REFERENCE GUIDE This reference guide explains how the Multilateral Development Banks (MDBs)* and European Development Finance Institutions (EDFIs)* calculate and jointly report private investment mobilization. The purpose of the methodology is to recognize and measure the private capital mobilized in MDB project activities. “From Billions to Trillions: Transforming Development Finance” outlines the MDBs’ joint commitment to mobilizing increased investment from the private sector and institutional investors. * For brevity in this guide, MDBs will include both DFIs and MDBs. TABLE OF CONTENTS Definitions Measurement Attribution Comparison Key definitions related Inputs and Attributing & Comparing the MDB to the methodology measurement process preventing double methodology against counting among MDBs other mobilization reports 2 MDB Methodology for Private Investment Mobilization - Reference Guide – June 2018 SOURCES OF FINANCE DEFINITIONS MEASUREMENT ATTRIBUTION COMPARISON The methodology is focused on assessing the private financing mobilized by an MDB, which must be assessed on a project-by-project basis, since the financing structure for each or activity is unique. These definitions define the sources of financing in a transaction. Total Activity Financing (TAF) MDB Commitment Private Co-financing (PCf) Public Co-financing is the total financing from all public and is the sum of annual new investment is the investment made by a private entity, which is is the investment made by a public entity. private sources provided in connection commitment volumes of loans, equity, defined as a legal entity that is: Public entities include multilateral and with a specific activity for which the MDB guarantees*, etc. by an MDB. bilateral financial institutions, export credit (a) carrying out or established for business purposes is providing financing. TAF is composed of agencies, and any other institution whose MDB commitment for commercial and and the following three components: primary purpose is to benefit or promote a non-commercial risk guarantees consists (b) financially and managerially autonomous from specific national interest, regardless of 1. Commitment * of MDB exposure to the project (i.e. the national or local government. ownership. 2. Private Co-financing (incl. covered portion of underlying investment private sponsor financing) and any other future investments and Some public entities that are organized with financial financial and ancillary costs as request by and managerial autonomy are counted as private 3. Public Co-financing the guarantee holder). entities. Other examples include registered commercial banks, insurance companies, sovereign Note: Public co-financing is not included in wealth funds and other institutional investors this methodology, as its purpose is to * For non-commercial risk guarantees, investing primarily on a commercial basis. measure private mobilization only by the TAF consists of the sum of private and participating MDBs public co-financing. 3 MDB Methodology for Private Investment Mobilization - Reference Guide – June 2018 LEVELS OF MEASUREMENT DEFINITIONS MEASUREMENT ATTRIBUTION COMPARISON The methodology focuses on measuring and reporting private investment mobilized. Therefore, the only finance sources that are included in the methodology are MDB Commitment and Private Co-financing (PCf), also referred to as private mobilization. PCf is broken down into two key elements as described below. Private Direct Mobilization Private Indirect Mobilization is financing from a private entity on commercial terms is financing from private entities* provided in + due to the active and direct involvement of a MDB connection with a specific activity for which an MDB leading to commitment. Evidence of active and direct is providing financing, where no MDB is playing an involvement include mandate letters, fees linked to active or direct role that leads to the commitment of Total Private Mobilization financial commitment or other validated or auditable evidence of a MDB’s active and direct role leading to commitment of other private financiers. PDM does the private entity’s finance. PIM includes sponsor financing, if the sponsor qualifies as a private entity. = Private Co-financing are the sum of all PDM and PIM. not include sponsor financing. A sponsor is an entity or individual responsible for technical and financial success of activity 4 MDB Methodology for Private Investment Mobilization - Reference