The IFC Review of Private The t I, 2 N o . 1 / 85 86 I q2 A 'lU~~~~~~~~~~~~rchli1;ddl !L hip;'e Across the Jordan .t!3e ina1t X ,, . j,, ,. v. %.,\t~~~~~~~~'1' / tli't' s , ~~~~~~~~~ ~~~~~~~ i3tgo+ u[t jtl,,l'isl j _ t 11hb3e ~~~~~~ fI. ;-t j IFC l The IFC Review of Private Investment in Developing Countries )FC is a member of the World Bank Group supporting private sector development in member countries through investment_ advisory services, and technical assistance, Intemnational Finance Corporation 2121 Pennsylvania Avenue, NW :C Washington, DC 20433 USA www.ifc.org 0 0 ~~W ii n t e r 1 9 9 8 V o I . 2, N o . I Rob Wright Chitra Atwis Patricia Hord.Graphik Design In this issue West Bank and Gaza: 2 A New Direction A private sector that just won't g/ve up What's New about Globalization? 8 McKinsey & C-ompany's View An issue that affects us all Just Out! 13 Africa Business Network Investors log on 14 John R.H. Bond HSBC Holdings plc 4D 16 Estonia Rocks 17 Privatization: Going... Going. . .Gabon The story behind the bidding for an African ubtility 21 Hungarian Rhapsodies A tale of two IPOs People & the Environment 25 Long-Life Lights for Long Cold Nights Building a market for energy conservation - in the home 27 Georgia in Two Minds > Message in a bottle (of mineral water) Covet: Map of eastern E.iope, die eastem Mediteram-ear, the Near BEst, and thle Black 4 Sea, 1600. NavaL Museum, BarceLona. 4 All references to dollars ae 18 dolars anless orherwas indicated. Models from Manila Czech Private Power lenders expect to be maintained Once in a While ... I was very pleased to receive a Thank you for your informative for most of the life of the project Congratulations on the new copy of Impact. The topics arc article on thc financing of the financing, overcomes the cur- publication Impact. The articles interesting, well chosen, and KLadno power project in the rency depreciation problem and, present interesting examples of clearly written. Czech Republic. The Kladno if combined with liberal foreign IFC's work, in a refreshing and project financing achieves some investment regulations, will readable style. As a former IFC Being a Filipino and a lifelong very worthy objcctives: it avoids contribuite to local capital mar- staff member, I am pleased to sec customer of the Metropolitan a government guarantee, it does ket liquidity. Second, social that the institution continues to Waterworks and Sewerage not automatically pass on fueL insurance privatization can pro- be involved in very sophisticat- System (MWSS), I found the cost increases to consumers of vide, in most emerging market ed and challenging projects. article on the privatization of power, and - by relying upon countries, the single most the Manila water works very 50% local debt - it holds cur- important source of capital mar- There is an obvious tendency to interesting and enlightening. It rency risks within reasonable ket liquidity. In turn, a reason- highliglht an-d present projects is almost unbelievable, given the bounds. In short, project risks ably liquid capital market will and deals where IFC's role great- Philippines' past experiencc in are not shifted to unsuspecting serve its classic function of mar- ly contributed to the overall suc- privatization, that such a large Czech taxpayers and consumers; shaling funds for long-term cess. Maybe, once in a while, contract which was hotly con- they remain primarily where financing requirements from you can also publish an article tested was awarded with the los- they belong - with project investors with relatively short- about failures and what we all ing bidders readily accepting the investors and lenders. term horizons. should learn from them. process and decision as fair. Of course, this successful IFC-assist- While your article correctly Let's hope that the Kladno ed privatizarion is also a source points out the favorable condi- model will soon be replicated in Jean Van den Eynde of pride for all IFC staff, includ- tions in the Czech Republic that a broad range of emerging mar- Rucssell Reynolds Associates ino myself, a formel IFC staff were conducive to the success of ket countries. Brussels member of some 15 years. this transaction, I am not con- vinced that the prospects for Bruce R. MvacQueen I am also pleased that one of Kladno-like financing projects President your articles gave recognition in weaker emerging market Novecon Financial Ltd., ro the Philippine Business for countries are as thoroughly Washington, D.C. Social Progress (PBSP). I was bleak as they first appear. The actively involved in PBSP for most formidable barriers to the But Kenya Keep it up? almost a decade in the 1970's assumption of project risks by Please accept my congratula- (before I joined IFC), and all investors and lenders are expec- tions on launching Impact, the the partners in our firm con- tations (usually quite justified) new quarterly magazine of the tributed I % of our gross income of currency depreciation at IFC. The magazine is informa- every year to PBSP. I hopc that unpredictable rates and illiquid tivc and intercsting, and I hope your article will help further (or nonexistent) capital markets it will go a long way in bringing promote PBSP in the that do not permit the mitiga- together various players in the Philippines and will encourage tion of these currency risks development sector. The maga- the replication of PBSP in through local currency medium- zine will certainly play a catalyt- other countries. Indeed, even or long-term funding. ic role in enhancing private developed countries would sector involvement in develop- greatly profit from a program The growing acceptance of two ment work with a view to allevy- such as this. major policy reform measures is ating poverty in developing cause for optimism that these countries. Ignacio D. Maramba barriers will be alleviated in Manilat some countries more rapidly MIanu Chandaria than one might otherwise have Chairman predicted. First, a currency The Kenya Association of board, which investors and Manufacturers Nairobi Impact Winter 1998, Vol. 2, No. I West Bank aandesGaza: A N ew D i rection ~~~4 _ _ _ _ __ _ hey were investing in peace. "Even if there are some troubles on the political front, there is no reason why we shouldn't move ahead economically," said Peres, who Meeting in Paris Jan. 20, World Bank Group President will be chairman of the privately managed fund. "I am convinced James D. Wolfensohn, Palestinian leader Yasser Arafat, that the better the economic situation of the Palestinians will and former Israeli Prime Minister Shimon Peres signed become, it will be easier for them and for us to cooperate in making an agreement to launch a $100 million investment find targeting peace a palpable reality." private companies in the West Bank and Gaza. The new Peace Technology Fund (see p.7) will be a joint effort of IFC and leading "Our presence here today to sign the Peace Technology Fund agree- Palestinian and Israeli investment firms, bringing together capital ment sends a strong and clear message on the extent of our commit- and expertise from both sides' leading businesses to help hoost the ment to peace as the strategic option for all of our people," Arafat Palestinian economy and thus contribute to the peace process. added. Impact Winter 1998,Vl2, No. I Political and business leaders agree that rebuilding the Palestinian Khouri had long been adamant that expanding Pharamacare could economy must bc a vital underpinning of any lasting peacc. It will make a tangiblc difference to the local cconomy, building export require creation of the legal infrastructure needed to absorb private markets for a home-grown product and demonstrating to others that investment, create jobs, and provide new opportunities for those financing is available for firms that are sufficiently organi2ed and who cunently live in poverty. Establishing this basis for peace will determined to obtain it. But to make the project a reality he had to require not only initiatives such as the Peace Technology Fund, but tirn to those trying to fill the local financial sector's many gaps. In also strengthening key building blocks of the local economy such as November 1997 he received a loan of $500,000 from the Arab banking systems, the stock exchange, housing markets, financing for Palestinian Investment Bank (APIB), a local financial institution small business, and the like. Though far from easy, these efforts will that IFC had helped establish. Another S450,000 loan directly from help the Palestinian economy to take full advantage of its highly IFC sealed the financing for the project. Within a few months the educated work force, strong entrepreneurial tradition, and other new facility will be fully operational, consolidating Pharmacare's assets when the political climate improves, and then turn the corner market position and its potential to increase exports in areas where as the first significant private investment flows arrive. its products have already demonstrated success: Central and Eastern Europe, the former Soviet Union, Yemen, and Oman. The task is daunting. The West Bank and Gaza face a deteriorating standard of living and some of the world's highest unemployment. In "Without the IFC funding we would not have been able to complete an effort to compensate, public investment has increased, but this in our new plant," Khouri said. itself has done little more than unleash a balooning of the public sector and a potentially disastrous fiscal hurden. Until 199.3 the lack Loans of self-government had left Palestinians relying on the predominant Banking solely on export activities to kick-start the economy, how- private sector to keep the economy afloat, but decliniing incomes, ever, would be folly. ongoing legislative and regulatory uncertainty, high risk, and limited access to finance have since challenged local firms to the limit. Creating more long-term jobs within the local economy depends They are hard pressed to create the 30,000 new jobs needed each largely on improving Palestinian firms' competitiveness and increas- year in a population that is growing faster (at 5.6% a year) than any ing investment. But access to financing remains a major problem, other in the world. and external partics such as IFC can mcet only a small part of the need. Local financial institutions must step up. Still, there are prospects for hope. Much of it lies with Palestinian entrcpreneurs, long known throughout the Middle East for their Since the post-1993 transfer of authority for banking legislation to business acumen and abilities to survive under the most difficult of the Palestinians, about 20 new local banks have opened, creating 71 conditions. new branches throughout the West Bank aid Gaza. Yet despite the subsequent fivefold increase in deposits, financing for local firms Small businessmen like Bassem Khouri tell the story best. CEO of a remains heavily restricted. The high risks and relatively low returns leading Palestinian pharmaceutical company called Pharmacare currently associated with local lending so far limit the banks' aver- Ltd., he was one of the first to turn international attention to the age loanL-to-deposit ratio to only 27%. Palestinian private sector. Given the heavy post-Oslo focus on pub- lic investment, he feared the private sector would be overlooked To help combat these problems, in 1996 IFC joined forces with an despite its potential to create a viable, well-structured economy, Arab Bank-led group to establish APIB, the West Bank and Gaza's These convictions led him to help found the Palestinian first investment bank. Since then, APIB has huilt a committcd loan Businessmen's Association and other initiatives aimed at ensuring portfolio of $8 million that reaches manufacturing, construction, optimal growth prospects for local companies. Through foresight tourism, and other sectors. General Manager Samir Abdullah sees and determination, he won a French government grant in 1996 that the bank playing an important role in financing viable Palestinian was instrumental in initiating his company's expansion plans. Now enterprise such as Pharmacare, a firm that operates at intemational he is about to open a new $4.5 million facility that will allow standards and has passed inspection by the U.S. Food and Drug Pharmacare's Ramallah-based plant to add seven products, increase Administration. its current $6 million in annual sales, and add 180 new jobs. Impact Winter 1998, Vol. 2, No. I Improving the local regilatoty ond legislative frame work CoLIld stim- A ii~~~~~~~~~~~~~~~~~late far greater aiiounts of insvestiment, Abdiill ah argues. Much i more need> to be done to create a more comprehensive, credit- a t Sj prone linancial sector. Without stroiiger legislation anid Cqually oeon- 'vincing enforcement nechanisms, the West Bank- and (dar buisiness climate will contintie to> iffer. * - A ~~~~~~~~~~~~~~~~Accordi ig to World Bank researchi, tor example, only 30' ei of land i i Acc din the West Bank i registered. lIpr wing land titling and clarifying 3 ~~~~~~~~~~~~~~~~~~propertyf iights wxould blcp boiriowers post the collateral Lthev nccd tO Teducc risk perceptions and obtain loans. There are also needs to B S - 3 - -:; redutice banks' reseirs rCiLlirrmcnts and facilitate longer maturitics :nd cflcctise risk-shl ring miechiniisms. The P lIestini Atithority * -lE a);tEUlilak'1>*ttI[*D *- '-- Gaza)}kSCIIJil;RhU EI:jj.F.ul>n:zc fruit ~US olar ha_ taLen up these isSee, bet local capacitv in drafting and ratiying new li-lati on reinait tii I ireiod. These banking dificith is u rte> hai dl reflected, hlaoweCr, in the growing Palestinian equityt naarket. W irh considierable drive and deteiriminatisot, local company P>alestite Des'elopmeint aiad Invesrnhent Ltd. (PmaDlO hpis succeeded in est ublishing a nodern siock exchange in Naiblus. Although its miarket capitair7ation is Lill tiny at $3 9i0 million, the Palestine Secuitrie> Exchange's informa- tioi technology is alreada as advanced as an- in the region. Since tradiing began in Febriiary 1997, 23 com1panies have beeni listed, andi -s ~~~~~~18 of them airc traded. There are now' twos trading days per w'eek and six brokerages on th~e PSE. Ins'estoir interest has been high fisr an exchange operating in Sorbh difficLult conditionis. "There i> still ongoing intern iriinal intreste, and it comes pattiru- latlv tfroia ftoeigni lurid mianagers" cofrmiaitis Safwaai Batainia, 4eiiermil manager iOf the PSE. But he carrions "withi the crirrent mix of politi- cal turmoil, Israeli closure policy, aiad tlae absenre of strtmCtuaral pte- reequisitres, thete is no telIling host loug it wxill Ilast.' Nevertheless, like iwany Palestinian rterurnees committed to rebulikd- iiag theec conitry, Bataiia is nor abiort to give up. Duriiig tlae worst closures of 1997 in Jujlv and Auigiist, when Palestinians were nor Palestinians' economic or development problems. A way must be _ found to allow financing to reach those who need it most. Atadean Shawa is director of the Development Resouirces Center, a i4~r; _ Gaza-based Palestinian nongovernmental organization (NGO) working directly with small businesses. He worries about "the insti- . rtutional gap between the very informal nature of most Palestinian a ~ $4fuZ t|2#r4fi~ ¾t-ttt 0 2 companies, more than 95% of which have fewer than five employ- es, and the formial nature of thie leniding institutions." An appropri- ate allocation of credit, he emphasizes, depends on an