The International Finance Corporation (IFC), the World Bank’s private sector arm, is one of five members of the World Bank Group (WBG), alongside the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the Multilateral Investment Guarantee Agency (MIGA), and the International Centre for Settlement of Investment Disputes (ICSID). The IFC is owned by 186 member states – with the seven largest Organisation for Economic Cooperation and Development (OECD) governments currently controlling 51 per cent of the capital shares – and has an internal governance structure that includes a board of governors, a board of executive directors and an executive vice president.
Founded in 1956, the IFC’s focus is on encouraging private sector activity as a means to achieve the World Bank’s stated mission to end extreme poverty and promote economic and social development – on a liveable planet. It is therefore intended to complement the Bank’s lending to states and is exclusively focused on investing in private sector entities and expanding private sector activity and markets. In fiscal year 2023, the IFC committed $43.7 billion to private companies and financial institutions in developing countries. However, many are critical of the IFC’s role in borrowing countries – many of which are trapped in cycles of debt, dependency and continue to suffer from challenges due to their colonial past – given the negative developmental consequences of the inherent self-interest and profit-seeking nature of global multilateral corporations and large businesses often supported by IFC.
In recent years, including under current WBG President Ajay Banga, there have been questions over the increasing emphasis of the private sector in the Bank’s approach to development. This is happening amidst deepening global crises, including worsening inequality and pressure to implement austerity measures that decrease the scope for public finance, with civil society calling for reform of financial institutions and an increase in public funds (see Observer Summer 2023).
While offering dedicated support to the private sector could result in positive development dividends, civil society has been critical of the skewed preferences of IFC’s client selection. The IFC financing model is focused on financial sustainability rather than developmental impact, and therefore often privileges large-scale multinational corporations over vital local and regional businesses, as they can provide higher levels of capital, and therefore lower financial risk to the IFC’s balance sheet. This dynamic creates environmental and social risks, and undermines IFC’s potential development impact, especially as economic gains to large corporations often flow back to the Global North or tax havens rather than boosting revenue in borrowing countries. As part of recent commitments to reform, the World Bank’s ‘Evolution Roadmap’ pledged to expand the Bank’s private-led development model, despite warnings in a 2023 briefing signed by 80 CSOs and individuals that it “assumes incentivising private finance is inherently benign and productive, while failing to acknowledge that the type of projects designed to attract profit-seeking private investors and generate quick returns might not match the public interest and national or local priorities, or support sustainable economic transformation.”
Development the IFC way
A common form of private sector involvement in Bank-supported development is through public-private partnerships (PPPs), a contract between a government and a private sector institution. PPPs are hailed by the Bank as a way of mobilising additional finance for public infrastructure or public services in a context of a supposed scarcity of public resources, and the IFC is a co-investor in many of them. However, PPPs have been proven to contribute to the financialisation of the economy and exacerbation of inequality of access to quality services and infrastructure – many of which should be considered basic human rights, including healthcare, education and water. It has also been shown that PPPs ultimately tend to cost more than public initiatives due to the need to meet private sector profit requirements – a concerning outcome when public money and the delivery of essential social services and infrastructure are at stake (see Observer Autumn 2015). The human cost of PPPs is also high, particularly in cases of healthcare and education, as quality of service is often driven down to cut costs and prioritise profits, and regulations are often relaxed in order to attract investors. Additionally, as private contractors and financiers become involved, levels of transparency and accountability may dissipate, and money becomes more difficult to track.
Also controversial is the IFC’s lending through financial intermediaries. These are third parties – including private equity funds, insurance companies and commercial banks – in which the IFC invests through loans, guarantees and equity. Human rights organisation International Accountability Project found that in 2020 about 60 per cent of the IFC’s investment portfolio was in financial intermediaries. Much criticism surrounds the harmful human rights impacts of this financing, and the difficulty of tracking financing through financial intermediaries, as most of these investments are not required to adhere to the IFC’s Performance Standards on Environmental and Social Sustainability in the same manner as direct project financing. Investment in financial intermediaries also challenges the effectiveness of the World Bank’s independent accountability mechanisms, as communities negatively impacted by projects supported by IFC investments typically remain unaware of the link between the project and World Bank financing as once money leaves the IFC, it is hard to track and identify negative consequences.
