilateral development partners have already started to adapt to the 2030 Agenda. They are moving towards goal-oriented programming rather than focusing on narrow activities and outputs. In particular, they are:
aligning their policies and operational strategies with the SDGs;
creating indicators and monitoring tools to track their alignment with the SDGs;
designing and implementing programmes and projects that mainstream crosscutting development issues;
carrying out research and analysis to monitor the state of advancement on the 2030 Agenda.
For instance, the UN Secretary-General recently adopted the 2018-2021 strategy for financing the 2030 Agenda. This strategy calls for mainstreaming SDGs within global economic policies as well as regional and national financing strategies and investments, while harnessing the potential of financial innovation and new technology at the project level (United Nations, 2018[41]). From a results perspective, the World Bank Group has adopted eight SDG indicators verbatim and linked to 45 others for 31 targets and 15 goals (World Bank, 2018[42]). While these efforts are at early stages, they show that the multilateral system is responsive to the calls of the international community to commit to the 2030 Agenda. Multilateral organisations will need to demonstrate their results in mainstreaming crosscutting development goals in their programming in order to maintain legitimacy and political support.
As discussed above, sovereign states recognise that multilateral organisations have a comparative advantage when operating in the most challenging situations. They are politically neutral (especially in the case of the UN), have a greater capacity to absorb risks and can distribute funds more rapidly. This is evidenced by the increasing levels of earmarked funding to multilateral organisations for humanitarian assistance. It is also shown in recent reforms and discussion within MDBs and the UNDS to increase development efforts in fragile contexts. This echoes the OECD 2018 Survey, which found that DAC countries believe security and fragility should be prioritised by multilateral organisations.
The preference of donors to choose multilateral channels in the most challenging contexts can be seen as a risk management approach. It allows donors to transfer part of the programmatic and fiduciary risk to the implementing agency, while retaining some degree of control (OECD, 2012[43]). However, multilateral organisations may feel that operational and reputational risks resulting from increased delegation by donors are too high. For grant providers, such as the UNDS and vertical funds, this will further increase programmatic risks. Moreover, for the UNDS, increased programmatic risk will add to the already high financing risk arising from funding modalities that are fragmented and unpredictable (see Chapter 2). For loan providers, such as the MDBs, this will require adjustments to funding and operational practices. Practices will need to be adapted to fragile contexts, by mitigating high sovereign risks, supporting debt management, streamlining fiduciary systems, developing skillsets and breaking silos between central and local government [see e.g. (McKechnie, 2016[44])].
Achieving the 2030 Agenda is a priority given the limited time frame to avoid irreversible climate consequence to the planet. Countries must speed up the green transition. As a GPG that requires collective action, climate change should be high on the agenda of multilateral development partners. This is also reflected in what sovereign states expect from multilateral organisations, as shown by Figure 3.20.
Such a change will require both reduced support for carbon-intensive infrastructure and increased volumes of low-carbon and climate-resilient infrastructure. As shown in Figure 3.13, only small shares of existing portfolios of multilateral development partners are climate related. Importantly, only a third of official development finance for infrastructure and production sectors is climate related. MDBs will need to “green” their portfolios by avoiding support for carbon-intensive infrastructure which could “lock-in” a country to high-carbon development pathways in the long term (OECD, 2017[45]). MDBs face several constraints, relating to the conservative risk profile of their investments and balancing climate and development goals (Meltzer, 2018[46]).
Moreover, multilateral development partners should continue to support disaster risk reduction and climate resilience projects both by helping countries with thematic programmes and by mainstreaming climate objectives, including in urban and rural development. These will require loans and technical assistance, including grant-funded operations for countries most in need.
Finally, the governance of multilateral climate funds should be considered. As noted by (Amerasinghe et al., 2017[47]), there is a need to increase the effectiveness and coherence of an increasing number of these funds, consolidating some if necessary. For example, given the direct link between the Green Climate Fund (GCF) and the UNFCCC and its scale, this fund could absorb the Climate Investment Funds and the Adaptation Fund. However, consolidation of various funds in the GCF will require improvements in the fund’s governance and operational modalities, which have led to inefficient management and slow disbursement (Waslander and Vallejos, 2018[48]). If the GCF takes a leading role in supporting the Paris Agreement, including providing resources for adaptation projects, these structural issues need to be resolved.
A crosscutting and integrated agenda calls for co-ordinated approaches in order to build on comparative advantages and avoid competition and overlaps. Multilateral development partners are trying to strengthen systemic coherence and collaboration via institutional reforms, strategic partnerships and intergovernmental processes, including partnerships with new multilateral organisations. Bilateral development partners feel that most multilateral organisations need to work more cohesively towards the 2030 Agenda, particularly for the UNDS (see Figure 3.21).
DAC's opinion on the areas where multilateral development partners need to improve to be fit for purpose for the 2030 Agenda
Note: Values normalised based on survey responses and scores attributed by each respondent. Highest and lowest levels of need for improvement are 0% and 100%, respectively.
