Why is additionality key for private sector development finance?
To this end, as part of efforts to mobilize greater private investment for development, a group of multilateral development banks (MDB) has established a harmonized framework for assessing the additionality of their private sector operations.
What does additionality mean for MDBs and their private sector clients?
The concept of “additionality” captures the basic idea that MDBs should contribute beyond what is available in the market and not crowd out the private sector. In other words, they step in to fill market failures, rather than compete with private markets.
For our private sector clients in developing and emerging markets this means gaining access to financing or innovative financing structures and instruments that the local capital markets or financial sector would not otherwise provide, such as local currency or extended tenor financing. It also means that in addition to financing, MDBs can help clients structure more sustainable projects in terms of environmental, social, and governance standards, among others.
While additionality is context and project-specific and the implementation of the framework needs to be suited to each MDB’s business model and specific mandate, this harmonized approach allows for a more effective and efficient conversation with shareholders, impact investors, clients, and other stakeholders.
How does additionality work in practice?
To illustrate how the IDB Group provides additionality to its clients on different fronts, let’s take a look at a new IDB Invest wind project in Argentina, La Castellana. IDB Invest financing was provided in the context of the first public auction held by the national company that regulates wholesale energy to develop the RenovAR renewable energy program. Leading up to the auction, IDB Invest advised the Ministry of Energy on preparing bidding documents and energy purchase contracts to ensure the bankability of the projects and maximize investor participation. La Castellana marked a milestone for the Argentine financing market, as this was the first long-term project finance operation to be closed in the country since 2001, signaling the important role multilateral financing plays in reigniting financial markets and reassuring private investors. In addition, IDB Invest mobilized $5 million in concessional donor resources to offer financial incentives to the project manager, Central Puerto, to implement a comprehensive gender equality program at the company level.
Likewise, providing knowledge and technical support to help clients across different sectors, from manufacturing and agribusiness to financial institutions, make tangible and lasting improvement in gender equality, management of environmental and social issues, and corporate governance capabilities are among the ways that IDB Invest provides value beyond financing.
For example, in the agriculture sector, we are working with agro-exporter Danper in Peru to design a gender action plan, including adapting the company’s procurement practices to integrate more women-led companies into its value chain. We are also working with companies across sectors to help them navigate the impacts of climate change by mitigating risks, increasing resilience, and identifying ways to operate more sustainably and capitalize on new business opportunities.
More broadly speaking, as part of the project approval process, we evaluate and score both the expected development impact and the additionality (financial and non-financial) of every operation, answering questions such as: Are the project outcomes likely to be achieved without IDB Invest financing? How can IDB Invest’s participation ensure the achievement of development outcomes in a more sustainable way? How can our involvement ensure that clients will improve environmental, social, and corporate governance outcomes or gender equality practices? For more details on our additionality approach see the 2018 Development Effectiveness Overview.
Ultimately, alongside financing, additionality is at the core of IDB Invest’s mission to bring value to its clients and promote development through the private sector across Latin America and the Caribbean. And, being part of this harmonized Additionality Framework helps to ensure that collectively, MDB resources are used in the most catalytic way possible and that they go toward addressing the world’s most pressing challenges in line with the 2030 Agenda for Sustainable Development.
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