The Domino's Effect

The International Finance Corporation -- a little-known arm of the World Bank -- is supposed to fight global poverty, but instead is pouring millions into luxury hotels and Domino's Pizza franchises.

| Sat Apr. 15, 2000 12:00 AM PDT

El Gouna, a swanky, sprawling resort on Egypt's Red Sea coast, makes an unlikely public works project. The $500-million complex boasts six luxurious hotels, including a five-star Miramar Sheraton, all with swimming pools. There are also such amenities as an 18-hole golf course and, should a guest arrive by yacht, a marina capable of mooring 66 boats.

A playground for the international rich, El Gouna can thank the world's taxpayers for at least part of its financing. It received a $20-million direct loan and $37,000 in other financial support from the International Finance Corp., the branch of the World Bank devoted to promoting private-sector investment in emerging markets. The IFC also took a $4 million equity stake in Orascom projects and touristic development, the Egyptian development company which opened its first hotel at El Gouna eight years ago.

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It's those kind of skewed priorities that are bringing thousands of protesters to the streets of Washington, DC this week, where executives of the World Bank are meeting on April 16 and 17. When, the World Bank reports, more than two thirds of the global human population lives on less than $2 a day per person, and half the world's adult population has never made a telephone call, a growing chorus of critics -- including not just environmentalists and nongovernmental organizations but international business groups and a US Congressional committee --- is questioning whether projects like El Gouna are the best use of the world's development money.

The 1,500-person IFC's stated mission is "to promote private sector investment in developing countries, which will reduce poverty and improve people's lives." It's a lofty goal, but critics say the IFC all to often acts as little more than a global welfare agency for rich multinational corporations and for business interests in the developing world already prospering on their own. Moreover, the IFC's portfolio is top-heavy with bulky petroleum, mining, and infrastructure projects in Africa, Asia, Latin American and Eastern Europe that critics say are likely to do damage to the environment and do little to help the poor.

The agency, to its credit, has prohibitions against lending to particularly egregious industries and companies, such as gunmakers, munitions industries, tobacco growers, and distillers. Still, the IFC seems to have an uncanny knack for financing dubious undertakings such as Coca-Cola bottling plants, beer breweries, cultivation of flowers in hunger-wracked Africa for export to Europe -- not to mention pizza parlors. In 1998, the IFC invested $780,000 to help a Domino's Pizza concession in South Africa expand from two stores to 20.

"They're not delivering new services or health benefits," snorts Andrea Durbin, international program director for Washington, DC-based Friends of the Earth US. "They're delivering pizza."

"The IFC," Durbin adds, "is a publicly owned institution with finite dollars available. It should be taking the lead to demonstrate model investments that result in sustainable development and alleviate poverty."

Perhaps the least-known member of the World Bank Group, the IFC is a distinct organization with its own funding, supplied by the 174 member-governments and its internally generated profits, most of which are derived from its investments in paper securities and which it uses to finance the institution's growth. In 1999, the IFC approved $3.5 billion in loans and investments while marshaling another $1.8 billion in loans from private financial institutions, such as Chase Manhattan Bank or Credit Suisse First Boston, for 255 projects in 77 countries.

The organization is not deaf to its critics. Under its new director, Peter Woicke, the agency is calling attention to its "frontier investments" in the poorest countries and its "extending the reach" initiative, which gets money to home-grown enterprises as various as a cement factory in rural Albania, a pastry shop in Israel's West Bank and a tea company in Vietnam. Mark Constantine, the IFC's manager of corporate relations, notes that 40 percent of the agency's funds are lent to developing countries' financial sector, "a key way we reach small and medium-sized businesses." Environmental groups do credit the IFC with improving transparency and being more ecologically friendly since it hired an ombudsman last year.

IFC officials insist that many of the franchises it finances, especially those arrangements with Coca Cola, build transferable business and entrepreneurial skills, and that the Domino's franchises help to empower the black population in South Africa. And it justifies investment in the luxury development El Gouna on the grounds that the hotel complex creates as many as 5,000 jobs and acts as a magnet for growth in the region.

