Global development banks: stretching capacity to meet growing project needs
Opinion 3 minute read

Global development banks: stretching capacity to meet growing project needs

31 January 2023

In recent years, national development banks in emerging markets have been forced to adapt their financing strategies – in a large part due to fiscal constraints created by huge government spending programmes during the pandemic.

At the same time, there is a greater demand to respond to the need to provide more help in low-income communities, often through boosting infrastructure that allows private sector economies to flourish. This growing pipeline – daunting enough in scale – presents a further challenge by needing to meet sustainable construction methods.

This complex challenge requires greater emphasis on partnerships delivering the pipeline of projects that are so needed in emerging markets (EM), and these fiscal constraints are now having a material impact on development banks’ abilities to simply underwrite the majority of a country’s project finance needs. The consolidated public sector primary deficit is expected to worsen in 2023 and the debt-to-GDP is close to 80%.

Elsewhere in Latin America, the evolution of state banks' financing policy has been less dramatic. However, there are still many regional markets – such as Colombia – that see the level of government ambition far outstrip the government's ability to finance new projects either through state funds or by harnessing the domestic capital markets. International capital will therefore be important to the viability of these governments' ambitious infrastructure plans. Meanwhile, national development banks are increasingly keen to combine with pan-regional development finance institutions (DFIs) that are active in their regions – such as CAF, Cabei and the IADB in Latin America. As well as targeting the smaller countries in Latin America these regional banks are keen to fund projects in these larger markets, as they offer sufficient scale, both in terms of finance and project results, to justify the internal work required for project execution.

In Africa, the Development Bank of South Africa (DBSA) is one such regional development bank and it continues to be active in multiple countries within its region. Not only does DBSA deploy its own funds but it uses its partnership with European development banks to generate investment funds for the continent.

Meanwhile, in developed markets – such as the continental EU – supranational banks (e.g. EBRD and EIB) continue to be selectively active in pursuing project financings. In contrast to the challenge in Latin America and Africa – funding enough capital to green-light a swathe of attractive developmental projects – the Europeans’ challenge is a lack of attractive investment opportunities in EM within its region. This is a particularly acute problem given both development banks have adopted a deliberate strategy to switch funding projects from global EM and focus its divestiture within its home continent.

Deals that are brought to market under the umbrella structure of the EBRD or EIB (the A/B loan structure) see much greater appetite from infrastructure and investment banks. However, the capacity of these banks – both in terms of the internal personnel resources and available capital required to execute on such deals – is limited and is becoming a significant market constraint. The paucity of viable projects will likely become a distant memory, however, when the rebuilding work can start in Ukraine.

Whether it is fiscal or internal capacity constraints – the world’s DFIs face a challenge to meet the growing need for capital to finance much-needed infrastructure improvements. The added cost of ESG – both in terms of financial and human capital – is exacerbating the short-term challenges of DFIs. And while, in the long-run, sustainable finance and construction methods will add resilience to countries’ infrastructure, the transition to that future continues to present development banks with significant challenges.

Project Finance

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