Source: OECD/DAC “2018 Survey on Policies and Practices vis-à-vis the Multilateral Development System” (unpublished).
Enhancing systemic coherence and reducing overlaps and fragmentation among multilateral organisations is a main concern among sovereign states, as expressed in the 2018 OECD Survey. Multilateral organisations are already making efforts to align their strategies and promote co-ordination in order to increase the impact of their contribution to the SDGs. This is being achieved through ongoing institutional reforms, intergovernmental process and strategic partnership frameworks.
Institutional and policy reforms: Institutional reforms, including capital reforms and updated institutional and thematic strategies, are increasingly highlighting the need for coherence and collaboration. The ongoing institutional reform of the UNDS aims to achieve greater coherence among UN entities. It aims to strengthen in-group co-ordination with a reinforced role for resident co-ordinators and improved co-ordination among UN agencies and other multilateral organisations. Similarly, the World Bank Group’s Maximizing Finance for Development strategy is an attempt to create a “whole-of-group” approach for PSD.
Strategic partnerships: Multilateral organisations are encouraging partnerships with each other through strategic partnership frameworks that define areas of co-operation and joint initiatives. For example, the recent Strategic Partnership Framework between the UN and the World Bank Group is a step to collaboration in country project implementation and in fragile contexts. The newly created Asian Infrastructure Investment Bank (AIIB) has entered into multiple Memoranda of Understanding with other MDBs, such as the World Bank, the AfDB, the ADB, the EBRD and the IADB.
Intergovernmental processes: International fora are increasingly becoming a platform where crosscutting and thematic issues are discussed to improve the contribution of the multilateral system to the current development agenda. For example, the G20 has catalysed MDB joint approaches, for example, by carrying balance sheet optimisations and agreeing with shareholders on capital reforms. It has also promoted efforts for infrastructure and PSD. More recently the G20 Eminent Persons Group has discussed global governance, advocating closer interaction among MDBs (Box 3.5). Similarly, compelling development issues are bringing bilateral and multilateral development partners together on specific themes. For example, WHO is co-ordinating an intergovernmental process with bilateral development partners and other multilateral development partners that focus on health (i.e. UNAIDS, the United nations Children’s Fund, the United Nations Office on Drugs and Crime, UNDP, the Global Fund, GAVI and the World Bank) to identify comparative advantages and develop a joint plan to achieve SDG 3 (WHO, 2018[49]).
The G20 Eminent Persons Group on global economic governance was created in spring 2017 to make practical recommendations for the functioning of IFIs in a rapidly changing global system. Within its remit and functions, the G20 Eminent Persons Group has called for the MDBs to collaborate more closely on “principles, procedures, and country platforms” and to work more “as a system”.
However, it is unclear to what extent these broad recommendations will be actionable in practice. The calls from the G20 Eminent Persons Group seem too vague and unlikely to bring about greater collaboration, especially in co-financing of large programmes among MDBs (e.g. the ADB and the AIIB) or with bilateral donors.
Concrete suggestions are needed from G20 Eminent Persons Group for the repartition of roles among MDBs based on common but different capacities. They could provide concrete suggestions to:
Determine an appropriate repartitioning of roles among MDBs in financing and providing GPGs and supporting country lending (e.g. World Bank’s specialisation on GPGs and increased support of regional development banks in country lending for infrastructure);
Ensure an appropriate regional division of roles in country lending (e.g. among the World Bank and regional development banks in specific regions or among regional development banks in overlapping areas, such as the EBRD and the AfDB in northern Africa);
Support a broader reflection among shareholders about the financing capacity of the MDBs as a whole (i.e. does the MDB system has sufficient resources?). Correct imbalances among them (e.g. balance the shrinking AfDB’s concessional window size with the one of the World Bank’s larger IDA windows in Africa);
Tackle MDB’s corporate issues, such as excessive bureaucracy and the rigidity of funding and administrative practices.
Note: Summary of main points of article written by (Birdsall, 2018[50]), On the G20 Eminent Persons Group “Update”: I’m Disappointed but Still Hopeful, https://www.cgdev.org/blog/g20-eminent-persons-group-update-im-disappointed-still-hopeful.
Political resistance in traditional multilateral institutions has led large emerging economies, particularly China, to carve out political and economic leadership by creating new multilateral financial institutions, such as the AIIB and the New Development Bank. These new MDBs have gained significant traction as shown by the large membership in developing and more advanced economies. For example, AIIB includes members from emerging economies and all major European countries.
Despite fears of fragmentation and competition within a growing multilateral system, early experience shows that they are more likely to partner with traditional institutions than replace them. For instance, the AIIB and the World Bank signed their first co-financing framework agreement in June 2016. This sets the legal framework for the two institutions to develop joint projects. This includes preparing and supervising co-financed projects in accordance with the World Bank’s policies and procedures in areas such as procurement, the environment and social safeguards. Moreover, in 2017, the two MDBs agreed to strengthen co-operation and information sharing, signing an agreement providing a framework for co-operation in areas such as development financing, staff exchanges, and analytical and sector work. Similarly, AIIB developed Memoranda of Understanding to promote co-operation with major traditional MDBs, such as the AfDB, the ADB, the EBRD and the IADB.
