Key Highlights
- Since 2018, nearly $16.4 billion in private capital has been mobilized in Latin America and the Caribbean, including from WB Treasury transactions.
- Among other impacts, this private capital will help generate almost 3,000 Megawatts of renewable energy capacity.
- The Dominican Republic, thanks to the technical assistance delivered by Finance, Competitiveness, and Innovation, with the support of Treasury in developing a Sovereign Green, Social, and Sustainable Framework, placed its inaugural US dollar sovereign green bond in the international capital markets, with a maturity of 12 years and an annual coupon of 6.6%. The transaction was oversubscribed 6 times and raised $ 750 million, reflecting strong and diversified investor demand. It supports expenditures on low carbon transportation, renewable energy, efficient and resilient management of water and wastewater management, and natural resources, use of soils and protected marine areas. The framework was recognized highly by S&P as a second party opinion and some elements of this Technical Assistance became part of a recent Development Policy Operation.
- In Argentina, World Bank guarantees totaling $730 million and assistance from the International Finance Corporation helped raise more than $3 billion in private financing over three rounds of auctions to build 147 renewable energy projects.
- Also in Argentina, the Innovation Program for Smart Growth (PINCRI) project (P175143) includes a ¡°Strategic Innovation and Growth Equity Window¡± through which the project will co-invest in innovative start-ups, along with the private sector (financial intermediaries and partner investors), in funds created and/or managed by professional fund managers. The objectives of the funds will be to support start-ups and regional cluster funds (e.g. business angels, accelerators) and green growth and diversification (VC funds). The project will allocate $40 million and with an expected private capital multiplier of 4 to 5 may mobilize up to $115 million. A call for fund managers was closed at the end of 2023 and potential fund managers¡¯ proposals are under review.
- In Honduras, a $26 million infusion of private sector capital in the context of COMRURAL II (P168385) and COMRURAL III (P174328) helped rural producers gain access to markets and financial products.
- In Ecuador, a World Bank Investment Project Financing (IPF) (P172899) line of credit has enabled a local development bank to increase credit provision to productive MSMEs from 3,000 to 13,000. Groundwork on the national guarantee scheme that is also part of the project is expected to mobilize $240 million in private capital for productive purposes.
- In Mexico, World Bank?s $1 billion, Development Policy Financing (DPF) will support the Government¡¯s efforts to improve the policy framework for sustainable finance and access to finance for MSMEs. Cumulatively, private capital enabled (PCE) through the Prior Actions in the DPF is expected to reach at least US $11.2 billion by 2025. This builds on extensive just in time TA provided during the last 3 years, including support to develop the sustainable taxonomy (first one to include gender considerations).
- In Jamaica, a CAT bond issued in 2021 intermediated by the WB Treasury and with substantial WB TA on Disaster risk management (P163012) provided the Government with financial protection against losses from named storms for three Atlantic tropical cyclone seasons. The original transaction mobilized private risk capital for $185 million, while a renewal transaction in 2024 mobilized $150 million for another 3 years.
- Also in Jamaica, Technical Assistance and a Project Preparation Facility under the recently closed Foundations for Competitiveness and Growth project (P173165) have had far-reaching impacts, encompassing the mobilization of private capital and enhancement of institutional capacity. The project assisted the government in attracting private investments in key infrastructure assets through PPP and privatization. Several transactions were completed in various sectors, including renewable energy. Private Capital in the amount of $487 million has been mobilized. The Development Bank of Jamaica is now strengthened with better capacity to manage PPP transactions; engage with local stakeholders, investors and transaction advisors including IFC. The Ministry of Finance's PPP Unit is stronger with tools for PPP Fiscal Risk Management, Value for Money analysis and Economic Analysis.
- The Jamaica Access to Finance project (P152307 - $15 million) has mobilized, through the Development Bank of Jamaica (DBJ), 2,049 guarantees totaling US$106.9 million in loans to SMEs. In addition, JASMEF, DBJ¡¯s investment fund capitalized by the project, has successfully mobilized private investments totaling US$10 million, exceeding the initial IBRD allocation of $7 million. One investment totaling US$1.95 million has been finalized and several others are currently in progress.
