The Role of Private Capital in Shaping a Sustainable Future in Latin America and the Caribbean

Key Highlights

• Since 2018, nearly $16.4 billion in private capital has been mobilized in Latin America and the Caribbean, including from WB Treasury transactions.
• Among other impacts, this private capital will help generate almost 3,000 Megawatts of renewable energy capacity.
• The Dominican Republic, thanks to the technical assistance delivered by Finance, Competitiveness, and Innovation, with the support of Treasury in developing a Sovereign Green, Social, and Sustainable Framework, placed its inaugural US dollar sovereign green bond in the international capital markets, with a maturity of 12 years and an annual coupon of 6.6%. The transaction was oversubscribed 6 times and raised $ 750 million, reflecting strong and diversified investor demand. It supports expenditures on low carbon transportation, renewable energy, efficient and resilient management of water and wastewater management, and natural resources, use of soils and protected marine areas. The framework was recognized highly by S&P as a second party opinion and some elements of this Technical Assistance became part of a recent Development Policy Operation.
• In Argentina, World Bank guarantees totaling $730 million and assistance from the International Finance Corporation helped raise more than $3 billion in private financing over three rounds of auctions to build 147 renewable energy projects.
• Also in Argentina, the Innovation Program for Smart Growth (PINCRI) project (P175143) includes a “Strategic Innovation and Growth Equity Window” through which the project will co-invest in innovative start-ups, along with the private sector (financial intermediaries and partner investors), in funds created and/or managed by professional fund managers. The objectives of the funds will be to support start-ups and regional cluster funds (e.g. business angels, accelerators) and green growth and diversification (VC funds). The project will allocate $40 million and with an expected private capital multiplier of 4 to 5 may mobilize up to $115 million. A call for fund managers was closed at the end of 2023 and potential fund managers’ proposals are under review.
• In Honduras, a $26 million infusion of private sector capital in the context of COMRURAL II (P168385) and COMRURAL III (P174328) helped rural producers gain access to markets and financial products.
• In Ecuador, a World Bank Investment Project Financing (IPF) (P172899) line of credit has enabled a local development bank to increase credit provision to productive MSMEs from 3,000 to 13,000. Groundwork on the national guarantee scheme that is also part of the project is expected to mobilize $240 million in private capital for productive purposes.
• In Mexico, World Bank´s $1 billion, Development Policy Financing (DPF) will support the Government’s efforts to improve the policy framework for sustainable finance and access to finance for MSMEs. Cumulatively, private capital enabled (PCE) through the Prior Actions in the DPF is expected to reach at least US $11.2 billion by 2025. This builds on extensive just in time TA provided during the last 3 years, including support to develop the sustainable taxonomy (first one to include gender considerations).
• In Jamaica, a CAT bond issued in 2021 intermediated by the WB Treasury and with substantial WB TA on Disaster risk management (P163012) provided the Government with financial protection against losses from named storms for three Atlantic tropical cyclone seasons. The original transaction mobilized private risk capital for $185 million, while a renewal transaction in 2024 mobilized $150 million for another 3 years.
• Also in Jamaica, Technical Assistance and a Project Preparation Facility under the recently closed Foundations for Competitiveness and Growth project (P173165) have had far-reaching impacts, encompassing the mobilization of private capital and enhancement of institutional capacity. The project assisted the government in attracting private investments in key infrastructure assets through PPP and privatization. Several transactions were completed in various sectors, including renewable energy. Private Capital in the amount of $487 million has been mobilized. The Development Bank of Jamaica is now strengthened with better capacity to manage PPP transactions; engage with local stakeholders, investors and transaction advisors including IFC. The Ministry of Finance's PPP Unit is stronger with tools for PPP Fiscal Risk Management, Value for Money analysis and Economic Analysis.
• The Jamaica Access to Finance project (P152307 - $15 million) has mobilized, through the Development Bank of Jamaica (DBJ), 2,049 guarantees totaling US$106.9 million in loans to SMEs. In addition, JASMEF, DBJ’s investment fund capitalized by the project, has successfully mobilized private investments totaling US$10 million, exceeding the initial IBRD allocation of $7 million. One investment totaling US$1.95 million has been finalized and several others are currently in progress.
• Brazil plays a leading role in the world's transition to sustainable food production. A World Bank IPF to Banco do Brasil (P178888) of $500 million is mobilizing up to $1.4 billion more from Banco do Brasil’s own resources and from investors in a private fund created by the project. Financing will target SMEs and companies that will be independently validated for emission reductions in their operations. The project aims to scale up sustainability-linked financing of decarbonization investments across various sectors, including scope three emissions and agribusiness supply chains.
• Beyond World Bank lending operations and technical assistance, technical assistance from the World Bank Treasury’s Sustainable Finance and ESG Advisory Program has helped the Ministries of Finance of Colombia and Brazil raise USD 4.9 billion from the private capital markets. Brazil’s inaugural $2 billion sustainable bond proceeds were allocated to deforestation control, biodiversity conservation, the National Climate Change Fund that focuses on renewable energy and clean transport, etc., and programs to combat poverty (Bolsa Familia) and hunger (Food Acquisition Program). Colombia’s sovereign green bond supported expenditures on clean and sustainable transport, sustainable management and sanitation of water, ecosystem services and biodiversity, energy efficiency, sustainable agricultural production, circular economy and climate change adaptation.
• Since FY18, World Bank has executed 20 catastrophe (CAT) bonds and derivatives mobilizing USD3.8 billions of private capital to provide coverage for Latin America and Caribbean countries like Mexico, Chile, Colombia, Peru, and Jamaica against extreme disaster events such as hurricanes and earthquakes. These CAT bonds enable countries to get access to fast-disbursing and cost-effective financing from the international capital markets, without increasing sovereign debt.

