Financing for Development

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MOOC on Financing for Development
Second Google Hangout, “Questions and Clarifications Regarding Private Finance
10am-11am, Tuesday December 1, 2015
Source: https://www.youtube.com/watch?v=m2_WMoU6PaU
Moderator: Gargee Ghosh, Director of Development Policy and Finance, Gates Foundation
Panel:
Aaron Bielenberg, Senior Vice President at McKinsey & Co
Tara Nathan, Executive Director for International Development at MasterCard
Magdi M. Amin, Manager of Corporate Strategy and Partnership at IFC
Transcript:
Gargee: Good morning from Washington DC and welcome to the Google Hangout for week three,
private finance for development. I’m Gargee Ghosh, moderator for today, I’m Director of Development
Policy and Finance, Gates Foundation. I’m here with a great panel. I’ll ask them to introduce themselves.
Aaron: I’m Aaron Bielenberg, Senior Vice President at McKinsey & Co. My work is primarily power and
infrastructure sector. I focus on catalyzing private sector capital into developing markets, working a lot
with donors and private investors on the topics we will explore today.
Tara: I'm Tara Nathan, I'm with Mastercard Worldwide. I run international development. International
development is a function within Mastercard that looks at how we can create commercially sustainable
businesses to accomplish development objectives. So working on things like, financial inclusion, gender,
etc. Similarly working with development organizations from donors and funders.
Magdi: Hello, I'm Magdi Amin, I manage corporate strategy and partnership for IFC. IFC is the largest
development organization focused on entirely on the private sector. In corporate strategy we try to
position IFC against the largest and most important development challenges and see how they can be
aligned with the World Bank and other partners to help address them through the private sector. I'm
excited about today also.
Gargee: Thank you. I understand that you cover four key concepts this week and these will be the focus
of our discussion today. First, sources of private finance for development including philanthropic and for
profit. Second, motivation and drivers of that capital, including risk and reward. Third ideas about how
public and private finance work together including some innovations. Fourth, a focus on infrastructure
and finance. Let us proceed to your questions submitted online advance. There were a large number of
questions, we will go through them in a synthesized fashion. My job is to try to make the discussion
interactive. Let us start. I would like to hear from all of you ---- there is so much excitement about the
private sector and development. It featured prominently in the Addis Ababa conference on financing for
development. Tell me what you are excited about and where there is too much hype.

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Magdi: You nailed it. This year we have seen a couple of things happen including in Addis on financing
for development, New York with the adoption of the SDGs at the UN Summit. In the private sector there
has been a realization on all parts that the role of the private sector is central to development, in a way
that's been gradually the case over the last years, but really come into focus this year. I'm excited about
the realization that development really requires not only governments and civil society but the private
sector as well in a very large way. I'm also excited about innovations we are seeing, firms like
Mastercard, ideas coming out of firms like Mckinsey, the Gates Foundation. We are also trying also to
really push the envelope. There is a lot to be excited about. What I'm a little worried about sometimes is
that in an attempt to spur this along, including through entrepreneurship, sometimes we see too much
money -- or perhaps money isn't the problem -- it's really the ideas. A money first approach can
sometimes distort markets, which is a little concern.
Gargee: Is there one thing you want to debunk and one thing you want to confirm?
Tara: I would confirm that this notion that the private sector plays a key role. Not only from the
perspective of financing. But also from the perspective of expertise. And also in generating economic
activity. That is a key truism that I would like to see explored more. I'm excited that there seems to be
greater receptivity to greater engagement with the private sector and the legitimacy of private sector in
accomplishing key development objectives. I think the myth that I'd like to debunk is this notion that if
you build it they will be come and that if we say the words public-private partnerships they will exist. I
think there is a lot of work to do collectively at the community to actually get there. Work around
governments, eliminating perceived and real conflicts of interest both on the public as well as the
private side. Rules of governments and cultural norms around accepting the notion corporates being
profitable entities. Around the legitimacy of profit or not in a development context. These are some of
the things I'd like to explored more.
