A Case Study of the International Finance Corporation in Nigeria

A Case Study of the International Finance Corporation in Nigeria

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IFC Mission-

‘To promote sustainable private sector investment in developing
countries.’

“The World Bank’s role, in my opinion, is to help improve the business
environment in the developing countries so that the private sector can
drive growth.”- Mr. Peter Woicke, Executive Vice President of the
World Bank Group (WBG) in charge of the International Finance
Corporation (IFC) - Lagos, August 2004.

At the time Mr. Woicke was speaking, IFC involvement in Nigeria had
reached $200million in investment commitments, a figure quickly
surpassed in less than a year from that date (as at June 2005, IFC
investment in Nigeria was to the tune of $290million). This was in
spite of the fact that only five short years before (in 1999), IFC was
doing practically no business in Nigeria and merely had a functional
working office in Lagos. Mr. Woicke went on to say- “We have increased
our exposure since democracy returned from almost nothing to almost
$800 million and an exposure at the IFC of about $200 million. We have
made a bigger bet to have the bank (WB) and the IFC work on Nigeria’s
problems together. We were quite instrumental in advising the
government on reforms in the telecom sector. We have been pushing very
hard for privatization of other sectors.”

Clearly, the advent of democracy had re-ignited interest in Nigeria.
The initiation of a reform agenda by the new government was also
playing a part in this renewed interest in Nigeria. Beyond financial
commitments however, IFC was beginning to offer a great deal of other
services towards developing the economic environment of business in
Nigeria. As Mr. Woicke put it- “I actually think we should increase
our presence quite (in Nigeria) dramatically. We don’t necessarily
want to lend tons of money to Nigeria, because Nigeria has lots of
resources. We can contribute in terms of providing advice,
transferring technology, providing technical know-how in social,
environmental and corporate governance issues”

Indeed, the nature of IFC operations globally and increasingly in
Nigeria were such that contribution was becoming greater in terms of
technology, advice, social development, environmental assistance,
corporate governance and ethical issues, and global competitiveness
concerns. IFC had begun to realize that their market, and indeed their
business model had reached a pivotal moment wherein clients had begun
to expect more than just project finance deals and long term
syndications.

Governments were asking for help on private sector issues that went
far beyond privatization or concession structuring. There had arisen a
case for IFC involvement as much in the Economic as in the Social,
Environmental, Technological, Global and indeed perhaps ultimately-
Political Environment of Business.

II. IFC- HISTORY AND EVOLUTION

The International Finance Corporation (IFC) was founded in 1956 to

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cater for economic growth and development of the economies of member
countries by promoting private sector development. IFC is a member of
the World Bank group, which includes the International Bank for
Reconstruction and Development (IBRD) otherwise known as World Bank,
the International Development Association (IDA) and the Multilateral
Investment Guaranty Agency (MIGA). IFC is a legal entity, separate and
distinct from the World Bank, IDA and MIGA. Launched with 31 members,
IFC had 175 member countries by June 2001. It made its first
investment of $2million in Brazil (1957) and by 1984, had capital in
excess of $1billion. In Africa, IFC launched its African Enterprise
Fund to finance Small and Medium Enterprises in 1988. By 1996,
syndications had reached $4.8billion and environmental and social
policies were being strengthened. In 2000 IFC achieved a new record
for investments in sub-Saharan Africa ($1.2billion). In June 2005,
IFC's stated mission was “to promote sustainable private sector
investment in developing countries, helping to reduce poverty and
improve people's lives.”

III. IFC- OPERATIONS

Regional and industry sector departments manage IFC investment
operations.

The industry departments manage projects within their respective
sector globally, regardless of which region the project is located in
while the regional departments manage projects in their respective
geographical area in sectors that are not covered by an IFC industry
department. Most projects managed by the regional departments are in
the broad areas of general manufacturing and financial services and
markets.

IFC also has jointly managed departments with the World Bank in
industries where there are strong interfaces between policy and
private investment transactions. The departments are: Corporate
Governance; Global Information & Communication Technologies;
Investment Climate; Oil, Gas, Mining & Chemicals; and Small and Medium
Enterprises. 2004 operating income for the IFC group was $982million,
with a 23% increase in new commitments. New investments in Sub-Saharan
Africa more than doubled in 2004 with a spread of business distributed
across all sector. By June 2005, Nigeria had become the largest
location of IFC exposure with over $290million invested. South Africa
was second largest with $225million. As was stated earlier, recent
developments in Nigeria (1999-2004) were responsible for these
increases.

