LONDON — The International Finance Corporation’s promise to be more transparent about its use of subsidies to the private sector in the world’s lowest-income countries has been welcomed by experts and civil society groups, who said the institution still needs to do more.
In an op-ed for Devex on Thursday, Philippe Le Houérou, the head of the World Bank’s private sector arm, announced that from Oct. 1 IFC “will publicly disclose the estimated subsidy for each proposed project along with the justification for why it is necessary” and said that the rule will apply to all of IFC’s blended finance facilities. Le Houérou called on other development finance institutions using blended finance models to do the same.
For Pro subscribers: The Rise of DFIs report
Development finance institutions have an increasingly high profile as the industry focuses on how private finance can be leveraged to achieve the SDGs. Devex digs into the data to see where DFIs are investing and track the trends.
The move comes in response to concern from civil society groups and development finance experts over IFC’s use of blended finance to do deals with the private sector in the world’s least developed countries through the “private sector window.” IFC can use the $2.5 billion pot of aid money to subsidize and de-risk deals with commercial companies and funds in emerging and frontier markets which would otherwise be deemed too risky.
The PSW issue — which includes concerns that IFC is giving overly-generous subsidies to firms without proper competition and transparency or policy-led decision making — was escalated all the way to the U.S. House of Representatives. Last April, U.S. Rep. Maxine Waters, chair of the House Financial Services Committee, threatened to delay IFC’s capital budget increase — agreed in 2018 — unless it improves.
In his op-ed, Le Houérou was clear that “PSW is not a giveaway to private companies,” and commits to “applying the highest standards [of transparency] in the use of blended finance.”
Although onlookers welcomed IFC’s decision to be a first-mover and take its critics’ concerns on board, they want it to go further.
Half the story
“It’s a welcome step in the right direction but it’s a small step covering just one issue,” said Charles Kenny, senior fellow at the Center for Global Development, who has been following PSW from the beginning.
For Kenny, the information on the subsidy estimate is only useful if IFC also discloses its estimate of what financing terms would be without the subsidy.
“The fact that they are not being explicit about what they estimate ... means we still don’t know what’s going on or how reasonable IFC’s subsidy is,” he said.
They may also be reluctant to disclose more specific details for fear of being undercut by other development financiers — something that DFI insiders say is fairly common, especially in fragile and conflict-affected countries where there is a lot of pressure, but few opportunities, to do deals. The head of the Private Infrastructure Development Group, Philippe Valahu, made this point at a recent Devex event, and called competition among DFIs “absurd.”
“IFC should try harder because this is aid money which could be used for other things,” he said.
Setting an example
Opinion: In blended finance, transparency and rigor must rule the day
As of Oct. 1, the International Finance Corporation is publicly disclosing the estimated subsidy for each proposed project — along with a justification. IFC CEO Philippe Le Houérou explains why.
IFC’s new disclosures will make it a leader in the sector, according to Nadia Daar, head of Oxfam International's Washington, D.C. office, who added that other development finance institutions have long argued that it is impossible to be transparent since it will disrupt nascent markets. Daar said she hopes it will set a new precedent.
“It will be really important for other DFIs to see IFC doing this, especially if they show that greater transparency doesn’t make them less competitive,” Daar told Devex.
However, she said that a more transformational shift will be needed in order for groups like Oxfam to feel comfortable with the private sector and development.
“Confidentiality needs to be broken if we are going to talk about a bigger role for the private sector in development,” she said.
Jolie Schwarz, senior policy advisor at the Bank Information Center, said she was “pleased that IFC has recognized the importance of transparency with respect to PSW,” and also its responsiveness to stakeholders.
However, more needs to be done to ensure PSW projects are responsive and accountable to the needs of countries and affected communities, she said.
“Public funds being used to subsidize private firms requires stronger accountability measures … and while this is an important first step towards that … there are still specific things we’d like to see,” Schwarz said.
This includes ensuring all stakeholders and affected communities are consulted throughout the project cycle and that communities know about potential redress systems if things go wrong, she added.
Hans Peter Lankes, IFC’s vice president of economics and private sector development, said that increased disclosure will lead to a better understanding of how to use these resources effectively.
“What we will be doing now is disclosing the subsidy as a percentage of the overall project cost. We are the first to take this step,” Lankes wrote in an email to Devex.