Guide – June 2018 WAYS TO SEGMENT THE RESULTS DEFINITIONS MEASUREMENT ATTRIBUTION COMPARISON Infrastructure The MDBs use a common definition to qualify transactions as infrastructure projects. Infrastructure is defined as underlying physical foundation or civil works (including integral and/or dedicated equipment) that support economic and social development. The following sectors are automatically classified as infrastructure: • Energy (electricity generation, transmission, distribution) • Water and waste management (water and sanitation, solid waste, irrigation, flood control) • Transport (roads, ports, airports, urban transport, railway, fluvial and maritime transport) • Telecommunications • IT within infrastructure sectors • Social infrastructure (schools, hospitals, etc.) Captive infrastructure, reserved for the sole use of a firm, is excluded Image by Samir Cabbarov, 2012. Via Wikimedia Commons 5 MDB Methodology for Private Investment Mobilization - Reference Guide – June 2018 TREATMENT OF LONG-TERM FINANCIAL INSTRUMENTS DEFINITIONS MEASUREMENT ATTRIBUTION COMPARISON Long-term financial instruments have a tenor that is at least one year. Short-term (< 12 month tenor) instruments are tracked and reported separately. For some instruments, special treatment is required to differentiate MDB Commitment, PDM and PIM. Long-term Loans, Equity & Islamic Finance Private co-financing is classified as PDM when there is a verifiable active and direct role played by an MDB in mobilizing a private financier. In the case of loans and Islamic finance, examples of PDM could include syndicated loans or any other case where an MDB plays a role similar to a mandated lead arranger. Collection of fees or MoUs are examples of auditable evidence. For MDB equity investments, a verifiable role that demonstrates an MDB playing an active and direct role must occur for private co-financing to be classified as PDM. Being an anchor investor is not sufficient justification and is classified as PIM. If MDB is General Partner (GP), other private investments in the fund committed at same financial close are considered PDM. If MDB is Limited Partner (LP), other private investments in the Fund committed at same financial close are considered PIM unless LP has an active and direct role in bringing in LPs. Lines of credit are loans from the MDB to financial intermediaries for on-lending to investment projects undertaken by final beneficiary companies. The lending by the private intermediary, as governed by the credit line agreement signed with the MDB, is classified as PIM. Any private sponsors’ own funds at beneficiary project level would be reported as PIM. 6 MDB Methodology for Private Investment Mobilization - Reference Guide – June 2018 TREATMENT OF LONG-TERM FINANCIAL INSTRUMENTS DEFINITIONS MEASUREMENT ATTRIBUTION COMPARISON Guarantees Short-term Finance (STF) The total amount of the loan or equity being guaranteed by the MDB is counted as PDM. This includes both commercial STF includes but is not limited to trade finance, supply chain finance risk guarantees and non-commercial risk guarantees. For commercial risk guarantees, the PDM is counted net of any amount and other programmatic support for real economic activity reported as an MDB commitment. where the tenor is less than 12 months. Guarantees by sponsors are counted as PIM and subject to attribution. In the case of Trade Finance. the portion of risk in a program not funded or guaranteed by an MDB that is funded or guaranteed by a private partner financial institution/ private confirming bank is counted as PDM or PIM., depending on whether the MDB has a verifiable active and direct role in mobilizing the private financier. The portion of risk distributed by an MDB on an unfunded or funded basis to private insurance companies or other private third parties is counted as PDM. For unfunded risk distributions, these flows would only be counted as PDM only if the three criteria for URTs are met (see next page). 