- | afs Developing Countries 1~~~~~~~~~~~~~~~~~~~~~~~~1 ~~~~~~~, ~~~ ~ ~ 4 r~~~~~ ip *qt 4 ; f:iery Times in Asia it ;0; dIFC \X32702;\\t (- 9 * r s ca of Japao n rledba sin e gnFEalyT pricipal v s hed inglude Sak-ra Bank of Japan (25%), the general public (22%), the Gokongwei fami- _ ly of local conglomerate J.G. Summit Group (20%), and Philamlife, local subsidiary of U.S. insurance giant AIG (8%). Illustrations Pp. 2-3: Detail fromr tirlitled painitirg, ptrhaps painted for William Fullerton,W s o e. 1760-63. Victoria & Aivert Mtuseumn, London. P. 4: Buddha on Naga. Lop Buri School (stone) Nationial Museum, Ayuthaya, Thailand. The Chinese worfr P, 5: Btuddhist temple, Ban gkokc (wei ji, above)cmb characters for d opportn mpct . Spring 1 998, Vol. 2, No. 2 oundup * North Africa -Jzbekistan:Three of a Kind Tanzanta: Uplink Agrlture is the heart of the Uzbek economy. It accounts for Tanzania has one of the world's thinnest telecommunications aO.t, 30% of GDP> contributes about 60% of export earn- networks. It has fewer than 100,000 lines for a population of i.gs, and directy employs about 40% of the labor force. The 29 milion, a call completion rate of only 35%, and litte abil- .coutry is the world's fifth largest producer of cotton and the ity to serve the country's current needs for data communica- Second largest cotton exporter after the United States. tions. Quick exchange of information and financial resources is vitally needed to spur domestic and foreign investment Uzbekistn's industrial base is also centered around processing throughout the promising tourism, infrastructure, and agricuebased raw materials and manufacturing related agribusiness sectors. Machiney suh as cotton harvesters and textie machines. But the sector is facing a citkal shortage of farm equipment, with To help fill this gap, IFC has recently approved a $2.25 mil- the aailable stockargely otdated in design and operation. lion loan and $507,000 equity investment for Datel Tanzania F -arms also cannotain the long-term credit they need to Ltd., which w0i establish, install, operate, and maintain a acqires Hmore m3odeml equiprmnt As a resul, production has national data communications network. A joint venture clndrd in the last two years, and crop losses at harvest are between Nexus International of France and state-owned sus*tantia. In 1996 cotton harvesting osses partly related to Tanzania Telecommunications Company, Datel will invest a E"undermechanization were estimated at 20% of the crop, or total of $10 million to introduce Very Small Aperture us$140 imflon. Terminal technology and wireless systems that will operate independently from the existing network. To addres the situation, IFC has provided $60.4 million to help finance the launch of three interrelated companies in By providing much-needed data transmission services and UzbeWkstan, each a joint venture between Uzbek entities and a Intemet access, Datel will greatly increase business efficiency, susiary of Case Corp. of the United States. They will intro- For example, in the banking sector most money transfers duc newnu techogg ilmanagement know-how and market currently take a minimum of 30 days, hampering security ifores toD tilbk agriculture and accelerate the country's transi- and confidence in the banking system. Reducing the time ti.Mol to a market econom, frame for transfer of money will result in a higher rate of mobilization of domestic savings and will serve to increase 7 The manufacturing component (UzCaseMash) will produce domestic economic effkiency. Early positive results have cotton pckers and grain headers for combines specially suited been achieved with the Bank of Tanzania, which has already for local conditions to improve harvesting productivity and intertinked its five branches through Datel. Another Datel efficency. The service componert WiCaseervice) will ensure dient is French oil company Total, which now can exchange proper mairneoance of equipment through a network of 13 market and operational data with its headquarters in Paris. service enters. The lasing component (UzCaseagroleasing) will mitigate the shortage of term credit by providing a new IFC's proactive role in this project began in 1994 when it finarning mechanism to enable farmers to acquire new equip- used trust funds from Finland to engage consultants for early ment ani machinery. In time it is expected to be a model for design work. Through an open and competitive international the establishment of similar leasing institutions in Uzbekistan bidding process, Nexus International was selected from five and throughot Centra Asia. intemational telecommunications operators. In 1996, IFC used trust funds from Norway to retain consultants to study The projed mwrks the first time IFC has taken an integrated, the network's technical viability and update market condi- m u- torponent approach to address the needs of a country's tions. With observer status on Datelts board, IFC will contin- key economic sectr. ue to play a neutral and balandng role in looking after the future best interests of the company. _KetI&Bfragwaf, Raymondc Chiu, and Per Kjellerhaug - Omari tssa, IFC Telecommunications, Transportation and <3.: ffCCepfral A sr Middle East & North Africa Department Utilities Department and Paul Crystal, IFC Corporate j _ FC i Corporate RelationsUnat Relations Unit Impact- Spring 1998, Vol.2. No.2 In rastructure~s Lssosfor E merginllg MAarkets Adria A. Mntagu, ChifExective,Treasury Traskforce, London Power, Transport, Telecom and More... Impact Spring 1998, Vol. 2, No.:2 Governments throughout the world face mounting demands on Track Record scarce public resources. At the same time the pressures of interna- In theCOurSeofthe UK's privatization program, UK advisers have tional competition mean that they want efficient enterprises, capa- developed a number of new techniques that have been adopted, and ble of competing directly with, or delivering cost-effective services some a furter oped inisaes a the world. Ths to, others. In developing countries, growing populations and the some cases further devedoped, i sales around the world. These need to provide an attractive environment for business require iimproved infrastructure. In developed countries there is a continu- ing dmandfor ighe stadard in he povison o serices* The restructaring of industries to create financially viable and ing demand for higher standards in the provision of services, commercialLy focused companies, for example, the extraction of whether heatlhcare, electricity and telecommunications, or trans- the oil exploration company Enterprise Oil from the state-owned port, and whether provided to the public or to business. Yet every- British Gas Corporation where governments are under pressure to keep control of public * The restructuring of other industries to improve (and in some finances. *Tersrcum fohrmute ompoe(n nsrr cases to create) competition - between market participants, for example, in creating National Power and PowerGen, the com- The disparity between the demands on the public purse and the pe ting Nation compani from the m opl resources available to meet them is leading government to look at petrag fossElefuel generating companies, from the monopoly how infrastructure can be developed, services provided, and enter- Te creation of neratory a se oy d prises~~~~~~~~ moeie in patesiihtepiaesco. Thi p *t The creationi of ne-w regulatory structures and supervisory bodies prses modenized i partnership with the private sector. This part- (OFTEL, OEGAS, OFFER, OFWAT, and the Office of the Rail Regulator, C)RR), with the aim of safeguarding the consumer * Using private sector finance and skills to develop, construct, and interest where local or national monopoly suppliers still exist oUsingperiate sewifctre, finance returndskis tor dope construcssiond * The invention and refining of large-scale public offers, a tech- operate new infrastructure, in return for operating concessions nique now aLdopted for sales outside UK (for example, Deutsche for the asset (known as the Private Finance Initiative, or PFI, in Telekom, Electricidade de Portugal, the Indonesian telecom the UK) ~~~~~~~~~~~~company PT Telkom, the Polish copper mining group KGHM, * Partiat sales of existing enterprises, either to a single strategic and the Australian airline Qantas) investor or to institutional or retail investors via trade sales or * The development of legal structures for sales by installments, public flotations or pubThe clompeteatrnsfer oeneristpivenetrsallowing investors to pay for shares over an extended period- now adoptel overseas, including the recent offers of shares in Commonwealth Bank of Atustralia and Telstra As well as securing financial benefits for the public sector, these okbuiling T esto i * The introdtuction of "bookbuilding" techniques into privatizati mechanisms can introduce new management, working practices, and offerings, allowing the vendor to obtain better pricing informa- techniques from the private sector, thiereby promoting the introduc- tion from the market, so increasing value to the taxpayer tion of intemational best practice into less efficient companies. m The refining of concession structures to allow continued subsi- Through any associated industrial restructuring, they can help con- dies from thne public sector while introducing private sector man- tirnue the development of a more dynamic and competitive econo- mrey. They can increase investment in infrastructure and related agement techniques and working practices services -omnpared to the levels that could be afforded by govern- * Through the PFI, creating structures that allow private sector services lompae.ad-tio they aleoel -that nme to focus on specify- operators to deliver improved services by construeting and man- merit alone. In addition,- thiey atlbw government to focus on specify- agnifrsucrendohrpjcttatavtaiinly ing the required standards of a service, rather than on providing the aging infrastructure and other projects that have traditionally - ' ~~~~~~~~~~~been the province of govemment. service itself. A Wordwide Phenomenon Structur(es Privatizarion programs tend to have three stages. Broadly, these Privaruatfon is now being pursued by governments in many coun- phases can be defined as the initial, commercial stage; the more tries across the world. It takes many forms, from the wide-ranging c u -voucher privatizations in former Soviet Unionl and other Fast complex, utilities phase; and the third phase, involving the less vu Er priv tfz4tions in former Soviet Union and other East commercial industries, possibly