Scaling Private Investment to Close the Development Financing Gap: Five Case Studies
This piece is drawn from a document of the same name, developed by INVEST and Prosper Africa. See the full report, with this introduction and five case studies, here.
At the recent International Monetary Fund (IMF)-World Bank annual meetings in Marrakech in early October 2023, World Bank President Ajay Banga articulated an ambitious vision and sobering reality for the development finance community at a time of accelerating poverty and climate change: “There are new frontiers to explore — like moving from small, bespoke loans to large, standardized investments that can be packaged. If done right, we could draw in institutional investors — pension funds, insurance companies, sovereign wealth funds — and put their $70 trillion to work in developing countries. This has been the thing of fantasy for years, but hope isn’t a strategy.”
Since the COVID-19 pandemic, the financing gap for developing countries to reach the Sustainable Development Goals (SDGs) has only grown, reaching $4.5 trillion in 2022. [1] Even though closing this gap would take just 1% of total global financial assets of $400 trillion, the development finance system has struggled for decades to attract private capital to riskier developing markets, mobilizing only an estimated $45 billion between 2018 and 2022. [2] The main constraints to more private capital flowing are the perceived and actual risks in developing markets that restrict private investors from deploying funds. Nearly 90% of all developing countries are classified as sub-investment grade risk, placing them outside the fiduciary obligations that investors have to their shareholders and retirees.
At the 2022 COP27 meetings in Egypt, five large institutional investor groups representing over $130 trillion in assets, brought together by Prosper Africa, USAID, and Convergence, released a blueprint for a more intentional strategy to achieve scale-level private capital flows in developing markets. [3] It called for greater use of blended finance (the strategic use of public capital to de-risk and crowd in private capital) in standardized structures that could package and distribute risk to a wider universe of mainstream investment actors.
In these structures, donors, development banks and philanthropic organizations collaborate to provide risk-tolerant, “catalytic” capital that can leverage larger, more diverse pools of capital from commercial investors. Blended finance structures help manage and reallocate risks, reduce transaction costs, and address information gaps that prevent institutional investors from entering developing markets. One year after the release of this capital mobilization blueprint, despite their potential to capture a much wider universe of additional commercial investment and crowd in the expertise and innovation of the private sector, blended finance structures remain grossly underutilized.
Despite the slow progress of the overall system to drive change, this report analyzes a set of five innovative de-risking approaches that have achieved notable success in mobilizing private capital in new and replicable ways. The approaches described in this report primarily target the infrastructure, housing, and climate sectors and involve coordination among local actors, development finance institutions (DFIs), and multilateral development banks (MDBs). Taken together, the case studies demonstrate how concessional capital, technical assistance, and guarantees — supported by donor agencies and MDBs — will help over time to unlock more than $2.6 billion in private capital with less than $135 million provided in technical and financial assistance. [4]
These five case studies show how donors and MDBs effectively engaged private institutional investors, leading to billions in private sector investment for development goals. They also synthesize key insights and recommendations on ways in which donors, MDBs and other development actors can build on and replicate this nucleus of success and harness the scale and sophistication of global institutional investor assets.
Blended Finance Structures
Donors, MDBs and other development finance actors can learn from blended finance transactions to achieve greater impact. This report specifically highlights three intervention options, as originally identified by Convergence:
Lessons Learned for Donor Agencies and Development Finance Actors
Donors and MDBs play a key role in mobilizing institutional investment and integrating private and public capital to achieve development impact. Integration between public and private actors will need to accelerate if the development finance community hopes to close a trillion-dollar annual investment gap for the SDGs.
Even relatively small amounts of funding from donors and MDBs, strategically provided in blended finance structures, have proven effective in driving large-scale investment. These organizations are exceptionally well-positioned to play a catalytic role in this market due to their credibility and their ability to coordinate actors within the development ecosystem. They can take on and transfer high levels of risk while providing expertise in developing markets and operating under a credible mandate for development impact.
Through the five transactions outlined in this report, donors and MDBs effectively shifted risk-return calculations for institutional investors, leading to billions of dollars in private sector investment for development. Acting as market champions, they drove the adoption and implementation of these innovative financial mechanisms. In some cases, as with the Room2Run synthetic securitization and the Eastern and Southern African Trade and Development Bank (TDB) share issuance transactions, MDBs pursued innovative structures that apportioned risk more effectively and enabled them to leverage new sources of private capital.
