Investing in Progress with Experience, Innovation, and Partnership 2005 Annual Report The International Finance Corporation is the private sector arm of the World Bank Group and is headquartered in Washington, D.C. IFC coordinates its activities with the other institutions of the World Bank Group but is legally and financially independent. Its 178 member countries provide its share capital and collectively determine its policies. The mission of IFC is to promote sustainable private sector investment in developing and transition countries, helping to reduce poverty and improve people's lives. IFC finances private sector investments in the developing world, mobilizes capital in the international financial markets, helps clients improve social and environmental sustainability, and provides technical assistance and advice to governments and businesses. From its founding in 1956 through FY05, IFC has committed more than $49 billion of its own funds and arranged $24 billion in syndications for 3,319 companies in 140 developing countries. IFC's worldwide committed portfolio as of FY05 was $19.3 billion for its own account and $5.3 billion held for participants in loan syndications. For more information, visit www.ifc.org. view 2 AGEP Over International Finance Corporation 2005 Annual Report Volume 1 Volume 1 Contents Overview Operational Highlights 2 IFC Board of Directors 4 Message from the President 6 Message from the Executive Vice President 7 ogressrP in Theme Feature: Investing in Progress with Experience, Innovation, and Partnership Strategic Objectives 11 ting 10 Client Leadership Award, Tsunami Relief, and IFC's 50th Anniversary 24 AGEP Inves IFC Organizational Structure 26 Report on Regions Sub-Saharan Africa 28 East Asia and the Pacific 34 South Asia 38 Europe and Central Asia 42 Latin America and the Caribbean 50 Middle East and North Africa 56 Report on Operations Regions Investment Operations 62 Technical Assistance and Advisory Operations 65 on t Operations Evaluation Group 68 27 Compliance Advisor/Ombudsman 70 Financial Review 71 AGEP Repor Portfolio Review 75 IFC's Products and Services 78 Acronyms, Notes, and Definitions 80 Volume 2 of this report includes management's discussion and analysis, the audited financial statements, detailed information on IFC's Board and management, listings of the Corporation's fiscal 2005 investment commitments and technical assistance and advisory projects, and IFC's investment portfolio as of June 30, 2005. IFC's Annual Report on the Web, www.ifc.org/ar2005, is a companion to the printed edition. It provides downloadable files of all content in the two volumes, including several language versions of Volume 1. Operations Currency is given in U.S. dollars throughout unless otherwise specified. All numbers reflect rounding. on t 61 AGEP Repor Operational Highlights COURTESY OF NEWMONT OPERATIONAL RESULTS SUMMARY, FY05 RESOURCES AND INCOME, FY05 New projects committed 236 Operating income $1.95 billion Total financing committed $6.45 billion Net income $2.02 billion Financing committed for IFC's own account $5.37 billion Paid-in capital $2.4 billion Total committed portfolio* $19.3 billion Retained earnings $7.4 billion Loans as a % of committed portfolio 77% Borrowings for the fiscal year $2.0 billion Equity as a % of committed portfolio 17% Net worth $9.8 billion Guarantees as a % of committed portfolio 5% Risk management products as a % of committed portfolio 1% *For IFC's own account as of June 30, 2005; includes guarantees and risk management products. How What IFC offers a full range of investment products; the Corporation IFC is active in all commercial sectors in its developing member also increasingly provides technical assistance and advisory services countries. Funding is often accompanied by assistance on to private sector enterprises and related government agencies. industry best practice, corporate governance, environmental For details, see the Report on Operations, beginning on p. 61. and social issues, and links with local small businesses. COMMITMENTS BY PRODUCT, FY05 COMMITMENTS BY SECTOR, FY05 Includes IFC's account and syndications (millions of U.S. dollars) Includes IFC's account and syndications (millions of U.S. dollars) Finance and insurance $2,227 34.5% TOTAL $6,449 Transportation and warehousing 561 8.7 Industrial and consumer products 552 8.6 Loan syndications 1,076 Risk management Primary metals 330 5.1 products 4 Pulp and paper 327 5.1 Utilities 322 5.0 Guarantees 216 Oil, gas, and mining 314 4.9 Agriculture and forestry 278 4.3 Equity** 612 Chemicals 237 3.7 Nonmetallic mineral product manufacturing 222 3.4 Accommodation and tourism services 203 3.1 Information 200 3.1 Loans* 4,541 Collective investment vehicles 188 2.9 Wholesale and retail trade 143 2.2 Food and beverages 139 2.2 Textiles, apparel, and leather 84 1.3 Plastics and rubber 41 0.6 Education services 39 0.6 * Includes loan-type quasi-equity products. ** Includes equity-type quasi-equity products. Construction and real estate 23 0.3 Health care 20 0.3 IFC also mobilized $1.1 billion through structured finance related to guarantees, loans, and equity investments. TOTAL COMMITMENTS $6,449 100% 2 Where IFC invests in companies and financial institutions in all developing regions. These activities are detailed in the Report on Regions, beginning on p. 27, and in the table of project commitments in Volume 2. Projects involving more than one developing region are classified as "Global." COMMITMENTS BY REGION, FY05 INVESTMENT PORTFOLIO BY REGION, FY05 Includes IFC's account and syndications (millions of U.S. dollars) For IFC's account (millions of U.S. dollars) TOTAL $6,449 TOTAL $19,274 Global Global Middle East and 95 Sub-Saharan Africa* 445 Middle East and 245 Sub-Saharan Africa* 1,698 North Africa* North Africa* 315 1,210 East Asia and East Asia and the Pacific the Pacific 811 2,940 Latin America South Asia Latin America and the Caribbean 643 and the Caribbean 1,783 6,125 Overview South Asia 1,634 Europe and Europe and Central Asia* Central Asia* 2,357 5,423 *Some amounts include regional shares of investments that are officially classified as global projects. See regional sections for details. Why Impact IFC emphasizes sectors that have a high impact on the IFC also targets much of its effort to countries where there economies of developing countries, because they reach large is little or no foreign capital flow. Each year a sample of numbers of people or benefit many other sectors. These mature projects is assessed to determine the contribution sectors represent a large share of IFC's investment activity. to development. COMMITMENTS BY STRATEGY, FY05 SNAPSHOT OF DEVELOPMENT IMPACT Includes IFC's account and syndications (millions of U.S. dollars) Commitments for IFC's account (percentages) 2,500 Financial 37.4% FY03 FY04 FY05 New investments 2,000 In the financial sector 51 34 44 1,500 Small and medium In infrastructure, information and 17 24 17 enterprises 17.5% communication technologies, 1,000 Infrastructure 13.7% health, and education Information and communication In low-income or high-risk countries* 28 26 28 500 technologies 3.1% Health and Mature projects with a positive 58 58 59 education 0.9% 0 contribution to development ** FY05 Commitments Financial consists of finance and insurance, and collective investment vehicles. *Countries that are low income, as defined by the World Bank, or high risk, rated 30 or SME investments are derived from all industry sectors. below or unrated by Institutional Investor. (Excludes regional and global projects.) Infrastructure consists of utilities and transportation. **As evaluated by the Operations Evaluation Group (see p. 68). 3 IFC Board of Directors DEBORAH CAMPOS Board of Directors: Perspective and Oversight for IFC This year the Board of Directors approved a number of investments and maintained close oversight of the development and implementation of IFC's Letter to the Board strategy. During FY05 the Board continued to encourage the Corporation of Governors to coordinate its work closely with other World Bank Group institutions, The Board of Directors of the especially in providing technical assistance to improve the investment climate International Finance Corporation and promote private sector development. Directors noted IFC's proposal has had this annual report prepared to expand collaboration with IBRD in middle-income countries and with in accordance with the Corporation's IDA in low-income countries. The Board reviewed country-specific by-laws. Paul D. Wolfowitz, president of IFC and chairman of the Board of operations and discussed 14 joint World Bank­IFC­MIGA country Directors, has submitted this report assistance strategies and related products. with the accompanying audited financial Directors noted the challenges in both maintaining profitability and statements to the Board of Governors. increasing development impact. They reaffirmed their support for IFC's The Directors are pleased to report five strategic priorities and endorsed a scaling up of activities to expand that for the fiscal year ended June 30, IFC's development impact. Directors were pleased to note the Corporation's 2005, IFC expanded its sustainable plan to increase substantially its support to private sector development in development impact through private high-risk and low-income countries and to expand its investments in sector project financing operations and infrastructure, health, and education through public-private partnerships. advisory activities. Specific issues Directors discussed with IFC management include the Corporation's updates of its disclosure policy and its social and environmental safeguards policy, as well as a review of its accounting principles. They also discussed IFC's program for anti­money laundering and combating the financing of terrorism, as well as the integration of gender issues into its work. In keeping with its oversight responsibility, the Board discussed the annual review on operations evaluation and the IFC management response. The Board appreciated the continued positive dialogue between IFC management and the Operations Evaluation Group. With respect to the Corporation's performance, the Board welcomed IFC's achievements in FY05, as reflected in its strong financial results and the expansion and improvement in the quality of its portfolio. 4 PICTURED OPPOSITE IFC Governance FROM LEFT TO RIGHT: The International Finance Corporation's member (Standing) Robert B. Holland III,* countries, through a Board of Governors and a Board Herwidayatmo, Pietro Veglio, Eckhard Deutscher, of Directors, guide IFC's programs and activities. Each Mathias Sinamenye, John Austin, Tom Scholar, country appoints one governor and one alternate. IFC Chander Mohan Vasudev, Thorsteinn Ingolfsson, corporate powers are vested in the Board of Governors, Sid Ahmed Dib, Yahya Abdullah M. Alyahya, which delegates most powers to a board of 24 Nuno Mota Pinto,* Otaviano Canuto, Pierre directors. Voting power on issues brought before them Duquesne, Paulo F. Gomes, Gino Alzetta, is weighted according to the share capital each director Gobind Ganga,* Alexey Kvasov, Luis Marti. represents. The directors meet regularly at World Bank Group headquarters in Washington, D.C., where they (Seated) Mahdy Ismail Aljazzaf, Zou Jiayi, review and decide on investment projects and provide Jaime Quijandria, Yoshio Okubo, Ad Melkert. overall strategic guidance to IFC management. Directors also serve on one or more standing * Alternate director committees, which help the Board discharge its oversight responsibilities by examining policies and procedures in depth. The Audit Committee advises on Overview financial and risk management, corporate governance, and oversight issues. The Budget Committee considers business processes, administrative policies, standards, and budget issues that have a significant impact on the Directors and Alternates as of June 30, 2005 cost-effectiveness of Bank Group operations. The Committee on Development Effectiveness focuses on DIRECTORS ALTERNATES operations and policy evaluation and development Mahdy Ismail Aljazzaf Mohamed Kamel Amr effectiveness with a view to monitoring progress on Yahya Abdullah M. Alyahya Abdulrahman M. Almofadhi poverty reduction. The Personnel Committee advises on Gino Alzetta Melih Nemli compensation and other significant personnel policies. John Austin Terry O'Brien Directors also serve on the Committee on Governance Biagio Bossone Nuno Mota Pinto and Executive Directors' Administrative Matters. Otaviano Canuto Jeremias N. Paul, Jr. Paul D. Wolfowitz is president of IFC and the Eckhard Deutscher Walter Hermann other World Bank Group institutions: the International Sid Ahmed Dib Shuja Shah Bank for Reconstruction and Development (IBRD), Pierre Duquesne Anthony Requin the International Development Association (IDA), the Paulo F. Gomes Louis Philippe Ong Seng Multilateral Investment Guarantee Agency (MIGA), and Herwidayatmo Nursiah Arshad the International Centre for Settlement of Investment Thorsteinn Ingolfsson Svein Aass Disputes (ICSID). Mr. Wolfowitz also serves as chairman Alexey Kvasov Eugene Miagkov of the boards. Assaad J. Jabre is acting executive vice Luis Marti Jorge Familiar president of IFC, overseeing its day-to-day operations. Marcel Masse Gobind Ganga Ad Melkert Tamara Solyanyk Yoshio Okubo Toshio Oya Jaime Quijandria Alieto Guadagni Tom Scholar Caroline Sergeant Mathias Sinamenye Mulu Ketsela Chander Mohan Vasudev Akbar Ali Khan Pietro Veglio Jakub Karnowski Zou Jiayi Yang Jinlin (vacant) Robert B. Holland, III See Volume 2 for full listing of Board of Governors and for voting power of the Board of Directors. See also related sections on the Operations Evaluation Group (p. 68) and the Office of the Compliance Advisor/Ombudsman (p. 70), both of which function independently of IFC management. 5 Message from the President WORLD BANK This Annual Report records the achievements of the International Finance Corporation during the last year of the tenure of Executive Vice President Peter Woicke and my distinguished predecessor, World Bank President Jim Wolfensohn. It is an enormous responsibility to be entrusted with the leadership of this extraordinary institution, and I am grateful to Jim and Peter for having done so much to strengthen it. While much has been accomplished by the World Bank Group and its IFC's MISSION development partners, much remains to be done. The G-8 Summit at To promote sustainable private Gleneagles at the beginning of this new fiscal year has brought a welcome focus on the challenges of global development, particularly in Africa. It has also sector investment in developing reaffirmed the central role of the World Bank in so much of that work and has countries, helping to reduce given us even more to do. poverty and improve people's lives. As we move forward, we need to keep a balance among the different development priorities. The first priority must be to pay special attention to the needs of the poorest people in the poorest countries in the world. At the same time, the World Bank still has an important role to play with the rapidly growing developing countries, the so-called "middle-income" countries that nevertheless still have hundreds of millions of people living in extreme poverty. Finally, as a multilateral development institution, the World Bank is uniquely positioned to help the world address some of the concerns of the "global commons," such as the development of sustainable energy and the alleviation of global health crises. For its part, IFC is at the forefront of private sector development--promoting sustainable private development to help reduce poverty and improve people's lives. It is an exciting mission, and across the spectrum of private enterprise-- from critical, long-term infrastructure to small microfinance lending-- encouraging progress continues. IFC's strong operating results and ever-increasing development impact are compelling arguments for an optimistic outlook for the developing world. And I am very optimistic. I see the work ahead of us, but in the energy, creativity, determination, diversity, and talent of the people, I also see the promise. In all of this work, the World Bank is blessed with an exceptionally dedicated and qualified professional staff. It is an honor and a privilege to work with them on a daily basis. Paul D. Wolfowitz President 6 Message from the Executive Vice President "The Year of Development"--as many in the international community have termed 2005--has been a rare moment in the long global debate about reducing poverty and improving people's lives in the developing nations. Few times in recent years has there been such a sustained airing of views about aid, development, and the degree of progress Overview it is fair to expect. The focus on development is long overdue, of course. But as important as the issues themselves has been the multiplicity of the voices taking part. No longer is the issue of global development finance the preserve and prerogative of experts on development. It is a wide-open, wide-ranging debate that includes virtually all nations, large and small. It includes the public and private sectors. And it includes global advocates who campaign on behalf of a diverse array of economic, environmental, and social issues. To a striking degree, these voices agree on many fundamental aspects of development. Few, if any, have suggested that they will be untouched by the decisions made. Few have argued that solutions can be transplanted from one nation to another without careful attention to local conditions. Overwhelmingly, the role of the private sector is recognized as pivotal, and most agree that one of the main challenges is to scale up the successful approaches that have been tried. Improving governance and building capacity in both the private and public sectors seem to be the starting point for every discussion. Strategically speaking, "bottom-up" approaches are in; "top-down" are out. The watchwords: discipline, measurement, and results. LITTLEHALES Moreover, the idea that the developing nations are somehow a "third" world has BRETON been relegated to the dustbin. The fate of these nations has become the political, moral, Assaad J. Jabre economic, environmental, and social crossroads of our generation. Were one to list Acting Executive Vice President the biggest global challenges in economics, energy, or the environment, nearly all of them would be centered in the developing world. Wherever one may live, one's fate will be linked in some way, large or small, directly or indirectly, to the course these countries take. All of this underscores what a great opportunity IFC now has as an institution focusing on sustainable private sector development. For decades, our focus has been helping nations grow and thrive from the bottom up--one investment, one business at a time. This has also helped us catalyze investment and reform throughout markets and sectors, creating interest in those at the frontiers of the emerging markets. Meanwhile, the challenges we face in globalizing markets have continually forced us to innovate and experiment, while refining our traditional products and services. The institutional discipline that comes with being a risk-taking private investor has cultivated precisely the kind of careful, tailor-made approach that is now so widely recognized for its 7 BRETON LITTLEHALES effectiveness. And, more than ever, we have convincing results that point to the strong potential of this approach, at a time when pragmatic solutions are in demand. This year marks a third consecutive year of record results for IFC. As much as we pride ourselves in that accomplishment and rejoice that the strong performance of so many emerging markets has made it possible, these results are overshadowed by a sobering recognition of how much remains to be done and, as the tsunami in Asia so tragically demonstrated, how quickly unforeseen events can reverse years of progress. Fulfilling our developmental mission will take more effort, creativity, and resolve, not less: · For each of the past two years, we have committed more than $400 million in financing in Sub-Saharan Africa, a robust growth consistent with an upturn across the region. Yet Africa's economic growth needs to accelerate further if it is to reach the Millennium Development Goals. · From a power plant in India to a port in Madagascar to airlines in Central America, we have helped catalyze much-needed private sector investment in infrastructure. Yet many nations still find their competitiveness and their access to markets and services hamstrung by transportation bottlenecks and an unreliable power supply. SASOL · We have mobilized more than $1 billion through structured finance transactions OF in sectors such as housing, education, and microfinance. Yet many companies and COURTESY aspiring entrepreneurs still find their dreams deferred or their business growth thwarted without mature markets and long-term financing in local currencies. · Through our regional facilities and financial sector investments, we have helped improve the management capacity of institutions serving small and medium enterprises and facilitated access to financing for thousands of them. Yet many developing nations remain saddled with investment climates that are too heavy in applying red tape and too light on the expertise needed for effective governance. · We have helped finance pioneering projects that preserve biodiversity, that promote the use of sustainable energy and energy efficiency, and that develop the carbon market. Yet the threats from ecosystem degradation and climate change call for a several-fold increase in such efforts. PORT In recent months, IFC has outlined an ambitious growth strategy for the coming years that will challenge all our staff. This strategy is grounded in a recognition that the MANZANILLO OF needs of developing nations are enormous. It is grounded in the fact that private sector growth, through both domestic enterprise and foreign direct investment, is the largest COURTESY lever available for reducing poverty. It is also grounded in the belief that IFC has grown into an institution with a unique value proposition for our clients and for our 8 Acting Executive Vice President Assaad J. Jabre and IFC's Management Group From left to right Front: Nina Shapiro, Assaad Jabre, Javed Hamid, Farida Khambata, Jennifer Sullivan Back: Edward Nassim, Declan Duff, Dorothy Berry Not pictured: Michael Klein, Corporate Secretary W. Paatii Ofosu-Amaah shareholder governments, fostering sustainable development not only as a financier but also as a provider of advisory services and a promoter of best practices. Our ambition is not growth for the sake of growth. Our ambition is to make a difference in our markets by improving the business environment for private investors and extending the benefits of economic growth to the underserved; by building capacity Overview at the enterprise level and increasing competition at the market level; and by working with partners that share our commitment to improving corporate governance and raising environmental and social standards. These may be broad objectives, but they translate into the local, step-by-step victories on the road out of poverty: a new business, a first paycheck, a family with a new home, a child with a better education. They translate also into regional and global progress toward sustainability: clearer air, cleaner water, and healthy ecosystems. Our founders' vision foresaw the growing role of the private sector in development when IFC was created in 1956. Our legacy of hard-won experience, the leadership of Jim Wolfensohn and Peter Woicke in recent years, and the commitment of our new president, Paul Wolfowitz, to the Corporation's mission will enable us to celebrate IFC's 50th anniversary next year with a brighter potential than ever before. Should we succeed in fulfilling that potential, the achievement will be shared across the years. We will continue to look back in gratitude, outward in partnership, and forward with a renewed sense of purpose. IFC is a catalyst for progress in a rapidly changing world. We are fortunate that we can play an important role in addressing the defining challenge of our generation. Assaad J. Jabre Acting Executive Vice President TRAM TRIET 9 Investing in Progress with Experience, Innovation, and Partnership The International Finance Corporation is at the forefront of private sector development: we are redefining how poverty can be reduced and lives improved through a stronger private sector in emerging markets. Accomplishing this goal means reaching people, regions, and sectors that have not yet shared in the overall growth of emerging markets. It means innovation--forging new partnerships with governments and other multilateral institutions, identifying new roles for the private sector, creating products that develop financial markets, and making it easier for disadvantaged people to launch a business or own a home. It means building on significant strengths in many countries and industries--helping established enterprises become more competitive and sustainable as they expand their operations or extend their reach into new markets. It also means bringing to developing economies proven products and techniques, both from industrialized countries and, increasingly, from other developing countries. Above all, it means tailoring our global expertise to local needs. We recognize that there is no "business as usual" to our task of helping the private sector make a larger, more positive difference for the people living in developing countries. The examples that follow show how IFC is addressing, and working to solve, the challenges that face the countries we serve. 10 Strategic Objectives Expanding Access to Finance ess 1 IFC works with financial institutions to broaden access to finance; the emphasis includes smaller businesses, housing ogr Pr finance, and leasing. Our advice and innovative products in are also developing and strengthening financial markets. Investing Increasing Private Participation in Key Sectors 2 In infrastructure, health, and education, IFC is developing new approaches that increase private sector participation in delivering services. 117_1777 Helping Successful Enterprises Grow 3 Many of IFC's clients are poised to grow into competitive, global players in their markets, but they still benefit from our long-term financing and global experience as they raise standards and improve performance. Focusing Where Needs Are Greatest 4 In countries that are low income or high risk, IFC is helping governments improve the investment climate. We also use our capital and technical assistance to demonstrate the viability of private enterprises in these markets. Ensuring Sustainability 5 Alongside financial expertise, IFC's experience in corporate governance and environmental and social development is crucial to helping our clients sustain the long-term success of their businesses. Our standards are also widely influential in the project finance community. 11 Expanding Access to Finance TANG CHHIN SOTHY IFC is helping strengthen developing countries' financial markets--with an emphasis on expanding access to finance for poor people and the businesses they create--as a key to sustainable economic growth. Through investments and IFC helps establish microfinance technical assistance, IFC is developing financial intermediaries and building the institutions, leasing companies, and financial infrastructure. We are also working with the World Bank and credit bureaus in emerging markets. governments to ensure that laws and regulations in emerging markets support a robust financial sector. Our innovative transactions and advice Financial intermediaries include the bank and nonbank institutions through to regulators are helping build securities whose lending IFC reaches smaller businesses, as well as larger firms that have a markets in many client countries. positive impact on development. IFC invests in financial institutions and provides technical assistance to increase their activity in such key areas as financing for smaller businesses, microfinance, housing finance, leasing, and insurance. Through innovative investments and technologies, we are also helping them build their capacity to provide finance for a wider range of environmental and social products and services, especially in sectors, such as renewable energy and energy efficiency, with much untapped potential in the global market. As part of its efforts to develop financial infrastructure, another critical component of sustainable growth in emerging markets, IFC emphasizes establishing credit bureaus and securities markets. Credit bureaus play an indispensable role in expanding credit and enabling economic growth, and IFC is involved in developing such bureaus in 34 countries around the globe. A functioning securities market also expands the availability and affordability of financing, and IFC is helping establish such markets both through engagement with governments and through pioneering transactions that break new ground. (For details of transactions, see the sections on investment operations and individual regions.) 