New leadership at the International Finance Corporation is transforming the institution but a “profound change” in the way it does business is still needed if it is to fulfill its mission and become a “public development agency whose interest is to develop the country, not to make money,” according to economist and development heavyweight Paul Collier.
The Oxford University professor and author of The Bottom Billion praised the IFC’s new CEO Philippe Le Houérou, who took on the role last year, for reorienting the private sector arm of the World Bank during a panel on supporting private enterprise in conflict-affected situations as part of the World Bank and International Monetary Fund Spring Meetings.
In particular Collier noted the creation of a $2.5 billion private sector financing window as part of the latest replenishment round for the World Bank’s International Development Association fund — which supports the bank’s work in the poorest countries.
The private sector window is designed to expand private investment in IDA countries, with a particular focus on fragile and conflict-affected states, by applying financing tools from both the IFC and the Multilateral Investment Guarantee Agency, which is the the bank’s political risk insurance arm, to incentivize private sector investment.
Collier said the PSW, by making it more attractive for private companies to start up in conflict-affected and fragile countries, would drive economic growth and thus enable those countries to break out of the fragility “trap.”
Explaining the logic behind the PSW, he said: “There is huge public interest in decent firms going to fragile states ... it’s a public interest from which the firm doesn’t benefit so [it] has to be covered by public money — that is the core role of the private sector window — it’s about 30 years too late, but it’s happened now.”
However, after praising the new direction within the World Bank Group signaled by the creation of the PSW, Collier warned against complacency, saying that while “new stuff is happening,” it is “not before time.”
“Where has IFC been in fragile states? It’s been missing in action, with a few honorable exceptions,” he said.
Collier also called for the PSW approach to be scaled up across the institution and for further, more “profound” changes in the way the IFC does business. This would mean moving from a model of “cherry pick and hold” — whereby the institution funded lucrative projects over the long term and which tied up capital and provided very little value add to developing countries — to a new model of “catalyze and sell on,” he said.
“Be proactive, go out and find stuff, and then when it’s been developed to point of success pass it on into a portfolio so that you can move capital around — you’ve not got much capital, so make it work as fast as possible,” Collier said.
The economist also called on the IFC to start working alongside its sister institution the World Bank to introduce policy reforms to improve the business climate in fragile countries, saying that the IFC can no longer argue, as it has in the past, that this would be a conflict of interest: “You are a public development agency and your interest is to develop the country, not to make money,” he said.
Laure Wessemius-Chibrac, managing director of Cordaid Investment Management, who was also on the panel, agreed with Collier.
“They [IFC] should change their business model. If the target is really that you want to end poverty and have 50 percent of your resources and effort put in fragile and conflict affected states — because that’s where 50 percent of poverty is — that’s your mission … put that as hard targets and if people don’t meet the targets, fire them; maybe give them a bonus if they reach the targets,” she said.
Both pointed to the fact that the CDC Group, which is the U.K. equivalent of the IFC, already invests half of its finances in conflict and fragile states.
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