including those reliant on contini- European counries, to the granting of concessions to operate water ing state subsidies to operate socially desirable or necessary services. supplyand sewage treatment services in India. OECD figures show that the cumulative value of privatization sales worldwide reached The UK's experience suggests that it is important to plan privatiza- some $88 billion in 1996, with total privatization revenues in 1997 Ton as axprrinitially the vd gornmnt may rite estitriated to have reach:ed some $260 billion, The tK was among ina rga.Iiilyth edrgvrmn a eur :-the firstmated es to hvereachedsome $260biion. The UK warms amongw rec early and high-profile successes, and in some cases short-term pro- the first c-ountries to adopt privatization, and UK firms are now rec- ceeds. Such irLdividual, proceeds-driven, sales may be carried our ognized as leaders in this field, having helped transform privatization from an academic concept into a practical policy that has been on a case-by-case basis. However, a shift in emphasis, considering applied througliout the world - not necessarily following the UK and implementing sales as part of a more coherent and planned pro- gram, can have significant benefits. Within a longer-term frame- rodel All respects, but drawing on the lessons learned there and work- it is poss:ble to plan forward and prepare tor the later phases of elsewhere, and on the experience of key UK-based panicipants. the program, including the complex re-examination and restructur- ing of entire sectors that is often required to ensure success. Impact . Spring 1998, Vol.2, No.2 m The Commercial Stage The commercial stage may involve the sale of companies that, although state-owned, are free-standing and already operate in a competitive fashion, whether domestically or internationallya UK examples include the sales of Amersham International, the radioac- tive materials manufacturing group; Britoil, the state-owned oil exploration company; and British Airways and Royal Ordn-anice Companies of this nature can be rransferrcd to the private sectr largely in their existing form, although govemrments may want to consider before sale whether their balat ce sheets are appropriate for their newSamtls. Soch companies may be strong candidates for trade sales to third parties in the same business sector, although to encourage competition there ate often advantages in establishing the companies as stand-alone entities and selling via flotation. The Utilities Phase The second, utilities, phase is likely to requite an examination of the role of the state in providing key services, including telecommu- nications, power generation and supply, and water and sewerage ser- vices, where there will oftcn be monopoly elements. This phase may also involve restructuring the existing monopoly operation to create new, competitive, markets, and competing companies to oper- erating stations, binvolved creating a ong-teun, ring-fenced, funding ate both within that market and internationally. It may require the structure to allow the company to provide for the liabitities associat- creation of a regulatory system and a regulatory body to oversee the ed with decommissioninga nuclear power stations. And the privai- new market and, through price and service regulation, to protect the ration of some central governmeint fuctions entailed the needs of consumers. The rcgulatory system may also provide a government providing the businesses with a guaranteed workload in means of improving levels of service and increasing investment, the short to medium term, so as to enable them to adjust to their Key UK examples of companies that, because of the monopoly new environment before having to tender competitively for con- nature of parts of their businesses, were sold subject to a regulatorv tracts from government and new work from other sources. regime, were Britishi Telecom, British Gas, the Regional Electricity supply and distribution companies, and the Water and Sewerage Trade Sales and Concessions companies in England and Wales. Utilities of this kind are likely to Although the UK's privatn ation program has mainly involved the be large companies, and this usually makes them candidates for sale listing of companies on the London Stock Exchange, and share by public flotation. This approach waS adopted for tbe majority of offers to institutional and retail investors, it has also sold a large UK companies included in this phase, although a few (including the nubr paniestrausale. Ti mecanism has arge was pplid tothe rai opeatin comanie, wile aiLtack,the in tero com panuinessvi setoradesubject thi cmimehnistbs targelha electricity generating stations in Northern Ireland) were privatized been used for smaller companies or those that may face particular via trade sales. challenges to their business in the near term, Or where the business's track record is too short to meet flotation requirements. This mech- The Public Service Phase anism is used to a greater extent outside the UK, reflecting the The third phase has involved the sale of companies that do nor smaller scale of the companies involved, the perceived need to operate in a wholly commercia l environmenr, for example, because introduce strategic investors and management changes to effect a they operate socially desirable services, often reliant on subsidy from swift change in the company's performance, and the lesser emphasis governmenct. In oder to privatize such companies successfully, new placed on the retail investor elsewhere. Interestingly this pattern relationships between the public and private sectors may need to be has been changing in recent years, particularly where sales of the established, for example to target subsidy only at those services larger utility companies have been undertaken, with European and where direct support is essential. The nature of these businesses has sonic Latin American countries focusing sales towards retail meant that in some cases companies have been franchised, allowing investors to a greater extent and drawing heavily on the UK's initia- private sector operators to manage public transport services while tives in this area. Outside the UK, trade sales often take the form of still receiving subsidies from central government for socially neces- sales to strategic investors, with- a significant stake in the business sold saty, but otherwise uneconomic, routes. In the UK, this structure to a third party investor - usually an international company active was applied to di-e train operating comnpanies, wvhile RaiLtrack, the in the samne business sector - subject to commitments from that rail infrastructure operating company, was sold by flotation, purchaser to fund significant investment for expansion or system imnprovements. The UK also had to develop structures to deal with the circum- stances of particular industries. The flotation of British Energy, the Such strategic investment sales can be a useful way of bringing new electricity generatinig companiy that owns and operates nuclear gen- management anid expertise into a company. They are often, So Impact u Spring 1998, Vol. 2, No. 2 although not exclusively, linked to a disposal of part of the compa- higher service standards. In the UK, the various sectoral regulators, ny's share capital to its employees -which may be seen as a form of although appointed on a fixed term by the government, act inde- compensation for the change in their status (from public to partially- pendently, at arm's Icngth from government. private sector staff) - and to a simultaneous or subsequent listing of a percentage of the company's share capital on local or international Regulation may also be used to allow the relativc performancc of stock markets. companies in th e same business sector to be compared where direct competition is not possible, so providing a mechanism to spread best Sales through concessions are now becoming more widespread inter- cost and service practice within the industry. This "yardstick regula- nationally, with the public sector using th is method to introduce tion" is applied in the UK to the regional electricity and water com- private sector management and investment into companies panies. over a medium-term period. while still retaining the ability to re-let the contracts to manage these services after the expiry of the con- In some cases regulation can act as a cession period. In some countries, concessions are let over vely long temporary substitute for competi- periods -for example, the 50-year concessions let by the tion while facilitating its Australian govermment to manage their main airports, and by the development, for exam- Mexican government to operate sections of the Mexican rail net- ple, in the UK elec- - work. However, it is possible for concession arrangements to be tricity sector, where _ offered for shorter periods, depending on the nature of the contract the regional co npa- and the service involved. For example, in the UK, concessions nies' local monopoly in - have been Ict for somewhat shorter periods, normally 5 years, in the the supply of electrici- case of bus services, and between 5 and 15 years in the case of rail ty has been progressively services, dependent on the routes involved antd the prosedtteves reduceds, o that smaller of investment offered. Concessions in the UK lhave tended to fea- users of electricity _ e -av ture most heavily in the transport sector. Elsewhere, teconcession been ayt.e vauca"-,. technique has been apptied to other areas, fr mple wa nd r- power services. - - : - ent suppies over ttrae. Conversely, at the time- One notable feature of the conession mechanism is that it allows o nt prfratizati of - the transfer from government control of industries that rentain British Teleo iin 198+, = M= reliant on public subsidv. The mechanismn used :i the UK has only two natial o'-at ,,=tf; offered the right to run services, awarded partially on the bass of' toas wele lice4 ed, and' ,.'D v ' , , the amount of subsidy requtired, although the relative qupality of ser, tbe, govet=rnmn made K vices offered (assessed against a minimum service requirement specid clea thattthis l'==pa:ly fied by the govemnment} and other, predominantly invtstment, -was eeted to lastl JasX=tX criteria, are also taken into account, Crucially, the conitractual at, east Decermber 199 --` agreement that underpins the concession agreements specifies the A Da'resultof direct amounts of subsidy to be paid to the operator over the life of the experience of the devel- '- concession agreement. This will require a con.tractual commitment opment of theleom - from governmnent to a long-term, and inviolate, funding stream, market, the govenme' - I which may or may not be higher than that which existed under was ables to allow 'p.l state control, but which will in any case not be sduect to short tetm licensed, competition4 n i- ' variation. :telecom in the K - j ; 0: 0:0 :; i 0 0 0;; .