By Aniket Shah | November 17, 2015
National development banks can play a decisive role in financing the Sustainable Development Goals (SDGs) and the transition to a low-carbon energy future. Given their size and potential, these financial institutions do not receive adequate attention in global financial or development discussions. For the sake of sustainable development, this must change.
To achieve the SDGs, the United Nations estimates that an additional $2-3 trillion of investment will be needed, per year, in energy, infrastructure, agriculture, health and education. Specifically, there remains an annual $1 trillion infrastructure financing gap, mostly in emerging economies, to be filled. Relative to a $110 trillion global economy and over $100 trillion of assets of institutional investors in the OECD alone, this should be manageable. Yet, the critical question remains: what are the right financial institutions to intermediate saving for sustainable investments? National-level development banks are a major part of the answer.
Development banks are financial institutions that provide long-term capital and advisory services for infrastructure projects, businesses, agriculture and other sectors whose financial needs cannot be served solely by the public sector, commercial banks or capital markets. They are very often publicly funded, or at least initially capitalized, by public resources. They range from international institutions such as the World Bank and the Asian Development Bank, to national level organizations like the China Development Bank, to sub-national institutions such as the Chicago Infrastructure Trust or the Connecticut Green Bank in the United States. As these examples suggest, development banks are policy instruments that exist both in the developed and developing world, regardless of the level of economic development.
Although much attention is given to global development banking institutions such as the recently announced Asian Infrastructure Investment Bank, national-level development banking institutions will play an even more critical role in the achievement of the SDGs.
National development banks have played a crucial role in economic development since 19th century Europe. In 1852, Credit Foncier and Credit Mobilier were launched in France to accelerate investments in agriculture and manufacturing. They were critical in helping Continental Europe catch up to Great Britain in the industrialization process. More recently in the 20th century, national development banks have helped former colonies to mobilize long-term investments into their economies, from China to India to Ethiopia.
National development banks come in all shapes, sizes and histories. A 2012 survey by the World Bank is quite illuminating. Out of the 90 development banks from 61 countries that responded to the survey, 39% were founded between 1990 and 2011. They represented assets of over $2 trillion, with the China Development Bank, Brazil Development Bank and Kreditanstalt fuer Wiederaufbfau (KfW) of Germany being larger than the World Bank itself.
Over 70% are fully state-owned institutions, whereas others, including the Credit Guarantee Corporation of Malaysia, have part private ownership. Despite the expansion of private sector investment vehicles and general deepening on financial markets, development banks remain critical for two reasons: 1) the need for public-private partnerships for infrastructure investments, regardless of location, and 2) the growing shortage of long-term capital from commercial banks and capital markets due to changes in regulation of pension funds and banks.
So what specifically can national development banks do to support the financing the sustainable development goals?
First, national development banks must lead on building robust pipelines of bankable projects for infrastructure financing. Institutional investors–namely sovereign wealth funds, insurance companies and pension funds–are looking to significantly increase exposure to infrastructure assets, but are not finding enough opportunities to do so. This is a true public policy failure of global dimensions. National development banks can serve as the critical bridge between the planning of infrastructure investments by government and the proper structuring to crowd-in private capital. They may be the only financial institution that can serve as this bridge.
Second, national development banks should guide local savings pools on how to support and invest in local sustainable development. This is a key modality that has not yet been analyzed. The growing savings pooling in the developing world must be used to finance domestic development, as opposed to purchasing overseas securities for the sake of diversification. National development banks should engage with domestic pension funds and insurance companies and come up with agreed to targets for investments.
Third, national development banks should lead on the transition to a low-carbon future. For high-income countries, this means aligning investment with long-term decarbonization strategies. This includes creating new financial instruments– including more aggressive credit guarantees and risk mitigation products–that will attract private capital into low-carbon energy solutions and large scale infrastructure. For low-income countries, this will mean aligning investment with climate adaptation plans. The growing number of Green Banks–ranging from the UK Green Investment Bank to the Malaysia Green Bank–shows how this can be done.
Fourth, national development banks must build a presence in the global financial and development discussions. A Global Development Banking Forum, co-chaired by the World Bank and the Asian Infrastructure Investment Bank, should be established with bi-annual meetings in Washington DC and Beijing. Such an initiative would accelerate learning and idea sharing between the hundreds of national and sub-national development banking institutions, and the outcome of this could be tremendous.
National development banks, when structured properly, embody exactly what is needed to finance sustainable development: public-private partnership and long term capital deployment. Neither the public nor the private financial communities can do this alone. These institutions should be reexamined and elevated in importance to support the coming transitions in our global economy.
Aniket Shah is the Program Leader for Sustainable Finance at the Sustainable Development Solutions Network. He has been seconded from Investec Asset Management, a leading emerging markets investment firm, where he was a global investment strategist and researcher.