eyond its internal governance battles and external reach into projects in every corner of the globe, the World Bank is also a handy resource for the equally multinational corporations that do business in those same territories.
From its founding in 1956 through FY06, the World Bank’s International Finance Corp. has committed more than US$56 billion of its own funds for private- sector investments in the developing world and mobilized an additional $25 billion in syndications for 3,531 companies in 140 developing countries.
courtesy of Botnia
Its products include loans for its own account (A- loans), equity financing, quasi- equity financing, syndicated loans (B- loans), risk management products, partial credit guarantees and funding for financial intermediaries that in turn lend to small and medium enterprises.
How can your company access these funds? By approaching IFC directly with a project proposal.
“IFC’s role is not to compete with private sector sources of finance,” says Carmen Powell, IFC’s communications officer for global manufacturing services. She says the chief incentives that might motivate a company to come to IFC instead of other sources include “our value added services, international best practices, environmental and social standards, IFC risk mitigation, ability to mobilize finance, technical expertise and local and global knowledge.”
Current projects range from southern Europe to the Maldives, China to Brazil, and feature such niches as medical waste disposal plants, hotels, cement, auto parts, ports and banks. The organization’s focus on the developing world means a large concentration of resources in post- conflict countries and sub- Saharan Africa, but the IFC portfolio includes a significant number of projects in India, South America and China.
Not all are obscure either: the US$1.1- billion Orion pulp mill in Uruguay, to be operated near the town of Fray Bentos and majority owned by Finnish company Botnia, has been enmeshed in controversy because of its position at the border between Uruguay and Argentina, causing Argentina to file a complaint with the International Court of Justice in The Hague. The bleached eucalyptus pulp mill will create 300 direct jobs, but the project is estimated to be creating as many as 8,000 jobs in Uruguay as a whole – 5,000 direct and 3,000 indirect – with some of those coming on the nearby eucalyptus plantations owned by Botnia subsidiary Forestal Oriental. The project will see a $170- million investment by IFC and a guarantee of up to $350 million from its World Bank sister organization the Multilateral Investment Guarantee Agency (MIGA).
The Orion mill represents the largest foreign investment in Uruguay’s history and will help the country “move up the value chain beyond the export of raw materials,” said a November 2006 IFC press release. “The plant will generate value added equivalent to 2 percent of Uruguay’s entire GDP (based on 2005 figures) and slightly more than 8 percent of the country’s exports for each year of full- capacity production,” it said.
In March 2007, IFC approved a $90- million loan to Grupo Bertin, Brazil’s second- largest meat processing company, in order to support the firm’s expansion and modernization across Brazil and to “help it develop a system, the first of its kind in Brazil, to ensure that Bertin’s cattle is sourced from ranchers that use sustainable practices and do not contribute to increased deforestation of the Amazon.”
“No other investment bank is as strict as IFC on economic, environmental, and social assessments,” said Douglas de Oliveira, Grupo Bertin’s CFO. “Grupo Bertin wants to become a standard setter in sustainable development. We are making a long term commitment, in which we hope to engage not just IFC but all stakeholders.”
IFC funding differs from World Bank financial instruments precisely because it’s only available to private- sector projects, whereas other World Bank arms lend directly to governments in the developing countries. How much will it invest? “For new projects the maximum is 25 percent of the total estimated project costs, or, on an exceptional basis, up to 35 percent in small projects,” says the IFC Web site. “For expansion projects, IFC may provide up to 50 percent of the project cost, provided its investments do not exceed 25 percent of the total capitalization of the project company.”
Powell says the Global Manufacturing and Services sector at IFC includes 17 sub- sectors ranging from hotels to forestry. Asked how frequently multinational industrial companies seek out IFC financing for their projects, she says, “In the cement industry, hotels or auto parts we have a larger percentage of multinationals investing in emerging markets, while in forestry or retail it is about 25 percent.”
Dennis Meseroll, director of Tractus Asia, says MIGA offers breach- of- contract insurance that can help companies get just compensation if governments pull out of investment agreements. If a breach occurs, MIGA’s relationships with investment officials in national capitals and the World Bank’s ability to withdraw credit facilities can exert significant pressure.