(iplretienrd 1ff199). ' -' } l- Regulation - -- More complex companies, such as utiliries, present particular diffi- I the eltricif genera= culties that need to be addressed. Where governments are consider- tion sector, th UK split - , ng oly .GB into a numthe berte' m ing the privatization of large or monopoly utility compans theY t ::w mo: o .-'' may wish to consider how to resttict the market power of the priva- f smallr cpi - tized body, and to ensure that there are sufficient: inceatives: for th - of smaler, l cx- B i ndustry to become more efficient. The UK ai-med to develop com- E- rizedbody andin esui~ tha thee ar suficiet inenties. at te so girarors in , uiro ' ' petition wherever possible, but this could not be achieved in all sepSO - ld ha an the two tors. Geographic and investment constraints give some indlustrieis - Atit gencargig in particular those with substantial ne-tworks, a significant degree ofdcd mpaoies (Ntial - natural rmonopoly. In these instances, and a number of other cases P r d PewerGen) _ where the introduction of competition could not take place irmedi the ing sear A ately, regulation has been used to replicate, as far s possible, the t c co .p- effects of competition by enforcing both restrictions on prices and ing thAe nuclear rt 0 0,0 ;; ' 0 ','',''S%''''','f'''''a'',','',' ,'' J8. Z,'N4 ing assets of the former CEGB, was withheld from sale in 1991 fol- - lowing concerns about the decommissioning liabilities associated _ with the nuclear industry. The more modern nuclear generating sta- tions were themselves privatized, as British Energy, in 1996, while a state-owned company continues to own and operate the older nuclear generating assets. Such restructuring is not restricted to the electricity sector; nor is it confined to the UK. Intemationally, New Zealand, some Australian states, Argentina, and Hungary are among those who are consider- ing, or have already implemented, the separation of the generation, transmission, and supply sectors of the electricity industry. Similarly, the separation of rail infrastructure and operation is now required under European Union (EU) law, with the particular model pio- neered in the UK being followed in Austria, Denmark, and the Netherlands; and outside the EU also in the Australian state of New South Wales, and New Zealand. Regulation of Monopoly Activities Systems of regulation need to: * incentivize companies to increase efficiency * strike a fair balance between returns to shareholders and prices and services delivered to the consumer * deliver the level of investment necessary to maintain and enhance service standards in the longer term and * give the regulator access to commercially sensitive information on performance, productivity, and investment. ha e inluded a The move to more commercial operation has often been accompa- that service. The successful bidder is paid as the services are deliv- tiled by reductions in the size of the workforce, or the outsourcing of ered. Any PFI deal must satisfy two basic criteria: that there is a gen- functions previously carried out within the organization. This has uine transfer of risk to the private sector operator where it is best applied particularly in the electricity, gas, and telecom sectors, where placed to manage the risks, and that the project represents value for technological developments have also promoted productivity and money when comipared with other available public sector options. efficiency and contributed to falls in employmcnt. Howevcr, experi- ence has been different in different industries, and across time, with Under the PFI, the hidden costs that come from design faults, pro- some industries (for example, British Airways) increasing employ- ject delay, and poor performance are managed by the private sector. ment following an initial fall in staffing lcvels. Thc introduction of Because the private sector partner has to livc with the project it has competition has also meant that reduced employment in former designed and bui]t, and because it has its own money at risk, it has monopoly companies has been accompanied by increased employ- every incentive to get the project right from the begilning. ment opportunities in new, competing, firms. This is not to understate the human problems that can arise from Experience of the PFI Over Ł7 billilon cf PFF1 deals have been agreed in the UK. These the restructuring of previously state-owned businesses. In certain iler deals m ver aea of the p s , inldn areas where high concentrations of unemployment have developed, tnsport health, pisos, efence, education, housing, urban rede- for example, in former coal-mining or steel-working areas, it is possi- velopmenrt, and government accommodation. ble to ameliorate the impact through enhanced redundancy pack- ' ages, community and business support grants, and training and A good example includes the deals to design, construct, manage, and re-skilling programs. Nevertheless, focusing on the short-term job finance private sector prisons. The contracts rin for a 25-year pen- losses directly associated with privatization looks only at part of the od, at the end of which the prisons revert to public sector ownership picture. The pressures to improve efficiency would have existed even (not always the case under the PFF). The public sector specified if the industry had remained in the public sector. And privatization what itwante custodervies) The than how itewanted stiold e sen a par ofa wier rogrm o ecoomi refrm,what It wanted 6custodial services) rather than how it wanted those should be seen as part of a wider program of economic reform, evcst epoie b uligapio ihacrannme which can create a more competitive economy and future jobs. oells an so forth). 4 of cells and so forth). Government and Business I The private sector is paid a daily rate for prison places made avail- The partial or total privatization of businesses provides the oppor- able, hence no payment iS made intil the prison is fully opera- tunity for govemments to review the nature of their relationship tional. A prison place is not seen as just a cell but as a series of with those businesses. In particular, it allows the state to alter its required functions including adequate staffing levels; the provision role, from provider of services to that of overseer of the market. of suitable health care services; and food. Payments to the prison It may therefore be able to witddraw from the input side of operator depend on performiane -if there is persistent poor the industry (taking no further role in commercial deci- { performance the operator will be exposed to financial penal- sions such as investment, staffing levels, and pay) and . ties and, in an extreme case, the contract could be terminat- concentrate instead on defining the appropriate output- i ed. prices, customer service standards, and environmental cri- teria. Such a move may entail surrendering control over - The public sector, on the other hand, tales responsibility for certain aspects of the management of "strategic" or l various risks, including the number of prisoners occupying "nationally vital" assets a process that may be problem- - the prison, since this is dependent on the way in which the atic for historic or political reasons. However, it mayv government allocates prisoners and the policy that dic- also allow the state to ensure greater accountability . tates their numbers. on the part of the company, both to the state itself (via regulation) and to its shareholders. _ Emerging Markets in contrast to priva.izan th F1 wrograms for the private development and financing In contrast to privatization, the PFI was designed v- for those capital-intensive services where govemr- of infrastructure have been introduced in manyv ment recognizes it has a role to play but where it - = ,>..ji.e. e g malectng the neds of the tlocal economies, they tend to focus on projects wishes to harness private sector management x t and expertise, and private sector financing in the . ra t delivery of public services. .. 48 X W ........... . growth being achieved (including gas and power . fit' r@ffl - $ projects, which are sectors that have been com- pletely privatized in the UK). In the UK, from The switch from inputs to outputs is a key compo #1' its early beginnings in the transport sector, the PFF1 nent of the PFI. Under the PFI, the public sector : ,ie,G),,'' . nentdes of the FF1.sUndervice ithe the publice. shecS .,tor , . .', ha s recently tended to concentrate in areas of decides on the service it wishes to provide. The sIal infrastructure, such as health and prisons private sector is invited to bid for the deal, using - w Lt an icreasing emphasis on the education its skill and capacity to innovate to find the best sector. But the techniques involved in structur- way to design, build, finance and then operate Impact e Spring 1998, Vol. 2, No. 2 ing and financing projects in the PFt and in emerging inarkets involve many common features. At the heart of PFI projects are long-term operating contracts with the public sector (25 30 years is a fairly typical length for a con- tract). PFI projects are only financeable because the private sector is confident that the UK govemiment is willing and able to pay them for services over such a period. Projects in emerging markets are often perceived as having a higher risk profile, either because of the risk of political instability or because of exchange rate volatility. It is often necessary to seek external guarantees for these risks in order to attract the support of international capital markets for the provision of the long-term debt financing that underpins most privately financed infrastructuire projects. The process is not always straightforvard. Policies have to be devel- oped, legislation passed, industries restructured, regulatory regimes put in place, and transactions completed. The process requires focus, commitmcnt, and skill. Howevcr, thc technical skills arc avail- able. The unparalleled experience of the UK gives others an oppor- tunity to learn from the UK's experience and draw on the skills of UK firms in developing their own approach to these issues. For its part, the Treasury Taskforce is always willing to share