By Alain Godard
Before the COVID-19 crisis, the international community was facing a huge question: how to crowd in sufficient private sector capital to address the twin challenges climate change and sustainable development. MDBs’ own experiences over the years have shown that well-structured, sustainable, long-term, patient investment does pay off. But the challenge remained of how to demonstrate this to others and encourage much more of “the right kind” of investment, particularly in emerging markets and developing economies.
Many things hold back investment in partner countries (political risk, weak legal environments, regulatory uncertainties or penalties, lack of standardisation, weakly structured projects and/or weak deal flow, in spite of huge latent demand) all of which can lead to prohibitively high upfront costs for investors thinking about entering such markets.
Over the last 60 years the international community has relied on a range of multilateral and national development banks and institutions to do much of the heavy lifting associated with providing non-domestic finance to critical projects in these geographies. Over that time, our institutions built up often unique expertise and knowledge about how such investments perform and what investors can expect when they enter such markets.
The challenge remained, however, of how to share this knowledge, and data, more widely. At a project-by-project or investment-by-investment level, performance and risk data is usually highly confidential — making it available to others would undermine trust between project promoter and financier and could even reduce the chances of scaling up future deal flow.
The current pandemic is unprecedented and has already had hugely negative effects on developed economies. But in many ways developing economies are suffering twice: both from a severe domestic contraction and also from the disappearance of overseas financial flows on which they are often highly dependent. The resulting strain on public finances in partner countries is clear, and sovereign lenders, as well as their development banks, will need to find ways to deal with the situation while continuing to finance the projects and investments that can drive the recovery.
More than ever, MDBs and other financial institutions working in partner countries, will need to deepen cooperation and inter-reliance between themselves, to reduce overlaps and provide a fast and efficient response. Again data-sharing, this time between international institutions themselves, will be key.
Global Emerging Markets Credit Risk Consortium (‘GEMs’) — set up in 2009 by European Investment Bank Group and Wold Bank Group and now comprising 24 multilateral development bank and development finance institution members — can provide part of the answer. GEMs today collects together key financial data (at counterparty or investment level) from its members and provides an aggregation of that information to a level which protects confidentiality and also provides a statistically valuable output. The outputs already help member institutions build a common view of the risks associated with doing business in priority regions or sectors and has allowed for the deployment multilateral products and enhanced cooperation. The big step for GEMs institutions will be to make some of this aggregated data available publically to help potential investors to evaluate market opportunities, set return expectations and calibrate risk models in new markets.
The endeavour should be seen as part of a broader, necessary transformation of development institutions globally: going from being primarily providers of cheap financing to being providers of expertise, knowledge and data, through a “system” of development finance. It also represents a key step in the path towards recognising data as a strategic asset, in developmental finance, but also in other areas of publically-funded, policy-based investment; publically owned financial institutions have often been active for years in areas where private sector must now follow, and finding effective ways of sharing the risk, performance and impact experiences of those institutions with the wider investment community can be transformational in unlocking the volumes of investment that are needed to meet policy objectives. Finally, data is central to the digital transformation everywhere, but in particular in the financial sector; safe and effective ways of aggregating and making available sensitive information can help drive evidence-based investment patterns.
Data alone will not solve all the issues that investors face when evaluating the feasibility of new, sustainable investment opportunities — data will not, for example, remove political risk, regulatory uncertainty or provide contractual standardisation — but, at a time of record low interest rates in developed markets, it can help to encourage a virtuous cycle of sustainable risk-taking in new markets.
Views expressed in this publication are the author’s and do not necessarily reflect the views of the Paris Peace Forum.
Alain Godard is the Chief Executive Officer of the European Investment Fund. Mr. Godard previously served as the Director General of the Risk Directorate and Chief Risk Officer at the European Investment Bank and contributed to the design and the implementation of the European Investment Plan (EIP) and the European Fund for Strategic Investments (EFSI) in 2015. He was one of the architects for the establishment of the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM). Mr. Godard is also a founder and co-chair of the Global Emerging Markets Credit Risk Consortium (GEMs), an international consortium bringing together multilateral development banks, international financial institutions and national promotional banks working to promote investments in emerging countries by sharing expertise and financial statistics. GEMs is one of the projects presented at the Paris Peace Forum in 2020.