Roger S. Leeds
Both the working environment and the operations of the International Finance Corporation (IFC) have changed significantly since April 1955, when the Executive Directors of the World Bank approved the proposed Articles of Agreement for the new affiliate. The mandate of the new institution was clear: to stimulate the growth of productive private enterprise in its member countries without competing directly with private sources of capital. The Corporation was expected to differentiate itself from private merchant and commercial banks by financing projects that would make a demonstrable contribution to economic development, as well as being profitable. At that time, no such institution existed to serve as a catalyst for the growth of private enterprise in developing countries. Although the fundamental objective has remained the same, a number of changes in IFC’s operating environment have influenced how its staff go about the challenging process of promoting productive private investments in developing countries.
Some of the changes have been triggered by the growth and diversification of the Corporation’s membership, which has quadrupled during nearly three decades of operations, from 31 countries to 126. With most of the newer members classified as low-income countries, the Corporation has moved to broaden its developmental role by investing in new sectors (e.g., energy and agribusiness) and new regions (e.g., Africa and the Caribbean). This growth and changing composition of the Corporation’s program have required new approaches to identification and promotion of projects in the private sector.
Other adjustments have been precipitated by changes in the international investment climate, which today stands in stark contrast to the environment envisaged by the architects of the Corporation. During the Corporation’s first decade of existence, private banks demonstrated only a passing interest in providing medium-and long-term credit to developing countries. But by the late 1960s a surge in private lending to these countries began, and the composition of foreign capital flows changed significantly as private banks became a primary source of funds for investment in many developing nations. Although this borrowing contributed to accelerated growth in a number of IFC’s member countries, excessive indebtedness eventually led to severe economic problems in these countries. Recently many of these nations have also been suffering from painful recession and serious balance of payments problems. Weak demand, high interest rates, and shifts in relative prices have severely undermined the climate for private investment in IFC’s member countries.
The rationale for stimulating private initiative has become particularly convincing recently. With public sector deficits burgeoning, it is incumbent on many developing countries to shift greater responsibility for production to the private sector, where the drain on public financial resources is less. Private enterprises and entrepreneurs, less dependent on the protection often associated with state-owned enterprises, are more compelled to operate efficiently in competitive markets. One of the key issues for IFC is to ensure that these private initiatives make economic, as well as financial, sense; there must be a net benefit to the country as well as to the enterprise’s shareholders. When this occurs, the private sector is serving as an effective agent for economic development.
Even though it is a development institution, IFC faces many of the same challenges that most businesses face: markets are always changing; the investment climate is constantly in a state of flux; and competitive forces are rarely static. Part of the Corporation’s responsibilities is to anticipate the key directions of change and to respond effectively.
Within this dynamic international economic environment, IFC staff are expected to identify and develop projects that are likely to satisfy IFC’s criteria for investment (see box). In fiscal year 1984, the Corporation financed 62 projects in 37 countries. Most of these projects resulted from visits by staff to individual countries, or enquiries from a project sponsor who was aware of IFC’s capabilities and resources. However, because the investment climate in many of IFC’s member countries has become more difficult, it has been necessary to supplement these conventional methods of project identification with more innovative alternatives.
One approach that is proving to be successful involves devoting increased attention to project promotion in a particular sector or industry. In IFC vernacular, project promotion refers to the identification, planning, and preliminary appraisal of new direct investment opportunities that would meet the Corporation’s investment criteria. This definition suggests that project promotion is an exercise in discovery—seeking out new opportunities for private sector investment in Third World countries. The process, analogous in a private corporation to developing new business opportunities, places a premium on entrepreneurial creativity—a relatively free-thinking process of identifying and developing new types of projects for the Corporation. By definition, the process is not always neat; it is inherently risky; and inevitably it involves false starts and failures. But this creative process is essential in order to keep abreast of changing conditions in the international marketplace.
Promotion is considerably more time-consuming and costly than IFC’s mainstream activities, which are more transaction-oriented. In normal project appraisal work, the premium is placed on moving a prospective project expeditiously through the pipeline—individual projects are identified, appraised, prepared for Board approval, and then funds are disbursed. Normally, staff devote relatively small amounts of time developing a project for appraisal until there is a full feasibility study that can be reviewed in Washington. Project promotion, on the other hand, is a less systematic and a more deliberative process that can rarely be accomplished quickly. It deals with a particular sector or industry that offers new investment opportunities that could be replicated in more than one country. Considerably more time is devoted to developing the project even before the feasibility study is done. The end result of this relatively prolonged activity ultimately must justify the high cost to the Corporation in terms of time and manpower.
