~~~ =t l ~~~~~~~~~~Developing Countries ;~~ ' ' ~ 14~~ A V~~~~~~~~~~~~~~A4 t ;. t < -> A t r~~~~~~~~~~~~~~~~~ 'r. * Kt I I,,ffli IAxiz* I IFC ;:;::; 0::X: ;f 0V; :0: 0 00 The IFC Review of Private Investment in Developing Countries IF is a member of the Word Bank Group supporting prievate sector development in member countries through investment, advisor, services, and technical assistance. International Finance Corporation 2121 Pennsylvania Avenue, NW Washington, DC 20433 USA wwwifc.org E d i t r ; 00 ;; f : 000 0 j D C; 0S u:: m m e r I 9 9 8 V o I .2, N o . 3 Rob Wright C o p y Ed i t o r Chitra Alwis D e s i g n :0$0:0000f000t: i00 Patricia Hord.Graphik Desiggn In this issue, 2 Giant Steps Gargantuan locally owned conglomerates dominate the private sectors of many developing countries. They might be giants, but in the wake of the East Asian financi'al crisis, some want to break them up. Which raises the question: Is bigger badder? 8 Whale in a Swimming Pool Costa Rica to Intel: Hello, Mr. Ch*ipsi Big company/small country, as seen from Harvard Business School. 15 Muhammad Yunus, Grameen Bank Sui' generi.s 21 A Penchant for Pensions Latin America gets into privatized social security LI MM ; , -l ' 25 Act Locally The only way to go in Ukraine, IFC leams 29 What we're doing in Thailand, Samoa, and Namibia Cover and p.2 illustratiors: Frorn an edition of Jonathan Swift, Gullivers, Travels [17261 Chromolithograph. London & New York: 1911 All references to dollars are U.S. dollars unless orherwise indicatedr Mailbag To the Editor How to House the Mongols? and then is re-exported by Song of the Volga Chinese companies to Japan Insurance Man I recently read the spring issue and South Korea for $250. of Impact and found there an Since the export price is so I'm the head of the investment article about a private housing high, the domestic market rate bureau of the insurance compa- project in Mexico City. This for wood is expensive: approxi- ny "AStrO-Volga," and a sub- story has attracted my interest mately $100, or the equivalent scriber to your very useful very much. of two months' salary for a magazine. Thank you a lot. Mongolian government offi- As you knoxv, Mongolia is cur- cial. So most logging compa- I've recently changed my work rently in a period of transition nies tend to export their from the Nonstate Pension to a market economy. After our products rather than sell in the Fund of AVTOVAZ to this democratic revolution in 1990 domestic market. insurance company. the old society structures col- lapsed, and now we have just In connection with this trend, Thank you once more, and all started our recovery in a new the rates of illegal logging in the best. form. In our country many forest areas are soaring. donor agencies and intema- Krainioukov Nikolai Ivanovich tional organizations are con- Exports of wood are obtaining Togliatti, ducting various kinds of some support in legislation in Russia activities such as implementing the Mongolian Parliament, projects, making investments, while other building materials and conducting technical are being imported from China We welcome your letters. cooperation. But, in my mind, and other countries. Since the But we might edit them. the only clear activities are in materials are imported, they of Eax: ma02-974c@3f84 the housing sector. course are expensive and some of them do not meet household Currently in Mongolia there environmental safety s[andards. are some private constnmction So, having one's own cottage companies, but they are mainly in Mongolia is not something putting up large-scale public available to ordinary residents. apartment buildings, according It is only for rich people. This to the old traditions. There trend is wrong, but is left out of have been some initiatives by our legislators' consideration. individuals to build their own houses (two-story, like modem Thank you very much for giv- Westem cottages), but huilding ing me most useful information modern cottages in Mongolia is and advice. very expensive. Ts. Munkh-Khuvag Mongolia has quite extensive Mongolian News Agency forest resources, but most of our Ulaanbaatar timber is being exported to neighboring countries such as China, Russia, Japan, and South Korea. A container (train container with volume of 20-40 tons) of wood is exported to China for $150 Impact . Summer 1998, Vol. 2, No. 3 XIM& rl4 n eIs Can~~B Better? Handpicking DU$ lotfunelate:d: -ind-ustries, local conglo 16dveopngcountry p)rivate sectors. For by Erik D'Amato o many economists an corporate strate- financial storm-unaccountable empires that subordinated prof- gists, the East Asian financial crisis offers itability to expansion and genuine business acumen to political final proof that multi-industry business connections. Taking advantage of Korea's casy-credir atmosphere, groups are counterproductive destroy- they long carried some of the world's highest debt-equity ratios, in ing shareholder value while stunting eco- some cases claiming more than 30 diverse subsidiaries under their noraic developmiient. But other experts corporate flag, simultaneouslv getting themselves into everything challenge this conventional wisdom, from electronics and autos to insurance and construction. But when arguing that broad diversification still the lax lending came to an cnd last year amid the country's banking has important benefits in the context of meltdown, their weak foundations were revealed. Now the top developing countries. three are making unprecedented layoffs and trying to sell iimore than $17 billion in assets by the end of the year to scale back into fewer One need not be a conspiracy theorist to believe some have bene- key industries. fited by, perhaps even relished, East Asia's continuing financial woes. There are the foreign exchange traders who made bundles Similar gangly, dangly corporate octopi are also common in betting against sinking currencies, the local exporters whose com- Indonesia, Malaysia, India, and elsewhere around the world. "The petitive positions have risen dramatically, the cash-heavy investors Japanese call it keiretsu; the Koreans say chaebol; the Russian word who have suddenly found themselves awash in attractive huying is semibankirshchina, and the Americans label the cozy arrange- opportunities. And, of course, there are those economists, consul- ment among industrialists, bankers, and government officials crony tants, and other assorted analysts who had long suspected that key capitalism," writes influential New York Times columnist William parts of the Asian "miracle" were in fact less miracle than mirage, Safire. "No miatter what you call it, the sysLem now roiling Asian perhaps even a rigged game built on political favoritism, poor gov- finances is seen to be a perversion of the open market that is the ernance, had loans, and perpetual overcapacity. essence of real, trust-busted, unfettered free enterprise." For many skeptics ot the Asian miracle, and more than a few of its Safire's disdainful equation of conglomerates with corruption and champions, the region's most troubling characteristic has been the unheaLthy business practices is echoed by many developed-country dominant role of its conglomerates - diversified business groups, officials, economists, bankers, traders, and management gumrs. In often family controlled and involving a banking group, that sprawl short, diversification is out in the US, and increasingly in Western across multiple product markets. The best known are Korea's Europe as well; focus -the belief that a company should stick to immense chaceol such as I lyundai, Samsung, and Daewoo. Once narrow areas of core competence -is in. loved, they have lately been seen as the evil eye of that country's Impact a Summer 1998, Vol. 2, No. 3 How Small Got Big seemed that many diversified entities werc responding sensibly to 1 1 . . . . . . . . ,. ~~~~~aspects of the environment in which they found themselves, hilt Lying behind today's anticonglomerate sentiment is a belief among aspects of the environment oun seles, ha t many Western analysts that corporate diversification has failed in which did not characterize the environment one sees in advanced developed economies or is at best a lesser business strategy. Ever economies." since the US heyday of large-scale diversification three decades ago, Wall Street has steadily soured on the practice, and spin-offs No apologist for poorly run companies of any kind, he prefaces his and splits have become a hallmark of the shareholder value-driven argument by stressing some fundamental points. First, he says, con 1990s. "When US firms first diversified, investors liked it, and glomerates are ubiquitous throughout the world, with the focus- stock prices went up," says John Matsusaka, professor of finance at minded US being the exception rather than the rule. Second, the the Univcrsity of Southern Califomia. "But after 10 or 15 years, reasons they exist vary from country to country. "In Russia," he investors who were pricing firms discovered that diversification points out, "it is the absence of law and order In India and many wasn r working. And if you look at the evidence now, it is clear other countries, information problems are key -the lack of effi- that two-thirds of highly diversified firms do nor do well." cient intermediaries, analysts, good reporting systems, and other institutions that allow markets to function well." Also, he says, tht Why diversification didn't last in the US is no mystery, say abuses now commonly associated with developing country con- Matsusaka and others in his camp. Its complex corporate structures glomerares corruption, lack of transparency, poor treatment of hindered innovation, misallocated capital, and shielded unprof- minority shareholders -are not inevitable products of diversifica- itable subsidiaries from the painful but necessary "creative destruc- tion itself. Most important, conglomeration, while imperfect, is tion" wrought by functioning markets. Subsequent breakthroughs almost always a rational response to an imperfect business environ- in wholesale and retail capital markets brought new financing ment. options to promisiiig start-up firms and allowed investors to spread their exposure across different industries. The twin forces of global- While the structure and strategies of developing-country conglom- ization and domestic deregulation also subjected even the sleepiest erates can and do differ widely, Khanna says it is important to industries to ferocious competition. remember that they usually bear little resemblance to the;organiza- tion of the US diversified corporations that remain, such as Ultimately, diversification led to open conflict between increasing- General Electric (owner of banks, refrigerators, the NBC television ly aggressive shareholders concemed only with returns and self- network, aircraft engines, medical equipment, and more). While centered CEOs more interested in maximizing their own power, their exploitable synergies may not be immediately obvious, such prestige, and compensation. In the end, the shareholders won. organizations have a single overarching company and piublish trans Owen Lamont of the University of Chicago is a long-time student parent consolidated financial statements indicating the status of of US conglomerates. His verdict: "We value focus now because each asset. "The structure you often see in emerging markets, on managers in conglomerates felt insulated from extemal markets and the other hand, is the business group," stresses Khanna. "It is often were thus inefficient." not a legal construct." This loose structure, which frequently includes different units publicly listed in their own: right,l is often A Developing Exception bound by a common family and interlocking directorships; In So thoroughly has diversification's star fallen in the developed many ways, Khanna points out, the bcst developing-country busi- world that even some of its harshest critics say the anticonglomer- ness groups have characteristics not only of conglomerates but of ate sentiment has become unrealistic. "It has gone too far, espe- US leveraged buyout (LBO) funds, with each of their assets legally cially in the academic literature," says Matsusaka. "People are distinct and bound by strong restrictions limiting cross-subsidiza- forgetting that diversification can work for some companies." tion. "Depending on which aspect you emphasize, people's reaction can be very different. If you say a business group is a conglomerate, One voice determined to help people remember this point, or per- people yelL, 'Break it up!"' he laughs. "But if you say it's an LBO haps understand it for the first time, is Tarun Khanna, an associate firm, they say, 'A- excellent."' professor at Hlarvard Business School. In papers, speeches, and seminars around the world, Khanna and his Harvard colleague While it is precisely the "informal" connections linking such group! Krishna Palepu have recently been challenging the conventional that put off many critics, others stress that those connections are thinking on this topic, especially when applied to dcveloping coun- the outcomes of rational decisionm-aking by executives with inti- trics. A driven researcher, he has scrutinized conglomerates from mate knowledge of their home markets. After all, the business envi Chile, Mexico, Turkey, India, Korea, Thailand, Malaysia, and else- ronment in most developing countries is far from merely imperfect where through incessant travel for company visits in recent years. - in many cases, it is also dangerously volatile. "The way compa- He concludes they are not as destructive as many US academics nies evolve in developing countries is very survivalist," says Mark and elite management consultants maintain. Agnew, director of emerging markets corporate bond research at Lehman Brothers. "These economies can move quickly and an "Being an Indian, and having spent time in a lot of different devel- entire company can be wiped out. So companies might want to be oping countries, I thought this antidiversification mindset didn't invested.in industries that, for example,~ do well in both high- seem to square with reality," says Khanna, who grew up in New inflati;on environments and in.downturns. The effect of all this is DeLhi and Mumbai but has lived in the US since 1984. "Instead, it that to sutvive they get dlversified." Impact * Summer 1998, Vol. 2, No. 3 Joel Houston, associate professor of finance at the University of Florida, has even found empirical data pointing to a slight "premi- um." "For the US most of the existing literature finds that the drawbacks of diversification exceed the benefits," says Houston. . "Wthat we are doing is looking at 8,000 firms in 35 countries, including Bra2zil, Chile, China, India, Indonesia, Mexico, Pakistan, Thailand, and Poland, to see if the results of the US cxtend world-: wide. And what we have found is that the value of diversification. varies across countries, correlated with the legal system of the country." A Bank of Our Own? The most customary value ascribed to conglomerates is their ability to provide "internal" capital markets, These arrangements can take the form of either closely affiliated batks or a corporate trcasury open to the group's various units that compensate for the home country's lack of efficient debt and equity markets. "A lot of devel- oping country conglonierates are serving financial functions," says Matsusaka. "The story, in short, is of a bunch of bad laws that gum up the capital markets, prevent transparency, and impede the abili- ty of people to own shares. All these things force companies into relationships with banks, because in an imperfect world this is the best way to get capital." But maniy prodiversificationi experts downplay this argument. They cite the fact that a number of emerging market countries have dra- conian legal restrictions on the use of internal capital markets, and that in others, state-directed lending has imposed external priori- ties on the internal operations of diversified groups. So, at bottom, few conclusions can be drawn on the net effectiveness of such internally sourced financing. "A lot of what happened in Korea and Southeast Asia has to do with the fact that induistrial policy made the cost of capital artificially cheap," warns Francisco Larios, senior emerging-markers economist at Standard & Poor's-DRI, a US-based risk analysis and economic forecasring firn. "And this in turn created excessive diversification to areas where firms were not efficienL and not capable." Likewise, experts debate the value of diversification in overcoming inefficient product markets. Cross-branding unrelated industries (that is, putting the same corporate name on trousers, tractors, tele- visions, and tea) can add value, but only if the corporate identity is widely considered gold and if the markets for the products them- selves are not significantly price sensitive. Developing internal information network's that bypass or suirpass slow and unreliable external services will add value only when the information being shared itself has inherent worth. Another area of potential benefit derives from the acquisition or development of units capable of supplying the entire group with superior inputs and services. James Champy, chairman of consult- ing at Perot Systems, the global computer services company, and coauthor of Re-engineering the Corporation, says that the unreliabili- ty of potential suppliers can make such moves toward vertical inte- gration very attractive. "At my previous firm we were trying to acquire computer services companies in a number of developing Impact. Summer 1998. Vol. 2. No. 3 a markets in Southeast Asia, and what we found was that there weren't And Khanna stresses that recognizing this and other unsavory reali many candidates to choose from," says Champy. "A developing- ties in no way means denying their social cost or accepting that country business could find itself compelled to take this activity in- they are the only, or even primary, benefit of diversification. 