PROJECT FINANCINGAN INTERNATIONAL FINANCE CORPORATION PERSPECTIVE
| Jurisdiction | United States |
(Feb 1995)
PROJECT FINANCINGAN INTERNATIONAL FINANCE CORPORATION PERSPECTIVE
International Finance Corporation
Washington, D.C.
While I expect that there are a number of you here who have either heard of, or worked with, International Finance Corporation, there may be some who are not familiar with us. Therefore, in order to put IFC's activities in context, I will describe IFC and what we do, including an outline of our business by region and by sector. I will then describe in more detail the way IFC goes about financing a project, and in particular will describe the typical documentation you could expect to find in a transaction involving IFC. As part of that exercise I will point out some of the peculiarities of IFC documentation.
Who is IFC?
IFC is a multinational institution headquartered in Washington, D.C. and has representatives in 32 cities worldwide. IFC is a member of the World Bank Group which consists of four separate institutions: the International Bank for Reconstruction and Development (IBRD) established in 1945 (this is what is commonly referred to as the World Bank); the International Finance Corporation (IFC) established in 1956; the International Development Association (IDA) established in 1960; and the Multilateral Investment Guarantee Agency (MIGA) established in 1988.
The goal of all members of the World Bank Group is to alleviate poverty and raise living standards by promoting sustainable economic development and by channelling resources from the developed nations to developing countries. In addition, each of the four World Bank institutions has a distinct developmental role. IBRD, the main lending arm of the World Bank Group, lends to governments of middle-income developing countries. IDA lends on concessional or "soft" terms to
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governments of the poorest developing countries, and MIGA provides guarantees to foreign investors against non-commercial risk.
People are often puzzled about IFC's relationship with the World Bank. IFC's fundamental role is to promote economic development by encouraging private sector investment activities in developing countries. When the Corporation was established, its shareholders were concerned that, while there was multilateral lending to governments and through governments, there was no direct support for the private sector. IFC's development mandate is, therefore, to use a market-based approach to assist private enterprise while, at the same time, operating as much as possible like a private sector corporation.
In carrying out this mandate, IFC provides debt and equity finance to private sector projects, mobilizes large volumes of additional funding from other sources, and offers a broad range of advisory services and technical assistance to businesses and governments. The Corporation is now the world's largest source of equity and loan financing for private enterprises in emerging economies.
IFC's activities are closely coordinated with the other World Bank Group institutions, though the Corporation is legally and financially independent with its own Articles of Agreement, shareholders, financial structure, management and staff. The President of the World Bank Group is also President of IFC, although IFC's Executive Vice President runs the Corporation's day-to-day operations.
IFC is owned by 161 countries as of October 3, 1994. The shareholders collectively determine the Corporation's policies and activities. The five largest shareholders (U.S. with 22.3 percent, Japan with 7 percent, United Kingdom with 5.8 percent, Germany with 5.3 percent and France with 5.2 percent) control 45.6 percent of IFC's shares. The remaining 54.4 percent of shares are controlled by 156 other countries.
Given IFC's substantial shareholder support, strong capital base, profitable performance, and asset liquidity, the Corporation has been accorded a superior credit standing by the international capital markets. This is reflected in triple-A ratings both from Standard and Poor's and Moody's Investor Services.
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As a multilateral institution, IFC has a staff of 1,204 people who come from 96 countries and have specialized financial management, economic and technical skills. They include: economic experts, financial analysts, legal advisors, and country, industry and environmental specialists, who are skilled in analyzing business opportunities and in finding solutions to investment problems in the developing world.
