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Development finance: Filling today’s funding gap

The Business and Sustainable Development Commission, led by Lord Mark Malloch-Brown and with business leaders from around the world, reports that it will need about $ 2.4 trillion a year for additional investment to achieve the Sustainable Development Goals (SDGs) by 2030. It also estimates that achieving those goals could open up $ 12 trillion of investment opportunities in four sectors – food and agriculture, sustainable cities, energy and building materials, health and welfare. [1] While that represents a huge opportunity, it also raises the question of what options are available to close the current financial gap.

There are at least four options to fill that void:

An aggressive pursuit of efforts aimed at reducing or eliminating trade barriers to market access, hindering the delivery of goods and services across borders, and disallowing direct foreign investment.
Extending the official development assistance (ODA) from the current trend of nearly $ 160 billion a year.
Making more money from domestic resource promotion (DRM) and environmental development that allows for private and financial sector investment.
Increasing foreign and domestic investment in low- and middle-income countries by reducing the involvement of development finance institutions (DFIs) and various development banks (MDBs).
The focus of this paper is on the fourth option – development finance.

Development funds can be broadly defined as the use of public sector resources to facilitate private sector investment in low- or middle-income countries where business or political risk is too high to attract private investment only, and where investment is expected to have a positive impact on development in the host country. Development finance institutions use direct loans, loan guarantees, equity investments, and a variety of other products to support and strengthen these investments – and to reduce political and commercial risks.

Co-Chair – Consensus for Development Reform (CDR)
In recent years, development finances have become increasingly important as a tool to fight global poverty and reduce income inequality. In many cases, it has been a key contributor to the ODA and that includes implementing the SDGs. While the Millennium Development Goals (MDGs) were focused on increasing donor assistance to developing countries, the SDGs included the goals of each country and emphasized all kinds of funding, especially from the private sector. Agenda 2030 recognizes that the private sector is not only a source of income, but also a source of jobs, development, technology, knowledge, and practical experience.

Strengthening the involvement of DFIs and MDBs to facilitate greater corporate investment in developing countries could potentially make great strides in inclusive economic growth and opportunities. To see what can happen, DFIs need to secure leadership and work more collaboratively than ever to borrow, co-operate, and make more money available at affordable prices.

In the case of the United States, the first important step is to equip the US government with a development finance center with the many tools and powers that other DFIs have in Europe and Japan. Overseas Private Investment Corporation (OPIC), created in 1971 as a subsidiary of USAID, is America’s largest development finance firm. OPIC, which has not changed significantly over the past 40 years, offers three different products: direct lending and loan guarantees; political risk insurance; and private equity funds.

Direct loans and loan guarantees from OPIC can go up to $ 350 million and are only available if commercial lenders or financial intermediaries are unable or unwilling to lend on their own. Political risk insurance protects the consumer from foreclosure, financial instability, and political violence and is only available if commercial insurers are unwilling to take on all the risks themselves. And private equity funds are designed to encourage investment in high-quality and / or high-quality areas where there is insufficient investment, such as in agribusiness in sub-Saharan Africa. OPIC’s participation takes the form of a large secured loan, which means that, out of the fund, OPIC returns its original loan and interest, before private investors get a return.

In FY 2017, OPIC approved $ 3.8 billion in new commitments to 112 projects, and increased its total exposure to $ 23.2 billion. Currently, it has a $ 29 billion limit on total commitment. OPIC charges premiums for its insurance, and its fees for its services, and makes more money each year than it has been in costs since its inception. In FY 2017, OPIC generated $ 262 million and had operating costs of $ 70 million. In short, OPIC makes a living and makes money for American taxpayers.

While these numbers are impressive, European DFIs (collectively part of the Association of European Development Finance Institutions or EDFI), have commitments of $ 45 billion, or twice the size of OPIC. When one compares the number of OPIC and EDFI commitments (tens of millions) with those made by China’s One Belt One Road (hundreds of billions), the difference is huge, even if it does not include China’s commitment to projects in Africa and Latin America. Indeed, from 2000-2014, China’s illicit development investment contributed $ 276 billion to more than 4,300 projects in 140 countries.

Aside from the problem of size and breadth, OPIC has other problems with its European and Japanese peers. For example, OPIC can pay for transactions, but unlike its peers, it cannot invest in equities

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