“COVID has been a big setback and particularly a setback for the poorest countries. But I think there are some opportunities that we can build on into the future.” World Bank Group President, David Malpass on his hopes for 2021.
In a special year end edition of The Development Podcast, President Malpass and Interim MD and COO of the IFC, the Bank’s private sector arm, look back on 2020 and examine the path to a resilient recovery in 2021.
“I really do hope that as we come out of this, we can think about a resilient recovery that’s about greater equality.” Stephanie von Friedeburg explains how the pandemic has laid bare global inequalities.
Raka Banerjee: Hello and welcome to The Development Podcast. I’m Raka Banerjee, alongside Paul Blake.
Paul Blake: Today: A conversation between World Bank Group President David Malpass and the International Finance Corporation’s Stephanie von Friedeburg. Their thoughts on this extraordinary year. The impact of COVID-19 on everything from education to climate goals, and the role of the private sector in a recovery.
David Malpass: COVID has been a big setback, and particularly a setback for the poorest countries.
Raka Banerjee: As well as the challenges and opportunities that await us in 2021 and beyond.
Stephanie von Friedeburg: The private sector is probably more important now than we’ve ever been in helping the global economy kickstart growth.
Paul Blake: All that over the next few minutes, here, on The Development Podcast.
Raka Banerjee: Over the past year, the COVID-19 pandemic has precipitated a massive health crisis, created the biggest economic shock since World War II, and upended decades of global development progress. But it has also encouraged innovation and reform that has the potential to shape the future for decades to come. Two people who have been tracking the pandemic’s impacts from the start, and looking at ways to shape the future for the better are David Malpass – the President of the World Bank Group – and Stephanie von Friedeburg – the Interim Managing Director, Executive Vice President, and Chief Operating Officer of the International Finance Corporation – that’s the private sector arm of the World Bank Group. They join us now in conversation to share their reflections on the past year, and what the future holds. David, over to you.
David Malpass: Thank you very much, Raka and Paul. I want to ask Stephanie about COVID itself. We should start there. It’s been a tragic change in the course of the world. It has an effect on everyone and everyone’s organization, and that includes IFC, the International Finance Corporation. So, Stephanie, I wonder, could you tell us how COVID has changed what you do, what you’ve done all year?
Stephanie von Friedeburg: So first David, it’s great to be here and we should have a very fun conversation. I think you’re completely right in thinking about COVID as a crisis. It’s just dealing such a huge blow to our efforts to fight poverty and to raise standards of living. And we’re certainly seeing it from the private sector perspective. So remember, IFC is the private sector arm of the World Bank Group. And we deal only with private sector companies. And we’ve seen our business really pivot and change very dramatically over the course of the last year. What we’ve tried to do is frame it in a way that helps us think, “Well, what is it we’re trying to deliver in relation to development?” So we’ve come up with our three Rs. The first is what we call relief. So we know that there’s been a substantive hit on supply chains, trade shocks. And so our trade finance business, which has always been a core of our business, has grown very substantially. And we’ve seen it in the poorest countries in particular, where we know that we need to continue to keep trade flowing. So we’ve seen an increase in trade finance in that relief piece. We’ve also seen many of our existing clients needing working capital and needing liquidity, and we believe it was important for us when we typically don’t do a lot of liquidity or working capital, but important for us to step in and help our existing clients to withstand the crisis, keep them solvent so that when we come out of the crisis, we can rebuild faster and better. Then to our second R, which is really around restructuring. We’re beginning to see some interesting opportunities in refinancing and re restructuring, which really has historically not been a large part of our business. But if you look at the global spillover in areas like tourism, there’s a lot that we can do. And historically, people have said to us, “Is investing in tourism really good for development?” And yet it’s 10% of the global GDP. And we might lose as many as 200 million jobs in emerging markets’ tourism as a result of the crisis. That’s 200 million families who lose access to income. So finding ways to put together restructuring funds to use every tool that we have so we can invest across the capital stack, making equity available in some of these restructurings, thinking about helping the strongest companies refinance, if refinancing is necessary to keep them from insolvency, I think will be very important. And then finally, how do we build back more resiliently? And maybe David in a minute, we can talk about what does that mean from the IFC strategy perspective about building back more resiliently?
David Malpass: Okay. Super. Yeah, that’s a high priority. You use the term, the capital stack. So go through it. IFC invests in equity, meaning ownership of shares in companies, even in poor countries and especially in developing countries and then also in debt instruments of various types. Is that right, and what else is meant by capital stack?
