As the newly appointed president of the World Bank, Ajay Banga, formerly CEO of Mastercard, steps into his role, he brings with him a promise to unlock vast pools of private capital for infrastructure development in low-income countries. This strategy has become a recurring theme among World Bank presidents, yet it has historically failed to materialize into substantial investments.
This trend is not new; it extends back to previous leaders, including David Malpass (2019-2023), Jim Yong Kim (2012-2019), and Robert Zoellick (2007-2012). The quest for private sector investment gained momentum during the globalization boom of the 1990s under James Wolfensohn, who sought to harness the influx of capital into emerging markets. However, the urgency of this mission has intensified as nations pivot toward renewable energy and low-carbon technologies amid growing environmental concerns.
With traditional donor countries like the UK, France, and Norway scaling back their aid budgets, development finance institutions (DFIs) have taken center stage. The UK’s British International Investment company and the World Bank’s International Finance Corporation (IFC) lead these efforts to engage private investors in infrastructure projects across developing nations. The goal is to create a conducive environment that “crowds in” private capital.
Unfortunately, the results have consistently fallen short of expectations. A forthcoming book by former World Bank economist James Leigland highlights a troubling reality: private investments in developing-country infrastructure peaked at a meager 10 percent in 2012, with contributions to the lowest-income countries declining since then. While some sectors, such as renewable energy, have attracted investment, others continue to struggle.
An independent G20 commission on multilateral development banks aims to mobilize $240 billion in private capital by 2030. However, current figures stand at only $71.1 billion, with a mere 10 percent allocated to the poorest nations. Despite DFIs’ intention to leverage multiple times their initial investments, the private-to-public capital ratio has rarely exceeded 1:1.
Institutional investors, particularly pension funds, remain notably absent from these efforts. While Australian and Canadian pension funds actively finance infrastructure in developed economies, their contributions to developing countries have historically accounted for less than 1 percent of total investments.
So, what are the barriers to increased investment? Experts suggest that a possible solution involves creating mechanisms to mitigate currency risk for investors. Avinash Persaud, a special adviser at the Inter-American Development Bank, is among those advocating for such facilities. However, investment managers argue that the fundamental issue lies with DFIs, which often operate like private investors instead of acting as catalysts for broader investments. Their bureaucratic processes tend to deter rather than encourage private funding.
Infrastructure investment is inherently complex, typically requiring long-term commitments and facing both political and commercial risks. Projects involving essential public services, such as water and power, necessitate accurate regulatory frameworks and detailed information in the host countries.
The aid transparency initiative Publish What You Fund (PWYF) has emphasized the need for more granular data disclosure to aid private investment decisions. This report underscores the slow response from DFIs, particularly the IFC. Institutional investors such as AllianzGI and Africa Investor have voiced support for these conclusions, advocating for improved data transparency.
Hubert Danso, CEO of Africa Investor Group, asserts that a stable legal framework and access to reliable data are more critical for attracting private capital than the efforts of multilateral development banks, which can sometimes stifle private investment rather than foster it. He and PWYF reject the notion that disclosing such information threatens commercial confidentiality.
Historically, development banks and their stakeholders have focused on the volume of funds disbursed rather than the outcomes achieved. This approach is particularly problematic for DFIs, whose mission is to facilitate access for other investors.
Most importantly, government officials and lending institutions must adopt a more realistic perspective on the potential of private finance in infrastructure projects. It is ironic that the UK has aggressively promoted public-private partnerships (PPPs) in developing nations, given its own mixed outcomes in this area.
The UK’s long-standing experiment with the Private Finance Initiative yielded inconsistent results and was ultimately scrapped by the Conservative government in 2018. Crafting contracts that incentivize genuine investment and appropriately allocate risk to private entities has proven to be a formidable challenge.
Recent efforts, such as a summit in London aimed at reigniting private investment in UK infrastructure, have been marred by concerns regarding the country’s business climate and overall clarity. The government’s response has been a rehash of the familiar rhetoric about eliminating bureaucratic hurdles.
While encouraging private investment in infrastructure projects across both low- and high-income countries is commendable, announcing ambitious initiatives without establishing the necessary incentives will only lead to skepticism. To meet global green transition goals, it may become increasingly clear that public funding must play a central role in driving these efforts, a reality that benefits no one, especially the developing nations that need support the most.
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