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Down to Earth IFIs Factsheet Series

No 15, September 2001



IFIs in Indonesia

This series of monthly factsheets on International Financial Institutions (IFIs) will include information on the World Bank Group, the International Monetary Fund (IMF) and the Asian Development Bank (ADB), focussing on their involvement in Indonesia.

Part 2 of 2:

The International Finance Corporation (IFC):
Critiques of Its Policies and Operations


The IFC, a private sector arm of the World Bank Group, is bound by the Group's safeguard policies on environment, social, and information disclosure issues, as are its sister organizations, the international Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). However, the IFC claims that it needs to protect clients' business confidentiality as it operates in the competitive private sector and that there should thus be limits to the safeguards that IBRD and IDA have to meet.

The IFC's role in poverty reduction and development is highly questionable due to the lack of clarity on the criteria for financing by the IFC other than by other private financiers, and the development impacts of IFC-funded projects. Mechanisms to evaluate IFC projects' contribution to poverty reduction and environmental protection are very weak. The IFC has resisted the jurisdiction of the World Bank's Inspection Panel a mechanism which allows people affected by Bank-funded projects to file claims of violation of the Bank's own policies. The only public accountability mechanism is through the IFC Compliance Advisor and Ombudsman (CAO).


Information Policy

The IFC has an information policy, although it is weaker than the IBRD and IDA's. The IFC makes three documents available to the public: (i) the Summary of Project Information, a short description of all proposed projects; (ii) the Environmental Assessment for projects with major environmental and social risks; and (iii) the Environmental Review Summary for projects with less adverse environmental and social risks. The opportunities for public scrutiny and participation in the early stages of the project cycle are very limited because the IFC insists that it should protect its clients' "business confidentiality". In many cases, adverse impacts of IFC-funded projects are difficult to mitigate because they are noticed too late.


Environmental and Social Policies and Procedures

The IFC has only recently adopted a set of environmental and social policies similar to the IBRD and IDA's including mitigation of environmental impacts, involuntary resettlement and protection of natural habitat and forests. However, as noted above, the IFC has a much more limited information disclosure policy. Consequently, stakeholders are unable to engage in discussions and public consultations with the IFC in a timely and informed manner. In addition, the IFC has been criticized for failing to supervise its private sector clients to ensure that they comply with IFC standards.


IFC: Public Finance for Private Sector

Though as an arm of the World Bank Group, the IFC is a public entity, its clients consist of competitive, fast-moving private sector enterprises. The IFC argues that it aims to attract and catalyse private investment to countries and sectors it would not otherwise reach. In fact, in Indonesia and other countries, the IFC has supported big corporations and sectors that could have been funded on a purely private basis. For example, the IFC supported the development of four-star hotel in central Jakarta and a luxury hospital in Karawaci, in the suburbs of Jakarta, both of which are only affordable to the rich. It is unclear how the IFC decides which projects to support, without crowding out private financiers. IFC needs to ensure that it does not fund projects that could have been fully supported and facilitated by private financiers. Without such assurances, it makes little sense that the IFC should continue to exist as a public entity within the World Bank Group.


IFC, Poverty Reduction, and the Private Sector Development Strategy

The IFC claims that, through advice and direct investments, it seeks to reduce poverty by directing private resources toward activities that will employ people and foster business growth, thereby benefiting the poor. It also says that it plans to do further work on promoting environmental, social and corporate governance standards.

The IFC assumes that poverty reduction will inevitably flow from private sector investment. This leads to questions about whether the IFC's concept of development really incorporates an analysis of the priorities of poor people and whether its financing and advisory work are sufficiently targeted to benefit them. Such evidence has yet to be found.

The IFC simply ignores the importance of distribution factors in poverty reduction. It assumes that growth will create jobs and in turn will reduce poverty. Structural impediments and non-economic problems are left to its sister organisations, the IBRD and IDA, to tackle. It is only recently that IFC staff has helped draw up World Bank Country Assistance Strategies (CASs) and have worked with their IBRD and IDA colleagues in designing sector strategies. Critics argue that this co-ordination may end up persuading governments to open up strategic sectors for private involvement even though benefits for the poor are not guaranteed.

