[Recorded by Electronic Apparatus]
Tuesday, April 16, 1996
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[English]
The Co-Chairman (Mr. Graham): I call this meeting to order. I will just draw to the attention of the members before we begin that Mr. Lindbaek, who is here with us today, is free only until 12 noon, so I'd like to get started right away.
This is a joint meeting of the Standing Committee on Finance and the Standing Committee on Foreign Affairs and International Trade. Mr. Brent St. Denis will be co-chairing with me.
[Translation]
We are very pleased to welcome to the committee Mr. Jannik Lindbaek, Executive Vice-President of the International Financial Corporation, which is a member of the World Bank group.
Last year, the Standing Committee on Foreign Affairs and International Trade prepared a lengthy report on the activities of international financial institutions. Consequently, we are very pleased to have Mr. Lindbaek to continue our work in this area.
[English]
Mr. Lindbaek, we generally ask if our witnesses would keep their comments to around 15 or 20 minutes, which then allows members an opportunity to question. Since this is both the finance committee and the international affairs committee, there are more members here than normal, so we look forward to that.
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Mr. Len Good accompanies Mr. Lindbaek. For those of you who don't know, Mr. Len Good is the executive director of the bank, representing Canada and Caribbean nations as well.
Welcome, Mr. Good.
The Acting Co-Chairman (Mr. St. Denis): On behalf of the members of the finance committee, I second the welcome of my colleague Mr. Graham. We won't waste any more time on welcomes.
We look forward to your comments, Mr. Lindbaek. Thank you for attending.
Mr. Jannik Lindbaek (Executive Vice-President, International Financial Corporation, World Bank): Thank you very much, distinguished members of the committee.
Mr. Chairman, it's an honour for me to appear before you today, and I appreciate the warm words of welcome that you have extended to me.
[Translation]
I will be very pleased to answer any questions asked in French, but I must apologize for my 30-year old student French, and I would ask to be allowed to answer in English.
[English]
With your indulgence, I would like to make a brief opening statement, and then I shall be glad to respond to any questions you might have.
I will begin my remarks with a brief overview of the work of the International Financial Corporation, IFC. I would then like to touch on a few issues of interest and relevant points with regard to the excellent report produced by the committee last year, From Bretton Woods to Halifax and Beyond: Towards a 21st Summit for the 21st Century Challenge.
As I am sure many, if not all, of you are aware, IFC is a member of the World Bank group, whose mandate is directly to promote private sector development. We are owned by Canada and 168 other member governments. I should like to add that at the IFC we are most grateful for the strong support your government has expressed for our work, through both your financial subscriptions to our capital and contributions to our trust funds, as well as through the good work of your able directors. In fact, Canada's current IFC board representative, Mr. Good, is with me today and kindly hosting what is proving to be a very fruitful visit to your country.
Like the World Bank and IDA, IFC shares the common objective and purpose of alleviating poverty, promoting environmentally sustainable development, and seeking to increase living standards and the overall quality of life in our developing member countries. Unlike the World Bank or IDA, IFC does not lend to governments and we cannot accept a government guarantee of repayment. Rather, we seek to fulfil our development mandate by investing in private companies and financial institutions in our developing member countries.
We do this in three ways: first, as a project financier providing both loan and equity investments in projects; second, as a mobilizer of capital using our commercial bank loan syndication program as well as other sources of finance; and, third, as a provider of advice and technical assistance.
Under its charter IFC is required to work on a business-like basis, and we have in fact had a profitable net income statement every year since our foundation in 1956, almost 40 years ago. We are committed to the belief that profitability and development are complementary, rather than conflicting, aims.
Our objective, therefore, is to complement and stimulate private investment and sources of finance, not to compete with them. But where private investors and lenders are reluctant to invest in commercially strong projects because of their perceptions of political risks, IFC has an important role to play.
The corporation has grown dramatically in recent years. This growth has been driven by the shift from public to private ownership of productive enterprises throughout the developing world.
Allow me to illustrate with some numbers. Over our 40 years of existence, IFC has invested in over 1,100 companies in more than 100 developing countries. Over the last 10 fiscal years, the number of firms in our committed portfolio has grown from 377 to close to 1,000. IFC's loan and equity investment approvals have increased over the same 10-year period from $700 million per year to around $3 billion per year, and this increase in demand is showing no real signs of slowing.
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Over these forty years, Canadian firms have had substantial involvement in our work, with 84 companies and banks having invested about $650 million U.S. in projects for a total value of more than $7 billion U.S.
In 64 instances, Canadian companies were suppliers of capital goods and services in support of these projects. Almost half of the loan-on-equity participation in dollar terms from Canadian companies came, in fact, during 1995 from some large mining projects in which firms from this country are involved. However, a key objective of my visit here is to do better in building many more partnerships between Canadian entities and the IFC.
