Follow the money: The World Bank Group and the use of financial intermediaries APRIL 2014 ClimateFollow the Investment money Funds Monitor 7

Contents

1 Introduction 13 How the IFC currently Boxes measures development 3 Background 1 Box1. What is a financial outcomes intermediary (FI)? 3 Broader perspective – BRICS, 14 An alternative model infrastructure and climate 5 Box 2. Gender implications of 17 Ways forward supporting FIs 4 Financial sector investment at the IFC 17 Broader implications 6 Box 3. IFC FI investments alleged to have harmed 5 Implications of these 18 Approach 1: Same tools, same communities developments operators, stronger rules 10 Box 4. Country analysis: 7 Analysis of IFC FI portfolio 18 Approach 2: Same tools, Russia, India and Kenya different operators 7 Financial sector support 14 Box 5. Financial inclusion and growing 18 Approach 3: New tools financialisation 8 Hogging the money: Large 19 Future agenda commercial banks benefit, 20 Annexes SMEs miss out 20 Annex A: Methodology for the 9 Help for the poorest or finance analysis for upper middle income countries? 21 Annex B: IFC FI risk categorisation 10 Risky projects are a problem 22 Annex C: Projects chanelled 11 Do resources stay: dubious tax through secrecy jurisdictions structures, returned capital 25 Annex D: Resource list 12 What are the environmental implications? 26 Endnotes 13 Assessing development impact

Cover photo: Bank of England © Katie Chan Follow the money

Executive summary

Just five years after a major international going to financial intermediaries (FIs). In The IFC has not proven the effectiveness financial crisis the financial sector is now the wake of the 2008 financial crisis, the IFC of the FI model and should do so before the largest beneficiary of World Bank rapidly increased its support to the financial commitments on such a massive scale Group investment. A push for channelling sector, especially trade finance. The IFC are acceptable. The onus is on the IFC to money through the private financial sector accountability mechanism released an audit show that investing in FIs leads to direct is occurring despite the failures of the into the social and environmental outcomes and tangible positive results for people’s financial systems of US and European of the IFC’s investment in FIs in February livelihoods in developing countries. The countries in the last five years. 2013. It concluded that: “The result of [the] broader question remains unanswered: lack of systematic measurement tools is Is this a valuable use of development This report should be viewed as a research that IFC knows very little about potential resources? An expansion of investments in tool to stimulate debate about how civil environmental or social impacts of its FIs at the expense of direct investments society organisations can engage with [financial market] lending.” Communities should only be done with clear proof that the increasing support being given to the in Honduras, Cambodia, India and Uganda they have a greater positive development financial sector. With detailed information have complained about negative impacts impact than direct investments. A on IFC financial sector investments it allows of FI investments ranging from water preferable alternative model to consider civil society to discuss ways forward. pollution, to land grabs, to torture and development impact would include better murder of farmers. This has led civil society client choice, stronger measurement, and Donors, international financial institutions groups to demand a new World Bank Group more independent reporting and evaluation. and elites in developing countries are strategy for investments in the financial pursuing so-called financial deepening, sector. Given the trend towards bolstering the which is one component of financialisation financial sector with international public – the increasing importance of financial Between July 2009 and June 2013 the resources, it is important to grapple markets, financial motives, financial IFC invested $36 billion in FIs. This is with the nature of FIs, their potential institutions and financial elites in the three times as much as the rest of the environmental and social risks, and question operation of the economy. It is a step World Bank Group invested directly into what development impacts they have for change in the way financial institutions education and 50% more than into health people living in developing countries. This interact with the rest of the economy care. The IFC justifies its investments in report sets out three possible approaches which has major implications for long- the financial sector because they “spur for civil society to achieve this calling for: run economic development, including economic growth” that will then lead stronger rules, different operators and new transforming the functioning of households to positive development outcomes. The tools based on different mandates and and the productive parts of the real IFC’s portfolio of FI investments shows a ownership models. economy. concentration of funding in commercial banking rather than in small and medium The international development finance While the World Bank and its private sector enterprises (SMEs). Funding is also skewed environment is currently fixated upon arm the International Financial Corporation to upper-middle-income countries such as the use of the private financial sector as (IFC) are leaders in this area, they are not Russia, Brazil, China and Turkey, despite the development actors, without fully thinking the only public institutions that promote poor living predominantly in low-income through the implications of this. Though use financial deepening or provide finance to and lower-middle-income countries. of the private financial sector as a channel the private financial sector in developing Additionally, at least $2.2 billion worth of of development finance is controversial, countries. A host of development finance public money from the IFC was channelled the fact remains that it is growing. Each institutions now operate in this fashion, through secrecy jurisdictions because of national context, where different amounts including Brazil’s Banco Nacional de their attractive low-tax, low-regulation of financial liberalisation have occurred and Desenvolvimento Econômico e Social environments. variable levels of governmental interest (BNDES) and the China Development Bank. in sustainable and pro-poor development The UN’s Green Climate Fund plans to When assessing the development impact exist, will determine the best fit of use this model. It is also likely the new of investing in FIs, the IFC uses either reach approaches and strategies. Yet, unifying civil development bank being proposed by Brazil, indicators (the number of clients) or purely society positions and demands as much as Russia, China, India and South Africa (BRICS) financial indicators (such as return on possible can enable successful challenges will use this method. invested capital and return on equity). While to the underlying systems of international an increasing number of public institutions finance. From 2005, there was both a large increase are channelling capital into the financial in the IFC’s overall portfolio and an increase sector there remain large risks from this in the percentage of new commitments approach for overall development efforts. Follow the money

1. Introduction

Just five years after a major international financial crisis driven by unsustainable activities by the financial sector, this $36 billion sector is now the largest beneficiary of World Bank Group investment. IFC investment in financial intermediaries between July 2009 and June 2013; three times as much as The World Bank Group’s 2013 strategy says “private sector resources and expertise are the rest of the World Bank group invested in education critical to achieve the two goals” of ending and 50% more than it invested in health care extreme poverty by 2030 and boosting shared prosperity.1 The World Bank, a public body, invests directly in the private sector through the International Finance Corporation (IFC), its private sector arm. The IFC has a large portfolio of investment successful in doing no harm” and indicated 1 Provide detailed information on IFC across a range of economic sectors, that “the result of this lack of systematic investments in FIs in terms of location, however, the largest portion has been measurement tools is that IFC knows size and financial instrument; and still is invested in the financial sector. very little about potential environmental The pre-crisis thinking about the need to or social impacts of its [financial market] 2 Consider the development impact of increase the role of the financial sector has lending.” While overall the World Bank investment in FIs, given that the IFC’s remained unscathed within the IFC; this Group has a mandate for poverty reduction mandate is to reduce poverty; report aims to analyse the implications of and procedures to ensure responsibility for this thinking and present some ideas for impacts of its investments, in the case of 3 Discuss ways forward for civil society civil society groups working on international the IFC investment in FIs, this mandate and given the increasing focus on the finance. responsibility is abdicated in favour of the financial sector from a range of FI’s own judgements and systems. institutions, including the UN’s Green The IFC justifies its investments in the Climate Fund, the G20, and more. financial sector because they “spur While the IFC does not have a full idea economic growth”, though this has been of the impact of its lending, several high- Failure to fully understand the changing contested by many researchers. The IFC profile cases highlight what can go wrong, nature of international cross-border flows, also says the financial sectors allows it to and how harm can come to people and the and its increasing concentration in the expand its “reach and development impact environment. Communities in Honduras, finance industry, will put civil society far in our target markets”. The financial sector, Cambodia, India and Uganda have behind the real discussions shaping global also called financial intermediaries (FIs), complained to the CAO about negative development finance. This report should are essentially go-betweens, taking IFC impacts of FI investments ranging from be a tool for civil society organisations to resources and reinvesting them in projects, water pollution, to land grabs and murder analyse and collaborate on developing people, and businesses. The FI then takes of farmers (see Box 3). effective strategies to influence the nature the decision about the use of what were and type of investments in FIs and by public resources, determining who gets it Given the growing World Bank Group focus default in the private sector - of which FIs and where it is spent. The IFC claims lending on the private sector and the increasing play an increasing role in today’s globalised to FIs has led to the creation of around 100 proportion of the IFC budget going to FIs, economy. By the very nature of FI lending, million jobs.2 this report intends to stimulate debate there are many ‘black boxes’ areas that are on the role of FIs and how civil society unclear with a lack of accurate available FIs and their questionable development organisations can propose alternative information. This report does not attempt to impact models. Specifically it aims to: provide definitive answers about the WBG FI There is a lack of clarity about the causal lending or recommendations. Instead this link between IFC investment in an FI and improvements in poor people’s livelihoods in developing countries. In February 2013 the IFC’s accountability mechanism, the Box 1: What is a financial intermediary (FI)? Compliance Advisor Ombudsman (CAO), A financial intermediary (FI) is a third-party financial entity, such as a bank, insurance published an audit which found that the IFC company, microfinance institution, or private equity fund. Support to FIs comes from was not doing assessments of “whether the the International Finance Corporation (IFC), the part of the World Bank Group that [environmental and social] requirements are invests in the private sector.

1 Follow the money

report should be seen as a contribution to conclusions in this section can only be initial civil society discussions engaging with this observations. complex issue. It aims to help civil society ask the right questions. Part 4 makes observations on how the IFC currently judges the development impact Structure of this report of its FI investments. It then proposes a possible alternate model to guide and Part 2 of the report looks at the background judge the development impact of lending and trends of the majority of international to FIs, exploring new criteria based on client financial institutions to increase their FI choice, development impact indicators and lending and what this means for key issues, third-party verification. such as gender, human rights and the environment. Part 5 looks at potential approaches civil society can take to work on FIs. It puts Part 3 of this report delves into data forward three options for how to take this analysis on the IFC’s FI investments work forward in the future. The aim again between July 2009 and June 2013. It finds is to stimulate informed discussion rather that the IFC concentrated its lending to than to provide answers. It also frames private commercial banks and for financing some important discussion questions to be of trade. Due to the ‘black box’ nature of addressed in the future. the IFC’s financial sector investments the

2 Follow the money

2. Background

An increasing number of public equity funds. This financial deepening is countries, such as Brazil’s Banco Nacional institutions are channelling capital into one component of financialisation – the de Desenvolvimento Econômico e Social the financial sector, but there are large increasing importance of financial markets, (BNDES) and the China Development Bank. risks to the environment, communities financial motives, financial institutions and overall development efforts. and financial elites in the operation of the Channelling funds through FIs is also on economy.3 It is a step change in the way the increase. Analysis in section 3 of this The types and varieties of cross-border financial institutions interact with the rest of report shows that the IFC, now makes more financial flows have proliferated in the last the economy and the amount of speculation than 60% of its annual commitments in decade. No longer are flows to developing that occurs.4 The increasing size and power the financial sector rather than directly in countries neatly divided into aid, loans, and of the financial sector has major implications projects. This trend is replicated among foreign investment. Increasingly flows are for long-term economic development, regional development banks and bilateral bridging public-private divides and being including transforming the functioning of development finance institutions. It may channelled via financial intermediaries (FIs) households and the productive parts of the also be used by the new development – third party financial institutions. real economy. bank being proposed by Brazil, Russia, India, China, and South Africa (BRICS). The This push for channelling money through Broader perspective – BRICS, so-called BRICS Bank is expected to have a the private financial sector is occurring infrastructure and climate capital base of $50 billion and is still being despite the failures of the financial systems designed.5 It is widely expected that the While the World Bank and the IFC are of the US and European countries in the last BRICS Bank will invest directly in private leaders in this area, they are not the only five years. Donors, international financial sector projects, using the model that the public institutions that promote financial institutions and elites in developing countries Brazilian national development bank BNDES deepening or provide finance to the private are pushing so-called financial deepening. employs for overseas investment. It is not financial sector in developing countries. A This process involves liberalising financial clear how the BRICS Bank will partner with host of development finance institutions markets, developing capital markets the financial sector of BRICS countries or (DFIs) now operate in this fashion, including and introducing more complex financial the financial sector in possible investment some bilateral development banks in instruments. Often playing a part in this destinations. However, it is unlikely that the rich countries, for example the FMO in are unregulated financial institutions and new bank will completely avoid the use of the Netherlands, as well as national investors, such as hedge funds and private financial intermediaries, as the proponents development banks in emerging market

Figure 1: Timeline: Recent events in the rise of IFC lending to financial intermediaries

April CAO registers case on IFC investment World Bank Group activities in India Infrastructure Fund - Odisha communities complain of negative social and environmental impacts of Kamalanga coal power plant December CAO registers case on IFC investment Update of the IFC Policy in Agri-Vie fund - Ugandan IFC starts using the on Social & Environmental communities and Oxfam allege Development Outcomes Sustainability and IFC UK-based New Forests Company Tracking System Performance Standards involved in forced evictions.