Stephanie von Friedeburg: So that’s exactly right. We can invest as a very secured senior lender in a preferred position all the way down to a very small equity position in a startup company that’s using new technologies to try to solve development problems and everywhere in between. So we anchor bonds for some of the more sophisticated companies with the thought that we can help create local capital markets. We do project finance for big power projects, ports, airports, things like that. We can lend corporate finance to companies that need expansion or want to build out a facility. So it’s really everything you can imagine across that capital stack.
David Malpass: Okay. So a big challenge facing the world is COVID itself and vaccines. So can you apply that to ways IFC is investing to help with vaccines?
Stephanie von Friedeburg: Yeah, maybe I’ll broaden that, the answer, a little bit, because we’ve always had a very active health and education practice, but what we saw almost immediately with the COVID crisis was this massive need for supplies, ventilators, medical equipment, PPE. So just to put it in perspective, there’s 170,000 ventilators in the United States. There are three ventilators in the Central African Republic. So the first thing we thought is, “We have to find a way to help our countries of operation and our private sector hospitals and clinics figure out how to get the equipment and supplies they need.” So we created our global health platform to do just that. And it’s really a very innovative platform because it allows us to help companies in the developed world who are delivering to the developing world, which we don’t typically do, as well as help countries in the developing world. So I’ll give you a really good example. We have a clothing manufacturer we invested in, in Sri Lanka, called Hela. And when they began to see that people weren’t buying their trousers and their shirts and their dresses, they converted a big piece of their factory to create protective gear for hospitals and have begun exporting that across Asia. So we knew that there was a lot that we could do there. And now that we have the facility up and going, we see an opportunity to continue to pivot it toward not just vaccine production, but I would say some of the other areas around the logistics, the transport, the distribution, the cold storage, all of the things that the private sector potentially does a little bit better than the public sector and has the skills to actually do, so that we can roll that vaccine out as quickly and as equitably as we can across our countries of operation.
David Malpass: Interesting. And so you talked about recovery. And so looking … if we begin to think about surviving COVID and looking beyond, one of the issues is how do countries actually use private sectors in order to create jobs, in order to supply healthcare and educate well? What things can be supplied through the private sector, and how is that done in the poorest countries, the fragile, conflict, violent FCB countries that are such a challenge?
Stephanie von Friedeburg: David, I’ve been in development finance for 29 years, and I think the private sector is probably more important now than we’ve ever been in helping the global economy kickstart growth as we emerge from this pandemic. And I say that because, and I’m sure we’ll come to this later, but we know there’s just limited fiscal space in our countries of operation and especially in the poorest countries in the world. Governments don’t have the capacity to continue to create the economic growth and the jobs that are needed for the citizens in those countries. And so the private sector can and must play a super important role. But even before the crisis, we knew that in those poorest countries, finding ways for the private sector to intervene was extremely difficult. And there was a lack of bankable projects. So we created IFC 3.0, which today, as we build a more resilient recovery, is far more important than it was when we created it four years ago, because it’s really designed to say, “How can we, IFC, partner with our World Bank colleagues, partner with other MDBs and get the right policy and regulatory environments in place to incense private sector investment?” So we call it the cascade. But in essence saying if the private sector can invest and can build something out, use the private sector to do that and use your limited fiscal space as a government only in those places where the private sector can’t play. And then partnering with that is really us. So historically we’ve been takers of projects. Our clients have come to us and say, “IFC, we have a great idea. We want to build a hospital in Sierra Leone.” Now, what we’re asking ourselves is, can we actually step in? And if the policy and regulatory environment is right develop the projects ourselves, take our sponsors who we know we’ve invested with elsewhere in the world and bring them those opportunities. A good example is our scaling solar project where we’ve done just that.
David Malpass: Right. That means setting up the contract structures that are attractive, then to bring private sector capital in to mobilize not only IFC money, but then private investors’ money into something that’s a worthwhile profitable project. Stephanie, I wanted to ask you how, or think about how does that work with the climate change issues that we focus on, and also, can you bring in the cooperation with the World Bank and with others? IFC doesn’t operate alone. There’s a very close cooperation with the World Bank at the country level, the country directors, for example, interface every day, every hour, probably with IFC, and thinking about how the World Bank programs can help facilitate better outcomes for the people of the country, which often means using an expanded or building an expanded private sector. Those are important. Then on the climate side, choosing projects or thinking about companies that are having a positive impact on climate change issues and reduction of greenhouse gases, for example, is one of the challenges. How does that all work?