You may ask, why is this important? Obviously, in political terms, the more directly Canada's commercial interests are served, the more likely it is also that you and your colleagues will continue to support our important development work.
But to undertake our work, we need partnership. It is not an option for us, because IFC will not finance, in most cases, more than 25% of the total project cost of any one project. We therefore always need to find partners who can invest and lend together with us. That is why I place such a high priority on my visit here and why I have spent a significant time meeting with members of the Canadian business and financial community.
The changes in economic thinking over the last decade have a direct impact on IFC's current operational priorities. These priorities include a focus on infrastructure, capital markets development, and assistance to small and medium-scale enterprises.
It is in infrastructure, power, telecommunications, transportation, and water supply and treatment where we have seen the most dramatic impact in terms of the worldwide shift to the private sector. About 25% of IFC's approvals on new projects last year were in the infrastructure area. The needs are huge and we expect this surge to continue.
A secondary focus for us is the capital markets development. This includes a range of IFC's activities that seek to build the financial sector of developing countries. Fundamentally, a long-term goal in order to achieve sustainable development is the country's ability to channel domestic savings through its own domestic institutions into long-term investments. For this reason, capital markets development work has always been a major priority of IFC's work. We have, over the years, helped establish and support close to 200 financial institutions around the world, mainly very successfully.
A third major priority for IFC, one in which I know is a concern of this committee, is assisting small and medium-scale enterprises in difficult environments, such as countries with small markets, countries in transition, and countries with little access to equity or long-term financing. Over the years we have successfully invested in activities to support such enterprises through our project development facilities and business advisory services. They have all been created in partnership with a wide range of donors, including Canada.
These activities started first of all in sub-Saharan Africa. We have more recently extended them to the South Pacific. We are going to launch soon a project development facility and a small and medium-scale lending facility directed towards Vietnam, Laos and Cambodia. We also have a separate facility on the drawing board for eastern Europe and the former Soviet Union. In this area, we must be more proactive, and we are continually in search of new mechanisms to meet these obvious needs, particularly in regions or countries that attract the least amount of private capital.
A case in point: it is estimated that in countries like Peru or Bolivia, more than half of the GNP is generated by micro-entrepreneurs, the so-called informal sector.
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In the last month, we have approved in our first investment a fund that will invest in micro-enterprise financial institutions. The advantage to the microfinance institution is equity capital to help to expand and reach more of its small-borrower client base. However, what is novel about this initiative is the fact that Pro-fund, as it's called, will also seek to earn a strong rate of return for its investors based on the profitability of the microfinance institution in which it invests. I should add that the Calmeadow Foundation of Canada is the founding investor in the same company.
Like any organization, we are of course not perfect, but we seek to keep our ear to the ground and listen to our client base, to our shareholders, and to external audiences; and if we need to make changes, we do.
On that note, let me mention that we recently reviewed and analysed our relationship with the private sector financial institutions and through a collaborative effort with a number of banks around the world we issued new guidelines to staff to promote more collaboration rather than competition with other financial institutions.
This outcome is important both to maintain a positive relationship with our investment partners and to allow IFC to leverage its resources to the maximum extent possible. And leverage is necessary in a world where the shift to the private sector has meant increased demand for our financial services and thus a need to be selective and obtain maximum development impact. But we also feel an obligation to use the capital in which we have been entrusted in a maximum way in terms of efficiency and productivity.
I initiated, when I joined the IFC two years and a few months ago, a strong cost containment policy that has lasted to this day. We have basically had flat administrative budgets in recent years, and we have had a portfolio grow on average by about 15% per annum on a cumulative basis. Of course these efficiencies and productivity gains have served to improve the basic profitability of our lending and our equity operations.
Before concluding, I would like to turn to three issues that are of concern to the committee, as reflected in your report, From Bretton Woods to Halifax and Beyond. The first of these issues is the environmental performance of the multilateral institutions like IFC. The second one is the degree to which our operations are transparent - or information disclosure, if you like. The third is cooperation and coordination among the different institutions within the World Bank group.
Let me first say a few words about environment. In all our work, we seek to ensure that we invest in projects that are environmentally sustainable. I acknowledge that, in the past, environment has not always been given the priority it should have; but when I came to IFC two years ago, I made it clear from the first day that environment has always been one of my main priorities. In my view, it is the obligation of IFC to be a leader in the efforts to improve the environmental performance of the private sector in developing countries. This is not always easy. For example, we often require private clients to implement environmental requirements that go well beyond local government standards and thus their neighbouring competitors.
