International Finance Corporation 1983 Annual Report 21384 International Finance Corporation 1983 Annual Report -A 2 Opening an irrigation sluice gate at Delta Sugar Company S.A.E., an Egyptian agribusiness project for which IFC provided supplemental financing this year. Table of Contents I FC's Objectives 6 Review and Outlook 8 The World Investment Climate 13 Fiscal 1983 Operations 21 " , * Investment Summary 21 Africa 24 Asia 26 Europe and Middle East 28 Latin America and the Caribbean 30 Capital Markets 32 Syndications 34 Technical Assistance 35 Other Activities 36 The Year's Investments 38 Financial Results 44 Financial Statements 49 Appendices 68 Governors and Alternates 68 Directors and Alternates 70 Officers and Department Heads 71 Divisional Managers 72 4 International Finance Corporation 1818 H Street, N.W. (202) 477-1234 Washington, D.C. 20433 Cable Address: CORINTFIN U.S.A. July 28,1983 To the Board of Governors: The Board of Directors has had this Annual Report prepared for the fiscal year ending June 30, 1983, in accordance with the By-laws of the Corporation. A. W. Clausen, President of the Corporation and Chairman of the Board of Directors, has submitted this Report, together with accompanying audited financial statements, to the Board of Governors. The Board wishes to report that the five-year payment period of IFC's capital increase, approved by the Board of Governors on November 2, 1977, terminated on August 1, 1982. As of that date, of the $468.8 million additional capital allocated to 106 member countries, $420.9 million (90 percent) had been paid. Additional payments of $13. 1 million, made subsequently, resulted in a total of $434.0 mil;lion, or 93 percent paid by June 30, 1983. Shortly after the capital increase was approved, the Corporation adopted its first Five-Year Program for the period FY79-83. This Program initiated a reorientation and an expansion of the Corporation's activities. The Board is pleased to report that with few exceptions the Program's indicative targets were met or exceeded. A new long-term Program, building upon the achievements of the past five years and setting forth new initiatives to meet the emerging challenges confronting the Corporation, is now under preparation. As to this year's operations, the Board reports that the Corporation met its invest- ment and lending objectives in spite of the adverse investment climate which pre- vailed throughout the year. A total of $844.5 million was approved for 58 projects in 36 countries. The Board expresses its appreciation to the staff of IFC for the high standards of its performance during the year and its dedication to the purposes of the Corporation. The Board of Directors 5 The Board of Directors Directors Alternates Patricio Ayala-Gonzalez Roberto Mayorga-Cort6s Mourad Benachenhou Salem Mohamed Omeish James B. Burnham George R. Hoguet Ronald H. Dean You Kwang Park Jacques de Groote Herbert A. Lust Bruno de Maulde Robert Hudry Said E. El-Naggar Abdulrahman M. Sehaibani Pekka Korpinen Ole L. Poulsen Morris Miller George L. Reid Reinhard MOnzberg Norbert Schmidt-Gerritzen Phaichitr Uathavikul Giorgio Ragazzi Rodrigo M. Guimaraes H. N. Ray Gholam Kibria Antonio V Romualdez Hector Echeverri William Smith Astere Girukwigomba Nicephore Soglo Andre Milongo Ferdinand van Dam Riza Sapunxhiu Wang Liansheng Fei Lizhi Nigel L. Wicks Derek F. Smith Kenji Yamaguchi Toshihiro Yamakawa Eduardo Zalduendo Pedro 0. Montorfano Officers of the Corporation A. W Clausen President Hans A. Wuttke Executive Vice President K. Georg Gabriel Vice President Judhvir Parmar Vice President Jose E. Camacho Vice President and General Counsel Makarand V Dehejia Vice President Sven Riskaer Vice President Jose M. Ruisanchez Vice President Timothy T Thahane Secretary Marshall Burkes Department Director Richard H. Frank Department Director Advisory Panel IFC's advisory panel meets regularly with the Corporation's management to discuss its activities and policies. The Corporation wishes to express its appreci- ation for the valuable advice they have given. Members are: Jan Ekman, President Yusuke Kashiwagi, Chairman Svenska Handelsbanken The Bank of Tokyo, Ltd. Stockholm Tokyo Dr. Wilfried Guth, Speaker of the Lord Roll of lpsden, Chairman Managing Board S. G. Warburg and Co. Ltd. Deutsche Bank A.G., Frankfurt London Jean-Yves Haberer, President Robert V Roosa, Partner and Managing Director Brown Brothers Harriman and Co. Banque de Paris et des Pays-Bas S.A. New York Paris 6 IFC's Objectives The International Finance Corporation is dedicated to furthering economic development in its developing member countries by promoting and supporting private enterprise. It seeks to accomplish this by bringing together entrepre- neurship with both foreign and domestic investment capital for productive developmental endeavors. The Corporation provides and mobilizes funds for promising ventures in developing countries. It is flexible as to the form its financing can take. It is one of the few international organizations which can provide risk capital as well as long-term loans without government guarantees. Not only are IFC's own funds often critical to a venture's success, but its financial commitment has become increasingly important and is frequently essential in attracting other funds. The Corporation attracts funds from interna- tional capital markets by syndicating loans, by underwritings and standby financing. This flexibility enables IFC to assemble a unique financial package tailored to the needs of each project and to the ability of each firm to raise funds from other sources. IFC's technical assistance to member countries and project sponsors is equally important in stimulating private capital flows. The bulk of this assis- tance is project related, consisting of legal, financial and engineering advice to project sponsors going well beyond what private financial institutions would be prepared to provide. Aside from work directly related to individual projects, the Corporation has also launched about 30 policy and technical assistance proj- ects of a broader nature. More generally, technical and policy assistance of all kinds account for an estimated one-third of IFC's administrative budget-costs which must be met by earnings from its investments. For