Five hundred public development banks from around the world and key financing and official development assistance stakeholders, met by VTC on October 19 and 20, 2021 in Rome for the second edition of the Joint Finance Summit in order to « reiterate and strengthen their commitment to joint action for climate and sustainable development. This is an unprecedented collective approach which, if successful, could greatly benefit the African continent.
By Jacques Leroueil
This second Finance in Common summit organized by Cassa Depositi e Prestiti- the Italian Deposit Bank- as part of the Italian presidency of the G20, in partnership with the International Fund for Agricultural Development (IFAD), aimed to capitalize on the momentum generated during the first edition, held in November 2020 in Paris. The objective is to mobilize and coordinate the operations of public finance stakeholders around issues related to the implementation of the Paris Agreement on Climate Change and the 2030 Agenda for Sustainable Development.
« We need to ensure that investments are going in the same direction, that we share standards and methodologies, and that we go further in the convergence of strategies and co-financing, » Rémy Rioux, Chief Executive Officer of the French Development Agency (AFD), said at the first Finance in Common summit in Paris. One year later, the ambition is still the same: bringing into line the actions of public finance stakeholders, whose profiles are often very disparate. In fact, beyond a few common points (state-controlled institutions, public service mission, legal and financial autonomy, etc.), these different development banks (bilateral, regional or multilateral) are characterized first and foremost by very diverse fields of intervention (social housing, agriculture, energy, SMEs, exports, etc.) and by different financial strengths. The World Bank ($157 billion committed between April 2020 and June 2021) and the African Development Bank ($93 billion in capital in 2020) cannot be compared, for example, to the Caisse des dépôts et consignations (CDC) in Burkina Faso, which was founded in 2017 with a capital endowment of 20 billion CFA francs ($35 million).
Focus on financing projects in agroecology and agribusiness
The new development goals set by the summit organizers are however global and shared by all development finance institutions, such as the fight against global warming, preservation of biodiversity or protection against pandemics. For this 2021 edition, the Finance in Common summit has focused on the issue of financing projects in agro-ecology and agribusiness with the launch of a collective financing platform to increase greener and more inclusive investments in agriculture and processing activities. This joint commitment by the PDBs should benefit, in particular, Africa which is home to 60% of the world’s available arable land and where the potential for increasing agricultural yields is the greatest.
It is precisely this type of consensus around key issues that could make the difference for public finance stakeholders, because ‘these institutions [PDBs] initiate or promote programs and projects of general interest that are essential for economies, thanks to instruments that mix public resources and funds raised on financial markets. They chart out paths and create dynamics, » AFD reminds us on its website. Their role as a « leveraging force » is even more crucial at a time when most nations must redouble their efforts to achieve the 17 Sustainable Development Goals [SDGs] set by the United Nations as part of the 2030Agenda.
A financial and political lever
This collective lever for action, represented by the public development banks, takes two forms, one financial and the other political. In financial terms, the decisive advantage provided by the PDBs is their ability to raise funds where money is abundant and interest rates low, and then redirect them to developing regions (Africa, Latin America, Asia, etc.) where such capital is rare and expensive. The African Development Bank, the largest borrower on the African continent, for example, had total outstanding borrowings equivalent to US$ 36.4 billion as of December 31, 2020. They are split into 22 currencies (US dollars, euros, yen, Swiss francs, Brazilian real, Indonesian rupiah, Mexican peso, Russian ruble, Hong Kong dollars, etc.) and obtained on very advantageous terms. At the height of the COVID-19 health crisis, in late March 2020, the AfDB, which enjoys the highest credit rating, « AAA », awarded by international rating agencies (Fitch, Moody’s, S&P), raised three billion dollars on the international financial markets through a social bond issue at 0.75%, intended to mitigate the effects of the pandemic on the lives of the African population and the continent’s economies. No state on the continent can currently raise capital at such low rates, as African sovereign bonds are most often issued with annual coupon rates ranging from 6 to 9%.
Better still, beyond their financial clout, public banks have a strong « political » knock-on effect on private sector actors – banks, private equity funds, pension funds, but also NGOs or philanthropic institutions – by making them more sensitive to certain contemporary issues (energy transition, sustainable development, good governance, etc.) whose impact is potentially transformational.
Ongoing search for transformational impact
Ian Cochran and Alice Pauthier, researchers at the Institute for Climate Economics (I4CE), a non-profit organization specializing in economics and finance, point out that this ongoing search for « impact » by public development banks « implies not only increasing the volume of financing, but also, in some cases, rethinking the financing tools to be used – and how to use them ». Citing the concrete example of renewable energy development, the two analysts explain that « a public bank can finance pilot projects for new technologies that are not yet mature or support the planning and construction of an electricity grid capable of incorporating a growing proportion of renewable energy. […]And in some cases, accompany the transition of key companies in carbon-intensive sectors of the economy by using their leverage as shareholders and financiers to encourage them to adopt and implement decarbonization strategies »
These are all major assets provided by development finance institutions, whose overall activity has never been so sustained (+25% of financing between 2019 and 2020 for the 26 members of the International Development Finance Club [IDFC]), due to the COVID-19 crisis. However, it will be necessary to meet the enormous needs not yet covered: according to the OECD, some 4,200 billion dollars of annual financing would be missing for developing countries to achieve the SDGs by 2030. The vast majority of these countries are African.
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