# **Introduction**

In March 2017, the World Bank Group set out a long-term vision of using development assistance and/or government spending to spur private sector investment–often called “crowding in.” That document, produced for discussion at the Development Committee, introduced the _maximizing finance for development_ (“MFD”) approach to infrastructure finance, which entails promoting private finance, wherever possible, to pay for the trillions of dollars of global infrastructure needed to support the sustainable development goals.<sup>2</sup> The MFD approach argues for a changed role for multilateral development banks (MDBs) in which they would use their development assistance funds to encourage private finance, especially from largely untapped long-term institutional investors.

Specifically, to entice commercial financing, the MFD approach promotes reforms to address market failures and other constraints, such as improving the domestic legal and regulatory framework. Where risks remain high, the MFD approach calls for the use of guarantees and other risk-sharing instruments. Only when market solutions are not possible through reforms and risk mitigation does the MFD approach deem official development assistance appropriate. We aim to demonstrate why and how the MFD approach could help the Middle East and North Africa (MENA) region unleash its potential.

Indeed, when governments have limited or no ability to increase spending, the MENA region could leverage private finance to help build infrastructure—such as power plants and airports— and help enhance the quality of public service delivery. The vehicle to do just that is commonly known as publicprivate partnerships (PPP). While there is no one widely accepted definition, the World Bank’s PPP Knowledge Lab defines a PPP as "a long-term contract between a private party and a government entity, for providing a public asset or service, in which the private party bears significant risk and management responsibility, and remuneration is linked to performance." PPPs typically do not include service contracts or construction contracts, which are categorized as public procurement projects, or the privatization of utilities where there is a limited ongoing role for the public sector.<sup>3</sup> Scaling up PPPs is essential if MENA countries are to address the multifaceted set of challenges they face: moribund private sectors, low public-sector efficiency and the need to create millions of jobs for their young populations. Given their vast experience and knowledge, MDBs can help with the origination and the financing of PPP projects by providing technical assistance to governments, making government commitment to reforms credible, and mitigating risks by providing guarantees.

Conceptually, the matching of demand and supply of funds for infrastructure is hindered by both market and government failures, some of which are well understood and others somewhat less so:

- the public good nature of infrastructure projects, in which non-paying consumers cannot effectively be excluded from using them and their availability is not diminished by use—more formally known as non-excludability and non-rivalry in consumption;

- the market power of the operator of the infrastructure facilities; and

- the externalities (positive and negative)— including through trade, growth and network spillovers— associated with infrastructure investments.

> 2 See http://siteresources.worldbank.org/DEVCOMMINT/Documentation/23745169/DC2017-0002.pdf

> 3 See PPP Knowledge Lab. An increasing number of countries are enshrining a definition of PPPs in their laws, each tailoring the definition to their institutional and legal particularities.

2