The fortieth anniversary of the founding of the International Finance Corporation (IFC) was marked in 1996. The IFC, the second-oldest member of the World Bank Group,2 was established to promote development in its member countries by supporting the private sector. Unlike the World Bank, which is involved mostly in multilateral lending to governments, the IFC uses market-based approaches to assist private enterprise without a guarantee of repayment by the member government concerned. Since its inception, the IFC’s membership has grown to 172 countries. In 1995, the IFC welcomed Armenia, Georgia, Moldova, and Tajikistan as new members.3 Since its inception, it has provided more than $16 billion in financing for approximately 1,600 business ventures in 114 developing countries.4 The IFC is now the world’s largest multilateral source of direct investment for private project finance in developing countries.5

The fortieth anniversary of the founding of the International Finance Corporation (IFC) was marked in 1996. The IFC, the second-oldest member of the World Bank Group,2 was established to promote development in its member countries by supporting the private sector. Unlike the World Bank, which is involved mostly in multilateral lending to governments, the IFC uses market-based approaches to assist private enterprise without a guarantee of repayment by the member government concerned. Since its inception, the IFC’s membership has grown to 172 countries. In 1995, the IFC welcomed Armenia, Georgia, Moldova, and Tajikistan as new members.3 Since its inception, it has provided more than $16 billion in financing for approximately 1,600 business ventures in 114 developing countries.4 The IFC is now the world’s largest multilateral source of direct investment for private project finance in developing countries.5

In recent years, the IFC witnessed a global trend toward greater encouragement of private initiative and the development of a viable private sector. The sweeping reforms in Central and Eastern Europe, the Baltic countries, Russia, and the other countries of the former Soviet Union are the most obvious example. In these regions and elsewhere, the IFC supports the transition to market economies by providing legal, financial, and technical advisory services in privatization. The IFC’s funds buttress the crumbling infrastructure in many of these countries. Capital markets of developing countries and the small and medium-sized enterprises of those countries also require nurturing in order to ensure that domestic savings are channeled into long-term investment. As economies develop and mature, however, developmental agencies, their member countries, and members of the public all struggle with the issue of sustainable development and the relationship between finance and the global and local environmental impacts. These changes in the political, economic, and developmental climate have confronted the IFC with special challenges.

IFC’s Role as Investor in the Private Sector

Traditionally, the IFC has been most active in project finance, acting as a project lender, investor, or both in private sector financing in cases where other private sources of funds are not available. Using its own funds, the IFC participates in projects whose prospective earnings are likely, in the IFC’s judgment, to be sufficient to meet debt service and to earn an acceptable return on equity. In other words, project finance lenders look to the expected cash flow from the project only as a source of repayment. Except for certain project completion or financial support obligations on the part of the project sponsor to ensure the project’s commercial operations, there is no recourse against the project sponsors. Furthermore, unlike the World Bank itself and many other multilateral institutions, the IFC is prohibited from accepting government guarantees of its loans or equity investments. This means that the IFC always takes the commercial risk.

Although, as a rule, the enterprises financed by the IFC are wholly or majority privately owned, the IFC may provide funding for a company with minority government ownership, provided that the private sector is participating and the venture is operated on a commercial basis.

IFC’s Role as a Mobilizer of Resources: The “B” Loan Program and the Capital Markets

The IFC, in connection with its project financing activities, also mobilizes resources from the private sector. Under the “B” Loan Program, the IFC lends to projects, in addition to its own funds (the “A” Loan), those funds obtained from commercial banks through the sale of participation in the IFC “B” Loan. The borrower’s contractual obligation is to the IFC as the lender of record. The participating commercial banks provide their own funds and take their own commercial risk. However, participating banks receive the same treatment from the host government and the project sponsors as does the IFC, including immunity from taxation, and any default is a direct default to the IFC. No IFC loan, including portions taken by participants, has ever been included in a country’s general external debt rescheduling. Because of these factors, banking regulators in a number of industrialized countries have introduced exemptions from country-risk provisioning requirements for participation in the IFC’s loans.6 These factors provide the commercial banks with the necessary comfort to enable them to participate in projects with risk profiles that they otherwise are not prepared to accept on their own.

As a mobilizer of funds, the IFC also sponsors and underwrites portfolio funds for investing in local markets, or arranges and underwrites international securities issues by companies from emerging markets. Besides being active in international markets, the IFC also uses innovative products to promote foreign portfolio investment in emerging markets.

