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Finance

News

IFC “needs to try harder” on development

3 July 2012

NGOs continue to find that the International Finance Corporation (IFC), the World Bank’s private sector arm, is off track in reducing poverty and promoting development, with concerns that the IFC development goals (IDGs), to be implemented from July, will not help the poorest.

A report published in May by European NGO network Eurodad examines the trends in public support for private business in developing countries, asking whether investing in private companies can deliver for the poor. Analysing the private sector portfolio of two multilateral banks – the IFC and the European Investment Bank (EIB) – and six European bilateral development agencies between 2006 and 2010, the report concludes that funding to the private sector has increased by 190 per cent.

While the report explains that the rationale for the investments is “to provide financing that supports positive development outcomes for companies in developing countries that would otherwise not be able to access funds”, its analysis shows that “only 25 per cent of all companies supported by the EIB and IFC were domiciled in low-income countries.” Furthermore “almost half goes to support companies based in OECD [Organisation for Economic Cooperation and Development] countries and tax havens,” leading to the conclusion that it is not credit-constrained companies that are benefiting. Instead the institutions “appear to be simply following market trends” in their lending.

Questioning the ability of the IFC and other similar bodies to measure their development impact or enforce responsible finance guidelines, the report concludes that they “focus on projects where they can leverage large returns on investment and reduce their development impact to a secondary motivation.” It concludes that the IFC, and other similar financiers, “need to better demonstrate that they engage exclusively in pro-poor and equitable investments, where development impact is held above financial return.”

A key component of the Eurodad analysis is that an increasing proportion of lending to the private sector, now hitting 50 per cent of many of the portfolios, is going to financial institutions rather than projects. This topic is explored in an April briefing by NGO Oxfam International, which reviews the issues with so-called financial intermediaries (FIs, see Update 81, 79, 76, 73). The briefing highlights the reduced transparency that comes with FI investments, the conflicting priorities of development banks and profit-oriented FIs, inadequate safeguards and the inability to properly track development outcomes. It concludes that the approach of the IFC to intermediaries needs to be turned on its head: “The selection of FIs should be prioritised towards institutions that have substantial local ownership and are equipped to make investments that are in line with the [development finance institutions] development objectives and approach.”

Even developing country governments, which have generally been supportive of the IFC, have become concerned with the proportion of FI investments. In his statement to the World Bank spring meetings in April, Zimbabwean finance minister Tendai Biti said: “Moreover, noting the high concentration of its financial services portfolio currently, we call upon the IFC to work on diversifying its services.”

IFC development goals debate

Until recently the IFC had not set out a clear rationale for how its increased support for FIs would lead to positive development outcomes except for a belief in economic growth having positive development implications. In an end June supplement to its annual strategic “roadmap”, the IFC clarified: “to analyze more systematically the association between different types of IFC interventions and poverty reduction, Investment Departments and Advisory Business Lines are in the process of conducting literature reviews that will help IFC more clearly map how specific operations impact the poor.” The reviews are to be finalised some time in 2012.

Partly in response to the criticisms from civil society (see Update 73, 71, 58), a process was started in late 2009 to develop a set of IFC development goals (IDGs). The IDGs, which also aim to answer criticisms in a 2011 report of the Independent Evaluation Group, the Bank’s arms length evaluation body, on the IFC’s poverty focus (see Update 76), “are targets for reach, access, or other tangible development outcomes that projects signed or committed by IFC are expected to deliver during their lifetime.” Though officially still in “testing phase”, two of the targets – on health and education (IDG2) and financial services (IDG3) – are going to be formally implemented in the new IFC fiscal year starting in July, including being incorporated into the objectives setting and performance evaluation systems for IFC staff. Targets in another four areas – agribusiness; infrastructure; micro, small and medium enterprises; and climate change – are to continue being tested this year and are scheduled to be formally rolled out in July 2013.

