The IFC and (De)Scaling Solar

May 08, 2023


I have previously suggested that the Scaling Solar project, in which different institutions within the World Bank Group worked together to help countries prepare solar power projects, bid out tenders, and provide finance to bidders, might be a model for the kind of market-building activities that the International Finance Corporation (IFC), the private-sector lending arm of the Group, should undertake more broadly. If that model worked, such activities would be reason to push for a climate-dedicated capital increase for the IFC. But new research on Scaling Solar has me rethinking that position.

If you listened to senior management at the World Bank Group, you’d be forgiven for thinking that Scaling Solar demonstrated that African countries could access privately financed and provided renewable power at a very low cost and no subsidy—four cents per kilowatt hour in the case of Zambia, the first country to complete a scaling solar investment. But Teal Emery, for the Energy for Growth Hub, works through why that turns out to be wrong.

The Zambia project involved $24.5 million in private equity investment but also $81.5 million development finance institution debt financing and an IDA guarantee of $5.7 million. That means it took more than $3.50 of public international finance to bring in each dollar of private finance.  And Teal estimates the effective subsidy rate on the debt was equivalent to about $10 million a year. Use a high discount rate of fifteen percent over ten years (to match Teal’s estimate private borrowing costs) and that comes to a net present value of $53 million, suggesting it took at least $2 of subsidy to bring in each dollar of private finance.  That’s not to mention the IDA guarantees, alongside implicit subsidies of free land, tax breaks, project preparation, and the implicit guarantee related to all finance from development finance institutions (DFIs).

It all sounds a little different from the official line that “there aren’t any implicit or explicit subsidies involved in the deal,” and perhaps helps explain why the Zambian experience was so hard to replicate. The Scaling Solar team had hopes of supporting 1,000 megawatts of solar power around the world by 2019, but four years after that date it has still only delivered three projects, in Zambia, Senegal, and Uzbekistan, with a combined capacity of 235 megawatts, and all three sharing heavy public financial support.

Teal suggests there were wider costs attached to the rosy projections of cheap, private, unsubsidized, renewable power: “official messaging undermined the program’s goals by denying or downplaying the critical role that explicit and implicit subsidies played in Zambia’s success. This distorted price signals for African governments and solar developers” and led to other countries in the region abandoning potential energy deals when they couldn’t get similar terms.  One lesson: the IFC board should require full contract transparency in the power projects it supports.

A second lesson: when the IFC plays the role of both advisor and financier, it can put itself in a position of conflict of interest. The newly released USAID evaluation Teal discusses suggests that the IFC should have—indeed, may have—spotted that the winning bidder had not complied with the request for quotes and would only be able to deliver power at the advertised cost with subsidies, tax breaks, and the very extensive use public debt finance, but it had reputational and financial incentives to ignore that fact and move on. Conflict of interest is hardly a new issue for the Corporation: back in the 1990s, the IFC was pushing countries to at least temporarily retain monopoly provision in telecoms services because it would maximize the revenues of the privatized companies the corporation was financing, and similar conflicts have resurfaced since then. Scaling Solar shows the limits to ‘bundling services’ once again. For each individual project, the Corporation needs to pick a lane: advice or finance.

This case also provides yet more evidence against the general idea it will be easy to unleash a flood of affordable private infrastructure finance to low- and lower-middle-income countries with just a small amount of project preparation support or public finance or subsidy. Development finance institutions as a whole are currently using subsidized finance to achieve leverage ratios of two to one: that would be two dollars of public finance for each private dollar that comes in. Billions to trillions is no more, it has ceased to be, it is bereft of life. And yet its zombie still stalks the halls of the US Treasury, the EU’s Development Commission, the World Bank, and wherever the G7 happens to be meeting, sustained by some dark art (or, at least, BlackRock). It is time to move on.

Indeed, Scaling Solar illustrates the often-limited distance between the ‘private sector led’ model of infrastructure development pushed by the G7 as opposed to the state-owned/directed model associated with China. That 80 percent of the funding in the Zambia deal was from state-owned enterprises of one sort or another only puts it a little ahead of the DFI average for subsidized deals. Beijing may do private enterprise with Chinese characteristics, but DFIs are often modelling state enterprise with Western characteristics and the most significant difference is simply that China does it (or at least used to do it) on a bigger scale. The ’cascade’ idea, that the World Bank Group would default to private finance, doesn’t reflect the reality of how the ‘private’ deals it is financing in infrastructure actually work. It is time to acknowledge the fact that most infrastructure has always been, and will continue to be, financed by the public sector, while infrastructure governance choices are between ‘public’ or ‘hybrid public-private.’

A final lesson: that this major effort to demonstrate that solar is cost competitive has done no such thing should be a warning to those claiming ‘no tradeoff’ between climate mitigation and development goals. There remain tradeoffs, and until the advance of technology removes them, donors should not be withholding cash from development projects in countries that have played no significant role in creating climate change even if those projects involve greenhouse gas emissions. 

And in that regard, something that I will be taking away from the experience: the failure to launch of one of IFC’s best attempts to catalyze and scale financially sustainable private investment for renewable infrastructure leaves me skeptical of the role of a larger IFC in helping countries deliver on net zero commitments, at least under its current model. IFC investment in the electricity sector in a country has no association with subsequent growth in the renewable share of total electricity in that country (or, indeed, growth of the sector as a whole), and there is now (even) less good reason to think that would change were the IFC given more cash for climate mitigation projects. In the fight for more capital for climate at the World Bank Group, we should focus on the International Bank for Reconstruction and Development (IBRD) alone.


CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.