Much will depend on how the multilateral banks choose to use their capital. Many have now recognized that their current lending models are insufficient to drive the scale of change required. Most now believe that their capital would be better put to work by leveraging multiples of private sector capital through financial instruments that enhance the credit of the senior debt portion of the financing and, in doing so, give access to the full extent of the capital markets.
The result should be a massive injection of institutional debt over the coming years. The newly minted Asian Infrastructure Investment Bank (AIIB), for example, has clearly stated that it will use some of its US$100 billion to catalyze private sector investment. The EU’s Juncker Plan aims to turn EUR21 billion of public money into EUR315 billion of private investments. Others are now shifting their models in the same direction.
That being said, changes in policy often take some time to translate into action so there may be some delay before the acceleration in investment takes hold. The risk in the short term is that limited deal flows will see new public sector capital crowd out private sector debt. This is acceptable for a short period, but only if it acts as a catalyst for a new and greatly expanded institutional debt market.
The big question is whether the multilaterals will be able to take the right steps at the right time to truly unlock private investment. If they are able to get it right, the world should enjoy the massive benefits that will flow from a more-liquid debt market. But the long-term prize must stay clearly in view; the goal here is not to invest billions over the next two years but rather to catalyze some US$70 trillion in investment over the next 30 years.