WASHINGTON, 30 September 2002
—Oil, gas, and mining companies should fully disclose their payments to governments in the developing nations, said the head of the International Finance Corporation on Monday. Click
here
for the speech.
“We would come a long way if all – and I emphasize all – natural resource companies would make their transfers of royalties, fee payments, and other revenues to host governments fully transparent,” said Peter Woicke, executive vice president of the International Finance Corporation (IFC), the private-sector lending arm of the World Bank Group. Woicke is also managing director for all the private sector-related operations of the World Bank Group.
Disclosing such payments “would push governments to invest more wisely,” Woicke said in a luncheon speech to IFC clients. “Hiding behind confidentiality agreements does not help anybody, and those with the most to gain financially from these projects – the poor people – are too often helped the least.”
Woicke also pledged that IFC would redouble its efforts to help private sector companies in the emerging markets that lose access to the global capital markets during financial crises.
“Good companies in the emerging markets – with solid credit histories and foreign currency earnings – should not be punished every time the global capital markets close,” Woicke said. “They need export credit. And we need to fill these financing gaps so that exporters, particularly small exporters, can weather these storms. This is one of the messages that has come out of the [World Bank Group-IMF] meetings this weekend.”
Woicke said that the major macroenomic forces in the developed world, which he termed “push” factors, that had contributed to dramatic increases in capital flows to the emerging markets would be less powerful in the coming years.
“The ‘90s were all about the ‘push’ of capital flows, we’re now into the decade of pull,” Woicke said. “These factors include a country’s investment climate, the depth and strength of its financial sector, and its public and corporate governance.”
If the natural resource endowments of emerging market countries are developed in an environmentally and socially responsible way, they could be a major source of economic growth, Woicke said. “But as long as revenues from such projects are squandered away and are not productively channeled into health, education, and infrastructure for the benefit of the people, such projects will not reach a full level of sustainability.”
The issue of disclosing payments from extractive industries to developing nation governments has been contentious in recent years. Critics of the industries have argued that royalties and other revenues, which often run to the billions of dollars, are not properly accounted for and subject to abuse by government officials. Developing country governments counter that the degree of disclosure should be determined by each nation.
The World Bank Group has incorporated a disclosure agreement into one of its extractive industries projects, the Chad-Cameroon pipeline, which is currently under construction. However, such disclosure agreements are not mandatory.
In 1998, following discussions with the World Bank Group, Chad's parliament approved a law that sets out the Government's poverty reduction objectives and details arrangements for the use of project revenues. Under the law, 10 percent of the royalties and revenues will be held in trust for future generations, 80 percent of the remaining funds will be devoted to education, health and social services, rural development, infrastructure, and environmental and water resource management, and 5 percent will be earmarked for regional development in the oil-producing area (over and above its share of national spending).
Annual published audits of Chad’s petroleum accounts are published, public expenditures are reviewed by the Government and the Bank, and special arrangements have been made for channeling and accounting for the funds. In addition, the law created an oversight committee to monitor the use of oil revenues. This committee will include representatives of Government, Parliament, the judiciary, and civil society.
A related capacity-building credit from the International Development Association supports the work of the oversight committee, as well as strengthens Chad's general accounting office and the dissemination of information on Government expenditures.
IFC’s mission is to promote sustainable private sector investment in developing 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, and provides technical assistance and advice to governments and businesses. Since its founding in 1956, IFC has committed more than $34 billion of its own funds and arranged $21 billion in syndications for 2,825 companies in 140 developing countries. IFC’s committed portfolio at the end of FY02 was $15.1 billion, with an additional $6.5 billion held for participants in loan syndications.
Speech by Peter Woicke
Executive Vice President, International Finance Corporation (IFC)
and Managing Director, World Bank Group
IFC Client Luncheon
September 30, 2002
Park Hyatt Hotel, Washington, DC
Thank you all for joining us here. It’s hard to believe that it has actually been two years since we had one of these luncheons. Needless to say, it has been an extraordinary two years for the emerging markets and IFC, extraordinary because we in IFC have the privilege to be at the nexus of the developed nations and the emerging markets, of the public and private sectors, and of the financial sector and the so-called “real” economy.
This is where the old debate about the “push” and the “pull” of capital flows comes up. The push factors, of course, are the ones outside the control of an emerging market, like growth rates, interest rates, and trade policies of the G-7. The pull comes from the factors inside a country.
