IFC Leads Sustainable Investing in Emerging Markets

Two recent announcements from IFC (the World Bank Group member dedicated to private sector development in emerging markets) demonstrate continuing leadership in emerging market sustainable investing.

The IFC's inaugural green bond, a $200 Million, four year, fixed rate issue scheduled to close on April 26, will reserve all proceeds for investment in climate friendly projects in developing markets. This is the first time IFC will dedicate bond funds to a specific pool of loans. The green feature makes the bonds attractive to a growing audience of institutions charged with finding socially and environmentally responsible investments. “The Green Bond is yet another example of how IFC is creating innovative financial products that offer both development impact and good return for investors”, said Nina Shapiro, IFC Vice President and Treasurer.

IFC has also published a brief on it's ongoing sustainable finance mission in preparation for the Spring Meetings – the annual review of the joint IMF-World Bank Development Committee and the IMF International Monetary and Financial Committee held April 24 and 25 in Washington, DC. The plan is not just to invest IFC funds wisely, but to build investment infrastructure in developing countries while using IFC's track record to encourage and enable sustainable investment by global capital markets in those developing countries.

Three IFC focal points seem particularly exciting for the sustainable investment community:

• IFC is developing the necessary market infrastructure to support the growth of sustainable investment by funding the development of enhanced stock market indices, market research, and training; and by sharing IFC’s substantial experience in incorporating environmental and social issues when investing in emerging markets.
• With assets of over $20 trillion and long-term investment time horizons, pension funds are a potentially important source of investment capital for the hundreds of millions needed to combat climate change. IFC is working with pension funds to develop new financial instruments to help tackle climate change.
• Private Equity is an increasingly important source of capital for growing businesses in emerging economies. IFC is supporting private equity managers use of sustainability to identify new investment opportunities and drive improvement projects within their investments.

This work, along with projects like the Carbon Efficient Index, developed with S&P and Trucost and the Private Equity Toolkit, designed to bring a serious look at sustainability into private equity's investment decision process, show what IFC's mission is all about.

Photo credit: acameronhuff

Emerging Markets Plugging In To Mother Earth

Imagine you are living far, far off the grid, in an emerging market rural outpost, say 100 miles Northwest of Moroto, Uganda near......well, you are pretty sure there's an outside world. You'd like a radio, maybe even a cellphone. You'd like to see at night without lighting candles and filling your home, and your baby's lungs, with soot and other dangerous combustion reaction products. If only you had an extension cord 100 miles long or better yet, if only you could just plug in to the dirt floor of your own home.

Soon you will be doing exactly that. Lebone Solutions, a team of six MIT students, has developed a battery powered by microbes living in dirt which can operate for months, charging LED lights, radios and cell phones. The device costs less than $20. It harnesses the energy from metabolic reactions of soil dwelling bacteria, an energy source that has been recognized for years but not utilized in a practical way. Lebone Solutions member Presser Aiden predicts 1,000 households will be using one by this summer. Although the dirt battery will be welcome in many emerging market areas, it was designed with sub-Saharan Africa in mind a region where some of the Lebone Solution members (along with 500 million other people) have lived without power.

The dirt battery was hailed by Popular Mechanics as one of the ten most brilliant innovations of 2009 and named one of the winners in this year's MIT IDEAS competition. It's also featured in a cover story on public service at MIT in this month's Spectrum (an MIT newsletter). The Spectrum story made me feel much better about many years of contributions - contributions to a wealthy institution that didn't always seem like it should be high on the list of neediest candidates for my limited funds.

The Spectrum public service story also reminds me of two trends I've been noticing lately. The first is a greater emphasis on relatively low tech solutions to problems like malaria, rural power or clean water. Solutions that combine solid engineering and cultural analysis without spending a fortune on new frontiers of basic science or expensive equipment that many emerging market populations can't afford. The second trend is the rapid advance of microfinance, with organizations like Kiva leading the way and tools like securitization steering microfinance in the direction of a socially beneficial investment that can compete with other interest bearing options. These trends are a powerful combination that might lead to a real take-off for impoverished rural areas a lot faster than expected.

