The MDB Role in “Billions to Trillions”: Were We Delusional?

This blog post is based on remarks given at OECD's “CoP-PF4SD Conference 2025: Mobilising Private Finance Towards 2030 and Beyond.”

Judgment day is approaching for sustainable development finance. It is now ten years after the agreement on the Sustainable Development Goals (SDGs) and the launch of the Addis Ababa Action Agenda, where leaders set out the vision of using billions of dollars in public finance to catalyze trillions of private finance. This June and July, Spain will host the fourth International Conference on Financing for Development. We need both an accurate stocktake of where the world is on sustainable development finance, and an equally accurate framing of what that stocktake means for where we go from here.

Losing ground

A good place to start is with some stylized facts about the current financial and economic reality for emerging markets and developing economies (EMDEs). We are not, unfortunately, in a situation that might be characterized as generally moving in the right direction but too slowly.

• SDG finance gaps are widening, not narrowing, as the pandemic, the climate crisis, and major conflicts have knocked countries off growth and poverty reduction paths.
• Trends in foreign investment in emerging market (EM) debt and equity are in the wrong direction. The total in 2024 was $274 billion, a striking $100 billion below the annual average of $375 billion in 2019–2021.
• The world’s largest aid-provider, the US, which accounts for 26 percent of global aid, is slashing its funding.
• Judging from recent pullbacks from net-zero partnerships, big private investor commitment to climate-related investments may be softening.
• Long-term growth prospects for lower-middle-income countries (LMICs) and lower-income countries (LICs) are increasingly uncertain as the manufactures export-driven growth model faces ever more obstacles, including trade tariffs.
• “Higher for longer” global interest rates suggest little relief from EMDE debt burdens, especially given heightened inflationary risks in the US.

So stiff headwinds are rising, and the base case foretells failure by any reasonable standard, not success.

Meanwhile, the struggle over scarce aid dollars is intensifying. There are growing and understandable objections to deploying public subsidies to de-risk the private sector rather than finance debt-burdened governments.

Actually, not much aid is spent on blended finance transactions to mobilize private investment—$2.5 billion in 2022 according to the OECD, about 1 percent of total official development assistance (ODA). But we can expect no surge in blended finance to ride to the rescue. Especially given recent developments in the US, we have no reason to believe that the concessional resources available for blended finance are going to balloon anytime soon, any more than the rest of aid. So how we use those resources, rather than their scale, becomes the critical question.

What went wrong

We’re out of the denial stage but I’m not convinced we’ve got the diagnosis right. A growing chorus argues that the vision was doomed from the start. But to my mind, that’s the wrong lesson. The world was not misguided in the bet it placed on multilateral development banks (MDBs) and development finance institutions (DFIs) in 2015. The expectation that they would play a central catalytic role was not unreasonable.

You can argue the numbers were exaggerated—the tag line should have been “tens to hundreds of billions” rather than “billions to trillions,” but it’s hard to argue that it’s the wrong role for MDBs. Helping to channel large pools of private capital from rich countries to diversified, sustainable, high-yield investments in EMDEs should be at the core of the MDB mission and a win for all parties. And MDBs have the tools, on-the-ground presence, and expertise to help make that happen.

So it’s time to be clear about why they’ve fallen short. I would point to three basic challenges for MDB shareholders and management alike.

• First, the finance model and internal staff incentives: MDBs are banks focused on returns. They use retained earnings to add to equity for growth in lending capacity. That strongly favors own-account commitments over mobilization. And it makes shareholders happy because there are fewer calls on them for more capital. But MDBs will never be in a position to add hundreds of billions of dollars in private finance to their own accounts. Only mobilization offers enough scale.
• Second, MDB risk tolerance and additionality: Both borrower and creditor shareholders want to keep MDB ratings high and capital costs low. But being additional—driving investment that would otherwise have not happened—requires targeting the risks that private actors will not take. That means getting creative about managing more risk and adding staff with skills in more subordinated products, and it means that shareholders have to face hard decisions about new capital.
• Third, internal silos: MDBs can reduce, not just share, risk by helping governments build better policy and regulatory environments and stronger institutions. But the parts of banks that serve government clients do not have the same priorities as the parts that serve private clients. That gap has to be bridged by management.

We now have an agenda

But the good news is that the MDB ships are turning. We have seen an unprecedented, intense focus on MDB reform in G20 work over the last three years. Interestingly this progress has been made under EM presidencies—Indonesia, India, Brazil, and now South Africa. That’s important and healthy: the impetus for reform should no longer be the sole purview of rich countries.

It is fair to say there is now convergence around a shared agenda, as most recently articulated in the G20 Roadmap developed under Brazil’s presidency. That’s no small achievement.

CGD has invested a major effort in assessing reform progress through our MDB reform tracker, which scores 7 MDBs’ progress on 39 agenda items across 6 reform categories. Here is the condensed version of where we see progress and where not.

Key gaps in progress

In broad terms, you can group the private finance mobilization agenda in five buckets:

• Placing mobilization at the center of the private finance strategy
• Shifting to a portfolio approach to mobilization to achieve scale
• Changing the instrument mix to more catalytic products
• Getting serious about the whole of bank approach to strengthening pipelines and investment climates, cross-bank collaboration, and helping countries build effective investment strategies
• Building markets through the power of MDBs’ own data—filling information gaps

We’ve seen the most progress in shifting to a portfolio approach—investments in bundles of assets or even on the MDB balance sheet itself. The African Development Bank (AfDB) was the first to offer hybrid non-voting capital to private investors. This was one of the recommendations of the capital adequacy framework (CAF) report for balance sheet optimization, but it’s equally important as a way to crowd the private sector in by letting it help capitalize MDBs.

