This is the report of an Independent Expert Group that was commissioned by the Indian G20 Presidency. The Co-conveners of the group are Lawrence Summers, President Emeritus of Harvard University, and Nand Kishore Singh, President, Institute of Economic Growth and Chairperson, Fifteenth Finance Commission of India. CGD President Masood Ahmed served as a policy advisor to the group. Members of the technical team included several CGD experts: Victoria Dimond, Senior Policy Analyst; Clemence Landers, Senior Policy Fellow; Nancy Lee, Director, Sustainable Development Finance and Senior Policy Fellow; and Karen Mathiasen, Project Director. The team was supported by research and communications staff from CGD and ICRIER, including the following from CGD: Hannah Brown, Research Associate; Samuel Matthews, Research Assistant; Scott Morris, Senior Fellow; and Erin Norton, Executive Assistant to the President.
Executive Summary
Radically reformed and strengthened MDBs are essential to address the immense global challenges in today’s world. The welfare of billions of people and the health of the planet, the foremost example of a global public good (GPG), are under threat. To make matters worse, the problems are getting bigger; the SDGs are badly offtrack, with over 600 million people still living in extreme poverty, and there is an intense urgency to address problems of climate change and nature conservation and protection in all countries.
The window for action is closing fast. The world’s stock of infrastructure will double in the next decade, much of it in developing countries, so the choices made now will determine prospects for growth, sustainability and inclusion for decades to come.
The threats of today can be transformed into an opportunity for tomorrow. There is an emerging growth story of the 21st century that is sustainable, resilient, and inclusive. It is a growth path that invests in people, that secures livelihoods for those exposed to natural disasters, and that builds on the innovations now available in green energy and digital technologies. It will require strengthening of policies and institutions, and a large scale-up in the size and pace of public and private investments. For example, spending on sustainable infrastructure in developing countries needs to expand four-fold by 2030.
MDBs have a key role to support the needed reforms and resources. 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. They have a wealth of knowledge and experience in partnering with clients to achieve effective development solutions, and they combine affordable long-term finance, technical support, and policy advice in a unique way to deliver sustainable results. In an increasingly fractured world, they have a history of bringing together diverse nations to not just discuss but to act in support of a shared agenda of transformative growth.
However, to transform development, the MDBs will have to transform themselves. This report of the Independent Expert Group (IEG), appointed under the auspices of the India G20 Presidency, recommends a triple agenda to harness the potential of MDBs (see Annex 1 for terms of reference). The three elements of this agenda are: (i) adopting a triple mandate of eliminating extreme poverty, boosting shared prosperity, and contributing to global public goods;[1] (ii) tripling sustainable lending levels by 2030; and (iii) creating a third funding mechanism which would permit flexible and innovative arrangements for purposefully engaging with investors willing to support elements of the MDB agenda.[2]
Effective implementation of the triple agenda requires important changes in the ways that MDBs operate. Individually and collectively, MDBs must become effective agents in all developing countries for integrating the development and climate agendas, working with governments and the private sector to reduce, share and manage risks and thereby bring down the cost of capital. They must change their culture, become more client responsive, and take more risk. Timelines for project preparation should be shrunk and procedures rationalized. They must also increase the scale and nature of their activities. Relative to the GDP of borrowing countries, MDB gross disbursements are now just half as large as they were in 1990, and their net resource transfers are unacceptably low.
One of the greatest opportunities for transformation is in MDB engagement with the private sector. There is considerable innovation and energy behind new ways of attracting private capital into sustainable infrastructure, and MDBs must complement, rather than compete with, these efforts. Helping to co-create country platforms that identify the nature and scale of investment climate reforms will be central to this. Coordination between private and public sector arms of the MDBs on the use of the Cascade principles, guarantees, blended finance, political risk insurance, and foreign exchange hedging should be systematic rather than episodic. We are mindful of the difficulty in assessing when public funds truly lead to a faster pace of additional private investment, but believe that with the right design and governance, public sector catalyzation can be significant. Today, MDBs only mobilise 0.6 dollars in private capital for each dollar they lend on their own account. They should aim to at least double this target.
The agenda for SDGs, climate action, nature preservation and other GPGs is mutually-reinforcing. Strategies for poverty reduction and national and global prosperity are converging in their need for larger investment in sustainable infrastructure. Reframing mandates in this way should not detract from the large unfinished business of national development priorities and will require MDBs to lend more.
Additional spending of some $3 trillion per year is needed by 2030, of which $1.8 trillion represents additional investments in climate action (a four-fold increase in adaptation, resilience and mitigation compared to 2019), mostly in sustainable infrastructure, and $1.2 trillion in additional spending to attain other SDGs (a 75% increase in health and education).[3]
The international development finance system should be designed to support this spending by providing $500 billion in additional annual official external financing by 2030, of which one-third in concessional funds and non-debt-creating financing and two-thirds in the form of non-concessional official lending. It should also help mobilise and catalyse an equivalent amount of private capital, implying a total additional external financing package of $1 trillion.
MDBs should provide an incremental $260 billion of the additional annual official financing, of which $200 billion in non-concessional lending, and help mobilise and catalyse most of the associated private finance.A larger fraction of concessional assistance should be channeled through MDBs. Low-income countries have the largest shortfalls in spending on achieving SDGs and addressing GPGs. They have limited options for domestic resource mobilization, and non-concessional borrowing is precluded due to a lack of creditworthiness. Their access to concessional funds must therefore be protected and expanded. We are concerned that bilateral ODA to the Least Developed Countries has declined in real terms in 2022. At the same time, there is a short-term “cliff” facing IDA clients that must be resolved as quickly as possible. As IDA is the major source of long-term cheap financing for LICs, we urge a tripling in its level by 2030. In addition, we recognize that many middle-income countries also need concessional financing, especially when faced with sudden shocks such as natural disasters, conflict, fragility and pandemics, or in support of their efforts to address global challenges.
