How will World Bank reform change IFC?

A key part of the ongoing World Bank Group reform process has focused on how it can do more with existing resources, including attracting more private capital. But it’s been rather quiet about the role of its private sector arm, the International Finance Corporation. IFC officials say the institution is adapting to new pressures and mandates from shareholders. That means it will focus more on global public goods, including climate change, and seek to improve how much private money it attracts alongside its investments. Some of those shifts are already underway, IFC’s Managing Director Makhtar Diop told Devex. IFC is on track to make considerably more investment commitments than last year and could even exceed records, he said. Nearly 50% of those investments are related to climate change, Diop said. “The bottom line is that you will see much more investment from IFC because that’s what the world currently needs,” he said. Expect IFC to take on more risk, expand its support for smallholder farmers and small businesses, do more trade financing and working capital loans to help bridge financing gaps, as well as ramp up its work to make projects investible, Diop said in an interview. “IFC will be increasing and taking even more risk in the future,” he explained. “I think our shareholders are totally open and ready as long as it’s done within reasonable terms and to take more risk to be able to go to the frontier markets.” Diop declined to quantify just how much exposure IFC might assume in the future but said it would likely take more risky projects if they have greater potential for development impact. IFC’s return on its portfolio is just under 4% and those profits cover operating costs and are reinvested, Susan Lund, IFC’s vice president for economics and private sector development, told Devex. While IFC could take on more risk, shareholders would need to be prepared for potential losses, and they might need to pony up more cash if investments suffer, she said. Right now for every dollar IFC invests, private investors also invest about a dollar. To attract more private capital, the institution is trying to change the way it works and be more creative, the officials said. IFC is considering which type of financial instruments may better attract money from pension funds or insurance companies and also how it can help build a pipeline of projects for investment. In the past, lending was very project focused, so for any individual deal a call might be made to a potential backer to seek investment. The problem is “that’s very time-consuming and bespoke,” Lund said. As a result, IFC wants to create platforms that can simplify the process. Its co-lending portfolio program, One Planet, is an effort to raise $3 billion for climate finance projects from big investors that IFC can use to make a variety of smaller investments. IFC hopes to do more of that and is also considering whether it can make loans that it then sells off to others, Lund said. Institutional investors, who can typically only invest large sums of money, could then buy bundles of loans from IFC. That could create an avenue for much smaller projects in low-income countries — say $5 million — to attract funding that would otherwise be unable to invest. IFC also works to create more investable projects by addressing policy issues and by helping ready projects for investors. Such project preparation could be IFC helping set up businesses in Sierra Leone to commercially grow onions, which the country currently imports, or it might help pineapple farmers improve the quality of their fruit to sell to a local juice plant, she said. It could also play a role in helping identify and coordinate multibillion-dollar projects such as dredging a river that would enable farmers to operate at a larger scale. IFC is also doubling down on its Country Private Sector Diagnostic, which assesses opportunities for and constraints to private sector-led growth in a specific country, Diop said. The idea is that those assessments will better feed into the World Bank’s policy work in countries worldwide and help improve coordination. To help meet its new private investment goals, IFC will reorganize internally, including removing bureaucracy that slows its ability to act quickly, Diop said. IFC is considering a number of ways to push the new objectives and while Diop said he wouldn’t “equate incentive with financial compensation,” it’s ultimately up to the board to decide if pay structures will change. As many critics have pointed out, real change won’t happen if IFC staff continue to be compensated based on the number and size of deals they close. Why? Because investments in lower-income countries are by nature more complex and smaller. Update, May 2, 2023: This article has been updated to clarify that the IFC pay decisions ultimately sit with its board.