However, Nigeria had not always been such an attractive destination
for International finance.

IV. NIGERIA- HISTORY AND ECONOMIC EVOLUTION

Nigeria, situated on the west coast of Africa is home to an estimated
125 million people, (National Planning Commission, 2001) of 200 ethnic
nationalities who occupy 98 million hectares of land (an estimated 76%
of which is arable) and speak 500 different languages.

Prior to independence from British Colonial rule in 1960, Nigeria had
developed an agricultural economy that was linked to global trade in
commodities like cocoa, groundnuts, palm produce, and extractive
minerals like tin. Commodity boards organized activity in these
industries but were known for policies that transferred wealth from
the rural farmers to the urban political elite. This notwithstanding,
there was steady growth during this period (average annual real GDP
growth rates were about 5%).

With self-government and subsequent independence however, came
policies of import substitution industrialization and the depletion of
the huge Commodity Board accounts that existed at Independence. Civil
War between 1967-1970 and the discovery of Crude Oil in commercial
quantities heralded an era of Big Government during which government
sought to control economic activity in virtually every sector. These
developments were further encouraged by huge upsurges in Crude Oil
prices and the consequent evolution of a massive import economy
supported by the highly valued local currency. Exports became
unattractive and the economy became entirely dependent on oil income
and government patronage. However, when oil prices crashed inevitably
in 1982 without a commensurate crash in the demand for imported goods
and the governments expenditure profile, drastic economic measures had
to be taken. The short-lived Structural Adjustment Program sought and
managed to eliminate some of the inconsistencies that constituted the
Nigerian Economic system. However, the prolonged political crisis of
the 1990’s led to a long period of continued military misrule and
economic stagnation. The advent of democracy in 1999 was thus a great
opportunity for stability, growth and reform. By 2004, certain
benefits of liberalization and privatization based reform had become
evident and efforts were being made to speed up the reform process in
the country. It was thus within these Social, Political and Economic
conditions that IFC sought to achieve its objectives in Nigeria.

V. IFC WITHIN THE SPEB FRAMEWORK

IFC operates (globally and in Nigeria) within a framework that places
great emphasis on ‘Socially Responsible Investments’, amongst other
key Investment challenges. As part of its goals, IFC seeks to achieve
sustainable business assistance by making highly selective, strategic
interventions in key sectors of the market where demonstrating such
business practices offers significant benefits. To do this IFC
operates the Corporate Citizenship Facility, the Environmental
Opportunities Facility and the Sustainable Financial Markets Facility,
amongst other tools for achieving its objectives. Thus, among the
criteria for IFC financing are several non-core finance issues ranging
from Social benefits, to Environmental assessments as well as Ethical
and Corporate Governance requirements.

In Nigeria for example HIV/AIDS awareness, control and management
issues are a great priority for IFC in all its investment decisions,
as will be illustrated later in this report.

In making its investment decisions, IFC typically carries out Return
on Investment analysis that takes into consideration the ROI from a
Social, Political, Economic, Legal/Institutional, Ethical,
Technological, Global and Environmental point of view. Hence various
investments, to varying degrees have impacts that extend beyond the
financial to one or more of these other realms. Nigeria is no
exception to this rule, even though a lot can still be achieved in
certain respects within the Nigeria environment. In particular, IFC
Environmental Financing Capabilities, typically geared towards
achieving environmentally favorable investment returns are sorely
needed in the Nigerian Oil producing areas where Environmental
degradation has become the norm.

IFC efforts here would as always signal to the rest of the industry
that such practices are indeed profitable and sustainable, leading
perhaps to increased industry acceptance.

Surprisingly, IFC executives say that the Legal and Political
environment is not an area out of their purview. In this regard, they
insist that regulations, laws and policies that will favor business in
Nigeria are constantly being formulated, in conjunction with the World
Bank and made available as presentations to government for
consideration. In this regard, the pressures on government to
institute a Bond Market and an enabling law for the Leasing Business
in Nigeria are examples of IFC involvement as a political pressure
group in the country. Also IFC is at the forefront of calls for an
enabling environment for business in Nigeria. In this regard, they
champion the cause of the small and medium enterprises for
infrastructural and other reforms. However, there seems to be a strong
leaning in IFC towards complete displeasure at government’s protective
tariffs or outright bans also intended by government to be beneficial
to local industry. The key argument here is that protectionism will
never yield a globally cost competitive industry.