12 Financial Markets Technical Assistance In FY05, 127 technical assistance projects for financial markets were active in over 60 countries, representing more than $89 million in donor commitments. Projects in this sector represent a significant share of IFC's technical assistance ess work. Most were in high-risk or low-income countries (65 percent), particularly in Africa and ogr the Middle East. More than 70 percent of the Pr projects focused on strengthening access to in finance, mainly through lending to micro, small, and medium enterprises and through leasing. Many of these activities accompany IFC's financial sector investments; specific projects are highlighted ENERGIA Investing CPFL in the regional sections of this report. OF COURTESY Mexico: Innovative Structure Helps Finance Housing In a landmark transaction, IFC committed a total of 1.265 billion Mexican pesos (about $113 million) to GMAC Financiera, a wholly owned subsidiary of GMAC Residential Funding Corporation, to finance the origination or acquisition of eligible mortgage loans for low- to middle-income families and to support the company's mortgage-backed securities business in Mexico. The financing consists of an IFC loan of up to $65 million equivalent and a credit enhancement facility of up to $50 million equivalent. Through this transaction, IFC is providing its first-ever structured, collateralized mortgage loan; it will be backed by a pool of mortgages in a trust that will be rated AAA on a local scale. The project is expected to have a major developmental impact. It will enable GMAC Financiera to continue extending mortgage JOSEPH financing to sofoles, specialized financial institutions that in turn will LUDWINA provide housing finance to a large number of lower- and middle- income people. With its innovative structure, this transaction will also contribute to development of Mexico's capital markets. 13 Increasing Private Participation in Infrastructure ALEJANDRO PEREZ IFC prioritizes infrastructure because it is the basis for all economic growth and development--and because it offers so much scope for the private sector to play an innovative role. The Corporation is an active investor and advisor in sectors ranging from In FY05, IFC's investments power, transportation, and water and sanitation to information and communications in developing countries included technologies. We invest for our own account, mobilize private sector funding, $883 million in infrastructure sectors advise governments on the privatization of services, and provide technical assistance (utilities and transportation). that helps companies and agencies improve the competitiveness and sustainability We also invested $200 million in of their operations. information and communications Cornerstones of IFC's efforts include the promotion of public-private technology. partnerships to deliver infrastructure services, the expansion of our investment and technical assistance efforts to subnational levels of government, and--as in all our activities--unwavering attention to the environmental and social impacts of the development activities we support. In all these efforts, IFC operates in partnership with the institutions of the World Bank Group. IFC Advisory Services IFC provides advice to governments on the structuring and implementation of private sector participation in infrastructure, health, and other public services. IFC's efforts focus on sustainably expanding access to public services, where we can help strike the balance between the objectives of governments and the requirements of private investors. In FY05, IFC worked on 25 transactions in mining, power, water and sanitation, health, solid waste, irrigation, and several sectors of transportation: airlines, airports, ports, railways, and urban transit. We completed four transactions: Moatize Coal in Mozambique, the concession for operating Madagascar's principal port, and public-private partnerships in Morocco and Romania. The Moroccan transaction is the developing world's first for irrigation services. New projects are underway in Brazil, India, the Philippines, and Saudi Arabia, as well as in Sub-Saharan Africa and the Pacific islands. An advisory hub has been created in IFC's Johannesburg office. 14 Subnational Financing: The Municipal Fund A joint pilot program of IFC and the World Bank, the Municipal Fund continues to explore ways of investing in municipalities, municipal entities, and other tiers of local government without taking sovereign guarantees. Staff have studied over 20 countries and identified opportunities in markets as varied as Brazil, China, Colombia, India, Peru, the Philippines, Russia, and Thailand. The team has built partnerships and alliances with advisors, commercial and development banks, and bilateral and multilateral donors. This initiative has established that subsovereign finance contributes strongly to IFC's mission, as the potential impact on development--expanding its benefits to less developed areas and to poorer people--is substantial. Engaging with municipalities supports a number of IFC's priorities, including small businesses, housing finance, public-private partnerships in infrastructure, and carbon finance. It also complements our efforts to help governments simplify NEWMONT OF municipal business regulations, as demonstrated by IFC's work this ess year in Bolivia (see box, p. 55). Technical assistance is also critical to COURTESY enhancing the capacity and creditworthiness of subsovereign ogr borrowers and to ensuring successful implementation of projects. Pr in Investing COURTESY OF CEPALCO The Philippines: Long-term Financing Supports Renewable Energy IFC has provided its first loan in Philippine pesos for up to $15 million equivalent to Cagayan Electric Power and Light Company. Known as CEPALCO, the company serves nearly 87,000 customers in northern Mindanao, a less developed region of the country. Our 12-year financing in pesos through the local swap market supports critical infrastructure needs while furthering development of the country's long-term hedging markets. Up to now, CEPALCO has funded its network expansion and assets through financings of five years or less because of limited access to debt or capital market financing. IFC's long-term financing will help the company make critical investments in its distribution network. It is our second investment with CEPALCO; we also helped the company establish the first full-scale demonstration of the environmental and economic benefits of combining hydroelectric and photovoltaic power. The company now operates the largest CEPALCO grid-connected photovoltaic installation in the developing world. OF 15 COURTESY Increasing Private Participation in Health and Education TED POLLETT As with infrastructure, the social sectors of health and education are a priority for IFC, both because they are key to raising living standards and because more involvement from the private sector can improve the quality and reach of services. IFC invests in private companies that deliver health care or that provide health-related services and technologies. Concern with health also underlies much of our emphasis on environmental and social development, as we help client companies upgrade their operations to international standards or, in a growing number of places, address the unprecedented threat to their operations that is posed by the spread of HIV/AIDS. IFC also invests in private schools and universities, which are often an essential complement to state-run institutions as developing countries struggle to meet a burgeoning demand for education. Through an innovative program, we are also helping the business schools of industrialized nations share expertise with their counterparts in developing countries. Reflecting the knowledge-sharing role of the World Bank Group, IFC develops and disseminates best practices in many sectors, sets up forums for policymakers and businesspeople to share ideas, and helps client companies upgrade their operations and the skills of their staff. Contributing to the Millennium Development Goals The international community has set specific targets for a global partnership to reduce poverty, hunger, and child mortality; expand primary education and gender equality; combat infectious diseases and improve maternal health; and ensure environmental sustainability. The Global Monitoring Report 2005, produced by the World Bank Group and International Monetary Fund to assess progress in reaching these goals by 2015, has outlined an agenda for accelerating progress, especially in Sub-Saharan Africa. The agenda emphasizes the need to improve the environment for stronger economic growth RONKE-AMONI OGUNSULIRE led by the private sector--the area in which IFC, as the private sector arm of the Bank Group, is uniquely positioned to make a difference. Our approach has never been more relevant to fighting poverty and improving lives. As demonstrated by the efforts highlighted in this report, we are addressing regulatory and institutional constraints to business and trade, innovating to strengthen basic infrastructure, improving access to finance for smaller enterprises, and working to make private sector activity more environmentally and socially sustainable. Our global reach also gives us a role in transferring innovations with broad impact on living standards among developing countries and regions. For more information on the Millennium Development Goals and progress toward meeting them, see www.developmentgoals.org. 16 Ghana: A New Approach to Funding Private Schools IFC is providing local currency financing and technical assistance to private primary and secondary schools in Ghana, our first investment in the country's education sector. The project includes a partial guarantee of up to 9.5 billion cedi (equivalent to $1.1 million) to Ghana's Trust Bank on loans extended to eligible private schools in the Accra region. The loans will fund construction, purchase of educational materials, and other capital expenditures. Comprehensive technical assistance is being designed to strengthen the schools' financial, management, and educational capacities; to improve the business environment ess for private education; and to foster the development of an ogr independent provider of educational services to private schools. Pr Few local banks lend to Ghana's private K-12 schools, and in those that do generally lend for less than two years, a tenor too short to support expansion or modernization projects. Hence projects proceed in piecemeal fashion, while schools lose revenue and cannot keep pace with the growth in demand for private schooling. IFC's guarantee will help Trust Bank lengthen Investing loan maturities to three to five years, tenors better suited to capital investments. IFC hopes to establish a model that it can expand across Ghana and adapt and replicate throughout Sub-Saharan Africa. LIN ALICE Global Business School Network IFC has established a partnership with business schools around the world that is strengthening the skills of business managers in developing countries. To date we have enlisted faculty from 18 business schools in industrialized countries to help build the institutional capacity of their African counterparts. Pilot programs with business schools in Sub-Saharan Africa are improving future leaders' access to high-quality management education, improving the transferability of best practices in education and training, and strengthening ties between institutions and their surrounding communities. The efforts aim to maximize the impact of private sector knowledge and skills at the local level. This year one pilot brought together over 60 African faculty from 20 business schools across the region for an intensive course on practice-based and case teaching methods. The workshop was jointly organized by South Africa's Gordon Institute of Business Science and Nigeria's Lagos Business BURES School, with the involvement of the Columbia, Harvard, and LAURA IESE business schools. Also this year, IFC convened a conference of deans and directors of Africa's business schools, at which participants launched a regional association of African business schools. For more on IFC's work with business schools, see www.ifc.org/gbsn. 17 Helping Successful Enterprises Grow COURTESY OF RIO BRAVO Though the challenges of development remain immense, a number of emerging markets and many individual private enterprises are making impressive progress. Increasingly, IFC is building long-term relationships with successful clients. In addition to investing capital, IFC Companies and financial institutions that we supported in the early stages of helps firms become more competitive their growth now seek our expertise to upgrade their operations. We help these by improving corporate governance firms finance capital improvements, attract strategic investors, and mobilize and upgrading environmental and additional funding from commercial banks. We assist them in bringing their social performance. business practices and environmental compliance more into line with international standards, improving their competitiveness as they prepare to expand or develop Increasingly, we are helping long-term new business lines. We are also helping spur a rapid increase in private investment clients expand their business into other among developing countries. These interregional or "south-to-south" investments sectors or countries. have the potential to extend development to less developed areas and to many people who have not yet benefited from growth--and they make business sense for many of our clients. Corporate Governance IFC emphasizes corporate governance in its investments and internal operations; the Corporation also provides technical assistance to companies and financial institutions seeking to improve their practices. A joint department with the World Bank serves as a clearinghouse for knowledge and resources, including the Bank's country-level assessments and policy recommendations to governments. It also houses the Global Corporate Governance Forum, a donor-funded center of best practice. IFC has developed a methodology that allows us to reduce risks related to corporate governance while contributing to the development of best practices. IFC also organizes and participates in conferences and policy dialogue to build global understanding of the business benefits that derive from upgrading corporate governance practices. As highlighted in the regional sections of this report, our efforts have helped many clients become leaders in their markets, improve their access to long-term capital, and play a larger role in economic growth. 18 Global Trade Finance Program Launched in FY05, IFC's Global Trade Finance Program will support trade with emerging markets worldwide. It extends and complements the capacity of banks to deliver trade financing by providing risk coverage in difficult markets. Targeting banks in Africa, Asia, Latin America, and the Middle East, the $500 million program is open to all regional and international confirming banks. The resulting network allows participants to finance their trade conveniently through any of the bank counterparties in the program. IFC will provide partial or full guarantees on the payment risk of banks in over 70 developing and transition countries, with the objective of increasing developing countries' share of global trade and promoting the "south-to-south" flow of ess goods and services. The guarantees will be used primarily to ogr support short-term trade but will also accommodate longer Pr tenors, of up to three years, for capital goods imports. In addition, IFC will make pre-export cash advances and in provide technical assistance and training for local banks, helping them achieve best industry standards in trade. IFC is spearheading this new approach because trade finance plays a critical role in economic growth. This Investing initiative strengthens local financial institutions and assists smaller companies that need trade finance in order to grow. JAIN NEERAJ Kazakhstan: Helping Launch the Leasing Industry IFC has brought together Bank Turan Alem, one of Kazakhstan's largest banks, with ORIX Corporation of Japan and ORIX Leasing Pakistan in a joint venture, called BTA-ORIX Leasing, to support Kazakhstan's leasing industry. The investment will enhance the firm's institutional capacity and increase its capital base, helping it expand operations to serve the needs of the country's private sector. By bringing in technical expertise from its counterpart in Pakistan, the joint venture will also strengthen BTA-ORIX Leasing's risk management and corporate governance. IFC has invested $1.2 million for a 10 percent equity stake and is providing a senior loan of up to $5 million. The project represents IFC's first investment in Kazakhstan's leasing industry after working, through our Private Enterprise Partnership, to establish an appropriate regulatory and legal framework for a leasing industry in the country. This project demonstrates IFC's commitment to supporting leasing throughout Central Asia, as it offers an effective term financing alternative for smaller businesses that seek to upgrade long-term assets and improve their competitiveness. The project will also help BTA-ORIX Leasing secure independent access to sustainable private sector funding once it establishes a good borrowing record. IFC's involvement helps set high operational and governance standards for the financial services industry in Kazakhstan. MUKHAMMADKULOVA 19 NILUFAR Focusing Where Needs Are Greatest NEERAJ JAIN The private sector can help raise living standards for poor people in developing countries, but only if the economic climate is conducive to investment, job creation, and higher productivity. IFC collaborates with the World Bank and MIGA to identify ways of fostering a climate for growth. Some countries need help with the basics of attracting foreign investment. Others need our expertise to ensure that business development is equitable, reaching, for example, less urbanized areas, more women, and groups that have been excluded from full economic participation. Strengthening the Investment Climate IFC and the World Bank work together on surveying and assessing the investment climate of developing countries. A database of the surveys has been set up, which makes data from 30,000 firms accessible to governments considering reforms. In addition, IFC and the Bank publish the annual Doing Business report, which provides objective, quantifiable indicators of business regulations in 145 countries; reform efforts in more than 30 countries have been spurred by the data and recommendations in the first two editions. Investment climate is also the focus of the Bank's 2005 World Development Report. Foreign Investment Advisory Service A joint operation of IFC and the World Bank, the Foreign Investment Advisory COURTESY OF NOVOBANCO Service advises developing country governments on how to attract and retain foreign direct investment and maximize its impact on poverty reduction. Since 1985, FIAS has advised more than 130 countries in more than 600 projects. FIAS conducts diagnostic studies, helps design solutions, and assists in implementation of its recommendations. FIAS completed 74 projects in FY05. These included 16 knowledge management activities, notably four regional learning events on investment climate issues, which were held in Bangkok, Cape Town, Istanbul, and Washington. FIAS coordinates its activities with other parts of the World Bank Group and bilateral donors; it increasingly works with IFC's regional facilities. Examples include collaboration with the Private Enterprise Partnership in Magadan in Russia's Far East, with PEP-MENA in Egypt, and with SEDF in Bangladesh. 20 New Initiatives Broaden Our Reach This year IFC and the World Bank launched the Strengthening Grassroots Business Initiative, which helps poor, marginalized people expand revenue-generating activities that bring them into the market economy. The initiative provides technical assistance and invests "patient capital" to strengthen organizations' access to markets, management capacity, and capital structure. Recipients can be for-profit or not-for-profit. Pilot projects are underway in Africa, South Asia, and WILD Latin America, and the initiative is working to MICHAEL develop a wholesale approach to supporting ess grassroots businesses. ogr IFC has also launched Gender Pr Entrepreneurship Markets, a program addressing the gender inequalities--including in in the investment climate, access to finance, and business management skills--that prevent women from realizing their economic potential in emerging markets. To expand opportunities Investing for female entrepreneurs and reduce restrictions to women's participation in the formal economy, the program is integrating gender issues into IFC's work. Its initial focus is Sub-Saharan Africa, where women run some 40 percent of WILD BAND businesses but have little access to finance. ALEX MICHAEL Small and Medium Enterprises In many developing countries, small and medium enterprises--companies with 10 to 300 employees and annual sales of $100,000 to $15 million--are a key source of employment and critical to economic growth and poverty reduction. Strengthening these firms as well as microenterprises--businesses with fewer than 10 employees and less than $100,000 in turnover--is a priority for IFC. In FY05, commitments to institutions focused on smaller enterprises, such as microfinance institutions, banks, or leasing companies, reached $1.1 billion, up from $718 million in FY04. We also strengthen smaller enterprises through our technical assistance programs, which help establish a more favorable policy environment for local businesses, build capacity at financial institutions that finance smaller enterprises, and expand the range of business services available to these enterprises. IFC assists smaller businesses through a network of regional facilities, which tailor services to meet local demand, as well as the IFC-IDA program for micro, small, and medium enterprise development in Sub-Saharan Africa; linkage programs, which extend the benefits of large IFC investments to local firms and communities; the Strengthening Grassroots Business Initiative (see box); and other donor-funded operations. 21 Ensuring Sustainability KENJI YUHAKU Private sector development supports IFC's mission only if it is sustainable--if it makes a positive, long-term contribution to the economy and in doing so reduces poverty and improves lives. Integrating environmental, social, and corporate governance issues with financial and The Equator Principles: economic factors helps ensure that our efforts have long-term benefits for the people, Raising Industry Standards regions, and sectors most in need. It also allows us to engage more comprehensively for Project Finance with our clients, reduces the risk of private investing for everyone involved, and Through the Equator Principles, IFC is strengthens the ties between companies and the communities in which they operate. collaborating with the wider financial IFC has become a leader in making private sector development more sustainable--for sector to meet the demand for greater all of these reasons--and because there is a business case for doing so. Our expertise in social responsibility among providers of sustainability, in turn, is a main reason that clients who have other options for funding choose to work with IFC. capital. Launched in June 2003, the The Corporation incorporates environmental, social, and corporate governance due principles are a voluntary set of diligence into its investment operations. Sustainability is also the focus of much of our environmental and social guidelines technical assistance and advisory work with clients, as detailed throughout this report. In for project finance lending based on addition, we ensure that key staff at IFC receive thorough training in these issues; to date IFC's standards and procedures. It is some 555 staff have participated in the Sustainability Learning Program. It has been estimated that they are now used by delivered in our regional hubs as well as in Washington, and with clients, partners, and about 80 percent of the project finance other stakeholders attending. IFC also collaborates with the international community on market worldwide. To date, 32 financial many key initiatives, including on the Millennium Development Goals (see p. 16). institutions have adopted the principles; During FY05, IFC increased its resources for measuring both its development impact the group increasingly includes and the environmental and social footprint of its own operations. These issues are institutions from emerging markets, covered in detail in IFC's annual Sustainability Report. (See also related section on the with four Brazilian banks among new Operations Evaluation Group, p. 68.) adopters during FY05. IFC has helped train Equator bank professionals in Updating IFC's Policies and Guidelines implementing the principles; the IFC's environmental and social standards have a broad impact on the private sector, both institutions in turn have participated through our work with clients and through the widespread adoption of the Equator as stakeholders in IFC's policy review. Principles by major commercial banks (see box). To ensure that these standards remain relevant to a rapidly evolving marketplace, this year the Corporation pushed ahead with an integrated review of our existing Safeguard Policies; Policy on Disclosure of Information; and Environmental, Health, and Safety Guidelines. The review involved a broad consultation process with stakeholders around the world, including governments, our clients and partners, and representatives of civil society. The resulting comprehensive update of our policies and guidelines was presented to IFC's management in July 2005, with Board discussion to follow. The new Policy on Social and Environmental Sustainability and Performance Standards is expected to take effect during 2006. For more information, see www.ifc.org/policyreview. 