Over the last three years we have substantially toughened our environmental standards and their implementation. We have developed these policies in close consultation with Canada and other key shareholders, among others, who have given substantial attention to the environmental issues through our board of directors. We have also consulted widely, if not always agreeing 100% of the time, with interested NGOs in the process.
Although numbers of staff in and of itself is not determinative, we have more than doubled the allocation of such resources to the environmental work of IFC in the last three years. I have also designated one of the operational vice-presidents of IFC to have corporate oversight responsibility for environmental and disclosure issues. This helps ensure appropriate attention at the management and corporate-wide level.
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We are not only concerning ourselves with the remedial measures but also actively promoting investment opportunities in the environmental sector.
In the area of disclosure, eighteen months ago IFC established a new policy on disclosure of information, and last December we reviewed and further strengthened that policy on the basis of the experience we have had in the first year and a half. Again, we developed our approach after extensive consultation with the NGO community, and as a result we now release far more project-specific information than ever before prior to board consideration of an investment proposal.
In IFC's case, we have faced the challenge of developing a disclosure policy that balances in a reasonable way the obligation to be open and transparent in our activities with, on the other hand, the need to respect the necessary business confidentiality of our private sector clients. In developing our disclosure policy we have placed the priority on releasing information early enough to ensure that those people potentially affected by a project have the ability to be consulted and provide input.
To forge better understanding and new partnerships, we have also begun, in association with our strengthened disclosure policy, an NGO outreach program. This means whenever IFC management visits a member country, we will seek out NGOs to consult with them and develop new relationships. Within this context I will be meeting with a group of Canadian NGOs later today.
I have a few words on the cooperation with the World Bank. Next month the president of the World Bank group, Jim Wolfensohn, will be received by this committee. One of his key priorities, and one I certainly share, is to improve the level of coordination and cooperation within the World Bank group. IFC and the bank are working hard to meet this objective, one that does not come completely naturally, partly due to the fact that we have fairly different cultures in the World Bank and in the IFC.
Let me give you one example. Until this year IFC and bank staff largely worked independently in developing country operational strategies. As a result IFC did not fully benefit from the knowledge the bank had developed, particularly at the macro level, and the bank on its side did not fully benefit from IFC's on-the-ground experience working in the private sector.
We are now engaged in a pilot program of joint country assistance strategies in which the bank and IFC will work together to develop a comprehensive bank group strategy, in a limited number of countries, to gain experience from that pilot.
In other ways, too, the private sector activities of the bank group are being better coordinated. In particular, President Wolfensohn has designated a managing director, Mr. Richard Frank, to oversee these activities and where necessary rationalize and remove duplication of effort.
One thing is clear to me, however: the world needs a healthy and well-functioning World Bank group. Without the macroeconomic reform work undertaken by the bank and the relevant governments, and without the bank's social investments in health and education, IFC's private sector work will only have a marginal impact as we go forward. All the tools need to be in place.
I will leave it to Mr. Wolfensohn, when he is here next month, to give you more detail on the changes being implemented at the bank.
Thank you very much for your patient attention and interest. I am delighted to be here and I look forward to responding to any questions or comments the committee may have.
The Co-Chairman (Mr. Graham): Thank you very much, Mr. Lindbaek.
Your reference to our committee report I think was appropriate, because it illustrates the importance with which parliamentarians are now approaching the issues of both the World Bank and the International Financial Corporation.
I think you will see an increased parliamentary interest in the activities of your institutions as we recognize that they are very important to Canadians in terms of the delivery of the aid profile of this country. This joint committee of both finance and foreign affairs illustrates the importance parliamentarians attach to the work of your corporation.
I also think it's a very good idea that you're meeting with the NGOs this afternoon, because they too have a very interesting stake in this issue.
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Mr. St. Denis and I recognize that we have a very short period of time. There are many members here. Our procedure will be that we will hold everybody to five minutes, maximum. We hope people will keep it to four. We will try to get as many questions in as possible. We will go back and forth between opposition and government members in both the finance and the foreign affairs committee.
[Translation]
Mr. Paré, five minutes.
[English]
Excuse me, Mr. Paré. I had a notice of motion delivered to me before. Mr. Duhamel wanted to raise a brief -
[Translation]
Mr. Duhamel (St. Boniface): I think you answered the question.
[English]
It was basically this: how do you choose the people? You've indicated the parties. Has that decision been made?
The Co-Chairman (Mr. Graham): Yes, and we will go back and fourth between foreign affairs and finance and the two chairs will try to make sure everybody gets a crack at it.
[Translation]
Mr. Paré (Louis-Hébert): I would like to thank Mr. Lindbaek for being with us today. It's always interesting to meet the mandarins who are in charge of the money Canada provides for international development.
