~~~The IFC Review of Private Investment in Developing Countries

~ I !- _1 5 .~~~~ ~ ,.

* .. . , ,.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~',:t''',. , ^

;~~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 6;-/* s

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

IFC P' '~ The IFC Review of Private Investment in Developing CountriesIFC is a member of the World Bank Group supporting privatesector development in member countries through investment,advisory services, and technical assistance.

Intemational Finance Corporation2121 Pennsylvania Avenue, NW IF CWashington, DC 20433 USAwww.ifc.org

E d i t o r ~~~~~~~~~~~~~~~~~~~S u m m e r 1 9 9 9 V o I . 3 N o . 3E d ito rRob Wright

D e s i g nPatricia Hord.Graphik Design

In this issueI A big bank sale in Prague; Thailand's model restructuring

.A_

2 Riding the Rising TideCatch a wave and ride it around the world - the wave

of corporate governance, and improved performance.IFC and its partners will take you there.

10 African Privatization: A New LookLo, the word hath gone forth... eventhe 10 Commandmentsd

Infrastructure

1 8 Pushing the Envelope rArgentina has no problem getting the big bucks forestablished industries. But when it tries something

* really new and different, like privatizing its postalservice, IFC has a big role to play.

Client Perspectives

22 Private Sector, Private SchoolsAfrican educators ... African entrepreneurs ...African women

26 A Treasury of Trees Tell us what you think!IFC and the World Wildlife Fund take a for-profit F,ix: 202-974-43b4approach to protecting the rain forests of E _ I: I 1-;l.r (i icsPapua New Guinea

Cover: Eric Westbrookpp. 2, 6, 7 and 11 illustrations: The Image BankPage 16 illustration: Archive Photo W W FT All references to dollars are U.S. dollars unless otherwise indicated.

R 0 U N D U P

EuroUpe t

Poland and Hungary are roaring economically, thanks in part to sound banking privatizations that have attracted top foreign partners -something the Czech Republic has lacked, helping keep it lagging behind them despite its considerable potential. But the country made amajor breakthrough on June 24: after working closely with IFC for more than two years, it sold a controlling stake in one of its three bigstate-owned banks to a foreign strategic investor for more than $1 billion.

IFC had kickstarted the process back in 1997 by offering to invest $75 million alongside whoever emerged as the eventual buyer ofCzechoslovenska Obchodni Banka (CSOB, the Czechoslovak Trade Bank). The vote of confidence from the World Bank Group helpedattract strong offers earlier this year from Germany's Deutsche Bank and HypoVereinsbank as well as KBC Bank of Belgium, with KBCultimately winning with a $1.4 billion bid for a 66 percent stake. IFC will hold 4.3% and help influence the strategic direction by joiningthe board of CSOB, now the first Czech bank with long-term debt upgraded to investment grade status by the major rating agencies.New parent KBC also owns a smaller stake in Hungary's privatized K&H Bank.

The transfer of CSOB to new management and ownership is the cornerstone of the Czech government's market-oriented reform plan forthe financial sector and should help pave the way for future privatizations of the larger Komercini Bank and Ceska Sporitelna. UK invest-ment bank Shroders advised the government in the transaction - the largest foreign investment to date in the Czech Republic, whenKBC's anticipated purchase of the Slovak government's former 24 percent stake in CSOB is included.

Asia ' .

In one of the largest corporate restructurings yet in the country where the East Asian financial crisis began, longtime IFC client Siam CityCement Co. and its 63 creditor banks have agreed on a plan that will enable the Thai company to gradually repay all of its $540 millionof foreign currency debt and return to financial health.

The deal closed in Bangkok July 14, ending an intensive 18-month period in which IFC first advised Siam City on drafting its restructuringplan, then switched to the other side of the table, co-chairing (with Citibank) the committee of international banks that hammered it outwith the company during extensive negotiations.

At the signing ceremony Thai central bank governor M.R. Chatumongol Sonakul called the agreement a model transaction he hoped oth-ers could follow. With the debt problems resolved, the firm is now "financially very robust and able to withstand significant future eco-nomic and market downturns," IFC's Kip Thompson added.

IFC first financed Siam City in the late 1970s, when it was a little-known local company with only one plant. Over time it grew into aregional cement industry leader, one with excellent access to global capital until the Thai baht collapsed in July 1997. The resultingexchange rate volatility severely drove up the cost of servicing foreign debt, plunging the otherwise-strong company into sudden duress.For help it retained IFC, which organized an advisory team producing a transparent and viable workout proposal in July 1998 that all sidesaccepted as fair. That clear sign of progress then helped Siam City obtain critical new investment: one of the world's largest cement com-panies, Switzerland's Holderbank, bought a controlling interest for $153 million the following month, with Thailand's Ratanarak familyand other existing shareholders adding another $150 million in fresh equity soon thereafter.

Under the new restructuring agreement Siam City has paid off an initial $250 million of its debt at full face value. The creditors, includingIFC, have also rescheduled the remaining $290 million over 8.5 years based on updated cash flow and macroeconomic projections IFCproduced. The company has thus gained valuable time to repay its debts, including a three-year grace period for principal only, and canbegin selling non-core assets in order to rebuild its competitive position. Peter Redhead of ING Barings in Bangkok called the deal "one ofthe best examples of a Thai company that has embarked on both corporate and debt restructuring at the same time."

Impact . Summer 1999, Vol. 3, No. 3 -

Corporate Governance Goes GUlobal

Rob WrightIFC Corporate Relations Unit

Nobody said it would be easy. But the shareholder revolution is starting to spread...

mad. Vs happy. samazed.

He is a Chilean investor, and he is mad at Master of a $12 billion emerging market He runs a Korean mutual fund company,what he has just learned. portfolio, he is happy about a victory he and he is amazed at the change in his

has just won. country.A $1.5 billion friendly takeover bid forone of his most important holdings has Leaders of the company that represented After three decades of cozy governmentturned out to be rife with hidden gains his largest investment in Hungary had protection, the Korean economy has donefor its top executives. Conflict of interest been making disastrous decisions. Their an about-face, opening to global capital ascharges abound: management has shafted muddled moves helped drive down its never before. The early results are promis-the shareholders, secretly cutting a far stock -bad news for the legions of small ing, especially on the booming local stocksweeter deal for itself than was available investors entrusting their money to the market. Khwarg's shop has seen theto Cruz and other players on the Santiago Templeton funds Mobius runs. With all money it manages rise by a factor of sevenStock Exchange. The memory would still appeals exhausted, he saw only two in six months, with mom and popburn in his mind two years later. options remaining: lose more money or investors rushing into the markets, keenly

try to topple the CEO and his backers on watching the performance of the local"We felt we were being cheated, and the board. He chose the latter, a high-risk companies they now owned. En route, awere really angry," he recalls today. "On move virtually unprecedented in Central little-known business school professora per share basis, the insiders were going and Eastern Europe. named Jang Ha-sung suddenly gained folkto be receiving 850 times the amount we hero status as the country's first grassrootswould be getting. So we investigated our It worked. shareholder activist, launching battle afterlegal options to see if there was the basis battle to rein in the country's most power-for a fight." A new management team arrived to ful firms. He was a new David taking on

cheers from the Budapest financial com- Korea's corporate Goliaths.munity. It quickly brought in McKinsey &Co. and Andersen Consulting advisers totry to turn the company around. Thestock price showed immediate recovery.

*_ Impact a Summer 1999, Vol. 3, No. 3

/

I

S

t3:1$

VI

/

/ �r U

'ii>

t

F ive years ago such stories would have been constrained, making developing countries ever more dependentunthinkable. But today they are the new face on their ability to attract private capital. It could also be oneof finance. where industrialized nations grow ever richer, still investing

almost exclusively in themselves because they can't find enough

Cruz, Mobius, Khwarg - important IFC partners all - are just companies from developing countries willing to disclose theirsome of those around the world who are fast moving corporate true financial state ... to allow independent voices onto theirgovernance near the top of the development agenda. In an era boards of directors ... to stop management insiders from treatingwhen private capital is king, and crony capitalism is widely outside investors with disdain. Under these conditions, the pri-credited with plunging East Asia and Russia into economic cri- vate capital on which the developing world depends would neversis, a tough new message is starting to go out to the developing arrive in sufficient quantities. The fight against poverty wouldworld's CEOs and the controlling shareholders who appoint grow ever harder.them: play fair, or be forgotten.

It is out of this fear that the Organization for EconomicJust ask Mark Mobius. Cooperation and Development (OECD) and the World Bank

have recently agreed to form a Global Forum on Corporate"Corporate governance is the single most important issue facing Governance. Their goal is to raise the profile of reform and helpdeveloping countries," he says. individual countries develop their own course of action. The ini-

tiative will bring together relevant international institutions

A veteran IFC adviser, he has long been a hairless crusader (including IFC), developing and developed country governments,working to make the process of investing in developing coun- private sector participants, and other stakeholders to reach bettertries "FELT": fair, efficient, liquid, and transparent. Otherwise, consensus on how to proceed in this complex and difficult area.he argues, the mountain of capital these countries need, andthat is available to them, will always prefer the safer havens ofhome. The facts back him up. Institutional investors in the Life LessonsUS, Europe and Japan have more than $21 trillion at their dis- The time has definitely come.posal, according to a recent report by the New York-basedConference Board. Yet the total amount of private capital "Good corporate governance is important for enhancing individ-reaching developing countries in 1998 was only a little more ual countries' long-term economic performance and strengtheningthan 1% of that ($233 billion). the international financial system," an OECD-World Bank paper

says. "This is one of the basic lessons that the world has learned

"There is no lack of money out there, but it will not find its way from the recent crisis in emerging markets."into these markets under current conditions," Mobius says withconviction. "And without good corporate governance and pro- Like many basic lessons, this one did not come without pain. Bytection of shareholder rights, investment is simply not going to Institute of International Finance estimates, foreign equitybe effective over the long term." investors lost $240 billion in the East Asian and Russian crises-

blowing much of it, no doubt, on companies whose poor corporateThe issues at stake go far beyond the concerns of investors. To governance standards were clearly visible long ago.World Bank and IFC President James D. Wolfensohn, theprocess of keeping companies accountable to their owners is "a Badly bruised by this experience, the world is at last trying tovital element in a modern democracy." Why? Because, he says, mend its ways. The OECD has lately held conferences on corpo-"free markets do not work behind closed doors." rate governance in Korea and Russia and adopted nonbinding

global guidelines (www.oecd.org/daf/governance/principles.htm) that"Good corporate governance can make a difference by broaden- stem in part from the "shareholder value" movement that manying ownership and reducing concentrations of power within call a key to the US productivity revolution of the 1990s. Aftersocieties," Wolfensohn wrote in The Economist. "It bolsters capi- all, nothing raises one's output like having a demanding boss, andtal markets and stimulates innovation. It fosters long-term for- Wall Street increasingly believes companies perform best wheneign direct investment, reduces volatility and deters capital watched closely by their owners.flight. Moreover, it is only when high corporate standards areadopted that the public will trust their savings to companies to Research proving this link is hard to find. But in one widelyprovide their pensions. This is a daunting concern for countries quoted study, Wilshire Associates found that 42 formerly poor-with weak social-security systems." performing companies beat the New York Stock Exchange's

Standard & Poor's 500 index by 41% in the five years afterDaunting, definitely. Maybe even downright scary. they felt heat from shareholders at the California PublicImagine a 21st century world where aid budgets are increasingly Employees Retirement System (CalPERS). McKinsey & Co.

c. - Impact * Summer 1999, Vol. 3, No. 3

discovered that US investors will pay an average of 11% more azine survey of international executives, it more than doubledfor shares of companies whose boards its annual revenues between 1993 and 1998, with the increase

in its stock price making rrore than $65 hillion for its share-• have a clear majority of outsiders with no management ties holders in that time.* are paid, to a large extent, in company stock and undergo

formal performance evaluations Pfizer attributes much of this success to a checks-and-halance• respond to investor requests for information. system of governance that is widely considered a model for oth-

ers. Its board, which meets 10 times a year, makes all majorThere are skeptics, of course. Arguments are made, sometimes decisions and has outsiders as 11 of its 14 members. All, includ-with good reason, that the CEO doesn't always need nosy out- ing CEO William C. Steere Jr., have the same incentive for thesiders telling him how to do his job. And many investors clearly company to do well: they are paid primarily in stock. Steere iswill continue risking money on poorly governed companies as one of the most active background voices in the corporate gov-long as the chance of high financial returns exists.What applies ernance debate, seeing shareholders as friend, not foe. Corporatein the US, with well-developed bankruptcy and civil courts chieftains, he says, have "both a fiduciary and a moral responsi-and company ownership widely dispersed among many small bility" to their investors.investors, also does not apply easily to developing countries,where the reverse is often true.

But who wouldn't want to he like Pfizer? The world's most Unfortunately, not all his counterparts in the developing world agree.admired pharmaceutical company, according to a Fortiune mag- That makes today's sudden high-level governmental attention

Four PillarsInvestors Need...

-- Corifiderice that AEteIlctl;tc ,t Effective over- I i dii i.a host country's tlft Iy. si,ght based oni o n 'li:,- l i -regul tors and aeqd:Le ca tel balance of o:ey ho,- It ku1-coLurt, will aIl,id 't-acufroe e y I I dv

pt tect thiemli binarino.l11 IIulag ers c lost' an -i o--- .l, i rlr 'i 01-13 Ii ,,1, -i iwi-it iI fi_), v i ;l-r9-ot :e- I -i os Ill~ >v- t- r

1 jinrI wrong- oUre.asililil; n1,lv sdr n I^ 3 L fils, h ,rFilJe k ti-c,t :.: th l nlc u

ci X, .i~ by,rri e, a i d r b. ii i- s. IIn [ 1 3 I ell or

* 111 I 'h, , ,WFI 'I *f _ s e r :»_ *

4 -U- -tt'

C Ic,ely hel. d Mmrii', Lo tr-i t, ii- Id F mu.,rI bil'-i:ir I J rAs t,,i ,:ttbusilJl. I ;II arid limitr:,c rlfcirlllif ,lIrin .iIIl,:iiit iid'peIrIit oA ii .ii: -i

,, I:1,il .1te Of ''with: di ,i.c,ui,:- il L,,:s 1' : r1.lrl, I hi lt II,d f: t.iril, 1.1Ik uI,LI 'tl

iIItcrIocL Ioc [iIrihPlic 3111d p ej?3to L:i.v,rc wd. 10n .itl-duet LII t's;,t - -e.t,:,r a.v.iiin,|ru[ i :iser>uiht ,ecu' L:p^t:ico :i ,ItEQ,-.

pu:uac-riuil .j-] cud harrj r,, ,:,t litr -uwiro l d

rr:zrec ute .- pc,, It- reciur

Impact * Summer 1999. Vol. 3, No. 3

to an essential topic that had long been largely ignored in the allowed management to appoint the majority of the Enersis

developing world is good news indeed. But in the end corporate board and thus exert effective control.

governance is a job for the private sector itself to carry out. And

it is there that the real action has started taking place. The bat- Enersis was a highly successful company, spinning out money left

tles are in the boardrooms. and right by producing an essential good in a high-growth region.

It wasn't long before it found a suitor. In July 1997 a major utility

In developed countries, many of them are fought by pension from Madrid, Endesa de Espafia (EdE), announced a $1.5 billion

funds. Entrusted with the retirement savings of large numbers of tender offer for all of the holding companies' Series A shares.

workers or retirees, they are a key constituency that listed com- Coming at roughly a 25% premium to the market price, the offer

panies must go to when trying to raise debt or equity. Their suc- might have appeared good to public investors such as Moneda. But

cess at playing the markets gives people an essential source of news to the contrary soon emerged.

ongoing income in their later years beyond personal savings and

the government social security system. And whatever success A Chilean newspaper obtained records in New York indicating

they achieve does not come by flying blind: two giant US pen- that Yuraszeck's team bad negotiated lucrative additional terms

sion funds, the $260 billion Teachers Insurance and Annuity for themselves based on important agreements concerning the

Association - College Retirement Equities Fund (TIAA-CREF) future strategic direction of Enersis that they never told the

and the $155 billion CalPERS are the trendsetters of corporate Series A shareholders about. Moneda's Antonio Cruz did not

governance. In many ways they have set the standards for infor- like it a bit, and swung into action.

mation disclosure and management accountability that the rest

of the world is now starting to embrace. TIAA-CREF's John Realizing he was in effect being asked to sell his investors' stake

Biggs is one of the new OECD-World Bank initiative's key at a price far

advisers, along with Mobius and others. r below the

a A ~~~~~~~~one"What corporate governance comes down to is an alignment of Yuraszeck's

interests between a company's owners and its management," says -.. ;. : . insider group

Joe Chulick of the San Francisco-based Lombard Group, an , -w \ f planned to

investment house managing money from CalPERS and others. . j get, Cruz

"Management often thinks they are the company, even though J called histhey really don't have that much money in it. They forget they ' y * lawyers. Hehave something else called shareholders." ha- thad e m

examine

It's hard to imagine how global financial centers like New York, EdE's

London, Tokyo or Hong Kong could exist without private pen- American

sion funds. In the developing world, though, privately managed p' -1-d Depositary

pension funds are still in early stages. Most of those that do exist V - Receipt fil-are modeled at least in part on Chile, the pioneer in the field * ings, which

with an 18-year history and $33 billion in privately managed under US law

assets. It was probably no accident that Chile was also the site of required the

one of the first big victories for developing world shareholders. disclosure of

much more