'I'm house." completely in agreement with the view that there is no room for corruption in an efficient allocation of resources, and that in many A marked benefit of diversification also c-omes from the attractive- countries corruption is an important cause of these business ness it offers to foreign firms. From the earliest days, multinationals groups," he says. "However, removing corruption is not tanta- looking for foreign partners in developing countries have often mount to getting rid of diversified business groups. Some groups in found comfort in a local diversified group, which can become a key India and Chile, for example, are squeaky clean, while for others conduit for two essential components of the private sector develop- political relationships and rent seeking are a raison d'etre." ment process: technology transfer and foreign direct investment. Much reassurance can also Bye Bye, Love? come if the conglomerate has The debate becomes most already gained credibility by urgent when it takes up the doing business with many question of "unbundling." other large foreign companies, With mutibilliun-dollar behe- and therefore has much to suf- moths such as ITT and Gulf & fer if it treats any of its part- .Wiiestemn in the US and nets badly. "if a Procter & Hanson in the UK having Gamble is looking for a part- been successfully, broken up neti in China, they would anid reborn as ni mbler enitities, rather have it be a Hurchinson many inifluential economists Whampoa than a more now urge developing-country focused firm," says John govemments to make breaking Godfray, a Hong Kong-based up diversified business groups analyst specializing in con-, priority. glomerares for Dresdner- Klrinwort Benson. Others, including some skep- tics of diversification, are urg- "If conglomerates are so ineffi- ing caution hiere. John cien-t, why will focused multi- Godftay of Dresdner Kleinwori nationals always partner with Benson wars that as China them?" asks Khanna. reforms and sells off its state- owned enterprises, focus The shiould riot be aii overriding onnections priority. "Single-industry oper L onnection ations ,are much more likely to One answer to this question --be wiped our, which could leac involves the final, and most to the miore rapid failure oif controversial, perceived ben-e- -.firms and enormous social fir of the developing-country uinrest," he says. conglomerate: that it is the best vehicle for overcoming -Many think that the wave of and, some argue, unfairly col- globaltzation and internal lib- luding with - heavily inter- eralization will slowly but ventionist regulatory regimes. inexorably eat away at the Judged and Found Wanting? Some experts question the rush to judgment rationale for diversification, This issue, which combines for corporate giants in the developing world, just as in the US. "If I look regulation, connections, and ahead," says Anil Gupta, a corruption, is not something University of Maryland profes- prodiversification analysts are afraid to discuss. Instead, they view it sor who both advises top Western corporations and closely watches in practical terms, as just another market failure that firms must seek congloimierates such as A.V. Birla, Tata Group, RPG, and Reliance to rationally overcome. Denied the ability to grow in one industry, in his native India, "I would say that rhere is a fairly clear trend often by antitrust regulation, many businesses find that the size trwards opening up and liberalization of both capital markets as wel needed to be a political player or to open and staff an "industrial as product markets, and that's true whether we take South Korea, embassy" in a far-off national capital, for example, could only come India, Mexico, or Brazil. And both of these liberalization trends through broad diversification. would tend to work against the conglomerate form of organization." cI Impact a Summer 1998, Vol. 2, No. 3 Ashe assesses the head-spinning changes of recent times and looks Khanna, for one, doubts major change will come quickly, and he is so he utue, upta -speculates: 'What happened in Chile in 20 not necessarily sure it would be a good idea in any case. For one vasmay in aohr mrenotaenlfi."thing, he says, disbanding is enormously expensive, and in many developing coun-tries there are regulatory barriers to shutting busi- SC,h cear to mei that tmoeforward these comnpanies will have to) nesses down. And, he says, the data simply do not show that diver- divet ad fcuson their core competencies," adds Francisco Larios sified groups are losing their advantages, even in the most of Stndar & Por's-DRI. "Whether or nor they should is an aca- "developed" emerging miarkers. "It is tinot clear that disbaniding is demi quetion Thy wil"the best way to respond to changes in the market," he says, "andi my colleague Krishna Palepu and I have now amassed empirical Butforevey sppoterof disbanding, there may be a skeptic. In a evidence from India and Chile that econometrically shows that reet cmetary on Russia's "financial iindustrial groups," the those groups that are not disbanding but strengthening are doing Fin.ncia Tims waned hat therole of their Asian equivalents, better." Japa's-keiers an Koea' chebol, in the recent Asian financial criss crtaily oesnor akethemodel one to follow. But in a Most important, Klhanna says, is thie fact that, eveni giveni th-e global counry wth byzntin poitical system and limited access to cap- march of liberalization, the many market failures that make diversifi- tal- anid skilled labor, the evolution. of such group struictures is per- cation pay are easier to) talk away than actually fix. "The way out of -hapsinevitable." The same publication also wrote that India's this situation conceptually is very simple, and practically very diffi- largesrt conglomerates are "starting to recite the mantras of shiare- cult. Conceptually, developing-countLry governments should be in hdrvatIue,` buit cautioned that "the mnain beneficiaries of thlis the business of encouraging specialized intertriediaries and forcing deirto re-evaluate core activities to date have been management accountability, transparency, and minority shareholders' rights. In *cnutnsrather than shareholders." While conceding that Tata practice," he says, "the governiusents are uniable to do this, or are Group and others.in India had begun exiting a few de-emphasized beholden to existing interest groups and thus unwilling to do it, or, indutris, he espcte Lodonnewspaper said that "rhetoric has more likely, both. And it may be a mistake if conglomerates- so fr rn aeadof ealty"andthat "no big industrial group has yet including the Korean chaebol -are unbundled forcibly without the disesaged he eb f crpoateshareholdings which bind group simultaneous development of thLe stand-alonie institutions and prac- cmais"Noting that after shedding some domestic assets, such rices that makec mark-ets work-, SuIch as those that suipport corporate busiess groups. often quickly entered others, the newspaper warned governance and protection of shareholder rights, stronger enforce- that 1ni "could witness a new generationi of emnpire building - ment mnechianisms tot legal and regulatory stan-dards, and higher stan- ansitalk of focus could yet prove to be a fad." dards for disclosure, of corporate information. U Erik D'Amnato is mnanaging editor of Th-e Prague Business cournal. Tarun Khanna, Harvard Univ ersity USA Artil GuPta, University of Maryland, USA Impact.a Summer 1998. Vol. 2, No. 3 Whale in a Swimming Pool That's how Intel Corp. once thought it would seem if it built a $300 million computer chip plant in tiny Costa Rica. And therein lies a tale... By Debora Spar Harvard Business School, USA Impact * Summer 1998, Vol. 2, No. 3 countries have seen industry-specific promotion efforts stagnate or 2 ~~~~~~~~~~~~' ~~~~~~stumble, Costa Rica appears to liave succceded cluite brilliantly. Thus the Intel investment provides a compelling platform to discuss Ihow countries can gradually improve their climate for foreign investment and the design of their investment promotion strategies Intel's decision to invest in Costa Rica serves as a rich example of x~~~~~~~~~~~~~~~~~~~o smt |W3:l jgclashhountlry widi no domestic market can still ture a world- high technology firm, Decision to Expand In 1971, the Intel Corporation introduced the 4004 chip, the -_'___v_____ world's first microprocessor. This introduction revolutionlzcd the computer industry and set off the phenomenal growth that both the industry and Intel have enjoyed ever since. In 1995, the world- wide production of computers was valued at $237 billion, up 13.5% I. ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~W ~~~~fromn the 1994 total. Semiiconductor sales alone were valued at - $123 billion and were predicted to continue growing at 20% a year between 1995 and 2000O. These growth figures arc driven by the diverse and increasingly pervasive applications of microprocessors, the advanced and complex semiconductors that form the core of :,~ . -'' j ' Intel's business. Essentially, microprocessors are the "brains' that drive most etec- tronic computing functions. They are integral to the futnction of mainLframe computers, personal computers, wireless communica- tions, and a host of consumer electronics products. Because of their growing applicability, microprocessors are generally regarded as a key component of industrial growth - and a symbol of economsic and industrial prowess. Thus, although firms from the US and Japan continue to dominate the itidustry, the governments of Korea, Taiwan (China), and Singapore have all actively supported It "'A-b -! t ' 1- '- the development of their home-grown semiconductor companies, and China, Ireland, Israel, and Malaysia have eagerly pursued investmentfrom leading foreign firms. For developing countries, the semiconductor industry carries perhaps the ultimate promise of positive extemalities - of jobs and technological innovation and ( ) a November 13, 1996, the US computer industry giant the kind of long-term returms that have made [ntel one of the most orp. ano s to construct a $300 nilt- profitable companies in the world. Intel's distinctive position in the ionsemiconductor assemblyand test plant (ATP) in semniconductor industry has led it to pioneer an equally distinctive Cosa Rica, lan that was to have up to 2,000 strategy tor operations and investrnent. Essentially, the strategy is 1o- rndwithintw to. tihreyasb fully manned and staffed driven by cutting-edge technology and blistering speed. Every nine byCotra Ricans. The announcement came as a triumph to Costa months or so, Intel builds a newv plant. Nearly all of these plants - k~an ties, ad also aroused-consierable interest in the are constructed to meet future, rather than existing, demand. As Jat~d~ foreign investment comnvuniry .CEO Craig Barrett acknowledges, "We build factories two years in advance of needing them, before we havc the products to run in -With ans-al revenuesof more than $25 billion, Intel is one of the them, and before we know the industry's going to grow." wk largestiindriostproft cbororatioa s. Costa Rica, mean- 'h,iA tiny country, With n of 3.5 million and only Such optimism is rational, even required, in the fast-paced semicon- z2"fiae develpmeSnt in electrocs and o-ther high: technology sec- ductor market. For this is an industry where producers reap the bulk r owh aho did-Intel ch6oose Csta Rica? of their profits early, usually in the first six months following a prod- U; ~- ~-;- .. .. .E :: ;~...............uct's introduction. During that time, manufacturers can charge up to c~to&tRik ik ma- ny developing countries) expli2iciy targeted the $1,000 per chip. After six months, however, lower-cost imitations eleetroscs Sector as an area fhighp tial growth. Like other tend to exert significant downward pressure on prices, customarily ontirie it also set its sights on icreasing flows offoreign invest- pushing them toward around $200. For Intel, this basic cycle implies ny And crea an investment promotion agency a constant need to innovate, and to ramp up produiction capacity as isa at-trac and convince potential investors. But 'whereas other quickly as possible for each new generation of processor. Impact a Summer 1998, Vol. 2, No. 3 * - This logic of expansioti has also 1ed Intel to decelop an iniipressive - *. - .s. - - - - - 'tiing of overseis facilities. By thc time it begain contemplating * sr~~~~~~~~~~~~~~~~~~h at WsoLII3 becomt-e anl insVestiTnen rn Cforta Rica, the coiiip~ify - -i 3 -1 - iz = 113 | alrheady had waifer fabrication plants in rlad RiJ d Israel, and issersbly and tcst plants in Malaysia, China, and the Philippines. _Early in 1996, executives at Intel decided to tesearcia sites for a news assembly anJd tesr plant. They conseried a ream of fLnctional expe-ts, composed priimnrily (though noit entirely) of people is ho hid significant expericnce with site selectioin. Intel execiitive had alscady deteriiiined the precise contours sof the planinecd iniestment. It was to he a plant ol 400,000 psqiare feet, employing tip to 2,000 people to assemble and test thc latest Penltiumii uitroprecessors. This typc of plant, kTiown as an ATP, is the sec,mnd type of plant that ciinstituites Intel's manufacturing base. = = lS l _ s ~~~~~~~~~~~~~The first tv c, a fiibrication plant (oi tabl is where the heart L1f thie in=!m icroprocessot is produced. EssentiAlly, fabs takc thini layer's f sili- i_ ,ii known as