Potential conflicts of interests arise because the IFC has merged several of its departments with those in the IBRD and IDA. The same group of people will now be advising governments on privatisation and regulation strategies as well as discussing private sector investment plans in the same sector. Under the Bank's Private Sector Development Strategy, the interests and involvement of the private sector in development are assured, but the Strategy lacks the analysis and assurance that it will actually contribute in a positive way to development and poverty reduction.


IFC's Parameter of Success

IFC uses net income as the main parameter of success, as shown in its annual reports and other publications. It does not have a clear methodology for estimating or evaluating development impacts, nor does it have any mechanism in its project cycle to articulate the intended development impact of a given project.

If the IFC is to continue to exist under the World Bank Group, it must define its strategic approach and its measurable accomplishments in terms of promoting poverty reduction and sustainable development as opposed to net income.


Office of the Compliance Advisor/Ombudsman

The public sector arms of the World Bank Group the IBRD and IDA are subject to a public accountability mechanism called the Inspection Panel. Communities and groups who are adversely affected by IBRD and IDA-funded projects can file a claim for an Inspection in which compliance to Bank's own policies are investigated. The private sector arms of the Bank's Group, the IFC and MIGA, do not fall under the jurisdiction of the Inspection Panel. In other words, there is no comparable mechanism to hold these institutions accountable for the adverse impacts of the projects which they fund.

Communities affected by IFC and MIGA- funded projects can only raise their concerns to the Compliance Advisor and Ombudsman (CAO), who does not have the same level of authority. The CAO position was created in 1998 by World Bank Group President Wolfensohn. The CAO is by nature an advisory and problem-solving mechanism. It attempts to address the overall performance and accountability of the IFC and its sister organisation, the Multilateral Investment Guarantee Agency (MIGA) in social and environmental areas.

The CAO position is filled by one person who carries out two functions. The Compliance Advisor is responsible for providing independent advice and recommendations on policy compliance and procedure to the management of IFC and MIGA. As an Ombudsman, he or she must also respond to and address the concerns of individuals who are affected by an IFC or MIGA-funded project. The current CAO is Ms. Meg Taylor, who was appointed in June 1999.Ms. Taylor can be contacted at the following address:

Ms. Meg Taylor
Vice President, Compliance Advisor/Ombudsman
International Finance Corporation (IFC)
2121 Pennsylvania Ave.
Washington, DC 20433
Phone: (1) (202) 458 9452
fax: (1) (202) 522 7400
email: mtaylor@ifc.org

A few cases have already been brought to the CAO. These include the notorious Bujagali Dam in Uganda and the Chad-Cameroon Petroleum Development and Pipeline Project. The effectiveness of the CAO in addressing the affected communities' concerns and in ensuring policy compliance has yet to be seen.


IFC's Activities in Indonesia: Unknown Compliance and Accountability?

The IFC's operations in Indonesia have not yet come under the scrutiny of the public or watchdog organisations and very little monitoring work has been done on IFC-funded projects in Indonesia, most of which fall under the financial markets sector. However, many of these projects may indirectly support projects that are environmentally and socially sensitive through IFC funding provided to financial institutions and companies engaged in financial market activities. In addition, the IFC has also been directly involved in environmentally and socially sensitive projects such as those in the mining sector; oil palm plantation development and expansion; hotel and tourism development; agribusiness; timber, pulp, and paper; and textiles. Below is a list of companies that have received IFC support for projects in Indonesia.