22 IFC Against AIDS Carbon Finance: Building IFC Against AIDS helps client companies step up their involvement in fighting for the Future HIV/AIDS. Through this program, IFC works with clients to analyze the IFC is helping developing countries participate business risks the disease presents and provides guidance on design and in the fast-growing market for carbon credits. implementation of education, prevention, and care programs that target the We are leveraging our experience and knowledge workforce and surrounding communities. in evaluating and financing private sector During FY05, we began providing strategic technical assistance in South projects in developing countries to help mitigate Asia, where Indian companies are matching the funds they receive through the risk associated with the delivery of emission IFC's Corporate Citizenship Facility. The first two companies, Ambuja Cement reductions under the flexible trading mechanisms Foundation and Apollo Tyres, are already scaling up their HIV/AIDS awareness set up by the Kyoto Protocol. For example, and prevention programs in the workplace and the community, as well as our equity investment this year in AgCert enhancing their clinics' capacity for treating sexually transmitted diseases and International will help over 500 livestock farms for preventing and detecting HIV among long-distance truckers. Partnership in Latin America capture and dispose of methane ess with African companies, including training for smaller businesses, also remains from animal waste, generating revenue through ogr a key focus of the program (see box, p. 32). For more information, see carbon credits. We have also begun collaborating Pr www.ifc.org/ifcagainstaids. with private sector partners to design, launch, in and manage related financial products, with the goal of taking risk in such transactions for IFC's own account. In addition, IFC operates two facilities to purchase emission reductions on behalf of the Netherlands. In FY05, these Investing facilities concluded emissions reduction purchase agreements with two clients: Brascan Energetica in Brazil, which is building and operating run- of-river hydropower facilities to displace generation from fossil fuels; and Balrampur Chini Mills Limited, one of India's largest sugar producers, which has developed, with IFC support, two cogeneration projects that use bagasse, reducing reliance on fossil fuels. These agreements represent a combined 4.5 million carbon credits and an expected contract value of more than $25 million. VLASSIS TIGKARAKIS Making a Difference in the Extractive Industries In association with the World Bank and MIGA, IFC has begun implementing a set of proposals to improve the governance, revenue management, and community involvement of the extractive industries--oil, gas, and mining-- in which we invest. This reflects the recent Extractive Industries Review, which consisted of independent evaluations of World Bank Group involvement in this sector; during FY05, the Board endorsed a response from the management of IFC, the World Bank, and MIGA. The Bank Group is setting up an Extractive Industries Advisory Group, which will draw on the experience of outstanding representatives from a range of stakeholder groups to provide advice and a forum for discussing key issues in these industries. As part of an overall commitment to sustainability, the Bank Group will also increase its investments in natural gas and renewable energies, as well as in projects that improve energy efficiency. YACOUB 23 MAX ACLEDA Bank Receives IFC Client Leadership Award IFC presents an annual Client Leadership Award to recognize a highly successful corporate client that, in line with IFC's mission, has made a significant contribution to sustainable development. This year's award goes to ACLEDA Bank Plc, a leading private bank serving micro and small enterprises in Cambodia. With IFC's support, ACLEDA has transformed itself from a nongovernmental organization focusing on rural development into a first-tier commercial bank. Established in 1993, the Association of Cambodian Local Economic Development Agencies began its transition into a full-service bank in 1998, assisted by IFC's Mekong Private Sector Development Facility, the United Nations Development Program, and other international aid agencies. Through investments in 2000 and 2004, IFC established an equity stake in ACLEDA, mobilized other investors, and provided financing to expand the bank's lending to microenterprises. The transformation is a success: today ACLEDA is Cambodia's second-largest bank in terms of market share on loans outstanding. Its strong profitability has exceeded business targets and makes it a top performer among microfinance institutions worldwide. With 136 branches and offices, ACLEDA has expanded coverage to more than 130,000 active borrowers and to areas not usually served by formal financial institutions. About 66 percent of its clients are women. As part of its efforts to raise living standards, it has introduced a loan product for small power generation facilities that serve remote districts and has invested in communications infrastructure to support money transfers between its rural branches. ACLEDA has aligned with industry best practices in training and compensation for staff, and it has drawn on IFC's expertise in (3) implementing effective environmental management. ACLEDA's success demonstrates how providing financial services to low- ACLEDA OF income entrepreneurs makes sound business sense in emerging markets. It serves as a role model for similar institutions around the world. COURTESY 24 Helping the Private Sector Respond to the Indian Ocean Tsunami The devastating tsunami in December 2004 affected several economies in East and South Asia. IFC immediately set up a matching grant program for selected partner companies in Indonesia, the Maldives, Sri Lanka, and Thailand. By matching KELLS the costs they incurred in their response to the tsunami, IFC JOHN helped these firms step up their participation in the relief effort. The program helped remove infrastructure and distribution bottlenecks for relief operations and provided health services, power, communications, and clean water. IFC committed $1.4 million to support 11 projects covering water treatment plants and emergency school facilities in Indonesia; food, ess water, emergency supplies, and repair and reconstruction of housing in the Maldives; port and airport logistics, relief camps, ogr and emergency telecommunications in Sri Lanka; and cleanup Pr and reconstruction of buildings and boats in Thailand. in IFC also established a special loan facility to support the SENANAYAKE recovery of tourism in the Maldives, Sri Lanka, and Thailand. SANJIVA In addition, the Corporation has conducted seminars and consultations on insurance in the Maldives and Sri Lanka. IFC Investing also provided $150,000 from its corporate contingency funds to a program run by Sri Lanka's National Development Bank Group that repaired or replaced fishing boats and equipment damaged by the tsunami. SENANAYAKE SANJIVA At its launch, the International Finance Corporation became the first multilateral organization to have as its main objective the promotion of private enterprise. Today, it remains one of the 50 few multilaterals to assume full commercial risks alongside private investors in emerging markets. The idea of an institution to spur private sector investment in poor countries-- complementing the World Bank's lending to governments--had been broached at the founding of the Bank and the International Monetary Fund in 1944. In the summer of 1956, IFC's first loans, for manufacturing projects in Brazil and Mexico, put the World Bank Group on course to making that vision a reality. years In half a century of growth, IFC has remained the largest multilateral source of loan and equity financing for private sector projects in developing countries, even coining the term "emerging markets" for the clients we serve. We have been a key investor in more than 1956-2006 3,300 companies, a catalyst for partnerships in commercial investment and technical assistance, and a champion of best practice with global expertise to help firms and the government entities that work with them. We have played a leading role in building recognition that developing and transition countries offer sound and sustainable business opportunities. The Corporation will celebrate its accomplishments during 2006 with a renewed commitment to providing the innovative products and services our clients need and to expanding our impact on development. 25 IFC Organizational Structure IFC has a workforce of over 2,400, representing more than 120 nationalities. Reflecting the strategic decentralization of operations, 45 percent of staff work in field offices in some 70 countries. To be closer to clients and tailor strategies and services to the countries where they operate, regional departments are centered at hubs in Cairo, Hong Kong, Istanbul, Johannesburg, Moscow, New Delhi, and Rio de Janeiro. Each draws on the global expertise of industry departments based in Washington. BOARD OF GOVERNORS BOARD OF DIRECTORS Paul D. Wolfowitz President Ajay Chhibber W. Paatii Ofosu-Amaah Meg Taylor Acting Director-General Vice President & Compliance Advisor/ Operations Evaluation Corporate Secretary Ombudsman1 William E. Stevenson Assaad J. Jabre Director Acting Executive Operations Evaluation Vice President, IFC Group2 Michael Klein Assaad J. Jabre Farida Khambata Dorothy H. Berry Jennifer Sullivan Nina Shapiro Vice President Vice President Vice President Vice President General Counsel Vice President Private Sector Operations Portfolio & Risk Human Resources Finance & Treasurer Development Management & Administration & IFC Chief Economist3 Vacant Jean-Paul Pinard Edward A. Nassim Director Director Director Udayan Wagle Investment Climate & Agribusiness Central & Eastern Director General Manager FIAS3 Europe Business Risk Group Declan J. Duff Director Teresa Barger Jyrki Koskelo Javed Hamid Allen F. Shapiro Municipal Fund Director Director Director Director Corporate Governance4 Global Financial East Asia & the Pacific Controller's Rachel Kyte Markets & Budgeting Director Environment & Laurence Carter Social Development Mohsen Khalil Director Director Atul Mehta Guy-Pierre de Poerck Small & Medium Global Information Director Chief Information Officer Joseph O'Keefe Enterprises3 & Communication Latin America Corporate Business Senior Manager Technologies3,5 & the Caribbean Informatics Corporate Relations Dimitris Tsitsiragos Michael Essex Marc Babin Bernard Sheahan Director Acting Director Director Director Global Manufacturing Middle East Corporate Portfolio Advisory Services & Services & North Africa Management Harold Rosen Sakdiyian Director Guy Ellena Iyad Malas Kupasrimonkol Grassroots Business Director Director Director Organizations3 Health & Education South Asia Credit Review Toshiya Masuoka Shahbaz Mavaddat Senior Manager Francisco Tourreilles Acting Director Avi Hofman Operational Strategy Director Southern Europe Director Infrastructure & Central Asia Financial Operations Hiroshi Arichi Director Tokyo Office Rashad-Rudolf Lakshmi Kaldany Shyam-Sunder Director Richard Ranken Director Oil, Gas, Mining, Director Risk Management 1. Vice presidential rank; serves same role for MIGA. & Chemicals3,5 Sub-Saharan Africa & Financial Policy 2. Reports to the Director-General, Operations Evaluation; to the Executive Vice President Haydée Celaya Maria da Graca for administrative purposes. Director Domingues 3. Jointly IFC and World Bank. Private Equity & Director 4. Also reports to Vice President, Portfolio & Investment Funds Special Operations Risk Management. 5. Also reports to World Bank Vice President for Infrastructure. Mwaghazi Mwachofi Director For details of IFC organization and management, Trust Funds see Volume 2. 26 Regions on t Repor 27 TED POLLETT Sub-Saharan Africa Project Financing and Portfolio Commitments (millions of U.S. dollars) (millions of U.S. dollars) FY03 FY04* FY05** Financing committed for IFC's account 140 405 445 445 Loans 93 242 357 405 Equity 28 81 36 Guarantees and risk management 20 82 52 Loan syndications signed 26 0 0 TOTAL COMMITMENTS SIGNED 167 405 445 Committed portfolio for IFC's account 1,448 1,608 1,698 Loans 974 1,010 1,185 Equity 414 461 336 140 Guarantees and risk management 60 137 177 Committed portfolio held for others 254 225 194 (loan participations) TOTAL COMMITTED PORTFOLIO 1,702 1,832 1,892 26 0 0 Loans include loan-type, quasi-equity products. Equity includes equity-type, quasi-equity products. FY03 FY04 FY05 *Includes regional share of LNM Holdings investment, which is officially classified as a global project. Financing for IFC's **Includes regional share of BAPTFF investment, which is officially classified Syndications own account as a global project. IFC's Largest Country Exposures Project Commitments and Countries Committed portfolio for IFC's own account as of June 30, 2005* FY03 FY04 FY05 (millions of U.S. dollars) Number of projects 21 25 30* Nigeria 419 Number of countries 13 12 14 South Africa 191 *Includes BAPTFF investment. Mozambique 139 Cameroon 121 Kenya 115 *Excludes individual country shares of regional and global projects. 28 Some data from previous years have been revised. All dollar amounts reflect rounding. ANGOLA, BENIN, BOTSWANA, BURKINA FASO, BURUNDI, CAMEROON, CAPE VERDE, CENTRAL AFRICAN REPUBLIC, CHAD, COMOROS, DEMOCRATIC REPUBLIC OF CONGO, REPUBLIC OF CONGO, CÔTE D'IVOIRE, DJIBOUTI, EQUATORIAL GUINEA, ERITREA, ETHIOPIA, GABON, THE GAMBIA, GHANA, GUINEA, GUINEA-BISSAU, KENYA, LESOTHO, LIBERIA, MADAGASCAR, MALAWI, MALI, MAURITANIA, MAURITIUS, MOZAMBIQUE, NAMIBIA, NIGER, NIGERIA, RWANDA, SENEGAL, SEYCHELLES, SIERRA LEONE, SOMALIA, SOUTH AFRICA, SUDAN, SWAZILAND, TANZANIA, TOGO, UGANDA, ZAMBIA, ZIMBABWE New Opportunities Africa for the Private Sector Growth for Africa was 4.4 percent in calendar program, the Private Enterprise Partnership year 2004, an increase from 3.1 percent in for Africa, was approved by IFC's Board in Sub-Saharan 2003. The region benefited from the recovery March 2005, with IFC initially funding its of the world economy, rising commodity core staff and operating costs. PEP-Africa prices, improved macroeconomic stability, has already mobilized $9.5 million in donor and country-specific developments. Still, funding and initiated five new multiyear growth remains below the 7 percent target technical assistance programs. These include that is needed to reach the Millennium a regional program to support leasing in east Development Goals by 2015. Africa faces Africa; a parallel leasing program in Ghana immense challenges in generating private that forms part of the joint Micro, Small, sector development and overcoming a weak and Medium Enterprises initiative with the investment climate, lack of infrastructure, World Bank's International Development HIV/AIDS, conflict, and a shortage of Association; a program to improve business human capital. regulation in Burkina Faso; an export IFC is working to address Africa's promotion program for smaller businesses development more comprehensively in Madagascar; and an Entrepreneurship through a new strategy initiated in FY04. Development Initiative, which will continue Committed investments were $445 million some successful small and medium enterprise for FY05; for the first time, we have development activities of APDF. invested over $400 million in the region for As part of comprehensive assistance to two consecutive years. IFC's strategy focuses smaller businesses, IFC opened a second on expanding the program to target smaller SME Solution Center in Kenya this year. businesses, which constitute much of the The MSME initiative with IDA is funding private sector in Africa. For larger projects, activities in Ghana, Kenya, Mali, and the strategy targets more support in the Uganda. Also under this initiative, IFC formative stages of project development, has invested $1.9 million in ACCION expanding our role significantly beyond Nigeria to launch a new commercial provision of finance. To improve the overall microfinance bank (see box); this will be investment climate, IFC is also focusing its complemented by technical assistance global knowledge and local expertise on funds from an IDA credit. reducing investment constraints that the In addition, IFC has invested in a new private sector faces. microfinance bank in the Democratic This strategy calls for an increase in Republic of Congo. At the request of the technical assistance. Hence IFC has country's government and the World Bank, designed a program that builds on the work IFC also launched the Mozambique SME of its Africa Project Development Facility Initiative. On a pilot basis, the program but has a broader mandate to promote provides an integrated package of risk capital private sector development. This new and technical assistance to selected businesses. 29 ABIGAIL TAMAKLOE IFC has paid particular attention to Nationale de l'Industrie in Madagascar; identifying new investment opportunities Guaranty Trust Bank and Diamond Bank in the region. This effort has resulted in in Nigeria; and Generale de Banque de innovative financial products for schools in Mauritanie in Mauritania. Collectively, Ghana (see box, p. 17). We have also financed investments with repeat clients totaled a greenfield cement plant in Nigeria, the $158 million in FY05. country's largest private investment outside the IFC is also seeking to assist countries oil sector in recent years (see box). To assist in emerging from conflict. Building on our first broadening economic empowerment in South investment in Angola, we have now invested Africa, IFC has committed $30 million to in NOSSA Seguros, an insurance company FirstRand Empowerment Trust (see box). that will help improve efficiency and IFC is working hard to strengthen introduce new products in the country's relationships with existing clients. For insurance sector. example, IFC has invested $35 million Private sector investment in infrastructure with MTN Nigeria, the country's leading is another important focus. Here we have telecommunications provider, following a invested in Scancom, a cellular provider in $100 million investment last year. We have Ghana; we also initiated several infrastructure also made repeat investments in Celtel, a advisory assignments and closed the Tamatave regional cellular provider; the Development port advisory mandate in Madagascar with a Finance Company of Uganda; Banque successful private concession. Nigeria: Helping the Smallest Businesses Access Finance Poor access to finance seriously impedes development of the micro and small enterprise sector in Nigeria; 85 percent of the country's firms have access only to short-term credit. IFC is helping Nigeria's government address the problem. The country's commercial banks are now required to set aside 10 percent of pretax profits for investments in the equity of smaller businesses. IFC is helping them do so through the new Micro Finance Institution, which specializes in funding micro and small businesses. The MFI was launched with initial capital of $5 million, with ACCION International providing technical and management expertise. IFC has taken an equity investment along with several large Nigerian banks, and ACCION is the lead investor. Funding for technical assistance is coming from the Micro, Small, and Medium Enterprise Program, a collaborative effort of IFC and IDA. This is IFC's first investment under the program. The institution's specialization will help it streamline credit evaluation procedures and implement tailored systems for information management and monitoring of microloans. Its lending is expected to become highly efficient in a relatively short time. 30 Nigeria: Assisting an Industry with a Pivotal Role in Development IFC is providing $75 million for construction and operation of a greenfield cement plant with a capacity of 4.4 million tons a year at Obajana in Nigeria's Kogi state. One of IFC's largest investments in the country or the region, it is being implemented by Dangote Industries Limited, a leading Nigerian conglomerate, and will fill a supply gap in the country's cement market. Whereas over 75 percent of the annual consumption of 10.6 million tons is currently imported, the project will use locally available limestone, gypsum, and natural gas to produce cement at a competitive price. Better Africa availability of cement will promote investment in infrastructure, as well as in industrial, commercial, and residential construction. These are acute needs in a nation of 134 million people. The project will generate employment and improve the standard of living in a part of Nigeria with limited industrial activities. It will also create jobs indirectly through formal and informal businesses serving the plant and its employees. IFC is helping Dangote Sub-Saharan Industries build its capacity to implement community development programs in such areas as water supply, small business development, skills training, and health, including HIV/AIDS and malaria. South Africa: Empowerment in the Financial Sector In 2003, South Africa's financial sector published a charter mandating that a quarter of financial institutions' interests should be vested with historically disadvantaged South Africans by 2010. In support of this empowerment agenda, IFC has approved a rand-denominated, five-year mezzanine loan equivalent to $30 million to FirstRand Empowerment Trust to finance its acquisition of 6.5 percent of common shares in a major bank, FirstRand Limited. The project is part of the bank's transformation to comply with the charter; the acquired shares will be held in the trust for the benefit of four black economic empowerment groups. The project helps transfer ownership of a leading financial institution, and related economic benefits, to reputable and broad- based partners. Over time, as the debt of the trust is serviced, cash flows to the empowerment groups will increase, enhancing their financial resources and establishing partial black ownership and control of FirstRand. The empowerment groups will also benefit from skills development, training for professionals and managers, senior appointments within the institution, access to financial services, empowerment financing, and procurement and sourcing from black- owned ventures. The transaction is expected to set a benchmark for future transformation projects in the country's financial sector and to help improve opportunities for black South Africans. 31 Helping Businesses Address the Challenges of HIV/AIDS Through the IFC Against AIDS program, the Corporation works with client companies in Africa to accelerate their efforts in fighting HIV/AIDS. This year, MTN Nigeria received guidance in developing an AIDS policy, conducting a specialized survey, offering peer education, and providing anti-retroviral treatment to employees and their dependents. In Kenya, Magadi Soda also began providing this treatment; IFC Against AIDS will continue to strengthen the company's internal program and develop funding proposals to expand it in the community. IFC Against AIDS also worked with the South African company Hernic Ferrochrome to help shape its HIV/AIDS education and prevention program. In Nigeria, IFC provided assistance to the Dangote Group in drafting an AIDS policy, outlining an intervention strategy, and identifying partners among nongovernmental organizations for a program that will cover all the group's operations. In cooperation with PEP-Africa, the program is developing tools that will help smaller businesses in TAMAKLOE many parts of the continent manage the business risks of HIV/AIDS. ABIGAIL This year, IFC Against AIDS also established a full-time staff presence in Johannesburg to support activities in the region. Kenya: A Better Living for the Poorest Farmers This year IFC lent $178,000 to Honey Care Africa Limited, a socially responsible Kenyan small business that sells hives to local subsistence farmers and buys their honey at guaranteed prices. The market Honey Care creates for locally produced honey increases incomes in rural areas with few economic opportunities, typically doubling beekeepers' income. Honey Care also provides training in beekeeping as well as equipment and technical support to the farmers. Many of these farmers are women, and most earn less than $1 a day. To date, the company has provided sustainable economic opportunities to more than 2,500 poor farmers in rural Kenya. Through the Strengthening Grassroots Business Initiative, IFC is also helping Honey Care upgrade its processing capacity to meet international standards, strengthen its management information systems, and increase its level of extension services to beekeepers, collection centers, and distribution facilities. This will enable the company to increase its geographical coverage in Kenya, assist more farmers, and enter the export market. LIN ALICE COURTESY OF CELTEL Africa Sub-Saharan Africa: A Company's Success Spurs Interregional Investment IFC's experience with Celtel International, B.V., a telecommunications company active across Sub-Saharan Africa, demonstrates that the region is becoming an attractive destination for foreign investors. IFC has made a number of investments in Celtel since 1994, helping the company as it developed mobile networks in more than a dozen countries. In addition to providing modern cellular communications at affordable prices to African consumers, the company has been a model of good governance and community involvement-- a commitment recognized by IFC in 2004 with its inaugural Client Leadership Award. This year the company's success led the Mobile Telephone Corporation of Kuwait to acquire Celtel for $3.34 billion. The transaction is a leading example of the interregional or "south-to-south" investments that IFC is promoting among developing countries. It also reflects investors' changing perceptions of Sub-Saharan Africa. The combined company intends to support further substantial growth in the region, and IFC will continue to nominate one of its board members. CELTEL OF 33 COURTESY OU YANGJIE East Asia and the Pacific Project Financing and Portfolio Commitments (millions of U.S. dollars) (millions of U.S. dollars) FY03 FY04 FY05 740 730 Financing committed for IFC's account 573 730 740 Loans 135 427 520 Equity 178 239 195 573 Guarantees and risk management 260 64 25 Loan syndications signed 10 33 72 TOTAL COMMITMENTS SIGNED 583 763 811 Committed portfolio for IFC's account 2,791 2,897 2,940 Loans 1,354 1,503 1,572 Equity 850 961 910 Guarantees and risk management 587 433 458 Committed portfolio held for others 1,138 907 821 (loan participations) 72 TOTAL COMMITTED PORTFOLIO 3,929 3,804 3,761 33 10 Loans include loan-type, quasi-equity products. Equity includes equity-type, quasi-equity products. FY03 FY04 FY05 Financing for IFC's Syndications own account IFC's Largest Country Exposures Project Commitments and Countries Committed portfolio for IFC's own account as of June 30, 2005* FY03 FY04 FY05 (millions of U.S. dollars) Number of projects 31 40 40 China 999 Number of countries 7 7 11 Indonesia 494 Philippines 480 Thailand 336 Korea, Republic of 155 *Excludes individual country shares of regional and global projects. 