effective ______ _ h * i delivery mechanism. Without it, he fears, many local firms may shy away from the complicated procedures needed for accessing loans, keeping demand low despite the great need for capital. Echoing his sentiments is the chief economist of the Center for Palestine Studies and Research, Hisham Awartani. In a recent debate held in the West Bank's trade and commercial hub of even allowed to move freely inside the West Bank, the PSE did not Nablus, he stressedl the lack of basic inforrmation about potential miss a single day of business. Through establishing remote electronic Nancing fro cfs m the c asith cut smal tradng,invstos wee giarnrcd acessto he arke, i no to financing frorn local firms, as much the case with cuirrent small cred- trading, investors wcre guaranted access tO the market, if not to it providers as with newcomers such as the "Extending IFC's Reach" initiative. He also added that several seminar participants felt that the "small" nature of the facilities was not small enough and that Without appropriate national securities legislation, however, the the $250,000 minimum loan offered by the lFG program far exceeds PSE so far has had no choice but to be self-regulating, a fundamen- the needs of nveag Plan ompanies. tal disincentive to both the foreign investors who rely on indepen- the needs of average Palestinan compames. dent overseers to set the rules of the game and their local The issue has not gone unnoticed. IFC and the World Bank have counterparts who lack confidence in such a new institution. In jointlv launched a $23 million microenterprise project in conjunc- response IFC has obtained Canadian grant funds to send experts tion withi three local banks. It aims to pioneer the concept of who are helping the relevant Palestinian ministries draft new securi- microlending to the formal financial sector, with loans not to ties legislation that could lead to the investor protection needed to exceed $30,000 and at least 20% of the total funding allocated to increase trading volumes and stimulate demand. loans of less than $1 0,000. Any loan to a microenrterprise will be Deviating froin itsoretraitinaldictinceinedivided among the participating local commercial banks, IFC, and Devitin fro it inre tadiiona diectfinace echaism to the World Bank. In this way, local banks will have enough of their provide donor-funded technical assistance in the financial sector is own money involved to ensure their seriousness in administering the one way IFC is adapting to the unique circumstances of the Ioans.erhaps mos Palestinian business environment. There really is no other choice in t oans. erhaps most an economy area threatened by a hazy legislative framework and is the way the pro- associated high risk. associated V-iigli risk. ject will go one step i; a ~~~~~bevond the rnany One example is insurance, where IFC is working with Irish funding - eyond tmany to improve the existing mishmash of economic laws accumulated D smat wit during the West Bank and Gaza's different eras of external rule: _ programs It will British, Egyptian, Jordanian, and Israeli. The goal is to develop a _ Dutch-funded tech- solvency-based, rather than a capital-based, law to bring the D nitca assistace Palestinian insurance sector into line with European standards. Another key focus is housing. There is no denying the increasing w co mponent that demand from a rapidly growing population, or investors' strong wi compa ideni interest in meeting it. Yet without the necessary legal tools to ensure t companies identify property rights and housing finance, many of the new dwellings that 3 th needs and present mark the Palestinian skyline will remain empty, with local residents them in a formally unable to afford to buy or rent them. IF has stepped in, work-ing _ I documented man- closely with the Palestinian Hiousing Ministry, among others, to pro- d c-u ner thus mprovn vide the regulatory environment and long-term finance needed to 414 jh 3 their chances of offset the high risk in the market. thi chne succes 11 w - - t gW ~~~success. Scaling Down But the mere creation of a more sophisticated and comprehensive financial sector is not, in itself, an all-encompassing solution Lo trie . U * -j8, Vol. 2, No. I Dividend Reinvestment Improving the West Bank and Gaza's investment climate and pro- moting private sector growth to create jobs, a stable economic base and an element of hope are directly linked to peace. This was reit- erated by IFC Executive Vice President Jannik Lindbaek on an Octobcr 1997 visit to Gaza, where he signed an agreement with the Palestine Industrial Estates Development and Management Company (PIECO) to finance a Gaza industrial estate. BuC until an enduring peace comes, creating some of the fundamental insti- tutional prerequisites and reinjecting some confidence into the West Bank and Gaza's investment climate can help reinvigorate optimism. Local banks would grow more ready to lend, for example, if the legal context of taxation and land titling improved, which would, in turn, make local companies more likely to raise capital on the PSE. Foreign investors, including those of the Palestinian diaspora, would then be more likely to invest. The result: two of the things that are needed most - more jobs and higher incomes. The 50% of the pop- ulation currently under the age of 15 would gain a brighter future. IFC has now approved investments of $60.9 million in eight pro' jects in the West Bank and Gaza, seven of them in the last IS months. As PIECO Direcror Amin Haddad said during Lindbaek's October visit, IFC activity in the area is "a statement reflecting the trust and confidence in the investment potential of the economy." A demonstration, perhaps, that the peace dividend may well be delayed but is not necessarily lost. - Impact Winter 1998, Vol. 2, No. I i-;A, 'S . ..; - -- .- - - joint venture partners. Information technology production and distribution, electronic component assembly, and telecommunica- e. ls, --- -- tions are all considered potential areas for the fund's investment, along with other industries such as agribusiness, tourism, textiles, and general manufacturing. Investments are expected in both d*lestibnians unlisted firms and others traded on the growing Palestine Securities Exchange in Nablus. Iii,, , " s s n n Cosponsorship comes from the Peres Center, an apolitical, non- j: - | | | . - -< ~~~~~~~~~profit organization that backs wide-ranging Arab-Israeli ventures aiming to cement Middle East peace. Each Peres Center project is XA _ _ -- --_ _l ~~~~~~~~~structured around practical incentives intended to bring growing Fun - ru n u numbers of Israelis and Arabs to the understanding that there is V U flU .. - - -more to gain from cooperation than from continued conflict. The project started taking shape at the November 1997 Middle East economic summit in Qatar. IFC's Central Asia, Middle East ~wa~k~t'of-ts kind unpdertakin~g, IFC is team- ~I~Jt~wfh ladig Paestnian and Israeli asset I~a~er~~nd th PeresCenter for Peace to i ~ ~ new $400 million investment fund ct~p?nesin heWest Bank and Gaza. %8~nk Group President James D. a d-the; inritiative at a Jan. 20 ~Pi&.19o9 .alonogsie,1994 Nobel Peace Prize _ , ______= rrrdsr~'Shimon Peres and Yasser Arafat, calling it _________._ ~ vey ~~itve eveopmnt n the road to_______ ~p~earrdpospeity n-the region." + und w'il have $100 mil- tc~w~ttn captal romthe private sector, I ~~t~~kstnianArabinvestors, 30% from IM"3 from international ~~t ~~a- td inimum -10%/ ~commnitment- eirst time Palestinian and Israeli 8s: h iitied for such an enterprise and i4Sp0 ort pea:cprocess:by encouraging ~eit~sbetween Israelianid Palestinian >~n4~ helping invetorstoestablish business '______ j.Sd!h frlttinian entrepreneurs, and support- -___:_- ~ ~r.gp~ompnietinthe West Bank and i~. ~ k4ecfng mclv.nededcapital into the >qi.vco.n.omny the fund will facilitate tech- ~r4 'ww-h~w transfer, create job oppor- -:m:~~~~an4ggerial and production -rt=2- -4e~hance managerial and productin -Peace Technology Fund: Arafat, Wolfensohn, and Peres at Jan. 20 signing in Paris. .ireanaged by a.new company. It links IFC with and North Africa Director Andre Hovaguimian says the fund is l nlrt.estrnent Management Corporation, a West Bank precisely the kind of risk the World Bank Group needs to take, w Uh--ou w-ith 300 milliorn under management and an and indeed "something that no one else can" to spark the pri- >5 knoe d e - -of the local business environment, and Tel vate sector growth that the West Bank and Gaza so badly needs. -Canada Israel Investments Ltd., which He sees the fund's commercial orientation as bringing an impor- I*nk$te2& million in long-term venture capital funds and has tant new element into the peace process, business-to-business company affiliated with BancAmerica/Robertson Stephens cooperation. it2d States' What this can do is open up a lot of avenues, and then que sera key areas of expertise is the fast-growing sera," said Hovaguimian. "The Peres Center has a tremendous techt;ology4 str, which has,supplied a steady stream of amount of credibility among both Israeli and Palestinian compa- New York's-NASDAQ exchange in recent years in nies, which is absolutely necessary, and IFC can help by acting as 5an4 teated co.mmunications hardware, software, and middle man and providing our experience from other parts of the K~X~d~ict$. Given the high education levels in West Bank and world. Business is business. Once you remove the barriers, the #d eth~rni se -gr potential for bringing Palestinian firms Palestinian economy will be able to take off." '~ wthraeli .t.chnology groups as contractors or Impact Winter 1998, Vol. 2, No. I MNNIDE,ou GLOBE TERRES xi. - DElY PLANS HEMlSHL sx.qwv...,, > Mt^~ . 77 '-~~~~~~~~~~~~~~~~~~~~~~~~~7 4 Srr '-I~~~~0V - _-- A~~~~~~~~~~~~~ ~~~~~~~1'~~~~~~~~~~01 - 1- Jane Fraser and Jeremy Oppenheim McKinsey & Company "stuperconductor" of knowledge and capital is economy. Apart from the relatively small intemational trade in about to reach the right temperature. A $21 goods and services and a few industries that globalized early, national trillion market will emerge, with no natural economies have remained predominantly local. Gross international owners. The challenge will he to leverage trade flows, except in small open economies, typically account for brands, ideas, and people, Many of the great less than 35% of GDP. International capital typicalLy finances less companies of the twenty-first century will than 10% of investment - even in emerging economies. come from outside the industrial world and have vet to be born. But all this is changing. Suddenly, the pace of globalization has quickened. The gradual process that gave companies ample time to Cynics ask, "What's so important about globalization? It's been adjust has gone for good. In just a couple of decades, the economy under way for decades." In some respects, they are right. The under- will become substantially global. And much of the impetus for that lying processes have indeed been evident for some time, though will come from the integration of vibrant, emerging markets into the without making much more than a modest impact on the world global economy. Impact Winter 1998, Vol. 2, No. I A Fundamental Transformation is for more developed economies. Conversely, governments that pur- The transformation under way in the world economy is unlike any- sue economically unsustainable policies - for example, by failing to impose sufficient discipline on domestic capital markets - get swiftly thing we have experienced before. The increasing availability of punished and find they can borrow only on discriminatory terrms. global capital, coupled with advances in computing and communi- cations technology, is accelerating the processes of globalization. Second, a deepening pool of interationally mobile capital is pursu- Economics arc becoming superconductors of vast flows of capital i and transplants of production techniques. The barriers to globaliza- w itacle natinenomyN capital ly of vested interests tion are coming down wherever you look: not just in Western within a closed national economy, capital is increasigly available to E,and Japan, but also in the emerging giants anyone capable of generating high retums, wherever in the world of China, India, Brazil, and Indonesia. they may be. Companies that used to face capital constraints can now obtain virtually limitless supplies of relatively inexpensive capi- Underpinning these changes arc three mutually reinforcing factors: tal to fund their growth. This is also true in many emerging mar- * the growing scale, mobitity, and integration of the world's kets, where traditional bank credit is being supplemented (and often capital markets out-competed) by an array of new" capital markets players: venture capital, principal investment funds, royalty trusts, and specialized * the increasing irrelevance of national borders as regulation is lesn copnis Ths nemdaisaen ogrcnett liberalized and other economnic barriers fall leasing companies. These intermediaries aTe no longer c-ontent to liberaiedpanding obither eo barriersgeknoa f focus on larger corporates, an increasing number of which tap inter- wotherexpandwingability technoleage knowledge and talent national capital markets directly. Rather, they often serve the most innovative, medium-sized companies in emerging markets: the com- panies that, only 5 to 10 years ago, got squeezed between excessive Global Capital Markets regulation and insufficient financing. The growth and integration of the world's capital markets are the engines of globalization. As foreign exchange and bonds become As capital markets grow and mature, the financial instruments that more integrated, the law of one price begins to apply throughout the can be used to unbundle and manage different classes of risk become world. As equity markets start to integrate in their tum, capital more sophisticated. Ten years ago, infrastructure projects in emerg- becomes more mobile. ing markets were almost always financed through public sector resources. Today, despite regulatory and exchange rate risk, more Cross-border capital flows rose from $536 billion in 1991 to $1,258 and more of these projects are funded by private sector sponsors. billion four years later. These totals exclude foreign direct invest- They are able to disaggregate the various components of the risk, ment, which itself soared from an average of $26.2 billion between allocate them to the players that are in the best position to bear 1986 and 1990 to over $250 billion by 1996. The world's stock of liq- them, and then securitize the project financing, spreading risk effi- uid financial assets grew from $10.7 trillion in 1980 to $41.5 trillion ciently through the capital markets. The world's capital markets in 1994 and is expected to exceed $80 trillion by the year 2000. now possess both the power and the instruments to globalize the The impact of these capital market developments is striking. First, world economy. they are driving a convergence of economic policy across more and more countries. Economies that the capital markets perceive as fiscal- A Global Arena ly responsible and politically committed to market-based policies attrct he iteratinal apial tey eedto fnane grwthand With the greater mobility of capital comes an expansion in the scale attract the international capital they need to finance growth and infrastructure development. This