The Math of Development Finance is Pretty Simple. Finding the Numbers, Not So Much

For all that investment is far from all we need, we will still need a massive amount of it if we are to meet global targets on sustainable development. Low and zero-carbon power plants; expanded electricity, water and sanitation networks; universal health and education systems—none come cheap. Estimates over the next decade range into the tens of trillions. There is little sign that we’re actually going to see the kind of global mobilization of finance that would be required to achieve that—the recent G7 communique promised hundreds of billions of finance while devoid of policy commitments that would deliver it. But even when we fall short, the smaller the investment gap, the better—especially in the world’s poorest countries, where each additional dollar is likely to have the greatest impact on quality of life. And that leads to the question: how do we make more investment affordable, especially in a time of rising global interest rates?

In a new note, I look at the simple math of development finance. In short: if you have to pay 20 percent interest rates on the money you borrow to invest, you won’t be able to invest as much as if you only have to pay 2 percent. And the problem is that direct private investors in developing country infrastructure, health, and education projects appear to want close to 20 percent returns.  When the World Bank and other multilateral development banks can (still) borrow money from the private sector and on-lend it to developing country governments at rates closer to 2 percent, it seems fairly clear which strategy can finance more sustainable investment. That’s certainly not to say there’s no role for private investment—broadly, it’s a case of the more, the better. But to reach anywhere close to transformative levels of investment is going to take lower-cost support from public sources.

For the note (as well as a forthcoming working paper looking at the complementarity between human capital investment and infrastructure investment), it would have been great to have detailed information on returns to individual infrastructure investments involving the private sector. But such information is very hard to come by. The (fantastic) PPI database provides data on the size and location of infrastructure with private participation, but not returns. IMF staff members with access to the Orbis Bureau van Dijk database could put together data on return on equity at the firm level for 8,504 infrastructure companies based in developing countries. They also had access to the Cambridge Associates LLC Private Investments Database offering returns data on private equity and venture capital funds. But (even if access were open) neither of these data sources provide project-level data. 

Of course, development finance institutions like the IFC, the US DFC and the UK BII do have access to that project-level data. Sadly, they rarely share it with outsiders, and never without a ban on project-level data reporting (despite the fact that they pool and share this data amongst themselves). This is part of a broader, and considerable, DFI transparency deficit.

It would be a considerable public good if development finance institutions (DFIs) agreed to open up more on the returns that their projects are earning. These are projects financed by the taxpayers of the countries that own DFIs, and they should know what their taxes are paying for. More broadly, if private and public investment is to have the maximum impact on sustainable development outcomes, it needs to be open to scrutiny. Not least, greater transparency should reduce the unknowns and transactions costs that are a significant factor behind high costs of private capital in the first place. In turn that would make the math of development finance a bit more supportive of transformative change.