2005 2006 2010 2011 2012 2013 2014

November September Out of sight, out of mind? (Bretton The New Forests Company and its Woods Project briefing) says “IFC Ugandan plantations: Oxfam case overly relies on a belief that any study. Allegations of land grabs financial sector development related to IFC investment in Agri-Vie automatically benefits the poor” fund Civil society activities

3 Follow the money

of the Bank are key participants in the G20 design expected to take shape by the end In early February 2013 the IFC’s where much discussion on how to leverage of 2014.15 The GCF has already put out a accountability mechanism, the CAO, private financial sector investment is being job description for a specialist in financial released an audit into the social and conducted. intermediaries.16 The GCF, as of yet, has environmental outcomes of the IFC’s not agreed its environmental and social investment in FIs. The study, which looked The G20 started work on promoting safeguard policies, and it is unknown how at 10% of the clients in the IFC’s FI portfolio “long term finance for investment” in they will treat financial intermediaries. The since mid 2006, found that only 65% of the 2012.6 This G20 work stream aims to WBG is also facilitating a strong role for the sample were fully compliant with the IFC’s propose mechanisms to transform project private sector at the Climate Investment environmental and social requirements. investment, particularly infrastructure Funds which it hosts. The CIFs are open to The CAO emphasised how the IFC’s investment, into an asset class which can financing FIs for projects related to clean requirements focus on the client developing then leverage money from institutional technology, renewable energy, forests and a social and environmental management investors, such as pension funds and adaptation.17 system, rather than actual social and sovereign wealth funds. One of the environmental outcomes. Looking beyond institutional innovations rumoured to Financial sector investment at the IFC just meeting requirements, for IFC clients being particularly pushed by the Indian “around 30% of investments in CAO’s The IFC has financed FIs throughout its government is the new Global Infrastructure sample were not regarded by the CAO panel history, accounting for more than 22% Facility to be hosted by the World Bank.7 The as to have ‘improved’” their environmental of its committed portfolio (entire set of key feature of this work is the development and social outcomes. Furthermore, the active investments) as far back as 2001. In of close collaboration and risk sharing CAO found “the proportion of cases of non- terms of annual commitments, FI financing between the public sector, the private improved performance was around 60% temporarily peaked at about 50% of the financial sector and project implementers. at the subclient level, which is where IFC total in 2002, before declining again. The cost of such initiatives to the public seeks to really have an impact.” Overall However, from 2005, there was both a sector, which ultimately bears large portions the report found that the IFC conducts “no large increase in the IFC’s overall portfolio of the risk, has been heavily criticised. assessment of whether the [environmental and an increase in the percentage of new and social] requirements are successful commitments going to FIs (see table 1). In It is certain that the UN’s new financing in doing no harm.” The CAO concluded the wake of the 2008 financial crisis, the IFC mechanism for climate change, the Green that: “The result of this lack of systematic rapidly increased its support to the financial Climate Fund (GCF), will channel some measurement tools is that IFC knows very sector, especially trade finance. Figure 1 resources through the financial sector. little about potential environmental or social shows a timeline for recent developments in The GCF is currently developing its private impacts of its [financial market] lending.” the IFC’s work with FIs. sector facility14 for this purpose, with

September IFC FI action plan approved by Bank board, proposes marginal increases in transparency and supervision August January CAO registers case on IFC investment Performance standards updated in FICOHSA - Honduran bank said February resulting in stronger, but still to provide finance to Dinant palm CAO registers case on IFC investment incomplete application of these oil company, being investigated for in Dragon Capital – Cambodia groups policies to FIs human rights abuses by CAO. allege land grabs and illegal logging

2005 2006 2010 2011 2012 2013 2014

April April March Risky Business (Oxfam briefing) calls Rubber Barons (Global Witness report) Civil society briefing to Jin-Yong Cai, for focus on development impact, finds evidence of land grabbing in IFC executive vice president, calls for transparency, greater due diligence Cambodia and Laos, with IFC involved “immediate revision of action plan by financing private equity fund to comprehensively address the CAO May Dragon Capital. audit’s findings” Private Profit for Public Good? (Eurodad report) calls for improved FI reporting and research on development impact November: Negotiating Power (Research Collective study) documents the socio-economic 4 realities of the people effected by the Odisha Kamalanga coal power plant Follow the money

Table 1: Historical IFC investment figures to change the way the IFC handles lending to FIs. These address the sequencing of capacity building and investment, risk $ billions FY 2005 FY 2009 FY 2013 categorisation of FI projects, contractual arrangements with clients, transparency, Total assets 39,583 51,483 77,525 supervision, and third-party verification of outcomes and impact.19 Annual commitments 5,373 10,547 18,349 Implications of these developments Source: IFC annual reports The pursuit of financial deepening combined with the use of intermediated finance can have profound implications for human rights, social development In 2003, the CAO’s review of the IFC’s environmental and social risks. The IFC and and environmental sustainability. First, performance standards found “the rapid other institutions concentrate resources the increasing use of the financial sector growth of the FI portion of the portfolio has and attention on managing financial obscures accountability and allows outstripped IFC’s capacity to conceptualise risks, while devoting less attention to the the bypassing of the IFC’s social and an effective [safeguard policies] system for environmental and social aspects of risk and environmental standards. The businesses FIs.”18 Since then civil society groups have reward. and projects that receive funds from the continued to pressure the IFC on this issue, FI can still have environmental, social and as well as becoming more concerned about Civil society organisations are demanding development implications. Using FIs as the lack of proof of positive development that the World Bank Group needs a new go-betweens waters down the application outcomes from investment in the financial group-level strategy for investments in the of the existing standards but does nothing sector. One continued concern, which financial sector to fundamentally rethink to mitigate the potential harms such as has been echoed in other debates on the nature, purpose, modalities and limits of gender impacts, human rights violations, development finance, is the imbalance of these investments. At the same time, NGOs livelihood disruption, and biodiversity risk tolerance between financial risk and have made specific short-term suggestions and habitat destruction. This potentially

Box 2. Gender implications of of individual characteristics, including may be seen more as a source of profit, supporting FIs income, education, employment status, essentially as untapped markets. The rural residency and age. microfinance industry particularly has The World Bank’s 2012 World been accused of loading women with Development Report on gender broke In recent years the IFC has sought unsustainable debt without sufficiently new ground for international financial to promote women’s economic dealing with the underlying economic, institutions finally putting forward gender empowerment, including through social, cultural and legal barriers to perspectives into the development investments in FIs. For example in March women’s equality.12 There are also discourse. The report referenced 2013 it teamed up with multinational concerns about the power dynamics fundamental women’s rights and moral company Coca-Cola to launch a $100 generated by microfinance’s use of arguments for gender to be considered. million, three-year joint initiative to community shame to ensure repayment However, the World Bank has long taken provide access to finance for women compliance.13 an instrumentalist approach, focussing on entrepreneurs in Eurasia and Africa.10 In gender equality as smart economics. March 2014 it signed an agreement with Questions around the gendered impact of international investment bank Goldman support to FIs are impossible to answer The financial sector has been one key Sachs, which it claims, will support up from a portfolio review. The IFC itself target of discussion in terms of gender to 100,000 women small and medium is simply unable to assess the gender equality. Research by the World Bank has sized business owners in gaining access to impact of its investments because there is shown that women disproportionately capital.11 little to no knowledge about the ground- lack access to financial services.8 This gap level social implications of its investments. is widening in developing countries.9 A key However, questions remain about the At best the IFC might measure data about finding was that there are gender specific mechanism of women’s integration the reach of its financial sector clients in legal barriers in many countries that are into the financial system and whether a gender disaggregated way, but little correlated to the lack of use of financial the IFC’s approach promotes structural beyond that. Assessing the real gender services by women. Usage of financial changes that empower women and impacts constitutes an important future services remains significantly related to buttress women’s rights. In IFC-supported line of enquiry into the FI agenda. gender, even after controlling for a host financial sector institutions, women

5 Follow the money

exposes citizens, especially disempowered A related risk is that the growth of the communities, to unwarranted risks. financial sector’s influence could lead to it finding new ways to profit from the delivery Second, financialisation fundamentally of public services or public infrastructure. changes the power structures in an Citizens are drawn into deeper relations with economy, altering the rewards and the financial sector just in order to meet incentives, and potentially shifting them daily needs, with implications for upward away from long-term development in redistribution of wealth. This may increase favour of short-term profit. Rich countries the distance between citizens and control experienced this shift in the wake of over national resources and public services. massive financial deregulations in the 1980s and 1990s, which has been recognised as This makes it all the more important a major contribution to the 2008 financial to think clearly about the trade-offs crisis.20 As the financial sector grows in associated with using these new channels size and strength it can play a bigger role of finance. While public institutions claim politically, attempting to capture state that this approach allows for more efficient institutions, for example those related to allocation of capital, increased leverage financial regulation. Financial interests can of private funds, or better targeting of also push for greater extraction of resources small and medium enterprises, they out of national economies to be stored have little proof that investments create and used in international financial centres, positive development outcomes, let ultimately meaning the gains of productive alone do no harm to communities or the activity are not accrued by the country or environment. The next section examines people who were involved in the activity in the IFC’s investments in FIs in detail, the first place. trying to separate out fact from fiction and understand the true nature of these massive, and increasing investments.

