World Bank president Jim Yong Kim speaks to Jane Monahan about the institution's changing approach to investing in infrastructure in developing economies, its national disaster emergency response, and how it is getting more involved in the renewable energy market.

Jim Yong Kim

Q: What is behind the World Bank’s new approach on infrastructure lending and policies in emerging markets and developing economies?

A: In 2015 we embraced the UN’s Sustainable Development Goals [which include goals on building infrastructure capacity for clean water, non-fossil fuel energy and so on]. What we have seen is a huge $1500bn financing gap a year in infrastructure spending in the developing world, meanwhile all the different multilateral development banks [MDBs] together provide between $50bn and $75bn a year, so their financing is not even touching the real need.

[On top of that] there are not that many great opportunities in infrastructure projects in the current global economy, where there is a lot of concern, a lot of uncertainty, a lot of headwinds.

But one of the big opportunities is that there is so much institutional capital sitting on the sidelines earning almost nothing. It’s estimated that [there is] now about $12,000bn in negative interest rate bonds that are being held by different actors, mostly sovereign wealth funds. These investors are looking for a return. We feel the opportunities for returns in developing countries are as yet untapped. 

Q: How is the approach at the World Bank and other MDBs changing?

A: What we’ve discovered is that running around looking for the right [infrastructure] project is not the right approach. The approach is to go upstream and ask: what are the conditions that are necessary for any given country to be able to put one bankable project after another on the table? And so we [the MDBs] have to really shift our focus.

Instead of being only the financiers of infrastructure – because we can only do $50bn to $75bn a year – we want to be the facilitators, using our resources and our expertise to create the conditions to attract much larger sums of money from institutional investors. But those institutional investors have to be convinced that we understand risk and reward so that they feel comfortable investing. That’s a new role for us. We need to de-risk not a project, but the entire country. 

Q: What does this mean?

A: It would mean establishing clear checklists of the upstream conditions of the country that are needed for [such] investments; [for instance], that the regulatory structure is such that it gives private sector investors confidence. And I’m not just talking about investment banks, I’m talking about sovereign wealth funds, insurance companies and others.

It would require processes that happen quickly and efficiently. There should be an agreement among MDBs and bilateral development agencies about how we approach infrastructure in developing countries. We cannot just go into a country and literally compete with each other to finance these projects. We are talking about a very different approach where, through leadership and policy coordination, we, the MDBs, say that the first thing we have to do is to try and reach the scale [to reduce the massive gap in infrastructure spending]. 

Q: How is this scaling up achieved financially?

A: Well first, if there’s a project that can be fully financed by the private sector and the country does not have to take on more sovereign debt, then the development community has to work together to make that happen. Then, if it’s not a pure private sector play, we need to find out if some risk capital or incentive is needed to bring the investors in.

And as you get into the more fragile and conflict-ridden countries, you may have to bring in more risk capital, provide more incentives for the investor and in some cases public resources, donor resources and domestic resources. We may also provide partial risk guarantees, credit risk guarantees or even instruments like exchange rate risk guarantees. 

Q: Has the World Bank announced a specific financial initiative recently to mobilise resources from institutional investors to increase investments in energy, water, transport and telecommunications systems in emerging markets and developing economies?

A: The World Bank launched a new lending platform, the Managed Co-Lending Portfolio Programme [MCPP] at the annual meetings in October. The aim is to raise up to $5bn from institutional investors who wouldn’t normally invest in infrastructure in developing countries. So what happened was the International Finance Corporation [IFC], the private sector arm of the World Bank, and SIDA, the Swedish International Development Co-operation Agency, agreed to work together and absorb the first losses on any project, to meet the risk-reward profile that institutional investors require.

Global insurance company Allianz found this [limited] first loss capital guarantee actually met its prudential requirements on risk. It became the first institutional investor to sign onto the platform, investing $500m, which will be channelled into IFC debt financing for infrastructure projects in emerging markets. 

Q: In another initiative, the World Bank is scaling up investments to create a viable regional market in Africa for private solar energy projects, by reducing the development time and uncertainty for bidders and investors while lowering tariffs for utilities, which ultimately benefits consumers. Could you tell me about this initiative?

