Here’s how development finance institutions (DFIs) can mobilise large amounts of private capital: find projects that are close to commercial viability and only require a modest contribution from DFIs to get them over the line. That can be more efficient than having DFIs finance the whole project themselves and can act like a multiplier of scarce development finance. You might have noticed the idea getting some attention in policy circles recently.
This is something DFIs should be doing. BII mobilises private investors in many ways: by putting risk capital into ventures with large corporations so that they are willing to enter new markets, such as Safaricom, DP World, Kelix Bio and Mahindra & Mahindra; by founding energy generation and infrastructure businesses such as Ayana and Gridworks, whose projects attract private lenders, and individual infrastructure projects such as Kenhardt; and by anchoring private equity and credit funds, to give private investors the confidence to participate.
But investing alongside private investors is not the only thing DFIs should be doing. We also want DFIs to be making investments that are initially so far beyond commercial investors’ appetites that it is not worth trying to shoehorn them in (although we only ever invest if we see potential for commercial sustainability). That may be in lower income countries where risks are higher but there are also projects in middle income countries that cannot find willing commercial financiers and where changing their minds would be too costly. And sometimes we want patient public capital invested in enterprises to support more socially impactful business plans that commercial investors would not back.
The debate about mobilisation often revolves around data reported by the OECD and MDBs (each using somewhat different methodologies). These statistics record DFIs’ co-investments with private investors. But – and I am fighting the temptation to type in capitals – that’s not the only way of mobilising private investment.
Here are few others. You could build critical infrastructure, such as electricity supply, in places where private investors will not go, and local firms will respond by investing. You can build a portfolio of equity investments that are outside commercial appetites, help those companies develop a track record that will satisfy commercial requirements, and sell those that succeed to private investors (absorbing the losses from failure on your balance sheet). You can put equity or “tier 2” debt into financial institutions to be leveraged by borrowing, to finance lending. More generally, DFI investments that are outside commercial appetites can contribute to the slow process that turns frontier markets into emerging markets. None of these things are counted in the mobilisation statistics. Some of them could be in principle, but others are beyond feasible measurement.
Which brings us to how the mobilisation performance of DFIs is assessed. The most common way is to take the official mobilisation data and compare it against a DFIs’ total commitments that year. Here for example the portfolio-level mobilisation ratios of BII, PIDG and Mobilist are compared. There is nothing wrong with citing these ratios per se. It would be bizarre not to look at these numbers, and the authors recognise that things are not as simple as higher is better. But not everyone looking at these numbers will understand what lies behind them. A portfolio-level ratio reflects a DFI’s strategic choice of how much effort to put towards things that are counted in mobilisation statistics, and how much to put towards other mobilisation pathways, which are not. You are not necessarily getting more mobilisation bang for your buck from a DFI that reports a higher portfolio-level leverage ratio – you may be getting more of one type of mobilisation and less of the others. The development finance ecosystem would certainly not be improved if every DFI prioritised co-investment with private investors in big deals and nobody worked further beyond the commercial frontier. Mobilisation ratios also reflect a DFI’s choice of sector focus (infrastructure tends to get bigger numbers) and whether mobilisation consists of finding private co-investors for individual projects on the ground or bundling up existing assets and selling them to private investors in secondary transactions (or other intermediated approaches).
DFIs have multiple objectives and therefore their performance needs to be captured by multiple KPIs. But the point here is not that too much emphasis is being put on mobilisation to the detriment of other objectives, it is that the portfolio-level mobilisation ratio is itself an unreliable KPI for mobilisation, because it only captures the easy–to–measure fraction of it. Everyone knows, although we all probably need reminding from time to time, that it is a mistake in development to distort activities around whatever is easiest to count. Matthieu Pegon, head of blended finance at IDB Invest, has written about how the objective of blended finance should be to generate the highest possible social returns on investment, not the ability to report the highest possible “leverage ratios”. Mobilisation is a strategic priority for everyone right now, and if we want to make the right strategic choices, we must keep in mind everything we know about what it takes to stimulate investment, not obsess over one KPI.