Chapter 13

UNIVERSITY OF LJUBLJANA
FACULTY OF ECONOMICS
International Finance Mojmir Mrak
CONTENTS
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CONTENTS AND PURPOSE

1. 2. 3. 4. The World Bank Group Regional Banks for Development Financing Chosen European Development Banks International Banks Development Financing Projects as a Business Opportunity
purpose:
present those IBDF that are important because of the size of their funds present business opportunities
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1. The World Bank Group

the oldest and the only international bank for development financing with truly global membership group of five independent international development institutions:
International Bank for Reconstruction and Development - IBRD (1944) International Development Association IDA (1956) International Financial Corporation IFC (1960) Multilateral Investment Guarantee Agency MIGA (1988) International Center for the Settlement of Investment Disputes ICSID (1966):
non-financial institution
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International Bank for Reconstruction and Development (IBRD)

Establishment, objectives and membership:
establishment: Bretton Woods, 1944 objectives: long-term financing of after-war reconstruction and long-term financing of development of less developed member countries (developing countries and countries in transition) membership: IBDF with global membership
Evolution of activities and changing priorities from establishment until now:

second half of the 1940s and first half of the 1950s: financing economic reconstruction of countries that were affected most during World War II second half of the 1950s: long-term financing of economic development
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1960s: financing big industrial and infrastructure objects 1970s:
socio-economic development goals: growth, poverty reduction, securing basic needs of the population financing integral programs of countryside development, heakth and education projects, securing clean water access, sanitary services, apartment building and urban area development
1980s:
project and balance-of-payments financing ecological aspects of economic development
1990s: Washington Consensus

poverty reduction programs, institutional capabilities strengthening and anticorruption programs, programs oriented towards cooperation with the private sector as well as non-government organizations
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Capital and voting method:
capital: 188,6 mia $ (in the middle of 2000), of which less than 1/10 of paid-in-capital voting method:
voting power of a country depends on its share in the capital of the bank basis: quotas in the IMF
Organization:
Board of Governors Board of Executive Directors Development Committee President
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Sources of funds:
basic financial source is capital borrowing in international capital markets reserves and debt repayments for loans approved in previous years
Loans as a prevailing form of the allocation of funds:

terms of the loans: favorable commercial loans, payment term between 12 and 20 years (3-5 years of principal payment deferral), variable interest rate, unconditional insurance with the borrowing country guarantee preferred creditor
International Finance Mojmir Mrak Page 7
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loan types:
project loans sectoral loans structural adjustment loans technical assistance loans loans for reconstruction
size and structure of approved loans:

the biggest IBDF that approves loans to developing countries and to countries in transition
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Table 13.1:
Year 1980 1981 1982 1983 1984 1985 1986
Loans approved by the IBRD in the period from 1980 2000 (mia $)
Total 4.4 5,1 6,3 6,8 8,6 8,6 8,3 Year 1987 1988 1989 1990 1991 1992 1993 Total 11,4 11,6 11,3 13,9 11,4 11,7 12,9 Year 1994 1995 1996 1997 1998 1999 2000 Total 14,2 16,9 14,5 14,5 21,1 22,2 10,9
Source: Bakker, 1996, p. 55 (for the period 1980 1993) World Bank Annual Report various years (for years from 1994 onwards)
Table 13.1: Net financial flows between the World Bank* and its membe rs in 1995 2000 (mia $)
Africa 2000 A .Approved loans B. Gross effective loans C. Principal payments D. Net effective loans (C B) E. Interest payment F. Net transfer (D E) 2,2 1,9 1,5 1995 2000 13,8 15,0 7,0 East Asia 2000 3,0 3,6 2,3 1995 2000 38,4 33,8 15,7 South Asia 2000 2,1 2,5 1,9 1995 2000 16,5 15,5 9,2 Europe 2000 3,0 3,7 1,4 1995 2000 27,5 22,3 9,1 Latin America 1995 2000 2000 4,1 6,1 3,9 32,3 31,6 25,1 Middle East 2000 0,9 0,7 1,0 1995 2000 7,0 7,1 6,6 TOTAL 2000 15,3 18,5 12,0 1995 2000 135, 5 125, 3 72,7
0,4 0,5 -0,1
8,0 3,8 4,2
1,3 2,7 -1,4
18,1 13,6 4,5
0,6 1,0 -0,4
6,3 6,4 -0,1
2,3 1,3 1,0
13,2 6,7 6,4
2,2 2,7 -0,6
6,5 14,8 -8,4
-0,2 0,6 -0,9
0,5 4,1 -3,6
6,5 8,8 -2,3
52,6 49,4 3,2
* IBRD and IDA.
Source: The World Bank Annual Report 2000, pp. 147 149.
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Structural Adjustment Loans (SAL):
multitude of economic reforms that are supposed to reach macroeconomic equilibrium in a country through supply side measures reasons for the introduction of SAL loans concepts and basic elements of the SAL loan/program:
SAL loan balance-of-payments loan SAL program structural reform program
criteria for accompanying success of implementing SAL programs: drawing in more tranches complementarity of/competitiveness between SAL programs and economic stabilization programs
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International Development Association (IDA)

