David Malpass Emphasized on Private Capital for Strengthening World Bank Delivery
Here is complete text of the speech by David Malpass at Center for Strategic and International Studies on Strengthening of World Bank Delivery on Private Capital Facilitation
The developing world is facing an extremely challenging outlook, with growth slow and interest rates rising. Much of the world’s available capital is being absorbed by a narrow group in the advanced economies to sustain massive national debts and central bank duration mismatches. I spoke on the deepening inequality at the G20 meetings in India last month. Living standards are diverging rather than converging. Restoring growth, including growth in median income, is critical to the World Bank’s mission of poverty alleviation, shared prosperity, and sustainability.
With interest rates rising to more normal levels after over a decade at near-zero, I expect a long period of asset repricing and regulatory interventions. Last week’s banking turmoil underscored the tendency of governments in the advanced economies to protect against losses. If so, this risks allocating much of the burden of losses to average taxpayers and poorer countries.
The bond-buying policies of central banks protected government bonds, mortgages and municipal bonds, causing a reach for yield. Even before SVB, the Fed already projected a huge ramp-up of its bond purchases in 2026, protecting bond owners and issuers.
Many other guarantees are already in place to protect those with the most assets. Japan has a cap on the ten-year bond yield, in effect putting a floor on the price of government and corporate debt. Governments often guarantee high returns on pensions. Investors in sovereign debt have seen their returns largely protected.
The risk is less dynamism and more reliance on regulation. We should expect slower economic growth and a continued concentration of capital in the advanced economies.
For many developing countries, this leaves a desperate shortage of funds for education, nutrition, health care, and debt service. We estimate that developing countries will need $2.4 trillion per year for the next seven years to address climate costs, conflict, and pandemics alone. This is a huge number and far above where we are today. It leaves infrastructure severely under-funded. Rather than growing, we expect the capital stock in 20 percent of EMDEs to decrease between 2021 and 2024. Some estimates even show a decline in almost all EMDEs at a time when massive growth in investment is needed.
Private capital is essential to closing this financing gap. Enabling private sector investment and capital flows are core activities and a priority of the World Bank Group. PCF features prominently in our Evolution process on two levels. I just met with the full Board this morning. First, we provide policy advice and lending that support economy-wide and sector-specific reforms and the preparation needed to unlock private capital through “Private Capital Enabling,” or “PCE.” Second, we channel capital to WBG operations through co-financing from private investors through “Private Capital Mobilization,” or “PCM.” PCM and PCE work together as we help create well-regulated and competitive markets that attract private investment.
Let me walk you through the three main pillars of our new approach and how they address the key challenges. Our aspiration over time from these three pillars is to see the creation of a massive, dynamic, investable asset class for infrastructure in developing countries that spans borders and sectors in order to diversify risk and achieve lower financing costs.
The first pillar is enabling private capital by creating a conducive environment for private capital to flow. Helping countries achieve macroeconomic stability and promoting prudent monetary, exchange rate and fiscal policies are at the center of World Bank’s economic policy dialogue with client countries and are important aspects of business enabling. Also, we have been making efforts to increase transparency of public debt contracts to better assess debt sustainability and promote accountability. To guide this work, we are also revamping core analytics that will more systematically identify barriers to private investment (including FDI) and capital market development, as well as market distortions that affect capital allocations. The product of these analytics will focus on actions that countries need to take for a sound investment climate, competitive markets, and a balanced role of the State in the economy. These analytics will complement our toolkit targeting private sector development, including the IFC 3.0 strategy for creating markets with upstream work and the new Business Enabling Environment (BEE) reports. The BEE reports will evaluate the business environment both from the perspective of an individual firm’s ease of doing business and also from the standpoint of private sector development as a whole. We can then take the knowledge from these analytics to create multi-year programmatic engagements that support targeted reforms and create prioritized opportunities for the private sector in core areas of focus, as well as new areas such as agriculture, digital, and housing. We will also continue to be a key contributor to the development of international standards, including on sustainability and transparency, so that the regulations are proportional and don’t unfairly burden developing countries.
The second pillar is building capital investment pipelines that address the often-mentioned challenge that there are not enough projects in developing markets that can attract financing. We aim to establish WBG Global Priority Programs that will develop initial projects and follow-on transactions that will combine World Bank, IFC and MIGA interventions, and then replicate these in different cities and countries. This work is designed to create robust capital investment pipelines of viable projects by identifying, framing, preparing and assessing the feasibility of projects in a variety of key sectors. For example, these programs could focus on energy access, the digital economy, or access to capital for entrepreneurs in Africa. Delivering growth and impact requires investment approaches designed to realize scale and uniform documentation. Scaling Solar and Mini-Grid Portfolios are two successes in realizing the efficiencies and impact of scale and uniformity. In addition, our work on Quality Infrastructure Investment, or QII, is also helping to increase private investment opportunities. One important example is our partnership on QII with Japan, which has helped mainstream QII principles in more than $22 billion of World Bank projects. We also house the Global Infrastructure Facility (GIF) and Public-Private Infrastructure Advisory Facility (PPIAF). Those help us build pipelines of impactful, high-quality, and resilient infrastructure.
