The IFC’s massive lending increase

Corporate welfare or development finance?

16 February 2009

The financial crisis has shrunk credit availability to the private sector, including in developing countries. The International Finance Corporation (IFC) plans to step into the gap, but there are questions about the likely development impact and implementation of environmental and social safeguards.

The IFC, the World Bank’s arm for lending directly to the private sector, plans to provide more than $15 billion annually over the next two years, up from annual commitments of about $5 billion just 5 years ago. In mid-December the IFC board approved four measures in response to the financial crisis: a doubling of the global trade finance programme to $3 billion; an increase in IFC advisory services (see Update 62); a new infrastructure crisis facility; and a new fund for bank recapitalisation.

IFC crisis response

The IFC is committing $300 million of its own capital to the infrastructure crisis facility, which it hopes will disburse between $1.5 billion and $10 billion in total. Since board approval, IFC staff have been intensively fundraising from governments and donor agencies. Some of the money it raises may come out of those donor agencies’ increasingly squeezed aid budgets, meaning direct offsets in aid for other priorities such as social protection, health and education.

This is simply global corporate welfare in the name of development

The facility will fund both private and public-private partnership (PPP) projects. There is no indication whether the facility will invest in controversial sectors such as water and electricity privatisation or fund more traditional projects like ports, fossil fuel pipelines, and other transportation schemes. While the IFC “will seek to ensure that the projects it finances are operated in a manner consistent with the IFC’s performance standards on social and environmental sustainability”, it is expecting the projects financed by this facility to be originated by international financial institutions (IFIs), either the other institutions or the IFC itself. It will rely on the standards of the originating institution, even if they are laxer standards than its own. Most importantly it will conduct no due diligence of its own on projects not originated by the IFC.

The $3 billion bank recapitalisation fund will get $1 billion from the IFC’s own resources and an additional $2 billion from the Japan Bank for International Cooperation (JBIC). It will “make equity and equity-related investments to recapitalise banks with systemic impact on IFC emerging market client countries.” This is to allow emerging markets without sufficient capital to bail out their banks, like rich countries have. However these IFC bail-outs will have no public scrutiny and thus no chance of requiring measures designed to curb banking excesses such as large executive bonuses.

In the process, the IFC may also be ensuring that its own large investments in the banking sector in emerging markets, which some have blamed for facilitating the crisis (see Update 63), do not go bankrupt. It remains unclear how the fund will deal with cases where the entire banking sector has been taken over by foreign banks, such as in some countries in Eastern Europe. Will the Eastern European subsidiaries of Western European banks be eligible for these bailouts?

Subsidising mines, oil

The IFC’s chief executive Lars Thunell indicated in early December that the agency would increase its equity stakes in mining companies that have been hit by sharply lower commodity prices and the credit crunch, but he indicated that they will only “try to invest in commercially viable projects.” Antonio Tricarico of Italian based NGO Campaign to Reform the World Bank called this outrageous: “This is simply global corporate welfare in the name of development. Once again public money will support bad companies without any consideration of the price for local communities and the environment.”

The IFC was considering a large loan to a combined mining-power-transport project to export aluminium from Guinea in Western Africa. The $5.2 billion Guinea Alumina Project is being proposed by the world’s largest mining company BHP Billiton, and is trying to attract $500 million in loans from the IFC. The IFC board was set to decide on the investment in late January, but all Guinean projects have been put on hold after a military take over of the government in November 2008.

Another massive infrastructure project, the Kafue dam (see Update 61), is looking threatened financially, not to speak of the complaints about its environmental and social impacts. Many of the private sector sponsors are pulling out of the project, a dam which would chiefly provide power to the Zambian copper mining industry, because of the drop in commodities prices. The IFC has so far only funded a feasibility study, but may plump for a bigger investment given the lack of private capital.

The next megaproject in the IFC’s sights is the development of off-shore oil fields in Ghana. The IFC will consider $225 million in investments in February, but a coalition of Ghanaian and American NGOs have asked the board to delay a vote due to concerns over environmental protection, weak accountability and poor transparency of contracts.

In January the IFC invested $5 million in a nickel mining project in Mozambique which was proposed by an Australian mining company. Another $25 million was invested in a British controlled oil and gas exploration company for drilling oil wells in Laos and Thailand. Another $5 million was invested with a Canadian mining company for exploration in Burkina Faso. Though these are small projects by comparison they are also likely to be facing problems with finance in the current global environment.

Where is the IFC going?

The continued focus on mining and infrastructure reinforces questions over the strategic direction of the IFC. The IFC is supposed to catalyse private sector investment by sharing risk and doing demonstration projects. Instead, the financial crisis may be pushing it to be one of several big, publicly backed financiers, that join together to provide cheap finance for private sector projects. The IFC is increasingly cooperating with the European Investment Bank, and private-sector arms of the African Development Bank and the Inter-American Development Bank, but due to lack of transparency about deal structures, it is impossible to know how many of the private sector projects are actually 100 per cent financed by public institutions.

Margarita Flores of Colombian NGO ILSA, was critical of this new trend: “This decade we have seen an increase in direct credits to the private sector from publicly-backed banks like the IFC, such as for the Camisea project in Peru and dams on the river Madeira in Bolivia and Brazil. These banks are not doing development, but merely financing multinational corporate profits.”