- ~~~informationChilly Winds than was

In 1994 IFC put up $10.2 million to help launch both a new available in

Chilean investment company called Moneda Asset Santiago.

Management S.A. and one of its groundbreaking domestic The truth came out. "There were many side agreements being

investment vehicles backed primarily by local private pension made with the Spaniards that did not represent the interests of

funds. Among Moneda's early investments was Luz, one of five the shareholders," Cruz recalled. "And Enersis's board had not

publicly listed holding companies for the country's dominant been given all the information about them."

electric utility, Enersis. The capital of these entities was divided

between "Series A" shares available to the public and "Series B" Although Moneda by itself owned only a tiny portion of Enersis

shares held exclusively by Enersis's top management, led by through its holding in Luz, it rallied several of the country's pri-CEO Jos6 Yuraszeck. Although representing only 0.06% of the vate pension funds together and called for a special meeting of

holding companies' capital, ownership of the latter in practice Luz's shareholders. There it was decided to liquidate the holding

* Impact . Summer 1999, Vol. 3, No. 3

company, convert its underlying assets into shares in Enersis, environment for TVK's products, CEO Milos Varhegyi and hisand sell them to EdE at the higher Enersis price. The move ulti- team had blithely spent the equivalent of $75 million to buy anmately earned Moneda's shareholders almost $50 million more Austrian packaging materials company that proved extremelythan they would originally have received. difficult to absorb and showed what one Credit Suisse First

Boston (CSFB) analyst called "few obvious synergies." AlthoughPerhaps more important, though, was the legal fallout the battle Varhegyi had outside directors on TVK's board at the time, hehelped provoke: in November 1997 the Chilean government reportedly gave them little information about that acquisition, orslapped Yuraszeck and two of his colleagues with a $55 million about another risky attempt to hedge future prices of a key feed-

fine for a variety of stock that backfired, losing the company millions. By CSFB'sinfractions, including estimates, TVK's net income for 1998 was almost a third lower

- C v r ) - ,~" :,.:~': - conflicts of interests than the previous year's. Its Budapest-listed shares plummeted.I .| P-gt^i-- - -4and failure to disclose

i S > -" necessary information Outside shareholders then questioned TVK management's deci-ir .Xt ^ to Enersis's board on sion to retain $85 million in cash rather than invest it in new

- ^ ,__ the single most impor- production or distribute it as dividends. When the company3 &fi[ , _ - ~~~~~~tant transaction in the decided to increase that cash position by selling another 11 %

company's history. stake in the company into the markets at a time when the shareSoon thereafter the price had bottomed out, things seemed to be out of control.

-4 board fired him.Never one to stand idly by, Mobius enlisted another TVK

Although the fine investor, the Croesus Central European Restructuring Fund, forremains unpaid to this support at the company's April 27 annual meeting. Although

-. b :' x E.il day, the case has had Templeton and Croesus together held less than 30% of TVK,an important effect. It they were able to gain approval for their motion to fire Varhegyi,

o opened the door for replace him with his chief financial officer, and then remake the* IFC to advise the board with Croesus's Csaba Barta as chairman. TVK's share price

Chilean Finance rallied by about 25% upon news of the shakeup.i-~ Ministry on ways to- reform its takeover This hardball maneuver would have seemed commonplace on

legislation. A new set Wall Street. But it was considered among the first of its kind inof laws based in part on this advisory work is soon expected to Central and Eastern Europe, where "shareholder activism is still inbe passed, and the local corporate governance climate has its infancy," a regional newsletter published by The Economistalready improved greatly, in Cruz' view. When EdE did ultimate- noted. "Few Hungarian funds have either the experience or capitally win control of Enersis in a separate transaction this spring, he to initiate restructuring, and there are only a handful of Westernsays, it was through "a very open process where all minority funds willing to take on the burden of forcing companies to shapeinvestors received a fair price." up," it added.