Challenge

The region faces several obstacles:

1. Inconsistent and uncertain regulatory frameworks increase investors’ perceived risks.
2. Lack of proper skills and weak managerial capabilities limit innovation, productivity, growth and job creation.
3. High financing costs and stringent regulatory requirements limit growth and innovation capabilities. This could particularly hurt vulnerable yet entrepreneurial demographic groups: Micro, small and medium enterprises (MSMEs) and SMEs, agricultural workers, women, and youth.
4. Poor or outdated infrastructure raises projects’ costs and risks, hindering new investment opportunities.
5. High political, credit, and operational risks may deter investors due to inadequate risk mitigation options.
6. Challenges in meeting Environmental and Social Governance (ESG) criteria complicate investment decisions due to issues in impact measurement and verification.

Approach

As of 12 June 2024, the World Bank portfolio of projects in the LAC region consists of approximately $36.2 billion in net commitments; 15 of these projects are also expected to generate Private Capital Mobilized (PCM) totaling $4.6 billion (~12.7 percent of the total net commitments). Additionally, WB Treasury intermediated bonds and TA leading to clients’ bond issuance represent around $8.6 billion worth of PCM in outstanding bonds in the region that are not associated with any WB commitments. Therefore, the total Private Capital Mobilization (PCM) corresponding to the active portfolio that has already been realized and is still expected to materialize amounts to $8.1 billion.

The Maximizing Finance for Development (MFD) program is the World Bank Group’s approach to increase private sector investments in development projects. It focuses on addressing market failures and capacity gaps to enable private investment in areas where it is viable, allowing public resources to be allocated more efficiently elsewhere. MFD prioritizes sustainable, economically viable, transparent, and environmentally and socially responsible private sector solutions.

In LAC, the World Bank is using financial instruments (e.g., guarantees to de-risk investments), technical assistance (e.g., advisory and knowledge services), and capacity building (e.g., supporting the financial sector) to support sustainable development, economic transformation, and resilience, particularly around:

• Inclusion and access to finance and markets for underserved groups, including women-led MSMEs, rural communities, and smallholder farmers.
• Promoting sustainable finance, enabling MSMEs and the broader financial sector to integrate ESG considerations into their operations (e.g., decarbonizing MSME operations in key value chains through aggregation models).
• Focusing on enhancing skills, innovation, productivity, and competitiveness in key sectors (e.g., agroforestry, energy, housing, bioeconomy, blue economy, circular economy) supporting technology adoption, inclusive business models, and the development of entrepreneurship and innovation ecosystems.
• Supporting the strengthening of institutional frameworks and capacity building for public entities and private sector stakeholders, in order to promote private sector partnerships and improve the enabling environment for PCM.
• Focusing on building resilience and adaptation to climate change impacts across sectors.