Aaron: I'm very excited by the level of interest we're seeing in the private sector. There is some
tremendous stories of renewables and the way that the private sector pulls capital from everything from
hedge funds to pension funds to banks, has got so much more comfortable with infrastructure,
renewables, that has technology risk, sometimes emerging markets risk, and this is created the largest
power generation technology that we're seeing. It has surpassed coal for the first time this year. There
are some tremendous stories in terms of levels of interest from the private sector. The innovation as
Magdi pointed out, has been quite remarkable in terms of the findings ways to have sustainable
infrastructure. The developing world is actually go to the retail capital markets. This level of innovation is
something that we haven't seen at scale before. Ultimately the challenge -- as Tara pointed out -- is that
if you say the private sector is there, it doesn't mean that the flows will be completely uncapped. The
conditions for success -- the enabling environment, transparency, and capital flows, all of the things that
we know are requirements for private sector investment have to make even stronger than before. What
we've seen over the past year is a lot of learning between both the private sector, public sector, and the
MDBs, in terms of what the requirements are and what the rates of return are. That learning has to

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continue. Ultimately enabling structures have to be put in place to facilitate that. We spent about $3
trillion a year. Less than half of that is private sector at this point. More than 70% of the private sector is
actually corporate, so large corporate investment in infrastructure. That means we are only spending
small portion from the financial institutions that hold our pensions at home and our insurance policies.
There is tremendous opportunity for growth of that capital. But it is only going happen through
coordination.
Gargee: Thank you. Let's get into some specific questions received. Tara, we had a question about
pension funds. There is a lot of excitement about sovereign wealth funds, pension funds, the trillions of
dollars of private sector available for development. What are the conditions under which you think we
can unlock some of that long-term investment capital?
Aaron: The numbers speak to that observation, fact. If you look at the assets available for investing, at
least particularly for infrastructure, but generally for development -- 80% of that is in pension funds,
large insurance companies, and also banks. The challenges are that -- and should be -- that they are
conservative investors. So their ability to take higher risks -- as seen in trends in innovation --- that is the
hope and the challenge. The pool of capital are clearly there. The interest is clear there. The interest to
invest in long-term reliable cash flows and assets, which actually fit the profile of infrastructure and
other assets is there as well. The bridge, the mechanisms, the ways to de-risk the investments for the
pensions funds, the way to actually create liquidity in the market which is a prerequisite for pension
fund investment, that is where we are going to see the innovation. Again, some of the project bonds,
some of the tools that have come to market, that where -- well of course there are bumps in that road
and it's easier said than done -- but then the pension fund capital is a great opportunity. The education
process for those investors has gone incredible well over the past few years, thanks to a lot of actors in
the market. We will see that allocation, although gradually we will see it increase in its application to
development.
Gargee: Thank you. Magdi, comment on this, especially the liquidity issue. We hear a lot about the
need for deeper capital markets to motivate the investment. Clearly that's necessary for domestic
savings, investments as well. What progress are we making there? What are best practices? Who are the
leading countries?
Magdi: Okay. So there are two parts to that question. It's a great question. Part of it is development of
deeper capital markets. There are plenty of large liquid capital markets in developed countries. But in
the places that need infrastructure the most that tends to be pretty scarce. There is work that is being
done in IFC, World Bank and other development institutions that issue bonds that are financed from the
capital markets can use our bonds issuing processes to help those capital markets deepen. In Rwanda
recently we issued bonds, including green bonds to help development their capital markets. The
governments themselves can start issuing on a regular basis in order to sort of develop a yield curve,
develop practices using some of their savings in capital markets. There is a lot of work on regulatory
capacity -- the FCC equivalents, the institutional investors themselves. Sometimes there are regulatory
restrictions that keep them from investing in infrastructure. So they will be putting their money into
AAA, treasury paper from developed countries, rather than develop their own market instruments. Now

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on the infrastructure side we are starting to see this work. A great example is Colombia where recently
we've been financing toll road program, which involved a lot of work on risk mitigation, a lot of work on
developing the regulatory capacity to look at and to transform these revenues streams coming from the
toll road process into instruments that institutional investors and capital markets can imbibe. It's
worked very well and it is going to be a program or a number of other infrastructure projects will then
be developed, through finance, through the capital markets, involved a lot of coordination and time but
we think that's paying off. Colombia is at the one end of this fairly developed market, it will take time
but we would want to see this then spread into other regions, lower income countries.
