Let us scale up the IFC

Dear Colleagues,

Do Ministers, the representatives of the WBG shareholders, agree that the World Bank should make a capital contribution of five billion dollars to the IFC, our private-sector lending institution, fully paid in cash? That is a question I believe we should raise in the next meeting of the Development Committee. 

Why? Even though we regularly speak about the role of the Private Sector, the outstanding credits of the World Bank to governments are currently ten times those of IFC credits to the private sector. 

The Bank has entered into a somewhat stagnant mode from which it will not be able to pull itself out, until it is better able to focus its activities. With so many things going on, it is very hard to see where capital and budgets should be allocated to get the best results, and there should be no better stimulant for getting the house in order than to see important capital resources diverted to a sister institution.

Currently the World Bank has, according to its own finance department, an unused borrowing capacity of over 40 billion dollars at rates lower than Libor rates (Libor being the rate the best banks pay for deposits in US dollars, in London), and that only seems to be growing, and so to dedicate a small fraction of it for an increase of IFC’s equity does not seem at all incompatible with our constant declarations about the importance of the private sector. 

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My Editor’s Q: Do you mean that the World Bank has to pay interest? I thought that much of the money it lends comes from outright grants from donor countries. I thought much comes from successful countries repaying earlier loans. Surely the World Bank has good credit. If the World Bank were in a financial pinch, wouldn’t the United States government lend it billions interest-free? 

My answer: Jim, the world has put about 12,000 million dollars into the bank, plus the promise of an additional 178,000 million—if needed. In addition, the WB[i] has been able to accumulate 24,000 million dollars in profits over the sixty years of its existence. On the basis of these resources the WB borrows around 110,000 million dollars from the market and lends about 110,000 million to the developing countries, keeping its own 36,000 million dollars in income-generating reserves. If the World Bank gets in a financial pinch, it is not that the United States and the rest of the world would assist it with interest-free loans; it is that they would have to cough up an important part of the 178,000 million in subscribed, but not paid for, equity. Of course, a normal bank would have to pay in the capital before authorities were to treat it as capital, but this is no normal bank, as you should have gathered by now. The IFC, on the other hand, has a fully paid equity of about 2,360 million dollars plus retained profits of another 5,420 million. They also borrow in the markets, but in their case they do not have a huge reserve of unpaid subscribed capital as the World Bank does, which is also one of the reasons I am proposing to put some substantial new equity, in the form of cash, into the IFC. 

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The IFC might not feel that it really needs capital at this stage, because it is doing fine and is not thinking about really expanding. In this respect, a substantial capital injection, thereby clearly signaling the wish of its shareholders, would perhaps force a quite naturally somewhat comfortable and thereby somewhat reluctant IFC to come up with a substantial growth strategy. 

The IFC would perhaps reply that it does not need more capital in order to sustain growth, given its strong balance sheet. This might be true, but the fact is that its loan and equity investments of 10,279 million dollars are primarily financed with their own equity resources, 7,780 million dollars. In fact, were the IFC to adopt IFRS (International Finance Reporting Standards) and adjust its probably excessive loss reserves, its equity would be even higher and their ratio of loans and investment to equity would almost reach 1 to 1.

Since almost all of the IFC’s current borrowings go to maintain the financial “hoopla” (liquidity) that makes up more than 50% of its balance sheet, and the loans and investments are financed almost completely with their equity, then, whether we like it or not, there might be no other way to accelerate the IFC’s credit growth substantially than through a substantial capital injection.

“If it ain’t broke don’t fix it.” That might very well be so, but the fact is that IFC’s mission is to take risks in order to assist the private sector in generating sustainable economic growth in the world, and not just to avoid risks in order to guarantee the sustainability of some initial capital contribution and some private development jobs. 

“If it ain’t broke don’t fix it” is clearly irrelevant in IFC’s case since, as we look to its general performance, it is not that they are broke; just the opposite, it is that they are doing too well for them not to be forced to expand. 

There have been some calls for flat budgets and, in the IFC’s case, this policy would quite obviously produce something much worse than suboptimal results. As for those colleagues who in any circumstances are hooked on a flat-budget concept, let me remind them that this goal could be obtained equally by letting some entities grow strongly, compensated by the slower growth of others. This is the way equity and budget resources are, and should be, allocated in the real world, year after year, and so perhaps we should think about adopting some external best practice. If for instance, the World Bank were formed by five regional subsidiaries, perhaps the pressure for results, to validate the fight for resources, would provide us with a very stimulating competitive environment. 

Friends, when I see the challenges of the PPPs, (Private Public Partnerships) the MDGs, the immense market and needs of sub-sovereign lending, all the regional initiatives just waiting for support, and all the South-South investment and private-sector business waiting for help and guidance, and I place all these needs in the perspective of IFC’s results, my conclusion is that we are obliged to provide IFC with much more long-term development resources. Would our ministers agree?

Real fresh capital increases take ages to negotiate, a check from the World Bank to the IFC could be negotiated in months—hopefully even before our ED group leaves.

While management has the task of budgeting for the best use of resources allocated to each entity, the Board has the responsibility for channeling the resources to the most productive entities. Actively shifting resources from low-productivity entities into higher ones is an absolute requirement to achieve productivity increases, and we may have been doing this insufficiently.

Per