wafers, and use a highls ads anced process of photo- lithography to etclh layers of electrrnic circuitiy on each eight-inch s wfer. This process requires ani ultraclean environment and stag- gering levels ol c:apital and technical expertise. Onice the fea I_pcess his heen conmpleted. the wafer- are sent to the ATP There, the watei s are thinined t,r redcice internal stress, then coit into anv- _ - sewhere from 302 to 500 individual chips, or integrated circuits. The chips are thel ri,oiinted onto a lead framie and ittached to thin __ g,lhd wires that will csentually connect them with the other cie- menits of the coTptirer. In the finial stige of the manuefactutring _ process, the chips are eiicapslated in eithel-i ceraiiiic or plastic p ackaginig and subjected to a i igoro as series of tests. S~~~~~~~fJ .41 To rLtus the news ATP as coist effect is sv is possible-, Intel lknewi it had to) find a lost-cost let hiighly trainable worikforce. It siwould al-ia h ise to iiiid i spot where highlyl quatified eingineets seere asvailable, aiad w5lie re ernpl(ivee turnioiser coinIld reasonaabls he kepst to a mainimtini. Inrhse-s early das otiRica wsnten sa partictilarly f m 4 ala ~- ~8- - targeting and appraaclhaine Ilirge, t, 3-based etectrtciiacs firiiis. In thie U Impact Summer- 1998, Vol. 2. No 3 late 1980s, CINDE had decided to follow a focused strategy of "insider's" perspective on business conditions and state practices investment promotion, marketing itself to a specific group of within each potential host. Team members conducted lengthy potential investors, rather than spreading its fairly limited interviews with consulting firms, government officials and other resources across a hodgepodge of ambiguous leads. For several US corporate executives. They met with accounting and law years, this focus had been textiles, but as Costa Rican wage levels firms, ran in-depth analyses of key factors such as work force rose and competition from lower-wage emcrging markets mounted, capability and waste watcr infrastructure, and tried to solicit the CINDE abruptly shifted out of textiles and concentrated instead opinions and experiences of other foreign investors. on electronics. With a high level of technical knowledge in the country, relatively low labor costs (for this industry), and an abun- Costa Rica received its first visit in April. The two-day tour dance of bilingual workers, Costa Rica's advantages seemed to began with an overview presentation by CINDE, which also coor- mesh well with the needs of the growing global electronics indus- dinated many of the subsequent meetings. The Intel team then try. And so, ever since 1993, CINDE had been assiduously court- spoke with representatives from Citibank to inquire about the ing Intel and the other "big fish" of the electronics industry. adequacy of the country's financial infrastructure, and with execu- tives from international accounting firms KPMG Peat Marwick, In November 1995, Intel at last responded with interest and invit- Price Waterhouse, and Ernst and Young to examine the reliability ed the current director of CINDE's New York office, Armando and transparency of Costa Rica's legal and financial institutions. Heilbron, to its headquarters in Santa Clara, California. Almost Closed-door meetings with enthusiastic executives of DSC -.9tr~edsa~t4y aft1nhearngof Intel's interest, Enrique Egloff, Communications, the largest US electronics company with opera- 30~1;ESQGUCoitaRicA ~ assignedtee investment officers tions in Costa Rica, as well as with several other manufacturers, MI~yi-tlr~prqjecv It was sevezal months after the first apparently gave the Intel representatives additional confidence in R ' ,Sanre l? a~d after CiND.staff sent hitel a detailed the countty's general business climate and its capacity to process pcka t a a made it onto and convert weekly flows of several million US dollars. of possible investr sites along with Argentina, Ia 1nai oia , Koreay Mexico, Puerto Rico, Presidential Push I = --an Th.:== During this preliminary visit, CINDE had also arranged for the site -s, S'-~--~ .t. =f--.-f.- --0 i.-0selection team to meet with Jose Rossi, Costa Rica's minister of M 16ft~srtbegan Ž.s4 basic d~k etsearch, looking for obvious foreign trade, as well as with Jose Marfa Figueres, the country's or sti~s't~ e~cI.ude -r:m the list. president. Since November, Figueres had been kept informed of CINDE's interaction with Intel and had continually expressed s,erious contender,the country in question had interest in helping with the project. The young, Harvard-educated .NVb ` ooeinionjitions, an established and reliable Figueres, in the middle of his presidential term, was keenly aware ~syst, and a reati tasparent operating and legal of the potential impact Intel could have in helping to lead the lsoteddLa sufficient supply of professional and country's growth. He took a strong personal interest in relations s,1 and-a Aunon kork environment. with Intel, and was a critical element in Costa Rica's eventual suc- : ~g- .> -. -. ~~; - -; X 0 -.: = :-cess. During the initial visit, he spent two and a half hours with tp ta. iabe financial situation for the Intel representatives, during which he pledged to "do whatever s+ Tei ~- e in l pa#t!by+ the cost of labor and over- was necessary" to make Costa Rica competitive in the race. He 9ar~naxatiorz rates, tars, customs fees, and the ease of capital was engaged, enthusiastic, and energetic in his pitch and respond- i_ ; p~ Eeeause5all the_plant5 products were intended for ed directly to Intel's concerns. When the team expressed doubts 'vwerlff Wapd customs fees were particularly impoTtant. about the quality of the work force and the adequacy of technical- -y trained graduates in the country, Figueres suggested that the me pressures underwhh Initel:-generally operates, the government could create an enhanced training program to meet j-~i~~sAsts1iad to ensure that products cormingfrcamits plants Intel's needs. l a~iIi~stXSe ~i?sci fron t .the plar to an inrernational departure '+< p tu.Ythen exp-edJitio-usly through customs and any other export In what would become a critical move, Figueres appointed Rossi procedures. Before investing in any country, Intel had to be to manage the Intel project for the Costa Rican government. assured of receiving all necessarv permits within four to six months. CINDE would remain a key contact for Intel and a facilitator for Any delay in the permitting process could seriously compromise the any sub-sequent meetings or negotiations, but Rossi, a high-rank- project's very tight schedule. ing and well-respected government official, would serve as the central point of coordination within the Costa Rican govern- On the basis of these rough criteria, team members slowly win- ment. Rossi impressed the visitors, who appreciated his active nowed down their list. By the end of this process, the original list involvement and understanding of the firm's htusiness needs. Rossi of 12 had been narrowed to four: Brazil, Chile, Costa Rica, and himself had been a businessman, running a sizable family-owned Mexico. holding company before he joined the Figueres administration. He recognized the importance of speed and the need for an expe- During the spring of 1996, Intel's site selection team went directly dited process and clear, consistent communication from the gov- to visit the countries under consideration, seeking to glean an ernment. Impact a Summer 1998, Vol. 2, No. 3 s that transportation issuesecould stymie the invest- inpuAsfromea4t fabrcationerantin mns cNDE eandwPresidenteigueresturged heavi the Ministry of thcworldand to Imondproducts, kyte air,ena evisted Transportateon tofiendrg some wu or rac modating Intel's needs. lcation*vasvery attractive en dthis reparesenta, ve each rime Andusthey, dvid. After gatheprin s ifor o ar nd meeting with Intel, thr ferehours,Intel wasworr&ied about thebfrequened tfflighes eand theMinistrydifagreced hetowranthis orae licens toe carriershif it capacity th hof San t Jose'ss anti negcsdaaon perrod er aintelt. Mexio ncesaryd put ensta Rcan adequate numbr sof flights. It als.o Miandokngofaniry aoraked pCandis f Natonecarg terminal, slated to open Althoughtheoverolsize h of Intel's shipm entswoldbe small theout invelp May 1 r Onradus,tha rtw sidesstrckur avng easy compromise. l8 ton As/week),theyneeded tsolbe dved wnto many batwohesand Intel donated savomableofitso pri meng. lar toe reae an access road for e~ntdon severaL, different flights.Thiswasduetotheinsurance itg facinal, whiale the Ministryf agreedrto wimpre access to the high- wayt byf o constructing anotn overpass ramp,nandecoordinate traffic pat- 14rsbrofLgta nd their d~eestinassations w. Ad there CositaRcfelsel Costan puicas stand pord neta ntionschedultes make sure supoliers and sho<4rt Wh~sieteewr uberlDE I f daily ime fihse atmjor Los temploees hadneasyse acce aetotheml fttactiiry.rngivetrssc Anee,Huton andMiami,therel wasonlany limitepdresctacicessto as Entergy proved ex ptior troubleome. Evesn though Intel's projected Europe and arod worecd access shareeFarEast of opeatiota enemption fellh frm for l yestimates of 30% However.soucet a mchmre tma be o , the piantis Cstil dmaned its own Roads were also a ~sour t ic f some concern.h Inthasite wintl's substation And thsl asubstatio he tone debuilt and funded by ICE, loctated n closetothecountrv'smakin ite%rnatinalairortal losnaatvheiuing extraeRica uappy stabe-ownt electric co, sInitially, ICE estimated highway lnkingthecenterofSanJosewithRhe airts phe prob- a nd yt cotruclid onbte substa tionl: roughLy cl nLo even for a year are, and the inancial term and 9 half -clearly an unsustainable lem did not lie with the quality of the highway,whaichis mhose schedulelion faci]ity.Complicating fotters was Intel. To expedite mat- adequate;'rather the4accesseto theM main &ri&ad fomtheplnne Lca haal tempaddrily tapsed,Lers,ng Itel vncrtualty agreed to cede all oI inthen equitd land to ICE and to .. -9 prov~~~~~~~~~~~~~~~~~~~~ide funding (through Lan undis- developedr& - closed loan arrgement) for the Impac6b tits wzth CSumm ier b , additional power lines and substa- ccch'i&asttuetiadatpAiiiani h-the .. tion. It also agree~~~~~~d to fund a see- transportation sector. To meet h ond substation to serve a demands of its market, Intel's new neighboring industrial park. facility would be designed to use inputs from any fabrication plant in Mawile, Intel negotiated heavily with the min- the world and to scnd products, by air, stroengyto secuire better rates for the Intel plant. to any customer. While Costa Rica's Existing rate structures included only two rates, residential and locaton wa veryattrative n thi regad, i,\ CoO- inidustrial, leaving Intel with prices of around $0.07 to $0.09 per with access to California or Texas in under co""es kilowatt hour (kWh). For an energy-intensive facility such as an three hours, Intel was worried about the frequency of flights and the ATP, the difference between this rare and the $0.02/kWh that capacity of San josf's airport. Mexico offered put Costa Rica at a significant disadvantage. So the Ministry worked with ICE and its National Regulatory Authority to AlthOLugh the overall size of Inrel's shipments wouild he small (abouit develop a two-niet indr]srrial rare strujcrure, giving larger uisers like 18 tons/week), thiey needed to be divided into many batches and Intel mote favorable pricing. Under the new agreement, still pend- sent on several different flights. This was due to the insurance ing final approval, the cost of power will drop to an average of requirements that surrounded the transport of a cargo that xvas, $0.05/kWh for any users conisuming over 12 megawatts. quite literally, worth its weight in gold. Thus the volume capacity of flights into and out of San Jose was nor as important to Intel as the F iinan cial Incentives rnumber of flighits and their destinations. And hiere Costa Rica fell Costa Rica's stanidard inivestmient inicenitives anid tax policies under short. Whiile thiere were a number of daily direct flighits to Los the free zone system are extremely attractive, offering investors such Angeles, Houston and Miami, there was only limited direct access to as Intel a full exemption from taxes on profits for the finst eight years Europe and no direct access to the Par East. of operation, and a 500/ exemption for the next four years. However, at the time of the negotiations, Costa Rica still leviled a Roads were also a source of some concern. Thie Intel site will be 1 %i tax on the total assets of free zone developers. Intel was located close to the country's main international airport, along the extremely unhappy about this tax, since its total cost to thec compa- highway linking the center of San Jose with the airport. The prob- ny would be substantial: roughly $3 million for its proposed S300 lem did not lie with the qu]ality of the highway, which is more than million facility. Complicating matters was the fact that the tax law adequate; rather the access to the main road from the planned loca- had temporarily lapsed, leaving some uncertainty as to its applica- riots was indirect and conivoluted, tioni, especially sinice Intel initended toi build oni a site not previously developed as a free zone. Impact u Summer 1998, Vol. 2, No. 3 The government decided to seek an interpretation by the attorney In the end, Mexico, which reportedly was the front runner, was com - general. who, bearing in mind the country's new objectives of promised by its currency crisis and a system of mandatory union attracting high technology, capital-intensive industries, concluded rules. For Intel, union-free in all its manufacturing facilities, the that the tax did not apply to companies under free zone status. presence of a Mexican union might have created a significant cul- ture clash within the plant and even within the company. Mexican Education authorities offered to make an exception to the rules for Intel, as it Intel's most pressing concern, and Costa Rica's most interesting con- had for other major multinational investors. Yet their very offer cessions, came in the area of education. Although education levels made Intel wary of the way business poLicy was formulated in in Costa Rica were already substantially above the norm for develop- Mexico and ironically helped, in part, to eliminate Mexico from ing nations, the country did not have the education infrastructure to consideration. support Intel's personnel needs -for example, to train the 800 technicians the plant would require. Both Intel and Costa Rica Intel s Choice knew that this gap had the potential to be a deal breaker. And thus, on November 13, 1996, Intel announced its decision to build its next assembly and test plant in Costa Rica. As is customary Well aware of this threat, CINDE and the government qtuickly with Intel, the announcement was conditional: it declared that the launched a program to ameliorate Intel's concerns. A team consist- project would be located in the chosen country only if the govern- ing of Intel human resources staff, CINDE staff, the minister of edu- ment delivered on the provisions of an agreed-upon contract. In cation, the minister of science and technology, and officials Costa Rica's case, these provisions included the comple- from national institutions of higher educa- tion of Intel's registration in an authorized free trade tion was formed to identify the gaps in zone, the awarding of a series of environiimental and con- Costa Rica's educational system and to - strrction permits, and a government commitment to submit guidelines for improvement. A enhance technical curricula and training facilities at several institutions for students studying electronics. The team spent considerable time matching the