IFC lending under the microscope

IFC lending under the microscope

In this two-part Sustainability Watch, Ben Cooper looks at the lending activities of the International Finance Corporation (IFC), the division of the World Bank that lends to private corporations, which is rapidly expanding its activities in the agribusiness sector.

Last month, Norson Holding, a joint venture in Mexico between US meat processing giant Smithfield Foods and local investors, announced plans to expand capacity while introducing innovations to reduce greenhouse gas emissions.

While creating business opportunities for local pig farmers and new jobs in the processing plants, and bringing environmental benefits, the initiative was notable for another reason. It was made possible by a US$40m loan from the International Finance Corporation (IFC), the part of the World Bank that lends to the private sector.

There are two reasons why the IFC is becoming a more familiar name in the international food business.

First, it is expanding its operations in the agri-food sector. In 2012, the organisation more than doubled its lending to agriculture-related projects to some $4.2bn out of a total pot of around $20bn which itself has grown prodigiously in recent years.

The other reason is that the IFC has not been immune from controversy and criticism from campaigners regarding the environmental, social and governance (ESG) conditions it places on its lending.

The nub of concerns from campaigners such as the Bretton Woods Project is that the IFC "stretches" the interpretation of what is sustainable development and diverts capital to projects which, while possibly offering economic benefits, may have potentially negative social and environmental impacts.

Among questionable investments highlighted by Bretton Woods is a loan to finance construction of a Marriott hotel in Jamaica and a proposed loan for building Lidl supermarkets in Bulgaria, Croatia and Serbia. In the agribusiness sector, NGOs have raised concerns over negative environmental impacts and land entitlement issues related to IFC-backed projects.

Peter Chowla of the Bretton Woods Project says the fact that the IFC is distributing public funds means "very high levels of transparency, accountability, and safeguards" should be applied. He says the IFC's sustainability criteria are too weak and their definitions of what constitutes sustainable development too blunt, giving disproportional weight to key economic indicators such as job creation over ESG concerns.

Just to say a project is contributing to economic growth is "really unsatisfactory when it comes to use of public resources for development outcomes", says Chowla. "You really need to be thinking more carefully about what kind of growth, who are the beneficiaries, what are the distributional impacts and what are the environmental impacts."

Not surprisingly, the IFC defends itself stoutly against campaigner criticism. "Sustainability is very important to us," says an IFC spokesperson. "And we work with companies who very much want to increase their business in a sustainable way, and we have performance standards."

It should also be noted that the IFC substantially revamped its sustainability guidelines last year, suggesting both that earlier concerns carried some weight but also that the institution is trying to do something about it.

While, like other World Bank institutions, the IFC is subject to internal auditing processes, Chowla says these "aren't strong and robust enough yet". He believes the independent recourse mechanisms should have the power to force suspension of investments or compel the IFC to give restitution to displaced people, and calls for the World Bank to innovate in this area. "It is supposed to be an innovative institution so let's see innovations on the accountability front as well, which create stronger safeguards and procedures to make sure that people are not harmed by their work," Chowla says.

Even if the most rigorous sustainability standards are applied, Chowla questions whether multinational corporations are appropriate beneficiaries of such funds.

While the IFC spokesperson refutes the idea multinationals find utilising the organisation's funds expedient, she stresses part of the IFC's remit is to step in when other forms of finance are more difficult to come by. "We are supposed to have a counter-cyclical role," she tells just-food. "In time of financial market crisis that's exactly when we are supposed lend more."

She also suggests the IFC's "knowledge and experience" in developing markets can make it a valuable partner. "We work with many multinationals who are expanding in developing countries who probably don't need our financing in the sense that they couldn't get it somewhere else but at the same time they want to be sure they have a long-term partner or the advice we can bring for operating in this new environment."

The question of how multinational corporations investing in developing countries may contribute negatively or positively to the development of those countries is of course a broad subject but it is undoubtedly highly pertinent to the debate over the role and practices of the IFC.

The spokesperson stresses that sanctioning loans to multinational corporations must be seen in the context of the overall benefits of "encouraging investment in developing countries and creating jobs in developing countries". She also highlights that the IFC spends "quite a lot of energy and effort promoting south-south trade".

However, campaigners still feel the IFC has a case to answer with regard to multinational companies receiving IFC finance. They suggest that if such powerful companies are eyeing an investment, it is because they believe there is a return to be gained and they should finance this out of their own debt or capital resources, allowing IFC funds to go to recipients which lack such capability.

Chowla states: "In general, multinationals have much greater options for financing projects, including out of their own retained earnings and revenue streams, or potentially by issuing corporate paper in their home countries, or approaching their home country banks for financing. They need not rely on local banks the same way a small or medium sized enterprise does. They tend to approach the IFC because it lends on terms that are better than market terms, which ends up being a subsidy to multinational businesses in the name of development."

For its part, when contacted by just-food Smithfield stated categorically that the Norson investment would not have taken place without the IFC loan. "The IFC loan became necessary when we were not able to secure financing from local banks for Norson, a joint venture in which we are engaged with a group of local Mexican investors," Smithfield said. "Without the IFC loan, the facility modernisation would not be possible. With the IFC loan, we will modernise the facilities, help reduce environmental impact through lower greenhouse gas emissions, capture methane from hog waste to generate electricity and possibly use solar power in our operations."

When asked again why other forms of finance were not deemed possible, Smithfield pointed out that Norson was a joint venture rather than a majority-owned subsidiary and made no further comment.

Interestingly, the challenge facing the IFC on ESG issues pertains to their lending both to the largest and smallest of companies. While IFC funding of multinational investment in developing countries has clearly been an area of concern for campaigners, the means by which it lends to the smallest operators in the agricultural supply chain has also proved controversial.

The debate over the IFC's lending through financial intermediaries is examined in the second part of this Sustainability Watch.