The international financial institutions have often been criticized for investing in major projects which did not always respect people or the environment.
In addition, the international financial institutions have often imposed on developing countries structural adjustment programs that further impoverish the poorest of the poor.
I am therefore very pleased to see that one of your objectives is to reduce poverty and to work toward sustainable development.
I would like to ask you a few questions. In the 100 or so developing countries in which you have carried out projects, what is the status of the general community?
You also spoke a little about the NGO. Are the NGO consulted only at the beginning of a project, or are they involved in carrying them out?
What are your human rights concerns? Do you have in fact any concerns of this type? Do you take any action designed to promote the establishment of democratic societies in the developing countries in which you are involved?
Finally, what mechanisms have you set up to evaluate the extent to which you meet the objective of eliminating poverty and achieving sustainable development?
Do you have intentions only, or have you established mechanisms to assess to what extent you meet these objectives?
[English]
Mr. Lindbaek: Would you like me to respond right away?
The Co-Chairman (Mr. Graham): Yes, please, Mr. Lindbaek.
Mr. Lindbaek: First of all, on our relationship with the NGOs, our direct consultation with them is of relatively new date. In fact, I took the first initiative in recent times for organized consultation with the NGOs based in the Washington area, to listen to their concerns and to try to see if there were ways in which we could improve the ongoing consultation with them, both on the project level and on the policy level.
I think we can say that many of these organizations share the broad thrust of our activities. But again, there are some organizations with whom we know we shall probably never agree completely on what we are doing.
The environmental policy and the disclosure policy we have put in place ensure, first of all, that there is not only consultation in Washington, in that the documents of the projects are available to the public at a reasonable time before board discussion of the project, but there is also the need for local NGO and public consultation on the projects. I'm talking about the projects that are most complicated from an environmental point of view.
I would be happy to furnish you with a lot more detailed information about our environmental procedures, but I fear that might be too long. It's clear the environmental procedures of an institution like the IFC are evolving all the time. We see the interchange with affected groups as being a natural part of that development.
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You were touching upon the question of human rights and a striving towards a democratic society in the countries where we are working, in terms of the poverty alleviation as an overarching objective. You also mentioned the role of the various lending programs.
I don't think it's necessary to remind you, but the IFC itself is not lending to the governments as such; we are not a party to those lending programs. That's left for the World Bank itself, or for the regional development banks. We are purely working with the private sector in developing countries.
We are precluded by our articles of association from taking direct political views into consideration when it comes to the individual project. But even so, let me say that the kind of society in which we are trying to do a project will in many ways, of course, influence our views on the project. If that particular society is not functioning in a reasonable way, it also means that it is impossible for us to attract resources from other private sources of capital.
Let me further say that -
The Co-Chairman (Mr. Graham): Mr. Lindbaek, I'm sorry to interrupt you, sir, but because of the number of other questioners, perhaps you could have an opportunity to address any remaining issues in other answers. In fairness to the other questioners, though, I think we have to move on to the next question. Thank you very much.
The Acting Co-Chairman (Mr. St. Denis): Thank you for your question, Mr. Paré.
The first question from the Reform Party is from Mr. Grubel.
Mr. Grubel (Capilano - Howe Sound): Welcome, Mr. Lindbaek. It's good to have you here.
We all know that the World Bank group and the IFC played an important role in the immediate post-war years, when international capital markets were very imperfect. We now know, however, that capital markets throughout the world have indeed become almost obnoxiously perfect with all the capital racing around the world and disturbing policies of individual nations.
The key question that I hear continuously is whether or not there is, in this world in which the private capital markets are doing such a good job, still room for the World Bank group, but in particular the IFC. And as I understand it, the IFC is not an arm for providing money on a subsidized basis, but on a break-even one. So I would like to have your response to this. To start with, do you happen to know what proportion of total capital flows to developing countries were provided by the IFC about twenty or thirty years ago, and what they are now? It has been shrinking substantially. Do you have any numbers on that at your fingertips? I know it's unfair maybe, but....
Mr. Lindbaek: I can ask one of my colleagues to look into the numbers. IFC's activities have grown dramatically, as I've told you, but we continue to be a small part of the overall private flows to developing countries.
The interesting picture is the very rapid growth of private flows to developing countries. The private flows have become a much greater part of the financing of developing countries, while public sector funding has been a relatively stable part of that.
I wish I could share your optimism, sir, in terms of well-functioning capital markets. The fact of the matter is that in the large majority of developing countries there is quite simply no long-term loan financing available for private sector projects. You could take most of Latin America and you could take many countries in the Far East and most of Africa and this is quite simply the case.
