Background
Last year the IFC commissioned a review of its objectives and the context of its operations. This welcome move followed pressure from NGOs and some Executive Directors who argued that the Corporation’s strategy was unclear and unsatisfactory, emphasising deal-making in response to the private sector at the expense of any clear focus on poverty alleviation or environmental protection.
The Corporation commissioned New York-based consultants Oliver, Wyman and Company to interview existing clients and a few other stakeholders and to advise on a new strategy. The OWC report has been processed by IFC management into a document IFC: Beyond 2000, dated May 12, 1998, which will be considered by the IFC board this autumn or winter. Neither document are yet available to the public.
Beyond 2000: Main Shortcomings and Limitations
The recommendations of the Beyond 2000 report are very limited and do not promise a fresh start for the Corporation. Rather than flesh out a clear view of what development contribution the IFC is supposed to provide, and how it should select projects which will maximise social and environmental gains, the Report emphasises ways to expand IFC operations as currently conceived, using narrow volume-based performance indicators to guage impact. Beyond 2000 is reminiscent of pre-Wapenhans Report World Bank documents, assuming that the maximising the volume of IFC activities equates with maximising development impact, with no need to examine results on the ground. The document’s logic and conclusions contrast markedly with James Wolfensohn’s public speeches and Strategic Compact reform initiative, as with the UK White Paper and the international development targets.
Beyond 2000 obscures the most important dilemmas facing the Corporation such as:
- the subjectivity of assessing what projects private companies are prepared to pursue without IFC backing;
- the pressure for IFC staff to raise transaction size and take stakes in projects which will generate income at low risk, and;
- the extent to which the IFC can better use its leverage to raise social and environmental standards of companies it backs.
The document borrows freely from the language and strategies of commercial banks, and fails clearly to spell out the IFC‘s advantages compared to such banks: IFC can take a longer-term view than private companies as it cannot be taken over and, as part of the World Bank Group, can get a very clear picture of risks in discussion with World Bank staff and government ministers, and assume that the World Bank’s ongoing creditor and advisor relations with Southern governments will make them think twice about reneging on contracts involving the Corporation.
Beyond 2000 is a sadly missed opportunity because it:
- rarely mentions poverty reduction and environmental protection and accords them low priority in the few places where it does. The IFC‘s proposed mission statement (Exhibit 1.3), for example, does not mention either;
- accords incredibly strong emphasis to expanding the IFC‘s portfolio as an end in itself (see eg paras. 3.2, 5.3), with minimal or no exploration of how to select projects which will have measurable positive results on the ground, or of staff incentives or objective evaluation mechanisms to raise the quality and impact of IFC‘s work;
- shows little distinction between results of different types of private sector investment and promises to measure impact through vague sectoral and macroeconomic demonstration effects rather than analysis of direct results such as quality and quantity of jobs created, linkages to other parts of the local economy, inclusion of poorer people as employees or customers, technology or more environmental management techniques transferred etc;
- implicitly assumes that the private sector will be willing and able to provide goods and services to even the poorest people and regions;
- indiscriminately adopts commercial bank management goals (eg aggressive positioning, portfolio growth, and risk-adjusted rate of return on capital calculations) with only brief acknowledgements of the implications of IFC‘s multiple objectives as a publicly-owned institution;
- shies away from any comparisons with the growing private sector ethical and environmental investment sector, and ignores the IFC‘s potential to use its special position to press companies to adopt high social and environment standards;
- fails to analyse the risks for countries which open up too rapidly to external private finance and the difficulties in persuading companies to invest in infrastructure aimed specifically at poorer people;
- fails to provide clear goals and operating principles to guide or inspire IFC staff (recognised by the Report to be disgruntled);
- mentions public expectations in passing but fails to set out a clearly comprehensible set of objectives or a strategy for communicating objective analysis of IFC impacts;
- asks the Board to endorse the proposed general strategy conclusions while key papers such as on the IFC in Africa, on Corporate and Country Scorecards, and on equity issues in private sector health and education have yet to be produced.
Recommendations
The UK government should reject the document as currently presented, and call for the original Oliver, Wyman and Company report and the papers on the Africa strategy and on Scorecards to be circulated to Board members and some external stakeholders so that outsiders can understand what data and opinions are being used, and so that a wider discussion can take place before the IFC adopts a long-term strategy.
Rather than endorse the IFC‘s proposed faltering steps into the next millenium, the Board should press the Corporation to do further work and then present further-reaching papers.
In these the IFC should:
- move beyond the two narrow scenarios outlined and more explicitly outline the detailed trade-offs and options which the Board should consider;
- establish more concrete goals than portfolio growth, rate of return on equity and rolling back the risk frontier so that the Board and external analysts can easily assess the IFC‘s contribution to poverty reduction;
- follow the Bank, UK government and other development agencies’ lead in adopting the international development targets and specifying how it will contribute to them;
- detail development impact performance targets as central to this overall strategy review not as an add-on, and establish internal mechanisms to reward staff for supporting ventures which are more financially risky but likely to contribute more directly to poverty reduction;
- examine positive and negative criteria to guide investment selection, and a list of project types that the IFC would not back (similar to OPIC which has ruled out backing projects such as large dams), and of private sector ethical investors;
- consider appointing a committee of external advisors to supervise project selection and IFC standard-setting, and/or sectoral conferences of IFC specialists with academics, NGOs, donors and businesspeople to produce best practice guidelines for IFC involvement in those sectors;
- be more frank about the limits to private sector interest (ie projects in very poor areas and countries, or following collapse in market confidence as in Asia), and the strong terms that many companies may demand (ie hidden or overt subsidies/guarantees, cherry-picked assets, etc, cf. the Channel Tunnel rail link negotiations to service the cash-rich South-Eastern English market);
- outline ways other than capital markets development to support domestic private companies;
- examine the potential clashes with the World Bank Group’s other private sector instruments (ie IDA, IBRD and MIGA guarantees and other private sector support all growing in volume), and explain how harmful turf-wars between these often uncoordinated agencies can be minimised;
- examine the skills mix of staff necessary to change the IFC and take it forward.
Bretton Woods Project
25 June 1998