Stephanie von Friedeburg: It’s a great question, David, because we do work very closely at the country level, and I think we work more closely now at the country level than we have at least in my 29 years in the institution. We actually have created country private sector diagnostics and country strategies, and we actually use those to be able to have the conversation with our bank colleagues to say, in the key sectors in a particular economy, where do we see impediments or obstacles for the private sector to invest? And how can we get some of the development policy lending that the bank is doing in the country, or that ABB is doing in the country to really push the government in the right direction to get the policy changes so that we can continue to increase the level of private investment? We’ve done that, interestingly, very naturally with climate. I’ll give you a couple of examples, because both speak to climate and both speak to how we partner with the bank once we have the right policy and regulation. A couple of years ago, three years ago, we finished a very large hydro project in Cameroon, one of the largest in Western Africa, but we knew that the actual dam and the energy that was being generated couldn’t go through the local utility because it wasn’t strong enough financially. First, the bank actually helped us set up the right policy and regulatory environment to bid out the construction of the dam. Then through a partial credit guarantee from the bank, we were able to attract a very good private sector sponsor for the dam and raise almost a billion dollars of private sector money to fund the construction of the dam, knowing that there was a partial credit guarantee that was being made available through the utility from the world bank to give all of the investors comfort that we had de-risked the issue of the utility and their ability to continue to pay as part of their off-take agreement. That’s one example. Another example, as I mentioned earlier, is scaling solar, where … we started in Zambia. We’ve expanded to seven countries and have actually moved outside of Africa to Uzbekistan now. Again, we use the MIGA balance sheet, the IFC balance sheet, and the World Bank balance sheet.
David Malpass: So, MIGA is the Multilateral Investment Guarantee Agency part of the World Bank Group, and so we can guarantee things like political risk?
Stephanie von Friedeburg: Exactly. We worked with our public private partnership advisory team in Zambia and help the government set up a series of standard documentation, that anyone who was bidding on them would understand the legal jurisdictions, the key rights they have, the manner in which the documentation works. Then, we were able to reach out to many of our existing sponsors with whom we have built solar projects in other parts of the world and attract them to bid. We used again, because we’re worried about the utility and their ability to create an off-take, we use a partial credit guarantee from the World Bank to give everybody comfort, we de-risk some of the political concerns with the MIGA balance sheet using insurance, and then we provide our own financing and help mobilize other private sector financing. Interestingly, in Uzbekistan, in the latest bid, we came in at two and a half cents a kilowatt hour.
David Malpass: Yeah. Much lower than previous electricity prices, so it makes it more available to the poor in Uzbekistan, and also then ends up attracting business who need to use electricity in their businesses as well. Coming back to the hydro-power in Cameroon. People want to make sure that things are done in an environmentally sustainable way and dams are one part of that. How was that done? Also, why do you need hydro-power? In that it does affect the land, the environment. Why use hydro-power when other sources might be available?
Stephanie von Friedeburg: Well, so first, on the environmental issues, one of the reasons why many of our sponsors like working with us is that we follow our performance standards, and we actually set the bar extremely high in relation to environmental and social issues, and we help our clients work through many of those issues. So, we actually do build these large infrastructure projects in a way that is the most beneficial to the environment. In West Africa, where there’s a massive shortage of power, we have a couple of options. We can use hydro, which is clean, which will help us pull coal out of the system, will help us pull heavy fuel oil out of the system. So, we’re actually making cleaner electricity and cleaner power by using hydro as a source of power in West Africa. There’s the opportunity to have run of the river dams, which are not as environmentally damaging. [crosstalk]
David Malpass: That means that the water keeps flowing down and the flow is left the same after it drives the turbines. Right?
Stephanie von Friedeburg: That’s correct. Yeah.
David Malpass: So, you get a positive impact on carbon emissions by substituting baseload power from the dam for the alternatives that countries are using. One of our goals has been to think about how countries can meet their climate goals in a way that leaves them with electricity and with other kinds of energy within their economy for things like production of fertilizer and chemicals that are necessary at some point for growth, doing that in a way that’s much more environmentally sustainable than what they had been doing. That becomes an important part of the task, right?
Stephanie von Friedeburg: It is. The really interesting thing, we’re working on another big dam in Malawi, the Mpatamanga dam, and we’re also building solar parks. The sun is very strong in Africa. So, one of the things that we can do is use the solar power during the day and run the turbines at night. So, you create a consistent baseload. One of the issues that we have with wind and sun is that they don’t always function, because the sun doesn’t always shine and the wind doesn’t always blow, so you’ve got to have a consistent baseload or the ability to create that base load when you don’t have sun and you don’t have wind. And hydro is the best and cleanest way to do that.
