WASHINGTON — Having pulled off a surprise victory to secure a large chunk of the World Bank Group’s capital increase earlier this year, the International Finance Corporation is now gearing up to tackle the “huge challenges” involved in meeting the terms of the deal, especially around upping its investments in fragile and conflict-affected countries.
The bank’s private-sector lender was given a $5.5 billion boost as part of a broader $13 billion paid-in capital increase announced by the World Bank’s board of governors two months ago. The deal marks IFC’s first significant increase since 1992 — bank insiders told Devex it seemed unlikely just a few months ago.
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The additional money has the potential to ramp up IFC investment from nearly $12 billion in 2017, to up to $25 billion by 2030, putting it on a par with the World Bank itself — comprised of the International Bank for Reconstruction and Development and the International Development Association — in terms of lending activity.
However, unlike the bank’s own increase, IFC’s portion requires sign off from the United States Congress. As a result, it is not set in stone and is likely to be heavily delayed.
While the promise of the capital injection represents a major win for the institution, the package comes with tough conditions. These include requirements to channel 40 percent of IFC’s investment into the world’s most disadvantaged and fragile countries, as well as to address gender equality and climate change in its future investments.
Chief Executive Officer Philippe Le Houérou told Devex the organization would have its work cut out to meet the board's demands, which will require reforms including “workforce planning,” new incentives for staff, and shaking up the advisory service.
Most difficult will be meeting a requirement to up IFC investments in International Development Association countries — among the most disadvantaged in the world — to 40 percent by 2030. Of this, shareholders say that between 15 and 20 percent should be spent in fragile and conflict-affected states, something that is likely to be time-intensive, costly, and could put IFC’s profitability and credit rating at risk, experts said.
“The FCS [fragile and conflict-affected states] and IDA targets will be the toughest, the most expensive … but [it’s where] our impact should be irreplaceable,” Le Houérou said, adding, “I'm hard headed, so I'll do it.”
However, he also sees the 15-20 percent target as an “ambition” rather than a “condition” — an interpretation that board members Devex spoke to did not reject — explaining that investing in such contexts does not lend itself to hard targets.
“If the private sector doesn’t want to come there’s not much we can do,” he said.
He added that the number of countries classified as “fragile” tends to change, which might affect the target.
Executive directors at the bank, who represent the interests of shareholder countries, agreed that IFC’s targets will be harder to reach than those set for its counterparts within the World Bank Group, but also that it was crucial to the organization’s mission.
“The name of the game is crowding in private sector investment and IFC is a very important instrument in that. It’s impossible to deliver … without a better and stronger IFC,” said Frank Heemskerk, executive director for the Netherlands’ constituency.
From reactive to proactive
Le Houérou acknowledged that IFC will need to change the way it works in order to meet the board’s ambition.
The institution currently makes approximately 25 percent of its investments in IDA countries, but has yet to make real progress in FCS except in its advisory services, committing only $7 billion over the past 10 years. That spending volume is impressive compared with other development finance institutions, but still far below the levels needed to meet the capital increase targets.
Over the past two years, Le Houérou has undertaken a number of major reforms in the building of “IFC 3.0,” with the aim of making the institution more development focused. This has included pursuing deals that could support the creation of nascent markets in relevant countries, and working more closely with other arms of the World Bank to structure deals, in what is known as the “cascade” strategy.
“What I'm trying to do in IFC is to move — not completely, but in a big chunk — from reactive to proactive,” he said. “This new approach is the only chance we'll have to make it. And we need to organize ourselves to make it happen.”
The IFC boss has moved more staff to the field in an attempt to make the institution more “country anchored,” as opposed to sector focused. He is also “rethinking” the role played by IFC’s Advisory Service, which offers companies technical assistance, and which he sees as a pivotal part of the “creating markets” agenda.
In an email sent to staff, he wrote that effective July 1, most advisory personnel will now be “embedded” within IFC’s industry teams. The move is designed to get IFC doing more venture capital type work to develop a pipeline of potential deals. This is especially needed in FCS with weak or nonexistent markets.
“For IFC 3.0 to be successful, our advisory teams must continue to work upstream. [The] new structure will also include more Infra Venture-type teams,” he said in the staff email, seen by Devex.
