of Private Investment in Developing Countries F a I I 1 9 987 Yo I I NS /~~~. + 0 *"' * r t 4' - ''- ~~* d -Pk~~~~~~~~~~~~~~~~~~~~~~~ .. W., K ,,q, + , \~~~~~~~~~~~..00 S t -t * :- ' lo.-%. - - I | FC: 0 t; f ;00 : o\ 2 0 XX The IFC Review of Private Investment in Developing Countries IFC is a memberoftheWorldBank Gropsortngp rivate sector development in member conries through investment, advisory services, andtechncalasistance, International Finance Corpoation 2121 PennsylvaniaAvnu,W Washington, DC 20:433 U'X 0 0 :Q > www.jfc.org ob Wngt t 00\ \0 PE 4 t Xt0: t0t9 97 V o I .I ,N o .2 C oyE d i t o r ;;0t f 00 U Robi Wright Co0p y Ed it or Chitra Alwis D es i gn Patiia Hord.Gaphik Design Iri this issVue; ,~~~ Metropolitan Waterworks and Water Sector Pnvatization: Sewerage System 2 Th Manil Gorilla'- ' Manakgenment: F 8 An Afia 0 t Ati eraive 00 L 11 A Difern Kn R ii 15 Sir GordoinW, Hopewell Holdings 16 Czech Republic: Power Sector Landark 19 C'ANTV1: Comeback of the Year 22 ReCorporate Citizenship 26 NwICPbiain Cover and illustrati,ns on va two r s Ec ies nio Mailbag To the Editor Welcome Aboard The Need for Local Funding Recognizing the power of such pro- ductiviry of the borrowed capital. Congratulations to you and your cul- Impact is a welcome adldition to IFC's grams, two Latini Amierican governi- I believe this on die basis of a priori leagues on your new pubLication, list of publications, renowned fnr the ments have just annoi]nced reasoning buittressed by field wnrk Impact. I found the articles interest- quality of their contents but not gen- groundbreaking microfinance initia- as a deveLopment economist who has ing and the style refreshing. The erally considered a light rcad. Impact tives of their own. In a major depar- worked for the World Bank and also piece on foreign direct investment was presents some interesting examples of ture from the past, however, both been an Executive Director and, in excellent and I was especially pleased IFC's work in a readable manner, efforts will be 100% privately man- addition, has some acquaintance with to see the feature on Morocco and highlighting the wide range of IFC's aged. MIBANCO, the Peruvian gov- the subject as a consultant. I've been Banque Marocaine du Commerce activities. emment's much-touted bank for the to Bangladesh of late and reviewed Exteri6ur (BMCE), olie of our newest poor, will be privately capitalized and RD12, Bangladesh Rural members fromll North Africa! One major achievement was dhe managed. Anid itn Argentina, die Advancement Commnittee (BRAC) financing of the Via Dutra tolL road Fondo Fiduciario de CapitaL Social and Orameen operations. On the basis Charles H. DalLara project in Brazil in which the IFC role (FFCS), a US$40 million govemment of my own observations and analysis Managing Director in assembling a B-loan package was a microenterprise fund, will be managed and reading World Bank evaluation Institute of International Finance, Inc. critical feature in completing the pro- by a new private sector company, reports, I challenge anyone to demon- Washington, DC ject finance. IFC's ability to catalyze FONCAP SA. strate that the poor in significant finance for such projects is a powerful numbers are getting out of poverty by example of its additionality. However, ACCION International, a U.S--based this route. The repayment record IFC in Argentina iofrastmucture is ideally finaniced from noonprofit, served as an adviser on reflects the desperate nieed for capital I was pleased to learn of this new mag- local sources for a variety of reasons both projects. Our goal was to ensuire and even if it does not generate the azince of IFC. I think that the first including avoiding the problems caused that the two efforts were structured to rcquisite income, it has a payoff in issue's stories about Nahuelsat and by currency depreciation. Although be permanent, sustainable over the terms of women being given recogni- Acindar in Argentina are good exam- local savings in many countries are low, long term, and free of the waste and tion by virtue of loans from strangers. ples of the distinctive goal of IFC: its there are possibilities ranging from political pressure that have tradition- contributioni to development. moniey under the mattress to pension ally plagued govemrment-sporsored If IFC will only support those mnicrofi- funds and retuming capital flight mono social weLfare efforts. nance institutions that are profitable In the Nahucisat project IFC was a cys. The debacle in Albania over pyra- financially, it will be supporting those pioneer. Carrying out this risky mid schemes indicates that even in the At a time when governments and that charge rates that arc high. For proposition - with complexity of most unlikely economies local savings multilaterals are increasingly channel- without subsidies, this approach to technical risk, huge up-front invest- exist. One challenge for international ing funds to microenterprise develop- development is not going to be effec- inseits, and uncertain demand - IFC development finance institutions is to ment, both MIBANCO and FFCS tive. One must remember that has paved the way tot other investors, provide the same sort of comfort that wiLl serve as important models of how the terms of trade are usually against mainly private, in this new area of B-loan providers enjoy to local to establish microfinance institutions the peasants (who have little political infrastructure. This kind of project investors thus encouraging the growth that will be financially