Since the 2016 agreement, the AIIB and the World Bank have co-financed several projects. These include rural connectivity and power supply projects in India, an improved flood management in the Philippines, hydropower rehabilitation and extension projects in Tajikistan and Pakistan, dam safety improvements in Indonesia, improvements to regional infrastructure and urban infrastructure in slums, and the construction of the Trans‑Anatolian natural gas pipeline.
Overall, the increased prominence of emerging economies in these new institutions is bringing new perspectives to development finance approaches. In particular, the increased presence of China and other emerging economies in the newly created MDBs is emphasising the importance of the positive role of well-run public development banks. This highlights the need for more balanced provision of both public and private long-term finance for development (Griffith-Jones, 2016[51]).
Development challenges are increasingly interconnected and global in nature, making it all the more important to support GPGs. Multilateral development partners are main actors in this area, carrying out support functions. Support includes facilitating policy dialogue, implementing programmes on global issues, developing global standards and norms and collecting data on development. However, multilateral development partners are experiencing difficulties in finding sufficient resources and identifying a clear division of roles in the implementation of these activities.
Multilateral organisations play a key role in the international development architecture by providing GPGs. These are institutions, mechanisms and outcomes that provide quasi-universal benefits. They cover more than one group of countries and several population groups (Kaul, Grunberg and Stern, 1999[52]). They include policy areas, such as peace and security, global financial stability, climate change, global pandemics, migration and so on. Multilateral organisations contribute to the delivery of GPGs by:
facilitating political dialogue on global development issues;
implementing donor-funded development programmes;
setting global norms and standards;
monitoring the implementation of international agreements;
collecting data;
providing forecasting and policy intelligence on global issues.
Despite the importance of global public goods for a crosscutting and integrated development agenda, only USD 14 billion is provided annually for GPG-related activities. This mainly covers UN peacekeeping, IMF surveillance and selected WHO activities (Birdsall and Diofasi, 2015[53]). These estimates only include ODA activities that are global in scope and exclude support for country programmes on GPG-related areas, such as climate change, pandemics and migration. Funding for carrying out UN normative functions has been estimated at USD 5-6 billion, although the credibility of the number is contested (Jenks and Topping, 2017[54]). Beyond the quantity of support, the increased use of piecemeal and volatile earmarked funding for these functions hinders long-term predictability and effectiveness. This is highlighted by the UN Secretary-General and a 2008 World Bank Independent Evaluation Assessment [ (United Nations, 2017[55]); (World Bank, 2008[56])]. Challenges in filling financing gaps for providing GPGs arise because no single country can fully recover the benefit of its own spending. This results in low political returns on financing and incentives for free-riding [ (Kaul, 2012[57]); (Birdsall and Diofasi, 2015[53])].
More and better funding for multilateral organisations for GPG delivery is essential if the international community wants to achieve a global development agenda. Given the inherent reluctance of sovereign states to carry out functions and activities that they cannot fully benefit from, collective action steered by multilateral organisations is needed. Multilateral organisations need to take the lead in facilitating discussions to divide roles in the provision and financing of these functions.
First, there is a need to ensure a clear division of labour based on common but differentiated capacities of multilateral organisations. In a growing multilateral development landscape, it is increasingly difficult to reach agreement among multilateral organisations that sometimes have overlapping mandates. It is unclear what constitutes a GPG within the broader development community and what mechanisms can be used to steer governance and attribute roles in the provision of these goods. This is an issue both within multilateral groups (e.g. UNDS) and among different groups (e.g. UNDS and MDBs).
Mechanisms are needed to pool resources from a variety of actors (public and private, national and international) in order to raise sufficient funding that is also flexible and predictable. Multilateral organisations can also play a role. One option is to use returns from lending activities of MDBs to subsidise the delivery of GPGs. For instance, as suggested by (Morris and Atansah, 2017[58]), IDA reflows could be used to provide grants to multilateral organisations that provide GPGs and subsidised loans for GPG-related investment (e.g. infrastructure, agriculture, etc.). However, the use of margins from income-generating operations to fund GPGs could be an opportunity cost for developing countries as shifting reserves of MDBs to finance GPGs will reduce the amount available for new operations. Therefore, alternative options for fundraising that involve the participation of advanced economies are still important to ensure fairness.
Multilateral development partners play a leading role in promoting PSD and mobilising finance from the private sector, for instance through blended finance arrangements. However, these two types of engagements present both challenges and opportunities for achieving the 2030 Agenda. A bigger role of the private sector is necessary in terms of resources and financing needed to fill significant financing gaps. In contrast, it is important to align these activities to national priorities, avoid harm to people and increase development gains.