Project promotion of specific industries or sectors in IFC is designed to supplement the more traditional promotion work done in individual countries by the regional investment departments of the Corporation. There are a number of recent examples of this alternative approach to project promotion that demonstrate the potential benefits to IFC and its member countries. From relatively small commercial shrimp farming ventures to enormous oil and gas exploration programs, the similarities in the sector-specific approach to project promotion can be highlighted.
The IFC at a glance
The IFC was set up in 1956 to supplement the activities of the World Bank by providing financing and investment expertise to the private sector in developing countries, without competing with private sector capital sources. It seeks to do this by bringing together entrepreneurs with both foreign and domestic investment capital in ventures that are not only productive but also support economic development in individual countries. The IFC operates with its own staff and capital. In 1984 the Board of Governors approved a capital increase that raised the IFC’s current authorized capital from $650 million to $1,300 million. In addition to using its own capital, the IFC raises funds for its projects from international capital markets by syndicating loans and by underwritings and stand-by financing. Both its project and technical assistance work are instrumental in generating additional private capital flows to developing countries. Such flows have been estimated to be about five times IFC’s investments. By the end of fiscal year 1984 the IFC had approved a total of 773 projects, with the Corporation’s investments totaling about $6 billion. The total cost of those projects was almost $27 billion. About $2.5 billion worth of syndications accompanied these projects. During fiscal year 1984 IFC financed 62 projects in 37 countries. More than 80 technical assistance programs in over 30 member countries were also undertaken by the Corporation during this fiscal year.
In September 1984, Sir William Ryrie of the United Kingdom took over from Hans Wuttke of Germany, as the Executive Vice President of IFC.
IFC investments approved, by sector, fiscal year 1984
Source: IFC, Annual Report 1984
Shrimp farming: an illustration
It may be useful to examine a case of how IFC recently designed and implemented a promotion strategy in a specific industry in order to illustrate how the process contributes to IFC’s dual objectives of profitability and development. Shrimp farming was singled out for a major IFC promotion initiative after a staff analysis determined that this particular industry appeared to satisfy many of the criteria that are important for success. The first level of inquiry, an economic and financial analysis of some existing commercial shrimp farming ventures, concluded that well-designed projects in this industry appear to aid general economic development and are also likely to have high financial returns.
The industry also proved to be attractive for promotion because it was relatively new. This provided an opportunity for the IFC to play a significant catalytic role in the early stages of the industry’s growth and development by mobilizing financial and technical resources from other participants that otherwise would have been reluctan to participate. This role is particularly necessary in a relatively new industry, when the perceived risks are especially high.
Another important criterion for successful promotion is that the industry selected for a special promotion initiative should be well-suited to the economies of a number of developing countries, not just one or two. In the case of shrimp farming it was determined that numerous countries in different regions appeared to be endowed with the most important factors of production necessary to ensure economic efficiency in the industry (e.g., appropriate climate, coastal land availability, and water quality).
Analysis of the international market for the project output also is crucial. Sectors in which growth already is constrained by supply shortages are obvious candidates for project promotion. In the case of shrimp, the export market is well established and growing. The market potential for shrimp farmers in particular is further enhanced because the total harvest of shrimp caught at sea, which represents more than 90 percent of total global consumption, peaked around 1977 and cannot be expected to expand significantly in the future. Thus, any major increases in global consumption must come from shrimp farms.
Finally, there is the important question of technology. Although relatively new, which suggests a high degree of risk by normal standards, the technology has reached a commercially viable stage. Visits to a number of operating shrimp farms by IFC staff provided convincing evidence that the technology was sufficiently well established and tested to be viable on a scale that would be attractive to IFC. Moreover, it was determined that this emerging technology was not particularly difficult to transfer and could be adapted in many developing countries. In conjunction with its promotion function, the IFC could play a significant role in facilitating the transfer of this new technology.