In other cases — such as the transactions involving the Asset Owner’s Forum South Africa (AOFSA), Green Guarantee Company (GGC), and Caisse Régionale de Refinancement Hypothécaire (CRRH) — donors provided essential financial resources, technical assistance, risk capital, and expertise to help navigate structural complexities and risk perceptions. Donor involvement helped build trust, establish partnerships, and facilitate knowledge sharing among stakeholders. Donors have also been instrumental in advocating for blended finance within the development ecosystem, raising awareness about its benefits and potential and thus mobilizing private capital in markets that would otherwise not have received such investments.
See the following case studies in the full report here:
1. Asset Owners Forum South Africa
With support from USAID and Prosper Africa, African pension funds have formed consortiums to successfully scale up local investment in infrastructure, driving African savings into real economy investments. Through investment capacity building and collective risk sharing via the AOFSA Secretariat, AOFSA members have committed over $400 million to infrastructure and other alternative asset classes that they have been reluctant to invest in previously.
2. Caisse Régionale de Refinancement Hypothécaire (CRRH) bond issuance
Technical assistance funding from Prosper Africa, in partnership with USAID and a guarantee from the U.S. Development Finance Corporation (DFC), enabled a West African regional mortgage refinancing company to access $274 million in cheaper, longer-term financing from global capital markets. This private sector funding will be used to provide affordable housing access to an estimated 6,000 households in the region, impacting over 45,000 individuals.
3. Green Guarantee Company
Guarantees can unlock significant pools of capital for climate adaptation and mitigation projects in developing countries by enhancing the credit ratings of borrowers and specific projects. The Green Guarantee Company (GGC) is the first privately run credit guarantor dedicated to climate solutions in developing markets. The GCC’s initial balance sheet of $100 million will be leveraged more than tenfold to mobilize $1 billion in global institutional capital towards climate finance. Prosper Africa, in partnership with USAID and other donors, have provided the initial seed funding, but the expectation is that GGC will raise a multiple of this in private capital moving forward to support its objective of unlocking scale-level private investments in climate solutions.
4. Room2Run synthetic securitization
MDBs can adopt the widespread commercial banking practice of balance sheet optimization to increase their capacity to lend towards the SDGs while reducing their reliance on already strained donor budgets. One such approach is synthetic securitization, which enables MDBs to transfer risks in their portfolio to the private sector — specifically, institutional investors. This approach simultaneously opens up more space on MDB balance sheets for lending and provides a credible avenue for private investors to take more risk in developing markets. In the 2018 Room2Run transaction, the African Development Bank (AfDB) pioneered this approach, synthetically securitizing $1 billion in private sector loans to expand its lending capacity by $650 million, with zero losses to date. While MDBs can adopt these proven financing strategies independently, DFIs and donor agencies can support increased adoption by offering guarantees and/or funding for technical assistance.
5. TDB Class C green share issuance
MDBs are exploring new ways of attracting institutional capital for climate investments, reducing their reliance on donor funding by providing private investors with investment-grade exposure to emerging markets. In 2022, the Eastern and Southern African Trade and Development Bank (TDB) began offering “Green + Shares” to both public and private sector investors. Each dollar financed by these green shares will mobilize $3 of green funding from TDB. DFIs and donors can play a catalytic role in equipping MDBs with the right technical expertise and credibility to crowd in private sector climate finance through these innovative structures.
Citations
[1] OECD (2022), Global Outlook on Financing for Sustainable Development 2023: No Sustainability Without Equity, OECD Publishing, Paris.
[2] OECD (2023), Private finance mobilised by official development finance interventions, Development Co-operation Directorate, OECD Publishing, Paris.
[3] Convergence, USAID, and Prosper Africa (2022). The Action Plan for Climate and SDG Investment Mobilization.
[4] Capital mobilization calculation of $2.6 billion includes $400 million in infrastructure investment by the Asset Owners Forum South Africa members, $650 million of additional lending headroom made available through Room2Run, $300 million from the Trade and Development Bank’s climate funding deployment, an estimated $1 billion of climate capital unlocked with the Green Guarantee Company, and $274 million raised through the Caisse Regionale de Refinancement Hypothecaire global bond issuance.
