Multilateral development banks to be less risk-averse as part of reforms to global financial system

MULTILATERAL development banks (MDBs) will be less risk-averse going forward, as part of ongoing reforms to fulfil their mandate as “derisking machines” for major infrastructure projects in emerging markets, said an executive of New Development Bank.

“Our main focus now is on derisking, and about using our very high creditworthiness with the fact that we have AAA ratings in such a way that we can take on the risks of the private sector… We want to become big derisking machines,” said Leslie Maasdorp, vice-president and chief financial officer of the New Development Bank, an MDB set up by Brics – a grouping of emerging economies comprising Brazil, Russia, India, China and South Africa.

The other ways MDBs are looking to reform their financing mechanisms include moving away from the more conservative business model of originating loans for a project and holding them to maturity, and instead considering to offload and sell these assets once returns are generated to free up more capital for lending, said Maasdorp. He was speaking on Wednesday (Nov 1) at a transition finance conference organised by the Singapore Exchange and Official Monetary and Financial Institutions Forum.

While discussions to reform MDBs had started as far back as two decades ago, the reform agenda has gained considerable momentum in the last two years over the urgent need of mobilising more developmental finance to address the climate crisis.

Reform efforts gained steam due to the launch of the Bridgetown Initiative – which called for an overhaul of the global financial system – by Barbados Prime Minister Mia Mottley at the 2022 United Nations Climate Change Conference, more popularly known as COP27.

Among ongoing efforts, Maasdorp said MDBs are looking at how they can provide more catalytic funding not just in individual projects, but in bigger projects that could have a multiplier effect. MDBs have also recognised that their capital adequacy frameworks and their use of concessional funding have been too conservative, he added.

For example, middle-income countries typically do not have access to concessional funds. This would disadvantage economies such as China and India, which are major emitters globally and need more capital to finance their decarbonisation initiatives.

MDBs could also look to currency financing, as projects can be more sustainable if the revenue generated from the project is in a global currency. 

Development financing is often tapped by emerging markets seeking cheaper costs of financing for larger infrastructural projects. This is because commercial investors, who typically focus on market-rate returns, price a higher cost of financing when investing in these markets due to concerns over higher risk.

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The use of development financing and public capital to lower the risk of such projects, especially in the areas of energy transition, to allow commercial investors to participate in them – a financing mechanism known as blended finance – has been touted as a possible solution to close the financing gap in these markets.

However, MDBs acknowledged that the amount of capital invested through such blended finance structures have not been able to scale despite industry efforts.

Joachim von Amsberg, special adviser to the president of the Asian Infrastructure Investment Bank, said the policy environment of emerging markets and the complexities involved in large-scale infrastructure projects have been some of the inhibiting factors.

The complexities in such projects have prevented large pension funds from deploying more capital to energy transition projects. For example, Leong Wai Leng, managing director and regional head of Asia-Pacific at Caisse de depot et placement du Quebec, said that the institutional investor has set up a US$10 billion fund for transition finance, but has only deployed less than 10 per cent of that amount.

Speaking at a separate panel, she noted that a company looking to decommission its fossil fuel plant, for example, has to subject itself to external audits and manage external stakeholders such as the local community and government. With many stakeholders involved, the interests of all parties may not be aligned.

Through regulatory certainty and the quality of contracts, governments have the ability to reduce the risks of such projects, said von Amsberg.

He added that concessional funding is scarce and that MDBs should allocate such funds into projects that can have the biggest impact. This includes setting up renewable energy projects in markets where the commercial interest has not been established yet, or technologies that are on the verge of becoming commercially viable.