- Brazil plays a leading role in the world's transition to sustainable food production. A World Bank IPF to Banco do Brasil (P178888) of $500 million is mobilizing up to $1.4 billion more from Banco do Brasil¡¯s own resources and from investors in a private fund created by the project. Financing will target SMEs and companies that will be independently validated for emission reductions in their operations. The project aims to scale up sustainability-linked financing of decarbonization investments across various sectors, including scope three emissions and agribusiness supply chains.
- Beyond World Bank lending operations and technical assistance, technical assistance from the World Bank Treasury¡¯s Sustainable Finance and ESG Advisory Program has helped the Ministries of Finance of Colombia and Brazil raise USD 4.9 billion from the private capital markets. Brazil¡¯s inaugural $2 billion sustainable bond proceeds were allocated to deforestation control, biodiversity conservation, the National Climate Change Fund that focuses on renewable energy and clean transport, etc., and programs to combat poverty (Bolsa Familia) and hunger (Food Acquisition Program). Colombia¡¯s sovereign green bond supported expenditures on clean and sustainable transport, sustainable management and sanitation of water, ecosystem services and biodiversity, energy efficiency, sustainable agricultural production, circular economy and climate change adaptation.
- Since FY18, World Bank has executed 20 catastrophe (CAT) bonds and derivatives mobilizing USD3.8 billions of private capital to provide coverage for Latin America and Caribbean countries like Mexico, Chile, Colombia, Peru, and Jamaica against extreme disaster events such as hurricanes and earthquakes. These CAT bonds enable countries to get access to fast-disbursing and cost-effective financing from the international capital markets, without increasing sovereign debt.
Challenge
The region faces several obstacles:
- Inconsistent and uncertain regulatory frameworks .
- Lack of proper skills and weak managerial capabilities limit innovation, productivity, growth and job creation.
- High financing costs and stringent regulatory requirements limit growth and innovation capabilities. This could particularly hurt vulnerable yet entrepreneurial demographic groups: Micro, small and medium enterprises (MSMEs) and SMEs, agricultural workers, women, and youth.
- Poor or outdated raises projects¡¯ costs and risks, hindering new investment opportunities.
- High political, credit, and operational risks may deter investors due to inadequate risk mitigation options.
- Challenges in meeting Environmental and Social Governance (ESG) criteria complicate investment decisions due to issues in impact measurement and verification.
Approach
As of 12 June 2024, the World Bank portfolio of projects in the LAC region consists of approximately $36.2 billion in net commitments; 15 of these projects are also expected to generate Private Capital Mobilized (PCM) totaling $4.6 billion (~12.7 percent of the total net commitments). Additionally, WB Treasury intermediated bonds and TA leading to clients¡¯ bond issuance represent around $8.6 billion worth of PCM in outstanding bonds in the region that are not associated with any WB commitments. Therefore, the total Private Capital Mobilization (PCM) corresponding to the active portfolio that has already been realized and is still expected to materialize amounts to $8.1 billion.
The Maximizing Finance for Development (MFD) program is the World Bank Group¡¯s approach to increase private sector investments in development projects. It focuses on addressing market failures and capacity gaps to enable private investment in areas where it is viable, allowing public resources to be allocated more efficiently elsewhere. MFD prioritizes sustainable, economically viable, transparent, and environmentally and socially responsible private sector solutions.
In LAC, the World Bank is using financial instruments (e.g., guarantees to de-risk investments), technical assistance (e.g., advisory and knowledge services), and capacity building (e.g., supporting the financial sector) to support sustainable development, economic transformation, and resilience, particularly around:
- Inclusion and access to finance and markets for underserved groups, including women-led MSMEs, rural communities, and smallholder farmers.
- Promoting sustainable finance, enabling MSMEs and the broader financial sector to integrate ESG considerations into their operations (e.g., decarbonizing MSME operations in key value chains through aggregation models).
- Focusing on enhancing skills, innovation, productivity, and competitiveness in key sectors (e.g., agroforestry, energy, housing, bioeconomy, blue economy, circular economy) supporting technology adoption, inclusive business models, and the development of entrepreneurship and innovation ecosystems.
- Supporting the strengthening of institutional frameworks and capacity building for public entities and private sector stakeholders, in order to promote private sector partnerships and improve the enabling environment for PCM.
- Focusing on building resilience and adaptation to climate change impacts across sectors.