As part of this pillar, we are also looking to create new opportunities to support State Owned Enterprises, or SOEs, to attract private capital. SOEs in the world’s poorest countries are large economic actors, with revenues close to 16 percent of GDP and employment accounting for around six percent of formal sector employment. This work helps SOE utilities clean up their balance sheets and use transactions to expand their debt capacity and optionality; reduce debt service costs and operating expenses; and enhance credit ratings. Our work in this area supports reforms on regulatory frameworks, competitive neutrality, pricing, tariffs, and governance to improve the fundamental dynamics. We support SOEs to optimize their balance sheets and operational efficiency, and monetize existing assets, so that they can make new investments for growth, called ‘asset recycling.’ In addition, our technical and financial support helps sovereigns, sub-nationals, and private sector clients access sustainability, green, and blue debt capital markets. Finally, we are exploring support for “hybrid PPPs” where World Bank financing or guarantees can help ensure a balanced risk allocation and make the PPP feasible.
This vertical is critical because it is designed to strengthen the backbone of private finance solutions in emerging markets. SOE utilities – electricty, wate and other utilities – represent the largest pool of energy and infrastructure projects of scale in the emerging markets. As such, healthier SOE utilities that can stand on their own for credit purposes present less project risk, and therefore will promote greater project velocity at lower risk premiums and make a meaningful impact in creating robust project pipelines.
The final pillar is establishing private capital connectors by creating a market of investment grade securities that will provide institutional investors better access to EMDE infrastructure debt. This work aims to create greater depth and liquidity and longer tenors in EMDE infrastructure debt markets, mainly domestic capital markets. It does this by aggregating and packaging EMDE loan assets into investable securities for institutional investment. The IFC’s highly successful Managed Co-Lending Portfolio Platform (or MCPP) is an excellent example of significantly scaling up IFC’s debt mobilization from institutional investors. And, indeed, we are exploring an originate-to-distribute model to unlock institutional capital at an even greater scale. For example, IFC is developing a new multibillion-dollar platform to securitize IFC loans by packaging and distributing them to institutional investors through a warehouse. This platform can also be designed to include assets originated by other MDBs, and, possibly, in the future tap into the market of EMDE infrastructure loan assets originated by commercial banks. The Bank is also exploring a co-financing facility that would be supported by grants and first loss guarantees by donors and would co-invest in projects prepared and financed by the Bank.
These debt aggregation vehicles require market reforms for optimal impact. Thus, we will focus on reforms to develop local capital markets with legal and regulatory framework for securities issuance, investment, trading, and supervision. We will also support incentivizing deeper pools of domestic savings for investment, with fuller financial participation by lower-income households and women. The WBG Joint Capital Market Program, or J-CAP, will strengthen its efforts to provide both advisory and financial support. Finally, giving investors high quality data is key to help them properly evaluate projects. We are working to enhance investors’ access to payment history for private sector projects in developing markets through the Global Emerging Markets Risk Database, or GEMs. Currently the data is only available to the consortium members that contribute data—mainly MDBs and development finance institutions. Making the aggregated statistics available to investors would be a global public good, and we are working on ways to do so with appropriate safeguards and quality standards.
Progress on all of these pillars is heavily reliant on blended finance approaches from the global community, where concessional resources are combined with commercial funds. Blended finance solutions optimize risk sharing by the private sector and avoid “socializing losses” and “privatizing profits.” As an example, we introduced our new fund called SCALE, which stands for Scaling Climate Action by Lowering Emissions. It can be a major channel to provide blended finance in middle income countries to fund verifiable emissions reduction and help countries build a track record of projects that can lead to unlocking private capital through carbon markets. Verification is key to building trust. We also issued outcome bonds—a water bond in Vietnam to provide clean drinking water to schoolchildren and a Rhino bond in South Africa to conserve the highly endangered black rhinos—where payments to investors depend on verifiable outcomes. You may have seen my description of these two innovative financing techniques in Barron’s over the weekend. Results-based approaches such as SCALE and outcome bonds are transparent and avoid greenwashing.
The three pillars—enabling private capital, building capital investment pipelines, and establishing private capital connectors—provide the blueprint to massively increasing the amount of private capital flowing into developing countries. This programming will be delivered on a One WBG basis, benefitting from the World Bank Group’s:
- partnerships with recipient governments, private investors, development partners and donors
- analytical and diagnostic work that brings focus to geographic and sector priorities and
- expertise in realizing economies and efficiencies of programming based on scale and uniformity of structure, documentation and approach.
This program requires a high degree of partnership among all key stakeholders. It helps to meet climate and development objectives through private capital enabling and mobilization. It maps a holistic, practical, transactional, targeted and efficient approach for all partners. And perhaps most importantly, it is ready now to help millions of people all over the globe. The WBG is uniquely positioned to play a leadership role in this game plan. Of equal importance are the roles and responsibilities of all key stakeholders—donors, recipient governments, IFIs/MDBs, institutional investors and other private sector players—and, importantly, the rewards that successful partnership will bring. Chief among these rewards is the World Bank’s ability, alongside all of its great partners in the global community, to facilitate much greater amounts of private capital for impactful and scalable projects for sustainable development.