Lesson: Honesty is still the best policy. "This was a very positive step, as it was a case where manage-ment had become a bit overpowerful," says a Hungarian businessleader. "But now the company has a real board that is more pro-

The CEO M ust Go fessional, exerts supervision over management, and helps setBooting a bad boss like Yuraszeck is the ultimate sign of a effective strategy. Corporate governance is much improved."board's independence. Never enjoyable, it sometimes must bedone if the board truly is to represent the entire ownership of Lesson: Prestigious foreign investors can be demanding, but help athe company and not just the insiders - something that global market mature.leaders like Pfizer swear by. A prolonged fall in stock pricesoften foments such rebellions. Seoul SurvivorThat was the case this spring in Hungary. Frustrated with end- Similar stories are starting to be told the world over. IFC recent-less bad news at TVK, a privatized chemical company where ly backed a revamped local investment house called SEI-Assethe held a 10% stake, Templeton's Mobius made his move. Korea, which aims to set standards for that country's nascent

mutual fund industry based on the best international examples itStrange things had been happening. Despite a depressed price can find. As proof of the way shareholder activism is taking root

Impact a Summer 1999, Vol. 3, No. 3

among Koreans, its CEO, Thae Khwarg, points to the rise of (Hyundai, Daewoo, Samsung, LG, and SK), although barred fromlocal crusader Jang Ha-sung. owning banks, had greatly increased their control of securities

houses, insurance companies, and investment funds. The KoreaJang, a professor at elite Korea University, has become a nation- Herald warned this trend ran dangerously against "the long-heldal phenomenon in the past year for his campaigns to hold the principle of separation of industrial and financial capital."country's powerful industrial groups (chaebol) more accountable.He often buys tiny stakes in the chaebol to gain entry to their But a more optimistic reading came from Khwarg, who workedannual meetings and put them on the spot, recalling the pio- with IFC to sell control of his formerly chaebol-controlled compa-neering tactics of consumer advocate Ralph Nader, whose suc- ny to a respected $40 billion US mutual fund house, SEI, as a waycessful proxy war against General Motors in 1970 is often credit- to gain greater expertise and a competitive edge. Among his funds'ed with starting the shareholder activism movement in the US. investment criteria are factors Korean investors used to overlookWhen that's not enough, Jang also files suit to stop companies to their peril: the character of a company's controlling sharehold-from taking steps he considers contrary to investor interests. ers, the transparency of their financial statements, their willingnessAmong his victories: getting giants such as Samsung Electronics to tell major shareholders of important moves in advance, and toto increase the transparency of their financial statements. keep debt and internal lending at workable levels."Small steps maybe, but they are moving Korea in the rightdirection" is how Business Week described them. "Things have really changed in the last two years here, and it's a

trend that will continue," Khwarg said. "It's partly because ofIn another recent challenge, Jang joined forces with the third the greater presence of foreigners in the market, but alsolargest investor in cellular leader SK Telecom, New York-based because of the new reliance on financing growth by raising equi-hedge fund Tiger Management LLC. Tiger claimed the parent ty rather than debt. To do that means pleasing shareholderschaebol, SK Group, was improperly trying to weaken minority through far more consistent investor relations efforts."investors' ownership position with a planned $1.1 billion equityoffering primarily sold to SK itself Lesson: It's the information age, baby; the old rules do not apply.

"It's not just a matter between Tiger and SK," Jang said. "Koreainvited foreigners to enter its equity, capital, and mergers markets Private Mattersand should respect their legitimate rights." So far, much of the world's new focus on corporate governance

has centered on companies that have publicly traded shares asNevertheless, a Seoul civil court ruled against Tiger, apparently their mechanism of accountability. But in many developingending the argument. Some foreign investors took that as a sign countries, the majority of private sector output does not showthat corporate governance still had a long way to go in Korea. up on any stock market, however imperfect. The key check onSeeming to point in the same direction: news that since the company performance is thus private equity investors - thosecountry's financial crisis broke in late 1997 the top five chaebol risk-tolerant players who buy a big piece of a company before

f ''' ' f 0 .0,;~~"A'YW

13 .

izi ' -| s , .,, ,, .......... 0 , . . ..

|~~ i . .,

44* 4 z. .*8 .,'.{ {8..8 - ;

its listing, and often take board seats to ensure that manage- Menatep, defaulted on $236 million in loans to Germany'sment will be responsive. Westdeutsche Landesbank, Daiwa Securities of Japan and

Standard Bank of South Africa. The loans had been collateral-Chulick's $2 billion Lombard Group has long been doing this ized by a pledged 30 percent stake in the enormous oil companywith promising Silicon Valley start-ups: investing, sitting on Yukos that was also controlled by Menatep's billionaire owner,boards, getting a value-creating business plan from managers, Mikhail Khodorkovsky. But before the foreign institutions couldand holding them accountable to it. Post-Asia crisis restructur- act, Yukos - whose reserves are considered by some to be equaling opportunities have allowed it to take this same governance- to Texaco's -received local court approval to bar minoritycentered approach to the far less open business world across the investors from shareholders meetings of its key subsidiairies.Pacific. "Asian companies should realize they face a simple Meetings were then held where the subsidiaries were transferredchoice: they can either fight against this inevitable internation- almost free of charge to obscure offshore companies also suspect-al trend - and become the weaker for it - or they can ed to be part of Khodorkovsky's empire. That left the foreignembrace it and build stronger, more modern companies," says banks with nothing more than shares in a holding company thatChulick's Hong Kong colleague David Chiang. suddenly had no holdings -and thus was almost worthless.

For this reason, IFC has long taken part in leading private equi- The banks fumed, never having been consulted in the transactionty funds as a way to improve local corporate governance stan- - as reportedly was required under Russian law. Exasperated,dards. The Corporation's largest investment ever is its $250 mil- they began supporting another large investor in the Yukos sub-lion of support for the new Asia Opportunity Fund. Backed by sidiaries, Dart Management of the US, which shared their reac-the private equity arm of Chase Manhattan, this vehicle will tion to the high-stakes shell game. Dart soon began a legal battletake controlling stakes in ailing large companies in Korea, that within a few months convinced the Federal SecuritiesThailand, Indonesia, and elsewherc and turn them around, in Commission in Moscow to suspend trading of Yukos and its sub-no small part through improved corporate governance. Early sidiaries and request a full investigation of alleged illegality in theinvestment from an IFC-backed Central Europe fund sponsored affair. How much trading there could really be, though, wasby Advent International also helped the owners of Poland's another question: the companies' shares had fallen to less thanleading cable and satellite television service, Wisza TV, reach 1% of their prior value as a result of the affair that Troika Dialogthe point where they could raise $200 million in 1997 by going calls "so blatant and extreme as to defy simple description."public on New York's NASDAQ stock exchange. The straight-forward financial reporting required for a publicly traded compa- Dart's deep-pocketed backer, financier Kenneth Dart, is one ofny in the US enabled investors to closely monitor the compa- the largest foreign investors in Russia. He has been badlyny's growth. With a million subscribers in Central Europe's burned, and vows to fight back on the Yukos case as long asfastest-growing economy, it was sold earlier this summer to one necessary to help rebuild the rule of law. But many are skeptical,of the continent's largest cable players, Amsterdam-based and no one is yet predicting what, if any, lasting improvementUnited Pan-Europe Communications. The price: $1.5 billion. will result from a case widely considered to exemplify the rea-

sons Russia is scaring off the foreign investment it so badlyBut it almost goes without saying that not all are success stories. needs. The social cost is high: World Bank data indicate that byMuch more needs to be done before corporate govemance truly early 2000 as much as 20% of the country may be living in con-takes root around the developing world - more shareholder ditions of extreme poverty. In 1994 the comparable figure wasactivism by domestic institutional investors like Chile's Moneda, only 1 1%, and alcoholism and drug abuse have risen, as havemore involvement by foreign players, more legal reform, and more the suicide and divorce rates. There seems to be little hope for asecretive family-owned companies being willing to open up to Russian revival unless major steps are taken to restore foreignincrease their chances of long-term survival. investor confidence and restart economic growth.

Some more big wins would help, too -nowhere more, it would In other words, the global corporate governance battle has justseem, than in Russia, where many foreign investors are furious begun, and it's a tough one, with well-entrenched vested inter-about the way they have been treated and are staying away in ests leading the opposition in many cases. But it needs to bedroves, leaving the economy in dire shape. fought, as James Wolfensohn makes so clear.

At the OECD's corporate governance conference in Moscow this "As the battered economies of the emerging markets piecespring much discussion centered on one key case that respected themselves back together in 1999, one lesson will not be forgot-local brokerage Troika Dialog detailed in a report titled, aptly, ten: rotten economies spring from rotten corporations," he"How to Steal an Oil Company." It began after the ruble's col- argues. "If business life is not run on open and honest lines,lapse last summer, when one of Russia's key financial institutions, there is little chance the wider economy will be." H

Impact i Summer 1999, Vol. 3, No. 3 '1

cA N-w - A

m l -- X _

BrSaii. BrianSa & _"LI1k RhL FII'LLhIL*L \. LL'

,-'."N''Rt>'%M~~~~~~~~~~~~ aS't; -_

_ . _ . , fiC>. | ~ ~ ~ ~ ~ ~ ~ ~ ;; #, , *

ost of us would like to agree that infrastructureprivatization brings better delivery of essential

public services: transportation, communica-tions, water and sanitation, electrical power,

and the like.

Unfortunately, it doesn't always work that way.

It isn't enough to sell off an inefficient state company, sit back,

and say, "There, we've done it." It takes something more.What people want is better performance, not just dIiII- I !1

'~ Ri It§,,.6 L , 9 owners. Changing the captain, sadkl, does not always mean theSt'. ship sails better.

To illustrate, let me give an example from my adopted home-land of Jamaica. In the late 1970s, its government decided toreform Kingston's urban transport sector. The state-owned buscompany was a complete disaster. Rightly dcciding that it was

beyond rehabilitation, the government closed it down. In itsplace, the government opened up the sector to small-scaleminibus operators, most of whom were laid-off bus drivers.

Pretty soon anyone with a driver's license and an old. l 0 t l Volkswagen bus in the back yard was out on the streets picking

- l .| up passengers. But there was one big missing piece in the jigsaw- l r puzzle: regulation. There wasn't any. The single most important

.A. si ~ 4.' 4 | W consideration, safety, soon went by the wayside.

% t' ,i 1[ T-, . t; a l The government's understaffed transport board was incapable ofcontrolling the hundreds of murderous minibuses that soon

started careening around Kingston's streets, and the police hadmore important things to do. The end restilt: a worsening of theurban transport system, with deplorable vehicles fighting to pick

'o[; -s3 f 1; [11 up passengers on the main road while leaving the low-revenueroutes virtually ignored. Traffic and chao.s w7orsened in an

X~l -7 ' ^s *^,J ' ']galready chaotic city. In the good o(d days 1, like virtually allchildren, had gone to and from school by bus. But now nobody

c >1* .; v. ^ Lg mwho could afford otherwise would entrust their children to theseX2 + o tw j3,;ajld3a?instruments of motorized destruction.

Successful privatization, in other words, requires more than justopening the door to private enterprise. In Jamaica, insufficientattention was paid to ensuring that the new transport systemwas fairly distributed, safe, and properly operated.

M f #4 ,' 1, ' The issues are much the same in the privatization of any infrastruc--M* _ _ y , . tire sector. It is not enough to sell a telephone or electricity or

water company in a back room deal and then stand up and declares.iccess. It takes more than that, ais Africa now knows so xvell.

- . ~ .,~ , Impact m Summer 1999, Vol. 3, No.3 3

* iit*~~~~ ~~~&t in . -- -~~~~~~~~~-

D elivering the G oods Thus far, however, Africa has accounted for only a small frac-More and more African governments are beginning to realize tion of worldwide privatization activity. To appreciate Africa'sthat the old ways of state ownership of an economy's "coi- reluctance to embrace this global trend, it pays to recall histori-manding heights" cannot be sustained. Simply put, that cal factors that have shaped the development of the continent,approach failed to deliver the goods. Today, the vast majority of starting with the legacy of colonialism. Not long ago, I sat next

Africans are still living without access to the most basic infra- to an African telecommunications minister at dinner. We werestructure services of electricity and water, let alone telephones. talking about the poor state of the telecommunications network

ln many cases, coverage is lowernowthanitwain Africa, and every argument I advanced in favor of privatiza-In many cases, coverage is lower now than It was two or three

decades ago. People are no longer willing to accept the old sta- tion was expertly parried by a counterargument. Finally, thetus quo. Where possible, they are working through new and minister banged on the table and exclaimed, "Listen, we foughtthriving democracies to make the message loud and clear: give us a war for this, and we're not giving it up!the services we need, or we will vote you out.

What could I say? The minister's argument has a compelling

The pressure is on. But the treasuries are bare, forcing emotional component that is hard to counteract with cold eco-

African policymakers to come up with innovative ways of nomic statistics. No one likes to see their country's "Crownincreasing and improving the delivery of infrastructure ser- jewels" sold out to foreigners. The issues are the same forvices. Hence privatization. Africa as for anywhere else in the world. When Japanese com-

panies invest in landmark US institutions, similar noises aremade in the media about "foreign domination". In the African

IFC,-assisted pri'arizanons whose rrcick records speak for themselves.