Multilateral development partners have supported policy and institutional development more than bilateral development partners since their creation. They have been particularly active in promoting macroeconomic reforms and increasing competitiveness in various sectors to bolster private sector participation. However, results have been mixed – both in terms of alignment of the policies with national priorities and in overall social and economic impact, particularly from MDBs and other IFIs (Shah, 2013[59]). In particular, structural adjustment programmes of the IMF and World Bank during the 1980s and 1990s have, in several circumstances, failed to achieve their social and economic objectives. At times, they have had serious detrimental effects on recipient countries.
Since the late 1990s, multilateral development partners have increased their efforts to integrate social considerations into their policy conditionality. For example, social impact assessments and poverty reduction strategies are more integrated into their policy lending. In 2004, the World Bank switched from adjustment lending to development policy lending, putting emphasis on country ownership of the reform programme (Swaroop, 2016[60]). It also introduced the Poverty and Social Impact Analysis tool to avoid collateral damages to the most vulnerable segments of societies in borrower countries. However, criticism from civil society suggested that the change was in name only, rather than in creating different policy instruments (Shah, 2013[59]). Contrary to this, recent reviews carried out by some MDBs show improvements in the economic and social impact of policy lending compared to past experiences [ (World Bank, 2015[15]); (Asian Development Bank, 2018[61])].
More recently, the humanitarian crisis in Africa, led the European Union to boost its engagement in the region, particularly in fragile contexts. While increased resources for fragile contexts are particularly important, given the challenges that these contexts face, the objectives of the organisation were questioned. Critics claimed that motives were political rather than developmental. As mentioned in Chapter 2, country studies on Libya, Niger and Ethiopia suggest that EU trust funds – which also integrate PSD activities, e.g. SME development – are mainly motivated by EU’s migration policy. Critics claim they prioritise reduced transit of migrants over the safety and the impact of development operations (CONCORD, 2017[62]).
More evidence is needed to comprehensively and accurately assess the intentions and consequences of the funding practices and policy conditionality of multilateral development partners. It is important for these institutions to preserve and, when needed, advance efforts in supporting policies and institutions. However, this support should respect country ownership, avoid collateral damage to the most vulnerable people and support development rather than political issues.
Overall, private finance mobilised from the private sector is increasing and is set to continue due to interest in private sector solutions from official development partners, particularly multilateral agencies. The AAAA, the Paris Agreement, intergovernmental processes at the G20 and the UN clearly show political commitment to promoting commercial solutions to close important financing gaps in infrastructure, climate change and social services [ (United Nations, 2015[1]); (G20, 2017[29]); (OECD, 2017[63])]. This raises two issues. First, ensuring that resources allocated for mobilisation efforts achieve increased mobilisation rates, which are currently low. Second, that these operations do not cause collateral damage and effectively contribute to development.
Amounts mobilised by the private sector from multilateral development partners are far from the trillions expected. This is illustrated by MDBs’ private capital mobilisation ratios of 1 (public) to 1.5 (private) over their whole portfolios (Blended Finance Taskforce, 2018[30]). Diversifying transaction-based portfolios dominated by loans and finding financial mechanisms will free up more space in MDBs’ balance sheets for increasing private sector operations. However, methodological difficulty in understanding the potential of each instrument makes comparisons challenging and evidence hard to find. First, ascertaining additionality – ensuring that private finance was mobilised because of MDBs’ interventions – is hard to calculate in practice and widely contested. Second, instruments are diverse among MDBs and comparisons are challenging. In fact, only grants entail an actual and definitive flow of resources once disbursed. In contrast, loans are meant to be repaid, equity can be redeemed upon exit and guarantees – which are not flows – cashed only if activated. However, despite their difference in terms of risk-taking for their providers, loans, guarantees and equity are all booked on balance sheets based on their value and therefore limit the amount of new investments that multilateral institutions can make.
This is important as MDBs are bound by capital adequacy rules. These rules restrict the magnitude of new investments that they can take. Therefore, multilateral organisations need to choose the instruments that can maximise their investment. They also need to develop financing mechanisms that expand their financing capacity for private sector operations (see the “In My View” piece by Nancy Lee). For example, (Lee, 2018[64]) suggested creating special purpose vehicles (SPVs) for all MDBs. These would be designed to target highly catalytic uses – e.g. early stage finance and high-risk project tranches – freeing up space in MDBs’ balance sheets for new investment by sharing risk.
To date, the surge in private investment – critical for filling SDG financing gaps – has for the most part failed to materialise. In infrastructure, for example, World Bank data show that the volume of investment with private participation in developing countries is down sharply. It has gone from over USD 210 billion in 2012 to USD 93 billion in 2017. As the world looks for ways to channel huge pools of private capital to SDG investments, the private sector windows (PSWs) of the MDBs are moving centre stage. Rightly so, for these are the most important publicly funded instruments for tackling this challenge.
