PANNA: Dubious Development: How the World Bank's Private Arm Is Failing the Poor and the Environment

The World Bank Group has steadily increased its support of the private sector over the years and its private sector lending arm, the International Finance Corporation (IFC), is an increasingly important facilitator of private investment in the developing world. As part of the World Bank Group, whose mission as a development institution is to promote development and alleviate poverty, IFC's lending to the private sector is often at odds with this mission.

What is IFC?

The World Bank Group is a public, multilateral development institution. Its shareholders are governments and its mission is to alleviate poverty around the world. The World Bank gives loans to governments through its "public" lending arms, the International Bank for Reconstruction and Development (IBRD) -- which supports middle income economies -- and the International Development Association (IDA) -- which supports the poorest countries. The Bank also supports the private sector through IFC and the Multilateral Investment Guarantee Agency (MIGA) which provides political risk insurance to private companies. Established in 1956, IFC's role is to "promote private sector investment in the developing world, which will reduce poverty and improve people's lives."¹

In the last five years, IFC's support of the private sector has grown steadily.² Even the Bank Group's lending to governments -- through IBRD and IDA, which together are called the World Bank -- reflects new approaches for assisting the private sector. IBRD and IDA now provide partial risk and partial credit guarantees to facilitate private investment. The World Bank's support of "structural adjustment" loans is also on the rise. These macroeconomic loans result in more favorable conditions for private sector investment in the developing world, but often at a cost to the poor and the environment. In 1999, more than half of the World Bank's lending to governments was for structural and sectoral adjustment loans.³

In general, the World Bank Group's increased focus on private sector lending and developing new tools for private sector development has not been matched with efforts to ensure that its private sector investments lead to further poverty alleviation or sustainable development.

What Is Wrong with IFC?

IFC's modus operandi has been to emphasize economic growth by investing in the private sector, but growth does not necessarily result in sustainable development. Economic growth may result in profits for a company, and it may generate some jobs -- either temporary or permanent -- but that alone is not sufficient for furthering development and alleviating poverty in the developing world.

Some World Bank research acknowledges this disconnect between economic growth and poverty alleviation. In a study of its lending in the poorest countries, the Bank acknowledges that poverty rates increased between 1987 and 1993 from 29% of the population to 33%, in spite of increased economic growth rates.⁴ Other research by the World Bank argues that economic growth will not generally translate into increased incomes for the general population or environmental protection unless other conditions are in place. The findings prioritize investments in human development, support of social and environmental programs, and reform of governance and financial regulation problems.⁵

The conclusion of this research is that economic growth alone is not a sufficient end goal for delivering development that is equitable, sustainable and long-term oriented. If IFC wants to promote development through investing in the private sector, it must expand how it evaluates potential investments and assesses expected results. It requires a change of mindset from promoting commercial interests and operating like a commercial bank with a similar portfolio to becoming development practitioners.

Problems with Transparency: Protecting Business' Interests

IFC all too often withholds information from the public, in spite of its information disclosure policy which states that "there is a presumption in favor of disclosure where disclosure would not materially harm the business and competitive interest of clients."⁶ In practice, IFC errs on the side of withholding documents that are not explicitly required for public release.

IFC often hides behind the concept of "business confidential" information, or the notion that releasing sensitive information would harm a company's competitiveness. Business confidentiality should apply to financial information only, but IFC and its clients also use the concept to conceal relevant information about the social and environmental impacts of projects.

IFC's current policy requires only that limited information be made available to the public before project approval. Once IFC approves an investment, it is no longer required to release any information.

Progress on Policies, But Weaknesses Remain

In 1998 -- after years of confusion about the environmental standards it applies to projects -- IFC modified and adopted the World Bank's environmental and social policies. IFC has taken local consultation with affected communities more seriously and has developed "good practice" guidelines for companies on how to consult with affected communities. However, the good practice guidelines are not binding, even for the most environmentally or socially sensitive projects.

But the real test for IFC is after a project is approved and implemented. Currently, IFC does not put enough financial and management resources into the monitoring and supervision of IFC-backed projects to ensure compliance with its policies. Aside from the basic problem that many of the investment officers do not know the policies, IFC does not have sufficient staff to monitor the more than 1,280 companies that it supports in its portfolio.⁷ This is also true for loans to financial intermediaries,⁸ which is an increasingly important part of IFC's work. While IFC has improved its policy framework, it still needs to improve implementation of these policies.

That said, the existing policies do not address issues of human rights, gender and social equities and corporate responsibility. The environmental and social policies, called the "safeguard" policies, have been in place at the World Bank for several years without being expanded. If the World Bank Group, including IFC, wants to be a leader in development, then its policy framework will need to catch up with the changing times.

