The future of development finance

1. Introduction

Good afternoon, ladies and gentlemen.

It is a pleasure to be here today and in such distinguished company.

Thank for you inviting me to speak at this world famous institution named after the man whose oversight of Singapore’s own remarkable development story has been much studied but rarely emulated.

Economic development, and how to finance it, are subjects close to my heart.

2. Singapore

And I am especially excited to be discussing economic development here in Singapore.

There are two main reasons for this, which I want to flag right at the start of my remarks.

The first is that I and my colleagues at the European Bank for Reconstruction and Development – EBRD - have been heavily involved in the G20 Eminent Person Group on Global Financial Governance, chaired by Singapore’s Deputy Prime Minister Tharman Shanmugaratnam.

Tharman and his group have done a terrific job.  He and I have met on many occasions and discussed the issues his group has been grappling with.  And this last year I have been honoured to chair the group of heads of multilateral development banks - MDBs - who follow this work closely.

We are all very much looking forward to seeing the final fruits of the deliberations of Tharman and his group.

And very keen to follow up on them when its report is published.

But there is a second reason why it makes particular sense for me to be delivering this lecture in Singapore. 

Alongside our partner development banks, the EBRD is, of course, firmly committed to the values of multilateralism.

Singapore holds a special place within the global multilateral system that we are, together, trying to enhance and improve.

And I won’t deny that, in recent years, we have begun to see our role as that of defending that system from external challenge.

Singapore is an exemplary trading hub within that system.

It is an important source of capital – and we would like it to invest more in the EBRD regions which is why I am meeting with Singaporean companies and prospective investors during this trip

But perhaps even more importantly Singapore is a stalwart of the rules-based international order on which we all depend.

And, last but not least, Singapore’s own development is a model and inspiration for many of our own countries of operation.

Not in every particular, of course.

But, put simply, if more of our countries of operation were more like Singapore, the future of development finance would be a far less knotty problem.     

Our countries of operation have some way to go to reach Singapore’s status.

So we do need to put our collective heads together to work out how to address the gaps.

For now I will be focussing my remarks to you today on what we could call the ‘market’ for development finance:

First, on the supply side, what is the EBRD ‘offer’ and what make us different from other multilateral banks?

The EBRD is part of a wider MDB system and some of those differences are very relevant to the subject of my remarks today.

And, second, on the demand side, how the new 2030 agenda for sustainable development is asking different questions from the MDB system on how we can help mobilise the private sector.

You won’t be surprised to hear that I believe EBRD is well placed to match its supply of finance and know-how to the demands of this new agenda.

3. What is the EBRD and what makes us different from other RDBs?

The EBRD was set up in 1991 with shareholders from all five continents, although it has some very particular characteristics.

First, EBRD was created at the end of the Cold War and is very much of its time – what some called ‘the End of History’. It thus has specific ideological underpinnings which are increasingly contested.

For example, Article One of our founding document commits us to fostering the development of open market economies in countries committed to and applying the principles of multiparty democracy and pluralism.

Second, we define what an effective market economy actually is and what are the so-called ‘transition gaps’ we need to address in each of our countries of operation.

Indeed, we recently updated our definition of transition to include a list of the six qualities a market economy has to have.

The six are: competitive, well governed, green, integrated, inclusive, and resilient.

And we measure everything we do against them, even before we look at potential rates of return on our investments.

Third, we have an overriding focus on the private sector. It currently accounts for 79 per cent of our investment.

And we combine that focus with extensive work on policy reform, dedicated to improving our countries’ investment climate and governance, corporate and otherwise.

Fourth, we seek to develop financial markets not undercut them – so our project and equity finance is provided at market rates of interest, not as budget or balance of payments support. 

In sectors and countries where EBRD has been investing for years, we have developed deep knowledge about what foreign and domestic investors need to make them want to invest more.

And fifth, although originally focused on developing open markets in the formerly command economies of communist Eastern Europe and the former Soviet Union, our business model has proved so successful that shareholders have asked us to take our expertise to new geographies.

They include Turkey, Greece and Cyprus and the Southern and Eastern Mediterranean.

We now operate from Estonia to Egypt, from Morocco to Mongolia.

And the EBRD is thus the only regional development bank that is not really regional! 

What is more, our current geographical sweep contains countries that were never command economies in the first place.

However, we are doing very well in our newer geography with our trademark business model. 

