Many would argue that government-owned banks are not a good use of public money. Indeed, there may even be some “stigma” attached to supporting their merits, even when those institutions are built to support economic development, thinks Rémy Rioux, CEO of Agence Française de Développement (AFD), France’s public development bank.
As solving the world’s most pressing issues demands the attention of all actors, public and private, as well as a bridge to bring the two together, the role of development banks will, in fact, likely grow in relevance. It will also need a better definition. Mr Rioux, for example, wants his government to assign him new targets.
First, though, the criticism. Over the years, there have been arguments that efficient markets would be best placed to deal with economic growth, while critics accuse development banks of aiding the private sector in its pursuit for higher returns at lower risk, while their actual impact on development remains dubious. Civil society organisations have complained about lack of consultation with local communities in the creation of projects supported by development banks. They also lament a lack of explicit commitment to stay clear of fossil fuel financing.
The Finance in Common gathering, last November, which for the first time brought together 450 public development banks to commit jointly to align to the Paris Agreement and the UN Sustainable Development Goals (SDGs), was largely seen as a positive step even by those critics. They feel, however, the joint commitments still lack sufficient focus on local communities – and a timeline.
A few hundred civil society organisations, including the Asian People’s Movement on Debt and Development and BankTrack, penned their frustrations in an open letter after the Finance in Common summit. A degree of frustration may be felt also by others less critical of development finance, as well as by development bankers themselves.
Meeting the UN SDGs by 2030 translates into a $3tn global annual investment. The private sector will inevitably continue to seek returns and shun away from areas that it deems too risky. Of course, it will need to remain involved: public finances will stretch only up to a point, particularly as governments that typically provide debt or aid to countries at a different stage of development are now dealing with greater pressures at home. So, ensuring development finance is fine-tuned to secure a transition to a greener and more just economy is all the more important.
Mr Rioux, who also chairs the Finance in Common initiative, has a proposition: “At AFD, I’m rewarded on the volume of financing I’m doing. I’d like to have two targets: one on my own financing and one on what this amount, about €14bn a year, is leveraging [from] private finance or other types of investors.” He was speaking at the CogX conference this June. “Believe me, if I had this target I would do it, and find and develop the instruments that will make it possible. And [I would] ask the 450 of us [part of Finance in Common] to do it – that will be extremely powerful.”
For that to happen, he added, these institutions “need to receive a signal that is more structured and stronger than the one we’re receiving right now [from their governments]”.
Mr Rioux believes that the issue centres on how capital is used. Public development banks “need to have a [much] stronger mandate to push for sustainability and for climate and [to address] inequalities. And we need to organise access to concessional resources that is more fluid.” He added that: “[Right] now, the way that we allocate resources is suboptimal.” It is important to finance following banks’ methodologies and standards, but, he said, that financing and work need to be quantified differently and include the leverage effect it has on the private sector.
Criticism may remain about the effectiveness of development finance, and undoubtedly, few would argue against the importance of greater involvement by local communities. So governments could do worse than listening to all involved, beginning with the very people who are running their development banks.
Silvia Pavoni is the economics editor at The Banker.