We are there to provide a small measure of alleviation to a very great market imperfection that is still in existence. You might be able to obtain loans for up to one or two years, but the long-term financing necessary to finance an industrial project is quite simply not available in most countries.
Mr. Grubel: Why not?
Mr. Lindbaek: That's a very big question. If you go to the fundamentals of that, you need savings. If you want savings, people need to believe in the value of money. If they shall believe in the value of money, then you have to have inflation under control.
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Mr. Grubel: I don't mean internally imperfect markets. Why are the private sector markets from the rest of the world not putting money into those areas?
Mr. Lindbaek: The simple response is because of the perceived political country risk. The Mexico crisis is a good example of what is happening in the capital markets. Many countries in the Far East and in sub-Sahara and Africa are perceived to be so politically unstable that the private sector financial institutions in the industrialized world are not willing to place money there.
Mr. Grubel: But IFC is in our name.
Mr. Lindbaek: Yes.
Mr. Grubel: This then should be reflected somehow in the rate of return or something. This is an element of subsidy that you are providing to the developing countries.
Mr. Lindbaek: Our pricing policy is based on market terms. It's difficult to judge what the market is where there is no alternative, but I can assure you that we are charging very substantial margins in order to meet the administrative costs and the loan loss risks that we are covering. We are run on a fully business-like basis.
Mr. Grubel: So the benefits to society are coming from your diversifying the political risks existing in those developing countries' markets.
Mr. Lindbaek: At the basis of everything we are doing is an attempt to develop viable companies and projects in developing countries, companies that can sustain the test of time and hard international competition. We do have an international franchise given to us by our 169 member countries, channelling money to private sector projects in developing countries, many of which would not see the light of day without their assistance.
The Acting Co-Chairman (Mr. St. Denis): Thank you very much, Mr. Grubel andMr. Lindbaek.
The first question from the government side is from Mr. Duhamel.
Mr. Duhamel: Mr. Lindbaek, thank you for your presentation.
I have two quick questions. From a layperson's perspective there appears to me to be a crowded market out there with a lot of players, some duplication of mandates, and some overlap of service geographically, yet some gaps, some real needs that are not being responded to. That may not be an accurate picture, and I would like your comment on that.
Secondly, what's the one thing that you'd like to take away from this meeting after this particular presentation and exchange?
Mr. Lindbaek: I would like to take away from this meeting the continued support of Canada for the activities of the International Financial Corporation and of the World Bank group as a whole.
I believe we in the IFC are a unique institution, the only source of capital for long-term funds and equity capital in many developing countries, but we are stretched. We have a portfolio encompassing close to 100 countries. We did projects in 65 countries last year alone and we are trying to use our relatively small resource base and our organization of about 1,200 people around the world to meet the requirements of many countries and the wishes of many constituencies. It's not a small job, but IFC is growing rapidly and we hope to be able to do it in the best possible way.
In terms of duplication and gaps, let me mention the important cooperation we have with bilateral institutions like the EDC. We are with them in many projects and we are cooperating on developing projects with EDC and other bilateral institutions of a similar kind around the world. That is not a duplication of effort. They frequently can bring things to the table both in terms of knowledge of the country where we are working and in terms of bringing to the project Canadian sponsors that we might not otherwise have found.
Similarly, we are also working with other multilateral development banks and financial institutions. For instance, we're working with EBRD in eastern Europe. We are complementing each other, not overlapping.
Mr. Duhamel: I'd just like a clarification then, very briefly. You're saying that overlap is not a problem, that there are in fact interactions between these various actors that are indeed very positive. Have I understood that correctly?
Mr. Lindbaek: That is my view, yes. I'm not worried about overlap. If anything, I'm much more worried about what you could call ``underlap''.
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Mr. Assadourian (Don Valley North): Thank you very much for your presentation.
I was in developing countries last year and CIS countries two years ago. The main concern I had when I came back was that they used the phrase ``joint venture''. Joint venture is, I think, a fast track to Swiss bank accounts. One of the major concerns they have is corruption. How do you separate the goats from the sheep, and how do you follow up on where the money's going and how effective your contributions are?
Mr. Lindbaek: I hope you have time for a long answer, sir.
Mr. Assadourian: We have 40 minutes. Go ahead.
The Co-Chairman (Mr. Graham): We don't have time to go to Switzerland and back anyway.
Mr. Lindbaek: I think we can all agree that the transparency issue is a huge problem all over the world, in developed countries and in developing countries.
In IFC, we are working with the private sector, and of course we have a rigorous control over each individual project in terms of the costs going into the project, so we have reasonably good control of the costs involved in the project itself. I think that is providing quite a bit of reassurance against obvious attempts to channel funds in the wrong direction. That is perhaps the most important one.