Another popular product the IFC offers is blended concessional finance. The IFC subsidises investment in the private sector at lower than market rates by combining donors’ concessional funds such as Official Development Assistance (ODA) with the IFC’s own non-concessional funding to “address market failures and to help mobilise private investment in pioneering projects and challenging environments” (see Inside the Institutions, IFC blended finance.) Increasing volumes of ODA – public money – are being funnelled through blended finance, often being utilised to guarantee returns on, and derisking of, private sector investments, which often come from corporations based in donor countries, maintaining a flow of profits from the Global South to the Global North.
Controversially, the IFC has gone from a contributor to IDA – the Bank’s low-income country lending arm – to a beneficiary of scarce IDA resources. The Private Sector Window (PSW) was established during IDA18 in 2017 with $2.5 billion to “catalyse private sector investment” and has been maintained with similar investment levels since then, with a key stated aim to “help mitigate the uncertainties and risks, real or perceived, to high impact private sector investment”, utilising blended finance and risk mitigation. The success of the PSW in actually mobilising private sector investments has been questioned as has the degree to which IFC investments have been additional rather than merely subsidising private sector investment that would have taken place regardless. Additionally, the PSW offers short-term trade finance – opaque indirect financing providing bonds, stocks and guarantees used by banks and other institutions to guarantee payments or provide short-term capital to governments or businesses – which has recently been found to have furthered harmful investments in fossil fuels by the Bank (see Observer Winter 2023).
The case for a ‘do no harm’ approach
Mounting examples of the harmful human costs of for-profit IFC-backed projects are building a case for an enhanced ‘do no harm’ approach to ensure all IFC investments are aligned with a dedicated human rights policy and international human rights law, responsible exit and remedy frameworks, and transparent, publicly available disclosure of funding through financial intermediaries.
The IFC and MIGA’s independent accountability mechanism, the Compliance Advisor Ombudsman (CAO), has historically been a critical actor in ensuring IFC complies with its own environmental and social standards. However, the independence of the CAO has recently been questioned, amidst alleged retaliation against a whistle-blower when human rights abuses were exposed as part of the Bridge International Academies case, where the IFC reportedly called for a lead investigator to be “neutralised” and findings to be covered up, according to reporting by online media outlet The Intercept (see Observer Winter 2023).
The now infamous case of Bridge International Academies, a for-profit schooling start-up funded by IFC in Kenya, Uganda, Nigeria, Liberia and India, saw the IFC invest $13.5 million between 2013-22, before eventually divesting following complaints received by the CAO. Ultimately, numerous shocking instances of human rights abuses were found. Current World Bank President Ajay Banga finally apologised in March 2024, without offering compensation to the reported victims.
A 2023 Oxfam International report found that the IFC was one of a group of development finance institutions that funded expensive, for-profit private hospitals in developing countries which have denied service to or even detained patients who cannot pay. It also highlighted that the IFC has been involved in questionable flows of taxpayer money into tax havens through its investments in the health sector (see Observer Winter 2023).
In light of damning findings against the IFC, civil society has amplified a 2020 external review’s call for an accountability framework and remedy process when harm in IFC projects is found. In 2023 the IFC and MIGA published a draft Approach to Remedial Action and Responsible Exit Principles in response to the external review, of which civil society organisations were critical, noting that it lacks detail and largely places remedy responsibility on clients. In the wake of the findings, concerns remain that IFC remains unreformed, raising the risk that its investments will continue to cause avoidable harm, and fail to provide remedial action when this does occur.