with govemments in emerging markets its experience of the PFI and to provide further information about public private partnerships, the UK's experience of privatization, the regulation of privatized indus- tries, and the contribution that the London securities and financial markets can iiiake to a successful privatization program. * Adrian Montague is the Chief Executive of the Treasury Taskforce, a department within HM Treasury, established by the new Labour Goverment in 1997 to become the focal point across government for all privately financed infrastructure projects. He has a private sector back- ground and was previously co-head of global project finance at Dresdner kleinwort Benson. _ o n Impact m Spring 1998, Vol. 2, No. 2 q rii - - The Sustainable MON SANTO On the record Food Health Hope onsanto used to be egy - even to the point of making sustainable 1- j tt A R A known as a leading development one of its four global businesses d f- ' U.S. chemical compa- along with agricultural seeds and chemicals, .t ny, mentioned in the pharmaceuticals, and food ingredients. It is a same breath with strategy that says soon the woril's limited nat- , R * ', ,'.5 DuPont and Dow, ural resources and waste-absorption capacity I X 1 _Xwith successful prod- wi/i no longer be able to meet the demands of - wo. ucts ranging from an ever-increasing population, creating a colli- z in - acrylic fibers and sion course that opens vast business opportuni- o ajtd's form chemica phosphates to window guards and water treat- ties for those that can provide solutions - bus.nessto:st sh de ment solutions. No more. especia/ly in the developing world, where most i ta ecp cale Solutii of the world's population growth will occur and -thWr#vehues of $3 -biilionr 5spent- Dashing 96 years of history, the company its battle for sustainable development will be $14 bilion toqre s last year spun off its chemical business and lost or won. -.pme Holde's Foundation Seeds renamed it Solutia. There is no longer any con- .eS C S - Services (US) ,and Semerites Agricere nection between the two firms. Freed from its This new thinking has taken thie company into o past, Monsanto is now focused instead on many surprising new activities. They include inrzn ( atils). something else entirely into which it has been major commitments to steer farmers big and Argentina (pharrnaceutkaIs),. growing for a decade, and that it sees carrying small around the world towards soil conserva- lafnchwd joint ventres With far greater long-term profit potential: applying tion and use of environmentally sound herbi- local partners in Argentina (cot- biotechnology and other evolving "life sciences" cides and pesticides, to offer training programs ton seeds, India1(genetcallY to meet the food and healthcare needs of a fast- to counter slash and burm agriculture in tropical enhanced cotton),: and Russia growing world. forests, and even to collaborate with non- (harmaceuicals). governmental organizations specializing in Oter Affiliations: -rOn boards Record financial success has accompanied the micro finance. of CiticorpI Sicon Graphics change in direction. The company's market U.S.-Japan Business Council; Co- value has more than quadrupled in the past five By the company's own admission, it has not all Microcredit Movement's Councna years. Profits from core businesses have allowed been successful. -fn 1978, it passed up the of Corporations' received U.S. it to invest $2 billion in recent biotech-related chance to be a major early irivestor in President's Award for Sustainable acquisitions with no effect on the corporate Genentech, now the world's third-largest Development for "pioneering credit rating. Many of these transactions were biotechnology firm. More recently, European sustainable technologies." specifically designed to help the company move consumer groups have prote';ted vocally over IFC ries: Monsanto is an more rapidly into emerging markets. introduction of M4onsanto's genetically investor in Southeast Asia enhanced soybeans as food ingredients, fearing Venture Investments Co., an Perhaps most remarkable about the new they may contain.hidden health dangers. IFC-backed regional venture Monsanto is the way it has integrated environ- Nevertheless, in its-annual report the company n gaP mental principles deeply into its corporate strat- commits itself to finding ways 'to help people Impact n Spring 1998, Vol. 2, No. 2 l around the world lead longer, healthier lives, at costs they and IFC: "Sustainable development" Maslow hierarchy of wants and their nations can afford, and without continued environmental is a phrase usually heard from other needs. Money can be degradation. " Monsanto releases a self-critical report each year developiiient institutions, gov- made meeting those needs, and tracking its own performance in meeting these goals. "All we ernments, and environmental is, routinely. The only thing know is that we don't know enough, " says its co-director of groups, not multinational corpo- that puts our view a little ahead sustainable development business, Jan Novak, who looks for rations. Yet you have made it a of the pack is that we think the opportunities in needs like biodiversity conservation and central part of your business, world will want sustainable increased supply of affordable water in arid, low-income with remarkable financial suc- development, even though, at countries. cess. What's going on? this point, most of the world doesn't even know the term. One of the company's primary advisers in developing this Shapiro: It comes down to intriguing new stance is biologist Peter Raven, director of the how you think about markets. IFC: How can you tell that peo- Missouri Botanical Garden and a world-renowned expert on f try not to he romantic about ple want something they aren't tropical ecosystems. "A fairly small handful of major interna- markets, nor assume that they aware of? tional companies have realized that to continue to be profitable automatically will take care of they have to live within the bounds of sustainability in all their the world's ills any time soon. Shapiro: We just think the processes, " he says. "The list includes British Petroleum, But I do think that markets are reality of a more sustainable Unilever, Monsanto, ABB, Volvo, maybe a few others. These powerful institutions through economy - one that satisfies companies are making profound contributions to defining sus- which people can express their peoples' needs in ways that also taindbility, and laying very sound foundations for their own wants, their preferences, and provide for a spiritually and aes- future, because sustainability is not any kind of fanciful concept their aversions. People can also thetically pleasant environment but something that is very much in their own interest. If the do that through other institu- that can continue to sustain life countries of the world are going to accomplish their common tions, political ones being the - is a need that can be goals, multinational corporations can be the most important most obvious, but also the vol- expressed in the marketplace. tool imaginable in helping them do so by appropriate transfer untary institutions like the non- Therefore, someone (and proba- technology, or they can be one of the worst detriments possi- governmental organizations. But bly lots of someones) will make ble. That's why this is so important, and why I spend so much markets are important, and the a living by trying to meet those time advising them." question to ask is, "What do you needs. What we fundameentally think people want?" are is a technology company. As Monsanto looks to the future, it already has a formidable Our role has to be to use good product line led by the world's most popular herbicide It is truly easy to make a great science to try to create products (Roundup, with estimated annual sales of $2.2 billion) and arti- deal of money dealing with very and services that are consistent ficial sweetener (aspartame, sold commercially as NutraSweet, primary needs: food, shelter, with what we think will be an Equal, and Canderel, with estimated annual sales of $725 mil- clothing, and some kind of emerging and increasing need lion). But when Impact met Monsanto CEO Bob Shapiro in his for sustainable development. Chicago office, that was not what came to mind. Nor did his company's push to bring other potential blockbusters to market, IFC: How does that translate such as the planned anti-arthritis medication Celebra, which Monsanto: Rise in Market into new markets for you? Morgan Stanley projects could produce more than $1 billion in Capitalization revenues five years hence. Instead, it was the combined oppor- Dollars in billions Shapiro: You can spot oppor- tunities of two great forces. One: a biotechnology industry he 35 tunities in almost any part of feels will revolutionize life, yet is still in the early stages of our economic system. Energy, commercialization, doubling its ability to identify and apply 30 water, waste - all of them offer genetic technology in a host of industries every two years and cconomically interesting, plausi- currently turning out products that are merely "the equivalent ble potential for making money of Intel's four-bit microprocessor in 1971: very useful, but no 25 by doing things that move us more than the tip of the tip of the iceberg. " The other: a plan- toward sustainability. Look at et's desire for better living standards - more productive farms, 20 food and the process by which a sounder environment, safer and more abundant water, and 20 food is grown, manufactured, higher incomes overall, and distributed. There's plenty higher incomes overall. 15 2 of opportunity to produce more efficient, mnore productive, more bountiful agriCuLtture while at 1 0 the same time reducing the bur- den on earth's systerm. 92 93 94 95 96 97 98 IFC: This kind of thinking inevitably would seem to require Source: Monsanto 1997 Annual Report changing Monsanto from what NOTE: Adjusted to represent today's Monsanto has traditionally been a U.S.