A: It’s called Scaling Solar, where the World Bank Group comes into a country and provides a one-stop, box-like solution. Not only does the country get support on the different regulatory reforms that have to be put in place, we also provide the forms that are needed to get the procurement right and that are needed to do an auction for solar power. We cut all the red tape that investors have to go through and pre-negotiate prices and terms.

We’ve found that if we make the conditions right, solar providers will bid at very low prices. In one of the recent deals we structured in Zambia, we obtained prices as low as 4.5 cents per kilowatt/hour of solar energy and the price of electricity for the consumer was only 20 cents an hour. 

Q: Another major change at the World Bank is its involvement, and new financial instruments, for emerging markets and developing economies hit by emergencies. For example, the World Bank launched a global facility in September to help countries facing a sudden influx of refugees. Why is it moving into this area of work?

A: We were asked to get involved by European leaders, outgoing US president Barack Obama, and the incoming UN secretary general, Antonio Guterres, who said some of the refugee situations in the world have been going on for so long – for example, in Jordan and Lebanon – that they are really turning into development challenges and the UN High Commission for Refugees doesn’t have the expertise for these.

So in September 2016 at the UN General Assembly, we launched the Global Concessional Finance Facility, a $1.5bn financing platform. The principle of it is simple: to be serious about tackling the refugee challenges, the finance has to follow the refugees and not [be determined] only by the gross national income of a country.

So we started with Jordan, where the debt-to-gross domestic product ratio has gone up from about 50% to about 90% in a short period, basically because of Jordanians’ efforts to fund the surge of refugees. We decided to take some grant-based finance and blend it with our ordinary loans. As far as I know, this is the first time the World Bank has ever extended concessional finance to a middle-income country. And now we are getting involved in tasks such as creating special economic zones for jobs, for both Syrians and Jordanians, in Jordan. This is an entirely new economic approach for us. 

Q: As part of the World Bank’s new crisis response agenda, it also launched the first insurance market ever for pandemic risk, during a G& finance ministers meeting in Japan in 2016. Again, what is the reason for the bank’s involvement in this work and what countries have access to the approximately $500m new insurance fund called the Pandemic Emergency Financing Facility [PEF]?

A: The facility is focused on the world’s 79 poorest countries. They lack the resources to halt a potential pandemic. [At the same time] international aid organisations such as the World Health Organisation can sometimes only go out and ask for donations to do their work [which causes delays]. This was the case with Sierra Leone, Liberia and Guinea, which were at the epicentre of the Ebola pandemic.

So we wanted to set up an automatically dispersing instrument. We talked to Swiss Re and Munich Re, the reinsurance companies, and they were very eager to participate. They said that when epidemics such as SARS hit, they had to pay not only life insurance claims but also many business disruption claims.

The PEF fund is different from usual types of insurance – it’s not claim-based. Once an epidemic starts growing at a certain speed and starts affecting a certain number of countries, it hits certain very specific scientific triggers and the money is released at once. Roughly half the $500m annual facility is coming from the reinsurance market. 

Q: According to a recent World Bank report, natural disasters around the world now result in losses equivalent to $520bn a year, and experts expect an increase in the number of such events because of climate change. So what kind of risk management tools and instruments has the World Bank pioneered to help countries facing these disasters, especially small island states that are particularly vulnerable?

A: One example is the Pacific Islands Catastrophic Insurance Facility, which we set up. It covers five islands – the Cook Islands, Marshall Islands, Samoa, Tonga and Vanuatu [see article on page 94]. Knowing that none of these had separate [natural disaster] risk insurance, or would even be able to attract such insurance on their own, we decided to put the five together to secure aggregate coverage. The way the facility works is when a cyclone or another natural disaster occurs, the money is released right away.

I was in Japan in 2015 with Japanese president Shinzo Abe and the president of Vanuatu, Baldwin Lonsdale, when Vanuatu was hit by a cyclone. Because of the facility we could tell Mr Lonsdale that the World Bank would be able to release $65m almost immediately when he returned to the island. 

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