VI. IFC IN NIGERIA

STRATEGY-

IFC strategy within Sub-Saharan Africa seeks to support comprehensive
development primarily through developing small and medium enterprises
with the knowledge that these are the major drivers of growth. To this
effect, an SME capacity building facility has been developed with over
117 pilot projects in the last 4 years. More significantly, the donor
sponsored Africa Project Development Facility (APDF) is being
re-organized into an IFC sponsored program known as the Private
Enterprise Partnership Africa (PEPAFRICA) due for launch on June 30,
2005.

GDP growth rates for Africa were found to have reduced from about 3%
in the two years prior to 2004 to about 2.4% in 2004, far below the 7%
growth required to meet the Millennium Development Goals of poverty
reduction. Hence, total commitments in Sub-Saharan Africa increased to
$405million for IFC accounts. The strategy is to expand service
availability to smaller businesses while larger projects are being
supported at formative development stage with Finance and Corporate
Governance support

In Nigeria, IFC strategy in the two broad directions mentioned above
has been very evident. However, IFC has augmented its Nigeria strategy
such that it is no longer a direct provider of Finance to SME’s. It
observed over time that servicing such facilities to an SME would
involve services that are better provided by local commercial banks.
Hence, the Lines of Credit it began to extend to various commercial
banks for on-lending to businesses. However, advisory services and
other support services continue to be available to SME’s through APDF
and now PEPAFRICA.

PRODUCTS-

IFC’s main services are:

* Equity and Quasi-Equity
* Loans and Intermediary Services
* Syndicated Loans
* Structured Finance
* Risk Management
* Technical Assistance and Advisory Services

PROJECTS-

IFC in Nigeria currently has commitments in excess of $300million, as
against the $290million for FY04. Exhibit 1 is a list of IFC projects
at the moment. These are projects with outstanding equity and debt
commitments. Various other projects exist with expired debt or equity,
which are no longer on IFC books.

However, some of the major projects at the moment are evaluated here
from a SPEB perspective. Exhibit 2 is a typical IFC published Summary
of Project Information (SPI) illustrating IFC approach to these
projects. A SPI exists for every IFC project in Nigeria and worldwide.

* Commercial Banks Credit Lines-

As mentioned earlier, as part of its development strategy aimed at SME
development, IFC began to make Lines of Credit available to several
reputable local Nigerian financial institutions for on lending to
local businesses. The underlying assumption here is that such Banks
are in a better position to lend, monitor and recover credit made
available to smaller businesses in the less than $5million range that
the IFC considers below its lending capacity at the moment.

Diamond Bank, Citibank, Guaranty Trust Bank (GTB), FSB International
Bank, Investment Banking Trust Company (IBTC) and United Bank for
Africa (UBA) were some of the Banks that received about $100million
for this purpose. GTB has since become a revered ‘repeat customer’ for
IFC by taking up further facilities in this regard.

As part of the Loan agreements, IFC executives say that they have put
in certain limited checks to ensure that these funds get used for the
appropriate purposes. However, they say they are limited in setting
checks because the Banks take full responsibility for the lending risk
and hence cannot be dictated to in terms of whom they should lend to.
IFC has however been known to refer promising entrepreneurs that have
APDF support to the Banks for possible lending.

The potential for economic environment impact in this instance is not
hard to imagine. Nor is the potential trickle down effect on job
creation, citizen health/well being and other social implications. On
the one hand, these long-term loans are available at low, dollar based
Interest rates to the Banks (LIBOR plus, actual rates not available)
who thus have funds available for longer-term business with their own
customers. This allows for planned, job creating, non-trade based
business to grow in the country. The jury is still out however as
regards the magnitude of impact of these lines on SME’s as expected by
IFC.

* ACCION Microfinance-

ACCION Nigeria is a global Microfinance based lending institution that
is beginning micro lending business in Nigeria with IFC support. They
aim to provide low cost credit to entrepreneurs at the lowest level of
credit requirements in the economy. Here, facilities of as low as $100
will be available in ‘stepped loans’, designed to increase loan size
in steps as lenders pay back earlier receipts. The strategy is to
encourage organized entrepreneurship at even the lowest levels of
trade and commerce in the economy.

The potential social implications of success in this regard are
enormous as small time traders and business people begin to get access
to the finance and business support services of world-class
organizations like ACCION and IFC.