In fiscal year 1995, for every dollar that the IFC approved for its own account, it mobilized $5.73 from other investors through the “B” Loan program and through other pooled investment vehicles in the emerging markets.7

Current Developments

Privatization and Advisory Services

The dramatic political and economic changes in Central and Eastern Europe, the Baltic countries, Russia, and the other countries of the former Soviet Union have necessitated equally dramatic changes in the legal and institutional framework of those countries. These changes have increased the demand for the IFC’s investment and technical and financial advisory services in these countries, particularly in the area of privatization. The IFC’s aim in these former command economies is to maximize its impact in accelerating the transition to productive market economies.

The IFC actively promotes privatization as a policy instrument to promote private sector development. It offers extensive experience to government clients in the area of public sector reform and the restructuring of state-owned enterprises. During the past few years, the IFC has advised several member governments seeking to improve the managerial and competitive efficiency of state-owned enterprises through partial or complete privatization. The IFC prepared and implemented the privatization of thousands of small enterprises in Russia, as well as scores of small firms in Ukraine.8 The IFC designed an auction method for privatization, which both countries now use as a model. Many small businesses have now been privatized in Russia using this method.

The IFC also provides transaction-specific advice on legal, technical, and financial issues that arise when state-owned enterprises undergo privatization. The IFC’s assistance frequently covers postprivatization issues as well as advice on rehabilitation, modernization, expansion, and financial restructuring of projects. The IFC also assists buyers from the private sector to purchase state-owned enterprises when they are put up for sale.

One of the IFC’s long-term priorities is to promote and develop domestic capital markets. As such, the IFC is active in providing advisory services to governments on fiscal, legal, and regulatory matters and on the institutional structure required to develop a market-oriented financial sector. For example, the IFC provided advice on the design and development of the general legislative environment for the establishment of a stock exchange in a number of countries.9 Such advisory work often involves providing recommendations on the drafting or revision of a company’s law and on the oversight of enforcement entities and their procedures. In the past few years, requests for assistance have increasingly focused on improving market infrastructure, such as assessing options for trading, clearing, and settlement functions. Recently, the IFC helped Russia open its first independent share registry, developed at the request of the government of Russia in cooperation with the European Bank for Reconstruction and Development and the Bank of New York.10

In addition to advisory services conducted by the IFC’s investment and specialist departments, the IFC also participates in advisory services through the Foreign Investment and Advisory Service (FIAS), a joint World Bank and IFC venture.11 The FIAS advises governments on foreign investment laws, policies, regulations, and procedures. It also organizes the framework and institutions needed to promote and regulate foreign direct investments. In 1995, FIAS completed 26 advisory assignments in 27 countries.12

Infrastructure Projects

Significant changes are under way in the financing of basic infrastructure. While infrastructure projects used to be closely regulated and exclusively financed by the public sector, many governments now look for private capital for infrastructure projects instead of using their own resources. Private capital is in high demand globally for power generation and distribution projects, telecommunications systems, ports, highways, urban sanitation systems, and the like. These key businesses are increasingly subject to less regulation. Deregulation, in turn, attracts foreign direct investment.

In response to demands for private funds by IFC member countries for infrastructure projects, the IFC established the Infrastructure Department in 1992. The Department is subdivided into the Transport and Utilities Division, the Power Division, and the Telecommunications Division. In 1995, for infrastructure projects, the IFC approved financing of over $730 million for its own account and approximately $1,050 million in additional loans from commercial banks under the “B” Loan Program.13 Infrastructure projects accounted for 25 percent of the IFC’s 1995 approvals.14 Infrastructure investments included Vietnam’s first private port, which will help stimulate development in the Thi Vai River region.15 The IFC has also invested in Bangkok’s new elevated rail system in order to ease traffic congestion and pollution.16 In Buenos Aires, in just two years, an additional 800,000 people are getting their first water and sewerage service because of the IFC’s investment in Aguas Argentinas.17

Of the various sectors financed by the Infrastructure Department, however, the power sector experienced the most growth. Power projects frequently involve high capital costs, at times in excess of a billion dollars, and long payback periods. However, private power projects in developing countries may find it difficult to attract foreign direct investments, particularly long-term funds. Frequently, a private power project has only one purchaser for its power, which is likely to be a utility company controlled by the host government. Owing to a subsidized tariff structure, the utility may not be creditworthy. Even in cases where the utility has already been privatized, such companies may lack credit history so that their financial performance in the future is questionable. In addition, few lenders worldwide have experience in financing private power projects because the power sector has not historically been open to private companies in the developing world. Foreign investors are particularly cautious because power projects are not export oriented and thus do not generate hard currency. Revenues are often subject to the rate-setting policies of government agencies. Most export credit agencies are used to the comfort of government guarantees and are just beginning to accept the concept of nonrecourse or limited-recourse project finance. The IFC, therefore, has played an important catalytic role in power projects by attracting other investors.

