Some say that the financial crisis is the worst crisis since 1930, I say, this is the best opportunity since 1930. Financial crisis happens, in such times, both big winners and losers will emerge at the end of the tunnel. And I believe, IFC stands to be a winner, here’s why
1. Commercial and political risk of emerging countries
With recession looming and uncertainties abound, money will stay close to home markets. This makes the perceive commercial and political risk of investing in developing countries even higher. If the sophisticated financial market crumbles so easily, why venture your money to financial markets in emerging countries, sure there’s an upside, but why take the risk, such would be the reasoning of money manager in US and Europe.
Yet the potential of supply and demand for energy remains high in the Asia Pacific region, nearly 2 billion people uses more and more energy everyday, representing huge sums of returns to be made. This provide clear opportunity for IFC, IFC competitive advantage exist in understanding and working in developing countries, while major funds from Europe and US fear to tread, IFC is literally on a mission is to play this field. Thus IFC has the unique ability to provide funds, industry expertise, and market experience for investors looking to tap the region’s energy potential.
2. Capital intensity of Oil and Gas industry
The oil and gas industry is capital intensive, what this means to funding source is, there’s not much of an option out there. With the possible exception of super majors, other investors need to rely on funds from developed countries or syndicated financing if sourcing funds from developing ones. Yet, as mentioned above, money from developed economy would stay close at home, and there are limitations to how much fund indigenous capital will provide. Indigenous capital, wise to the local context and can better navigate the risk, will weight the attractiveness of energy project against other sectors of the economy, unlike Europe and US, there’s room for growth in all sectors. Beyond absolute numbers, diversification consideration will also limit the amount of funding provided by indigenous capital
3. Tighter lending and funding situation
The US financial market meltdown has prompted talk about increasing regulation and supervision in the financial market. One of the lingering lesson of this crisis would be “be careful to whom you lend your money”. Beyond government sanctioned regulations, we can expect that there will be higher standards in credit screening and approval, self-imposed by the financial institution themselves to prevent similar problems on their balance sheet.
This condition brings two advantages for IFC as provider of funds.
a. IFC stand as a clear alternative in this condition. Investors are on the lookout for funds, as access to commercial funds from developed economy becomes more difficult, IFC will stand more clearly in the investor’s radar screen.
b. IFC higher standards become more palatable in light of the more stringent self-imposed and regulatory standard in the financial industry. IFC has high standards on environmental and community protection, ensuring that stakeholder’s interests are well taken into account. Some investor might feel that enforcing these standards would lead to additional burden for them. And decide to shop for commercial funds, where the process, though rigorous, is as not as throughout as IFC’s. But when requirements and process in accessing commercial funds becomes more stringent, IFC could be seen as just as competitive.
A chance to spread IFC’s value
Sustainable development can work. It’s not a hype, it’s not a “feel good” thing, it is a feasible way of doing business.
This is why the financial crisis provides great opportunity for IFC, for it is a chance to tap the market, show that IFC values can work in larger context, not just be seen as an “alternative”. The aforementioned conditions, IFC having strong advantage as a funding source in developing economies at current time, potential financing constraint from developed economies and indigenous capital, commercial funding process becomes tougher, and IFC’s process becomes more competitive are all opportunities to tap the market, with the end goal of having more and more investors discovering and experiencing that sustainable development can work.
And hopefully, as more investor and stakeholders, experiencing that sustainable development can work, this experience will prompt commercial financial institution to begin adopting sustainable development principles at their own funding practice. That is a lofty goal, a long shot perhaps, but who knows, less than 20 years ago fighting global warming is also a lofty goal and a long shot.
There will be challenges on IFC side, IFC might not be able to gain sufficient funding from its sponsors and it might not have enough resource to tap the market. There are solutions to these challenges, yet it seems the space in this short article doesn’t provide to discussing them.
Fill the void, gain the advantage
There will always be investor willing to take the risk to invest in the region. But will there be capital to finance these projects? We are looking at a potential void, IFC stands tall to fill the void.