World Bank private sector approach under fire

29 November 2010

The International Finance Corporation (IFC), the Bank’s private sector lending arm, has come under fire for its business model, increasing use of financial intermediaries such as banks, funding of companies associated with tax havens, and its controversial Doing Business report.

A November report by Brussels-based NGO Eurodad, Development diverted, reviews IFC activities in low-income countries since 2008. It finds that almost two-thirds of IFC support over this period went to companies from rich countries, with less than one-fifth going to companies from the poorest countries. Over half of the IFC’s support went to the eight largest operations, “showing that the IFC targets mostly large companies from rich countries, rather than smaller companies from poor countries.”

The report also finds that “the industry department at the IFC headquarters in Washington – and not country authorities – have the strongest say in which projects deserve financial support and which do not. IFC investment officers actively seek business opportunities driven all too often by financial returns rather than responding to developing countries” demands and needs.” The report repeats criticisms of the IFC’s weak focus on development outcomes, lack of additionality, and poor monitoring and evaluation made in an April report, Bottom Lines, Better Lives, by six NGOs including ActionAid International and the Third World Network,   (see Update 70) as well as by the Independent Evaluation Group, the Bank’s arms-length evaluation body (see Update 62).

Meanwhile, a November briefing paper from NGOs the Bretton Woods Project and ‘Ulu Foundation, Out of sight, out of mind?, critiques the IFC’s lending through financial intermediaries such as banks and private equity funds, which grew to over half of all IFC commitments in the last financial year. The paper criticises the lack of transparency of financial intermediary lending and finds that “the way the IFC assesses potential social and environmental impacts is woefully inadequate, and significantly worse than comparable institutions.” In addition, it notes that only 8 per cent of 2009 financial year projects through intermediaries went to low-income countries, and that “while the IFC claims an emphasis on lending to micro-enterprises and small and medium businesses it is unclear how it knows this, or how the public can verify whether or not sub-project lending does actually focus on them.”

At an end November conference organised in London by NGOs CounterBalance and the Bretton Woods Project, the particular problems of lending by the IFC and others through private equity firms were highlighted. Doton Oloku, an independent Nigerian researcher argued that private equity “has no place as a channel for development finance institutions.”  

Meanwhile, past criticisms of the IFC’s failure to incorporate human rights into its lending practices and policies (see Update 72) were highlighted by an October panel discussion in Washington hosted by Amnesty International, the World Resources Institute and others. 

IFC supporting tax havens?

The IFC faced fierce criticism after signing a $40 million loan agreement with Petra Diamonds Limited in September, despite concerns about the company’s tax status and past history.

The IFC’s investment would be used to finance a three-year expansion of the 70-year-old Williamson mine in Tanzania.  A November article by Khadija Sharife, Southern Africa correspondent for The Africa Report, published in Pambazuka News claims that “all revenue from production is to be chanelled through Willcroft Company Limited, a 100 per cent owned intermediate company based in Bermuda, a tax haven, before being remitted back to Williamson Diamonds Limited (Tanzania).”  The article also alleges that “Tanzania is not the only country to have resources funnelled through a tax haven: Petra’s mines in South Africa, its primary stronghold, also transfers revenues through Cullinan Investment Holdings Limited based in the British Virgin Islands, while the company’s exploration in Sierra Leone are similarly passed through an entity based in the Seychelles.” Petra is headquartered on the island of Jersey, a British Crown Dependency off the coast of France, better known for its advantageous tax laws than its diamond mining industry.

In October, NGOs including Eurodad and the Tax Justice Network sent a letter to Lars Thunell, head of the IFC, in response to a World Bank Group April statement on the use of offshore financial centres, more commonly known as tax havens. The letter argues that “the new policy position is not sufficiently in line with recent positions and statements by major [World Bank Group] shareholders in the fight against illicit flows and tax avoidance.” It calls for an enhanced due diligence procedure to screen all projects and transactions using offshore financial centres, and for the IFC to introduce a requirement for clients to report their turnover and profits country by country.

Doing Business controversy grows

In November, the IFC released the 2011 edition of its controversial Doing Business report (see Update 67, 66) to criticism from within and outside the organisation. The report ranks countries according to a series of indicators that the IFC regards as making it easier for companies to do business. Singapore topped the rankings for the fifth successive year.

The International Trades Union Confederation (ITUC), a longstanding critic of the methodology used in the report, called for a “complete overhaul”. While welcoming recent changes that saw the removal of the employing workers indicator (see Update 66) the ITUC noted that the basic data for the indicator remains published as an annex to the report. According to the ITUC, the overall report “penalises countries that require any sort of contribution by employers for unemployment insurance, workmen’s compensation, old-age pensions, maternity leave or other social protection programmes.” The ITUC also claims that the ‘paying taxes indicator’ advocates that businesses should be exempt from all forms of taxation. ITUC general secretary, Sharon Burrow said “it is not just retrograde but simply irresponsible for the World Bank’s highest-profile report to be promoting the idea that companies should not have to pay one cent of tax or social contribution.”

According to David Bosco at Foreign Policy, a US-based magazine, the report led to heated debate at an October meeting of the Bank’s executive directors. Fast growing emerging economies with seats at the Bank’s board have pointed out that their economic success is not reflected in the rankings; Brazil comes 127th and India 134th for example. Brazilian executive director, Rogerio Studart said the report is “doing a disservice” arguing that it has an ideological approach. “I’ve always been struck by the exuberance of the propaganda they made out of it and the pressure they would put on some governments by using the rankings to adopt reforms, as if those reforms would solve some fundamental problems that in my view they could not solve,” he said. He points out that, “reducing the number of procedures and the number of days to open up a company – this is always helpful. But portraying that as a way to create more jobs is a total jump.”