The World Bank Group has steadily increased its support of the private sector over the years and its private sector lending arm, the International Finance Corporation (IFC), is an increasingly important facilitator of private investment in the developing world. A part of the World Bank Group whose mission as a development institution is to promote development and alleviate poverty, IFC's lending to the private sector is often at odds with this mission.
The following report will examine some of the reasons why IFC's lending fails to support positive development for those the World Bank Group is supposed to serve most: the poor and marginalized in the developing world. One of the key reasons for this is that IFC is focused more on economic growth than the quality of growth. Achieving development requires more than increasing growth rates or income levels, as many recent World Bank studies confirm. If IFC wants to promote development through investing in the private sector, which Friends of the Earth does not disagree with, then it must expand how it evaluates potential investments and assesses expected results. It requires a change of mindset from promoting commercial interests and operating more like a commercial bank with a similar portfolio to becoming development practitioners.
Much of IFC's portfolio is oriented toward the interest of corporations, not necessarily the interest of the poor or environmental protection in the developing world. The report highlights certain sectors that often cause more developmental problems than benefits, such as the extractive industriesóoil, gas and miningówhich tend to cause severe environmental and social problems for communities. Other types of projects, including large agribusiness, coal-fired power plants that exacerbate global climate change, and luxury hotels chains, are not really delivering on the IFC's development mission.
The report also points out that many of the beneficiaries of IFC lending are some of the largest corporations in the world and calls on IFC to be more proactive, rather than reacting to the agenda and priorities set by the private sector. The report recommends that IFC cease financing companies with poor environmental and social records until they change their practices. If IFC wants to improve corporate behavior, it can work with companies individually to assist them. Companies with poor corporate records should not be rewarded with public assistance, otherwise there are no incentives for them to change.
Finally, the report concludes by calling on IFC to fulfill its development mission by adopting a development screen that details the developmental results IFC aims to achieve. IFC must have a clear development strategy, a real sense of what development means, an understanding of and a willingness to use its leverage, and a willingness to say no to companies.
IFC should be investing in projects that directly benefit local communities and the environment. IFC should challenge private companies to invest in emerging sectors that provide public benefits such as renewable energy, sustainable agriculture, environmentally sound tourism, natural resource conservation and locally owned businesses. These sectors should be prioritized in IFC's portfolio.
It is urgent that IFC takes steps to ensure that its investments are environmentally and socially sound, demonstrate a positive developmental impact beyond just economic growth and are beneficial to the poor and the most marginalized. These changes must be made for IFC to prove that it is fulfilling its developmental role within the World Bank Group.
Dubious Development: How the World Bank's Private Arm Is Failing the Poor and the Environment
Yanacocha is the largest gold mine in Latin America, owned by a company called Newmont. At this site in the Northern Andean region of Peru, local campesinos tell a story of rivers polluted with mining waste, contaminated drinking sources, displaced people, families broken by men leaving to find work, and eroded indigenous cultures.1
The Sarshatali coal mine in West Bengal, India, will produce 3.2 million tons of coal annually. The project will disrupt ten local villages and relocate two of them.2 When burned the coal will produce 8.62 million tons of carbon dioxide per year and exacerbate the global threat of climate change.
Marriott renovated its hotel in Amman, Jordan, upgrading it to five-star quality by adding new amenities such as a health club and a movie theater.3 The resort is geared to meet the needs of the wealthier traveler in Jordan.
What do all of these projects have in common? They were financially supported by the World Bank Group's private lending armóthe International Finance Corporation (IFC)óand the development benefit resulting from these investments is dubious.
IFC, which provides loans and equity investments for the private sector, helps drive private sector investment in the developing world. IFC's stated purpose is to fulfill the World Bank's development mission through investing in the private sector. But this drive to channel money to the private sector and achieve certain levels of growth each year, placing the focus on the financial bottom line, can be at odds with the World Bank Group's mission to promote development and alleviate poverty. This is especially true for IFC where the development impact of its investments is currently not fully assessed or emphasized in the decision-making process. Achieving sustainable development is more than increasing economic growth or income. The role of development institutions is to promote development that is equitable and environmentally sustainable, and to serves the needs of the population, especially the poorest and the marginalized.
Friends of the Earth is not opposed to investing in the private sector or fostering private sector development. The important issue for IFC is whether or not these investments are promoting sustainable development and helping to leverage positive development results. The purpose of this report is to evaluate some of the problems with IFC's current lending approach and propose ways that IFC can improve its operations and development results.
September 2000
This report was made possible by the generous support of the Charles Stewart Mott Foundation, the John D. and Catherine T. MacArthur Foundation, the Moriah Fund, Wallace Global Fund and the W. Alton Jones Foundation.
Contributing authors include dekila chungyalpa, Andrea Durbin, Dawn Montanye and Jon Sohn. Special thanks go to Michelle Chan-Fishel, Francesco Martone, Keith Slack, Jon Sohn, Alex Wilks and Sara Zdeb for their comments.
This report is written for dual purposes. First, to educate the growing number of NGOs that are interested in the private sector lending of the World Bank Group and to provide these groups with information about needed policy changes at the IFC. Second, to further the discussion about the IFC's developmental impact and contribute ideas for improving IFC's operations. The audience includes NGOs and IFC staff.
Additional copies of this report are made available for $7 each (includes shipping) from:
Friends of the Earth
1025 Vermont Avenue, NW, Suite 300
Washington, DC 20005
202-783-7400
202-783-0444
For information about this report, contact:
Andrea Durbin
Friends of the Earth
1025 Vermont Avenue, NW, Suite 300
Washington, DC 20005
202-783-7400
202-783-0444
adurbin@foe.org
