Multilateral Development Banks’ Risk Mitigation Instruments for Infrastructure Investment

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Feb 2018
Risk mitigation instruments such as guarantees are attractive options for achieving the United Nations Sustainable Development Goals because they provide a way for multilateral development banks (MDBs) to strategically de-risk investments while crowding in private financial resources. However, despite the potential attractiveness of these instruments and their effectiveness in mobilizing private resources, their use has been relatively limited. According to private estimates, guarantees represent only 5 percent of MDB operations, although they account for 45 percent of total private resource mobilization. This paper considers supply and demand determinants of MDBs’ current guarantee products, addresses the requirements of private sector investors, and identifies ways to close the gaps between private sector needs and the ability of MDBs to scale up risk mitigation mechanisms. The main conclusion from this analysis is that MDBs’ business models impose significant limitations on the further use of guarantees. A possible alternative to overcome these limitations is the creation of specialized entities or off-balance-sheet facilities, learning from the experience of the Multilateral Investment Guarantee Agency.