When asked why he embarked on a career at the World Bank, Philippe Le Houérou explains that it was the experience of attending high school in Ethiopia during the country’s civil war — and witnessing friends being tortured, killed or disappearing — that has motivated his work.
Now heading up the International Finance Corporation, the world’s largest development finance institution dealing with the private sector, Le Houérou sees the organization as a tool to help in parts of the world still riven by the sorts of crises and violence he witnessed as a child.
His lessons learned are being put into practice on a global scale, as Le Houérou tries to reorient the IFC — which in 2016 invested approximately $11.1 billion of its own money and mobilized an additional $42.5 billion from other investors to finance commercial projects in low and middle income countries — towards a new way of doing business; one which can unlock trillions of dollars in private investment for the developing world.
“I wanted to put development impact at the heart of what IFC does — that was my first year. For my second year, I want to put IFC at the heart of development impact.”— Philippe Le Houérou, CEO at the IFC
Unlike his predecessors, who are traditionally drawn from the banking sector, Le Houérou is a development veteran. The son of a Nobel prize-winning research scientist working on desertification, the Frenchman had a nomadic childhood, with spells living in Tunisia, Algeria, Morocco, Libya and Ethiopia.
While he admits that, at the time, he would rather have been playing soccer with his friends than helping his father gather samples in the Sahara desert, the work he did then contained a strong lesson about the impact humans have on the environment, particularly in fragile countries.
But it was his experience in Ethiopia during the revolution of 1974 that set the path for Le Houérou’s life, triggering a flood of questions and inspiring him to study economics, politics and history in order to make sense of what he had seen.
“For me the turning point was Ethiopia — I was there during the revolution and there were people being killed … All these questions went through my mind — when you see your friends start disappearing, discovering they were killed or tortured, that gave it a different dimension,” he recalled.
The strategic shift at the IFC that Le Houérou is steering is part of World Bank President Jim Kim’s wider vision to transform the World Bank Group into an “honest broker,” tasked with moving significantly more private sector capital into developing countries. As the private sector arm of the bank, the IFC is at the heart of this strategy.
The CEO of the International Finance Corporation — Philippe Le Houérou — talked to Devex about the key role the IFC will play as a market creator in the World Bank Group's new strategy to position itself as an "honest broker" helping move trillions of dollars of private money into developing countries.
This means investing more capital and manpower in frontier markets — countries and sectors where investors are currently unwilling to go. This requires changing the kinds of deals the organization has traditionally gone after, moving towards smaller deals with higher risk and potentially lower profits but greater development impact. It also means working more closely with the other arms of the World Bank.
Reforming the IFC will not be easy, but after a year in the job, Le Houérou seems to be quietly and systematically making progress. He has helped devise a new investment approach called “cascade” which sees World Bank and IFC staff working together to develop the best financial packages and support for countries; he is rolling out a new pre-approval rating system for projects, which looks at estimated development impact as well as financial performance; and he is building out the institution’s microeconomic knowledge to help make investments more targeted.
Summarizing his year, he told Devex: “I wanted to put development impact at the heart of what IFC does — that was my first year. For my second year, I want to put IFC at the heart of development impact.”
This kind of talk marks a change in tone and direction — welcomed by development professionals — at the IFC, which has long been run by bankers, and criticized for focusing too much on profit and too little on poverty reduction.
Le Houérou also seems keen to keep a lower profile than his counterparts at the World Bank and International Monetary Fund, and to align himself more closely with the IFC rank and file, relocating his office from the penthouse floor to be closer to colleagues, and reportedly spending hours touring the building to speak with individual members of staff.
A new way of working
Devex met Le Houérou at the IFC’s Pennsylvania Avenue headquarters in Washington, D.C. At six feet tall, dressed in a slightly crumpled gray suit, he cut an impressive but unassuming figure. He initially appeared taciturn, but revealed a humorous side as the interview progressed, answering questions in his fluid, measured and heavily-accented English, frequently punctuated with jokes and asides.
Le Houérou spent three decades with the World Bank, including as regional vice president for Europe and Central Asia, and also had a brief stint at the European Bank for Reconstruction and Development, before taking over as CEO of the IFC in March 2016.
The institution has come a long way since its first project, financing a Siemen’s electrical plant in Brazil in the 1950s, he said, and he wants to push it much further out of this early model of supporting large multinational companies. IFC version 2.0, as he describes it, saw the development finance institution working more with domestic companies in emerging markets. The new vision — IFC 3.0 — will take the institution deeper into fragile and poor countries and challenging sectors where private capital is unwilling to go.
But getting to IFC 3.0 will require a new way of working: Staff can no longer wait for project sponsors to come to them with investment opportunities, Le Houérou said, but instead will need to be proactive and “create markets.”