34 Some data from previous years have been revised. All dollar amounts reflect rounding. CAMBODIA, CHINA, FIJI, INDONESIA, KIRIBATI, REPUBLIC OF KOREA, LAO PEOPLE'S DEMOCRATIC REPUBLIC, MALAYSIA, MARSHALL ISLANDS, FEDERATED STATES OF MICRONESIA, MONGOLIA, MYANMAR, PALAU, PAPUA NEW GUINEA, PHILIPPINES, SAMOA, SOLOMON ISLANDS, THAILAND, TIMOR-LESTE, TONGA, VANUATU, VIETNAM Domestic Demand and Trade Fuel a Boom Pacific East Asia and the Pacific grew by 8.5 percent in Credit Public Company Limited, a finance the 2004, a regional boom led by strong domestic company that focuses on retail services and demand and trade growth in China. Growth has commercial financing for small and medium and also been robust in Malaysia, the Philippines, enterprises. Proceeds of the loan will be used Thailand, and Vietnam, with Indonesia not far primarily to fund the company's growing business Asia behind. Underpinning this surge are reforms in leasing. In Indonesia, IFC made its first rupiah- associated with WTO membership, a more denominated loan to Austindo Nusantara Jaya East welcoming attitude to foreign capital, and efforts to Finance, an independent finance company. The recapitalize and restructure the financial sector in the loan will help the company expand its leasing countries most affected by the 1997 financial crisis. activities, diversify its funding base, and better To maintain this momentum, however, match the currency of its assets and liabilities. To economies in the region need to deepen and help develop the private equity market in China, diversify their financial systems, strengthen IFC invested up to $5 million in the BioVeda corporate governance and other responsible China Fund, through which institutional investors business practices, and improve the environment will provide capital for developing Chinese for private investments in infrastructure. IFC's companies in biotechnology and life sciences. investment and technical assistance programs in the In Malaysia, IFC became the first supranational region focus on these priority areas for reform. institution to undertake a bond issue using the IFC is working to develop new and stronger principles of Islamic finance; the 500 million banks in East Asia, particularly in transition ringgit issue (equivalent to $132 million) helps economies. In Cambodia, we provided a loan to deepen the country's domestic capital market. help Canadia Bank expand its lending operations; Expansion of private infrastructure, including through technical assistance, we are helping through privatization, is another priority for IFC Canadia become a leader in risk management in East Asia. This year, IFC assisted in the expansion and other best practices. In Vietnam, we increased of Minsheng Shipping, a company operating on the our equity stake in Sacombank, part of our Yangtze River in China (see box). In the Philippines, ongoing support to strengthen its capital base we made a long-term corporate loan in local and institutional capacity. In China, our equity currency to CEPALCO, an electricity distribution investment in Bank of Beijing supports its strategic company, to finance its investment program (see development and modernization (see box). box, p. 15). Also in the Philippines, IFC provided IFC also continues to encourage the deepening a $22 million loan to a consortium of local and strengthening of the financial sector through shareholders to computerize and connect the technical assistance and investments in nonbank offices of the country's Land Registration financial institutions. In the Philippines, we Authority (see box). helped the National Housing Mortgage Finance IFC continues to promote the growth of the Corporation conduct the country's first auction of region's domestic companies as they transform nonperforming housing loans; this auction is a themselves into regional and international model mechanism for resolving nonperforming competitors. This effort is particularly strong in assets and helps develop a market for them. In China, where our program in general manufacturing Thailand, we provided a loan to Siam Industrial expanded significantly in FY05. IFC made a loan 35 The Philippines: A Private Sector Approach to Land Registration Property rights can support economic growth and development but only when they are formalized, for example through land titling and registration. This is crucial for poor people, who may have assets--basic housing, informal businesses--but lack formal rights to them. Lacking rights constrains people's ability to use assets as collateral and raise capital for small enterprises. It can also preclude entrepreneurs from connecting to the formal economy, making it difficult or illegal for them to obtain utility services. In the Philippines, IFC is helping the government address this problem. A leader in privatization, the Philippines has awarded concessions for various public utilities and selected government services. To meet the urgent need for land registration and titling, it awarded a concession to Land Registration Systems, Inc., a local private company, to computerize and connect the 162 offices of the country's land registration authority. By building a database and network infrastructure, the privatization will increase the authority's efficiency and the security, quality, and accessibility of land title information. It will also improve the process of issuing land records. IFC has provided a loan of $22 million and a quasi-equity instrument of $2.7 million to support this privatization, which we expect to send a positive signal to the market and demonstrate the viability of service concessions to other governments. The project also complements the World Bank's efforts to promote broader institutional reforms in land administration. China: Opening the Interior to Trade In little more than 20 years, China has emerged as one of world's premier trading nations. But because the benefits of growth have largely bypassed the country's interior, the Chinese government is working to accelerate economic development there. IFC is supporting this goal through, for example, the donor-funded China Project Development Facility, which provides technical assistance to improve the business climate and develop financing and business support services for smaller businesses in the southwestern province of Sichuan. Our larger investments are also making a difference. Based in the city of Chongqing, Minsheng Shipping is a leading transportation company along the Yangtze River, the principal artery linking the interior of China with the coast. Minsheng operates nearly 70 vessels on the river, including container liners, barges, tugboats, and specialized vessels for carrying vehicles (called "ro-ro" vessels, short for "roll on, roll off"). Minsheng also operates six oceangoing container vessels, mainly to serve the market between China and Japan. To serve its clients more effectively, Minsheng is shifting its river operations from the barge and tug business to container and ro-ro operations. Through our $15 million investment, IFC is helping the company acquire 20 new vessels by 2007. The project will help Minsheng optimize its fleet structure, gain efficiency, and capitalize on a growing demand for transportation along the Yangtze. YANGJIE OU China: Upgrading Bank Operations and Securing Foreign Investment The challenges facing Chinese banks in general--high levels of nonperforming loans, a thin capital base, management and governance in need of strengthening--are amplified among the city commercial banks that China established by consolidating some 2,000 urban credit cooperatives in large and midsize cities. These institutions also face heavy local government influence and are restricted to conducting business only within their city boundaries. IFC has been helping the Bank of Beijing build its business amid these challenges. Soon after the bank's founding in 1996, IFC provided technical assistance to improve its credit risk management and formulate overall business strategies. The bank has considered IFC a close partner ever since, consulting us in its ongoing efforts to improve management and asset quality and recently seeking our advice in the selection of an international strategic investor. IFC's involvement has been encouraged by Chinese regulators, who believe that the development of Beijing's city commercial bank, the country's second-largest, could have a strong demonstration effect for financial sector reform across China. In FY05, IFC made an equity investment in the Bank of Beijing of up to RMB479 million (about $58 million). The Netherlands' ING Bank is taking just under the 20 percent ceiling that a single foreign investor is allowed to invest in a Chinese bank; the combined investment will reach the 25 percent maximum imposed by the country's banking regulators for combined foreign shareholdings in a domestic bank. The funding initiates a comprehensive strategic alliance. ING will provide technical and management support to the Bank of Beijing, helping expand its retail business, providing training to staff, and nominating personnel to senior management positions. The Bank of Beijing will use its strong branch network across the city's 12 districts to promote the insurance business of ING's joint ventures in China. 36 WANG QINGXIAN and equity investment in Fenglin, one of the East Asia: Innovative Partnerships Address country's largest medium-density fiberboard Environmental Challenges producers, for construction and operation of a IFC's technical assistance facilities are establishing relationships with civil Pacific plant producing fiberboard and related value- society organizations to help private companies and entrepreneurs added products. The project will also establish the contribute more to sustainable development. Examples from our facilities over 13,000 hectares of fast-growing plantation in eastern Indonesia and China's interior demonstrate approaches that forest, helping make the company's business more and are friendly to business and to the environment. environmentally sustainable. Fenglin will be able In Indonesia, IFC-PENSA has established a sustainable supply chain to play a larger role in meeting the demand from program in partnership with the World Wildlife Fund and the Nature Asia China's furniture and construction industries, Conservancy; it creates market-based alternatives to illegal logging and while increasing economic activity in one of the other practices that are depleting tropical forests. A pilot program is poorest areas of southern China. IFC has also East promoting fast-growing acacia wood as an alternative to teak in furniture invested in North Andre, a major apple juice production. To test the market for acacia products, the program displayed producer in Shandong province; this will enable it samples from five manufacturers at a furniture show in Singapore in March to complete an expansion project by providing 2005. Initial orders exceeded $40,000, and inquiries continue. One permanent working capital and a long-term loan, company signed an exclusive deal to sell beds to the British market, while while benefiting thousands of farmers who supply another received a 900-piece order for a product using acacia and bamboo. its processing plants. In the Philippines, we IFC's China Project Development Facility has set up its own innovative continue to work with Manila Water, as this partnership with the World Wildlife Fund, which is helping preserve critical concessionaire serving eastern Manila develops a natural habitat in northern Sichuan. The project, initiated by WWF, will help more integrated and sustainable approach to local farmers in Minshan develop sustainable farming as an alternative to managing its business. illegal logging and the poaching of endangered monkeys and deer, in We also help build capacity for private habitat that is also home to pandas. IFC is providing advisory services and enterprises and regulators, and funding for additional resources to create pilots that can be used in an area with more technical assistance in the region has more than than 500 villages. Our contribution includes helping identify products with doubled, to $20 million, in the past two years. a positive impact locally as well as good market prospects. For example, IFC This assistance, much of it delivered by four is supporting a company that purchases honey, walnuts, mushrooms, and regional facilities, is our main product in some spices from local communities. Our support has helped attract the global smaller, more isolated economies. In Samoa, retailer Carrefour, which offers a guaranteed price and provides display the Pacific Enterprise Development Facility is space for these products at its outlet in Chengdu. IFC's facility is helping helping develop the venture capital industry, reduce costs in this supply chain and increase product quality to meet the privatize infrastructure, and promote tourism standards of a demanding international business. The project provides new development. In Laos, the Mekong Private income for local farmers, while Carrefour benefits by building ties to Sector Development Facility has launched a communities and offering unique Chinese products to local consumers. forum to promote public-private partnership on improving the business environment. Our WANG QINGXIAN facilities in less developed regions of China and Indonesia are working on supply chain partnerships that benefit the environment (see box). This year IFC also assessed private sector investment opportunities in Timor-Leste and worked on a strategic business plan with a new microfinance institution in Papua New Guinea. 37 ANASTASIA GEKIS South Asia Project Financing and Portfolio Commitments (millions of U.S. dollars) (millions of U.S. dollars) FY03 FY04 FY05 Financing committed for IFC's account 386 405 443 443 Loans 355 379 384 405 Equity 28 18 57 386 Guarantees and risk management 3 9 2 Loan syndications signed 37 109 200 TOTAL COMMITMENTS SIGNED 422 514 643 Committed portfolio for IFC's account 1,447 1,518 1,634 200 Loans 929 1,101 1,326 Equity 345 265 214 Guarantees and risk management 172 152 93 109 Committed portfolio held for others 140 237 416 (loan participations) TOTAL COMMITTED PORTFOLIO 1,587 1,755 2,050 37 Loans include loan-type, quasi-equity products. Equity includes equity-type, quasi-equity products. FY03 FY04 FY05 Financing for IFC's Syndications own account IFC's Country Exposures Project Commitments and Countries Committed portfolio for IFC's own account as of June 30, 2005* FY03 FY04 FY05 (millions of U.S. dollars) Number of projects 18 19 20 India 1,268 Number of countries 4 5 2 Bangladesh 111 Sri Lanka 102 Maldives 55 Nepal 47 Bhutan 10 *Excludes individual country shares of regional and global projects. 38 Some data from previous years have been revised. All dollar amounts reflect rounding. BANGLADESH, BHUTAN, INDIA, MALDIVES, NEPAL, SRI LANKA Strengthening International Asia Competitiveness South South Asia remained one of the world's fastest- largest pulp and paper manufacturer; loans to growing regions during FY05, with particularly repeat clients, United Riceland Limited, one of strong growth in India. Many companies in India's leading rice millers, and Rain Calcining the region are striving for international Limited, a producer of petroleum coke; and a competitiveness and pursuing new investment loan to SRF Limited, a manufacturer of nylon opportunities in South Asia and beyond. IFC is tire cord and chemical gases. In support of promoting sustainable private sector growth, India's IT industry, IFC provided a loan to both through investments in projects that KPIT Cummins Infosystems Limited, an IT have a high development impact and through services outsourcing company focused on technical assistance. This technical assistance manufacturing and financial services, as it helps clients improve their sustainability; it also embarks on a growth and acquisition strategy. helps strengthen smaller businesses and support We are also helping South Asian countries community development programs. In FY05, continue their growth in tourism, a focus that IFC committed investments of $443 million took on special urgency after the tsunami in the for its own account and $200 million in Indian Ocean in December 2004. As part of loan syndications. our comprehensive support to response and IFC's investments in Indian manufacturers recovery efforts, IFC established a Tsunami demonstrate how we are helping build an Tourism Loan Facility. A company affected in internationally competitive private sector. A the Maldives has already received assistance loan to Tata Steel will facilitate the company's through this facility, which will also support the expansion in East Asia, while increasing its industry's recovery in Sri Lanka and Thailand production capacity and productivity in India. (see box, p. 25). Our second investment in Apollo Tyres will help Infrastructure is a high priority for IFC's expand its production of bus and truck tires. investment and technical assistance work in Through an equity investment in Cosmo Films, the region, given its critical importance for a packaging manufacturer, IFC is helping a sustaining growth and reducing poverty. IFC is repeat client strengthen its capital structure and helping expand the availability of power, water, supporting its growth prospects. DCM Shriram and telecommunications through investments Consolidated, a diversified chemical company, is and advice on public-private partnerships. In using IFC's investment for an environmental FY05, IFC provided AD Hydro Power Limited upgrade of an existing plant, to create more with a loan and equity investment to develop capacity for production and captive power one of the first hydropower plants to be financed generation, and to help expand the company's on a merchant basis in Asia (see box). An rural network of retail stores for agricultural investment in Sealion Sparkle will allow this products. IFC also made three equity company to expand its port management investments to support India's emerging biotech services within India and beyond (see box). industry (see box); a loan and equity investment IFC has also provided an equity investment to in Andhra Pradesh Paper Mills, India's fourth- India's Ramky Group, helping expand the 39 country's largest private business in solid waste management. IFC has signed an advisory mandate with the Indian city of Bangalore to introduce private participation in its water and wastewater systems. NEERAJ JAIN IFC is supporting infrastructure indirectly Bangladesh: A Consortium as well, through a loan to the Infrastructure Helps Small Businesses Grow Development Finance Company Limited, a firm that invests and provides advisory services for An important way to improve the competitiveness and performance developing projects in India's key infrastructure of small and medium enterprises is to increase their access to sectors. Also in the financial sector, a loan to business services. IFC's SouthAsia Enterprise Development Facility is Kotak Mahindra Bank will help it increase its helping service providers in Bangladesh make more comprehensive lending to smaller businesses, particularly and sustainable assistance available to small and medium enterprises. those that focus on exports. One such effort is the Consortium for Business Development Services, Through technical assistance, the SouthAsia launched in 2003 with an initial investment of $8,500 by a group of Enterprise Development Facility expands IFC's local consultants. SEDF has helped the members coordinate and reach in Bangladesh, Bhutan, and Nepal, as integrate their capabilities so that the consortium can now offer a well as in India's northeast. Operational since wide range of management training and business consulting services 2002, SEDF is working to improve the to the country's smaller businesses. These include pricing analysis of business environment, strengthen providers poultry, feed, nursery, and seed products; assessment of training of business services, and increase financial needs for businesses in selected supply chains; a diagnostic study of services for smaller businesses. For example, the Dhaka Chamber of Commerce and Industry; and the publication SEDF has supported the development of a of a set of business case studies. The consortium is now generating consortium to help smaller enterprises improve revenues from its training and consulting. SEDF will continue to their access to business services (see box). Also support the evolution of the consortium into a one-stop shop that during FY05, the IFC Against AIDS team provides key management development services to smaller launched a program with IFC's South Asian enterprises throughout Bangladesh. clients (see p. 23). JAIN NEERAJ India: Investing in Biotechnology and Pharmaceuticals Biotechnology and pharmaceuticals could potentially be major growth sectors in India's economy. To support these emerging industries, IFC made three investments during FY05. The first is an equity investment in the APIDC Biotechnology Fund, which will make equity and equity-related investments in start-up and early-stage life sciences businesses working in such areas as health care, drug discovery, agriculture, dairy, and environmental and industrial applications. IFC's investment will enable the fund to take significant minority stakes in Indian businesses; it plans to build a portfolio of 20 to 25 companies with an average transaction size of $1.5 million. IFC also made its first direct investment in a biotech company, Bharat Biotech India Limited, a firm in Hyderabad that develops, manufactures, distributes, and markets vaccines and biopharmaceuticals. IFC's equity investment will help the company expand its development and production of new products, as well as improve its marketing and sales efforts. As the first international institutional investor in Bharat Biotech, IFC will assist the company in establishing good corporate governance and help it ensure timely financial reporting and sound financial management. IFC also invested equity in Dabur Pharma, a leading pharmaceutical company in India. This investment will help the company expand and upgrade its manufacturing facilities to meet regulatory requirements in the United States and the European Union, obtain regulatory approvals for sales of generic oncology products in these markets, and enhance its corporate governance practices. Asia South India: Meeting the Competition for Port Services With competition rising among the country's ports and with Indian companies seeking to enhance their competitiveness in international markets, IFC is helping improve the efficiency, productivity, and safety of India's port operations. Ocean Sparkle Limited, one of the first private Indian companies offering comprehensive port services, owns and manages one of the country's largest private fleets of harbor tugs and provides management and other services to eight key ports in India. To strengthen its financial and technical capabilities and its ability to bid for larger port management contracts, Ocean Sparkle has entered into a joint venture with the Port of Singapore-Marine Limited, a subsidiary of Singapore's port authority. The consortium has won three large port management services contracts in India and is seeking additional opportunities, both in India and worldwide. IFC's loan to the consortium, Sealion Sparkle, for $4.9 million will support these domestic and international expansion plans and contribute to the SPARKLE overall development of infrastructure critical to India's growth. SEALION OF COURTESY India: A Pioneering Investment in Cleaner Energy IFC has made a combined $49 million loan and equity investment in AD Hydro Power Limited in the Himalayas of northern India. The project is one of the first hydropower plants in the developing world to be financed on a merchant basis, with the private sector taking market risk. IFC's funding supports construction, operation, and maintenance of a 192 megawatt run-of-river hydroelectric power plant and a 185-kilometer, 220-kilovolt transmission line. The plant will help meet a growing demand for electricity and alleviate peak shortages in the region. It will be developed mainly by Indian contractors and suppliers, generating short- term and permanent jobs as well as substantial revenues to the state and national governments through royalties and taxes. By using a renewable source of energy, the plant will help reduce reliance on thermal power, which produces greenhouse gases and particulate emissions. The project encourages private hydropower development and private participation in India's power sector. To ensure that local communities benefit from the investment, IFC will provide technical assistance to promote forest and wildlife conservation, links with smaller local businesses, and sustainable tourism in the area. YUHAKU 41 KENJI BRYCE MEEKER Europe and Central Asia Project Financing and Portfolio Commitments (millions of U.S. dollars) (millions of U.S. dollars) 1,938 FY03 FY04* FY05** Financing committed for IFC's account 1,203 1,667 1,938 1,667 Loans 1,058 1,374 1,751 Equity 50 292 187 Guarantees and risk management 95 1 0 Loan syndications signed 191 363 419 1,203 TOTAL COMMITMENTS SIGNED 1,394 2,030 2,357 Committed portfolio for IFC's account 3,575 4,548 5,423 Loans 2,899 3,768 4,602 Equity 521 667 719 Guarantees and risk management 156 113 102 419 Committed portfolio held for others 785 935 1,008 363 (loan participations) 191 TOTAL COMMITTED PORTFOLIO 4,360 5,482 6,431 Loans include loan-type, quasi-equity products. Equity includes equity-type, quasi-equity products. FY03 FY04 FY05 *Includes BTC Pipeline and regional share of LNM Holdings, which are officially classified as global projects. Financing for IFC's **Includes regional share of Melrose Facility, which is officially classified as a Syndications own account global project. Committed portfolio includes BTC Pipeline, which is officially classified as a global project. IFC's Largest Country Exposures Project Commitments and Countries Committed portfolio for IFC's own account as of June 30, 2005* FY03 FY04 FY05 (millions of U.S. dollars) Number of projects 60 65* 67 Russian Federation 1,432 Number of countries 18 17 15 Turkey 981 *Includes BTC Pipeline. Romania 409 Ukraine 265 Bulgaria 253 *Excludes individual country shares of regional and global projects. 42 Some data from previous years have been revised. All dollar amounts reflect rounding. ALBANIA, ARMENIA, AZERBAIJAN, BELARUS, BOSNIA AND HERZEGOVINA, BULGARIA, CROATIA, CZECH REPUBLIC, ESTONIA, GEORGIA, HUNGARY, KAZAKHSTAN, KYRGYZ REPUBLIC, LATVIA, LITHUANIA, FORMER YUGOSLAV REPUBLIC OF MACEDONIA, MOLDOVA, POLAND, ROMANIA, RUSSIAN FEDERATION, SERBIA AND MONTENEGRO, SLOVAK REPUBLIC, SLOVENIA, TAJIKISTAN, TURKEY, TURKMENISTAN, UKRAINE, UZBEKISTAN Rising Investment and Broader Impact Asia At 7.2 percent during 2004, growth in Europe and company (see box, p. 19). Here IFC took a 10 percent Central Asia has remained strong. IFC's activity shareholding and helped attract foreign strategic and here covers many sectors, led by the financial sector, technical partners; our involvement helped set new Central where our investments, expertise in structuring standards in corporate governance, encouraging other transactions, and advice to firms and governments investors to enter the country. In Turkey, through a and are helping build capital markets and expanding loan and equity package, IFC supported Intercity, a access to finance. During FY05 we also continued vehicle leasing operation, reflecting our strategy to ope expanding our technical assistance efforts, help innovative clients and entrepreneurs (see box). Eur particularly in Southeast Europe. IFC supported TSKB, a large term-lending institution, to enhance the availability of funding Southern Europe and Central Asia for Turkish companies. IFC invested in financial institutions, often with technical assistance to Rapid Change, Varied Opportunities strengthen capacity, in Azerbaijan, Bosnia and Southern Europe and Central Asia is an economically Herzegovina, Croatia, Romania, and Tajikistan. diverse region, with per capita incomes ranging from In Serbia and Montenegro alone, IFC committed $200 a year in Tajikistan to $6,500 in Croatia. Most $108 million in the banking sector this year. countries are in transition from state-controlled to In manufacturing and services, and consistent free market economies or are coming out of conflict. with IFC's strategy to encourage "south-to-south" But most of these are changing rapidly, with a growing investments, we helped a Lebanese sponsor invest private sector and emerging local businesses, and are in the Albanian cement sector; a competitive local drawing increased interest from foreign investors. supply of cement will reduce Albania's dependence This year, the economies of Southeast Europe on imports (see box). In another example of and Turkey registered strong growth; for the most interregional investment, we worked with Arcelik, a part, growth was healthy in Central Asia and Turkish firm, to establish a greenfield manufacturing Azerbaijan. Economic development in the region facility in Russia that will improve the company's will require large investments to accelerate growth, position as a globally competitive supplier of major increase employment, and facilitate integration household appliances. In Bulgaria and Croatia, IFC into international markets. During FY05, IFC's invested in discount retail outlets and hypermarkets; investments in the region reached $811 million these are expected to improve distribution of in new commitments, compared to $842 million locally procured goods at competitive prices to in FY04; we also mobilized $174 million consumers nationally. through syndications. In the social sectors, IFC supported two projects IFC has been involved in restructuring and in Turkey, where the market is well positioned for privatizing the financial sector in much of the region. private provision of education and health services. This year, we continued to support private banks, IFC is helping a leading health services provider which in turn help improve access to finance for local establish two hospitals, one in Istanbul specializing in private companies and smaller businesses. IFC is oncology and neurosurgery, the other serving general also fostering the development of nonbank financial health care needs in Bursa. In education, IFC made institutions, especially in housing finance and leasing. its first loan in Turkish lira to assist a K-12 school and In Kazakhstan, we invested in Bank Turan Alem vocational institute in expanding its services, Leasing, the country's first commercial leasing including in information technology and software. 