THIS weekend, the heads of most of the world’s major multilateral development banks (MDBs) are meeting at the Asian Development Bank here in Manila, following the World Bank Group-International Monetary Fund annual meetings held in Bangkok this week. These meetings are taking place in a global environment in which development aid is significantly declining, and so one major topic of discussion has been the need to mobilize more private investment. With the Philippines having recently been declared an “upper-middle-income country” (UMIC) by the World Bank, this conversation is of critical importance to us, as the country’s profile as a recipient of outside financial assistance for social, infrastructure and institutional developments has significantly changed.
First of all, the UMIC designation means that the Philippines has “graduated” from eligibility for lower-cost financing for development programs and projects, and fiscal support. Being statistically better-off economically, the country will have to pay higher interest rates for development loans, and will not be able to access as many outright grants as it did before UMIC. That obviously presents some budgetary challenges, but on the opposite side of the coin, it does potentially open up some new financing options.
What is, perhaps, unlucky for the Philippines is that this change in status has happened at a time when development assistance is being scaled back around the world. The US infamously slashed its overseas development assistance (ODA) outlays, and eliminated one of its biggest vehicles for that, the US Agency for International Development (USAid), last year. Other countries are also cutting back on their budgets for foreign aid, driven by increasingly uncertain global economic and geopolitical conditions, as well as the understandable need to focus on their own domestic well-being.
Even if this were not the situation, the need for development financing is so enormous that MDB funding or ODA from individual countries simply cannot meet it all. As just one example, which was discussed last week in the wake of the Asean Ministers of Energy Meeting and Asean Energy Business Forum events held in Manila, the region will require between $281 billion and $400 billion a year through 2050 to fund its clean energy transition aspirations, including the development of new sources of power and upgrading grid infrastructure. Sovereign and institutional funding cannot possibly cover all of that. In fact, the amount that will come through ODA and MDB channels would be no more than a rounding error compared to the overall financial need. And that is just one area of need; there are many others, including public health, poverty reduction, general infrastructure, education, governance and fiscal administration, and climate change adaptation and mitigation.
Understanding this, the MDBs have ramped up their efforts to mobilize private capital, although in most experts’ views, this is not something they are very good at, as it is a departure from the way they have operated for decades. It will take some time for them to absorb the experience that institutional investors already have in mobilizing capital and creating asset classes to be able to effectively offer “bankable” projects and programs. They will eventually achieve that, but in the meantime, perhaps, for a few years, there is going to be a bit of gap between national development aspirations — because every bit of MDB funding begins with a request from the beneficiary government — and what can actually be supported.
What this means for the Philippines specifically is that a great deal more rigor is going to need to be applied in designing programs and projects, and what support it can seek from MDBs and ODA sources is going to shift to more market-oriented mechanisms. This will not apply to everything, of course; there are some kinds of development initiatives and other assistance, such as disaster relief, that will always be cost sinks. Those that have some return-generating potential, however, should be maximized, so long as the cost-benefit balance remains favorable to the country. In those cases, the external support from ODA and development finance institutions can be used to “sweeten the deal,” so to speak, by being put to use as de-risking mechanisms such as loan guarantees.
One final point is that the government should be more open to private sector investment proposals; this same point has been made to the MDBs by some experts as well. To prevent private sector investors from taking unfair advantage of the government, working with the MDBs can help to develop more transparent and equitable project structures.
