Stretching Sustainable Development Funds

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International Finance Corporation's Nena Stoiljkovic talks about the group's novel approach toward boosting private sector development.

The International Finance Corporation (IFC), a sister organization of the World Bank, is making a big push in the Asia-Pacific region. The IFC provides financing, advisory and other services to boost private sector development in developing nations and has set a goal of ending extreme poverty and promoting shared prosperity in every country by 2030. The organization operates by aligning multiple stakeholders to a common vision, leveraging innovative financing instruments to reduce project risks, and helping to pioneer private investments.

Those approaches are ideal for projects in emerging-economy countries where political and sector risks run high, according to Nena Stoiljkovic, IFC’s vice president for Asia and Pacific. Pulling more private funds to the projects is particularly important in the region, which accounts for 60% of the world’s population but has widespread poverty, she said in a recent interview with Knowledge@Wharton. (Listen to the complete podcast at the top of this page.)

It helps that in her previous role as IFC’s vice president of blended finance and partnerships, Stoiljkovic worked on developing new instruments to “de-risk private sector investments in emerging markets,” among other global initiatives. It also helps that several countries are displaying technological prowess in sustainable development technologies such as in combating climate change.

For example, an IFC project in Singapore is a model that can be replicated in emerging markets, while other economies such as Indonesia, the Philippines and Vietnam are promoting low-carbon energy generation through increased energy efficiency, particularly solar and wind, hydropower and geothermal and green buildings. Meanwhile, Bangladesh and Indonesia are proving to be fertile markets for fintech companies and the financial inclusion they bring to underserved populations.

The ‘Cascade’ Approach

According to Stoiljkovic, the Asia-Pacific region needs $3.5 trillion in infrastructure financing every year. “A cascade approach” that the IFC has designed would help achieve the sustainable development goals of the region, she added. “That’s a simplified way of talking about maximizing finance for development. What it really means is that whenever you can finance something through the private sector, do not resort to public sector [financing] – especially grants – because these are precious sources of financing that should be used only where the private sector cannot do it.”

When a project is presented, the IFC asks whether there is a sustainable private sector solution that limits public debt and contingent liabilities. “If the answer is ‘yes,’ then promote private solutions. If the answer is ‘no,’ ask whether it is because of policy or regulatory gaps or weaknesses, and how the World Bank can support policy and regulatory reforms,” she said. “And if it is because of risks, we can see what World Bank  instruments we can bring to bear.”

In essence, that “cascade” strategy implies boosting private sector financing. “The only way we will be able to put trillions of dollars into development by 2030 to deliver on SDGs (sustainable development goals of the U.N.) is to create conditions for the private sector to provide financing that’s needed,” said Stoiljkovic.

“We can bring a lot of the trillions that sit in institutional investment companies to emerging markets to finance some of those much-needed projects.”

The IFC is also pushing for policy reforms in public sector institutions. “When we connect it all with the same goal, we can bring a lot of the trillions that sit in institutional investment companies to emerging markets to finance some of those much-needed projects,” Stoiljkovic explained. At the same time, she stressed the overall need for effective collaboration among nonprofit organizations, the public sector, private sector financiers, commercial banks, private equity funds and institutional investors. The World Bank Group has tried to promote this concept with other multilateral development banks through work on mobilization definitions and common blended-finance principles.

The Jordanian Case

The “cascade” strategy sets out to make systematic what has happened informally over the years in the World Bank. One example that stands out is Jordan’s project to build a new terminal at its international airport that ran the better part of the past decade, Stoiljkovic noted. The King of Jordan had originally planned to finance it solely through public sources. However, a World Bank team leader suggested that it would be better to build a private airport, which could generate ongoing revenues for the government.

The IFC helped set up a public-private partnership financial structure for the project, where the government awarded the contract to a French company to build and operate the airport on essentially a lease basis.

Between 2007 and 2016, the IFC assumed three roles: an advisor to the Jordanian government; a lender and lead arranger of financing; and portfolio manager during the implementation of the project, according to an IFC note. Queen Alia International Airport “is now one of the most successful airports in the world,” said Stoiljkovic.

The financing plan for the airport helped conserve substantial government resources, she added. The Jordanian government went from subsidizing airport operations at a cost of $23 million per year to receiving an annual fee from the operator to run the airport amounting to more than 50% of the net revenue — the highest revenue share ever bid on an airport PPP project. This has added up to over $1 billion in revenue for Jordan over the last decade.

The IFC is adopting similar approaches in solar energy and climate-change reduction projects in Africa, with the private sector providing the financing, and the public side providing regulatory and policy support to institutions like the IFC to structure the bidding processes and contracts for private operators.

Retooling Financial Instruments

One important aspect of the financing structures the IFC puts together for such projects is “de-risking,” or finding ways to reduce the risks for private financiers. In several emerging-economy countries, the economies are “fragile and conflict-affected,” or have other political risks, Stoiljkovic noted. At times, such projects also face technological risks — for example, a solar power initiative, if it happens to be the first of its kind in the country.