detailed personnel requirements from For the next several months, various ministries, Intel against the curricula of the country's - - CINDE, and Intel worked to prepare the relevant technical high schools and advanced training a documentation and finalize the arrangements of programs. In addition, a group of four profes- their deal. In April of 1997, construction on the sors from the Costa Rican Institute of new T bean a4s | -va p Technology (ITCR) and two teachers from t 70Q ° t th i local technical high schools made a six-week M o the year. ' ' : trip to Intel facilities in Arizona, New Mexico, -- and Califomia. By speaking at great length to e f Others, operators and technicians at the plants, they . W , l-e to con th sought to understand precisely the education and - stori W Iss? skills required to support an Intel work force. - to &r deeioi Following this review, the team submitted a detailed c - - p oh h t o firti-s= and extensive list of recommendations to the Ministry of Education. Right frm the sti did not e a * ITCR would make this program available to either technical high firm was big- ka rich -ar nternA t b school or academic high school graduates to update their techni- that this firm' vestment Pat-eftl hap nt10- cal skills and physics/chemistry competency on an as-needed basis. with Costa Ricais existin-g set -of ccrifirrY c'h atrt • Graduates of the certificate program and qualified graduates of Hellbron, J:ow CINDEs-CEO, had hIs firtmeeting i-5 technical high schools would also be able to enter an additional utives. CGsta Ri&a 4iery had m'4ch-of wbar M" rt one-year program designed jointly by Intel and ITCR. Initially, political syster, a libertalized ec these programs would focus on semiconductor manufacturing,- a deveLpi eleiag. although they could be extended over time to inctude other Costa Rica had aa d i career tracks as well. existing competitive trrengths,adCDh gee-oprs 0 ITCR would provide intensive language training courses in sicludin Intaeljth:B meshd witht Spanish for expatriates from Manila and the US, and English -son here is clar. c targe training to the first group of 50 technicians hired in Costa Rica. This is independent of the degree program and will be done O: Ance this tret directly on contract with Intcl. CINDE officials continued td .ho . t site selection tea wa OtIn ii Urged by CINDE and President Figueres, the Ministry of Educationl were conudi their own exefvisi 1e ts ei approved all of the team's recommendations. ITCR began almost ab,ou,t s a immediately to implement the new curriculum,. about the intric cies of lntel' pariealarisi it- T *~~~~~~~uuna -t99 VO2N D fl Costa Rica had not appeared on Intel's long list of possible con- ~~w 4 ~tenders. d000 tf 0 00 00 VPhase I -S < Prequa.:ficationSo what does it take for countries that are not yet "on the map" to * First Quarter 1996: Worle search to develop get there? The Costa Rica case suggests several possibilities. The long lst, for new $300:milion ATP first is marketing. While glossy brochures and investment promo- * April 1996: Finalize short list Make firtsite visits. tion offices are clearly not sufficient to generate investment, they are p 0i00 0 0X00000000 \\\\ 0 000 \0 0 0; \t t0one way to raise awareness of a country's potential and compel Phase I1 - Site Research investors at least to take a look. Second, any objective publicity 0* July 1996: Reduce shod list toatwo finalists: Mexico about a country appears exceedingly helpful. Stories of an economic & Costa Rica. ; boom, for instance, or a novel training program, or a successful pri- 0 September 1996: Negotate inpiplith vatization tend to catch the eyes and attention of potential both countries and select se finaist investors. So do attractive tourist destinations, simply by exposing would-be investors to) the virtues of a possible site. By contrast, 0 0 XPhase: $III - fContingent Announcemeznt\t an 0 00000000 000 000:reports of corruption or instability or political strife are likely to keep Delivery, v 199: Announce ie nt countries far from any investor's list of possibilities. Third, a prepon- E November 1996: Announce mv~estrr3ent:s oXV E S contingent onf the completion of final apVpXrovals 00000 derance of follow-the-leader investment suggests that attracting the andpermits. Land optioned but not purchased. first multinational is particularly critical to a country's longer-term success, for tthis investor is likely to bring not only its own capital Phase IV - Start-Up and technology but also a dramatic ability to market the country to * April 1997: Start construction, detail work flow, other investors. The first catch, therefore, is a big one, especially for develop staffing, and obtain supplier and vendoriX a country with limited natural resources and a small domestic mar- support. Select plan7tmanager0 ket. Efforts to land that catch- so long as they do not involve spe- cial deals or extralegal treatment -are almost certain to be well worth their while. enabled them to meet Intel on its own terms and to conduct negoti- ations with a fairly detailed knowledge of what the company needed A final, more subtle, lesson comes from the detailed corIcessions anrd and how the cotntry could provide it. accommodations that Costa Rica eventually made to Intel. Costa Rica did not "sell out the state." -They granted no special favors to At a broader level, another lesson is that general country factors Intel, no side deals or firm-specific concessions. But they did, make matter a lot, especially for a high-profile and long-term investor such major adjustrmrents - at the airport, the schools, the free trade zones as Intel. What drew Intel to Costa Rica, and what was vital in con- -to accommodate Intel's needs. But in doing so, Costa Rica was vincing the company to invest, were the basic characteristics of addressing legitimate problems of the company in order to secure the Costa Rica's political and economic system. The country is a investment. Undenably, there were concessions, but ey were nor democracy; it is stable, liberal, and generally committed to economic unreasonable or capricious. Second, all the adjustments made were openness and progress. Its government's attitude toward private generalizable to other investors - and generally good for Costa enterprise is basically facilitating, rather than harassing. It also has a Rica's economy. Investment in technical education, investment i fully transparent legal system. infrastructure, a cap on taxes in the free zones areas: oall are benes that other investors will undoubtedly appreciate as well. And they A third lesson: Throughout the site selection and negotiating will probably bring long-term benefits to Costa Rlca's own; develop process, both CINDE and the government committee led by Jose mcnt goals. E Rossi were consistently well-preparcd, well-informcd, and cager to: view their negotiations with Intel as a positive-sum game rather than Debora Spar is an associate professor at Harvard Business School.She is an adversarial relationship. Aided by the personal commitment of the author of the 1994 book The Cooperative Edge: The T Interna the country's top leadership, CINDE was able to take a lead role in Politics of International Cartels, which examines cartels inor iner orchestrating Intel's interaction with all levels of Costa Rican gov- tional commodity markets: diamonds, gold, silver, and uranium. This ati- emiment and society. Coordination was absolutely key, and CINDE cle is condensed from her 1998 study for the World Bank/IFC Foreign was given the authority and capability to coordinate. It also had an Investment Advisury Service (FIAS) "Attractng High Technology enviable position vis-a-vis both govemment and business. investment: Intel's Costa Rica Plant." opies of the full studyl may be Independent of the government, yet closely aligned with it, CINDE obtained free of charge by contacting Damien Shiels of FJAS had an autonomy and independence of minid that were critical to its (Dshielsiifc org, fax 202-974-4303). eventual success. These are attributes that could be adopted (albeit with local modifications) by other investment promotion agencies. Illustration, p.8: Eric Westbrook A fourth lesson concerns the earliest selection phase. All the things that Costa Rica subsequentLy did right, aLl of the factors that made the country a good fit for Intel, would have been utterly irrelevant if Impact * Summer 1998, Vol.2, No.3 IsU I ferent in 0 an eiF F r e 1 | ^ 0 | | |On the record t's hard to argue with Muhammad Yunus' people, There are probably too many other parts to achievements in building the world's best- list. But, as a recent internal IFC analsis stressed, known microcredit institution, Grameen "the important thing is that the process~ as a ulhole Bank. But like any high-profile figure, he works." has his crincs. They say he receives too much limelight -that he collaborates too Lately Yunus has used Grameen Bank as a spring- little with other organiZations around the board into other innovative business veentures intended world in his highly specialized business of to create new opportunities for his country's rural poor. making tiny loans to the poorest of the poor. But what- They typically start off with a nonprofit or tion ever the case, there is no denying his track record. and a desire to fill an important niche in the xal development picture, but are intended to convert to i From the day 22 years ago that he first looked into the for-profit status within a few years. The best estab- : , troubled eyes of a village woman and asked what, lished of these, Grameen LUddog ("Rural Iniiative"), ; despite his comfortable lifestyle and secure teaching job, finances local women's purchases of yarns and dyes to g t . - he could do to help, Yunus has been at the center of a weave on tradiaonal handlooms, then links them with . '-- i selfe unique developmtent success story. It is one with a for- Bangladesh's thriving textile export business. The pro- se} b w o profit basis, one that believes people can work them- duction capacity is currently a rmillon yards per wise ave le econrmi selves out of poverty if only given a chance, that they month, with more than 15 million yards of the fabric opporniy.as some housing can hire themselves even if no one else will hire them, exported to date. B- siness-Strategy: el:ds with- so long as they have access to credit. out collateral to small groups of Although it has become increasingly active with com- peers, rnot-individuals, via a sys- - The well-documented ability of Grameen (named for mercially viable microcredit insttutions in the last two temn based on -'mutual trust' the Bengali word for "rural") to fight poverty in one of years, IFC has so far not financed Grameen Bank acountbility, partcpaton, and creatiVity` the wvorld's most impoverished countries has done more itself. Instead it has targeted two of these emerging How It Works: If any member than anything else to legitimize the field of micro- spinoffs, providing captal is their high-risk early stages of the group defaults, all are cut finance, which now has a well-coordinated worldwide when commercial bank support cannot be obtained. off from new lending until the movement trying to reach 100 million of the world's Two are now on IFC's books; GrameenPhone, a for- outstanding debt is repaid. poorest families by 2005. As Impact learned in speak- profit joint venture that brings modern communications Repayment Rate: 98% ing with Yunus in Wzashington, DC, pinning down the into both big cities and unserved rural areas, and Number of Villages Served: reason for that success is no easy task. Part of it may Grameen Shakti ("Rural Energy" `, which wil build, Number of Employees: be the bank's relentless innovation and flexibility in market, and sell small-scale solar and wind energy sys- 12,000 organizing itself to work in the challenging setting of tems in areas far removed from the nearest power line, Portion of Borrowers Who rural Bangladesh. Part of it may be the bank's co-op As Yunus makes clear in the following interview, all Have Escaped Poverty: structure, here borrowes ae cd " " a33.3% (World Bank/Grameen structurte, where borrowers are called ' members " and these effors revolv e around an unshakable personLas estimate) make up the key block of its shareholders. Part of it commitment to fighting poverty from the bottom up- Definition of Credit: "The may be the desire to be only minimally profitable and and an equally strong sense that the established order entry point for breaking the return as much of its earnings as possible to those very has little to offer those it has left behind. vicious cycle of poverty" Impact - Summer 1998. Vol. 2, No. 3 Business Installation of $124 m illion nationwid ii ta Bd a mk f rw e systems i cellular network sponsored by Grameen e B d u i a s ls;pridingd (a nonprofit subsidiary of Grameen Bank), Teor cpa t a m en res to enterprises (Norway), Marubeni (Japan), andGonofoneDvelpmnttha r ene en tillage lev Corp. (US); seeks to have 190,000 s b 0 Grameen Bank financespucaeofhnstadwolae bulk airtime by rural entrepreneurs wh ofits by operating them as retail village payphones. 2 gedW ~~~~~~~~~~~~~~~~~~~~~~eim I / FC W5 t as well start oatn prov id youg ca see extreme thei% >YJCE obl Env H dir you Unm vernity and Mhuimed rigium inolvd inmicSredtl in sthe P aro und ramthen cams. Soi ~~~~~~~~~~~~~~~~~~~Yuu:I h 9i||i1a19Qad fistarmeteo teaching sid arond inthe fvilaes y earn | ! |~~~~~~~~~~~~~~~~~U as a ulbringhto scolrI pan andeverthing17,bo elooise didn't wr w l ~~~~~~~~~~~~~~~~~cme in 196 lrtlon Veanderbilt didn to hael anybdy meanic InhL tes ~~~~~~~~~~~~~~~~~~~~Uivesity l oandthaen candleted tnhe lives of popl whayo slivedte s E E ~~~~~~~~~~~~~~~~~901 and stre teaching Jun e aofu92Knd ihn, the vilgstor goeam gll_ l l I FC: What d~~~~~~~~~idyudle whennse starte d t ecnms frompole -hn frealu ~~~~~N . Chtagn University.Iwsaay plan- eonouts that is,hecwause making |111 r x | ~~~~~~~~~~~~~~i togon rack,e bthen 19eoie of book ecor2pnomics aday,n' workwh tenmc ye ou I eetahn h was pliiigto frtimak in thoulittl "Whyit back nth square with the "wrelts of do'tIkind ouch myself?iful liberation" ousiegn the Ic]ass-t thinc.Se this lainwedg domesthat retum. Insthiead ly sathed case? shel anybdn't cave Ithel motheyrto Impact~ ~ ~ ~ ~ ~ ~ ~~~~ ~ainn fo tumme ineenec even Vol. 2, day, tosle3hi oft Ba0ds nds n he polm? wa neda heedof17 I FC: Wea digh as d whellstarteat Yunus:oYo ca ingse extremeu the beginnink How dgldyogetsoeryadhugr?ih firstplace7theories were woany good, howe Yu nus:I joind te fCLII t Of wcomeallith beauboti oolsthIng Yuttgnus Unhd ivrsity coetote uengad othand the five-yearg US asa Fulrightscholr. onlan an pevner dythIn eolseddn't ICam In' 1965ton Vanderbilt so iuee oto have anyomeaningli Uonraizersithean thenocompleted theklives o peoples whoaylivedh mPhDineconomicyowese therehing arudhse We was goi~oliteingsit 1970 andt stuarewted threahingins aoun maing tuhe vlagbesutofuler yunoiverstyd watsid alway plans- economicS, thpatis,d because text- them year tiws pealanin toe gose foshem din' Iav the oug et "Wh Impact m Summer 1998,painig or heinepedece eve.fr 2da, oNolv.tei buy the bamboo. So she had to I FC: Onice it started workilg at Bangladeshi banking system. would form a center so that all borrow it from a ttader to buy this small level, how long did it This was a local problem I was weekly meetings would be held the bamboo, which cost about take you to get repaid on those trying to solve with a local in terms of the center. Later on, 25 cents. The condition of that initial micro-loans? banker who didn't want to give we saw bigger groups split and lending was that she had to sell me the money. smaller groups never merging. the