IFC to introduce new methodology to forecast impact of deals

That’s a great question. By construct, our investments are demand-driven. We finance private investments. So, to put it simply, if there are no investment projects to start with, we cannot be involved. The question is whether you wait for an investment to come to you so that you can finance it, or whether you create conditions so that there is more investment to start with. We want to do more of the latter. That’s what I mean by creating markets that allow increased levels of investments.

What I think, because I’ve seen it from over 30 years in development, is that you can create an environment where we have more of these opportunities. The beauty of the World Bank Group is that you can go from the macro, or the sector, to the micro, or the corporate, and everything is linked. Over the last few months, we have been funding missions in Guinea, for instance. We have brought investors with us to look at the potential in agribusiness, which we believe is huge. We’ve asked them what are the key issues that need to be solved. That’s what I mean by actually creating markets. In other words, if there is a regulation that doesn’t work, let’s have a discussion with the government. It’s about leaning forward. So yes, by construct, we follow the demand, but I believe the demand for investment is a function of the opportunities, which themselves should be expanded by creating markets.

Your new vision for the IFC – IFC 3.0 – involves a closer working relationship with the World Bank and the IMF. Crucial to this is what you call the cascade approach, where different institutions work together to find the best enablers of private sector investment in emerging economies. What prompted the use of the word ‘cascade’?

‘Cascade’ is a word that tries to capture a very straightforward approach. When a government comes and asks you for a project, ask yourself whether you can do that with private solutions. That means not using more public debt and/or contingent liabilities. As you know, for many governments, public resources are stretched. If the conclusion is that a private solution cannot be done, ask yourself why.

If private investors won’t come because they feel it’s too risky for policy or regulatory reasons, then try to fix that. If you can’t fix it or even if with new regulations, investors think the risk is still too high, then go with blended finance to mitigate the risk of the project. If you still can’t do that, then go to the public debt, public contingent liability, and concessional finance. We’ve had examples where it has been done, but we need to do it more systematically. There are two levels to doing that, however. There’s the policy level and then there’s the project level. The World Bank can be an enabler for private sector solutions.

One example that covers 20 years of evolution is the energy market in Turkey. The government worked closely with the World Bank to change the policies and the regulatory framework. The bank supported the policy reforms upstream through budget support and finance, paving the way for private sector investment downstream. Over time, IFC took the baton, and now the vast part of what has been installed in terms of electrical capacity in Turkey over the last 10 years has been privately financed. The bottom line here is that you’ve created a market for private generation and financing of electricity, and governments have spent much less public money than they would have been forced to do otherwise to increase capacity.

You’re in the process of producing a series of diagnostic reports on developing countries that already include Ghana and Kazakhstan. How are you positioning the IFC to make larger strides into fragile states where poverty is most egregious?

The reason we started with Ghana and Kazakhstan is to work upstream and provide inputs on strategies being developed. Country strategies are on a regular schedule of around four years on average. So, when we know there’s a strategy coming up in one year, we start the work from the private sector development perspective, adding a very detailed diagnostic of what it will take for private sector development to accelerate. The choice of country in some sense is when the country strategy of the World Bank Group is due. We are trying to follow that approach so that, again, we are more systematic and prepared. In fragile states, this is even more important.

You mention private investment in fragile states, and how we are going to do private investment with our very strict social and environmental standards. In these cases, we give a lot of technical assistance. I was in Myanmar a few months back. We worked with an entrepreneur for two years giving advisory services on environment and social standards, accounting, and so forth, before we felt we could invest. Advisory services can come at three levels. One is with government to improve the business environment. Another is for legislation and the structuring of public-private partnerships. The third is the work we do with corporates.

In addition, the International Development Association (IDA) [the part of the World Bank focused on the poorest countries] has created what we call the Private Sector Window, allowing us – among other things – to de-risk specific projects without the need of a government guarantee. Remember, IFC doesn’t take a government guarantee. We take full risk. With the Private Sector Window, we can go further and finance projects in more difficult situations.

Increasing investment for development “from billions to trillions” will require a capital increase for IFC to reach around US$30 billion in new commitments per year by 2030. How do you hope this can be achieved?

IFC’s capital increase is rightly in the hands of our shareholders. But this is not just about IFC. A strong IFC also needs a strong World Bank – both IBRD and IDA — and a strong Multilateral Investment Guarantee Agency to meet our goals. Our shareholders recently gave a very generous replenishment for IDA for its work in the poorest countries. Now both IBRD and IFC will need additional capital if we hope to meet our goals.

At IFC, we are trying to persuade our shareholders that, thanks to our tested business model, a new strategy, and great financial leverage, we are uniquely placed to powerfully help translate the “billions to trillions” agenda into reality. This means creating economic activity and jobs without creating public debt and contingent liabilities for governments in emerging markets.

Let me explain the leveraging capacity of IFC in simple numbers to give an order of magnitude. Take IFC’s last fiscal year. We delivered US$19.3 billion of development finance, which was made up of US$11.9 billion of own account – this is what is held on our own balance sheet — and US$7.4 billion of direct loan and equity mobilisation. In turn, this US$19.3 billion, thanks to the capacity of IFC to crowd in other co-financiers, translated into about US$60 billion of investment projects. We do that every year.

So US$11.9 billion of IFC direct financing unlocks US$60 billion of investments. It’s a one to five ratio. This leverage gets even better if you look at the capital needed for IFC to deliver this. This US$11.9 billion of own account consumed US$3.2 billion of economic capital. So we needed last year just over US$3 billion of capital to generate over US$60 billion – or a one to twenty ratio.