In such cases, the IFC steps in with “blended finance instruments,” such as “loans with much longer tenures than the market can provide” or other instruments such as guarantees and even equity to reduce the overall risk profile of the transaction. That approach, which uses relatively small amounts of donor financing to target specific risks in private sector projects, allows private sector investors to earn satisfactory returns on infrastructure projects, Stoiljkovic explained. The IFC has successfully implemented several such first-of-its-kind solar power projects across Africa and in South Asia, using those blended finance instruments as incentives to help investors offset some risks.

“Public sector [funds] … are precious sources of financing that should be used only where the private sector cannot do it.”

All those initiatives are part of a broader refresh of the ways in which the IFC approaches project financing. In earlier years, it would raise money through bond offerings, where government guarantees would help it secure attractively low rates, and use such funds to support private sector projects. Its traditional approach was also to wait for projects to be ready for financing.

Now the IFC takes a different approach, where it can help create a market for a project if one doesn’t exist, Stoiljkovic said. These may be privately operated solar or hydroelectric power projects, new fintech instruments, digital education or health care initiatives. What’s more, the IFC attempts to “connect all the players” in a project with each other, which may include the World Bank, commercial investors, nonprofits, and of course the IFC itself, she added.

A prime example of such an approach is in the building of the 750-megawatt Rewa solar power project in India’s Madhya Pradesh state that is slated to be commercially operational in December. Here, the World Bank provided advice on the resettlement of people around the project site while the IFC structured the deal and provided financing.

“We worked in sync because one without the other – just the advice on resettlement without private financing – it would not have worked,” said Stoiljkovic. The Rewa project and other such solar power projects that the IFC has financed account for 15% of India’s solar capacity.

Asia and Climate Change

A big chunk of the IFC’s work is directed at climate change mitigation, which includes projects such as the Rewa plant. In that space, Asia is an important market for the IFC. “Asia in particular is interesting from a climate change perspective, because it is a region where many people live around the coast,” said Stoiljkovic. “It’s also very fragile in terms of being prone to climate change effects, whether they are storms or tsunamis.”

At the same time, Asian countries, such as India, Indonesia, Vietnam and China, are developing innovative technologies in the production of solar power equipment, batteries and related products, said Stoiljkovic. Climate-change mitigation projects in global emerging markets — such as in renewable energy — now account for some $18 billion of IFC financing annually, which is close to a third of its overall financing outlays, she added.

“Asia in particular is interesting from a climate change perspective, because it is a region where many people live around the coast.”

Some of that takes the form of “green bonds,” which provide an alternative source of long-term green finance used exclusively for climate-friendly projects, including in agribusiness where crops can be protected from the adverse impacts of climate change, she added. In December 2017, the IFC enabled the first green bond to be issued by a financial institution in the Philippines, which is particularly vulnerable to the impacts of climate change. The proceeds are to be being used in renewable energy, energy efficiency and green building projects.

Stoiljkovic further noted that the IFC has supported climate-friendly technologies by advising local banks in emerging economies about financing “climate-smart projects.” This adds to its efforts to help build capacity and provide advisory services. In addition, the IFC finances a “green energy efficiency alliance” by providing local banks credit lines that they could use to provide loans to their small and medium-sized clients.

Digital Banking for the Underserved

Another example of how the IFC’s new approach works: a fintech company transforming the money transfer business in Bangladesh. Considering Bangladesh’s population density, an essential part of the IFC’s development mandate is to design strategies for financial inclusion jobs and economic opportunities, Stoiljkovic said.

The country’s banking sector has some 50 banks, many of which were state-owned and “not very efficient and have non-performing loans,” she added. That setting provided an opportunity for an IFC client called bKash to pioneer digital money transfers using mobile channels in the country. It was able to grow rapidly to provide access to finance for some 30 million people and allow for money transfers to poor families in rural Bangladesh, according to Stoiljkovic.

“The fintech company [bKash] has now reached the size and scale that it cannot be regulated as a bank or as a micro-finance institution,” Stoiljkovic said. The IFC is helping the Bangladesh government find ways of regulating the fintech space. “They obviously did not know that [digital money transfers] would grow at such a pace,” she added. “[This is] a classic example of market creation and a tremendous story of financial inclusion in a country that very much needed it.”

Once set in motion, projects such as bKash tend to have a snowballing effect. “[Setting up physical] branches in rural areas of Bangladesh or any other country is very difficult and expensive,” Stoiljkovic pointed out. “Technology is allowing us to connect people and give them that access, simply by having a mobile phone.”

Stoiljkovic placed the impact of IFC’s work against the backdrop of the larger goal of using sustainable development to reduce world poverty from current levels of below 10% to less than 3% by 2030.  “When I think of Asia, I think about sustainable cities, urbanization. I think about agriculture and linking what happens in rural areas providing food to growing urban populations. I think about a lot of young people that need to be included in the economy – by providing jobs for those people and [empowering them with the] skills for those jobs,” she said. “And of course, I think about doing all of that in a sustainable way and hopefully using more and more technological development to speed up the growth.”

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