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Development Co-operation Report 2016
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branch I. The SDGs as sustainable business opportunities and five approaches to make it happen
  branch 4. Measuring private finance mobilised for sustainable development

by

Julia Benn

Cécile Sangaré

Suzanne Steensen

Development Co-operation Directorate, OECD

The OECD is working on ways to monitor and measure private resources mobilised through public sector interventions. This is of great importance in the context of the Sustainable Development Goals: improving the tracking of these resources will increase transparency while also encouraging their use to mobilise further resources. This chapter provides an overview of the work underway and outlines some of the methodological challenges involved. It also presents the findings of a recent survey that focused on private sector finance mobilised through guarantees, syndicated loans and shares in collective investment vehicles between 2012 and 2014. It concludes with a set of key recommendations.

Challenge piece by Jeff Chelsky, World Bank. Opinion pieces by Pierre Jacquet, Global Development Network; Philippe Orliange, Agence Française de Développement.

The challenge: How do we measure the mobilisation of private finance?

Jeff Chelsky, Program Manager, Strategy, Risk and Results, Operations Policy and Country Services, World Bank 1

Massive amounts of private finance will be needed to achieve the Sustainable Development Goals (SDGs). At the same time, there is understandable pressure on official sector entities to demonstrate that their use of scarce public resources is having impact. While this makes it important for them to show how they are catalysing private investment, measuring this contribution is fraught with challenges.

The first challenge is definitional. Words like “mobilise” , “catalyse” , “leverage” and “additional” are often used interchangeably, with varying degrees of precision and consistency. A number of these concepts appear in the World Bank Group (WBG) “corporate scorecards” 2 – an integrated performance and results-reporting framework – which has presented us with a platform to distinguish the terms.

For example, “private capital mobilised” is defined as: Financing from private entities other than the WBG that becomes available to a client at legal commitment of the financing (i.e. financial close) as a result of the WBG's active and direct involvement in raising resources (i.e. that are contractually part of a distinct transaction).

This definition makes it relatively easy to measure private capital mobilised. The International Finance Corporation (IFC), the private sector arm of the WBG, has a long history of measuring and publicly reporting on the additional financing it mobilises. Their ability to do this is largely thanks to the nature of their business, in which they deal directly with the private sector and are paid by clients to mobilise funds.

The definition of private capital mobilised is quite narrow, however, and as such does not offer a comprehensive view of the impact of institutions like the WBG on attracting private financing. Much of the impact from interventions by the WBG's International Bank for Reconstruction and Development or its International Development Association comes from helping clients (in this case, the public sector) improve the underlying conditions for private sector activity and investment. 3 For this reason, private capital mobilised is complemented in our corporate scorecard by the concept of “private investment catalysed” , defined as: Private investment resulting from the contribution associated with the WBG's involvement in an investment, operation or non-financing activity. Private investment catalysed measures financing provided, regardless of whether or not the WBG was actively and directly involved in raising such financing or soliciting investors, and includes investment made as a result of an engagement after it is completed.

The second challenge is measurement. It is relatively easy to track investment linked to a specific transaction but which is not a contractual part of the transaction, for example, co-financing. Measuring private investment catalysed as a result of the impact of the intervention or activity is more problematic. Not only is it essentially arbitrary to delimit how far along the results chain one goes to track finance catalysed, it is also not obvious how far into the future to look. An investment may be made, for example, as a result of an operation, an activity or advice that has helped improve the business and investment climate in a client country, by reducing red tape in the registration of new businesses or by improving creditor rights. Or infrastructure financed by the WBG could make it possible to profit from private sector activity where this was previously not the case.

The relationship of the investment to these kinds of interventions may be easy to grasp conceptually, but it is very difficult to measure quantitatively, even when significant (and costly) effort is expended. Yet failure to take into account the important contribution of development institutions in attracting private financing through such means would paint an incomplete and fundamentally misleading picture of their impact and effectiveness.

Given the importance of acknowledging this contribution, the WBG is investigating the potential of using “multipliers” to estimate private investment catalysed. Drawing on various studies, particularly from the infrastructure sector, we are attempting to come up with credible “rules of thumb” for estimating the impacts on private investment of WBG interventions or investments. The methodological challenges are enormous, however, and the outcome is likely to be, at best, an “order of magnitude” estimate.

Despite these challenges, failure to acknowledge indirect effects on mobilising private capital can easily lead to sub-optimal decisions about the relative effectiveness and efficiency of different kinds of development interventions and institutions. Not everything that matters can be measured and not everything that can be measured matters. An effective strategy to catalyse private finance will always have qualitative and quantitative dimensions, and will require ongoing learning from experience to ensure that development activities are achieving real results on the ground. Only by embedding the overarching objective of making interventions of development partners more catalytic can we hope to attract the scale of resources necessary to achieve the SDGs.

