A decade ago the IFC financed any large project in an emerging market. No longer. The early 1990's saw a dramatic increase in private sector flows to emerging markets followed by famine post Asian crash. Both conspired to adjust the IFC focus. The private sector, in a number of instances, began criticizing the IFC for competing unfairly ? the argument was made that the IFC had a number of projects that could have been done by the private sector itself, without IFC involvement. Second, there were increasing calls, from the board and stakeholders, asking for the IFC to focus more on developmental issues, above and beyond simply financing projects in developing countries.

Now the focus is on countries where there is little or no foreign capital flow ? especially debt capital ? or areas and sectors where there is limited availability of capital. In simple terms the IFC mandate is on stimulating emerging market development whilst working with, and not competing with, market institutions, commercial and investment banks or private equity funds.

Project Finance: How has IFC's shift of focus since you took over in 1999 played out in practical terms on private infrastructure projects?

Peter Woicke: It has been about 10 years since private infrastructure began to attract the serious attention of international project developers and financial institutions. In those years, private investors have supported just short of $600 billion in infrastructure improvements in emerging markets. IFC operations alone have financed some $40 billion in infrastructure investment in about 45 countries.

We looked very closely at what the World Bank had been doing. For instance, looking back to the early 90's, 40-50% of the Bank's assets were in state infrastructure projects. But with the fall of communism, the focus shifted, and the Bank and IMF began preaching privatization: let the private sector drive infrastructure was the mantra. The Bank shifted away from making direct investments and instead opted to provide structural loans, which meant governments were enticed to look more to the private sector, thus creating the right environment for private participation. This really put more of a burden on the private sector as well as the IFC to come up with financing for the hard assets.

But for all the progress of the 1990's there remain about 80 countries where privatization in infrastructure has not taken off, or is limited to easier sub sectors. These countries include some of the most politically difficult investment climates. Without pressure from the international community the gap between the privatizers and the laggards can only widen. IFC's poverty reduction focus requires that we continue, along with the Bank, to push for reforms in these most difficult countries and sectors.

You are responsible for bringing the IFC closer to the World Bank, particularly for financing and developing private infrastructure projects. How has this move helped?

In our strategic review, we maintained our goal to finance private sector driven infrastructure and resource projects, but we also decided it made sense to get closer to the World Bank, to leverage its knowledge, while allowing the Bank to leverage the knowledge of the IFC as well.

Accordingly, we suggested combining the infrastructure sectors in the Bank with the industry departments of the IFC. We combined telecoms, mining and oil & gas. I would have included water and power, since they're increasingly within the ambit of the private sector, but there was some resistance within the Bank, and the view was that water and power were still very much regional issues. Rather than arguing the issue at that time, we decided to first demonstrate that merging the departments for these three sectors will serve out clients better ? then, after success, we'd look more closely at power and water. That's essentially the stage we're at right now ? evaluating our successes to date.

As with any such integration, there were some initial hiccups. Ultimately, our clients have been happy with combined assistance from the Bank and the IFC ? for example, the Bank has drawn on IFC's private sector expertise when advising on how to restructure telecoms industries.

What other areas fall into IFC's strategic focus?

Beyond infrastructure, the third area for IFC's strategic focus has been stimulating the growth of small and medium sized enterprises (SMEs) in developing countries. The big question when privatizing is how to create employment in these countries. It will have to come from the small companies, so we have focussed our attention on the SME sector. Our Chad Cameroon project and our Mozal project are two notable instances where we've really focussed on developing the local supply chain, and the SME sector.

IFC needs to be profitable. Is it fair to characterize the corporation's role as something like an investment bank for emerging markets?

I think that's how we would have characterized ourselves eight or ten years ago. We have to go beyond such descriptions. The developmental aspect has to be there. I believe we cannot just support the private sector in the classical sense. When financing private sector projects we have to drive home the point of corporate responsibility to all companies involved. And that's precisely where the development bank aspect enters. To simply finance a project because it's a financially good project is not enough. We have to convince the sponsors that the project is only going to be good if the local community derives some benefits from it. We can't just be an investment bank. Of course, the approach is about striking a balance between being profitable while keeping such developmental concerns in the forefront.

The private sector is very perceptibly beginning to peel back from emerging markets. One might argue that this spells an ever greater need for institutions like the IFC in these regions. What do you find most worrying about such withdrawal?