sound, well clout) and providing subsidies only will have a great developmental of local capital markets. managed, and focused on their tiue evens the scales. If the subsidization impact in Areentina and Mercosur purpose: serving the poor. issue precludes IFC's involvement, so through a better integration of territo- Sean Magee be it. Better honesty than indulging in ries within the country and among Directoe, Corporate Relationls Maria Otero hype and losing credibility, ilot to countries within rhe area. Moreover, Cnmmonwealth Development Fxecutive Vice President mention a positive impact in alLeviat. helping Argentina to enhance its Corporation ACCION International ing poverty. communications will contribute to London Washington, DC reducing countrv costs and making it Morris Miller more competitive. Adjunct Professor NMarket-Based Microfinance In Defense of Subsidies Uniersity of Ottawa In the case of Acindar we see how Your article Credit, Where Credit is Impact is a welcome addition to the Ottawa, Ontario IFC, giving comfort to long-term Due: The Changing Face of avalanche of joumals on the develop- lenders by mitigating some of the risks Mircrofinance accurately identifies the ment theme, and I found your first involved and providing technical key challenge facing the microfinance effort very interesting. But I am We welcome letters advice, helped the company to solve field: how to make this extremeLy prompted to drop you a line in reac- of up to 500 words. its finsncial pr-oblems that have been effective social mLiission finaniciallv tion to youLr article, Credit, Wihere They may be edited. exacerbated by the Mexican peso cri- viable. As it pointed out, commercial Credit is Due: The Changing Face of Fax: 202 974 4384 sis, and to restructurc its operations. viability is simply the only way Mircrofinance. It smacks of hype, the Email: Impactiifc.org microlenders can summon the type of hype we've been getting of Late Summarizing, in both cases IFC resources to reach a significant per- as we desperately tum to "good exam- devoted resources to areas where it has centase of the world's three bilLion ples" of aid. provided trie additionality. poor. Several private sector microfi- nance institutions, including Microfinance seems the flavor- of the Enrique Ructe ACCION's affiliate in Bolivia. Banco month but it is nor nutritious: it is Chairnan, HSBC-Roberts SA Solidario SA, have already demonstrat- not helping much to get the poor out de Ineersiones ed that it is possible to meet the needs of poverty given the fact that the rates Bvue7os Aires of the poor aisd still tum a profit. charged are unusually above the pro- Impact Fall 1997, Vol. 1, No.2 Manila: Private Water Works Scott MacLeod, Tony Clamp and Luc Dejonckheere IFC Corporate Finance Services Department ~~~~~~~~~~~~~~~~~~~~~~~~~~'-N Water... Everyone needs it. When it is scarce, people will do whatever it Until these formidable obstacles are overcome, the developing takes to get it- especially in the developing world, and especially world's poor will continue to suffer disproportionately for the lack of the poor. access to quality water and sanitation. Some of them buy water from street vendors at five or more times the rate charged by the public The need for improving the delivery of water and sanitation scrvices utilities whose systems do not reach their homes. Others have no almost defies imagination. Anticipated demand in the developing choice but to risk their health by using water from unsafe sources. world is estimated to require at least US$600 billion worth of new water projects during the next 10 years alone, an amount larger than "Current water management practices and policies have resulted in the current GDP of China. But there is unfortunately little chance stark and terrible failures," says the World Bank's vice president for this can be achieved. Deep-rooted problems have long choked the environmentally sustainable development, Ismail Scrageldin. "But sector: shortages of government funds in the face of competing the problems we witness today are only an indication of what nmay demands for other infrastructure and services from an ever-growing lie ahead. Current trends in the growth of population, urbanization, population ... reliance on inefficient, uncoordinated and highly industrialization, and income will not allow us to continue current centralized government bureaucracies . . , use of subsidies that per- practices without crippling our health and our economies, as well as versely encourage wastage.. . and neglect of adequate health and causing irrevocable damage to our environment." environmental factors when deciding how to allocate funds. MEil I-- F.ll I IQ7 VA- I Ki.