Gargee: Great, thanks. Tara, as you do you work for Mastercard, how do we think about the role of
corporate money in assisting the entry of private firms, capital, into the developing world?
Tara: I think it is a lot like how Aaron articulated it. It is really about derisking. So I think that when you
look at a really successful public--private engagement is one where public dollars can incentivize the
private sector to come in do what they do as their core business. In a market, or in a capacity, or in a
way, they wouldn't have done it previously. There are umpteen examples, one, we have a partnership
with IFC doing similar type of risk mitigation fund. What is that fund meant to do? It is really tackling the
issue of financial inclusion. We sort of say, we absorb a certain amount of risk as a company for
settlement risk across our network for institutions that are part of our network. In order to get to the
bottom of the pyramid, we know we have to go and reach out to tier two, tier three type of institutions
in partnership with the IFC. We have built sort of q risk mitigation capability that enables us to do that.
That's a classic example of something to me where we said, hey look, we may not have been able to
extend franchisees licensing to this type of lending, but now we can.
Gargee: I think that financial inclusion is a great example, where our role is to help build this market
faster than it would build otherwise, but supporting regulators, regulating banks, to build the digital
guard rails. But in the end this a private industry. You can put philanthropic capital in, but it's not clear
that this is needed when the industry is fully <inaudible>.
Tara: I think you are spot on, especially in the area of financial inclusion. There is an element of
regulatory stimulus or encouragement. Looking at things like 3-tired KYC -- frankly, even more basic than
that. Just fair trade, frankly, in the market is that something that is not really always something that we
can take for granted. So can global players come a play on equal footing with local, national teams? That
is something helpful. How can you bring to bear? I think the word we like to bat around a lot is this
concept of innovation. It is something that we are very passionate about. At Mastercard we have a
cultural of innovation that centers on everything that we do. But how can we apply this innovation, not
only to gadgets and gizmos, which is where a lot of the focus goes. There are all kinds of venture capital.
There's good money chasing bad money into innovations that already exist. You can't innovative on
something that already exists, right? So how do we leverage private sector expertise? Especially those
who have been doing this forever? Mastercard has been doing financial inclusion for fifty years next
year. Fifty years. There are companies in the telecoms space, there are companies in the power space,
who do this day-in, day-out. How can we leverage that expertise? This is what I'm really interested in. To
sort of, provide more informed guidance to the way that development dollars and private sector dollars

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are being invested. That's where we'll get real traction on innovation. As opposed to 15 new pre-paid
cards or reinventing the same payment systems.
Gargee: This course covers public and private finance. This is the place where see so much excitement.
That public dollars will be used just to elevate profits. How do you feel about that? I hope that I'm not
distributing this quote: "everyone wants to leverage, but nobody wants to be leveraged." Let's discuss
examples of really good PPPs where public dollars were used to really bring innovation or push the
private sector further than it would otherwise have gone. We all work in this space. It would be even
more interesting if you have a bad example.
Aaron: It's a great question. This is a debate that is happening all over. I think, frankly, collectively we
have better information and data as to when PPPs really do save on cost and time. And ultimately that
ends up being the <inaudible>. The government has a lot of attributes, a lot talents, a lot of resources,
but ultimately some governments are not the best at delivering. It's not a core capacity, a core business.
I think we will find that some governments are well suited to it. If you look at roads authorities, for
example, in northern Europe, they are very good at delivery roads. They are very good at managing
programs and are in many ways they are delivering. However, if you like at examples such as the UK, we
think that our private sector is able to deliver projects, schools, hospitals, roads, through the PFI
program they set up at a lower cost. The UK examples is an excellent one that shows that costs were
reduced through a good data set on government run projects compared with PPP, PFI projects.
Ultimately there's a focus on cost of financing and how expensive equity is, how expensive private
sector data is. Ultimately we find that this additional cost is more than compensated for by the
efficiency of private sector entity can bring to the table, who have built the road or bridge ten times. If
the auction for the PPP process does not allocate risks in the right way and expects the private sector to
do more than it normally does, then it gets very expensive. Then some PPPS have failed based on that.