over a decade the Corporation has been actively involved with its member governments and private investors in the strengthening of local capi- tal markets-from the establishment of equipment leasing industries to securi- ties market development-all of which become progressively more important in successive stages of economic development. The International Bank for Reconstruction and Development (IBRD), the Interna- tional Development Association (IDA) and the International Finance Corporation (IFC) are affiliated financial institutions designed to complement each other in support of their member countries' economic development. The IFC was, in fact, established in 1956 to supplement the activities of the IBRD by providing the type of financing and investment expertise particularly suited to attracting, and lending confidence to, private sector investors in developing countries. Even though it operates with its own staff and capital, IFC-through joint ventures, by building upon the Bank's infrastructural achievements or through the sharing of purposes and policies-works closely with its affiliates in their common goal of helping to stimulate economic development in their member countries. 7 Typically, IFC's role goes beyond simply providing funds and technical assistance. Its presence is often sought to raise investor confidence in pro- posed ventures and to facilitate the process by which the partners (including governments) can arrive at mutually satisfactory investment arrangements. What the Corporation does and where it concentrates its efforts is guided by general program targets. Among the most important are: greater emphasis on the smaller and poorer member countries, particularly in sub-Saharan Africa; promoting business ventures in a greater number of countries; broadening activities beyond the manufacturing sector, particularly into the development of renewable and nonrenewable resources such as agribusiness, mining and energy; and continuing efforts to support the development of capital markets and financial institutions. While guided by these program objectives, what the Corporation can accom- plish in any particular year depends largely on the decisions of private inves- tors who are influenced by the political and business climate. k.V The Tata Iron and Steel Company Limited's $263 mlillion expansion is being supported by IFC financing. 8 Review and Outlook Investments The total volume of investments approved by the Board of Directors in- creased 38 percent from $612 million in FY82 to $845 million in the past fiscal year. The projected dollar volume of approved investments for the Corpora- tion's own account of $426 million was about the same as the previous year's, reflecting the extraordinarily high proportion of loans which were, or will be, syndicated to commercial banks and other financial institutions. The Corporation has pending, or has completed, syndications of $419 mil- lion. This represents a greater total and a greater percentage of total approved investments-about 50 percent-than ever before. These results were achieved during a time when many others in developing as well as industrial countries were curtailihg their investments. There were, for example, serious cutbacks in net lending to developing countries by many commercial banks. The Board approved equity investments in 41 companies totaling $55.3 million-the highest in the Corporation's history. The Past Five Years (US$ millions) Fiscal Years 1979 1980 1981 1982 1983 OPERATIONS Approved Investments number of projects 48 55 56 65 58 number of countries 33 30 34 31 36 amount (gross $s) 425 681 811 612 845 total project costs 1,714 2,377 3,340 2,936 2,894 Cumulative Approvals number of projects 477 532 588 653 711 amount (gross $s) 2,571 3,252 4,063 4,675 5,520 total project costs 12,776 15,153 18,493 21,429 24,323 syndications 890 1,157 1,559 1,747 2,166 Investments Held number of firms 253 288 314 333 341 loans 889 1,159 1,374 1,551 1,588 equity 223 245 273 284 294 total 1,112 1,404 1,647 1,835 1,882 RESOURCES AND INCOME Capitalization borrowings 455 438 509 531 536 paid-in capital 229 307 392 497 544 accumulated earnings 119 140 159 181 204 Earnings net income 19.2 20.7 19.5 21.6 23.0 9 IFC began the year with a full pipeline of potential investments under active consideration, but numerous ventures were cancelled or postponed as the economic difficulties continued into the year. As a result, the 58 projects approved by the Board were below the 65 projects approved the previous year. The Corporation has been increasing its investment promotion work for several years and it appears that in many cases the full benefit of this effort will be realized in future years. The estimated total cost of approved projects was $2,894 million which meant that for every dollar invested by IFC, for its own account, others invested about six dollars-about the same as the previous year. IFC continued to broaden its investment activities. Manufacturing, which in the past accounted for about two-thirds of the number of projects, was less than 38 percent of the total. Likewise, fewer fertilizer, chemical and petro- chemical projects were approved than in the past. However, the number of investments approved for agribusiness projects, which made up slightly less than one quarter of the total, and mining projects was considerably higher. Reflecting the Corporation's sustained efforts to promote and support ven- tures in low-income countries, 22 projects which represented 38 percent of those approved by the Board of Directors, were in countries with a per capita Cumulative IFC Investments Approvals Fiscal 1983 Investments USs MWII,or- Country Distribution Number of Investments 6,000- Lower Income Middle Income Upper Income 30- -5,000- 25- -4,000- 20 3,000- -15 -2,000- 10 1,000 5 0 ' 81 82 83 10 income of less than $730. About 28 percent of the projects approved were in Africa. Although the average size of projects tends to be small in low-income countries, the approved IFC investment of $324 million in these countries was also 38 percent of the year's total dollar volume. These results were due to two large projects in Egypt and Pakistan. In line with the objectives of supporting ventures in more countries, the Corporation undertook