Blending from the Ground Up: Multilateral and National Development Bank Collaboration to Scale Climate Finance

International financing for development has persistently fallen short of developing country needs. That gap has widened dramatically with the onset of the climate crisis, where the costs of climate inaction far outweigh the financing needed in developing countries to catalyze low-carbon, socially inclusive and resilient growth trajectories and adapt to climate-related shocks that are already damaging development prospects. 

There is broad agreement that development finance institutions (DFIs) will have to assume a more central role in helping to mobilize more resources, both international and domestic, for development and climate goals. Although DFIs have upwards of $23 trillion in assets, until recently they have lacked an effective institutional framework for cooperating amongst themselves to leverage those assets for structural transformation in general and green structural transformation in particular. The recent emphasis on country platforms to coordinate efforts around national plans and strategies provides an opportunity to develop such a framework by placing national development banks (NDBs) and DFIs as the key levers of country-led resource mobilization. 

“Blending from the ground up” is a call to establish partnerships across public finance institutions that are clearly aligned with the host government’s development and climate change priorities and focus on transformational programs and projects that would not be realized in the absence of public support. This requires mobilizing private capital which is risk-tolerant, patient as well as willing to share risks and rewards of investments in a policy environment which is enabling but also regulated and accountable to citizens.

A new report by Chiara Mariotti, Richard Kozul-Wright, Rishikesh Ram Bhandary and Kevin P. Gallagher utilizes five case studies to examine how partnerships between NDBs and multilateral development banks (MDBs) have worked in practice. These case studies include the Islamic Development Bank (IsDB), the European Investment Bank (EIB), the Asian Development Bank (ADB), the Interamerican Development Bank (IDB) and the New Development Bank. The case studies focus on green energy and provide the empirical foundation for identifying the opportunities and barriers to scaling up MDB-NDB collaboration.

Key findings:

• The report shows that NDBs and DFIs are uniquely poised to serve as key partners for MDB development and climate finance strategies given their potential complementarities accessing external finance, lowering the cost of capital, managing and mitigating risk, identifying bankable projects and capacity building.
• MDBs have had a long, but often forgotten history of collaborating with NDBs. While there is currently an incipient revival of such partnership, this could stall in the absence of a comprehensive MDB-NDB collaboration policy. Most MDBs don’t have specific policies or strategic frameworks for engaging with NDBs.
• Our analysis of the recent wave of partnerships shows strengths and weaknesses that need to be accentuated and addressed.
  • The favorable terms at which NDBs obtain financing from MDBs are critical to making capital affordable for the intended beneficiaries and helping hedge risk (especially currency risk) that NDBs can’t manage on their own.
  • Projects which are embedded in comprehensive programs, clearly aligned with government’s priorities and backed by an enabling policy environment are more predisposed to innovation and success.
  • Local currency lending is still under-utilized due to perceived difficulties.
  • Technical assistance significantly increases the chances of success of a project, and capacity building at scale can contribute to nurturing a “coherent global ecosystem of public-public financing,” while also having a significant financial leveraging impact.
  • Partnerships between MDBs and NDBs are characterized by a strong reliance on different types of derisking instruments, mostly without the means to assess their additionality and ensure accountability of the private sector involved. 

Policy recommendations:

• MDBs should institute policies that encourage partnerships with national development finance institutions. 
• NDBs could play the role of a financing anchor for country platforms by coordinating resources around country-owned plans.
• Additional concessional funding is necessary to scale up green finance and renewable energy investment, including for the development of innovative currency risk hedging instruments and the provision of impactful technical assistance and capacity building.
• MDBs and DFIs need to experiment with more risk-taking, including through the development of new guarantee products, which are still under-utilized, and NDBs need to expand their potential sources of funding and use of new financial instruments.
• MDBs and bilateral agencies should support portfolio gurantees to bolster the financing capacity of NDBs.
• MDB-NDB partnerships would benefit from easier country access to international climate funds, including through easier accreditation processes and harmonization of regulatory regimes.