Box 3. IFC FI investments alleged to of negative social and environmental FICOHSA. Without a CAO investigation have harmed communities impacts, including pollution and water of the direct investment it is unlikely the shortages, and alleged that the company IFC financial links FICOHSA would ever Uganda: It is claimed that more than did not adhere to legally mandated have come to light. A CAO investigation 20,000 villagers have been unjustly procedures when acquiring land, has not of the FICOHSA investment is due to be evicted from their homes by UK-based offered proper compensation, and that it published in June 2014. New Forests Company (NFC) between used intimidation and force. They filed a 2006 and 2010 to make way for CAO complaint in April 2011, which is still Cambodia: Two of Vietnam’s largest plantations. In the summer of 2010, the being investigated. companies, Hoang Anh Gia Lai (HAGL) IFC invested $7 million in private equity and the Vietnam Rubber Group, have fund Agri-Vie, whose portfolio includes Honduras: Communities in Honduras, leased vast tracts of land for plantations NFC. Two communities filed complaints which had complained about human in Laos and Cambodia, which are claimed with the CAO in December 2011, one of rights abuses associated with the IFC’s to have disastrous consequences for which was settled in July 2013. direct investment in palm oil producer local communities and the environment. Corporation Dinant had no knowledge or Communities complained that the India: Community groups in the Indian information about the IFC’s subsequent companies took their land and forest. state of Odisha (formerly Orissa) are FI investment in the commercial banking The IFC is involved through its 2002 resisting the construction of the coal-fired partner of Dinant, FICOHSA. A January investment in private equity fund Kamalanga power plant. This plant is run 2014 CAO investigation found that the Dragon Capital Group and its later direct by GMR Kamalanga Energy Limited (GKEL), IFC violated nearly all its performance investment in the Dragon Capital-owned which has received financing from the standards in investing in Dinant, which fund Vietnamese Enterprise Investments private equity fund India Infrastructure, has been accused of involvement in the Limited (VEIL). These funds both invest in who themselves received a $100 million killing and forced eviction of farmers in HAGL. Communities filed a CAO complaint equity investment from the IFC in 2008. the Bajo Aguan region. The CAO also in February 2014. The local community has complained revealed the links between Dinant and

6 Follow the money

3. Analysis of IFC FI portfolio

The IFC’s portfolio of financial analysis, figures are based on four years into FI investments and direct investments. intermediary investments shows a of data, covering fiscal years 2010 – 2013. Financial intermediary investments have concentration of funding in commercial This report also provides a more detailed gone from less than 10% to nearly 21% of banking and upper-middle income breakdown of the sectors and destinations the total group commitments in the fiscal countries, with little evidence of claimed of the public resources that the IFC invests year 2013. development impact. in the financial sector. Annex A describes the methodology for conducting the The IFC’s trade finance and other FI This report builds upon past civil society analysis. investments over the four-year period, as efforts to analyse international financial reported in its annual reports, totals $36.1 institutions funding to the private financial Financial sector support growing billion. The figures show that, in the latest sector. A 2011 Bretton Woods Project and fiscal year, 62% of overall IFC commitments The World Bank Group is increasingly ‘Ulu Foundation briefing, Out of sight, out were directed to FIs and trade finance. As focussing investments on the financial of mind, analysed the IFC’s 2009 fiscal Table 3 shows, over the same four-year sector ahead of other economic sectors. year financial intermediary investments.21 period the World Bank Group spent far less Table 2 shows World Bank Group Eurodad’s 2012 report Private profit for on health, education and water, sanitation commitments for the last four fiscal years, public good? provided figures for the and flood protection than on the financial with the IFC’s investments broken down IFC’s investments through 2010.22 In this sector. In fact, investments in the financial

Figure 2: World Bank Group prioritising financial sector instead of poverty (Fiscal years 2010-2013)

ent, soc pm ial, lo e e n 3 times more v v i

e r

FI investment is 21% of o

D

money for n

World Bank Group total m

e

financial sector n

in 2013 t

a

l

i than education m

p

a

c t

Investment

$ $ channelled $ $ through secrecy jurisdictions $36.1 billion ($2.2 billion) invested in FIs Other 8% Commercial Private equity Investment that banking 14% goes to upper- ?middle or high- 42% income countries ($8 billion, 38% of Trade finance 9% total) SME Finance 14% Microfinance 5% Amount invested in projects identified as FI investment in 2013 is high risk from the last 18 2.4 times the 2005 level Financial intermediaries months ($856 million, 15% of total)

7 Follow the money

sector were about three times those in Table 2: World Bank Group commitments by arm of the Bank Group education and about 50% greater than those in health. $ millions FY 2010 FY 2011 FY 2012 FY 2013 Total There are serious questions raised about what kind of development impact International Bank for 44,197 26,737 20,582 15,249 106,765 investments in the financial sector have. Reconstruction and Development While the different arms of the World Bank International Development 14,550 16,269 14,753 16,298 61,870 group operate on different capital bases, Association in some ways there is an opportunity cost of these investments. Every dollar invested Multilateral Investment Guarantee 1,500 2,100 2,700 2,800 9,100 in a bank or financial institution is one that Agency is not available to invest in other kinds of projects. While the intermediary will use International Finance Corporation 12,664 12,186 15,462 18,349 58,660 the IFC’s resources to itself lend or invest, it is unclear whether these investments are of which financial intermediaries* 7,062 8,176 9,859 11,014 36,111 poverty-reducing, development-oriented or aligned with national or international of which direct investment 5,602 4,010 5,602 7,335 22,549 development goals.

While the IFC provides aggregate level TOTAL 72,911 57,292 53,497 52,696 236,395 information in its annual reports, this information does not allow a detailed cross- * Includes financial markets and trade finance investment. Source: World Bank Group annual reports sectional analysis of FI financing by client type, destination country or instrument. The remainder of this analysis is based on the IFC’s disclosed project database for the Table 3: Selected commitments from IDA and IBRD compared to IFC FI investments fiscal years 2010 to 2013. ($ millions) FY 2010 FY 2011 FY 2012 FY 2013 TOTAL Hogging the money: Large commercial banks benefit, SMEs miss out Financial intermediary investments 7,062 8,176 9,859 11,014 36,111 The IFC’s website explains: “working with (IFC)23 FIs allows IFC to support far more micro, small, and medium enterprises than we Health (IBRD/IDA) 6,792 6,707 4,190 4,363 22,052 would be able to on our own. In fiscal year 2012, our financial-intermediary clients Education (IBRD/IDA) 4,945 1,733 2,959 2,731 12,368 helped us provide loans to 25 million individuals and 1.5 million small and Water, sanitation and flood protec- 4,103 4,617 3,605 2,220 14,545 medium sized enterprises. Access to finance tion (IBRD/IDA) is a key barrier to the growth of SMEs and the establishment of microenterprises. Source: Bretton Woods Project calculations, World Bank 2013 annual report The access to finance gap in emerging markets is large - 2.5 billion adults do not have access to savings or credit, and 200 million MSMEs (micro, small and medium These figures look impressive but should not a medium sized enterprise, as defined by enterprises) do not have access to credit.” be taken at face value. An FI client which the IFC. may have more than 50% MSME clients, The IFC often justifies its support to FIs in may still have a balance sheet concentrated Our FI project level analysis casts further terms of the need to support SMEs. The on large businesses or may use the IFC’s doubt on the IFC’s targeting. Support IFC annual scorecard includes a total for resources to expand lending to large for commercial banks numbered 164 “Commitments in micro, small, and medium businesses. Additionally the IFC’s definition projects, representing $8.9 billion or 42.2% enterprises sector”. This “includes direct of MSME is controversial. In practice the IFC of the FI total. In comparison only 89 FI MSME borrowers, financial institutions with financial markets department categorises projects, representing $3 billion or 14.2% more than 50% of their business clients businesses, based on the size of the loan, of the total, were labelled by the IFC as being MSMEs, and any other investments not on the size of the business. An IFC- specifically targeting SME finance. The IFC that specifically target MSMEs as primary financed FI can lend up to $2 million to its actually supported more private equity beneficiaries.” Those figures show a four- client and still count this as an MSME loan.24 projects than specific SME finance projects year total of $24.6 billion, 42% of total IFC Additionally, many question whether a in the four-year period. The 102 private investment. business with up to 300 employees and $15 equity projects represented $2.9 billion in million in annual sales can rightly be called commitments, roughly equivalent to the

8 Follow the money

Table 4: Largest geographic recipients of FI investment Figure 3: IFC FI Project size

120 $ millions World Russia India Turkey China Brazil Indonesia 100 Total FI 3,629 1,320 1.198 1,069 955 845 612 investment (17%) (6%) (5.6%) (5%) (4.5%) (3.9%) (2.9%) 80 (% of total) 60 Total number 29 27 50 20 25 25 11 of FI projects 40 Number of projects

Volume of FI 3,566 1,145 790 953 778 542 563 20 projects over $30 million 0

Number of FI 22 17 13 16 12 8 8 5-10 10-20 20-30 30-40 40-50 60-70 70-80 80-90 Up to 5 90-100

projects over 100-150 150-200 200-250 300-500 $30 million $ millions

Number of FI 19 11 9 11 7 7 6 projects over $50 million

amount committed to SME finance. Even projects were in the world region, with projects for the four years, with a clear if a project is listed as having an SME focus $2.5 billion allocated to just nine projects preponderance of projects (34.6%) in upper it is still not possible to say what the exact ($3.5 billion to 22 projects, of which 19 middle-income countries. The next largest development impact is because the FI were investments over $50 million in size). group is lower-middle income countries that receives the investment has the final In terms of projects across all countries with 25%. Low-income countries only decision on which entities it invests in. A the largest number of projects (114) were receive 5.5% of IFC FI financing. Global scale scan of project description reveals that between $10 million and $20 million.25 investments represented over 17.1% of the some descriptions, including for example total while regionally focussed projects were private equity fund investments, mention Help for the poorest or finance for upper almost 14.4% of the total. SME finance, but the IFC provides no clear middle income countries? data on what percentage of the financing Questions have been raised about whether The IFC’s highest country exposures, ended up with SMEs. the IFC is effectively targeting poverty highlighted in Table 4, show a significant and development impact, including from proportion of IFC FI investments in upper- The size of projects could also be one the Bank’s own Independent Evaluation middle-income countries, such as Russia26, guide to the scale of businesses that are Group (IEG).27 The IFC’s FI projects are Brazil, China and Turkey. Figure 5 shows being supported. This will of course be an not reflective of the breakdown of world the breakdown of the entire set of FI imperfect proxy. The biggest individual poverty, as the distribution of the world’s

Figure 4: IFC FI projects by client type Figure 5: IFC FI projects divided by country income group 7,000 Insurance Capital markets 7,000 6,000 World Microfinance Regional projects 6,000 5,000 Other High-income Trade finance 5,000 Upper-middle income 4,000 PE Lower-middle income SME finance 4,000 Low income 3,000 $ millions Commerical banking 3,000 2,000 $ millions 2,000 1,000 1,000 0 FY 2010 FY 2011 FY2012 FY 2013 0 FY 2010 FY 2011 FY2012 FY 2013