is as true for emerging markets as t of the profit opportunity. We estimate that the value of the world economy that is "globally contestable"- that is, open to global competitors in product, service, or asset owncrship markets - will rise from about $4 trillion in 1995 to well over $21 trillion by 2000, boosted by emerging markets and new sectors joining the fray. This Global capital markets increasing scale, mobility trend to economic openness looks set to continue, fueled by com- and integrauon of world's capital markets munications technology and by the power of the idea that markets create freedom and expand individual choice. In the past decade, the legitimacy of the state's role in running national economies has come under question: witness the demoli- tion of the Berlin Wall, the wave of economic liberalization across Latin America, and the explosive dynamism of capitalism with a Chinese face. In many cases, the market revolution has been pushed farthest fastest in emerging markets. Consider, for example, the pri- vatization of pension arrangements in Chile, with its long-term sav- ings regime as sophisticated and market-based as anywhere in the world. The result: Chile has attracted some of the world's best fund managers to enter and help develop its pension market, vastly -ena expansion Knowledge-based economics upgrading the competitiveness of domestic players. Emerging markets capturing increasing returns Deregulation of service through leveraging intangible and utility sectors assets cross-border Impact Winter 1998, Vol. 2, No. I As regulation is relaxed and other barriers - such as foreign exchange controls, ownership restrictions, and access to capital, A Quick Guide to Globalization: Definition of Terms infrastructure, and informatioi - are overcome, opportunities to International * Refers to world economy that is composed of markets A globalize products and relationships and capture couintry differences ar lag . cotie wihnntoalbudre are largely contained wiwthin national boundaries are growing exponentially. In the financial, utility, and transporta- tion sectors, armong others, the creed of national interest and natural Global * Refers to ,a world economy that is composed of markets ownership that has kept international competition at bay is being which largely operate without regard to national bound& swept away. The profit opportunities now there for the taking are Globalization * Refers to the process of transforming the world's econor worth hundreds of billions of dollars. Moreover, unlike most such from one that is composed of national and regional marl ' ~~~~~~~~~~~~~into markets that operate without regard to national boi opportunities in national economies, they have no natural owner. Consider personal financial services, which has an annual pretax Multinational X Refers to a company which operates in multiple profit opportunity worth roughly $300 billion, over 95 percent of it countries and competes primarily within the national ma currently captured by nationally based competitors. Within a Global company I Refers to a company which is able to operate across nati decade, this opportunity is likely to double in value, quickly becom- boundaries in pursuit of both international and global ing accessible to global competitors via transplants of integrated opportunities busincss systems, or through clectronic distribution. Today's national players will see their profitability come under threat as they face hundreds if not thousands of new competitors, any one of which globe. And valuable business knowhow that a relatively sumall num- could, if it plavs the game well, reap extraordinary rewards. ber of players used to monopolize will be accessible to all, in many cases at cluse to marginal cost, across the Internet. Across the Knowledge Economics matire economies, from the oil industry through to retailing, we are Three decades of constant progress in information and communica- seeing a resurgence of small but high-growth entrepreneurial compa- tion technologies have triggered a complex pattern of social and nies taking advantage of the new opportunities opened up by low- economic change. This technological revolution is shaping the cost information technology. There is every reason to expect the process of globalization by providing new tools and infrastructures same trend in emerging markets, many of which suffer from a deficit with which to capture global opportunities, of precisely the medium-sized firms needed to disrupt the existing industry hierarchy and usher in the revolution. Evolvinig technologies and the worldwide deregulation of the telecommuinications industry have lowered the marginal cost of More su]btly, technological changc is also driving up the relative computing and communications almost to zero. The upgrading of value of all forms of intangible assets -brands and reputation, the world economy's computing and communications infrastructure intellectual property, software, media content, talent - throughout is enabling a massive increase in the cross-border information flows the world. Many of these assets have huge scale effects when lever- that serve to reduce the risks associated with unfamiliarity, speed up aged globally, giving intangible-rich companies strong incentives to the arbitrage of price anomalies, and stimulate consumer demand for shape their industries along global lines. While the likes of Coca- world-class products, services, and brands. Soon, services that used Cola and Microsoft are the masters of this game, the advantages of to require a local physical presence will be opened up to electronic the intangible model have not been lost on more progressive players delivery, amplifying companies' ability to reach consumers across the from emerging markets. Banc Itau from Brazil has worked out how to use its superior banking skills to carve out a niche in Argentina, profitably delivering basic banking products to that nation's under- served low-income segment. Ranbaxy an Indian generic pharma- World Market Capitalization ( trillion) ceuticals mnanufacturer - is building a global reputation for the quality of its products, and yet is also one of the world's low-cost $11.7 00 $21.3007000 $33.1 $5100020000000 ;0 ;; 00000 ; 0 suppliers in a global market that operates on wafer-thin margins. 100% _ t $ 1.7; \ . 3.1;X0f;; ;;fS $51; ; :t 0 0 f Meanwhile, Proton, the Malaysian auto-assembler, executed its 100% U Rest of World intangible strategy in one leapfrog by acquiring Lotus, the pre-emi- t.aun era 1_ ltnent British engineering company, to upgrade its product perfor- mance and reputation on a global basis. 60% UNon-Japan Asia Tal zr 40% - - - Japan Trailblazing corporations have their foot on the global accelerator. These pioneers realize how large the profits can be for a player that 20% Europe captures arbitrage opportunities between countries or shapes a global industry. They understand the dynamics of globalization: first find a 0% * US way around national barriers, and then turn them to your advantage. 1991 1996 2001* 2005* They know how to shape an industry to play to their own strengths. 'McKirsey & Cc., prcjecions Impact Winter 1998, Vol. 2, No. I They recognize that unplanned globalization can destroy value for best talent from all nationalities; and they will aspire to a market all of an industry's participants, leading as it does to wars of attrition capitalization that seems enormous today. Lacking all respect for the in which players contest away value in country aftcr country, even- status quo and having nothing to gain by preserving it, they will be tually commoditizing the entire industry. They need look no farther the architects of discontinuity in their industries. Many will be from than automobiles, semiconductors (recent favorite investments of outside the United States and Western Europe. the Korean chaebol, or conglomerates), interbank foreign exchange trading, and public telecom switching equipment to see that not all This new era presents a fundamental challenge to all but a very few globalization is profitable. Such corporations know how to create companies that have already learned how to ride the globalization opportunities through deep knowledge of local markets married with whirlwind. global reach- opportunities that others are unable to see until they are converted into real profit streams. Closing Down ... With greater freedom and choice come intensifying competition, Pioneering corporations in search of global profits are driving the diminishing control, accelerating product cycles, and deepening globalization of their industries. There is no structural reason why uncertainty. In the new global economy, most companies, unable to soft drinks should be global whilc beer and spirits remain much rely on patronage or position for protection, are permanently vul- nerable. The scale of the global opportunities, the complexity of the The Globalization Process is Self-Fueling competitive arena, and the relentless performance discipline imposed by the capital markets will force companies either to spe- hence globalization investment u ehavior cialize and become world class and world scale in their chosen field, or exit. In industry after industry, globalization is raising the stakes Pressure for economic Time/s and forcing national and regional players to double or quit. The 3 Pressure for economic Time/space _ liberalization compression next decade will see shakeouts and consolidation in new and old industries alike - even in such highly fragmented industries as - - - machine tools or electricity transmission and distribution equip- Arena Knowledge ment, which until recently had appeared relatively immune from Arena Knowledge globalization-driven restructuring. C ~~~~Expansion Economics - Many companies - in both developed and emerging economies- respond to these challenges by "closing down" the problem. They creater supply More knowledge diversity look at globalization as primarily a threat and seek to hold onto the -of savings Greater leverage past by intensifying their lobbying activities or by playing an increasingly complex and opaque game of cross-subsidies. The firms most at risk in this era are paradoxically those that thrived most Capital increasingly valuing intangible assets robustly in the 1970s and 1980s. Their skills, relationships, talent pool, and (in many cases) diversified business portfolio look increas- ingly misaligned with the new set of opportunities. It will be in more local. The only difference is that Coca-Cola has redefined soft their economic interest to get in the way of change, and to paint a drinks as a global industry. Similarly, it was hardly inevitable that dark picture of globalization -as a blind and destructive force, in trainers should become the only global footwear product. But Nike which the rich get riclher at the expense of everyone else. and Reebok drove their business in a global direction, creating glob- al brands, a global customer segment, a global supply chain, and a In our view, nothing could be farther from the truth. This is an era set of global imitators. when privileged insiders who have traditionally captured most of the value get progressively outflanked by attackers - new compa- Much the same is true of fast food, aircraft production, construction nies with nothing to lose and no respect for the existing order. equipment, and credit cards, where Citibank, VISA and GE Capital Expect to see a galaxy of medium-sized Chinese, Mexican, Polish, are creating a global sliver. One or two players shape an industry on and Turkish companies forcing their way onto your radar screen a global basis, and we all discover with hindsight the global scale over the next decade. These companies will start by mobilizing and skill effects in R&D, the supply chain, branding, knowledge knowledge and capital from global markets to capture massive arbi- management, talent development, and risk diversification, to name trage opportunities in their home markets (created by the price but a few. umbrella of highly inefficient "national champions," subsidized for years by their governments). They will then get to meaningful scale Since about two-thirds of the world's economy and almost all ser- by spreading into their immediate regional hinterland through joint vices are still in the early stages of globalizing. it seems likely that ventures and targeted investments. They will orchestrate a web of most of the great growth firms of the twenty-first century have yet strategic alliances with industrial country players to improve their to be born. These companies will start out with a vision of the world access to consumers, talent, and new intangible assets. And they as their market; they will share few of the mental constraints that will move onto the world stage within a matter of years rather than inhibit the incumbents; they will seek to recruit and develop the decades. Impact Winter 1998, Vol.2, No. I . .. Or Opening Up? _ * Looking behind the success stories of leading globalizers, you find - * * companies that have leamed how to think differently from the herd. They seek out different information, process it in a different way, 1 come to different conclusions, and make different decisions. Where l * * * others see threats and complexity, they see opportunity. Where oth- - -* ers see a barren landscape, they see a comucopia of choices: how to define their industry; which customer segmcnts to target; which countries to prioritize; how to manage the risks in uncertain geogra- | 0 E 3 phies; how best to rationalize the business portfolio; what to own and what to influence; how best to manage a network of extemal2 relationships; how to shape their organization's intemal architecture; and which levers to pull to overcome the rigidities of their formal - 3 5 * 0 structure. These choices are made easier when companies understand what is new about globalization. With this in mind, they can identify strate- gies that fit the processes under way, instead of conflicting with them. They can shape opportunities by concentrating on pieces of the business in which they have world-class skills and proprietary intangible assets. They can create open business ecologies that thrive on constant change, translate diversity into strength, attract top tal- ent from all over the world, and leverage third-party capabilities. Conclusions We are on the brink of a major long-term transformation of the world economy from a series of local industries locked in closed national economies to a system of integrated global markets contest- ed by global players. This is a world xvhere capital is freely available to those with the necessary assets and skills, where intangible and not physical assets are the source of strategic differentiation, and where a glut of opportunities are up for grabs. Within a global arena that is expanding to four times its former size, standing still means falling behind in the race for position and opportunity. Creating a shared understanding of this reality is the principal leadership task for most corporations. Without a global mindset, companies risk being marginalized; with it, the opportunities they face will seem almost limitless. - McKinsey and Company is an international management consrulting firm with offices in more than 30 countries, offering strategic and organizational advice to the world's leading corporations and governmental entities. Jane Fraser is a consultant in McKinsey's New York office and Jeremy Oppenheim is a consultant in the London office. Copyright © 1997 McKinsey & Company. All rights reserved. Impact Winter 1998, Vol.2, No. I Just Out! Africa Business Network: Web Page for the World ii r.... .. :..Y E Netscape: RIBN - Business F; Economic Information - Countr Information Center i--------_____ * SDk F-ord Re,k, . S#',, GOe tsgo MM00 Oo-d,itg S_; F or a wealth of information - -----4 ----- --a--/t---o about Africa's private l investment environment, r*lp II Country Information visit WWWIFCORG/ABN, C v i NC Center home page for the Africa . Business Network (ABN). The l user-friendly, interactive site that i .0 or r'to1n-d z CI rorro rrot or rt00 e IFC recently launched is one of - f n dnda tf:ec. r0'wg rr 00010! 