investments in 36 countries this year as compared to 31 in the previous year. Because of the generally adverse economic difficulties, disbursements of $374.4 million were off sharply from the previous year. Of this total, $342.9 million was for loans, including amounts disbursed for participants in IFC loans, and $31.5 million was for eqLuity. As a result of the Corporation's continuing efforts to mobilize resources for additional equity funds, the Kingdom of Saudi Arabia and the Corporation entered into an arrangement in January 1983 under which Saudi Arabia will make available $100 million to be used in parallel with IFC for suitable equity investments. Financial Results While up slightly from last year's levels, total operating income of $137.4 million was less than expected. Interest and dividend income equaled $122.4 million and $5.1 million was capital gains from the sale of equity investments. While firms continued to service their obligations and pay dividends through- out the year, a combination of the lack of foreign exchange and the economic downturn forced some companies into arrears. Net income of $23.0 million, compared to $21.6 million in the previous year, was added to accumulated earnings which brought that total to $203.8 million. Portfolio IFC's investment portfolio is well diversified in terms of both industry and country. At the end of the year, the Corporation's investment portfolio held for its own account (including undisbursed balances) was $1,881.9 million, up $46.9 million from the previous year. In addition, $1,122.7 million was being held and administered for participants in IFC financings. Recognition of the potential effects of poor economic conditions in certain countries prompted the Corporation to add $25.7 million to its Reserve Against Losses. This brought the Reserve to $99.6 million, or 7 percent of the total outstanding portfolio, which is considered adequate. About $10.1 million of investments were written off during the year. Because of IFC's rapid growth over the past five years, much of its portfolio is not yet mature. Of the 341 companies in the portfolio, 83 have been added within the past three years. The majority of projects are still under construc- tion, are within the grace periods or are just beginning to provide the Corpora- tion with a return on its equity investment. 1 1 Net Income Portfolio $US Whioms $US MllOMs _3,250 Total -32 2003 __ Held tor Others 25- -2,5000 25~~~~~~~~~~~~~~~~~~,5 210 2,000 5~~~~~~~~~~~~~~~~~~~~,5 15 --1500- 0,-9 '80 81 '8 83 _ '7-9 '80 '81 '82 '83 Capital Increase In November 1977, an increase of $540 million in the Corporation's autho- rized capital was approved by the IFC's Board of Governors, Of this, $468.8 million (468,800 shares) was allocated to member countries for subscription. During the year, the Corporation received $46.5 in payment for shares subscribed under the capital increase. August 1,1982 was the terminal date for payments. Of the 468,800 shares ($468.8 million) allocated for subscription, 420,900 shares, $420.9 million (90 percent) have been paid for. Seven countries, representing an additional $1 .8 million of additional capital, were granted a payment extension. Subsequent to the terminal date, five other countries voluntarily subscribed to $8.2 million additional capital which had been allocated but not subscribed by others. By June 30, 1983, therefore, a total of 435,300 shares ($435.3 million) or 93 percent of the total allocated had been subscribed. Borrowings The Corporation borrowed $145 million from the World Bank during the year. This was less than that borrowed during the previous year, which in part was a reflection of the lower level of disbursements made during FY82 and the business slowdown in FY83. 12 The Corporation continued the practice of offering U.S. dollars as well as other currencies to its clients. A total of $111.6 million was made available in Deutsche mark, French francs, Netherlands guilders, Pounds sterling and Swiss francs. Equivalent funds were borrowed from the World Bank. New Members During the year, the Republic of Maldives and Guinea took up membership in IFC. This brought the total membership to 124 countries. Prospects Over the coming year, the Corporation, together with its existing and pro- spective partners, will, of course, be affected by world-wide economic condi- tions. By the end of Fiscal Year 1983, some of the industrial countries were clearly in a recovery phase. This is likely to spread to the developing countries only with a time-lag. But many businesses, especially in the least developed countries, will only gradually regain the ground lost during the past two years. IFC does, therefore, expect a temporary continuation of the financial pressures on many companies. Nevertheless, as was demonstrated by its own perfor- mance in the past year, IFC is confident that there will be sufficient opportuni- ties for sound projects to be assisted and financed in these countries. In the longer term, there are several trends now underway which will have a major effect on the shape of IFC's operations. Many companies, for example, have seen their financial structures seriously weakened during the recent economic difficulties, aggravated, in some cases, by large or frequent devalua- tions. This has increased the weight of foreign liabilities in their balance sheets and left them undercapitalized. Equity capital is important to the survival of many private sector firms. IFC, as one of the few international institutions which can provide equity, should and must be at the leading edge of efforts to mobilize a significant increase in equity financing. Second, more countries are turning to their private sectors to lend additional dynamism to their economic development. Increasingly, the Corporation will be called upon not only to provide more direct assistance to private investors in general, but help mobilize large amounts of funds for certain non-traditional areas including efforts to assist the private sector participate in the ownership and management of mixed government/private sector enterprises. Discussions are currently underway within the Corporation as to how it can and should expand to meet the growing challenges given the financial implica- tions of its development objectives and the financial constraints imposed by its current capital and cost structures. 