As public-sector capital ebbs, MDBs turn to risk mitigation

Led by the World Bank Group, international financial institutions are increasingly relying on risk mitigation as they look to mobilise trillions of dollars towards infrastructure projects in developing countries.

Though many say the trend dates back at least a decade, the shift in focus has been particularly pronounced since the UN’s Sustainable Development Goals conference in Addis Ababa, Ethiopia in 2015. A report issued by several multilateral development banks prior to that conference looked to move the discussion from billions of dollars to trillions. To accomplish this, MDBs have begun focusing less on direct lending and more on finding ways to engage the private sector.

“There is a sense that there is no public-sector capital growth out there, but there is a lot of private-sector capital,” Bernard Sheahan, director of infrastructure for the International Finance Corporation, a World Bank Group member, told Infrastructure Investor. “There was a trend that was beginning to build, but now it is becoming main stage.”

Among the World Bank Group, the Multilateral Investment Guarantee Agency has provided political risk insurance to the private sector since its inception in 1988. But the IFC has stepped up its efforts to these ends in recent years, last year launching MCPP Infrastructure, a spin-off from its Managed Co-Lending Portfolio Program. The scheme gives large insurers a vehicle to co-invest alongside the IFC in infrastructure debt, providing guarantees to cover a limited first-loss tranche. And the IFC now devotes a greater chunk of its infrastructure resources towards creating an enabling environment for successful development.

The International Development Association, meanwhile, included a $2.5 billion private sector window in its $75 billion replenishment in December 2016. This was a first in its 57-year history.

“When MDBs look in their tool bag of credit support instruments they can combine credit enhancements to deliver transactions that would not otherwise be financeable in challenging jurisdictions,” said Andrew Davison, senior vice-president of project finance for Moody’s. “When you look at all of these different elements working together, the credit story becomes very robust.”

Look out for our in-depth report on the changing role of MDBs in the June edition of the magazine