At London’s Impact Capitalism Summit, which took place from 25 until 26 October 2016, Jack Aldane spoke to Neil Gregory, head of thought leadership at the IFC, about private sector investment in emerging economies, how the IFC has sought to measure its impact, and what is being done to bring in private capital from alternative sources to commercial lenders
As a global investor, how is the IFC working to entice more private investors into projects in emerging markets, given the uncertainty in those markets?
There is a lot of interest in investing in emerging markets among investors currently, and there are two drivers of that. One is that financial returns in developed markets are very low in this low interest-rate, low-yield environment, and the low growth of developed markets means it’s not clear where those financial returns will come from. Emerging markets still offer higher growth rates and higher potential returns, so it’s a question of investors getting comfortable with the risks and finding vehicles to invest in markets which they may not be familiar with or where they may not have the capacity to manage investments. Since the global community agreed on the Sustainable Development Goals (SDGs), we’ve also seen a lot of private businesses starting to think about how that will create business opportunities for them. There’s an investments agenda, depending on the estimates, anywhere between US$3-5 trillion a year needed globally to meet the SDGs, so that creates a huge opportunity if it can be materialised. A lot of private investors simply don’t have the capacity to go and find individual investment opportunities, so a lot of institutional investors such as pension and sovereign wealth funds are looking to invest more wholesale in a portfolio of assets. This takes away the management capacity gap and allows them to diversify the country risk of their portfolio with a global investor like IFC that has exposure to countries across emerging markets.
The IFC recently announced an infrastructure programme of up to US$5 billion for emerging economies. Where does this facility need to be applied most critically, and what is the risk of not addressing this infrastructure gap?
IFC’s Managed Co-lending Portfolio Program for Infrastructure is a new initiative aimed at mobilizing up to $5 billion in five years from institutional investors that are interested in increasing their exposure to the infrastructure sector in emerging markets. The initiative contributes to the global response to close the infrastructure investment gap in emerging economies. If you look at access to power, access to clean water, there’s still a big deficit. As these countries urbanise they need to build roads, highways, ports and airport. You have a lot of population growth in low-income areas like Africa and South Asia. Most of that population is going into urban areas, which means a great amount of infrastructure needs to be created in order for these cities to function and for these people to be economically productive. If you look at Africa, the risk really is that a lot of people are left without access to infrastructure and without access to clean water or power. That has huge social impacts, where without this kind of access, children find it harder to study, and it’s hard for people to be economically productive. When you look at surveys of private enterprises in Africa, which the World Bank carries out and they ask people what are the biggest constraints to growing your business, access to power comes out as the most important constraint. Filling that power gap will be a huge boost to economic growth and reducing poverty in Africa. Where we see the constraints has been the limited government capacity to implement the sectoral reforms needed, to get the tariffs right, to get the regulatory framework in place for private investment to come, and limited capacity to develop projects and bid-out projects to the private sector. One of the things we’re trying to do is to create a more standardised approach. The way to scale up these investment projects is to stop trying to design custom projects one at a time but to take a more standard approach. For example, We have a global programme called Scaling Solar , which brings together a suite of World Bank Group services under a single engagement aimed at creating viable markets for solar power in each client country. Rather than every country trying to design its own tendering process, we’ve come up with a package of bid documents and design specifications that we can take to governments. Governments can get the tendering done in less than one year and get electricity connections done within two years – a fraction of the usual time. We’ve had success with this in several countries in Africa to date and are talking to many others in other regions about making this standardised approach to infrastructure work.
The Finance Minister of Nigeria, Kemi Adeosun, said at the World Bank 2016 Annual Meetings that holding sub-Saharan African countries to the same standard as developed countries on lowering their carbon emissions is counter-productive to growth. What is your opinion of this?
The first thing I’d say is that we’re seeing rapid advancements in the competitiveness of clean energy, especially solar and wind energy, so we think the idea that there is any kind of trade-off between clean energy and cost-efficient energy is rapidly diminishing. We think you can have both and that is why we have been expanding our investments in clean energy. The second thing I’d say is that we do have programmes where we use blended finance combing grant money from donor countries with commercial financing from IFC. This means that where there’s a choice between a clean project going ahead or not going ahead because of its commercial viability, we can blend some public grant money to tip the balance towards investing in climate-friendly projects. Our ambition is to have 28 percent of our business in climate-friendly investments by 2020. For the most part we’re going to be able to do that commercially. There are more and more opportunities where these things really stand on their own feet. Where they don’t however, we will make strategic use of blended finance like this.
How does the gap in private entities’ understanding of what DFIs do present a challenge to achieving the deal volume needed to reduce poverty in emerging markets?
We’ve always worked with a range of private co-financiers. Typically, we won’t finance more than 20 percent of an investment and we always have co-financing partners investing alongside with us.. The challenge now is that the mix of investors is changing, and particularly the appetite of commercial banks to invest long term in emerging markets is reduced because Basel regulations are putting higher capital requirements on that kind of investments, so we are seeing pullback from some of the traditional partners we’ve worked with. That’s why we’re interested in a new class of investor, particularly the pension funds and insurance companies who can invest in large scale and who are looking for yield and emerging market exposure. That’s why we’re putting a lot of effort into our outreach to those communities and are spending a lot of time talking to those investors to understand what they’re looking for and design new investment vehicles to meet their needs
Finally, how has the IFC found measuring its impact to be a challenge, particularly considering the scale of the task set out in the UN’s SDGs for 2030?
IFC has always paid great attention to measuring and reporting on the impact of its investments. We measure the financial and economic impact, and also the wider market impact and the reach – for example, new electricity and water connections, or number of women getting access to financial services. We’ll continue to evolve our impact reporting to align to the SDGs.
Neil Gregory is head of thought leadership for IFC, promoting private sector solutions for development challenges and increased private investment in emerging markets. He has held a range of senior strategy and management roles at IFC, including research, business planning, investment and advisory functions. He has extensive work experience in South Asia, China, Africa and the Caribbean. A British national, Neil has MA and MSc degrees in economics from Cambridge and Oxford and an MBA from Georgetown.