43 COURTESY OF FUSHE KRUJE Albania: The First Investment in the Privatized Industrial Sector In infrastructure, IFC is helping potential European Union accession countries privatize This year IFC provided a $30 million loan for rehabilitation and expansion of their utilities. In Romania, IFC provided a Albania's Fushe Kruje Cement Factory, which will install a new production line, financing package to DistrigazSud, a recently increasing capacity to 1.3 million tons a year. A good example of interregional or privatized gas distribution company. The private "south-to-south" investment, the project is sponsored by Seament Holding, a provision of infrastructure services, especially major cement trading group based in Lebanon. It will establish the only modern through public-private partnerships, will be cement factory in a market that consumes 1.5 million tons of cement per year, two- increasingly important, especially in Southeast thirds of which is imported. Located near inexpensive sources of clay and limestone Europe, and IFC will seek to support the and operating with a low capital cost, the factory is expected to produce clinker emerging opportunities in this area. and cement at roughly half the cost of imports. IFC continues to give priority to the frontier With a total cost of $130 million, the project is the first investment in markets of Central Asia, where opportunities for Albania's industrial sector since its privatization. It brings modern production investments remain severely constrained. Here, technology and operational know-how to the country while providing attractive through the donor-supported Private Enterprise wages to 400 workers in an area with few employment opportunities. Fushe Partnership, IFC has deployed technical Kruje will draw on IFC's environmental due diligence and supervisory oversight assistance, especially for small and medium to raise its environmental and social management to international best practices. enterprises. To achieve long-term, sustainable The workers will also benefit from a more formalized safety program. impact, regional and country programs have been IFC played a key role in completing the financial plan, which posed challenges established in the areas of leasing, housing and due to the project's size and a shortage of domestic and external sources of mortgage finance, microfinance, corporate funding. Our presence gave comfort to other financial institutions, encouraging governance, and supply chain links between them to participate. The project will help demonstrate the feasibility of project small and large companies. A major new initiative finance in Albania and promote more foreign direct investment in the country. in leasing will combine technical assistance with Tajikistan: Supporting the Growth of Smaller Businesses One of the poorest countries in the former Soviet Union, Tajikistan needs private sector growth to help raise living standards. Because investment opportunities are limited, IFC is providing technical assistance to improve the investment climate and supporting pioneering programs that help bring scarce capital to small and medium enterprises. During FY05, IFC followed up on a survey of smaller businesses that it conducted last year with Swiss support. The survey identified major regulatory hurdles that entrepreneurs face, including complex licensing procedures and repeated and overlapping inspections. IFC has convened stakeholders to build consensus on the PEP issues, established close partnerships with several key IFC's advice on corporate governance helped Romania's Banca Comerciala Romana improve its credit rating this year. PEREZ ALEJANDRO investment capital to selected financial intermediaries in four Central Asian countries. Serbia and Montenegro: Privatization Asia During the year, IFC also committed to a new Support to a Major Bank initiative, the Private Enterprise Partnership for Southeast Europe, which will continue and IFC has taken a shareholding in Podgoricka Banka, the largest broaden our technical assistance in the countries bank in Montenegro, to help the government with privatization. Central there. Its focus will be on smaller businesses, Founded in 1906, Podgoricka Banka was one of the first environmental issues, and infrastructure. This banking institutions in the region. It is the only relatively large and year, we worked with Serbia and Montenegro to bank in Montenegro, with branches across the republic and establish legislation that creates a leasing industry 230 employees, and it has remained majority state-owned. ope for the first time. In FYR Macedonia, we IFC has also extended a new 5 million term loan to Eur initiated a program to help the steel recycling enhance the bank's reach and allow it to provide long-term industry work with small enterprises that employ loans for the first time. In addition, IFC is providing technical more than 5,000 Roma people. In Bosnia and assistance to strengthen the bank's management capacity in Herzegovina, we introduced alternative dispute advance of privatization: a resident advisor will support its resolution for commercial cases, enabling management, while specialists will assist on selected banking businesses to save time and costs while resolving functions. Our investment and technical assistance will help cash-flow and liquidity issues successfully. improve Podgoricka Banka's performance, corporate IFC's efforts have had a favorable impact, governance, market position, and attractiveness to potential but major challenges still remain. To meet strategic investors. The restructuring and IFC's support are these challenges effectively, IFC will continue expected to have a large impact on the Montenegrin economy, to strive for innovative programs in line with helping attract foreign direct investment and significantly country priorities. improving the bank's privatization prospects. inspectorates, and helped the legislature draft a new law governing business inspections. Also this year, IFC invested in the First MicroFinance Bank of Tajikistan, a joint investment and advisory project with the Aga Khan Development Network and Germany's development bank, KfW. The new bank provides credit and savings products to micro and small enterprises, and it already has over 7,000 clients. IFC is undertaking a broad technical assistance program to help the bank upgrade its operations, train staff, and extend its services to more customers, especially to women. These efforts should contribute to the bank's achieving financial sustainability within four years. PEP 45 A Successful Model for Technical Assistance The Private Enterprise Partnership is IFC's technical assistance program in the former Soviet Union. It is funded jointly by IFC, which has allocated an annual budget of $4.6 million through FY06, and donor governments, which provided a total of $73 million from the partnership's founding in 2000 through the end of FY05. The partnership implements programs to build financial markets, link local firms into supply and distribution chains of larger companies, improve corporate governance practices, and strengthen business support services and the regulatory environment for small enterprises. These activities serve the partnership's objective of building and strengthening the private sector and economic growth in these countries. The partnership's technical assistance has facilitated $493 million in investment, including $100 million from IFC. Its success has provided a model for new partnerships that IFC is promoting in Sub-Saharan Africa, PEP the Middle East and North Africa, and Southeast Europe. Georgia and Turkey: Vehicle Leasing Spurs Business Growth Throughout Europe and Central Asia, IFC promotes leasing as a key source of financing for growing companies. In Georgia, for example, our Private Enterprise Partnership has worked with the government to improve leasing legislation, assessed the market to determine the sectors most in need of leasing, and trained and advised companies on the benefits of leasing. This year IFC lent $3 million to TBC Leasing, one of Georgia's first leasing firms, allowing it to meet demand for this new financial product. One company this helps is Clauss, a small, growing business whose 42 employees deliver food and beverage products around Tbilisi. In two years, Clauss has grown from a start-up to become the market leader in distribution services. To keep pace, the company needed more vans--but CLAUSS found it made more sense to lease than to buy them. Leasing does not OF require collateral or credit history, and it typically offers longer maturities than banks. Thanks to TBC Leasing, Clauss has six new Ford Transit vans. COURTESY A bigger fleet has helped sales grow by 45 percent, and the company has created 12 new jobs. In Turkey, IFC has provided a $45 million financing package to Intercity, an independently owned business that leases cars, vans, and trucks to the private sector. Its vehicles assist a wide range of commercial clients in sales calls, inventory management, and the transportation and delivery of goods. Founded in 1992 by a local entrepreneur, Intercity has become the country's largest vehicle leasing and fleet management company, with more than $20 million in annual revenue. It has a 20 percent market share, 90 employees, and over 6,000 vehicles under management. By providing Intercity with both equity and long-term funding, IFC is helping an entrepreneurial business become a larger, more significant player CLAUSS OF in Turkey. The project addresses a scarcity of medium-term financing for the country's auto leasing industry and promotes the development of COURTESY operational leasing. IFC's support is expected to encourage other financial intermediaries in Turkey to consider operational leases as an alternative financing instrument. 46 Asia Central and TED POLLETT ope Central and Eastern Europe financial institutions, including one of Georgia's Eur Supporting the Region's first leasing companies (see box). In Belarus, IFC made a loan to Belgazprombank; coordinated Expanding Opportunities technical assistance funded by Sweden will strengthen IFC's commitments in Central and Eastern the bank's operations. In Ukraine, IFC provided Europe exceeded $1.1 billion, with an additional $35 million to Aval Bank, one of the country's $245 million in syndications, a record high, largest locally owned banks. In Russia, IFC supported reflecting the region's continued growth and Sibakadembank's further growth in Siberia. We also increasing investment opportunities. The majority provided a subordinated loan and a ruble-linked of this funding went to Russia, where IFC invested loan to a repeat client, Center-Invest in the Rostov more than $832 million in 21 projects, with an oblast, allowing long-term ruble financing to the emphasis on the financial sector and infrastructure. bank's small business clients. IFC lent to Moscow The sharpest increase was in Ukraine, where strong Credit Bank and continued to support Russian growth and an impetus for reform enabled IFC to Standard Bank, with a $20 million ruble-linked quadruple its investment volume, to $255 million. loan. In addition, IFC targeted smaller borrowers Technical assistance continued to play an important through ruble-linked credits to the Russian Women's role in former Soviet countries, helping develop Microfinance Network. IFC leveraged its long financial institutions, improve the business experience in corporate governance advisory environment for smaller enterprises, strengthen services, launching projects with Russian and corporate governance, and target strategic industries Ukrainian banks. by strengthening supply chains and access to markets. IFC complemented its work with local banks Inadequate infrastructure remains a constraint to by supporting two global clients that are active in the region's business growth, but the private sector building banking and leasing services throughout is helping address the problem. This year, IFC's Eastern Europe. Raffeisen International will expand projects to support Russia's transport infrastructure its subsidiaries in Belarus, Russia, and Serbia and included two investments to build cargo ships, with Montenegro, while Societe Generale will direct our Volga Shipping and Northwest Shipping Company, funding to subsidiaries in Russia and Ukraine. and investments to increase the capacity of two rail Housing finance is another priority for IFC. Our shipping companies, Eurosibtrans and Russkiy Mir. efforts in Russia include mortgage credit lines, a In Ukraine, IFC supported two private electricity Dutch- and Swiss-funded advisory program to help distribution companies (see box). develop a primary mortgage market, and ongoing Access to finance remains a challenge, particularly work with the Russian government on securitization for smaller companies. IFC continued to provide transactions (see box). In Latvia, IFC structured and financing and know-how to strengthen local brought to market the first cross-border sale of notes 47 Building the Russian Dream With 144 million people, Russia is potentially Europe's largest market for mortgage finance. Developing this market could raise living standards while helping Russians realize their dreams of owning a home. Over several years IFC has become the country's largest financier of housing finance, with investments topping $245 million. We have provided credit lines to leading housing finance institutions--including Credit Bank of Moscow in FY05--that are bringing modern practices to bear on a nascent market. This year IFC also launched a technical assistance project to help develop further Russia's market for primary mortgages. It will work closely with up to five Russian banks, helping them implement international best practices in mortgage COURTESY OF KUAZ origination, underwriting, and servicing, then following Russia: Better Governance up with credit lines. IFC will also train other banks and Attracts Investment providers of mortgage-related services as well as advise Kuibyshevazot Joint Stock Company produces chemicals for government agencies. artificial fibers and engineering plastics. Based in the Samara To make affordable financing for mortgage lending more region, 600 miles southeast of Moscow, it is also one of Russia's available to financial institutions, IFC is promoting securitization leading producers of nitric fertilizers. It has a good reputation in through a partnership with market participants and the Russian the market and in the community where it operates. parliament. IFC spearheaded a technical working group that In 2002, when the company's management enrolled in a has identified key legal obstacles to securitization transactions corporate governance program run by IFC's Private Enterprise and developed recommendations for overcoming them. Russia's Partnership with funding from the Netherlands and Switzerland, Federal Service for Financial Markets, a government agency, is they realized that to attract international long-term financing now drafting legislation based on these recommendations, with at competitive rates, the company needed to align its corporate additional input from the working group. governance with global best practice. Drawing on IFC's advice, Kuibyshevazot's management and shareholders developed a plan to upgrade corporate governance practices throughout the company. These efforts have made the company a regional leader in corporate governance while forming the foundation for a deeper relationship with IFC. As part of helping the company prepare for international financing, we assisted with an environmental audit, which led to an integrated health, environment, and safety management system that the company is now putting in place. This year IFC provided a $15 million corporate loan to Kuibyshevazot to refinance a local currency bond and finance the company's capital expenditure program. Several international banks active in Russia have also expressed interest in working with the company. 48 Asia Central FABIANA FELD Ukraine: Recharging the and backed by mortgages, increasing the financing available Electricity Sector to final borrowers in the region. This transaction was ope Ukraine emerged as the fastest-growing economy precedent-setting in the region, with strong potential in Eastern Europe during 2004, but its aging Eur for replication in other countries. In Belarus, at the infrastructure poses a barrier to sustaining this request of the National Bank, IFC organized a growth. The challenges facing the electricity sector, seminar on mortgage finance, including discussion for example, include deteriorating power plants and of international experience and best practice. power lines, poor reliability, high losses during IFC provided equity support to local companies transmission, nonpayments, and a lack of through investments in three funds this year: Russia investment. IFC is helping turn this sector around. Partners, a venture capital fund; Quadriga Capital, a In 2001, Ukraine privatized several electricity private equity fund that invests in midsize companies distribution companies, and the government is in St. Petersburg and Nizhniy Novgorod; and Baring continuing to reform and privatize the sector. Vostok Private Equity Fund, which works with local This year IFC invested in two of these distribution Russian companies. In addition, the Corporation companies, Kyivoblenergo and Rivneenergo. Both lent ABOLmed $8 million to produce antibiotics in majority-owned by AES Corporation, the companies Novosobirsk. IFC joined with foreign investors to serve 1.4 million customers in the Kyiv and Rivne support the processing of one of Russia's major regions and cover a combined service area of nearly natural resources--wood products--through two 50,000 square kilometers. IFC's $45 million loan to investments in particleboard lines. Kyivoblenergo and Rivneenergo will help them reduce Agribusiness, an important sector for Ukraine's electricity losses, refurbish their network equipment, economy, remained a priority for investment and and increase network capacity in high-growth areas. advisory services there. IFC made a second investment The companies will also improve their overall of $80 million in the leading Ukrainian poultry management efficiency by investing in modern company, Mironovsky, to help expand operations and communication systems and information technology. lower costs. With the second investment, IFC will The investment will ensure a more reliable energy help Mironovsky improve its corporate governance, supply and better service to 3 million customers, and prepare for an initial public offering, and further it should help power Ukraine's further growth. strengthen its food safety program. Apart from this large investment, IFC targeted the vegetable, fruit, and dairy sectors in Ukraine with new advisory projects funded by Sweden and Austria. Through these projects, over the next three years IFC will provide advice and training to small and midsize farms to improve their efficiency and ability to meet a growing demand from food processors for high-quality products. 49 JOUNI EERIKAINEN Latin America and the Caribbean Project Financing and Portfolio Commitments (millions of U.S. dollars) (millions of U.S. dollars) 1,398 FY03 FY04 FY05 1,258 Financing committed for IFC's account 1,258 1,218 1,398 1,218 Loans 1,147 1,119 1,221 Equity 63 60 75 Guarantees and risk management 47 39 103 918 Loan syndications signed 918 374 385 TOTAL COMMITMENTS SIGNED 2,176 1,593 1,783 Committed portfolio for IFC's account 6,145 6,076 6,125 Loans 4,963 5,033 5,113 Equity 1,099 928 799 385 Guarantees and risk management 82 115 213 374 Committed portfolio held for others 3,447 2,504 2,179 (loan participations) TOTAL COMMITTED PORTFOLIO 9,592 8,580 8,305 Loans include loan-type, quasi-equity products. Equity includes equity-type, quasi-equity products. FY03 FY04 FY05 Financing for IFC's Syndications own account IFC's Largest Country Exposures Project Commitments and Countries Committed portfolio for IFC's own account as of June 30, 2005* FY03 FY04 FY05 (millions of U.S. dollars) Number of projects 53 45 54 Brazil 1,398 Number of countries 16 16 17 Mexico 1,104 Argentina 731 Colombia 387 Peru 320 *Excludes individual country shares of regional and global projects. 50 Some data from previous years have been revised. All dollar amounts reflect rounding. ANTIGUA AND BARBUDA, ARGENTINA, THE BAHAMAS, BARBADOS, BELIZE, BOLIVIA, BRAZIL, CHILE, COLOMBIA, COSTA RICA, DOMINICA, DOMINICAN REPUBLIC, ECUADOR, EL SALVADOR, GRENADA, GUATEMALA, GUYANA, HAITI, HONDURAS, JAMAICA, MEXICO, NICARAGUA, PANAMA, PARAGUAY, PERU, ST. KITTS AND NEVIS, ST. LUCIA, TRINIDAD AND TOBAGO, URUGUAY, REPÚBLICA BOLIVARIANA DE VENEZUELA An Economic Rebound amid Major Challenges Caribbean The economy of Latin America and the particularly lower-income housing; micro, small, the Caribbean is rebounding significantly from years and medium enterprises; and indigenous groups. of crisis. Growth was 6 percent during 2004-- We also helped corporates face many challenges and up sharply from 1.9 percent the previous year-- posed by globalization: the need to deepen local and it has remained strong into 2005, reflecting capital markets, improve corporate governance, an upswing in exports of commodities to China, become more competitive globally, and address a growing U.S. economy, and effective fiscal and environmental issues (see box). America debt management that has lowered country Technical assistance is a key component of risks. But the region continues to face major IFC's work in the region. We are using our LAC Latin challenges. It compares unfavorably with other Facility, IFC's advisory services on privatization, emerging markets in investment climate, domestic and teams specializing in the development of financial sectors, infrastructure, and social smaller businesses. These efforts, many of which tensions. These factors have hampered the are donor-funded, are resulting in streamlined development of a broad-based private sector, and business regulations (see box), improved access the benefits of growth have yet to reach poorer to markets, more socially responsible enterprises, segments of the population. Having responded and stronger competitiveness in small businesses. to the region's crisis with countercyclical In Brazil, Colombia, and Peru, IFC is collaborating interventions in the last few years--supporting with the World Bank to deliver on specific export-earning projects in Argentina, for example, findings of the Doing Business report, which and helping reactivate trade financing in Brazil-- pinpoints ways to improve the business IFC has now refocused its activities on providing environment. Technical assistance is also longer-term funding and selecting projects with supporting IFC's investments in strategic a broader impact on social and economic industries--oil, gas, mining, and agribusiness-- inclusion. Throughout, we have emphasized sectors where we often have unique expertise to competitiveness, support to high-growth offer our clients. The Corporation is advising on industries, and helping the region's firms several privatization mandates, notably in Brazil become global players. and Panama. During FY05, IFC committed $1.4 billion, Poor infrastructure remains a constraint to including $385 million in syndications, in the growth throughout the region. Underinvestment region, with an emphasis on sectors that have a in the sector impedes economic activity, and in high impact on poverty alleviation and economic many countries, basic utilities are not available competitiveness. IFC continued to find creative to poorer people. This year IFC financed three ways to maximize its impact, partnering with operations totaling $96 million in the energy clients, nongovernmental organizations, donors, sector, with an emphasis on environmentally host governments, and local communities, as friendly sources of energy and on reduction of well as increasing our collaboration across the harmful emissions. Recognizing that the region's World Bank Group. The Corporation was able exporters face bottlenecks and high costs, the to reach underserved segments of the economy, Corporation also invested in transport and 51 NEWMONT OF COURTESY logistics. Projects include ports in Brazil and Yanacocha project in Peru is a good example Panama, airports in the Dominican Republic, (see box). In this project and others, IFC is and a logistics company in Peru. Our investments addressing the specific issues and challenges in two regional airlines, Copa and Taca in of projects in the extractive industries as part Central America, will help promote regional of our comprehensive commitment to integration and competitiveness. We also sustainable development. This year we also lent $15 million for a telecommunications financed two oil and gas projects in Bolivia project in Paraguay. and Venezuela. IFC is also helping clients understand how IFC is introducing innovative financial sustainability fuels growth. Many companies are products into local capital markets, giving gaining business benefits from progress toward clients new sources of long-term financing sound environmental practice, better corporate while helping them avoid foreign exchange governance, and attention to social and risk. This approach is allowing us to make a economic development in the communities difference in the social sectors: this year, we where they operate. In key industries, IFC is partially guaranteed a seven-year bond in U.S. combining financial investments with assistance dollars and Peruvian soles to Universidad San in community engagement and in local capacity Martin de Porres, a leading private higher building for efficient use of fiscal revenues; the education institution in Peru. In addition, Latin American Corporates Go Global IFC works with first-tier companies in the region's larger countries when we can help them become more competitive in the global marketplace. We assist in long-term finance, advise on corporate governance and environmental performance, and encourage firms to invest in other emerging economies. Through all these efforts, IFC promotes greater development impact. Empresa Brasileira de Aeronáutica (Embraer), a Brazilian company listed on the New York Stock Exchange, is among the world's largest aircraft manufacturers and Brazil's second-largest exporter. But due to perceived country risk, Embraer--like other top-rated Brazilian borrowers-- has limited access to loans in the international market with tenors of five or more years. This is a constraint to growth in an industry whose product cycle is up to 10 years. IFC's $180 million loan package, which includes $145 million in long-term funding from participating banks, is financing the end-stage launch program for Embraer's new 170/190 series passenger airplanes. This will help the company consolidate its position as a global player and diversify its funding base. IFC is also helping Embraer reduce its emissions of volatile compounds and integrate international reporting standards into its internal financial monitoring. In addition to the benchmark loan tenor, our due diligence and ongoing business relationship with Embraer contribute to the company's establishing itself in the global debt markets. This year IFC also provided a $50 million loan to Carvajal, one of the leading privately owned Colombian multinationals. Carvajal, a socially responsible company, operates in 17 countries across Latin America; its business lines include paper manufacturing, school and office supplies, plastic packaging, and publishing. IFC's loan supports Carvajal's further expansion in the region, EMBRAER helping it improve efficiency and upgrade its environmental standards. OF COURTESY MATTHIAS HEDINGER An Ongoing Commitment to Microfinance IFC's portfolio of microfinance investments in Latin America and the Caribbean covers countries as varied as Bolivia, El Salvador, Haiti, Caribbean Mexico, Nicaragua, and Peru. These include key investments in specialized, privately managed funds that operate on a regional level. Our efforts emphasize activities and transactions that effectively connect microfinance institutions with financial and capital markets, and we the are developing and working with private sector investors and funds that have a focus on microfinance. We are also responding to the demand among microfinance institutions for innovative investment structures, including bond issues and securitizations, that allow them and to reach new groups of investors such as local pension funds. This year, IFC invested $430 million in three microfinance operations in Brazil, Chile, and Mexico. By developing creative structures and instruments and partnering with bilateral institutions, multilaterals, and NGOs, we are reaching out to entrepreneurs in segments traditionally excluded from the formal economy, including women, indigenous groups, and people in rural areas. America An investment in Mexico's Financiera Compartamos is a key example. With IFC's help, Compartamos has closed a bond transaction that greatly improves its access to financing from institutional investors. Some 300,000 Mexican small businesses, the vast majority of them Latin run by women, rely on microloans from Compartamos, which is registered in Mexico as a sofol, a nondeposit­taking financial institution. The company's ability to tap the markets is critical for its expansion. In July 2004, Compartamos issued five-year, Mexican peso bonds equivalent to $15 million. The issue was partially guaranteed by IFC for 34 percent of the outstanding principal amount. Our guarantee helped the bond issue achieve high ratings from both Standard & Poor's and Fitch. The transaction was named the Best Structured Bond of the year by LatinFinance. The Caribbean: Benefiting Business and the Environment IFC is helping ensure that projects with broad environmental benefits are