- only (fadoring out former chemical business) Impact m Spring 1998, Vol. 2, No 2 focused company into a globally ly optimize around the things since we announced the split. ing together to chaLlenge world focused one. How do you think you think you are good at?" The The market is clearly saying, agriculture to find some nontra- you're doing at that? problem with having business as "You tend to suboptimize differ- ditional ways of organizing itself divergent as our chemical busi- ent businesses when you manage to take advantage of the oppor- Shapiro: We are trying, but it ness on one hand, and what has them under a cormmon struc- tunities that are just now emerg- is incredibly difficult. In the become our life sciences business ture." When you allow each ing. I'm talking now about the classic multinational model, a on the other, was that we ended business to say "NVhat's right for whole agricultural system, not firm starts by selling products in up making cultural compromises me? I don't care what's right for just the part we've been dealing its home country, then selling that suboptimized both. It is less- some other business," you get with. In thc past we've supplied more or less the same products a matter of finance, or even a in lots of other places as well. matter of operations, than it is a I", But we are really trying to figure matter of culture. our a new Model. IFC: Why? The conventional model says, "We are a company of X coun- Shapiro: The difficulty with try, where we do our research, having a single company that where we think about the world, has very divergent cultures with-b and where we make our deci- in it is that you have a hard time U .- sions. If in the process we devel- explaining to one part of your op things that can be sold business whv you treat another elsewhere, we'll sell them else- part very differently. For exam- where, maybe even make them ple, th e kinds of people who are . elsewhere." That's the old important to) a life sciences busi- m model, and it's very hard to ness are rather different from the .---- ...- s break out of -but we're trying. kinds of people who are impor- tant to a chemical business. Not The new model of a corporation only do they have different edu- Sustainable Ag: l1onsanto encourages use of horse-drawn seeders (above) would be a truly global one, cational backgrounds, but thev and its environmentally sound herbicide Roundup as an alternative to although, I don't know that also th.nk differently. One group plowing. The combination can bring major savings to developing-country farmers and reduced degradation of farmland through soil erosion. global companies really exist yet. thinks more about creating If you realfy probed into any blockbuster new products, the company I know of, it would other more about operational more aggressive management agricultural inputs to help farm- still tend to see faraway places as excellence and customer focus. and better performance. Could ers grow crops, and we have a markets. Not as sources. Not as those things be done in a single worldwide business in doing places where their next-genera- IFC: What happens as a result? company? In principle, I don't that. Increasingly, we're looking tion products are going to be see any reason Nvhy not, but in instead at creating value invented. Not as places where Shapiro: You end up making a practice I've ne,'er seen it done. throughout the chain, running their next CEO is coining from. set of trade-offs that don't allow from seed and inputs all the way Yet if you really ask what a glob- you really to get the best out of IFC: Yet at the same time you through to consumers. The new al company is going to be, you both. A chemical business ought were shedding businesses you techniques that biology offers let see that it will be one where it to be managed like a chemical were also buying them. And us make products that appeal to doesn't make any difference business, and that's what Solutia much of what you've bought consumers, particularly products where you come from - your is about. A life-science business lately has been in the emerging that improve their likely health ideas, your prospects, and your ought to be managed according markets. Why? outcomes. We have to deal with ability to influence outcomes are to its imperatives. That's what the whole chain, not simply the the same, and there is no inher- we're trying to do as Monsanto. Shapiro: MosL of the acquisi- farm. ently privileged nationality or tions have been in agriculture. culture. I feel we at Monsanto IFC: So you split into two coni- The underlying belief inside We acquire seed companies not have taken the first steps on a panics. How has the market Monsanto is that we have to sell traditional seed but very long road in this direction. reacted to that decision? entered a remarkable and very because seed is the vehicle for rich moment irn an agricultural making genetic change real. To IFC: Did any one global eco- Shapiro: It has said the parts history that is 1.0,000 years old. the extent that we're talking nomic force affecting your long- are worth more than the sum of The reasons for that have to do about genes, it is to help farmers term competitiveness force you the whole. Solutia's share price with technology, economics, the change the nature of their crops to undertake this change? is already up almost 50% since environment, and a global trade so that at the end of the day the split last September. That's regime that is quite different consumers get something they Shapiro: The fundamental not bad. We've probably gone from anything that has hap- want, like a tastier tomato or oils global force is "How do you real- up about that much ourselves pened in the past. It is all com- that will produce healthier car- Impact X Spring 1998, Vol. 2, No. 2 = pened in the semiconductor sons. Asgrow will hels bring i l o- tech.-no lo.gya,iiMf 2 > industry in the 1960s and early improved genetics to thiscr. 1970s. In thc semiconductor They have excellent germ industry, it was the limitations plasm. To that, we're bringin g on processing arid memory that our ability to find and introduce 1. T h e u se o prior magnetically oriented tech- new genes that will confer other nologies had. It wasn't one key bcnefits on that germ plasm. It's invention that did it, but a series the combination of the traits m icrorg U X ani's' .1 - z of events that led to a cascade of that we can produce through microrg ani si s iinformation technology. It all agricultural biotechnology and 0 * '>::;;fi: made possible many things that the germ plasm that companies now are deeply built into the like Asgrow bring that creates or b iologic i;i gQ\cffabric of the way we live and value for the farmers. Our genes work - so many, in fact, that by themselves are worthless. We life would be almost unrecogniz- can't sell genes. But we can s wyso te m sllJ 111 iJllsl able without them. The same splice them into seeds. <<; S0Xityt0Qt j?thing is happening in biology. 0 The areas we think are going to IFC: So commercially speaking, m aceutical and be most immediately affected what new abilities do you get over the next few decades are from acquiring this Mexican- agriculture, food, nutrition, and owned U.S. company? e nvironm en't > W n;05ithout< 0them. Nbd growzssoybeans for the:0 IFC: In that li s lie bcse they're pretty. They about your $240 million 1996 ,grow soybeans because they ro acquisition of Asgrow duce meal and oils that are use- diovascular outcomes. The IFC: But no one would say that Agronomics from Mexico's ful in many ways. Our genetic whole system of commodity- fanners are knowledge economy- Empresas La Moderna (ELM), modifications can make them based agriculture has to change based workers. which the Wall Street Journal more useful in a greater variety to deliver that. This means the has called one of the few emerg- of ways. corn you grow is going to be dif- Shapiro: Except that farmers ing market companies that has ferent from the com I grow. Your increasingly see themselves that transformed itself into a globally IFC: Developing a new profit corn may be designed for high- way. That's the theme of our lat- competitive player in its indus- center like genetically enhanced protein animal feed, and mine est annual report - that the try. ELM also seems to be one seeds we can understand. But as may be designed for heart- ongoing cascade of break- that has changed along the same a company, you are simultane- healthy oils, but the whole sys- throughs in biology is forcing lines you're talking about. ously also taking an active inter- tem by which we plant, grow, every biology-related field, est iin microfinance - hosting a and market our products has to including agriculture, to become Shapiro: Exactly. We bouht conference last year that brought change. a knowledge-based industry akin Asgrow because e a together companies andnon- to information technologv. seed vehicle for deflierig profits, and commllitting yourself IFC: We're having this conver- genetics into soybeans and some to support one microcredit pro- sation in Chicago, which is IFC: You often refer to the cor. Soy interest- ject operating by the end of this probably the world's biggest trad- world as standing on the thresh- ing crops ru.In first gen- year in every area of the world in ing center in the commodity- old of incredible change because cration, we've be al to which you operate. Why? based system of agriculture that, of biotech. What do you mean design soestii aythat as vou say, has predominated for by that? draam r Shapiro: What appeals most to the last 1 0,000 years. Are you bici owingth to us about microcredit is that it saying that agriculture is chang- Shapiro: If I had to put it in a use our oundup on works. As the World Bank ing from a commodity-based to couple of sentences, I'd say the their in ways that knows better than anybody else, an information-based industry? confluence of technologies today ir d control and there have been a lot of opens a new set of possibilities ys fer down the approaches to dealing with very Shapiro: That's exactly the for addressing some very large reans arc a wonderful poor people over the years, and: way to put it. and difficult problems, as hap- lot of nutritional rea- many of them have not worked. Impact . Spring 1998, Vol. 2, No. 2 This one seems to have a translating global-scale technol- remarkable. What is needed is a about will be a complete laugh- remarkable record of actually ogy for local use. But when you more vigorous base for microen- ingstock five years from now. producing lasting economic ben- really get down to details at the terprise, in all our countries, That's certainly a possibility. efit for the world's poorest peo- local level, to what a particular everywhere in the world. Lots of things could go wrong. ple. That's exciting to us. Some village needs, multinationals But having said that, I've been of our people have just come tend not to be great ar that. IFC: You are taking Monsanto around business for a while and back from meetings in Microcredit, however, does that in lots of interesting new direc- have had a chance to