Nena Stoiljkovic is International Finance Corporation’s Vice President for the Asia-Pacific region. She is responsible for all IFC operations in the region’s 29 countries. Stoiljkovic has global experience in development issues such as climate change, gender, and fragile and conflict-affected situations, and delivered excellence in her recent role as Vice President of Blended Finance and Partnerships. She has a track record of promoting development finance innovation in a variety of leadership roles at IFC. Most recently, she played a key part in the corporation’s efforts to build a new architecture for development finance with other institutions, governments, and the private sector. Stoiljkovic was in Nepal last week on a three-day visit to meet different government officials and business communities. In an exclusive interview with the Post’s Bibek Subedi, Stoiljkovic talked about IFC’s existing as well as future plans for Nepal. Excerpts: Your visit coincides with the first anniversary of the first stable government in Nepal in more than two decades. Since political instability has always been the bane of Nepal’s development sector, how do you think the IFC and Nepal can make the most out of it from here on?
As you said, after a long time we have a stable government. And those of us who represent the private sector know that one of the preconditions for the sector to do more in Nepal is political stability. So, I look at this very positively and that is why we are excited with some of the work we can do on market creation and bring more private sectors into the country.
What do you make of the current government’s relationship with the private sector? There have been some concerns that there is a lack of trust in the private sector. Do you feel the government’s attitude towards enabling the private sector is working?
It has only been a year of a stable government and everything cannot be done in a year. We should also give the government some space too, right? But I can say that we are very engaged with the government to help them create a better business climate. You probably know that we have done that in many countries. We have worked on various advisory services to the government itself, and we can leverage our colleagues from the World Bank who are helping the government reform some of the key sectors through their instrument, both financing and advisory. So there is quite a lot of work going on right now with the government, and some of the things I have observed during this visit represents the move to the right direction.
So, you are satisfied with what is going on?
That is very hard for me to say. But what I can say is that business climate is extremely important for private sector participation. Maybe I can say something else… if you need $10 billion investment in Nepal between now and 2030, the government has to be supportive of the private sector. There is no way an investment of $10 billion will happen through public sources and the government’s own financing. Therefore, the government needs us and the private sector to make that happen. And we obviously need the government to make the reforms and regulatory changes that would allow for all of that investment to come in the country.
Do you think we are heading towards the right direction?
On my side, I would love to believe so because IFC together with the World Bank just signed up on the new country partnership strategy for Nepal for the next five years. We are radically increasing our programme in Nepal. Our current portfolio of everything that IFC has invested in Nepal is $57 million. And cumulatively over the next five years, we are targeting something worth $800 million or perhaps even $1 billion. You can see multiple scales up there and the government has signed up on that as well. This is the product that we have agreed with the government. And there is no way a $1 billion investment can be done by IFC alone. We often bring many partners with us, and that won’t happen without the government’s support of the private sector.
What is the biggest project in IFC’s current pipeline? What challenges do you anticipate while working on this project and how do you plan to overcome these obstacles?
It is Upper Trishuli-1 Hydroelectric Project. I don’t want to make it sound like a regular project in all respects. This project is very unique for us, and I believe for Nepal as well. And I also want to say that it hasn’t been easy to bring it to the stage where it is right now. Nepal clearly has a huge potential in hydropower and the current capacity is not sufficient to serve the need of the people of Nepal. Hydropower is the sector we are focusing on and Upper Trishuli-1 will bring 30 percent more to the current power capacity. It is important for Nepal and it is important for IFC and it is important for development. But I also have to say that it took us almost eight years to bring the project to a stage where we can get final approvals, and hopefully we will reach financial closure in the next few months. So, it is not a regular project for IFC. A normal project cycle for IFC is 6 to 12 months. This has been many, many years in the making, with support from the World Bank. And I am happy to be in a position to talk about it at this stage.
Will you share with us some of the obstacles you faced to bring this project here?
For us to move forward, we needed a bankable power purchase agreement. That created a space for foreign investors—and in this case the Korean companies—to be confident to step into the sector. And the rest was us... arranging the financing. I also want to say that financing was not 100 percent commercial even though IFC supports commercially viable projects. This project will be commercially viable. But to fund it given that it is the first of its kind and the largest FDI in Nepal, we have to use some of the blended finance instrument/s that IFC has access to in order to de-risk it for the private sector partner to come.
