World Economic Forum Financing for Development Program

Status Report on Enhancing Official Sector Leverage:

Preliminary Recommended Action Areas & Next Steps for Further Research

(first incomplete discussion draft 2/ 12/ 05 – further input needed from participating experts)

BACKGROUND: The World Economic Forum (WEF) program in support of the United Nations Financing for Development Initiative (FfD) is responsible for developing concrete recommendations on how to enhance official sector leverage in support of development finance for the review of the international policy community. Immediate improvements are critical to delivering on the Monterrey Consensus and the Millennium Development Goals, given the recognized imperative of supplementing limited official resources and the indisputable critical role of private sector in increasing growth and the standard of living in developing countries. The WEF FfD recommendations are to be finalized by July 2005 with presentations at the General Assembly and the annual World Economic Forum CEO meeting in Davos.

STATUS OF RESEARCH: In the six months of the initial research phase from May-December 2004, over 150 experts from across the public and private sectors have been consulted on a not-for-attribution basis. Consultations have included a workshop in Sao Paulo with extensive discussions on critical action steps that need to be taken by official sector entities. Experts from both the public and private sectors have submitted over 27 specific proposals [COUNT NUMBER OF PROPOSALS HERE]. The research methodology underlying this report is dedicated to including those expert assessments and suggestions as an invaluable resource in guiding senior decision makers in the official sector responsible for most effectively employing official sector resources.Please note this is only a preliminary first status report, so research is incomplete and recommendations are tentative, with changes certain before the final report is submitted in July 2005.

PRELIMINARY CONCLUSIONS: The overall consensus conclusion from the research to date is that official sector resources can be much more effectively leveraged in mobilizing private sector investment, increasing the available finance for developing countries by billions of dollars, and resulting in huge advances towards meeting the Millennium Development Goals. However, to realize this tremendous potential, radical change is needed throughout the official sector, encompassing financial engineering, the process of how official sector institutions interact with the private sector, and the very structure of the institutions themselves. The preliminary recommendations in this status report are therefore far-reaching, with implementation of the recommended action steps requiring committed focused leadership from the executives responsible for official institutions and support from their political constituencies.

FEEDBACK NEEDED: This draft status report is intended to facilitate feedback from experts in the public and private sectors who are willing to contribute their detailed suggestions in two areas:

Toward this end of facilitating senior official sector review, the proposals received to date have been grouped in seven overall “action focus areas,” with broad overarching general recommendations. These seven preliminary action recommendations are listed in the below Executive Summary.

Each of the seven broad action recommendations is accompanied with a more detailed section spelling out specific “recommended action steps.” Providing as much detail as possible is critical to insuring these recommendations culminate in actual changes with concrete benefits for all stakeholders. The rationale for providing detailed action steps from both public and private sector experts is three-fold:

Therefore, to facilitate the determination of the merits of the recommendations

and the possible implementation strategies, each of the seven action focus areas in this status report is broken down into as much detail as possible, drawing on the specific recommendations and proposals provided by experts. Please note, however, that the recommended action steps suggested in this status report are only intended to be illustrative (rather than conclusive) and are incomplete and require more research and elaboration. All experts are strongly encouraged to engage in this research process, providing their detailed candid suggestions on how to best refine both recommendations and action steps. Without open partnership and extensive exchange among experts, neither countries nor companies will be able to define practical means for meaningfully advancing financing for development. (Please see below questions.)

STATUS REPORT STRUCTURE: As noted above, each of the seven action focus recommendations have sections that contain the proposals received to date. The sections necessarily vary in content and length, reflecting the different types of input received to date. In a few cases, proposals have been slightly altered to integrate similar suggestions from other experts, in addition to overall editing. (Authors of proposals are asked to communicate any concerns with changes to their original proposals, and further suggestions on improvements. Some proposals still need to be included; authors are asked if at all possible to draft text for inserts.)

QUESTIONS FOR EXPERT FEEDBACK: As noted above, the purpose of this status report is to refine the recommendations and proposals contained therein. Each expert reading this report is to provide his or her candid comments and suggestions. In particular, suggestions and research assistance would be very much appreciated in the following specific areas:

  • MAIN RECOMMENDATION: In your judgment, are the overall recommendations valid? If not, how would you change them and why (please be as concrete as possible with changes and rationale providing evidence)?
  • PROBLEMS: What concrete evidence could you provide of the problems to help bolster the need for change? (Please remember all comments are on a not-for attribution basis. Examples of issues can be generalized.)
  • ACTION STEPS: How would you refine the specific action steps and proposals received to date, and why?
  • EVIDENCE: What case studies, working papers, statistics, or other sources should be included to support the recommendations and proposed actions steps or your suggestions?
  • OTHER EXPERTS: What other experts should be consulted? (Please provide their contact info and an indication of the specific area they you feel they would provide insight.)

