Jannik Lindbaek, head of the International Finance Corporation—the private sector arm of the World Bank Group—shares with Finance and Development his views on how the institution can meet the challenge of fostering private sector development in today’s rapidly changing, high-risk international financial environment.
As IFC approaches its 40th anniversary, it is growing fast and it is profitable. What exactly do you see as IFC’s role?
The IFC’s main role will always be a catalytic one. The needs of developing countries will always far outstrip the resources that IFC can bring to the market. This means that we have to try to mobilize funds from sources other than ourselves, both by attracting financing for individual projects and by developing local capital markets.
We are seeing a unique situation in that the demand for our services is at a record level. The move to more market-based productive activity worldwide has driven this increase in demand. IFC’s dramatic growth in investment activities, capital markets development, and advisory services in recent years is a reflection of this new reality. On the other hand, I firmly believe that a financial organization should have “organic growth”—you cannot grow in steps; you have to build the portfolio over time or you risk making costly mistakes. We are undergoing substantial growth, and I expect that to continue in the near future. But this also presents a challenge: ensuring that growth takes place efficiently and productively.
The World Bank is planning to do a lot more in the private sector. How do you see cooperation between the Bank and IFC?
In one sense, there is a clear distinction between Bank and IFC lending in that the Bank always has to have a government guarantee whereas IFC is not allowed to accept government guarantees. Beyond this, traditionally, the role of the Bank in private sector development has been more policy-based whereas IFC is transaction-oriented. Recently, however, as IFC’s activities have increased in certain sectors, IFC has provided more input on policy, and the Bank has become more involved in private sector transactions. This is both unavoidable and desirable. Joint Bank/IFC work has been strong in areas like infrastructure, particularly power and telecommunications, and capital markets development. I am fully on the record as being in favor of strengthening Bank/IFC cooperation.
Assuming a project or enterprise is likely to be profitable, what does IFC provide that investment or commercial banks do not?
We can provide a degree of political comfort, which a private institution can never give. Our relationship with governments provides some reassurance to other investors that the local government is supportive of the project. That is quite an important consideration. The political situation in some countries is very difficult and, as a result, there are almost no private flows to some areas. Our process of scrutinizing projects and carefully analyzing all aspects, not only commercial but technical, developmental, and environmental, to name a few, is not undertaken to the same extent, if at all, by private financial institutions. IFC brings something additional to the table as a result of such analysis. We can help structure projects to limit risk.
Which investment areas will be key for IFC in the coming years?
One area is infrastructure. Five years ago, the approvals were still small. This year, they are up to about 25 percent of our total. So it is a very rapidly growing area, reflecting the great change in the market for infrastructure finance, where so much has moved from the public sector to the private sector. We will also continue to emphasize our capital markets work, given the fundamental importance of capital markets as a building block for private sector development.
But according to the Bank’s World Development Report 1994, about 90 percent of financial flows for infrastructure in developing countries are still provided directly or indirectly through government agencies. What is the growth potential?
The public sector will always play an important role, but the shift in many parts of the world, notably in Latin America and in the Far East, is one of the strongest trends that we are seeing in the market at the moment. Resource requirements are so great that governments are beginning to recognize that they cannot do it all and are encouraging the private sector to step in. I see a unique position for IFC, not only in helping to arrange long-term financing, but also along with others, in providing the necessary equity financing and technical advice.
Would you highlight any particular area within the infrastructure sector where you expect growth to be the strongest?
Power production, because this is such a bottleneck for many developing countries in terms of unleashing their industrial potential. Another important area is telecommunications. Here we are not only talking about traditional developing countries but also Central and Eastern Europe, where the markets are very big indeed. It is an area where IFC is eminently well-placed to play an important role as we have relationships with all the major players.
What will IFC do to push private infrastructure financing in those countries that so far have received little of it?
We are already working on providing governments, through technical assistance and other means, with advice on how to structure contractual and legal arrangements to foster private investment. We are also promoting a number of power production projects in low-income countries. Here, our role can be crucial because some of these countries do not have the credit standing that is necessary to arrange traditional financing.
IFC’s financial position
With the role of the private sector now at the forefront of the development agenda, will IFC be in an adequate financial position to respond to the growing demand?
On the external front, the speed of change is great. Private capital flows to developing countries are at record levels. On the internal front, IFC has limited capital and we would have faced severe headroom problems in a few years if nothing had been done about it. We have been able to address those needs through the introduction of new financial policies based on the Bank for International Settlements capital adequacy framework. This, coupled with other measures, will allow us to continue to grow at the present rate through the end of the decade. We are also considering securitizing part of our loan portfolio to enhance our capital. The pilot transaction that we are now considering is, tentatively, about $400 million dollars.
