Expanded role for IFC with major capital increase
For the first time in its history, the International Finance Corporation (IFC) is undertaking a major increase of its share capital. In a decision made by its Board of Governors in November 1977, the IFC’s authorized capital stock has been increased by $540 million, from $110 million to $650 million. Of the increase, $480 million has been allocated for subscription by current member countries. More than $165 million has already been subscribed and $33 million paid in. The remaining capital—$60 million—has not yet been offered for subscription. Countries wishing to subscribe normally will have five years to pay the full amount of their subscriptions.
The IFC is the affiliate of the World Bank which has been given the specific task of furthering economic development by encouraging the growth of productive private enterprise in developing countries.
Even though its authorized capital stock has not risen since a small increase of $10 million was authorized in 1963, the IFC’s total resources have expanded from $100 million in 1956 to about $970 million just before the recent capital stock increase was authorized. Approximately $100 million has been added through retained earnings, which are now being accumulated at a rate of about $10 million per year.
In 1965, the IFC’s Articles of Agreement were amended to allow the Corporation to raise capital by borrowing funds from the World Bank. Such borrowing is, however, limited by a restriction prohibiting total debt from exceeding four times the IFC’s net worth (unimpaired subscribed capital and surplus), so long as the Corporation is indebted to the World Bank.
The expansion of the Corporation’s paid-in capital stock significantly increases its capacity to borrow. Should all of the stock offered for subscription be subscribed, the IFC’s resource base would increase to about $3,400 million.
The IFC has a special responsibility to encourage other capital to move in conjunction with its own; this is often described as the Corporation’s “catalytic” role and exemplifies its distinctive approach to development projects. Over its history, the IFC has provided about $1,800 million to over 300 enterprises in developing countries. At the same time, other investors, both public and private, invested about $7,200 million in these same projects. Thus, for every dollar provided by the IFC, another four dollars were provided by other investors.
Bank study assesses completed projects
A review of about 70 completed projects assisted by the World Bank shows that over 90 per cent of the investments had re-estimated economic returns similar to, or substantially better than, estimates made at the time of appraisal.
The findings are contained in a report, the Annual Review of Project Performance Audit Results, published early this year by the Bank. The report was compiled by the independent Operations Evaluation Department. In the Bank, the department is unique; it reports to the Director General, Operations Evaluation, an appointee of the Executive Directors, who represent the institution’s 131 member government shareholders.
The review details the reasons for the relative strengths or weaknesses in the 70 projects, and the lessons to be learned from them. It stresses that its main purpose is to analyze experience in order to understand how things could be done better in the future.
Most of the 70 projects, the report points out, have been implemented successfully and are in operation, more than half with expenditures close to appraisal estimates. Although many projects were changed during implementation, and took longer to complete and cost more than was originally estimated, the overwhelming majority of the investments clearly remain worthwhile. The 70 projects reviewed represent Bank lending of approximately $1.3 billion—around 75 per cent of the loans were authorized in 1969 and later years—supporting investments totaling $3.3 billion.
Only four of the 70 projects reviewed were not completed and the loans and credits for them ($70.5 million) were cancelled. Another ten projects, accounting for about 8 per cent of total investment, yielded estimated returns that were either uncertain or unsatisfactory.
The reasons for these ten uncertain or low return estimates are varied. The one highway project was affected by the failure of the area opened by the road to develop as expected; the one shipping project was affected by the unforeseen depressed state of the ship charter market following the large increase in world oil prices; the one development finance company project was affected by the unexpected political division of the country it was designed to serve.
Of the seven agricultural projects in this group, three were implemented as planned but suffered adverse changes in world market prices; the others reflected inadequate recognition at the time of appraisal of the risk that these complex projects might not develop as planned. The Bank’s practice now requires the explicit discussion of risk for all projects.
The overall experience reinforces some general lessons derived from earlier evaluations: the need for better project preparation, improved forecasting, and project monitoring; more attention to supervision, training, institution building, and projects of weaker borrowers. The experience reinforces those concerns, while recognizing that corrective action on a number of them is being steadily introduced into current Bank practice.
The report has been published in the belief that this experience will be of value to those engaged in similar operations and to those interested in the role and performance of the World Bank.Single copies of the Annual Review of Project Performance Audit Results (February 1978) are available free of charge from the World Bank, Publications Unit, Washington, D.C., 20433, U.S.A.
The increase in the IFC’s authorized capital will not only allow the Corporation to greatly expand its activities but it will also, through these activities, encourage an increasing flow of capital into productive enterprises.
The importance of the action taken by its member countries to increase its stock was not just in increasing the IFC’s capital base. The IFC is different from the IBRD and the IDA in that in addition to making loans to private sector companies in its member countries, it can provide equity capital as well—in other words IFC can invest in the ownership of these companies through buying stock.
