Financing for Development Post-2015: Challenges and Solutions

Hosted by FES, Chile, Benin, Sweden
Greentree Estate, Long Island May 30-31 2014

 Global development cooperation framework to tackle
development goals and the associated financing framework
 Complement increases in public spending with targeted,
evidence-based policies and sound institutions for better
outcomes
 A post-2015 financing framework that supports achievement
of country goals and global public goods
2

 It should build on the commitment made under the Monterrey Consensus that
emphasized sound policies and financing as means to achieve the MDGs.
 It also needs to adapt to changes in the global economic and financing
landscape and tap financing from diverse sources:
◦ Domestic resource mobilization
◦ Private finance for development
 Domestic
 External
 Better and smarter aid
 Innovative sources of finance, including for
global public goods
 The relative significance of each source, and the associated leveraging
challenges, will differ between countries.
33

 Improve taxation capacity
 Harness sustainable streams of natural resource revenue
 Improve expenditure efficiency
 Curb illicit financial flows
44

 Domestic resources constitute the largest pool of funds available to developing
countries, which mobilized $7.7 trillion in 2012, largely through taxes, duties, and
natural-resource concessions.
 But, while developing-country revenues have grown 14% annually since 2000, average
tax revenues in the poorest countries stand at only 10-14% of GDP, compared to 16-
20% in middle-income countries and 20-30% in high-income countries.
 Improved domestic resource mobilization and management – for example, through
better tax administration, greater capacity to negotiate and manage natural-resource
contracts, and stronger mechanisms for limiting capital flight and illicit financial flows –
would improve the situation considerably.
 Subsidy reform also offers significant scope for revenue gains. In 2010, only 8% of some
$400 billion in fossil-fuel subsidies reached the poorest 20% of the population.
 But this does not relieve major economies of their responsibility to support
development. On the contrary, better and smarter aid is critical to financing the post-
2015 development agenda.
55

21.2
28.4 28.4 29.3
18.8
17.1
19 19.3
11.3
10 10.5
13.6
0
5
10
15
20
25
30
35
1994 1998 2003 2009
High Income Middle Income Low Income
6
Tax Revenue (in % of GDP) by Income Groups, 1994-2009
Source: World Development Indicators

7Source: World Energy Outlook, IEA,
Fossil fuel consumption subsidies measure what
developing countries spend to provide below-cost fuel to
their citizens. High-income countries offer support to
energy production in the form of tax credits or loan
guarantees, which are not included in these calculations
since they are directed towards production rather than
consumption of the fuel.Subsidies are an inefficient means of assisting the poor: only
8% of the $409 billion spent on fossil-fuel subsidies in 2010
went to the poorest 20% of the population.

Figure 2.2: World subsidies to fossil-fuel
consumption
Figure 2.3: Share of fossil-fuel subsidies received
by the lowest 20% income group, 2010
0
100
200
300
400
500
600
2007 2008 2009 2010
USDbillion
Oil Natural gas Coal Electricity
5
%
LPG
6
%
Gasoline
6
%
Diesel
9
%
Electricity
10
%
Natural gas
15
%
Kerosene
8
World subsidies to fossil-fuel consumption Share of fossil-fuel subsidies received by the
lowest 20% income group

 Improve the business enabling environment, including
through a good public investment program
 Develop financial institutions and markets.
 Improve financial inclusion
99

 Financial institutions and markets facilitate economic growth by
mobilizing savings and allocating savings to the most productive uses.
 Financial inclusion facilitates access to credit and payments services to
small and medium sized enterprises (MSMEs).
◦ Broader access to financial services would help an estimated 4 million MSMEs
in developing countries to expand and pursue opportunities.
 Developing countries’ financial markets will play an increasing role in
intermediating external capital flows than they do today.
◦ Developing countries are projected to account for about half of global capital
inflows in 2030, up from about 23 percent in 2010 (Global Development
Horizons, 2012).
10

How do financial
institutions contribute to
economic growth?
Improve the allocation
of resources
Lower the cost of
financial and
nonfinancial
transactions
Facilitate efforts to
reduce and trade risks
11

 Draw the best development impact from FDI
 Ensure the effective use of borrowing from
international capital markets, which is an increasing
source of financing for developing countries.
 Leverage additional private sources of financing for
infrastructure
1212

