Global development lender, World Bank, announced on Thursday that it had mobilised $112 billion in private capital for developing countries during the last financial year.
The bank’s chief hailed the decision as "adding another arrow to the quiver."
According to official data cited by AFP, private capital mobilisation had risen more than 60 percent since last year and is almost on par with the World Bank Group's own lending.
Read more: World Bank names Nobel laureate Michael Kremer as next chief economist
World Bank Group’s President Ajay Banga told AFP that the focus on private capital mobilisation was due to the stark reality of donors not having the funds to meet the world's development needs.
"We can't be lending $200 billion a year. We don't have it," he said. He also added that private capital augmented the bank’s operations and did not replace it.
Banga said that to increase the bank’s lending, countries would need to increase their contributions, which is unlikely in a world with very high debt-to-GDP levels.
Read more: Who is Michael Kremer, the Nobel laureate set to become World Bank’s next chief economist?
"Governments don't have that kind of fiscal headroom today," he said.
The World Bank usually offers low-interest loans and certain grants to member countries through a combination of two organisations under the group, the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA).
The Group’s president emphasised that IBRD and IDA lending could not grow to the requisite level.
The Bank’s private capital mobilisation strategy, however, would not be deployed indiscriminately, with funds and projects being offered in combinations that suit member states.
"These things are not either/or, and they're also not mutually exclusive," he said. "One size doesn't fit all."
Criticisms levelled against the use of private capital by multilateral development lenders said that it can shift commercial risks from investors onto public finances, which in turn could subsidise private profits.
Banga, however, sees private capital being crucial to address the scale of development financing needs.
"You got to remember that private capital will not go unless there is a proper return and proper demand," he said.
"You can't force countries to take private capital. It's going to have to be a mutually acceptable system," the chief added.
AFP, citing the World Bank, said that more than half of the Group’s lending and private capital mobilisation would go to five job-creating sectors: infrastructure and energy, agribusiness, health, tourism, and value-added manufacturing.
A variety of methods have been employed by the World Bank to increase its private sector mobilisation, which included prioritising the provision of regulatory certainty in emerging markets to its investors and taking on risk through guarantees and seed money in larger funds.
"The role of private capital mobilisation is to bridge the gap between what you need versus what you can generate from public financials and try and see if there's a way to de-risk that investment, to incentivise that investment, to make it more predictable," said Banga.
One of the novel methods adopted was to create an emerging markets asset class to attract large institutional investors.
The aim was to bring in investors to a bundle of projects where they may not otherwise have the expertise or risk appetite to evaluate on their own.
"I'm not going to invest in one water project in Kenya and one in Vietnam, but if you give me 10 packaged together every year worth $2 billion, and I get a Standard & Poors or Fitch or Moody's rating for them," then they become attractive, Banga said.
An example of the new approach was how the International Finance Corporation (IFC)—a WBG subsidiary—approached a transaction with Banco Industrial of Guatemala to support small and medium businesses.
With the IFC's support, the Guatemalan bank secured an $850 million financing package, including $750 million raised from international capital markets that the bank could not have reached on its own.
For the World Bank Group President, the work done in the last four years was just the start.
"This is wet paint, and as the paint dries, you get a little more result," he said.
"And I think that's what you're beginning to see," he added.
(With inputs from AFP)