1 3 World Investment Climate Private investors in 1982 were confronted by a more depressing set of conditions than the world economy had experienced since the 1930's. Follow- ing two years of sluggish growth, output in 1982 declined in the industrial countries and failed to keep pace with population growth in most developing countries. The volume and value of world trade declined markedly for the first time since the Second World War. As 1982 wore on, a growing number of developing countries experienced balance of payments difficulties, followed by a number of devaluations and debt reschedulings towards the year end. Unable to continue earlier rates of international borrowing, many developing countries were forced to cut back on economic growth and imports. The events of 1982 were the culmination of imbalances which emerged in 1980 and 1981 following several years of rapid expansion from the trough of the 1974/75 recession. Real gross national product (GNP) in the industrial countries grew by a little over 4 percent a year between 1975 and 1979, and in the non-oil developing countries by more than 5 percent. The volume of the non-oil developing country exports grew at an 8 percent rate during 1975-80 and, in spite of some softening of primary commodity prices after 1977, even faster in value terms (20 percent per year). Both short-term and long-term debt of the non-oil developing countries increased rapidly during this period. How- ever, with output and exports also expanding, developing country debt out- standing had increased by 1980 only slightly in relation to GNP and had declined relative to exports. These high-strength bricks produced by Jordan Lime and Silicate Brick Industries Company Limited, an- enterprise which IFC assisted, are used in a wide variety of construction applications. 14 Among the proximate causes of the deterioration of economic conditions and the investment climate in 1981 and 1982 were the policy responses of both the industrial and the non-oil developing countries to persistent structural problems throughout much of the 1970's, including the upsurge in oil prices in 1979. In the industrial countries, inflation rates-which had already been in- creasing for several years-accelerated to levels felt to be no longer tolerable. In response, they undertook corrective action in the form of restrictive mone- tary policies that resulted in very high interest rates. In nominal terms, short-term interest rates have fluctuated between the end of 1979 and the fall of 1982 in double digit ranges in the industrial countries, periodically exceeding 20 percent in some of them. Real long-term rates, which had averaged close to zero or even been negative in most of the industrial countries in 1978 and 1979, rose dramatically. On one measure, real rates in the United States increased to about 10 percent in 1981, and 6 percent or more elsewhere. Although a slight downward trend was discernible during 1982, these rates averaged 5 or 6 percent in most of the industrial countries for the year as a whole and hardened again somewhat in early 1983. Under the impact of such restrictive policies, output growth in the industrial countries slowed significantly in 1980 and 1981, and became negative in 1982. The volume of industrial country imports declined in each of these three years. Current Account Deficits of Non-Oil Real GNP Growth Rates Developing Countries (as a % of Exports) 13 Low Income Oil Importing 12 Industrial Countries Developing Countries 12 :-. ' Oil Exporting All Non-Oil 11 S : Developing Countries i Developing Countries 10 X Non-Oil Developing Countries 9 50- 8 I -~~~~~~~~~~~~~~~~5 62 ~~~~~~~~~~~~~~~~40- 5~~~~~~~~~~~~~~~~~~2 1- 1~~~~~~~~~~~~~~~5 2'i, 10 3 73 74 75 70 77 78 79 '80 9t 82~~~~~ '83+ 73 '75 '78 .81 '82* 83-4 preliminary projected I projected + preliminary Source:IMF Source: IMF 1_5 Quality control tests in the laboratory of Societe Mamadou Sada Diallo et Freres SARL (SOMACI)-a bleach and plastic products manufacturer in Mali which IFC helped to expand and diversify. _ An index of international prices of 30 non-oil primary commodities exported by the developing countries dropped by 15 percent in 1981, and a further 12 percent in 1982. Thus, the non-oil developing countries were squeezed from three sides at once: declining demand (and prices) for their exports; rising prices for their oil imports; and massive increases in their debt service obliga- tions as interest rates rose sharply. Growth of output leveled off in the low-income countries of Asia and Africa. In the middle-income and oil-exporting countries the rate of growth of output declined sharply. Real GNP growth in the non-oil developing countries as a group, which had averaged over 5 percent during 1975-80, declined to 21/2 percent in 1981 and under 1 percent in 1982. Rising interest rates had a quicker and larger impact on borrowing country debt service requirements than in comparable earlier periods because of the widespread shift in recent years to floating rate debt instruments. Debt service payments rose quickly, reaching a ratio in 1982 of nearly 24 percent of exports for the non-oil developing countries as a whole. For Latin America, this ratio reached well over 50 percent. Current account deficits increased sharply, and developing country external debt, which had been stable or declining as a percent of exports for several years, jumped from 113 percent of exports in 1980 to 143 percent in 1982. Thus, while the steady growth of borrowing had appeared to be quite manageable prior to 1980, by 1982 it reached levels at which the commercial banks became reluctant to continue to increase lending to the more heavily indebted countries. 