Hans Peter Lankes, IFC: IFC’s Development Impact, One Market at a Time

Author: Hans Peter Lankes
IFC Vice-President Economics and Private Sector Development

Having worked in the international financial institutions for much of my career, I’m a big believer in the power that development institutions have in building a bridge between the government and the private sector. That philosophy underpins the International Finance Corporation’s (IFC) focus on creating markets and a private-sector-first approach to development.

Take, for example, Argentina’s success in modernising its power sector, which shows what can be done with the help of development institutions.

Argentina is working hard to diversify its power grid. But easing the country’s dependence on fossil fuels and cutting carbon emissions takes more than hard work. Argentina needs to attract a vast amount of investment to meet its goal of generating 20% of its electricity from renewable sources by 2025.

The IFC and other development institutions are helping ensure that goal is achievable – by creating a new market for private investment in renewable energy. We helped organise a renewable-energy auction and set up the process to attract international bidders. At the same time, the World Bank provided $480 million in guarantees to reduce investors’ financial risks. As a result, the energy projects became bankable and meet international standards.

“As markets mature, extending the reach of established models, supporting standards, and mobilizing finance at scale are paramount.”

IFC is the largest development finance institution focused on the private sector, but our investments are small relative to the needs in emerging markets. At a time when developing countries need as much as $4 trillion every year to achieve the Sustainable Development Goals, simply investing on a project-by-project basis isn’t good enough.

That’s why my work is so heavily focused on creating markets, a strategy designed to crowd in far more private capital and overcome systemic barriers to economic growth – poor governance, limited access to finance, and inadequate infrastructure, to name a few. By responding to the challenges that keep private capital from being deployed at a scale required to address major development gaps, the creating markets approach should expand the pipeline of investable projects.

I believe the creating markets strategy can have an impact through a variety of channels. It can help focus our work to support the implementation of regulatory frameworks that allow markets to function. It can sharpen our approaches to promote competition that prompts other market players to up their game. It can help us scale the financing of demonstration effects and replication such as novel bond structures whose success with investors in one market opens the way for similar transactions elsewhere. Lastly, by deepening our work to build capacity and skills, it can help open new market opportunities.

Each of these channels takes us beyond the direct impact of IFC’s investments by triggering activity that is not directly connected to our own investment. The approach recognises that markets evolve in a dynamic way, based on an interplay and linkages between private investment and public policy. For that reason, the type of work we take on will depend on a market’s maturity and a country’s economic and political situation.

For example, in a market’s early stages, pioneering investments, new platforms, and innovative technologies may be necessary triggers. Take bKash in Bangladesh, a company that introduced a new mobile payment platform and now has 27 million registered customers in a country that has long struggled with access to financial services.

When markets begin to develop, market creation involves bolstering the market infrastructure so goods and services can be exchanged more efficiently. The World Bank Group’s Scaling Solar Programme is one example. By simplifying government processes and lowering pricing, Scaling Solar allows governments to procure privately funded solar power stations quickly, transparently, and at the lowest tariffs possible.

As markets mature, extending the reach of established models, supporting standards, and mobilising finance at scale are paramount. The explosion of mobile telecommunications in Africa over the past two decades shows how regulation, competition, investment, and affordability can scale opportunities across many markets.

In this context, I’m convinced that development finance institutions need to embrace private-sector-first principles. It means we must always ask ourselves if private financing alone can pay for a proposed project. If it can’t, we should move down a cascade of other options – from the enactment of regulatory reforms to public-private partnerships to blended finance. Only when all other options have been ruled out, should public or concessional financing be considered.

To operationalise this approach, we need to modernise our analytical tools to help assess where we can be most effective. That is why I have a mandate at the IFC to implement a new framework for development impact over the coming years to give us a firmer foundation for targeting and documenting our investments. The concept, measuring development impact, is not new, of course, but its vigorous application – including upstream to feed into investment decisions, to capture market creation effects, and through its alignment with incentive structures – will put IFC on a trajectory that will further deepen our commitment to the development mission we were established to advance over sixty years ago.

The challenges ahead of us are considerable. Investors face elevated uncertainty and are understandably cautious about investing in unfamiliar locations at times of geopolitical instability. It is clear to me that the private sector’s capacity for scale and delivery and the public sector’s ability to create the right conditions for development need to urgently come together to confront the world’s development challenges.