Implementation of an industry-specific project promotion strategy depends on developing appropriate expertise within IFC (i.e., engineers and investment officers) for the efficient appraisal of projects in the new sector. Once IFC became committed to identifying a series of shrimp farming projects that could be financed, it was necessary for staff to develop a detailed understanding of the financing requirements, the technology costs and risks, and an acquaintance with individuals in the public and private sectors who have an interest or expertise in shrimp farming. This latter group would include prospective joint venture partners, technical consultants, shrimp traders, and market analysts.
The IFC promotion strategy in the shrimp farming industry concentrated on two interrelated sets of objectives. The first was to identify and develop new project opportunities that satisfy the Corporation’s criteria for investment. For example, staff currently are appraising a number of shrimp farming projects that came to IFC’s attention as a result of this special project promotion process. In one low-income Central American country, IFC has been instrumental in mobilizing financial resources for a $7.5 million shrimp farming joint venture with an experienced U.S.-based technical partner and a group of local investors. When completed in 1986, the project will produce about two million pounds of shrimp tails annually, with a projected f.o.b. value of $7.6 million. Not only are IFC’s financial resources essential to ensure the project’s viability but also it is highly unlikely that the local partners would risk their capital in the joint venture without the benefit of IFC’s technical appraisal. It is hoped that the demonstration effect from the proposed project will stimulate other local investors to consider shrimp farming ventures, which could be earning large amounts of foreign exchange for the country by the end of the decade.
The second component of the promotion strategy is less traditional by IFC standards. In a limited number of countries, where there appears to be exceptional potential in the industry being promoted, the IFC may respond to government requests to conduct an assessment of the sector or industry, rather than a particular project. In the Philippines, for example, at the request of the government, IFC agreed to “(a) conduct an assessment of the current level of development of the shrimp farming industry and (b) make specific recommendations regarding how the industry should develop in the future, maximizing the participation of the private sector.” The assignment entailed sending a staff mission to the Philippines, including the consulting services of a senior aquaculturist with a specialty in shrimp culture and a shrimp marketing expert. The team then prepared an extensive analysis of the shrimp farming sector and a strategic plan of action was presented to the Government for implementation. This analysis should contribute to accelerated investment in the Philippine shrimp farming industry. IFC has already received a number of project proposals from Philippine investors that are expected to meet its own criteria for investment.
Many of these same considerations—economic and financial returns, market prospects, project replicability, and technology transfer—also were addressed before proceeding with the largest IFC promotion initiative, in oil and gas exploration. In June 1984, the Board approved a $500 million program designed to combine IFC resources with those from private exploration companies to stimulate new oil and gas exploration initiatives in a number of member countries. Although this industry and shrimp farming are vastly different, the criteria applied by IFC to select these two industries for special promotion initiatives were similar.
How IFC appraises projects
Project appraisals in IFC normally are carried out by a team comprised of an investment officer (“mission” leader); an engineer, who is a technical specialist in the industry being appraised; and an economist. After a prospective project has been identified and the sponsors have been evaluated, the first step in the appraisal process is a detailed desk analysis of the project feasibility study. If the results of this analysis are positive, the appraisal team undertakes a two- to three-week mission to the country, which includes in-depth discussions with the project sponsors and an extended visit to the project site. The objective is to evaluate all aspects of the project, including the capabilities of the sponsors and technical managers to implement the project, the technical viability of the project design, the extent of the market for the project’s product, and the real financial and economic returns. Once the field mission is completed, a detailed appraisal report is prepared and presented to IFC’s senior management for a discussion on whether to finance the project. Once it is approved, the final step in the process is to present the appraisal report along with the financing recommendation to the Board for final approval. The time required to complete the project appraisal cycle can vary considerably depending on the circumstances, but normally the time allotted from project identification to Board appraisal is about six months.
This promotion process for specific sectors is a continual one; and the promotion staff is constantly assessing new industries that may satisfy the established criteria for promotion by IFC. The investment by IFC to develop these new project areas has been substantial. Whether it has been worth the investment of staff resources, depends on the Corporation’s success in identifying, developing, and financing a number of projects in the same sector that are exceptionally attractive in terms of their potential profit and their impact on economic development. Ultimately, these experiments with project promotion must demonstrate that IFC can respond to an ever changing international market for its services and financial resources, and continue to make a significant contribution to “productive private enterprise,” as mandated by the original Charter.