Priming the pump
Targeted support from a multilateral institution can result in substantial commercial and developmental rewards, says Olivier Mussat of the World Bank Group’s IFC
The International Finance Corporation (IFC) makes private sector projects happen in the world’s most challenging countries. While its parent, the World Bank, provides funding to government ministries to build institutional capacity and infrastructure, the IFC supports the private sector by leveraging its capital to make projects commercially viable.
The IFC manages $58bn, including $14.6bn dedicated to infrastructure. Energy is the most important component of infrastructure, with $1.2bn focused on upstream and midstream projects but the lion’s share of $6.9bn on the power sector, as it more effectively fulfils its development goals.
While these figures are not huge in an oil and gas context, the capital is used strategically to sponsor projects and ‘prime the pump’ for international capital markets, securing investors and partners otherwise unwilling to finance projects in the world’s toughest markets.
Olivier Mussat, chief investment officer of the IFC's global energy group, has been on the front line of facilitating investments in emerging markets for seven years, following a career in the private sector.
How can the IFC act to be most effective?
Mussat: We are capital agnostic—projects may need finance, equity or venture capital partners. You can give governments as much money as they want, but would that create a sustainable financial system or private sector? Investing in a local bank creates jobs, which increases the tax base and allows for sustainable government.
The energy sector is clearly important. Most of our exposure is on the power side, and increasingly in renewables. We reduced oil and gas investments due to growing climate change concerns and technological advances. The challenge is to juggle the need for the least-cost energy—for poverty reduction and economic competitiveness—with sustainability. In this context, sustainability means being shielded from macroeconomic shocks, environmental sustainability and not being locked into something that no longer works.
We used to invest a lot in upstream oil. While governments still want upstream tax revenue—in Nigeria, 83pc of each barrel goes to the state—oil has become easier to finance via the private sector so the IFC became less relevant. Sometimes help is necessary—such as when we put bridge financing together during the 2008 credit crisis—but ultimately our decisions are based on where our dollars would have the biggest impact.
We have become heavily invested in gas for domestic use. Our role is clear when you look at price volatility—gas fell from $15/mn Btu to $5/mn Btu, but it could reasonably go back to $15/mn Btu. If a country is dependent on foreign gas, developing domestic resources makes total sense from an energy security point of view.
IHS Markit predicts the price of natural gas will hit a 50-year low in 2020. Does it make sense to support upstream development?
Mussat: There has been a lot of debate internally. We are out of upstream oil but continue with upstream gas in exceptional circumstances—essentially in very poor countries with domestic reserves where it is very clear gas beats all other available sources.
We are open to midstream and downstream projects. There is an employment element—midstream gas creates many local jobs—and it is 60-70pc cleaner than coal so there is also a clear climate alignment.
Although upstream developments are not cheap, to import LNG, assuming you have a good port, you need at least $200mn to install regasification capacity and commit to long-term yearly LNG imports of $500mn/yr. Countries may be comfortable paying $500mn on a one-off basis but not to commit to $500mn every year, at a set cost, to a single seller. It could quickly shift the fiscal balance of a country.
What characterises the most effective projects?
Mussat: The macroeconomic environment and regulatory capacity to adapt play a large part. For example, Egypt has been very smart and reactive, switching from being an exporter to an importer very quickly. Now, thanks to discoveries, it will be an exporter again. It created a massive amount of flexibility—this is the sort of project we are interested in.
Likewise, Pakistan is energy hungry and tried for 10 years to get LNG imports off the ground. The IFC became sponsors and helped address the challenges that prevented LNG imports from happening. It worked out and we are already talking about terminals three, four and five. Pakistan was astute commercially—it convinced Qatar Petroleum to provide lowest-cost LNG when everybody said it was impossible.
“We cannot save the world by ourselves—we need sponsors and investors, and they will not invest in a project if it is not sustainable”
We have talked about South Africa for many years but it always comes back to the same issue, ‘what happens to coal?’ We would like to displace coal with gas, but the reality is there are already power cuts and tens of thousands of jobs rely on coal, so we need to be sensitive and ensure they coexist.
Can the level of development be too low for the IFC to get involved?
Mussat: The IFC investment follows the country strategies defined by the World Bank Group. The World Bank divides countries into three categories, to which we offer different products. IDA [International Development Association] categorised countries—ones the World Bank provides loans to at 0pc—benefit most. The poorest countries have the biggest problems, but typically need only a small amount of dollars.
Slightly richer countries pay some interest on their World Bank funding, but not at market rates.
Middle income countries may not need the World Bank, but we still look at specific projects. China and Mexico have large GDPs but massive pockets of poverty and may need help to access finance. If a country says ‘we would love to move out of coal to renewables or gas, but it is too expensive’ we would step in to help bridge the gap.
How do you decide which projects to pursue?
Mussat: We first look at the country strategy. There are countries where our priority may be agriculture rather than energy. In countries where we prioritise energy investments, we look at what is needed and for good potential sponsors in the private sector.
There are times when there are potential projects but no sponsors—this is when we can step in and become project developers. We then mature the project until we can attract good sponsors.
“If a country is dependent on foreign gas, developing domestic resources makes total sense from an energy security point of view”
We have pockets of donor money to ‘prime the pump’ where something needs an extra push, such as a commercial study or legal advice to put a consortium together. We would provide that for free.
