The International Finance Corporation (IFC) is the private sector arm of the World Bank Group and one of the largest Development Finance Institutions in the world. They’ve been making blended finance transactions happen since the start of the millennium.
In 2017, the World Bank Group launched the IDA Private Sector Window (PSW), a $2.5 billion facility focused on catalyzing private investment in IDA countries (the world’s 53 poorest countries) and fragile and conflict-affected states. This has propelled IFC’s blended finance activities to another level, becoming even more established and impactful.
IFC has embraced blended finance as a tool to help them achieve their broader IFC 3.0 strategy, which aims to reach newer markets in more frontier areas and to focus on climate and gender themes. The blended finance team takes on projects that are earlier-stage than the private sector or IFC’s regular activities would otherwise support – its blended finance activities are able to take on more risk and price at concessional levels most of the time, more than the IFC, other DFIs, or commercial investors can take on.
Convergence spoke to Kruskaia Sierra-Escalante, Senior Manager, Blended Finance at IFC and Martin Spicer, Director, Blended Finance at IFC, on how IFC measures impact, its new transparency practice, its track record of investing in low-income countries, the Small Loan Guarantee Program, and how they see IFC’s role in blended finance evolving in the future.
As one of the largest DFIs in the blended finance space, what are some interesting or unexpected challenges you’ve faced in executing blended finance deals?
Martin: I would say one of the things that’s been interesting for me has been the different ways people look at the subsidy and concessionality aspect. There are some, inside and outside IFC, who assume that concessionality alone can create success by attracting more financing or achieving greater development impact. If there’s something free or cheap, people are going to want it.
In reality, concessionality is a more nuanced solution and “cheap money” is not the only key ingredient that makes a project successful. Ultimately, it’s really in how you structure the blended finance solution to address specific challenges in the market. And not all of the problems are because of the cost of financing. Challenges may also be the perceptions of risk, regulatory barriers or uncertainty, or any number of things. So, one has to think about more than just the level of concessionality as the solution to supporting high-impact projects in developing countries.
How important is impact to your investment decisions and how do you measure the impact of your blended finance deals?
Kruskaia: Impact is everything. For us in the blended finance team, the impact we’re looking for is compounded. As a DFI, we’re already focused on impact. When it comes to our blended finance activities, the blended finance team is looking at what else we can do to deepen that impact. For example, IFC might be already lending to banks for on-lending to SMEs, but we’re not seeing as much lending to women-owned SMEs. Through blended finance, we can extend those activities to harder to reach populations or markets. We have the numbers to demonstrate that impact: the anticipated development outcomes for our blended finance activities tend to be significantly higher than for IFC’s regular business-as-usual investments.
Then, we also see impact in terms of leverage – how much additional DFI and private capital accompanies a blended finance solution. Across different sectors, facilities, and instruments, what we have seen is that every dollar of donor funds that we have deployed in a blended finance transaction tends to leverage about $4 from IFC’s own account, and then another $5 from other co-investors that could be DFIs, but also commercial banks and other private sector investors.
How does IFC identify potential transactions for blending?
Martin: I encourage the IFC teams to go out and look for opportunities the way they normally would, especially in non-infrastructure areas, and to identify where the frontier is for that company or project. Think about what the challenges are for growing their business or implementing new projects, and if they really are facing financing challenges, then we think about ways that IFC can provide de-risking instruments or lower-priced debt to support them. That being said, many times the challenges are not financial and require solutions beyond blended finance, maybe regulatory reform is more important or capacity building or maybe the environmental or social aspects of a project will hinder success.
Can you give me an example of a specific blended concessional finance deal led by IFC?
Martin: Let me tell you about the Small Loan Guarantee Program (SLGP), which is a good example of a blended finance structure that has had good uptake and is scalable and replicable. It’s a risk sharing facility that’s supported by first-loss capital from the IDA PSW to help banks increase the size of their lending to SMEs. The risk sharing facility provides partial guarantees to financial institutions to cover a portfolio of loans to SMEs. The first-loss coverage from IDA PSW reduces the risk for IFC, which allows IFC to price the instrument attractively and, therefore, incentivizes banks to do more lending to higher impact projects and entrepreneurs.
We’ve had a lot of success with the SLGP – in Haiti, Cambodia, and in eight countries in Africa. The facility offers a standardized product, which helps in terms of deployment: financial institutions understand the product and its benefits. That’s one of the main complaints we hear from the private sector about the blended finance space: that the structures are too bespoke and complex. Now we’ve gone back and increased the amount of first-loss available because the uptake has been so good and we are trying to replicate the solution with other donors.
Convergence’s data finds that the majority of blended finance transactions have targeted middle- and lower-middle income countries, how does IFC think about / prioritize blending in the Least Developed Country (LDC) context?
Kruskaia: Before, we didn’t have sufficient concessional resources to operate in the LDCs, because the majority of the funds under management were earmarked for climate, specifically climate mitigation, mostly in middle-income countries. With IDA PSW resources becoming available, a greater percentage of our portfolio is in lower-middle income (more than 30%) and low-income countries (more than 40%). A lot of the current data still only captures the historical portfolio of our blended finance operations, but we expect to see those numbers change over the next few years. We already see that in IFC’s numbers and we will only grow our activities in those countries from here.
How do you see IFC’s engagement / role in blended finance evolving in the future?
Kruskaia: Within IFC, blended finance used to be a niche product that was used in specific areas, typically according to the agreement with contributors, and primarily for piloting innovative projects. As we have evolved, blended finance has become a more established solution that can be used strategically to support IFC’s priorities. For example, more availability of concessional funds for low-income countries means that we, in the blended finance team, can talk to more teams across IFC and discuss potential structuring solutions for their transactions much earlier. While before it was more reactive, we can now be more strategic and have more solid processes in place. This also means we can further our leadership role and share our experiences and learnings to date with other DFIs.
Martin: Building on that, we expect to continue our leadership role in working with other DFIs, practitioners, donors – to continue to improve blended finance practices. For example, we will continue to lead initiatives like the development and implementation of the enhanced DFI principles for blended concessional finance for private sector operations and the joint DFI reports. We can’t just stop where we are today, we’re encouraging better governance and more disclosure among the community. We need to ensure that we’re not using blended finance improperly in the sense of unhealthy competition among concessional capital providers, but rather focusing on minimum concessionality to have more impact and support more projects. Overall, we see both our internal and external roles evolving and growing, and that includes the partnership with Convergence.
Can you tell us more about IFC’s new transparency practice around the IDA PSW subsidies? How did that come to be and what impact do you think it will have on the blended finance space?
Kruskaia: IFC has been disclosing to our Board estimated subsidy figures for blended finance projects across all sources and facilities since 2013. Externally, we have also been disclosing the use, source and amount of blended finance at the project level. Starting with projects mandated this month, we are enhancing our public disclosure practices to include the estimated subsidy as a percentage of total project cost – both for PSW and all other blended finance facilities. Transparency is key in ensuring public confidence in the use of blended concessional finance solutions, and IFC has been one step ahead in disclosures to our Board and externally, and with this enhanced practice we are committing to go one step further.
We hope other implementers of blended finance will follow suit, and we are already in discussions with some to share approaches and experiences. Donors and other stakeholders can support these efforts by asking for the same information to become publicly available from others and requiring the application of the DFI enhanced principles for blended concessional finance when making resources available for private sector operations.
