World Bank Document

INTRODUCTION ______________________________________________________________________ The International Finance Corporation (IFC), part of the World Bank Group, is in the business of reducing Public Disclosure Authorized poverty and encouraging economic development in poorer countries through the private sector. IFC carries out this mandate primarily by investing in a wide variety of private projects in developing countries, always investing with other sponsors and financial institutions. These projects are selected first and foremost for their ability to contribute to economic growth and development. Obviously, to contribute effectively to development in the long run, IFC’s private sector projects must also be financially successful. Companies that are not financially viable clearly cannot contribute to development. IFC and its partners are, therefore, profit-seeking and take on the same risks as any private sector investor. Thus all IFC projects are screened not only for their likely contributions to development but also for the likelihood of their financial success. This screening, as it happens, is not simple. Projects have complicated effects on an economy and, more generally, on society as a whole. Usually, for example, projects directly create productive employment and better jobs in the business being financed. But employment effects are spread much more widely, as Public Disclosure Authorized increased business goes to suppliers or retailers and as new business is created elsewhere in the economy by employees spending their wages and salaries. There are many such effects, each difficult, if not impossible, to isolate from the investment. Because of these difficulties, most of these effects are not normally included in project analysis or decisionmaking but are nonetheless important in a development context. Four years ago, IFC’s Board requested that the Corporation investigate means by which some of these ancillary development effects might be examined more thoroughly. One response to this request has been case studies devoted to development outcomes of selected projects. The studies, undertaken by IFC’s Economics Department, cover investments made at least five years before the research. The cases are not selected as a means of evaluating IFC operations. They are intended to broaden the notion of development impact and to understand better what factors should be used to assess development effectiveness. For example, the cases selected for inclusion in this volume describe employment effects, environmental improvements, technical transfers, the provision of infrastructural and other facilities, Public Disclosure Authorized market development, training, and other effects. This group of cases is the third in an annual series. One of the goals in the selection process is to reflect both geographic and industrial variety and to avoid close duplication in countries or sectors from one year to the next. In this third annual report, the five cases represent five countries and five industries: • Argentina: Maxima is one of several private pension funds established after the government reformed the pension system in the early 1990s, allowing privately run funds to operate alongside the government’s plan. Among the other advantages they will provide, private funds are expected to double retirement benefits and to do so with greater reliability, flexibility, and transparency. • India: Titan Industries, Limited, started the first private wristwatch company in India to make quartz- based analog timepieces. It was competing with a well-established government-owned firm producing mechanical watches. Titan introduced new technology to India and used local designers for its products. It radically changed the way watches were marketed and successfully began exporting, all within a decade. Public Disclosure Authorized • Pakistan: Millat Tractors used IFC funds to establish a loan program for Millat’s struggling suppliers. The program enabled suppliers in many cases to become world-class producers and to introduce new products, in the process making it possible for Millat to survive in a climate of declining protection of imports and confused government policy. • Philippines: Hambrecht and Quist Asia Pacific (H&QAP) established the first professionally managed venture fund in the country. It subsequently set up two other funds, all partially financed by IFC. In total, nearly 60 such funds have been supported by IFC in the developing world. H&QAP began operations as the economy of the Philippines was slipping. But the company persisted and has now provided more than $30 million1 in equity capital to 36 companies, several of which have gone public. • Zimbabwe: Interfresh, Limited, packages fresh fruits and vegetables for both domestic and export markets. IFC has financed two projects with Interfresh, the first involving increasing warehouse and cold storage facilities, the second funding construction of a dehydration plant. The company has grown rapidly, providing a vital link between farmers and consumers and fostering employment in an economy still plagued with high unemployment. Each of these projects illustrates the good that can result from the presence of viable private sector companies in poor countries. Although IFC’s preinvestment analysis has gone much further than that of most investors in trying to assess the developmental worth of its projects, many benefits are still excluded from traditional financial analysis. A compilation of these case studies over time may facilitate understanding of these benefits, allowing them to be taken into account in the consideration of new investments. Meanwhile, careful reviews of the type included here show how private sector activities in a developing country affect both poverty reduction and growth. 1. U.S. dollars unless otherwise specified. 2 INDIA: TITAN INDUSTRIES, LIMITED ________________________________________________________________ Robert R. Miller Under the best of circumstances, starting a new manufacturing business in a developing country presents an entrepreneur with a particularly daunting set of problems. Technical skills may be lacking to design products of appropriate quality and to establish manufacturing facilities that can employ and train local workers. Product markets, almost by definition, are likely to be primitive by Western standards. If the product is to be sold through retail distribution channels, for example, appropriate retail stores and the means to draw potential customers to them often are difficult to find. Suppliers of components often need to be developed and trained; one cannot simply assume they exist. At every step of the way, development of a new product in a poor country demands an unusual degree of persistence and imagination. India offered an even more difficult business setting in 1985 when the Tata Group finally received permission from the Indian government to establish watchmaking facilities using foreign technology and imported parts. The very fact that permission from the central government was required testifies to India’s business environment at that time. Many larger companies and groups, Tata included, initiated projects because new licenses were available rather than on the basis of any inherent business or organizational logic. Many sectors were dominated by state- owned enterprises, reflecting the government’s belief that equitable economic progress required close government supervision, monitoring, and, in sectors deemed sufficiently important, ownership. Even India-based wristwatch manufacturing was done within a single, government- controlled company, Hindustan Machine Tools, Limited (HMT). In fact, the supply-side orientation of government planners is illustrated by their apparent belief that HMT was sufficient to service the Indian market and that a new company in the same industry would, therefore, represent a misallocation of national resources. India’s watch industry at the time enjoyed almost total protection from the importation of completed watches. The government achieved this goal not by using high tariffs but rather through what it hoped would be a complete embargo. The wholesale smuggling of completed watches and movements, particularly of products based on quartz technology, ultimately compromised this protection. But, at least at the beginning of Tata’s planning, there was no need to be concerned about competing directly against such large international producers as Seiko, Timex, or Citizen, all of which were well established in other parts of the world but not in India.1 This was the mixed environment into which the Tata Group launched Titan Watches Limited.2 No one in the new company could know with certainty whether quartz analog watches would find a market in India. Nor could they know if consumers would substitute Titan watches, incorporating a new technology for India, for the rugged, well-known, and respected HMT watches. And finally, there could be no assurance that quartz analog technology could even be manufactured in an Indian production environment, since knowledge of the technology was superficial at best in Titan’s nascent management group. The risks were great, but so too were the potential opportunities. IFC’s Investments IFC became involved with Titan at an early stage, when IFC’s board in January 1987 approved a financing package to support establishment of a manufacturing facility. This plant, intended to produce about 2 million watches a year, was to be built in Tamil Nadu, about 45 kilometers

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