look at a Bangladesh with Grameen Bank brilliantly. tions. Buit is there a risk that get- lot of ideas as they have with some interesting ideas on ting into these new things - evolved, and I've never seen projects we could do together. IFC: How can something as microcredit, sustainable agriciil- anything as exciting as the possi- locally driven as microcredit ture, and the like - will take bilities that these new biological IFC: What have you leamned attain the global economies of management attention off the technologies create. They are from Grameen' scale that multinationals like existing businesses that are so possibilities that apply not only yoturs have? profitable? in the most obvious short-term Shapiro: That it works, but commercial ways, but in long- boy is it complicated! To make it Shapiro: My guess is that what Shapiro: Sure there's a risk. term ways that apply to issues work, it is critical to understand will evolve over time is a Web- Anytime you addl to what you're confronting the planet as a in fine grain the details of vil- based set of connections doing, there's a risk of adding whole and give us possibilitics lage life in the places you are between microenterprises that things that will require more that simply weren't there before. trying to deal with. It's not the will have the advantages of attention. But there is also the That's thrilling work. U kind of thing a multinational is "globality" on one hand and real opportunity of enriching what likely to be very good at. We local knowledge on the other. you are doing by the new activi- have to work with people like This is a powerful and pervasive ty, by the insights that come Grameen and other microcredit form of economic organization from it, or by the network that it practitioners like them around on a global basis somewhere opens up to you. People like me the world. In the world economy down the road. This is not this have been wrong about lots of today, the miultinational corpo- summer's project, but I can sense things in the pa,t, and it may be ration is the principal vehicle for a potential there that is quite that everything I'm talking The Sustainability Continuum Five Phases of Business Helping Itself and the Environment K stainab~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~le Source: Sustainable Development Business Sector, Monsanto Impact a Spring 1998, Vol. 2. No. 2 The Ppwer to Compete (East ot Moscow) By Denis Clarke, IFC Power Department IBRD 29. D espite its enor- RUSSIAN FEDERATIONE mous strides SEVERSTAL GEOGRAPHIC LOCATION toward building a market economy .~ aet in the last seven years, Russia is still sometimes ,' K Olen rsk criticized for having few interna- tionally competitive private companies. Raw materials such as oil, gas, and minerals domi- nate its exports, and few locally u 1 owned manufacturers of value- addcd goods can hold thcir own in today's global marketplace. cherpvt Vorsuta Some 600 km northeast of Moscow, however, there is a company that bucks this trend: R S steel producer AO Severstal. Privatized in 1993, Severstal has Upetsk become the largest steel company in Russia and the sixth largest in Europe. Without any foreign strategic investor, its new man- agement team, led by 34-year-old . CEO Alexei Mordashov, has restructured and developed a clearly defined business strategy focused on flat-rolled steel prod- i ucts with high value-added. Specialization has enabled Severstal to take advantage of its low operating costs to amass $1.2 billion in annual exports. These sales abroad now accouint for o o enues ~~~ ~ <~~i but all signs are that the com- new investments to strengthen Severstal already meets some of of any Rus~sdn ~ ~ pany's newfound marketing and itself. This spring IFC is ptovid- its own power needs with a distribution savvy will leave it ing a $92 million financing cogeneration plant inside its Tha recen d~sab.raj4~ in good shapc for years to come. package to hlp Severstal main- main steel mill in Cherepovets, ming -im h l omy, iNevertheless, like any tai one of its key sources of a city of 320,000 in the Vologda brougir dowt~ h ps .~company in today's global econ- comnpetitive advantage - low- Region. In looking for cost- Severstaks Koo~.n. omy, it must constantly make cost power. effective sources of power, the ~~ lr~~pa~t ~~ No. 2 company realized that its own Severstal's mill only had enough year loan to Severstal for its unused industrial waste gases industrial waste gases to support own account, with plans to syn- Nam AG S.SeM offered an excellent choice, able construction of a new 80 MW dicate another loan of up to $67 Industrr Steel to provide additional electricity captive cogeneration plant million for the account of com- Loatiorherep hvetC ~ at a much lower price (2.5 U.S. inside the steel mill, comprising mercial banks. The syndication 600 km, O cents/KWh) than it currently a combined cycle gas turbine is expected to play an especially Historyt Founded. S pays the local distribution com- facility to include a natural gas- important role in familiarizing state-ow ed pany. This price is also likely to fueled turbine, a heat recovery major private international tized in 1993 tbVOtI~47 remain well below those that steam generator with supple- lenders with the opportunities m =anagement, ItI~O3/~/~will prevail in the new competi- mental firing using waste steel posed by Severstal's mainstream peet5 - - tive Russian power sector that is mill gases, and a steam turbine. steel business and other emerg- 51% ilp: . just now emerging. The compa- Because of the potential impact ing blue chip companies in 4overnment. ny's decision to proceed through on the local environment, Russia. O ertiployces,- at Iona combination of purchases including the possibility of and general puWic ~ - from national utility holding increased NOX and CO emis- company RAO UES and "inside sions, IFC arranged for the * . . - - E i-.the fence" generation, inlstead of international environmental Ahiwal Sales (;-Th, ,- buying more power from its own engineering firm Dames & ApprOXn $local distribution company, Moore to advise the comipany as.3 million txSns~1~4 - - shows that market forces and on an air emissions reduction which $1.2- bilbot0 competition now exert a power- program. As a result, the new exports, pri y ful influence on the sector. To power plant will reduce the Asia, the achieve such a favorable rate, mill's emissions by 90%/o in the =America- however, Severstal had to year 2001, providing a huge Rise In iX#OWtR 5JP#0~, obtain loans at longer-term improvement in the region's air PrlvatlzatlOne 220 - maturities than are available in quality. It will aLIso produce 121 Nit InTcw (70 Russia. So it has turned to IFC, MW of steam for use in the $117.2 stiilllon -' - whose financing for this project steel mill and 52 MW of hot Key _Soure" represents a significant step in water for the district heating CompetItlvouw&4~tx< - __ promoting competitive power network in Cherepovers. operating Cost¶ fIYIA generation in Russia and burderw UWEStflWflt. er increases the likelihood that Once these corLsiderations had technoloieh other private power investments been addressed IFC made avail- Growth: A few years ago, IFC was makirigrc, will soon be made there. able an up-to-$25 million, 11- supporting small scale trucking pri- fuvacesdt; vatizations (below) in Russia. Now international diitnh it is financing major industrial pro- wm-k cOflipFehett6i y ducers there, including Severstal. of cost an r improved fart a mio fi , powE.r plwa:nv it Marc | A| (pSA) andy st*l in Housing Fnance n Lati n Ul in~~~ a Base By Lucy Conger Me4ce~~tty' ~~ Finiance Fund (FOVI) for tower income housing, These Mort- gages and others like them are ad~~~~ issued and supervised by F V l~~t~ l~~ -, General Hipotecaria, a new IFC client mortgage banka that pays 0behsc~s ~t~W commission to use FOVI funds becauvelof the affordable t erms :--and disburses them to develop- outsislongmortgage.sThe 0:X;~ >- ,1 ers who build the housing units mecifica 'ortgage was mand employ sales representatives ~~mi1ies1s~~s~ A to identify prospective buyers. combination of overnmnt|is 0, ~iX .0 wFinite public sector resources, tcrit~ his for middleHin hous- l ; thowever, will never be enough tee, buyred evenly by the [ ; ncomto meet the demand for housing At the age of 39, self-emenploved ceramics painter Zufniga has just in Mexico or anywhere else, year, market tate FOVI mort- bought a home for his family for which is why IFC is also work- gage requiring a monthly pay- the first time. He could do so ing to help General Hipotecaria ment of $5 t a 7, which only can because of the affordable terms and other Latin American be raised if there are increases in of bis long-terriliiortgage. The lenders build a truly market- the government-set minimum mortgage was made possible by a -.driven h-ousing finance system., wage. Today, Carlos and his comnbination of government -Iwife, a bilingual secretary, are credits for middle-income hous- -ISold! proud oners ofan S18,000 ing construction and a gBaran- - With a combined annual family two-berOm, one-bathroom tee, shared evenly by the inoeo ewe 000ad townhouse. Thcv havc already Mexican government and the 72,000 o Metican pesos0($7,200 iimproved it by pIutting in new country's fledgling mortgage to $8,70), thex uiicanp s qualified flooring and carpeting on the banking industry. fo OImrgg rmstairway. "The living room is General Hipotecaria, a special- rsfladtebdom r o The capital for the miortgages ized mortgalge bank formed in so small," said Zufliga, working for El Obelisco's homeowners ~ 95 fe aiga1%at the dining table on the deco- comes from the goverment's dwpy t A the got a 30- rative ceramic items he paints Housing Operation and Bank dwpamltthygta3 and sells. Later, he hopes to add Impact . Spring 1998, Vol. 2, '' another bedroom to the 55- There is a sizable shortage of Mexico's nine other specialized Secondary square-metel home, which has affordable housing nationwide, mortgage banks financed the skylights designed to be knocked with an estimated 30 million construction of 28,780 homes. Ma,ikel out and replaced by a staircase people living in substandard They expect to finance another In the future, IFC will advi to a new third story with anoth- conditions. Every year the 50,000 this year. IFC is working General Hipotecaria on the ' er bedroom and bath. amount needed increases by to expand and accelerate the establislment of a seodi about 300,000 units. Most of availability of housing finance mortgage mnarket t d Another 366 families like the this demand is after