Now imagine that IFC gets US$10 billion of capital paid in over the next few years — in addition to our existing US$25 billion of capital. By 2030, this will enable us to, on average, almost triple our capacity to lend directly – up to US$30 billion — and ramp up to as much as US$150 billion of new investments each and every year. Over the next decade, this adds up to about US$1.2 trillion.

By the way, more capital will be necessary not only to do much more in aggregate but also to take more risks in the most difficult geographies.

The portfolio approach to IFC’s activity in the market will mean more diverse deals with varying degrees of financial and social impact. If social impact is to be preserved, what metric(s) are you using to measure it?

This is one of the things I want to develop. As you know, IFC was one of the first movers in tracking results and we created the famous development outcome tracking system, or DOTS. We use this to track our portfolio results – what is disbursed and what is happening with our investments. But you only get the results once the project is fully completed and fully working. That is often years after the fact.

On DOTS, I think the system was very innovative at the time, but we need to improve it. For example, we measure only the direct impacts. We count how many people work in the companies we invest in, and report it as the number of jobs we’ve created. But we don’t capture the indirect impact. We need to improve the methodology.

I also want to go beyond that and to measure what will be the development impact ex ante – before a project begins. We do it on the financial side; it’s called internal rate of return. What is that except your best estimate of what the financial returns will be? We can do exactly the same for development impact. My hope is that I will be able to go to our Board next year and say, we will have a development impact target for all our new commitments of ‘x.’ This will enable us to establish a monitorable and measurable portfolio approach. We call this the Anticipated Impact Monitoring (AIMM) system, and we are rolling it out this fiscal year.

Blended finance, where grant or concessional finance is mixed with private or commercial bank finance has started to blur the picture between the deployment of aid, public sector grants and finance, and private sector loans and equity offered by DFIs. Is this a threat to the role of DFIs in terms of the potential for market distortion?

Market distortions come from many sources. I was just thinking about blended finance in medical terms – maybe because of a knee injury that I had this past summer. If you have a medical problem, you take a drug. If you take it exactly as the doctor prescribes, it has a good chance of curing you. However, if you take the wrong dose, you could hurt yourself. It’s the same as blended finance. We need to be clear on principles and we need a rigorous analysis.

One principle is to use blended finance to capture some positive externalities that cannot be commercially captured. For example, we can do privately managed water utilities, which use private sector solutions that are much more efficient than what many public sector companies can achieve. The problem with that is that it’s not commercially viable to go to the poorest part of town – the last mile, if you will. Yet, the externalities of clean water for all kinds of illnesses are huge. In my view, this is a very good reason to use blended finance.

The other principle is risk mitigation. In some places, you can see great possibilities, such as with one of our projects in Bhutan – it was an investment in hazelnut production. It is a great project that creates jobs and exports, and reduces soil erosion. In that case, however, the risk was so high for investors that we used blended finance to create a de facto first loss guarantee mechanism.

This is, again, where we have to be very clear about the principle. You can do that only if you can demonstrate that the investment can be commercially sustainable. If not, then it’s not going to work in the long run. This is the same approach for blended finance as it is in medication — something very powerful but also something that you have to take with great care and precision.

You started your career as CEO wanting to make development impact core to IFC’s mission, now you want to make the IFC core to development impact. What cautions you from claiming it is this already?

Again, that’s a great question. It’s not that we’re addressing things from scratch. We have 60 years of experience to build upon. What I’m saying is that we’re trying to develop a new set of tools, and new approaches. I mentioned the IDA Private Sector Window, and I cannot overstate how important it is. We never had that before, and our experience in Iraq and Afghanistan has taught us it’s possible to do business in the most difficult situations, but it’s very tough. Not only is it tough, but the risk-return equation doesn’t work for too many potential private investments.

We now have the tools to be able to do more. We did it in the past using trust funds, but it was small, and not systematic. In terms of mobilisation, we have been very innovative by crowding in new players. Beyond the tested syndicated loans, we innovated in 2008 with the creation of the Asset Management Company, a subsidiary of IFC, to attract those who wish to invest in private equity in emerging markets. Now, with innovative syndication platforms, we are crowding in insurance companies in these markets. This is great news. We can do it thanks to our 60 years of experience in emerging markets. I want to be more systematic, and this is a key word you’ll be used to hearing me say. I want us to be more systematic and more proactive.

Finally, what are your beliefs about true leadership, given you have opted for a more approachable, personable style of leadership as CEO of IFC?

Well, I’ve been a manager for many years. I’ve learned by doing and by watching other leaders, both in the private and public sectors. Through this mix of personal experience and learning from others, which I enjoy, I’d boil down true leadership to asking the right questions and having a clear sense of direction or a compass to guide you. Having a vision, but also having a strategy to attain that vision. Without a compass, it’s impossible to navigate the high seas. The second thing is to always follow up, and to do that while trusting people, encouraging the creativity of your staff. But you have to do this in a disciplined way. One thing that I love to do is visit IFC staff and our clients in the field. I find it very exciting and rewarding to see how our partnership is making a difference. I always learn a lot – and often get ideas that I take back with me and see if we can use them elsewhere. On a personal note, I take this job extremely seriously. The stakes are very high. But you can’t take yourself too seriously. A sense of humour helps.