Results

The World Bank—through the International Bank for Reconstruction and Development (IBRD), the International Finance Corporation (IFC), The Multilateral Investment Guarantee Agency (MIGA), and the International Development Association (IDA)—has worked with several countries in LAC to mobilize private capital in areas such as renewable energy, infrastructure development, education, competitive jobs, and health.

Addressing the substantial financing gaps in infrastructure, including renewable energy projects, is pivotal for economic growth in LAC. In Argentina, the government's RenovAr Program sought to increase privately-generated renewable energy production through auctions to purchase renewable energy from private sector-led independent power producers (IPPs). World Bank Group institutions helped throughout the process.

The IFC helped design RenovAr program, review bid documents, and devise risk mitigation structure in close collaboration with IBRD.

The World Bank, over the course of  three funding rounds starting in 2016, provided an IBRD guarantee totaling $730 million for roughly 4,400 Megawatts (MW) over 147 mostly solar and wind projects through the Renewable Fund Guarantee (Fondo para el Desarrollo de Energías Renovables or FODER in Spanish). The Multilateral Investment Guarantee Agency (MIGA) provided political risk insurance to foreign investors.

The first two rounds mobilized around $3.2 billion in renewable energy financing, showcasing an innovative approach using financial intermediaries to raise private capital and mitigate investment risks, significantly contributing to Argentina's sustainable energy goals and climate commitments. 

Enhancing the productivity and competitiveness of small-scale producers is crucial for fostering economic development and reducing poverty. In Honduras, several World Bank projects have used private capital to enhance the productivity and competitiveness of small rural producers.

Between 2008 and 2021, the Honduras Rural Competitiveness Project (COMRURAL), which used IDA credits to encourage private investment, linked small farmers to domestic and international markets. More than 50,800 small rural producers have benefited from improved financial inclusion, technical capacity, and market access under COMRURAL. The project has raised $26 million in co-financing from the private financial sector and raised the ratio of private capital mobilization from 0.9 to 1.23.

Since 2019, two additional projects have deepened COMRURAL’s approach: the Integrating Innovation for Rural Competitiveness in Honduras (COMRURAL II) and the Innovation for Rural Competitiveness Project (COMRURAL III). COMRURAL II is expanding the program’s coverage from seven to 13 departments in Honduras to reach 18,000 beneficiaries with business plans. As of October 2023, the project has created 6,698 full-time jobs under business plans financed by the project. COMRURAL III is expected to directly benefit more than 22,500 rural households (90,000 people) led by farmers or agri-food entrepreneurs and indirectly help nearly 264,000 Hondurans (e.g., partners or allies of producers) with improved job opportunities.

In Ecuador, a World Bank project has boosted credit to productive MSMEs by supporting development bank CFN in moving its operations to second-tier (that is, placing credit through other financial intermediaries). This has enabled CFN to increase the number of MSMEs receiving credit from 3,000 in 2019 to 13,000 in 2024, which represent 17 percent of productive MSMEs in Ecuador. The project also supports the enhancement of the National Guarantee Fund, including a complete overhaul of the regulatory framework, which is expected to mobilize $240 million in private capital by project closure in 2027.

In terms of financial inclusion, Mipymes have a notable participation of women and first-time access to credit in the IFP. Fifty-seven percent (5,905) of the operations were aimed at Mipymes under the direction or ownership of women (5,481 were for loans and 438 for guarantees). Thirty-five percent (3,642 people) accessed credit for the first time. 

In Mexico, World Bank´s US $1 billion, Development Policy Financing will support the Government’s efforts to improve the policy framework for sustainable finance and access to finance for MSMEs. The DPF is expected to have substantial impact on the mobilization of sustainable finance and the enhancement of access to finance for women and MSMEs beyond the life of the Program. This would increase resources for implementation of Mexico’s NDC and foster inclusive economic growth in a climate-sustainable manner. Cumulatively, private capital enabled (PCE) through the Prior Actions in the DPF is expected to reach at least US $11.2 billion by 2025.