Another great example is some of the IWPP powered programs -- water and power in the Middle East --
very good programs that started 15 plus years ago, where the government recognized that they had
limited capacity to develop large scale power. But they were focused on bringing that in-house, so
partnered with the private sector both on financing as well as the development BLN&M. They put
together very sound programs where the government got very good value for money and retained
ownership. Additionally they were able to train to increase professional capabilities.
Tara: The focus has to be on efficacy, as opposed to input. There's too much focus in PPPs on how much
is being made, how much the CEO makes does. What the CEO makes should be irrelevant to the
conversation. It should be instead a measure of efficacy or output for the price. What's the value for the
dollar? When I think of PPPs -- I don't if this is controversial but, I think -- I don't know if public-private
partnerships truly exist today. What I see a lot of is prevalence on the purely commercial side -- let's
concoct this enormously convoluted RFP, `that we then tender, that no-one can actually respond in an
efficient meaningful way, because entities formulating the RFPs don't have the expertise to actually
construct a meaningful RFP. Which necessarily then produces inefficient outcomes. Sometimes we call
these PPPs. On the extreme other side we have a lot of partnerships which are philanthropic. Brookings
recently did an assessment of the number of PPPs across a number of donor agencies. What they found
out was that philanthropic donations. Corporations making philanthropic donations is not a partnership.

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That's a donation. That's a philanthropic endeavor. What I think is really interesting is, how do we
unpack this central concept of a true public-private partnership. If you think what that word partnership
means, it means, we are all getting something out of this. So I think we just need to be really frank and
honest about what do you want? What are you trying to? And everyone who is around that table should
be upfront about what they need right now. Whether it's development outcomes, innovation, or
whether its profit. I think a lot of companies come to the table with what they are going to get out of it
is a sort of corporate social responsibility outcome. But I think that is dangerous. It is mythical solution
because it's not saleable. So if we are looking to solve the world's most pressing problems and we're
claiming that there is a 2-3 trillion dollar gap, you're not going to fill the gap through CSR dollars. You
may get a million dollars to buy some bicycles, but it's not going to be sustainable. The way you're going
to get us to the table in a really meaningful way is when we can come up with commercial models to
solve this issue in a sustainable way. One example headed in the right direction is one we did with the
Gates Foundation. The Gates Foundation gave a grant to Mastercard Corporate. It was very innovative
for us to open an innovation lab to focus on financial services for the poor. Think about it. We have labs
innovation capability. We built labs around the world. Typically we don't focus on the base of the
pyramid. Typically we've been located in countries like Australia, US, UK, Ireland. This lab's focus is
based in Nairobi, Kenya. It's a brilliant example of saying, we know you're the best in innovations with
financial services products, go do it, but do it from my segment, do it for my countries, and produce
these outcomes. We are being held to very strict outcomes. It goes back to Aaron's point -- measure the
development outcomes. What are the deliverables? What is the efficiency of how I could have spent
that dollar with you versus how I could have spent it elsewhere?
Gargee: Magdi, we had a number of questions on the extractives sector, which features prominently in
many developing countries.
Magdi: I am actually pretty excited about some of the developments with extractives. Of course in the
last year or so there has been a substantial drop in commodity prices across the board. Some of the
economics of this have changed. But as we were heading into 2015, you started to see a lot more
emphasis of what extractives sector do in the country development. Focus on both content. Some of the
policy approaches were trying a little too far, so that the mandate was a little too quick and too much to
be reinvested. But the supply-chains for extractives sectors create a lot of opportunities for businesses
to thrive. We've seen approaches, for example, a large mine creating a lot of potential long-term
growth, but in order to get that mine running, it requires the development of a railway, a lot of products
and services that were are training the private sector locally to provide. Now, part of the impact of the
extractives from a local development standpoint comes from that infrastructure, that railroad, for
example in Mozambique, is dual-use. It can help unlock agriculture, manufacturing and other services to
develop the country. So the extent you can get dual-use from the extractives infrastructure, the extent
to which you can get local content and local firms providing products into those supply chains, it's get
helpful. What's most important in the long run is that the extractives are managed in a way that it
transparent and that does not create redundancies, because the way that those exports might bid up
the currency, leading to other things becoming uncompetitive. It also about macroeconomic
management. I do see a lot of hope, lessons that have been learned. People are doing a better job of it.