01 rent Pe0 the most comprehensive informa- Cu t 11 .i- e: ie . ln the l set Cl -01ur0,0 'ni e.lss 0:'oO.I 0pla-jpdt1 tion sources about Africa avail- 10 I'CtC120 p 000 able. It offers the latest World ,,> ,A. t.10rr, lon a - t Oae _1 0l"re IS 8-:00 bl0 Bank country and regional eco- nomic data, local press reports, Select a Country for Business, Economic anceSociul toformution free electronic mailing lists for the so benefit of the African business community, and more. ABN is tailored to the specific jFoqs - _ needs of investors in Africa. For eSe aphrOchlc tionotrl small businesses, it provides gen- I 2305 122 eral business help and "how-to" 122X information in formulating a busi- Popr!fJdi9 44a7t 53 50 4 3 ness plan, starting, financing, and ______4_,0n2 25 managing a business. It also Area ,-7 * 1 2,381,740 includes a variety of information si . for larger businesses. MM & os-l" CEOo Entrepreneurs and investors will ,3 ----- . ------------ - find the web page an easy way to contact IFC field offices and Washington staff, and to lea with a project idea can learn from Anyone with Intemet access can Intemet now stands at approxi- moreinabou sthef, acitesof thear ABN what he or she needs to use ABN for free. Once there mately 30 and is expected to Afrcan Prouect Development include in an initial proposal, cyber-investors will also find grow fast Come visit - ABN is Facility African Enterprise Fund, then send it via e-mail for a quick quick links to African stock constantly being refined in order Facility,African M gementSerprises F response. Ditto for foreigners exchanges, multilateral and bilat- to become as valuable a tool as African Management Services seeking a potential business eral institutions, and other sites of possible for increasing the quanti- Co., the Enterprise Support Service for Africa, and other facil- opportunity in Africa. interest. The number of African ty and quality of private invest- ities. Any African entrepreneur countres connected to the ment in Afrca. Impact Winter 1998. Vol. 2 No. I The Biggest Bank in the World <:-=7X:E here are many ways to measure a bank. But whether by equity ($25. 7 billion), market capitalization (about $70 billion), or profitability ($7 6 O tn e re cor billion), HSBC Holdings ranks as the largest in the world. Those profits, it should be added, are efficiently accumulated on an asset base of only Title: Group Chief Executive $401 billion, not enough even to be in the world's top 10. HSBC Holdings plc, London (becomes chairman in May after Founded by a steamship company executive and other international retirement of Sir William Purves) - investors in Hong Kong in 1865 as the Hongkong and Shanghai Banking Corp., it has grown into one of the world's few global financial institutions. Yet its largest share HSBC Holdings plc e of profits still comes from operations in the former British Crown Colony, where it has long been the leading bank. The rapid transformation of the island economy, where per capita incomes have Born: July 24, 1941 risen from $1,000 to $24,000 in the past 25 years, and flagship unit Hongkong Bank's subsequent Key Holdings: Hongkong Bank growth throughout developing Asia have provided a base for expansion into many lines of retail (top bank in Hong Kong, more and wholesale banking throughout the world. A string of acquisitions last spring and summer and territories in Asia); Hang have made HSBC the largest foreign player by far in Latin America, and the opening of initial Seng Bank (Hong Kong); Midland offices in Azerbaijan and Kazakhstan gave it a foothold in parts of the world where its familiar Bank (UK); Marine Midland Bank hexagon flag had not flown before. (US); British Bank of the Middle East; HSBC Investment Banking Chief Executive John R.H. Bond is a new member of IFC's Banking Advisory Group, a panel of (global); HSBC James Capel (glob- top international bankers who meet with IFC senior management twice a year. His 36-year career al equity brokerage); HSBC with HSBC has included service throughout the world, including stints in Asia and as chairman of Equator Bank (sub-Saharan Hongkong Bank of Canada and Marine Midland Bank in Buffalo, New York. Interviewed at African investment bank) HSBC's London headquarters, he shared the following perspectives on international finance that Employees: 130,000 in 79 come from his unique position atop the biggest bank in the world - and one for whom the high- Recent Transactions: Invested growth-potential markets have always been the highest priority: roughly $2 billion in banking acquisitions in Latin America in IFC: Uniquely among major people who go to countries and BOND: 'Emerging markets' is 1997: $960 million for 100% of intemational banks, HSBC has are self-starters, who do not not a description we particularly Banco Bamerindus in Brazil; roots that hie in the developing have to have somebody looking favor, but what we look for in $174 million for 19.9% of Banca world. How does this make you over their shoulders or talking our strategy around the world Serfin in Mexico; $600 million different from the others? to themii every day on the tele- are markets where the demuand to increase shareholding from phone. This also shows in our for financial services is growing. 29-9% to 100% in Banco BOND: Our origins in Hong strategy for information tech- For example, in 1997 we invested Roberts of Argentina; $16 million Kong and Clhina have shaped nology, where we tend to devel- in Argentina, where we estimate for 10% for Banco del Sur in the character of HSBC. We op all our own systems in-house. maybe 20% of the population has Peru; and $14.5 million to grew up in a world of limited We're thrifty as an organization. a bank account, and in Brazil, increase shareholding from 3.9% resources: human and, to start We watch the pennies. Where where maybe 30% of the popu- to 7% in Banco Santiago of Chile with, financial. And we grew up we came from has dictated to a lation has a bank account. I siis- IFC Involvement: Member, in an era of imperfect communi- large extent the essential char- pect the comparable number for IFC Banking Advisory Group; has cations, so the character of our acrer of the HSBC Group today. India is no more than 20% of approximately $50 million in IFC group is to manage on as limited the population, and we have B-loan participations, including a resource base as we can and to IFC: How does it affect the been there for over 100 years. financing for private power gen- be self-reliant. We are used to kinds of banking business you do? But in the wesrern markers, eration in the Philippines, textile plants in Indonesia, and others. Impact - Winter 1998, Vol. 2, No. I nearly everybody who's likely to IFC: Are you optimistic or pes- BOND: We believe that will IFC: Now that HSBC is active want a bank account already simistic on the region? come. If you look, for example, in Latin America as well as the has one. The source of growth at Argentina's relationship with Middle East, the former Soviet in mature markets is likely to be BOND: We remain confident. Malaysia, you will see that just Union, Africa, and Asia, what how many customers you can The underlying fundamentals of over five years ago they did vir- would you say the introduction wrest from your competitors and high savings rates leading to tually zero trade with one of a major foreign bank means what the increase in the surplus high investment, strong com- another. Today, they do a half- to a developing country's finan- income of individuals and com- mitment to basic education, pri- billion dollars a year, and cial sector? panies will be. So you are going mary and secondary education, Malavsian Airways flies to to be really in a markeL share raising the intellectual capital of Buenos Aires, and Varig flies to BOND: You have to consider game, whereas in emerging mar- the country, a group of very tal- Hong Kong from Sao Paulo. it from the host government's kets, you participate in the ented entrepreneurs all of These links are going to grow. perspective because, after all, growth of the market itself. those fundamentals remain in What a group like ours can do is they are the people who enable place in most of the countries. bring in the attributes of our it or disallow it. I would have IFC: That said, what has been experience in Asia, which thought it makes good sense to the key to your profitability? IFC: What drove your recent would be productivity, customer have foreign capital in your acquisitions in Latin America? orientation, self-reliance, and financial system, particularly if BOND: We are fortunate to be thrift. it is in need of recapitalization. in markets where the demand BOND: This is something that If you've got strong demand for for financial services and the has been at the back of our IFC: Your acquisition in Brazil, capital for other projects in your demand for funds has been minds for 20 years. People at Bamerindus, is that country's country, you want to release growing. It's axiomatic that no the top of this group have said fourth largest private bank and that capital into providing jobs, bank can be better than the "There's going to come a time currently lacks the high profile economic development. So use clients it serves. We've had some when it will be sensible for us to of its larger competitors foreign capital in your financial very successful clients for very make some investments in Latin Bradesco, Unibanco, and Itau. system, especially if it brings many years. We are very fortu- America." Why has this not It has been reported that you with it some expertise. I will nate in that respect, but man- happened until today? A very intend to build it into number always consider that to be a agement would like to claim the simple answer: the opportunity one. Is thiat true? very sensible strategy. But we credit for managing the expenses wasn't there. It took the reforms need to he quite clear: the sov- tightly and managing the risks of in Brazil, Argentina, and BOND: We always set our- ereign states still write the rules the business well. Mexico to enable foreign finan- selves challenging goals, but it for the financial sector, so they cial institutions to own banks in will take time. This is a five- to can control the behavior of the IFC: A large portion of your those countries. So we were seven-year program for us. Our banks. business is done in Southeast unable to make the investments ambition is to be successful. Asia. What is your reading of its until really recently. The oppor- We've benchmarked ourselves IFC: In addition to your hold- financial crisis? tunity came and we weren't very carefully against the comr ings in Hong Kong, HSBC slow to capitalize on it. petition and we don't go for size recently opened its eighth BOND: The financial systems for size's sake. We would like to branch in China, and has a rep- vary from country to country. IFC: Spanish banks like Banco be what our clients and our utation for knowing that coun- Some of them arc in fairly early Bilbao Vizcaya and Banco shareholders want: the best try as well or better than phases of development; some of Santander got there ahead of bank in the region. anyone else. How much of an them are very sophisticated. you. But it appears that by wait- opening do you see in the years Looking at it from that perspec- ing, you found opportunities to IFC: Are you interested in ahead for foreign banks in tive tells you which countries come in at very attractive entering any other Latin China? are likely to have a temporary prices. Were you necessarily American countries, say slowdown and which countries waiting for special situations Colombia or Venezuela? BOND: China has pursued a are likely to take longer to such as these to arise before you very sensible strategy in its resolve their particular issues. entered this mark-et? BOND: What we have to do is financial services sector. It is What strikes me about the art of the possible. You have adopting a gradualist approach, Southeast Asia is that for 20 BOND: Well, it's in our charac- to make your priorities and not which is just what I would years western commentators ter to be careful with money. We assume that you can be every- advocate. I don't think it wants accorded near-halo status to its are very price sensitive in mak- where at once. It is a big man- foreign financiaL institutions to economic achievements. It ing major investments and yes, agement and information have substantial market share in strikes me as slightly odd that we wait for suitable conditions. technology challenge to support China, and we understand and they applied the hornls within the investments we've made, we respect that. It is a sound two months of a market correc- IFC: Do you see these moves and we have to make sure those decision on their part. On the tion, albeit a severe one. But I helping HSBC facilitate a are properly put to bed before other hand, with a tremendous don't want to make light of the growth in Asian-Latin we think about anything else. amount of foreign direct invest- situation. There are some seri- American trade? ment comes a need for some ous issues out there. financial institutions to help Impact Winter 1998, Vol. 2, No. I facilitate that process, and that's ence, we are likely to see a slow- exactly what they're doing. down in the opening up of the Estonia: The Electronics Age There is no doubt in my mind equity markets in that part of that China is destined to be a the world and perhaps a bias Estonia has much in its favor: a government that has suc- major economic power. It would- toward direct investment. I cessfully carried out sweeping economic reforms, a well- n't surprise me at all if it is the would expect that people would educated, efficient work force, and geographic and largest economy in the world at press the brakes a little bit on some point in the next century. how you develop the futures linguistic ties to Scandinavia. markets. Nothing says that the IFC: Do you have a domestic financial system in a country IFC can help not only by financing selected enterprise banking license in China? with a GNP of $30,000 a head is modernizations, but also by setting an example for for- the right one for a country with eign investors who can provide long-term funding - BOND: No, we have a license a GNP of $1,000 or less a head. something that has so far been scarce but is vital to to deal in renminbi under speci- The challenge in Asia is to cher- Estonia's continued growth. Nowhere is this more appar- fied terms. It started this year. ry pick the bits that make sense ent than with Elcoteq Tallinn, A.S., a contract electronic They issued several licenses to and to put aside