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November 2001

Private-lending arm looks set for a tune-up





       
Peter Woicke
The International Finance Corporation, the World Bank's affiliate for private-sector investment, could be ripe for an infusion of new capital, as World Bank president James Wolfensohn recently signalled (Euromoney, September 2001). There's just one catch. Key players among the 186 member governments that are the IFC's current shareholders - the G7 in particular - have been in no mood to contribute new funds.
Peter Woicke, the IFC's executive vice-president, has a few tricks up his sleeve to deal with the problem. Woicke thinks ethical funds could find investing in the IFC quite appealing if the agency were to raise its sights and aim for returns of 10%. "I could well imagine," says Woicke, "that some of the ethical funds would say 'that's a good return.'" The IFC currently tries to earn 8% on equity, but rarely succeeds.
Woicke says the ethical funds would appreciate the social and environmental standards the IFC insists on before investing in specific projects. "And we run less of a risk than private-sector investment banks as a result of our relationships with local governments," he points out. Woicke has yet to explore the possibility with IFC shareholders or with the ethical funds. The approach, however, would need to be tailored to avoid extending IFC's preferred creditor status to private investors.
"IFC could mobilize the same capital simply by setting up an investment pool that it would own jointly with the ethical funds," says Lex Rieffel, a longtime student of multilateral development banks. And the World Bank, of course, could shift equity from its own balance sheet to the IFC, as it did when shareholders initially agreed to set up the IFC. The last time the IFC asked shareholders for new equity was in 1992, when they agreed to boost capital by $1.15 billion. The IFC had a total of $2.4 billion in paid-in capital and $3.7 billion in retained earnings, as of June 30.
But whether or not the IFC needs new equity depends on how it defines its objectives. Adam Lerrick, director of the Gaillot Center for Public Policy at Carnegie Mellon University and former head of product development at Credit Suisse First Boston, spells out alternative approaches. "If you agree that they should continue to lend relatively large amounts to large projects in large developing countries then they will require increasing funds to expand their portfolio," he says. "But if their mandate is to finance pioneer projects in frontier economies, they have more than enough equity."
Lerrick sees a danger in giving people with other agendas more say in the IFC's investments. "One of the great problems at the World Bank is that they have deliberately courted the NGOs over the past several years," he argues. "When you start talking about ethical funds, you're talking about NGOs or people who think like the NGOs. Groups like Friends of the Earth or Save the Children should not be telling developing countries through the World Bank how to run their economies."
Woicke thinks the IFC should be looking for new funds so that it could make more grants, a theme debated much more intensely in the wake of the Meltzer Commission's recommendation that the Bank shift from lending to grants. "If you look at development aid today, how much is being given away?" he asks. "I would argue that if you would give a little bit of that money to the IFC to channel it to commercial entities, you would probably get a little more for your buck."
The private sector, for example, could operate water or electric power projects funded by the International Development Association in situations where poor people could not pay tariffs high enough to make the projects commercially attractive. The IDA, like the World Bank, can lend only to governments. Woicke thinks the IFC could mobilize the private sector to provide better services than are offered by many public-sector water and power companies.
Start-up funding for microfinance is another candidate for IDA support that could be reallocated to the private sector. Woicke points out that quite a bit of money has been given to NGOs to set up microfinance operations in developing countries. "They do a fine job," he says, "but it's not sustainable. But we work with microfinance institutions that are both profitable and sustainable and they directly bind the poor into the economy. To expand, they need up-front grants to send in their expat staff and train the locals for a few years. That's costly." IFC currently takes $35 million out of its net income for grants in this and similar areas.
Others are more cautious. "Capital is too precious in these countries to give away," warns Rieffel. "The worst thing you could do is put them into an entitlements mode." Yet Rieffel and other sceptics concede that there is a place for combining IDA assistance with the IFC's role in promoting the private sector. The Chad-Cameroon oil pipeline is an excellent example.
Privatizing state-owned enterprise may be good for developing countries but the politics won't be palatable unless policymakers find ways of easing transition costs. "People in developing countries can and are willing to pay market prices for things that are valuable to them like clean water and reliable electric power," says Rieffel. "But you can't raise prices in one fell swoop. So it can be sensible for the World Bank to provide a subsidy that consumers could see on their regular bills and to phase out that subsidy over a reasonable time - say, three to five years."
More competition might also improve the IFC's performance. "We are constantly talking to the other multilaterals about memorandums of understanding and how we could work better together," Woicke observes. "Perhaps we should say to hell with all of that. Perhaps that would help the client a little bit more. I think that if we can get a little bit more efficient, a little bit faster with our clients, that 8% to 10% return on equity is not out of the question."
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