The IFC: opportunist expansion?

10 July 2009

The financial crisis which has rocked developed and developing country economies alike has resulted in an expanded role for the International Finance Corporation (IFC), but its methods may leave a bitter taste with civil society.

Since April the IFC has announced several new programmes. These come on top of the flurry of initiatives announced earlier in the year (see Update 64 ) and expanded coverage for the Multilateral Investment Guarantee Agency (MIGA), including a Global Trade Liquidity Programme, an Asset Management Company and $150 million for a Microfinance Enhancement Facility. Increased disbursement is not apparent from the IFC’s spending figures released at the beginning of July, but will likely surge over the next year.

The IFC has benefitted from a rush of credit to support this expansion. In early April it raised $3 billion from a global bond issuance, which was oversubscribed by $1 billion.

The IFC’s trade liquidity programme aims to channel $5 billion through banks to provide trade financing to under-served clients globally. The total will include $1 billion from the IFC with additional contributions from G20 governments. To help reach the $250 billion for trade finance pledged by the G20, the IFC claims that this $5 billion will over three years support $50 billion worth of trade.

The IFC will provide the funds to commercial banks who will pass it on as trade finance to their clients in developing countries. Global banks must provide 60 per cent of the ultimate loan from their own resources. For regional private banks the IFC will fully fund the credits. To date four multinational banks have agreed to participate: Standard Chartered Bank (UK), Citibank (US), Commerzbank (Germany), and Rabobank (Netherlands). Standard Bank (South Africa) is the first regional bank to join. The five banks will be receiving a total of up to $2.2 billion. Given that these banks face high funding costs in capital markets, the deal likely subsidises their activities in the sector, though the exact terms of the contracts are secret.

Public money or private equity?

Adding another string to its bow, at the beginning of May the IFC launched the IFC Asset Management Company to buy shares in emerging market companies. It is the first subsidiary company that the World Bank has ever created, and for the first time it will be seeking to attract and invest third party funds. The company will initially manage the $3 billion IFC recapitalisation fund, designed to inject funds into the banks of emerging markets (see Update 64 ).

It will also manage a $1 billion private equity fund set up in late 2008, to invest in Africa, Latin America and the Caribbean. They hope to attract national pension funds, sovereign funds, and other sovereign investors to co-invest with the IFC’s $200 million contribution.

Aldo Caliari from Center of Concern sees the downside for developing countries, “access to credit has traditionally rigged the playing field against developing country companies. Now, instead of fixing those asymmetries, this device will allow foreign investors to help themselves to any company they might have in their sights, bearing little or no risk, courtesy of IFC-provided public money. It’ll be the ‘coup de grace’ for many banks and corporations, and it could worsen capital concentration trends at a global level.”

The IFC project document about the private equity fund states that investments will be "in accordance with the IFC’s investment principles, including the IFC’s policy on social and environmental sustainability." Despite owning the subsidiary outright however, the IFC’s investment will be considered as channelled through a financial intermediary (see Update 58). In August 2007 the IFC’s Independent Evaluation Group found that financial intermediary investments, while required to comply with IFC standards, were very weak at monitoring impact on the ground. In this instance there has been no reassurance that the fund will conduct assessments of the development impact of projects.

ECA surge?

With the private finance sector reluctant to take on risks, the significance of export credit agencies (ECAs) providing lending and guarantees has been rapidly rising. In tandem with increased activity for ECAs worldwide, MIGA has been expanding its guarantee coverage to cover state-owned companies (such as ECAs), particularly to include situations where financial risk is coupled with political risk. Peter Frankental of Amnesty International UK cautions that "a higher profile and bigger footprint for MIGA needs to be matched with the necessary screening of projects to ensure that they are complying with appropriate social and environmental safeguards."