Kenya Airways MTN UgandaThe Goal: Re in urnder. The Goal: Opening the Ugandan telecommunicationspurtcrn;iiig airline troni the cc'.ern- sector to competition bs licensing second national --

ro nents ti.fl!s sttrlctrn. i credible operator_-,. - i.nteinlrnat .............rn:,nal airl.ie psrtnrr and

_- ma-=r ii.nrer,liinni ma pira, n tilne The Deal: In a competitive tender held in cecember-- ---l h3nds ot Keni, joi n-.e;lors 1997 Ihe license v.is .m.varded tor $c.6 millicin to a D

I group led byr Mobile Telephone Networks fIMTN4, of

The Deal: Tlhe Kenvar, TreasUr, South Africareci .ed $ ". nilli.on rro-nr the sle c; -.r ct it; 'h3re in 196 '' a %riec

;t cnietri. nid 'uction; Srr.le,;: n.estor RLMA Rc3al Dutch The Results: Within a s,ear NiTN Ug.snda began a

Airlines icqurecd i2 - nI6 tere't o,m lor jl n. estors remanink In cControl $7( million rollout cit nev. produts slating %li,th an Ericsson-equipped

tv,rclcs; 3 st m Cost,ng 5 0 ; les; than thc c%i;ting pris ate cellular

The Results: Pivist:at,on h..i: drast:sll, mpro'.ed the reliatitit.. an:n per. mr,onpolss service it ha; mrade cellular an Vttordtble mass market ptetcrmanre ot the nat.on3l carrier ,h,ich i. industry cOUrnal namned Atr.can nomenon prices be-gin at the e.qusalent ol $15 a month plIjs 6 to 22

Airlne ;r the .ear in June 1999 Attf iesting $150 million In rc,ur cents per minute Of irt,met tATN ;igned up 35000 wvireless subscribersnec. Bo.e,nz - 37; l~~~en~a Airs'. lys iss per mithee arketileader _in-duph35 both

ri,>, 13. B.en7 -37.; i;~nya A,ys Is; no.>, the rnarket leader In tl,,,ht: L1h in le.s than a sear w,eil ahead ct the concessorin agreement; schedule

bect en Europe and trica and Iothn Alr, and Is generall; seen as nand almost to,-thirds the stste-run carriers total o It ed lines Ugandaoperating at the standards of other major intemational airlines worldwide. now has the same number of cellular subscribers as fixed-line phones, a

remarkable outcome for Africa.The Impact: VWilh pn.atzatrcn. h3s come a maior ini,ra:e In routes

ser%el making the Afrncan bu;iness tra,elers tile far less difficult Some The Impact: By offering affordable wireless service nationwide, MTN has30: cr KenVa Aira',a; resenuec ncs.' come trom a greativ increased increased communication in a country with one of the world's lowest ratesdo,mesto . seri ce includc-n 60 %seeklv 4a,robi-PMombasa tlgahts and ottlers of fixed-line penetration. Goods that used to sit for two weeks at theto secondarn, Ken .an cities ncit previousl'. ser. ed The airline has also Kenyan border, unable to clear customs because their owners could not beadded trequent tlights ini and out of Cameroon Mala., Nieri.i Uganda reached by phone or fax, now can move in and out much faster. MTNZan-bia aiid other couiitries u-iill` NJa,,b, ia a hut subscribers in Kampala can also call friends and relatives in secondary

cities and the countryside, where people have begun to pool theirJobs Created: 401' resources and go wireless if fixed-line service is not available.

IFC Role: Ad% ised government on the structuring and implementation of Jobs Created: 96th,e pmat:at,on in 1995.1996

IFC Role: Advised government both on awarding the license that ulti-mately went to MTN and on the upcoming privatization of UgandaTelecom Ltd.

Kt Irrpact * Summnie 1999. Vol. 3. No 3

context, the investors most qualified to run the enterprises are A Long Roadfrequently from the former colonial power and are politically So that's the good news. But there's also some bad: the road tounpopular at home. In addition to the emotional arguments, privatization is long, winding, and littered with potholes. Therethere are economic consequences of privatization which are are many obstacles to attracting the necessary investment.sometimes hard to bear. Among them:

Tariffs do not always fall - in fact they often have been highly 1. Small market size: As a US businessman once said to me,subsidized in the past, and must rise to the levels required by the "Africa is a big country." Although the continent may belaws of economics. Jobs often are lost, at least in the short term. big in terms of population, its individual nations are not.But things are changing. Moreover, urban dweLlers with spending power generally

A New Beginning form a small proportion of the total. Thus Africa is oftene coNtnens nwbeg g below the radar screen of many large emerging market

The continent's new breed of leaders has shown readiness to investors-why go for Malawi when you can get Mexico?break with the past and engage in fundamental restructuring of

their economies. Angola, Ghana, Kenya, Mozambique, South 2. Low per capita income: The perception is that most

Africa, Tanzania, Uganda, and Zambia have all launched ambi- Africans, particularly those in rural communities, cannot

tious privatization programs. The francophone countries of afford to pay the full economic costs of private infrastruc-

Senegal, Cote d'Ivoire, Gabon and Cameroon have all complet- ture services. So, although an "opportunity gap" may exist

ed extensive privatization programs involving the electricity, because few people have access to service, this need may

telecoms, water and banking sectors. not translate into effective demand.

Uganda started by giving back to the Asian business community 3. Improper legal and regulatory framework: In movingthe property confiscated during the Idi Amin era, and then pri- from a state-dominated to a liberalized environment,

vatized dozens of small-scale enterprises, mostly to local African countries need to redefine the rules of the game

investors. It is therefore not surprising that it has consistently and create strong, independent regulatory agencies. Foreign

achieved one of the highest growth rates in Africa over the past investors need reassurance that critical matters such as rate10 years. The Zambian Privatization Agency is also implement- increases will be dealt with in an impartial and professionaling a far-reaching program, including the restructuring and sale manner.

of the huge ZCCM copper mining conglomerate, itself a mini-

economy. Further south, the ground-breaking sales of 30% of 4. Poor financial performance: State enterprises usually have

Telkom South Africa to a consortium of Southwestern Bell of a history of financial losses, are overstaffed, and are bur-the United States and Telekom Malaysia for $1.3 billion and of dened with excessive debts. This is usually why they're

20% of South African Airways to Swissair's holding company being sold in the first place. How do you convince investors

for $230 million have sent a signal to other multinational that a company has value when its financial records paintinvestors: Africa can indeed be fertile ground for investment. the opposite picture?

The average size of African privatizations to date, however, has 5. Political risk: Recently, war and political uncertainty have

been relatively small- approximately $1 million. The most increased on the continent. The conflict in the former

common method of sale has been through competitive tender, Zaire, for example, resulted in sensational media accountswhether of shares or of assets. In countries with an established and brought fear and loathing to the minds of international

capital market, public flotations have also been popular, often as investors. Although many African countries enjoy domes-part of an integrated strategy involving the sale of a block of tic peace and stability, a few bad apples spoil the lot.shares to a strategic investor. Governments have also begun to

tackle privatization in the infrastructure sectors, where there is 6. Lack of a domestic capital market: In the absence of anneed for complex sector restructuring involving legislative and effective domestic capital market, investors have to comeregulatory change plus a host of social and political issues. Of up with more cash to pay for privatized enterprises and

the 2,689 privatization transactions in Sub-Saliaran Africa meet investment costs. This dampens their appetite forreported between 1986 and 1996, fewer than 60 were in the African ventures. Other financial issues, such as

power, telecommunications, and utility sectors. In the infra- exchange rate instability and the lack of currency con-structure sectors, international investors are usually required to vertibility, also reduce the attractiveness of privatization

supply both technical and managerial expertise as well as the in unstable economies.vast amount of capital needed.

Impact * Summer 1999, Vol. 3, No. 3

Still, a few obstacles shouldn't keep investors out. None of our assignments is easy. Two UgandaThey just make the job more challenging. years ago, I was so pleased to be quoted in Telecom Sector Restructuring

the Wall Street Journal, saying "We like and PrivatizationSome may view the constraints and conclude the difficult ones." Little did I know how With only 55,000 fixed lines for a popula-that Africa is not ready for investment. At IFC, that phrase would come back to haunt tion of roughly 20 million, Uganda haswe draw exactly the opposite conclusion and are me. Here are some examples of our recent one of the lowest levels of telephone penplaying an important role in assisting this privati- privatization advisory activity in Africa: etration in the world, and what serviceszation process in Africa, both as investor and the state company does offer are anti-adviser. Thus far, IFC has provided financing Gabon quated and unreliable. In looking at tele-commitments of $234 million to 30 recently pri- Societe d'Energie et d'Eau du com policy, the government did not wantvatized companies in Africa. Gabon (SEEG) to swap a state monopoly for a private

This 1997 transaction was not only one and therefore decided to sell a licensc

The privatization of Tanzania Breweries, for Gabon's first major privatization, but the for a second national operator to competeexample, assisted by a $6 million investment first full water and electricity concession in with the incumbent, Uganda Telecom Ltdfrom IFC, transformed the company from a loss- Africa where the concessionaire accepted IFC signed on as adviser in mid-1995, an(fromakIn, urandeoru ed state enterpriinto frona lof complete responsibility for financing and when it became apparent that the restructhekmost pndrofitabled blute hi eprcmaises intooeo management. Before the bidding, turing was going to be a long, drawn-outthe most profitable blue chip companies in investors' perceptions of significant eco- process, the government decided to giveTanzania. In Ghana, IFC has recently disbursed nomic and political risks were heightened a shot in the arm by licensing the secondfunds for a project to rehabilitate and expand a by the fact that an existing consortium of operator first. The bidding, which tookforierly government-owned coffee plantation, French and Canadian companies already place in December 1997, was won forplanning to increase production from the current had a management contract with SEEG $5.6 million by a group led by Mobilelevel of 28 metric tons per year to 650 tons by and were well positioned with an inside Telephone Networks, a South Africanthe year 2000. Working alongside Amalgamated track to bid for the privatization. company launched with backing fromBank of South Africa, IFC has also invested Generating true competition for the mar- Cable and Wireless of the UK and$27.8 million in loans and equity to support the ket was going to be difficult. In order to Southwestern Bell (see box). In the meanprivatization of Commercial Bank of Zimbabwe. increase the attractiveness of the opportu- while, the struggle continues regarding

nity, it was decided not to separate the privatization of the incumbent, Ugandacompnen pats o SEG, s eah wuld Telecom Ltd. In November 1998 the gov-

If the history of privatization in the developing be too small to attract serious players. At ernment held a tender for 51 % of UTL,world teaches anything, it is that when the busi- the time of the privatization, the capacity which was won with a bid of $23 millionness environment is especially challenging, gov- of the Gabonese government to regulate by a consortium of Detecon (a Deutscheernments need good advisers to get good the water and power sectors was limited. Telekom subsidiary) and WorldTel; butinvestors. Governments value IFC's status as an We therefore tried to pin down the rules before the deal could be finalized, theinternational organization, our understanding of of the game as much as possible by defin- consortium broke up through no fault ofgovernmental objectives, and our experience in ing in the concession contract the respec- the government, which was left with nostructuring complex infrastructure transactions tive rights and obligations of concession- alternative but to cancel the tender andbased on the fundamentals of transparency, effi- aire and government. Bidders had to bid start again. IFC is still advising the gov-ciency, and impartiality. One factor they appreci- on the average reduction in tariffs they ernment in this challenging assignment.ate is IFC's tendency to go the extra mile in pro- would implement if awarded the conces-viding service to our government clients, often sion. Compagnie Generale des Eaux ofsticking with them longer than would purely com- France (since renamed Vivendi), in a con-mercial advisers who lack a development man- sortium with the Electricity Supply Boardmercal avises wh lac a dvelomentman- of Ireland, won with a proposed cut ofdate. You tend to do that when your client is also 17.2% land, n winvestmentorequirmn

your shareholder! ~~~~17.25% and an investment requirement _ iyour shareholder! of at least $200 million. The strategic sale

was followed by Gabon's first Initial PublicOffer (IPO), a challenging task in a coun-try with no stock exchange. Nevertheless,the IPO was a success and has consider-ably broadened the ownership base of the ,privatized company. Since privatization,Gabon's former money-losing utility hasnot only turned profitable, but cut itswater losses to 13% and enabled publicuse of electricity to rise by more than10% and of water by more than 8%.

