World Bank ‘Fighting Poverty’ Financing Billionaires’ Luxury Hotels

World Bank Has Other Questionable Poverty-Fighting Investments

Luxury hotels and resorts are hardly the only IFC investments that offer at best limited prospects for serving its poverty-fighting mandate.

Founded just a dozen years after the World Bank itself, the IFC has in recent years become its fastest-growing unit. It now has a staff of some 3,400 people in 103 countries and made $15 billion in loan commitments in 2012 across about 580 projects—more than double its 2006 total and a figure that’s projected to grow to about $20 billion in the next few years.

The original notion was that while the World Bank was lending directly to poor countries, the IFC would stimulate the growth of private business, entrepreneurship, and financial markets in some of those same countries by lending to and investing in for-profit corporations. The founders, notably including a General Foods executive named Robert Garner, emphasized that the IFC would participate only in projects for which “sufficient private capital is not available on reasonable terms.”

That concept has become muddied over the years, as well-heeled borrowers with excellent credit have sought to take advantage of the IFC’s relatively attractive loan terms and other investment vehicles, plus, in some cases, the cachet associated with World Bank support.

The IFC’s growth got a boost in the early 1980s when it was permitted for the first time to raise money from the global capital markets by issuing bonds. More recently, its growth has accelerated as it has entered new businesses, including trade finance, derivatives, and private equity, sometimes to the annoyance of private banks with which it competes.

Today, the IFC’s booming list of business partners reads like a who’s who of giant multinational corporations: Dow Chemical, DuPont, Mitsubishi, Vodafone, and many more. It has funded fast-food chains like Domino’s Pizza in South Africa and Kentucky Fried Chicken in Jamaica.

It invests in upscale shopping malls in Egypt, Ghana, the former Soviet republics, Eastern Europe, and Central Asia. It backs candy-shop chains in Argentina and Bangladesh; breweries with global beer behemoths like SABMiller and with other breweries in the Czech Republic, Laos, Romania, Russia, and Tanzania; and soft-drink distribution for the likes of Coca-Cola, PepsiCo, and their competitors in Cambodia, Ethiopia, Mali, Russia, South Sudan, Uzbekistan, and more.

The criticism of most such investments—from a broad array of academics and watchdog groups as well as local organizations in the poor countries themselves—is that they make little impact on poverty and could just as easily be undertaken without IFC subsidies. In some cases, critics contend, the projects hold back development and exacerbate poverty, not to mention subjecting affected countries to pollution and other ills.

The debate is swirling as the World Bank has a new leader, installed in July: Jim Yong Kim, an American physician who recently stepped down as president of Dartmouth College.

The bank declined to make him available to comment for this article, and in his brief tenure so far, he has given little hint of his view of the IFC. In both his statement when he took office in July and on his first overseas visit, to Ghana’s neighbor to the west, Ivory Coast, he did note briefly the importance of the IFC within the World Bank Group and of the private sector to global job creation.

The IFC is also in the middle of a change in leadership. Its former head, Lars Thunell, recently completed his term, and Chinese national Jin-Yong Cai, a Goldman Sachs partner who was in charge of the firm’s Chinese banking operations, succeeded him in October. At that time, Kaldany, who had been serving as the IFC’s acting CEO, stepped back to the post of vice president for global industries.

The IFC’s operations have been the subject not only of outside criticism but of significant parts of 2011’s stinging internal report and other critiques from within the World Bank. The 2011 document, in which the bank’s Independent Evaluation Group examined the IFC’s activities over the previous decade, portrayed a profit-oriented, deal-driven organization that often fails to reach the poor, and at times may even sacrifice the poor, in a drive to earn a healthy return on its investments: “Greater effort is needed in translating the strategic intentions into actions in investment operations and advisory services to enhance IFC’s poverty focus.”

But the IFC’s money-generating strategy has at least one benefit: It sustains the jobs of the people who work for it. The “more money the IFC makes, the more the bank has [available] to invest,” says Griffiths, the director of Eurodad. “Staff is incentivized to make money.”

Francis Kalitsi, a former IFC employee who is now a managing partner at private-equity firm Serengeti Capital in Accra, has a similar view. “To get ahead, you had to book big transactions,” he recalls of his time at the IFC. “The IFC is very profit-focused. The IFC does not address poverty, and its investments rarely touch the poor.”

The IFC sets annual targets for the number, size, and types of deals employees should complete, and it awards performance bonuses for reaching these targets, according to several current and former IFC staffers.

“If you don’t reach the target, you don’t get a bonus,” says Alan Moody, a former IFC manager who now works elsewhere at the World Bank. Deals often come to the IFC from private companies, not the other way around. “We choose our projects by identifying key clients and asking them what their needs are,” says the IFC’s Moyo.

That means, though, that by following private companies’ priorities, the IFC makes investments that are not necessarily aligned with countries’ own development strategies.

Even if the IFC focused more of its resources on poverty, it doesn’t have a good way to track whether its work has any impact. The 2011 report—which advises that the IFC “needs to think carefully about questions such as who the poor are, where they are located, and how they can be reached”—criticizes theIFCfor lacking metrics for its investments, saying it fails to “[d]efine, monitor, and report poverty outcomes for projects.”

The IFC does not contest these criticisms. Its management responded to the evaluation group’s report by stating,”We broadly agree with [the] report’s lessons and recommendations” and conceded that the “IFC has not been consistent in stating … the anticipated poverty reduction effects of a project.”

The IFC notes that it several years ago began using a Development Outcome Tracking System (DOTS) to measure the effectiveness of its projects at spurring economic development and alleviating poverty.

This system, however, has drawn snickers from a number of IFC clients. They note that the DOTS ratings rely heavily on self-reporting by the recipient companies and depend to some extent on financial data for the entire firm, often with multiple divisions around the world, rather than focusing on the specific area of the IFC-funded project. Still, Kaldany expresses enthusiasm for the effort, saying it is pathbreaking and getting better.

Meanwhile, there has been little evidence of change on the ground. Everywhere I looked—in Ghana, in nearby West Africa, and globally—the IFC still seems to be giving its mandate to fight poverty short shrift.

In finance, for example, R. Yofi Grant, executive director of Databank, one of Ghana’s largest banks, told me that the IFC’s practice of providing loans at attractive terms to multinational companies “crowds out local banks and private-equity firms by taking the juiciest investments and walking away with a healthy return.”

Grant says that the IFC recently organized a $115 million financing package for global telecom giantVodafone to expand its operations in Ghana, even though six telecom companies already operate in the country. Despite such robust private investment, the IFC’s loan package for Vodafone was its second in two years.

“That is not poverty reduction, and these are not frontier investments,” Grant says, referring to the IFC’s refrain that it invests where other financiers might not. “The IFC says all the right things and does all the wrong things.”

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