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Max Planck Encyclopedia of Public International Law [MPEPIL]

International Finance Corporation (IFC)

Sheetal Asrani-Dann, Philipp Dann

From: Oxford Public International Law (http://opil.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: null; date: 22 January 2019

Sustainable development — International financial law — International investment law — International trade

Published under the auspices of the Max Planck Foundation for International Peace and the Rule of Law under the direction of Rüdiger Wolfrum.

A.  Purpose

The International Finance Corporation (‘IFC’) is an international organization, established on 20 July 1956 by an international agreement and headquartered in Washington, DC. It is an affiliate of the International Bank for Reconstruction and Development (IBRD), a member of the World Bank Group, and a United Nations Specialized Agency (United Nations, Specialized Agencies). It was established to complement the IBRD and its task to promote economic development by creating an entity that would encourage the growth of private enterprises in member countries, particularly the less developed. The IFC thus fulfils a specific role within the World Bank Group as it lends only to private enterprises and without a government guarantee, while the IBRD and the International Development Association (IDA) only lend on the basis of a government guarantee and to governments. The IFC shares the World Bank’s general mission to reduce poverty and supplements the activities of the IBRD and IDA as the private sector arm of the World Bank Group.

To further this purpose, the IFC shall, according to Art. I IFC Articles of Agreement:

  1. i)  assist in financing the establishment, improvement and expansion of productive private enterprises … by making investments, without guarantee of repayment by the member government concerned in cases where sufficient capital is not available on reasonable terms;

  2. ii)  seek to bring together investment opportunities, domestic and foreign private capital, and experienced management; and

  3. iii)  seek to stimulate, and to help create conditions conducive to, the flow of private capital, domestic and foreign, into productive investment in member countries.

B.  Membership, Capital, and Voting

The prerequisite for membership in the IFC is membership in the IBRD (Art. II (1) IFC Articles of Agreement). With South Sudan’s assumption of membership in 2012, the IFC has a total of 184 member countries and thus near universal membership. The IFC’s members provide its authorized share capital of US$2.4 billion, and collectively determine its policies and approve its investments.

The capital structure of the IFC is similar to that of the IBRD in that it is based on a capital stock provided by members (Art. II Articles of Agreement). At its inception, the authorized capital stock of the IFC was US$100 million (divided into 100,000 shares having a par value of US$1,000 each). The authorized capital stock was increased by the board of governors as of 10 December 1992 to US$2,245,000,000 (divided into 2,450,000 shares of US$1,000 each). For its ongoing operations, the IFC also relies on retained earnings from its loans and equity investments. It also funds its lending activities by issuing bonds in international capital markets and has been among the first multilateral institutions to issue bonds in the local currencies of many emerging markets. Although the IFC coordinates its activities with other institutions of the World Bank Group, it is legally and financially independent. Its funds are kept separate from those of the IBRD and it is neither liable for the acts or obligations of the IBRD or vice versa (Art. V (6) IFC Articles of Agreement).

The voting system of the IFC is linked to the capital structure and thus the same as those used by the IBRD and IDA in that it relies on a structure of weighted votes. According to Art. IV (3) IFC Articles of Agreement, each member has 250 votes plus one additional vote for each share of stock held. Currently, the US has the biggest share of stocks, which translates into 23.69% of votes, followed by Japan (5.87%) and Germany (5.36%). Except as otherwise expressly provided, all matters before the IFC are to be decided by a majority of the votes cast.

C.  Organization: Boards, Staff, Accountability

The IFC’s institutional structure is typical of an international organization. Its staff (similar to those of the IBRD and IDA) have considerable influence on its policy-process, while accountability structures are emerging though not yet satisfactory.

Member countries guide the IFC’s programmes and activities through a board of governors and a board of directors (Art. IV (2), (4) IFC Articles of Agreement). Governors and alternate governors of the IBRD appointed by countries which are also members of the IFC are ex officio governors and alternate governors, respectively, of the IFC. All powers of the IFC are vested in the board of governors, which holds annual meetings. It has delegated most powers to a board of 24 directors which is responsible for the conduct of general operations. To that end, it meets regularly (normally twice a week) to review and decide on investment projects and provide overall strategic guidance to IFC management. The IFC’s board of directors is composed ex officio of each executive director of the IBRD and his or her alternate. Five of the 24 directors are appointed by the biggest shareholders respectively (the US, Japan, Germany, France, and the UK), while the remaining 19 are elected by groups of the other members. Voting in both boards, as mentioned above, is based on a system of weighted votes.

The president of the IBRD is ex officio chairman of the IFC’s board of directors (Art. IV (5) IFC Articles of Agreement). He may participate in meetings of the board of governors but has no vote except a deciding vote in case of an equal division. The responsibility of leading the IFC’s strategy and day-to-day management is delegated to the president of the IFC (now called executive vice president and CEO) who is appointed by the board of directors on the recommendation of the chairman. He or she acts under the direction of the board of directors and the general supervision of the chairman, and is responsible for the organization, appointment, and dismissal of the officers and staff. He or she may participate in meetings of the board of directors but cannot vote at such meetings. He or she is supported by a nine member strong management group composed of vice presidents of the IFC.

The IFC substantially has the same the privileges and immunities as those of the IBRD and IDA (Art. VI IFC Articles of Agreement). Accountability to staff, clients, and affected citizens is provided by different means. Its staff which currently number over 4,000 of whom 57% work in field offices and 43% at headquarters, have access to an administrative tribunal. Its projects and programmes are assessed by an independent evaluation group. Accountability towards clients of the IFC and affected citizens is ensured by the semi-independent office of the compliance advisor/ombudsman with which any person or community directly impacted by an IFC project can file a complaint. The IFC publishes an annual report separate from those of the IBRD and IDA.

