IFC investments “rarely touch the poor”

12 February 2013

Criticism of the International Finance Corporation’s (IFC, the World Bank’s private sector arm) lack of poverty focus has again caught the spotlight, as the IFC continues to fund projects that stretch the interpretation of development. An audit of its investments in financial institutions reveals a lack of assessment of environmental and social impacts.

An early January article produced by US non-profit news agency ProPublica and published in the US magazine Foreign Policy argued “that the IFC’s portfolio of billions of dollars in loans and investments is not in fact primarily targeted at helping the impoverished.” The investigative article, written by Cheryl Strauss Einhorn of the Columbia Business School, leads with a dissection of an IFC loan to a five-star hotel project in Ghana (see Update 77) before reinforcing the general critiques from civil society groups (see Update 81) and the Bank’s own Independent Evaluation Group (see Update 84, 76).

Einhorn’s research undermines the IFC’s claims to be prioritising development results and working in frontier regions lacking access to capital. Takyiwaa Manuh, an adviser to the Ghanaian government on economic development as a member of the National Development Planning Commission, who was interviewed by Einhorn, “doesn’t think of the IFC’s investments ‘as fighting poverty. Just because some people are employed, it is hard to say that is poverty reduction.'” Francis Kalitsi, a former IFC employee who is now a managing partner at private-equity firm Serengeti Capital in the Ghanaian capital Accra, “has a similar view. ‘To get ahead, you had to book big transactions,’ he recalls of his time at the IFC. ‘The IFC is very profit-focused. The IFC does not address poverty, and its investments rarely touch the poor.'” For R. Yofi Grant, executive director of Databank, one of Ghana’s largest banks, “the IFC’s practice of providing loans at attractive terms to multinational companies ‘crowds out local banks and private-equity firms by taking the juiciest investments and walking away with a healthy return.'”

The IFC does not address poverty, and its investments rarely touch the poor.

The IFC’s response to the article emphasised that Einhorn “failed to fully examine [the IFC’s] impact” and cited the IFC’s reinvestment of profits, contributions to the Bank’s low-income country arm, and the number of jobs created by the IFC’s investments. It also complained that Einhorn failed to always identify herself as a reporter, rather than as an academic researcher, when requesting interviews. However, ProPublica has disputed this.

Corporate welfare?

Other recent IFC projects also seem to have questionable development impact or need for public subsidy. Early 2013 will see construction of a Marriott hotel begin in Kingston, Jamaica, which is being doubly financed by the IFC. A 2007 credit line, including debt and equity of up $28 million, will finance the majority stake in the hotel held by Caribe Holdings, while another 2008 loan of up to $25 million to holding company First Jamaica Investments Limited is providing capital to its subsidiary and the minority shareholder in the hotel project Pan-Jamaican Investment Trust. The revenue of the franchiser and operating entity for the hotel, US based Marriott International, was more than $12 billion in its most recent financial year.

In mid January the IFC proposed to invest €170 million ($232 million) in the German multinational Schwarz Group so it could expand its discount supermarket chain Lidl in Bulgaria, Croatia and Serbia. The investment in Lidl, which reported €45.4 billion in sales in the group’s most recent financial year, is supposed to contribute to development by improving “food supply chain development” and “expanding the access of low and middle income population in secondary and tertiary cities to affordable, diverse selection and high quality food products.”

In December 2012, the IFC approved a €10 million loan to a joint venture of Italian multinational Same Deutz-Fahr and the Chinese conglomerate Changlin Group to build a tractor factory in China. Changlin had almost $500 million in sales in 2010 and in the same year Chinese manufacturers exported more than 166,000 tractors worth over $1 billion. Also in December, the IFC approved a $25 million loan to Colombian non-bank financial institution Credivalores to enable it to expand its payday lending operation, often called ‘legal loan sharking’, to more small and medium sized cities. The IFC justified its support by saying it will “allo[w] the company to continue supporting the inclusion of its clients to the formal financial sector.”

Dotun Oloko, a Nigerian anti-corruption whistleblower, argued “the fallible maxim that profit equals development put forward by the IFC and other so called development agencies fails to recognise or address the reality on ground in the developing world which is that the profit tends to go to the corrupt political elite and big businesses with little or no trickle-down effect to the vast majority of the impoverished citizens. In reality this maxim creates the perverse effect of undermining development by widening the gap between the rich and corrupt political elite and the poor and disenfranchised masses.” A February report from the IFC’s accountability mechanism reinforces that criticism, finfing that the IFC had almost no knowledge of the environmental and social impact of the nearly half its portfolio invested in financial intermediaries (see Update 84).

Excess profits?

A mid December report from three NGOs looked into the development legacy of the IFC-financed Mozal aluminium smelter in Mozambique. The report – published by Justica Ambiental (Friends of the Earth Mozambique), Jubilee Debt Campaign UK, and Tax Justice Network – argued that “half the costs of building Mozal came directly from publicly owned institutions, or were guaranteed by them. In return, they and the private investors have received large returns in profit and interest. But the Mozambique government has been left with very little. For every $1 from the smelter being paid to the Mozambique government, we estimate that $21 has left the country in profit or interest to foreign governments and investors.” The IFC contributed $121 million in quasi-equity for the project, out of a total of $1.1 billion lent by private and numerous public entities. The NGOs called for the public entities to “hand the excessive profit they have made out of Mozal back to the Mozambique people”, which for the IFC they estimate to be $97 million, and to “support a renegotiating of the terms of the smelter to ensure Mozal pays a fair rate of tax”.

The IFC is also being challenged by locals and tourism business operators in the South Indian state of Kerala over its support to the Vizhinjam port expansion project. They filed a case with the IFC’s accountability mechanism, the Compliance Advisor/Ombudsman (CAO), in August 2012 with particular concerns around water scarcity, loss of livelihood, loss of land and inadequate compensation. While the CAO sent an assessment mission at end 2012, the port project, which is backed by the Indian federal and Kerala state governments, is proceeding with the completion of an environmental and social impact assessment.

In the last few months, controversy has also followed on the IFC’s involvement in a number of airport projects. In October 2012, a Nigerian consortium sued the government and the IFC for breach of contract over a 2006 concession for an airport in Abuja. The consortium’s 2006 contract for airport operation and maintenance was allegedly violated when last year the federal government brought in the IFC to advise on a new concession which was subsequently granted to a group of Chinese companies. After seizing power in February 2012, the new government of the Maldives began investigating the IFC’s 2010 tendering of an airport redevelopment in the capital city of Male, eventually cancelling the concession which the IFC had granted to an India-based infrastructure multinational. In early December a court of arbitration in Singapore upheld the decision of the Maldivian government to take back operation of the airport. In Cambodia, a $10 million 2011 loan for airport expansion has been implicated in the October 2012 eviction of hundreds of families from their land next to the airport without adequate compensation. The IFC has recently been granted the contracts to tender the upgrading of airports in Sri Lanka and Nepal.