those bits that manufacturer specializing in assembly of printed circuit foreign banks to do that, and it don't. Very often the western boards. In 1996 it underwent a $40.6 million expansion started just as they've done it mind believes that what's good that was partly financed by a $7.7 million IFC A-loan. previously, in a gradualist way, in the West is good in Asia. which I think is right. You learn That's not necessarilv true in my what works, wht doesn't wor, experience.The expansion has doubled the size of Elcoteq, and made what works, what doesn't work, experience, its Tallinn operations the base for the current $500 million an-d then you fine tune and improve. It's off to a good start. IFC: Taking a step back from it in revenues. It has established the company as both all, what would you say is the Estonia's largest exporter and Europe's largest contract IFC: IFC is increasingly working most important contribution manufacturer in electronics. to support the financial sector IFC can make in the developing liberalization process in China, world? The expansion has also increased Elcoteq's labor force by wvhose government is a share, up to 1,200, making it the country's largest employer and holder. Is there anything you BOND: Our view of IFC's role having a significant effect on joblessness in Tallinn, a city think we should be cautious of? is that it's there to do the things of about 500,000. The factory there has only two expa- the private sector banks will not triates, and the firm's Estonian CEO has emphasized a BOND: It is hard to give a do, either for risk reasons or for tTaining program to upgrade the skills of the Estonian general answer to that question. lack of detailed knowledge of management team together with universities in both There's going to be a series of ad how a particular sector in a par- Finland and Estonia. hoc issues. The Chinese govem- ticular country works. Over the imient is going to say "It would be years, lFC has been very success- nice to have a different view on ful at this. HSBC has worked Products made at the Tallinn plant will mostly be used in that, or have somebody act as a with IFC in various countries the rapidly expanding cellular telecommunications indus- catalyst for change." IFC will around the world. The difficult try as an outsourcing base by Ericsson and Nokia, and in participate, I am sure, in ad hoc judgments IFC has to make are the power industry by ABB. Spurred on by its success at solutions to issues of the day. when is the private sector is home, the company now will open a pilot production ready to commit fully and when base in Russia in a few months. St. Petersburg operations IFC: The Southeast Asian cnsis is it time for IFC to fade from are expected to be managed by key personnel from threatens to give some aspects of the scene - whether a sector in Tallinn. Elcoteq Tallinn's successful expansion has attract- financial sector liberalization a one market, or an entire market. ed significant interest among other producers and is likely bad name. Do recent events tell That is always going be a deli- to lead to other similar ventures, improving the environ- us how these reforus might Ibe cate judgment. ment for Estonia's emerging electronics industry. carried out more successfully in the future? the future?:In November Elcoteq Tallinn's parent company went pub- BOND: Several issues should lic, selling 33% of its shares for approximately $100 mil- be considered. They include lion on the Helsinki exchange. Most of the shares were controlling the amount of lend- sold to international investors based in London and New ing on a sectoral basis; on an York who were attracted by the fact that the company's individual name basis; making revenues had grown 64% in the past year because of the sure there's sound liquidity; mak- Estonian operations - ing sure there's competent man- agement - it's all the basics of a Jyrki Koskelo, IFC Europe Department and properly functioning bankingiV: 0i i fi properly0 functioning bankingPaul Crystal, IFC Corporate Relations Unit system. Out of recent experi- Impact Winter 1998, Vol 2, No. I 1 i14t - ing a 17.6% local currency- ':Ie'l - denominated stake of national *5ti m a;_ Sally Gelston, IFC Corporate Relations Unit telephone company SONATEL . * as the debut issue on the new - regional stock exchange in Abidjan. This added to the _ _ $107.4 million it had raised - from France Telecom's purchase of 33% of the same company *-_ mr oor perceptions. consider Mozambique. The five months earlier. IFC sup- The plague of poorest country the World ported the process by overseeing _ I = =: Africa. Bank measures, with per capita the creation of the Abidjan - - GDP of only $80, it has ncver- exchange over the past three *NIiiiii- Nowhere are theless carried out what many years and structuring and invest- they poorer consider to be Africa's most ing in Framlington's $25 million than among pri- successful privatization program, West Africa Growth Fund, an vate investors, who sent the continuing the dismantling of important local institutional continent only about 3% of the its Marxist legacy by selling buyer of SONATEL shares. __X_ _ roughly $265 billion they majority interests in approxi- _ W i poured into the developing mately 500 state-owned world last year. The reasons are enterprises. Although many, but partly stem from their almost all of them have 26 sense that Africa has missed out been very small, the World . MALI , NIGER X CHAD on the world privatization Bank has catalogued an parade, with its economies still impressive list of efficiency / BURKINA. I N. L. far too marred by the heavy gains coming with the FASO 'i/ hand of state intervention. change in ownership. It . l N e NIGERIA / includes a doubling of sales D'VORE ) l. ! , _) Until recently the perceptions volumes and tripling of !6 ) I / CENTRAL have been true. While reformist productivity, net job cre- - , I AFRICAN REPUBLIC governments in other regions ation with higher wage ~, -C)AMEROON '. have reaped billions of dollars scales, and increased tax EQ. GUINEA '1' from private investors eager to collections for the state. SAO TOME T | purchase and revitalize state & PRINCIPE L\EjRCONGOj assets, Latin America receiving Yet no matter how many \ GABON / DEM. REP. about $90 billion in the 1990s small fisheries, grain mills, X OF CONGO alone, Africa has had few trans- and cashew processing 'C ./ actions of the kind to report. plants Mozambique may Cabind ' Whatever the reason be it sell, it will always be the (ANGOLA) A,_ - N- too little political will or attrac- larger transactions that G A BON\ .F'- tive assets, too many miles of attract the world's atten- - - AIONALCAPITAL red tape or entrenched old tion. An increasing number (--- guards, or something else alto- of these are starting to close ' ANGOLA gether -the deals just weren't in Francophone Africa, getting done. especially in the critical o 25 50 75 100miles- infrastructure sector. Lately, though, the reality has 0 7o 100 begun to change, as IFC has In December, for example, 1I zation assignment in Gabon ~ ~ ~ ~ ~ ~ N~ NAM'IBIA seen in a recent utility privati- the Senegalese government zation assignment in Gabon. Or raised $60 million by sell- T 20- BOTSWANA DECEMBER 1997 Impact Winter 1998, Val. 2, No. I Be Creative None of this came easily. But ho sys yu ned a tock Especially not the bid opening exchange for an initial public for SEEG's privatization, which offering (lPO)' December also took place in front of an inter- saw the local flotation of a $14 national audience of 70 journal- *lEssl million piece of the Gabonese ists, diplomats, and business water and power utility, Societe people at the Hotel Le M6ridien d'Energie et d'Eau du (Gabon Re-Ndama in Libreville last (SEEG). Enthusiastic retail and March. As an edgy crowd looked institutionaL investors bought on, Gabonese ministers opened shares through a local bank the envelopes, looked at the because Gabon has no bourse, bids, then without announcing leaving the offer oversubscribed. thie numbers called for an "inter- SEED's IFC-advised privatiza- ruption" and inexplicably left - tion was the first significant one throm in the country's history, and the SEEG: Better service, lower prices after privatization. first privatization of a water and The sudden silence left IFC's electricity utility in Africa Philippe Lietard fearing his team involving full commitment for had wasted 16 months of adviso- "known as being rather secure combination of oil wealth and future investment by the private ry work in Gabon. He had no for the usual investors." small population give it Africa's operator. Some African water idea what the Gabonese minis- highest per capita income. networks had previously tnder- ters were doing and "decided That image has since changed gone various forms of privatiza- not to try to know." for Gabon. Lietard quickly Following the 5C% devaluation tion, but SEEG's involved the points out: "This has created a of the common regional curren- first real financial commitment In the eind, transparency ruled. reputation for Dabon that in the cv, the CFA franc, in January for system expansion. New Although Gabonese Privatization end privatization happens there. 1994, its government began majority owners from France Committee Secretary Meye So the next time they put some- earnest efforts to restructure the have agreed to invest at least Bekourou says to this day he does thing on the block, people will economy. This included a broad $200 million to upgrade the not know for sure what hap- say, 'This is serious.' " reform program in the public company during their 20-year pened, he speculates that the bid enterprise sector to improve effi- concession, and likely will end openers - surprised by the Serious indeed, for President ciencies and reduce costs. As up spending much more, thus results -needed to reach Bongo had provided the kind of part of this effort, Lyonnaise des making it one of Africa's largest Gabon's President Omar Bongo, staunch govemment support that Eaux was retained on contract privatizations. who was traveling outside the is essential to seeing a privatiza- for 2.5 years to manage the utility country at the time. They did tion through to completion. along with HydroQu6bcc of The bottom line for consumers not want him to "receive the Canada and Electricite de is better service at lower prices. news over the radio," Bekourou "It's somewhat unfortunate that France. As a result of the sale: said. After two hours, they when we did the privatization of returned to the almost-deserted SEEG certain large corporations The International Monetary Gabon's water and electricity banquet room and awarded the -some Americans, some from Fund (IMF) supported Gabon's customers have been paying concession to the technically elsewhere -thought the game initial stabilization program with 17.25% lower rates since July 1 qualified bidder offering die was being played with a loaded a $56.4 million-equivalent 12- More Gabonese will gain greatest reduction in tariffs, as deck. They were later disap- month standby. This was access to clean water and had been planned. SEEG's long- pointed," said Bekourou, who is replaced upon completion by a electricity through a required standing partner, Lyonnaise des now working on selling the three-year $165 million-equiva- buildour, which takes place Eaux of France, was out of a job, national railroad, tclecommuni- lent Extended Arrangement in at no cost to the government replaced by low-bidders cations network, and other November 1995 under which the and thus frees its resources Compagnie Generale des Eaux assets. "The public sector has IMF called upon IFC to assist for other needs. (CGE) of France in association had its day and is handing the the Gabonese government in Service upgrades will with Electricity Supply Board baton to the private sector. expediting SEEG's privatization. improve water quality and International (ESBI) of Ireland. Privatization is going on all over The World Bank, meanwhile, reduce brownouts. the place, not just Gabon, had been working to strengthen The public, by becoming The winners were outsiders to because it is necessary if you Gabon's mechanisms for regulat- shareholders in SEEG, has Gabon, outsiders even to Africa. want to participate in the global ing utilities and will continue to been given its first glimnpse at Many saw it as a victory that market." do so for several years. the way capital markets can they and a third competitor, channel savings into invest- SAUR Intemational of France, Roots To get the company ready for ment. had offered bids at all given that The bid award culminated a tender, IFC drew upon Japanese Gabon was, in Lietard's words, lengthy process in Gabon, whose grant funds of $389,800 to hire Impact Winter 1998, Vol. 2, No. I outside consultants, including IFC also opted early on to push one other major weakness: its The Judgment French lawyers Klein-Goddard for an international competitive largest shareholder (64%) was of Paris of Paris and Abidjan, industry tender instead of negotiating a the state, whose delinquency in O Paris experts Management Systems concession contract with paying its own utility bills left So a fair bidding was held, with Consultantts of Paris, and tax/ Lyonnaise and its partners. This SEEG teetering on the edge of three of the premier French accounting specialist Arthur choice involved a risk: if no bankruptcy. So to attract the infrastructure firms contesting Andersen of Paris. This team, outside companies bid, IFC strongest possible field of bid- each other to take over the top together with IFC, appraised would have to resort to negoti- ders, IFC advised the govern- utility in a small African nation. SEEG and restructured its ating a contract with incum- iiient to insist that no two Once the award was made, finances; developed a privatiza- bents who knew IFC had companies experienced in attention quickly shifted to the tion strategy. financial model, nowhere else to turn if it did Gabon's water or electricity winners' obligation to meet regulatory guidelines, and raLe not like their price. sector could bid togedter. structures; and prepared a con- lFC team member David cession contract, share purchase Mindfut of the need for outside Donaldson recalled that the The fact that IFC was agreement, and bidding docu- interest, the IFC advisers quick- incumbent foreign partners a participant with real ments. ly realized that allowing uinified "didn't like it at all. They bidding by the Lyonnaise-led objected publicly, privately, in authority was the ele- IFC structured a deal designed consortium, with its perceived all sorts of ways. But finally, the to encourage competition, keep- inside track, could kill fair com- government of Gabon realized menft that permitted the ing the water and electricity petition. That option most like- this was the only wav to gener- p units together in order to make ly would also drive away any ate true competition" process to proceed with the asset more attractive to bid- outside interest, especially since complete transparency ders. This prevented duplication SEEG was not an obvious "It's an illustration of how the of administrative functions such choice to attract international best way of privatizing is not from beginning to end. as billing and collections that attention. It was small, serving necessarily by following the -Alain Tronche had been efficiently handled less than 100,000 households, rules written in a rule book," l together. commercial customers, and gov- added IFC's Bernard Portien Compagnie Generale ernment offices out of a popula- "You have to make your own des Eaux tion of 1.1 million. And it had rules." Country Company Sector Date Price % of Shares Sold Purchaser Zambia Zambia Mining/smelting; Initial transactioni $940 million fot nine Up to 88%, Major mining companies, Consolidated Power tranismission in ongoing process packages ($260 millioni dependinig including Anglo-American Copper Mines closed january 1997; cash, $220 tmillion debt, on package (South Africa), Cyprus Ainax (ZCCM) final transaction $460 million investment (U.S.), Falconbridge (Canada), due to close in rcquirements) and Phelps Dodge (U.S.), February 1998 and power companies Cinergy/ National Grid (U.K.) Ghana Asnianti Mining Mar 1994 $450 million 30% Intemational investors Gukltields Gabon SEEG Watere/poevr July 1997 At least $200 million 99. 