 Foreign direct investment (FDI) has been a dominant source of
external private financing.
 Over the past decade, many countries have demonstrated an
increasing ability to access international capital markets, despite some
slowdown after the recent crisis.
◦ Between 2000 and 2012, international long term debt flows – bonds and syndicated
bank lending – increased four-fold.
 Low income countries have less market access, however.
 Overall, available financing for developing countries falls short of their
investment needs, such as for infrastructure.
1313

Foreign direct investment (FDI) has been a dominant source of external private financing
14
Developing economies take biggest share of global FDI in 2013
FDI flows mainly to manufacturing, finance and mining and extractives
(Estimated world inward FDI flows to developing economies by sector and industry 2009-2011*)
Sources: (top): World Bank. Note: *World Bank staff estimates; (right): UNCTAD World Investment Report 2013.
FDI dominates net capital flows

 Meeting developing countries’ cumulative infrastructure financing needs will require an enormous
mobilization of private financing from external sources
 Attracting private financing to infrastructure has been a challenge. Key areas of work include:
◦ Put in place an adequate legal and regulatory framework
◦ Support project preparation for quality project
◦ Mainstream use of risk sharing mechanisms with support from multilateral financial institutions
◦ Have appropriate financial regulation
◦ Develop domestic capital markets
◦ Leverage private finance
 Addressing the infrastructure deficit also requires a commitment to green infrastructure.
 Climate finance and development are complementary and should not compete with each other.
 Both public and private finance are both key elements for infrastructure financing.
15

0.0
0.5
1.0
1.5
2.0
0
50
100
150
200
250
300
350
400
2000 2002 2004 2006 2008 2010 2012
Bonds Bank Lending % GDP (right axis)
$ billion % of GDP
16Source: World Bank Development Prospects Group

 Welcome the recent 6%+ increase in ODA.
 Ensure that ODA continues to be a relatively stable source of
financing for the poorest countries.
 Draw the best possible impact from new, emerging sources of
aid, including from private philanthropy
 Continue efforts to increase aid effectiveness
 Strengthen the catalytic role of ODA
1717

 ODA has been relatively stable source of
development financing for the poorest
economies.
 A substantial increase in ODA is unlikely in the
near future.
 Evolving aid landscape:
 Aid from OECD-DAC donors declining in
importance
 Other official flows (OOF) less dynamic, more
volatile
 Non-DAC donors and private institutions
growing
 Emerging market economies contributing
more
 Private philanthropy, vertical funds on the rise
 New partners promote their own economic and
strategic interests and meet needs not addressed
by traditional donors
1818
ODA
40%
FDI
22%
Remittanc
es
38%
The Importance of ODA in Financing Fragile States
Gross financial flows to fragile states, 2010
Total: USD 125 billion
• ODA represents biggest financial inflow to FCS
• Every FCS has had at least one aid shock in the past 10 years
• Targeted external financial aid can support countries to
transition out of fragile situations

1919
“Official development assistance (ODA) plays an essential role as a complement to other sources of financing for
development, especially in those countries with the least capacity to attract private direct investment…For many
countries in Africa, least developed countries, small island developing States and landlocked developing countries,
ODA is still the largest source of external financing and is critical to the achievement of the development goals and
targets of the Millennium Declaration and other internationally agreed development targets.”
Monterrey Declaration, 2002
Source: OECD DAC Database
19
0.20
0.22
0.24
0.26
0.28
0.30
0.32
0.34
Net ODA (% of GNI) by all DAC members

202020
Emerging donors, led by China, provide limited aid now as defined by the OECD but they also contribute
through other external flows and in-kind assistance.
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
2003 2004 2005 2006 2007 2008 2009
Estimated aid from BRICS, 2003-2009 (USD billion)
China India Russia Brazil South Africa
For the purpose of comparison, in 2009, net ODA from DAC members was 119.8 bn USD.
Source: World Bank CFP Working Paper No. 8, Finance for Development

 Countries need to determine their policy and financing strategies to implement
post-2015 development goals, given scarce financial resources and levels of
access to private finance.
 Countries need to:
◦ Assess their growth prospects, scope for policy changes to enhance
growth and progress toward post-2015 goals, and access to different
financing sources.
◦ Assess (quantitatively if possible) the impact of policy and financing
options and understand the magnitude of the “effort” needed to
achieve post-2015 development goals.
◦ Understand their financing options and what is needed to expand
these options.
 Development partners will play an important role in supporting policy makers to
get ready to finance and implement their post-2015 development goals.
2121