With prices the way they are, maybe on the margins some of the local content opportunities might be

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harder to reach. Because countries are trying to compete for the scarce mining dollars that are out
there. Only the best opportunities are being exploited today. But that cycle will hopefully see better
partnerships on better terms. Good responsible terms. There are many in the extractives sector in
countries that have those resources.
Gargee: Participants have commented that we are using PPPs in the most general sense -- public and
private getting together to do something in development. Obviously there is a tighter definition of PPPs,
which is around a specific project. So just to clarify that we are using it in the broad, generic sense.
Magdi: Well, all of development we now know is a PPP. It is about the government, private sector and
civil society working together around the challenges. But there are great examples. In the health sector,
you might have a hospital that can do well commercially, but the additional cost of reaching low-end
consumers and service users / potential patients, might mean in the short-run a small amount of
subsidy. But that small subsidy is far cheaper than to try create an entirely public-driven system from the
ground. On the margin, there is sometimes a role for leveraging small amounts of public money, but
then leveraging it with the power of the private sector that can then develop that service sustainably.
We like partnerships that we now see in cities -- we see it in Turkey, in Izmir -- a focus on building
infrastructure sustainably, in a green way, that has then has translated into an ability to issue cheaper
bonds so that Izmir can finance itself. We like what's happened in solar. Solar prices are coming down
quickly. With initial options there might need to be a little bit of a margin. First of all, technical
assistance. A little margin may be needed to bridge the gap between very cheap fossil fuel sources and
solar. But as the markets get more mature and more competition occurs, eventually it will move to
commercial delivery. So, early bridging the gap, getting the markets to work, providing the technical
assistance. There is extremely well leveraged forms of public money that then create real, true,
commercial opportunities.
Gargee: We have a question on sub-national governments. Sub-national, states, provincial, city
governments deliver many of the services that matter to people -- health, education, etc. Their ability to
raise revenue is constrained. There is the Izmir example, but there are many counter examples, for
example Dhaka. What do you think needs to happen more of? What's been your involvement at the sub-
national level?
Aaron: We are in many way at the beginning of thinking of solutions and about innovating. Having said
that, we do have a lot of models, in the US for example, the <inaudible> market which has had its ups
and downs, but has been quite successful and helpful in creating a liquid environment for investors for
investors to support cities and states in financing infrastructure. There are a number of questions -- can
you replicate that? It's a question of how deep is the market. Luckily, as Magdi pointed out, in many of
these countries, the local capital market which actually funds these community bonds usually tax
benefits aren't there, so it doesn't work. We're only starting to see in the emerging markets a deeper
market at the national level. The credit metrics, the engagement with the ratings agencies, the investor
education process -- all of those things that are required to let the market form for bonds, for sub-
sovereign, are really just starting. That said, in more developed markets, like the Emirates, who have
been issuing for some time for infrastructure programs and are now some of the larger cities -- which

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are truly the drivers of the economy as we know and are the sites of population. An increased concerted
effort is happening in the market to understand the credit profile of cities. To understand them as very
creditworthy counterparties, to the extent that their taxes are in place, to the extent that they monetize
some of their government services. There needs to be a lot more innovation in how governments
provide services and how they monetize them and how they create transparency. We have a lot of great
models. Issuing municipal financing instruments has really been going for some time. It's a matter of
creating transparency and capability at the city level. But it's quite exciting. We are seeing in the US that
most of the demand for infrastructure is at the local and state level. But a lot of the finance has been
allocated at the federal level. So there is a mismatch.
Magdi: I think Aaron nailed it. I wanted to add that mayors in cities are a really big source of innovation
in development right now. I am very excited by what we saw in terms of the response to Paris coming
out of the private sector and cities. We are also seeing some of the most innovative and interesting ways
to make cities more sustainable. Cities are where the private sector can thrive because sometimes the
private sector requires the ecosystem to be developed. But also a conglomeration really matters.
Development happens when a lot of forces are at work at the same time -- financing, infrastructure,
policy, regulation. Sometimes it requires scale. Which requires concentration. So it's natural that you see
cities as drivers, as nice laboratories for development. Now with the ideas that are starting to come in
and the mayors as -- in a way -- drivers of innovation, we are seeing the start of a very nice revolution
that we're excited about.