For this reason, calculations of indirect “catalytic” effect should be an integral part of the thinking that goes into the design of every project, investment or activity, even if it is difficult to measure the impact with precision. It should also be an integral aspect of any effort to assess the extent to which development interventions are able to “crowd in” the private sector.


1. This piece benefited from insightful comments from Neil Gregory, Christopher Calvin, Jyoti Bisbey, Paul Barbour, Marco Scuriatti and Arthur Karlin.

2. See: www.worldbank.org/en/about/results/corporatescorecard.

3. For a discussion of the additionality that multilateral development banks can bring to the mobilisation of financing, see Chelsky, Morel and Kabir (2013).

 

The question of how private resources can best be mobilised 16 is at the heart of discussions around how to finance the Sustainable Development Goals (SDGs) (OECD, 2014a) and to realise developed countries' commitment to mobilise, by 2020, USD 100 billion per year for climate action in developing countries (UNFCCC, 2009).

The potential exists: global savings have never been higher, there are new sources of capital that can be tapped, innovative financial instruments are widely available and investment opportunities abound. Yet in order to realise this potential, incentives need to be created to help mobilise and channel “patient capital” – i.e. medium or long-term investment – particularly from the private sector. Public funds can be used to create these incentives, providing guarantees, mitigating risks, improving the enabling environment and helping to improve technical capacity at the receiving end (see the “In my view” box by Philippe Orliange).

In my view: Innovative mechanisms can help to mobilise domestic finance

Philippe Orliange, Director for Strategy, Partnerships and Communication, Agence Française de Développement

The financial model of the Agence Française de Développement (AFD) is typical of those of development banks in general. 1 The agency borrows on capital markets at low interest rates, thanks to its good ratings as a solid, state-owned institution. It provides these funds to developing country borrowers in the form of development loans – subsidised or not, according to need.

This is the most direct way in which development banks “mobilise” private funds. Yet other vehicles for mobilisation need to be further explored; in particular, ways of enabling developing countries to mobilise their own domestic resources, through local banks, to finance small and medium enterprises. One of the main hurdles local companies face is insufficient access to bank finance in the volumes they need, with affordable interest rates, reasonable pay-back time and security. The AFD and its private sector subsidiary, Proparco, 2 offer several tools to help them overcome these obstacles:

  • Credit lines for small and medium enterprises. When there are clearly identified financing gaps in the local market, the AFD can provide support in the form of a credit line to one or several local banks, which will then lend to local small and medium enterprises. The beneficial terms of these loans to local banks are passed on to the end-borrowers. The local banks also usually offer additional loans on their own terms; these, together with what the enterprise invests itself, contribute around 45% of local resources within the overall investment. In addition, the AFD's credit line is often complemented by technical assistance, both to the local banks and to each specific project.
  • Guarantee mechanisms. The inability of small and medium enterprises to provide sufficient collateral is often a major barrier to obtaining a loan. Even when collateral is available, in the case of default, shortcomings in the local legal system may make it lengthy and costly for banks to recuperate their investments. The risk for the local bank can be reduced if a third-party “guarantor” agrees to pay part or all of the amount due on the loan in the event of non-payment by the borrower. These “guarantee” schemes, legally binding, allow small and medium enterprises to access credit at low cost. The AFD has developed such a risk-sharing tool, ARIZ, 3 which is mainly used in the least developed countries, guaranteeing loans from local banks to over 5 000 companies in more than 30 countries to date.

In my view, using mechanisms like these can go a long way towards mobilising domestic resources, putting them to work for productive investments. This, in turn, will help to stem both licit and illicit outflows of resources – a goal at the heart of the financing-for-development agenda that the international community adopted at Addis Ababa in July 2015.


1. See: www.afd.fr.

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2. See: www.proparco.fr.

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3. ARIZ stands for Accompagnement du Risque de financement de l'Investissement privé en Zone d'intervention de l'AFD (support for the risk of financing private investment in the AFD's areas of operation).

 

To ensure that these funds achieve their maximum impact, and to assess whether governments and private sources are living up to their commitments, it is fundamental to monitor and measure them. The OECD Development Assistance Committee (DAC) is currently expanding the scope of its statistical framework, introducing new reporting requirements and methodologies for measuring the amounts mobilised from the private sector through public sector interventions.

This chapter presents the outstanding challenges in measuring international private finance mobilised by public funding. It reviews the results of a recent survey on mobilisation and, drawing on the lessons from this work, concludes with a number of recommendations to providers of development assistance, including developing common and pragmatic approaches, and increasing internal capacity to report data on the mobilisation effect of their interventions.


Note
16.  In the DAC statistical system, mobilisation refers to the stimulation by specific financial mechanisms/interventions of additional resource flows for development.
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