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New orientation of World Bank and other development agencies sought to stimulate private sector investment

20 April 2006 - Washington

The World Economic Forum’s Financing for Development Initiative today issued its final report of recommendations regarding how multilateral development banks and bilateral aid ministries could better leverage their capital to promote development, particularly in the 94 countries classified as middle income by the World Bank. Based on nearly two years of consultations with over 200 public, private, academic and NGO experts, the initiative concludes that the activities of these public institutions should shift over time from issuing direct loans and grants to catalysing greater domestic and foreign private investment in developing countries through the following:

· Wider use of risk mitigation instruments to alleviate part of the risk faced by investors
· Stronger direct support for capacity building to strengthen the enabling environment for investment

Building on the Monterrey Consensus: The Untapped Potential of Development Finance Institutions to Catalyse Private Investment is the outcome of a project conducted by the World Economic Forum in partnership with the United Nations Department of Economic and Social Affairs and the Swiss Agency for Development and Cooperation as part of the follow-up process to the 2002 UN Conference on Financing for Development in Monterrey, Mexico.

Richard Samans, Managing Director of the World Economic Forum, said: “In the past decade, there has been much debate about reform of the international financial architecture as it relates to low income and heavily indebted poor countries. But relatively little attention has been paid to middle income countries and, more broadly, how the public capital in multilateral and bilateral development agencies can best be used to facilitate much larger amounts of domestic and foreign private investment in countries where in principle such investment should be attractive because of prevailing and projected levels of economic activity and household income. Forty percent of the world’s poor, or over one billion people, live in these countries.”

Richard Frank, Chief Executive Officer of Darby Overseas Investment and former Chairman of the World Bank’s Private Sector Group, said: "This situation cries out for action. The development banks are sitting on over 100 billion dollars of idle capital, while projects to improve infrastructure and help the poor go unfunded. Hopefully, this increased attention will lead to fundamental changes in development aid effectiveness.”

Noting large estimates of unmet investment needs in power (US$ 120 billion per year) and water and sanitation (US$ 49 billion per year), the report finds that development finance agencies have not adapted sufficiently to the changing needs of their client base, as evidenced by weakening demand for their loans. Experts involved in the project concluded that the proper response would not be for these agencies to exit this part of the world with this financing gap remaining. Rather they should adapt their services, culture and capital allocation strategies to the imperative of “crowding in” domestic and foreign investors. This could be done through risk mitigation products including partial guarantees – as a transitional strategy – and capacity building in such areas as property rights, contract dispute adjudication, bankruptcy frameworks, accounting and auditing capabilities, corporate governance, banking supervision and securities market development – as a longer term strategy to render themselves obsolete only after the emergence of robust local currency capital market and bank lending institutions.

The report outlines specific recommendations for development finance institutions in five areas:
· Reorienting Their Culture, Capital and Skills
· Expanding Risk Mitigation Activity
· Expanding Support for Local Currency Financing
· Establishing Investment Climate Capacity Building as a Central Priority
· Strengthening Investment Project Pipelines through Project Development Support

The project’s main multistakeholder consultations were conducted in 2004 and 2005 in São Paulo, Hong Kong and New York.

The International Conference on Financing for Development in March 2002 brought together 51 presidents and prime ministers, numerous finance and foreign ministers, leaders of international organizations and financial institutions, as well as business and civil society leaders, to address the challenges of development financing and poverty alleviation in a spirit of partnership between developed and developing countries and between the public and private sectors. The conference was the culmination of a process mandated by the United Nations to promote international cooperation in six key areas – mobilizing domestic resources, increasing private international investment, strengthening official development assistance (ODA), increasing market access and ensuring fair trade, solving the debt burden, improving the coherence of global and regional financial structures, and promoting fair representation of developing countries in global decision-making.

Note to Editors:
· Click here to download the executive summary and full report, “Building on the Monterrey Consensus: The Untapped Potential of Development Finance Institutions to Catalyse Private Investments”: http://www.weforum.org/site/homepublic.nsf/Content/Financing+for+Development

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