LAC Study tour: National Development Banks - sector note 2

This publication is part of a series of five notes reviewing the trends and challenges associated with urban development in Latin American cities (LAC) in five key sector. All of these notes identify the specific challenges that the cities have encountered in managing urban development and the impact of climate change. African cities can draw valuable insights from Latin American cities, which have successfully implemented innovative solutions to tackle the challenges of urban development while keeping environmental and fiscal sustainability standards.

To support their infrastructure development strategies, some governments have opted for the creation of National Development Banks (NDBs). Market failures in developing countries constraining long-term local currency financing for infrastructure projects have played a role in governments’ decisions to create these vehicles. Lack of well-developed local capital markets, liquidity constraints, relatively high interest rates, and poor access to global financial markets are among the market failures influencing the establishment of public infrastructure funds.

This note reviews the many forms taken by these NDBs (i.e., financing vehicles) and the different types of public financial support they’re providing. From the provision of pre-investment financing to prepare good projects all the way to the provision of credit enhancements (partial credit and partial risk guarantees), these vehicles support both public and private infrastructure development via different mechanisms (senior debt, availability payments, liquidity lines, and so on). 

First, this note defines the role and use of NDBs compared to other available government mechanisms. It will explore the reasons and motives (i.e., the rationale) driving the decision-making process to create NDBs. It provides a framework for a fiscal management analysis considering the impact of a NDBs on fiscal commitments and contingent liabilities, as well as an overview of the governance and institutional issues affecting its performance. 

In conclusion, the paper describes the corporate governance and institutional framework issues as well as the key factors for success.