News & Analysis

MDB-backed credit enhancement plays growing role

Moody’s expects to see several ‘innovative, precedent-setting credit enhanced transactions’ backing developing world infrastructure in the next 18 months.

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Multilateral development banks will continue to increase their focus on risk mitigation and credit enhancement as they look to increase private sector capital mobilisation by up to 35 percent over the next three years.

That is the conclusion of a report from Moody’s, which highlighted the role of international financial institutions in meeting the UN’s goal of adding $1 trillion to $1.5 trillion per year in emerging market infrastructure spending.

“MDBs are in a unique position to provide policy guidance, technical assistance and financing support that will change the balance of risk and reward sufficiently to attract private sector capital to infrastructure investment opportunities in developing countries,” the report stated. “Over the next 12-18 months we expect to see further innovative precedent-setting transactions reach financial close, supported by credit enhancements provided by MDBs and/or other development finance institutions.”

Led by the World Bank, MDBs have been shifting their missions from directly lending to projects to shepherding private sector capital. In April 2015, a report released by a group of MDBs looked to move the discussion from lending billions of dollars to mobilising trillions.

This April, World Bank President Jim Yong Kim called on his organisation to prioritise de-risking projects and mobilising private sector capital. In July, a group of eight international financial institutions issued a joint statement of ambitions elaborating on this goal. The statement calls on the institutions to increase private sector financing of developing world infrastructure by 25 to 35 percent, or $17 billion to $24 billion, over the next three years.

“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, told Infrastructure Investor earlier this year. “There was a trend that was beginning to build, but now it is becoming main stage.”