The World Bank's Financial Components

The World Bank Group has four financial arms: the International Bank for Reconstruction and Development (IBRD, also known as the "World Bank"), the International Development Association (IDA), the International Finance Corporation (IFC), and the Multilateral Insurance Guarantee Agency (MIGA). After the debt crisis, the World Bank Group became the primary source of governmental loans to the developing world. However, in the past few years, the amount of private investment has dramatically increased in the World Bank Group.

The International Bank for Reconstruction and Development was founded in 1946 as a way to finance reconstruction projects in war-ravaged countries despite their poor creditworthiness. The IBRD gets its money from regular subscriptions paid by member governments and by borrowing money on international markets (through selling World Bank bonds). The Bank then lends that money to borrowing governments at a lower rate than commercial banks would. Although the IBRD still concentrates on development it operates primarily in mid-middle-income developing countries; in FY 1994, the IBRD was funded at about $17 billion.

The IBRD offers loans to developing country governments for a variety undertakings: Sectoral loans support reform or infrastructure improvement in a specific economic sector, i.e., mining, transport, energy, banking, etc.; project loans support the completion of a specific project, such as a dam, highway or power plant; and macroeconomic loans assist governments in achieving the economic objectives detailed in a structural adjustment program (more on structural adjustment programs, below). IBRD loans can cover the entire cost of a project, but Bank clout attracts many other sources of financing, especially from the private sector. Recently, the Bank has also started offering support for private investors themselves, in an effort to attract development money to Southern countries. Finally, IBRD also offers a host of technical assistance programs to its developing country members for "capacity building" and "technology transfer."

Technical assistance can be given in areas such as privatization of state owned entities, developing banking systems and domestic capital markets, as well as creating a regulatory framework for foreign direct investment.

To be eligible for IBRD loans, governments must be a member the World Bank, and comply with Bank-imposed Structural Adjustment Programs (SAPs), which have been severely criticized by NGOs worldwide as an unnecessarily harsh set of macroeconomic policies. SAPs are aimed at reducing government budget deficits by decreasing government expenditure (particularly on social programs), increasing export production, privatization, and liberalizing trade and investment policies. The purpose of these reforms is to help countries become more economically robust, creditworthy and able to pay off its debts. These policies are prerequisites for loan eligibility and often include provisions for reduced government spending on social services. The Bank offers advice and loans to help implement SAPs.

The International Development Agency (IDA) was established in 1960 to provide concessional (no interest or "soft") loans to the world's poorest governments. IDA's funding priorities are poverty alleviation, environmental protection, and sustainable development. Its loans, however "soft" they might be, are conditioned by harsh structural adjustment requirements. IDA and IBRD are often lumped in the same category, because they lend for the same purposes and focus primarily on government borrowers. However, IDA funding is considerably lower than that of the World Bank, amounting to $5.6 billion (about 34% that of IBRD's) in FY 1994.

IDA is considering the establishment of two new financing services to enhance the private sector. The rationale is that through foreign investment, IDA countries could gain much-needed infrastructure. The first is a guarantee program that would encourage the penetration of foreign capital and multinational corporations. The second program is the IDA Private Investment Fund which would be IDA money managed by the International Finance Corporation (see below).

The International Finance Corporation (IFC) is the Bank's lending facility to the private sector. Established in 1956, it offers a wide range of financing, including equity investments (having an ownership stakes in companies), loans, and guarantees. It also offers numerous technical assistance and advisory programs in areas such as privatization, environmental assessment, risk management and accessing international capital markets. IFC is funded through investment contributions from member countries and from the income those investments generate. IFC is the largest source of direct investment for private-sector projects in developing countries. In 1994, IFC helped finance 213 projects, totaling $5.4 billion. The IFC prides itself on its history of mobilizing private money -- for every one dollar IFC invests, it recruits six more dollars from private investors. In theory, IFC should invest only in those projects that have trouble attracting private-sector funding, but 85% of its investments have been concentrated on large projects in 15 emerging market economies that are often able to attract sufficient private investment. The IFC is supposed to "go where no one else will go," but instead they seem to follow other private investors to the safe markets to minimize risks.

This concentration of investments in a handful of countries is a direct result of the IFCs requirement that all of its investments must make a profitable rate of return. By linking its activities to profitability criteria, critical development projects which are not lucrative (such as health, education, services to rural or poor populations, etc.) are passed up.

One of the most pressing NGO concerns regarding the IFC is how IBRD policies regarding environment, gender, resettlement, indigenous peoples, information disclosure, etc. will apply to the IFC's private sector clients -- primarily corporations. While activists are fighting to keep these hard-won policies in place, the IFC claims that Bank policies must be adapted to respect business confidentiality, an important consideration for private companies who face competition from corporate rivals. Exactly how these policies will be adapted is still under debate.

MIGA -- the Multilateral Insurance Guarantee Agency, is the World Bank's newest arm. Its stated purpose is "to help developing countries attract productive foreign investment." MIGA itself has no explicit aim of reducing poverty, but it is a member of the World Bank Group, which claims goals of reduced poverty and improved standards of living. Established in 1988 as a "direct response to the debt crises of the 1980s," MIGA provides long-term non-commercial risk insurance to foreign investors doing business in MIGA-member countries. Originally, the World Bank was created with the intention of granting guarantees or insurance to private parties wishing to invest in war-torn countries. But only in the last ten years has the Bank been actively involved in issuing guarantees. MIGA gets its money from member-country subscriptions and insurance premiums.

As of November 1995, MIGA had guaranteed over 155 contracts valued at more than US$8.5 billion, but actually had never made any payments on claims. MIGA insurance covers private investors from "political risks" associated with doing business in a developing country. Such political risks include: expropriation (government take-over of a private company or assets), civil disturbance, the risk that local currency cannot be converted to "hard" currency (like dollars) and government breaches of contract.

In addition, MIGA sponsors investment missions to help businesses and governments network with each other. They also provide technical assistance to governments, such as helping to develop information technologies, train policy makers, and establish investment promotion agencies.