A popular option today for power projects is based on the BOT model, by which a private company builds, operates, and, after several years, transfers to the government a privately financed power plant. The IFC has financed BOT projects for new power stations in Asia and Latin America and is currently considering a number of such power projects elsewhere, particularly in Eastern Europe and Africa.

Capital Markets

Capital markets development has been a major priority of the IFC’s work. To date, the IFC has invested in over 180 private financial institutions in over 80 countries. In 1995, financial sector projects represented 23 percent of total project financing approved for the IFC’s own account.18

Ability to funnel domestic savings into long-term investment is fundamental to a country’s sustainable development. The IFC’s capital markets operations emphasize mobilizing domestic savings within the capital markets of the developing countries themselves. In 1995, the IFC helped certain Latin American countries to introduce private pension funds to mobilize domestic savings.19 In South Africa, a franchise fund will help finance small and medium-sized businesses.20 It is the first fund in the world designed specifically to help individuals invest in franchises and will enable previously disadvantaged people to acquire their own business. In the West Bank and Gaza, establishment of the Arab Palestine Investment Bank will introduce financial services necessary to support the urgently needed private sector growth in the region.

The IFC has also been at the forefront of developing innovative channels for investor funds where traditional channels have not been available. During 1995, the IFC signed its first syndication of a structured U.S. commercial paper issuance facility, a $150 million issue for a Thai finance company, Finance One.21 Such facilities will enable companies in developing countries to access the U.S. commercial paper market. Similarly, the Natwest/IFC Latin American Index Fund, also developed in 1995, will allow investors to gain exposure to emerging Latin American markets on an indexed basis.22 The IFC also helped establish P.T. Citimas Capital in 1995—the first specialized securitization and credit enhancement institution in Indonesia.23 Citimas is an example of the increasing role that securitization may have in the future of the IFC’s work. Through securitization, the IFC can help companies raise more funds and strengthen its development role.

Small and Medium-Sized Enterprises

One of the less-well-known activities of the IFC is the assistance it provides to small and medium-sized enterprises in small countries and countries in transition, and those enterprises with little access to equity or long-term financing. Over the years, the IFC has invested in important activities to support such enterprises through its Project Development Facilities and Business Advisory Services.

The IFC’s efforts in sub-Saharan Africa, through the African Enterprise Fund, are well known. A review of the IFC’s experience with this operation confirms the critical importance of this work.24 In addition, the Africa Project Development Facility helps entrepreneurs throughout Africa organize, diversify, and expand.25 The African Management Services Company provides management training and management services for enterprises in Africa.26 The South Pacific Project Facility, based in Australia, helps entrepreneurs in the South Pacific island countries identify and prepare small and medium-sized projects.27 Through 1994, these facilities have assisted over 240 projects, raised $300 million in financing, and created or saved more than 23,000 jobs. Many ventures would not have gone ahead without these facilities.

The IFC is also planning to use its project development expertise and experience in direct lending to small and medium-sized enterprises in other regions. New facilities are currently being pursued in Indochina and other regions.


It is only in the last decade of the IFC’s history that the environment became one of the criteria by which a project is appraised and evaluated. Apart from the obvious benefits and appeal of “green” projects, it makes financial sense to look at environmental issues—the long-term profitability of an investment is closely linked to its environmental quality, which in turn entails properly managing raw materials, minimizing waste and pollution, avoiding contamination, increasing worker productivity through health and safety measures, and maintaining a good relationship with local communities. All IFC projects must comply with the relevant World Bank environmental, health, and occupational safety policies and guidelines.

The IFC screens all proposed investments to identify and manage environmental risks along with other credit risks. Projects are categorized at an early stage according to the project’s potential impact on the environment.28 Category A projects are those projects that could bring about significant environmental impacts; they may involve special concerns, such as resettlement of indigenous people. Category B projects are projects with specific environmental impacts that must be mitigated through predetermined performance standards and design criteria. Category C projects are those that do not result in any environmental impact at all. In addition, certain projects in the financial sector are designated as Category FI; these are typically projects that finance subprojects that may result in environmental impact. Power projects usually rank somewhere between Categories A and B.

The IFC requires a full environmental assessment study for Category A projects. An environmental analysis will be required for Category B projects. Finally, in the case of the FI projects, the IFC must be satisfied that the financial intermediary is capable of conducting environmental review of subprojects and is committed to doing so.