David Malpass: Yeah. And this can be transformative. Malawi is one of the world’s poorest countries. I’d sat next to the now former president of Malawi back in February at an Africa conference in London. And we talked specifically about electricity because Malawi was so short of electricity and it means that there are millions of people without electricity. What’s the status of that project?
Stephanie von Friedeburg: So this is another World Bank Group project. And the bank and IFC are really working hand in glove to make this project happen. You’re absolutely right. I think only 13% of the people in Malawi have access to consistent power. So it’s important for the country, but it’s also important for the potential to create a regional power pool in the event that not all of the energy can be used in Malawi at the current time, because they’re very rural. We can actually pull it into the regional power pool and it will be a way for the country to continue to generate revenue.
David Malpass: Yeah, this is an important development process and growth factor of trying to have countries, because their borders come together and it’s not always divided up by national borders where the power can best be used. We need to find ways to cross borders with things like electricity, maybe even clean water systems, roads, of course, because crops need to go both directions across borders, and goods do as well. I wanted to shift a little bit. And we can come back because just what we’ve been talking about, I think, is at the core of IFC business. But there was a major capital increase early in 2020. How is that changing how IFC operates?
Stephanie von Friedeburg: So the capital increase was historic, David, and in the history of IFC, it’s really only the second large capital increase the institution has ever had. We have historically … Again, because we were able to invest across the capital stack, we’ve actually been very successful in taking what was originally the two and a half billion dollars of paid inequity and growing that to 25 billion via retained earnings. But when we looked at what our shareholders and stakeholders were asking of us, to do more in the poorest countries, to figure out how we bring the private sector to IDA, to fragile and conflict states, we knew we needed more capital. And so the agreement that we made with our shareholders was we would get more capital, and by 2030, we would try to do as much as 40% of our business in the poorest countries in the world. So the IDA 17 countries and plus some additional fragile and conflict states that fall outside of that IDA window. The thing I’m most pleased with is as a result of the COVID crisis and as a result of the fact that we had our capital increase and we have a very solid capital basis, a financial institution, we’ve really been able to think about how do we lean into this crisis in ways that we haven’t in the past. And when I went back and pulled our independent evaluation groups reviews of other crises and how IFC behaved, they in essence said, “You say you’re a countercyclical institution, but you don’t always behave counter-cyclically.” And I think if you look at our $8 billion COVID fast-track facility, the global health platform, some of the things that we’re trying to do with our asset management company and the creation of a restructuring fund, these are all really us leaning into the crisis to try to help our clients. And I think it’s going to make a difference.
David Malpass: Yeah. And so that’s kind of counter cyclical in the sense that because the world has entered a deep recession right now, that’s a time when IFC and the World Bank Group as a whole are expected to do more, not less. So that makes it counter cyclical to what the growth trend is. And that sets the institution a little apart because private sector investment may be pulling in its horns, doing less now because of the downturn. But those are tall targets. You said 40% of the business coming from really poor countries. That’s going to be hard to make a profit at. And in addition, a big percentage of the business expected to have climate co-benefits as well. So can it be done? Can it be done within the constraints of the financial statements?
Stephanie von Friedeburg: Well, David, I think it could before the COVID crisis. You asked early on, “Is your product mix changing? What are you seeing?” Because we do invest across the capital stack and we mark to market our equity book, you’ve seen our net income fluctuate really dramatically, and I think it will continue to do so over the course of the next 12, 24 months. And we’re also seeing more and more of our sponsors putting those big projects on hold. So you said they’re pulling their horns in. The most recent number I saw said that domestic private investment and foreign direct investment in emerging markets has fallen by $950 billion this year. So I think the question remains for us is can we push our strategy, get the right policy and regulation and create those projects to attract that money back to countries of operation fast enough to reach our goal by 2030, together with the ability to continue to create the retained earnings that are necessary to keep the balance sheet and keep the financial sustainability. I think we’re going to have to watch how the crisis unwinds and unravels or ends and how long it takes for us to be able to decide can we get there by 2030, or does it take us a little longer?
David Malpass: Yeah, those are big challenges. One of the things we’ve talked about is as we try to help countries find a resilient recovery process, it’s going to take investment, new investment, and well chosen investment, quality investment in the areas of their economies that can grow into the future. So we expect it to be a very different kind of economy than what it was in the past. And you pointed out tourism was a big part of GDP, and especially for some of these countries, remittances are a big part and it will be hard to recover those two sources in full. So one of the things we hope can happen is the countries find new sources of growth and new target destinations for good investment. So maybe our final topic, you’re a world expert on digitalization for countries. How do we invest in that area and what’s the biggest challenge for IFC in getting countries to have more connectivity, more financial transactions, more internet? How do we go about that?