Tara: We think of the city issue from maybe two different dimensions. One is the concept of
transparency and how can digital payments infrastructure create transparency within a given economy -
that obviously happens at the city level. What we've seen is that can drive incredible amounts of
efficiently. The more you digitize an economy. We've done or seen studies that talk about the cost to
produce, manage, and operate cash can be upwards of 1.5 -2 percent of GDP. That's a huge operational
cost of cash that can then be reinvested in the city. Add on top of that issues of corruption, fraud, things
falling off the back of a truck and whatnot that number has ranged from 5-10 percent in terms of loss of
capital flows. On this issue of transparency, as we're thinking about cities and smart cities, how do we
incorporate into it notions of building a digital infrastructure is something that we think a lot about. This
touches on the issues of remittances. It's not just about creating greater efficiencies in the cities and
economies in which we are operating, but how can digital infrastructure encourage flows of income into
a given market. We know that there are many nations for which remittances exceed ODA, FDI, and all of
that combined. I have heard anecdotally, that if you visit certain cities in the summer in China -- an oasis
in the middle of nowhere -- you see high-rises, water, houses, and everything completely being built on
this notion of remittances. The extent to which we digitize is the extent to which we can ensure there is
transparency, efficiency. Those funds go to their intended.
Gargee: Tara can you pick up on this point of creditworthiness and credit profiles. This is an issue at all
levels, from the individuals who are trying to reach with financial services, to cities, sub-sovereign
entities. What are some of the innovations you're seeing in how we assess and understand
creditworthiness?

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Tara: There are a lot of cool innovations in this space. At the heart of it, we need to -- especially for
populations that are off grid, or are not included -- the idea is, how do we get a sense of their
creditworthiness? Some of the things we are doing include this partnership with IFC. Can we come up
with... that approach is not a new way of assessing creditworthiness; it's a new way of dealing with the
risk of creditworthiness of tier two institutions. When you talk about new innovations in the sphere of
assessing individual risk, they have cycle metric tests. We have a partnership with Harvard's EFL labs,
that's doing things like behavioral diagnostics to understand better how someone would perform in a
credit situation. Some things we are doing at Mastercard that I'm interested in include just starting to
track digital signature and digital payment behavior. How can that start to create a credit profile? These
are some of the benefits of digitizing. You start to create a digital signature and footprint that can then
be leveraged by that individual to get credit, get access to many other capabilities.
Gargee: We want to discuss a question from participants on political risk. There has been a long
standing, not myth, perception that political risk in the developing world is so great that private finance
sources can't or won't come in. How we made progress on that? And what's next? How big of an issue is
political risk or stability? Our question actually asked about democracy, but I think that's even harder.
How prominently does that feature as you think about private investment?
Aaron: Quickly, the studies that have been done, say on PPPs between emerging markets and developed
markets actually show that there is not too much of a difference in terms of default. Nationalization is
relatively rare. In the scheme of things, political risk is an issue, but actually it manifests very much in the
development cycle, early stage, less so once the projects have been structured. Issues related to clarity
on land rights, land reform, those are very real political risk issues that have been holding back
development. At the same time, political risk in its big shape of nationalization or default after change of
governments are relatively rare. The key point is this risk is mitigated by products the World Bank offers,
it's mitigated by guarantees that governments provide often. But really the private sector tends to see it
as best mitigated through institutional structures and capability, and a long term view of the
government towards infrastructure and development. What the private sector is really looking for is
true partnerships. It's not just one off investment opportunities, but at pipeline investment
opportunities, strong regulatory structures, strong industries, lifetime administrators. That type of
framework creates the conditions for lessening political risk beyond the natural political cycle. At the
core, a lot of the development infrastructure financing, there is a mismatch between the political cycle
and the lifecycle of the project. That mismatch is at the core of the risk that has to be allocated in this
investment. The way around is enduring political institutions and monitoring compliance that reinforce
the private sector's comfort with political risk.
Gargee: What risks do you see these days? What risks are you worried about?
