A new role for development banks?

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Earlier this month, development banks from around the world took stock of where they stand and where they see their efforts having the greatest impact at a meeting organized by the World Bank and Brazil’s development bank, BNDES.

As the world struggles to find funds to meet the Sustainable Development Goals, development banks can be instrumental  in narrowing that gap. They can help to crowd-in the private sector and anchor private-public sector partnerships, particularly for infrastructure financing.

However, misusing development banks can lead to fiscal risks and credit market distortions. To avoid these potential pitfalls, development banks need a well-defined mandate , operate without political influence, focus on addressing significant market failures, concentrate on areas where the private sector is not present, monitor and evaluate interventions and adjust as necessary to ensure impact, and, finally, be transparent and accountable.

Two themes characterized the discussion at the meeting: how to leverage private capital and create new markets . To support Small and Medium Enterprises (SME) finance, development banks use partial credit guarantees while letting private lenders originate, fund, and collect on credit. In markets with limited competition, development banks support the creation of an ecosystem of specialized Micro, Small, and Medium Enterprises (MSME) lenders to which they provide a stable funding source. 

Innovation support is often done as co-investment with private funders or through investment in funds that in turn lend to risky ventures. To create markets, development banks have established factoring platforms to provide the actual market.  For example, to establish infrastructure financing, Colombia created a new institution, Financiera de Desarrollo Nacional (FDN), to lead the market development and provide liquidity to mitigate a risk that market players were not willing to assume.

Development banks can build on their experience to help bring in private sector financing to fund development objectives  and focus on providing technical assistance, consulting, management and technical advice to private sector counterparts they bring in.
 
Specifically, development banks can help in the following ways:

  • Leave the funding of commercially-viable and “safe” projects to the private sector.  
  • Focus on investing in less-commercially viable initiatives that still yield significant development results. Among them: building roads and water systems in remote locations, investing in clean energy, helping municipalities design and fund critical urbanization projects, financing risky R&D ventures, or supporting social impact bonds projects.
  • Use direct lending or direct equity investment with discretion and with complementary policies to stimulate both entrepreneurship and the development of private capital markets that can alleviate credit constraints for private firms.
  • Reform credit analysis in line with advances in financial digitization.  KfW, the German Development Bank, stands out for its efforts in this area to support sustainability, exports and new challenges posed by aging and by Industry 4.0 – the current trend of automation and data exchange in manufacturing technologies. 
  • When lending directly for large investment projects, development banks should do so in syndication with private banks, funding less than 50% of the project to crowd in private sector and ensure market viability. For example, FDN in Colombia can only fund 20% of an infrastructure project and the Caribbean Development Bank cooperates with other development banks in co-financing projects, in addition to sharing information and training programs. Thus, partner with private sector to receive financial assistance.
  • Find innovative ways to crowd-in private capital, including by developing credit guarantee schemes, credit enhancements on capital market instruments, or matching private equity funds. For example, Corfo’s Startup Chile initiative has pushed the development of local venture capital funds in Chile, while BNDES has been working to develop a corporate bond market in Brazil. 
  • Support the development of an ecosystem of factoring, leasing and MSME finance companies through the provision of stable funding sources via credit lines or facilitating their access to capital markets as for example done by Nacional Financiera (NAFIN) Mexico.  
  • Provide the private sector with incentives to take more responsibility for operations and maintain long-term finance for infrastructure projects. 
  • Solve public-private coordination problems that increase the social returns of investment projects in cases where social returns exceed private returns, and the private returns aren’t sufficient to induce investment.  (An example of this is the support to export quality control and shared food quality lab testing facilities which enabled Bolivian producers to capture 90% of the EU Brazilian nut market over the 2010-15 period.)
     
Earlier this month, the World Bank issued two reports that looked at infrastructure and public-private sector partnerships in Latin America. As Martin Raiser, World Bank Country Director for Brazil, summarized, “there’s the need for a better pipeline of projects, a more reliable regulatory framework, better governance and oversight over operators and concessionaires, as well as stable macroeconomic policy.

In a nutshell, the role we see for national development banks is parallel to the role we see for ourselves, the World Bank Group, as a global multilateral development bank. That is, to help crowd-in the private sector to finance public sector needs, such as infrastructure, and to provide technical assistance to improve the enabling environment.