Please provide your feedback to Dr. Barbara Samuels at (USA + 845-868-7639). Please note all input is on a not-for-attribution basis (i.e., off-the-record views of experts and not necessarily those of employer institutions).

EXECUTIVE SUMMARY

PRELIMINARY ACTION FOCUS RECOMMMENDATIONS:

ENHANCING LEVERAGE OF OFFICIAL INSTITUTIONS

SUMMARY OF INITIAL ROUNDTABLE DELIBERATIONS

Following are a number of the key issues raised thus far in the project’s deliberations. Further consultations are being undertaken to prioritize needed reforms and identify other key issues requiring attention.

1) PROJECT FEASIBILITY FUNDING. Official sector institutions need to pool project feasibility funds and make them easy-to-access, utilizing appropriate experts from across the public and private sectors to identify quality projects and develop acceptable risk-mitigating financial structures.

2) RISK MITIGATION PRODUCTS. Official sector institutions need to commit significant funding to successful risk-sharing programs in partnership with private sector companies, enhancing aid effectiveness by harnessing private sector capital and developing capital markets. Frameworks for five instruments need to be developed for immediate large-scale replication by multilateral and bilateral institutions:

  • Guarantee Programs that include partial loan guarantees, loan portfolio guarantees, commitment agreements for guarantees (“portable guarantees”), and bond guarantees
  • Risk-sharing agreements with banks and monolines
  • Supplemental Tariff Payments to support Infrastructure Projects
  • First Loss provisions in financing agreements
  • Regional debt and equity funds

In certain cases, financing may need to be made conditional to the adoption of training and other programs needed to insure adequate execution of project by government and/or private sector partners. In addition, to be effective in maximizing the effectiveness of official sector resources, the official sector needs to disseminate information on these risk-sharing programs to targeted banks, companies, government officials, and other donors.

3) LOCAL CAPITAL MARKET ENHANCEMENT. Official sector institutions need to develop and mainstream new financial instruments specifically aimed at developing local capital markets and expanding local sources of available credit in direct collaboration with private sector and national government experts. Frameworks for seven additional instruments need to be developed for immediate large-scale replication by multilateral and bilateral institutions:

  • Local currency and tenor extension guarantees
  • State Revolving Funds (SRFs)
  • Regional or country local monolines
  • Regional swap funds
  • South-South Emerging Market Export Credit Agency
  • Official sector counter guarantees of national guarantees
  • Risk-sharing programs outlined in above point (Recommendation Two)

4) REGULATORY AND FOREIGN EXCHANGE RISK. Official sector institutions need to collaborate with private sector experts in designing new financial structures that correspond to market needs in two specific areas blocking mobilization of capital, government regulatory risk and foreign exchange risk. Frameworks for two instruments need to be developed for immediate large-scale replication by multilateral and bilateral institutions:

  • Contingent regulatory guarantee facilities at both a country and official sector level, so that country project-specific regulatory guarantees can be counter guaranteed by creditworthy multilateral and bilateral entities
  • Country foreign exchange liquidity facilities at both a country and official sector level, so that country devaluation liquidity guarantees can be counter guaranteed by creditworthy multilateral and bilateral entities

5) REDEPLOYING CAPITAL OF WORLD BANK GROUP AND OTHER DEVELOPMENT BANKS. The capital structures and charters of official sector institutions need to be realigned with the specific objective of maximizing the leverage of official sector capital (i.e., the efficiency of each taxpayer dollar).Political leaders need to implement open audits and investor/client surveys immediately to remedy impediments in the following areas:

  • Allocation of capital to different official sector units (on global level within respective Bretton Woods institutions, at regional level within regional development banks, on national level between bilateral development agencies)
  • Charter rules that impede effectiveness need to be openly disclosed and changed accordingly (for example, restrictions on dealing directly with subsovereigns, working with other donors, beneficiaries not being member states, length of tenors, etc)

6) DONOR AID COORDINATION. Official sector institutions need to create streamlined standardized mechanisms for donor coordination at the global, regional, and country level, including explicit structures to leverage official sector resources by mobilizing private sector capital and expertise (i.e., above eleven instruments). Frameworks for four types of donor coordination mechanisms need to be developed for immediate large-scale adoption by multilateral and bilateral institutions:

  • “Public-Private Syndications” of debt, equity, and currency transactions (at global, regional, and country levels)
  • “Sector Donor Tables” to enable cost-effective donor coordination in support of national development objectives and regional economic integration (at regional and country levels)
  • “Global Sector Capacity-Building Kits” consisting of principles, implementation guidelines, and tool kits that enhance developing country capacity to execute transactions
  • “Consultative Mechanisms to Build Country Criteria” for official sector entities and key private sector entities to build local capital markets and global competitiveness (including business organizations, financial institutions, rating agencies, and other key actors)

In addition, all donors need to adopt basic principles of non-compete and coordination (see below).