The World Bank is helping countries in the region green their financial system and facilitating the issuance of sustainable bonds through technical assistance programs. The World Bank Treasury’s Sustainable Finance and ESG Advisory Program provided technical assistance to help debt management offices in Brazil and Colombia to establish sovereign sustainable and green bond programs, which led to the issuance of a $2 billion sovereign sustainable bond by Brazil in November 2023, followed by another $2 billion in June 2024, and the issuance of five green bonds by Colombia in 2021, 2022, and 2023. The $2 billion sustainable bond issued by the Brazilian National Treasury is supporting projects that align with Brazil's climate and environmental targets, including climate change adaptation, biodiversity conservation, and social development initiatives.

With technical assistance from the World Bank, Colombia became the second country in the region after Chile to issue sovereign green bonds and the first to do so in the domestic market in order to develop a domestic green capital market, increase market liquidity, and diversify the investor base. About 40 percent of Colombia’s debut green sale was purchased by overseas funds, thereby expanding and diversifying Colombia’s investor base.

In addition to the above, in FY24 the World Bank Treasury’s Sustainable Finance and ESG Advisory Program provided guidance to the Ministry of Finance of Honduras and contributed to the technical assistance delivered by the Finance Competitive and Innovation Practice to the Dominican Republic to establish sovereign sustainable bond programs. In the case of the DR resulted the sovereign recently placed its inaugural $750 million sovereign green bond in the international capital markets.

The World Bank Treasury’s Sustainable Finance and ESG Advisory Program also provided technical assistance to help Colombia develop a national green taxonomy. This joint World Bank and IFC engagement led to Colombia becoming the first country in the Western Hemisphere to adopt a green taxonomy. The taxonomy is expected to play a key role in scaling up private sector capital towards Colombia’s environmental priorities. The World Bank also advised the Bank of Costa Rica on the development of a national green taxonomy, helping them understand best practices, organizing peer to peer learning experiences, and developing design principles and action plan.

Investing in human capital and infrastructure is crucial to enhance economic stability and social inclusion. In Caribbean states, which are particularly vulnerable to climate shocks, private investors can enhance economic opportunities and foster sustainable development. The Organization of Eastern Caribbean States (OECS) – Skills and Innovation Project offers technical assistance, capacity building, and funding for collaborations between post-secondary education institutions and the private sector, aiming to enhance youth skills, foster innovation-led entrepreneurship, and respond more promptly to crises. The project connects 40,000 youth (18 to 34 years old) from OECS post-secondary institutions with 120 entrepreneurs and firms to work on innovative projects. In a competitive matching grants program private firms and entrepreneurs are expected to contribute around $600 thousand towards collaborative innovation projects, demonstrating viability of the private capital mobilization effort in generating opportunities for young entrepreneurs. In the Dominican Republic, the National Housing Program aims to increase access to affordable and resilient housing for eligible households. The project uses upfront housing subsidies to help roughly 44,000 households (nearly 141,000 people) buy homes, while also strengthening the housing sector. The IBRD financing of $99.35 million allocated for providing subsidies to low- and informal-income households is expected to leverage an additional estimated $500 million in commercial finance from participating lenders in the National Happy Family Housing Program. These subsidies will make mortgages technically and commercially feasible per the requirements of the commercial lenders, several of which, including those with a strong presence in the lower market segments, have expressed strong interest in participating in the program.

Data Highlights

The roughly $16.4 billion in private capital mobilized in the region was distributed as follows:

• (i) 30% or roughly $4.9 billion were mobilized via WB Treasury provided technical assistance in support of the client countries bond issuances in various sectors;
• (ii) $3.6 billion were mobilized  towards improving energy infrastructure (22% of the total);
• (iii) WB Treasury intermediated bonds that deploy some of the capital raised in EMDE economies (21% of the total) is the third largest category bringing in around $3.4 billion in private capital mobilized for a diverse set of sectors since FY18.

