Dilemma of multilateral finance: Scaling up capital from pvt sector crucial

Last week, a report entitled “G20 Independent Expert Group on Strengthening MDBs”, authored primarily by Larry Summers, former US treasury secretary, and N K Singh, chairperson of India’s fifteenth Finance Commission, was placed before the Third G20 Finance Ministers and Central Bank Governors meeting in Gandhinagar, Gujarat. The meeting was jointly chaired by Finance Minister Nirmala Sitharaman and Reserve Bank of India (RBI) Governor Shaktikanta Das.

Interestingly, the meeting did not accept the recommendations of the expert group but stated that the G20 “may choose to discuss” them “to enhance their effectiveness”. Yet the topic of the report, on global financing of public goods, is critical to the future of the G20.

The world needs money to build infrastructure hard and soft, at a scale never built before. At $3 trillion annually by 2030, the private sector is unlikely to step in; it has no appetite for taking on the risks, mostly located outside USA and Western Europe, unless the multilateral development banks (MDB) share those.

For the MDBs, this situation means either taking on more debt on their existing equity or adding to their equity, known as General Capital Increase, or possibly both. The former risks reducing their coveted Triple-A rating that keeps their interest rates rock-bottom. The alternative, which is to make the G20 countries raise their equity in the MDBs, is riddled with dissensions. The Summers-Singh report notes that MDBs have to contend with an “increasingly fractured world”.

Soon after they were set up in 1944, the clutch of World Bank, Asian Development Bank, International Finance Corporation, African Development Bank and even the International Monetary Fund (IMF) faced calls to change the way they do business. But in the 21st century, especially after the BRICS (Brazil, Russia, India, China and South Africa) countries have come to rival the economic powers of G7 countries, the differences have become acute. The BRICS countries, for instance, have not only have set up two rivals, Asian Infrastructure Investment Bank and the New Development Bank, but have also demanded greater say in the governance of the older ones.

To ease some of the differences, in 2016, the IMF included the Chinese renminbi in the basket of currencies whose combined value determines the Special Drawing Rights (SDR), the international reserve currency. This month, an RBI working paper has demanded that the Indian rupee should also be a part of the basket.

There are two parts to this demand. First, inclusion in the SDR basket would give the rupee a recognised place among the major international currencies. This would enhance its status as a global reserve currency, making more countries agreeable to trading in it. Second, the share of SDRs also determines the share of voting rights of a nation at the IMF. India has an SDR quota of 2.75 per cent, giving it a voting right of 2.63, the eighth largest in the league of 190 member countries.

On the other hand, the US, which is the largest shareholder in the IMF at 16.5 per cent, is keen for a higher say in the agenda if it were to put in more equity into the MDBs including the IMF.

This is why the Summers-Singh report has the potential of creating further divisions. The report is a rich one, assessing that the need for spending on sustainable infrastructure in developing countries must expand fourfold by 2030.

And it is MDBs, the report says, that can play a key role here. “They work with governments and the private sector to create the conditions for investment and transformation. They are the most effective institutions to provide low-cost, long maturity financing, to mitigate risks faced by private investors, and to share risks in the most efficient way,” the report said.

A critical way to serve this need is to create a “third funding mechanism”. That means drawing in money from the private sector in addition to the corpus that signatory governments and trusts provide to these banks. But to get that money, which the authors reckon has to be about $3 trillion, the MDBs need to provide $260 billion more every year from less than $100 billion now.

The call to rope in the private sector worldwide is a remarkable change for the stilted world of global finance. Over the past decade, though global anger over the climate crisis has spread, along with that of rising inequality in more countries, the space for private capital to be involved in global commons has been limited. Companies engage with the MDBs but the partnerships are not talked about often. Instead, state capacity has been talked up, even in the US. For instance, the oil companies have the money but would they be willing to share in the build-up of climate infrastructure in the Global South?

The Summers-Singh manifesto is remarkable in that context. It explains that this engagement “would permit flexible and innovative arrangements for purposefully engaging with investors willing to support elements of the MDB agenda”.

But the report acknowledges that difficult choices lie ahead. Either these banks shall have to increase their leverage, including bringing in more “callable capital” and run the risk of losing their pristine credit ratings, or ask their member countries to pay more into their General Capital Increase to make private capital a willing partner in the global construction of infrastructure.

World Bank President Ajay Banga offers a way out. At Gandhinagar, he said corporate social responsibility funds from the private sector, of the sort India has made mandatory, can augment current sources of financing. He said a portfolio guarantee programme under which one or more shareholder countries take over risks in a project cluster can be used to create hybrid capital or bonds. Following Banga's announcement, the World Bank has announced a slew of steps including a portfolio guarantee programme. It will be subscribed to by countries as a pooled mechanism to underwrite loans taken by the poorest countries. The others are measures to raise hybrid capital. “These instruments with special leveraging potential will be treated as capital by rating companies, allowing the (World) Bank to expand funding without losing its triple-A rating,” he explained.

These are options, but difficult ones. Summers and Singh have held out an attractive carrot though. “New equity in MDBs would provide extraordinary value-for-money to shareholders. Once the recommendations on leverage and private capital mobilisation are fully implemented, each dollar of new equity could reasonably be expected to support at least $15 of additional external financing for sustainable investments: $7 in direct MDB lending and $8 in additional direct and indirect mobilisation of external private capital.”

Despite this, the reception to the report suggests that it might need more than one G20 term for the radical proposals to become acceptable global.

Chasing the money

• Additional spending of $3 trillion per year needed by 2030
• Of this, $1.8 trillion represents additional investments in climate action (a fourfold increase in adaptation, resilience and mitigation compared to 2019)
• $1.2 trillion is meant for attaining other Sustainable Development Goals (a 75% increase in health and education)
• Current global development finance needs to raise $500 billion in additional support per year (1/3rd concessional aid)
• Of this, MDBs will raise additional $260 billion per year
• Private investment needed: $1 trillion