The traditional model of using aid for developmental work is not enough to fulfill the 2030 Sustainable Development Goals. To move at a faster pace, it is important to get the private sector to participate more and also at an early stage. At the International Finance Corporation (IFC), a sister organization of the World Bank and member of the World Bank Group, one way of involving the private sector to close the funding gap is by using more affordable financial instruments through combining concessional funds — typically from development partners — with IFC’s commercial funding.
In a conversation with Knowledge@Wharton, Nena Stoiljkovic, IFC’s vice president, blended finance and partnerships, explains how the corporation’s strategy of using blended finance helps mitigate early entrant costs and project risks. Stoiljkovic also discusses the organization’s approach of working with the private sector in developing countries to create markets that open up new opportunities.
An edited transcript of the conversations follows.
(Those interested in international development or social entrepreneurship may enter the 2018 Ideas for Action competition, a joint initiative by the World Bank Group and the Zicklin Center for Business Ethics Research at Wharton. The competition is seeking young leaders worldwide to share ideas for financing and implementing the U.N.’s sustainable development goals).
Knowledge@Wharton: What is blended finance and what kind of partnerships do you manage?
Nena Stoiljkovic: I have 22 years of experience in IFC and have worked on all instruments and in many different areas, different sectors, different countries, at the headquarters and in the field. I have also worked at the World Bank. Around a year ago we started thinking about how we could maximize the mobilization of the private sector by leveraging as little as possible of donor funds and public sector ODA [official development assistance] money.
Blended finance is when we blend or mix some of the more concessional instruments funded by our donors with our own funds that are more commercial in order to achieve the right risk-reward profile of the transactions and make it possible for private sector participation.
Knowledge@Wharton: This seems to be an innovation in the way that economic development is funded. What were some of the factors that made this necessary compared to the old model of just using aid?
“The catalytic nature comes, for example, on climate projects where one dollar of concessional blended finance generates up to $15 of the overall financing.”
Stoiljkovic: Grants, public sector funding, commercial funding through debt and equity and some short-term instruments are all very good. But the push to do more in less developed countries required a different approach. It wasn’t anymore possible to just go into South Sudan or Burkina Faso and find readily available projects or sponsors who would implement them. We realized that for us to be there early on and get the private sector interested in some of those opportunities, we would need to blend [concessional funds with commercial funds].
IFC has been blending for 10 years. In the first five to seven years, we did this maybe a little bit shyly. We used these instruments in a very disciplined way for three sectors only — climate, agri-business and SMEs — where inclusion was a big challenge, where we couldn’t push our clients, bank clients in particular. We incentivized them by using some of the more affordable financial instruments through blending. So that’s one angle… going deeper and bringing the private sector on board early on.
The second reason is donors are realizing that grants are very expensive. They are not returnable; it’s very hard to leverage them and you can only do such funding on a selective basis, in a disciplined way, in certain sectors.
With the push to do more by 2030 [to serve the 2030 Agenda for sustainable development], donors are now more interested in blended finance instruments. So you have both the demand and supply side wanting this type of instrument. We found ourselves in a situation where we could start leading among the other multi-lateral development banks and international financial institutions (IFIs) on these new instruments.
Knowledge@Wharton: If you were to look at the total volume of funds that are now part of the blended model, how does that compare to other forms of capital and how fast is it growing?
Stoiljkovic: Blended finance is still very modest in comparison to IFC’s overall volume of around $11 billion of our financing every year. On top of that we mobilize around $8 billion from other sources, normally IFC’s B Loan syndication program or other IFIs who co-finance with us. We commit on average 22 blended finance projects a year, deploying only around $130 million in donor funding annually. It is very little because we use it in a minimal and disciplined way, but at the same time it’s catalytic. Normally, IFC does around 400 projects every year. So a small number of projects every year out of 400 plus are beneficiaries of concessionality. And in all cases it’s minimal. As we move into more difficult markets and challenging situations, blended finance may become an even more important tool in our toolbox and as such blended amounts and concessionality needs may increase. But IFC will maintain a focus on disciplined deployment within the principle of minimum concessionality.
In terms of volume, in terms of dollars, this is not significant. The catalytic nature comes, for example, on climate projects where one dollar of concessional blended finance generates $15 of the overall financing. One thing I would like to reiterate is that we do not blend grants. We blend only instruments that can return the principal to the donor and in most cases make a small return. It’s never a grant. We use grants only for technical assistance that can support and complement blended finance instruments.