7 MDB Methodology for Private Investment Mobilization - Reference Guide – June 2018 TREATMENT OF OTHER MOBILIZATION SITUATIONS DEFINITIONS MEASUREMENT ATTRIBUTION COMPARISON Unfunded Risk Transfer (URT) Client Bond Issuance Direct Transaction Support An unfunded transfer of credit risk associated with loans or When an MDB supports the issuance of a MDBs may also provide advisory services guarantees from an MDB to a third-party guarantor (like an bond by a client, the total amount raised by and related assistance to a client where insurance company or a commercial bank). Qualifies as PDM if it the client from bond issuance to private these services are linked to the meets all three of the following conditions: entities counts as PDM when the MDB can procurement of funds for a specific activity. demonstrate an active and direct role in Procurement of private financing linked to 1. The risk transfer is in respect of the specific set of assets which bringing private investors into the bond the provision of advisory services counted as the MDB is financing from its commitments issuance (while complying with legal PDM. 2. The timing of the commitment of the third-party insurer and the requirements). Being an anchor investor to MDB’s financing commitment are within twelve months of each the bond issuance is not considered an other active and direct role. 3. The MDB reduces its reported commitments by the same amount as the coverage of the risk transfer. 8 MDB Methodology for Private Investment Mobilization - Reference Guide – June 2018 DECISION TREE: CLASSIFYING & MEASURING INPUTS DEFINITIONS MEASUREMENT ATTRIBUTION COMPARISON This decision tree outlines how a reporting MDB would classify financing flows into a project. This decision tree applies to all instruments and situations where an MDB is co-financing alongside one or more private investor. Did the reporting Did another MDB MDB play an active Is the financing Is the co-financier a play an active and direct Start from an MDB’s own balance sheet? No private entity? Yes and direct role in the private No role in the private financier’s financier’s commitment? commitment? No Yes No Yes Yes Total MDB Public Co- Other MDB’s Activity MDB’s PDM Activity PIM Commitment finance PDM Finance Measured Inputs 9 MDB Methodology for Private Investment Mobilization - Reference Guide – June 2018 OTHER REPORTING CONVENTIONS DEFINITIONS MEASUREMENT ATTRIBUTION COMPARISON These include protocols and other data uniformity conventions agreed to by the MDBs. Timing of Measurement Reporting Period Reporting Currency 1. Timing of measurement for PDM is normally the commitment date of the PDM. is the calendar year, covering all is USD, at the applicable exchange commitments made during that year. rate as of the end of the calendar 2. Timing of measurement for PIM is normally the PIM commitment date if available. If not, PIM would be measured and reported based on the MDB's year being reported. PDM commitment date, or the MDB commitment date when the PDM commitment date is not available. 3. If no commitment date is available, the approval date of the MDB Commitment will be used. 4. Where the MDB’s financing contribution is made in several tranches over more than one calendar year, and a commitment date is not available, private co- financing is to be measured on a pro rata basis using the share of the MDB’s financing commitments in each year to the total amount approved by the MDB for the activity. 10 MDB Methodology for Private Investment Mobilization - Reference Guide – June 2018 ATTRIBUTING PRIVATE CO-FINANCING DEFINITIONS MEASUREMENT ATTRIBUTION COMPARISON Treatment of cross-regional projects which involve countries from more than one region, as defined by the TF. PcF is attributed on a prorated basis. Proration Formula There might be cases in which projects take place in more than one region. The ( ) percentage of PcF attributed to a region A is the share of region A in the total # of countries in region A number of countries in all regions of the % of PcF project. = attributed to region A # of total countries in region A and B If this calculation cannot be made, we advise the responsible manager to work with the respective project team to estimate the regional distribution. 11 MDB Methodology for Private Investment Mobilization - Reference Guide – June 2018 ATTRIBUTING PRIVATE CO-FINANCING DEFINITIONS MEASUREMENT ATTRIBUTION COMPARISON Treatment of regional projects which involve countries of more than one income group. PcF is attributed on a prorated basis. Proration Formula There might be cases in which projects contain countries of more than one income group. ( # of LIC in the region Total # of countries in the region ) = LIC % of PcF ( # of MIC in the region Total # of countries in the region ) = MIC % of PcF ( # of HIC in the region Total # of countries in the region ) = HIC % of PcF 12 MDB Methodology for Private Investment Mobilization - Reference Guide – June 2018 