How Corporations Benefit from IFC Support

IFC's beneficiaries include some of the world's richest corporations: Rio Tinto, Citibank, Marriott, and ExxonMobil, to name a few. The annual sales of some of these companies outrank the gross domestic product (GDP) of many developing countries. Of the world's top 100 economies (countries ranked by their GDP and companies ranked by their sales), 51 are corporations. Royal Dutch/Shell is the 33rd largest economy and Exxon is the 37th.⁹

In situations where IFC supports transnational or foreign-owned companies, the chances for local benefit are diminished since these companies take most of their profits back home to their shareholders. One cannot assume that a domestically owned company always benefits the community either, but in general, these companies may be closer to the development priorities and needs of a community. Some investments may be better suited for trans-national companies just by their nature, but when a transnational or foreign-owned company is the major investor, IFC's role should be to help ensure that local benefits are maximized. In general, IFC should try to prioritize support to domestically owned companies that have a direct interest in the well-being of a community and a country.

As a public financial institution, IFC should invest in companies that demonstrate a commitment to corporate responsibility and have a track record of meeting high standards of social and environmental performance. As part of its due diligence process, IFC should review the corporate record of potential clients to determine if a company has a responsible record or not (factors such as violations of environmental laws, problems with community interactions or human rights abuses should be cause for concern). Companies with recent records of poor environmental or social performance should not be eligible for IFC financial assistance until that record changes.

Where Should IFC Money Go?

To foster economic growth that benefits the poor and decreases inequities, IFC should promote economic investment that directly responds to the needs of the most disadvantaged sectors of society. IFC should target investments that deliver economic benefits or services to the poor and the most marginalized. These can be investments that provide services to the poor, such as access to clean water or clean energy, expanding access to capital for local populations, or investments that provide a productive and environmentally sustainable economic generation for a local community, such as shade-grown coffee or organic agriculture.

One of the most effective ways for IFC to maximize poverty alleviation via private sector investments is to target small- and medium-sized enterprises. IFC should also favor projects that generate local employment and ownership, that benefit women entrepreneurs, and that develop new and environmentally sustainable businesses. Friends of the Earth recommends that IFC adopt a "development screen" with clear social and environmental criteria for projects that would provide better guidance about the types of projects that meet IFC's mission to support long-term sustainable development and poverty alleviation.

Picturing Positive Development

IFC needs to do more to fulfill its development mission. IFC should develop a clear development strategy, a real sense of what development means, an understanding of and a willingness to use its leverage, and a willingness to say no to potential transactions to maximize its investments. IFC should be investing in projects that directly benefit local communities or lead to a minimum level of environmental or social benefit. IFC should challenge private companies to invest in emerging sectors that provide public benefits such as renewable energy, sustainable agriculture, environmentally sound tourism, natural resource conservation and locally owned businesses. These sectors should be prioritized in IFC's portfolio.

Friends of the Earth does not oppose investing in the private sector so long as IFC can meet this basic test: that the investments are environmentally and socially sound, demonstrate a positive developmental impact beyond just economic growth and help to alleviate poverty. For that to be realized, IFC must seize on its role and leverage in the global economy. As a financier, capital mobilizer and partial owner of some projects, IFC can make a difference in development. The question is, will IFC use this leverage and, if so, how quickly.

Contributing authors include Dekila Chungyalpa, Andrea Durbin, Dawn Montanye and Jon Sohn. Special thanks go to Michelle Chan-Fishel, Francesco Martone, Keith Slack, Jon Sohn, Alex Wilks and Sara Zdeb for their comments.

Additional copies of this report are made available for US$7 each (includes shipping) from Friends of the Earth, 1025 Vermont Avenue, NW, Suite 300, Washington, DC 20005; phone (202) 783-7400; fax (202) 783-0444.

The full report is available on line at http://www.foe.org/camps/intl/institutions/index.html.

Notes

1. IFC Press Release No. 00/24. "IFC Announces Profit in Year Marked by Crisis Response and Investments in New Markets."

2. Between 1996-1999, IFC's lending has increased by an average of 9% a year.

3. World Bank Annual Report, 1999.

4. World Bank, IDA in Action 1994-1996, The Pursuit of Sustained Poverty Reduction, 1997.

5. Presentation by Vinod Thomas, Vice President, World Bank Institute before the Environment Forum 2000, March 20, 2000.

6. IFC Policy on Disclosure of Information, p. 5.

7. IFC Annual Report, p. 69.

8. IFC provides loans to financial intermediaries, or other banks, which then use the loan for sub-projects.

9. Anderson, S., J. Cavanagh and Thea Lee. Field Guide to the Global Economy. The New Press: New York.