7) INSTITUTIONAL CULTURE CHANGES. For official sector institutions to partner effectively with the private sector and optimize use of official sector resources, senior management must take the lead in devising new management incentive programs and processes that change the behavior of officials and processes. Specifically:

  • Senior Political Leaders commit to creating new performance incentives, measurements, deliverables and targets, and revise management processes in line with stated mission of maximizing aid effectiveness, including strict rules against direct competition with the private sector (“no compete” rules)
  • All official sector officials responsible for risk management change in line with senior directives risk management policies (leverage, loss reserves, limits, surveillance, transaction approval processes, etc), and report openly on results
  • Explicit integration of private sector expertise into all levels of operation (e.g., third-party surveys of investors, private sector “testing” deals, meaningful broad-based business advisory groups), with open dissemination of recommendations and discussions
  • Training of officials and outsourcing activities that require private sector skills

Please see the attached detailed sections for details and expert proposals received to date on each of the above action focus areas. Please provide suggestions and research to refine and enhance action focus recommendations, actions steps, and specific detailed proposals to Dr. Barbara Samuels (. phone USA +845-868-7639).

ISSUES AND RECOMMENDED NEXT STEPS IN EACH ACTION AREA

REPORTED PROBLEMS: The ability to improve infrastructure in developing countries, critical to attracting investment and improving standards of living, is totally dependent upon the availability of funding for feasibility studies and the ability to design sustainable projects with strong financial fundamentals. Without a system that enables the financing of costly feasibility studies, quality projects cannot be defined or successfully financed and implemented. In today’s environment of high risks and uncertain profitability, investors often cite the high sunk costs of project development as a major constraint to their investments in developing countries. While the official sector does provide a number of bilaterally-managed trust funds for feasibility studies, they are reported as difficult to access and inefficient in identifying projects.

As a result, many projects critical to enhancing a country’s overall global competitiveness and living standards are never designed or implemented. Often the only projects that are viable are those attractive enough to construction companies for them to assume the development cost, leaving countries without an independent expert validating the project selection, design, and financing requirements. Mistakes in project selection and design can be very costly for countries, misdirecting scarce resources and eroding public trust. In addition, both government officials and private sector investors cite the need for more expert support in explaining concessionary arrangements and project management, including the sharing of best practices and success stories.

RECOMMENDED ACTION STEPS:

1)Create centralized easily-accessible feasibility funds

2)Staff with experts in risk-mitigation who can work with government officials and private sector participants in identifying projects and structuring transactions (i.e., operate as SWAT team)

BENEFITS: Experts from the private sector claim the benefits would be dramatic in scaling-up the ability to finance infrastructure projects in developing countries, and also in provided needed enhanced support of developing country government officials. Specifically:

  • Increase the number and quality of project financings in developing countries, improving country competitiveness and living standards
  • Significantly enhancing the ability to fund feasibility studies and resulting projects for chronically under-served sectors (e.g., water in rural areas, or wastewater in general)
  • Enhanced capacity of developing country governments (central and subsovereign government officials) to proactively initiate project feasibility studies, implement financings, and deliver results

OBSTACLES: Key problems in implementing these action steps are expected to be both political and technical:

  • POLITICAL DECISION: The dominant portion of trust funds are currently under the control of individual countries (e.g., the Executive Directors of the multilaterals, bilateral aid agencies). Countries would have to agree on merging their funds, for example within the regional development banks (see specific proposal below).
  • TECHNICAL REQUIREMENT: Private sector experts in risk-mitigation need to be recruited to staff this function (i.e., not public sector professionals).

DETAILED SPECIFIC PROPOSAL(submitted by experts)

In each of the regional development banks, establish a high value-added unit of highly qualified experts (Regional Project Support Unit), with access to a well-capitalized central fund to finance feasibility studies (Feasibility Study Fund).

The investment professionals would have expertise in both project design and risk mitigation structures, enabling them to use funds efficiently to develop bankable quality projects. The experts in the Regional Project Support Unit would also serve as catalysts in disseminating needed expertise and support, best practices, and success stories on project management and concessionary arrangements throughout the region.

The Feasibility Study Fund would be funded by aggregating existing official sector funds (e.g., from country trust funds, etc), and might be augmented with appropriate budgetary resources. An annual budget of $20 million might fund an average of 100 feasibility studies annually.

One critical feature of the Regional Project Support Unit could be its catalytic nature in mobilizing private sector capital and expertise, and building capacity in the recipient countries. Feasibility Study Funds would be available to local firms in target countries, supervised by FSF professional staff with knowledge of required risk mitigation techniques and services. This will create the local capacity to consistently develop first-rate feasibility studies and develop knowledge of risk mitigation services. In addition, projects are likely to be designed more appropriately for the country environment, with the local firm better able to factor in local regulations, laws, risks, and costs.