9% CGE (France) in (including capital association with increase and investment ESBI (Ireland) requirement) C6te d'Ivoire CI-Telcom Telecomumunications Marli 1997 $193 omillion 51% France T6lecom Senegal Sonatel Telecommunications July 1997 $167.4 million 33.3% France Tilecom, ptublic shareholders Kenya Kenya Airways Transport January-June $70 million 77% KLM (Netherlands), 1996 intemational investors, employees, Kenvan public and institutions Impact Winter 1998, Vol. 2, No. I S How They Did It Name: Societe d'Energie et d'Eau du Gabon (SEEG), utility for both public water supply and treatment and power generation, buildout targets or face penal- for CGE, one of the largest pri- transmission, and distribution. ties. As time goes by, the share vate sector groups in France Service Area: Before privatization SEEG was the exclusive of the population that SEEG with 1996 net income of FF1.1 provider of electricity (84,000 connections) and water (43,000 must serve increases, with indi- billion ($220 million). But it connections) in Gabon. The concession agreement transferred vidual percentages stipulated for did further its international to the private sector exclusive responsibility for serving major water and electricty in five dif- presence, which previously population centers and 30 unserved villages across the country. ferent areas. In Libreville, water included water projects in the Pre-Privatization Financial Condition: Nearly breaking coverage must rise from the U.K., Mexico, Argentina, even through improved management from 1993 to 1996 by 49.3% when last calculated in Malaysia, and other countries. Lyonnaise des Eaux/HydroQu6bec/Electricite de France consor- 1993 to 53% by 2000, then to Now that the SEEG-seeking tium; but with total accumulated losses of CFA 61 billion ($103 60% by 2005, 65% by 2010, and process is over, CGE's Alain million), compared to 1996 revenues of CFA 50 billion ($85 70% by 2015. The company is Tronche credits IFC's advisory million). obligated to keep up with its services with shepherding all Government's Goals in Privatization: Improve quality of targets as the population grows parties through the process. service; provide universal coverage of service at affordable and service about 30 unserved "The fact that IFC was a partici- rates; end fiscal burden; free up public sector resources for villages before 2015 by pant with real authority was the more efficient use elsewhere. installing independent genera- element that permitted the Length of Concession: 20 years tors and by drilling wells. process to proceed with com- Selection Criteria: All qualified parties agreed, if chosen, to SEEG is now raising another plete transparency from begin- purchase all of SEEG's shares, minus one, at non-negotiable $30 million through a capital ning to end," he said. "There book value price of 2 billion CFA francs ($3.4 million) and to increase to cover some of the needs to be a political will for subscribe to a capital increase of 15 billion CFA francs ($30 mil- initial costs of this system transparency, but then there has lion). After prequalification, the draft concession contract and upgrade. Out of this S30 mil- to be an organization that has the share purchase agreement were fully discussed, refined, and lion, $14 million came in the technical and moral capaci- finalized with all bidders individually. Award was made solely on December through the first-ever ty to sec it through." basis of largest across-the-board tariff reduction. Gabonese public offering, which Financial Restructuring: Complete restructuring of SEEG's was structured by IFC and con- In Washington. World Bank balance sheet through absorption of past accumulated losses; ducted through BICIG, the Executive Director Ali transfer to state of all of SEEG's state-guaranteed long-term local Banque Nationale de Paris Bourhane of Comoros has taken loans to offset overdue bills. affiliate. The transaction allo- the unusual step of reporting in Winner: Compagnie Generale des Eaux (France) in association cated 5% of the shares to detail on the SEEG privatiza- with Electricity Supply Board International (Ireland), with rate employees, 20% to local institu- tion. He mailed out 66 copies cut of 17.25%. tional investors, and 24% to of his report to top government Other Bidders: Lyonnaise des Eaux (bid rate cuts of 11.51 %) Gabonese individuals. officials in the 22 Francophone and SAUR International (bid rate cuts of 5.8%), both of France. African nations he represents, Capital Investment Requirement: At least 100 billion CFA As there is no stock exchange hoping they will follow Gabon's francs ($170 million) for system rehabilitation, plus an unde- in Gabon, a secondary trading textbook example. His 13-page fined amount for future expansion based on demand. mechanism had to be designed analysis, written in French, con- Mandated Service Improvements: Must expand water where BICIG agreed to become cludes with a word to the wise: and electric services to reach a growing segment of the popula- the market-maker for SEEG "Do not expect all privatizations tion through 2015, as specified by geographic region; heavy shares. To prevent any possibili- to happen as quickly as SEEG's. fines to be paid to the regulator if coverage targets are not ty of manipulation in such an That would be unrealistic." u met. illiquid environment, the shares Job Losses through Privatization: None cannot appreciate in the first Government's Adviser: IFC year beyond the 6.5% interest rate offered by local savings accounts. This arrangement is seen by the Gabonese govern- ment as a temporary step, com- ing before the eventual creation of a formal stock exchange. In dollar terms the SEEG trans- action is not an enormous one mm _ Impact Winter 1998, Vol.2, No. I Hunryv for Rob Wright, IFC Corpoate Relations U--it Budapest ditions stemming from the the Hungarian prin'azanon b -I# Southeast Asian financial crisis. APV. It was another milestone ; W3 he halls of the stock Its initial public offering (IPO) for a country that leads Cntral exchange are buzzing. is quickly termed one of the and Eastern Europe w The atmosphere is year's most successful, receiving mately $15 billion offgn tense. People spill out more than three times as many direct investmerin the l99Osi into the lobbv, jostling each orders as could be filled and see- and, in the recerit words ofihe other for a glimpsc inside. ing its share price rise 27°,% in Financial 'Tmnes "has:the the following month. strongest economic bindael il All eyes are on the price quota- of any post-communist cunny tions of the overhead monitors. The Matav deal was big news in in the region." - Rushed conversations are taking the world's financial press, place in a halfdozen languages, demonstrtaing the value the But it isn't only the big deals bank card rather than wait in but attention centers on the market attaches to strategic that define a country's progress. long lines to drop them off at screens. investors' ability to turn around Sometimes the little ones mean the local post office, as had long a former state-owned enterprise. a lot, been the custom. It is a November Friday after- After more than three years and noon: 3:30 p.m. local time, 9:30 $1.7 billion of investment, To NAS DAQ Euronet's initial public offering a.m. in New York. With the majority owners Deutsche Eight months earlier another raised $83 million, too small to prime minister watching on the Telekom of Germany and Hungarian technology company, raise eyebrows on Wall Street, trading tloor, Hungary has just Ameritech of the United States Euronet, had listed with far less but big enough to give the com- launched the biggest equity had built Matav into one of the fanfare on NASDAQ, the U.S. pany money to build on its base offering to date from Central transition economies' best private market for small and mid-sized in Hungary and expand into and Eastern Europe. Trading is companies, doubling its number companies. Euronet sells some- Poland, the Czech Republic, immediately active on both of installed lines and increasing thing just as vital as Matav's Croatia, eastem Germany, and sides of the Atlantic, as the eamings by 44% a year. The phone calls: access to one's own elsewhere. It was also a venture global flotation of 26.9% of pri- equity offering's flare under such money. It runs the country's first capitalist's dream. One of the vatized national telecommuni- difficult market conditions made independent network of auto- world's largest private equity cations company Matav raises it "the flagship transaction for matic teller machines (ATMs), managers, Boston-based Advent more than $1 billion, despite Hungary as well as for the allowing Hungarians to withi- International, had made a high- the grim emerging markct con- region," said Pal Szabo, head of draw cash around the clock, and risk investment of $3 million in Impact Winter 1998, Vol.2, No. I the company between 1995 and "That's outstanding by any mea- it injected $30 million into been founded and long before it 1996. The day Euronet went sure. Even in the United States, Matav in 1993 to help strength- had any cash flow. The others, public, that stake suddenly was any venture capitalist would be en the company's balance sheet Advent and its related private worth $30 million. very happy with it." and add enough credibility to equity funds in Hungary and the privatization prices to Poland, finalized a $3 million Not Bad IFC played an important back- attract investors like Deutsche investment in April 1996, about "You don't get many deals any- ground role in 1997's two big Telekom and Ameritech. One three months before Euronet where in the world that net you Hungarian IPOs, using different the other IFC worked through began contemplating going public. ten times cost in a year or two," tools to help the country devel- some of its investee venture said Advent Senior Vice op its potential as a prime capital ftunds (see box), which In both cases, the equiity from President Nicholas Callinan. investment target. On one hand take equity positions in growing IFC and the venture funds' other Hungarian companies investors showed how critical like Euronet unable foreig~n venture capital can be in Danube to attract financing an emerging ecoomy, whlere from other sources in domestic sources of long-termn their early stages. Onie financing are often scarce, if - .~~~~.r- ~~~~-c~~~-±.~~~ of rhese funds, available at all. The venture - _.~ .bn~matt~. '~ Euroventures capitalsts rake the early risks Huingary, put up that banks and capital markets $330,000 in July won't, knowing thAey can reap far 1994, only a month higher returns if things work out - ~~~~~~~after Euronet had as planned. Business: Principal telecommunicati in Hungarynes in H a o History: State-owned ultil privatize Principal Shareholders: MagyarCom (50/50 on etr fDush ulc(0) E ihe .Bon(17) TelekomadAeieh,9%pulc18;DTSsesUS.() HungainadPiaiainSaeHligC. (APV)6%EBD2,FC% Competitiveness: Holds monopoly in voietlpoyimotoSlesrcervdrintsakt country until 2002; stroglae ndmsi markets alreadly opentocmeionsuha cellular and network addt rnmsinsrie Employees: 18,85014 Profit/Loss: Profits of $93 mnillion on earnings f$1 ilo osso 76mlino eeuso 12mlini for six months ending June 3,197clnayer19;pocigfrspoitin99 IPO: Raised apprloximtl$1blinNv14197 Rasd$3ilinMrh619,aungcpnyt in the largest eqiyofrn vrfo eta prxmtly$0 ilo nytoyasatrsatp and Eastern Euroe aun opn tmr hn frtNSA itn faCnrlErpa opn $4 billion; listediNeYokadBaps IFC Role: To facilitate Matvsucmn rvtzto,IC ICivse nfu etr aia ud Frvnue invested approximately$0mliniOcoe193 Hugr,AvnPrvtEqiyFd-nraErp, when the compaynee e qiyt mrv ugra rvf qiyFn,Pln netetFn)ta its financial raisbtcudntgtifrmte tgteprvdd$?miloinhg-ikrePOqiy government or private sector Development Impact: Since privatizatlion Matav has,douldisnme fCeto fhg-kl os rcdn o te ml installed lines and turned into onofrgo'to buiessatp,seclyinehooyseo; companies in four years; IPO mare h is ie dmntainefc o fiin oeg a Central European company) ihaistdoih e ietivsmn n ehooytase York Stock Exchlange and did moenoincesoa participation on the Budaps tc xhneta any other issue Impact Winter 1998, Vol. 2, NO. I Venture Capital in Hungary Two Funds: Zc i Euroventures Htungary Hungarian Private Equity Fund k,t4 ........ ° ." .- -:.' . l:. ":......l0ltioft (denominated in Duhilders), Initial Size: $15 million, of which $6.2 million of which $10.5 miin has been invested has been invested "fIwst. P ~ i $20r m honi f $9.1 million ~wy~Sh~r.hofders~ ., ....M-' RA, Neternds (28.6%), Advent Private Equity Fund-Central Europe (43.2%); Hungarian Fore-g Trade Bank (21. 3-%); Abu Dhabi Investment Authority (16.7%); J1 (16.8%); Dresdiner Bank, Germany (10.2%);Y IFC (16.7%); EBRD (16.7%); Creditanstalt, Austria (6.7%) Euroventures V, -Netherlands (9.5%) . 1990 1995 it . -'- .--.' -,.--.'.- Lonerm cpitfal appreciation through equity Longterm capital appreciation through equity participations participations of up to 15 %: in, and m nagement of at least 10% in medium-sized private enterprises supports top, port-oriened priate enterprises t.picaily having access to western management :''..... :z: '--:...... -0:years l- ;. ........ .:Ef-: 0years:: Lo-. = . Adviser- . .:.'-KErXai:Antra 'Kft- Budapest Equinox Investment Management, Budapest .b '- -e 10'(fod and ausiness, technoogy, retailing) 5 (food and agribusiness technology) Ai_ew .stt,en t :'r $1 mlio. $1.2 million aRJetniS ': ................ At leiast -5%- Goal of 25-30%. SuchJ was the case with Euronet. A lack of prior experience in the potential in the concept, which beyond a good idea and an It is the brainchild of U.S. country did not stop Brown and had two strong selling points: untapped market. entrepreneur Michael J. Brown, partner Daniel Henry. One of (1) enabling Hungarian banks founder of what became a their first stops was Euroventures to avoid the heavy cost of build- By the end of 1994, Euronet was Silicon Valley financial software Hungary, a vehicle IFC was sup- ing large ATM networks of their seeking another S6 million in a company called Informix that porting to help develop exactly own; and (2) unlocking hidden second round of venture capital had annual revenues of $170 this kind of company. Euronet demand by introducing western financing. Interested this time million by the time he left it in General Counsel Jeff Newman marketing savvy and customer were the funds IFC had invested 1990. In 1994 Brown sensed well remembers the first meeting service standards rarely seen in in through Advent, which man- there could be a mass market for with Euroventures' man in the region at that point. ages a $3 billion global portfolio. ATMs in Hungary. Knowing Budapest, Andras Geszti. The idea was one of classic out- Although Euronet's balance that only 8% of the population sourcing, or making money by sheet still showed nothing but had a bank account at the time, "What he essentially saw werc performing a key business intangibles and projected earn- but that far more wanted them, two guys from Kansas City trying process for clients more cheaply ings, Advent's team was equally he launched Euronet with $1 to do business exclusively with than they can do it themselves. intrigued with the business plan, million of his own and $1 mil- the five biggest Hungarian Euronet envisioned becoming which depended on negotiating lion from DST Systems, a com- banks, which at the time were the region's leading low-cost contracts with local banks to pany in his home town of still government-owned and ATM service provider, charging install ATMs in locations that Kansas City, Missouri that pack- managed exclusively hy client banks about $1 per trans- would draw high customer traf- ages data for U.S. mutual funds. Hungarians," Newman recalled. action. Knowing that the ser- fic. But good venture capitalists "That was a big risk." vice could work and that are not easily impressed. They Brown specifically wanted to whoever introduced it first typically turn down 10 deals for find local partners to supply Risky Business would have a huge advantage every one they accept and put some of the additional $1 mil- In 1994 few foreign investors over competitors, Geszti took one thing above all else when lion required in his business thought it worthwhile to make the idea to his investment com- considering wlhether to invest: plan. But finding no Hungarian investments of less than $5 mil- mittee, which included an IFC management's track record. Here companies strong enough to do lion in Central or Eastern representative. He won approval Eturonet fared the best. so at the time, he had little Europe, and at the time Euronet and put the fund's money at choice but to tum to Hungary's had only two employees: Brown risk, buying 10% of an infant "I've been in the venture capital nascent venture capital industry. and Henry. But Geszti saw company with little to show business for 14 years, and I'll put Impact Winter 1998, Vol. 2, No. I Branching was seven times oversubscribed, been created are attractive, Out with demand neatly split demanding English skills and E 2 l = | | 2 One of the con- between U.S. and European computer literacy and coming tracts sgned was investors, with a brigh-t future for th-e w th the Hungarian young Hungarian graduates who hbranches of iaC The ING Barings-led underwrit- hold them. But perhaps most l l 1 Bank, whose invesr- ing syndicate was able to sell important is the model it has set ment banking arm 40% of Euronet to NASDAQ for these employees, the first ING Barings soon investors at $13.50 a share, Hungarian generation in 50 sensed that instantly valuing a coripany that years tc grown up in a market Euront s asic ran-had been worth nothing only economy. chise and earning three years ago at $200 million. momentum were That made it quite a day for "What this has done is to create Euroventures, which less than a culture where people can three years earlier had gambled understand entrepreneurship," $300,000 of its S16 million fund says Euronet's Newman. on an unknown company in its "They've seen their bosses, who highest-risk opening stage. The are 32 and 40 years old, grow tht 'aItl V X S S iearly bird got the worm: the IPO company from zero to $200 mil- valued that original $300,000 lion in two years, and it's had an stake at $4.2 million, or 14 times incredible effect on them. We its cost. now use stock options as part of the compensation package down Mike Brown as one of the "You don't see many deals like throughout our entire employ- best entrepreneurs I've ever that," says Jeffrey T. Griffin, ment structure." seen," says Callinan of Advent. -_ IFC's representative on the "He is an all-arotnd, classic Euroventures investment com- The Matav and Euronet deals American entrepreneur, with all mittee. showed the value of well-struc- the skills to know where he strong enough to merit going R tured foreign direct investment wants to go and how he wants to public. In early 1997, a presti- Risk and Reward in an emerging economy that get there in terms of when to gious new investor came on It was the first time a venture had much to gain by partnering spend the money, how to attract board in the form of GE Capital capital-financed Central its way into competitiveness in the right kind of people, and so further strengthening the salabil- European company had listed on the computer age, and the ven- on. Unfortunately, a lot of entre- ity even though Euronet was still the intemational markets, and ture capitalists agree there is preneurs are, to quote Marshall in a capital-intensive buildout those that took the risks got the more to come in Hungary. McLuhan, 'driving into the nhase and not expecting to reward. Today Euronet has Euroventures, for example, is future looking in the rear view make money untI t installed 650 ATMs, just under high on similar investments in mirror' but Mike's overall perfor- 1999. Cffsetting that were other half of them in I lungary, and is a its portfolio in local companies, mance has been outstanding points in the company's favor: it growing small business with one testing semiconductor everywhere he's been. was starting to eam new rev- reported 1997 earnings of more equipment for foreign manufac- Consequently there are opportu- enues by taking advertising on than $5 million. Although it is turers and another designing nities unfolding even he had ATMs and managing banks' own still losing money while aggres- Intemet sports trivia games. For never envisioned," evinstaton-sire machines; its only com tlLing its infrastructure its part Advent is in the markets petitors were the banks that, around the region, ING Barings raising money for a larger second In April 1995, Advent and its ironically also were its cus- estimates that by 2000 Euronet generation fund for Central and related Hungary Private Equitv tomers; and it cotld point to the could report annual profits of Eastern Europe that will invest Fund and Poland Investment history of Portugal, where the $39.6 million. at least another $15 million in Fund invested $6 million. number of ATMs in use had Hungary, much of it in growing Euronet then signed up several grown from zero to 4,000 But the story is more than finan- technology companies. - leading local banks and began between 1985 and 1995. cial. In chancing its money on spending its money on ATMs Euronet through a risk-diversify- imported from the United States Euronet was the dominant play- ing venture capital fund before at a cost of roughly $30,000 er in a good business to be in for the IPO, IFC has helped build a each. At the end of the year, it a country where demand for effi- company that today has 140 dif- had 53 of them installed, 113 bY cient financial services was ris- ferent employees in seven differ- the end of 1996. No profit ing fast, and Wall Street's raging ent Central European countries, stream yet, but business was g 100 of them local hires, and a bulls were craving new issues Of looking up. precisely that kind. The under- high-tech Budapest processing writers went to marker, and the center almost entirely staffed by markets took the bait. The IPO Hungarians. The jobs that have aj= Impact Winter 1998, Vol. 2, No. I Planting Bulbs Dana Younger, IFC Environment Ditision and Christopher Granda, IFC Consultant n Dec. 11, after and services, while also spurring gation. Through one such emissions of the most abundant II grueling days technology transfer to develop- effort, IFC has worked with a $5 greenhouse gas, carbon dioxide of negotiations ing countries. This presents a million GEF grant for the last (CO2); reduced electricity con- in the ancient multibillion dollar investnment three years in Poland, a country sumption by 725 GWh; and laid Japanese city of opportunity for the private sec- with serious air pollution prob- the foundation for even greater Kyoto, delegates from 159 coun- tor, whose active participation lems and substantial greenhouse reductions in the future. tries agreed on what one leading will be essential in reaching the gas emissions frorm coal-fired publication called "the most targets the world has just set. power plants. The Poland The effort has targeted compact ambitious feat of environmental Efficient Lighting Project fluorescent lights (CFLs), a diplomacy ever attempted." It Long before Kyoto, however, it (PELP) uses a package of price product made by several manu- was the Kyoto Protocol, a legal- was clear that bottom line busi- subsidies and consumer educa- facturers around the world that ly binding treaty to cut the ness sensibilities and technical tion designed to build the mar- provides a similar quality of industrial world's emissions of capabilities had to be engaged ket for energy-saving light bulbs. lighting to ordinary incandes- the key greenhouse gases impli- in order to reduce climate cent bulbs while consuming cated in human-influenced cli- chaiige. As part of this effort, Self-PELP only 25% as much electricity mate change. IFC has for several years been A two-year program of subsidies and lasting up to 10 times developing pilot, private sector- has been completed, and all longer. Their high-efficiency There was no lack of controver- oriented, climate change mitiga- sales targets have not only bccn design enables them to help sy over how the new emissions tion projects with financing achieved but exceeded. The fight air pollution by lowering reduction standards were to be from the Global Environment Polish market for energy effi- utilities' need to generate elec- achieved, or to be divided Facility (G,EF), a World Bank- cient lighting projects has tricity, especially when widely among the 38 nations agreeing administered entity that pro- received a big boost, and by all used. But there's one big catch: to them. But it did appear that vides grant and concessional indications it will continue to they can cost up to 35 times a credible first step towards cre- funding to help eligible expand, as others have done more than ordinary light bulbs. ation of a global climate change economies protect the global during the last decade in North mitigation regime had been environment. IFC's activities America, western Europe, and This price barrier is so steep taken. Many industry observers seek to mobilize private capital, Japan. In the process PELP has that most developing countries have noted that these emissions technology, and management already offset do not use CELs to any sig- targets will help create skills to support GEF's objec- 75700 nificant degrec. Even in market signals for >-: tives, which include cltimate I - tons of North America and west- clean efficient ener change miti- ern Europe, well-defined gy products programs of manufacturcr subsi- sales by significantly lowering per bulb, and the five participat- jockeving with each other to dies, consumer rebates, and retail costs to consumers. After ing manufacturers also worked build market share and reap the other forms of financial incen- receiving input from the Polish with distributors and retailers to resulting advantages of tives combined with consumer Foundation for Energy Efficiency enforce the pass-through of economies of scale. Projections education have been essential in (FEWE) about ways to adapt the price reductions to consumers. show this season's sales will building the market for these model to local conditions, IFC But lower prices alone were not exceed last year's, even without products. received a $5 million GEF grant enough to build a market. Poles subsidies. in late 1994 and then competi- needed to understand the envi- When IFC began looking at tively selected the private Dutch ronmental benefits of such pur- ways to help the developing utility subsidiary Netherlands chases and to know that trusted Looking Back world overcome such price Energy Co. to manage PELP parties were behind the effort. PELP has succeeded in meeting obstacles in late 1992, Poland from Warsaw in close coopera- So $570,000 of the GEF finds its goal of addressing global seemed an ideal place to begin. tion with Polish utilities, lighting went to build receptivity environmental issues by reduc- Its northern location offered manufacturers, govemment through consumer education, ing national CO, emissions in high potential demand for effi- agencies, and NGOs. including design of an eye- Poland through a modest cient lighting during months of catching PELP logo affixed to expcnditure of GEF funds. The long winter nights. It was also a Most of the GEF grant funds the packaging of the promotion- market growth it has stimulated nation where IFC had made a were set aside to subsidize prices al campaign's products and has had other important bene- loan to finance Philips enough to allow the sale of a incorporation of endorsements fits at the national and local Lighting's modemization of a total of 1.2 million technically from leading Polish organiza- level as well consumer electric privatized lighting manufacturer, qualified CFLs over the t995-96 tiuns such as the National bills have been cut by an esti- which by then produced several and 1996-97 winter lighting sea- Energy Conservation Agency mated $40 million, and there lines of CFLs sold throughout sons. IFC and (KAPE), the have been reductions in emis- Europe. Yet while this formerly PELP encour- Polish sions of other conventional air state-owned plant outside aged local affili- Ecological Club poLlutants (SOx, NOx, and Poznan manufactured 14 million ates of Philips (PKE), and the TSP) that contribute to CFLs for export a year, the long- Lighting, GE Polish Poland's air quality problems. lasting bulbs accounted for less Lighting, and Consumers than 0.1% of the total Polish other smaller Federation. Much more can still be done lighting market. It would clear- Polish manufac- through demand side manage- ly be more economical for turers to com- By May 1997 ment to save energy, cut Polish consumers to save elec- pete with each the subsidy Poland's air pollution levels, and tricity while also aiding the other to apply funds had been contribute to further climate environment. But how could the GEF subsi- fully used. Sales change mitigation. But through they if the price was so high? dies most effi- had exceeded PELP a relatively small amount ciently. This the anticipated of donor funds has already led to To find out, IFC and a U.S. non- enabled PELP 1.2 million positive change, demonstrated govemmental organization wholesale subsi- CFLs. Thc the efficiency that comes with (NGO), the Intemational dies to average $2.14 per light share of Polish homes using private sector administration, Institute for Energy at the retail level, 27% them had risen by 70%, with and leveraged additional private Conservation, studied the ways of thaonsumer cost -quite a 97% of those who have bought financing to supplement GEF industrial country utilities had low level of subs i d y p er CF L them saying they were "very sat- resources in a cost-effective way. stimulated demand for