The private sector activities of development finance institutions

This thesis focuses on the efforts by multilateral development banks (MDBs) and other development finance institutions (DFIs) to mobilise the private sector to fulfil the Sustainable Development Goals (SDGs) and the Paris Agreement on climate change. Capital mobilisation matters because MDBs/DFIs do not have sufficient financial resources to complete the work alone. Consequently, there is an imperative to understand the mechanisms and forces at work that either enhance or inhibit mobilisation. The literature review draws together knowledge from a range of disciplines and frames it against the SDGs for the first time in the context of development of finance. This review highlighted several gaps in the research, some of which are filled in subsequent chapters using a mixed methods approach. An empirical study of competitive conditions using the Panzar-Rosse test reveals the market for development finance to be a competitive oligopoly. This implies that crowding in of private sector commercial banks will face some headwinds. The three qualitative studies were derived from a unique set of elite interviews conducted with 22 senior, front-line investment bankers from 18 banks with a total asset base of $25.6 trillion. A detailed study of Preferred Creditor Status shows that it appears to have no value as a financial asset for banks but does influence risk appetite leading to increased mobilisation. The second study explores the ‘bankability’ of a project or investment, finding that the market structure and practices of MDBs can conflict with the private sector, and that in complete reporting and taxonomies create mismatches between the goals of MDBs and private sector banks. Finally, an exploration of deal execution and structuring highlights various conflicts that could inhibit mobilisation. Complex financial structures to demonstrate additionality can reduce the pool of available financing, securitisation is likely to have limited scope, and MDB governance processes can be a limiting factor on mobilisation. This thesis has reframed the literature on development finance, resolved some research gaps and created a new research agenda. It provides a new perspective on the mechanics of capital mobilisation with value for practitioners engaged with implementing the SDGs, both in MDBs/DFIs and the private sector