product to the lender at the Yunus: I didn't even think of When I moved from price that he decided. So that that because I moved onto IFC: So you started getting a lot Chittagong, as a part of the explained the 2 pennies shc something else. It was such an of borrowers, all of whose loans challcnge that I was given to do made. excitement. I thought, "If you you were personally guarantee- it over a whole district and then can bring so much happiness ing. But if not managed well, in another district, all these I was tempted to give her the 25 and excitement to so many peo- that could leave you with pretty ideas were settled and our rules cents so that she didn't have to ple with such a small amount of heavy exposure. How did you were made. In the new district, I borrow from the trader, but then money, why shouldn't you do it keep track of them all? had an opportunity to abandon I stopped, thinking, "Would more?" a lot of old things. We said all that be the right thing to do?" Yunus: We would assemble in groups should be five -noth- And then I thought, "Before I IFC: How did you get che money one place and fix a date -say a ing more, nothing less. The idea do, why don't I find out if there to scale up your operations? Friday evening. We would all of groups between five and 10 were other people like that. Was get together at 8:0C, and we was abandoned. And the center she the only one? Maybe there's Yunus: I went to a bank to see paid, calculated, and gave size was fixed. So many groups a second and a third one." if I could find a more organized receipts. But as the numbers would make up a center. So this way of handling this rather than increased, accommodating is the way it evolved. I went around the village tor my just giving them the money. everyone in one day was a several days. And in that way, I But the bank manager thought headache, and we began doing IFC: Sounds like flexibility was made a list of people who need- this was a crazy idea. "This is a it in two days. We divided the essential on the organizational ed this kind of money. That list bank and we don't lend money whole operation and had a side, especially since you were I prepared had 42 people. The to the poor people," he said. "It's Sunday group and Monday dealing exclusively with vcry poor total amount they needed was absurd to give money to poor group, but then we changed the people. But was it the group- $ 27. Some needed a dollar, people because they cannot pay groupmgs. We said, "If you took based lending that was the basis some needed 50 cents or 30 it back. They are not credit- a loan to buy a cow, you belong of your high repayment rates? cents, but in total it became $27 worthy." And I said, "Hlow do to the cow group. If you took a -just to carry on the work you know?" So the debate began. loan to do basket-weaving, you Yunus: That could he one, they did. belong to the basket-weaving because of the networking with The manager conldn't satisfy me group."- But more problems came people involved and the taking IFC: What interest rates did you and I couldn't satisfy him. So he later when people paid back joint responsibility. Also, the charge on these first micro- referred to me the higher offi- their basket-weaving loans, pride that one group was better loanis? cials in the banking hierarchy, I wanted to buy a cow, and than another group, and not went to them, and for several switched groups. There was no wanting to lose face with your Yunus: Nothing. days had no results. Everybody stability, so we abandoned that friends. told me the same thing. So E;and said it was more important IFC: Nothing? finally, I offered myself as the how you liked the partners in IFC: XI take it youi had no idea at guarantor to take the money the group. So now you formed' the time you would later be seen Yun us: I had no idea of inter- from the bank. Such a long your gro-up based on how youi as the father of the global micro- est. This was a "do-gooder" job. I negotiation' I took the money liked each other and depended credit movement? felt that they were all bonded from the bank and gave it to the on each otheri These groups laborers, bonded to the lender. people. That way, for the first were limited to 10 and not less Yunus: All my efforts were to They had no capacity to market time, interest rates, payment than five. It all happened with- convince the banks that you can in a free way because the price schedule, everything, came back in the span of two years. In two do business with the poor people. was fixed by the lender. So I into it People had to pay back years, all our rules were all set. They didn't lend to poor people, took out freedom by giving them to the bank's account. I came iup and that was the only thing I was this money. And I told them this . with ideas on how to make sure Then we made the rule that big looking at. Regardless of the was a loan and they could give it they did pay back. groups could split- five people other businesses they do, I was back whenever they could. The could make up a group. Or, if saying, 'What's wrong with lend- ideas of interest and maturity did I FC: Did you know or care that you liked, another five-member ing to poor people? And why do not come to mind. What I said other organizations in other - group could merge with you. We we insist on collateral' Not all was, "Whenever you are ready, parts of the world were starting i kept all the options open. We the loans that you have given pay me back, but sell your prod- similar microcredit projects at X hoped that morc groups would with collateral are paid back. So uct where you get a good price." roughly this same time? : merge and make the groups big- if worst comes to worst, if you So this was the beginning. It ger. Then we brought tip the give loans to poor people they caught me up, because the Yunus: I had no idea of what question of electing a secretary won't pay back either. You have excitement and happiness it was happening outside. All the so that there would be a democ- collateral, and it doesn't help brought to them was such an problems I was facing in ratic structure. Then we added you. So why are you now dis- unexpected thing. Bangladesh I was blaming on the another tier. Several groups criminating against poor people? Impact * Summer 1998, Vol. 2, No. 3 IFC: And from that core belief Yunus: One of the allegations I IFC: When did you receive a IFC: What is your role in Grameen has become a big suc- had made against our banking domestic banking license? Grameen? cessful bank that countless oth- system was that not only was it ers are trying to replicate around biased against the poor, it was Yunus: In 1983. Yunus: I am just a paid the world. What rates of interest biased against women. If you employee of the bank. One of do you charge as you lend to take the gender composition of IFC: But wasn't it quite differ- the things that I was insisting people who are poor as any in all the borrowers of all the ent from the other banking on was that the banks should be the world? banks, not even 1% of borrowers licenses that the government owned by the borrowers. But were women. I said, "There must typically awarded? when the legal framework was Yunus: 20% on our one-year be something wrong with the made, govemment retained 60% income-generating loans, 8% on system." When I began, I wanted Yunus: We could do everything of the shares. I was very unhap- our 10-year housing loans. to make sure that half the bor- except for foreign exchange. py about it, so I wanted to make rowers in my program were That's the only difference sure that this 60% was released IFC: Informal moneylenders women, but then when we invit- business-wise. to the borrowers. Govemment would probably be the only ed women to join, they said, promised that in the future they other source of money for your "No, talk to my husband. I do IFC: But does the govemment would do it. We made amend- borrowers. How does Grameen's not handle money. I don't under- examine your books, or impose ments by releasing more shares loan rates compare to theirs? stand anything about money." on you the same levels of super- to the borrowers and limiting vision and regulation it does for government shares, and ever Yunus: Moneylenders' rates So people literally ran away from other banks? since we've continued to sell worldwide basically start at 10% us. That puzzled us. How could shares to the borrowers. Today per month, and go all the way to we have 50% women borrowers, Yunus: If they wanted to, they 93% of our shares are owned by 10% per day. In some cotntries when women say they didn't could. But they don't. borrowers. it is more exorbitant, like in the need it? But after six years, we Philippines, where you borrow finally had that 50/50 match. IFC: Weren't you also granted a IFC: How do they get them? five pesos in the moming and Now it's 94% women because we long-tcrm tax holiday? you pay six pesos in the evening, changed our situation after we Yunus: They pay. Each share is which is 20% per day. reached the 50/50 match. We Yunus: We had one, but it $2.50. The condition is, when- saw that money entering the expired in 1997, and since then cver you are ready to buy one I FC: Most of Grameen's borrow- family through women brought the govemment has imposed a share of Grameen Bank, you ers are poor women. 'What much more benefit to the family tax on us. have the opportunity to buy. would they be doing for money than money entering the family Nobody can buy two shares. if they didn't take out these through men. I FC: How profitable is Grameen small loans? today? IFC: These shares are not pub- IFC: Why? Are women more licly listed, I take it, and do not Yunus: They wouldn't borrow. responsible than men? Yunus: We're barely covering fluctuate in value? They had never borrowed in their our costs. We had about four or lives, and it was extremely diffi- Yunus: Many things: one, more five years on different occasions Yunus: This is all intemal. cuk for us when we came to per- responsible and very cautious where we've had losses, but oth- Unless you are a borrower, you suade them to borrow. They had with money, but also women in erwise we have covered our costs. cannot buy a share. So our staff never been offered the service, very poor families develop special cannot buy a share. You have to and they didn't know what to do skills and become efficient man- I FC: You have often said support be a borrower to buy a share, with it. They were scared of it. agers of scarce resources. That from international aid donors and in order to be a borrower, helps a lot when you are handling was important in Grameen's you have to fulfill other condi- IFC: How did you get them to a small amount of money. early days. When did you begin tions. Your total assets must not change their ways? Women aLso have a longer vision getting these grants? exceed the value of one acre of ahead of them -it's not all just land in the neighborhood of Yunus: The way we put it to for today. The mother's income Yunus: The first one we got was your village and so on. You have them was, "If you come up with immediately benefits the chil- from the Intemational Fund for to be poor, that's for sure. an idea that would generate dren, but not the fathers. Fathers Agricultural Development (IFAD) money and income for your fam- are impatient and want to enjoy in 1982, $3.4 million. That, too, IFC: Do you pay dividends to ily, come and talk to us. We things right now with whatever came extremely reluctantly your shareholders? have the money; we can lend to they've got. So we changed our because at that time the Central you." We never told tbem, "We policy and give priority to Bank was reluctant to give us Yunus: So far we have not. As can do this or that." women. We built incentive pack- money. So finally a project was I've said, we barely cover our ages for our staff to make sure that prepared where IFAD would put costs. There's not enough money I FC: How else did your approach they work hard to bring in more half the money as a loan and the to spread around. It's only mar- vary from that of Bangladesh's and more women, and today we other half would come from the ginally profitable: a very small conventional banks? have 94% women borrowers. Central Bank. return on equity -maybe 2%, No Impact * Summer 1998, Vol. 2, No. 3 that. So we wotild like to) see stand the nonprofit w~ord at all, how we are rated in the market so we spoke their profit Ian- ourselves. Securitization offers uis guage. We created this company several benefits, including get- called Grameen Telecom, which ting into the market on our own is a not-for-profit company, and I strengths, the strength cf what they became part owner ot you do for business. And also it GrameenPhone, which is a for- gives a good signal that micro- profit company. That's how the credit could be entering capital links are made. markets in the US and treated as a genuine business. IFC: How lo,ng has it been r that's all. But we are not non- if we have to add to our loan IFC: Tell us a little about profit. We are very much com- portfolio, we have to borrow mercial. from somebody -either from Granttmee nPhonved htmd o in~t~ the Central Bank if it is willing wn ogtivle ihcla er~ IFC: And yet yuu've never want- to give us money, or someone a tleph .e- ed to bring in outside sharehold- else. But the problem with the Yus:Aanopruiie ha i ers in order to raise inure capital? Ceiitrat Bank is that it's a u e year oan. e len mone Icr be used in a way that would be MCI, h~ Yunus: No. We've always kept one year but also have housing helpful for the poor people. In - e- it for the borrowers. If we want loans that are for ten years. this case, g to make more money, we can That's a mismatch. So we are sell two shares per borrower. looking for long-term financing. would like to get some ceth ula - at That way the capital would c h b licenses and that's what providoed e imimediately be doubled. IFC: Thiat's a very ambitious tebanae etogtw iifc~ step, since institutional investors shul brn t IFC: What does being part own- would look at Grameen in an the villages instead,ofehavin t--=. ers of the bank, even at this tiny entirely different way than the telephones only in th level, provide vour borrowers? aid community does. I guess you ind have Grameen borrowers might say they have no reason to become the telephoelde f t~hto Yunus: One is pride that they be charitable. Yet it seems you h ilg,sligsevcst rei?- own the bank. Second is the would rather lake this difficult the, opportunity it gives them to step than keep getting subsidized I .s either get elected to the board or loans from donor agencies, which ma h th hne, she -tii elect someone to the board. no doubt are available in virtual- won't be a viable business. Cb -t That's a great prestige factor. ly whatever quantities yotu want. Who's she going to call?" We Xe_ Running for the boardt of said, 'ing anyone. She's only going t a- Grameen board member add want that. Thlis is a legitimate be providing a service." My re r tremendous prestige in the vil- business. After 20 years, if you guess was that it would work as a teleishon ts lage as a whole because it's not can't run it as a legitimate busi- business, and although man o- - just a poor people's bank, it's one ness, then something is wrong. others doubted that, we got : o th- of the leading banks in the So we want to do it in a business Telenor of Norway and gt - country. way. We did issue bonds in the Maueio pnasares. it,thlli Bangladeshi market in 1995 and IFC: Lately you've expressed raised $150 million, but one IFC: They've both got big bot- .spenr-- interest in getting into securiti- funny provision in our charter tom lines to meet. Was it -har'd reo~i zations, even talking of trying to says that anytime we Isstie to speak the same language with 13 sell bonds on Wall Street. Wihy? bonds, government shall guaran- them? tee it. Every time we want to do thNem? ' Yunus: Our intention is to raise it, we have to go to the govern- Yunus- With them we just re S- more money so that we can ment to guarantee us according talked about business. Theyre -.