securing financial assistance and/or concessional loans Founding, objectives, membership and organization:
establishment: in 1960, as a response to dissatisfaction of politically independent developing countries with the size and the quality of IBRD funds objectives and membership:
concessional lending to the least developed developing countries (criterion: per capita GNP ) two groups of countries (differences in the method of initial obligatory subscription)
organization: same as IBRD

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Sources of funds:
member countries donations, part of the IBRD regular activities income and payments of loans, approved in previous years IDA replenishment: regular replenishment of IDA funds
Table 13.1:
Replenishment Beginning IDA-1 IDA-2 IDA-3 IDA-4 IDA-5 IDA-6
IDA replenis hments

Period 1961 1965 1969 1972 1975 1978 1981 1964 1968 1972 1974 1977 1980 1984 Amount (mia USD) 0,8 0,7 1,3 2,4 4,5 7,7 12,0 Replenishment IDA-7 IDA-8 IDA-9 IDA-10 IDA-11 IDA-12 Period 1985 1987 1988 1990 1991 1993 1994 1996 1997 1999 2000 - 2002 Amount (mia USD) 9,0 12,4 14,7 18,0 19,2 11,6
Source: IDA Information Briefs, 1994, p. 2. World Bank Annual Report 2000, pp. 9 and 22.
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Allocation of funds:
funds exclusively in the form of loans, for which a debtor country guarantee is needed basic criterion per capita GNP; depends also on whether the country has access to funds from other sources or not mainly poverty reduction projects repayment period between 35 and 40 years, grace period for principal repayment is 10 years, only payment of certain administrative costs
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Size and structure of approved loans:
Table 13.1:
Year 1980 1981 1982 1983 1984 1985 1986
Approved loans by IDA in 1980 2000 (mia $)

Amount 1,4 1,9 2,1 2,6 2,5 2,5 3,2 Year 1987 1988 1989 1990 1991 1992 1993 Amount 3,1 3,4 3,6 3,8 4,5 4,8 4,9 Year 1994 1995 1996 1997 1998 1999 2000 Amount 6,6 5,7 6,9 4,6 7,5 6,8 4,4
Source: Bakker, 1996, p. 55 (period 1980 1993) World Bank Annual Report various years (from 1994 onwards)
Table 13.1:
IDA credits by major purpose and by country in 1960 1999 (mia $)

Amount 31,8 14,1 13,6 11,0 8,3 7,8 115,9 Country India China Bangladesh Pakistan Ghana Tanzania Total Amount 26,2 9,9 9,1 5,5 3,5 3,1 115,9
Purpose Agriculture Multisector Transportation Education Electric power and other energy Health, nutrition and population Total
Source: World Bank Annual Report 1999, pp. 218-222.
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International Financial Corporation (IFC)

Establishment, objectives, membership and organization:
establishment and objectives:
accelerate economic development of developing countries exclusively by financing private sector projects in these countries
organization: similar to IBRD and IDA

capital: fundamental capital paid-in capital voting method: voting power depends on the paid-in capital share
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International Financial Corporation (IFC)