IFC's status as an independent international organization — which understands and works comfortably with both the private sector and host country governments — makes it an attractive partner for foreign and local investors and gives them an added measures of confidence. IFC has played the role of "honest broker" in helping companies and sponsors negotiate with host governments. In addition, the Corporation's position as a "neutral partner" reassures foreign investors and host countries. Governments trust IFC and companies know that we understand private sector needs. Foreign investors seek IFC's participation because of the Corporation's extensive hands-on knowledge of how to do business in developing countries and excellent relationships with developing country governments. Since it acts as a catalyst and induces other financiers and investors to participate, IFC's presence is considered beneficial to a project — from a political as well as a technical and financial standpoint. Because of IFC's extensive project financing experience, we have a large network of company contacts and a special ability to match sponsors and partners with investors.
What Does IFC do?
IFC offers three broad and complementary services.
1. Our traditional and largest activity is project finance. Using our own funds we provide both loan and equity finance to private sector projects that meet our appraisal criteria, but which cannot get financing from other sources on reasonable terms. We also offer quasi equity and financial risk management products. It is important to point out that, although we lend on market terms, we do not compete with but — in fact — complement private capital.
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As a rule, the enterprises we finance must be majority private sector owned and controlled. Like other private sector investors and commercial lenders, we seek profitable returns, price our finance and services in line with the market, and share full project risks with our partners. Even though we do not take any government guarantees for our financing, our work often requires close cooperation with government agencies in developing countries.
2. Another major activity is that of resource mobilization. IFC raises additional funds from foreign commercial banks through its loan participation program. It helps individual corporations from emerging markets to tap the international capital markets. IFC also raises funds from institutional investors through underwriting arrangements for public offerings or the private placement of shares, debentures, and other corporate securities.
3. Our third and increasingly expanding activity is providing country, industry, financial and technical advisory services to member country governments and to private sector corporations.
IFC's total committed portfolio of $11.5 billion includes $7.9 billion for IFC's account and $3.6 billion held for others. The $7.9 billion held by IFC for its own account is invested in a broad range of sectors, notably, financial services ($1,564 or 19%), infrastructure ($1,026 or 13%), general manufacturing ($765 or 10%), mining and metals ($728 or 9%), chemicals, petrochemicals and fertilizers ($694 or 9%), energy ($601 or 8%), textiles ($563 or 7%), food and agribusiness ($528 or 7%), tourism and other services ($502 or 6%), timber, pulp and paper ($477 or 6%), and cement and construction materials ($445 or 6%).
A regional breakdown of IFC's total committed portfolio of $11.5 billion includes $4.59 billion or 40% in 261 Latin American companies, $3.07 billion or 27% in 196 Asian companies, $1.67 billion or 15% in 121 European companies, $1.15 billion or 10% in 191 African companies, $0.90 billion or 8% in 91 companies in Central Asia, the Middle East and North Africa (CAMENA), and $0.12 billion or 1% in 8 global investments.
The following is a description of these different activities.
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Project Financing. As mentioned earlier, the main service IFC provides is project finance. This is the core of our business. Over the last five years, IFC's project financing activity has increased dramatically, from $2.2 billion in 1990 to $4.3 billion in 1994. In FY1994, IFC approved financing of $2.5 billion for its own account and $1.8 billion in the form of underwriting and syndications. The total financing of $4.3 billion was approved for projects in a broad range of sectors: Infrastructure $1,346 (31%), financial services $688 (16%), chemicals, petrochemicals, and fertilizers $417 (10%), mining and metals $352 (8%), food and agribusiness $309 (7%), cement and construction $290 (7%), energy $271 (6.5%), general manufacturing $271 (6.5%), tourism and other services $136 (3%), timber, pulp and paper $125 (3%), and textiles $82 (2%).
In order to receive funding, projects must meet a number of IFC guidelines. Whether it is the establishment of a new enterprise or the expansion of an existing one, the project must be in the private sector, it must be technically sound, it must have a good prospect of being profitable, and must benefit the local economy. Another important criterion for IFC investments is that the project be environmentally sound. Thus, in addition to being financially, economically, and technically viable, the project in question must satisfy our stringent environmental standards and conform to host country and World Bank guidelines.
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