First of all, its not just the commercial banks and financiers. More troublingly, it's the project sponsors that are also withdrawing from the emerging markets. But its not so much because all of a sudden they're worried about emerging markets. A lot of companies, particularly in the power sector, see more opportunities in the mature markets which liberalized, after comparison with risk premiums in developing countries. We were painfully aware of this fact when we advised emerging markets on privatization. We saw fewer and fewer companies actually bidding because the focus was really on developed countries.

The issue of current levels of private sector flows to emerging markets is critical. Unfortunately, with the dramatic withdrawal of the private sector from emerging markets, even markets that we had hoped had ?graduated? from us I'm afraid we'll have to assist again.

It's the sponsors' withdrawal from emerging markets that I find in the long term more disconcerting than, say, a temporary abeyance of capital inflows. I worked on Wall Street for 29 years and I know about cyclicality. Sooner or later, the bankers and investors will be back. But the withdrawal of the sponsors from emerging markets I find a bit more troubling.

How do you combat the particular issue of sponsors' retreat from emerging markets?

How much we can do is the big question. In order for the IFC to be successful in its mission ? to bring the private sector to the emerging markets ? we have to become a little more aggressive and proactive. No more complacency, or sitting by and waiting for the sponsors to come in, and then possibly discussing financing particular projects. We have to become more client focussed. We have to tell some of these companies to look to their previous successes, working with us in developing countries, and then promote replication elsewhere. If political risk is an issue, we can find solutions. So the biggest change in the IFC will be towards a more proactive client management than before. This will at least help get some of the northern hemisphere companies back. Underlying this is our continued push for reforms and privatization on a wide scale.

How is IFC supporting increased sophistication of the financial markets, and the project finance market specifically?

One of the biggest contributions we can make is in developing domestic financial markets ? creating savings in these countries, through introducing instruments to support projects. Again this goes back to foreign exchange risk. Of course, the biggest risk for these projects is that they often ask for foreign currency tranches, or tariffs according to foreign exchange. But that again can hurt the local population immensely, and in order to undertake more sound infrastructure projects for these countries, we have to find ways to mobilize some of the domestic savings. That's what we're really trying to do.

But ultimately we promote all possible sources of financing for infrastructure. We use diverse instruments to help develop local capital markets, particularly long term debt structures that are particularly attractive to infrastructure companies as borrowers and to institutional lenders like insurance companies and pension funds. Here we are most limited by the fairly small number of countries who have adopted reforms that allow these institutional lenders to lend to commercial clients.

IFC recently broke new ground with its new partial guarantee program, deployed in India. To what extent do you expect partial guarantees to catalyze such markets and to provide a route to local currency financing?

One thing we haven't really done in the past, and that we're now using increasingly much more actively, is our own guarantee. The partial risk guarantee in India really allowed local companies to tap into the domestic bond market successfully and we want to do more of that. We've had very good discussions with the rating agencies to improve the ratings of these companies. Of course, from our own risk management point of view, we have to be careful not to overdo that, but right now we're very optimistic to use the partial risk guarantee product for good projects, to allow for access to these local markets. I also think that in this connection, the World Bank guarantee scheme will continue to be very important for big projects.

What is your view on using full IFC guarantees?

We look to partial guarantees instead of full guarantees because we want to leverage the use of IFC's credit as much as possible. We also want to promote risk-sharing with other financial institutions, and to develop local markets, especially long term lending appetite among local financial institutions. This is also paves the way for the client to borrow without IFC's support in the future. And this really is our preferred avenue for local currency financing going forward.

What alternative sources of financing are you looking to promote?

In some of the poorest countries we really have to come to grips with using some IDA money for private projects. This is just a philosophical view: IDA money is there to help the very poor who need to be helped through social programs. It stands to reason, then, that some of the IDA money should be used for private projects.

For example, IDA money used for project in Tajikistan where a small power plant will be built. It is impossible to increase tariffs sufficiently over the next four or five years to make this a viable project. My argument is that this is another way to kick-start the region, to the benefit of 500,000 people who'll get electricity for the first time. After lengthy discussions we decided to get some IDA money into this private sector project, to ease tariff increases while ensuring that its still feasible as far as the private sector is concerned.

In the future we will have to be a little bit more innovative in using some of the IDA money, blending it into private sector projects.