The IFC monitors the environmental performance of all projects during their implementation and, in some cases, throughout their operation. The environment division in the IFC’s Technical and Environmental Department serves as a focal point for these activities.29

In recent years, many IFC member countries have begun to express interest in environmental issues. The IFC also has been receiving many inquiries from various nongovernmental organizations and members of the public on its policy-and project-specific information on the environment.

As a developmental institution dedicated to the private sector, the IFC’s policy generally is not to disclose to the public any business or confidential information relating to projects. The rules of discretion and confidentiality, as applied by investment, merchant, and commercial banks, must also apply to the IFC in order for the IFC to work effectively and with credibility. Accordingly, until recently, the IFC did not disclose to the public any information relating to a project prior to its approval by the Board of Directors. However, in response to environmental concerns expressed by IFC member countries, members of the public, and nongovernmental organizations who legitimately wished to express their views for consideration by the IFC before a project was approved by the Board of Directors, the IFC decided to modify its policy on disclosure of information.

In July 1994, the IFC adopted a new Policy on Disclosure of Information. Under this policy, summary information on a project must be filed with the Public Information Center at least 30 days prior to the day on which the Board of Directors is to consider the project. In addition, for all Category A projects, the environmental assessment and executive summary are released to the Public Information Center at least 60 days in advance of such date. The IFC must receive the approval of the project sponsors to release such documents publicly.

The latest amendments to the Policy on Disclosure of Information were approved by the Board of Directors in December 1995. These amendments emphasize early release of relevant information and renewed focus on adequate public consultation during appraisal of projects, so as to help improve project design before a decision is made. The public consultation must be carried out in a culturally and socially acceptable manner and in accordance with the applicable laws and regulations. Consultation techniques include official review committees, social acceptance surveys, and, in areas where local communities are primarily illiterate, meetings with village elders. The environmental assessments for Category A projects are now available in the country where the project is to be located and also in the World Bank InfoShop. The full text of all information available at the World Bank InfoShop can also be accessed on the Internet.30

Apart from the IFC’s efforts to work toward a greater degree of openness and transparency, the IFC continues to promote innovative environmental projects, such as ecotourism and waste water treatment projects. A recent ecotourism project illustrates the complexity of environmental issues arising from building a resort.

In 1995, the IFC supported a project to build a small ecotourism lodge on the beach of Panga ya Watoro, north of a national forest on a peninsula of Pemba Island in Tanzania.31 The project is supported by a loan from the African Enterprise Fund. The lodge is expected to have a positive impact on the fishery resources of the peninsula and Pemba Island in general. However, because the lodge is near a forest, turtle nesting sites, and coral reefs, and, due to the environmental sensitivity of the area, the IFC categorized the project as having potential for diverse and significant environmental effects (Category A).32 To protect the habitat, the IFC is requiring that the project sponsors shield turtle nesting sites from construction and other activities; use special lighting to avoid disorienting nesting turtles and their hatchlings; and restore a coastal evergreen thicket that is used as a corridor for local animals, including an endangered species of bat.33 The sponsors, who wish to make the lodge a world-class center for diving and marine research, plan to establish an environmental research station.34

With financial support from the IFC’s Part I country members (the developed countries), the IFC continues to tackle global environmental issues on a local scale. For example, the IFC approved during the 1995 fiscal year an investment in a project in Egypt, where a company will convert its manufacturing process for compressors in order to use alternatives to chlorofluorocarbons, which are ozone-depleting substances.35 A grant for the Poland Efficient Lighting Project will replace 1.15 million incandescent lights with energy-efficient compact fluorescent lamps over a two-year period.36

There are two sources of multilateral funding for these projects: the Global Environmental Facility (GEF) and the Multilateral Fund of the Montreal Protocol.37 The GEF was established to enable eligible developing countries to meet the agreed incremental costs of compliance with the various environmental conventions.38 The GEF is active in the areas of biological diversity, climate change, international waters, and ozone layer depletion. Both fund consultants who work with IFC staff to identify private sector projects eligible for their grants.39


In the last 40 years, the IFC has gained extensive hands-on knowledge of how to do business in developing countries. By assisting the flow of international financial resources and private sector entrepreneurship and know-how, the IFC has found solutions to the unique problems that affect private businesses in emerging economies. The IFC’s activities reflect the belief that market forces must play a greater role in the economies of developing countries if sustained growth is to be achieved. In recent years, many emerging economies have come to share the IFC’s belief and rewarded the IFC with many opportunities for assistance and cooperation. However, the IFC must look to the future and continue to ask how it can fulfill its role and meet new challenges in the rapidly changing and demanding world of economic development.