-- to extend our loan portfolio. Now, to the charter, and we don't like big business and don't d- -.IrnpactmSi:- e- ~_ Yunus: Only 15% of the popu- are all poor countries. That's is happening in other countries. Yunus: No matter what you say lation of Bangladesh has access where we all emerged from - Not every one is successful, but about how microcredit is a popu- to electricity. 85% don't. So it's poverty is our common ancestor. some are successful. So why lar theory and so on, it is still a big country without electricity. Some got out of it, some are still don't you take it from there? not in the mainstream. It's still Grid electricity is not going to there, never making it but hoping You can't say the poor are not an NGO activity. It's not a happen. to get out of it. But the important creditworthy and stop there. financial world activity. Because thing is to get out of it. What we did is raise a big ques- of pressures, because of criti- IFC: As you tum into these tion about the wisdom of bank- cisms, the World Bank has kind kinds of business ventures, is At the same time, Bangladesh ing. Banking cannot be the of accommodated it in CGAP your objective to make a profit? presents a very promising, opti- same again, no matter how you (the ConsuLtative Group to mistic picture, for when it was go about it. Assist the Poorest) and other Yunus: I would like to make a born some 38 years back, it was things, but it is not part of the profit. But with every company seen as a basket case. There was IFC: There's a rather nasty world banking system. we create, either for-profit or a large food deficit at that time, financial crisis going on in Asia not-for-profit, our ultimate aim no economic base on which it at the moment. Does it tell an I FC- How do you recommend is either to tum them into for- could go forward. Today our altemative banker such as your- changing that' profit companies or create a for- population is 125 million, which self anything about the way profit under the not-for-profit is almost double the number of conventional credit analysis is Yunus: It should be a legal and then sell the shares of those people we were, and we are carried out in Your continent? activity rather than an NOD companies to Grameen borrow- almost self-sufficient in food. activity - an NO activity ers so they become the owners of Despite all these problems and Yunus: That it's wrong! mea nig NOOs are oing it those companies. the bleak projections, this is Grameen has proven on on1e11 - thouti anylgal status. Sooner how it tumed out. side, and the Asian crisis hs-- or later you have-to provide IFC: In other words, as you did proven on the other sCid tat them the legal status so they can with Grameen Bank itself? We are not the most efficient the banks are wrong. No malter stay in this business. But defi- nation in the world, but things how much collateral u bt nitely not withinA theexisting Yunus: Exactly. Grameen bor- happen, and if you look through in, the more you cocentrateon structure of conmercial banks, rowers hopefully will someday every single item, you see very a few groups of peopleand poucr because theydo no00tunerstand have a portfolio of assets in all positive changes. The only prob- money on top of them, this is this business8at all. iAd I'm say- those companies and that will lem we see is politics. We are what happens. You just create inpag these are two different kinds form their old age ftnd so that not getting the lcadership that the basic structurc without any of stems.Youcannot bring in there's a pension for them, and wouLd help things move faster. foundation. We are saying th i someone arid say, "OK, we'll they will live without worries in But people are very creative; we have to create the structurie- phlu itf inand it will work." It old age with the income they young people adopt things very from the bottom. The more you won't,-because one is based on make from the companies they quickly. So there's ino reason try to do otherwise, Ithe me diustht's the commercial own. why Bangladesh should not you risk this kind ositatio3n. i one. ThiswholE business is chanage its situation veryfast. So that's anothr estin based on truist.You cannot bring IFC: Have you seen a marked mark. We are sayi-tat while some system ta fis functioning improvement in living standards IFC: Looking back on it all, you're gong io hil tE out, on trust and kind o take it on in Grameen's borrowers over what would you say microcredit don't jus- gi and bail out the with a system that is base6don time? institutions like Gratneen and same oIjld e bcause that distrust. Because their whole; others around the world have will just encrage them to do it attitude is emanating" om t at Yunus: All the researchers have contributed overall? again ae just waiting. basis. If you look at the worldi reported very positive changes in Anotheay, anorhbifoier timc, the the way that says, 'This guy u their lives in terms of housing, Yunus: One thing we've same thn will pen. going to cheat, that's all," every- sanitation, nutrition, literacy accomplished is proving what thing else follows from that. I'm among the children, in terms of you used not to be able to argue, IFC: Au seeing ommercial saying that you need a different their children going into higher intellectually: that the poor are banks inA udg any kind of financial structure. education. There have been creditworthy. We could go on funda menta es because of Today NGOs arc just initiating- very positive changes in every forever and ever arguing and this debcl?it. But someday, ptobably it area. Any visitor who come sees t 'sdemon- wn Just be s E the difference. strate it. If you say it doesn't YunUs: No, no, nof, n.I' t work, you can come and show the same old thing. I FC: Why is Bangladesh so us that it doesn't work. But here poor, anyway? are 2.2 million families. You can IFC: Really? Despite all the say Bangladesh is a funny coun- changes that are happening, with Yunus: It's like any other coun- try, all kinds of funny things can key microcredit banks moving to try, India, Pakistan, Afghanistan, happen there but it cannot hap- a more commercially sustainable or Europe 100 years back. These pen in any other country. Yet it basis ini so manycountries? * Impact a Summer 1998, Vol. 2, No. 3 The Lrnw Vie Latin America's Pension Boom By Lucy Conger San Salvador They play an important devel- the highest rates in the develop- In this ded opment role, most directly in ing world. A recent Salomon reforms h n here used to be a providing for old age security Smith Barney report called Latin wll ph o joke in Peru that better than weak government- America's achievements with ty an c wamed people taking run predecessors. But their indi- private pension funds "outstand- ters in seven a taxis to pay as soon rect role is equally important: ing," adding that "in some coun- countrie& T as they got into the cab. Why? helping build the demand that trics, companies have realized private peiv a t Because if they waited until the fuels growth of local capital mar- that they do not need to access have more than 2,< driver reached their destination, kets, giving domestic companies the international capital markets million enrolled- inflation might have doubled more options for raising the for a $100 million equity issue." mem- the fare. money thev need to That was in the late 1980s, and finance the . __ the joke's black humor reflected expansions the sad state of Peru's economy that add jobs at the time. Inflation had in the local reached 7,000% a year and was economy. _______ also running at three and four In the I -0: digits in many other Latin country i. - American countries. But today with the both the joke and hyperinfla- longest tion have gone out of circula- track __ tion, as sweeping economic record, reform programs have cut gov- Chile, emnment spending and stabilized private local currencies across the pension region. funds _ _v_ _ _ _ _ have -5. These new economic realities helped allow Latin AmericAns to think national beyond the end of their taxi savings ______._:_____= ride. Among the new institu- rise to ____-._. tions capitalizing on the longer 29% of time horizon are private pension GDP, ____-_______ funds, which enable workers to one - _ _ look 30 vears down the road of a i __:.- -- - --. and invest for their retirement. . Off They Go: Active marketers like _ these Banco Santander Mexicano - salespeople in Mexico City have attracted $136 billion into Latin ' America's new private pension funds. __-a-3_:_-__-i.- The result: stronger local capital markets and social security systems. Retire en bets and $136 billion in a.ssets whien- it comusiented on the draft the hiands of the private sector Savings u~~~~~i-nder management, with Latin legislation and regulations at the can involve crossing a political sav'ilngs ~~~~AMerica standing as the world invitation of the Salvadoran minefield. Peni faced perhaps the Name: AFP trvs6 eader in the introduction of pri- government, and its investment region's greatest challenge in this Countty: El avao vatized social security, of up to $1 million in one of the regard, introducing its pension Diescriptio:$1mllo five niew private fund maniage- reform in 1992 whien politicians, investmet in oneof fiveIFC has been an active partici- ment companies gives the sys- government bureaucrats, and private ension fnd man-pant in the burgeoning industry. tem a stamp of approval. IFC's tinions opposed a change. "Youi agers reatedto opeate inSince 1994, it has committed investee, Previsi6n, is a joint have to sell something hard to El Salvdor's ew priatizedequity capital totaling $26 mit- venture whose other partners are sell -future savings over 30 Shareholers: Bano Bilbaolion as a partner in private pen- Guatematan-based financial set- years -ini a country that doesn 't Vizcaya (pain, ~io,',,',,sion fuind managemnent vices conglomrneate C3rupo save, and at thae worst momienit Grupo Paific (Gutemala,companies in Periu, Argentina, Pacific, El Salvador's Banco when one of every three banks 20%), Banco alvadereijoand, this year, El Salvador, Salvaderefia), and Banco Bilbao had been shut down," said Cadlos (El Salvador, 20%), 1Wwhich launched the region's Vizcaya (BEV) of Spain. Bolofia, Peru's economy minister Number of Affiliated niewest pensioni system in April. El Salvador's penisioni reformi is at thLe timie. Workers: too,ooo ~~~~~~~~~~the first in Central America, investment Srategy: WitExpanding the and is expected to help the con- His first step to pave the way for domestic equity marketSystem cept of private pension funds reform was to sell the idea to a beingsmal anddliqtid.,willEl Salvador's new system will spread throulghout that region in skeptical president, Atberro initialy taret govrnmentcover all new entrants to the coming years. It has attracted Fujimori. "The great fear of the securiies, husing onds,country's work force as well as law must~~~~~ all those under the age ot 36 and scribers wi a minimumall others aged 36 to 55 who retur gtsaante~ofateastswitch over from the old system. 8G./aof th'ave&ge rturnWorkers' mandatory contribu- achieved y~al!tdte pen tion rates start out at 6% of ___ ston fnds i.the nun*~salary and will increase to 13 Oevelopwwit˝~t El Kby 2002, with the government Salvadar priyatz&~ooalcontiniuing to guiarantee a mini- tribue tc hotWmfroed Imum pension. Within four ~Jddag~ecehf aiirhapitalmonths of its launch, the system madeet rriPm Snt had signed up nearly all of its sxpeete4itQfr~.~< 400,000 proj eeted total sub- scribers, largely because the advantages of thie new private sy5stem were so clear. "You'll get ~~~~' ~~~~~a better pension because the 1 ~~~~~~~existing pensions in El Salvador - ~~~ are very, low, you can leave top foreign financial partners president was that he would have 4. ~~~~~~~~money in your account to your sueh as Citibank of the US, the 300,000 pensioners on his :~tvt~OW children, you are free to choose Spanish banks BBV and back, and the social security ff :00 R t )Z;S ' : bthe fund management company, Argenaria and thie Chilean ifnd union, which was powerful," and the system is guarantieed Provida. Together, tese foreign recalled Bolofsa, wio is now in throuh einsurance," says Francia institutions have invested 50% private business. The architect of Brev, the governmrient's superin- of the capita in the pension Chile's pension reform, Josn ye tendent of pensions, fund managers, and through Pifiero, was brought in to explain them "globalization has practi- ttie private systemii, which now The Salvadoran pension system eally entered El Salvador's finan- manages approximately $33 bil- emuilates the two leading imio- cial sector," says Brevs. lion, the equivalent of 43.8% of vations in traduced by Chile's GDP In time, the crisis in Peru's landmiark 1981 pension refori: Tougher Than It public social security system - it is financed with individual Sounds then running a $13 billion defined contributions, and the The economic case for pension deficit - was tured into an government carefully regoulates reform may, seem self-evident, but advantage. "Since Per-u was the funds' investments. IFC has eliminating government social absolutely broke, we made a total provided support since 1996, security and putting pensions in reform," Bolofia said. Today, I. 2, No. 3 Peru's system has 1.8 million "There was almost no capital already identifiable. Since the in the region excluding Brazil. workers enroLled and approxi- market in Peru before," he industry's birth in Chile in 1981 The funds also spur growth of inately $1.8 billion in assets stresses. "Now the market is- and its replication in Peru 11 other related financial services under management, or the growing, and no local compuanies years later, pensio fnds- and :indLustries, including insurance equivalent of more than 2% of launch their bond issues wiout -matsaged assets have shown companies tiat provide the GDP, and is likely to double by coming to talk to all of us fir teIand ditbl illilargest nm taer of affiated vate pensions, and rating agen- workers (1 1 million) of any pri- cies that certifv which stocks and vate social security system in the bonds meet the risk standards for = B | | I 1 1!