adjusting for with an equity investment of up vastly increasero es fo Zufiigas have snapped up all the the low-income families, who to $3.7 million, or 25%, in housing finance. Bt a cauious, - homes in El Obelisco, a modest have no chance of qualifying for General Hipotecaria. This will step-by-step ap to develqp. development built on a dirt field mortgages from the comnmercial help increase the bank's capital, img private sectorhou,, fi . . in the far northern edges of ever- banks that had to stop offering and allow it to enilarge the pool is needed in Mexic F. w e expanding greater Mexico City housing loans after the of mortgages it administers for liked about General H -oeai (estimated population 18 mil- December 1994 peso crisis. But people like the residents of El is that they underst r- lion). The demand for housing as greater numbers of innovative Obelisco. The investmenit is also kets andh ave a vi-fo t : among the professionals, mer- programs at specialized housing intended to help General future, and in this confecdona chants, and self-employed peo- finance institutions are devel- Hipotecaria gradually increase have not sought tn Jurp tight ple whose family incomes qualify oped, more people in the lower into secrtitizatio. Tey wihll '. them for mortgages there is so end of the income spectrum will - -= build up a strong balance sheet keen that the entire develop- be able to afford mortgages to - mwith sound repayment rate," said ment was sold nine months after improve their housing condi- - Eric Cruikshiank of IFC's Latin construction began. The devel- tions. "More than competing America and thc Caribbean capi- opers know that access to with commercial banks, a e com- t - = B tal markets division. financing was the key factor plement them" said Jose Manuel behind the sales boom. "The Rivero, president of General In the two years since it began possibility of this tvpe of credit Hipotecaria. "The needs of the operations, General Hipotecaria helps a lot. Payment terms here Mexican market are so great has done just this: only 0.22% of are stable, with Less variation that there is room for every- - its mortgages are nonperforming. than inflation," said Marcos body." It supervises its credits tightly by Gonzalez Torres, a young sales- maintaining offices in each man at the development, which Solutions remain difficult, but delopment that handle cotlec- gets as many as 100 prospective by helping build institutions that tion and follow-up with borrow- buyers on the weekends. increase private home ownership , ers. Mexico's lax credit culture The speed with which El among the middle and lower of the early 1990s taught lenders Obelisco sold shows the vora- middle class, IFC can make an a painful lesson in December ciousness of the market for mod- important contribution. Last 1994, when the peso lost more erately priced homes in Mexico. year, General Hipotecaria and t than two-thirds of its value and - - - ~~~~~~interest rates soared to more than 100%. "You have to be the supply of purely private sec- very close to the client-con- tor housing finance. There is sumer" and establish permanent -AW7 .=., ;: ,, _^considerable room for growth, and fixed rules for the mort- since the thin Iccal capital mar- gages, said Luis Contreras, direc- kets have provi led mortgages for t general of General only 16% of the existing houses Hipotecaria. Yet despite the - X_ in Mexico and clemand for mutt- risks, his business has proven gages is growing by 25% a year. highly profitable, posting a 78% retirn on capital in 1997. As A Renter No More: Artisan Carlos Zuriiga is a first-tine homeowner, thanks to a mortg,age from IFC- supported General Hipotecaria. Impact * Spring 1998,Vl2 N. 2 part of its future, increasingly Extending thel market-driven strategy, the Reach ge ba I t mortgage bank intends to reduce a b n r e e its reliance on FOVI to 50% of To make the markets work- f a t i total funding and shift to alter- and to expand private sector par- a i e l t E native funding sources by tap- ticipation in housingfnce- TdyithldnL jf#~ ˝ reis are captive buyers looking for long-term investments. With proper guarantees on packaged mortgages, a robust secondary mortgage market can lower rhe interest rates charged on home Participation in General transparent and homo-geneous bulltloans and improve borrowers' access to capital. Once more housing finance becomes available in Latin equity partcipaion in mortge wAmerica, the markct will be banks inTriniad-Tobaoand inLatinAericathfavorethere. The developer of El the Eastern C,aribbean. "We try route wil be tocreate ackages the sameterms, enor, ad solid Obelisco in Mexico, Yamtov -A ~ ~ ~ ~ ~~~~~ ~B6jar, is looking to design and t produce housing for the much l arger market segment of people wh-ose family incomes are far Cruikshank. " wnbelow that of the ZufMigas. For themo, the cost of a home would -- have to about 97,000 pesos .-t-~~~r~ (US$1t1,829) and, after mnaking 10% down paymenrs, the monthly payment would average Irnpactbout 652 pesos ($80). The challenge of creating lower income houising is tough. Costs ping Mexico's new private lending mechanisms that don't Going Fast: With attractive financ- must be reduced, and B6jar must pensions funds (AFOREs) and need lots of government support ing available, middle class develop- meet his own goal of creating other local savings institutions. are required, as are broader ments like El Obelisco in Mexico low-cost units that still offer his sources of finding and more City sell almost as fast as they are clients a decent home and a built. Participation in General transparent andt homo-geneous product that gives him a source Hipotecaria is part of a new IFC mortgage loans, The strategy of of pride. But th-e incentive to drive to invest in thie mortgage many developed countries, and find a solution to these problems markets of Latin America's lead- now of IFC, is to mobilize funds American economies, IFC hopes is great. "It's a much bigger mnar- ing economies. Thiese transac- for housing finance by creating a to jump-start that process. The ket," he said. U tions build on 1FC's earlier secondary market for mortgages. finiancial and technical support experience with more modest This means creating a market of IFC to institutions such as equity participations in mortgage where mortgages are traded, anid General Hipotecaria will gener- banks in Trinidad-Tobago and in Latin America the favored ate packages of mortgages with the Eastern Caribbean. "We try route will be to create packages the same terms, tenor, and solid Lucy Conger is a Mexico City- to play a catalytic role so the of mortgages that can be securi- credit record and develop insti- based journalist whose work has market can work," said tized r hat is, issuing a security tutions thiat can sell them on appeared in Institutional Cruikshank. "We want to) that is much like a bond, but local markers. Investor, Emerging Markets, improve efficient mortgage that is backed by mortgages - U.S. News & World Report, finance, but within the context and offered to investors who are Securitized mortgages hove Jomnal do Brasil, and other publi- of broader capital markets." seekinig a fixed return on olong- grown explosively in the United cations. She has lived and worked term paper. States in the last 15 years, with in Latin America for 17 years. In the Caribbean, 13 years after new issues of mortgage-backed as Impact m Spring 1998, Vol. 2, No. 2 MBS: More Brazil Securitizations- ifferent countries require Colombia have been the most islied homes, " said Luis meeting th; S )different solutions. So active to date, but their com- Eduuardo Pinto Lima of ment neodsot D while it supports bined MBS issues have only Cibrasec. "We wvant lo get tions, Cibr Mexico's primary mortgage totaled the equivalent of about receivables similar to a sec- mofe oF market by working with $570 million, far less than is ondary mortgage market."' savini an4 General Hipotecaria, IFC is also needed. This, in t ,' " planning to invest up to $5 mil- Wilh initial capital of $50 mil- to - lion in Cibrasec, a new private Cibrasec is a product of the .ion, Cibrasec is a non-bank more oes t sector entity helping build fast-changing economic envi- -financial institut on that is start- - Brazil's first secondary market ronment in Brazil, where new ing out modestly but expects In Brazil, 4 X for real-estate backed securi- legal and regulalory provisions explosive growth. Its business bu ildhig" v ties. Taking this important if are providing greater security to plan projects assets rising to sedoridy i l indirect step will generate more housing loans than in the past abouit $480 million by year vast -r p capital to finance homes in a A sharp drop in inflation and end, growing tc $3 billion far a i e country where the housing gradually falling interest rates within four years dnd to $60 p deficit among middle and lower are also stimulatrng demanld for billion by 2008. Construction of and wih iit income groups tops 5 million mortgages in Latin Americas Cibrasec-assisteo properties is at the units biggest housing market. expected to cre3te 600,000 tevclsf a jobs within five years. finando& h , Through its stake in the Sao Seizing the moment, 36 share- factor. t4at!W' Paulo-based company, IFC will holders, led by top Braz-lian -Cibrasec also expects to con- CibrmW' arda i assist in launching the first banks Banco Bradesco, . tribute to imprcving both hous- `ths-wr t mortgage-backed securities Unibanco, Banco de Creditc ing.finance and constructon ir. theirva1 - (MBSs) in a country where they Nacional, and government- ways ttiat will lotwer the costof of acroe are virtually unknown. These owned savings bank Caixa . mortgages and residences to country l packaged debt instruments play Economica Fede,al, created homeowners. By buying up and irflat70ii1 a critical liquidity-butilding role Cibrasec in July 1997. Its ni's- originators.-mo-tgages and ousfy volat in developed-country housing sion: purchasing poolsof resi- packaging them into enough markets But they are almost dential mortgages and then high-quality financial instru- -- Lucy Co ;r i nonexistent in the developing issuing securities backed by ments to stimru ate the sec- ; world - Argentina and them. "We will finance fin- ondary mortgage market, thus _ MBS PURCHASERS _ MORTGAGE ORIGINATORS Brazilian institutional MORTGAGE RECiPmENT Private universal banks .. . . . ... Homeowners \ \ ~I t , ..