This approach will allow us to focus on funding other areas we consider strategic for international development, but for which there is little private sector interest.

Photo: Maria Fleischmann / World Bank

Authors

Ceyla Pazarbasioglu

Vice President, Equitable Growth, Finance and Institutions (EFI), World Bank Group

Join the Conversation

Arthur Mboue
May 17, 2017

<p>It is true that there is a need to reinvent the development bank system. But, we need a new leadership with required knowledge to put a new strategy and organizational system. We can not stand here witnessing them chasing all the talents and creating very expensive kickback position. The right time is yesterday<br />
Arthur Mboue</p>

Joseph kanyi
May 17, 2017

<p>Thanks for boosting people,,and smale scale farmers, how do you help them?</p>

Angapat raghu Menon
May 18, 2017

<p>In the Latin America the Poverty is much than the comparable Europe,but not included Africa. First of all the development banks should intiative to give funds to the Small and medium enterprises. The basic should be given the support to the economic development those are putting the Enterprises.The role of Development banks are there the to achive the gole to developments. Most of the Development banks are not to achive the goles for development the countries. Funding to the Infrastructure developments in the large scale under the PPP intiatives are good to the developing countries in the large scale in the Latin America is worth wile. In Mexico the war loads of Mafia is much working and the poverty is much where as to divert the economic developments which attain the developments. So the poverty is there in Mexico. People should come out of Mafia gangs influance. Hope we can attain goals through the SMEs and PPPs. The field should develop in the fields of Education,Health and Food.Hope by 2030 in Latin America will come out of Poverty.</p>

Angapat raghu Menn
May 18, 2017

<p>In the Latin America Poverty is there,it is to solve in the different phases of development should take initiative such like SM enterepreners and PPP mode. The development banks should take initiative to finance Infrastructure developments in the countries which they need for economic developments in latin American countries. Latin America is much needed World Banks support to give economic development such as Medium small enterpreners to finance through development Banks in the countries. To finance Private sector will boost the economy and the Job creation in the poorer countries. The esey way to get the boost for the developments should take PPP mode. Sustainable growth should become a grate way to open developments in latin america to elimnate poverty with in the time of Ten to Fifteen years. In Colombia and Mexico are the most effected countries in the region for the poorer people are living. In Mexico the Mafia war loads are condroling the economics in the countries. Hope by 2030 the poverty will eliminate in Latin America.</p>

Arthur Mboue
May 17, 2017

It is true that there is a need to reinvent the development bank system. But, we need a new leadership with required knowledge to put a new strategy and organizational system. We can not stand here witnessing them chasing all the talents and creating very expensive kickback position. The right time is yesterday
Arthur Mboue

Joseph kanyi
May 17, 2017

Thanks for boosting people,,and smale scale farmers, how do you help them?

Angapat raghu Menon
May 18, 2017

In the Latin America the Poverty is much than the comparable Europe,but not included Africa. First of all the development banks should intiative to give funds to the Small and medium enterprises. The basic should be given the support to the economic development those are putting the Enterprises.The role of Development banks are there the to achive the gole to developments. Most of the Development banks are not to achive the goles for development the countries. Funding to the Infrastructure developments in the large scale under the PPP intiatives are good to the developing countries in the large scale in the Latin America is worth wile. In Mexico the war loads of Mafia is much working and the poverty is much where as to divert the economic developments which attain the developments. So the poverty is there in Mexico. People should come out of Mafia gangs influance. Hope we can attain goals through the SMEs and PPPs. The field should develop in the fields of Education,Health and Food.Hope by 2030 in Latin America will come out of Poverty.

Angapat raghu Menn
May 18, 2017

In the Latin America Poverty is there,it is to solve in the different phases of development should take initiative such like SM enterepreners and PPP mode. The development banks should take initiative to finance Infrastructure developments in the countries which they need for economic developments in latin American countries. Latin America is much needed World Banks support to give economic development such as Medium small enterpreners to finance through development Banks in the countries. To finance Private sector will boost the economy and the Job creation in the poorer countries. The esey way to get the boost for the developments should take PPP mode. Sustainable growth should become a grate way to open developments in latin america to elimnate poverty with in the time of Ten to Fifteen years. In Colombia and Mexico are the most effected countries in the region for the poorer people are living. In Mexico the Mafia war loads are condroling the economics in the countries. Hope by 2030 the poverty will eliminate in Latin America.