The other sizeable sectors are transport (~$2 billion or 12% of the total) and finance, competitiveness, and innovation ($1.9 billion or 12% of the total). FCI interventions leverage the capillarity of local development banks to reach MSMEs through the entire financial system.  

One World Bank in Action

Projects that combine domestic investors and collaboration between the World Bank, IFC and MIGA have better outcomes. Joint WBG interventions in energy and infrastructure projects show particularly favorable results. In the case of the Argentina Renewable Fund Guarantee, the World Bank provided support to the Fund for the Development of Renewable Energy, which helps the RenovAr Program. At the same time, the IFC financed three wind projects for a total of $86 million in own account investment and $73.5 million in mobilized funds. Project sponsors could also seek political risk insurance from MIGA. This collaboration supported Argentina's strategic shift towards renewable energy and contributing to the country's climate change mitigation efforts.

Likewise, a $729 million project to improve roads and bridges in Sao Paulo State in Brazil benefited from both a $300 million loan from the World Bank as well as MIGA credit enhancement guarantees mobilizing another $300 million in loans from Banco Santander. The project rehabilitated 680 kilometers of roads, built a bridge over the Tiete River and contributed to a 50% drop in the number of roadway fatalities at 100 critical spots between 2016 and 2020.

The project included improving environmental enforcement, strengthening land use planning and making the state’s infrastructure more resilient to natural disasters. 

World Bank Group Contribution

The World Bank Group has committed almost $2.9 billion to mobilize about $16.4 billion in private sector financing, although WB Treasury intermediated bonds and TA program for client countries’ bond issuance are not associated with any concomitant IRBD or IDA commitments. About 11% of the WBG’s contribution came from the International Development Association. 

Partnerships

The World Bank Group’s efforts to mobilize private capital in Latin America and the Caribbean work in concert with governments, international organizations, and other multilateral development banks. These include the International Monetary Fund (IMF), the International Fund for Agricultural Development (IFAD), the IDB, and the Organization of Eastern Caribbean States (OECS), among many others.

The WB, through the International Development Association (IDA), and the International Finance Corporation (IFC), and the Multilateral Investment Guarantee Agency (MIGA),  operates the Private Sector Window (PSW). This initiative is designed to mobilize private investment in the poorest and most fragile markets by providing de-risking instruments such as guarantees and blended finance. It aims to attract private sector investments that would otherwise be considered too risky. One example in the Agriculture and Food Security sector is the support through the PSW and the Global Agriculture and Food Security Program (GAFSP), the Haiti Horticulture advisory project. This initiative connects Haitian smallholder farmers to local firms like GreenFresh S.A., providing them with high-quality seeds, training, and direct market access. This approach helps boost domestic production, reduce dependence on imports, and improve farmers' incomes.

The IDB and the WB and other MDBs, are committed to scaling up private-sector financing for development goals, including by pursuing innovative approaches and financial instruments, like scaling up local-currency lending and foreign-exchange hedging solutions to boost private investment, and expanding the type and disaggregation of the statistics that MDBs and Development Finance Institutions (DFIs) release through the Global Emerging Markets Risk Database (GEMs) Consortium, supporting investors to better assess investment risks and opportunities. 

The WB and the IDB have collaborated on several initiatives to mobilize private capital, including the sustainable sovereign bond program in Brazil and the sovereign green bond program in Colombia.

Looking Ahead

If the world is to meet its Sustainable Development Goals by 2030, the private sector’s increased role will be important. The global financial system has nearly $500 trillion in financial assets but financing for development remains below where it should be. That’s partly because investors consider many of these projects too risky. The World Bank Group can overcome some of that risk aversion through institutional reforms, technical assistance, or risk-sharing mechanisms. That could relieve the burden on the public sector and allow governments to more effectively target their investments. In LAC there are some early signs of progress. For instance, the region has the world’s largest stock of active PPP investments and many countries – notably Brazil and Argentina – are working on putting in place the structural reforms necessary to attract more investment. But those aggregate figures mask a stark divide in the region. Just four countries – Brazil, Mexico, Chile and Colombia – account for two thirds of the region’s PPP’s in dollar terms. Other countries still rely heavily on the public sector to finance needed investments. As fiscal constraints tighten, the need for private sector investment will only grow.