Multilateral Development Banks and International Financial Institutions have in recent years significantly increased their cooperation with the private sector and have underscored this deepening relationship with guidelines that strengthen their impact on supporting economic development.
The decision to lay down a set of common principles reflected that fact that working with the private sector involves different approaches from those used in cooperation with the state.
The EBRD has traditionally conducted around 80 per cent of its activities with the private sector, while most other MDBs have traditionally dealt primarily with sovereigns. However, institutions generally have now started to shift a growing part of their operations towards the private sector.
A first set of principles was agreed at a Heads of MDBs meeting in April 2012 focusing on five areas: 1) additionality, 2) crowding-in, 3) commercial sustainability, 4) reinforcing -- and avoiding distorting – markets and 5) promoting high standards.
Development institutions primarily working with the private sector agreed in October on a further set of key principles guiding the use of concessional finance – or subsidies – with the private sector. These drew strongly on the basic principles agreed 18 months earlier.
Both reports underlined the major principle of providing finance to the private sector on market-based, non-concessional and sustainable terms. This is because subsidised financing to the private sector risks distorting the market and possibly undermining the demonstration impact of any support for private sector operations. Nonetheless, there are instances where subsidies or concessionality may be justified, such as in the case of market or institutional failures. In these cases concessional finance can bridge the immediate gap and support a transition to a sustainable solution.
At the meeting in October 2013, EBRD First Vice president Philip Bennett said, “Private sector development is critical for growth and jobs and requires an engagement that supports rather than crowds out market efforts. For this reason the use of subsidies and concessional finance needs to be limited to market failures, carried out transparently and phased out over time.”