The “Bovima project” in Madagascar is an example of this work in practice. Three years in the making, it has revived the country’s lapsed export market for zebu beef and goat meat. Bringing together IFC’s Advisory Services and capital with IDA credits and technical assistance from the World Bank, to help the government pass the regulations and reforms needed to export to foreign markets.
While heralded a success by Le Houérou, Bovima also demonstrates the scale of the challenge IFC faces in working in fragile and conflict states. The project was expensive and time-consuming, and it will take many more like it to create markets, he said.
“I don’t have an infinite budget so I have to be strategic on how to use it,” he said.
This means being “more patient, to align advisory and the business, and advisory from the government to the sector to the company.”
A hit to profits?
IFC reported an approximate 5 percent return on capital in 2017. Shifting its portfolio toward FCS is likely to lead to financial losses, some said. While the additional $5.5 billion will give IFC “more room to manoeuvre,” it will still need to balance FCS losses against the importance of preserving its capital and good credit rating, Scott Morris, senior fellow at the Center for Global Development, told Devex.
“We all knew, when we agreed on the package, that 40 percent for IFC in IDA and FCS countries is a very ambitious target. It will involve many difficult trade-offs going forward regarding development impact, risk, and profitability.”— Frank Heemskerk, executive director for the Netherlands’ constituency
Balancing the books could mean IFC does more big deals in large economies such as Turkey, Brazil, and China, which have less development impact and additionality — the likelihood of the private sector to come in without IFC investment — compared with projects in lower-income countries, according to Vijaya Ramachandran, senior fellow at the Center for Global Development.
“There is a tension between IFC’s traditional operating model of returning a profit to shareholders with going after projects in fragile countries, and it’s unclear how IFC will reconcile this,” Ramachandran said.
The executive directors Devex interviewed said the board was aware of the risk to IFC’s profitability but stopped short of saying what kind of a return on investment they would be willing to accept.
“We all knew, when we agreed on the package, that 40 percent for IFC in IDA and FCS countries is a very ambitious target. It will involve many difficult trade-offs going forward regarding development impact, risk, and profitability,” Heemskerk said.
“All board members are aware of the less comfortable risk-reward features of IFC’s operations at the margin as it pursues the FCS target,” Otaviano Canuto, executive director for the Brazil constituency, among others, added.
Le Houérou’s ambitions can only be achieved if the organization can change the way it has traditionally worked to embrace a more collaborative and less deal-centric approach, he said.
But the task looks set to become even harder with the bank’s shareholders asking for “efficiency measures,” including reducing the rate at which World Bank staff salaries can grow, as part of the capital increase package.
IFC is already undergoing “workforce planning” with the aim of preserving “efficiency but within a growing scenario,” the CEO said. This will mean the institution continues to recruit but alongside a “review of skills and a rethink about where we put boots on the ground and with what skills,” and a re-evaluation of the use of consultants, he said.
Le Houérou has also been working closely with his counterpart at IBRD, Kristalina Georgieva, around how to best reward and incentivize staff from both institutions to embrace the cascade approach — an effort that must be made in coordination with the bank, he said. Options currently on the table include a “pool of awards” — including monetary rewards and other forms of recognition — to be shared amongst staff from all parts of the bank. He also talked about the “need to rethink career paths and encourage people through promotions.”
Both IFC’s “workforce planning” and the new incentives strategy will be finalized over the summer with a view to updating the board at the next annual meetings in October. While the challenge is daunting, there is a lot riding on IFC’s success.
“IFC is the leader on [investing in FCS]; it’s the one everyone is looking to in terms of expanding into this area … so the stakes are high,” Ramachandran said.
But while there are clear signals coming from IFC and bank leadership, it remains to be seen whether the institution can deliver on its ambitions.
“Much as IFC can declare victory with this capital increase,” the institution will struggle to meet the targets unless it starts investing in a new way, and one which involves “much more work upstream to create environments where these deals can emerge,” Morris said.
“IFC does not have a magical ability to find deals that are commercially viable and which others can’t find,” he said, adding that unless big shifts occur, meeting its end of the bargain “doesn’t strike me as plausible.”