D.  Policies and Operations

10  The IFC made its first loan of US$2 million to Siemens do Brasil Companhia de Electricidade on 20 June 1957 for the expansion of Brazil’s first integrated heavy electricals manufacturing plant. First conceived as a provider of project finance, the IFC has since adapted to the evolving needs of private sector clients and has developed a full range of operations which centre on four areas:

11  First, the IFC offers various financial products and services that enable companies to manage risk and broaden their access to foreign and domestic capital markets. It provides loans, guarantees, equity, structured finance, risk management products, trade finance, and municipal finance to build the private sector in client countries. In determining what investment opportunities to pursue, the IFC maintains a policy of investing in enterprises that can provide both an adequate financial return on the IFC’s investment and an adequate economic return to the country in which the investment is made. Following the 2013 World Development Report on Jobs the IFC has recently been putting special emphasis on job creation.

12  Second, the IFC provides a range of advisory services in support of private sector development. These include improving the regulatory environment for doing business; increasing the environmental and social responsibility of private enterprises; strengthening local infrastructure by promoting public private partnership[s], privatization, health, and education; and broadening access to finance (through support to microfinance institutions, banking and insurance, trade finance, small and medium-sized enterprises). Much of the IFC’s advisory services work is conducted through facilities managed by the IFC but funded through partnerships with donor governments and other multilateral institutions.

13  Third, the IFC assists companies in developing countries to tap into international capital markets. The centre of these activities is its loan participation programme, which arranges syndicated loans from banks. The IFC also mobilizes financing from other international financial institutions (Financial Institutions, International). It hence acts as a catalyst for other investors.

14  And finally, while the IFC tailors its investment operations to the needs and circumstances of each member country, the degree to which it can meet its objectives greatly depends on the decisions of private investors. These are, in turn, influenced by their perception of the business climate and opportunities. For this reason, a significant part of the IFC’s efforts are devoted to developing investment opportunities and raising the level of investor confidence in selected projects through promotional work with local investors, foreign partners, other financial institutions, and host governments.

15  In all of these activities, the IFC is guided by a number of policies laid down in the Articles of Agreement, internal rules, as well as other statements. Since the 1990s the IFC has explicitly shared the World Bank Mission Statement to promote sustainable development, reduce poverty, and improve people’s lives. It also aligns its activities more comprehensively with those of the other members of the World Bank Group, especially by following the multi-year Country Assistance Strategies that the IBRD/IDA develop for every partner country.

16  Moreover, the IFC is bound by a discrete set of policies laid down in its Articles of Agreement (especially Art. III (3)). According to these, the IFC may not fund projects for which private capital could be obtained on reasonable terms (subsidiarity rule). Also, the IFC may not assume responsibility for managing any enterprise in which it has invested; nor may it exercise voting rights for such purpose or for any purpose which, in its opinion, is properly within the scope of managerial control. The policies also oblige the IFC to respect the sovereignty of the State in which it is doing business. Therefore, the IFC may not finance an enterprise in the territory of any member if the member objects to such financing. Besides, Art. III (9) IFC Articles of Agreement bars the IFC and its officers from interfering with the political affairs of any member; nor may they be influenced in their decisions by the political character of the member concerned. Only economic considerations are to be relevant to their decisions, and these considerations are to be weighed impartially in order to achieve the purposes of the IFC. Finally, the IFC may borrow funds provided that before making a public sale of its obligations in the markets of a member, it has obtained the approval of that member and of the member in whose currency the obligations are to be denominated.

17  The IFC has also adopted a set of internal secondary laws called Performance Standards on Environmental and Social Sustainability that are modeled on the Safeguard Policies that lay down environmental and social standards for IBRD/IDA lending. In 2006, the IFC Board of Directors approved (and in 2012 revised) an umbrella policy and accompanying eight performance standards for environmental and social sustainability. These are based on international environmental law and in part relate to the ILO’s Core Labor Standards. They outline the private sector’s role and responsibilities for managing projects and condition the receipt and retention of IFC funding. Hence, while the performance standards are directly binding only for IFC staff, its clients also have to comply with them in order to receive funding. The adoption of these policies had important spillover effects. Several regional development banks have developed similar standards. Furthermore, the standards were the basis for the Equator Principles which lay down environmental and social minimum standards as a risk-management framework for private financial institutions that subscribe to them.

E.  Assessment

18  In terms of the scale and distribution of its investments, the IFC has seen a constant increase and diversification over the last few years. From its founding in 1956 through to the fiscal year 2013, the IFC committed more than US$144 billion of its own funds and arranged more than US$46 billion in syndications for more than 3500 companies in 140 developing countries. In the fiscal year 2013, the IFC invested US$18.3 billion of its own funds. IFC involvement in projects often serves to increase confidence in sectors or projects, which generates additional investment from the private sector; in this respect, the IFC in 2008 mobilized another 4.8% through syndication, structured, and securitized products. This amount was invested in 612 projects in 113 countries. Analysed by regional distribution most investments went to Latin America and the Caribbean (26%) and to Sub-Saharan Africa (19%). In terms of supported industries, in the fiscal year 2013, 35% went into trade finance and 20% towards the financial markets. With 46% of the investments, loans are the most important product, followed by guarantees (38%). In the fiscal year 2013, the IFC invested US$231.9 million into advisory services and provides advice in a total of 105 countries. Here, the largest regional advisory program in the fiscal year of 2013 was in Sub-Saharan Africa (28%), followed by East Asia and the Pacific (17%). Substantially, the advice centred on investment climate (32%) and access to finances (27%).