commercially viable in emerging markets. In line with our pledge to increase lending for renewable energy, IFC has provided $23 million to Consorcio Energetico Punta Cana-Macao SA, a small, off-grid private utility company serving the Bavaro and Punta Cana districts in the Dominican Republic. The project will include construction, operation, and maintenance of an 8.25-megawatt wind power plant to be located at Cabo Engano. By using a clean, sustainable resource rather than burning fossil fuels to produce electricity, the plant will avoid 17,000 tons of carbon emissions per year over the 20-year life of the project. The project is expected to demonstrate the viability of wind power in many emerging markets. IFC is also assisting Trinidad Cement Limited, the only integrated cement producer in the English-speaking Caribbean, as it expands and modernizes its Jamaican subsidiary. In addition to lending $35 million, we helped the company arrange local financing, including a bond issue in Trinidad and Tobago dollars and a syndicated loan. The funding will enable the company to raise its environmental performance, with improvements in the production process reducing carbon emissions by more than 100,000 tons per year. This reduction should make the company eligible for carbon credits under the IFC-Netherlands Carbon Facility. TCL OF 53 COURTESY COURTESY OF NEWMONT (3) IFC uses local swap markets to structure direct bond that raised $50 million equivalent in local currency loans and hedges to clients; Trinidad and Tobago (see box). A credit line we work closely with market counterparts in to Brazil's Banco Real allows it to target Latin America to extend the maturity and some of its lending specifically to companies liquidity of these swap products. that are improving their environmental During FY05, IFC committed $622 million sustainability (see box). for 21 financial sector projects in areas IFC committed $217 million for five including finance for micro, small, and projects that support housing finance to medium enterprises (see box); housing finance lower-income families, as well as the (see box, p. 13); financial restructurings; and deepening of local capital markets. In regional banking. Our efforts to develop addition, we are using technical assistance local capital markets and expand financing to improve access to housing finance: options for local corporations included an through a program funded by Canada and IFC guarantee to Corporacion Drokasa S.A. Italy, we are working to integrate primary in Peru; our participation helped ensure mortgage markets in Central America a triple-A credit rating for the bond. In and supporting Peru's Fondo Mivivienda another innovative transaction, financing we in developing a domestic market for arranged for a cement company includes a secondary mortgages. Peru: Broader Benefits from Mining IFC is helping companies in the mining sector upgrade their social and environmental performance so that more local people benefit. In addition to financing, we are providing training and technical assistance that build stronger ties between these companies and surrounding communities, as well as to the smaller businesses that can serve as suppliers of goods and services. The goal is to promote sustainable economic development around the mining projects in which we invest. In Peru, for example, IFC and the World Bank are strengthening local municipalities' capacity to manage funds that the Yanacocha mine generates, as well as helping disseminate information on the mine in order to increase transparency and accountability. Working through local NGOs and service providers, we have helped local small and medium enterprises improve their business skills and their access to finance--in some cases expanding their role as suppliers to the mine. With IFC's encouragement, the Yanacocha mine has set up a foundation that is undertaking broader community development programs in health care, education, agriculture, forestry, and microfinance. Yanacocha also supports directly an extensive rural development program for communities near the mine. 54 Brazil: A Long-term Partnership Promotes Sustainability IFC has committed a $115 million credit line to Brazil's ABN AMRO Banco Real that supports long-term on- lending targeted to sustainability. The funding will finance firms for environment-related projects as well as small and medium enterprises whose work addresses climate change, loss of biodiversity, land degradation, and persistent organic pollutants. A long-time IFC client, ABN AMRO was one of the original adopters of the Equator Principles--voluntary standards based on IFC's environmental and social guidelines. And now its Brazilian operation, Banco Real, is the world's first financial institution to target a large IFC credit line specifically to advancing Caribbean environmental sustainability. The investment lets Banco Real focus on middle-market, family-owned companies the in Brazil. Funding from IFC's credit line is expected to encourage a wide range of reforms that promote and sustainability in these companies. VIEIRA MARICY America Latin Reducing the Hurdles to Registering a Business Local governments are a first point of interaction for many businesses, and they tend to impose a high administrative burden. Hence IFC's LAC Facility is working to simplify regulatory procedures, especially business registration at the municipal level. Starting with a pilot in Bolivia's capital, La Paz, the facility's business simplification work has grown within two years into a regional program, allowing a common methodology and sharing of expertise across countries while still tailoring assistance to the specific needs of the client. The facility has helped simplify administrative procedures in Bolivia, Honduras, and Nicaragua and is expanding this effort to Brazil and Peru. By making it simpler to register a business, these reforms encourage more businesses to comply. While increasing revenues for municipalities, the simpler procedures also bring more micro, small, and medium enterprises into the formal economy, making it easier for these entrepreneurial businesses to access finance. 55 COURTESY OF MERLON EGYPT Middle East and North Africa Project Financing and Portfolio Commitments (millions of U.S. dollars) (millions of U.S. dollars) FY03 FY04* FY05** 315 Financing committed for IFC's account 287 236 315 287 Loans 164 186 257 Equity 0 13 20 Guarantees and risk management 123 37 38 236 Loan syndications signed 0 0 0 TOTAL COMMITMENTS SIGNED 287 236 315 Committed portfolio for IFC's account 1,337 1,144 1,210 Loans 803 840 926 Equity 253 191 161 Guarantees and risk management 281 113 123 Committed portfolio held for others 837 739 664 (loan participations) TOTAL COMMITTED PORTFOLIO 2,174 1,882 1,874 0 0 0 Loans include loan-type, quasi-equity products. Equity includes equity-type, quasi-equity products. FY03 FY04 FY05 *Includes regional share of LNM Holdings, which is officially classified as a global project. Financing for IFC's **Includes regional shares of BAPTFF and Melrose Facility, which are officially Syndications own account classified as global projects. IFC's Largest Country Exposures Project Commitments and Countries Committed portfolio for IFC's own account as of June 30, 2005* FY03 FY04 FY05 (millions of U.S. dollars) Number of projects 17 18* 21** Pakistan 315 Number of countries 6 7 8 Egypt 297 *Includes LNM Holdings. Oman 105 **Includes Melrose Facility. Morocco 80 Algeria 72 *Excludes individual country shares of regional and global projects. 56 Some data from previous years have been revised. All dollar amounts reflect rounding. AFGHANISTAN, ALGERIA, BAHRAIN, ARAB REPUBLIC OF EGYPT, ISLAMIC REPUBLIC OF IRAN, IRAQ, JORDAN, KUWAIT, LEBANON, LIBYA, MOROCCO, OMAN, PAKISTAN, SAUDI ARABIA, SYRIAN ARAB REPUBLIC, TUNISIA, UNITED ARAB EMIRATES, WEST BANK AND GAZA, REPUBLIC OF YEMEN Building Capacity Africa in the Private Sector North Fiscal 2005 saw major changes in the way IFC public-private partnerships, and the privatization and operates in the Middle East and North Africa. or restructuring of state-owned enterprises With the launch of the Private Enterprise (see box). Building on earlier initiatives to East Partnership for the Middle East and North support the region's smaller businesses, the Africa (PEP-MENA), the Corporation now partnership has initiated programs in many has the capacity to provide a wide range of countries, from frontier to more developed technical assistance throughout the region in markets, and is assessing possibilities for Middle addition to traditional financing. IFC's field others throughout the region. presence also broadened, with new offices in IFC invested $315 million for its own Jordan, the United Arab Emirates, and the account in 21 projects during FY05, across a Republic of Yemen. number of sectors. In the financial sector, we IFC's strategy aims to address the main provided support for housing finance, notably challenges of the region, including employment in Saudi Arabia (see box) and Oman; other creation and increased investment, in order to investments focused on small and medium accelerate growth and create more open economies. enterprises, insurance, and banking. IFC's IFC is focusing on highly developmental sectors, $45 million to Oman's Alliance Housing Bank, including housing and development of smaller the first institution of its kind in the Gulf states, enterprises, with about 40 percent of FY05 will be accompanied by capacity-building commitments in these sectors. IFC is using technical assistance from PEP-MENA. The technical assistance, separately or in combination Corporation committed its first investments in with long-term capital, to reach our goals and Iraq, with pioneering projects in the financial to introduce best practices in the region. sector; we also launched the first bond issue by Our investment program is broad-based and a supranational in Morocco (see box). includes the financial sector, manufacturing, In infrastructure, IFC's activities increased in oil and gas, education, agribusiness, and FY05, reflecting greater business development infrastructure. Our efforts in higher-risk efforts, particularly for advisory services. We countries, including Afghanistan and Iraq, expanded our investment in the port sector of emphasize the financial sector and other basics Pakistan and undertook advisory assignments of private sector development. Our Dubai in power distribution. Other advisory projects office is helping mobilize private resource included an airport terminal in Saudi Arabia flows from the capital-surplus countries of the (see box) and, in Morocco, the world's first Persian Gulf to the region's FDI-seeking public-private partnership for irrigation. Here a economies and beyond. Moroccan-led private consortium will join with Launched formally in October 2004 and the government to provide water for citrus largely donor-funded, PEP-MENA focuses farming; the project will establish a significantly on the financial sector, small and medium lower tariff than farmers now pay for use of enterprises, the business enabling environment, rapidly depleting groundwater. 57 Saudi Arabia: Upgrading a Key Airport Terminal IFC is advising Saudi Arabia's aviation authority on private sector participation to expand and rehabilitate the Hajj Terminal at the King Abdulaziz International Airport in Jeddah, which is used by Muslims visiting the holy city of Mecca during the hajj and umrah pilgrimages. The hajj season takes place over a six-week period, creating unusually heavy air traffic in a concentrated time frame. Given the number of pilgrims to be accommodated and the diverse requirements of the hajj, the facility was designed and built in 1981 to function much like a large village in the range of services it provides. With improvements in air transport, the number of pilgrims has grown significantly, reaching an estimated 2.5 million people in 2004. The terminal's facilities have become inadequate, and its capacity is constraining the growth of the pilgrimage itself. To alleviate this situation and accommodate future growth, the aviation authority has enlisted IFC's help to bring in the private sector under a "build then own" scheme. The project represents the first large-scale private sector involvement in an air terminal in the Middle East. The Saudi government intends to use the Hajj Terminal as a model for private sector participation that can be replicated at other airport terminals in the country. The engagement in Iraq's banking sector will help it contribute to the reconstruction demonstrates how the technical assistance effort in the country. IFC also invested in the provided by PEP-MENA complements IFC's first subproject of the Iraq Small Business investment program. Here PEP-MENA joined Finance Facility, a donor-funded program that with the Arab Academy for Banking and allows us to provide financing and technical Financial Services to conduct in-depth training assistance to local Iraqi banks (see box). for Iraqi bankers. This five-month initiative was IFC investments in Iran's financial sector this geared to operating-level staff and focused on year include two credit lines to private Iranian retail banking, risk management, credit banks, Karafarin Bank and Saman Bank, for appraisal, and other key topics. It was followed on-lending to private companies. Through this by a strategy seminar for senior managers project and a related technical assistance of Iraqi banks. During the year, IFC also program--the first of its kind in Iran in committed its first investment in Iraq's banking 25 years--market-based practices in banking and sector, an equity investment in Credit Bank risk management will be introduced to these of Iraq, together with the National Bank of nascent private sector banks. Like much of Iran's Kuwait. Credit Bank was one of the participants economy, banking has been heavily dominated by in the PEP-MENA training, and the funding the public sector. Hence IFC's credit lines have a FARHADI TOREK Morocco: An Innovative Bond Issue in Local Currency IFC broke new ground in the region this year with innovative financial transactions. The Corporation became the first supranational to launch a bond issue in the African continent or the Middle East. The bond, denominated in Moroccan dirhams and launched in Morocco's domestic capital market, will help develop that market and will provide a benchmark for future bond issuers. The issue was for seven-year bonds totaling 1 billion dirhams (equivalent to about $117 million). The bonds were targeted to domestic institutional investors, and the transaction was listed on the Casablanca Stock Exchange. More than 20 investors, including insurance companies, mutual funds, and pension funds, purchased the paper. The success of the issue shows how far Morocco has come in instituting structural reforms in its local financial markets. IFC worked closely with Moroccan authorities for two years to bring this transaction to fruition. The results demonstrate the effective partnerships IFC can establish with governments to support capital market development. 58 Africa North and PEP-MENA East PEP-MENA: Greater Impact through Technical Assistance IFC's Private Enterprise Partnership for the Middle East Middle and North Africa is a new technical assistance facility that supports private sector development in all countries of the region. Its broad program activities include assistance to the financial sector, development of small and medium enterprises, advice on privatization and the business enabling environment, and support for public- private partnerships. PEP-MENA is increasing access to finance for smaller companies through its advisory program for commercial banks, with assignments underway in Algeria, Egypt, Morocco, Saudi Arabia, and Tunisia. PEP-MENA is helping Afghanistan's first leasing company standardize its underwriting procedures and internal controls and is working with the Central Bank of Yemen to review the country's leasing law. The facility is conducting a survey of corporate governance practices at Lebanese banks and has begun advising these institutions. It is collaborating with FIAS on a study to reduce administrative barriers to business in Egypt, as part of a World Bank Group investment climate assessment; this work will inform further technical assistance and provide a model for efforts in other countries. In Jordan, Oman, Saudi Arabia, the West Bank and Gaza, and Yemen, the facility is also rolling out Business Edge, IFC's management development program for small and medium enterprises. The program supports local organizations that provide management training HAMDY REEM to meet the needs of smaller businesses. 59 MARTIN KEITH significant demonstration effect, encouraging other international financial institutions to invest in the country's private banks. Saudi Arabia: IFC Helps Fund Also in Iran, IFC invested in Karafarin Leasing Islamic Home Financing Company. We consider leasing a priority for many IFC is providing its first-ever funding for a Murabaha countries in the region, since it is well suited to the facility, an Islamic finance product, through a transaction financing of smaller businesses, compatible with Islamic with Saudi British Bank. Our investment of 187.5 million finance, and a sector in which IFC has extensive Saudi riyals (equivalent to $50 million) will support the knowledge and global experience. This year a Pakistani growth of the bank's Islamic home financing portfolio. leasing company, ORIX Leasing Pakistan, joined IFC The project is a key element of IFC's effort to encourage and other partners in an interregional investment in development of a viable housing finance market in Kazakhstan (see box, p. 19). We also cosponsored a Saudi Arabia; we aim to catalyze the country's primary conference on leasing with Yemen's central bank. mortgage market and to provide technical and advisory Supporting our goal to foster private sector services to local authorities as needed. IFC seeks to investment in health and education, IFC invested in replicate this innovative approach across the region, the International School of Choueifat for a school increasing access to housing finance for low- and middle- being built in Adma, Lebanon. The new school will income individuals. This is also IFC's first use of the World be the flagship for Intered, a Lebanese education Bank's national currency paid-in capital to fund a project. company that owns the Choueifat schools across the region and in the West. Iraq: Lending Targets Smaller Businesses This year IFC and our partners committed $12 million to the Iraq National Bank under the Iraq Small Business Finance Facility, which supports development of micro and small businesses in the country through local financial intermediaries. IFC is contributing up to $50 million to the facility for on-lending to smaller businesses, along with $40 million in donor funding from Japan, Spain, the United Kingdom, and the United States. Technical assistance will develop the capacity of local Iraqi banks, so that they can operate on a modern, transparent, and financially sound basis and develop their lending to smaller enterprises. By providing these partner banks with long-term resources to on-lend, the facility will help put entrepreneurial businesses back on their feet and create jobs in the private sector. The Iraq National Bank has entered into a joint venture with the Export and Finance Bank of Jordan, which has assumed management responsibility. The project is expected to have a very strong developmental impact, improving the lives of ordinary Iraqis by helping them acquire new capital assets for the businesses they run. ISBFF 60 Review Portfolio Operations on t Repor 61 Investment Operations COURTESY OF NEWMONT Overview In FY 2005, more than 55 percent of IFC's new investments were in the financial sector, infrastructure, information technology, and health and education. The share of investments for IFC's account in either high-risk or low-income countries was nearly 28 percent. Investment Commitments IFC signed investment commitments of $6.45 billion in FY05, including $5.37 billion for its own account and $1.08 billion in syndications, compared with $5.63 billion in IFC commitments for FY04, which included $4.75 billion for its own account and $879 million in syndications. IFC provides a range of products and services for clients, including loans, equity, quasi-equity, structured finance, and risk management products that are funded through IFC's own financial resources. It also syndicates participations in its loans to IFC's Largest international financial institutions. Of the investment commitments IFC signed for its own account, $4.54 billion were for loan agreements (including loan-type quasi-equity), Country Exposures $612 million were for equity investments (including equity-type quasi-equity), $216 million Committed portfolio for IFC's own account were for guarantees, and $4 million were for risk management products. Based on the total as of June 30, 2005* project costs of our FY05 projects, each $1 in IFC commitments for our own account (millions of U.S. dollars) resulted in an additional $3.38 in funding from other sources. Russian Federation. . . . . . . . . . 1,432 We committed a total of 236 projects in 67 countries, compared to 217 projects in Brazil . . . . . . . . . . . . . . . . . . . . 1,398 65 countries in FY04. Our investment portfolio at June 30, 2005, included $19.3 billion India . . . . . . . . . . . . . . . . . . . . 1,268 for IFC's own account and $5.3 billion in syndicated loans held for others. We added Mexico. . . . . . . . . . . . . . . . . . . 1,104 174 companies to our portfolio this year, and 176 companies left the portfolio. Investment China. . . . . . . . . . . . . . . . . . . . 999 projects are detailed in the regional sections and listed in our project tables in Volume 2. Turkey . . . . . . . . . . . . . . . . . . . 981 Argentina . . . . . . . . . . . . . . . . 731 Indonesia. . . . . . . . . . . . . . . . . 494 Syndication and Resource Mobilization Philippines . . . . . . . . . . . . . . . . 480 IFC's syndications play a key role in mobilizing private sector finance in emerging markets, Nigeria. . . . . . . . . . . . . . . . . . . 419 where tenors are generally limited to shorter maturities and market access is open primarily *Excludes individual country shares of regional and to top-tier companies in middle-income countries. Our B-loan program helps clients global projects. secure more favorable financing, often through landmark transactions. Signings of new B-loans totaled $1.08 billion in FY05, compared with $879 million in FY04. In addition, IFC mobilized $65 million for the market by selling existing A-loans through the B-loan program. As of June 30, 2005, IFC's syndicated loan portfolio was $5.3 billion in 204 projects. In Brazil, Embraer raised $145 million with tenors of up to 10 years, the longest maturity for a private corporate loan achieved in the country for many years. In Bolivia, 62 IFC Operations (millions of U.S. dollars) FY01 FY02 FY03 FY04 FY05 OPERATIONS Investment commitments Number of projects1 201 203 204 217 236 Number of countries 73 76 64 64 67 Total commitments signed2 3,934 3,494 5,037 5,632 6,449 For IFC's own account2 2,734 2,957 3,856 4,753 5,373 Held for others 1,201 518 1,181 879 1,076 Investment disbursements Total financing disbursed 2,370 2,072 4,468 4,115 4,011 For IFC's own account 1,535 1,498 2,959 3,152 3,456 Held for others 835 574 1,509 964 555 Committed portfolio3 Number of firms 1,378 1,402 1,378 1,333 1,314 Total committed portfolio2 21,841 21,569 23,379 23,460 24,557 For IFC's own account2 14,311 15,049 16,777 17,913 19,274 Held for others 7,530 6,519 6,602 5,546 5,283 1. Includes first commitment to projects in the fiscal year. Projects involving financing to more than one company are counted as one commitment. Operations 2. Includes loan guarantees and risk management products. 3. Total committed portfolio and held for others include securitized loans. Some data from prior years have been revised. All dollar amounts reflect rounding. Balance Sheet Highlights Investment (millions of U.S. dollars) FY01 FY02 FY03 FY04 FY05 ASSETS Liquid assets, excluding derivatives 14,581 16,924 17,004 18,397 22,781 Net loan and equity investments 8,696 7,963 9,377 10,279 11,489 Derivative assets 1,143 1,077 1,734 1,092 1,516 Receivables and other assets 1,750 1,775 3,428 2,593 3,774 Total assets 26,170 27,739 31,543 32,361 39,560 LIABILITIES Borrowings outstanding 15,457 16,581 17,315 16,254 15,359 Derivative liabilities 1,768 1,576 1,264 1,549 2,332 Payables and other liabilities 2,850 3,278 6,175 6,776 12,071 Total liabilities 20,075 21,435 24,754 24,579 29,762 CAPITAL Capital stock 2,360 2,360 2,360 2,361 2,364 Retained earnings 3,723 3,938 4,425 5,418 7,433 Other 12 6 4 3 1 Total capital 6,095 6,304 6,789 7,782 9,798 Income Statement Highlights (millions of U.S. dollars) FY01 FY02 FY03 FY04 FY05 Interest and financial fees from loans 732* 547* 477 518 660 Interest from time deposits and securities 773* 493* 318 278 533 Charges on borrowings ­ 961 ­ 438 ­226 ­141 ­ 309 Net interest income 544 602 569 655 884 Net gains and losses on trading activities 87 31 157 ­104 ­175 Net income from equity investments 26 160 145 658 1,365 Release of/provision for losses on loans and guarantees ­206 ­389 ­ 48 103 261 Net noninterest expense ­210 ­243 ­295 ­ 330 ­ 344 Income before expenditures for TAAS 241 161 528 982 1,991 Expenditures for TAAS -- -- -- -- ­ 38 Operating income 241 161 528 982 1,953 Net gains/losses on financial instruments 11 54 ­ 41 11 62 Cumulative effect of change in accounting principle 93 -- -- -- -- Net income 345 215 487 993 2,015 *Reclassified to conform to FY05 presentation. 63 BANK COMMERCIAL ASIAN OF Transierra was able to raise $100 million from the market at a time of political uncertainty; this was the first time we combined our B-loan COURTESY product with expropriation insurance from a private sector provider. IFC Local Currency Financing syndicated a $65 million, six-year loan to Trakya Glass Bulgaria, part of IFC uses local currency financing to help clients the largest foreign direct investment in Bulgaria since 1989. In Russia, mitigate foreign exchange risk and to develop local IFC completed its first acquisition financing syndication, enabling capital markets. Using market-based instruments, Orient-Express Hotels Ltd. to acquire a property in St. Petersburg. IFC provides local currency debt financing in several forms: loans in local currency, risk management Client Risk Management Products swaps that allow clients to hedge foreign currency liabilities back into local currency, and credit IFC provides currency, interest rate, and commodity price hedging enhancement structures that enable clients to products to clients in emerging markets, who usually cannot access them borrow in local currency from other sources. because of credit or country risk. Through its Client Risk Management To date, IFC has disbursed over $1 billion program, IFC combines its experience in risk management with its equivalent in local currency transactions through traditional role in credit intermediation. Because we can accept our 39 loans and hedges in 10 currencies. In FY05, IFC clients' long-term credit risk, IFC can intermediate between them and committed its first local currency loans in Indonesian derivatives markets. Clients who hedge using risk management products rupiah, Philippine pesos, and Turkish lira. This form protect their financial positions. The transactions also improve the of financing requires long-term derivatives markets, quality of IFC's investment portfolio. and IFC works closely with market counterparts and In the 14 years since the program was established, IFC has committed government regulators to extend the availability and 82 risk management projects in 32 countries. The transactions have liquidity of these markets. hedged a notional amount of over $2.7 billion (the potential exposure IFC is at the forefront of domestic capital market or future risk of these transactions is a fraction of the notional amount). development. Through its participation in the In FY05, the Corporation committed risk management transactions structuring and credit enhancement of transactions, to provide interest rate hedging for Laredo, a raw sugar producer in IFC has helped introduce new asset classes. Peru; for Merlon, an oil and gas producer in Egypt; and for Magadi Transactions have not only enabled IFC's clients to Soda in Kenya. secure attractive long-term local currency financing; Risk management products are offered to IFC customers solely for they have also been catalysts for expansion of hedging purposes and not for speculation. IFC hedges its own market numerous domestic markets. IFC has completed risk on these transactions and monitors exposure on an ongoing basis. 