In this particular instance, the project clearly benefits a segment of an extremely impoverished population. Of course, you have to do this on a case by case basis, but just the sheer idea of having IDA money for a private sector project, until a year ago, was totally unacceptable. With this project, we have a case for why this should change.

The private sector is increasingly trying to shift risk onto third parties such as the multilaterals. To what extent is the IFC more willing to take on risk now than a few years ago?

This is not a risk averse institution. I chair the investment committee here, and I've overseen some pretty hefty risk taking in terms of term, region, etc. But in the end, the IFC's risk profile is limited by our AAA rating. We really need to preserve this rating. Of course we have certain limits, country limits.

One constraint, that we've been debating with the rating agencies ? who've since given us greater flexibility in this domain ? is equity. We are an equity investor. But we were limited to 50% of our net worth for equity. I argued that this was a little too conservative and limiting. Our whole gearing is so low that I thought they should give us a little bit more freedom ? and now they have.

Our risk approach is ultimately limited to our financial ratios. This in turn is limited to our capital. The IFC's 174 shareholders have contributed $2.3 billion in cash, we have now have a capital of slightly over $6 billion. We have to aim at having a return on equity of anywhere between 8-10%. But we haven't achieved that very often. That's partly because of the risks we're taking, but also because of our gearing. It's very difficult to get up to 10% when you have a 3½ x gearing. To that extent, we're somewhat limited in terms of how much we can earn, how much we can build up capital.

There's not much appetite among the shareholders to increase the capital, and these are the limitations. In normal times, when the private sector feels comfortable to invest in mid-income countries, our capital is fine. For what we do in frontier countries today, our capital is sufficient. We need more projects today in Sub-Saharan Africa, in Central Asia, in Central America.

With any financial crisis, the domestic private sector gets hit first ? but this is precisely who we need to support. After all, this is our role.

Many argue that IFC's role should be strictly in frontier countries, developmentally. But if you accept that there is volatility in capital markets, whether you like it or not, then somebody has to support on an interim basis the local private sector in these countries.

This is the instance in which we don't have enough capital. If we have to massively go back into mid income countries, we won't have enough capital. This worries me.

The obvious fact remains that IFC needs to generate money ? seeking out sufficient capital is key. To this end, is talk of privatizing the IFC a tenable suggestion?

Some would look at this as simply outlandish. Sure, examples exist ? CDC is going to privatize. But I think one of our biggest strengths is our credibility, and subsequent leverage on governments. And I'm not quite sure, as attractive as privatization might be in some other aspects, that we could retain that if we privatized. We'd loose a lot of our capability to mobilize the private sector. To that extent, I'm averse to full privatization. Part privatization is more conceivable. If we really need more capital at some point, and the present shareholders are reluctant, I could imagine such a scenario. I really must emphasize this ? this leverage we have on government is because we're owned by them, because we're a multilateral organization. And governments view us as a real, objective and trusted counterpart. We have to be very honest here. A lot of the poorer countries still look with some suspicion at some project sponsors, strictly private institutions. Our objective is not only to bring in the private sector, still in itself not fully trusted by all the countries we deal with, but ultimately the development of the country itself. To this end we can be ? and indeed are ? trusted. I would not want to change that. It would be a real loss for the IFC.

Also, if you look at our B-loan program, commercial banks are coming to us because of preferred creditor status, and also because of our special relationship with governments. This is a boon for any bank coming in under our umbrella.

Given the current downswing, particularly, though of course not exclusively, in emerging markets, what other recommendations would you make for promoting long term investments in emerging market infrastructure?

In the World Bank Group today we have a better handle on internal directives. There is much better coordination; its not yet one stop shopping, but with big projects we have specific methodologies to help us consider whether to use IDA guarantees, IBRD guarantee, IFC loans or whatever. The Group's functioning is smoother than ever.

But going forward, particularly for project finance, we have to work more closely with insurance companies and pension funds. MIGA, of course, provides PRI. But there's a lot going on in the insurance sector today with which we need to get more involved. Our recent African infrastructure fund is only one example of the form such involvement might take. Together with AIG, we are driving this project. It has been difficult ? I was hoping we'd raise more private money for the fund. AIG was really the only private investor there, in addition to multilaterals and bilaterals. Nevertheless, these are precisely the sorts of schemes that we need to develop actively in the future.