@ 1 l H H - ^ F world. Throughout the region, pension fund investment. funds under management now total nearly 8% of Latin As private pensions proliferate, America's combined GDP. By the arts and sciences of pension the year 2000, assets are expect- reform are evolving. The newer ed to nearly double to S213 bil- systems, created in this decade, - ~~~~~~~~~lion (or 11% of th-e region's are testing new designs and GDP), and to reach $954 billion techniques to improve on a @ i E ; ! : . ; (26% of GDP) by the year 2015, Chilean system that has been reports Salomon Siirith Barney. touted as a model for industrial and developing countries alike. Without doubt, the strongest immediate impact of pension Problem-Solving The Pitch: Pensioners young (above) and old (left), like these funds is to deepen local capital Despite its acknowledged suc- Salvadorans, benefit from privatized retirement savings accounts in markets. In Chile, funds have cesses, the Chilean pension Latin America stimulated the issuance of long- model is widely criticized for term securities, the initial place- high fund management fees and ment of large blocks of shares of for its contributors' frequent the end of 2000. The private sys- As proof he cites the recent 10- privatized companies, and the switches into new funds, factors tem guarantees preservation of year sol-denominated issues by development of secondary mar- thar have also plagued the sys- contributors' capital and has won Banco dcl Cr6dito, Banco Sur, ket trading. Funds also havc tems in Argentina, Pcru, and the trust of the people, but oper- and Interbank placed with local developed research capability other Latin American countries. ates in parallel to the old govern- investors, and the $69 million- among domestic brokers and El Salvador is tackling the fee ment system that continues to equivalent that Pesquera Austral promoted interaction between problem by setting a cap on exist and to sign up new, risk- and Grania y Montero raised in domestic and intemational mar- commissions at 3.5% this year, averse contributors every day. initial public offerings of equity kets through arbitrage of to be reduced to 3% from the on the Lima exchange -trans- American Depositary Receipts of year 2000. Bolivia took an even Rafael Dammert is investment actions that would have been Latin American companies sold more radical approach to slash- manager of AFP I lorizonte, an unthinkable as recently as 1991. on the New York exchange. ing start-up costs of funds that IFC-supported private pension Infrastructure-related companies run massive marketing cam- fund in Peru whose assets under such as the electricity distribu- Private pension systems are paigns. Its govemment limited management have grown from tors Luz del Sur and Edelnor are drawing foreign banks into the competition in the first five zero to $430 million in the last also beginning to issue five-year region, lured by the steady years, opening fund managemcnt five years. It has brought real bonds in soles. While the income derived from commis- to only two companies that were average annual returms of 7% to amount they can raise this way sions for asset management and selected by an international bid- its contributors in that time with is far less than is available to the possibilities of offering bank- ding proccss. As a result, contrib- a portfolio that includes short- them in the Yankee or Euro ing services to pension fund con- utors are paying lower fees than term bank deposits (25%), local markets, it helps by enabling tributors. Citibank is the largest in other countries. Mexico, on corporate bonds (25%), local them to avoiding some of the foreign player, managing $7.6 the other hand, has reduced bank bonds (18%), and local risky currency mismatches that billion or 17% of total funds in commissions by introducing equities (36%). The active come with those debt obliga- Latin America excluding Brazil. more competitioni through a flex- demand that his fund and its four tions. Four foreign institutions- iblc system that leaves managers counterparts thas created for liquid Citibank, Provida, Santander, free to decide how to charge fees. long-temi instruments has had a But despite the short history of and BBV -account for nearly For instance, fees can be pegged huge effect on financial sector private pension funds in Latin 44% of assets under management to contributions, assets Lnder developmenL in Lima, he says. America, several clear trends are and over 51% of all contributors management, real retums, or any 0~~~~~~ combination of these. mentality, concentrating invest- lions of workers who are not in independent workers might well These newer systems have also mLents in conservative bonds and formal jobs -the self-employed be skeptical of the govemment's set terms to reduce subscriber shares of the nation's largest and street vendors, cobblers, machin- ability to keep its promises. turmover, which has reached most liquid companies. "Ftnd ists, and the like who make up Nevertheless, he sees it as an 20% in Chile and cut into pen- managers are realLy protagonists the so-called informal sector. In important long-term goal in the sion fund profits everywhere. In with the ability to set prices in many Latin American countries, efforts to combat poverty in his Bolivia contributors are allowed markets,' said Marcella this burgeoning element makes country. to switch only once a year, and Martinuzi, investment director up the majority of the work other countries are studying sim- for Argentina's Previsor fund. force, and in Peru, fully 70% or "You would have to be creative ilar restrictions. There is also a more of it. Nearly all of Chile's to get taxi drivers and the like to raging debate in Latin America To diversify risk and return, 5.6 million workers reportedly put money in," says Dammert. about government regulations managers seek more flexible reg- have their retirement savings in "We've raised the issue, but there that dictate limits on the type ulations that would allow more privately managed funds, but in are no concrete proposals yet and and proportion of stocks, bonds, investment iii foreign holdings El Salvador and other countries it is not seen as a priority. But if and paper in w[hich funds may and call for the developineeiit of the ratio is 25% or less. While governmllents do niot act on invest and that set performance long-term instruments and having a reliable pension would something like this, it will come standards for the returns of funds. Cautious investments are likely be a better form of old-age back to haunt them later in the funds. The investment rules in appropriate, argues Martin security for informal sector work- form of higher social costs." most systems limit domestic, Gerson, an IFC consultant on ers than relying solely on chil- equity investments to less than pensions. "The use of mandatory dren and other extended family Convincing taxi drivers to look 35% of assets, allow no more pension savings is not a camping members, as is usually the case down the long road to retire- than 10% of the portfolio in for- trip to the efficient frontier, or now, Dammert of Peru's ment will remain a challenge for eign equities, and channel the the outer edge of risk and Horizonte fund stresses that years to come. For now, the bulk of investment into govern- return," he says. A response to there will be complexities funds will try to lure new con- ment securities, at least in the this dilemma is in the works in involved in reaching that point. tributors with the promise of early years of a system. But this Mexico, where authorities will To attract the participation of secure and strong returns and can leave fund managers feeling soon authorizc the creation of informal sector workers, who enticing names like Profuturo, straitjacketed and generate calls two funds with distinct risk pro- often have unpredictable cash- Horizonte, and Protecci6n that for greater diversification in files - a sharp departure from only payment cycles and do not reflect a long-term vision. holdings. In most systems, each Latin American systems that use bank accounts, govemments fund must perform within a nar- allow only one fund per pension would likely have to make some Mexico City-based financial jour- row range of the domestic indus- fund manager. form of matching contribution. nalrst Lucy Conger wrote about try average, which is measured But then strict eligibility stan- private housing finance markets in daily against market value. Tight A major chiallenge remains for dards would have to be set to Latin America in the Spring 1998 standards have fostered a herd the funds: how to reach the mil- prevent abuses, and even so the issue of Impact. -I * --. Country Chile Peru A ta Colombia Mexico Bolivia Insets under management $33.1 billion $1.8 billion $86 Illict $1,6 billion $9fl3 bums $1.4 billian Year implemented 1981 1993 1994 1994 .1995 1996 Transition arrangements: What happened to ite old system? Phised out Confinues with changes Colioe i cone nues with changees nontrtes with changes Is current lborforfce ollowed to remin in ilit old scheme? Yes Yes Yes Yes No No Is new system mandatory foI new lboi force entrints? Yes No No Na Yes Yes Can workers senitch back to public system after entering AFP? No No (after June 19961 No Yes, every three yecrs No No Profile cf new pension fund scheme: Minimum pension MPG Plot MPG Nin-zontnibutorj Role fcr pubic secter? guarontee (11MP Sociol assistance ptern NSocicl assistance Social ysera minimum pension Social insistnem eisoc benefi Tcta: contribution mte for rew system: 13% Prin:8% (1%no 1/911) 8% 1 i.%5 01 bnf asailacle for old age annuity Pin ic: 11 % (max 13 . i disability/survivors/administoive 3% 3.6%0 % 3.5% 4 2.5% public Minir nd socil assistance Genesolrecenuces 0 16 i 1% Ce rnas lapitalizaaon revenues Iota. cnlfrihoion rote: tsfare refoarm 19% 9% 27% 8% (priv. sector) 15.5% 9.0% and 18%.o cher reform 13% 13.3% 21% 13.5%- 14.5% 16.5%o21.0% 12.5/h Moax %of poafola allowed in: Domesic equifies 3::;t 35% 050% 30Y Regulation te Se Foreign equifes 10i 5% 10% 15% 0 issued Governmentsecurities(in 1994) 45% 40YD 50% > 50% 100% in 1991) Mnimum rotes of return of private pension fuinds Benchmark relAive Bancrmark relates Bacbhor rain/inn loncbrnarkrel alive to market average tomrketveoe trket ge a synthetic portfolio None Nn and/en inflation ints Goveernient guuiantees orr rites of Dilferelice beteseen None NDne i ifference between Dfenc e return of private pensionfunds bhlascai t imnet balance at bane a retirement and MPG rehirement and MPG rine o Sources: WXorld Bank, Salorron Smith Barney, and AFP Horizonte (Peru) Impact a Summer 1998, Vol. 2, No. 3 Act Locally* Making Privatization Work in Ukraine Alyona Voloshina, Head of IFC Operations, Ukraine .. _,,0 , . .t!-; -eE - g 1t -e^"SW | | Lots to Choose From: Ukrainian E~~~~~~~ J. entrepreneurs have nowV bought - - 45, '0l small enterprises privatized - ~~~~~~~~~~. ~~~~~with IFC help. _ 3 .f,f Kiev cial's pounding fisIs ani harsh the government, the entre- increasing the volume a- words reverberated loudly in preneurs, even IFC's own selection of goods on sale,: N o one likes to be my hcad, I wondered if there Ukrainian team -have a fun- extending shop hours, and- called an enemy was some truth to them. Would damentally different mindset, improving service, the new of her owII peo- private ownership, nemesis of althlough much remainis to be private small-busness- owners pLe. But this is everything we had so long done. Nationally, the macro- have demonstrated:that eco- precisely what an been taught in Ukraine, really economic picture and the cli- nomic change can be fast, posi- official in the Ukrainian improve our day-to-day lives? I mate for major business tive, and effective. And the Ministry of Finance accused had to think Long and hard. transactions remain undeniably demonstration has occurred me of being when I first started grim, making it difficult even where ordinary Ukrainian. con- working on IFC's Small-Scale Eventually, though, it was for IFC to make investments in sumers feel it the most - at Privatization project in these very accusations that the country. The economy has the local level. Ukraine in 1993. convinced both my Ukrainian contracted by more than 50% colleagues and me that our in seven years of indepen- Making a Given the deeply ingrained economy could change only by dence, through factors that Mindset Soviet aversion to private owtn- buildinlg up from the grassroots, incLude excessive regulation, You might call this a case of ership and the nature of the rather than top down in the weak tax collection, and scant "seeinig is believing." Under task we were then just begin- traditional Soviet manner. progress in privatizing both the the Soviet system, it had been ning, there was nothing unusual Today, after five years and the largest industries and the agri- just the opposite: people had in his way of thinking at the creation of 45,000 new private cultural sector, once known as generally accepted what they time. Our country had virtually enterprises with 172,000 own- the "breadbasket of Europe" were told, given the absence of no experience of privatization, ers, all the participants in our but now in deep decline. Yet any visible evidence to the and as this government offi- nation's privatization process by putting food on shelves, contrary. And the fact is that Impact * Summer 1998, Vol. 2, No. 3 t there were some grains of truth exciting and frightening. We In moving to Ukraine, IFC 0 t000 Name Ukram&. in the old ideology's condem- had been closely watching the drew from its Russian experi- Privatizatimi >t .nation of capitalism. My father groundbreaking economic ence but faced a govermiient Purpose. Preparint, was once posted to the Russian reforms unfolding in Poland, and population far more resis- 1Ukrainestale u mission to the United Nations, Hungary and elsewhere. But tant to risk and change. As in shops, r;:esta 0 and as a young girl in New Ukrainians have always been Russia, long-term sustainability establishmets XYork I witnessed some of the conservative, and few of us of the project would depend on ued00> at 1ess11 harsh realities of a market- believed that ou-r own govern- an unknown factor: the degree throughtaw thr 2 based system. It frightened me rnent had the will, courage, or to which ordinary citizens woulc procedures '?I7 to see the state shirk the ability to change. Russia's tran- be willing to take responsibility Number of Eateta § responsibilities I felt it had to sition to a market-based econo- for their lives after decades of 45,000 siri&5 aguarantee its citizens: housing nmy soon ceased to be an reliance on the all-powerful those eligible - S and jobs. When left to the free example, and as the year wore Communist system. Buyers: '172$0IG M hand of the market, I thought on, the government's rhetoric Methods -.0 =at the time, society would was clear: Ukraine would not Going Once, 0 (8O% -f; J exploit rather than protect its embrace the private sector at Going Twice... tenders:t (I t members, leaving those with the expense of the security and The program enacted gave D evelopment hnp#the most money wielding the stability seemingly ensured by local governments their choice transfer of most power At home in the the Communist system. of three ways to privatize small private sectg r Sovict Union, we at least took Nevertheless, it did agree to business: lep!rePj:. ;comfort in the fact that all launch a small pilot project to U auction (sale of enterprise proinoti6; \were considered equal and determine if ways could be assets through open, com- among providbclt 2 could count on a certain stan- found to introduce private petitive bidding) ser:icesi creatlq5 : dard of living, even though we ownership at the local level. U tender (sale through closed mechanism, always expected the bidding) signals toprod Communist party apparatchiks This test case eventually came U employee buy-out (noncom- raised eqis4 d -w to have morc. in mid-1992, when the govern- petitive sale of an enterprise 25% of lo(afj< '-'- - ment asked for IFC's help in to its employees acting as a budgets < -At the same time, however, privatizing its nearly 50,000 workers' collective) IFC Role: Atistiijg7j, problems in our stores were small state-owned enterprises. ments in d'essg commonplace, and we were IFC was chosen because of its Lviv, a city of about 800,000 in transaction ID6d*~ accustomed to them. Waiting success the previous year in western Ukraine, was selected when00 there~in line for an hour each day to supporting small-scale privati- for the pilot project funded by edget: of, rbuy basic things like cheese or zation in Russia, where it had USAID, in large part because zatton00 snUkram4 r -sausages was nothing out of the helped create a system of open it had been part of Poland in0 the country "'~-ordinary- Nor were shortages, auctions with price as the sole until World War II and thus Funding $5 mslh:*~ - indifferent service, and limited