NANEKOULA GASPARD
May 25, 2017

Je remercie la BM pour la mise en oeuvre de cette approche de financement des projets structurants. Je prie de ce fait, l'équipe de la BM à venir expérimenter ce modèle en Afrique Centrale ou les banques privées et développement n'accompagne pas le développement et l'innovation surtout les jeunes entrepreneurs qui sont pleins de dynamisme mais hélas. A cet effet, prenant le cas du Gabon, je traite ces banques privées de caisse de d'enregistrement car elles car elles ne prennent pas de risques.

Meso Nsumbu Joseph
May 25, 2017

Le développement est synonyme de progrès. Il n’existe point de progrès si la culture à laquelle appartient le pays ou l’individu n’a pas intégré cette variable dans son quotidien. Pour ce faire, les Banques de Développement doivent d’abord s’assurer ̶ avant tout financement ̶ que son débiteur a cette valeur(le développement) dans sa culture(ensembles de valeurs intrinsèques socio-économico-politiques d’un individu ou d’un peuple). Sinon les fonds tomberont entre les mains d’un partenaire qui les utilisera à des fins dilapidatoires et, ce faisant, l’objectif(du crediteur, c-à-d la BD) ne sera qu’un chateau de cartes!
En conclusion, une BD doit plus s’atteler à aider les individus ou les peuples à créer des cultures dans lesquelles la VALEUR ou L’ELEMENT “DEVELOPPEMENT/PROGRES” est partie intégrante de la vie quotidienne c-à-d faisant partie de leur culture. Le mot DEVELOPPEMENT ne doit seulement pas être un vocable qu’on lit dans un dictionnaire et pour lequel on prononce des discours pompeux mais plutôt une VIE. Toute culture(mode de vie) d’un peuple/individu qui n’a pas cette valeur doit être scanée pour en chasser le virus ou carrément formatée pour créer ou installer une autre qui fera que le récipiendaire puisse s’adapter et subsister dans ce monde en plein mutation.

RAIKNAN TAMDJIM
June 01, 2017

je trouve cet article pertinent mais permettez moi de vous poser une question. alors pensez-vous que ce genre d'expérience est faisable en Afrique précisément en Afrique francophone où le secteur privé est marginalisé quand il s'agit de defendre l'intérêt commun ou de prendre de decision sur certaines choses?

Edgar Alvarado Avilez
June 03, 2017

Me parece excelente el nuevo papel de la Banca de desarrollo.
Saludos desde Machala,Ecuador.

bertha haydee
June 03, 2017

Esencial que el marco regulatorio sea confiable y gestionable, sea unidad publico privada que apoye estos emprendimientos y que sean mas favorecidos con las ayudas económicas, que propici en el desarrollo de emprendimientos estrategicos y novedosos, acorde a sus propios origenes y conocimientos. dra. bertha de peru

Anselmo Moore Morey
June 09, 2017

Tal como se aprecia,esta nueva forma de trabajar de la Banca de Desarrollo que recibe aportes fundamentalmente de los estados aportantes y otros entidades, está elaborado a la medida de la banca privada para asegurar su rentabilidad cuando dice que se debe negociar cuando la rentabilidad de la banca privada sea menor a la rentabilidad social, cuando lo que interesa es maximizar la rentabilidad social, desafortunado en un contexto internacional en que la forma de financiar proyectos de infraestructura captando la inversión privada mediante las Asociaciones público privadas esta venida a menos por la corrupción de "algunos" políticos y representantes de la empresa privada que mediante negociados y adendas sobrevaloran los proyectos, que demuestra que lo último que importa es el desarrollo de los sectores marginados de la sociedad.El objetivo de la Banca de desarrollo es justamente apoyar el desarrollo de los pueblos y el objetivo de la empresa privada incluyendo bancos es percibir la máxima rentabilidad, naturaleza diferente y compatibilizarla pasa mas por conceptos éticos, se debe buscar e intentar otros mecanismos para financiar el desarrollo social.

د.رشدى صالح.
June 11, 2017

الموضوع متميز.ويجب ان تؤدى البنوك.دورها فى تمويل.المشروعات وبخاصه المشروعات الصغيره.فى الدول التى تعانى من نقص فى الموارد النمو بل به.