World Bank - International Finance Corporation & The Multilateral Investment Guarantee Agency

International Finance Corporation (IFC)

This section draws from the websites of the Bank Information Center and the IFC.

Structure

The IFC is the private sector lending arm of the World Bank Group. Its stated mission is “to promote sustainable private sector investment in developing countries, helping to reduce poverty and improve people's lives.” It wants to do so by providing loans and equity financing, advice, and technical services to the private sector. The IFC also plays a catalytic role, by mobilizing additional capital through loan syndication and by lessening the political risk for investors, enabling their participation in a given project.
The IFC was established in 1956 and is owned by 179 member countries. The United States is the largest single shareholder, with 23,7 percent of votes, followed by Japan (5,9 percent), Germany (5,4 percent), the United Kingdom (5 percent), and France (5 percent). Remaining shares are divided among the other member countries.

Since the World Bank Group’s president also serves as IFC’s president, the head of IFC’s management is the Executive Vice President and CEO, which is recently the Swedish national Lars Thunell. The member countries appoint representatives for the Board of Governors, normally they are the minister of finance or an equivalent. The Board of Governors meets once a year at the Bank’s Annual Meetings. They decide on general policy questions like increase or decrease of authorised capital stock, distribution of net income etc. The day-to-day work is executed by the Board of Directors. Although the IFC is legally separate from the World Bank, its Board of Directors is comprised of the same members as the World Bank’s Board, with slightly different voting shares.

• More information can be found on the website of the World Bank. 

Lending

In the financial year 2007 IFC invested US$ 8,2 billion, the vast majority being loans (68,7%), followed by equity (19,3%) and guarantees (11,9%).

In terms of sectors, the vast majority of the investment went into

• “global financial markets” (41%),
• followed by “global manufacturing and services” (16,7%),
• “oil, gas, mining and chemicals” (12%)
• “infrastructure” (11,4%)
• “agribusiness” (7,6%)
• “global information and communications technologies” (4,9%)
• “private equity and investment funds” (3%)
• “health and education” (2,4%)

Apart from the direct investment IFC mobilised further US$ 3,9 billion through structured finance, loan participations and parallel loans.

Further information can be found in IFC’s annual report for the financial year 2007. 

Policies

This section draws from the report “One step forward, one step back” by the Halifax Initiative from May 2006.

In 2005/2006 the IFC conducted a process to revise its social and environmental policies, moving from the former Safeguards Policies, to a new system and set of policies called the Performance Standards. The IFC explained the need for a new system with the fact that they wanted to remain competitive in its financing for which they needed policies focusing more on outcome and less on process. Another reason, at least in part, were internal critiques by the Compliance Advisor Ombudsman (CAO), who released a report in 2003 on the implementation of its own safeguard policies. The report criticised the IFC for failing to rigorously implement its policies, for supporting companies with negligible commitments to environmental and social responsibility and for failing to invest in projects that reduce poverty and promote sustainable development.

Whilst the latter reason is a laudable one, the outcome of the review process has been criticised by many NGOs working on the IFC. The main reason for concern is that the Performance Standards represent a shift towards a more flexible system that relies heavily on the discretion of clients and individual decision-makers at the IFC. Significant leeway is permitted in their application and non-compliance is tolerated as long as clients continue to improve their performance. The Performance Standards give an increasing role to the client, relying on client-generated information and on self-monitoring by the private sector.

The importance of IFC’s standards is very large as it influences other international financial entities. Many private commercial banks and some export credit agencies have adopted the IFC’s policies through an initiative called the “Equator Principles”, voluntarily applying the IFC’s policies and environmental management system approach to their project finance lending (in project finance the revenues generated are the source of repayment and security for the exposure). 

The Performance Standards are just one element of the IFC’s Social and Environmental Policy Framework, which consists of seven key components:

1. The Policy on Social and Environmental Sustainability, which sets out IFC’s specific role and responsibilities with respect to proposed projects.
2. The Procedure for Social and Environmental Review of Projects, which details the review process, gives guidance for the implementation and includes an exclusion list.
3. The Performance Standards define the requirements for receiving and retaining IFC support. They include:
   Environmental Assessment and Management Systems
   Labour and Working Conditions
   Pollution Prevention and Abatement
   Community Health, Safety and Security
   Land Acquisition and Involuntary Resettlement
   Biodiversity Conservation and Sustainable Natural Resource Management
   Indigenous Peoples
   Cultural Heritage
4. Each Performance Standard is accompanied by a Guidance Note, which provides more detailed information on application and operationalisation of the Standards.
5. Sector-specific standards are contained in IFC’s Environmental Health and Safety Guidelines and the World Bank’s Pollution Prevention and Abatement Handbook. The standards apply to specific projects like coal mines, offshore oil and gas development etc.
6. The Action Plan explains how the client mitigates or compensates for project impacts.
7. The Policy on Disclosure of Information sets out IFC’s disclosure requirements.

The report “One step forward, one step back” by the Halifax Initiative analyses the content of the Sustainable Policy, Performance Standards and Disclosure Policy, looking into each Performance Standard, giving an overview of the requirements in the standard, improvements form the previous policy and shortcomings including a section on what is missing specifically on extractives.

Complaints
With growing public concern about the negative impacts of investments supported by its private sector arms, in 1999 the World Bank Group established an Office of Compliance Advisor/Ombudsman (CAO) for oversight of the IFC and MIGA. Whereas the Inspection Panel only investigates whether the Bank has violated its own policies, the CAO has a broader mandate. In addition to examining the compliance of IFC and MIGA projects with the institutions’ policies and procedures, the CAO also plays a problem solving (ombudsman) role and an advisory role to IFC/MIGA management. The CAO reports directly to the World Bank President. It can only investigate and offer corrective actions for lapses in compliance on the part of the WBG. It has no authority over actions of the Bank Group’s clients, i.e. borrower governments or private companies. This limitation means that the mechanism may not fully address the needs of some complainants, since the local implementing agency, be it a government or private sector company, should also be held accountable for harms to people and the environment.

The CAO has its own website, explaining its role and explaining how to file a complaint.

The Multilateral Investment Guarantee Agency (MIGA)

MIGA is the political risk insurance arm of the World Bank Group. It was established in 1988 to help developing countries attract and retain private investment and has 172 member states. MIGA gives private enterprises investing in developing countries non-commercial risk insurance and provides developing country members with technical assistance regarding investment promotion. MIGA guarantees protected investors against loss resulting from expropriation, breach of contract, war and civil disturbance including insurrection, coups d'état, revolution, sabotage and terrorism. In addition to offering insurance to private companies, MIGA mobilizes additional guarantees for investors and assists host governments with legal services and strategic advice regarding investment.

MIGA’s guarantee portfolio is mainly made up by:

• Infrastructure 44%
• Financial Markets 29%
• Manufacturing and Services 15%
• Extractives Industries 12%

For its operations MIGA is guided by Environmental and Social Safeguards, which mainly rely on Performance Standards. These address:

• social and environmental assessment and management
• labor and working conditions
• pollution prevention and abatement
• community, health, safety and security
• land acquisition and involuntary resettlement
• biodiversity conservation and sustainable natural resources management
• indigenous peoples
• cultural heritage