Even with a continued growth of 12 percent annually—your base case rate—IFC is not likely to be able to meet the growing demand. This puts a premium on leveraging resources to the maximum extent possible and undertaking other activities. How is IFC responding to this challenge?
There is no reasonable rate of growth which would allow IFC to fully meet the demand for our resources. That has never been our objective. The average mobilization rate for IFC last year, that is, how much money we generate from other sources in support of our projects, was 6:1. But with strong growth in infrastructure and natural resource projects, which have higher mobilization ratios, we expect this average to increase. But we should not underestimate the impact of our recent and anticipated growth: the 12 percent growth in our three-year plan is identical with a doubling every six years. Our approvals have increased from roughly $1 billion per year five years ago to about $2.5 billion today, and we should be close to the $5 billion mark by the end of the century.
Before your predecessor stepped down, he called for more money to go to IFC from the World Bank, a call that is also heard from outside critics of the Bank. The Bretton Woods Commission has urged the Bank to expand IFC’s capital by assigning additional resources out of its income or reserves, or by lending to IFC. How do you feel?
It is a fact that IFC is growing very fast and I think that growth will continue for the near future, certainly the rest of this decade. It is also a fact that the World Bank is not currently in a strong growth phase in volume terms, but even so, there is a great deal of difference in size between the two institutions. IFC has resolved its most pressing problems with regards to capital, so there is no immediate need for further capitalization or a transfer of capital from the Bank to IFC. But if we are required to meet an even larger share of the demand than we have anticipated, the capital requirements of IFC would have to be addressed.
So far, IFC has been a big investor in equities. Do you feel the emerging markets in equities have peaked?
No, I do not believe that the emerging markets have peaked. However, we did identify the possibility for a correction in the emerging markets in the past fiscal year and took steps to sell more of our mature equity portfolio than originally planned. So the correction did not come entirely as a surprise—in a way—it was overdue. After all, the emerging equity markets had a tremendous performance in the last two to three years. For the long term, I am optimistic, although we may not see, on a relative scale, quite as strong a growth as in the last three years. I think the emerging markets will, over the next five to ten years, outperform the more mature markets.
How does IFC balance its development role with its mandate to return a profit on its investments?
In the individual project, these two things are possible to reconcile because the only project that really benefits a country is a viable project—and a viable project is by definition a profitable project. In fact, being profitable has a strong demonstration impact for other potential investors and is central to our objective to build a strong private sector in developing countries. But what we are talking about in broader terms is the need for IFC to be profitable. And that is quite a challenge, in that we have a very limited area of operation. We only do private sector projects in developing countries, which is a limited niche entailing many elements of risk. In accordance with our development role, we take risks every day in countries where many banks do not normally lend. Further, in order to finance our projects with long-term finance, we need to borrow with an AAA rating, which in turn requires maintaining acceptable profitability. Maximizing profitability will never be IFC’s goal, but we must have acceptable and stable profitability.
What lessons has IFC learned from its extensive privatization work in Russia?
Privatization in itself is not an end, but it is a means to achieve a goal, and the goal is the transition of command economies to market-based economies. What we have tried to do is help develop mechanisms and methods for privatizing various parts of the economy—methods that could be replicated internally. The experience that we have seen so far is quite remarkable. Taking the case of Russia, trying to assist that country in moving from a command economy to a democracy and a private sector economy within a few years is perhaps an unrealistic task. We have instead tried to focus on smaller, manageable efforts aimed at specific niches where there is maximum potential for a demonstration impact and replication in other cities and regions.
Any particular examples?
What I find fascinating is the privatization of agricultural land. There is strong agricultural growth potential, but the way agriculture was organized in the former Soviet Union was a major obstacle to the performance of this sector.
The land privatization program has been structured so that those that will own and farm the land have the right to choose how the enterprise will be organized. The whole process, including an auction, is as open and transparent as possible. We have just completed the third privatization of state farms in Russia, and we have written the manual, both in English and Russian, on the method. Originally, Mr. Chernomyrdin, the Prime Minister, was skeptical concerning the privatization effort in agriculture, but today, he is a strong proponent of privatization under the IFC plan—endorsing it as a standard for the whole of Russia.