ATTRIBUTING PRIVATE DIRECT MOBILIZATION DEFINITIONS MEASUREMENT ATTRIBUTION COMPARISON PDM is attributed at its full value, less any adjustments in the case of guarantees or URTs, to the MDB which demonstrates the active and direct role. For the Reporting MDB For the Counterpart MDB Each MDB differentiates, at the project level, (i) its own Any private co-financing flows classified as the PDM of another Private Direct Mobilization; (ii) the Private Direct Mobilization MDB are not reported. of other MDBs; and (iii) Private Indirect Mobilization that is neither (i) nor (ii). To avoid double-counting and assign attribution properly, each MDB reports 100% of (i), 0% of (ii), and a prorated share (iii) equal to the MDB’s share in total MDBs’ commitments of the activity. 13 MDB Methodology for Private Investment Mobilization - Reference Guide – June 2018 ATTRIBUTING PRIVATE INDIRECT MOBILIZATION DEFINITIONS MEASUREMENT ATTRIBUTION COMPARISON PIM is attributed on a prorated basis, according to the reporting MDB’s share of all Commitments attributed to all MDBs in an activity. Proration Formula The ratio of the reporting MDB’s Commitments* to the total of all MDB ( ) Commitments is the way PIM is prorated and attributed to the reporting MDB. Reporting MDB’s Commitment PIM attributed In this way, the activity PIM is not double counted across both MDBs’ reports. X Activity PIM = to reporting MDB Reporting MDB & Other MDB’s Commitments Instead, it is apportioned between the MDBs. The cases starting on the next page illustrate this in practice. * Excludes MDB commitments as part of PDM attributed to another MDB. 14 MDB Methodology for Private Investment Mobilization - Reference Guide – June 2018 COMPARISON: MDB JOINT CLIMATE CO-FINANCE (CCF) APPROACH DEFINITIONS MEASUREMENT ATTRIBUTION COMPARISON The private mobilization methodology and climate co-finance approach are conceptually the same, with differences arising from the underlying purpose of the reporting initiative. Equivalences Differences • Both are joint approaches developed by the MDBs • CCF only reports climate-related projects and not the whole universe of MDBs’ projects • Both seek to report total private co-financing provided alongside MDB transactions • CCF reports co-financing from both private and public sources. • Both prorate the co-finance flows based on the proportion of total MDB commitments made by the reporting MDB; this is in order to mitigate double counting • Both only prorate amongst the MDBs, as both approaches are framed as assessments of co-financing invested alongside MDB commitments Report available here • Both cover the same range of transaction types 15 MDB Methodology for Private Investment Mobilization - Reference Guide – June 2018 COMPARISON: OECD AMOUNTS MOBILIZED FROM THE PRIVATE SECTOR DEFINITIONS MEASUREMENT ATTRIBUTION COMPARISON Both approaches have common underlying principles, but the scope of application and formulas used are different Similarities Differences • Both seek to demonstrate the private •The OECD approach does not differentiate between direct and indirect mobilization achieved through public mobilization as defined by the MDB approach. interventions for the benefit of developing •The OECD approach attributes private mobilization to all official development countries. finance interventions in a project (additionality assumption); the MDB approach only • Both only attribute private investment attributes this amongst MDBs contributing to the joint report . mobilization where there is concrete linkage •The OECD approach is work in progress. Currently, the measure covers five or a direct and active involvement of a public instruments (guarantees, syndicated loans, shares in collective investment vehicles, institution. credit lines and direct investments in companies). Work is on-going for standard grants/loans and project finance schemes. The MDB approach covers all instruments. • Both rely on validating evidence of the public institutions’ mobilization role. •The OECD approach defines infrastructure to include only economic infrastructure (roads, energy, etc.) while the MDB approach includes part of social infrastructure (hospitals, schools, etc.). Report available here 16 MDB Methodology for Private Investment Mobilization - Reference Guide – June 2018 CASE COMPARISON BETWEEN OECD AND JOINT MDB METHODOLOGIES DEFINITIONS MEASUREMENT ATTRIBUTION COMPARISON Instrument Example OECD Approach MDB Approach 30% of the guaranteed private loan is reported as PDM (the An MDB guarantees 70% of a loan provided by a private rest is added to the MDB’s Commitments) Commercial Risk The full amount of the private loan is attributed to the guarantor (i..e. bank, who is the sole lender to a project alongside the Guarantee the MDB) as mobilized private investment. 