The appraisal methods of IFC are very thorough, and that's why we are sometimes known as being a bit slow and bureaucratic. That's another word for thoroughness and should perhaps be taken as a compliment.
In terms of running the project, we are frequently represented on the board of these joint ventures that we are financing, and again we have an ongoing control of what is going on and what is happening. I cannot guarantee that we are 100% able to avoid any problem of this kind now or in the future, but I think we have much better control than you would find in other projects. I think also there is a presumption that if sources of capital, investors, or participants in such projects really would have plans for, should we say, less agreeable practices surrounding the project, they would probably not seek IFC's assistance, because they know we have to insist on a transparent procedure and the best possible controls.
Mr. Assadourian: I have one quick question. Would you declare or announce the name of a country if you see there's corruption taking place or money is being diverted to some other account than it is supposed to go to? Would you declare what this nation or this country has done so that Canada - not your corporation - can watch the situation and make sure we don't put the money in there again? Or do you keep your investigations to yourself?
Mr. Lindbaek: I'm afraid I cannot promise you that. We are normally talking about confidential business information. It would have a great deal of impact on whether we would do business with those companies or those people in the future, but it is not our role to be police in this respect.
Mr. Assadourian: Thank you.
The Acting Co-Chairman (Mr. St. Denis): Thank you. Mr. Pomerleau, please.
[Translation]
Mr. Pomerleau (Anjou - Rivière-des-Prairies): Thank you for your presentation,Mr. Lindbaek.
I would like to ask you a question that is somewhat related to what Mr. Grubel was saying earlier. You mentioned that in a number of countries, long-term private funding was difficult to obtain. You referred to Africa and some South American countries, among others. As Mr. Grubel was saying earlier, there seems to have been a significant reduction over the years in the financial resources made available to developing countries by the International Financial Corporation.
Your corporation is probably competing with private international capital belonging to other organizations. Given this, how would you define the nature of your work? Why does your corporation exist if private capital is already doing what you are doing?
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[English]
Mr. Lindbaek: Thank you. Let me say first of all, as an example, in most of Latin America there is quite simply no access to long-term funding for private sector companies or enterprises. Even the strongest companies in some of those countries are today not able to attract long-term funding beyond two to three years. There's a huge demand for the kinds of services IFC can provide together with our participants in our syndication efforts where Canadian banks are also playing a role.
So it is quite simply a misconception if you believe there is heavy competition among international markets to lend to private sector projects in developing countries. That is not the case.
Now, we have tried to be open and transparent about our own policy with regard to competition with private sector financial institutions. And we have had a full review of the whole matter in good cooperation with a large number of international banks, some of the largest banks of the world. They were given the opportunity to openly discuss our guidelines for competition and collaboration with international banks. And this resulted in a document which came out six months ago and which today forms our guidelines. Generally this document has been extremely well received by the international financial world and has served to clarify and to define the areas of collaboration for the future.
This is, in my view, much less of a problem than you might think. IFC is one of the very few sources of capital available in most developing countries for the private sector today.
The Co-Chairman (Mr. Graham): Merci. Mr. Flis.
Mr. Flis (Parkdale - High Park): One of my first questions was to ask what recommendations from From Bretton Woods to Halifax and Beyond have been accepted and implemented by IFC. You answered this with your opening remarks, so that pleases the committee members very much.
But IFC was established in 1956. So most of your financial activities took place at the peak of the Cold War between two superpower periods. That period is over now. My question is what impact do the former Cold War policies have on IFC involvement in certain projects? I'm thinking now of Cuba. Do you have any projects in Cuba? Would the recent Helms bill legislation prevent IFC from doing business in Cuba? We have Canadian companies or private companies doing business there. Would they be eligible for 25% of assistance from IFC?
Along the same trend of post-Cold-War policies, you did say you complement work in central and eastern European countries. Let me give you an example. A country like Belarus needs a lot of our assistance. It has taken quite a pro-Russia military and trade policy, etc. A country like Azerbaijan has taken a very anti-Russia policy in the same areas. The needs there are even greater. It has seven million people, one million refugees. Is IFC affected by former post-Cold-War policies and specifically Cuba and former Soviet Union countries?
Mr. Lindbaek: Thank you. First of all, on the elementary basis, we can only work in projects that are members of IFC and Cuba is not a member of IFC today. If they were to become a member in the future we would be happy to try to develop our activities in the country.
When it comes to the former Soviet Union and countries like Belarus and Azerbaijan, we are trying as much as we can with our resources to develop our activities in those countries. First let me mention Russia. We have invested in roughly 15 different projects - mostly fairly large projects - in anything from oil, gas and mining projects to paper production and general manufacturing projects of various kinds.
