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

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, as discussed in a recent article, measuring this contribution is fraught with challenges.^[1]

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.