Yet, MDB shareholders are surprisingly conflicted about their core expectations and priorities for these institutions. They want MDB PSWs to operate commercially, price on market terms, meet profit objectives and avoid distortive subsidies. Yet, they are also asked to make markets, achieve additionality and target development impact. PSWs are encouraged to deploy subsidies through blended finance, but cautioned to avoid wasting resources and taking on risks and costs that should be borne by the private sector. After many years of operations, the purpose and records of PSWs remain a subject of debate.
The following suggests some operational principles that would clarify PSW priorities and require shareholders to make choices. Fully implementing these principles would change PSWs’ business models towards more mobilising and less lending, lower risk adjusted returns and possible reductions in institutional ratings, and more development impact.
PSWs are held accountable by their shareholders for the volume of their own business and returns. Returns tend to trump and constrain mobilisation ratios (dollars of private finance mobilised per dollar PSWs commit), leading PSWs to focus on lending rather than more catalytic but less profitable tools, such as guarantees.
To catalyse private finance that would not otherwise flow, PSWs must help bridge gaps in capital markets, not occupy the same space as private investors. Capital is typically scarce in early stage finance (for firms and for infrastructure projects) and in high-risk tranches for later stage projects, e.g. junior equity. To support increased PSW operations in these riskier areas, I proposed elsewhere the creation of an off-balance sheet SPV to help PSWs manage such risks.
To make or build markets, PSWs should choose projects specifically for their likely effect on the behaviour of market actors, market infrastructure, and the management of first mover costs and risks (without discouraging other market entrants). The best use of blended finance is to tackle obstacles that affect not just a single firm but actors throughout the market: information or skill gaps, collective action problems or the need for new business models that work in low-income environments.
PSWs have long financial track records that show respectable financial returns in the aggregate. However, these are not, with some exceptions, shared at the project level with the private sector. PSWs therefore miss the opportunity to use the power of their own data to signal markets on profitable opportunities and to price risk more accurately.
Conventional wisdom contends that the problem for PSWs is largely the scarcity of bankable projects, suggesting a fixed supply. It is more accurate to view project supply as partially a function of the operations of the PSW itself. The capacity to pilot innovative business models or new goods and services, adapt them to market feedback, and take them to commercial viability would expand project pipelines.
PSWs compete more than collaborate – rational behaviour in a world where their capital and their capital increases are dependent on their business volume. To change these dynamics, shareholders should mandate the creation of standardised asset pools for all institutions, common or at least complementary country strategies, and the sharing of project pipelines, due diligence and risk.
The unique MDB comparative advantage is their ability to support policy and institutional reforms (PIRs) as well as finance projects. They would do well to consider the Millennium Challenge Corporation (MCC) compact model. This brings sectoral PIRs and project discussions together in the compact negotiation between the MCC and the partner country. The result is greater country ownership and greater synergies between policy and projects.
If interventions that help women to access project benefits are not explicitly incorporated in project design, women often gain less than men. We cannot assume that the same interventions are equally effective for men and women. Paying attention to the specific obstacles confronting women, women-owned firms and women farmers creates additional gains that make everyone better off.
Note: This is an original contribution by the author based on her article The eight virtues of highly effective DFIs, published in Development Finance Magazine in July 2018.
1. Nancy Lee is Senior Policy Fellow at the Center for Global Development and Senior Advisor at the Center for Strategic and International Studies.
Increasing resources through private finance mobilisation is not enough to achieve the 2030 Agenda. Additional resources need to be aligned with national priorities, avoid environmental and social disruption, and promote development gains. Principles 1, 3 and 5 of the OECD ‘blended finance principles’ state that development finance operations that aim to increase commercial finance should be anchored to a development rationale, tailored to local context and the results measured (OECD, 2017[27]). This is because the commercial motives of private companies and financial institutions can conflict with local priorities and development objectives. It is important for multilateral development partners to integrate these principles in the design and implementation of private sector operations and put in place effective monitoring and evaluation systems. Current systems are rudimentary in terms of coverage, quality and comparability (OECD, 2018[28]). Beyond ensuring that operations to mobilise private finance “do good”, it is also important that they “do not harm”, particularly in sectors with high private sector participation, such as infrastructure.
As discussed, the deterioration in quantity and quality of donor contributions is an issue for those organisations that rely on donor contributions for highly concessional operations, particularly the UNDS. Highly concessional operations are required to: support countries and people in the most challenging contexts, such as fragile contexts and humanitarian settings; test innovative programmes and initiatives that bear high risks (including from the private sector); or fund activities that would be otherwise difficult to support, such as normative work and GPGs. The increase in earmarked funding poses challenges to ensuring predictable financial flows for highly concessional operations and promoting coherent multilateral programming and implementation. This is because earmarked funding is often provided in a fragmented fashion, e.g. through single-donor trust funds that reflect the interest and priority of the single contributor. In a context of competing priorities, there is a need to find financing mechanisms that balance donor needs (e.g. supporting donor agendas, increasing international visibility, etc.) with those of multilateral organisations and those of recipient countries. This is essential in ensuring system-wide approaches in line with both multilateral operational strategies and with local needs.