Stephanie von Friedeburg: So I have been a proponent of closing the digital divide and spoken loudly and publicly about it for a long time, because I think it was growing, not shrinking. So the crisis has a silver lining, it’s all things digital. And it’s also reveal the really fundamental divide between the infrastructure in the developed world and the infrastructure in the developing world, especially the poorest countries. So I think about creating digital economies when you need three things. First, you need the right digital infrastructure so that people can connect. Then you need to have citizens who are digitally literate. So they have the basic skills to be able to use applications that are created. And then the third piece is the entrepreneurship and the entrepreneurial ecosystem to design those applications for the context of the country. And with all three of those things, I believe that we can begin to really transform the way countries think about pulling their SMEs from informal to formal, the way that we think about creating financial access to the millions and millions of people who don’t have bank accounts, who don’t understand, how do we create financial health? We can do that digitally. But David, the gap is wide. I think 20 of the least connected countries in the world are in Africa. You know there are 450 million children out of school because they don’t have access to the internet. If those children choose not to come back, they’re going to lack the basic reading and writing skills, the basic skills you need to create digital literacy for us to be able to create parity and equality around how you build a digitally engaged future. So I think we have a lot of work to do. We talk about the ability of Africa to leap frog, but I think the first thing we need to do, and the bank and IFC are working very tightly on this, is build the digital infrastructure. And typically, digital infrastructure has been built by the private sector. And I think again, using our IFC 3.0 strategy, getting our bank colleagues to help us get the right policy and regulation in place so that the private sector can build shared infrastructure, things like mobile towers, shared backbones, open access networks, these kinds of things will be-
David Malpass: Yeah, these are challenges because there are, in many countries, in fact, probably most countries, vested interests that don’t really want that competition. What you were describing was when you said open access, it’s the ability of newcomers to come into a market. So you might have a cell tower in a country where different providers could use the same tower and share it, but then they don’t sometimes like that because then there can’t be a monopoly under those circumstances. And so one of the things we’re trying to do is find a good competition policy that works for countries. It has to be installed, the countries have to choose it, and make progress on that. But we can help for that by, I think, showing the big upside that comes out of that competition. They can get more people connected, and a big area of growth is the financial transactions themselves. The low cost transactions are highly empowering for women and for the poor and for people that couldn’t otherwise get into the financial system. Bank accounts have the challenge that they’re expensive to maintain and most people don’t have them. And even if they had one, they wouldn’t use it very much. Whereas the use of cell phone for digital transaction has really opened new vistas in quite a few countries. So we’re trying to promote that both from the, from the IBRD/IDA, those are parts of the World Bank, along with IFC and MIGA so that everybody working together can really help countries build out these systems. Well those are huge challenges, Stephanie, any final word? I’ll thank you for your work, and IFC is a great part of the World Bank group and a great institution. What’d we miss?
Stephanie von Friedeburg: Well, I would just say David, that I do really hope the other thing that the COVID crisis has done has laid bare inequality in the world. And I really do hope that as we come out of this, we can think about a resilient recovery that’s about greater equality. As you rightly asked, a healthier environment and stronger economic growth for all. And that’s really what the bank group does best, and I think we need to just keep pushing.
David Malpass: Yeah. Pushing and pulling, meaning helping countries bring people up in terms of their jobs, income, in terms of their overall living standards. That’s the goal. And COVID has been a big setback and particularly a setback for the poorest countries. But I think there are some opportunities, and we’ve talked about some of those that we can build on into the future.
David Malpass: I want to close and thank you very much, Stephanie, for joining and sharing your insights today. Thanks.
Stephanie von Friedeburg: It was fun. Thank you very much.
Paul Blake: That’s David Malpass – President of the World Bank Group – and Stephanie von Friedeburg – Interim Managing Director, Executive Vice President, and Chief Operating Officer of the International Finance Corporation – sharing their end-of-year thoughts, here on the Development Podcast.
Raka Banerjee: As always, we want your feedback. Email us – [email protected]
Paul Blake: That’s it for us in 2020. We’ve enjoyed your company over the past few months, and look forward to bringing you new stories and conversations from the world of global development in 2021. Until then, stay safe, goodbye.
Raka Banerjee: Bye!