16 Summary of Payments Balances on Major Industrial Countries:* Current Account, 1977-83 Real and Nominal Interest Rates Industrial Countries _ : Non-Oil Developing Countries Interest Rates Oil Exporting Countries - Real Long-Term '14 - Interest Rates, 1002 -10- 10°0 t7 '78 * t S 9 2 6 2 [J j ft-t1 t8 0 20 ~~~~~~~~~~~~~~~~6- 40 -~~~~~~~~~~~~~~~~~~ 2 770 78 708 1 8± 8 '76 '77 '78 '79 '50 51 8 r preliminary Canada, France, Germany (Fed. Rep.), Italy, Japan, U.K., U S. projected + Approximated by using GNP detlators. Source IMF Source: IMF It seems clear that the system for financing international payments imba- lances that evolved following the oil price increase of 1973-74, while function- ing well for several years, had left the world economy very vulnerable to the events which came later. The aggregate amount of surpluses and deficits requiring finance had increased, and the commercial banks had taken on a much larger share of responsibility for financing them. Governments in many of the developing countries had become heavily dependent on commercial bank credits, much of it relatively short-term. This was an acceptable arrangement as long as developing country exports and economies were growing, but entailed a high degree of financial vulnerability once they slowed down. The debt overhang became particularly large in Latin America, which ac- counts for about two-thirds of outstanding developing country debt. Output declined in that region in both 1981 and 1982, and seems likely to recover more slowly there than elsewhere. Under these circumstances, both domestic and foreign private investment in the developing countries declined in 1982. Depressed demand left many developing country industries with excess capacity, and many firms with weakened financial structures as well as a shortage of internally generated funds to finance new investment. Such factors, coupled with exchange rate 17 and balance of payments uncertainties, dampened the flow of foreign private investment as well. Investment in mining and other basic commodities came to a virtual standstill because of the very low level of commodity prices, many of which fell below costs of production for even the most efficient producers. High real interest rates impaired the financial strength of firms which rely on debt financing and reduced the profitability of prospective new ventures. And credit availability diminished in countries which had to impose severe credit restraints in order to curb unsustainable budget and external account deficits. The Road to Recovery The adjustments made by the developing countries in 1982 began by year end to set the stage for some recovery during 1983. By cutting back imports drastically, the non-oil developing countries were able to reduce their current account deficits, and this new borrowing was down sharply in 1982. Most of the drop was in commercial bank lending. The banks actually reduced short- term credits outstanding, and cut back on the flow of new, non-guaranteed, medium and long-term lending. Developing country current accounts were helped further by the steep decline in nominal interest rates, although real rates are still relatively high in historical terms. Oil prices declined slightly during the year, and more substantially in early 1983. Altogether, current account deficits of the non-oil developing countries narrowed in 1982 by about $20 billion, or roughly 20 percent of their 1981 level, and is narrowing further in 1983. These adjustments were achieved at high domestic cost. However, the events of 1981 and 1982 provoked a much broader realization than existed before of the basic economic interdependence of the developed and the developing world. With prudent economic management, 1983 should see a continuation of the recovery that began towards the end of the last year. World trade, which declined in 1982, should increase slightly in 1983. This would encourage some export-led improvement in levels of economic activity and in the current ac- count positions of the developing countries, creating opportunities for some expansion in private investment and lending. Not all developing countries are assured of this outcome, however, and a general revival of trade and invest- ment hinges on a number of critical conditions. The burden of adjustment falls upon all countries. First and foremost, a revival of investment in the developing countries requires that the recovery which now seems gradually under way in the industrial countries be continued. Also, as recognized in the recent ministerial level deliberations at the OECD, the industrial countries must avoid new protectionist actions, and dismantle existing protection, so that the developing countries can share fully in the prospective expansion. In undertaking renewed expansion, it is essential that a new outbreak of generalized inflation be avoided. However, fiscal and mone- tary policy in the industrial countries should not overreact to some necessary recovery in raw material and commodity prices. Second, it is important that commercial banks continue net lending to developing countries pursuing appropriate development policies. Although in- 18 creased exports will ultimately provide the best underpinning for new commer- cial bank lending, the international banks, in the meantime, hopefully will find ways to expand their lending operations. Debt service in some cases is eating up such a large fraction of export earnings, and reserves have reached such low levels that, without new borrowing, it would not be possible to import the equipment and spare parts needed to reverse the present trend and expand output and exports. But such expansion is the only way the developing countries will be able to service their high and still growing levels of foreign debt. The creditors of developing countries, including the commercial banks, may be obliged to reduce interest charges, to begin funding interest obliga- tions, to stretch out repayment maturities, or some combination of all three. Obviously, it would be less disruptive to the world trade and payments system if these adjustments are made voluntarily and in an orderly fashion. Mining operations at Minera Real de Angeles, S.A. de C. V., a major Mexican silver producing venture the Corporation helped to establish. 