Tara: I tend to think that you know political risk is priced into your business model. That that is the way
we need to think about it. There is a great opportunity to help the private sector. Derisking from a
political perspective, for us, the way we mitigate and we think about it is through partnerships directly
with governments. We place a lot of emphasis on direct partnerships with all governments in the
markets in which we operate. Another key aspect for us is that we're local in each one. Therefore, for us
the notion of political, I think, is very different. We are present in 200 countries and territories, more

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than the UN, we like to say. When you're a local in that market, your notion of risk alters because we're
locals. I will bring it back to this notion of developing by local business models. To the extent we can do
that and create those infrastructures, we entice not just corporates but local private sector entities to
grow, develop and flourish.
Gargee: Thank you, Tar. Magdi?
Magdi: I want to take a slightly long term view on this question. If we go back a couple of decades, the
perception of the emerging markets was that political risks, the opportunities to invest there, were far
beyond what the global private sector, corporate sector might consider. I think there is a broad
realization that we understand that we're part of, and that's where the long term global opportunities
are. The tendency toward more and more focus on emerging markets and differentiating those that
have better and worse political, policy, and regulatory environments, is there now. So it is really a
different picture, but there is another issue. As this long term pendulum has swung, toward more
engagement with the private sector and more growth, we are also seeing inequality. Inequality plays out
in ways that do pose a political risk to the private sector and to this broad notion of opening markets
and helping to create a mixed sector, and one where the private sector can flourish. Part of the answer
to that is the private sector itself adopting sustainable and good practices. Being mindful of regulation.
Another part of it is good regulation, smarter regulation. We were talking earlier about public private
partnerships. We see many situations where there are a lot of subsidies involved in holding up sectors
with artificially low prices, or where utility is used to serve political purposes rather than to help the
sector provide overall services to everyone. So well designed smart regulations, can help address
inequality and the role of the private sector. The long term trend is good. There are instruments to deal
with political risks to provide comfort. But on the one hand better regulation, and on the other hand,
the private sector leaders in the private sector setting the model, setting the template, for how good
sustainable private investment is done.
Gargee: I would just add from our perspective an additional risk of information asymmetries. Even in our
business, the accessibility of information about markets is a real barrier. If I had a wish, it would be in
the health sector you have so many sources of data on health markets. In financial services, we and
others invested in Findex(??), which is a first demand side of what consumers are actually wanting in
terms of financial products. We need more of this kind of consumer information and data to debunk
some of the myths about risk and make the markets more accessible. I want to go back to questions. I
apologize that I haven't been naming people who have been asking questions, so I will start to do that
now. We have two questions are sides of the same coin. Obviously we are having parallel conversations
about the micro, individual, firm level, and then the macro, country level. We have two questions about
groups that are perhaps going to be left out of the private sector interest. On the macro side, small
island states and other vulnerable countries are not going to be as attractive to private capital, and that
question is from Paula. On the micro side, innovation and startups, who won't be as exciting to private
capital from abroad, that question is from Javier. What advice do you have? Are we wrong in thinking
that some groups are going to be left out of the private finance?

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Tara: I'd say on the private sector side, there is a whole lot of money and funding being spent towards
startups. I think that innovation is investment in startups, in the developing world. For example, the
Gates Lab in Africa, which is aimed at investing and incubating the developing and partnering with local
startups to do just that. The idea that we have is that solutions for the developing world will come from
the developing world, in a lot of cases. The entity involved doesn't have to be huge. For us, we look for
the ability to partner. We look at the opportunity and innovation, and what is potential impact we can
have. We have a lot of faith and are doing a lot of investment internally and partnering externally in
small startups.
Aaron: I would agree. I think there is a lot of areas of activity focused on startups in emerging markets.
There is over 250 plus private equity venture firms focused on Africa. There is a lot of attention. The
challenge there is how do you scale, how do you grow those companies to into being someday even
beyond SMEs? Someday to be national champions. Where is the liquidity stored for the investors in that
market? That is yet to be solved. Hopefully the maturity of the market will allow the interest in startups
to create sustained <inaudible>. I would add that some countries, generally, what we've seen for
infrastructure for some of the pools of capital from banks, pensions funds is, the transaction costs to
understand a small market are simply too high to justify investment. Even with the expanded
understanding and interest in emerging markets. To the extent that all countries can collaborate among
themselves and work in regional trade organizations can work collaboratively where they can pool their
capability to develop a pipeline of projects. They could pool their resources to market themselves, to
attract investors. That's really the way it's worked. It's worked in ASEAN and other larger regional
setups, where the investor base needs to have a broader palette of opportunities to engage. That is a
real concern. Some of the development organizations are doing tremendous work in smaller countries.