The project is a particular favorite of Woicke, who came to the agency from J.P. Morgan Asia Securities. "It's a huge creator of employment and foreign exchange," Woicke said. Plus, it fulfills the important function of keeping visiting capitalists happy. "I do think that in some of these countries you need a luxury hotel to attract businesspeople to go there and decide on investments," said Woicke.

Although it is still early in his tenure, Woicke seems unwilling to break with the practice of "cherry picking" deals in developing countries. As a supra-national, government-funded finance agency, the IFC is supposed to handle the neediest cases and leave the obviously profitable deals in the better-heeled developing countries -- such as Brazil, Argentina, Mexico, and India -- to the private sector. However, a 1996 report by the General Accounting Office, the watchdog arm of the US Congress, found many international bankers complaining that the IFC often cut them out of the best deals. More than one-fourth of all international capitalists and financiers interviewed by GAO investigators complained that "the IFC's presence conflicted with their participation in a given project." In particular, representatives of US companies complains the the IFC takes the best deals for itself and cuts out the private sector.

But rather than serving as a "lender of first resort" and financing only the most deserving projects in needy countries, the agency continues to funnel money into projects involving fat-cat companies that, critics say, are best left to the private sector. Some recent business-as-usual deals from the IFC include:

  • a planned $60 million investment in Grupo Posadas SA, the leading hotel operator in Latin America, for development of five new hostelries in Mexico.

  • agreements to invest $55 million in Harken de Colombia Ltd., a subsidiary of Texas-based Harken Energy Corp., to develop four oil fields in Colombia for foreign export.

  • an agreement to lend $47 million for a Venezuelan petrochemical plant that will produce propylene. The Venezuelan company which will build and operate the plant -- Propileno de Falcon Profalca, CA -- is a creature formed by Venezuela's national oil company Petroleos de Venezuela, SA; Inelectra, the country's largest engineering and construction company; Empresas Polar, its largest privately held industrial group; and Koch Petroleum, a division of US-based Koch Industries.

A deal involving Koch Industries seems a little like bringing sand to the beach: Koch is hardly a company that needs public assistance. Headquartered in Wichita, Kan., Koch is the nation's second-largest privately held company, described by a New York Times reporter as "an energy gusher of refineries, gas pipelines, oil trading, chemicals, cattle ranches and, increasingly, financial services."

Among its other claims to fame, the company is known for its appalling environmental record. In January, the US Environmental Protection Agency assessed Koch a $30 million civil environmental penalty for callously leaking 3 million gallons of crude oil from corroding pipelines from Texas to Missouri to Alabama. The EPA charged that Koch employed a deliberate policy of allowing the pipes to rupture and spew oil before instituting repairs, which fouled lakes and the Gulf of Mexico and killed thousands of fish and migratory birds.

The IFC defended its dealing with Koch, and spokesman Constantine said: "Whatever problems Koch may have had in the US, they do the right thing environmentally for us. And they've been a good partner. Today and going forward, IFC's role in oil and gas projects is led by the environmental and social value we can bring."

Critics, however, don't see much "social value" in the agency's involvement in a proposed Chad-Cameroon oil pipeline. The World Bank and IFC are promoting the 1,100-kilometer pipeline as the best way to tap Chad's oil reserves for export and help bring some measure of prosperity to one of the world's poorest countries. While the World Bank is putting up $100 million, the IFC is actually playing the bigger role. In addition to lending $100 million, the IFC is mobilizing $300 million in private capital for the project, which is estimated to cost $3.5 billion. Meanwhile, partnering with multinational oil companies Exxon Mobil (the company that have us the horrific Exxon Valdez oil spill in Alaska a decade ago) and France's TotalFina "reeks of corporate welfare," argues Friends of the Earth's Durbin.

In addition, it is questionable whether the benefits from oil wealth will ever reach the poor of either African country. Cameroon ranks as most corrupt country in the world, according to Transparency International. And Chad's government has such a wretched record of human-rights violations, massacres and political instability that the US has withdrawn its Peace Corps volunteers out of fear for their safety.

"These governments have absolutely no track record on environmental protection and poverty alleviation," asserts Korrina Horta, a senior economist at Environmental Defense in Washington, DC. Both African countries need economic development and political stability, but massive corporate welfare schemes are unlikely to do the trick.

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