Asked to get private- sector feedback on the insurance products the World Bank offers, Tractus queried a major global steel company, which said the World Bank road was too slow and bureaucratic. MIGA officials were surprised, because their typical turnaround time of 3- 4 months is not considered overly long in corporate circles.
“I believe the benefits of the contract breach insurance are well worth the time required for approval when key investment incentives are at stake, as the premiums are quite reasonable,” says Meseroll.
Among other projects approved for IFC participation over the past year is a multifaceted capital expenditure program from Chinese chemicals concern Dongyue Group (backed by chief sponsor Malaysia Macro Link Group Co., Ltd.) that includes establishment of an offshore holding company, a greenfield organic silicon project, expanding its existing refrigerant production capacity, and implementing a clean development mechanism project.
The project is located in an industrial park in Huantai County, Zibo, Shandong Province, and will mean the creation of approximately 275 new jobs.
The total project cost of $129 million includes an IFC equity investment of up to $15 million to subscribe to new shares to be issued by Dongyue Holding; a loan of up to $40 million and the purchase of up to 15 percent (approximately 7.5 million) of Dongyue Chemical’s Certified Emission Reductions (CERs), to be generated during the years 2008?2012 by a HFC- 23 decomposition project, which IFC will sell to compliance buyers of CERs with a partial delivery guarantee. In addition, Dongyue Group is seeking to raise an additional $25.0 million from private investors. “Parallel domestic loans and/or IFC B loans will also be raised to finance the project,” says the IFC’s project profile. “Any shortfall in the financing plan will be funded by the company’s internally- generated cash flows.”
Why did the company need to go to the IFC for long- term production expansion financing? “Given the current lending climate in China, such long- term lending by domestic banks is generally not readily available to non- SOE majors for fixed- asset investments,” reports the IFC. But a pending IFC project may aid those conditions: An investment package worth $175 million was due to be considered in June for Bank of Beijing, in the form of “long- term loans and guarantees to support Housing finance, SME, Energy Efficiency and Trade related lending operations, and a potential equity investment in the Bank to support its initial public offering.”
The institution is also lending the equivalent of $50 million over 10 years to Guangzhou Development Industry Holdings, which plans an investment program worth some $440 million in power generation, shipping, fuel oil logistics, natural gas distribution and other industries.
Beverage companies are seeing IFC involvement in developing- world projects as well. An $87- million project approved in November 2006 for up to $7.8 million in IFC equity funding is the establishment of a company to acquire and manage 24 tea plantations encompassing 59,300 acres (24,000 hectares) located in Assam and West Bengal in northeast India currently owned by Tata Tea Limited (a division of the Indian conglomerate) and implement a sustainable employee- owned plantation model, in which the management and employees would have a significant shareholding.
Meanwhile, as part of IFC’s goal to participate more in “frontier” countries, it has approved a $40- million loan to Coca Cola Sabco (CCS), a key South Africa- based bottling partner to Coca Cola Co. that is expanding its reach into Asia. The scope of the project includes support for existing operations in Eastern Africa and their incremental expansion and working capital needs; plant refurbishment, equipment and operations financing in Vietnam; establishment of an operation in Laos; and expansion and upgrade of operations in Cambodia, Nepal and Sri Lanka.
The CCS project also dovetails with another chief aim of IFC: to promote “South- South” investment projects, aka projects in developing countries from companies in developing countries. Of the $5.4 billion IFC committed in FY2005 (a 13- percent increase from the previous year), $484 million was of the South- South variety. The IFC’s operating income from that year was $1.95 billion.
Projected commitments from the IFC’s strategic plan total up to $6.8 billion in FY2007 and up to $8.2 billion in FY2009.
How does the institution’s backing play out in terms of chief beneficiaries? “Most IFC projects generate returns to society that are higher than the returns to the project owners and financiers,” pledges the IFC’s FY’07- 09 Business Plan and Budget document. “The Independent Evaluation Group found that the economic rate of return exceeded the financial rate of return in 66 percent of a large sample of IFC projects. Financial returns were higher than economic returns in only 9 percent of the sampled projects.”
Does IFC guarantee protection from political risk? “No, “says the organization’s leaflet on commercial property development. “However, IFC’s participation in a project mitigates political risks, which benefits all stakeholders in the project.”
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