But the transaction costs still remain high.
Gargee: Magdi, what is the IFC doing to help them?
Magdi: The question of exclusion is an important and serious one. We know that when given the
opportunity, those that have been excluded, women, in some regions youth, small countries and
regions, do have innovative solutions that can scale. Often, they face barriers. They face very tough
regulatory environments where who you know and who you can pay might be the way into an
opportunity. So for us, getting regulation right, working with other colleagues from the governments,
the World Bank and others, to reduce the friction and make regulations streamlined and simple, help
those groups who would otherwise be excluded. Financial inclusion is essential. Skills, education,
whether it's public, private or non-profit, is really essential to get to those groups. Vocational training.
Education that's relevant to the market. But in the end, competition. Even small excluded markets or
even large markets, if they setup and raise barriers to competition, they become small. And it's short-
sighted, short-term way of looking at things. So don't make yourself artificially small and if you're small
make sure that the transaction costs are low so that you have a chance. Any market can be viable, even
if it's small. But also big markets can also be very unviable with the wrong framework. We are focusing
on getting regulation right, but also on helping on inclusion through finance, through using value-chains
and supply chains to link excluded groups to markets.

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Gargee: We have about five minutes left, so I will ask for about 30 seconds for closing reflections on any
of the questions that you've seen asked. Tara, can I start with you?
Tara: Closing thoughts. The salient points that have emerged from me are: number one, a lot of hope
and enthusiasm around the potential and power of the private sector to create transformational change
across key development issues. The power of the private sector to play a critical role in innovation. Not
just technological innovation, but innovation of business models and market strategies. I have a lot of
enthusiasm, and I've heard a lot of positive reinforcement around the notion of how public and private
can partner together in order to derisk private sector engagement. But I will call with the caution and
call to action that, in order for this to work and for us to talk about how PPPs could support the SDGs,
and how we're actually going to start implementing this, we need to start getting down to an
operational and tactical level, that asks, what are those legal and operational constructs, commercial
constructs, that are going to enable these partnerships to thrive.
Magdi: Closing thoughts. I want to come back to where we started. We're at a great moment with
realization in the private sector and in the public sector, and in civil society that the importance of
getting this great engine of entrepreneurship going on development. And the realization that when a
firm thrives, it creates jobs, delivers services, and in the end of the day even pays the government in
terms of taxes. How can we harness that on the most important and difficult challenges? How can we
bridge the serious challenges the governments face with the interest that the private sector has with
helping to solve problems. I think that we're in a great moment. I love the innovation that's
happening. But it's a long, hard, difficult slog and we'll keep working on it.
Aaron: An important thing we've covered is how important coordination is between the public and
private sector. Obviously that's a broad topic, but we've seen a lot of barriers broken down, we've seen
a lot more communication over the last couple of years. I am also very optimistic. But truly finding ways
to coordinate between the both core capabilities and capacities of the private sector and the public
sector. The social impact goals and who is going to be responsible for achieving those in a transaction, in
a program, in a funding regime. Whatever it may be. Actually getting to the core about what
coordination means and then operationalizing it. That's our challenge as we start to start to implement
the SDGs. One of the key things is how we shift how we evaluate credit and integrate data into every
decision that would create the transparency to improve the credit quality. But also to help the
coordination mechanisms work better.
Gargee: To close, here are some final thoughts of my own. This morning was in a meeting with my boss,
together with the head of major bank, the Secretary for the Treasury, Secretary of Finance from Mexico,
all talking about how they work together to ramp up financial services for the poor in the next 3-5 years.
That was not a discussion we were having even 5-8 years. So I would say there is real momentum and
willingness now. Thank you to all participants for their questions and participation. A video recording is
available on youtube here: https://www.youtube.com/watch?v=m2_WMoU6PaU

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