Last year we achieved record investment levels and record transition impact.

And at a time when all MDBs are finding it difficult to make money in emerging markets we returned a very healthy profit too.

4. How the EBRD used to fit into the MDB system

In the past, the focus on transition to market economies meant that the EBRD was viewed as a rather semi-detached member of the MDB system.

We weren’t just the relatively new kid on the block. We were the odd one out as well for all the reasons I just described.

From the late 1990s to 2015, the international development agenda was defined by the Millennium Development Goals, the MDGs.

And, to be frank, it was donor countries, not developing countries, who were then calling the shots. 

The MDGs were – rightly - focussed on what I would call social goods, such as health and education, and eradicating poverty

And most of these need grant financing, public sector delivery, and were focused very much on the low income developing world, which fitted neither the EBRD business model nor our geography.

5. Why the SDGs are changing the rules of the game - and putting the EBRD business model in greater demand.

Today, our understanding of development is far more complex.

The Sustainable Development Goals, the SDGs, adopted in 2015, including by Singapore, were defined with much greater participation by developing and transitioning countries themselves and include economic outcomes and sectors where the EBRD has a comparative advantage. 

And they are much more explicitly set as goals for all countries, not just low income ones.

By now everyone can see that we cannot finance them in the old way.

Of course, we will still need to call on the domestic resources of the countries concerned. 

Grant funding will continue to be required too. As will funding from the public sector.

But the SDGs, with their interest in areas such as infrastructure and energy, cannot be financed from these sources alone.

The annual investment needed to meet the 2030 goals is estimated to be twenty times the current volume of official development assistance. 

If we are to meet them, we desperately need to leverage more private sector financing - and their delivery expertise.

That includes attracting new suppliers of finance from outside the multilateral system, eg from pension and sovereign wealth funds.

Financing by multilateral development banks will remain critical. But the MDBs alone simply do not have sufficient resources to deliver the SDGs by themselves.

The EBRD business model –focussed on the private sector and the mobilisation of additional financing – is now absolutely core to mainstream development thinking.  

So, from lurking somewhere off in the wings, the EBRD has now moved centre stage.

The fact is that, apart from the EBRD and IFC - part of the World Bank Group - none of the other MDBs have as part of their core DNA and business model the private sector ‘animal spirits’ that can deliver what is required.

So the response of the other regional development banks has been to grow private sector arms and mindsets.

The World Bank, for example, is trying to implement a “cascade” system that will encourage its managers to ask first whether an investment could take the private sector route rather than the usual sovereign loan-focused public sector one.

All of this is fine as far as it goes.  Except that the challenge is now urgent. 

The SDGs have to be delivered by 2030. And my fear is that many global decision-makers may not focus on what needs to be done until very late in the day.

6. Addressing the challenge

So how can we accelerate progress?  Having each institution attempt to change its business model will take a long time. 

A faster route may be for shareholders of MDBs, particularly the regional banks, to recognise – as they have already done with EBRD – that business models and specialist expertise can trump geographical neatness.

If ever we needed a reminder that the problems we face are global, not regional, then climate change is it.

So are the commitments we have undertaken as part of the Paris Agreement.

I would argue that there is a real opportunity here for the system as a whole to be more efficient, more relevant, and deliver better for countries.

We need a mix of models. We will not succeed in delivering the SDGs if every institution behaves like the EBRD.

But nor will we do so if everyone focuses on traditional public sector projects.

We need to move to a world in which MDB shareholders empower the EBRD and IFC to explore different partnerships with other RDBs, joint ventures or common investment platforms for example.

That way private sector financing and delivery mechanisms for delivering the SDGs could be put in place far more rapidly.

Our first priority is of course reviewing what more we can do in our existing regions in order to optimise our delivery.

Early next year we will start work on an initial analysis of what capital capacity the EBRD might still have and whether we could effectively deploy our resources and skillset in the region of the world that faces the biggest development challenge – sub-Saharan Africa.

That study will also take into account our role in the evolving international financial architecture – including how the multilateral development banks such as the EBRD are working together at both the global and the European level.

I will be reporting back to our shareholders on this at our next Annual Meeting in May. 

I do want to make one more point on this agenda.

The development ambitions and the private sector financing and delivery route I have just outlined are not the preserve of bleeding heart economic and social liberal. 