The problem now, as you know, is that there is very little pushing or pulling. Net private capital flows to the emerging markets are expected to be around $125 billion this year – which is about one third less than the average for the 1990s. As a share of emerging market GDP, net private capital flows have actually declined from nearly 4 percent a decade ago to just over 2 percent for this year. You may remember the phrase about the “electronic herd” of global finance? Well, the herd is not stampeding anymore. At best, it’s grazing. So if the ‘90s were all about the “push” of capital flows, we’re now into the Decade of Pull. These are factors like a country’s investment climate, the depth and strength of its financial sector, and its public and corporate governance.
It is much harder today to pull massive amounts of capital. We see this, for example, in the direction of overall flows, where there is more differentiation between countries on both the volume and the type of cross-border capital flows. Advances in technology and connectivity mean that data and information are available faster and in more detail than ever before. So the markets are doing a much better job in drawing distinctions – between sovereigns, between sectors, and between corporates within sectors.
We see it in the political and economic climate for privatization. Volume is back to the levels that we saw in 1992 – less than 150 deals per year – and nobody is talking about “waves” of privatization anymore. If you divide that number among all the emerging markets, you begin to see how slow the deal flow is. Even when the numbers work, the politics might not. In country after country, free trade, liberalization, and privatization are being held up as scapegoats for economies in trouble. This, of course, is a very damaging myth.
Social and environmental issues are also key variables that affect pull. One of the biggest potential sources of growth in poor countries is development of natural resources. But as long as revenues from such projects are squandered away and are not productively channeled into health, education and infrastructure for the benefit of people, such projects will not reach a full level of sustainability.
We would come a long way if all -- and I emphasize all – natural resource companies would make their transfers of royalties, fee payments, and other revenues to host governments fully transparent. This in turn would push governments to invest more wisely. Hiding behind confidentiality agreements does not help anybody, and those with the most to gain financially from these projects, the poor people, are too often affected the least.
In terms of environmental and social requirements, the IFC is happy and privileged to provide its expertise in these areas to project sponsors, particularly where that effort is coupled with another real effort to let local communities derive benefits from such projects. Long term financial sustainability of projects can only be assured when we pay attention to all these elements. Enlightened companies recognize this today. I spoke with the CEO of a mining company earlier this year. I asked how much time he was spending on sustainability. He said, “That’s the majority of my time. It’s the only way for our industry to have a future.”
That’s the same type of message we hear from people on the street. Earlier this year, a survey was conducted across 25 countries. Eight out of 10 people said, “we expect a company to do more than pay taxes and give to philanthropy.” We in the IFC believe that’s a sustainability issue. That’s a bottom-line issue.
Another “pull” factor that continues to need our help is the local financial markets. We need to keep deepening these markets. We need to keep widening them. Good companies in the emerging markets with solid credit histories and foreign currency earnings should not be punished every time the global capital markets close. They need export credit. We need to fill these financing gaps so that exporters, particularly small exporters, can weather these storms. This is one of the messages that has come out of the meetings this weekend.
Deepening the emerging bond markets is just one part of the long-term solution. Over the past five years, these markets have grown very rapidly, reaching just over $2 trillion dollars. They represent more than one-third of emerging market GDP. But we need deeper markets in the advanced countries. We still need to create markets in the frontier countries.
The challenge that we in IFC face, and that I think you face with us, is that all of those pull factors – the investment climate, political support for market reforms, development of local markets, and sustainability – are inter-related and dependent on each other. And there’s tremendous variability between the advanced markets and the frontier markets.
The political climate for privatization and free trade is not going to improve unless we do a better job on local community development and sustainability.
Capital flows are not going to return in large numbers unless we accelerate improvements in public and private governance, trade liberalization, and privatization.
The tensions around environmental and social factors are not going to change until we do a better job on overall growth, which relies on the investment climate.
The good news, and one of the things that makes my job so exciting, is that IFC has been working very hard to make sure that we can add value in precisely those areas where our clients and emerging market investors need help. Whether it’s upstream, working on the investment climate and project design; midstream, working on project implementation and compliance issues; or downstream, working on supply-chain linkages with local communities, IFC is in a much stronger position than we were two years ago.