9 Follow the money

Box 4. Country analysis: Russia, India is for bigger and fewer investments, IFIs have invested and who will directly and Kenya with 11 out of 27 projects valued at over benefit. $50 million and one investment of $250 Using the database of IFC FI projects, million. Despite the national development plan we analysed three country portfolios focusing on marginalised groups and rural to look at how they were targeted, and India: A high number of investments, areas, where millions live in poverty, just a whether they seemed in alignment with over 90%, appear designed to meet at third of investments were in low-income the national development plans of the least one of the national plan’s stated states and there are no references to country concerned. priorities and many cover several poorer groups such as scheduled castes priorities. However, for many of the and minorities. India has fewer larger Russia received the most investment of investments analysed there is insufficient projects (when compared with Russia) any country, totalling $1.3 billion, despite information to be able to assess their with 11 projects out of the 50 being over it being classified as a high income development impact. For example, though $50 million. country by the World Bank from 2013. some investments mention energy in the Half of this funding was for the financial/ project description, the intermediated Kenya: Almost all of the investments banking sector and went to foreign nature of the projects makes it unclear ($552 million out of $572 million) included owned banks or banks whose ultimate if they are for low-carbon, renewable a SME component meaning that there owners are identifiable. Nearly half went and/or pro-poor projects. The majority is strong alignment between IFC project to Moscow-based institutions while just of investments, over 65%, have some objectives and the Kenyan national 3% went to the poorer region of Central mention of targeting MSMEs, but development goals. However, lending is Russia and none to other less developed by volume only 13.3% of these FI concentrated in large commercial banks regions of Northern Siberia and the investments are actually specifically and banks not specialising in MSMEs Northern Caucuses. This raises questions labelled as targeting microfinance or SME which brings into question whether such about the direct development outcomes finance. The bulk of them are in other large institutions were in need of scarce for the poorest in Russia. finance companies, particularly leasing development resources, even if on a or mortgage finance. The descriptions positive note these are mainly domestic Just 1% of funding is aligned with Russia’s of private equity investments are all- banks. Despite energy and education national development plan. There is little encompassing, for example listing a wide being key components of the national investment in the main priority sector range of sectors, such as education and development plan, there is a noticeable infrastructure and none in other priority health alongside agriculture, energy and absence of FI investment that mentioned areas such as high technology, education “other emerging sectors”. Therefore it these sectors. and public health. The tendency in Russia is difficult to know exactly where the

poorest show that 16.7% live in upper- markets. Yet it is precisely this period in ratings, meaning 69% of the sample are middle income countries, 57.7% in lower- which the IFC ramped up financing of FIs in categorised only as Category C or Category middle income countries, and 25.7% in low- upper-middle-income countries. FI. Figure 6 shows the breakdown of project income countries.28 risk ratings for the projects since January Risky projects are a problem 2012 with the differential risk ratings. There are also questions about the so-called The vast majority of projects (57.1% by The IFC gives different risk ratings to additionality of the IFC’s work. The IFC volume, 60.8% by number of projects) are projects as part of its review of social and is supposed to be financing clients that in the FI-2 category, meaning medium environmental risks, with direct investments would not be able to access finance on risk. Private equity, commercial banking, receiving ratings from A (most risky) to commercial markets on reasonable terms. and capital market investments are the C (least risky). From 1998, when the IFC However, the concentration of financial riskiest sectors according to the IFC’s own adopted its first formal environmental and sector clients that operate on a global scale risk categorisation. Surprisingly, 18 of the social review procedure, it had a separate or in higher income countries (55% of the IFC’s private equity investments since 2012 risk category of “category FI” for all FI total), leads to serious doubt. Operators on are not considered to be in the highest risk investments.29 It was not until January this scale or in these countries should be category. 2012, and the implementation of a new able to access credit or capital markets on set of performance standards, that the IFC commercial terms quite easily. Aside from One problem with IFC risk categorisation implemented differentiated risk categories some very short periods of capital outflows is that, ultimately, it is a discretionary for financial sector lending. Annex B from emerging markets in 2008 and 2013, process, left to the subjectivity of its staff. provides the IFC’s description of the current on the whole the period of analysis was one For example, projects categorised as FI-2 risk categorisation, which goes from FI-1 when developing countries were awash with have had exposure to serious risks relating (highest risk) to FI-3 (lowest risk). liquidity because of macroeconomic policies to land acquisition. Additionally, there is a in the rich world. Those policies had led to concerning disconnect between the IFC’s For the four year sample, only one and half high levels of capital inflows into emerging investment teams and its environmental years worth of projects were given the new

10 Follow the money

and social (E&S) specialists in making this Figure 6: IFC FI project risk ratings Figure 7: Type of investment ($ millions) determination, as they having differing interpretations of the types of risk and $454 engagement in identifying project risks. $856 For example, there is a rigorous and robust 20 15% assessment of credit risk by the investment $2,471 staff, and a limited, almost secondary $1,546 47 consideration made on E&S risks. 28%

The CAO audit discussed in section 2 clearly spelled out the lack of knowledge of the ultimate impacts of the IFC’s FI financing. There is also no clear rationale for the IFC to undertake projects with high environmental $6,426 and social risks. Remembering that the IFC has the option of investing directly, and thus likely having better application of the FI-1 102 Loans $11,813 F1-2 Equity existing standards, or of investing in other FI-3 Guarantees projects, there should be a clear higher Risk managment expected positive development impact to $3,195 57% justify investing in risky projects. However, as the next section makes clear, there are serious problems with development impact assessment, undermining any claim that the IFC is approaching environmental and additional projects were regional and world owners, we believe that this does not social risk in a smart way. focussed, leaving 162 projects, worth 26% represent the full total of IFC financed of the commitments that were directed at projects that may be seeking to avoid Do resources stay? Dubious tax structures foreign investors. taxation. Many development economists believe that industrial development and productivity However even some of the domestic Returned capital financial institutions channelled their IFC increases are more effective when achieved The IFC can invest using different investments through offshore vehicles by domestic firms rather than by foreign instruments. Loans are repayable by the registered in other jurisdictions. For direct investment. Causality and evidence client with interest. Meanwhile equity example, many investments listed with a is difficult in this area, but looking at the investments give the IFC a stake in the destination in India are flowing through portion of FI investments that are directed company. The IFC can also insure credit risk corporate vehicles registered in Mauritius. at domestic financial institutions rather providing guarantees or risk management. However the actual FIs are not in Mauritius, than foreign ones, could be a guide to how The IFC FI investments as loans are meaning they are either in third countries, much the IFC is really adding value to firms approximately double those given as equity or in India itself. These structures are used that are resource constrained. Our analysis investments. This means that the capital for a number of financial reasons such as tried to determine the project location, the the IFC has put into the client country is reducing taxation, taking advantage of location of the IFC’s FI client, as well as going to be returned with interest, rather legal frameworks that protect investors, interrogate the use of corporate vehicles than stay in the destination countries. The or availing of preferential incentives given registered in other jurisdictions. There was IFC explains it provides investment as loans for foreign investment. To examine how considerable inconsistency in the reporting because the IFC operates on a commercial many of these might be designed to evade of this information in the IFC project basis and therefore “it invests exclusively in taxation or make use of corporate secrecy, database, as well as difficulty in assigning for-profit projects in developing countries we looked specifically at usage in the top 20 country locations to financial institutions and charges market rates for its products financial secrecy centres30, as compiled in whose operations or shareholders may and services”. Loans typically have the Financial Secrecy Index31. In the period, cross borders. We have tried to use a maturities of seven to 12 years and are the analysis indentified at least 90 projects common sense approach to locating the issued in global and local currencies. headquarters and thus the location of the intended for other developing countries that were channelled through corporate vehicles FI or its corporate registration. However Additionally, a large portion of the equity registered in those 20 secrecy jurisdictions. the figures reported here should not be investments, about one-third of the equity These projects had commitments of $2.2 read with some reservations and should investment total, are private equity projects. billion, putting into doubt the value of tax be looked upon as guides, rather than hard Private equity funds are designed to deliver receipts associated with these projects. totals. high returns to investors and the return of Private equity funds represented $1.2 billion the entire capital base at the end of the of this figure. See the Annex C for a sample Of the 560 projects assessed, 334 of fund’s investment period, which is usually of projects in these locations. However, them, representing 59% of the four-year 5-10 years. Private equity funds can also due to the lack of consistent reporting and commitments were determined to be return dividends throughout the investment inadequate information about beneficial domestic financial institutions. Some period, again leading to worries about the

11 Follow the money

Figure 7: Type of investment ($ millions) transfer of real resources to developing countries.

What are the environmental implications? The CAO audit highlighted the lack of knowledge of environmental impacts of FI investments. This is borne out by the project database, which was checked for investments in the power sector. Our analysis identified 79 FI investments that included energy or power sector in the project descriptions. These represented $2.8 billion out of the total $21 billion in investment. The majority of projects were for energy efficiency measures. However, the descriptions were insufficiently detailed to determine whether the power sector projects were focussed on fossil fuels or renewable energy. One large coal power plant has been financed by an IFC FI client (see Box 3) and there could be others that have not yet come to light.

12 Follow the money

4. Assessing development impact

Measurement of development impact Typical quantitative indicators include return IFC intervention.”33 (emphasis added) On is still rudimentary for financial sector on equity, number of people employed, tax top of this, the report identified that DOTS investment. An alternative model for payments, effluent or emission levels and “is not used for the short-term finance thinking about development impact could number of people served by community projects in the financial intermediary sector, include better client choice, stronger development programmes. Examples of in particular for the global trade finance measurement, and more independent qualitative indicators include whether facility.” reporting and evaluation. a new technology has been adopted or whether international accreditation Additionally, it is unclear if the FIs should be If the IFC and other development finance has been received. These indicators are trusted to report accurately. While financial institutions are increasing investments in tailored to focus on outcomes that are reports are audited, there is no audit FIs, it is incumbent upon them to think relevant for specific economic sectors and process on impact measurement. How will more carefully about how to determine, must be “relevant, aggregatable, time- it ever be known if they are being honest, measure and report development impact. bound and easy to track”. The World Bank if they are not transparent about their An expansion of investments in FIs at the Group’s Independent Evaluation Group investments in the first place? expense of direct investments should only (IEG) completes an ex-post evaluation of be done with clear proof that FIs have a a random sample of ratings of finished Until recently the IFC had not set out greater positive development impact than projects. a clear rationale for how its increased direct investments. Yet there are clear support for FIs would lead to positive weaknesses with the current framework. DOTS has been heavily criticised, with development results except for a belief the IFC accused of having a limited in economic growth having positive How the IFC currently measures understanding of the impact of its development implications. A process was development outcomes investments because the indicators it relies started in late 2009 to develop a set of upon only track outputs and outcomes IFC development goals (IDGs), which are Efforts to monitor and evaluate the end of IFC client companies.32 Other criticisms “targets for reach, access, or other tangible result of intermediary loans were largely include that the evidence that is used to development outcomes that projects signed non-existent before the introduction of judge development impact is inconclusive or committed by IFC are expected to deliver the IFC’s Development Outcome Tracking and does not reflect the context-specific during their lifetime.” The IFC began testing System (DOTS) in 2005. The IFC uses nature of investments, i.e. that the intended these in 2011 and from July 2012 began DOTS throughout the project cycle, from effect might be caused by something else. rolling them out. Altogether there are seven approval until the project ends, and says Another criticism is that there is insufficient goals grouped under six headings.34 the system allows for real-time feedback transparency in how the IFC chooses how into operations. It claims that DOTS is it invests based on predicted development IDG 3 focusses on financial services, which the industry leader and the best practice impact because the DOTS system only tries “measures the expected increase in access system amongst its comparable institutions. to evaluate impact once the decision to to financial services for individuals and invest has already been made. Additionally, microenterprises (IDG 3a); and small and All IFC investments are given an overall DOTS ratings are initially given by the same medium enterprise (SME) clients (IDG 3b) DOTS score based on their rating against investment team that agrees the project, contributed by IFC’s Financial Markets a number of quantitative and qualitative creating conflicts of interest and potential (FM) & Access to Finance (A2F) projects.”35 indicators identified in four performance bias in the ratings. However, the wording of the targets does categories: financial performance, not specify who should be the beneficiaries, economic performance, environmental Unfortunately, there is little tracking on leaving it open for the IFC to meet these and social performance, and private sector the IFC side of the development outcomes targets by investing in FIs that expand development. A synthesis rating is given associated with the sub-clients of FIs. When consumer credit access to those who to the overall development outcome assessing the development impact of FIs, already could access credit rather than of the investment ranging from highly the IFC uses purely financial indicators such enabling access for the excluded. unsuccessful to highly successful. For an as return on invested capital and return on investment project to receive a positive equity. However, a March 2013 IEG report However, another question remains rating it must “make a positive contribution on the monitoring and evaluation system of unanswered: Is this a valuable use of to the client, the private sector, the the IFC found: “in practice, DOTS tracking is development resources? The IFC may be host country, and the environment and based on ‘proxy’ figures from the financial trying to implement systems to manage communities”. The IFC’s current portfolio institutions’ portfolio, such as number of social and environmental risks, but it only achieves a successful or highly loans given to a targeted business segment completely ignores the development successful rating on about two-thirds of and the quality of that portfolio. IFC has impact side of the question for FIs. For projects, with the other one-third of projects limited knowledge about the underlying the largest portion of the financial sector rated as unsuccessful. results on its end-beneficiaries, and any work, the IFC only measures the reach of claims would be difficult to attribute to the its projects – the number of new clients