determining factor. And as in had some history of private dftAgeny for intselection. Few of us realized Russia, IFC turned for funding sector activity. The city Development ~ that it was lack of private own- of this non-income producing authorities there selected auc- costs $ ; 5 f iership that lay at the heart of technical assistance work to tions as the best way to Keys0\\\ to Suctthe problem that things the US Agency for achieve the underlying objec- will0 amongna4o ~ -work best when people care, International Development, tives of privatization: fairness, government i % ; ,that people care most about which also wanted to tackle transparency, and speed. But trained loc.4l sta~v~what they own, and that hav- the risky and difficult issucs this choice rcquired that IFC eampai.gn4ev ing one's personal livelihood central to the reform effort in work with local officials to simple, repllcabl~ inextricably tied up in a shop Ukraine. The Russian auctions demystify and humianize an :30:0willingness to.. or small business was the key to had given existing employees auction process that raised Named: Winrre of - improving its performance. incentives to participate in the many local suspicions. Bank Presiderjt0 process and take ownership of Wolfensohrs ¶0 >Things began to change with the shops where they worked. Why were auctions seen this Excellence for-$~9iOti~Y the political upheaval and They helped alleviate worker way? Because they clearly of the0 Wfdd ~transtoriiation that followed concerns about job security favored those with the most - the breakup of the Soviet through a process that out of money. This made Ukrainians Union in August 1991. I well necessity had to be locally uncomfortable, for in a society recall how the prospect of an focused, generic, fast, transpar- where all had supposedly been - 0: 000 0 0 independent Ukraine was both ent, and fair, "equal" for 70 years, excess Impcts 0 2, No. 3 The Gavel Guy: Auctions were a popular way to sell off state-owned restaurants and shops in Ukraine. was clear from that first auction the success in Lviv did not that once the entrepreneurial translate into a change in polir- bug had bitten an individual, ical will in Kiev, where we were excitement and hope for the up againist a federal governmenit I ~ ~~~~~~~~~~~~~~~~~~~~future would be contagious. The with no clear policy regarding * _ |11 _ _ I - I lselling prices kept going higher reform. Since a Ukrainian offi- _-1 l l * r S \ land higher as the competition cial's typical reaction was to say ignited the atmosphere of the no (because no one was ever small auditorium. A beauty punished for saying no), we salon called Hairdresser No. 94 were unable to secure the feder- whose starting price was $52 at government's support to wealth________ wudidcttht piazto.BtICsoe nmsoared to $45,276. A run-down replicate tne privatization _____________ ~~~~~~~~~~~~~~~cafti sold for $113,190, a far cry model developed in Lviv. trom irs $257 starting price. Theis meant we had to wo-r There were 195 bids on the 17 harder to build our credibility eople who feared the tants toadvisethegov n stores offered at auction that with the federal government day. We were sutrprised by the by prqmofii privntiar.i-=o--- wealth would indicate that privatization. But IFC shlowed number of anxious wotild-be -based onUkainian someone was not playing by it was different from other for- entrepreneurs and the atoount fcontmuing to co-i.t - the rules. When my colleagues ebgn aseriSCTpa who had been of money they were able to mariX campaigns - and s were designing the initial trying to work in the city. lr amass for biddinetraive the: i oing -wharest we auctions in Lviv, we met many used only Ukrainian consul- weaknesses of the country's > ±6: get thing. -rlte Then people who feared the 'mafia" rants to advise the government financial institutions, people 1994, newl e would gain control of the city and only expatriate managers had little coice bu to buy the becatse it was consolidating who wer fluent in Russian or shops with money they had for all dh wealth and poWer. This inher- Ukrainian. The team also accumulated from their fami- gmbfe sm c i ent distrust for people with demonstrated its commitment lies and borrowed from their Ukraine. .We wer.e money inevitably led to ques- by setting up an office and friends. The auctionecers tions about the auction mecha- residing in Lviv and engen- singsona voice penetrated the ; Wirhin.for years nism. To work, it would have dered the trust of the officials hall as the bidders silently had spreado avry to be fair, by beinsg responsive to their raised their cards, and whteam co u andw m concerns. For example, when his gavel banged for the last c6arnedosi-t- bytrmindlc An IFC team soon arrived and Lviv politicians worried about time, the room erupted in leaders wihoi- og : e;. worked with Eviv city officials the employee displacement applause. I can neveT forgard.- support. The to design and carry our the pri- that would occur during the the feeling of seeing the eAntred ao n, nd wor c vatization process. We lauinched privati7ation process, IFC preneurs' pride, confidence, begin-on eiqual4ly a~nfr an information campaign to developed a new approach - and hope as they signed thie- l -,pm'e-ases uba educate the population about the "going-concern" methodol- final documents transferriiig - privatizariondmig private ownership and to stim- ogy in which cities take title to them. All the member uppot forth6 ulare the demand for the shops responsibility for all the enter- of the privatization ream new ee offered at auction. But this prises' assets and ibilities up understood then that privatiza- - close cooperation with the to the point of sale. This tnon was the only way forwardt Oneply 2i, 1998- C S Lviv government could happen ensured that companies would My life hiad changed. And so Scale Pr i only after we had earned the be able to operate without had my, country. leadd- - cnuct6d rthe rh d t s city governmien-t's trust. interruption and the employees tinon din. Ukraife Nearly al-ie would not be displaced during Hold On ... -- assets eatmarkeat tebgn IFC arrived in Lviv with th-ree the privatization process. Following thie auctioni in LUiv - ning haid tow, be~en.,oU5 1jt_' expatriates and two) Ukrainian the team prepareda ma naru 76%o hmbuh.b h. experts -a group mostly made My memories of the first auc- that encapsulated the steps in former-ripes l up of lawyers, communications nion arc as vivid today as th~ey the privatization- process and resouireci, rokheu specialists, and support staff, were on that first day in included all the legarl docu- made themtie on'h almost all in their twenties and February 1993. I remember ments used in Lviv. We distrih- ost popu od early thirties. At first, Lviv watching as 17 properties rang- uted the manual to every city proved to he` at rto6` officials doubted the youthful ing from a beauty salon to a in Ukraine with a population employee bw~-oik4he team could design a model for metal repair shop were sold. It over 250,000. Unfortunately, , prises' --taffeirs,wre Impact - SSummm 3 both the most interested buyers ages in large-scale privatization ed them of the grocery stores in and those most able to block the that contribute so heavily to the Kiev. I was astounded by their sales if not happy with their country's overall economic prob- familiarity with the products. In prospects. They generally pre- lems. But we took great encour- a word, they were blase. It is ferred being given the opportuni- agement from World Bank difficult now to remember what ty to puirchase their workplaces President James D. Wolfensohn's our stores were like before priva- at book values set by the munici- words in giving the project team tization - it all seems so long palities rather than to take part one of his two 1998 Awards for ago. U in auctions where they mlight Excellence, the highest profes- lose control to outsiders. Using sional honor in the World Bank D n E l this buy-out method brought Group. He said the program had necessary spced into the process, "generated positive public opin- and the rate at which many of ion toward private ownership" the enterprises subsequently and "directly contributed to a chan-ged hands ar a profit on- the substantial improvement in the secondary market showed the quality of goods and services ',auction" mentality was still available in Ukraine." __ very much in place. When I lived in the United 1 Although the government does States with m-y husband in 1991, not keep precise records, the I remember being awed by the sales are cstimated to have gen- lights, colors, and selection in erated more than $200 million American supermarkets. It was in revenue for local authorities all so overwhelming that I had a 9 fp _ What A Difference: Rare before SrI1tAfarzknnf . ~~~~~~small-scale pri vat atiron began F ~~~~~~~~in 1993, wel!-sto cked shops icke -~~~~~~~~~~ ~~~~this one are becemin om on-on kt-sttttU in Ukraine. Some are even diversifying into new lines of business 'below). to use on improvinig iiifrastr-uc- hiard time getting USed to brand ___~~~~~~~~~~~~~~~~~~~~_ ture and other needs. In names, sales, and check-out con- Kharkiv, for example, the city veyor belts. Earlier this year. I government used the proceeds of traveled again to Washington, small-scale privatization to pro- this time with Lhree Ukrainian vide housing for Chemobyl vic- colleagues on their first trip out t tims, while in the Poltava region of the former Soviet Union. I - revenues financed construction was excited to show them what of natural gas pipelines to supply 1 thought would be a tourist residential heating, attraction: an abundantly stocked Safeway. As they walked It was clear to all that the pro- in, they looked at each other gram would not solve the block- and agreed that Safeway remind- M E Impact * Summer 1998, Vol. 2, No. 3 . 4 enabled staff of various exporting companies to become certified to develop and opetate HACCP plans Already, four of the five Improving Competitiveness, plans submitted by exporting companies have been approved by Sateguarding the Future the FDA Each year IFC delivers valuable technical assistance that brings The (nowledge gained from the workshop enabled Samoan many benefits worldwide. The technical assistance is funded by seafood exporters to continue exportrig their products to the US grants from donor governments and managed by the market without interruptioni. Exporters also learned to how to Corporation's Technical Assistance Trust Fund (TATF) Program In prepare, pack, and store food under safety conditions equivalent fiscal year 1998, some $21 million was approved under this pro- to those of US food safety systems As a result, the Samoa gram to carry out 138 technical assistance assignments in 65 Department of Agriculture, Forests, Fisheries, and Meteorology is developing and transition countries, considering adopting a new procedure for its meat safety inspec- tioris system thdL would be equivalent to the US system for han- Thailand and Samoa are two recent examples of countries 'o gain dling beef industry-specific knowledge at workshops financed in this manner Thai textile producers have learned to become more competitive by operating "eco-efficiently," while Samoan seafood producers a have been trained in new fish import regulations in their key Insure fo Naii expDrt market, the US Insurance for Namibia Eco-efficiency - the concept that firms can become more com- IFC has invested US$1 million to take an approximately 20% petitive by reducing their use of energy and raw materials and stake in Namibia's first indigenous life insurance company, thereby polluting less - is widespread in many European con-pa- Namlife It is the resuilt of a joint ventLire between a group of nies Such concern for environmentally sustainable development local Namibians w:th diverse business interests, the African Life led the European Commission to provide IFC with a $172,500 Assurance Company (AfIife), an indigenous, black-owned South grant to expand the concept of ece-efficiency in the industrializing African life insurance company in which IFC holds an 8 5% equi- countries of Asia. ty stake, and IFC. In 1996 Thailand emerged as the grant's target country, becoming Atlife, which has considerable experience in woiking with low- the focus for a progran on using eco-efficiency to impiove its income communities in South Africa, will be Namlife's technical competitiveness in the international marketplace GPH Conseil, a partner and will provide financial products to underserved sectors French consulting firm, organized and conducted a three-day of the Namibian population Namlife's basic product will be a workshop to train textile producers from 23 Thai firms and repre- derivative of Aflife's standard Family Product, slightly modified sentatives from the Thai Ministry of Industry and Environment in for the local market It is essentially a low-value endowment pol- developing and implementrig eco-efficiency techniques The icy with a high savings element that is collected monthly and workshop demonstrated cases in which several countries that pro- increasingly via payroll deductions. Namlife will also follow duce textiles for export by using the same equipment and raw Aflife's practice of offering variations on the basic product with materials (such as chemicals, dyes, and solvents) were at a com- various add-on options such as funeral benefits, most of which petitive advantage over those using substantially more materils are also available on a stand-alone basis. This approach and and energy in their production processes. product line has been highly successful for Aflife, which now have more than 3 million such policies in South Africa. As a coI1- IFC has recently conducted a survey to gauge the impact of the sequence Aflife has, over time, deveioped systems and a support workshop on Thailand's textile industry. It indicates that the work- infrastructure which can profitably handle a large number of poli- shop helped decrease the operating costs of many textile produc- cyholders by keeping maintenance costs low Aflife's system is ers, improve the quality of textiles produced, and reduce the not only proven but highly transferable as shown through its amount of pollution generated by textile producers in Thailand usage in subsequent Aflife operations in BoLswana and Lesotho. The program's success has supported the Thai Department of Industrial Promotion's moves to apply eco-efficiency in other Namibian President H E Dr Sam Nujoma, Narilife Chairman industries, including garments, steel, and food Festus Nahola, Aflife Executive Director Hugh Roberts, and Solomon Asamosh of IFC's Sub-Saharan Africa Department Trust fund-supported training in industrial processcs has also been attended HnIanlif&'s June 12 launch in Windhoek Dr. Nuloma said important in Samoa, which has been affected by the December he was supportive of 1997 US Food and Drug Administration (FDA) announcement of Namlife's aims and regulabons statng that any exporting country must have a food vision He noted that it safety system for fishery products equivalent to the US system was critical for the suc- known as Hazard Analysis and Critical Control Point tHACCP) cessful development of Since the US market accounts for 90% of all Samoan seafood the Narnibian pi ivate exports, meeting HACCP requirements was ctitical for the island sector that the indige- nation's economy nous population be included and benefit t To help Samoa prepare for the new US regulations a three-day from this project. workshop vwas held in October 1997, funded by a $15,000 trust fund grant frorn the Australia Agency for Internationial Development and administered by IFC's South Pacific Prolect Fully Insured: Na