MDBs have started a process to optimize their balance sheets. We urge the fullest implementation of recommendations made in the G20 Capital Adequacy Frameworks report that could generate headroom to lend $80 billion more each year. Leverage in each MDB can be increased further by better accounting for callable capital, preferred creditor treatment, and removal of statutory lending limits, while protecting their credit ratings. Mobilizing hybrid capital, including through recycled SDRs, and risk transfers to private and public actors to free up capital would also add significant capacity.
We also see potential for a new flexible legal and institutional mechanism that could crowd-in a coalition-of-the-willing among sovereign donors and non-sovereign investors wishing to be associated with specific MDB activities. In a second volume we will explore modalities for establishing a Global Challenges Funding mechanism for such purposes that could result in at least $20 billion in additional annual lending.
In our judgment, however, even if implemented with maximum effectiveness, these measures will fall substantively short of what is needed. Accordingly, we are inescapably led to recommend initiation of a process for a General Capital Increase (GCI) for those institutions which have binding headroom constraints, including IBRD. Balance sheet optimization is a necessary condition for a GCI. Equally, preparation for a GCI will support balance sheet optimization. The two should therefore take place concurrently. This would send a strong signal to credit rating agencies as to the deep level of shareholder support for MDBs, thereby permitting the greater leverage recommended by the CAF to take place with minimal risk of affecting credit ratings. It would simultaneously signal to developing country officials that they can trust that pledges of enhanced international support for their efforts will actually be realized.
Implementing the CAF recommendations together with preparation for a GCI would balance the risks facing MDBs. While MDBs can mitigate risk by helping countries improve the environment for private investment and by strengthening growth in client countries, the measures proposed here to increase leverage and to engage in new ways with the private sector will inevitably raise the risks to MDBs. These small risks are worth taking to reduce far larger global risks of social and environmental tragedies that are now apparent. MDBs have a toolkit of callable capital and preferred creditor treatment that permits them to bear more financial risk under most eventualities. They can further exploit opportunities for sharing risk amongst themselves and can potentially use new instruments such as the proposed global challenges funding mechanism to shift risk to other partners. But a GCI would give MDBs the strong financial foundation they need to implement these other reforms and achieve the necessary scale up of additional annual lending by $200 billion a year.
New equity in MDBs would provide extraordinary value-for-money to shareholders. Once the recommendations on leverage and private capital mobilization 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 mobilization of external private capital. If complementary investments from national development financial institutions are included, leverage would be even higher. For individual shareholder governments, the impact of their contribution is even higher as they only provide a fraction of any new capital increase (see Annex 3 for G20 country examples).
The MDB system must become more than the sum of its individual entities. MDBs are heterogeneous, with their own mandates, governance and priorities. Much of their strength has come from the fact that heterogeneity permits innovations in different parts of the system (Annex 5). For example, some MDBs have been leaner and faster (AIIB), others are experimenting with raising new forms of capital (AfDB and IDB), engaging with the private sector (EBRD and IFC) or better utilizing their balance sheets in other ways (IBRD and ADB). Nevertheless, there is now a convergence of objectives to which all MDBs subscribe, to help the transformation of client countries. Achieving this objective requires better coordination among MDBs. They can work better as a system through joint financing and risk-sharing, jointly improving the ecosystem of project pipeline development, regulatory and institutional reform, and information exchange, for example by making the Global Emerging Markets (GEMs) database public. They should harmonize and reciprocally recognize others’ financial, procurement and safeguard standards, and share diagnostic tools. At the same time, cooperation between the MDBs and the IMF is vital, most importantly in managing debt.
Institutional incentives must be put in place to reinforce MDB cooperation. We recognize that there have been many past efforts to promote MDB harmonization, with mixed success. Accordingly, we suggest that MDB leadership should be held accountable for progress on this agenda and should jointly report to the G20 on how their activities have contributed to improving the environment for scaled-up transformation investments in their clients.
Sustained multi-year effort and independent oversight are critical for MDB reforms to succeed. While the reform agenda needs to be decisively put on track this year, implementing it will be a multi-year endeavor. Therefore, there is a need for an independent monitoring group to encourage and catalyze full implementation of recommendations over multiple presidencies and report to G20 on progress beyond this year. Such a group would complement the work being done by the International Financial Architecture Working Group and provide the governance to ensure the system works as a system.[4]
[1] We interpret global public goods in a broad sense going beyond the conventional description of GPGs, focused especially on climate change, the preservation of biodiversity and the global water cycle, and pandemic preparedness and response. Here, investing in these GPGs goes together with addressing closely-related transboundary challenges such as conflict and fragility, food security, cyber security and energy security.
[2] The other two funding mechanisms are negotiated equity contributions from sovereign shareholders and discretionary trust funds.
[3] Figures are taken from/consistent with those presented in Songwe, Stern and Bhattacharya (2022). OECD, the International Energy Association, the Energy Transitions Commission and the World Bank, have produced numbers of similar orders of magnitude of what is necessary for delivery of the global agenda, although they differ in coverage of sectors, geographies, and time frames.
[4] The G20 Eminent Persons Group Report, 2018, similarly emphasized the need for the G20 to steer the MDB reform agenda for 3 years.
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