28 domestic market structured transactions for an exposure of $406 million equivalent and has assisted Structured Finance Products in mobilizing over $2 billion equivalent. During FY05, IFC continued to develop and execute structured finance solutions for clients, including partial credit guarantees and securitizations. These tools are part of IFC's broader strategy to build domestic capital RICHARD LORD markets; to provide clients with new forms of cost-effective financing, with an emphasis on long-term local currency funding; and to increase investment capacity in strategic asset classes, including loans to small businesses, mortgages, and trade finance. This year IFC invested $218 million and mobilized a further $1.1 billion through 13 structured finance transactions. Innovations widely recognized in the financial industry include the first securitization of nonperforming loans in Latin America; the first cross-border securitization of residential mortgages in Central and Eastern Europe, in Latvia; the first structured bond from a microfinance institution, which was also IFC's first direct partial credit guarantee in Mexico (see box, p. 53); the first structured risk-sharing facility in the education sector, in Ghana (see box, p. 17); and the first domestic partial credit guarantee in the agribusiness sector, in Peru. 65 Technical Assistance and Advisory Operations Operations BEN O'BRIEN Overview In addition to making investments, IFC provides technical Advisory assistance and advisory services that strengthen companies, financial institutions, and the government entities involved and in the private sector. In FY05 nearly one-third of IFC's staff were engaged in these efforts, in Washington and in the field. Much of this work is conducted through 24 facilities or programs managed by IFC but funded by partnerships with donor governments Assistance Many of IFC's technical assistance and other multilateral institutions. Facilities focus on either a and advisory services are detailed in region or a strategic aspect of development; they play a key the regional sections of this report. role in carrying out IFC's emphasis on the business-enabling environment, smaller enterprises, corporate governance, and A comprehensive listing of projects environmental and social development. During FY05, echnicalT appears in Volume 2. donor-funded operations accounted for about $108 million in expenditures. IFC provided more than $57 million in funding. Cumulative contributions to all donor-funded operations managed by IFC reached $1.11 billion through FY05. (See next page for a list of regional facilities.) The Corporation is improving and strengthening the systems that support technical assistance and advisory projects. This effort is making it easier to share knowledge, measure performance, and evaluate results. Trust Funds and IFC Funding In addition to donor-funded facilities, IFC has set up trust funds with individual donor countries and agencies. These funds can be used to hire consultants with financial, legal, technical, or environmental expertise to work on specific projects; certain funds are tied to hiring citizens of the donor country. Through FY05, the donor community provided cumulative contributions of $203 million to support the Technical Assistance Trust Funds program; this includes $17.8 million from IFC's own resources to date. Donors 65 have approved more than 1,480 technical assistance projects through the program since its inception in 1988. Examples of projects funded this year include a feasibility study for a global home township program in El Salvador, development of consumer and small business banking in Mauritania, and assistance to two new commercial banks in Iran to strengthen their operational procedures, credit analysis, and risk management. A project in the Democratic Republic of Congo benefited the general business environment, improving smaller businesses' access to finance and information and consultancy services. Other projects the program funded are highlighted in the regional sections of this report. This year, IFC also created the Funding Mechanism for Technical Assistance and Advisory Services, which designates a portion of the Corporation's retained earnings as a contribution to support donor-funded operations and other technical assistance and advisory projects. This improves the efficiency and strategic responsiveness of our technical assistance, especially for new initiatives. It also helps make IFC's spending on investments and donor-funded operations more separate and transparent, but it does not eliminate the need for donor funding of these activities. Using funds designated from FY04's earnings, funding was approved for 46 activities and projects to spend $225 million over a six-year period; spending in FY05 was $63 million. CHUZHAKOVA ELENA IFC's Donor-Funded Facilities in Developing Regions In addition to the regional facilities below, IFC operates facilities with a global focus on specific aspects of development, including--among others--foreign investment, privatization, and environmental and social development. A more comprehensive list of donor-funded operations precedes the table of Technical Assistance and Advisory Projects in Volume 2. China Project Development Facility Private Enterprise Partnership for Africa Sichuan province, China Sub-Saharan Africa Latin America and the Caribbean Technical Private Enterprise Partnership for the Assistance Facility Middle East and North Africa Bolivia, Honduras, Nicaragua, Peru Middle East and North Africa; includes Afghanistan and Pakistan Mekong Private Sector Development Facility Cambodia, Lao PDR, Vietnam Private Enterprise Partnership for Southeast Europe Albania, Bosnia and Herzegovina, Bulgaria, Croatia, FYR Pacific Enterprise Development Facility Macedonia, Moldova, Romania, Serbia and Montenegro Pacific islands Program for Eastern Indonesia SME Assistance Private Enterprise Partnership Eastern islands of Indonesia Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyz Republic, Mongolia, Russian Federation, SouthAsia Enterprise Development Facility Tajikistan, Ukraine, Uzbekistan Bangladesh, Bhutan, northeast India, Nepal 66 ELENA CHUZHAKOVA A Snapshot of IFC's Technical Assistance and Advisory Services Assistance to firms. Includes support to MAJOR AREAS OF TAAS WORK strengthen micro, small, and medium (percentage of approved funds for active projects, FY05) enterprises and to help establish supplier Operations Business enabling environment 22% or distributor links between these Assistance to firms 23% businesses and larger companies. Advisory Business enabling environment. Includes removing barriers to investment, Public-private partnerships 19% and improving government policies for SME Financial markets development 27% sector, strengthening business service providers, studying specific sectors, Environment and social development 10% advising on corporate governance, and conducting gender initiatives. Assistance GEOGRAPHIC DISTRIBUTION OF OPERATIONS (percentage of approved funds for active projects, FY05) Environment and social development. Includes benefits related to biodiversity, Global 10% energy efficiency, HIV/AIDS, renewable Middle East and North Africa 5% echnicalT energy resources, workforce health and Europe and Central Asia 30% safety, community development, and Sub-Saharan Africa 14% indigenous people. Latin America and the Caribbean 3% Financial markets development. Includes South Asia 8% promotion of leasing, factoring, housing finance, insurance, banking, microfinance, East Asia and the Pacific 30% and trade finance. Public-private partnerships. Includes GROUPS THAT BENEFIT (percentage of approved funds for active projects, FY05) providing advisory assistance (primarily to governments) on privatization and Financial intermediaries 16% restructuring of state-owned enterprises, and on private sector participation in infrastructure to expand access to public SMEs 39% Other intermediaries 12% services (such as transportation, health services, and power). Governments 23% Large companies 11% Approved funding for TAAS projects active in FY05 totaled $276 million. The data in these graphs were collected using new procedures implemented across IFC during FY05; they have not been audited. 67 Operations Evaluation Group OEG independently evaluates IFC's investment projects and The Risk Profile of Recent Commitments Improved programs, as well as the Corporation's related strategies, policies, New IFC commitments generally feature lower risk intensity than and procedures. OEG reports to IFC's Board of Directors, which investments in the mature, evaluated sample that was approved in discusses its evaluations. Many evaluations are carried out jointly 1996­1998. This reduced risk resulted from external market with OEG's counterparts in the World Bank and MIGA. conditions that have driven better business toward IFC, as well as In FY05, the Board discussed evaluations of IFC's project from management's initiatives, introduced in 1998, aimed at development facilities and the investment climate for private enhancing work quality. sector development. OEG also completed evaluations of IFC's operations in Pakistan, Romania, transition economies, and the IFC Pursued Its Frontier Strategy leasing sector. OEG is working to harmonize evaluative standards IFC first articulated its frontier country strategy in 1998, recognizing and reporting so that stakeholders can compare the performance the need to stimulate capital flows in higher-risk countries and in of various multilateral development banks according to pioneering or underserved sectors. Since then, IFC has successfully appropriate and transparent standards. A working group of steered resources toward countries where its value added and poverty these institutions has established good practice standards, and reach are greatest. IFC's investments are more concentrated in poorer IFC's evaluation system is considered the most consistent with countries, as compared to these countries' share of overall gross these standards. domestic product and foreign direct investment (see figure below). Historically, the best development and investment results have been achieved in countries that have improved their business climates and Findings from OEG's Annual Review graduated into medium- or low-risk environments. As a result of this Each year, IFC's investment staff evaluate a representative random graduation, the frontier country group (high-risk or low-income sample of investments that have reached operating maturity. OEG countries) is now significantly smaller than it was in 1998, has less analyzes the results and presents its findings in its Annual Review. absorptive capacity, and receives a smaller share of private capital flows. This year's review examined whether IFC is achieving its mission: Further information on OEG can be found at: to what extent it is promoting sustainable private sector www.ifc.org/oeg. investment in developing countries, helping reduce poverty and improve people's lives (see figure on opposite page). Key findings include the following. IFC IS MORE CONCENTRATED IN POOR An Upward Trend in Some Project Indicators COUNTRIES THAN ARE GDP AND FDI The trend since 2000 suggests an improvement in project success 50% IFC approvals (2001­2003) rates for development outcome, investment outcome, and IFC work FDI (2000­2002) quality. The environmental, social, health, and safety performance of GDP (2003) evaluated real sector projects has not, however, improved in line with 40% other development impacts, thus constraining development outcome quality. OEG has recommended that IFC move forward with the VOLUMES) $ mainstreaming of environmental and social sustainability within (BY 30% investment departments, and management is making progress. AL TOT IFC Invested More, and Achieved Better Outcomes, EACH 20% OF in Its Strategic Sectors TION Since making them a priority in 1998, IFC has steered its resources toward the financial markets, infrastructure, information technology, PROPOR10% and social sectors, increasing their share of its total commitments to 55 percent in FY05. This growth was achieved primarily in the finance and insurance sectors. Overall, the evaluated projects in 0% Quartile 1 Quartile 2 China Quartile 3 Quartile 4 these strategic sectors have yielded higher-than-average success Poorer than China Richer than China rates on development and investment outcome. BASED ON GNI PER CAPITA (2003) 68 How IFC Operations Help Reduce Poverty and Improve People's Lives INPUTS OUTPUTS OUTCOMES IMPACTS Investment Demonstration Operations Effects Poverty Reduction Sustainable Sustainable Economic Private Private Sector Growth Investment Development Improved oup Living Standards Improved Gr Tech. Assistance Business Advisory Services Climate Evaluation A Project with a Highly Unsuccessful A Project with a Highly Successful Development Outcome Development Outcome Operations The project was a pilot agency credit line serving wood The project was the installation of a new digital cellular network processors and furniture manufacturers in a postconflict in an Asian country to provide 55 percent coverage by area and transition economy in Europe. These companies were increase access to telephony services among poor rural communities. previously part of a state-owned conglomerate that had It aimed to provide a viable and affordable infrastructure in a country collapsed, leaving the companies without financial, that had one of the lowest telephone density rates in the world and production, marketing, or sales support. a waiting time of more than 10 years for a fixed telephone line. Project Business Performance: Unsatisfactory. IFC Project Business Performance: Excellent. The project is a provided technical assistance to help the companies build huge commercial success. Market uptake was overwhelming, and management capacity in preparation for a planned the company responded by making technical adjustments to its privatization. This support proved insufficient to bridge their network, which doubled its capacity. After four years, the lack of expertise, and problems were compounded by difficult company has achieved a subscriber base of nearly half a million, trading conditions. All the companies financed through the more than twice the level anticipated. agency line consequently fell into financial distress. Economic Sustainability: Excellent. The project has Economic Sustainability: Unsatisfactory. The project yielded outstanding returns to the economy, including taxes and aimed to regenerate the country's wood sector, which had duties paid to government, revenue-sharing payments to the traditionally benefited from skilled craftsmen and a natural regulator, license fees, and lease payments to a railway company supply of high-quality wood. None of the companies have for using its fiber-optic backbone. It has a village phone program proven a sustainable source of employment, tax revenues, that serves more than 50 million people nationwide and has or added value. Their expected contribution to postwar become an effective model for increasing rural connectivity. reconstruction has been limited. Environmental Impacts: Satisfactory. The company Environmental Impacts: Unsatisfactory. The environmental is committed to sound environmental, social, health, and performance of the companies did not meet prescribed safety performance and is in compliance with World Bank standards. For example, one furniture manufacturer was Group guidelines. found to be polluting local air quality, soil, and surface and Private Sector Development: Excellent. The project underground waters. increased competition in the cellular market, resulting in lower Private Sector Development: Unsatisfactory. No tariffs, increased range, and improved quality for users. It also privatization occurred due to lack of interest from domestic provided essential infrastructure for more general private and foreign investors. Moreover, the agency line failed in its sector development. Its village phone program helped create objective to help build expertise within the agent banks to microenterprises in rural areas by way of wireless pay phones support future private enterprise in the country. owned and operated by local women. 69 Compliance Advisor/Ombudsman The Office of the Compliance Advisor/Ombudsman is the India, and Kazakhstan. To resolve complainants' issues and independent accountability mechanism of IFC and MIGA, avoid future problems, the CAO uses a variety of methods, established in 1999 and reporting directly to the president of including mediation, negotiation, and fact-finding with the World Bank Group. The CAO serves as an ombudsman project sponsors, IFC or MIGA management and staff, and who responds to complaints from people affected or likely to affected persons. There was also one compliance audit be affected by projects; as an auditor who assesses IFC's and completed during FY05. MIGA's compliance with environmental and social safeguards; The CAO makes its operational guidelines and all other and as an advisor, who provides independent advice to the public documents, including assessment reports on complaints organizations' senior management and president on policies received, available in print and online at www.cao-ombudsman.org. and systemic issues, including those that arise in the process Most Web content is in English, French, and Spanish; the of complaint investigations and compliance audits. guidelines are available in these languages as well as in Arabic, During FY05, the CAO's office received 10 new complaints Chinese, Portuguese, and Russian. The guidelines and Web site and continued its work on ongoing cases. Complaints were include a model letter to the CAO's office to assist people in received regarding projects in Botswana, Georgia, Guatemala, filing a complaint. KENJI YUHAKU Financial Review Operating income1 in fiscal year 2005 was $1.953 billion, with $34 million in FY04). IFC's borrowings continued to above the $982 million earned in FY04 and $528 million keep pace with its lending activities. New borrowings in the in FY03. Including a $62 million gain from derivatives and international markets totaled $2.0 billion equivalent in FY05. hedging activities, IFC's net income totaled $2.015 billion in FY05, compared to $993 million in FY04. Operating IFC'S FINANCIAL PERFORMANCE HIGHLIGHTS income in FY05 comprised income of $1.759 billion on (millions of U.S. dollars) the Corporation's client services operations (compared to FY05 FY04 $911 million in FY04) and income on treasury services Client services--operating income 1,759 911 Review of $194 million, after administrative expenses (above the Loan--operating income 323 304 $71 million treasury contribution in FY04). Overall, the Equity/quasi-equity--operating income 1,425 585 Corporation's operating return on average net worth rose Technical assistance (8) (7) from 13.7 percent in FY04 to 22.6 percent in FY05. Contributions to facilities (38) (29) Financial The strong growth in profit on client services operations Corporate charges and other 57 58 reflected significant realized gains on sales of investments, IFC treasury services--operating income 194 71 robust dividend income from the equity portfolio, stronger IFC treasury services--liquid assets 194 71 loan portfolio income, and the positive impact of a release of IFC operating income 1,953 982 loss reserves in FY05. The loan portfolio generated operating income of $323 million in FY05 (after charges for non- accruals, specific loss provisions, internal administrative Financial Performance of Major Product Lines expenses, borrowing costs, and loan hedging costs). This Disbursed and outstanding loans (excluding loan-type quasi- follows an operating profit of $304 million in FY04. equities), or straight loans, rose 3 percent to $8.3 billion in The equity and quasi-equity portfolios--the portfolios FY05. IFC's loan portfolio recorded operating income of funded from net worth--recorded operating income of $325 million in FY05, compared to $304 million in FY04. $1.4 billion in FY05, significantly above $585 million in Lower nonaccrual rates, higher recoveries of interest past FY04. Capital gains realized on equity sales totaled a record due, stronger financial fee income, and a release of specific $723 million in FY05, up from $381 million in FY04. loss reserves all contributed to the improved performance The liquid asset portfolios outperformed their investment of the straight loan portfolio. Operating income here was benchmarks in FY05 and earned a positive return for the equivalent to a return of 22.7 percent of capital employed year. Reflecting a rise in U.S. Treasury yields, income from in FY05, unchanged from FY04. liquid assets rose to $194 million including $175 million The equity and quasi-equity portfolio (including loan- of realized and unrealized trading losses (compared to type quasi-equities), IFC's net worth funded portfolio, $71 million and $104 million respectively in FY04). totaled $4.0 billion outstanding in FY05. This portfolio New investment commitments for IFC's account amounted recorded a record operating income of $1.4 billion in FY05, to $5.4 billion (including $220 million in signed guarantees), compared to $585 million in FY04, because of significant and an additional $1.1 billion in loan syndications were capital gains from sales of equities, strong dividend income, signed. The disbursed outstanding investment portfolio and changes in carrying value of equity investments. Capital stood at $12.3 billion at June 30, 2005, about the same level gains realized on equity sales totaled $723 million in FY05, as the year before. The Corporation's administrative expenses compared with $381 million in FY04. Due in part to grew 12 percent to $403 million in FY05. As a share of the continued demand in the global markets for energy and average disbursed investment portfolio, total administrative resources, dividend income also grew strongly, totaling expenses rose to 3.3 percent in FY05, up from 3.0 percent in $258 million in FY05, up from $207 million in FY04. FY04. Administrative expenses include the grossing-up effect of Changes in the carrying value of investments contributed certain revenues and expenses attributable to the Corporation's $269 million to equity portfolio income in FY05, compared reimbursable program ($33 million in FY05, as compared to $74 million in FY04. In addition, in FY05, $191 million of 1. Operating income is defined as income after expenditures for technical assistance and advisory service (TAAS) but before any gain/loss from accounting for derivatives and hedging activities (SFAS No. 133). Certain amounts in the prior years have been reclassified to conform to the current year's presentation. 71 Financial Review unrealized gains were recognized on investments accounted for by the Funding Management equity method. Operating income on this portfolio (net of custody In FY05, IFC borrowed $2.0 billion equivalent in the international fees and derivatives gains/losses) amounted to a return on capital capital markets and repurchased $133 million in outstanding debt. employed of 44.5 percent in FY05, after 17.6 percent in FY04. These repurchases were undertaken as part of IFC's strategy of In FY05 there was another release of loss provisions totaling enhancing the liquidity of its outstanding bond issues. $261 million, compared to $103 million released in FY04. The IFC issued securities in six currencies during FY05: U.S. dollars, total reserve against losses on loans declined to 9.9 percent of the Japanese yen, Peruvian soles, Malaysian ringgit, Moroccan dirham, year-end disbursed and outstanding loan portfolio, significantly and South African rand. The largest borrowing of the year was a below the level of 14.0 percent in FY04. $1 billion global bond issue. IFC raised 50 percent of total new borrowings in FY05 through a U.S. dollar global bond issue, 22 percent via structured issues Capital and Retained Earnings primarily in Japan, 2 percent in Peruvian soles, 6 percent in Moroccan IFC's net worth consists of retained earnings and paid-in capital. dirham, 7 percent in Malaysian ringgit, and 13 percent in South IFC's paid-in capital was $2.4 billion, unchanged from the end of African rand. Notable among these was the Moroccan dirham FY04, while net income of $2.0 billion increased retained earnings issue, which was the first borrowing by a non-resident entity in to $7.4 billion. The Corporation's net worth at the end of FY05 that currency, and the Malaysian ringgit issue, which was the first was $9.8 billion. domestic currency borrowing by a supranational under Islamic On June 30, 2005, IFC's capital adequacy ratio (paid-in capital, finance principles. All borrowings were swapped into floating- retained earnings, and adjusted general reserves compared with rate U.S. dollars. Most loans made by IFC are denominated in risk-weighted assets, both on- and off-balance sheet) stood at U.S. dollars on a floating-rate basis. The below-LIBOR cost 50 percent. This is well above the policy minimum of 30 percent, achieved through the use of currency and interest rate swaps defined under the capital adequacy framework adopted by the as well as the income generated through debt repurchases Board of Directors in May 1994. IFC's leverage ratio--outstanding contributed to maintaining IFC's low funding cost in FY05. borrowings and guarantees measured in relation to the sum of subscribed capital and retained earnings--was 1.8 to 1, well within the limit of 4.0 to 1 prescribed by the Articles of Agreement. Liquidity Management Liquid assets on the balance sheet totaled $13.3 billion on OPERATING INCOME AND June 30, 2005, up from $13.0 billion a year earlier. The majority RETURN ON AVERAGE NET WORTH of liquid assets are held in U.S. dollars, with small euro and yen balances held to support operational disbursements. Total liquid 2000 25 Operating income assets held are determined by constraints associated with IFC's Return on average net worth AAA/Aaa credit ratings and, notably, by the pace of new market borrowings and new loan and equity disbursements to clients. 