For ‘real’ investments, things must stand on their own. We cannot save the world by ourselves—we need sponsors and investors, and they will not invest in a project if it is not sustainable. We can take the ‘first loss’ tranche—where we are the first to lose money if something goes wrong—to create confidence.
Or, we can take longer-term commercial risk, as was the case for a Ghanaian project. No bank was willing to lend money for more than seven years—so we structured a facility where banks were only exposed for seven years and we covered it to the required nine.
To what extent can the IFC tolerate losing money?
Mussat: Losing money is never fun. But, as my old private-sector boss used to say, 'if you are not losing money occasionally, you are not trying hard enough.' Sometimes we try our best but for various reasons—whether sponsor, macroeconomic, government or markets issues—we call it wrong.
The Seven Energy story in Nigeria was widely publicised but a lot of mistruths were put out there. It was a commercial disappointment—we lost equity and debt money, alongside international investors—but it was a technical success. The project provides enough gas to power a third of Nigerian generation. The asset exists and the jobs and developmental potential were achieved.
“We know each country is sovereign and must do its own thing”
We have a fiduciary duty to our board, to our member countries and to our co-investors and co-lenders. We need to make sure we are profitable to keep our AAA-rating. We get it right more often than wrong.
How well is Africa adapting to the global rise of renewables? Is there a role for IFC?
Mussat: Solar works very well in most of sub-Saharan Africa and generation can be extremely cheap. The oil and gas industry can be blindsided by that, especially on the LNG side that looks to power as an anchor off-taker.
A new renewable source could suddenly mean a large LNG project is no longer lowest-cost. We would then need to scramble to find fertiliser, transport or chemicals companies to take the gas.
With LNG, you need to worry about price volatility, but, for solar, you are not buying a fuel so there is no volatility. It takes 10,000 skilled workers to build an LNG export terminal but the barriers to entry for solar are extremely low. An entrepreneur just needs land, a couple of electricians, a bunch of solar panels and a lawyer to negotiate the power purchase agreement (PPA). Asia basically sells solar panels at cost price so the total cost can be incredibly low—and that worries us when supporting LNG.
However, as renewable power is intermittent, we see some of the largest renewable energy investors put capital into gas plants to hedge against delays and climate events.
There is a wall of money available for renewable energy projects. These are smallish projects, but this is changing fast and we are starting to see billion-dollar projects. But sometimes we must admit that we cannot beat coal—we must pick our battles.
How receptive are developing countries to the climate change argument?
Mussat: We are under pressure from our shareholders and civil society to increase our work on climate financing. But developing countries have a strong argument in that their carbon footprint is less than 5pc of developed countries. They would question why we would not finance the development of domestic gas but offer them as much as they want to buy solar equipment made in Europe or Asia. They say it is climate colonialism. It is a tough accusation so we must be realistic.
Likewise, the African Development Bank has been very clear—it will not be dogmatic because the continent is so far behind everywhere else and, whatever energy choices it makes, it will not realistically impact the climate.
Are accusations of ‘climate colonialism’ a serious barrier?
Mussat: No, but we need to educate people about what we do. We need to explain ‘why’ and engage in constructive dialogue. There are climate deniers everywhere—if we cannot agree, we reframe the dialogue, ‘do you agree that it is better to be more efficient? Do you agree that flaring gas loses money?’ In the end it gets us to the same place.
If we told a country that developing its beautiful new oil field—which would generate $5bn of tax revenue over 20 years—it is a bad idea and it should not go ahead, we would receive serious opposition. We know each country is sovereign and must do its own thing.
What other tools does the World Bank have to get projects over the line?
Mussat: Our World Bank colleagues at MIGA provide insurance products against civil disturbance, political events and natural events. The World Bank also has PRGs [partial risk guarantees], which means it stands in front of a government's obligation for a limited time. That provides a government—which may be B or A-rated—an AAA-rating for a defined period of time, which is hopefully long enough to get its project started.
The problem is that the energy chain is only as strong as its weakest link, and the end customer is ultimately buying electrons. The local power station may be great but payments to it may become disrupted—if, for example, the cost of energy for the poor suddenly becomes an election issue.
International investors are looking for yield but, in reality, there are very few bankable projects. Access to good projects is often the issue—sometimes it requires a sponsor to come along and say, ‘I will take a risk.’ Countries need to avoid delusions of grandeur and right-size projects for their market.
China has become very involved in Africa. Is this a positive or negative development for the IFC?
Mussat: China is able to move extremely quickly with very big numbers. That can be a very good thing, but the conditions of loans have not always been transparent. A lack of transparency does not mean it is a necessarily a bad deal, but it raises suspicions. The IFC has strict disclosure requirements for all projects.
Does China look at things in the same way as us? Probably not, as it produces lots of things that need a market. We make decisions based on what we think is good for the country—while China may do so based on what is good for China. If consumers in Africa wants shoes but China is producing flip-flops, they are going to get flip-flops. Thankfully, China produces a lot of solar panels and the cost has come down dramatically. Like in any commercial negotiation, countries should be mindful of who is talking to them and why. Why is someone giving you free money to buy something? Is it what you want or need? Can you afford to repay the loan? There is a saying in the development community that ‘it is expensive to be poor’ and we are trying our best to ensure it is affordable to get out of poverty.