- I By any standard, the picture is grim. Yet there is hope, and much of it lies in the private sector. It lies with motivated entrepreneurs w.ho The W Id B see this crisis as an opportunity and can bring together the ageless forces of supply and demand to improve service and create new jobs, - AW Iater Privatization profits, and tax revenues. The experience of Argentina and other countries in the early 1990s Name: Metropolitan Waterworks and Sewerage System (MWS shows that developing countries can reap rapid gains through the _a-govemment agency with roughty US$1 billion in assets and properly considered transfer of poorly performing public water svs- US$1 50i million in annual revenues tems to private control. It is a story whose momentum is building. : Location: Manila, Philippines Service Area Population: 11 million (1996)* This year IFC has had the privilege of serving as adviser to the gov- -year concessions for emment of the Philippines in the world's largest water privatization to - - - -- date. It is a transaction that mnay emerge as an important model as the Mseparate geographical service areas together cering all of Mel world looks for new ways to quench its ever-growing thirst for water. Manila; once technical qualifications were met, award made on the basis of the lowest proposed average consumer tariffs; the On August 1 Manila's public water utility, the Metropolitan same bidder was not allowed to win both concessions Waterworks and Sewerage System (MWSS), handed alL responsibili- Adviser to MWSS: IFC ty for operational management and future capital investment to two Closed: July 31, 1997; concession commenced August 1, 1997 new majority Philippine-owned private companies that together are Winnity Bidders: (1) Zone East-Manila Water Co. (Ayala expected to invest up to US$7 billion over the next 25 years. Corp./United Utitlities/Bechtel Enterprises); (2) Zone West- Tangible benefits of private sector operation quickly followed: that Maynilad Water Services (Benpres Holdings Corp./Lyonnaise same day consumer water rates tumbled, and the new companies des Eaux) launched a series of much-needed physical and managerial upgrades Rate Cuts: Zone East: 74%; Zone West: 43% that government had been unabLe to undertake. Before privatiza- Mandated Service Improvements: Improving water conne' tion, a third of the Manila area's residents were not even connected tions-from 67% to universal coverage in 10 years and sewerage to the system, the vast majoritv of them poor people who had no choice but to pay independent vendors exorbitant rates for this most and sanitation connections from 8% to 83 % in 25 years basic human need. The new private operators, however, are legally tiipated Total Capital Invesment: Up to US$7 billion bound to provide universal water coverage to the population within over life of-concession (IFC estimate) 10 years. * The largest previous water privatizations to date: Aguas Argentinas (Service area of 8.6 million, Argentina, 1993, "To sum it up, what we're going to have is better service for lower and thames Water (7.2 million, UK 1989) prices," said MWSS Administrator Angel Lazaro. "There are many things that we'll be getting this way that we couldn't have had before: more connections, a wider service area, better water pressure, lower losses, and far greatcr overall efficiency." Trouble Ahead, Trouble Behind BEFORE AFTER Trouble Ahead, Trouble Behind ~~~~~~~~~(Public Sector) (Private Sector) The handover successfully culminated a complex two-year process. It began in 1995, when far-sighted Philippine officials had examined Manila Water projections showing their capital city's population would double in 30 years. They determined that the creaky, heavily indebted MWSS system simply could not deliver water to all who would need it. Mania Water Company, Inc. Spurred on by the success of their country's power sector privatiza- (Service Area East) tion in ending crippling brownouts a few yea'rs earlier, they worked with parliamentary leaders to pass a Water Crisis Act, setting the framework for radical change in the sector. S4tj Change was long overdue. The Manila Standard, one of the coun- try's leading newspapers, wrote that the city's water consumers had grown "quietly convinced that no other arrangement could possibly Metropolitan Waterworks be worse than the present situation," one in which "the poor bear and Sewerage System the greatest economic burden of bad water service." The chairman Maynilad Water Services, Inc. of MWSS, Public Works and Highways Secretary Gregorio Vigilar, (Service Area West) readily admitted that the agency was "one of the most maligned organizations in the Philippines, and with good justification." With tion whose presence could both assure the general public and ensure 8,000 employees, he pointed out, it was probably between two to fairness and transparency in the privatization process. The develop- four times overstaffed and encumbered by a long history of con- ment challenges and commercial aspects of the task made it one ide- frontation in labor-management relations. ally suited for the private sector arm of the World Bank Group. Getting Started In November of 1995 the Philippine government tumed to IFC, "These Manila concessions clearly rank which had built a global name for itself in water in 1993 by organiz- as the number one water privatization in ing initial financing for the developing world's biggest previous pri- vatization in the sector, the US$4 billion Aguas Argentinas the world to date ... The transparency and concession in Buenos Aires. The need in Manila was even more fairness of the whole process set out by massive and could only be met by assembling a large inter-discipli- lEG and h5W~5S was major atraction." nary teamof expert consultants. That same month an advisory con- tract was agreed whereby MWSS would pay IFC a fixed retainer fee Nigel Hendley, United Utilities for the preparatory phase of the assignment, plus a more substantial success fee payable only upon successful completion of the privatiza- tion. In addition, MWSS agreed to pay the fees of the various con- sultants recruited into IFC's team, which consisted of Sogrcah MWSS could make service available only 16 hours a day on aver- Ing6nierie (engineers, France); ACCRA Law (lawyers, Philippines); age, often with