At the operational level, for example, IFC has taken a huge step forward in making the “business case” for sustainability. We know that, particularly in countries where the capacity of the government is limited, companies face difficult environment, social, and community development issues. We asked the question: “Can you make one of those factors into an asset?”
We looked at some of the leading companies throughout the emerging markets. Altogether, we came up with more than 240 examples of how performance on environmental, social, and corporate governance issues contributed to profitability. These examples come from more than 60 countries, every developing region and virtually every sector and every type of firm. In July, we published this in a new study called
Developing Value
, which is here in the back of the room for you.
The most impressive examples were
not
the cases where companies had simply paid their taxes and adopted a “do no harm” approach. The most impressive companies were the ones that viewed sustainability as a market opportunity. They were the ones with the strongest balance sheets, the most exciting prospects, and long-term potential. So our message to clients is: sustainability does not have to be something you do
to
your bottom line, it can be something you do
for
your bottom line. This is something that many companies are now discovering on corporate governance, another area in which we have been very active. We believe the same principle holds for environmental and social responsibility.
For years, advocacy groups have tried to use the moralistic argument to address environmental and social issues. That is important. But the moral case has not generated the capital flows or the major changes that developing countries need. We need the power of private sector ideas, technology, and capital. And it needs to be based on a clear value proposition – the value for your company, and the value for your community.
At the project level, IFC is becoming much more proactive in pursuing public-private partnerships. In just the past six months, we have created five new facilities specifically targeted toward helping our clients and potential clients find, add, and maintain value through sustainability. These cover a wide array of issues, from carbon emissions credits, biodiversity, energy efficiency, and renewable energy to community development and supply-chain linkages to helping local financial institutions better manage the environmental risks in their own portfolios.
We also believe that blending public funding with private capital in innovative new business models could help many good projects clear the hurdle rate and go forward successfully. We need a way to rejuvenate the basic services sector – water, power, and transportation – where privatizations have proven difficult, especially in the so-called frontier markets. But we have to find a way to ensure that public funding is done transparently, and that we address community concerns about rate shocks. Just to cite one example: we now have some of our shareholder nations coming to us and saying, “Why don’t you use IDA money for IFC projects?” So far, IFC has done this only once – in Tajikistan. But we believe we can use this model very effectively in other countries.
At the market level, we are very excited about the possibilities ahead. As part of our reorganization this year, we have consolidated our resources into a new Global Financial Markets Department. And we expect to see this department, together with our Treasury Department, be much more active in deepening and expanding capital markets.
I believe it’s time for IFC to scale up the expertise that we have in financial engineering – in securitization, in local currency financing, and in risk management guarantees – and continue reducing the exposure of our clients to the volatility and risk associated with the international markets. We can help create new asset classes. We can help build the bond curve. That, in turn, is going to create the “pull” of more investment.
For years, we in the international financial community have asked nations to disband capital controls, which has made them more vulnerable to the volatility of private capital flows. We can and should address that issue. Of course, that also means that we are going to have to be much quicker, much more agile, and much more involved with our clients to make this happen. But I am convinced that we can do it. I am convinced that it will have a huge multiplier effect on domestic economies.
We have had quite a number of meetings over the past few days – meetings with clients, meetings with government officials, meetings with participants. There is a consensus that this is not business as usual. The volume of capital flows is not going to come back. It is going to take a lot of hard work. It is going to take creativity. It is going to take commitment. It is time for the development banks – for IFC, in particular – to step up to that challenge.
When I look at our clients in Argentina and Brazil, I don’t see companies that have failed. I see great companies, solid companies, companies that can be players on the world market. I wonder whether we shouldn’t be more aggressive in helping the private sector. For years, we in the development banks have used trade, finance and public policy to bring private sector companies into the global economy. Now, at the very time when they could use our help, most of the focus is still on helping the governments. I think we can do better than that. Isn’t it time to think about playing a counter-cyclical role for the private sector? We have the expertise. We have the willingness. We have the patience. This is one of those times when a little bit of capital could go a very long way.
IFC is ready to play that role. We recognize that all the initiatives that we have taken over these past few months are necessary. None of them taken alone are sufficient. They are going to take work. But that’s what we are here for -- to work for you. I always tell people you have to be an optimist be a development banker. Well, I am an optimist -- even with the difficulties that we have now. In fact, when I look at the quality of the clients that we have in this room, and I look at the talent and energy that we have at IFC, I think it’s easy to be optimistic.
Thank you.
