To boost investment pipeline, IFC invests in its upstream work

In the past year, the International Finance Corporation has invested significantly in its so-called upstream work — bringing on hundreds of new staffers, setting up regional teams, and creating new incentive systems — in an effort to help create investment opportunities. It’s a shift from IFC’s standard approach of investing more reactively and turning away potential investments that didn’t fit a specific mold. That old system, critics say, resulted in IFC underinvesting in low- and lower-middle-income countries, as well as focusing too much on closing deals and too little on development impact. But now IFC is trying to change that — at least somewhat. As part of the institution’s “3.0 strategy,” launched in 2016, along with the commitment as part of its capital increase to significantly raise its investment in the lowest-income and most fragile countries by 2030, IFC has been staffing up and operationalizing its upstream approach: trying to create a pipeline of potential future projects through a mix of funding and technical assistance. That pipeline is growing fast. In fiscal year 2021, $215 million — about 22% of IFC’s total operational budget — was designated for its upstream work. About $2.4 billion in long-term financing was committed to projects enabled by IFC’s upstream work, and the development impact of those investments scored 18% higher than IFC’s average, the institution told Devex. At the end of June, IFC’s existing upstream pipeline topped $16 billion — more than triple the figure in the previous year. IFC’s traditional job has been to use private sector financing to drive development. But it is “handicapped” if it doesn’t have projects to invest in, said Femi Akinrebiyo, a global manager for upstream work at IFC with a focus on manufacturing agribusiness and services. The most challenging markets in the world have a lack of sustainable projects and a lot of money chasing the few projects that do exist. “The way this is different than what we’ve done in the past is that we are taking a proactive approach to creating opportunities, to do whatever it takes to make it happen,” Akinrebiyo said. Another thing that’s different about the upstream work is that the deals will take longer to develop. IFC told Devex that in the past 18 months, it hired more than 280 new staffers globally to work on the upstream portfolio. It’s a diverse team not just in terms of ethnicity or background, but also the skills that members bring to the job. One is even a rocket scientist. “Broadly, I think it is a good thing they are trying to do,” said Charles Kenny, a senior fellow at the Center for Global Development. The shift has its skeptics. Still, the proactive approach could help IFC deliver on promises to shareholders, but “it’s too early to see impact,” Kenny said. Building upstream Through the upstream work, IFC will get involved earlier in the investment process. It will help companies that may need financing for a specific environmental study, for example, or help with a technical issue or some development capital to de-risk a project so that it can get to a stage where IFC could invest. The goal is to work at a pre-investment stage and help build markets. Vaccine manufacturing on the African continent is a good example of where this upstream approach is needed, according to Akinrebiyo. Money alone is not enough because African companies need help with their technical capacity to scale or start vaccine production, he said. “The situation today is we take a development challenge and we can pick it up head-on,” he said. “We can support people’s ideas and not just fold our arms waiting for things to fall into proper places.” The portfolio requires wearing a “different hat,” with expectations that are different from typical project development. With the upstream work, if 25% of the projects get to the finish line, “that’s fantastic,” Akinrebiyo said. But, he added, “where we fail, we need to fail very fast and very cheaply.” It’s still too early to tell if IFC will hit those targets, and it may take a year to determine if projects will succeed or if they should be terminated. “We need to think about de-risking in different pockets of IFC,” he said. The upstream portfolio is a different bucket of risk, in which money is available for making riskier investments. That doesn’t mean that IFC’s overall credit quality will decline, he said. Traditionally, if a company didn’t “fit a square box” of what IFC was looking for, investment officers would pass it by. But now they have a tool to try to make more deals work. Both Akinrebiyo and Ken Osei, a principal investment officer at IFC who is based in South Africa, described the shift as being able to take a problem and find solutions, rather than just investing in solutions that may come to IFC. “I see upstream as giving us another set of tools to do things we otherwise wouldn’t have been able to do,” said Osei, who is not on the upstream team but has worked on some upstream projects. The portfolio also gives investment officers such as Osei flexibility to act more quickly — getting a project moving instead of going through the full approval process first. Projects eventually go through full due diligence, appraisal, and board approval processes. “The situation today is we take a development challenge