IDG2 sets a target of “improv[ing] health and education services for” 6.4 million people over fiscal years 2013 – 2015, but says nothing about what kind of people or where in the world they should be. IDG3 specifies that the IFC should aim to “(a) increase access to financial services for micro/individual clients”, with a target of 45.3 million clients, and “(b) increase access to financial services for SME [small and medium enterprise] clients”. The IFC defines an SME as a formal business with between 10 and 300 employees and annual sales from $10,000 to $15 million.

The methodology for measuring progress against the indicators had not been fully agreed by the end of June, nor was it clear how much the goals would impact on staff incentives, but the IFC promised to publish the papers on measurement methodology when they were finally agreed. However, the wording of the targets does not specify who should be the beneficiaries. This suggests that, for example, the IFC’s 2011 €40 million ($50 million) loan to Med Life, a private hospital in Romania that serves corporate clients and individuals, could have helped staff meet IDG2 in the testing phase for that year. Likewise, the IFC’s summer 2010 $100 million equity investment in Moscow-based Otkritie Bank, which serves “primarily SMEs, mid-sized corporate and retails clients” would have allowed IFC staff to boost client numbers towards meeting the provisional IDG3 for that year.

The IFC is “also looking at ways to strengthen its Development Outcome Tracking System (DOTS) to better capture emerging poverty links through relevant poverty-related indicators wherever this is feasible and practical. As not all poverty effects can be captured in ongoing monitoring, IFC’s new evaluation strategy supplements the monitoring system by helping to ensure that poverty reduction effects are more systematically assessed within self-evaluations.”

That the current indicators lack content on poverty or inequality has led to criticism. “The IFC really needs to try harder”, argued Jesse Griffiths, director of European NGO network Eurodad. “Efforts to focus IFC lending on actual development outcomes are long overdue, but these initial goals raise more questions than they answer. They target vague improvements to intermediate outputs without clarifying what these mean or how this will help the poorest.”

Doing Business slammed

The IFC’s flagship publication, the Doing Business report, has also faced renewed opposition (see Update 78, 73, 67, 66) , but this time not just from civil society organisations. The IFC is “organising a research conference on the impact of Doing Business” that the IFC will hold in December “to celebrate” the report’s tenth anniversary. The report ranks countries according to how easy the Bank judges it is for companies to operate in them.

Inside sources at the executive board indicated to the Bretton Woods Project that there is an effort to force the IFC to abandon the rankings being led by China. In the most recent version of Doing Business, released in November 2011 (see Update 78), China’s ranking dropped four places to 91, even though it is the world’s fastest growing economy. China joins France, a long-standing opponent of the ranking methodology due to the perception that the French civil law system is discriminated against, and Brazil (see Update 73) among others in the camp trying to get the rankings scrapped.

A late June briefing endorsed by 15 international civil society groups, including the International Trade Union Confederation and UK NGO CAFOD, argues that the rankings are harmful because they “skew government incentives away from the needs of the majority of poor”, “discourage governments from doing what is needed to help small firms”, “promote reforms that are harmful”, and “do not consider the balance of policy goals”. It called on the IFC to “stop ranking countries against an inappropriate check-list of reforms”.

Water privatisation still being fought

The IFC faced criticism from US based NGO Corporate Accountability International on the issue of water privatisation. In mid April the group published a report, Shutting the spigot on private water, which says the IFC “serves as the ‘nozzle’ on the flow of capital” to the sector and highlights the “alarming set of perverse incentives for supporting the profits of water corporations, rather than the access outcomes that are the legitimate mandate of a development institution.” The report “enumerates a range of conflicts of interest which arise when the World Bank, as part owner of water corporations, also holds itself out as an impartial advisor and expert, offering research, government advisory services, public relations and marketing of private water.” It makes the case for the Bank to divest from the sector, saying “removing institutional support for privatisation will clear space for public, democratic oversight, realigning the World Bank’s water development objectives with its mission.”