Paying for Success: Catalysing Private Investment for Development

Paying for Success: Catalysing Private

Investment for DevelopmentTheodore Talbot

Center for Global Development

SITE Development Day 2015

An emerging consensus

Public sector should create incentives

DFIs, IFIs, and MDBs should do this

Private sector’s unique, valuable role

1. Everyone’s doing it

2009-2011: Guarantees “mobilised” $15.3 bn

2013: DFIs wrote $11.5 bn in guarantees MDBs’ direct private sector investments doubled in 10 years: $30 bn in 2013

IFI Private Sector Commitments to Developing Countries, 1991–

2010

Data from “International Finance Institutions and Development Through the Private Sector”, IFC 2011

2. Everyone wants to do more of it

“ODA must…crowd in other funding sources…by playing an increasing role to leverage and catalyze public and private sources of financing.” – Development Committee joint statement

SDGs: a $2.5 tn annual gap

Needs Funding Shortfall0

1

2

3

4

3.9

1.4

1.2

1.3

$ t

rillio

ns /

year

Others

Infrastructure

Visualisation inspired by Shanti Krishnan, dalberg.com/blog

26%

2% - 5%

2001-2030: $9.6 Trillion

$8,000 - $22,000 / Km

3. We are doing it badly

Risk

Expect

ed R

etu

rn 

T-Bills

Savings & CDs

Highly rated corporates

Equities

Frontier market assets

Raise returns

Reduce risk

Three options

Reduce riskGuarantees, various kinds of insurance

Increase returns

Paying for success

Subsidies, including concessional loans

Distribute subsidies conditional on performance

Guarantees in theory

Guarantee

Debt

Equity

“Addit

ionalit

y”

Guarantees in practice

Unidentified

Distortionary & tied

$10 mn facility, backstops ½ FV of defaults

E(Cost)

True additionali

ty

“In FY2013 the World Bank directly mobilized $1.1 billion of private capital through its guarantee and loan operations….In FY2013, IFC mobilized $3.2 billion for the infrastructure sector” – Global Monitoring Report 2014

Yet…

Demanding burden of proofInvestors are systematically, persistently, unanimously wrong

Possible– but unlikely

Public information > private information?

Proposition

2. But have unique benefits

3. Not a new idea– but flexible, powerful, and should be more widely used

1. Conditional subsidies carry the same cost

Hypothetical investment

80% $10 mn $3 mn$5 mn

$X social return

Four options & three instruments

1. Do nothingE(π) = 0.8(10-5-0.2x5)-0.2(5) = 2.2 < 3

Priva

te

$0

Publ

ic

Socia

l

2. Guarantee3 = 0.8(4) + 0.2(-5+G), G = 4

$0 $0

3. Subsidise3 = 0.8(10-5-r x 5) - 0.2(5), r = 0%

4. Pay for success0.8 = 0.8(B) + 0.2(0), B = $1

$-0.8

$3 $0.8X

$-0.8

$3

$-0.8

$3

$0.8X

$0.8X

Bridge international academies

Bridge international academiesPrimary schooling at $6 per month, income is $60 per person per month

$26 million for 237 new schools

Enroll 300,000 students

Equity from CDC & IFC, debt from OPIC

Donor’s options

Subsidise$10 million at 4%

Guarantee$9.92 of commercial loan

Pay for success$2.58 bonus per student-year

Same expected cost to donor

Donor’s optionsSubsidiseAll Bridge’s activities

GuaranteeShifts downside risk to taxpayer

Pay for successContestable, targetable, risk stays put

Different effects

Guarantee

Subsidise

P4S

Avoid moral hazard in project selection ✗ ✓ ✓Better performance management ✗ ✓ ✓

Improve targeting ✗ ✗ ✓Promote contestability ✗ ✗ ✓Avoid the costs of optimism bias ✗ ✗ ✓Build public support ✗ ✗ ✓Reduce monitoring and evaluation costs

✗ ✗ ✓

Not reinventing the wheel

AMCs GAVI– 25 countries & 500,000 early deaths averted

Create a contestable market for pre-agreed results

DIBs

Girls’ education outcomes in India, combat recidivism in the UK,…

Millennials to inherit $40 tn– huge potential market

Private financing, public returns

And public finance…

Project finance Payment by Results

Cash On Delivery

Aid

Getting subsidies right

1992: FITEL

5,000 towns & 541district capitals

41% & 74%

Additionality: $11

vs. $22

“Unique” features of guarantees?

Protection rackets

Information asymmetries

Commitment device

Paying for Success: Catalysing Private Investment for

Development

Theodore Talbot

Center for Global Development

Available at www.cgdev.org