Few dispute the central role of private finance in funding development and climate-related investments, growth, and job creation. The 2015 “billions to trillions” vision overstated the catalytic power of the current multilateral development bank (MDB) model. But no one argues that MDBs should retreat from mobilization efforts or that public finance from MDBs, bilateral development finance institutions (DFIs), or domestic public banks can be expanded enough to offset weak private investment. Private capital mobilization (PCM) is a central part of the MDB reform agenda, including in the recent Circle of Finance Ministers Report, the Baku-to-Belém Roadmap, and the G20 MDB Reform Roadmap. MDB heads have embraced it as well. But to deliver on this agenda, MDB shareholders and management will have to agree on deep changes to MDB models.
The mobilization gap
The actual numbers reveal a serious gap between rhetoric and reality. The volume of private capital mobilized by MDBs and DFIs in low- and middle-income countries (LICs and MICs) has increased only modestly, from just over $60 billion at the beginning of the decade to just under $88 billion in 2023 (part of the increase reflects more MDBs and DFIs reporting PCM in 2023 than in 2020 and 2021). In contrast, the Independent Experts Group report to the G20 estimates the additional private finance needed by 2030 to meet development and climate-related needs at $500 billion, of which the MDBs would need to contribute direct and indirect mobilization of an additional $240 billion annually.
A step change in PCM requires fundamental changes in MDB business and operational models, especially in how they manage risk. MDBs must shift from a business model geared toward senior debt financing with their own resources to one that also prioritizes products that can crowd in private capital. That means a dominant share for guarantees, insurance, catalytic capital (including equity, junior equity, and early stage equity), and local currency finance in annual commitments. It means exploring whether capital deployed in MDB private finance arms can be used more efficiently—i.e., with greater leverage. It means more rapid turnover of MDB capital at the portfolio level (including through originate to share approaches like securitization, asset warehousing, and other risk transfer structures). And it requires alignment between financial and non-financial products (e.g., support for policy and institutional reform and technical assistance).
To succeed, these shifts need to be supported by MDBs’ organizational structures and operational performance incentives, and reflected in the financial and impact performance metrics (including risk and return appetite) that shareholders set for MDB management.
As we have noted before, though progress varies across institutions, the MDBs ships are turning in these directions. The problem is the slow pace. For example, the share of equity in IFC’s FY25 annual long-term commitments was 11 percent and the share of guarantees and other risk management products was 10 percent, while the loan share was 78 percent. That distribution has changed modestly from the annual commitment composition by instrument in FY21, when the equity share was 9 percent, the share of guarantees and other risk management products was 4 percent, and the loan share was 87 percent.
What’s holding back progress?
If MDB shareholders and management agree on the importance of change, what are the obstacles?
If you ask management, you will hear about conflicting priorities and messages from shareholders: “take more risk but don’t endanger your AAA ratings or jeopardize very low MDB borrowing costs.” You will also hear that the shareholder push for more private finance to poorer countries works against mobilization volume. They may not mention a third issue that is nevertheless a key motivator: the profitable loan-based model yields relatively predictable and often large retained earnings that they can use for adding to capital over time.
If you ask shareholders, you will hear that (1) they need more information and analysis from MDB management to accurately judge risks and returns and make decisions about risk tolerance and finance allocation; (2) the answer from MDB leadership on taking more risk is too frequently offloading it onto donor funds or requests for more capital, at a time when there is little political appetite for either; and (3) they caution against creating risk-return imbalances where the public sector bears most of the risk and the private sector captures most of the returns.
How can shareholders and management move beyond these differences, or at least get on the same page in managing these tradeoffs? We can start with the analysis needed and then move to the next steps, particularly in the G20, which has played a central role in MDB reform.
What would help shareholders push forward the mobilization agenda in MDBs?
Despite all the attention paid to PCM, key knowledge gaps remain that thwart progress. The first step is to undertake analysis that would allow shareholders to assess transparently and with reasonable confidence the costs and benefits of the fundamental changes in model outlined above. Indicative questions might include:
- Could the private finance arms of the MDBs lend more based on their existing capital without jeopardizing their ratings (using a similar analytical approach as the CAF report did for sovereign lending)? The ultimate goal would not be simply to minimize equity-to-loan ratios, but rather to assess the extent to which capital is underutilized, which creates headroom for more finance of different types, not just lending.
- Based on MDBs’ risk and return track records so far, what would happen to each institution’s returns—net income—leverage if the mix of instruments shifted significantly toward higher risk and more catalytic instruments? For example, what if the mix flipped from more than 50 percent loans to more than 50 percent equity and guarantees? (The analysis could also test the effects of a large increase in the share of local currency finance.)
- What kinds of MDB portfolio risk transfers and distributions are most scalable for private capital mobilization and require the least subsidy? What should MDB managers do to pool assets across institutions, enabling highly diversified transfers that build the asset class and lower risk premia?
