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Paying for Success: Catalysing Private Investment for Development
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Transcript of Paying for Success: Catalysing Private Investment for Development
Paying for Success: Catalysing Private
Investment for DevelopmentTheodore Talbot
Center for Global Development
SITE Development Day 2015
An emerging consensus
Public sector should create incentives
DFIs, IFIs, and MDBs should do this
Private sector’s unique, valuable role
1. Everyone’s doing it
2009-2011: Guarantees “mobilised” $15.3 bn
2013: DFIs wrote $11.5 bn in guarantees MDBs’ direct private sector investments doubled in 10 years: $30 bn in 2013
IFI Private Sector Commitments to Developing Countries, 1991–
2010
Data from “International Finance Institutions and Development Through the Private Sector”, IFC 2011
2. Everyone wants to do more of it
“ODA must…crowd in other funding sources…by playing an increasing role to leverage and catalyze public and private sources of financing.” – Development Committee joint statement
SDGs: a $2.5 tn annual gap
Needs Funding Shortfall0
1
2
3
4
3.9
1.4
1.2
1.3
$ t
rillio
ns /
year
Others
Infrastructure
Visualisation inspired by Shanti Krishnan, dalberg.com/blog
26%
2% - 5%
2001-2030: $9.6 Trillion
$8,000 - $22,000 / Km
3. We are doing it badly
Risk
Expect
ed R
etu
rn
T-Bills
Savings & CDs
Highly rated corporates
Equities
Frontier market assets
Raise returns
Reduce risk
Three options
Reduce riskGuarantees, various kinds of insurance
Increase returns
Paying for success
Subsidies, including concessional loans
Distribute subsidies conditional on performance
Guarantees in theory
Guarantee
Debt
Equity
“Addit
ionalit
y”
Guarantees in practice
Unidentified
Distortionary & tied
$10 mn facility, backstops ½ FV of defaults
E(Cost)
True additionali
ty
“In FY2013 the World Bank directly mobilized $1.1 billion of private capital through its guarantee and loan operations….In FY2013, IFC mobilized $3.2 billion for the infrastructure sector” – Global Monitoring Report 2014
Yet…
Demanding burden of proofInvestors are systematically, persistently, unanimously wrong
Possible– but unlikely
Public information > private information?
Proposition
2. But have unique benefits
3. Not a new idea– but flexible, powerful, and should be more widely used
1. Conditional subsidies carry the same cost
Hypothetical investment
80% $10 mn $3 mn$5 mn
$X social return
Four options & three instruments
1. Do nothingE(π) = 0.8(10-5-0.2x5)-0.2(5) = 2.2 < 3
Priva
te
$0
Publ
ic
Socia
l
2. Guarantee3 = 0.8(4) + 0.2(-5+G), G = 4
$0 $0
3. Subsidise3 = 0.8(10-5-r x 5) - 0.2(5), r = 0%
4. Pay for success0.8 = 0.8(B) + 0.2(0), B = $1
$-0.8
$3 $0.8X
$-0.8
$3
$-0.8
$3
$0.8X
$0.8X
Bridge international academies
Bridge international academiesPrimary schooling at $6 per month, income is $60 per person per month
$26 million for 237 new schools
Enroll 300,000 students
Equity from CDC & IFC, debt from OPIC
Donor’s options
Subsidise$10 million at 4%
Guarantee$9.92 of commercial loan
Pay for success$2.58 bonus per student-year
Same expected cost to donor
Donor’s optionsSubsidiseAll Bridge’s activities
GuaranteeShifts downside risk to taxpayer
Pay for successContestable, targetable, risk stays put
Different effects
Guarantee
Subsidise
P4S
Avoid moral hazard in project selection ✗ ✓ ✓Better performance management ✗ ✓ ✓
Improve targeting ✗ ✗ ✓Promote contestability ✗ ✗ ✓Avoid the costs of optimism bias ✗ ✗ ✓Build public support ✗ ✗ ✓Reduce monitoring and evaluation costs
✗ ✗ ✓
Not reinventing the wheel
AMCs GAVI– 25 countries & 500,000 early deaths averted
Create a contestable market for pre-agreed results
DIBs
Girls’ education outcomes in India, combat recidivism in the UK,…
Millennials to inherit $40 tn– huge potential market
Private financing, public returns
And public finance…
Project finance Payment by Results
Cash On Delivery
Aid
Getting subsidies right
1992: FITEL
5,000 towns & 541district capitals
41% & 74%
Additionality: $11
vs. $22
“Unique” features of guarantees?
Protection rackets
Information asymmetries
Commitment device
Paying for Success: Catalysing Private Investment for
Development
Theodore Talbot
Center for Global Development
Available at www.cgdev.org