* Impact * Summer 1999, Vol. 3, No. 3

Cameroon Senegal At the ThresholdSociete Nationale d'Electricit6 Private Participation in the In any country privatization involves difficult(SONEL) Water Sector choices, and as always, in Africa there areHere is a classic case of the need for IFC Currently, the city of Dakar's water supply special circumstances.involvement: a company in dire need of falls substantially short of demand, andprivatization, a questionable commitment the government of Senegal has decided toto privatization among key stakeholders, turn to private sector operators for invest- magie you are a new African leader, bravean inadequate regulatory structure, and ing in and managing the facilities required enough to make the break with a past that isinvestor concerns about transparency. to transport bulk water from the Senegal only a generation old. Issues of sovereignty andProduction at SONEL has stagnated in River basin, 240 kilometers north of the national self-determination figure strongly inrecent years, and commercial and techni- capital. IFC acted as lead adviser to the your country's privatization debate, and therecal losses have increased, causing rev- government to structure and implement are many forces opposed to any sort of reform.enues to fall. Tariffs have also fallen in an optimal method for private sector par- On the other hand, you've seen privatizationreal terms following the devaluation of the ticipation. We assisted in assessing the work in Latin America and Europe -and nowCFA franc in 1994. The debt burden has technical options, structuring the transac- in countries like Gabon, Mozambique andgrown, and the company recently stopped tion, identifying potential investors, mar- Uganda you're starting to see the benefits itservicing its debt. Cameroon's hydroelec- keting the project, and organizing an can bring in Africa too. You need these bene-tric potential, however, allows it to pro- international call for tenders. Various con- fits, right now, because the situation is urgent.duce some of the lowest-cost electricity in tractual arrangements were studied, such But re afraid of situaton sengthe world, and the company still has a as build-operate-transfer, build-transfer, But you're afraid of doing it wrong - and sellingcore of competent technical staff. The and concession. In 1995-1996, under the out to foreign capital And you know that theelectricity sector is fundamental to the World Bank's guidance, the government people will not be slow to cast blame your waycountry's development, and its current of Senegal privatized the production and if it goes wrong.poor performance directly affects the lives distribution operations for drinking waterof millions of Cameroonians. Tenders are in urban areas through a 10-year lease The best advice? Stay focused on results. Whatlikely to be issued in late 1999, with com- contract (affermage). This did not, howev- Africa's people need is more stories like those ofpetitive bids expected from several major er, resolve the growing water deficit in SEEG in Gabon, MTN Uganda, and Kenyainternational power sector investors. If the Dakar. IFC projected the demand over 30 Airways. This is precisely what IFC's advisorytransaction is completed successfully, IFC years, compared the various investment work in Africa is intended to help accomplish. -will have made an important contribution options, and succeeded in convincing theto Cameroon's development. authorities to abandon their dream of The author is based in IFCs Harare office. He

building a 250-km canal in favor of a 70- Th ea to asedgi 'he offic.iHkm pipe with the relevant treatment sta- would like to acknowledge the contribution of David

PO* tion to meet the needs of the next 10 Donaldson and the entire Corporate Financei0 years. This change of scale was hailed as a Services team in the writing of this article.V_ 9major accomplishment by all the donors

involved in the sector. While the 70-kmpipe could have been financed by the pri-vate sector, structuring it would have beencomplex and time-consuming, and,among other things, required significantincreases in water tariffs. The World Bank

4 therefore agreed to finance the $80 mil-lion project. This solution can be imple-

-. ;;mented with minimum institutional dis-ruption and within the existing affermagecontract, thereby speeding up the deliveryof badly needed water to the city of

NW r ,Dakar. This is a case where IFC's develop-mental mandate overshadowed its profit-/ .> .. -wlF s making one, since on our own recommen-dation we effectively agreed to forgo our

A4 J. ' success fees on the aborted transaction.

Hanna /Impact * Summer 1999, Vol. 3, No. 3 Ur

THEE TEN COMNDMIENTS

1. THOU CANST LEAD some in order to get others. would prefer that state huge financial windfalls.

THY H ORSE TO For example, you can't say ownership had worked. But The biggest benefits usually

WATER, BUT VERILY... you want high sales pro- on the other hand, a few accrue after privatization:

ceeds, high foreign invest- privatization success stories investment, better service,

Thou canst not make it ment, and low tariffs. can quickly spread the mes- and (eventually) more

drink. Privatization cannot Something has to give. sage: privatization really employment.

be imposed from outside; it works. The consuming

must be home-grown. 3. AND THERE SHALL public isn't bothered about 6. FAlTEN T1-TY

Make sure you have full COME FORTH A economic philosophy; they CALF BEFORE THE

political commitment at the HOST OF THINE just want better service at SLAUGHTER

outset. And not just appar- ENEMIES... lower prices.

ent commitment, REAL Nine times out of ten, the

commitment from all stake- And they have cogent 5. MONEY IS NOT "jewel" in question is heavi-

holders, particularly the arguments. Privatization THE ROOT OF ALL ly tarnished by years of state

most important ones (e.g., does have real social and PRIVATIZATION abuse. Two big problems:

the president of the coun- economic costs, in addi- excess labor and excess

try). In the case of Kenya tion to the "soft" argu- Often, sales debt. Make

Airways, there was excel- ments of sovereignty etc, proceeds are the unpalatabl,k

lent commitment from the which are impossible to least significant changes

top, when the president got counter with cold facts benefit, but the before

fed up with the airline's and figures. Developing most difficult hur- privatiza-

continual financial losses countries resent being dle for the politi- tion.

and poor performance, pressured into adopting cians to overcome.

sacked the entire board and privatization policies. This "It's only worth

appointed a new one with gives more ammunition to that?!" All too

the mandate to turn the air- the anti-reform forces. often, the enter-

line around, "no matter prise in question -what." When the new 4. PRIVAT _ - 1 ON has a negative

chairman reported that the MUST BRINC F Ti value when viewed

real problem facing the air- FORTH THE by every valuation

line was its ownership struc- BEN-EFITS methodology except '

ture, the president did not future potential (after a

flinch: he went ahead and Privatization is not some heavy dose of new

sold it. political or economic Holy management, invest-

Grail; if it does not bring ment, technology, etc).

2. KNOW THY tangible benefits in one Sales proceeds are used

PRIORITIES form or another, the oppo- to fund the expenses

nents of privatization (of involved in the

Privatization is all things to which there are many) will process, redundancy

all people, but some of argue that the benefits are payments, loan write-

these goals are conflicting, not worth the cost. Let's offs, etc. Govemments

and govemments need to face it: most politicians are should not go into the

be prepared to sacrifice privatizing reluctantly; they program expecting

h Impact * Summer 1999, Vol. 3, No. 3

DF AMERICCAN PRIVATIZATIHZON

The government can't 8. INVOLVETH ALL And then there is the army long and complicatedexpect the new owner to STAKEHOLDERS of consultants. process. A tiny and seem-clean up its mess. In the ingly inconsequentialcase of Kenya Airways, the Because any one of them 10. THOU SHALT change in techno-speakgovernment had taken the can derail the process at REGULATE deep in the annexes of adifficult decisions well any time. All stakeholders telecom license, for exam-before the privatization, so are affected by privatization Privatization of infrastruc- ple, can have enormousthey went to market with a in one way or another, and ture companies without effects on the level of ser-track record of profitability they usually have different effective regulation invari- vice provided thereunder,(albeit a short one) and a objectives. Before and dur- ably yields sub-standard and it behooves govem-slimmed-down airline. ing the privatization results in terms of welfare ments to have people on

process, someone credible gains. Not only must new their side who understand7. COMPETITIVE BIDS has to play a consensus- regulatory agencies be set what it all means. ChooseBRINGETH BETTER building role; talking to up, they must be indepen- advisers who have a suc-BARGAINS stakeholders, articulating dent and staffed by trained cessful track record in

and incorporating objec- professionals. One way to implementing similar pri-Without competition, tives into an acceptable assure independence is to vatizations in similar envi-

you'll always transaction structure. And ensure that the funding and ronments; the cheapest ishear the let's not forget a major staffing of the regulatory not necessarily the best.

question: Was player in all this: the con- agency are enshrined in And nothing helps morethat the best suming public. Money statute and separate from than intemational compari-

deal we could spent on a good domestic govemment. Usually, the son, to leam that somehave gotten? You'll never public relations campaign regulatory agency is being seemingly new and innova-know the answer, but usu- will be a good investment set up just before or concur- tive idea has been tried inally it wasn't. Nothing in ensuring public accep- rent with privatization. In Bucharest, Accra andspurs investors to put their tance of the privatization the absence of an effective Caracas and found to be ahands deeper into their concept. independent track record, total disaster. There is nopockets than the fear that investors will want objec- need to re-invent the wheeltheir rivals may beat them 9. PRIVATIZATTON tive regulatory provisions every time because verily, itto the punch. Bids also COSTETH MONEY (e.g. tariff-setting) built might tum out square!reduce the possibility of (A LOT OF IT) into their concession orcollusion, thereby enhanc- other contracts. AMEN!ing the image of the gov- Before embarking on a pri-ernment and the country as vatization program, govern- Now, as this is clearly NOT - S. Brian Samuela whole. Investors prefer ments must make sure they the Bible, I feel at libertyto have their privatization have the necessary financial, to change the rules.deals validated by open human and administrative Therefore let us add anbidding procedures, rather resources to carry it through. Eleventh Commandment:than risk the wrath of an In addition to the staff &incoming administration organization costs (which 11. THOU SHALTlooking suspiciously at can usually be funded by the CHOOSE GOODdeals negotiated by the pre- World Bank or other ADVISERSvious govemment. It may donors), there ir. rho cnrer-sound hackneyed, but prise-specific costs, such as The business of restructur-transparency pays. redundancies, debt write-offs ing and privatizing infra-

and cjir ii ni ro mn [, structure enterprises is a

Impact m Summer 1999, Vol. 3, No. 3 R

Infrastructure

c- iPRIVATIZED POSTAL SERVICE -Breaks New Ground in Argentina

uhin: the

m~~~~ _

Rob Wright, IFC Corporate Relations Unit

I .