13 Follow the money

Box 5. Financial inclusion and affect a country’s economic development extensive use of secrecy jurisdictions. financialisation trajectory because it will alter the power Profits are shifted to low or no-tax relationships between the state, the locations through financial engineering. Two concepts that have been used in financial sector, citizens and industry. The growing financialisation of economies debates about the role of the financial has undermined tax revenues and sector in development are financial One important development impact thus the ability to fund public services. inclusion and financialisation. Financial question that has been neglected is Investments in the financial sector inclusion is the idea that helping people whether support to FIs and boosting are significantly implicated in the use gain access to financial services allows the power of the financial sector results of secrecy jurisdictions (see previous them to have higher incomes, and in superior delivery of financial services section), with private equity funds making thus boosts overall economic growth. to the real economy. One key role of heavy use of opaque financial structures. Financialisation describes the increasing a well-functioning financial sector is The development impact of these importance of financial markets, motives, to mobilise the wealth and savings of structures needs to be better considered, institutions and financial elites in the citizens in an economy and channel with more information on potential lost operation of the economy. them to productive investment. It is tax revenue and the impact this has on estimated that developing countries lost public service provision. Prior to the 2008 financial crisis, there was $775 billion – equivalent to 4.3% of their little discussion in official circles of the GDP – due to illicit flows in 2009.39 This Finally, there have also been questions potential negative consequences of the means these resources are not reinvested raised about the social and development growth in the financial services industry. into productive activities in their own implications of credit provision to In the wake of the crisis, officials admitted economies, but instead exported to global microenterprises, particularly as provided that much financial deregulation and capital markets. through microfinance institutions. Aside financial service innovation was either from the gendered dimensions of their useless or in fact counterproductive.37 Yet, Secondly, there is insufficient analysis of work (see Box 2), there have also been in autumn 2012 the World Bank launched the impact of international public support worries about microfinance booms a new annual flagship Global Development to FIs on the credit market conditions in generating excessive, even crippling, Finance Report, which returned to some developing countries. As the IFC claims household debt levels.41 For example, in of the same pre-crisis themes about the to invest in its FI clients on commercial India a spate of farmer suicides has been need for liberalisation of financial services. or near-commercial terms, it is plausible blamed on excessive debt.42 The 2013 Global Financial Development that financing provision does not actually Report focussed on financial inclusion, enable productive firms or SMEs access Having a bigger, but short-term profit- arguing that, “research - both theoretical to credit on better terms. Research in oriented, financial sector contains risks and empirical - suggests that financial a number of developing countries has that have been insufficiently studied. inclusion is important for development found that the financial sector in many Inclusion of the poorest into the financial and poverty reduction.”38 emerging markets does not face a economy can give them extra capabilities financial constraint, as the FIs approach but also may subject them to financial While there are clear advantages at the implies, but actively chooses to invest its exploitation. The key question is what individual level of enabling excluded resources in speculative, high-yielding model of economic and industrial people to access financial services, there investments rather than in productive development is being enhanced - one are also potential larger implications enterprises40. that emphasises debt-based household of the mechanisms by which this is consumption or one that emphasises done. If the financial inclusion agenda Thirdly, financial innovation has been production and labour wage share is driven by expanding the power and accompanied by the development of increases? scope of the financial sector, this will opaque financial structures that make

for a bank, the number of businesses it is term investments needed to sustainably An alternative model lending to – without thinking about impact diversify economies and reduce poverty? The IFC’s approach on development in terms of what those subclients, (be There are no examples of countries that impact, while claimed to be best practice, they individuals, SMEs, or large businesses) have successfully increased prosperity is simply not sufficient to know the impact do with the resources. There is also little and equity by bolstering the power of the of FI investments. Development outcome recognition of the potential implications of financial sector and that lack a coherent assessment is clearly a difficult matter, strengthening the financial sector vis-a-vis national development strategy and with challenges of determining causality other stakeholders in national economies. industrial policy. The onus should first be on and defining counterfactuals. This is further Does having a more powerful, but short- the IFC to prove the effectiveness of their impeded by the lack of transparency about term profit-oriented, financial sector skew model, demonstrating the positive impacts. the ultimate beneficiaries of IFC FI financing incentives away from the sort of longer- and the reliance on client systems for

14 Follow the money

monitoring and reporting. Improvements The first criteria must be around more thought needs to go into how IFC could be made to ensure investments are commitment to shared goals, as investment affects behaviours of the as effective as possible, and also to know if determined by the client’s structure financial sector, the real productive sectors they are the best use of resources. and governance. Purely profit-oriented of the economy, individuals, and the public corporations aimed at maximising sector. There is a need to go beyond “do no The IFC seeks to convince its FI clients that return for shareholders should not harm” approaches and think about positive achieving development impact is good automatically be viewed as aligned with social, environmental and development for their own business and will enhance goals on development or environmental impacts. Of course the exact indicators to profit, and backs this up with advisory sustainability. Structurally they are not be measured should align with national services to try to strengthen the clients’ aligned, because of both institutional development goals and must match to own system.36 With competing interests, design and legal requirements in some the sector and country involved. A careful and profit-oriented banks and other FIs, it jurisdictions compelling corporations to seek balance will have to be struck between is not clear that it is even possible to have to maximise profit. Publicly listed companies one-size-fits-all standardisation, and development-oriented FI investments. Using have additional complications from needing incomparable customised targets. the existing approach the result is more to meet “shareholder interests”, which are likely to be profit-oriented FI investments defined as profit maximisation. Therefore A clear necessity is to think about the that incidentally have some claimed the IFC should choose clients who have distributional impact of any investment. positive development. And ultimately the positive social and environmental goals Are the resources being used in the capital claimed outcomes are not defined in terms as part of their corporate or institutional of a country or in rural or poorer regions? of human development, environmental goals, and ideally a track record in delivering Are they being targeted at the poorest sustainability or equity. results. Other key criteria should include segments of society or the richest? Are the alignment of the client with the there knock-on effects from the investment This makes it all the more important to national development plans of the country in productive sectors that generate think about institutional mandates of the concerned. For example investing in a bank environmentally sustainable and decent financial sector and the governance of that specialises in extractive industry trade jobs? And can positive human development finance. Thinking along these lines provides credit, when the government’s development impacts be attributed to the investment? a possible mechanism to ensure that public strategy is for economic diversification One important proxy is to carefully measure finance, despite being channelled through away from commodity exports, should the amount of participatory governance of private actors, can achieve public purposes. not be considered a good choice. If the an investment as this will provide clues as In this light, there appear to be three key national plan calls for strengthening private to whether it is in the public interest. areas for thinking through how the IFC, sector participation in certain sectors, for and other public international financial example in telecommunications, then this Another key consideration must be the institutions, can assess the development can be a guide for an international financial macroeconomic impacts of the activity impact of their investments: who you work institution when it comes to client choice. being financed. Financing for development with, what you measure, and how you agreements call for the long-term transfer report and evaluate. Other criteria could include past track of real resources to developing countries. record, willingness to learn, subclient However, certain modalities of investment Who to work with portfolio riskiness, openness and deliver little in terms of long-term real transparency to the public, and governance transfer of resources because of factors A clear consideration that must come up of the institution. Participatory governance such as profit repatriation, loan repayments, for international financial institutions is arrangements could be prioritised in order dividends or other mechanisms to remove client choice. If the IFC continues to choose to increase the control that communities capital from the country and send it clients with low capacity in environmental exercise over things that affect their back to investors, often based in rich and social issues and development livelihoods. Ratings on new metrics for countries. Additionally, international public outcomes, then the IFC should expect choosing clients should be provided in investments could provide positive signals to nothing more than continued failure from standardised formats and published encourage short-term capital flows, which clients to properly implement its standards publicly, for example in the reviews can destabilise financial systems when they and failure to achieve development impact. disclosed before investment decisions take rush in or out of a country. Choosing clients more carefully, and in a place. standardised, systemic and transparent In the financial sector, further consideration manner, should be a foundational rule for What to measure must be given to the location of the parent all public institutional finance to the private financial institution. Rapid development sector. Standards and safeguards cannot Once a trustworthy client is chosen, and industrialisation has rarely if ever been solve the problem if a client cannot be the next stage is to think about what is financed by foreign financial institutions trusted to deliver agreed outputs, which to be measured and how that should operating in a host country. Development hopefully lead to the desired outcomes. drive investment decision making. While success stories, such as Korea, Taiwan Even with dramatically increased levels measuring the number of people or and China, relied on a heavily regulated of project supervision by the IFC it would businesses a client reaches can be helpful domestic financial sector, not on foreign be impossible to implement agreements in thinking about impact, it is not sufficient. banks.45 While there is microeconomic without trusting the client. Because the key development constraint evidence elsewhere of the so-called is rarely just the amount of finance, efficiency of foreign banks, there is little

