History of the world economy

/* Written 7:55 AM Oct 25, 1995 by DEBRA@OLN.comlink.apc.org in igc:hrnet.develop */
/* ---------- "IFC Fact Sheet" ---------- */
## author : foedc@igc.apc.org
## date : 19.10.95

Getting the Facts on the IFC:
Private Sector Lending of the World Bank

By Friends of the Earth
19 October 1995

WHAT IS THE IFC?

The International Finance Corporation is the private sector lending arm of the World Bank, and is part of the World Bank Group. It was established in 1956 "to foster economic growth in developing member countries by promoting private sector investment". It has become the world's single largest source of direct project financing for private investment in developing countries. In 1995, the IFC approved $2.9 billion in loans, an increase of 17 percent from the previous year, making it the fastest growing part of the World Bank Group, after MIGA. In contrast, IBRD loans have increased more slowly and IDA loan commitments are down

HOW DOES IT DIFFER FROM IDA AND IBRD OF THE WORLD BANK?

The other parts of the World Bank, the International Development Association (IDA) and the International Bank for Reconstruction and Development (IBRD), provide loans directly to governments and their lending profiles are larger.

But the IFC serves as a catalyst for investment worldwide. The IFC's involvement is essentially a seal of good investment and opens the door for other investors to decide a project is not too risky to become involved. For every $1 in financing approved by the IFC in 1994, other investors and lenders provide $5.43. While IFC's loan commitments are relatively small, it mobilizes more than $20 billion of investments in the private sector.

WHAT ARE IFC'S DISCLOSURE, ENVIRONMENT & SOCIAL POLICIES?

The IFC sets its own procedures which are weaker than the rest of the World Bank. The information disclosure policy involves the public less in its project development, and the amount of information that is publicly available is limited. There is little coordination within the IFC of environmental information so that critical information is used in project development in an attempt to reduce the negative impacts. Environmental assessments are completed after the staff appraisal stage and after the critical decisions about the project have been made. The IFC argues that because it lends to private corporations, it has certain confidentiality rights to respect and cannot apply the World Banks general information disclosure policy. However, in the last year, the Inter-American Development Bank and the Asian Development Bank have both adopted stronger disclosure policies for their private sector windows, which includes the release of loan agreements, earlier public notification of projects in the works and a more thorough use of the information that is avaiable.

As for the environmental and social policies of the IFC, on principle the IFC is supposed to follow the same policies of the World Bank. However, in practice we find that rigorous application of these policies is lacking. In some cases, the local communities were not brought into the project development soon enough or at all. In other cases, local indigenous populations are affected by an IFC loan, but the indigenous peoples policy of the World Bank has not been followed. In effect, what we see is that the environmental and social issues will be addressed when convenient or not too costly, but the failure to apply such policies will not prevent a project from being financed.

WHAT IS THE IFC'S ENVIRONMENTAL RECORD?

The IFC's loans include large scale infrastructure projects, privatization and development of the manufacturing sector and extraction of natural resources. Between 1992-1993, 19.2 percent of the loans were in the energy sector for oil and gas development and energy production, 16.9 percent of the loans were in the chemicals, petrochemicals and fertilizer sectors, 12.2 percent were in general manufacturing and 22 percent for infrastructure.

One major infrastructure project in Chile typifies the kind of environmental and social degradation that occurs without strong policies or oversight in institutions like the IFC. In 1993, the IFC approved the funding for the construction of a large hydroelectric dam, the Pangue Dam on the Bio Bio river, one of Chile's longest and considered most important rivers. The Pangue is the first of six dams being proposed for financing by the IFC.

The beauty of the Bio Bio's gorges and rapids has led the area to be known as the "Grand Canyon of South America". The area provides habitat for native forests, as well as home to 5,000 native Pehuenche people, the only members of Mapuche Indian society still living in traditional manner. Construction of these dams will involve the forced relocation of thousands Pehuenche people, as well as the ecological destruction of a diverse valley and river.

The damming of the Bio Bio river became the first major development project to arouse opposition in Chile. The Peheunche people joined with environmentalists nationally and internationally to organize against the construction of these dams. The protest forced the Chilean Electric Power Company to complete an environmental assessment, which was later criticized by environmental groups for failing to address the impact of the broad impacts of the construction of the dams.

But despite the opposition locally in Chile and internationally, the IFC decided to provide the loans to begin the building of the first dam in the series.

FUTURE FOR THE IFC

There is a future for the IFC, but its role should not be to do business as usual and support the private sector blindly in its development. Its investments should make a difference for communities, such as helping an industry adopt pollution abatement equipment or finance the development of environmental technologies. The IFC should not finance power projects that are polluting or destructive to the environment, but should instead invest in renewable energy development and demand side management programs.

Most importantly, the IFC's definition of the private sector must broaden. The amount of private investment in developing countries in growing at a fast pace, reaching over $200 billion last year. The IFC's should expand its definition of the private sector to include micro and small scale entrepreneurers, such as women, small farmers, and members of the informal sector. Those are the sectors that are currently not getting the support. The power, mining, oil and gas companies are already competitive industries. It is the majority of society that needs the help.