The AfDB also pioneered the two Room2Run risk-transfer transactions—sovereign and non-sovereign—confirming that these assets have strong market uptake. Other MDBs have begun adopting this approach. The Asian Development Bank’s (ADB) Master Framework Program for Financial Institutions offloads large volumes of credit risk to private insurers. IDB Invest, the private sector investment arm of the Inter-American Development Bank, launched an innovative Scaling4Impact transaction which securitized a portfolio of assets for private investors. The International Finance Corporation (IFC) is now building its own ambitious platform, the Warehouse Enabled Securitization Program.

So portfolio approaches have proven much more scalable than blended finance operations designed and executed transaction-by-transaction. For the rest of the agenda though, progress is far from complete and it’s uneven across MDBs. A few key findings;

• Only two institutions have set and published targets for the volume of private finance mobilized per dollar of own-account commitments. That’s a litmus test for what is important to the institution and how it will judge its own performance. Some argue that targets disadvantage poorer countries. But a target at the corporate level gives institutions plenty of flexibility in how to reach it, just as financial return targets do. It is true that overall mobilization volumes will likely be lower in poor countries because there will likely be fewer bankable transactions and each transaction will likely be smaller. But we should not assume the mobilization per dollar of own-account commitment is always lower in poor countries.
• We don’t yet see a big shift in the mix of financial products. Commitments are still dominated by lending, despite evidence from the MDBs themselves that a growing share of mobilization is driven by new products. The World Bank Group has begun moving in this direction with the creation of its one-stop shop guarantee platform. But equity, first loss guarantees, local currency, more political risk insurance, and early stage finance to support innovation are the next frontiers for highly catalytic instruments. These all will involve taking on more risk, including on MDB balance sheets, meaning tough decisions for shareholders as well as management.
• The challenge of making a whole of bank approach work remains—by MDBs’ own admission. Only MDBs have the array of financial and non-financial tools that can support major change in countries’ investment climates and build whole markets. But they still struggle to bring those tools together internally and externally with other institutions. And they have a long way to go in moving toward joint efforts in support of common country-owned platforms.
• Regarding the power of MDBs’ own data, spurred by a rising chorus of calls for more access to the GEMs risk database, we are finally seeing more reports on the credit performance of MDBs’ own transactions. But these reports do not give private investors and credit rating agencies the granular data on defaults and recovery they need to accurately assess credit risk in EMDEs. Similarly, MDB transparency on their own private finance mobilization performance would help answer basic questions like:
  • Which sectors at a detailed level have offered the greatest mobilization volumes? Has that changed over time?
  • Which financial instruments are the most catalytic?
  • Is mobilization/dollar of MDB finance higher for middle-income countries (MICs) than for LICs?
  • What are the characteristics of countries where mobilization/dollar of MDB finance is highest?
  • Where should concessional finance be deployed to have the greatest mobilization and market-building benefits?

Right now we don’t have the data needed to adequately answer any of those questions.

Where would limited new resources do the most good?

Two priorities stand out from this stocktake:

• Giving MDBs the financial flexibility to accept below-market returns (and bear some losses) for taking on the riskiest tranches of portfolio and individual transactions with high market-building impact. That is not the same as directly subsidizing returns to the private sector. The most efficient way for shareholders to help MDBs bear more risk is by adding capital. Each shareholder’s paid-in capital is multiplied many times over by other shareholders and then leveraged in lending. The other option is for a subset of donors to create subsidy windows or guarantee funds to absorb risk offloaded by MDBs. But we’ve seen historically that neither capital increases nor subsidy windows in and of themselves drive major changes in risk tolerance. That requires deeper changes in institutional cultures, priorities, and incentives.
• Grants to support country efforts to build their own integrated investment and policy strategies or country platforms to support sustainable development. Effective country platforms lie at the core of much of the MDB reform agenda. With strong technical analysis they can establish the most productive areas of focus, priorities, and projects. Well-functioning platforms could: integrate development and climate objectives and supporting activities; bring together public and private investment in workable, mutually beneficial partnerships; help resolve internal political differences within a country; help overcome differences within MDBs that undermine whole-of-bank approaches; and help drive collaboration across MDBs. Yet, with the exception of the largest emerging markets with their own strong capabilities, countries building such platforms are struggling and have very little help. More grant funds to support the construction and management of strong platforms and projects—not a hugely expensive activity—would be money well-spent.

Not too late for hope

Given the early stage of many reforms, it is not surprising that we have not yet seen step changes in the volume of MDB private finance mobilization. But some institutions have done better than others. And this variability offers hope: what is possible for one institution should be possible for the others.  

Using the 10-year mark as a wake-up call to finally make some basic adjustments in the MDB model would also offer hope. It is not a stretch to argue that such model transformation could drive a tripling or quadrupling by 2030 of the $70 billion mobilized in 2022. That would bring private finance mobilization by MDBs into the range of $250 billion per year in 2030, an essential contribution by MDBs to fulfilling their global catalytic role.