Knowledge@Wharton: Taking a step back, IFC has been around for some 60 years. What are the organization’s top priorities for the next year?
Stoiljkovic: We’ve been around for 60 years and we are still the largest source of private sector financing in emerging markets. Over the years, we have evolved in a big way. We started by taking Western companies to emerging markets. Our first deal was with Siemens, which we took to Brazil. We call this IFC 1.0. We started decentralizing in the late 1990s and early 2000s. We put a lot of people on the ground to start doing what we call 2.0, where we worked with larger countries and regional companies. We have a very large presence in all continents, in about 105 countries. But then we realized that that’s not going to be enough if we want to tackle big development challenges and if we want to go more to the frontiers, in particular, African countries.
This is where we are coming up with our new strategy, which we call creating markets, where we’ll go in early, demonstrate that private sector can do projects, and work closely with the World Bank on policy and sector reforms. We create projects and bring clients in. Then, we will try to help them with advisory services, build capacity, and then stimulate competition. That’s what we call 3.0, the new strategy of IFC.
Knowledge@Wharton: You mentioned the new strategic framework. What are some of the analytical tools that IFC has started to use to implement that approach?
“We always wanted to demonstrate that private sector can be profitable in emerging markets.”
Stoiljkovic: The main one for us is what we call ex-ante development impact tool. It’s a model that is still under development but it will enable us ex-ante, before a project is approved, to decide how developmental it is versus or in complementarity to its financial assisting ability. IFC has a very strong record of profitable business and we have supported very successful and very financially viable companies.
We always wanted to demonstrate that the private sector can be profitable in emerging markets and I think that model has worked very well for us. At one point in time, we probably swung too much towards risk averseness, credit control and all of that has served us very well in the past. We now want to rebalance and make sure that our portfolio is highly impactful and financially sustainable. But not every deal has to be equally financially sustainable and impactful. This model will allow us to assess that for every project ahead of time so that we can make choices and tradeoffs as we build our portfolio.
Knowledge@Wharton: I was interested in what you said earlier about the approach of developing markets rather than just investing in companies. Could you explain how that approach changes the way in which you invest in new projects?
Stoiljkovic: It primarily changes the timing. We can wait for the countries to be ready for private sector financing and we can wait maybe for 10 years for some of those countries to introduce the right reforms, the right investment climate, to build the right infrastructure, the right set of skills. But that will mean too much waiting and we will be late to contribute in a meaningful way to what has to happen as part of the 2030 Agenda.
So we are now looking at constraints in every country, and it has to be a country-by-country approach, because different countries have different issues. We are trying to learn from one country and implement similar solutions in others. We are thinking of platforms rather than individual approaches in certain sectors.
I can mention a few examples. On the platform side — and this goes back to how we develop the markets — we have something that we call ‘scaling solar,’ where the same approach can be applied to many solar projects, for instance, across the African continent. We started with a project in Zambia where we leveraged the World Bank’s advice to the government on policies related to tariffs for solar energy. We then advised the government on how to structure the PPP transaction and do the bidding process, which was a couple of years of work, but it’s the same sequencing, the sector reform, the structure of the PPP transaction and the bidding process. And then we financed the very first transaction in solar in Zambia, which resulted in a very beneficial price for the ultimate consumer. It was around four to seven cents per kilowatt of energy, which was one of the lowest on the continent.
To achieve this we had to blend. We used IFC’s own funding of around $15 million, OPIC’s (Overseas Private Investment Corporation) funding, parallel funding for another $15 million, and we used a blended finance platform that we had from Canada for a climate project of another $15 million. This approach of policy reforms, advice on the PPP structure, bidding process and the financing mechanism is now being replicated in a second round in Zambia.
We also have a first round project coming to approval in Senegal. We can cut a lot of time by having exactly the same approach for many more solar projects. The impact is huge. There are benefits to consumers. There are obviously climate benefits because Africa has a lot of solar potential. Clearly there were benefits for the governments, and ultimately the regulatory framework will change so that this becomes possible without any blending.
We see increasingly in Africa that in some countries other than Zambia, South Africa in particular, that many of the solar projects are now taken up by the commercial sector. So institutions like IFC do not have a role, which is very good.
