## Mobilizing Private Finance for Development

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**Canonical URL:** [Mobilizing Private Finance for Development](https://www.imf.org/-/media/files/news/seminars/2021/sdg-event/luc-eyraud-and-adrian-peralta-imf.pdf)

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### I. Need to mobilize more private finance in Africa
- Large development needs in Africa; likely to get even larger post Covid.
- Additional SDG needs of 20 percent of GDP annually in African countries.
- Focus on 5 sectors: roads, electricity, water, education and health.
- Needs are computed for 2030 but expected to be recurrent afterwards.
- Needs could be covered from public and private sources.
- SSA median: 19 percent of GDP (source: Gaspar and others (2019)).
- African countries have a large domestic revenue mobilization potential (3-7% of GDP in medium term).
- If the international community delivers on the development assistance targets, the scaling-up of official aid would make a significant contribution toward meeting development needs (e.g., 4-5% of GDP if ODA reached 0.7% of GNI).
- Private investors could bring at least 3% of GDP of additional financing to development projects by the end of the decade.
- International flows to Africa are low and go predominantly to non-SDG sectors; FDI Inflows, 2018: Europe, 19.7; Asia, 8.5; North and Central America, 5.7; Latin America & Caribbean, 1.0; Middle east and North Africa, 0.3; SSA, 0.7 (Percent of global GDP).

*Authors: Luc Eyraud and Adrian Peralta (IMF); presentation based on a 2021 IMF paper.*

### II. Obstacles to greater private sector participation in Africa
- Investment returns were high in the 2000s but have declined during the past decade.
- Top 3 risks (from investors’ surveys):
  - Elevated project failure.
  - High currency depreciation.
  - Difficulties to divest.
- Many projects are not perceived as “investment-ready” (well-developed and advanced, financially viable, sufficiently large).
- Currency risk and exit risk reduce investor appetite.
- Financial market underdevelopment, weak protection of investors’ rights, and some capital account restrictions impede exits.

### III. Creating an environment more private-finance friendly
Three complementary approaches:
- Addressing country risks.
- Better designed sectoral policies.
- Government incentives.

Key measures under each approach:
- Addressing country risks:
  - Expand project preparation facilities to enlarge the pipeline.
  - Mitigate currency risk through prudent macroeconomic policies, sound FX management, and hedging mechanisms.
  - Reduce exit risk via financial market development, better protection of investors’ rights, and prudent removal of some capital account restrictions.
- Improving the design of sectoral policies:
  - Price setting mechanisms that enable cost recovery.
  - Regulations providing a conducive framework for the private sector to operate (e.g., free access to education sector).
  - Transparent public sector governance when the private sector works closely with SOEs (e.g., distribution and production of electricity).
  - Adequate provision of complementary inputs (e.g., skilled personnel).
- Providing the right public incentives:
  - Improving the business environment is just the first step.
  - Most development sectors present characteristics that hinder private sector involvement (e.g., initially high costs/low returns, long implementation periods, necessity to maintain universal access).
  - Government incentives are often necessary to attract investors in these sectors and ensure that projects come through.

Design principles for government incentives:
- Should address clear market failures.
- Temporary.
- Transparent.
- Display additionality.
- Leave sufficient risk to private parties.
- Minimize risk of contingent liabilities for the state.

On subsidies, guarantees, and blending:
- Subsidies are often more efficient than guarantees: more transparent, less fiscal risk, and less likely to distort incentives.
- Challenge is to attract private investors without overcompensating them.
- Blending: transfer the cost of public incentives to donors; several blending facilities exist.
- New paradigm is very promising.
- Scaling up blending may create challenges: fragmentation; complexity and lack of public awareness; risk of over-subsidizing some private investors, while excluding others from the market; lack of transparency.

### IV. Conclusions and policy lessons
- Africa needs more private finance to achieve its development objectives. Sole reliance on public investment is not sustainable.
- Raising the contribution of private finance by 3% of GDP by the end of the decade is a realistic aspiration.
- Main problem is that returns have declined, and risks are still high in Africa.
- Business environment reforms (project preparation, financial development, judicial reforms) and sectoral policies are key to improving risk-adjusted returns.
- Public incentives are often needed to make projects more attractive to private investors. But this entails costs and tradeoffs, which can be mitigated by sound policy design.

Considerations by country type:
- The choice between public and private finance approaches needs to pay heed to country circumstances.
- Middle-income economies with relatively strong institutions and market access are more attractive to international investors and could benefit more significantly from programs meant to catalyze private investment.
- Low-income countries and fragile states have a smaller economic size and sometimes weaker state capacity. They are less likely to attract international investors. Raising more official aid and channeling it to government budgets, while improving public expenditure efficiency, may be a safer and more actionable way of investing in infrastructure.

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_Source: https://www.imf.org/-/media/files/news/seminars/2021/sdg-event/luc-eyraud-and-adrian-peralta-imf.pdf_