Signaling – A message that a respectable financial investor sends, simply by virtue of investing in something, that it might be a worthwhile investment also for others.

Catalysing – speeding up private investment, or making it possible for private investment to flow into a project. It’s also called “crowding in”.

Crowding out – Providing financing with such good terms (soft loans or soft money) that private investors who would have actually invested don’t get the opportunity.

Soft money, soft loans - Loans or financing offered at a non-commercial rate, usually by development finance institutions (DFIs).

De-risking – Structuring of financing in a way that would remove some of the risk, so that private investors will agree to invest some of their money.

Layering – One way of de-risking something. Structuring a financial project in layers absorbing different amounts of risk, and providing different return options to investors.

Preferred return – Guaranteeing investors that if losses do occur, they are first absorbed by another layer of financing, by another party which has provided a ‘first (or second, etc.) loss piece’.

In this week’s episode of ‘A Dictionary of Finance’ podcast by the European Investment Bank we talk about the intersection of the private and the public sector in development finance. Specifically, we talk about how the public investment and development banks make projects bankable for the private sector.

And make themselves obsolete in the process!

As Aglaé Touchard-Le Drian, investment officer with EIB’s Global Energy Efficiency and Renewable Energy Fund (GEEREF), puts it rather more eloquently: “Ultimately, our goal would be to disappear and projects would be financed locally by local investors.”

“But,” Aglaé adds, “that is not the case today.”

This is why public finance institutions put effort into de-risking projects, taking on the bulk of the risk, blending the loans and investments with some grant money to make sure it takes off, as well as providing advice and technical assistance, and so much more.

Just so that the private sector can step in and reap the rewards, right? Why would we do that?

Gunter Fischer, also an investment officer with GEEREF, reminds us that the public banks do this only in situations where otherwise there wouldn’t have been private investment at all—and consequently the project would simply not have been realized.

Another benefit for the public sector is that capital can be preserved and the financing can be recycled for other projects, unlike when grants and subsidies are made, Touchard-Le Drian reminds us.

In the end, the private sector does take over. Many investors who initially invested with the EIB are now willing to invest in similar geographies and sectors on their own, having had a positive experience, Fischer says.

We dare you to give it a listen and not be convinced! We also dare you to give it a listen and not want to rate us with five stars on iTunes, give us a glowing review, and subscribe to future episodes.

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