19 Finally, the developing countries must continue appropriate adjustment poli- cies to increase economic efficiency, and enhance their export potential. Prominent among such needed policies are steps to enhance the development contribution of the private sector. Expanding the Role of With the flow of both private and official international lending stable or the Private Sector declining, renewed growth in the developing countries depends to a greater degree than ever on a reinvigoration of private investment, both domestic and foreign. Severe domestic and external financial pressures, including the rela- tive stagnation of official development assistance flows in recent years, have led a number of governments to adopt more positive attitudes and policy initiatives aimed at encouraging private investment within more market ori- ented settings. A greater reliance on private investment and market signals can help close the resource gaps in the developing countries in several important ways. Appropriate incentives for private initiative serve to increase the locally available supply of productive resources, not only savings and physical capital, but also the quantity and quality of human effort and creativ- ity. In addition, market signals can point the way towards a more efficient allocation of productive resources, thus expanding the level of output attain- able from any given level of resources. In trying to encourage private investment, a climate of predictability, fair- ness, and market orientation is crucial. Where rules of the game have been clear, and price signals reasonable, private firms have adapted successfully to a wide range of different mixes of public and private responsibility for produc- tion. Whatever the ownership distribution, a country trying to encourage invest- ment will succeed only if investors believe they can predict with some confi- dence at least the general outlines of the tax, regulatory, and legislative environment that will prevail during the pay-back period. Countries with ad hoc, unpredictable, or excessively costly and time-consuming procedures for obtaining necessary licenses or foreign exchange allocations, or for determin- ing tax liability, will find it extremely difficult to attract responsible investors. Related to this, an important but often neglected aspect of the investment climate is business-government consultations in the design of legislation and regulations. Many governments have found it useful to establish procedures for regular bilateral consultations, as well as tripartite consultations involving labor organizations. Foreign private investment can play an important role as a means of obtain- ing access to modern technologies, managerial resources, and foreign markets. But a country trying to attract foreign private investment is less likely to be successful, however promising its foreign investment code, if potential investors see that the local private sector is hampered by clumsy policies and unfriendly attitudes. Countries seeking to accelerate their growth need to be careful in the choice of policy instruments to achieve social objectives, since poorly thought- out instruments often can have perverse effects. For example, price controls, if administered inflexibly, can dry up the local supply of key commodities, and in 20 some cases have fostered the importation of items that could efficiently be produced locally and in some cases even exported. Similarly, while it is altogether appropriate for governments to pursue equitable income distribution goals, some instruments for achieving this are more efficient than others. For example, employers are sometimes burdened with social costs that are more logically funded through the public budget. This can have the effect of reduc- ing employment opportunities by saddling firms with uncompetitive cost struc- tures. As another example, artificially low interest rates penalize savers, encourage the outflow or unproductive use of private capital and, like other attempts to ration demand through non-market mechanisms, create formidable administrative problems. Many developing countries need to shift the direction of private investment incentives to encourage more attention to exports. Countries that in the past relied on the export of one or a few traditional primary comrnodities for their foreign exchange needs and emphasized production for the local market in their tariff and other policies affecting new investment are finding that high levels of protection have saddled them with inefficient, high-cost production which limits the export cost competitiveness of the entire economy. The shift of development strategies from import-substitution to export- orientation, while necessary, and holding great promise for the future, will be neither quick nor painless. Major new investments will be required, and many existing firms will face difficulties. This creates opportunities and responsibili- ties for many parties, public and private, including the international financial institutions. 21 Fiscal 1983 Operations Investment Summary Volume The Board of Directors approved 58 investments totaling $844.5 million. Of the total approvals, $789.2 million was for loans made at prevailing commercial rates. These included four subordinated loans totalling $20.4 million. The typi- cal loan was for seven years with a grace period of three years. About $55.3 million of IFC's investments was in the form of equity in 41 ventures compared with $32.3 million in 37 projects the previous year. Regional Distribution Projects approved by the Board were located in 36 countries. In three of these (Fiji, Gabon and Guinea) IFC was investing for the first time and in six (Botswana, Costa Rica; Malaysia, Uganda, Yemen and Zaire) the Corporation had not undertaken investments during the prior three years. Sixteen of the investments were in Africa, 16 in Asia, 19 in Latin America and the Caribbean and seven in the Middle East and Europe. The continued geographic diversification of IFC's investment activities is in part due to greater promotional efforts which in recent years have been increasingly concentrated in some of the small and low-income member coun- tries. Close to 38 percent of the year's investments were in countries with a per capita income of less than $730. Particular attention has been given to IFC's operations in countries in sub- Saharan Africa. The Board approved $65 million in the region as compared with $56.6 million during the previous year. The 12 ventures with a total project cost of $275 million were located in 10 countries. In the previous year the Corporation undertook 13 investments in eight countries. Regional Distribution of IFC Investments: Fiscal 1983 Number of Projects