* Nigeria Trade Enhancement Facility-

This is an IFC supported facility, provided in the first instance by
Standard Chartered Bank of South Africa to the tune of $20million to
increase confirmation limits available to local banks that are
otherwise constrained due to country exposure limits. Nigeria, in
spite of being the third largest importer on the continent (after
South Africa and Egypt) is constrained by the limited credit lines
available to local banks on account of past economic mismanagement.
This facility seeks to address that imbalance.

* Dangote Obajana Cement Factory-

This facility was extended in consistence with IFC strategy for Africa
regarding major capital investments. In this respect, IFC is moving to
support Dangote as a potential exporter of cement and a contributor to
national business and economic development with an up to $75million
syndicated loan agreement.

This project illustrates IFC commitment to simultaneous Social and
Economic development. The project has been chosen as an opportunity to
carry out aggressive HIV/AIDS awareness campaigns in unison with a
project development effort. Hence, this complex structured complex
finance deal is accompanied by a detailed HIV/AIDS prevention and
management program for the Obajana Community of over fifty thousand
people. The objective is to use this as a case study for community
based HIV/AIDS awareness, prevention and management programs. Progress
was on going in this regard as at June 2005. Besides, the various
infrastructural development contents of the overall investment are
designed to develop the Obajana area to a great degree. (See Exhibit 2
for SPI).

* MTN Nigeria-

IFC has provided funds ($100million) as Loan and Equity ($85million
and $15million respectively) to MTN Communications Nigeria, a leading
telecoms operator in Nigeria. MTN started operations in 2001, winning
one of three new 15-year licenses in the country. This investment is
in line with the strategic objective of rapid, non-oil, and private
sector-led growth in the country. IFC says its investment in this
project is to promote competition in the cellular market in order to
lower tariffs, improve service quality and responsiveness to
customers, and expand access to communications: objectives that are
all being met at a very rapid rate in the country. By June 2005, MTN
had announced a subscriber base size of 6million Nigerians, beginning
to dwarf even its parent company MTN South Africa (75 per cent
owners).

Partial ownership of the company by IFC through the aforementioned
equity participation is illustrative of IFC commitment to achieving
best practices in Corporate Governance in the country. IFC thus
maintains a seat on the board of the company as an observer and active
agent for ethical practices in MTN business practices as a model for
the rest of the industry and business community.

Furthermore, the multiplier effects of a fast growing
telecommunications industry (70% growth in telecoms contribution to
GDP from1999-2003) are increasingly evident in the Nigerian Economy as
new jobs are being created- formally through direct
employment/involvement in the sector, and informally through phone
centre operatives, recharge card vendors and many others.

* Niger-Delta Contractor Revolving Facility-

In FY02, $15million was made available as IFC loans to local
contractors that were able to secure contracts from oil companies
operating in the Niger-Delta but were unable to finance execution. The
objective here was to ensure that technically competent local business
people are not denied the ability to compete in this key, capital
intensive sector that has been termed an ‘enclave’ sector on account
of the lack of a significant connection between activity in that
sector and the rest of the economy.

* Anambra State Cluster Development Project-

IFC states its objective here as being: to improve the performance of
small and medium size enterprises in the clusters in Abia and Anambra
states (Eastern Nigeria) through policy reform, more efficient
horizontal and vertical firm linkages, and expanded access to business
development services and financial resources.

This initiative began in 2002 (Phase 1) and has implementation
components in the Business Environment area, the Business Linkages and
Enterprise Support Services area, and the Micro and Small Business
Finance area. The project is divided into two phases. Phase 1 will
cost $350 000, with IFC providing $100 000, UNIDO: $250 000. The APDF
will provide support services. Phase 2 is estimated to cost
$3.5million. ACCION will also be involved in this phase, which began
in 2003 and is expected to last till 2006.

Progress is on-going in this regard but results are already being seen
in the areas of capacity building, private-public sector dialogue,
technical skills development, the common facility center for leather
products (Aba), business networking/cluster coordination, and finally,
lending and business support services.

* Lagos Business School-

Enhancing the capabilities of African business schools to train local
management graduates is critical for development and improvement of
the investment climate-

Mr. Guy Pfeffermann, former chief economist of IFC and director of the
GBSN.

IFC operates GBSN (Global Business School Network), an initiative that
seeks to enhance management skills in emerging markets by partnering
with business schools to build local capacity for management training.
GBSN harnesses the experience of several of the world’s top business
schools in support of institutional capacity building for African
business schools. Strengthening these business schools will deepen and
widen the pool of well-trained local managers who play a crucial role
in generating jobs, reduce reliance on expatriate managers, and help
stem brain-drain. GBSN pilot programs are with the Lagos Business
School in Nigeria, the Ghana Institute for Management and Public
Administration and Kenya’s USIU. GBSN is also helping the World Bank’s
International Development Association in support of Ethiopia’s major
business school.