15 Follow the money

consideration of the socio-economic tax? How much is contributed to spending challenges are far greater for the use of effects when foreign banks dominate a on important public social services such funds by subclients of the IFC’s financial nation’s financial sector. Their presence as health care and education, versus how sector clients. If the IFC is not aware how its changes the structure of economies and much has been used to finance needed funds are being used, it will be impossible the relationship between finance, industry infrastructure or administration related to for affected communities to be able to seek and the state. Additionally, capital flight the project itself? redress for any harm done. There is also risks are exacerbated in countries with inadequate consideration of language and higher foreign bank penetration and no How to report and evaluate information access constraints of affected capital controls, unlike India’s experience in people, precluding access to remedy for The most important consideration in this 2010.44 Overall, the role of the state, which harm done. alternative model is much more careful has public interest obligations, is important thinking about the governance of systems in setting out regulatory frameworks that Financial auditing is a foundational part of for reporting and verifying development structure the financial industry and guide its business practice to counter malpractice impact. Current systems are rife with self- relationship with the rest of the economy. and to ensure integrity and accuracy of assessment, conflicts of interest, and lack of The presence of foreign banks, which have financial reports. The IFC no doubt makes independent verification. This should not be different regulatory treatment depending ample use of financial audits of clients acceptable. The priority has to be for greater on the investment structure, can reduce the which must be carried out by independent transparency to the whole cycle from client ability of the state to shape finance in the third party auditors. As the IFC claims to selection and project definition through to public interest. have a dual purpose of generating profit impact assessment. as well as development outcomes, it Finally, the level of public resources that makes little sense that the IFC pursues Accountability is a fundamental are generated is important. However, independent verification of results on only requirement for multilateral finance the tendency has been to report any tax the profit-oriented half of this mandate provided by a public institution and essential payment as a net positive, without thinking while not on the development outcome if the World Bank Group wants to credibly through the indirect effects. This leaves side. Development outcomes, including achieve its corporate goals. However, open numerous questions which bring into environmental and social risk management accountability is impossible if there is no doubt such a simplistic approach. Could and community engagement, must also be information about the ultimate destination higher levels of tax revenue have been independently verified as this is the reason of funds. Affected communities already sustainably generated through stricter rules that public funds are made available in the have difficulty accessing appropriate on off-shore finance? Would a domestic first place. information in a timely fashion relating enterprise have taken some of the market to IFC direct investment projects. The share and paid a higher level of domestic

16 Follow the money

5. Ways forward

While use of the private financial sector time to question this trend towards using The ‘black box’ nature of the IFC’s financial as a channel of development finance unaccountable intermediaries. sector investments raises many concerns. is controversial, it is also growing. Civil Where does the money go? Are there society organisations need to determine The data shows that the IFC is negative social impacts, for example their strategy in light of this trend. concentrating its work on lending to negative impacts on women or children? commercial private banks, generally for use What about the environmental impacts? Our examination of the data related to IFC by the bank to bolster its own balance sheet And can the IFC be held accountable? support for the financial sector has provided and expand operations, or for trade finance. The IFC takes a “management systems” some initial findings which can help direct Yet there is no compelling evidence that approach to the environmental and our thinking. While the World Bank Group trade finance or commercial private finance social risks, yet this is clearly insufficient. as a whole is shifting its attention and focus will lead to more prosperous, sustainable Without more participation, transparency, to work with the private sector, the IFC or equitable economies in developing accountability, supervision, and verification has been shifting its portfolio increasingly countries. There is evidence that financial related to financial sector projects, the towards the financial sector. Just five years sector liquidity is not a key constraint to IFC will continue to mismanage the risks, after a major international financial crisis development. The only certainty is that the often with devastating consequences for driven by unsustainable financial sector IFC does not know the real impact of these affected people, as the CAO is documenting activities, the financial sector is now the resources because it does not have the in countries as diverse as India, Honduras, main beneficiary of World Bank Group systems to know or track the development Uganda and Cambodia. And the questions investment. As investment in banks and outcomes, social consequences or raised in the previous section about the other financial intermediaries is now worth environmental harms generated as a result development impact of FI investment show three times as much as the World Bank of the use of the resources by the financial that this is also a question of efficacy for the Group invests in education and 50% more sector’s clients. IFC to achieve its claimed mission of poverty than its investment in healthcare, it is reduction. The IFC has not proven the effectiveness of the FI model and should before commitments on such a massive scale are viewed as acceptable.

Table 5: Summary of three possible approaches Broader implications

Approach tagline Stronger rules Different operators New tools The IFC is just one of many institutions now operating in the sphere of development finance. However, the financial sector is Mandate of FI Profit-oriented Social enterprise, mixed Public the channel that development finance institutions are increasingly utilising. The Type of FI Commercial banks, private Cooperatives, commu- National Green Climate Fund is already proceeding equity funds, other institutional nity banks, non-profit mi- development investors, non-bank financial crofinance institutions banks down this route and the G20 countries are institutions, profit-oriented examining how to strengthen the nexus microfinance institutions between public and private finance. The BRICS Bank may adopt the FI model as Ownership of FI International / national Local, national National state- well. Infrastructure provision is already owned enterprise being discussed in the context of FIs, and increasingly this model will encroach upon Key changes Subclient transparency, Criteria for client se- Strategy / man- needed increased resources for lection date changes OR direct finance in areas such as education, supervision national financial healthcare, housing, water and sanitation. regulation With an increasing proportion of public Locus of project Private sector Community institutions National govern- money being used to fund the private governance ments financial sector, civil society organisations and social movements should be thinking Profitability Slightly reduced to pay for Possibly moderately Potentially signifi- about more coherent strategies. This is implications regulation reduced cantly curtailed a very changed environment from the IFI instruments Loans, equity stakes, guaran- Concessional loans, Loans bank-lending-fuelled export-oriented to use tees, risk management loans development strategies adopted in East Asia. So far little independent thinking Difficulty of Medium-hard Hard Extremely hard has emerged that takes into account the implementation increasing sophistication of the financial

17 Follow the money

sector and translates that into a desirable reformed internal incentives, stronger Approach 3: New tools framework for using the financial sector compliance mechanisms, and more Finally, civil society groups that conclude the to achieve development objectives. Civil accountability for results and harms. hurdles to the effective use of the private society needs to grapple with the nature of financial sector as development agents are FIs, their potential environmental and social Approach 2: Same tools, different just too great would advocate a complete risks and development impacts, and put operators re-orientation away from private FIs as an forward a position that seeks to make sure This approach emphasises the argument acceptable model for cross-border public that the available instruments meet the that existing private, profit-oriented financial investments. Advocates of this approach needs of national contexts. institutions are not amenable to social goals might call for a new generation of public given their short-termism and failure to FIs and a cessation of lending directly to Below we outline three schematic internalise the full social and environmental private FIs. They should set out concrete approaches for how civil society might costs of their activities. Campaigners and alternative strategies that would seek to engage with the use of international public civil society could clearly articulate how achieve development outcomes through finance to fund the private financial sector. they think investments in the private sector other ways of utilising international public They involve different beliefs about the can achieve development goals, such resources. This could include pushing importance of safeguards, transparency, as environmental sustainability, human national development banks as the apex governance and state authority. As every development and equity by better ‘client’ institution within their country to be used as national, and even provincial or local, selection, by choosing intermediaries that the primary vehicle to channel international context is different, there is no single are constitutionally mandated to reduce development finance and even international approach that can be universalised and poverty, ensure sustainability or achieve private finance. The new generation of no one-size-fits-all strategy. As the public other goals. Public institutions would not be public FIs, along with international public institutions develop their strategies, held hostage to demands for commercial support, could seek to mobilise domestic advocacy and campaigning can build on the levels of return that match the profits of private wealth to invest in accordance with complimentary ideas below. private equity funds and hedge funds, public interest policies. instead trying to balance sustainable and Approach 1: Same tools, same operators, sufficient rates of return with development This could shift the focus from thinking stronger rules and transparency impact. They could seek out cooperatives, about the appropriate use and role of In this approach, civil society considers the social enterprises, state-owned institutions the private financial sector towards IFC and its financial sector clients as well- or other financial sector actors with a public national development banks or national intentioned positive forces that only need purpose, accountability to beneficiaries, development strategies. It would not to improve their systems and procedures. and a commitment to deliver positive social necessarily mean limiting the use of The private, profit-oriented financial sector and environmental outcomes/impact. international public finance, but would is viewed as a key agent to facilitate This approach could build on the stronger completely reorient the governance of such development outcomes. Profit-making rules discussed in the first approach, flows to the national financial sector and incentives are compatible with sustainability incorporating stringent transparency, could be part of a push to reduce the power and equity as long as they are accompanied safeguard and accountability requirements. and complexity of the financial sector. The by appropriate regulation, enforcement, current international economic environment and accountability. This approach may even Advocating such an approach would is not conducive to this approach, with see international financial institutions as contradict the momentum of discussion the final two large emerging markets with positive contributors to global outcomes by in international development finance relatively closed financial sectors, India and raising standards and curbing malpractice. circles, which increasingly seek out profit- China, undertaking moves to liberalise their FIs have a global reach, and could be oriented financial investors. NGOs would financial sectors and open their economies promoted within countries that might not have to make a clear case for the specific up to greater levels of foreign ownership have developed financial sectors to bolster private sector and FIs it favours based on and investment. goals like financial inclusion. This approach development goals, scale, participation, might imply a reduction in the number and accountabilty and ownership. This would Of course, given the very large degree of volume of FI projects to facilitate greater not preclude the desire for stronger global financial liberalisation campaigners supervision and accountability. transparency, regulation and accountability and NGOs would struggle to win the as described in the first approach, but it argument for this policy at international NGOs have campaigned for the IFC and would add a layer of complexity. Much level and even in some national contexts. other institutions to develop transparency stronger, but transparent, criteria for client However, within individual international policies and environmental and social selection would have to be developed. It financial institutions, for example the safeguards, and this approach would look would also have to be carefully applied in BRICS Bank, it could be possible to ensure to strengthen these given the critiques put line with the democratic wishes of affected rules that restrict the usage of FIs to forward about environmental and social people in recipient countries. In some national development banks. Individual risks. This would imply fuller disclosure of countries or localities this may preclude developing countries could adopt this investments, trying to eliminate tax evasion, the use of Northern-based private financial stance by restricting or regulating the inflow stronger development impact assessment, institutions as agents of development, of investment into their private financial capacity building for the financial sector, in favour of local or national pro-poor sectors. better supervision of implementation, institutions.

18 Follow the money

Future agenda The international development finance environment is currently fixated upon the use of the private financial sector as a development actor, without fully thinking through the implications. This report has identified gaps in knowledge about the gendered impact of the financial sector, the broader social implications of microfinance, and a more detailed country-specific understanding of the political economy of the financial sector’s relationships to industry and the state and how international financial institutions influence these relationships.

At the same time, civil society organisation and social movements have not consolidated their own understanding of the issues and brought forward recommendations. The large variety of positions complicates thinking about international strategies. Each national context, with differing degrees of financial liberalisation and variable levels of governmental interest in sustainable and pro-poor development, will determine the best fit of approaches and strategies. Yet, unifying positions and demands as much as possible can enable successful challenges to the underlying systems of international finance.