Amount of Investment Lati~~tn America Lathn mnenc2 l_ ~~~Caribbean Caribbean _\~~~_ 4 2_6 429% middle East 5% 22 Sector Distribution Reflecting the Corporation's efforts to diversify its activities, the number of investments approved by the Board in the manufacturing sector declined further to below 38 percent. Agribusiness continued to take up an increasing proportion of the number of investments. The 14 agribusiness ventures approved by the Board had an estimated total project cost of almost $55 million and accounted for 24 percent of the total number of investments approved. Six of these projects were in low- income countries. Thirteen investments were made in developing country financial institutions for a total of $198 million. The Corporation supported seven mining enterprises with $126 million of investments. IFC also diversified its operations into new types of businesses-diamond mining in Guinea, ornamental plants for export in Costa Rica, coconut growing and processing in Brazil, industrial financing packages, arranged through com- mercial banks, in Mexico and in Yugoslavia and the production of mini-hydro- electric plants in Colombia. Among the 58 projects, five were cement plants, four were leasing compa- nies, and two were pulp and paper mills. Ownership and Of the projects approved by the Board of Directors, 33 were wholly pri- Source of Funds vately-owned enterprises, 15 were mixed government/private, and 10 were wholly publicly-owned financial institutions designed specifically to assist the private sector. More than 57 percent of the project financing was raised from domestic sources. Most of the foreign sourced funds were in the form of suppliers' credits or government funding. Of the $599.2 million provided by foreign commercial banks, 70 percent was raised through the syndication of IFC loans. Copper processing at Nchanga Consolidated Copper Mines Ltd., a Zambian company that IFC assisted twice- to increase cobalt output and, last year, to expand copper production. 1 r~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ,,: d' .1~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~AN 24 Africa Of the 16 projects approved by the Board of Directors in north and sub- Saharan Africa, six were in agribusiness and four in mining and metals. The two sectors accounted for slightly more than two-thirds of the dollar volume of investments approved for the continent. Almost half of the Corporation's investment in the region, $102.3 million, was syndicated to financial institutions -up substantially from the $20 million the previous year. IFC's Africa portfolio on June 30 consisted of $60.8 million in equity investments and $353.0 million in loans compared with $58.7 million and $350.1 million a year earlier. In its African projects, as elsewhere, IFC worked with companies and organi- zations from countries throughout the world, including investors and institu- tions from Australia, the Federal Republic of Germany, India, Italy, Japan, Kuwait, the Netherlands, Norway, Switzerland, the United Kingdom, and Yugo- slavia. Of the projects approved, eight were joint ventures involving foreign and domestic private and public investors. In these projects, offshore funds ac- counted for about 71 percent of the total financing provided. For example, IFC cooperated with the World Bank in the financing of the Alexandria National Steel Company project which will help to reduce Egypt's dependence on imported reinforcing bars used in local building construction. The project is a joint venture which includes a number of Egypt's industrial and financial organizations and a consortium of Japanese companies who have the major managerial responsibility for the project. The project will be the largest joint venture company in Egypt and is an illustration of the Govern- ment's objective to establish efficient industries in the private sector as joint venture operations. As an example of the aim to increase exports and thereby increase foreign exchange earnings, IFC participated with a number of international investors and banks in putting together the financing for the complex Aredor diamond mine in Guinea. This project is expected to have a major impact on Guinea's balance of payments and is serving as a model for other potential investors to undertake other projects in this new IFC member country. In support of the development priorities of a number of countries in the region, IFC continued to give special attention to assisting agribusiness projects. In support of a rehabilitation project of the Sugar Corporation of Uganda, IFC has been able to assist in a program designed to restore sugar production to levels last achieved in 1970. On a different scale, IFC made a loan for the rehabilitation of the three tea estates and associated factories of the Toro and Mityana Tea Company in Uganda. In order to alleviate Egypt's increasing deficit in sugar and sweeteners, IFC supported two innovative projects. It took up a portion of Delta Sugar Com- pany's capital increase. The company recently started production of beet sugar, a new agricultural crop in Egypt. The other project, sponsored by the National Company for Corn Sweeteners, will utilize corn as the principal raw material in producing sweeteners used in the food industry and is the first of its kind in Egypt. 25 IFC considers the creation and support of development banks as an impor- tant part of its operations. IFC is increasing its share investment in the Botswana Development Corporation by almost one-half million dollars so that this company can continue to play a productive developmental role as the only institution in the country which provides equity as well as long-term loans. In Kenya, IFC made a second investment in the Development Finance Company of Kenya Ltd. as part of an overall financial package being provided by institutions from the Federal Republic of Germany, the Netherlands, and the United Kingdom as well as the European Investment Bank. IFC also made a loan to Banque Nationale pour le Developpement Economi- que (BNDE)-the principal institution providing long-term loans and equity funds to private industries in Morocco. BNDE's operations are concentrated in the food and beverages, engineering and construction industries. It is ex- pected