In this contexts, multilateral pooled funding mechanisms (MPFM) can support a crosscutting and integrated development agenda but need good governance and financing structures to succeed. MPFMs are financing vehicles that earmark development finance to support sectoral, crosscutting or system-wide programming and implementation. Providers contribute resources to an autonomous account or through more complex fund structures similar to multilateral institutions. The account or fund has specific purposes, modes of disbursement and accountability mechanisms. These mechanisms offer the opportunity to increase the quantity and the quality of financing for a crosscutting and integrated development agenda by consolidating scattered earmarked funding; promoting innovation; fostering policy coherence and co-ordination; and increasing financial mobilisation (OECD, 2015[65]). However, they can increase transaction costs and fragmentation if poorly designed and managed. They also need governance mechanisms that ensure country ownership and co‑ordination and require donor financing streams that are predictable and flexible.
Among MPFMs, interagency configurations are more complex financing mechanisms involving a variety of official and private actors with different degrees of participation. Some of the funds are institutional articulations emanating from a group of affiliated multilateral institutions, e.g. UN Multi-Partner Trust Funds and UN Joint Programmes. Others have a high degree of independence and institutional complexity, allowing them to be considered multilateral institutions in their own right, e.g. Global Fund, Green Climate Fund, etc. In both cases, fund responsibilities are spread among several actors, usually: 1) one institution responsible for fiduciary management; 2) a multi‑stakeholder steering committee deciding on funding allocations; and 3) national governments, aid agencies, CSOs or multilateral agencies implementing the projects.
The results of pooled-funding mechanisms have been mixed (OECD, 2015[65]). Large global pooled funds, such the Global Fund, GAVI and the climate funds (e.g. CIFs, Green Climate Fund, GEF, etc.) have managed to promote innovative solutions and mobilise important resources for sectoral and thematic issues, notably on health and environmental issues (Sachs and Schmidt-Traub, 2017[66]). However, because of their narrow thematic scope and a top-down governance structure, these funds have been criticised. They are accused of disregarding crosscutting issues and increasing transaction costs, notably by channelling high amounts of financing for specific projects and increasing administrative burdens for donors and recipients [ (Kennedy, 2017[67]); (OECD, 2015[65]); (Browne and Cordon, 2015[68])].
Conversely, smaller, country-specific funds, have been more successful in promoting country ownership and co-ordination. However, they have not been successful in mobilising adequate resources, promoting innovation and ensuring a flexible use of finance due to donor earmarking practices (OECD, 2015[65]). The interest in the use of multilateral pooled funds is growing, especially at the UN level. The proposed UN reform aims to double the share of financing received from donors through multi-donor trust funds in various sectors to reduce earmarked funding. One initiative is boosting an SDG fund to pool resources from various donors in order to support crosscutting programmes and partnerships in various SDG-relevant themes.
The complexity of the current development agenda calls for more and better multilateralism, which requires more and better financing. Overall, increasing sourcing of development finance from capital markets and profit-making activities of multilateral development partners, particularly MDBs, is contributing to an increasing level of loans for economic sectors. Conversely, UN entities, which are grant dependent, are experiencing a deterioration in the quantity and quality of their resources. This is impairing their capacity to contribute to a crosscutting and integrated development agenda, which still requires highly concessional resources, such as grants. This issue resonates among multilateral organisations financing GPGs – which are mainly supported by grants – where innovative funding mechanisms are needed to ensure adequate and predictable funding streams.
Multilateral development providers are increasingly called on to work in challenging contexts and to provide GPGs, but need to adapt their funding and operational practices to do this. This will include streamlining fiduciary systems, breaking country and regional silos and investing in staff with specialised knowledge of fragile contexts. For grant providers (e.g. UNDS entities and vertical funds), this means increasing operational risks arising from a portfolio that is increasingly focused on these contexts. Moreover, UNDS entities will need to find ways to increase the quality and quantity of grant finance from donors, including by creating trust funds with governance and financing structures that ensure predictability of resources. Finally, working in challenging contexts requires good co-ordination and co-operation among multilateral organisations based on respective comparative advantages. These include the financial and technical resources of MDBs and the political knowledge and legitimacy of UNDS entities in fragile contexts.
Multilateral development partners play a crucial role of in promoting the climate agenda in developing countries, acting as conveners, financers and implementers of climate-related projects and programmes. However, only a small portion of their resources is allocated to climate-related projects. The need for multilateral co‑operation has never been more important in this area. Climate change requires collective and urgent action to avoid catastrophic and irreversible effects.
To increase their contribution, MDBs will need to green their infrastructure and production portfolio. Ways to do this include avoiding financing carbon-intensive projects that could lock countries in to unsustainable patterns. MDBs should also increase support for low-carbon and climate-resilient infrastructure. There is an increasingly crowded architecture of funds with overlapping mandates and activities and these should be streamlined by building on the newly created GCF. However, the GCF needs to prove its added value by improving governance and operational modalities that have created inefficient management and slow disbursement.
