Does the IFC Capital Increase Add Up?

We may be witnessing a collision course of good intentions at the International Finance Corporation. The corporation’s shareholders have decided to increase their support for its private sector-led development model while also aiming to rapidly increase support for fragile states and other deeply challenging investment settings.

The result is a set of goals that are hard to view as realistic.

In May, the International Finance Corporation was granted a $5.5 billion increase in paid-in capital by its shareholders as part of a $13 billion capital increase to the World Bank Group. This is the IFC’s first major increase since 1992 and has the potential to expand IFC’s investment portfolio from the current value of about $12 billion to $25 billion by 2030. That could be good news, if the corporation can find enough high-impact projects to support with all that extra cash. But history isn’t too reassuring on that front, particularly when we consider the new investment targets that come with the additional capital.

In return for the capital increase, IFC has agreed to increase its commitments in International Development Association (IDA) countries and fragile and conflict-affected states (FCS) to 40 percent of its portfolio by FY30. Of this, 15 to 20 percent is supposed to be invested in projects in low-income IDA countries and IDA/FCS. According to the IFC, reaching these goals would deliver 75 percent more in cumulative commitments in IDA/FCS between FY19 and FY30 than if there was no capital increase.

This is not the first time that the IFC has promised to focus on countries that need more private investment the most. Back in 2010, for example, the corporation stated:

Within the framework of the Five Pillars, execution in FY11-13 will be evolving in response to the new normal challenges. To address poverty, unemployment and conflict, and to provide high levels of additionality, IFC will continue to have a geographic focus on IDA countries and other frontier markets. Overall, around 50% of IFC’s projects, and nearly 60% of advisory project spend, are expected to be in IDA countries, with a significant program and advisory project spend increase in Fragile Situations.

The same year, Moody’s noted that “the IFC expects that it will be IDA countries (the world’s poorest developing countries) that will drive the organization’s future growth.”

But the last few years suggest the IFC has struggled to meet its earlier promises. Between 2005–2008, we estimate 30 percent of IFC’s investments were in IDA countries. That climbed to 32 percent over 2009–2012 but declined to just 25 percent in 2013­–2016.

Are IFC’s new goals more viable? In 2016, only about 2.6 percent of IFC’s investment was in low-income IDA countries. This would mean that IFC’s activity in these countries would have to expand by a factor of eight. In fragile and conflict-affected states, the portfolio would likely have to increase by even more.

Where will all the new projects come from? Currently, IFC’s portfolio is heavily skewed towards middle-income countries. To maintain its AAA credit rating, IFC may need to invest even more in these countries while ramping up its activities in low-income and fragile states. It is not clear that there are a sufficient number of available projects in either set of countries. IFC could end up making large investments in projects with low development impact, or investing in riskier businesses which may not yield a positive return. Neither of these options will sit well with its investors. IFC itself noted in 2010 that “rapidly increasing the investment volumes in frontier countries will remain a challenge given the absorptive capacity of the countries in the frontier and the limited levels of private investment.”

In particular, we worry that money from the IDA Private Sector Window will end up being misused in order to meet these goals. In effect, the window provides $2 billion in aid resources to subsidize private investments in IDA countries. Used well, it might enable investment projects with a high development impact in those countries—projects that could only happen thanks to the support of aid. Used poorly, it could allow the IFC to undercut private providers of finance and invest in deals with low development impact that would have happened anyway. Ambitious targets based on IFC’s own investment levels (rather than development impact) will only increase the temptation to misuse the window.

If the IFC is, in fact, going to expand into new sectors and new (riskier) businesses, creating new investment opportunities rather than simply piggybacking off projects that sponsors bring to it, the corporation would need to increase its staffing to deliver. However, shareholders have asked for “efficiency measures” to be implemented, including a reduction of the rate of increase of staff salaries, even as they require that IFC ramps up its investments in risky frontier markets. Fewer people tasked with investing more in more difficult environments with little regard to development outcomes is a combination seemingly designed to push big, easy, low-impact, low-additionality projects.

In the end, the problem may be not that the new targets are unrealistic, but that they are not binding. It will take a lot of effort to realign incentives within IFC and adjust the attitudes of IFC shareholders. And financing more high-impact projects in difficult markets is going to take a new model—not least, IFC staff actively developing projects rather than waiting for a sponsor, and a far larger risk appetite. Perhaps hard targets at modest levels would help move towards that model more than dream goals that are likely to remain a dream.