While signing the PPA, the project developer and the Nepal Electricity Authority, which is the offtaker of the electricity generated from the project, agreed to contribute fund to the hedging instrument covering the foreign exchange risk that NEA will be exposed to while purchasing power. But, the PPA did not disclose the amount that each party was contributing to the fund. We have been informed that currently this has been the bottleneck to move forward the project and conclude the financial closure. How do you think the issue will be resolved?
We are in the process of agreeing to that. But even from IFC’s perspective... believe me we are not going to take such a huge foreign exchange risk. There is a significant dollar investment and investors expect reasonable returns. So all parties are now agreeing on how to resolve the issue. There is an issue on local currency in Upper Trishuli-1. But there is also an issue on local currency in Nepal in general and we are having discussion with the government on how to unlock the local currency financing. IFC can provide local currency but we need a hedging mechanism. And we can also issue local currency bond. So we are talking about the broader solution in Nepal, which I am very excited about. It will not be about one project as many more projects will benefit. But on Upper-Trishuli 1 we are about to resolve that because even from our perspective we will not be able to go to our board without mitigating foreign exchange risk.
How does IFC measure the success of its interventions, and specifically, what comes first—impact or profitability?
Both are very important. Our DNA is to look for a commercially viable transaction simply because we believe that for the project to be sustainable—to employ people on a sustainable basis and to make an impact on a sustainable basis—it has to be profitable. It has to be financially sustainable. A bankrupt project will not have that impact. But over the last years or so... in this spirit of creating market, we have also developed some tools to measure the development impact of our projects ex-ante. We already have very good measurement of financial success of the project—returns and the rest of it. But now we have a quantitative measure ex-ante which is telling us how impactful that project will be. And it looks at the project itself and the immediate impact the project makes. But it also looks at the sector and market creating aspects of the project. We call it Anticipated Impact Measurement and Monitoring (AIMM). From my perspective, I am looking for the portfolio of project that will be impactful and financially sustainable. But on an individual level you are going to see some projects that are more impactful but less financially sustainable and the other way around. But as a whole we have to have both—impact and financial sustainability.
Can you give some examples of how IFC has worked with the World Bank in Nepal? Do you have any examples of projects that have been jointly originated with public and private sector components, and will be jointly executed in Nepal?
I think it’s very rare because the World Bank funds the government and we fund the private sector. I would like to think about us working together in a more synchronised way. Very often the World Bank’s intervention with the government is needed for a certain sector to be open for the private sector. Upper Trishuli-1 is also a project where the World Bank worked very much with the government on regulatory framework for hydros. That came in first for us now to be able to bring the first project to commercial close. I am pretty sure that we can work very well with the colleagues from the World Bank on the tourism sector because there is a lot of tourism infrastructure that may come from public sources... that will be financed. We can do quite a lot on private properties and some may be private infrastructure that complement what the World Bank does. For me, the key is to jointly agree on what are the sectors of priority and joint work. And right now in addition to country partnership framework, which is joint, we have some other ways of deciding who is going to do what and how that will be done.
How does IFC make resource-allocation decisions? What determines the amount of business that is targeted to be done in South Asia versus Sub-Saharan Africa? What determines how much business gets done in Bangladesh versus Nepal?
We discuss that a lot at the corporate level. We have made it very clear that our priorities will be what we call either low income countries and fragile and conflict affected countries. Most of such countries are in Africa. But there are quite a few in Asia and South Asia also. Of course, both Nepal and Bangladesh are in that category. So you will see significant resources at the global level shifting to South Asia and Africa. And for me within Asia and Pacific, a lot of the resources will be shifted to countries like Nepal, Bangladesh, Cambodia and several countries in the Pacific island. How is that going to happen? We will bring manpower to those countries where we want to develop more businesses. The sole purpose of our staff running the country unit is to develop more business in that particular country. I also want to say that by 2030, IFC has committed to having 40 percent of its annual programmes in the type of countries I am talking about and Nepal will hopefully be one of the largest beneficiaries of that significantly larger investment by IFC. I also want to say that it is not about the investment only as you know where you are building markets, creating markets and introducing first of its kind type of projects... we also do lot of advisory services. Such services can be also provided to the government about business climate, doing business or how to structure a PPP transaction. Also a lot of our advisory services goes to individual clients who may not be fully ready for IFC investment but we want to make them ready by helping them with governance and even on some market aspects of their projects. So, we see a lot more advisory services being put in low income countries.