Sources and allocation of funds:
sources of funds: identical to IBRD sources allocation of funds:
commercial loans approved exclusively without a countrys guarantee IFC can finance projects in the form of equity stakes (not more than 35%)
Size and basic characteristics of activities:

financial placements need to be commercially interesting, projects need to have a clear development component usually not more than 25 per cent of the value of the project
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2. Regional Banks for Development Financing Fundamental Common Characteristics and Differences Among Regional Banks for Development Financing
IADB (1959), AfDB (1964), AsDB (1966), EBRD (1990) common characteristics:
organizational and financial structure similar to IBRD and IDA membership open to developing countries in the region (the only ones eligible to funds) as well as to countries outside the region regular financial sources are used for commercial loans special operations funds are very similar to IDA
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European Bank for Reconstruction and Development (EBRD) Regional Bank for Development of Countries in Transition
establishment: Paris, 1990 objectives:
supporting the transition process from command to market economy and strengthening the private sector in Central and Eastern Europe
Key differences between EBRD and other three regional development banks:
the only IBDF whose members are other international institutions and banks, in addition to independent countries the only IBDF whose political orientation is included in its statute much more detailed statute
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capital: share of paid-in capital is between 25-30 per cent voting method: number of votes depends on the share of the country in banks capital
Organization:
Board of Governors Board of Directors President
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Sources of funds and their allocation:
sources of funds:
financial basis for activities is the banks capital; borrowing on international capital markets, reserves, repayments of loans, dividends and capital gains on equity shares
allocation of funds:
exclusively to countries in transition state-guaranteed loans: public sector projects loans without state guarantee: private sector projects share investments
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Evolution of EBRD activities and key priority changes:

principal activity: financing projects whose goal is to contribute to efficient process of transition from planned to market economy 1991-1994:
financing projects of privatization of state companies, building and reconstructing infrastructure objects and financing of projects for restructuring the military industry production into production in the absence of wars and war-tensions
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from 1995 onwards:
a more balanced combination of loans and equity financing efficient financial system, especially the banking sector, is essential for the success of the overall process of transition new strategy of activities (1999) is trying to secure a balanced realization of given objectives, by countries and sectors as well as by types of instruments
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Size and structure of activities:
Table 13.1:
A. B y country - Central Eu rope*; of which 5,9 36 1,0 37 - Po land (2,0) (12) (0,6) (22) - Other countries (2,9) (22) (0,4) (15) - Southeast Europe** 3,4 20 0,5 19 - Russia 3,4 20 0,6 22 - Other Former Soviet Un ion 3,9 24 0,6 22 countries Total 16,6 100 2,7 100 B. By sector - Finance 4,8 29 0,8 29 - Manufacturing and commerce 4,8 29 0,8 29 - Infractructure 4,8 29 0,7 27 - Other 2,2 13 0,4 15 Total 16,6 100 2,7 100 C. Alokacija po instrumentih - State guaranteed loans 4,9 29 0,6 22 - Loans without state guarantee 8,1 49 1,3 48 - Share investments 3,3 20 0,6 22 - Other 0,3 2 0,2 8 Total 16,6 100 2,7 100 * Czech Republic, Estonia, Lithuania, Latvia, Hungary, Po land, Slovak Republic , Slovenia ** Albania, Bulgaria, Bosnia and Herzegovina, Croatia, Former Yugoslav Republic of Macedonia and Ro mania
Analysis of operational activity, 1991 2000

1991 - 2000 Amount Share ( mio ) (%) 2000 Amount (mio ) Share ( %)
Source: EBRD Annual Report 2000, pp. 21-22
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3. Chosen European Development Banks European Investment Bank (EIB)

significantly bigger than IBRD reasons for particular treatment:
EIB enables allocation of funds into all member countries EIB shareholders are exclusively industrialized countries from one region membership is limited to member countries of the EU, its activities are under strong influence of the EU
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European Investment Bank (EIB)