. ew around the world The public has responded well to

F., noticed at the time. Correo's increased efficiency, now send-But two years ago ing 10% more mail than in the past. But

Argentina did something there is no way to maintain the momen- b-ino other country had tum without substantial additional .

ever done: investment, and accessing large-scaleit sold its post office. conlnlerci II fin.inir t -r an infant B th

n .iiihtr; in L.ofrinfAiricf ii rL- Backthen anyone who used the post

Others like Great Britain, Sweden, the iv,-.. Pib1c roday Withl til i!1ulrlr.icr:iI offce took quite a gamble, since mailNetherLands, and New Zealand had .'.iprl:lrt So IFi- has ;I ,lJI. r.ij t *.-l could easily be lost or stolen. Argentines

already begun progressing in this same the lnter-American lIe ' I. priient Ball - shunned the system, sending only aboutdirection. But Argentina was the first to (0Fi)B to raise a new t ';:" mll'l .n r- one piece of mail per month, well belowwrap all its postal services into one con- age that should help k, r- e rlInrc.v,--rwc the norm in other countries at similar

venient package and mail them off to the Argentine L intc nL c.parnl.m -n 1n income levels. But they clearly wantedhighest bidder, cash on delivery. ule well into the dr : t , something better, and gave private mail

delivery services two-thirds of a postal

The winner: a private, for-profit consor- Correo'sbrihrll,v C-L rvd ntn. lr.Anci i market that was already open to a surpris-tium called Correo Argentino .es have rHl I,-rlok tUl inmg degree of competition.(Argentine Mail). It now handles every- retail outlets - ernin,II e ir., thin.thing from printing stamps and deliver- but the t:, i 1 .i *. [. I Ie-.ll' .rl .-1 The signal was not lost o n the Meneming letters to running more than 6,000 post office. Th., \ 1 e r i L r It rii * government. In 1997 it offered interestedpost offices nationwide. The government process that Fc1 ,n I '') ". .A !en I bidders the rigt to run all postal services

in the country for the next 30 years.is out of the business entirely. It is free of reformist gov crnrnicn intl-irt .nr pri-.fl:-

a major fiscal headache, and the nation ing as much inl 1.,. [riic nA el Ma , maybe nas a whole is enjoying sounder, more cus- Jilc 3 t, cnij .jiEr&i;te,I , ,. A good deal? Maybe, maybe not.tomer-friendly postal service ...in other system known In inlk tc.r p.. r itr% c: .it

words, a win-win situation. i-,iei prices. - The existing state-run operation hadlost about $50 million in 1996, and

r!_ Impact a Summer 1999, Vol. 3, No. 3

To get started, Correo's sponsors put inl $64.8 million in equity, then took out a

$150 million one-year bridge loan from a. ~'' ~S .syndicate of Galicia, Banco Santander,

and Citibank in early 1998 and beganinstalling the infrastructure needed toupgrade service. By the end of that year

- X~~~ 8as ' . ,,< '~~~~~~~~ the company had

* begun building a new central sortingfacility in Buenos Aires featuring11 T IN c, I I state-of-the-art Siemens equipment) ~ i } ~ * introduced new efficiency-enhanc-

'----- _-. ing postal codes* brought the bloated payroll down by

almost a third through voluntaryp- -~~~~~~~~~~~~~~~~~~~~ ~~~retirement.

> , . r t 1S2 2 t i f |These steps helped Correo exceed theconcession agreement's service improve-

ment standards, averaging next-daydelivery for 90% of all mail sent withinthe same city, and two or three days for90% of the mail sent between cities. Atthe same time it began to generateincome from a variety of new sources,

J. including

* subletting retail space in the__ .4 4 s \ -spruced-up post offices to stationery

stores and Galicia bank branches__________________ _ * offering new corporate products such

Vibrant: Argentina's post offices took on a new look after being sold to a as domestic parcel delivery, utilityViriant: Aconsotinum. os bill collection services, and mail-private consortium.room management

* taking on DHL, FedEx, and othercould recover lost market share only ment. In the end, that was Correo, an rivals with an air courier service towith a major investment of time and all-Argentine group that agreed to pay surrounding countriescapital. Its competitors showed no sign 100 million pesos ($100 million) a yearof pulling back. for 30 years and invest at least $25 mil- The new corporate products now generate

lion a year for the first l0 years, plus 1% the majority of Correo annual revenues,Nevertheless, investors wanted in, seeing of revenues thereafter. Its principal spon- which have climbed to more than $500excellent growth potential from sors were the local infrastructure devel- million. Profitability is projected next year.untapped business lines. The nationwide oper Sideco, which had built some ofpost office system was also Argentina's Argentina's leading private toll roads and nce this initial work was donebiggest retail network of any kind, one gas utilities, and Banco de Galicia y JCorreo needed to raise long-termwith many mass marketing synergies Buenos Aires (Galicia), the country's money, both to refinance the $150 millionwaiting to be explored. largest privately owned financial institu- bridge loan and cover additional invest-

tion. For technical support, Correo hired ment needs. But commercial banks wereThe more the bidders thought about the the British Post Office, an institution skittish in January 1999. The loud finan-opportunity, the better it sounded. that is profitable even though govern- cial hiccup in neighboring Brazil scaredSeveral competed for the concession, ment-owned and is at the forefront of them. The uncertain nature of cash flowswhich was set to go to whoever offered postal reform efforts worldwide. in a business as untested as private rmailthe highest annual fee to the govern- also proved to be more risk than they

Impact * Summer 1999, Vol. 3, No. 3 T.

75crv.b

It's rno Linc-h to rurn ai sratt-r:iuned albtitt.ss Into an nistut1 XttitT. in i c'mnipetinvc nwrkezt, cqx-cltaly ttIh 1 n the vdusiry is iwe rthit Ihs never been t'mmtdi rl'e&'tire. Curreo's CEO, 2O--'eal C"'ihbLalk tCtLrlLll ab nz ,Gie :1k: ELi, i'Ll Impact 1 prthar he sauw jhuir mriajor SuiieCs J/hLL' 4J himt when Ie LL'rned in Seprmnibor /097

Republic Argenrna -

1) Building a service culture from within "Thlis rteant champiunino values Di.:Pabl.,

like ht iCnesr inte',rit\. continLuA:*us unpro.i enientr and plirtint rheli cist,rrintr tir'r. were willing to take on alone, espe-and inNtalling a rine mr-ritocras v, \ here ciliv rhc best perth rnetr proer, ' cially in an Argentine election year

marked by a serious recession.2) Changing the market's perceptions "\W' c cull only du thit 1'vtl mo'. ino Otitr

nrmiil lastcr, which inr. IIlved reentunlt-crmn2 '.iur rrring and di%tributvP-n tacii c Facing difficulty in raising financing,nd imr n-,r iri our hack rAttice tune ri.W n "ith SAP buIlsnes r'rmce, "AtWteMrc Correo went to IFC. Having previous-

Th,n %x e ' A I C.3ca r, tirsh t ,ur ndu'rrn in Aide-ntini.tbr; ot uin I0 ly financed cosponsor Sideco's parent110o: cvrriticario:n hI higbI-lcvI qu.ihr\ rid bcL,.-n Ii.ini. Sefletis ritc'm.[ir company as well as several other land-

. lrtuin2 equi pmcnt. just i,s thk p'.'t *l sx.rc *-,it rthe lU and EurLpce J-t I mark infrastructure privatizations in

Argentina, IFC could offer detailed3) Changing the companv's image V"T., sh.'i" thl.3t k iterc f' 1-nct, a 'tarc- analysis that would put banks at ease,

runi rin tha,r didn't care LabruIt itC CIit LmrY t.-t hr iii tint.iLu cc'n,ul and was also willing to risk its own

nr hcntiom i lirm irn Nt% 'iL ,rl , h., ci le u; hrl 'IUc l.lt and 'c1IJ *, cl. *r t - 'rid a funds. It also saw the assignment ful-

ric v. %a', .1t prL.lnrinL -ur,clv4 R Lcen-t i.. n Ii. ire n1.atii .n a -[I I ni ivl filling one of its key strategic goals:

lmv Ii,r ot clAic IOU 'ri.c-t idniirtd in.ni[lic I n nt f." I attracting the first major wave of pri-

vate capital for under-invested sectors4) Earning a protir -- specri tric J r. In pr.rr bhCaitIcit trL tarirvitive of major emerging markets.

rit> cl tIn.-'ncine , r . iil:sl'lc' undc-r rilk 1I D1B tin incmin: IAcLkP.1. I"IF, I,1n .,r I t itt, I;; 2 .1' '': c-xre n.i - rc'e.arch cu rh,-. c*-rrip.l nti in bsih i . After several months, a final package

irid h',B iIIL r on h- 'ra 1rn. k ir ni.uich I . I-I t ' r r- iUnc the capital at rea- was worked out that teamed IFC with

sonable rates. I would call this a real trrc 11di " ItILL in fini cicmu f -r IFC. In the IDB to provide a dual $258 mil-ne-r five years, a lion long-term financing for Correo.

great many I * r -.l Together the two multilaterals areadministrations around making an eight-year, $138 millionthe world are '. .ir, tE. loan from their own resources andbe privatized, both in arranging a total of $108 million moredeveloped and devel- in six-year loans from commercialoping countries. The institutions. IFC is also becoming a

.1 i J @ {* postal world is really shareholder in the company, makingchanging.") equity and quasi-equity investments

; t 4 of $12 million.

.' (

Private Postmaster: Pablo Gonzalez Isla, CEO ofArgentina's for-profit mail system

Impact * Summer 1999, Vol. 3, No.3 3 t I1/i .1! j k

The money will allow Correo to carry out Q * t4 b Ia five-year investment program that M u tab l eincludes installation of customized busi- At 4)ness process software from Germanv's 4 -SAP as well as other technological v -i .t iupgrades, worker training, refurbishment of faciliries, and purchasing of new han- 7dling, equipment. Its mailbag is full of ..

other new ideas for continued improve-

ments in service. At a time when the '. 4 .

Philippines is also considering selling off .

its postal service and Germany's Deutsche 41i

Post is preparing for a landmark initialpublic offering next year, the deal is onethis fast-emerging global industry is

watching closely.

men t will help prove thattheprivate.

vices in a highly competitive environ- rJ~ ~4 w

.~~~~~~~~~~ ' ~~~~~~~~~~~B

ment, "said Declan Duff, director of IFC's.t.:-a'A ,a' 4. 'at' U'i'

Telecommunications, Transportation, ~~~4 -. .0 .. 44 * II S

and Utilities Department. "It is also like- ~~~~~~~~~* ' .. 4 . a 4,-- -…--

"The success of this pioneering invest-ment hill help prove that the privatesector can provide national postal set-vices in a highly competitive environ- issue-=ment," said Declan Duff, director of IFG's WTelecommunications, Transportation, p . 1a- 6l

and Utilities Department. "It is also like- . ~ S _-=- ly to he a model for consideration Im .e rv other countries."E*~~~

Correction An article in the Spring 1999 issue of!Impact ("Champion of Change," p. 18) Swrongly stated the kind of IBM serversIFC uses. The correct name isRS/6000.

