World Bank’s reliance on private capital to finance green transition in low- and middle-income countries risks falling flat

4 October 2023

The Ain Beni Mathar thermo-solar power plant in Morocco. Credit: Dana Smillie/World Bank.

Fresh questions have surfaced about the credibility of the World Bank’s strategy to assist low- and middle-income countries (LMICs) in their energy sector decarbonisation efforts, given its heavy reliance on mobilising private capital – and the practical difficulties such efforts face.

In a World Bank report released in April, entitled Scaling Up to Phase Down: Financing Energy Transitions in the Power Sector, the Bank argued power sector decarbonisation in LMICs should be private sector-led, with multilateral development banks (MDBs) and national governments pursuing regulatory changes and de-risking measures designed to attract private capital. The report proposed that relatively scarce concessional resources should be used to prepare ‘investible’ projects for private capital: “The fact that access and affordability of capital must be addressed simultaneously creates an opening for multilateral development banks to help LICs and MICs [low- and middle-income countries] prepare bankable projects that match investors’ risk-return expectations, while also preparing upstream studies and improving market conditions”, including through power sector privatisation and price liberalisation measures.

The Bank’s call for bankable project pipelines is aligned with an emerging consensus being formed by MDBs, policymakers and institutional investors, which re-imagines the role of governments largely as de-risking agents for private capital investments – what Professor Daniela Gabor of University of the West of England Bristol has referred to as the Wall Street Climate Consensus.

Enabling profit-seeking businesses to call the shots can hardly be the solution, and may instead worsen the problemJomo Kwame Sundaram and Khoo Wei Yang

The Consensus is supported by a powerful set of stakeholders, including G7 governments, and is fundamental to the Bank’s proposals for reform under its Evolution Roadmap (see Observer Summer 2023). Additionally, the influential November 2022 Songwe-Stern report, led by the Independent High-Level Expert Group on Climate Finance, also called for the creation of a country platform approach to finance LMICs’ energy sector decarbonisation.

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However, the Bank’s theory of change of relying on private capital to finance the green transition is constrained – inter alia – by structural factors relating to how institutional investors operate. These include fiduciary duty requirements designed to safeguard investor returns, raising questions about the value-for-money proposition of a private-led transition which requires investor profit margins to be priced into green projects, as well as investors’ risk aversion to holding lower-credit assets.

As Advait Arun of the US-based Center for Public Enterprise noted in an August piece in Phenomenal World, introducing de-risking mechanisms in LMICs will not automatically result in huge inflows of private capital: “Investors have asked emerging market governments to build ‘country platforms’ that aggregate these projects for them, but this strategy is best suited for larger, middle-income markets in Asia and Latin America, where private investment already flows, not the lower-income countries most in need.” Ultimately, the lack of suitability of institutional investors as willing partners in an equitable green transition raises the question about the role of the state in coordinating and ultimately being an important primary investor and shareholder in revenue-generating green projects.

As Jomo Kwame Sundaram and Khoo Wei Yang noted in an op-ed in Inter Press Service in August of the Bank’s approach, “Enabling profit-seeking businesses to call the shots can hardly be the solution, and may instead worsen the problem.” They note that this agenda stems from a marked refusal of rich countries to pay the ‘climate debt’ they owe to climate vulnerable developing countries: “It is unlikely the needed climate financing will be voluntarily provided by those most responsible for the climate crisis. At the very least, rich nations should support regular issue of IMF Special Drawing Rights in the near term” (see Observer Spring 2021).