Q: Some industry observers have said that emerging markets can be judged more harshly than developed ones, even though the risks are sometimes lower. What are the perceived risks versus the real risks in emerging markets infrastructure?
Jim Yong Kim: In the private sector, so many people see Africa as one risk pool. If you asked any of the people who work in an international financial institution if all of Africa is a single risk pool, they’d all laugh at you. But if you talk about Senegal versus the Central African Republic or Rwanda versus Burundi, the risks are so different, the politics are so different, the firms are so different and the leaders of firms are so different.
Part of it is that there’s not enough on-the-ground information. But once you can start distinguishing – not just country to country, but firm to firm, manager to manager in particular countries – then you have a much better base.
And the other part of it – and you hear this a lot – is, “Well, for me to invest in an emerging market infrastructure asset, there has to be double the return for me to be able to deal with the risk.” It’s simply a fact that a lot of people think that way. But there are all kinds of ways of mitigating those risks.
When I was at the IFC and the World Bank Group, we created a debt instrument for infrastructure investors. What the IFC did is, it took 10 percent for the first loss and then there was a senior tranche that became BBB-rated. Insurance companies for the first time were able to invest, at least in debt, in emerging-market infrastructure.
Then there’s also political risk insurance, credit enhancement that comes out of a multilateral guarantee agency. There is now an increasing number of donors, especially European, who are saying, ‘What can we do to facilitate the process of our private sector or pension funds and sovereign wealth funds to invest, for example, in Africa?’
Unfortunately, the path towards economic development that everyone assumes all countries will follow – industrialisation – is closing off very quickly. Bangladesh, for example, has the most efficient garment industry in the world, but the number of jobs being created there goes down every year because Bangladeshi factory owners are buying robots. So if that’s happening in Bangladesh, then what is the likelihood of these kinds of factories coming to Africa?
It’s not going to be about cheap labour anymore. It’s going to be about access to capital and access to human expertise. And if that’s the case, what are these countries going to do? So, I feel that we need to accelerate very quickly, and invest in transport, better ports, energy, broadband and the other things that might give these places a chance to compete.
Q: When it comes to de-risking projects in emerging markets, a frequent criticism is that private capital is just being subsidised. How do you respond to that?
JYK: It’s an important question and it’s a question that should be asked. But for me, it’s less a moral or philosophical question than a question of arithmetic. And the arithmetic is: are there enough resources in the global aid architecture to meet the needs for battling climate change? To meet the needs for example, of countries that have huge populations of young people who will be able to go online for their education, become very well educated and have aspirations as high as anyone. I don’t think there are.
A mistake that we’ve made in the past is that we’ve said impact investing has to be subsidised and provide a low return. That almost guarantees it won’t be sustainable. So we have to find a different balance, where the commercial returns are very attractive to investors and where we’re able to mitigate risks, using tools that are already out there but that just need to be used more aggressively. Maybe we need to change the way development agencies think about how to engage in issues like this and then get a return that leads to a win-win situation. Infrastructure investors have to really understand what the development path is for any individual country.
Q: In terms of the de-risking instruments you mentioned, what needs to happen for them to become more widely understood and used – not just by infrastructure investors, but by all relevant stakeholders?
JYK: Early on, Global Infrastructure Partners’ Michael McGhee told me the story of London City Airport. And the idea of what GIP does became really clear with that example: you buy an asset, you improve it and lots of different people win.
The Queen Alia International Airport in Jordan is a great example and one in which the IFC played a huge role. King Abdullah had first wanted to take out government debt to build it, but people inside the World Bank and the IFC convinced him not to. He instead did it through a public-private partnership, gave over the management to an outside firm and that airport is doing extremely well. Much better, we think, than if he’d gone down the other route.
So there are a few examples, but we now have to create fantastic examples that capture people’s imaginations. I’m convinced this can be done. This is why I joined GIP. I hope I can come back in later years and give those kinds of examples to get people interested.
Q: GIP is an overwhelmingly focused OECD investor. Will your appointment, given your experience and expertise in emerging markets, change its strategy?
JYK: We’ll see. GIP’s original plan was to do quite a bit of emerging market investment, but they had so much success in OECD countries that they kept going. I don’t know exactly over time what my role will be. But I hope it’s in the spirit of the way GIP has been successful, which is you don’t just buy a property and sit on it until it becomes valuable, you actively work to improve these assets and create value for everybody.
So if that’s what we’re going to do, then what I hope I can bring to the firm is the experience of being in so many of these countries – of having spent so much time trying to help the World Bank and other IFIs facilitate, together, the movement of capital.
There’s some $20 trillion or so sitting in very low-yielding government bonds and there’s something like $8 trillion sitting in cash. Now, I know we can do a lot better than that. And yet it’s not just about doing better than that. We have to prove that this is commercially viable, that people will understand the risk and that they will feel great, first about earning a really good return, but secondly about the fact that they contributed to making the world a better place. And that’s the great thing about being in infrastructure – you’re actually building things to help people make a living for themselves. n
This interview, which took place before an audience at our Global Summit, has been edited for clarity and brevity