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We also have a major effort in Russia, which is now also being spread to Ukraine, privatizing agricultural land supported by donor funds, particularly from the British and the Americans. It's a very large, ongoing activity. We have already privatized more than a hundred of the large state farms in the Nizhni Novgorod area, which is sort of in a trial period.
Our method for privatizing agricultural land has been adopted by the parliament of Russia as the standard method for the whole of the country, but I think we all know it's a highly controversial political question internally. I think you can also see the tremendous implications if we should succeed in transforming Russian agriculture.
So we are trying to do the best we can, just as we were very early in assisting Czechoslovakia, as it was called at that time, Poland, and Hungary. We are trying to help the Baltic countries. So we are trying everywhere.
Mr. Flis: In 1991, the European Bank for Reconstruction and Development began its operations. They fund up to 60% of the resources to the private sector; you fund 25%. How do you cooperate with regional banks, like the EBRD, in helping these countries in transition?
Mr. Lindbaek: The EBRD was established with the specific aim of helping eastern and central Europe, and the former Soviet Union. For us, that's only one of many regions. They can put many more resources into the region than we could ever hope to put into that region alone.
We have cooperation with EBRD because in many of the projects we are talking about the need for capital and support is far greater than both of us can do alone. Therefore, there is frequently room for both of us. We do support each other, and we frequently base our work on the appraisal of the other institution.
There is an element of competition in terms of smaller projects, but I believe that basically it's probably a healthy competition.
Mr. Morrison (Swift Current - Maple Creek - Assiniboia): Mr. Lindbaek, I would like to pose a question in a purely Canadian context.
Most Canadian investment into the developing world is in the form of equity for multinational companies and in promotional ventures. There are actually some very substantial promotional ventures. Do you follow the pattern of a private bank, if you are approached by such companies for loans, of basing your cooperation on the degree to which these people are willing to spend their own money, their own equity? Do you follow this policy? Or do you even invest in, for example, promotional mining projects in which the sponsoring company is putting up its own equity?
Mr. Lindbaek: Let me remind you that I said we can only take a maximum of 25% of any project cost in financing. We are therefore always looking for good partners. That's one of the reasons we are here. We are working with several important Canadian mining companies in ventures in difficult developing countries.
The question of the plan of financing for any such project is obviously the subject of quite intensive discussions and negotiations, as I am sure you will understand.
It is in our interest to have a strong strategic partner, for instance a Canadian mining company. We would like for them to put up a reasonable degree of the equity so that we know they are fully committed to the project and have an important stake in the upside potential of the project. That is providing them an encouragement. On the other side, we are prepared to be their partners and go in with another part of the equity, and perhaps provide a part of the loan financing and channel funds from international banks under our syndication auspices. That's approximately how that is functioning.
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The degree to which the international partner is willing to put up equity financing can from time to time be a difficult issue in the negotiations, but we have to insist on a substantial stake from the strategic partner in order to make sure they are fully committed to the project.
Mr. Morrison: Thank you.
The Acting Co-Chairman (Mr. St. Denis): Thank you, Mr. Morrison. Dianne Brushett, please.
Mrs. Brushett (Cumberland - Colchester): Thank you, Mr. Chairman. I will be brief.
My question touches on the previous questions regarding the criticism, particularly in some of the international newspapers, where the World Bank and the IFC are receiving attention for the fact that some of these reforms you've mentioned - transparency and prevention of duplication - you're not able to bring about the way you'd like to. There's resistance within your own bureaucracy.
With the costs of administration being what they are, and, as other members here have suggested, with the movement of free capital throughout the world today like never before, perhaps we've outlived some of the usefulness of the World Bank and the IFC and we're not able to make the changes rapidly and get the effective value for that dollar. Perhaps the U.S. will be one of the first ones moving in this direction.
Mr. Lindbaek: I fully believe we have to follow responsible policies. It's my job to see to it that the organization, over time, is implementing these policies in a responsible way.
You're right in saying that any organization doesn't necessarily take well to change and that it takes time, quite simply, to build up the necessary professional capacity, for instance in the environmental field. These people are not found and trained overnight. I don't claim to say everything is perfect, but I can assure you these issues have maximum attention within the management of IFC and also of the World Bank.
Mrs. Brushett: Do you expect to have rapid improvement or resolution fairly quickly on this?
Mr. Lindbaek: We do see tremendous improvement of the environmental and disclosure polices of IFC compared to what we saw five years ago, yes. In this respect that is a quite rapid development.
Mrs. Brushett: Thank you.