IFC executives at the Lagos office echo Mr. Pfeffermann’s statement
when they say that local managerial ability is one of the biggest
challenges they have found doing business in Nigeria. Contrary to
popular perception that Government inaction and infrastructural
inadequacies are the only issues hindering private sector development
in Nigeria, IFC executives say that they have been significantly
challenged by the lack of capacity and often lack of willingness to
imbibe management best practice by entrepreneurs in Nigeria.

IFC is thus in alliance with the Enterprise Development Service (EDS)
of the Lagos Business School towards building local managerial
capacity for business development. The objective is to get more
fund-seeking entrepreneurs to begin to observe international standards
in business practice whilst receiving business support services and
perhaps financing. This is with a view to achieving a more sustainable
development objective as opposed to mere financial transactions. This
will no doubt have multiple social and economic effects on local
businesses and the larger economy. Meanwhile, LBS is said to be in
continuing talks with the IFC towards obtaining donor funds as opposed
to IFC loans for its expansion programs. Progress in this regard was
on-going as at June 2005.

VII. IFC PERFORMANCE EVALUATION FRAMEWORK

IFC maintains an independent Operations Evaluation Group (OEG), a
critical mechanism for assessing its broad global developmental
objectives. A study of this mechanism was considered essential for
this case since it would be pointless for IFC to continue operations
without a constant, credible assessment of its performance relative to
stated objectives.

The Director of Operations Evaluation Group (OEG) is responsible for
the operations evaluation function within IFC.

OEG's independent evaluation work encompasses:

1. Programs, investment projects, advisory and technical services, and
the strategies, policies and procedures that relate to them with
particular attention to the achievement of agreed objectives for
private sector development and the effects of investment activity.

2. Assessing the quality and usefulness of IFC's evaluation processes
and products, and participating in the formulation and continuous
improvement of appropriate evaluation policies, practices and
instruments.

3. Identifying and disseminating lessons and making recommendations
drawn from evaluation findings to contribute to improved operational
performance, accountability for results, and corporate transparency.

This is typically achieved within an evaluation framework that is once
again illustrative of the strength of IFC within the SPEB framework.
The framework evaluates:

Private Sector Development-

A positive effect in creating sustainable enterprises capable of
attracting finance, increasing competition and linkages, or bringing
about improvements in the regulatory environment.

Environmental Impact-

IFC environmental, social, health and safety requirements.

Economic Sustainability-

Acceptable economic returns to society, taking into account net gains
or losses by nonfinanciers, nonquantifiable impacts, and contributions
to widely held development objectives.

Project Business Success-

Returns equal to or greater than the project cost of capital (in the
real sector) or, for projects in the financial sector, sub-portfolios
that contributed to the intermediary’s profitability, financial
condition and business objectives.

The year ended June 2004 saw IFC achieving success rates to the tune
of 72%, 64%, 61% and 39% respectively in its global operations as
regards the above criteria.

Success rates for Nigeria alone were not available as at June 2005. It
seems clear from the foregoing that IFC performance with respect to
project business success is quite unsatisfactory even when the
difficulty of satisfying this criterion as part of the larger
evaluation framework is recognized.

VIII. CONCLUSION

This case attempts to illustrate with many examples drawn from IFC
practices, the potential for finance as a veritable tool for
development within the Social, Political, Economic and Business
Environment. A further learning point is the realization that such
development need not be at a loss, that a business case exists for
social development, a fact clearly proven by IFC but which is yet to
be adopted as global best practice.

Other developmental finance organizations would do well to learn from
this. But even more than that, the challenge is there for profit
making businesses to begin to seek creative means of contributing to
SPEB development whilst creating shareholder value. This is quite
possible if appropriately factored into an organizations strategic
mission and plan. IFC in Nigeria provides various learning points that
can be incorporated into a company’s strategy for profit making within
a developmental framework.

By June 2005, Mr. Andrew Alli, IFC County Manager for Nigeria was
simultaneously coping with the challenges of doing business in
Nigeria, and the results of having elevated Nigeria to the status of
IFC largest business centre in Sub-Saharan Africa during his tenure.
As his term in Nigeria drew to a close, he was pondering on what the
future held for Business in Nigeria, for IFC in Nigeria and for the
continued Social, Political and Economic development of the Nigerian
Business Environment.
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