CFLs. compared to other lighting isfied" and interested in pur- The receptivity of consumers The most promising model was efficiency programs in North chasing more of them. The suggests that the private sector the one that Southem Califomia America and western Europe. estimated number of total CFLs can now largely continue the Edison had used since 1985 as sold on the Polish market market-building process on its part of the "demand side man- Manufacturers voluntarily pro- increased by 50% between the own in Poland. To carry the agement" activities prompted by vided an additional $1.6 million 1995-96 and 1996-97 seasons, message on, IFC has begun to local public utility regulations. in further wholesale price reduc- creating a booming market prepare a new $30 million GEF Based on manufacturer adminis- tions and were reimbursed by whose total annual sales may project that will hopefully be tered wholesale price reductions, PELP only after submitting someday reach 4 million units a able to expand this inodel to 10 this program's combination of proof that their CFLs had been year, more than three times cur- other developing countries in private sector input and compet- sold. When combined with for- rent levels. Africa, Asia, Central Europe, itive market principles had gone retail markups and VAT and South America beginning worked to encourage manufac- taxes, the effective average CFL This winter manufacturers are later this year. v turers, wholesalers, and retailers subsidy under the program to keeping their prices at or below to increase CFL availability and consumers thus reached $5.91 the previously subsidized levels, Impact Winter 1998, Vol.2, No. I 0~~ Georgia In Two Minds Maria C. Thomas, Special Assistant to the Executive Vice President, IFC ere distance always on the Beatles' mimi- mim measured in mi-mind. Armed with this infor- terms of spirit, mation, I boarded Georgian . culture, and Airways' 30-year-old Tupolev language, Georgia could not be 154 in Frankfurt for my first farther from the former Soviet jourtiey into the IFSl. ni Union (FSU). A small, proud, t a q _ predominantly Christian nation Soon I learned that the Borjomii nestled between the Black and Valley had first supported a pop- Caspian seas, it is a land of ular spa in czarist times, then in vineyards, orange trees, and a the Soviet period grown synony- distinctive language where the mous with its heavily mineral- word for "mother" sounds like ized sodium hydrocarbonate "dada." Its people routinely live bottled water that became the past 100 -I've never found "Perrier of the U.S.S.R." anyone who knows why. Borjomi was commonly known monthly wage in the private to Russians (as confirmed by my sector dropped by 90% to about Perhaps the answer lies deep informal polling of IFC Moscow $40, with government workers within the natural springs of the staff) as an excellent cure for earning only about $16. Beset Borjomi Valley, which produce a hangovers and stomach upsets. by a chronic electricity short- unique mineral water widely As recently as 1986 more than age, the government was forced believed to possess curative 300 million half-litre bottles of into rationing, and stranded powers. Until its output Borjomi mincral water were pro- trolleys lined the streets of the declined after the breakup of duced and sold a year. A majori- capital city of Tbilisi. the Soviet Union, Borjomi ty of these sales were in Russia, water had long been one of the a centrally planned economy From 1992 to 1995 much of region's favorite beverages. into which Borjomi was sold by Georgia's industry was idle, Helping revitalize this critical then-state-ownied enterprises, including the Borjoumi VaLLey's brand name has been the sub- largest glass bottle factory and ject of IFC's first major invest- Bottlenecks the two state-owned Borjomi ment in Georgia. Georgia's business climate dete- mineral water bottling plants. riorated shottly after the dissoLu- Things got so bad that a 65- The outcome of this effort looks tion of the Soviet Union in year-old glass master disassem- promising today but was far 1991, however. The onset of bled critical machinery and hid from certain when we started civil war and secessionist chal- the parts in his back yard to work in May 1996. At the time, lenges in the northern province save them from thieves. Then I knew only two things about of Abkhazia pushed it into the darkness led to dawn. After Georgia: it was the location of depression. The country's eco- narrowly surviving an assassina- the ancient kingdom of Colchis, nomic collapse was one of the tion attempt in August 1995, where Euripides' Medea killed worst in the FSU, with GDP President Eduard Shevardnadze her two sons to spite her declining in 1994 to 30% of its began to crack down on thugs unfaithful husband; and it was 1990 level. The average real who had taken control of Impact Winter 1998, Vol.2, No. I Georgian society. His adminis- Georgia although still only 30 Group, which owns a chain of years earlier. Given a similar tration annulled a questionable years old. Together, they quickly retail supennarkets, one of opportunity, would I have earlier privatization of the two began to tell the legend of Georgia's most important private invested in a brand name there Borjomi bottling facilities, jailed Borjomi: the healing powers of banks, a television studio in called Coca-Cola? Was it possi- the erstwhile owners, and the water . .. the majesty of the Tbilisi, and an outdoor advertis- ble that this Georgia's unique reclaimed the plants for the valley ... the bottling plants ing company. local product and powerful state. By November 1995, located near the birthplace of Borjomi brand name could be President Shevardnadze had Stalin himself . . . their need to As the night wore on, our col- resurrected? Was there an eco- ended the civil war and was finance a $10 million project to lection of dinner companions nomic way to transport it more freely elected to a five-year term. restore Borjomi to its place grew ever more exotic, and the than 1,000 kilometers ro its among the leading mineral That same year, a new company water brands in the FSU. - . called Georgia Glass and Mineral Water (GGMW) It sounded fascinating. I had to '"'t "",- RUSSIAN FEDERATION G E O R G I A acquired one of the valley's glass see it. A CAPTAL bottle makers, Khasuri, in one ,3 - . v , -- of Georgia's first large privatiza- . More tions. It also concluded a 50:50 F Hachipuri, B . joint venture agreement with u Please Bca FE the government to operate the On my arrival in two Borjomi bottling plants. Tbilisi late one -'--rt.-z t '4' BorIomi This arrangement continued evening after a 20- - until January 1997 when hour trip, I was greeted by Mr. v 7>-' r .9 -> GOMW won, through a public Khazaradze and several of his m ----'-' / TURKEY tender, the exclusive right to business associates. Sleep was a N D lS C 45 60 75KILOMEREES ' ARMENIA S AZEI manage both bottling plants and not on the agenda. We drove to 7455 4fl __ 1 '4 to control and license the prized a part of the city distinctly lack- trademark. ing in electricity. Toting flash- proclamations of the "tainada," main markets? Did consumers lights, we found outr way to a or traditional Georgian toast- need to be educated to distin- Borjomi and IFC became humble local restaurant. Several master, increasingly philosophi- guish between real Borjomi and acquainted in April 1996. I was people in one way or another cal. Had I acted on first the plethora of lower-quality in London to meet the manager connected to GGMW crowded impressions, I would have imitators that had hit die mar- of Baring Asset Management's into plastic chairs around a jumped the next plane to ket between 1992 and 1995? First NIS Regional Fund at one table overflowing with plates of Moscow. The next day we visit- of those "I Ate Too Much for cheese, fresh vegetables, and the ed the project site. Had I acted Diligence Is Due Breakfast" breakfasts. In walked local staple, hachipuri bread. on second impressions, I would IFC mounted an extensive effor Bob Meijer, a successful Dutch There, well after midnight, T have jumped the first bus to to explore these questions and venture capitalist. met the other principal investor Istanbul, abandoning the assess this opportunity. Over in GGMW. Fred Zimmer, a decrepit buildings littered with nine months, we studied the Venture capitalists can be color- Dutch national who had been broken glass that housed outdat- viability of the business and the ful people. This one is no president of Perrier before its ed bottle-making machines. strength of the brand name, exception. Among other things, purchase by NestIe. Then, in the heat of the early drawing on $133,000 in grant he is the developer of a major Georgian summer, I had my first funds from the U.K. and Dutch St. Petersburg office and retail The sponsors' credentials were bottle of Borjomi. The high governments to help fund essen- project, an antique race car strong. Mr. Meijer's company, sulfur content makes it an tial market, accounting, legal, enthusiast, and proprietor of an \VCl, manages a $500 million acquired taste, to say the least. and environmental assessments. eclectic Amsterdam art museum investment portfolio. And dur- In fact had I acted on taste Zenith Intemational, a U.K.- devoted solely to cats. He had ing his 35-year career, Mr. alone, I would have run for based consulting firm specializ- fallen in love with Georgia Zimmer had successfully Armenia! ing in mineral water, conducted upon roaring into the country launclhed several top mineral the teclnical and market study. during a road rally through the water brands: Poland Spring Still, I was struck by the spon- Coopers and Lybrand reviewed former Soviet republics. (U.S.), Volvic (France), Buxton sors' passion for restoring GGMW's unaudited existing Following him into the break- (U.K.) and others. Mr. Borjomi to its former glory. In a accounts, including many trans- fast room was his partner Khazaradze founded and runs frnny way, I couldn't help but actions recorded manually in Mamuka Khazaradze, the most Georgia's premier private busi- think of Atlanta, Georgia, an the Georgian language. The successful businessman in ness conglomerate, the TBC emerging market a hundred international law firm Clifford Impact Winter 1998, Vol. 2, No. I Chance conducted legal due owned bottling facilities possible once the company the first international audit of a diligence on Georgia's nascent the need to develop establishes a track record and private manufacturing compainy legal system and laws and pro- standards for extracting simplifies its legal and financial in Georgia. The Japanese funds posed laws protecting the mineral water on a sustain- structure. However, 1FC's man- ($257,400) will finance an Borjomi trademark. All of this able basis and to pay agement and board acknowl- assessment of all mineral water input helped develop the basic royalties to the govern- edged that one of IFC's central resources in Georgia, train framework of the project. ment of Georgia roles is to supply promising Georgian hydrogeologists and the importance of companies with equity capital environmental scientists in IFC also initiated discussions developing and issuing alongside other partners in organic analysis, and establish a with senior govermuent offi- hygiene and maintenance countries not yet in the invest- laboratory with state-of the-art cials, including President standards that can be ment mainstream. testing equipment. The Dlutch Shevardnadze, about: applied uniformly to all moneys ($125,000) will fund a the critical importance of mineral water producers Thanks to the new manufactur- full audit of GGMW according trademark protection and in Georgia. ing equipment and technical to intcrnational standards and enforcement assistance made possible by the will help the company establish the need for systematic, j Deal investment, GGMW is now an opening balance sheet. In all, transparent authorization L The valuation of operating relatively smoothly. It IFC accessed more than a half- of private companies to 4 J GGMW and negoti- sold nearly 28 million half-litre million dollars from three donor extract mineral water from ation of IFC's equity bottles of Borjomi in 1997 and countries for this project. The Georgia's state-owned investment were expects 1998 sales of up to $20 country, sponsors, and IFC are natural springs complicated by the million, increasing to about $50 all grateful for this endorsemenit. the benefits of encouraging lack of historical financial data million by 2000. The latter fig- exclusive private sector as well as pre-existing liabilities ure assumes sales of 100 million In late June 1997, our invest- management of state- that were difficuilt to enumerate bottles in 2000, which would ment grotup signed all respective and assign. But after much still represent only a third of investment agreements at a cer- work, IFC decided to invest. Borjomi's 1986 sales volumes. emoniy in the Borjomi Valley This move was based largely on If the market remains as respon- attended by President ;napshot: two equally important factors: sive to the product as it was in Shevardnadze and followed by Ue rgua (i) the power of the Borjomi the past, the future could be lunch at his eighteenth-century brand name and its consumer bright indeed. dacha. A few weeks later, I PoputlaTbion:i 5.5millioloyalty; and (ii) the commit- made what became my last trip Capital:- Tbilis(introducd ment and local reputation of I . So VVhat? to Georgia to speak at the coun- Currency: Lai (introduced the Georgian partners. In the What about the try's first major private sector in 1995) end IFC invested $2.8 million [-A-i development impact investor conference. A little Per Capita GDP: $440 for 14.9% of GGMW's common i bottom line? A more than a year after my first (1996) shares and 20% of its preferred major player in a key trip to Georgia I was, of course, Foreign Dire* shares, which encouraged an export industry is back billed as an "expert." With so Investment: $20 million additional $5.7 million from the in business. GGMW is now the much to say on the country's (1996) Baring First NIS Regional Fund third-largest exporter in the economy, its private investment Inflation: 15,606% (1994); and approximately $2 million country. IFC investment helped climate, and its most famous 163% (1995), 39% (1996) more from the project sponsors. facilitate transfer of technology export, Borjomi, Georgia would Poverty: 30(5) of pop Following IFC's decision to and know-how having ripple always be on my mind. o Poveructy:r3 of pcop: invest, the European Bank for effects throughout the entire Setrices - 41.4Eo Reconstruction and economy. For Servicesture-41.4%; Development (EBRD) agreed to example, lFC has ' -1 agriculture - 33.5%; lend GGMW $ 10 million more. also attracted an N industry - 25 1% W~Vheni fully disbursed, EBRD's additional wa Major Trading Partner: loan is expected to help $400,000 from the Russia GGMW export much more Japanese and mineral water. Dutch govern- ments. These The risks associated with IFC's grant moneys will investment in GGMW are rela- fund an industry- 1 ir. j tively large. There is no well- wide program of defined exit strategy or technical assis- "deep-pocket" strategic investor, tance and a full although a sale to one may be audit of GGMW, Source: World Bank Impact Winter 1998, Vol. 2, No. I 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.