The Acting Co-Chairman (Mr. St. Denis): Mr. Peterson.
Mr. Peterson (Willowdale): Thank you very much, Mr. Chairman.
Going back to 1947, some 49 years ago, with the establishment of Bretton Woods, one of the great dreams was that we would end the disparities that exist between the developed and developing worlds. Yet we have seen in recent years a decline in official development assistance going from governments to governments, and the United Nations is having incredible problems getting its funding.
Do you feel that without a huge increase in overseas development assistance, efforts such as yours through the IFC, supporting private investment, can really do the job of establishing the levels of development we want to see in the Third World?
Mr. Lindbaek: The fact of the matter is the developing country group is today growing faster than the developed part of the world, but from a much lower base.
Also, within the group of developing countries, the growth unfortunately is very skewed. You have a group of countries growing rapidly and you have all the countries where little progress is being made.
It's interesting also to study the success cases. If you go to the Far East and see how some of those countries, in the course of only one generation, have gone from developing countries to becoming major partners on the world scene, that is after all a remarkable accomplishment. So it is possible.
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In terms of the poorest countries of the world, if we want to achieve some measure of alleviation of the poverty, I think official development assistance through IDA and other funds will continue to be necessary for a long time. I do see it as the obligation of the world community to continue their support for developing countries in that way.
In IFC we are the only worldwide-based institution working for the private sector. We have very limited means. We are growing very fast and we will certainly also need more resources over time if we are to become as effective as we would like to be. There is a tremendous need for our services out there.
The Co-Chairman (Mr. Graham): Mr. Lindbaek, I wonder if I could ask you a question about your trip here. I understand that you were in Toronto yesterday speaking to the private banks because you wish to associate the private banking community with your activities in sort of a syndicated way. Could you tell the committee about how successful that is and what sort of success you're having in other countries in that respect?
I'd also like to hear your comment on a rumour I heard that in fact one of the problems you were having in attracting private banking associations was that when your corporation is the lead banker in one of these syndicated loans it takes the most aggressively self-protective position and that the private banks feel a little threatened by participating. It's just a rumour I heard, so I'm not giving it any credence. I would just be interested in your comments.
Mr. Lindbaek: I am delighted to play the role of killing that rumour anyway, because when we are working together with private banks within our syndication efforts, we are completely on a pari passu basis. The advantage that we are affording to private banks in Canada and other countries when they participate with us is that they get a measure of protection against certain political risks and that they're enjoying some of the immunities afforded to the project by virtue of the country's membership in IFC.
This has created the basis for a rapidly increasing syndication activity. We are working with more than 100 commercial banks and investment banks around the world in our syndication effort, and last year alone the activities were growing by more than 40%. Just to give you a measure of the importance of this, the overall volume in terms of syndicated loans today is higher than what we are lending for our own account.
Canadian and U.S. banks have been somewhat reluctant to participate in our programs in recent years after the debt crisis of the 1980s, but I'm happy to say that both U.S. banks and U.S. insurance companies, as well as Canadian banks, are coming back into our programs. Part of my visit here has been to stimulate the old friendship and partnership that we have with your major banks in this country. We have been extremely well received by your banks and I think there's a great deal of interest in increasing the activity in the future.
The Co-Chairman (Mr. Graham): So the advantage of the private bank participating in a syndicated way through you is that since the government to which the loan is being made is a member of your organization, there is some sort of a relationship there that would control default mechanisms that would be more protective than if they were going in there on their own. Is that sort of the essence of the relationship?
Mr. Lindbaek: Let me correct you by saying that we are never lending to the governments. We are only lending to the private sector project in that country.
The Co-Chairman (Mr. Graham): Right.
Mr. Lindbaek: If there is a Canadian partner and one of the Canadian banks would like to support their client, the Canadian partner, in their project in that developing country, they can do this to their advantage under the auspices of IFC, because they will be sharing in the immunities and the preference that IFC has against certain risks. That is making it possible for us to syndicate loans into countries where no commercial banks today would be willing to lend directly to the private sector.
The Co-Chairman (Mr. Graham): Thank you, sir.
The Acting Co-Chairman (Mr. St. Denis): Mr. Lindbaek, on behalf of all members I thank you and your colleagues for spending a valuable hour with us today. No doubt time will clearly prove that international financial institutions, including your own, will play an increasingly important role on the world stage. We appreciate the time you have spent with us and wish you well in your work.
Mr. Lindbaek: Thank you very much.
The Co-Chairman (Mr. Graham): The foreign affairs committee is adjourned until 3:30, when the minister will be coming. Minister Stewart will not be coming; Minister Axworthy will be coming.
We're adjourned until 3:30. Thank you.