100% of the private sponsor’s investment is attributed as private sponsor PIM 50% of the value of the private lender’s investment is attributed to the 100% of the private loan is attributed to the MDB as PDM arranger, (i.e. the MDB). An MDB leads a syndicate that includes one private lender 100% of the sponsor’s equity is attributed to the MDB as Syndicated Loan The other 50% is shared proportionally (by commitment amount) and one public lender; the borrower is private PIM between all public lenders in the syndication (incl. the MDB if applicable). Nothing is attributed to the public lender 50% of the private investment is attributed equally between all public One MDB and one public investor commit to a CIV (flat investors in the CIV, 50/50 to the MDB and the public investor in this 100% of the private investor’s commitment is attributed to Collective structure) alongside a private investor with investments of example. the MDB as PIM Investment Vehicles USD 50, 30 and 20 million respectively; no direct or active The other 50% is attributed on a prorated basis of total commitment Nothing is attributed to the public investor role is played by any of the investors. between all public investors. An MDB guarantees 90% of a non-shareholder loan 100% of the guaranteed loan is reported as PDM Non-Commercial The full amount of the private loan is attributed to the guarantor (i..e. provided by a private bank, who is a lender to a project 100% of the private sponsors’ investments are attributed to Risk Guarantee the MDB) as mobilized private investment. alongside other private sponsors. PIM 17 MDB Methodology for Private Investment Mobilization - Reference Guide – June 2018 APPENDIX: COUNTRY LIST BY REGION DEFINITIONS MEASUREMENT ATTRIBUTION COMPARISON Africa: Angola; Benin; Botswana; Burkina Faso; Burundi; Cabo Verde; Cameroon; Central African Republic; Chad; Comoros; Congo, Democratic Republic of; Congo, Republic of; Côte d'Ivoire; Equatorial Guinea; Eritrea; Ethiopia; Gabon; Gambia, The; Ghana; Guinea; Guinea-Bissau; Kenya; Lesotho; Liberia; Madagascar; Malawi; Mali; Mauritania; Mauritius; Mozambique; Namibia; Niger; Nigeria; Rwanda; São Tomé and Principe; Senegal; Seychelles; Sierra Leone; Somalia; South Africa; South Sudan; Sudan; Swaziland; Tanzania; Togo; Uganda; Zambia; Zimbabwe. Asia: Afghanistan; Azerbaijan; Bangladesh; Bhutan; Brunei Darussalam; Cambodia; China; Fiji; India; Indonesia; Iran, Islamic Republic of; Iraq; Kiribati; Korea, Republic of; Lao People’s Democratic Republic; Malaysia; Maldives; Marshall Islands; Micronesia, Federated States of; Mongolia; Myanmar; Nauru; Nepal; Pakistan; Palau; Papua New Guinea; Philippines; Samoa; Singapore; Solomon Islands; Sri Lanka; Thailand; Timor-Leste; Tonga; Tuvalu; Vanuatu; Vietnam; Kazakhstan; Kyrgyz Republic; Tajikistan; Turkmenistan; Uzbekistan. Europe: Albania; Andorra; Armenia; Austria; Belarus; Belgium; Bosnia and Herzegovina; Bulgaria; Croatia; Cyprus; Czech Republic; Denmark; Estonia; Faroe Islands; Finland; France; Georgia; Germany; Gibraltar; Greece; Greenland; Hungary; Iceland; Ireland; Isle of Man; Italy; Kosovo; Latvia; Liechtenstein; Lithuania; Luxembourg; Macedonia, FYR of; Malta; Moldova; Monaco; Montenegro; Netherlands; Norway; Poland; Portugal; Romania; Russian Federation; San Marino; Serbia; Slovak Republic; Slovenia; Spain; Sweden; Switzerland; Turkey; United Kingdom; Ukraine. Latin America and the Caribbean: Antigua and Barbuda; Argentina; Bahamas; Barbados; Belize; Bolivia; Brazil; Chile; Colombia; Costa Rica; Dominica; Dominican Republic; Ecuador; Grenada; Guatemala; Guyana; Haiti; Honduras; Jamaica; St. Kitts and Nevis; St. Lucia; Mexico; Nicaragua; Panama; Peru; Paraguay; El Salvador; Suriname; St. Vincent and the Grenadines; Trinidad and Tobago; Uruguay; Venezuela, Republica Bolivariana de. Middle East: Algeria; Bahrain; Djibouti; Egypt, Arab Republic of; Iran, Islamic Rep; Iraq; Israel; Jordan, Kuwait; Lebanon; Libya; Morocco; Oman; Qatar; Saudi Arabia; Syrian Arab Republic; Tunisia; United Arab Emirates; West Bank and Gaza; Yemen, Republic of. MDB Methodology for Private Investment Mobilization - Reference Guide – June 2018