Almost all IFC borrowings are from the World Bank, and the Bank’s Articles of Agreement restrict the use of such funds to the IFC’s lending operations. As a matter of policy, the amount of equity investments by the IFC cannot, therefore, exceed the sum of the Corporation’s unrestricted resources—essentially its equity. By 1975, it was obvious that the IFC was quickly running out of such funds and that they would be exhausted by the end of 1978 unless there was an increase in authorized capital stock.
The fact that the IFC can participate in equity financing is not only rather rare among international financial institutions, but it is also an extremely important part of a package of investment services the Corporation offers. Especially in the case of new ventures in developing countries, the more difficult part of putting together a well balanced financial package is not usually getting loan financing but raising an adequate amount of equity capital.
The IFC has made gross equity commitments of about $270 million, and its current disbursed portfolio, net of sales, write-offs, and cancellations, is at about $138 million, with holdings in some 146 countries throughout the world.
Sales from its equity portfolio support an important development objective for the IFC. They help to broaden public ownership and benefits from investments in private sector enterprises and to encourage private savings. As a matter of preference, the Corporation (where it can) sells its shares in the country where the company is located.
(In millions of U.S. dollars)
|Afghanistan (2)||Fruit and vegetable exports, irrigation||40.0|
|Bangladesh (2)||Jute, foodgrain storage||46.0|
|Cameroon (3)||Ricec, rural development (two projects)||36.0|
|Indonesia||Small enterprise development||40.0|
|Jordan||Water supply and sewerage||14.0|
|Pakistan||Irrigation and power||35.0|
|Senegal (2)||Irrigation, technical assistance||26.3|
|Sudan||Port development, livestock marketing||47.0|
|Thailand||Population and nutrition||33.1|
|Upper Volta||Urban development||8.2|
|Yemen, People’s Democratic Republic||Agriculture|
To help encourage this type of financial activity, the IFC has an active capital markets development program which provides both financial and technical assistance to public and private institutions designed to develop the flow of private capital.
Bank project to help Morocco’s urban poor
An $18 million loan was made by the World Bank to Morocco for the Rabat Urban Development Project in February 1978. The project represents the first significant attempt in Morocco to upgrade squatter settlements at a cost that the urban poor can afford.
Three “Douars” or quarters of Rabat are to be upgraded—Doum, Maadid, and Hajja. The following measures are to be undertaken: basic and social infrastructure is to be rehabilitated and extended; commercial structures and homes are to be expanded and improved through self-help; an experimental sites-and-services housing scheme is to be implemented. Some 2,500 new jobs are to be created by means of an employment generation scheme, supplemented by vocational training; and a special training center is to be set up for women, who represent about half of the unemployed in the project area. In addition, community services equipment to improve garbage collection, fire-fighting, and emergency services will be provided, and technical assistance will be made available to strengthen the institutional arrangements and technical capabilities of the executing agencies.
The project is expected to improve the living conditions and productive capacities of about 60,000 people; and by its successful example, it could have a major, long-range impact on urban development policy in Morocco.
|Countrya||Purpose||(In millions of U.S. dollars)|
|Brazil (3)||Electric power, rural development, sewerage||264.0|
|Cameroon (2)||Ricec, roads||31.0|
|Egypt||Development finance companies||40.0|
|India||Development finance companies||25.0|
|Jamaica (2)||Electric power, sugar||38.0|
|Korea (2)||Railways, rural electrification||215.0|
|Philippines (3)||Development finance companies, education technical assistance, irrigation||97.0|
|Romania (2)||Irrigation, industry||125.5|
|Syrian Arab Republic||Rural electrification||40.0|
|Thailand (2)||Rural electrification, highways||135.0|
|Yugoslavia (2)||Highways, railways|
Rural development in Cameroon assisted by IDA
The International Development Association (IDA) approved two credits totaling $21.5 million for rural development projects in Cameroon in March 1978.
The first credit for $8.5 million will support the expanded activities of Zones D’Actions Prioritaires Intégrées (ZAPI), a semiautonomous, government-supported rural development organization in Eastern Cameroon. A special feature of this project is that it will address the needs and problems of women farmers who are principally engaged in raising foodcrops. The productivity of the women farmers will be raised with the help of a cadre of female village extension workers and a foodcrop research program to be set up with assistance from the International Institute for Tropical Agriculture. The need for this cadre arises because most of the field work is done by women and Cameroonian tradition precludes male extension workers from working with women farmers.
The project is expected to benefit about 16,500 low-income farm families, raising their annual incomes by about 47 percent, from an average of $490 to $720, over a five-year period.
The second credit for $13 million is to finance a project to increase the production of foodcrops and coffee in the Western Highlands region.
The project is expected to increase foreign exchange earnings by a net amount of $3 million, partly from increased production and export of coffee and partly from import substitution of maize and rice. The cash incomes of some 200,000 rural inhabitants are expected to increase by about 54 per cent over a four-year period, to a range of $395 to $702 a year for a farm family.
Pushpa Nand Schwartz