Establishment, objectives, membership and capital:
Set up under the Treaty of Rome in 1957
autonomous institution and independent legal entity
objectives:
strengthening the economic integration of the EU countries securing economically and socially balanced development of the EU countries
capital: 6 per cent share of paid-in capital
Organization:
Board of Governors Board of Directors Management Committee and its President Auditing Committee Personnel
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sources of funds:
most funds from borrowing in the international financial markets, banks capital is the basis for activities; repayments of loans and reserves
Internal allocations exclusively in the form of commercial loans, repayment term up to 20 years, grace period on principal repayment up to 5 years (financing of infrastructure objects) External allocations mostly in the form of loans with /without state guarantee
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Activities of the bank, size and structure:
Table 13.1: Inte rnal and external loans of EIB in 2000
Amount (mia ) 30,6 10,4 8,8 2,6 5,4 3,0 1,2 0,4 0,1 0,5 0,2 36,0 Share ( %) 85,0 28,8 24,4 7,2 15,0 8,3 3,3 1,1 0,3 1,4 0,6 100,0
Allocation Internal - t ransportation - co mmun ications - energy External - EU Accession countries - Euro-Mediterranean Partnership - ACP States (Africa, Carribean and Pacific) - South Africa - Asia and Lat in A merica - Balkans Total
Source: Adjusted from EIB Annual Report 2000.

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internal allocation:
classical sectoral classification: financing infrastructure objects in member countries classification according to priorities:
financing of trans-European transportation and energy networks financing small and medium enterprises (SMEs) financing environment sustainability projects
EIF tripartite institution that issues insurance to agents willing to finance trans-European network and SMEs
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external allocation:
loans can be used only for technically and economically competent projects that can be financed according to commercial conditions the biggest share is intended for loans to countries in the process of accessing the EU and have an Access Agreement with the EU
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Table 13.1: EIB Accession Countries loans provided in 1990 - 2000
Criterium A. Allocation by sector - Transportation - Co mmun ications - Energy - Env iron ment - Global loans, industry, other Total B. Allocati on by country - Poland - Czech Republic - Ro man ia - Hungary - Slovak Republic - Slovenia - Bu lgaria - Baltic States Total Share (%) 46 14 6 17 17 100,0 25 20 15 13 8 7 7 5 100,0
Source: Adjusted from EIB Annual Report 2000.

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Council of Europe Development Bank (CEDB)

establishment: IBDF set up by members of the Council of Europe in 1957 objectives: financing of social projects and projects needed for solving extraordinary circumstances in member countries
Organization:
Governing Board and Administrative Council Executive Committee Governor Auditing Committee
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sources of funds:
banks capital (about 10 per cent of paid-in capital), borrowing in international financial markets, repayments of loans, approved in previous years, and reserves
commercial forms of lending: state-guaranteed loans (long repayment term and grace period on principal repayment)
Size and structure of approved loans:

statutory priorities new priorities other fields of action
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Table 13.1:
Sector A. Statutory priori ties - Aid to refugees and migrants - Aid to vict ims of natural and ecological disasters and disaster prevention B. New pri orities - Job creat ion in SM Es and vocational training - Social housing - Health - Education - Improving liv ing conditions in disadvantaged urban areas C. Other fiel ds of action - Protection of the environment - Rural modernization - Protection of historic heritage - Infrastructure Total
Sectoral structure of CEDB loans in 1996 2000 (mio and %)

2000 Amount (mio ) 11 329 Share (%) 1 17 1996 2000 Amount Share (mio ) (%) 51 771 1 13
362 493 119 73 60 308 44 23 33 1.855
20 27 6 4 3 17 2 1 2 100
1.228 1.456 511 592 132 989 206 35 133 6.104
20 24 8 10 2 16 3 1 2 100
Source: CEDB Annual Report 2000, 2000, p. 25. International Finance CONTENTS Mojmir Mrak
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4. International Banks Development Financing
Projects as a Business Opportunity

only business subjects from member countries of given IBDF can collaborate in the preparation and realization of the projects financed by given IBDF every contract needs to be made on the grounds of special rules, usually in the form of an international competitive bidding reasons for the interest of obtaining projects:
priority projects non-payment risk reduction projects co-financed by IBDF no non-payment risk projects that are usually fully analyzed and in which IBDF often collaborated in the past
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Project Cycle
project identification:
IBDF obtains preliminary information about the project, usually from general and/or sectoral studies about a country it ends when the projects obtains the priority project status for the country and IBDF includes it in its enlistment of projects
project preparation:
IBDF and the country harmonize basic goals of the project detailed analysis of all key aspects of the project, including technical-technological parameters, economic-financial characteristics as well as social, environmental and institutional characteristics
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Project Cycle
project analysis:
project analysis by IBDF precise identification of all types of goods, equipment and services that will be needed for project realization, as well as definition of procedures according to which these purchases will be made financial plan of the projects and all funds required to close the financial construction
negotiations and project approval:

negotiations about the appraisal report finalized version of the appraisal report along with all required accompanying documents goes to the Board of Executive Directors for approval
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Project Cycle
project realization and supervision:
borrower is fully responsible for the realization of this phase
project assessment:
IBDF usually assesses the achieved results of the project primary goal is to compare actual costs and benefits of the project with the ones anticipated in the appraisal report, and to take into account the experience from the past when preparing and realizing new projects
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Sources of Information about Projects

primary sources of information obtained with the help of personal contacts and written sources in the country in which the project is supposed to be realized secondary sources of information about IBDF projects:
sources in banks themselves contacts with project team members who are responsible for the project
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Rules and Regulations of IBDF about the Procurement of Suppliers of Goods and Equipment, Works and the Procurement of Consultants
responsibility of the borrower and not IBDF Procedures for procurements of goods, services and work:
international competitive bidding limited international bidding local competitive bidding international and local shopping direct purchase
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Rules and Regulations of IBDF about the Procurement of Suppliers of Goods and Equipment, Works and the Procurement of Consultants
forms of co-financing:
parallel financing common when the project is co-financed by IBDF and national export agency of a country joint financing every party takes over the financing of an agreed share
Procedures for procurement of consultants:

main criterion ability of the consultant to do the assignment well full competence of the kreditojemalca rosters of consulting companies
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Chapter 13

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Chapter 13

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UNIVERSITY OF LJUBLJANA

International Finance Mojmir Mrak

CONTENTS AND PURPOSE

1. The World Bank Group

International Bank for Reconstruction and Development (IBRD)

Evolution of activities and changing priorities from establishment until now:

International Bank for Reconstruction and Development (IBRD)

1990s: Washington Consensus

International Bank for Reconstruction and Development (IBRD)

International Finance Mojmir Mrak

International Bank for Reconstruction and Development (IBRD)

Loans as a prevailing form of the allocation of funds:

International Bank for Reconstruction and Development (IBRD)

size and structure of approved loans:

International Finance Mojmir Mrak

0,4 0,5 -0,1

8,0 3,8 4,2

1,3 2,7 -1,4

18,1 13,6 4,5

0,6 1,0 -0,4

6,3 6,4 -0,1

2,3 1,3 1,0

13,2 6,7 6,4

2,2 2,7 -0,6

6,5 14,8 -8,4

-0,2 0,6 -0,9

0,5 4,1 -3,6

6,5 8,8 -2,3

52,6 49,4 3,2

* IBRD and IDA.

International Finance Mojmir Mrak

International Bank for Reconstruction and Development (IBRD)

International Development Association (IDA)

organization: same as IBRD

International Development Association (IDA)

IDA replenis hments

International Development Association (IDA)

International Finance Mojmir Mrak

International Development Association (IDA)

Approved loans by IDA in 1980 2000 (mia $)

IDA credits by major purpose and by country in 1960 1999 (mia $)

Source: World Bank Annual Report 1999, pp. 218-222.

International Finance Mojmir Mrak

International Financial Corporation (IFC)

organization: similar to IBRD and IDA

Capital and voting method:

International Finance Mojmir Mrak

International Financial Corporation (IFC)

Size and basic characteristics of activities:

International Finance Mojmir Mrak

Evolution of EBRD activities and key priority changes:

International Finance Mojmir Mrak

Analysis of operational activity, 1991 2000

Source: EBRD Annual Report 2000, pp. 21-22

International Finance Mojmir Mrak

3. Chosen European Development Banks European Investment Bank (EIB)

International Finance Mojmir Mrak

European Investment Bank (EIB)

capital: 6 per cent share of paid-in capital

International Finance Mojmir Mrak

European Investment Bank (EIB)

European Investment Bank (EIB)