19 Follow the money

Annex A. Report methodology

Data on IFC aggregate commitments cross-sectional analysis of FI lending As the IFC public project list does not always and overall commitments to financial by client type, destination country or include information on project approval and intermediaries are based on IFC annual instrument. To overcome this constraint, signing dates, the projected project board reports for the fiscal years (FY) 2010 – our deeper analysis is based on a list of date is used to specify the fiscal year of 2013. In these reports the IFC provides an projects exported from the IFC website. All the project. IFC fiscal years run from July “industry” breakdown of its investments, projects between FY 2010 and FY 2013 were to June, and our data covers projects that from which we have combined “trade extracted from the IFC project database. went to the board in fiscal years 2010-13. finance” and “financial markets” to provide This yielded a total of 560 FI projects an overall financial intermediaries figure. in this four year period, with a total IFC IFC financial intermediary sector The IFC themselves combined these figures commitment value of $21.1 billion. This categorisation until fiscal year 2011. is far below the $36.1 billion reported in The IFC categorises its projects in several the IFC annual reports and therefore the ways. The table below provides the IFC While the IFC provides aggregate level data analysis and conclusions should be breakdown of sectors and our method of information in its annual reports, this interpreted as reflecting the sample of grouping these for analysis. information does not allow a detailed projects that were looked at.39

IFC project category FI type for this analysis IFC project category FI type for this analysis

Capital Markets Financing Company Capital markets Finance Companies Other (Including Investment Banking) Finance Companies - Consumer Finance Other Commercial Banking - Consumer Finance Commercial banking Foreign Portfolio Debt Fund Capital markets Commercial Banking - Distressed Assets Commercial banking General Insurance (Non-Life) Insurance Commercial Banking - General Commercial banking Leasing Services Other Commercial Banking - Housing Finance Commercial banking Life Insurance Insurance Commercial Banking - Microfinance Microfinance Microfinance and Small Business - Non Com- Microfinance Commercial Banking - Microfinance and SME finance mercial Banking Small Business Money transfer, remittances Other Commercial Banking - Risk Mgmt Facility Commercial banking Mortgage Services and Other Other Commercial Banking - Short Term Finance Commercial banking Online payments, ecommerce payments Other Commercial Banking - SME Finance SME finance Other Funds PE Commercial Banking - Trade Trade finance

Other Non-Banking Financial Institution Other Commercial Banking - Trade and Supply Commercial banking (NBFI) Chain

Other Non-Depository Credit Other Composite Insurance (Life and Non-life) Insurance

Primary Mortgage Institutions Other Development Finance Company Other

Private Equity/Venture Cap Fund - Country PE Distressed Assets Capital markets

Private Equity/Venture Cap Fund - Regional PE Exchanges (Trading Systems) Capital markets

20 Follow the money

Annex B. IFC FI risk categorisation

As part of the review of environmental are diverse, irreversible, or unprecedented. For FI investments where IFC’s funds are and social risks and impacts of a proposed traceable and intended for a specified end investment, IFC uses a process of FI–2: when an FI’s existing or proposed use, IFC will determine the environmental environmental and social categorization to portfolio is comprised of, or is expected and social category based on risks reflect the magnitude of risks and impacts. to be comprised of, business activities associated with the specified end use. The resulting category also specifies IFC’s that have potential limited adverse Where IFC’s funds provide general financial institutional requirements for disclosure in environmental or social risks or impacts support to an FI (such as equity in a accordance with IFC’s Access to Information that are few in number, generally site- Bank) the entire portfolio of the FI will be Policy. These categories are: specific, largely reversible, and readily considered in the determination of the addressed through mitigation measures; or category. In its determination of FI–1, FI–2, Category FI: Business activities includes a very limited number of business or FI–3 designation, IFC will consider tenor, involving investments in FIs or through activities with potential significant adverse size, and type of investments as well as the delivery mechanisms involving financial environmental or social risks or impacts that sectoral exposure of investments. intermediation. This category is further are diverse, irreversible, or unprecedented. divided into: Source: IFC Policy on Environmental and Social Risk, 1 FI–3: when an FI’s existing or proposed January 2012 FI–1: when an FI’s existing or proposed portfolio includes financial exposure to portfolio includes, or is expected to include, business activities that predominantly have substantial financial exposure to business minimal or no adverse environmental or activities with potential significant adverse social impacts. environmental or social risks or impacts that

21 Follow the money

Annex C. Projects channelled through secrecy jurisdictions

The top 20 locations in the Financial Secrecy Virgin Islands. The projects below represent Index are Switzerland, Luxembourg, Hong ones with resources channelled through Kong, Cayman Islands, Singapore, United one of these jurisdictions, but that location States, Lebanon, Germany, Jersey, Japan, not serving as the ultimate location of the Panama, Malaysia, Bahrain, Bermuda, project, nor the location of the FIs offices or Guernsey, United Arab Emirates (Dubai), headquarters. Canada, Austria, Mauritius and the British

Year Beneficiary (Project Company) Project Country Country of FI Country of company IFC financing ($ Disclosed registration millions)

2009 IFHA Africa Region Netherlands Mauritius 6.8

2009 ADP I Africa Region UK Mauritius 24.8

2009 Fanisi VC Fund Eastern Africa Region Nairobi Mauritius 7.5

2009 Ethos VI Africa Region South Africa Jersey 30.0

2009 GEF SACEF Southern Asia Region United States Mauritius 20.0

2009 SEAF Caribbean Latin America Region United States Barbados 10.0

2009 LeapFrog Fund World Region South Africa Bermuda/Mauritius 20.0

2009 Adlevo Capital Africa Region Nigeria Mauritius 10.0

2009 DARP SPV ADM CAPITAL Southern Europe Hong Kong Cayman Islands 47.6 Region

2010 TRG Africa Catalyst Fund I, LLC Africa Region South Africa US 25.0

2010 Agri-Vie Agribusiness Fund Southern Africa Region South Africa Mauritius 7.0

2010 Alta Ventures Mexico United States Canada 10.0

2010 AWF China Malaysia Singapore 20.0

2010 SEAF Bangladesh Ventures Bangladesh United States Delaware 12.0

2010 West Africa Venture Fund PCC Western Africa Region Nigeria Mauritius 13.5

2010 ECP Africa III Africa Region United States Africa 25.0

2010 GEF Africa Africa Region United States Canada 20.0

2010 MOF I Mongolia Mongolia Cayman Islands 7.5

2010 GGF Southern Europe Luxembourg Luxembourg 31.0 Region

2010 Aavishkaar Goodwell India India India, Netherlands Mauritius 15.0 Microfinance Development Company II

22 Follow the money

Year Beneficiary (Project Company) Project Country Country of FI Country of company IFC financing ($ Disclosed registration millions)

2010 Catalyst Fund I LLC Eastern Africa Region Kenya Mauritius 10.0

2011 SEAF Eastern Europe Region United States Cayman Islands or 10.0 Delaware

2011 Kaizen (Venture) Partners Ltd India India Mauritius 10.0

2011 Maybank MEACP Pte. Ltd East Asia and Pacific Malaysia Cayman Islands 25.0 Region

2010 Alta Ventures Mexico United States Canada 10.0

2010 AWF China Malaysia Singapore 20.0

2011 Vietnam Investments Group Vietnam Vietnam Cayman Islands 15.0

2011 Tuninvest-Africinvest MENA Region Tunisia Mauritius 21.7

2011 Tsinghua University China China Cayman Islands 20.0

2011 Aavishkaar Venture Management India India Mauritius 15.0 Services Pvt. Ltd.

2011 Forum Synergies (India) PE Fund India India Mauritius 15.0 Managers Pvt. Ltd

2011 Not entered East Asia and Pacific Canada Canada 25.0 Region

2011 Cauris Capital Partners II Western Africa Region Togo Mauritius 7.2

2011 Dragon Capital Group Vietnam Vietnam Cayman Islands 15.0

2011 Aloe East Asia and Pacific France Mauritius 25.0 Region

2011 Nature Elements Capital China Hong Kong Cayman Islands 25.0

2011 Leopard Capital Haiti Ltd Haiti Cayman Islands Cayman Islands 10.0

2011 Zephyr Management India United States Mauritius 15.0

2012 Business Partners Southern Africa Region South Africa Mauritius 8.0

2012 CoreCo Central America Partners I, LLC Central America Region Costa Rica/ United States 10.0 Guatemala

2012 Delta Partners Group United Arab Emirates Dubai Cayman Islands 20.0

2012 Real Infrastructure Capital Partners Latin America Region United States United States 15.0

2012 Capital Invest Group Morocco Morocco Luxembourg 13.2

2012 Mediterra Capital Management Limited Turkey Guernsey Guernsey 20.0

2012 Lombard Investments, Inc. Thailand Cayman Islands Cayman Islands 25.0

2012 Pragati India Asset Management India Mauritius Mauritius 20.0

23 Follow the money

Year Beneficiary (Project Company) Project Country Country of FI Country of company IFC financing ($ Disclosed registration millions)

2012 CapAleph Advisors India Private Limited India India Mauritius 15.0

2012 Falcon House Capital Management Ltd Indonesia Indonesia/ Cayman Islands 25.0 Singapore

2012 Grand River Capital Management Co., Ltd China China Cayman Islands 20.0

2012 Nereus Capital Management, LLC India India Mauritius 20.0

2012 BanyanTree Capital Advisors Limited India India Mauritius 25.0

2012 Almaz Capital Partners II, LLC Russian Federation Russian Federation Cayman Islands 25.0

2012 Satya Capital Limited Africa Region Jersey Mauritius 30.0

2012 Elbrus Fund II Russian Federation Russian Federation Cayman Islands 20.0

2012 CapMan Russia II Russian Federation UK Guernsey 19.5

2012 GC Credit Opportunities GP Limited MENA Region Cayman Islands Cayman Islands 20.0

2012 Earlybird Luxembourg Management SA Turkey Turkey Luxembourg 25.0

2012 Navegar I L.P. Philippines Sweden Cayman Islands 20.0

2012 Leopard Capital L.P. Bangladesh Bangladesh Cayman Islands 15.0

2012 Andrew Affleck, Michael McNeill and East Asia and Pacific Singapore Singapore 20.0 Stephen Mahon Region

2013 ADP II Africa Region UK Guernsey 40.0

2013 Amazon Fund Brazil Brazil Cayman Islands/Buernsey 30.0

2013 FIRST Brazil Brazil United States 15.0

2013 NH A&F Fund II China China Cayman Islands 20.0

2013 India 2020 II India India Maritius 25.0

2013 Lakeshore Capita Thailand Cayman Islands Cayman Islands 20.0

2013 BVCF III China China Cayman Islands 20.0

2013 IBEF II India India Mauritius 25.0

24 Follow the money

Annex D. Resources and reading list

Assessing International Finance Corporation’s Private profit for public good? Can investing (IFC) poverty focus and results, Independent in private companies deliver for the poor? Evaluation Group, World Bank, April 2011 Eurodad, May 2012 Δieg.worldbankgroup.org/evaluations/ Δwww.eurodad.org/files/ assessing-international-finance- pdf/520a35cb666a7.pdf corporations-ifc-poverty-focus-and-results Risky Business: Intermediary lending and CAO Audit of a sample of IFC investments in development finance, Oxfam and CIEL, April third-party financial intermediaries, Compliance 2013 Advisor Ombudsman, February 2013 Δwww.oxfam.org/sites/www.oxfam.org/files/ Δwww.cao-ombudsman.org/documents/ ib-intermediary-lending-and-development- Audit_Report_C-I-R9-Y10-135.pdf finance-180412-en.pdf

Financial Secrecy Index – 2013 results Rubber Barons: How Vietnamese companies Δwww.financialsecrecyindex.com/ and international financiers are driving a land introduction/fsi-2013-results grabbing crisis in Cambodia and Laos, Global Witness, May 2013 Infrastructure as an asset class: Financing Δwww.globalwitness.org/rubberbarons/ development or development finance? Nick Hildyard, Bretton Woods Project, July 2012 Δwww.brettonwoodsproject.org/2012/07/ art-570868/ Civil society letters to the World Bank and IFC on financial intermediaries Investing in private sector development: what are the returns? A review of development Civil society letter to Jin-Yong Cai, IFC executive impact evaluation systems used by vice president, calls for “immediately revisition development finance institutions in Europe, of action plan to comprehensively address the Norwegian Church Aid, June 2011 CAO audit’s findings. Δwww.kirkensnodhjelp.no/PageFiles/1891/ ΔMarch 2014, http://www. NCA_report_investing_in_private_sector_ brettonwoodsproject.org/2014/03/13785/ development.pdf Civil society letter to Bank President Jim Kim Negotiating Power: Study of socio-economic notes dialogue with IFC but say “IFC action impacts Kamalanga coal power plant in Odisha, plan fails to address our main concerns”. India, November 2012 November 2013 Δwww.scribd.com/doc/120264767/ Δwww.brettonwoodsproject.org/2013/11/ Negotiating-Power-Study-of-Socio-Economic- response-letter-wb-pres-ifc-fis/ Impacts-of-GKEL-in-Dhenkanal Civil society letter to World Bank President Jim Out of sight, out of mind? Bretton Woods Kim urges “revised IFC response to the CAO Project, November 2010 audit that acknowledges the fundamental Δwww.brettonwoodsproject.org/2010/11/ flaws”. March 2013 art-567190/ Δwww.brettonwoodsproject.org/2013/03/ art-572178/

