Financial Additionality of Multilateral Development Banks in Private Participation in Infrastructure Projects

Hiroyuki Taguchi,Kota Yasumura

doi:10.3390/su13158412

Abstract

This paper aims to provide empirical evidence for demonstrating financial additionality of multilateral development banks (MDBs) in private participation in infrastructure (PPI) projects in terms of financing beyond what is available in the markets. To verify MDB financial additionality, this study examines whether the PPI projects with multilateral support have significantly larger investment commitments than the total average projects by using the PPI database of the World Bank for 1996–2020. The empirical analysis identifies MDB financial additionality, in that the larger investment commitments of multilateral-supported projects beyond the average are confirmed in any income levels and regions in host countries and any sectors and types in the projects. In particular, MDB financial additionality is valid even in low-income countries where private finance is still too premature to be available. In the host countries where their government effectiveness is in the poorest edge, however, MDB financial additionality loses its significance, thereby requiring the governance enhancement and capacity building in the host countries and innovative blended finance instruments for its additionality to work.

Highlights

Graduate School of Humanities and Social Sciences, Saitama University, Saitama 338-8570, Japan; Abstract: This paper aims to provide empirical evidence for demonstrating financial additionality of multilateral development banks (MDBs) in private participation in infrastructure (PPI) projects in terms of financing beyond what is available in the markets
The subscripts i, t, and k denote host countries, years (1996–2020), and project number (8161 PPI projects), respectively; E represents the variables for country-specific time-varying macroeconomic conditions: gross domestic product (GDP), GDP per capita, inflation, exchange rate, and government budget balance; ν denotes year fixed effects; ε represents error terms; β, γ, and μ are parameters of variables; and Dj is the dummies under the five categories: j = 1–5; that is, d_low, d_lmid, and d_umid in income levels; d_gvel, d_gvem, d_gveh in government effectiveness; d_Asia, d_Africa, and d_Latin in regions; d_energy, d_transport, and d_other in sectors; and d_green and d_brown in types
This paper provided empirical evidence for demonstrating MDB financial additionality in PPI projects in terms of financing beyond what is available in the markets

Summary

Introduction

Graduate School of Humanities and Social Sciences, Saitama University, Saitama 338-8570, Japan; Abstract: This paper aims to provide empirical evidence for demonstrating financial additionality of multilateral development banks (MDBs) in private participation in infrastructure (PPI) projects in terms of financing beyond what is available in the markets. The empirical analysis identifies MDB financial additionality, in that the larger investment commitments of multilateral-supported projects beyond the average are confirmed in any income levels and regions in host countries and any sectors and types in the projects. The outlook predicts that meeting the Sustainable Development Goals (SDGs) increases the need by a further 3.5 trillion US dollars, growing the gap to about 18 trillion US dollars. In their projection, developing and some emerging countries continue to have relatively large infrastructure needs and investment gaps. The World Bank [2] reports that new infrastructure could cost low- and middle-income countries anywhere between 2% and 8% of gross domestic product (GDP)

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Conclusion