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Experts split over how to fund development

Development banks and commercial institutions argue for different strategies to provide energy to the world’s poor

Multilateral development banks (MDBs) have a crucial role to play in financing the upgrading and expansion of power generation, transmission and distribution systems in the world’s poorest countries. But how funding should be mobilised and invested remains a subject for hot debate.

Michael Eckhart, managing director and global head of environmental finance at Citigroup, told delegates at WEC 2013 that more should be done by MDBs – and the World Bank in particular – to fund electrification, rather than relying too much on private sector investment to achieve such a huge task.

Some $17 trillion of investment is needed between 2012 and 2035 to upgrade and expand the world’s power generation, transmission and distribution systems, much of it in the developing world, according to the International Energy Agency. Only around 39% of the population of Sub-Saharan Africa has access to electricity, compared to a rate of around 75% globally.

Power sector development should be a precursor to economic development, rather than a result of it, Eckhart said. “You don’t do rural electrification because people have spare money to pay for it. You do it to create wealth after the electricity is there.”

Eckhart, who has worked on several projects in Africa, suggested the World Bank’s resources should be increased considerably, noting that private sector institutions such as Citibank had far greater funding capacity. “Why do we allow the World Bank to be so small,” he said, adding that MDBs would be able to scale up funding better if their investment policies were oriented more towards lending to programmes, rather than individual projects.

Seethapathy Chander, director general of the Regional and Sustainable Development Department at the Asian Development Bank, countered that development banks had to operate differently from their private sector counterparts. MDBs have to manage their investments in a way that ensures they maintain high credit ratings and also have to take a long-term view, while commercial investment banks could have more short-termist approaches to cashflow.

Chander also said that providing an electricity network in a region with inadequate resources to maintain it, or where customers could not afford to pay for power, could be a risky business. “You need the infrastructure to be right. If there’s one thing worse than not being wired up, it’s being wired up and having no power,” he said.

Luis Enrique Berrizbeitia, executive vice president of the Development Bank of Latin America (CAF) said the focus of development banks and commercial banks were different and that it would be impossible for an institution such as the World Bank to reach similar levels to the largest commercial banks. The challenge for MDBs remained to mobilise investment from all sources, including the commercial sector, he added.

Farrukh Mian, division manager for energy at the Islamic Development Bank, said many regional development banks would struggle to mobilise such large sums of financing as they are backed by cash-strapped countries. However, he suggested there was a strong case to be made for MDB’s to think 20% more like commercial banks and vice versa if the full potential of their relationship was to be unlocked. 

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