Photo Credit: AnnaleeBlysse

Arrrgh! Pirate Finance – Emerging Market Success?

The piracy finance model excerpted (with minor edits) below appeared in early March in a UN report, and has gained interest through more recent republications, first in UN Dispatch, then Alphaville. The model is fascinating – so is what it tells us about Somalia, an area that, right now, can only aspire to be an emerging market:

The success and expansion of pirate militias requires new organizational arrangements and practices. Although leadership of pirate networks remains anchored in Puntland and central Somalia, participation in maritime militias and investment in pirate operations is open to a broad cross-section of Somali society. The refined finance model guarantees every participant in the operation, if successful, a well-defined percentage or share of the ransom money.

A basic piracy operation requires a minimum eight to twelve militia prepared to stay at sea for extended periods of time, in the hopes of hijacking a passing vessel. Each team requires a minimum of two attack skiffs, weapons, equipment, provisions, fuel and preferably a supply boat. The costs of the operation are usually borne by investors, some of whom may also be pirates.

A would-be pirate should already possess a firearm. For this contribution, plus, his services, he receives a class A share. Pirates who provide a skiff or a heavier firearm, like an RPG or a general purpose machine gun, may be entitled to an additional A-share. The first pirate to board a vessel may also be entitled to an extra A-share.

At least 12 others are recruited as militiamen to provide protection on land if a ship is hijacked., In addition, each member of the pirate team may bring a partner or relative to be part of this land-based force. Militiamen must possess their own weapon. Each receives a ‘class B’ share — usually a fixed amount equivalent to approximately US$15,000.

If a ship is successfully hijacked and brought to anchor, the pirates and the militiamen require food, drink, fresh clothes, cell phones, air time, etc. The captured crew must also be cared for. In most cases, these services are provided by one or more suppliers, who advance the costs in anticipation of reimbursement, with a significant margin of profit, when ransom is eventually paid.

When ransom is received, fixed costs are the first to be paid out. These are typically:

• Reimbursement of supplier(s)
• Financier(s) and/or investor(s): 30% of the ransom
• Local elders: 5 to 10 %of the ransom (anchoring rights)
• Class B shares (approx. $15,000 each): militiamen, interpreters etc.

The remaining sum - the profit,- is divided between class- A shareholders

Wow. The model has sophistication, with four classes of securities: 1) investors get a super share that splits 30% of the gross; 2) suppliers essentially get a subordinated preferred – payment is contingent on a successful hijack and ransom but return is a fixed percent of value supplied; 3) land based militia also get a lesser preferred, with a fixed sum contingent on success; 4) marine pirates get common.

The model assumes compliance with the deal terms by pirates, not generally known as a law abiding group. Is this driven by fear of retribution, the need to preserve reputation so that future missions can be staffed and financed or some other force, such as clan relationships? Really the model assumes more than just compliance. Since the supplier has limited upside, the supplier's investment probably makes sense only if the supplier can count on investing in multiple operations, with some chance to recover in the event the failure rate is high on the first few operations in which the supplier participates.

Finally, the model has some pieces missing. Who is the organizer and how are they compensated? Is it the primary investor? If so, does the lead get a share of that 30% that exceeds the pro rata share attributable to his investment?. Is the captain of the ship the organizer? If so, isn't this worth a couple of extra Class A shares? Who, in general, are the financiers? What percentage of Somalia's can afford to be venture capitalists?

In an emerging market with no consistently functioning educational or judicial systems, the pirates are pulling off some fairly sophisticated financing. Aside from how to be a pirate, what's the lesson? The pirate model probably tells us something about the capability and resiliency of the Somalians, if this lawless territory could somehow turn itself back into a nation and offer legitimate opportunities that would attract the same ingenuity. It may even tell us something about the prospects for investment and assistance for the Somali private sector from the outside world. Apparently, Somali's can run a business, but the outsider who is not viewed as part of the crew may end up walking the plank.