Knowledge@Wharton: Some research a few years ago noted that one of the major sources of value creation in the future would be women entrepreneurs in emerging economies. Some financial institutions focused on investing in such enterprises. Is this a priority for IFC?
Stoiljkovic: Yes. It’s one of the top three priorities. The first is fragile and conflict-affected countries, and most of them are in Africa. The second is climate. Blended finance instruments allow us to do more climate projects. And the third one, I would say a very prominent one, is women and maybe more broadly, entrepreneurship and SMEs.
We have a Gender Secretariat in IFC that has been very innovative and has helped us come up with a brand new strategy on women equality and women inclusion. We are trying to demonstrate that employing women, having women in leadership or financing women in enterprises is good for business. We have a number of reports and case studies on why it is good to have women in some of these roles.
For us it is a lot more than just financing women entrepreneurs, which we do through local financial institutions that we support. We encourage them to finance women and also teach them what kind of products they can use for women in some markets. We are also pushing our investing companies to have women on their boards and are working with some of our manufacturing companies to employ women. We look at women across the spectrum — employees, leaders, business owners and also women as consumers and in communities. We have a comprehensive approach and are very active in bringing women into the economy and showcasing that it is good for business.
Knowledge@Wharton: How far down to the bottom of the pyramid do you go? Say, for example, microfinance. The vast majority of borrowers tend to be women. Does IFC get involved in that?
“We are trying to demonstrate that employing women, having women in leadership or financing women in enterprises is good for business.”
Knowledge@Wharton: What is your strategy for the bottom of the pyramid?
Stoiljkovic: Initially it was mostly microfinance in Bangladesh and in Central Asia. We worked a lot with BRAC [an international development organization based in Bangladesh] and we were on the cutting edge of some of the new approaches. That was many years ago. Now we are mostly supporting microfinance institutions to convert them into proper financial institutions, allowing them to grow.
We don’t go too far down, especially not directly, to small entrepreneurs, but we leverage all possible platforms that we have. On the equity side we leverage private equity funds that we fund. We leverage local financial institutions, in some cases microfinance but in many cases local banks, to lend to small entrepreneurs. We work a lot along the value chains, especially the agri-value chains, to include farmers. Again, not as individuals, instead we package solutions for farmers – on how to produce sustainable crops, how to finance farmers, how to make them more efficient.
The way we work, we need someone who is an aggregator. It’s usually a local financial institution or a large buyer of cocoa or cashews, or a producer. That’s the typical way IFC reaches the bottom of the pyramid individuals as you call them.
Knowledge@Wharton: Apart from microfinance there’s also the movement towards what is called fintech — financial technology, bringing about more and more financial inclusion through technology. For instance, consider peer-to-peer lending, online loans, or, in places like Africa, the rise of mobile money. Does IFC have a perspective on how its strategy would support some of these technology-driven trends?
Stoiljkovic: Absolutely. The world is going that way and we cannot ignore it. We believe that technology is disrupting the way many sectors operate. I’m thinking of logistics that IFC has been supporting for years, in retail, health and education. We have supported some of the very innovative technology-driven education concepts like the Bridge Schools in Kenya and some other African countries. Sometimes these solutions are very, I don’t want to use the word revolutionary, but they bother the host governments because they are disrupting the usual ways of delivering education or any other service.
We see leapfrogging, going to new technologies, as very possible in Africa. But not all of the countries are at the stage where Kenya is, where there was proper regulatory framework, proper mobile phone penetration to allow for some of the innovative concepts like M-Pesa to materialize. When we talk of how much fiber optic is needed to develop digital infrastructure in Africa, we’re talking about billions of dollars. This will all not happen just like that, right? Kenya is a bright and stellar example but there is so much more needed to invest in digital infrastructure and even in skills to help that leapfrogging to happen everywhere. IFC wants to be on the forefront with that, on the billions needed for digital infrastructure, working with the World Bank on regulatory framework, as well as working with specific entrepreneurs who can be innovators in many of those countries.
Knowledge@Wharton: You have mentioned IFC 1.0, 2.0, 3.0. What does IFC 4.0 look like to you?
Stoiljkovic: If we could work ourselves out of business in 2030 that would be a success. But I’m not so sure that will happen. It will be something around new technologies and going deeper into more frontiers. I think it will also involve a lot more advisory services than financing because may not necessarily need our money, there may be money or funding available somewhere else, but they will need our knowledge and experience.
Article by Knowledge@Whaarton