' - Priv- At* ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~~~I AV L S

- s;:- . i : | ~~~~~~~~F 'S

It is the heart of entrepreneurship: that This sumnmer IFC hosted "Investment But it is not all big business. Especially notspecial ability to sense unmet demand . Opportunities in Private Education in in Africa, where, a recent Oxfamto say "This isn't what people want. I Developing Countries," the world's first con- International education report notes, meeting

can do better." ference of its kind. Organized in close coop- the demand for education is "clearly beyond"eration with the World Bank, it drew 200 the means of government. C6te dIvoire

Entrepreneurs thrive on risk. They believe in specialists from around the world, offering a understands. It has now put 60% of its sec-their ability to compete, to innovate. They global overview of the private sector's role in ondary schools in private hands, a trend thecan do so in almost any field, even many education and matching entrepreneurs with government actively supports through thethat aren't usually seen as part of the busi- potential sources of financing. The many provision of financial incentives.ness world - like education. case studies presented did not fit any one pat-

tern: sometimes the private sector comple- IFC has recently invested $41 .4 million in

Education? mented the public sector in education; other an initial I11 education projects around thetimes it competed with it. But things were world, seven of them in Africa. Why?

It's one of the most important of all products, clearly happening. Because educational entrepreneurs havethe refnery for the ultimate raw material great difficulty raising financing from com-people. Yet it is also something governments In Brazil a group of private educational mercial lenders. They need a developmenteverywhere tend to dominate. Why, we don't institutions called Objetivo has a total enroll- institution's support at this early stage inknow, but it is somehow seen as different ment of 500,000 and $400 million in annu- their industry. All of IFC's investments arefrom all other basic human needs: food, al revenues. It was the first school in the in "private" schools, but not all are for-profitwater, and shelter; transportation, health country to put computers in the classroom. - some are run by foundations or othercare, and clothing - not an absolute In India, a company called NIIT earns non-profit groups, yet with as much man-monopoly of the state, but generally consid- annual revenues of $73 million by providing agerial rigor as any successful business. Butered something private enterprise should not computer training to 140,000 students they have a major development role, supple-produce, price, and distribute at significant nationwide. Its ability to fill in the gaps of menting the important role of the state inlevels. Or if so, only for the rich . public universites gives it a vital role in a $2 building up the skill level in their countries

billion Indian software industry, the envy of and offering quality education at prices

Maybe some of that thinking needs to many developing economies. working families can afford.change. Maybe it already has.

Impact t Summer 1999, Vol.w3, No.3

Name: Harrett Ndow Name: Mary Okelotitle: Founder, Ndow Middle and Title: Cofounder, Makini School,High School (NMHS), Banjul, The Nairobi. KenyaGambia Enrollment: 2,000 (kindergartenlEnrollment: 900 in grades 7 through 12th grade)through 12, two-thirds of them girls Tuition: S500 to $1,600 per yearTuition: $300 per year Background: After being the firstBackground: Upon retiring as a woman manager at Barclays Bank in -

public school headmistress in 1992, / X Kenya and senior adviser to the pres-began looking for a better way to ident of the African Developmenteducate girls: after receiving donated land and tax-exempt Bank, started Makini with her husband in 1978: it soonstatus fronm government, started NMHS "as one woman's grew into a respected primary school, adding grades 9-12contribLition to development": added high school in 1995 in 1996 in response to parental demandIFC Role: Guaranteed a Gambian bankrs five-year local IFC Role: Provided a $545,000 six-year loan in 1996 tocurrency loan to NMHS in 1998 for the equivalent of complete the new secondary school and add a second$238,000; financing used to build new science and com- K-12 campus in Nairobi, increasing enrollment by 500;puter laboratories, a home economics classroom, a carpen- advised sponsors to have the new K-12 school be co-edtry and metal workshop, and other facilities. rather than boys-only, as originally planned.

After the conference, Impact spoke to a pair I FC: We understand that you actually age eight, for example -that they said

of hard-nosed businesswomen who also hap- started with a small nursery school back they did not want to send them back to

pen to be educators, African school otwners in 1966, so perhaps this isn't as new a the ordinary school. So they told me,

Harriett Ndow and Mary Okelo. Both start- business as we think. "You get on with it-" They went to the

ed respected private schools in countries minister of education, who in turn was

where the public sector leaves many educa- Ndow: That's true, and when things at pleased to hear that I was prepared to

tion needs unfilled. Their IFC-supported the nursery began to pick up fast, I went continue with a primary division.

schools primarily target middle-class children, to the president of The Gambia and

but also offer scholarships for the poor. explained that the school was growing lFC came at a very good time, just after I

and that we needed some land to cut the started the 10th, 11th, and 12th grades.

One thing was clear from talking to these expense of renting people's houses for the The children were doing extremely well,

ladies: education is everybody's business. school. The president immediately topping the whole country, in fact, with

-_ approved my request. If I had had then the highest aggregate averages in both

- - the sense I have today, I would have been grades 9 and 12. Then people started say-

able to acquire a whole street, because ing the school was very good, but didn't

the government was willing to give me as have any laboratories. I was using The

much land as I wanted. Gambia High School's lab, but they

wanted me to have my own. Fortunately,IFC. And you were working full-time as IFC made the new facilities possible, and

a headmistress in the public schools at the laboratories will start operating in

the time? September.

Ndow: Yes, I started our school on a vol- IFC: From the very beginning your91~I unteer basis, although as time went on, emphasis was on educating girls. Why?

we had to charge a small fee. But I never

- -, thought of starting a primary school. It Ndow: When I took over the-- - was only when the parents saw that the Serrekunda Primary School as head-

k s students were so good -writing letters at mistress, I noticed that girls were neglect-

Impact * Summer 1999, Vol. 3, No. 3

ed. Even when their papers were marked, . "some teachers would take marks off thegirls' papers because they thought girlswere weaker. I said no. According to psy- .chology, primary school girls should do w -better than boys. So I decided that I - K4 -

would give the girls equal treatment. K . r

IFC: How? V

Ndow: I am a very active person by jnature: I played tennis, hockey, and net -- I

ball; I also ran and took part in bicycleracing. I just rejected the idea that boyswere stronger and encouraged the girlsto compete. Last year, the grades of twoof my girls were the highest in the wholecountry. We've had two graduating class-es now, and most of the students havegone on to higher education, either in else, although my decision was also part- started as a nursery school. Slowly theThe Gambia, where we are just begin- ly based on necessity. When I worked numbers grew, and now we have expand-ning to have a university, or out of the at the bank, I was very busy. My daugh- ed to three locations.country to Ghana, the United States, or ter was only three, and it was becomingEngland. They're studying engineering, very difficult managing. So while I IFC: Why did you call the schoollaw, aviation, computer technology, and maintained a very busy professional "Makini"?

Okelo: It's a Swahili word that more orless translates to "work with diligence,

All agree that the single most keenness, and integrity." It reflects oneof our philosophies, which is to encour-

important key to development age our students to do their very best atwhatever they choose to do. We focuson setting goals, and they do us proud.

and poveft alleviation is One of our students became the first

woman pilot at Kenya Airways, andeducation." because of her example, many others are

- James D. Wolfensohn now pursuing aviation. Another had thebest score in the country in the 1997

President, World Bank and IFC Kenya Certificate of Primary Education,

and we believe he will go far. He isfocused, disciplined, and self-motivated.

other things. I'm sure that many of them schedule, at the same time I had towill come back to work at home once make sure that my daughter was not IFC: Africa certainly has its leadershipthey have completed their studies. But neglected. So we started a school in my problems, but it sounds as if you are try-for some, of course, there will be better house, partly to be able to help her and ing to build its leaders of tomorrow. Howopportunities outside the country. other children as well. do you do it?

IFC: Mrs. Okelo, what made you decide One of my friends who had a school lent Okelo: We remind them of what USto start a school? some of her teachers to start. We began President John F Kennedy said: "Ask not

with 15 children, but had to move out of what your country can do for you, butOkelo: I came into education more out the house when the numbers got bigger. what you can do for your country." Theof the love of children than everything We moved to another place and then school instills discipline and a profound

Rl_inI1 Impact * Summer 1999, Vol. 3, No. 3

sense of responsibility in each student so with all taught with commitment in an IFC: Will the expansion you are under-they can internalize it. We tell our stu- atmosphere of the highest tranquility. taking with IFC financing cause you todents that they can accomplish nothing raise your tuition?without self-discipline, because their IFC: Extracurriculars can be a big part ofteachers will not follow them everywhere. education. Tell us what you do there. Ndow: No, it will not.We also teach them to be self-reliantbecause we can no longer rely on govern- Okelo: We encourage and involve our IFC: Why?ment, which has its own problems. students in many extracurricular activi-

ties such as athletics, drama, and music. Ndow: For the simple reason that INdow: I'm from the old school as well. I But in particular we emphasize social started this school to help my people. Ibelieve in discipline. When it's time to responsibility - for example working did not do it for the money. That's beingwork, we work; when it's time to play, we with AIDS orphans, street children and completely honest, even though obvious-play. But we don't do anything halfway. the aged. ly I am getting something out of it.We pay attention to how the childrendress, how they speak to people, and so IFC: What are other examples of your If I could do it without charging a fee, Ion - we give them close attention, emphasis on social responsibility? would. But the fact of the matter is thatunlike the public schools. there are costs involved in building the

Okelo: We've set up a small rural buildings and paying high enough salariesThe only problem is our leadership in school for poor children inAfrica is not an example for young peo- my home area of Nyanzaple. And the children know this, you see, Province, using old Makinibecause they have television, radio, news- materials. It's just a single- v

papers - you can't hide anything from building school. But untilthm They know when someone has now the children who live _ eZI s

been fired for corruption, when somebody there had had to walk four -

has stolen, when someone who did not to six kilometers each way,have a car one day is seen driving an which is hard for five-year- -

expensive vehicle the next. olds in the hot weatherand means many of them ' : -'

IFC: Tell us about the courses your just don't go to school at -_

-schools offer. all. We felt obliged to do ,--- -*

something, because weOkelo: The curriculum we use is essen- knew they needed to be in l:tially the same as the public schools' but school. Otherwise they ~ - -

matched with better facilities and more will grow up to be nothingmotivated teachers - the public schools but laborers like their parents. to attract the best-qualified teachers.in Kenya can have classes with up to 60 Even the government schools in ourstudents per teacher. IFC: Was IFC the only source of financ- country charge a fee of $180 a year. But I

ing available to you? get no support or subsidies from anyoneNdow: The public schools in our coun- else, and never want to have to charge sotry also have a problem with low remu- Ndow: No. Standard Chartered Bank, much that the average or poor personneration of teachers and a low-quality our country's leading private financial cannot afford to come to our school. I seeeducation, with a student-teacher ratio of institution, lobbied to loan me the this as a long-term investment in myabout 40 to 1. We offer well-trained and money, but I told them their interest country, and what I am doing for othersmotivated teachers good remuneration rates were too high and that I preferred through it is far more important to meand i bier quality of education, with to deal with IFC. But the main point is than what I am getting out of it. C

classes of about 25 students. We use the that I don't like debt. I am afraid ofnational curriculum with core subjects debt. Even the IFC loan, when it wasand both prevocational (such as metal- offered, I wanted to refuse, but a parentworkine and carpentry) and vocational convinced me that I should take it at Interview by Ken Bestelectives. Then we have specific require- least for the new science complex, som-ents for computer studies, skills training our children would not have to gocouirses, and extracurricular activities, somewhere else.