In the rush to privatize to mobilize revenue, some countries are leaving monopolies in place with little or no price regulation. Do public monopolies behave any better than private monopolies?
Not necessarily. Where we have cooperated in privatizations, we have always tried to see to it that there are at least two parties and that there is competition—that is absolutely essential.
How is IFC approaching work in the emerging markets of South Africa, Viet Nam, and the West Bank and Gaza?
Now that we have seen an orderly election process in South Africa, there will clearly be a role for IFC. But it is somewhat different from the role that we have been playing in other parts of Africa, as South Africa is a developed economy with a functioning capital market. In essence, we shall try to help “bridge the gap” between the developed and the less developed parts of the South African economy. First, the country needs a capital market to encompass the whole population to a greater extent than is the case today. Second, we should try to help in projects where we can effect the transition of ownership to other parts of the population. Third, there is a lot of work to be done in assisting and financing small- to medium-scale enterprises. We shall be opening an office in South Africa, jointly with the World Bank, fairly soon.
As for Viet Nam, our first project is the modernization and refurbishment of one of the hotels, and we have three or four more projects on the drawing board, including a small port. We are also looking at the possibility of creating investment funds, and have advised the Vietnamese Government on the development of financial markets and a leasing industry.
Highlights of Jannik Lindbaek’s career
• Became IFC Executive Vice President in 1994, replacing Sir William Ryrie, who retired on December 31, 1993.
• President and Chief Executive Officer of the Nordic Investment Bank, 1986–1993.
• Group President and Chief Executive Officer of the Storebrand Insurance Group, Norway’s largest insurance company, 1976–85.
• Served on the boards of several companies, including Aftenposten, Norway’s leading daily newspaper; Capital Markets Insurance Corporation (New York); Vesta Insurance Company; and Det Norske Luftafartsselskap (the Norwegian partner in SAS).
Regarding the West Bank and Gaza, we have already gone to our Executive Board with the first project—the Arab Palestine Investment Bank created jointly with the Arab Bank Group of Jordan. It is a private sector bank and the intention is to provide long-term finance for private sector projects.
Will the bank be under the new Palestinian Monetary Authority or Jordanian banking law?
The Bank of Jordan is our major sponsor and also the majority partner.
Which currencies will be used?
Both the Israeli shekel and the Jordanian dinar will be acceptable.
How about currency risk?
The lending will probably take place in multiple currencies, so we will not be exposing ourselves to currency risks.
There are vast amounts of Palestinian capital abroad—and other potential capital—but apart from repatriating savings, this capital is apparently staying abroad until the strategic uncertainty is resolved. What difference can IFC make?
One of the ways that we can channel funds into the West Bank and Gaza is by creating various types of investment funds. We are reasonably confident that one or more of these funds will be off the ground soon. Here again we can play a catalytic role, and under the IFC umbrella bring in many other investors who would otherwise be reluctant or unwilling to come in on their own. For the longer run, the role for IFC will be in infrastructure, and as stabilization takes effect, tourism.
How can IFC ensure that its investments are environmentally sound?
It is our policy to only finance projects which are environmentally sound. We have recently strengthened our procedures to ensure that due regard is paid to environmental issues in IFC-financed projects. This strengthened approach includes requiring thorough environmental assessments for the most environmentally sensitive projects and comprehensive public consultation programs with local populations who may be affected by the project. More recently, we have established a new policy on disclosure of information which we think strikes the right balance between our public duty to be as transparent as possible in our operations and the need to protect the confidentiality of our clients.
As head of the Nordic Investment Bank, you set up the Nordic Environmental Finance Corporation. How do you see IFC’s involvement in the environmental services sector? Will IFC’s recent decision to invest in a wastewater treatment plant in Puerto Vallarta, Mexico, be just the beginning?
IFC is committed to giving special support to environmental projects. The private environmental sector is taking off not only in the developed world but in developing economies as well. In this respect, a dollar spent on the environment in developing countries tends to have a far more dramatic impact in terms of pollution abatement than does the same money spent in the developed world, which yields more incremental improvements. For example, when you have raw sewage being pumped into rivers, even a primary sewage treatment facility can make a huge difference in water quality. So the potential here is large. We have, in addition to the project you pointed out in Mexico, also invested in water supply and treatment in Argentina. We think this is only the beginning and have been undertaking an active environmental investment identification effort to locate suitable projects and sponsors in this sector. When we find such projects, we will invest.
Laura Wallace, Senior Editor, interviewed Mr. Lindbaek.