The future of multilateral development finance

Success in delivering the SDGs will require ambition and creative thinking

Ladies and Gentlemen,

It gives me enormous pleasure to be back at ODI.  Thank you very much for the invitation to speak.

It’s always good to be back where I started my professional career.  Not literally, of course.  I wasn’t an ODI Fellow in South London!

It was as an ODI Fellow in Botswana over thirty years ago that I started learning about development.  That experience shaped my thinking as you will hear this afternoon at various points.

My subject for this speech is the future of multilateral development finance. And now is a very good time to be focussing on this highly important topic.

The SDGs

This is not least because only in September world leaders approved an ambitious new development agenda for the world in the form of the Sustainable Development Goals, or SDGs.

These SDGs are, in my opinion, the best possible statement of all the complexities of economic development that we face today.

They represent a credible – and achievable – plan of action for the next fifteen years for us all.

I of course remain a fan of the Millennium Development Goals.  They did a lot to focus the efforts of developing countries and donors on a set of common objectives. 

But they were always a partial statement of the development challenge.  The MDGs concentrated largely, if not exclusively, on social outcomes. 

In sharp contrast, the SDGs emphasise the underlying drivers of sustainable development, as well as a wider set of critical development outcomes. 

Notably, the SDGs focus on issues as significant as inclusive growth, inequality, building strong institutions, sustainable infrastructure and climate change.

And they also integrate the challenges faced by middle income countries in a way that was simply not the case with the MDGs.

From our perspective, it appears that the SDGs and the agenda they embody have moved squarely into the EBRD’s space.

The EBRD is mandated to deliver investment projects, largely with the private sector. And private sector involvement is going to be critical for the SDGs.

But the EBRD also works more broadly to support the promotion of a market-based economy. 

We have always focussed on strong and effective regulation as well as encouraging a healthy investment climate.

Just as the development discourse has shifted, the EBRD has evolved too.  

So, for example, inclusion and gender are now priorities for us in a way they weren’t in the past.

Climate finance, on the other hand, has long been central to what we do. And we’re going to do even more in this area.

Just days after the SDGs were adopted, we announced a major scaling up of our contribution to the global fight against climate change.

EBRD’s new Green Economy Transition approach foresees €18 billion of green financing over the next five years.

That’s as much as we have delivered in this field in the whole of the last decade – and reflects our strategic intent to further scale up our activity.  By 2020 we expect 40% of our annual investments to be supporting the transition to a green economy, compared to around 30% today.

On Monday and Tuesday of this week I was at COP21 in Paris.  And I believe progress is being made in beefing up the SDGs with a universal agreement on climate change, although I doubt it will be legally binding.

The MDBs and the SDGs

So much for the goals we have set ourselves. How are we actually going to pay for their delivery?

Well, the multilateral development banks – the MDBs for short - will play a central role here. Indeed, they are one of the key engines of funding for development.

Between them, the MDBs already account for a very substantial share of official development finance.

If you’re a national government and looking for the best return on your investment in this field, then the MDBs provide a very efficient way of doing so. 

They are very effective ‘force multipliers’ or ‘catalysts’ maximising the use of capital, subscriptions and contributions invested with them in our partner countries.

That contribution is growing.

You can see that in the effort to deliver the MDGs.  Over the last 15 years, MDB support in the form of grants, concessional and non-concessional loans, risk-sharing instruments, guarantees and equity investment grew from an annual figure of US$ 50 billion to $127 billion.

As public institutions with a mandate to focus on the medium and long term, the MDBs can also play a critical countercyclical role.

At the peak of the most recent global financial crisis, for example, the MDBs and the IMF were able to boost their annual funding by up to 50 percent.

Plans are already afoot to continue increasing the level of financing for our partner countries.

This summer the MDBs announced their intention to unlock more than US $400 billion in new financing over the next three years. 

And even more significant than direct financial assistance is the way such support mobilises other public and private sources of development funding, both national and international, deepening local financial and capital markets and creating a healthy investment climate.