Impact a Summer 1999, Vol. 3, No. 3

Business and the Battle for the For

A Treusmq afJamie Resor, World Wildlife Fundand Douglas Salloum, IFC Environment Division

n business, the best deals - the comparable in many ways to the r--"o understand the complex dynamicsonly ones that last, it might be Amazon or Congo basins. It has been involved, go back to 1989. Thatargued -are those that benefit there for thousands of years. But if cur- year the country was experiencing a sig-all sides. rent trends continue, much of it could nificant economic downturn and loss of

be gone in just a few decades. foreign exchange from the closure of its

In that spirit, our two institutions have Bougainville copper mine, the world'scome together with other partners on a That might seem inconceivable, consid- largest. The government was in sore needfor-profit approach to preserving a por- ering the inaccessibility of PNG's rugged of a replacement source of tax revenues.tion of one of the planet's great natural interior and the fact that the country It turned to timber, which soon becamebeauties: the endangered rain forests of still has an unusually high degree (about PNG's third-largest export.Papua New Guinea (PNG). 75%) of its original forest cover. But con-

sider the Philippines. It was in a compa- The development model used essentially

Remote and rarely visited, PNG is a rable situation as recently as about 1960, involved the government's marketing thecountry whose assets are truly irreplace- when it decided to become one of the traditional landholdings of various PNGable. It is a group of islands like none world's biggest timber producers and ethnic groups as concessions to foreignother on earth, home to a kaleidoscope of began a development push that would logging companies, which then pay both700 different ethnic groups, many living see it lose roughly 95% of its Qriginal operating fees to the groups and taxes toin isolation with their traditional cultures forests. Today the Philippines is a net the government. The authorities,intact. Collectively, they speak a quarter importer of wood products. though, have often found it difficult toof all the known spoken languages, by enforce conservation policy and provedsome estimates. Equally dazzling is the At a time when the world loses an acre of largely unable to stop private concession-array of local plants and animals, includ- original forest every second, there are aires from using bulldozers to clear faring the world's largest butterflies, its serious concerns over what could happen more of the forests than is necessary forsmallest parrots, and a vast number of in IN'. - ir too encourages large-scale timber extraction.other species found nowhere else. commercial logging. Protesting won't

solve the problem. Nor will creating new Since the foreign logging companies first

This cultural and biological treasure national parks. The only solution must be arrived in numbers earlier this decade,chest survives within ['NG-. enormous one that fully considers the local pE 'plc's more than 1% of PNG's forests have beenvirgin rain forest - one of the largest, lck itLm rtc development r and gives lost each year. Raw logs are shipped toin fact, that remains anywhere today, tlieniii 1 1lcrrer dc.31 th { [i- flL. ilte rin' export markets across Asia, creating no

ber industry offers them today. added value and few jobs in the local

Fm Irnpacr m Summer 1999. Vol 3. No 3

a:~~~ ~~~ -- : H 0 :: : : -- :,:

.,..-- - y-r ., -, ,.- I -

- .. a .f

. . - .. : . ~~~~~-Forests of Papua New Guinea:

economv. The short-term cash gains the effect of the project's infrastrtcttire as residents' self-interest. Althouigh a non-

local communities receive for selting off a way of protecting local ecosystems and profit itself, WWF was keenly aware oftheir forests are usually well below their communities. But to go a step further the the fast pace of private logging develop-future costs of resource depletion. Chevron-operated project teamed with ment in the country and saw that any-

the world's targest conservation organiza- thing run on a charitable basis couldThe clearing of ancient forests is a tion, the Wortd Wildlife Fund (WWF), well fall apart once the grant funds

process with powerful momentum in which had been doing pioneering work stopped fLowing. It decided to try a for-

PNG. Unless a new, more sustainable in the country since 1989. profit approach, introducing instead a

model emerges that takes into account new way for people to earn money for

the needs of atl parties, the heavy habitat In 1994, the oit joint venture began fund- needs such as food, clothing, and chil-

losses in other countries may be repeated, ing a $7 million, six-year WWF effort to dren's schoot fees. Ideas such as eco-

sending many irreplaceable species and integrate the project area's needs for con- tourism lodges and butterfly farms were

cuttures into extinction. servation and development. The wrork w7as considered, but in the end it only made

done wTith extensive participation from sense to work with the area's dominant

` l!` 10, a year after Bougainville's the government and local indigenous peo- naturat resource, trees.

i 1 1 - .-,stopped operating, the govern- ples and produced many innovative ideas

ment approved the request of an intema- for collaboration. From an economic development perspec-

tional consortium to spearhead develop- tive, forestry was the only game in town,

ment of the country's first major oil pro- Consciousness-raising exercises were covering a far wider area and employing

ject, the $1 billion Kutubu Joint Venture. clearly not enough -something had to far more people than could any "non-core

An extensive environmental impact be done that could protect the region for business." It was time to try a different

assessment led to many steps to minimize the long term by appealing directly to its approach to commercial logging.

Impact v Summer 1999, Vol. 3, No. 3 Is

WWF has since helped design a new ment and scale up its activities. The SME counterpart in PNG, FUNDECOR's

community-based sawmill company called Program supports this initiative because it products receive independent environ-

Kikori Pacific Ltd., based in one part of addresses one of the GEF's basic objec- mental certification through the Forest

the large area surrounding the oil project. tives: developing sustainable strategies for Stewardship Council, an international

Its location in the town of Kikori lies at preserving biodiversity while providing an organization able to show that people

the confluence of several river systems equitable distribution of benefits to local and ecosystems were respected during the

that form a natural transportation hub for stakeholders. WWF shows its commit- production process.

many traditional communities in this ment by taking full commercial risk,

sparely populated area. That leaves it well being fully responsible for repaying IFC, Projects of this kind enable local people

positioned to train local people in envi- even if Kikori Pacific fails. both to preserve ecosystems and to make

ronmentally sound "ecoforestry" and then a living from them. But they cannot

purchase logs from them for processing, E attract commercial funding in their early,

thus adding value in the local economy. _ high-risk stages. Without the long-term

financing the SME Program provided,

Managed by a New Zealander with 15 Kikori Pacific might never have left the

years' experience in PNG, the sawmill drawing board. But by the end of 1999,

company approaches local landowners in =. its first full year of operations, the compa-

an entirely different way than do the ny expects to generate about $150,000 in

large foreign logging companies. It starts revenues, supplying sawn timber not only

by helping the local people map a to the Kutubu oil joint venture and other

150,000-hectare forest zone and choose local buyers, but also to the international

individual trees that can be responsibly market interested in high-quality species

cut. These trees are then cut and carried such as Papuan mahogany. This summer,

out, not by machine, but by hand. The ; Kikori Pacific exported its first shipment,

ratio is only five per square mile, leaving bought by an Australian company mar-

the fragile basis of forest life intact. keting environmentally sound lumber to5eetibe: k' k.f r the 2000 Olympics in Sydney.

Kikori Pacific buys logs from more than

1,000 local landowners. Since the compa- Similar interests have led the SME ''he people of the Kikori region are

ny does not need to invest in heavy earth- Program to find another innovative under heavy pressure to sell the rights

moving equipment, it can afford to pay tropical forest conservation effort: the to their forests to concessionaires whose

the landowners higher prices than the big Costa Rican foundation FUNDECOR, aggressive cutting would cause serious loss

foreign buyers. As these suppliers establish which helps farmers develop sustainable of biodiversity. Kikori Pacific, however,

their reliability, they will also obtain forestry skills and lends them money for offers many of them an altemative path to

shares that will eventually enable them to commercial reforestation efforts in areas economic development that permits com-

become Kikori Pacific's majority owners. surrounding national parks. Like Kikori munity-based involvement, keeps them as

Pacific, FUNDECOR blends commit- the true stewards of their own land, and

Working through the Small and Medium ments to conservation with economic preserves the riches of the forest. Given the

Scale Enterprise (SME) Program (see box, self-sufficiency, giving farmers the train- unique system in PNG, where the people

page 29) that it manages with funding ing and early-stage loans they need to (not the government) own almost all the

from the Global Environment Facility make reforestation and subsequent highly land, we believe this approach, based on

(GEF), IFC has provided a $250,000, 10- selective harvesting a viable livelihood mutually reinforcing incentives, is the best

year low-interest loan to WWF that will and reduce the pressuire for unsotind agri- way to achieve long-term conservation of

enable Kikori Pacific to buy new equip- cultural practices. And again like its the forests and their inhabitants.

En Impact m Summer 1999, Vol. 3, No. 3

As word spreads from village to village, motive can help avert widespread envi- government of Papua New Guinea that

and more local communities see that they ronmental tragedy, rather than cause it. there is a better deal to be obtained for

can earn more money by selling safely The model it offers may not stop those themselves and their forests.

harvested logs to Kikori Pacific than by that currently earn more than $250 mil-

concessioning away their entire forests to lion a year frouit controversial industrial Jar7lie Resor is conservation finance director

foreign interests, a basis for enduring logging in PNG. But it may help attract of WWF, based in Washington, DC.

long-term conservation will emerge. other, more responsible timber companies Douglas Salloum manages the IFC/GEF

Nevertheless, anyone who knows PNG who want to make a profit without SME Program.

knows the many difficulties involved in destroying the very resource on which

working there. This project has no guar- their industry and the country depend,

antee of success. It is essentially an exper- and which the world cannot afford to

iment to see if the power of the profit lose. And it may show the people and

_V ., ,. fi,

The Small and Medium Scale Enterprise (SME) Program is an initiative of the Global Environment Facility and IFC. GEF grant resourcesfund up to $16 million in IFC-administered loans used to stimulate greater involvement by private sector SMEs in addressing climatechange and the sustainable use and conservation of biodiversity. These long-term, low-interest loans of up to $1 million to each interme-diary are sparking several innovative SME projects (see below). Almost $10 million of the GEF funds have been lent out so far, with a fol-low-on program already under consideration.

1. Environmental US non-profit environmental Central America $400,000 Biodiversity, Energy efficiency,Enterprises Assistance investment fund Dominican Republic Climate change Renewable energy (photovoltaicFund Mexico solar home systems)

2. CARESBAC-POLSKA Local for-profit small business Poland $600,000 Biodiversity, Energy efficiencyinvestment fund Climate change Organic farming

3. FUNDECOR Local non-profit foundation Costa Rica $500,000 Biodiversity Reforestation,Sustainable forestry

4. El Sewedy For-profit electrical supply Egypt $500,000 Climate change Energy efficiencycompany (compact fluorescent lamps)

5. World Wildlife Fund Global NGO Papua New Guinea $250,000 Biodiversity Sustainable forestry

6. Grameen Shakti Local non-profit company Bangladesh $750,000 Climate change Renewable energy (photovoltaicsolar home systems)

7. Dessau-Soprin Canadian for-profit engineering Tunisia, Morocco, $800,000 Climate change Energy efficiencycompany Algeria (energy service companies)

8. Conservation Global NGO Global $1,000,000 Biodiversity Organic farming,International Ecotourism

9. FCG Local foundation Guatemala $500,000 Biodiversity, Ecotourism,Climate change Renewable energy

10. Selco Vietnam Local for-profit company Vietnam $750,000 Climate change Renewable energy(photovoltaic solar home systems)

11. Save Valley Wildlife Local for-profit company Zimbabwe $1,000,000 Biodiversity Re-stocking of wildlife on privateconservancy land

12. International US for-profit company Central and $750,000 Biodiversity EcotourismExpeditions South America

13. Barclays Bank of For-profit bank Botswana $1,000,000 Biodiversity, Ecotourism,Botswana Climate change Non-timber forest uses,

Renewable energy

14. Peer Consultants US for-profit engineering South Africa $1,000,000 Climate change Energy efficiency (passive solarcompany heating and cooling designs)

Total $9.8 million

Impacr * Summer 1999, Vol. 3, No. 3

IFCInternational Finance Corporation2121 Pennsylvania Avenue, NWWashington, DC 20433 USAwww.ifc.org

IFC is a member of the World Bank Groupsupporting private sector development in membercountries through investment, advisory services,and technical assistance.