The Future of Private Finance for Development in Poor Countries

This paper reviews data on private development finance flows in poor countries, identifies the lessons and questions that should shape future efforts to mobilize more finance, and develops proposals to strengthen performance. The data reveal a sobering picture. The vast majority of finance from development finance institutions (DFIs) goes to middle-income countries, including concessional finance as part of blended finance transactions. Global infrastructure transactions with private participation in poor countries are stuck below $15 billion and show no upward trend. Foreign direct investment as a share of GDP is trending downward and private portfolio inflows remain negligible and volatile. With pandemic financing needs layered on top of huge financing gaps for the Sustainable Development Goals, the development finance architecture is just not mobilizing private investment in poor countries on the scale needed. The evidence suggests several areas where DFIs, including multilateral development banks, and their shareholders should consider major changes to increase the scale of operations and effectiveness in poor countries. The paper offers five concrete proposals for change: (1) set targets for the shares of DFI commitments and concessional finance in poor countries; (2) change the DFI model to add a financial structure capable of managing more risk and making more projects bankable in poor countries; (3) mitigate, as well as share, risk through sectoral compacts that combine support for policy and institutional reforms with project finance (4) double down on building local capital markets, but target the most important gaps and (5) build green finance markets in poor countries through sovereign debt credit enhancements and technical assistance for local banks and bank regulators.