Opinion: How development lenders can regain the initiative from China

By Rob Mosbacher and Luis Alberto Moreno | October 3, 2023

The United States, its allies, and partners may have the most auspicious and timely opportunity in years to regain the initiative over China in financing infrastructure in the developing world. This is because of the very serious economic challenges facing China. While few expect the country to abandon its Belt and Road initiative and other international development strategies, there are a multitude of reasons to believe that domestic fiscal stimulus will be a much higher priority in Beijing for the next few years than financing development projects in low-income countries.

This creates an opening that must not be missed by those who believe in the free market rule of law approach to economic growth and development. It is also important to keep in mind that a better way to gain influence in the global south is by investing, rather than lecturing. In order to take full advantage of this opening, multilateral development banks, or MDBs, and development finance institutions, or DFIs, must work together like never before. By building on the individual strengths of each institution, they must focus more intently on how to de-risk projects that today are regarded as not financeable.  

The goal of de-risking is not just to make more projects financeable, but more importantly, to attract private capital on a scale that ultimately could help reduce the SDG funding gap, which is estimated at $4.2 trillion per year. And yet, it is estimated that private investors around the world hold over $410 trillion in financial assets with $16 trillion in low- and middle- income countries. The challenge is how to get more of that private capital off the sidelines and into the game. The short answer is that MDBs and DFIs must be willing to take more short- and medium-term risk in order to attract more private sector investment.  

Although many private sector companies may be sympathetic to the idea of reducing poverty and building capital markets in low-income countries, it is not their responsibility. Rather, it is incumbent upon MDBs and DFIs to help structure transactions in such a way as to reduce the risk to a private sector investor to an acceptable level and to provide an investment opportunity that has an attractive return and is competitive with other options.

There are many tools at the disposal of the MDBs and DFIs to reduce risk and attract more private capital. Those include concessional finance, blended finance, political risk insurance, targeted guarantees, subordinated debt, among others.  

Some of these tools require taking on greater risk, but by partnering with each other, as the Inter-American Development Bank and the U.S. International Development Finance Corporation did recently in guarantees for Ecuador’s “Galápagos Marine Bond,” MDBs and DFIs can share that risk in ways that preserve their AAA and AA ratings. Also, it is critical that guarantees used as part of a financing of a project be booked as contingent liabilities rather than as loans as definite liabilities.

As U.S. Secretary of the Treasury Janet Yellen and World Bank President Ajay Banga have said, it is time for MDBs and DFIs to think more creatively about risk. It is time for DFIs and MDBs to join together and share risk on a programmatic basis rather than one-off projects. It is time for those institutions to measure their success as much by how much private capital they mobilized that otherwise would have remained on the sidelines, rather than simply how many transactions were completed in a year.

One of the most critical areas of need for investment in lower-income nations is infrastructure, which is why the United States and its Group of Seven leading industrial nations partners committed to mobilize $600 billion over the next five years through the Partnership for Global Infrastructure and Investment, or PGII. The U.S. is committed to provide $200 billion of that total.  

The riskiest part of most infrastructure projects is the construction phase. Why not set a goal under PGII in which the MDBs and DFIs take on much more of the construction risk, particularly if it can be done in ways that provide banks capital relief under international banking regulations Basel ll rules for construction loans? Such a goal would encourage the MDBs and DFIs to more seriously consider the use of the various de-risking tools and would also facilitate more meaningful collaboration as a means of sharing and spreading the risk.  

Much has been written and said about the Group of 20 major economies’ independent expert group and their recommendations for reforming and strengthening MDBs. There has also been a particular focus on capital availability and how to increase the resources that are available for lending.  

Although one hopes that these recommendations are taken seriously and adopted as soon as possible, making more capital available to be lent in the same old ways would be tragic. It is time to think boldly and take advantage of this opening to regain the initiative in financing infrastructure in lower-income countries. This is not just an opportunity for the U.S., its allies, and partners, to reassert the free market rule of law development model, it is an obligation.

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Robert Mosbacher Jr. was President and CEO of the Overseas Private Investment Corporation, now known as the Development Finance Corporation (DFC), from 2005-2009. He was instrumental in the passage of the BUILD Act and currently serves as the Chair of the Development Advisory Council created under the BUILD Act.. He is Chair of the Board of Mosbacher Energy Company, a family-owned business which is located in Houston, Texas.

Luis Alberto Moreno was President of the Inter-American Development Bank from 2005-2020. He is currently a Managing Director of Allen & Company.