This will mean working more closely with the World Bank and the IMF, he explained — something that is already happening in Africa. For example, the Scaling Solar project in Zambia saw the IFC, World Bank and Multilateral Investment Guarantee Agency work together and with government, to successfully award two major solar deals to the private sector in the space of just six months. As a result of these investments, the price of solar energy power dropped to 6.02 cents per kilowatt hour — the lowest price for solar power in Africa to date. Le Houérou says he will be pushing for more of this kind of work.
Part of the success of the Scaling Solar project is that it keeps debt off the government’s books, which is necessary at a time when governments are “running out of fiscal space and the capacity to borrow publicly,” he said. This then frees up government resources to be spent on the kinds of low-return public good projects that will always need public finance, he added.
In practice, this approach could mean the IFC ends up passing over a project which could attract commercial backing, structuring a public-private partnership or offering financial tools such as first loss guarantees to “derisk” the deal for private investors. The key is for the World Bank’s institutions to work together, and with country governments to identify the best option.
The IFC boss has his own term for the approach — “cascade” — and it is currently being piloted in 10 countries, with another 23 countries also keen to take part. As part of the pilots, teams of between eight and 10 staff from different parts of the World Bank Group are working with governments to develop infrastructure projects that are “cascade enabling” — meaning they either enable commercial finance directly, bring in private sector management or innovation capacity, or contribute to creating the conditions for future private sector infrastructure financing.
Existing projects will also be reviewed to see if they can be adjusted to become “cascade enabling.”
The approach is not completely new, Le Houérou said, but this is the first time the World Bank Group has taken a consistent and dedicated approach to crowding in private finance.
A need for more specialized expertise — and more money
IFC 3.0 requires the organization to do more thinking around how to extract microlevel sector information and translate that into investment — like its work with dairy farmers in Columbia, where IFC specialists familiar with the dairy sector were able to identify poor roads as a key obstacle to development. As a result of this analysis, the World Bank worked with government to change capital-market regulations so that pension funds could invest in a newly created, IFC-supported financial institution to catalyze investment in infrastructure.
New leadership at the International Finance Corporation is transforming the institution — but a "profound change" is needed if it is to become a "public development agency whose interest is to develop the country, not to make money," according to development heavyweight Paul Collier.
Le Houérou wants the IFC to do much more of this kind of thinking. He has launched two close-look private sector country diagnostic analyses in Ghana and Kazakhstan, to identify “the impediments and then target advisory on critical roadblocks for the private sector,” he said.
More of these diagnostics — which will also feed into the broader diagnostics being done by the World Bank’s other arms — are planned for the future, he added.
A second challenge of the IFC’s new strategy is that working more in fragile countries is expensive and will require a capital increase, the CEO said. While he doesn’t expect a huge drop in IFC’s overall returns, the cost per deal will go up, he admitted.
“The difficulty is more on the budget side than the investment side — creating the space for the private sector means more analytical work, more engaging with the World Bank … It’s a more expensive proposition,” he said.
While he describes the IFC as a “leveraging machine,” able to trigger an additional $4 in private capital for every $1 it invests, making the leap from billions to trillions — as the multilaterals pledged to do in 2015 — will require a capital boost. Le Houérou hopes to increase the IFC’s core investments from $11 billion to $30 billion by 2030, he said.
The World Bank is also asking for a capital increase for the International Development Association and the International Bank for Reconstruction and Development. Shareholders are set to discuss this at the annual meetings in October.
Focus on development impact
In order to remain financially viable, the IFC will need to invest in a mixture of projects with varying degrees of financial and social returns, Le Houérou said. This means continuing to pursue more lucrative deals in middle income countries, while going after riskier propositions in fragile states, as long as the overall development impact hits certain targets, the CEO explained.
This idea of taking a portfolio approach to the IFC’s activities is something he has been pushing for since taking over last year. As part of that, staff have developed a new rating system which aims to offer a more robust and systematic way of tracking the impact of the institution’s investments to make sure they hit their development targets, as well as the financial ones.
The key change is that staff will now estimate the development impact of every project before it goes to the board for approval, rather than afterwards, as is currently the case. A cursory version of the rating system will be rolled out in July.
The IFC will set also set an overall portfolio target for development impact, to be approved by the board, and this will make it easier to assess how the institution is doing in achieving its poverty reduction targets.
“This portfolio approach idea is not new, but we’ve never had the tools to make it happen before,” Le Houérou said. It will enable the IFC to have discussions with the board and say “don’t judge me on one project — look at the average.”
Reorienting such a big ship is never an easy task — but he is confident the IFC can rise to the challenge of unlocking the kind of private capital needed to meet the sustainable development agenda.
“If we wait for things to happen by themselves, it won’t happen fast enough for the needs,” he said. “If we cannot make it happen here at IFC, I don’t know where it can be done.”
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