During the erratic administration of former President Abdurrahman Wahid, the IFC froze its funding to Indonesia. One of the triggers was a court ruling over a case involving IFC support recipient PT Asuransi Jiwa Dharmala Manulife. IFC considered that the ruling was unfair and unintelligible. However, according to Javed Hamid, IFC Director for Asia Pacific, a general lack of appropriate law enforcement in Indonesia has led the IFC to decide to temporarily freeze its funding to Indonesia. Hamid said that in order for the IFC to continue to play a role in building investor confidence in Indonesia, creditors would need to be treated fairly and to feel comfortable with their investments. IFC funding to Indonesia was resumed in August 2001 after Megawati assumed the Presidency of Indonesia in late July 2001. The first loan approved after the resumption is to support a mining service company, PT Dianlia Setyamukti. The loan is intended to boost the company's service in excavation and transportation mainly to coal mining companies, such as PT Berau Coal in East Kalimantan, PT Adaro Indonesia in South Kalimantan and its subcontractor PT Pamapersada Nusantara. (see DTE Update 18, August 2001).


IFC Support Recipients in Indonesia, as of June 30, 2000
RECIPIENT SECTOR FISCAL YEARS IN WHICH
COMMITMENTS WERE MADE
PT. ABS Finance Indonesia Financial Markets 95
PT. AdeS Alfindo Putrasetia Tbk. Food and Agribusiness 98
PT. Agro Muko Food and Agribusiness 91
PT. Alumindo Light Metal Industry Manufacturing 97
PT. Argo Pantes Tbk. Textiles 91
PT. Asia Wisata Promosindo Hotels and Tourism 94
PT. Astra Graphia Services 97
PT. Astra International Tbk. Motor Vehicles 90, 91, 94
PT. Astra Otoparts Tbk. Motor Vehicles 97
PT. Asuransi Jiwa Dharmala Manulife Financial Markets 88
PT. Bakrie Pipe Industries Manufacturing 95
PT. Bank NISP Tbk. Financial Markets 98
PT. BBL Dharmala Finance Financial Markets 93, 96
PT. Berlian Laju Tanker Tbk. Infrastructure 98
PT. Bunas Finance Indonesia Tbk. Financial Markets 95
PT. Dharmala Agrifood Food and Agribusiness 96
PT. Grahawita Santika Hotels and Tourism 96
PT. Hotel Santika Nusajaya Hotels and Tourism 96
PT. Indonesia Asahi Chemical Industry Textiles 92
PT. Indo-Rama Synthetics Tbk. Textiles 92, 90, 91, 95, 99
PT. Kalimantan Sanggar Pusaka (KSP) and Subsidiaries Food and Agribusiness 97
PT. KDLC BancBali Finance Financial Markets 94
PT. KIA Keramik Mas Construction Materials 92, 94, 96
PT. KIA Serpih Mas Construction Materials 95
PT. Makro Indonesia Services 97, 00
PT. Megaplast Jayacitra Manufacturing 99
PT. Nusantara Tropical Fruit Food and Agribusiness 93
PAMA (Indonesia) Limited Financial Markets 94
PT. Pama Ventura Indonesia Financial Markets 94
PT. Panca Overseas Finance Tbk. Financial Markets 96
PT. Pramindo Ikat Nusantara Infrastructure 97
Prudential Asia Indonesia Trust Financial Markets 94
PT. Rimba Partikel Indonesia Timber, Pulp, and Paper 92
PT. Samudera Indonesia Tbk. Infrastructure 93
PT. Saseka Gelora Finance Financial Markets 82, 85, 94
PT. Sayap Mas Utama Manufacturing 98
SEAVI Indonesia Aruba, A.V.V. Financial Markets 93
PT. Semen Andalas Indonesia Construction Materials 80, 88
PT. South Pacific Viscose Textiles 93, 96
PT. Wings Surya Manufacturing 98
(Source: IFC 2000 Annual Report. Financial Review)



Partially summarized from the Bank Information Center's Toolkits for Activists Issue 4 "The International Finance Corporation and the Multilateral Investment Guarantee Agency"; "Analysis of IFC's Role and Impact" by Alex Wilks. Bretton Woods Project. September 2000; CNN, August 10, 2001.

For information on Bank's Safeguard Policies, visit www.worldbank.org/



This IFI factsheet is published by Down to Earth, the International Campaign for Ecological Justice in Indonesia.

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