25 Follow the money

Endnotes

1 Furthermore, the World Bank Group strategy, 12 See “The social costs of microfinance and over- IFC_Factsheet_SME_Loan+Size+Proxy_Brief. October 2013, says “partnership with the private indebtedness for women”, in Microfinance, debt and pdf?MOD=AJPERES sector can create jobs, transfer technology, over-indebtedness: Juggling with money, Isabelle build skills, and promote innovation and Guérin, Solène Morvant-Roux, Magdalena Villarreal 25 Calculated based on the 560 projects reviewed in entrepreneurialism which all contribute to (eds), Routledge, 2013. this report economic growth and reducing poverty.” 13 See Microfinance and Its Discontents: Women in 26 Note that Russia became classified by the World 2 Presentation by the IFC to the World Bank’s Debt in Bangladesh, Lamia Karim, University of Bank as a high-income country in July 2013. For the Committee on Development Effectiveness Minnesota Press, 2011. purposes of our data analysis Russia has remained September 4 2013, E&S risk management of labelled as an upper-middle-income country. financial institutions at the IFC: ”It enables IFC 14 Green Climate Fund board documents, Structure to deliver financial resources to millions of SMEs, of the Fund, Including the Structure of the microenterprises and individuals that it would 27 Assessing International Finance Corporation’s Private Sector Facility (Progress Report), February (IFC) poverty focus and results, Independent never be able to reach directly. This engagement 2014 http://gcfund.net/fileadmin/00_customer/ has strengthened the capabilities of FIs to fund Evaluation Group, World Bank, April 2011, http:// documents/pdf/GCF_B06_Structure_of_the_Fund-_ ieg.worldbankgroup.org/evaluations/assessing- activities in vital economic sectors such as Progress_Report_fin_14_Feb_2014.pdf agriculture, housing, manufacturing, infrastructure international-finance-corporations-ifc-poverty- and social services.” focus-and-results 15 7 Things to Look Out for in the UN’s Green Climate Fund, IPS, February 2014 http://www.ips-dc.org/ 3 This definition of financialisation from Epstein, 28 “Where do the world’s poor live? A new update”, blog/7_things_to_look_out_for_in_the_uns_green_ Andy Sumner, IDS Working Paper 393, June 2012, G. 2001. “Financialization, Rentier Interests, and climate_fund Central Bank Policy,” Department of Economics, http://www.ids.ac.uk/files/dmfile/Wp393.pdf. University of Massachusetts, Amherst, MA, December, http://www.peri.umass.edu/fileadmin/ 16 Private Sector Specialist- Financial Institutes, Role 29 The IFC procedures recognised three different pdf/financial/fin_Epstein.pdf. description, SRI http://www.sri-executive.com/jobs/ “types” of FI transactions with different private-sector-specialist-financial-institutes requirements of meeting the IFC performance 4 For a deeper discussion of financialisation please standards, see “The International Finance see: Financialization and the World Economy, Gerald 17 CIFs Monitor 8, Bretton Woods Project, October Corporation Procedure for Environmental Epstein (ed), Edward Elgar: 2005. 2013, http://www.brettonwoodsproject. and Social Review of Projects”, Annex F IFC, org/2013/10/cifs-private-sector/ December 1998, http://www1.ifc.org/wps/wcm/ connect/8b64370048855267ab74fb6a6515bb18/ 5 See “BRICS bank: New bottle, how’s the wine?”, 18 A review of the IFC’s safeguards policies, ESRP. S&CACHEID=8b64370048855267ab74 Sameer Dossani, Bretton Woods Project, fb6a6515bb18. February 2014, http://www.brettonwoodsproject. Compliance Advisor Ombudsman, January org/2014/02/brics-bank-new-bottle-hows-wine/. 2003, http://www.cao-ombudsman. org/howwework/advisor/documents/ 30 The top 20 locations are Switzerland, Luxembourg, ReviewofIFCSPsfinalreportenglish04-03-03.pdf. Hong Kong, Cayman Islands, Singapore, United 6 “Infrastructure as an asset class: Financing States, Lebanon, Germany, Jersey, Japan, Panama, development or development finance?”, Nick Malaysia, Bahrain, Bermuda, Guernsey, United Arab Hildyard, Bretton Woods Project, July 2012, http:// 19 See a civil society letter and briefing sent to the head of the IFC on 17 March 2014 for Emirates (Dubai), Canada, Austria, Mauritius and www.brettonwoodsproject.org/2012/07/art- the British Virgin Islands. 570868/. more details: http://www.brettonwoodsproject. org/2014/03/13785/#briefing 31 Financial Secrecy Index – 2013 results http://www. 7 See “World bank infrastructure support: ‘finance as 20 Some developed economies are now undertaking a financialsecrecyindex.com/introduction/fsi-2013- extraction’”, Bretton Woods Observer, Winter 2014, results http://www.brettonwoodsproject.org/2014/01/ process of reversing the full financial liberalisation world-bank-infrastucture-support-finance- they had adopted prior to the financial crisis, extraction/ acknowledging that the financialisation model 32 Further description of these criticisms can be led to regulatory capture by the sector, economic found in Investing in private sector development: instability and rather than growth, massive wealth what are the returns? A review of development 8 See “Financial inclusion and legal discrimination destruction. impact evaluation systems used by development against women: evidence from developing finance institutions in Europe, Norwegian Church countries”, Asli Demirguc-Kunt, Leora Klapper, and Aid, June 2011, http://www.kirkensnodhjelp.no/ Dorothe Singer, World Bank Policy Research working 21 Out of sight, out of mind, ‘Ulu Foundation and Bretton Woods Project, May 2011, http://www. PageFiles/1891/NCA_report_investing_in_private_ paper no. WPS 6416, April 2013, http://www-wds. sector_development.pdf. worldbank.org/external/default/WDSContentServer/ brettonwoodsproject.org/2010/11/art-567190/ IW3P/IB/2013/04/19/000158349_2013041910534 9/Rendered/PDF/wps6416.pdf. 22 Private profit for public good? Can investing in 33 Assessing the monitoring and evaluation systems private companies deliver for the poor? Jeroen of IFC and MIGA: Biennial report on operations evaluation, Independent Evaluation Group, World 9 See 2012 World Development Report on Gender Kwakkenboes, Eurodad, May 2012, http://www. eurodad.org/files/pdf/520a35cb666a7.pdf Bank, March 2013, http://ieg.worldbankgroup.org/ Equality and Development, World Bank, 2011. evaluations/assessing-monitoring-and-evaluation- systems-ifc-and-miga. 10 See http://www.coca-colacompany.com/press- 23 IFC FI support based on IFC annual reports. Project center/press-releases/the-coca-cola-company- database calculations in the rest of this report show a lower total. 34 For a description of the IFC’s development targets, and-ifc-announce-initiative-to-support-women- see page 16, FY 2014 business plan http://www. entrepreneurs-across-emerging-markets ifc.org/wps/wcm/connect/corp_ext_content/ 24 “IFC’s SME loan size proxy: A reliable predictor ifc_external_corporate_site/ifc+projects+database/ of underlying small and medium enterprises 11 See http://www.goldmansachs.com/ projects/ifc_fy14_businessplan_budget citizenship/10000women/news-and- in the IFC’s financial markets portfolio”, events/10000women-ifc.html International Finance Corporation, 26 February 2013, http://www.ifc.org/wps/wcm/ 35 See “IFC development goals overview: connect/635f64804efbe2b18ef5cf3eac88a2f8/ IDG3 financial services”, 28 June

26 Follow the money

2012, http://www.ifc.org/wps/wcm/ SOAS, University of London, http://eprints.soas. connect/1d2a21004bcb4f538fbaef1be6561834/ ac.uk/17844 idg+3+flyer+financial.pdf?MOD=AJPERES. 41 Milford Bateman (2010) Why Doesn’t Microfinance 36 See for example “Draft results measurement Work?: The Destructive Rise of Local Neoliberalism, conference highlights”, IFC, May 2013, Zed books http://www.ifc.org/wps/wcm/connect/ b1568c004f8cd47d93cfff0098cb14b9/ 42 New York Times, 22 February 2014: After Farmers Draft+RM+Conference+Highlights+For+Web. Commit Suicide, Debts Fall on Families in India pdf?MOD=AJPERES. http://www.nytimes.com/2014/02/23/world/ asia/after-farmers-commit-suicide-debts-fall-on- 37 For example Lord Adair Turner, the then head of UK families-in-india.html banking regulator the Financial Services Authority, called the 2008 financial crisis “a fairly complete 43 See Asia’s Next Giant, Alice Amsden, Oxford train wreck of a predominant theory of economics University Press: 2006, Governing the Market, Robert and finance”. Time for a new consensus: Regulating Wade, Princeton University Press: 1992. financial flows for stability and development, Bretton Woods Project, December 2011 44 India and the Global Financial Crisis: Managing Money and Finance, YV Reddy, Orient Blackswan: 38 World Bank: 2014 Global Financial Development 2011. Report: Financial Inclusion wwwr.worldbank.org/ financialdevelopment 45 There is no supplementary project level information or disclosures that allow us to determine the source 39 Global Financial Integrity: Dev Kar and Sarah Freitas, of this discrepancy. The IFC was unable to provide “Illicit Financial Flows from Developing Countries an explanation before publication of this report. Over the Decade Ending 2009”, 2011, http:// iffdec2011.gfintegrity.org/

40 Subordinate financialisation: a study of Mexico and its nonfinancial corporations. Jeff Powell PhD Thesis.

27 Follow the money

28 Publisher: Bretton Woods Project Authors: Peter Chowla, Dario Kenner Research assistance: Lucy Tattersall April 2014

Thank you to the following, in no particular order, who have provided useful commentary on this report: Antonio Tricarico, Maria Jose Romero, Sargon Nissan, Petra Kjell and Clare Woodford. Remaining errors and omissions are solely the responsibility of the authors.

Funding for the production of this report has been provided by the European Union, CS Mott Foundation, Rockefeller Bros Fund, and a coalition of UK NGOs. The report should in no way be construed as reflecting the views of the funders. Copyright notice: This text may be freely used providing the source is credited.

Graphic design: www.base-eleven.com

The Bretton Woods Project is an Bretton Woods Project Tel: +44 (0)20 3122 0610 ActionAid hosted project, UK registered 33-39 Bowling Green Lane Email: [email protected] charity no. 274467. London EC1R 0BJ www.brettonwoodsproject.org United Kingdom @brettonwoodspr facebook.com/BrettonWoodsProject