FFD MOOC - WORLD BANK GROUP - FINAL PROJECT - JORGE A.

FUENTES ZAPATA

The Role of the Private Sector in Financing for Development and the Public Sector's Accommodation.
Introduction
As we have seen throughout the Financing for Development course provided by the World Bank Group through
the Coursera.org platform, it is clear that it is important for the private sector to become involved in
development goals and most importantly the post-2015 development agenda in accordance with the World
Bank, the UN, and the International Monetary Fund.
It is, however, very important to understand how the private sector needs to be incentivized and engaged in
order to cooperate and play a role in financing for development. More often than not, the private sector tends to
be a conservative risk-taker, and although the previous statement may sound surprising due to the breakthroughs
in technology, products, and services that the private sector is responsible for, as well as the inherent innovation
that is attributed to this area, it should be of particular interest to note that the real risk-taker and innovator when
it comes to world-wide development and improvements is the public, IGO, and NGO sector.
It is estimated that the shortfall of funding the Sustainable Development Goals, agreed to by members of the UN
at the 70th General Assembly, will be of about $3 trillion a year (Jay Collins, 2015), and exactly how that gap
will be financed is a matter of understanding the necessity of a private sector that is actively involved in helping
to reach the SDGs.
There is of course a conflict of interest between financial returns and social returns, the private sector tends to
be more focused on the former whereas the public sector has an obligation to care for social returns. Indeed, this
may discourage the private sector from financing a development project, especially one which has the potential
to yield a low or negative financial return even if it has a moderately high social return. However, there are ways
in which the public sector can mitigate the risk of financing certain development projects and enhance financial
returns in order to incentivize the private sector.
More often than not, the private and public sectors tend to differ on a lot of issues, and it is for this reason that it
seems to be difficult to make both sectors contribute at the same time with the same dedication into any social
project. It is nevertheless crucial for both the public and private sector to cooperate in financing for
development, as it cannot be done properly by one sector on its own.

The Risk and Necessity for Cooperation

First and foremost, the Sustainable Development Goals will only be reached through a hybridization process.
That means, a process in which resources from the private sector and those from the public sector are utilized in
an efficient manner, together, to achieve a final purpose. The capital to finance infrastructure development
projects is not enough through the public sector on its own. But if there's such an alarming necessity to bring the
private sector into the infrastructure development equation, why then, is it difficult to do so? Or what must the
public sector do to incentivize the private sector?

Capital subsidies
There are a number of strategies the public sector can pull-off in order to attract private investment in
infrastructure development projects, one of them is through capital subsidies, that is when the government will
promise to finance an infrastructure project on it's construction stage and mitigate the risk of a construction
company (the private corporation hired to build the project). What this strategy will do is to provide the path to
raise more capital in the future if the initial capital is not enough to complete the infrastructure project. In this
way the private sector lenders can be more confident that their capital will provide them a return once the
government decides to come in and take some of the risk away from the project through a capital subsidy.

Operating subsidies
The capital subsidy is used only through the construction stages of the infrastructure development project, that
is the first 3-5 years of the porject when it's only being built. Later on, on a period of about 25 to 30 years, the
project must undergo maintenance and operations on an ongoing basis to keep the infrastructure development
project afloat. Lenders in the private sector, particularly in developing countries, are not willing to provide
capital in a period where they will not see their returns for over 25-30 years. Hence, the public sector provides
operating subsidies, which are used to finance (on a 25-30 year period) the ongoing operations of the
infrastructure project. This also reduces the private sector capital risk in the project and enhances returns for

corporations and private banks willing to finance it.

Government guarantees
In the end, it is not difficult to include the private sector, but rather the public sector must accommodate
members of the private sector in order to finance development projects. In this regard, we come to one of the
most secure strategies the public sector can use to minimize the percevied risk of private companies. And that is,
through government guarantees. This is when the government, through its state-owned banks, guarantees any
demand or revenue which the project was expected to fulfill but wasn't able to, as well as if further capital is
required to keep it afloat and private sector financing is no longer available. In this way, the public sector can
secure all (or most) of the risk that the private sector is willing to incur in a development project. This will
finally provide the right environment for the private sector's inclusion into infrastructure development projects.

Conclusion, and Acknowledgements.

Although there are other ways in which the private sector can be incentivized to participate in financing for
development, it is nevertheless very important for the public sector to collaborate and meet the demands of the
private sector, and for the private sector to become more flexible and accesible, as these projects cannot be
financed by one sector alone. A special thanks to the World Bank Group and Coursera.org for making the
Fin4Dev MOOC available to all of us.
For making this final project possible, credits to:

Coursera.org
World Bank Group
United Nations
International Monetary Fund
OECD
ThePresidency.org
Wikipedia

 Investopedia.com
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By: Jorge Alberto Fuentes Zapata