Photo credit: darkpatator

Unpaid Internships: The New Sweatshop? (and we are not talking emerging markets)

Sweatshop paints an ugly picture, so let's start with what we are not writing about – an airless room in an emerging market country filled with seamstresses making subsistence wages, or less. We are not writing about students who are working for college credit (and in many cases wages too) as interns in a supervised educational program, like the co-op program pioneered by Northeastern University. We are talking about an office in a fun, creative glamorous business like publishing, entertainment or fashion; an office in a city like New York, San Francisco or Boston - in other words, the kind of office in which a lot of college students and recent grads would like to work so much that they are willing to work for free.

Consider a basic point, – employers don't get an exemption from minimum wage laws just by calling an employee an intern. Federal law does include a minimum wage exception for trainees and The US Dept. of Labor uses a six part test to distinguish between trainees and employees.

Most of today's expanding crop of unpaid internships fail at least one of the six tests – because the interns are regularly doing actual work, and a lot of it, for the benefit of the employer, not primarily learning. If you have any doubt about this, check the job boards for internships in any creative field. The skills required to even land one of these internships qualify the intern to handle a lot more than closely supervised photocopying. While the larger companies and NGOs, the ones that actually check with a lawyer once in a while, are often careful, the entrepreneurs sometimes go to town with an office full of unpaid interns who produce much of the regular work, maybe not all that different, in theory, from that emerging market sweatshop.

So what. Illegal doesn't always equal immoral or unsustainable. The interns are bright people who generally understand what they are getting. The on-the job-learning and the credential building are real, even if the hope of a paid position down the line might be exaggerated at times. Many of the employers are start-ups working on a shoe string who could not hire a single extra paid employee at minimum wage if they had to scrap the unpaid internships. Some employers might not even have a sustainable business without free intern labor. The basic theory of supply and demand suggests that any minimum wage retards job creation at the entry level and the Chicago School economists regularly advise emerging market countries against adopting minimum wages. Maybe slack minimum wage law enforcement during a recession is better than the kind of vigorous enforcement that would send these interns home to sit on the couch and drive their parents crazy.

Or maybe not; slack minimum wage law enforcement has some problems. First, some employers could and would create minimum wage jobs if they could not get free labor from interns. Second, only the reasonably well off interns can count on family support while they work for free. As the unpaid internship becomes a prerequisite to a creative career, doors close for the less fortunate. In an extreme case, companies have been known to auction unpaid internships off to the highest bidder with proceeds going to charity. Third, and most problematic, the unpaid internship seems to be spreading – presenting a slippery slope for minimum wage enforcement just in time for the Winter Olympics. The unpaid Summer internship morphed into the just graduated four or six or twelve month internship. The use of free labor also seem to be creeping out from the creative businesses. (Although we can stop banker bashing for one column. Investment banks still pay their interns more than minimum wage -before you ask, the banking interns do not make millions). Will the tide of unpaid internships ebb when the recession ends, or is this trend here to stay unless law enforcement tightens up?

If slack enforcement still sounds good to you, consider – wouldn't it be better to change the minimum wage law to something you would want to enforce? Maybe create some additional minimum wage exceptions for low revenue employers in creative fields who would clearly hire no one if they lost their unpaid interns? Possibly limit the number of free interns in relation to the size of the employer to make sure there were enough trainers to actually teach the trainees, not just exploit them. Maybe even limit hours for unpaid interns to part-time, so the intern who can't afford not to work can hold down a paying job too. What would you do: Abolish the minimum wage altogether; Enforce the minimum wage and effectively abolish the unpaid internship that produces serious work product for the employer; or, Change minimum wage laws to accommodate more legally unpaid interns, while addressing some of the problems this creates. Let me know, here or at Justmeans.