Multilateral development partners provide high shares of their financing to countries for PSD. This is mainly for policy and institutional development in PSD areas and for investment projects in financial services and infrastructure. Moreover, an important portion of these operations is provided through direct engagement with the private sector to promote market-based solutions and mobilise additional finance for development.
Previous and current practices of multilateral development partners highlight the need to ensure that policies and institutional development operations are aligned with national priorities. They should not cause collateral damage to the most vulnerable segments of the recipient countries. It is also important to ensure that political motives do supersede development motives. Similarly, private sector operations – where multilateral development partners are active – should be designed, implemented, monitored and evaluated to ensure that commercial objectives do not dilute development outcomes or threaten the environment and local communities.
A crosscutting and integrated development agenda calls for development approaches that are tailored to local contexts and implemented through partnerships that are coherent and build on comparative advantage. This requires an understanding what needs multilateral organisations can respond to and organisations’ respective comparative advantages in a crowded development co-operation architecture.
A development agenda global in nature should ensure that GPGs are provided and financed. As sovereign states cannot individually support this agenda, collective action is needed through multilateral organisations. In this context, multilateral organisations need to collaborate with shareholders. Issues include clarifying the scope of GPGs, ensuring a division of roles in financing and implementation, and introducing institutional mechanisms for steering global governance on these issues.
Further, development partners should continue to support coherent partnerships and understand respective comparative advantages. New multilateral development partners and increased use of partnerships among multilateral organisations are introducing new perspectives on how multilateral development organisations can work together. This is happening among MDBs – including with the newly created AIIB – and also among other multilateral groups, such as between the World Bank Group and the UN.
Finally, multilateral development partners need to promote crosscutting and integrated approaches through more and better-pooled-funding mechanisms. This is particularly important at the UN level, where piecemeal and transaction-heavy earmarking is impairing the capacity of the UNDS to contribute to a crosscutting, integrated development agenda. Both bilateral donors and multilateral organisations need to work together to find suitable funding mechanisms and governance structures to create effective pooled-funding mechanisms.
Chapter 3 concentrates on the outflows and operations of multilateral organisations. The report traditionally focuses on inflows; this is the first time it has offered such a broad analysis of outflows. To measure the magnitude of outflows and operations of multilateral organisations, the dataset included both core-funded operations of multilateral organisations reporting to the OECD Creditor Reporting System (CRS) and funding earmarked through multilateral organisations by DAC countries and other bilateral providers reporting to the CRS. While multilateral funding earmarked by bilateral providers is counted as bilateral development finance in the CRS, Chapter 3 uses these amounts to measure the value of operations of multilateral organisations for development. Excluding bilateral development finance earmarked trough multilateral organisations would significantly underestimate the magnitude of operations of multilateral organisations that are mainly financed through earmarked finance, particularly within the UNDS.
For analytical purposes, multilateral organisations are clustered into five groups in this analysis: i) the World Bank Group, ii) regional development banks, iii) EU institutions, iv) United Nations Development System, and v) vertical funds. “Vertical Funds” include: the Adaptation Fund, Climate Investment Funds, GAVI, the Vaccine Alliance, GEF, the Global Fund to Fight AIDS, Tuberculosis and Malaria, and the Green Climate Fund. “Others” include: the Arab Bank for Economic Development in Africa; Arab Fund; Global Green Growth Institute; IMF (Concessional Trust Funds); Montreal Protocol; Nordic Development Fund; OPEC Fund for International Development; and Organization for Security and Co-operation in Europe.
The data analysis is based on concessional and non-concessional official finance provided for development purposes by bilateral and multilateral development partners (i.e. official development finance). Private finance mobilised through official development finance, collected through an OECD survey carried out by (Benn, Sangaré and Hos, 2017[31]) is used in 3.14 and the related analysis.
The flow basis for Chapter 3 is deflated commitments (2016 prices). The choice of commitments over disbursements was made for three reasons: First, commitments better reflect geopolitical events in the period covered in the analysis (e.g. financial crisis, humanitarian crises, etc.). Second the data coverage is much more comprehensive than for disbursement. Third, commitments are comparable with data on private finance mobilised and markers, which are measured on a commitment basis.
Country-level analysis covers ODA-recipient countries, in line with other OECD publications based on OECD CRS data. The list of fragile contexts used is drawn from the “2018 States of Fragility Report” (OECD, 2018[23]).
Sectoral analyses used the following clusters, based on DAC CRS sector codes (in brackets):
governance: governance and civil society (150); general budget support (510)
humanitarian: emergency response (720); reconstruction relief and rehabilitation (730); disaster prevention and preparedness (740)
infrastructure: water (140); transport (210); communications (220); energy (230)
multisector: general environment protection (410); other multisector, excl. rural development (430)
production: banking and financial services (240); business and other services (250); agriculture, forestry, fishing (310); industry, mining, construction (320); trade policy and regulations (331); tourism (332); other multisector, only rural development (430)
social: education (110); health (120); population policies and reproductive health (130); other social infrastructure and services (160)
other: food aid (520); other commodity assistance (530); action relating to debt (600); administrative costs of donors (910); refugees in donor countries (930); unallocated or unspecified (998).
