By Akihiko Nishio and Ed Mountfield
The world is grappling with a collective action problem. Tackling global challenges like biodiversity loss and pandemic risks demand joint efforts by multiple countries. Yet, it can be difficult to prioritize these cross-border concerns when countries continue to face mounting domestic issues.
So, how can we incentivize countries to undertake investments or reforms that not only help themselves but also their regional neighbours and the worldwide community at large?
The World Bank has launched a groundbreaking new approach to development finance with its “Framework for Financial Incentives (FFI) for Projects that Address Global Challenges with Cross-Border Externalities.” Supported by donor contributions, it mobilizes additional resources for initiatives that advance a common agenda for the collective benefit of our shareholders.
We need innovative financial solutions to organize collaborative efforts and support projects that would not happen without such incentives to jointly tackle the pressing concerns of our time. With the FFI, the World Bank is better able to lead global action at scale. Starting in February 2025, the framework will offer three main incentives to countries borrowing from the International Bank for Reconstruction and Development (IBRD):
- More money: Billions in additional financing annually by 2026.
- Longer repayment period: Extended loan maturities up to 50 years.
- More concessionality: Grants and reduced interest rates for high-impact projects through the Livable Planet Fund (LPF).
The framework zeroes in on eight critical global challenges: enabling digitalization, energy access, food and nutrition security, fragility and conflict, climate change adaptation and mitigation, pandemic prevention and preparedness, biodiversity and nature protection, and water security and access. To get this support, projects will be chosen competitively and must address at least one of these issues while creating positive “spillover effects” beyond their borders.
For example, let’s imagine a coastal mangrove restoration project. It might start in one country, but its benefits ripple outward: better fish habitats that boost regional food security, natural barriers against storms that protect multiple coastlines, and carbon absorption that helps the entire planet fight climate change. This is exactly the kind of project FFI aims to accelerate.
When a project idea emerges in one country that can also generate benefits for its neighbors and the world, that’s when FFI steps in with enhanced support to help make it happen. The goal is to raise the ambition and scope of good ideas and impactful projects.
As with any new and pioneering approach though, the framework will evolve through a “learning by doing” method, with regular evaluations and adjustments based on real-world results. Measuring cross-border benefits isn’t always straightforward. How do you quantify the value of preventing a future pandemic? Or if protecting an endangered species has favorable impacts for the world, not just one country? We are developing new metrics and knowledge, while remaining flexible enough to capture potential positive outcomes.
The framework will aim to provide the “least financial incentive” necessary, ensuring that resources go where they’re needed most and have the greatest impact. The goal is to make it easier for all countries to participate in solving global challenges.
With $2 billion per year in additional IBRD lending volume made possible by the Global Solutions Accelerator Platform (GSAP), and $220 million in grants already available for its first year through the LPF, FFI marks a significant shift in development financing. For the first time, shareholders can leverage funding towards transboundary solutions through the GSAP, which is made possible by boosting our IBRD balance sheet using innovative instruments like hybrid capital, portfolio guarantees, and enhanced callable capital. It will also incentivize countries to borrow from IBRD to take on global challenges through projects that require concessionality—with grants mobilized through the LPF.
But just as important as the money is the message: In today’s interconnected world, the best solutions are those that transcend national borders. And the time to move forward with these solutions is now.
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