Not business as usual

So can we just sit back? Should we relax because the MDBs have all the answers and believe everything is for the best in the best of all possible worlds?

Of course not.

Past success is no cause for complacency in the future.

On the contrary, the MDBs’ importance makes it even more vital that they now raise their game.

While MDBs are a critical source of official funding, their contribution is still modest relative to overall financing flows to emerging and developing countries.

We will not deliver the SDGs if our approach is one of business-as-usual.

Today’s new challenges demand more ambition and more creative thinking. 

They also oblige the MDBs to work more closely together, enhance their performance and leverage their substantial collective potential to maximum effect.

I strongly believe that we can be greater than the sum of our parts. But we need to demonstrate how, in practice, that will work.  

I see three main ways we can do that.

Rapid response

First, MDBs should be much more nimble and flexible in the way they respond to demand from their clients.

One of the main factors behind the creation of the Asian Infrastructure Investment Bank and the New Development Bank (sometimes known as the BRICS bank), or indeed of other institutions such as the Green Climate Fund, is precisely this.

The multilateral status quo seems far too flat footed at adapting to new needs, particularly those articulated by developing and emerging countries.

As I said earlier, I made my development debut working for the government of Botswana, as an ODI fellow. 

What struck me then is still true today. It is the demand rather than the supply side which should be calling the shots in development.

It is recipient countries which are best placed to define what their priorities are.

And the multilateral system should be designed to meet those needs.

If anything, that belief has only been strengthened of late.

One very valuable lesson we’ve learned when the EBRD has moved into new countries and regions has been the importance of listening to the client - and taking on board their requirements.

It’s something that all international organisations, including the EBRD, need to get even better at.

Leverage expertise

Which brings me to the second way we as MDBs can maximise our impact - leveraging expertise across the system.

When our shareholders asked us to expand first into Turkey and later into what we call the southern and eastern Mediterranean, listening was vital.

But so was determining what we can bring to the table and where our particular value lies relative to others.

We knew we were moving into territory where others had more local knowledge, well developed relationships and a track record.

Duplicating what they were doing would have been pointless.

But at the same time we needed to leverage the experience of our peer institutions on the ground.

So we cooperated closely with those who knew the territory well.

The African Development Bank, for example, was very generous in sharing its expertise and knowledge as we set up shop in what had previously been their ‘patch’.

And we differentiated what we do by focussing on our private sector business model.

It’s a model that requires much time and effort. And it bears fruit only after you have worked hard at studying the local market, undertaking due diligence and getting to know clients.

That’s one of our unique selling points.

But many of our institutions have their own specific calling cards too.

Some have particular expertise in operating in fragile or war–torn states. Others have developed innovative ways of reaching the rural poor or helping bottom-of-the-pyramid entrepreneurs.

Some - like the EBRD - are experienced in developing local capital markets, financial engineering or structured products.

Others have invested in incubators for innovation, pushing the boundaries of how we operate. 

There is enormous potential for MDBs to exploit these specialisms together.

For instance, why not pool our know-how and, possibly, our financing, allowing MDBs to apply, together, tried and tested approaches in new regions or sectors?  

That way we could call on tools, staff and financial resources when we need to - without having to reinvent the wheel over and over again.

Leverage private sector finance

The third way we can raise our game is by better leveraging private sector finance.

Delivering the SDGs will be impossible without first attracting and then putting to good use private sector investment.

There is a dramatic need for greater volumes of finance for basic infrastructure, for example.

By some estimates the global gap between investments needs and investment flows for infrastructure is as high as US$ 1 trillion every year. That’s an enormous sum.

Only one tenth of that gap can be covered directly by the IFIs. We have to mobilise the private sector.

Here I see a vital role for the MDBs in a number of areas.  Three examples of what I mean:-

• Stepping up efforts to build a pipeline of projects attractive to private sector investors.

That message comes loudest and clearest from infrastructure investors.  Infrastructure’s problem is not just a lack of finance.  It’s the shortage of bankable, creditworthy projects with transparent procurement procedures to invest in.

