MDBs need to shift to informed risk-taking, says G20 group report

Pushes for pvt capital to strengthen MDBs

Multilateral development banks (MDBs) need a whole-of-institution approach to mobilise $240 billion in private capital by shifting from risk avoidance to informed risk-taking, the second volume of the G20 independent expert group’s report on strengthening MDBs has said. 

After 80 years of status quo, it is time to introduce new instruments — in the form of pooled portfolio guarantees and hybrid capital — and new investors into the MDB capital stack. This, the expert group said in a series of recommendations that lay out the changes, which MDBs need to bring to implement the G20 Leaders’ vision, the report said. 

“There has been a change from hesitations, prevarications exhibited in Gandhinagar. There was much more positive enthusiasm demonstrated on Thursday. Governors appreciated the idea of better, bolder and bigger MDBs. The issue is sequencing,” N K Singh, co-chair of the G20 expert group on MDBs and 15th Finance Commission chairperson, told Business Standard. 

Singh said that MDBs have to make their own assessment and putting additional money is not untouchability. “MDBs have to shed their risk aversion, which is easier said than done. It would require human resource development skills to harness the possibility of guarantees and hybrid capital,” Singh added. 

Speaking about various risk-mitigation measures for private capital, the second volume of the report suggests that MDBs should consider building off-shore hedging mechanisms and boosting onshore hedging options for managing foreign exchange risks. It has also suggested ways for the Multilateral Investment Guarantee Agency (MIGA) of the World Bank to become a heavyweight puncher. It can be done by building partnerships with other MDBs at scale, including for portfolio risk transfers, among other measures. 

In its second volume of recommendations, the G20 expert group asked MDBs to convert operating models to co-create multi-year programmes with national governments, taking a strong lead and tripling financing levels to $390 billion per year. 

This will help achieve the transformational change required to meet national and global priorities. 

Among other key recommendations, the expert group also suggested that the G20 Finance Ministers establish a mechanism to advise and independently assess the first-year implementation of the proposed roadmap. 

The first volume of the report, released in July, had set out a triple agenda of reforms for the MDBs that would triple annual sustainable lending levels to $390 billion by 2030. It would also adopt a triple mandate of eliminating extreme poverty, boosting shared prosperity, and contributing to global public goods.

The third agenda was to expand and modernise funding models to broaden the investor base in flexible and innovative ways. 

The expert group chaired by Singh and former US treasury secretary Larry Summers has called for a wholesale rethinking of the MDB operational model. 

These include a change of the institutional culture and mindset about how they operate individually and as a system.  Presenting a golden thread of risk management, the volume 2 said the MDBs can be fully transparent in their own operations to permit a better assessment of actual risk.

A potential breakthrough in MDB funding could emerge by opening up opportunities to non-government investors —sovereign wealth funds, foundations, impact investors and businesses contributing funds as part of their corporate social responsibility programmes, the report said.

“A world on fire requires the MDBs to be at centre stage in creating an effective response and bringing diverse actors to support a shared agenda of transformative development,” the report said.