and we can pick it up head-on. We can support people’s ideas and not just fold our arms waiting for things to fall into proper places.” --— Femi Akinrebiyo, global manager for upstream work, International Finance Corporation Osei gave the example of a partnership with Imperial, an Africa-focused logistics and market access company, to set up modular screening and treatment units to assist with South Africa’s COVID-19 response. IFC is supporting a pilot project for testing some of the modular units that is aimed at improving access to care for underserved communities. By getting involved early on, IFC could speed up the production process and help determine where the units were placed. “To do upstream, it requires a longer horizon. You have to be willing to dig deep and dig long, and you may not necessarily get the results you desire,” Osei said. The goal for IFC this year is to build a portfolio that would lead to $2.5 billion in investment in the sectors that Akinrebiyo covers, and so far his team is ahead of that target. The average investment differs significantly and may range from $10 million to $200 million when a project comes to fruition, he said. Unanswered questions Some big questions remain about the success of the upstream work. One of them is whether IFC can successfully undergo the culture change it needs to put these types of investments — particularly in lower-income countries — at the center of its work, some experts said. “There is a strong culture in the institution of deals over development,” and that necessitates a real shift that is still in its early stages, Kenny said. Nadia Daar, the head of the Washington office of Oxfam International, described one of IFC’s perennial challenges as “how to reconcile working with the private sector, which is profit-motivated, with poverty alleviation.” How the institution identifies development impact has also been a struggle, Daar said. Rather than just measuring the contribution to gross domestic product, it should consider environmental and social sustainability, safeguards, community participation, and community benefits, she added. “I think what’s really important is coming back to development impact,” Daar said. Beyond just private organizations, IFC should also think of the governments and people in the countries it is investing in as clients, Kenny said. IFC should start with a country’s development priorities, evaluate where the private sector can deliver on those priorities, and then determine what kind of projects the upstream staff should work on to meet them, he said. “That transformation has, frankly, hardly started,” Kenny said. Daar also suggested that IFC needs to do more than simply identify a problem and how the private sector can contribute. It should also ask whether the private sector is the right one to address each specific problem. “The private sector is an essential component of any functioning economy. If IFC can support the private sector to play the role and fill needs, it can be useful,” she said. But, Daar added, “market creation is only worth pursuing for IFC when it leads to positive development outcomes.” And that means that it shouldn’t be doing so in every industry or sector, she said. Sectors such as renewable energy — especially off-grid — are a good place for IFC to focus its efforts, but market creation is not always right for social sectors, including health, education, and water, she said. “There are lots of risks for private sector social service provision, and it’s important [that] IFC stay clear of that,” Daar said. In principle, a more decentralized approach with more deal officers in countries — and not just in Washington — is a good thing, she said. And providing technical assistance is a “huge added value” because IFC benchmarks, while “not perfect,” are “pretty much the gold standard” and can have a huge influence on the local private sector, Daar said. How successful upstream work is also comes down to how much it actually changes IFC’s portfolio, human resources, and compensation structures. Kenny said he is concerned that IFC will take the easy approach to its upstream strategy: mostly working with traditional clients to take nearly bankable projects that it would have turned away and making them bankable. If IFC does that, the upstream work won’t be transformative and would be the lowest-impact way to use the additional resources. For the upstream strategy to be successful, IFC must “move a lot upstream, not a little,” Kenny said. Despite buy-in from leadership, success will also depend on endorsement from staffers and how they are evaluated and compensated, he said. Changing objectives can be challenging if compensation and other internal systems still incentivize closing deals each year, rather than working on the longer-term upstream projects. But IFC is striving to change that, offering awards for those doing upstream work and adjusting how progress is measured. Upstream projects are viewed as multiyear initiatives, so investment officers will be measured not by whether they close a deal, but on the basis of a feasibility study or environmental assessment falling short and the reasons why it did or didn’t, Akinrebiyo said. Update, Aug. 31, 2021: This article has been updated with information on spending, staffing, and other details related to IFC’s upstream projects and efforts.