- ',=,)L*TS State-owned banks .......... ......... . Homeowners C , X \ \ \ ~t t t v5f i? Savings and loan institutions . ......!. .. Homeowners Cibrasec MBS ISSUER ImSprcS , Solomon sarnoah nd Pap&Niaye, lE Africa apital Markets Division Qfl ~~~~~~~~~~~~~~~~~~~~~maturity spectrum, where risks IaFridawQuirtingi ~~~~~~~~~~~~~~~~~~~~are lower. Private sector devel- time in Soweto. ~~~~~~~~~~~~~~~~~~~~~~opment suffers as a result. Cyrus Tshabalala [eaves 495 . ~~~~~~~~~~~~~~Finding solutions to these his factory job and head ~~~~~~~~~~~~~~~~~problems is lFC's business. home. Home, tJ the mod- ~~~~~~~~~~~~~~~~~~~In each case, it has en brick houst at-she end ~~~~~~~~~~~~~~~responded in a new way, of a dirt road where he lives 9$~~~~~~~~~349 I ~providing financing in with his wife andlour chiT .. ~~~~~~~~~~~~~- the African borrowers' dram, 90 minutes dri a neikety A ~~~~~~~~~~~~~~~~local cuirrency. This is a bus from his jobin sign~~~~~~~~~~~~~~~~~~~ificant departure, since until johannesburg ~ ~ ~ - in breaking the logjam, he ~~ now almost all IFC lending logja, be worldwide has teen in hard cur- After 14 years it these ramped w n stu~~ ~ ~~~~ck ~ rencies such as dollars, francs, or conditions, thing are be in ~~~~~~~~~~~German marks and often for so brighten up Lit e ~~~~~~~~~~~~~~~~thing export-oriented projects. the home that will veth ~~~~~~~~~~~~~~~Like any other banik, IFC can- dren their own hedteonis and 0 s, and 4~~~~~~~i not afford to lend too many dol- bathroom is nee y-eiamplese. ~~~~~~~~~~~ to lars to borrowers who earn are gates, walls, ~~~~~~~~~~~~~~~~~~~revenues in local currency, espe- that will malcetlWhomesafer ~~~~~~~~~~~~~~ - ~ cially since most of its loans a key considers kid, tim rdi the ;t. ~~~~~~~~~extend 5, 10, or more years. beries so frequent i the neigh kani to~~~~~~~~ - - Devaluiation duiring the lifetime borhood. As-a bhsekcollar worke 4 as - ~~~~~~~~of a loan could force bonuowers with a tight falnily budges, - S - - ~~~~~~~~~~nto painful rescheduling or used to think he would rsevet - i4MeŽnxthUe,evn deault-Butin ech o place, and he was glad to discov leadel~~~hes caes 1F istringne er he would qualify for one of its it~~~~~llistty,QW an ftechghtue Modern Alchemy: The well-devel- historically done so. This is why --V V- e 4e = W˘;o - x | >:5w oped rand swap mrarkets steer a local nongovemmental organi- 71A , v| t > Ioans from IFC (left) to South zation, Group Credit Corp., has A ~~~~~~~~~~African companies like Sharma tae ihsc edn Group (above) without foreign atia anks as N an exchange risk. -- ~~~~~~~~~~~~~~~~~~~~~~Investec, top local insurance companies, and IFC to create expects to lend to 62,000 South Castibanik, which offers low- =,'.=.. Africans t his year, up from income housing loans that work- 42,000 in 1997. The new bank ers secure by the assets in their is making an important contri- pension funds and repay with burion in a country that is con- irrevocable payroll deductions. sidered upper middle income in Most of the borrowers earn less to manage currency risk and: wherebylFC agrees to swap per capita terms, but has one of than R2,000 ($425) a month lend directly in erther rand or rand principal and interest pay- the world's widest gaps between The loans can be for as much as CFA francs. Thu2s it ken :in- j m- lent-s- for dollar principal anld rich and poor - the top 13% of R45,000 ($9,600 equivalent), to reach borrow4ts in the lae in teTest payments, with the the population enjoy a first but repayments cannot exceed non-expt se ts of Afrias countearty taking tthe world lifestyle and most of the 25% of a borrowers gross economiesb aen itsrage exchange rate risk. In doing so, rest live in substandard condi- income or 50% of net disposable of supot frt-private sector, IFC agrees at disbursement to tions. This creates income income, and the hank's sound develdutient ont tecotinent,- swap the future payments of inequality that is the second credit management has kept net - ;. - :- .; ,; 0 rand ptintcipal and interest that worst in the world, trailing only write-offs to less than 1% of the Swaps * r : 0' '0 >:' 0 ;it wilL receive from its client. Brazil. The disparities are espe- outstanding portfolio. Once Unique amonlg Afrcan curren- JThe pricing of the swap is the cially seen in the housing sector, 1FC's new $10 million loan is cies, the South African rand hasi - as for the pricing Of the loan, with whites hay ng an average swapped and reappears locally in a sophisticate long-term swap A 1 of 33 square meters of floor area the form of rand, Cashbank will market that allows foreign - perperson,bhot backs only be able to increase its volume of lenders to convert theitr har to a local for-profit lender tar- square meters. low-income housing loans, set- 1 i. . geting thelow-income iiarket , currency holdings into rand and getng tl- tg a new exa ple of the p *efficiently hedge the foreign: 0 :Cashbank, is being swvapped By all accounts the country faces ane example o te pri- effili-atly hedge the foreign ~~~~~~~~~~~~~~~vate sector's ability to meet basic excmnge risk. In December V into rand. The deal will allow a housing crisis that has become human needs in South Africa 1 997, IFCs boardi approved tahO Cashbank to inicrease the vol- one of its most pressing develop- ine7: enta that will sed two ume of financing it offers, ment challenges. Government investtinerts tr}at wilt use this Y r maarket to provide FC's first enabling borrowers like Cynis subsidy programs can't stretch Trash to Cash randidennominated financitgs. Tshabalala to upgrade their far enough, and it is vital that By accessing these same inter- Under the sXtructure bteing used9,: housing. A three-year-old insti- more South Africans gain access national swap markets, IFC can UFenders thenstructure being us, tution owned by a consortium of to home loans from their coun- also now lend directly to South swa tnterpainyo norally leading South African financial trv's large formal financial sector African small and mediu]m swnap counterparty-, iormnally an intermational cormmercial bank, institutions and IFC, Cashbank than the small minority that has enterprises' locaL currency-gen- erating projects. The first exam- Impact m Spring 1998, Vol .2, No. 2 - ple is a $47 million tissue paper its own and a $15 million one financing for companies in the ______ _n mill sponsored by Sharma for the account of participant region. Group Ltd., an established fami- banks, both of which are to be _____________________ ~] ly-owned business with opera- swapped into rand. Keep on Truckin' tions in several Southem Similar demand for this kind of African Development With the financing gap filled, financing exists among entre- _____ Community (SADC) countries. the Unicell project is under preneurs elsewhere in Africa. ____ ~~~~~~~~~Sharma Group is number three way and on target to begin So far, IFC is concentrating in 4 in a loc-al tissue m-arket that is operations in 1999. It is expect- the francophone couintries of r'ii - '' ' growing at close to 8% a year. ed to cut Sharma Group's oper- the CFA zone, where the local 0_2 .- 000 Needing to cut production ating costs well below those of currency is pegged to the costs, the company decided to others in the competitive tissue French franc at a rate of 100:1, I combine two things it knew paper market, providing stable but small business owners are Source of Supply: The poor are not about South Africa. One was employment for the workers it reluctant to take on hard cur scarce in South Africa. IFC client the 30% national unemploy- will recruit from the apartheid- rency loans out of fear that the Sharma Group will pay them to ment rate that offers an abun- era "townships" surrounding find waste paper, then recycle it dant supply of labor. The other: Johannesburg. into tissue at its new mill outside the country has one of the Johannesburg- world's lowest paper recycling "IF: was quick to appreciate rates, reusing only about 37% contibu this projectm s wat e a creating 50% in developn cutis emlyntada cleaner and having amsnodmn eninetbyrecyclinig-waste for recycled nesaesad ppr"si hraGroup's :ma~zinl. o Sarm Grop Praksh harna."We were has designe d its nespecialyimpresEsedby the mill t9i t:se wastepaper as it f b innovation tprimary raw ihaterial, whichi shown by IFOin the financing will be collce pr,imarily from structr tdades our con- low-income "hawkers nadi- c ency borrow- tion to t mil's 20 j obs atb all ingwhen revenue streams were skil evls,th cmpny inr,~and._this srcture has~ expe 0 idirect taken away froUnicell the ; jobs, breynonteeifr -uncertainties of the foreign mal ollctos. he abo-jrnn~ xchngemaietsand has, si-ve activity of iwaste pa - r enr its contifued viability. process of European Monetary collection-will providecinoi employ- U.........................0- nion might [ad to another ;,:: :.ment for the unskcilled, who wil,l ThelShatijaGroup and . f-. devaluation. Since the same ned only a-few ba0 gs00 a0000 0 > fneede a t . Unicetransacitions mayW 3 kind of long-term swap market pushcVCX; :-Xa L;- art to start business.0 be. mee; moadels for future lFC does nor exist for CFAs that _ 'X i i i - lol perations, not does for rand, IFC cannot lend Sharma tt: : . 8 Group will : recycle this only in South Africa but in sur- directly. Here, the instrument o: newl colce paper ; ; 0 into ris- - -s -- rounding countries as well, choice is a guarantee of CFA sue iard sell It nexpeyel ereconsirable potential loans, which enables sound ithe local market.But wite in the region for rand local banks to lend to local -a substantial equityiv etmet fi n ing,given the 1:1 peg entrepreneursatlongermaturi- the company found tha a -- etween the rand and theyotherwisecould. - smalluin sit could net get Namuibian dollar, the Lesothoi l 0 ' ; .ong-term loans from the big maloti, and the Swaziland(. - That means more financing for Johannesburgf ;0; j5banks.; And0X w X it wg. ---,l the entire purchase price within 3 the one-year maturities offered - iO , by Bamako banks. To meet his I* needs, IFC worked with Credit Ehia Initiative, a local financial insti- tution affiliated with the European Investment Bank. It is N o . lending 3Ts CFA 1 10 million (about $196,000) for five years, but covering two-thirds of the Echoes of a Bank: IFC has recently invested in this new Bujrkina Faso bank, a potential total with an IFC guarantee. channel for long-term local currency loans. This allows it to lend thc com- Impact a Spring 1998, Vol,.2, No- 2 IFC International Finance Corporation 2121 Pennsylvania Avenue, NW Washington, DC 20433 USA www.ifc.org IFC is a member of the World Bank Group supporting private sector development in member countries through investment, advisory services, and technical assistance.