2025 Public Sector Perspectives

Chris Tynan Development Finance, Corporate Banking Stephanie von Friedeburg Head of Development Finance Amanda Helfrich Development Finance, Corporate Banking Creating a New Catalytic Asset Class O ver US$4 trillion dollars. This the approximate annual shortfall that must be plugged if the world is to meet the objectives of the Paris Agreement and the UN’s Sustainable Development Goals. Clearly, a hole of this size cannot be filled with public funds alone. Such a staggering sum is larger than the GDP of all but four countries. Development practitioners have long hoped that private capital looking for yield might be a solution. And with good reason. The world’s largest banks — those deemed to be “Globally Systemically Important” (GSIBs) — hold $66 trillion in assets, equivalent to 63% of global GDP in 2022. 1 Moreover, these banks have historically funded key development projects. Why not turn to them? This idea was endorsed at the Third Conference on Finance for Development in 2015 and formalized in the Addis Ababa Action Agenda. Unfortunately, the desired influx of private capital has yet to materialize for several reasons. Since the 2007-2008 Financial Crisis, the world’s largest banks have buttressed their balance sheets by increasing Tier 1 capital and annealing their risk and control policies to meet stricter regulatory requirements. Yet this bolstering runs contrary to the run for investment in emerging markets and long-term infrastructure projects. From a conventional perspective, deploying the large amounts of capital needed for projects in emerging markets carries significant credit risk, making banks hesitant to invest. So how do we change this? Blended finance is often touted as a solution to this challenge. The “billions to trillions” mantra has become a familiar refrain — a rallying cry to use public capital to mitigate commercial risk and scale up private investment. Unfortunately, blended finance faces challenges of its own. Ticket sizes tend to be small and there are a limited number of bankable projects, especially in the lowest income countries (LICs). Blended structures are also complex. There is a knowledge gap for many donors and investors. The public, private, and philanthropic sectors have different goals and limited experience working together. These barriers mean that structures combining government aid, Official Development Assistance (ODA), and philanthropic monies will take time to prove out, replicate and scale. 1 https://www.imfconnect .org/content/dam/imf/News%20and%20Generic%20Content/GMM/Special%20Features/3Q22%20GSIB%20Monitor.pdf Citi Perspectives for the Public Sector 7