to finance approximately 25 percent of the total investment cost of all industrial projects during Morocco's 1981-1985 five-year plan. IFC FY83 INVESTMENT IN AFRICA IFC Project Company Country Type of Business Investment Costs (US$ millions) Botswana Development Corpora- Botswana Development .46 1.92 tion Limited finance Societe Agro-Pastorale et Indus- Cameroon Poultry operation 1.29 4.82 trielle du Cameroun (SAPICAM), S.A. Alexandria National Steel Com- Egypt Steel bar production 102.40 800.00 pany, S.A.E. Delta Sugar Company S.A.E. Egypt Sugar mill .50 11.80 The National Company for Corn Egypt Corn syrup 8.00 74.00 Sweeteners Barite Mining Gabon Barite mining .01 .30 Societe Mixte Aredor-Guinee Guinea Diamond mining 16.11 95.70 S.A. Ets R. Gonfreville, S.A. Ivory Coast Textiles 3.55 5.60 Development Finance Company of Kenya Development 4.76 28.86 Kenya Limited finance Leather Industries of Kenya Lim- Kenya Leather production 2.67 9.83 ited Les Pecheries de Nossi-Be S.A. Madagascar Shrimp fishing 7.43 10.80 Banque Nationale pour le Devel- Morocco Development 40.00 188.00 oppement Economique finance Sugar Corporation of Uganda Lim- Uganda Sugar plantation 8.00 75.00 ited Toro and Mityana Tea Company Uganda Tea production 1.72 8.80 Limited Consortium aluminium smelter Zaire Promotion company .24 3.50 Zambia Hotel Properties Limited Zambia Tourism 18.82 30.09 TOTAL 215.96 1,349.02 26 Asia Syndications were a major factor in the Corporation's financing of Asian projects, accounting for almost $130 million of the total $230 million invested in the region. The portfolio for investments in the region at year's end stood at $333.9 million in loans and $76.9 million in equity compared with $369.2 million and $76.6 million, respectively, the previous year. The fiscal year's 16 Asian projects demonstrate the full range of business ventures and activities that characterize IFC's special role as a catalyst for development. In Thailand, IFC helped to introduce an advanced new technology, originally developed in the Federal Republic of Germany, to assist the Thailand Tanta- lum Industry Corporation develop an integrated tin and tantalum processing industry. In a completely different type of investment, but one also designed to earn foreign exchange, IFC is helping Exotica Resorts Lanka to finance a new hotel in Sri Lanka, which is expected to earn more than $7 million in foreign exchange per year. IFC is helping to take advantage of an existing resource in the Philippines by utilizing locally grown rice straw to produce printing and writing paper for the domestic market. The project will be developed by Peoples Pulp and Paper Mills, Inc., with technical assistance and equipment from China. IFC FY83 INVESTMENT iN ASIA IFC Project Company CoInty Type oss nvestment Costs (US$ millions) Bata Shoe Company (Bangladesh) Bangladesh S manufacturing 3.92 13.00 Limited The Fiji Sugar Corporation Limited Fiji Sugar 6.00 25.49 India Equipment Leasing Limited rIdia Equipment leasing 5.45 36.91 The Gwalior Rayon, Silk Manufactur- India Cemet 4.30 55.50 ing (Weaving) Company, Limited The Leasing Corporation of India India Equipment leasing 5.46 32.52 Limited P.T. Semen Cibinong Indonesia Cement 25.00 32.00 Korea Development Investment Korea Venture capital .98 13.30 Corporation Korea Securities Finance Corpora- Korea Capita mariket 1.18 11.85 tion Pacific Hardwoods Sdn. Bhd Malaysia Wood products 11.50 46.50 Pakistan Petroleum Limited Pakistan Natural gas 90.21 176.60 Peoples Pulp and Paper Mlls, in- Philippines Paper 5.64 24.20 corporated Development Finance Corporation Sri Lanka Development .30 3.04 of Ceylon finance Exotica Resorts Lanka Limited Sri Lanka Tourism 710 12.80 Petrochemical complex Thailand Petricals .27 3.04 Bangkok Glass Industry C, Lt. Thind Glass 5.11 23.52 Thailand Tantalum Industry Crpo- Thailand Mt refining 57.40 90.00 ration Limite rTiOniirTAL f;000af:\ 229.800;0: gX :;0Q0;>0\000;t:Xi'^;'S' 'Y'i <' '" . '_ 5 , '. .'. ,'. . 29 In Jordan, IFC undertook a substantial amount of project promotion work. This included defining the concept and feasibility of a paper project and assisting various Jordanian institutions and businessmen in reviewing and developing other potential enterprises, including special steels production, a foundry, plastic molding manufacturing and fish farming. Production at Z.P. Slovenske Promotional efforts in the Yemen Arab Republic resulted in the completion of Zelezarne Zelezarna Jesenice, a $4 million IFC investment in the Yemen Dry Batteries Company and the one of Yugoslavia's largest building up of the project inventory of potential investments which now in- integrated steel producers, cludes several agribusiness and mineral projects. which the Corporation helped to expand. 30 Latin America and the Caribbean The 19 Latin American projects this fiscal year included agroindustries, manufacturing, mining and capital markets ventures. The approved invest- ments of over $350 million have an estimated total project cost of more than $775 million. The objectives of these investments were varied and demon- strated IFC's flexibility in meeting different needs in different situations. In Brazil and Uruguay, for example, IFC played an important part in ensuring that projects which faced serious difficulties or delays were able to proceed. In Brazil, the start-up of both the CODEMIN ferronickel project in Goias and the Sotave fertilizer project in the Amazon region were set back, respectively, because of delays in completion of a power line and because of market conditions. IFC led the efforts to complete the financial plans for these two projects, participated in capital increases and arranged with other banks to IFC FY83 INVESTMENT IN LATIN AMERICA AND THE CARIBBEAN CIF Project Company country Type of Business Investment Costs (US$ mHihions) Alpesca S.A.I.C. Argentina Fish processing .48 6.00 Cimento Portland Mato Grosso Brazil Cement plant 50.00 144.50 S.A. Companhia Siderurgica da Guana- Brazil Steel plant .64 8.68 bara (COSIGUA) Empresa de Desenvolvimento de Brazil Mining .40 4.00 Recursos Minerais "CODEMIN" S.A. Sococo S/A-Agroindustrias da Brazil Coconut palm plan- 5.50 23.00 Amazonia tation Sotave Amazonia Quimica e Min- Brazil Fertilizers 21.00 31.30 eral S/A Empresa Minera de Manto