So the MDBs have created new infrastructure project preparation facilities or infrastructure funds, including the Global Infrastructure Facility. Here cooperation will be key.

• As with infrastructure, we must also support the development of sustainable local sources of commercial finance.  That involves local currency lending and deepening domestic financial markets via a coordinated MDB approach.  

• And we must maximise the private sector’s contribution to development, ensuring access to commercial finance for women, youth, minorities and underserved regions.  They are generally locked out of finance for development.  We need to develop more credit facilities with local banks to unlock that door. 

But – if I may – just one word of caution.  We must take care to avoid inappropriate concessional funding subsidising the private sector, thus sabotaging the development of sustainable commercial sources of finance.

There will be cases where grant funding alongside market-priced loans is justified, eg to encourage investment in energy efficiency in contexts where policies don’t allow energy to be appropriately priced. But these occasions need to be limited and well justified.

The ‘new’ development banks

I’ve outlined three major areas in which the existing MDBs need to do a better job than they have until now. 

We need to be more nimble and flexible in how we respond to our clients.

We should leverage expertise across the MDB system.

And we should better leverage private sector finance.

What about the new kids on the block, the AIIB and the NDB - or BRICS Bank?  I’ve already noted that their arrival on the scene is a symptom of a broader dissatisfaction with the status quo.

Will they be a help or a hindrance in tomorrow’s world? Will they bring new firepower to bear on our problems? Or will they simply replicate what the system already has, with all its strengths and weaknesses?

Well, we at the EBRD are positively excited at the prospect of working with these new MDBs. 

Our dialogue with them is already intense and wide-ranging.

We are talking to them about our strategies and policies.  About governance. About business models.  About procurement.  About evaluation.

We’ve spent a lot of time explaining the lessons we’ve learnt from the 25 years of our history so far.

About creating a culture in which a project’s intrinsic quality is paramount.  That means ensuring assessments should not be compromised because a project is covered by a sovereign guarantee or there is strong political pressure to finance.

About encouraging a process which entrenches this culture.

About making sure we don’t get bogged down in bureaucracy.

About having staff skilled in the actual financial structuring of a project.

Practising what we preach, we are also listening.  And learning a lot about our new colleagues’ ideas and plans.

And we like what we have heard so far.

Take the AIIB.  They say that they are going to be ‘lean, clean and green’.

Lean for efficiency, in the AIIB’s processes as well as elsewhere.

Clean in its ethics and integrity.

Green thanks to its environmental and social standards.

These are values that any new – or indeed existing – organisation should aspire to. And the fact that they have been articulated in this way bodes well for the AIIB’s future.

They have said they will be streamlined and will be delivery focused. They are keen to cooperate with other MDBs. They will initially focus on infrastructure and the Asia region but want to remain flexible for the future.  I hope we will cofinance some projects together next year.

I’m convinced that the AIIB and EBRD can achieve a lot together.  And not just because we have many common shareholders and several countries where both of us will be operationally active.

This readiness to work with others, to be flexible and focused on delivery is exactly the approach that I am advocating for the MDB system as a whole. 

That a new member of that system such as the AIIB agrees on the need to do the same is a very encouraging sign.

Sum up

At the start of my remarks today I mentioned the debt I owe the ODI.

It was thanks to an ODI fellowship that, over thirty years ago, I was able to experience the challenges of development at first hand.

On the ground.

In sub-Saharan Africa.  In Botswana, one of the most successful modern development stories.

My perspective since then has been very much country-driven, demand-driven.

It’s my strong belief that this should be our common vision for the future too.

MDBs, both existing ones and the new entrants, are central to the financing of the development agenda, as defined in the SDGs.  

Success in delivering the SDGs will require much more ambition and creative thinking in the way we respond to countries’ and clients’ needs.

We MDBs need to be more responsive and more country-driven.

We have to work more closely with the private sector and collaborate more amongst ourselves.  Both by building on our respective strengths and by integrating new players.

Only then can we turn what are currently the Sustainable Development Goals into Sustainable Development Results.

Thank you very much.