- What kinds of MDB sovereign loans, non-financial support, and subsidies in blended finance transactions have the strongest track records in improving the investment enabling environment in ways that both demonstrably boost private investment and achieve market-level impact? And how can these tools be combined more effectively and systematically with MDB private finance?
- For those MDBs whose private finance operations are on a separate balance sheet, what would a downward shift in their ratings by one notch--or a shift to requiring ratings at current levels by only two of the three major credit rating agencies (given major differences in their methodologies)--do to their private finance capacity and borrowing costs?
- How do shareholders want to assess MDB performance in mobilizing and catalyzing capital? What are the key trade-offs, and what common financial and impact metrics should be used to measure progress across the system?
- Do shareholders want to set targets for MDB mobilization performance (absolute volumes and volumes relative to their own-account finance), by institution and/or collectively?
From analysis to decisions: Three steps
What process is needed to carry this analysis forward and act on its findings? Who should refine the questions and decide on priorities? Who should do the analysis? And who should act on it?
Step 1: Forming a shareholder coalition
Given the large upheavals in the global economy, this year’s G20 deliberations will likely focus much more on other issues than this aspect of MDB reform. The time, however, could be well used with preparatory work and consensus-building among like-minded G20 countries. The formation of a coalition of shareholders from borrowing and non-borrowing countries with a strong interest in advancing progress on private capital mobilization would help ensure that these issues receive ongoing attention and commitment. Such a coalition could be self-selected and seek input from countries outside the G20. It could conduct its work this year, and report its findings and recommendations during the UK and/or Korean G20 presidencies in 2027 and 2028.
The coalition would be well placed to consider the questions suggested above or adjust them as warranted, so that the analysis addresses issues of greatest interest to shareholders. A key lesson learned from the CAF report experience is the importance of clearly specified, focused, and widely supported terms of reference for analysis mandated by the G20. (There may not, for example, be widespread support for exploring the financial implications of a ratings downgrade.)
Step 2: Tasking analysis
Once the priority analyses/issues are agreed, the coalition would recommend them to the G20, which would then choose which to pursue. (See also a piece from colleagues Attridge and Svenstrup which calls for an MDB “Risk Allocation and Management for Private Capital Mobilization” (RAMP) Review.) The G20 would need to decide whether to task analysis of particular questions to the MDBs themselves or to groups of independent experts. As we saw with the CAF report, the independent expert approach works well when (1) credible, independent analysis is needed to fill information gaps that are blocking G20 consensus; and (2) the expert group’s report and recommendations focus tightly on a well-defined mandate. We have seen expert or eminent persons reports underutilized when their mandate has been too broad, leading to unmanageably long lists of recommendations that overload the bandwidths of official actors and institutions.
At the same time, G20-tasked expert groups don’t work well when the analysis requires access to large amounts of sensitive data and other information that MDBs will not share with each other, with experts, or even with shareholders. And they also do not work well if the relevance of the analysis varies by institution. In that case, it makes more sense for individual MDB executive boards to decide whether the analysis is worth doing rather than the G20.
The questions above are relevant across major MDBs, and there would be benefits to addressing them jointly. Question 2 on net income effects of different instrument mixes would clearly have different results for different MDBs. But a common methodology for pursuing the answers would be very helpful—even essential—for the results to be useful to shareholders.
For deciding whom to task for analyses, two considerations will be key:
- Would experts have access to the data, information, and input from MDB staff that they would need to produce strong products?
- Would shareholders have confidence that internal MDB analysis would generate results that are objective and unbiased, fully responsive to the terms of reference and mandate, and transparently evidence-based?
Independent experts would clearly add value in defining KPIs: performance metrics and targets (questions 6 and 7). The experts would serve as advisors to shareholders, bring best practices to bear, and consult widely with both external stakeholders and internal MDB staff to ensure broad buy-in.
Step 3: G20 review and decisions
The final step would be for the G20 to consider the work and recommendations and endorse those that its membership supports. The endorsed recommendations would then be considered by individual MDB boards and taken up collectively by MDB heads, as was the case with the CAF report.
To achieve much stronger MDB performance in mobilizing private finance, shareholders and other stakeholders, including private investors themselves, are asking MDBs to fundamentally change their models. There are consequences for MDB balance sheets, risks, and finance allocation. Shareholders have to be a more active and decisive part of conversations about how to manage these consequences while achieving desired mobilization performance. After all, it’s their capital. One can debate the specifics of the analysis needed and how best to advance change in the G20 and elsewhere. But shareholders cannot make intelligent decisions on risk tolerance and finance allocation if MDB management does not raise the curtain on risk, return, and impact track records.
The author would like to thank Umberto Marengo and Sam Sherburn of GFANZ for helpful input.