How does IFC make sure its investments do not lead to the creation of monopolies? Do you see this possibility in small markets like Nepal and how do you mitigate this perception risk?
Obviously the intent is to create the market, not to destroy it—and certainly not to create monopolies. But market creation takes a long time. Sometimes we do invest with the first of a kind or a large company that is willing to come to a certain sector simply to demonstrate to others that those investments are viable. But I want to go back to the new strategy of IFC—which is to create market. We don’t tolerate monopolistic behaviours and we don’t intentionally create them. But we want to invest in projects that can demonstrate that certain sector is viable to private partners.
Foreign currency hedging is a huge issue for large scale infrastructure projects in Nepal. What are the instruments that IFC has in its arsenal that could help mitigate this risk for project sponsors? What is the cost to the consumer of using these instruments?
You have many, many instruments and we are not the only institution that can help with the local currency. But, a normal approach would be to find a local institution that can hedge and build their capacity to hedge at a reasonable cost. We haven’t done that yet. That would be the first step, and IFC is very well positioned to do that. Our treasury colleagues do it all the time in many countries. And the second approach is local currency bonds and that will help multiple projects. Globally IFC has issued local currency bonds in 65 countries and I would love Nepal to be one of those countries. I just want to tell you that in your neighbouring country India, Masala bonds have allowed us to grow our programme in India from a minimal amount to $2.6 billion last year. Ninety to ninety-five percent of that is in local currency. And we know from our experience that if we cannot have conditions to issue those bonds we will be passing on many more projects. So we are working on that. The last instrument that we have is that when it gets too risky for local currency issuance or bonds, we can de-risk that. We have instruments that allow us to do so. It is a blended finance instrument. We leverage some money from donors to take an open position on certain local currency in a country like Nepal. And we can use that de-risking instrument to actually bring local currency bonds even if some of the conditions for that are not fulfilled. You have to have confidence in us that by working—obviously with the government for necessary approvals—we can bring any necessary solution very soon to Nepal.
Nepal is organising the International Investment Summit in March-end. But there are some concerns from the donor and international partners. What are your suggestions and what are the areas where Nepal should work to attract investment?
We can debate about when the right time will come. But to me putting Nepal on the radar screen of investors is a good idea. That’s what I assume is the investment summit’s first objective—to bring investors here to talk about certain sectors and to create a dialogue on what is possible. So, that in general is a very good idea and we are also trying to help the government to have a successful investment summit. We are also trying to prepare some of the projects that are not fully approved on our side for possible announcement at the summit. We offer our full support to the government and I personally think it is great to put Nepal on the radar screen of investment at any point of time. So, I am not going to say whether it is premature or not. I think it is important that we have Nepal on the radar screen of the investors. Who are the possible investors? I clearly can see quite a lot of neighbouring countries are interested in Nepal. We see increased interest by Korea, Japan... I have worked with them in Africa, Middle East.
Nepal has been seeking support from multilateral lenders like IFC to support its immediate priority of crowding in the private sector. What are the IFC’s immediate plans in this regard?
When you look at Upper Trishuli-1, it is the first project of the scale that is going to be structured on a commercial basis. It’s not 100 percent private as we have a Korean state-owned company and you have a lot of DFIs who are coming in on parallel. But we think that it is still crowding in investment that will demonstrate for the next set of project the viability and will bring more private sectors. At IFC itself we have a range of tools and instruments. It can bring in private banks, we have B loans syndication programme, we have Manage Co-Lending Portfolio Program (MCPP). But the key is to open a sector. And the first project of its kind will never be ideal or perfect in terms of full private sector participation or not needing de-risking. In Upper Trishuli-1, we still need some blended finance instrument. But I am hopeful that this creates space and market for many more private investments in hydropower in Nepal.