22
Liberia
(resource rich;
FCS)
Nigeria
(resource rich)
Yemen
(FCS)
Kyrgyzstan
(resource rich;
landlocked)
Uganda
(landlocked)
Pakistan
Senegal
Philippine
s
Jamaica
(small-island)
Peru
(resource-
rich)
Low-IncomeKey:
Lower
Middle-
Income
Upper
Middle-
Income

 Leverage global dialogue to convene private sector, policy makers and other
stakeholders, e.g., WEF, G20, and UN-led consultations.
 Multilateral Development Banks can play an effective role
◦ Infrastructure financing facilities
◦ Scale up risk sharing instruments to enable PPPs effectively
◦ Catalyze experimentation on innovative financing
 Encourage private sector-led consultations
 Country level public-private dialogue and coordination.
23

 The PPP global market has grown
substantially since 1990 but seems to
have leveled off over the last six years
to between $160 to $180 billion
annually.
 Energy and telecom have led in the
number of transactions and transport
is also playing an increasing role.
Water on the other hand, is still
substantially behind
 Cumulative since 1990 EAP has been
second only to LAC, representing
about 30% and 18% of the total
number of projects and investment
commitments, respectively.
 However, growth has actually
stagnated since the crisis in 1997, and
region has fallen behind both ECA and
SAR in most recent years. 24

The Sustainable Energy for All (SE4ALL) has three critical global energy objectives by 2030: universal
access to modern energy; doubling the rate of improvement of energy efficiency; and doubling the share
of renewable energy in the global energy mix.
 To achieve these objectives, capital flows to the energy sector would need to increase two to
threefold from current annual levels of $400 billion to at least US$1 trillion. Reaching universal access
to modern energy would require investments of just $50 billion annually, however this represents a
fivefold increase relative to historic levels.
 Such a significant resource scale-up calls for both bold policy action and innovative finance. One
without the other is not going to be enough.
 Getting energy prices right is critical to creating the incentives for more investment in clean energy.
That means phasing out fossil fuel subsidies, as well as providing price signals for carbon. More
countries need to adopt stringent performance standards for energy efficiency.
 Today, energy captures just a tiny fraction of resources available in the global capital market, and
relatively few investors are taking an interest in emerging market energy projects.
25

Climate finance and development finance are strongly interrelated, and essential to achieve
sustainable development.
 We need to think not only of infrastructure investments but of more and greener infrastructure.
 This will require additional investments. Climate finance and development finance are
complementary, and are not in competition with each other.
 Both public and private flows are indispensable elements of climate finance. Policies – ie.
comprehensive pricing policies - will play an important role in catalyzing high levels of private
investment in climate finance (80%)
 We have seen evidence in countries – from Morocco to South Africa, and from Uganda to
Vietnam -- that the target use of public finance can scale up private financial flows into green
investment through measures such as guarantees, insurance products, and incentives,
combined with the right policy environment that provides opportunity and manage risks. And
they are achieving notable results.
 We have begun to see significant change in the financial sector’s commitment to addressing
climate change. We note the expansion of the market for green bonds. Last year green bonds
issuances were $11.4 billion, double the previous year. We would like to see this trend
continue.
 In 2012, MDBs provided $27 billion in financing to address the climate challenge. Over the past
5 years, MDBs have also been working jointly with Climate Investment Funds to deliver catalytic
finance in 48 countries. MDBs can play a role in leveraging public funds and addressing gaps
that private sector finance addresses imperfectly.
 We need to work together to make the best use of public private finance and policy to create
attractive investment opportunities that address climate change.
26

 Facilitate the development of a financing framework for post-2015, building on the Monterrey
Consensus, with a view to identifying challenges and issues, to be addressed by the
international financing community.
 Engage Ministers of Finance, Economy, and Development, with our development finance
partners, including UN and other IFIs, bilateral agencies, the private sector, and foundations,
in a discussion about financing post-2015.
 Multilateral Development Banks can play an effective role
◦ Infrastructure financing facilities
◦ Scale up risk sharing instruments to enable PPPs effectively
◦ Catalyze experimentation on innovative financing
 Encourage private sector-led consultations
 Country level public-private dialogue and coordination.
27

28
Mahmoud Mohieldin
President’s Special Envoy
The World Bank

Financing for Development Post-2015: Challenges and Solutions

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