1600 20 In FY05, IFC's liquid asset portfolios faced a challenging environment, and both the externally and internally managed portfolios had difficulty outperforming their benchmarks. The 1200 15 DOLLARS most important market events were the steady increase in interest U.S. rates by the U.S. Federal Reserve, coupled with unexpected OF strength at the long end of the yield curve. Even though overnight PERCENT 800 10 Fed Funds rose to 3.25 percent by the end of the fiscal year, the MILLIONS 10-year U.S. Treasury yield fell from around 4.5 percent to below 4 percent during the year, resulting in a dramatic flattening of the 400 5 yield curve. The other key trends were the steep rise in oil prices, the decline of the U.S. dollar versus most other major currencies (though it had regained its losses by the end of FY05), and a 0 0 FY01 FY02 FY03 FY04 FY05 relatively weak performance by the U.S. stock market. The 72 Financial Review U.S. economy remained fairly strong, with unemployment delivering a return of 2.37 percent compared to 2.09 percent falling and the housing sector showing no signs of on the benchmark. moderating its growth. Inflation remained subdued. In The P1 portfolio consists of funded liquidity, specifically Europe, growth was stagnant; unemployment remained the proceeds of variable-rate borrowings, which are invested high and consumer spending weak. Japan appears to have in high-quality investments pending disbursements of Review begun a modest recovery, and there have been some signs approved loans. IFC's objective is to outperform the total that the Bank of Japan might start tightening conditions, return of its benchmark--three-month U.S. dollar at least moderately. deposits--within the interest rate and credit risk limits In this environment, the liquid asset portfolios generated allowed. The total return was 2.24 percent as compared $194 million in operating income, with $124 million in to the benchmark return of 2.17 percent, with an excess Financial spread income from funded liquidity and $70 million from return of 7 basis points. net worth liquidity, comprising interest income net of realized The P2 portfolio corresponds primarily to the Corporation's and unrealized losses. This compares with $71 million during paid-in capital and accumulated earnings. P2 is managed FY04, which included $39 million in spread income from against the Lehman Brothers U.S. Intermediate Treasury funded liquidity and $32 million in interest and gains income benchmark. The portfolio is actively managed on a total from net worth liquidity. return basis against this benchmark. The return for FY05 IFC's liquid assets are invested in line with policies and was 3.73 percent versus a benchmark return of 3.80 percent. standards set under the Investment Authority granted by The P3 portfolio consists of funded liquidity, originally the Board of Directors. The authority specifies the types of taken from the P1 portfolio. This portfolio is actively instruments and entities eligible for investment. IFC is managed by six external managers against the P1 benchmark. authorized to invest its liquid assets in the obligations of At the end of FY05, assets in the P3 portfolio totaled highly rated governments, agencies, corporations, and $1.128 billion--about 8 percent of the Corporation's total commercial banks. Within the authority's framework, IFC's liquid assets. The portfolio consists of a global fixed income senior management has established prudent guidelines for (GFI) program allocated to two asset managers with managing the different dimensions of risk inherent in a $317 million under management and a mortgage-backed large, diversified bond portfolio with particular regard to securities (MBS) program allocated to two asset managers market (interest rate) risk and credit risk. For management with $380 million under management. The remaining and reporting purposes, IFC's liquid assets are separated into $431 million is managed by two asset managers as a hybrid five distinct portfolios and invested globally in the highest- GFI/MBS mandate. The P3 portfolio delivered an absolute quality assets, including sovereign and triple-A-rated return of 2.35 percent for FY05, outperforming the corporate bonds. benchmark by 0.10 percent. The P0 portfolio is a cash account that accommodates The P4 portfolio is the outsourced portion of the P2 all of IFC's daily requirements, ranging from project cash portfolio. P4 is actively managed by three managers against movements (loans, equity, market borrowings) to administrative the Lehman Brothers U.S. Intermediate Treasury Index, like expenses of the Corporation. The portfolio also manages the P2 benchmark. At the end of FY05, assets in the P4 about $450 million cash for the P2 portfolio, as part of that portfolio totaled $415 million, about 3 percent of the portfolio's new benchmark. The larger portfolio size, which Corporation's total liquid assets. For FY05, the P4 portfolio is slightly longer in duration, has allowed P0 to take advantage delivered 4.51 percent and beat its benchmark by 0.65 percent. of higher-yielding short-dated assets, including very short average life home equity lines and home equity lines of credit. At the beginning of FY05, P0's benchmark was changed from Risk Management and Financial Policies an overnight Effective Fed Funds target to overnight LIBID In keeping with industry best practice, risk management and (LIBOR-12.5 basis points). While the change has not had a financial policies are administered by a separate department significant effect on portfolio performance, the new target is under the Vice Presidency of Portfolio and Risk Management. more in line with industry practice for an overnight book. The department is independent from all transaction groups P0 outperformed its LIBID benchmark by 18 basis points, and is responsible for recommendations on financial policy 73 and risk management issues, risk measurement methodologies, managed against duration benchmarks for each of the portfolios, risk limits, capital allocation and pricing, internal financial policy and currency risks are managed by using derivatives to hedge the guidelines, monitoring compliance with these guidelines, and rating currency exposure. Credit risks are managed through eligibility agency issues. It covers business operations, treasury activity, and requirements for investments and issuer limits based on size and active portfolio management with a view to ensuring coherence and rating as well as concentration limits on asset classes. consistency in policies and an integrated financial framework for all IFC uses derivatives in the areas of funding, liquidity management, business activities. asset-liability management, client risk management products, and IFC's overall activities are governed by a set of financial policies active portfolio management. on exposure, capital adequacy, leverage, asset-liability management, With the exception of the use of derivatives for active portfolio liquidity, and derivatives. Specific activities in treasury and portfolio management, and some positions taken in liquid assets management, management are subject to detailed internal management guidelines uses of derivatives do not entail market risk as they are used only for for each area of activity. hedging purposes. Market risk arising from derivative use in liquid IFC has policies that set guidelines on exposure to countries, assets and portfolio management activities is subject to the respective sectors, products, and groups as well as single obligors. While these guidelines for such activities. While the other derivatives used only guidelines serve to limit and monitor business exposures, IFC also for hedging do not entail open market risk, they create credit limits its financial risks through conservative financial polices. exposure that arises from the potential counterparty default when These include a minimum capital adequacy ratio of 30 percent of the derivative contract has positive value to IFC. risk-weighted assets and a maximum ratio of debt plus outstanding To manage these counterparty exposures, IFC has credit risk guarantees to net worth of 4 to 1 as long as IFC has any outstanding polices relating to eligibility criteria and credit limits that are borrowings from the IBRD. In addition, IFC has conservative coordinated with those of the IBRD. Limits are set in terms of approaches to asset-liability, liquidity, and derivatives exposure the total potential exposure to the counterparty. management as described below. To protect against counterparty downgrades subsequent to Funding, interest rate, and currency exposure is controlled through undertaking contracts, IFC has entered into mark-to-market the matched funding policy, which requires loan assets to be collateral agreements with most of its derivative counterparties. funded by liabilities that have matching interest rate and currency The active portfolio management program enables IFC to characteristics. In order to accommodate client needs for loans in hedge and manage the aggregate financial risks, returns, and exposures nondollar currencies in fixed or floating rates, and to allow for incurred in connection with its portfolio of loan, quasi-equity, and flexibility in borrowing and investment of liquid assets in various equity investments. The proactive use of risk management techniques, currencies and alternative interest rate bases, IFC makes use of hedging instruments, and income enhancement strategies is tailored derivatives, primarily over-the-counter swaps, to transform assets to IFC's financial risk tolerance and income objectives. and liabilities into synthetic variable-rate dollar assets and liabilities. Equity and quasi-equity assets are funded from net worth and are limited by policies that require such investments not to exceed TREASURY CREDIT RISK ALLOCATION 100 percent of net worth. Currency and interest rate mismatches that arise over the course of a loan's life (due to provisioning, prepayments, reschedulings, receipt of spread or fee income in nondollar currencies, and AAA or AA+ rated 32% possible differences in LIBOR reset dates between assets and liabilities) are monitored and hedged on an ongoing basis subject to operational limits. IFC's liquidity requirements are governed by the matched-funding policy and the liquidity policy. Under the matched-funding policy, IFC carries funded liquidity for approved but undisbursed loans. Under the liquidity policy, IFC is required to maintain at all times A+ or A rated 3% a level of liquid assets of not less than 65 percent of the next three AA or AA- rated 65% years' projected net cash flow requirements. IFC's liquid asset holdings are made up of market-funded portfolios and a net worth­funded portfolio. Interest rate risks are 74 Portfolio Review IFC's committed portfolio at the end of FY 2005 increased volume of new commitments were finance and insurance by 7.6 percent to $19.3 billion, from $17.9 billion in FY04.1 with 41 percent and transportation and warehousing Nearly 77 percent of the committed portfolio was in loans with 7 percent. amounting to $14.8 billion, and 17 percent was in equity Disbursements in FY05 were $3.5 billion, up from investments amounting to $3.3 billion. Guarantee products $3.2 billion in FY04. Loan disbursements were $2.9 billion of $998 million accounted for 5 percent of the committed and equity disbursements were $588 million. IFC also portfolio, and risk management products of $168 million disbursed $555 million on behalf of financial institutions accounted for almost 1 percent. In addition, IFC held and participating in its syndicated loans. Review managed for participants $5.3 billion in loans it had syndicated. At the end of FY05, the committed portfolio included loan BREAKDOWN OF IFC PORTFOLIO and equity investments, risk management products, and June 30, 2005 (millions of U.S. dollars) guarantees in 1,314 companies in 119 countries. Portfolio The net increase in the committed portfolio was $1.4 billion Committed loans and equity 18,108 after taking into account new commitments, repayments, Loans 14,781 sales, cancellations, prepayments, write-offs, and translation Equity 3,327 adjustments. Loan principal repayments and prepayments Off-balance-sheet exposure 1,167 totaled $2.3 billion, and $515 million in equity investments (on risk management and guarantee products) were sold or redeemed. Total committed portfolio for IFC's own account 19,274 The total disbursed portfolio for IFC's own account Total committed portfolio held for participants 5,283 remained nearly unchanged at $12.3 billion at the end of Total disbursed portfolio 12,276 FY05, primarily due to higher levels of loan prepayments. During the fiscal year, the disbursed loan portfolio grew by Total undisbursed portfolio 5,832 2.3 percent, whereas the disbursed equity portfolio contracted by 9.5 percent.2 Portfolio Management Many of the Corporation's investments are denominated in U.S. dollars, but IFC borrows in a variety of currencies As part of its supervision efforts, IFC closely monitors to diversify access to funding and reduce borrowing costs. compliance with investment agreements, visits sites to The currency breakdown of the disbursed loan portfolio on check on project status, and helps find solutions to problem June 30, 2005, is shown in the notes to the financial projects. To strengthen portfolio supervision, the Corporation statements (see Volume 2 of the IFC Annual Report). The has in place portfolio management units in all investment Corporation minimizes its risk exposure to off-balance- departments, each under a portfolio manager. This structure sheet transactions by entering into offsetting swap, option, helps identify problems early and address them in a timely or forward contract positions with highly rated market manner. The maintenance of an investment credit risk­rating counterparties and by performing thorough credit reviews system also supports this process. Furthermore, headquarters of all counterparties. staff has continued to be both rotated and relocated to the field, and local staff members in resident missions have increasingly been assigned to supervisory tasks. IFC makes Commitments and Disbursements special efforts to ensure that banks participating in IFC New commitments for IFC's own account were concentrated loans are kept regularly informed of project developments in the Europe and Central Asia (36 percent), Latin America through the B-Loan Management Division. There is and Caribbean (26 percent), and East Asia and Pacific always a close and continuing consultation between IFC (14 percent) regions. The business sectors with the largest and its participants. 1. Committed portfolio includes guarantees and risk management products, which are off-balance sheet. 2. The Corporation complied with EITF 03-1 effective March 31, 2005. EITF 03-1 changed IFC's loss provisioning policies and impairment assessment procedures with respect to equity investments. EITF 03-1 requires that investments that are impaired and for which impairment is other than temporary be written down to their impaired values. It also requires that the impaired value become the new cost basis for the asset. Equity write-offs during FY05 totaled $459.8 million. On the same basis as FY04, the disbursed equity portfolio would have grown approximately 6 percent. 75 COMMITTED PORTFOLIO FOR IFC'S OWN ACCOUNT By sector on June 30, 2005 (millions of U.S. dollars) Professional, scientific, and technical services 73 (0.4%) Finance and insurance 6,235 (32.3%) Education services 101 (0.5%) Plastics and rubber 158 (0.8%) Health care 173 (0.9%) Construction and real estate 177 (0.9%) Textiles, apparel, and leather 366 (1.9%) Accommodation and tourism services 420 (2.2%) Wholesale and retail trade 469 (2.4%) Pulp and paper 509 (2.6%) Primary metals 512 (2.7%) Agriculture and forestry 539 (2.8%) Chemicals 575 (3.0%) Utilities 1,838 (9.5%) Nonmetallic mineral product manufacturing 769 (4.0%) Food and beverages 824 (4.3%) Collective investment vehicles 923 (4.8%) Oil, gas, and mining 1,423 (7.4%) Information 936 (4.9%) Industrial and consumer products 1,050 (5.4%) Transportation and warehousing 1,204 (6.2%) TOTAL IFC PORTFOLIO $19,274 Operational departments evaluate projects case by case when transactions and strategies share the common goal of protecting difficulties arise. For projects with particularly severe problems, the the portfolio against downside risk. Special Operations Department determines appropriate remedial During FY05, loan and equity portfolio income was action. In such situations, it seeks to negotiate agreements with all $1.8 billion, up 63 percent from FY04, largely due to higher creditors and shareholders to share the burden of restructuring so capital gain and dividend income from the equity portfolio. that problems can be worked out while the project continues to Principal outstanding on nonperforming loans as a percentage of operate. In exceptional cases, when the parties reach an impasse in the disbursed loan portfolio was 6.4 percent on June 30, 2005, negotiations, IFC takes all necessary and appropriate measures to compared with 11.5 percent on June 30, 2004. During the same protect its interests. period, principal in arrears as a percentage of the disbursed loan IFC's Corporate Portfolio Management Department portfolio declined to 4.1 percent, from 5.1 percent. Furthermore, manages financial risks and exposures in connection with the the risk level of the loan portfolio declined in FY05 due to portfolio of loan and equity investments using market-based sustained economic growth in emerging markets, which risk management instruments, tools, and strategies. Portfolio reduced country risk levels as well as credit risk levels of management activities approved include the use of market-based existing investments. instruments to perform hedging transactions on the IFC loan Estimated unrealized gains on the equity portfolio rose and equity portfolio as well as equity buyback strategies. All during FY05. Capital gains of $723 million were realized, a 76 IFC COMMITTED PORTFOLIO, FY01­05 (millions of U.S. dollars) 20,000 15,000 For IFC's own account* Review Held for others 10,000 Portfolio 5,000 0 FY01 FY02 FY03 FY04 FY05 *Totals for IFC's own account for FY01­05 include risk management and guarantees. substantial increase from $381 million in FY04. IFC Management determines specific reserves against loan received dividends of $258 million, compared with losses on the basis of portfolio reviews and recommendations $207 million during FY04. Dividends in FY05 were by the portfolio management units in the investment higher than in FY04, primarily as a result of higher departments. For this purpose, the entire loan portfolio is commodity prices. reviewed quarterly. Management determines general Reserves against losses on loan investments decreased reserves using a Monte Carlo­based simulation technique. to $989 million in FY05, representing 9.9 percent of the The Corporation's external auditors examine closely the disbursed loan portfolio, down from 14.0 percent in FY04. recommendations, policies, and methods for determining The decrease was due to a $321 million reduction in specific the reserves against losses. loan reserve after the write-off of $143 million and a $57 million reduction in general reserve. The Corporation changed its process of estimating impairment on equity investments in FY05 to adopt an impairment methodology based largely on fair value estimates. As a result, the Corporation recorded a release of provision for losses on equity investments in the amount of $269 million. 77 IFC's Products and Services Investment Products Equity and Quasi-Equity IFC risks its own capital by buying shares in project companies, other project entities, financial institutions, and portfolio or private equity funds. We generally subscribe to between 5 and 20 percent of a company's equity. We will not normally hold more than a 35 percent stake or be the largest shareholder in a project. We are a long-term investor in our projects. When it comes time to sell, we prefer to exit by selling shares either in a trade sale or, if liquidity permits, in a capital market following a public offering. With quasi-equity instruments, we invest through products that have both debt and equity characteristics. Some instruments, like subordinated loans and convertible debt, impose fixed- repayment schedules. Others, such as preferred stock and income notes, do not require such rigid repayment arrangements. Loans and Intermediary Services We finance projects and companies through our A-loans, which are for IFC's own account. IFC cannot accept government guarantees as security for its loans. The maturities of A-loans COURTESY OF ASIAN COMMERCIAL BANK generally range between seven and 12 years at origination, but some loans have been extended to as long as 20 years. IFC's loans are provided in major currencies and in an increasing number of emerging market currencies. We carry out comprehensive due diligence before investing in any project. Because of our extensive lending experience in developing countries, we are uniquely qualified to evaluate the risks associated with projects. We are willing to extend loans that are repaid only from the cash flow of the project, with only limited recourse or without recourse to the sponsors. We also make loans to intermediary banks, leasing companies, and other financial institutions through credit lines that result in further on-lending. These credit lines are often targeted to small businesses. Syndicated Loans Syndicated loans, or B-loans, are a key part of IFC's efforts to mobilize private sector financing in developing countries, thereby broadening our development impact. Through this mechanism, 78 Services and COURTESY OF ODEBRECHT financial institutions share fully in the commercial credit Technical Assistance oducts risk of projects, while IFC remains the lender of record. and Advisory Services Pr Participants in IFC's loans share in the advantages that IFC s derives as a multilateral development institution, including Technical assistance further complements IFC's its de facto preferred access to foreign exchange. Where investment activities by offering advisory and training IFC' applicable, these participant banks are also exempted from services to governments and private companies in the mandatory provisioning requirements that regulatory developing countries. IFC delivers many of these services authorities may impose. through donor-supported technical assistance facilities that focus on either a region or a strategic aspect of Structured Finance development. IFC also manages trust funds supported IFC also offers structured finance solutions to clients, by donor governments and has established a funding enabling them to raise a significantly larger amount of mechanism that sets aside a portion of the Corporation's capital than that represented by IFC's own exposure. This net income as a contribution to donor-funded operations. is especially important for mobilizing local currency funds IFC collaborates with the World Bank through in the domestic market from institutional investors and several joint units dealing with aspects of private sector financial institutions. development, including policy issues, sector advice, and Through partial credit guarantees of debt instruments, specific transactions. Our activity includes advice on IFC uses its triple-A credit rating to help clients diversify competition policy, privatization structuring, and policy their funding sources, extend maturities, and obtain analysis of the investment climate. financing in their currency of choice. IFC also helps Much of our technical assistance and advisory services clients structure securitizations and risk-sharing facilities, aims to improve business practices of the companies and transactions that allow a client to sell off part of the risk financial institutions in which we invest. The focus associated with a pool of assets. IFC is continuing to includes upgrading compliance with international develop other structured products in response to clients' standards, especially in the areas of corporate governance financing needs. and environmental and social performance. Efforts promote development of smaller enterprises, create links Risk Management between these enterprises and larger companies, and help IFC's risk management products provide clients with our clients increase their community development activities access to long-term derivatives markets. Currency-hedging in the areas where they operate. instruments allow clients to hedge their foreign exchange exposures, typically related to foreign currency borrowings. With the development of emerging market derivatives, IFC offers hedges into local currency where these markets exist. IFC also provides derivative products to enable clients to manage their interest rate and commodity price risks. 79 Acronyms, Notes, and Definitions NEERAJ JAIN Acronyms CAO Compliance Advisor/Ombudsman MIGA Multilateral Investment Guarantee Agency EU European Union MPDF Mekong Private Sector Development Facility FDI foreign direct investment MSME micro, small, and medium enterprise FIAS Foreign Investment Advisory Service NGO nongovernmental organization FY fiscal year OEG Operations Evaluation Group GDP gross domestic product PENSA Program for Eastern Indonesia SME Assistance GEF Global Environment Facility PEP Private Enterprise Partnership IBRD International Bank for Reconstruction and Development PEP-Africa Private Enterprise Partnership for Africa ICSID International Centre for Settlement of Investment Disputes PEP-MENA Private Enterprise Partnership for the Middle East and North Africa IDA International Development Association PSD private sector development IFC International Finance Corporation SEDF SouthAsia Enterprise Development Facility IMF International Monetary Fund SME small and medium enterprise IT information technology TAAS technical assistance and advisory services LAC Latin America and the Caribbean TATF Technical Assistance Trust Funds MENA Middle East and North Africa WTO World Trade Organization Notes and Definitions A-loan and B-loan. A single loan agreement between the borrower and IFC normally stipulates the full amount of financing to be provided by IFC and the participating institutions. The IFC loan may be in two portions: (1) the A-loan is IFC's own portion, funded with IFC's own resources and subject to its agreed loan terms; (2) the B-loan is funded by participants on terms that may differ from those of IFC. Commitments include (1) signed loan and equity (including quasi-equity) investment agreements; (2) signed guarantee agreements; and (3) risk management facilities that are considered ready for execution as evidenced by a signed ISDA agreement or a signed risk management agreement with a client. Disbursements are loans and investments paid out. The fiscal year at IFC runs from July 1 to June 30. Thus, FY05 began on July 1, 2004, and ended on June 30, 2005. Investment amounts are given in U.S. dollars unless otherwise specified. On-lending is the process of lending funds from IFC's own sources through intermediaries, such as local banks and microfinance institutions. Participants and IFC fully share the commercial credit risks of projects, but because IFC is the lender of record, participants receive the same tax and country risk benefits that IFC derives from its special status as a multilateral financial institution. Quasi-equity instruments incorporate both loan and equity features, which are designed to provide varying degrees of risk/return trade-offs that lie between those of straight loan and equity investments. Rounding of numbers may cause totals to differ from the sum of individual figures in some tables. The World Bank includes both IBRD and IDA. The World Bank Group includes IBRD, IDA, IFC, MIGA, and ICSID. 80 Project Manager and Editor Paul McClure Corporate Relations Contributors Joseph O'Keefe, Senior Manager Dana Lane, Chief of Publications Ariadne Garscadden, Information Assistant Fiona Duggan, Consultant Gemma Lueje, Program Assistant Web site: Stephan Beauchesne, Anna Bottiglieri, Vincent Yemoh IFC and World Bank Contributors Translation Philippe Ahoua David Lawrence Arabic: Al-Ahram Center for Teresa Andaya Irina Likhacheva Translation & Publishing, Cairo Anthony Aylward Michele Lubrano Chinese: China Financial & Economic Stefania Berla Martin Lutalo Publishing, Beijing Paul Bravery David Martz French & Spanish: World Bank Nicholas Burke Pierre Nadji Translation Division, Washington, DC Julia Chiperfield Ali Naqvi Elizabeth Davis Kaikham Onedamdy Japanese: IBT Corporation, Tokyo Michael Dompas Lory Camba Opem Russian: Alex Publishing, Moscow David Donaldson Skander Oueslati Frank Douamba Janine Pampolina Design Kutlay Ebiri Sérgio Pimenta Financial Communications Inc., Sara Gann Beth Power Bethesda, MD Louise Gardiner Fereshteh Raissian Anastasia Gekis Yasmina Sam Printing Stella Gonzales Brian Samuel S&S Graphics, Laurel, MD Darrin Hartzler Hillmare Schulze Peggy Henderson Ellen Schwab Photography Brigid Holleran William V. Todd Breton Littlehales Neeraj Jain Marie Valmonte Richard Lord Lisa Kaestner Erika Veizaga Ou Yangjie Jung Lim Kim Eduardo Wallentin Wang Qingxian Gjergj Konda Wai-Keen Wong Staff of IFC, World Bank, and MIGA Additional Photo Credits Courtesy of CEPALCO: front cover, 1st row left; inside front cover, top right. Hoa Doan: front cover, 4th row left. Anastasia Gekis: inside front cover, top right. Neeraj Jain: front cover, 3rd row left and 4th row right. Alice Lin: front cover, 3rd row right. MPDF: p. 27, bottom right. Courtesy of Newmont: front cover, 2nd row middle and 3rd row middle; inside front cover, top left; p. 27, top left. Courtesy of NovoBanco: p. 30, bottom. Courtesy of Samarco: cover, 2nd row right; p. 61. Strengthening Grassroots Business Initiative: p. 27, bottom left. Tang Chhin Sothy: front cover, 2nd row left; p. 27, top right. Kenji Yuhaku: back cover. 2005 ANNUAL REPORT VOLUME 1 At IFC our mandate is to further sustainable economic development through the private sector. We pursue this goal through innovative solutions to the challenges of development, as we invest in companies and financial institutions in emerging markets and as we help build business skills. We consider positive development impact an integral part of good business, and we focus much of our effort on the countries with the greatest need for investment. We recognize that economic growth is sustainable only if it is environmentally and socially sound and helps improve the quality of life for those living in developing countries. INKS -BASED INTERNATIONAL FINANCE CORPORATION SOY 2121 Pennsylvania Avenue, NW Washington, DC 20433 USA WITH Telephone 202-473-3800 APERP Fax 202-974-4384 www.ifc.org RECYCLED ON 0-8213-6422-7 PRINTED ISBN