The development landscape has changed fundamentally. Private actors and private finance increasingly drive development, and annual private financial flows to developing countries now amount to more than five times official aid flows. Potential sources of development funding — institutional investors, impact investors, foundations, diaspora communities, sovereign wealth funds — are not lacking.
The challenge is to harness more of these flows for poorer countries and for investments with more development impact — which is central to the conversation at this month’s World Economic Forum on Africa in Rwanda. Even motivated investors face two critical impediments: (1) weak and sometimes toxic policies and investment climates and (2) underinvestment in the supply of bankable projects.
At the Millennium Challenge Corporation, a U.S. government aid agency that fights poverty through economic growth, crowding in the private sector is at the center of our approach.
That is why we are committed to building the policy-enabling environment to attract private investment. For us, reform incentives begin well before we fund programs. MCC works only with countries that perform well on a scorecard of third-party governance indicators that measure a country’s commitment to democracy, fighting corruption, open markets and investing in its people. These scorecards serve as a powerful incentive for countries to pursue the right policies and mobilise and invest their own resources in ways that lay the foundation for inclusive growth.
MCC is increasingly focused on working with partner countries to implement important reforms that will unlock private investment. It is easy to talk about the need for reform, but harder to find effective ways to help a country make it happen. Outside pressure and lectures produce limited and unsustainable results. MCC takes a different approach.
We do not partner with a country with a preconceived agenda. Rather, we begin by working with country partners on shared economic analysis to uncover the most binding constraints to growth and their root causes. Essential reforms and their rationale emerge organically from that joint analysis, rather than being imposed from the outside. Partner governments see for themselves the link between reforms and their growth and poverty reduction objectives. And by combining support for these reforms with support for tangible project investments, governments see real gains from tough policy decisions.
Support for locally driven reforms combined with project investment creates a powerful, catalytic package. In just three of MCC’s partner countries – Benin, Jordan and Ghana – MCC’s combined USD 1 billion contribution is expected to leverage nearly USD 5 billion in private sector investment.
In Ghana, for example, MCC and the Government of Ghana have heard clearly from businesses that a major obstacle to investing in power is uncertainty about the financial strength of the public utility, the Electricity Company of Ghana (ECG). So as part of MCC’s nearly USD 500 million investment in the power sector, MCC is helping the government structure a concession for a private sector operator that will ensure ECG’s financial viability. MCC’s investment in Ghana is expected to generate nearly USD 4 billion in new private investment and economic activity in the coming years, including major investments from GE and Endeavor Energy. These companies say Ghana’s MCC-backed reforms marked important steps towards building the creditworthy off-taker they needed.
MCC also is committed to leveraging the private sector at the project level. Consider one project in Jordan, where water scarcity impacts every aspect of life. MCC’s ambitious partnership with the Government of Jordan focused on increasing the water supply is expected to benefit more than 3 million Jordanians. And it is an example of the power of structuring the right kind of bankable project to scale up impact. MCC supported a public-private partnership (PPP) to expand the As-Samra wastewater treatment plant, the country’s primary water treatment facility. This PPP leveraged MCC’s investment of USD 93 million to mobilize an additional USD 110 million from the private sector. Through this financing method, the private sector not only provided more than 50% of the construction costs, but also committed to operate and maintain the facility at world-class standards for 25 years.
Panoramic view of As-Samra wastewater treatment plant
Last summer, MCC launched its P3 Platform, which will provide USD 70 million to help partner countries prepare bankable PPP transactions like the As-Samra wastewater treatment plant. We expect this funding will leverage as much as USD 1 billion from the private sector.
Moving forward, we are doubling down on our commitment to help governments implement policy and institutional reforms and develop bankable projects. MCC’s forward-looking strategy elevates our focus on leveraging aid dollars to one of our five main priorities. It specifically deploys scarce U.S. taxpayer resources to crowd in, rather than substitute for, private funding.
MCC is focusing systematically on using the full range of its robust and flexible toolkit to reach and lift up the poorest people in the world by building new, scalable market opportunities in frontier economies.
Cross-posted from the OECD.