The method used for tracking climate finance is different for bilateral and multilateral development partners. MDBs (including EIB) report the climate components of their projects, which are the portions of financing specifically spent for climate purposes. All the other bilateral and multilateral development partners use Rio markers that consider the whole financing for projects with principle or significant climate objectives. For the purpose of this report, only multilateral organisations that report climate data to the DAC have been considered in both the calculation of absolute amounts and the relative shares of climate finance within their portfolios. Climate finance is both concessional and non-concessional development finance for development.
The analysis uses statistical data as reported by development partners to the OECD CRS. A small number of estimates were made to fill data gaps and integrate analysis based on data beyond the CRS data, as follows:
Gross disbursements were used as proxy for commitments in all figures for the Montreal Protocol, International Atomic Energy Agency, GAVI and Arab Bank for Economic Development in Africa, United Nations Population Fund, United Nations Environment Programme, World Food Programme, Council of Europe Development Bank (only in 2013) due to data gaps. For the African Development Fund and CIFs, commitments were used for concessional finance and gross disbursements for non‑concessional finance.
Due to data gaps in non-concessional finance for EBRD (2008), IFAD (in 2013-2014), IFC (2008-2011) and OFID (2008), the authors made some estimates using available data as a proxy when possible and reasonable or drew on secondary sources. In particular:
EBRD non-concessional finance in 2008 was estimated using data from the annual report (EBRD, 2009[69]). An exchange rate of 1.47 was used to convert EUR in USD and a share of 52% was applied to capture the portion of financing flowing to developing countries. The share of 52% was calculated using data in the annual report (EBRD, 2009[69]).
IFAD commitments for 2012 reported in the CRS were used as a proxy to fill data gaps for commitments in 2013 and 2014.
IFC non-concessional finance in 2008-2011 was estimated using figures estimated by (Kenny, Kalow and Ramachandran, 2018[70]). Shares of financing to developing countries were estimated using data available on IFC’s website, https://finances.worldbank.org/es/widgets/fphv-p24n.
OFID non-concessional finance amount in 2009 was used to fill 2008 data gaps.
Amounts channelled to private sector companies by bilateral and multilateral development partners in 2016 are actual and estimated figures representing amounts for private sector operations. Figures for the African Development Bank (AfDB), Asian Development Bank (ADB), CDC Group, Compañía Española de Financiaciόn del Desarrollo (COFIDES), European Bank for Reconstruction and Development (EBRD), Entrepreneurial Development Bank (FMO), Norfund, the Development Bank of Austria (OeEB), SIMEST, the Belgian Corporation for International Investment (BIO and BMI-SBI), the Investment Fund for Developing Countries (IFU), the Islamic Development Bank (IsDB), the Finnish Fund for Industrial Cooperation (Finnfund), the Swiss Investment Fund for Emerging Markets (SIFEM), Sociedade para o Financiamento do Desenvolvimento (SOFID) are for 2015 either for data availability reasons or because they seemed figures more reliable.
The amounts were calculated using various methods depending on the specific data availability drawing from OECD CRS and secondary data. In particular:
Measuring amounts through the private sector channel (60 000) in the CRS was the default method to estimate amounts for private sector operations;
Amounts from AfDB and ADB were calculated using the CRS data for the channel 52 000 “others”, as private sector operations by the institutions were reported through this channel;
IFC amounts were considered 100% channelled to the private sector as the institution did not report on channels in 2016 and because it operates predominantly with the private sector;
Amounts from Belgian Investment Company for Developing Countries and Société Belge d'Investissement International, CDC, Compañía Española de Financiación del Desarrollo, Finnfund, Nederlandse Financierings‑Maatschappij voor Ontwikkelingslanden N.V. (FMO), Investment Fund for Developing Countries (IFU), Norfund, Oesterreichische Entwicklungsbank AG (OeEB), Swiss Investment Fund for Emerging Markets (SIFEM), Società Italiana per le Imprese all'Estero (SIMEST) and Sociedade para o Financiamento do Desenvolvimento (SOFID) are estimates calculated by converting EUR figures from (EDFI, 2016[71]) to USD and by applying the shares of sectors and instruments provided in the report;
CAF was estimated using figures from 2016 annual report (CAF, 2017[72]).
Annual investments and financing gaps in infrastructure in developing countries are based on estimates made by (UNCTAD, 2014[36]) through a meta-analysis that combines estimates made by several studies available in the literature. As UNCTAD (2014) provides ranges of current investments and financing gaps in each infrastructure sector, Figure 3.18 shows the average of these ranges. Amounts include only capital spending, leaving out operating costs.
Shares of shares of financing needs in infrastructure in developing country by country were calculated using estimates in (McKinsey, 2017[37]). While countries that are not ODA‑eligible were excluded when visible, estimates might include some countries in that group.
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