They represent a crucial agenda for conservatives too – including in some of our current countries of operation.  

Achieving the SDGs is in the interests of us all. Without successful development there is unlikely to be any easing of the migration pressures that we have seen reaching acute levels in much of Europe.

Moreover, growing and developing economies provide the markets of the future with which to trade as neighbours. 

And conservatives, other than diehard economic nationalists, should be inspired by our private sector financing message and call for open and well-governed markets too.

7. Mobilising the private sector – system-wide

So this is my vision for the future of the MDB system and how it could perform better.

As I see it, the MDBs need to work with governments, the local private sector and international investors to do the following:

1. ensure that the policy environment encourages more and better private investment ;  
2. increase the capacity of countries and private sector firms to absorb higher cross-border flows;  and
3. focus not just on the quantity of finance but also its quality and impact on debt sustainability.

One way of doing that is to leverage private debt finance by standardising debt instruments for projects or using syndicated loans where MDBs act as anchor lenders.

There needs to be more focus on equity flows. We know for a fact that firms in the EBRD regions which benefitted from private equity investors have grown faster and invested more than their peers.

We also need to make sure that MDBs crowd in private flows but without hindering the development of sustainable commercial financial markets. Additionality is essential.

Whenever possible, we need to supply local currency and encourage the development of long-term, sustainable and liquid local currency and capital markets. 

And, in many cases, developing a credible project pipeline and supporting a stronger policy environment will be more important than attracting private capital flows.

8. Developing infrastructure to underpin the SDGs

We have been looking at the SDGs as a whole and what will be required to deliver them, especially the vital role of the private sector.

I want to conclude by looking at three of the SDGs specific to infrastructure and to explain how EBRD approaches them.

Let’s start with the goal of clean water and sanitation. Here EBRD concentrates on working at the local level with sub-sovereign structures and directly with water utilities to improve quality and sustainability of water and waste water treatment.  

We’ve approved over 200 such projects in the last 20 years. Our activity here is very decentralised, with more than half our staff located in the field.  

What about the goal committed to industry, innovation and infrastructure?  Here the EBRD sets out to promote higher standards in both public and private sectors, including taking private equity positions or quasi equity in private companies investing in our markets.  This is often an effective way of fast tracking the adoption of innovative technology in the markets concerned. 

And then there is the goal to build sustainable cities and communities. Here we have been very active, launching a major new initiative called Green Cities. Our investments see municipal clients committing to ‘green city action plans’ that set them on a pathway to a low-carbon future. 

We are galvanising the donor community to provide concessional finance and/or capital grants to create attractive blended finance proposals to ease the capital expenditure burden that green investments often impose on municipal governments.

Across the infrastructure and power sectors, we specialise not only in PPPs and other forms of private sector participation.

We have also pioneered a focus on sub-sovereign structures, lending directly to municipalities and/or state owned enterprises on a commercial basis without the use of sovereign guarantees. 

We have financed more than 300 such projects, which are unique to the multilaterals, with a near zero default rate.

We support other mechanisms to boost and accelerate private sector investments.  We know that an expansion of private sector investment in infrastructure in developing countries, for example, requires credit enhancement to reduce risks.

These are all examples of innovation in the private sector financing and delivery of the SDGs.           

As such, they are important pointers to the direction I believe the MDB system needs to take.

9. Conclusion

Ladies and gentlemen, the SDGs and enhancing the means of delivering them have to be our shared, global priority.

As I have tried to show, the private sector focused business model that the EBRD adopted at the time of our birth at the end of the Cold War, one that we have refined since, is going to be absolutely central to achieving this common objective.

More broadly, the approach that I have outlined today would allow - I believe - the MDBs to work more closely together as a system while also leveraging their respective strengths to have much more impact.

At the start of my remarks I also observed how excited I was to be invited to deliver a lecture on this subject here in Singapore.

The SDGs and the challenge of climate change oblige us to think of ourselves as one system, as one planet indeed, more than ever before.

Singapore is a shining example of that global thinking in action. Your focus on upgrading human capital and networks of financial capital have driven a remarkable development story

We would love more of our countries to learn from the Singapore model. And we warmly invite Singaporean companies to explore the opportunities in our region.

With the report of DPM Tharman your government has already played a major role in shaping the global development agenda and EBRD and, I trust, the multilateral development bank system as a whole stands ready to deliver.

Thank you very much.