insufficient water pressure. People who could afford Cleary, Gottlieb, Steen & Hamilton (lawyers, United States); them bought back-up tanks; those that couldn't went without. Punongbayan & Araullo (accountants, Philippines); and National Economic Research Associates (economists specializing in utility Manila's water service coverage had become one of the lowest regulation, United Kingdom). among major Asian cities, with its system offering connections to only 67% of area residents for water, and to only 8% for sewerage. IFC's special contribution to the process as a development institu- And although it was in the enviable position of being a monopoly tion was to bear in mind the interests of all stakeholders -the seller of something that everyone needed, MWSS could not make different branches of governmenit, the consumiiers, labor, and the the necessary improvements in its system. This was due in part to a investors -and strike an appropriate halance that satisfied and financial crunch that stemmed largely from its loss of a full 55% of ended in financial closure. For its client, the government, the IFC the system's water through leakage and theft. Howv? Old, leaky pipes team quickly identified four overall goals: (1) transferring the finan- and obsolete meters certainly contributed, as did unscrupulous par- cial burden for providing water to Manila to the private sector; (2) ties who stole large volumes of water, either to keep for themselves improving service standards while rehabilitating and expanding the or illegally sell to others. The industry calls this phenomenon "non- system; (3) increasing operating efficiency; and (4) minimizing the revenue water." But by whatever name, the fact remained that tariff impact on consumers. MWSS was losing most of the only product it had to sell. The ability of the bidders to reach these goals was to hinge on their MWSS clearly had many problems. Once it decided on privatization perceived ability to reduce non-revenue water in the early years, as a means to address them, the Philippine govemment began looking increase operating efficiencies, and meet the anticipated growth in for an adviser to help it prepare and execute a transaction that, it demand across the system. IFC thus drew up a 25-year concession insisted from the start, had to be fully transparent in order to succeed. agreement with a total estimated investment requirement of US$7 billion that called on potential bidders to: The government saw creation of a process with complete integrity as the best way to attract world-class sponsors who could shore up the * elevate water pressure throughout the system to 16 pounds system. But it knew that attracting them would not be easy. Audited per square inch; financial statements showed that MWSS was barely breaking even U offer uninterrupted 24-hour water service within five years; on annual revenues of US$150 million, leaving no money available U comply immediately with Philippine national drinking water for system rehabilitation and expansion. No investors were likely to safety and water effluent standards; and come to the table unless the privatization process was well con- U provide universal water service coverage within 10 years and ceived, giving them access to adequate information and a clear bid- 83% sewerage and sanitation coverage by the end of the ding process. In addition, the transaction structure itself needed to concession period. he prepared, including design of appropriate legal and regulatory frameworks and contract docuiments. It was quite a wislh list, especially since bidders realized from the out- set that once all technical qualifications were met, selection was to Given the political sensitivities involved in seeking private companies be made on the basis of price alone. Under the rules of the bidding, to take over the capital city's water and sewerage system, the the winners would be whoever could find a way to do the job with Philippine govemment wanted to be advised by a multilateral institu- the biggest initial water rate cuts. These were cuts that could not be Impact :, Fall 1997, Vol. I, No. 2 AUGUST 1997 IBRD 28901 PHILIPPINES I METROPOLITAN 121P00 12110 `21220' WATERWORKS AND SEWERAGE SYSTEM ZONE BOtJNDARIES amftpwp6YeMw - \ ~ . -ZONE WEST ZONE EAST W." Unk C h w 0 k r ,{ .,p >apso7 404) IYNILADWA51R AS7--.> -44 ww fbnk sXs > A~~~~ERVICE, IN: C , of (MWSI) v MANILA WATER OF 4 >-COMPANY, INC. O s 10lGtobrs % - ~~~~~~~~~~(MWCI) ,. ..6, ' o 5Miles CITY OF MAKAJI Manila CHINA a PACIFIC OCEAN 14e30-, / 14o30 MANILA SOUTH 7 CHINA CAVITE PROVINCE Laguna fI <59 - .. . - - de Bay IND < 9~~~~~~~~~~~~~~~~12., OD 12130-121;10t ' < Existing MWSS Service Area: Divided between Zone West and Zone East. adjusted except for inflation and some other carefully specified expanding suburbs of the east and representing 40% of the popula- events beyond the control of bidders for the first five years. The key tion (see map, above). For bidding purposes it was ruled that, while to profitability thus would be rapid reductions in water losses, as all competitors had to bid separately on each of the two zones, the Buenos Aires had already shown could indeed be done. same bidder could not win both concessions. A "composite rate" system was to be used to select the wining bidder in the event that The One Shall Become Two one bidder submitted the lowest rate for both. Given the enormity of Metro Manila (population 11 million), the IFC team recommended that the Philippine authorities divide the Under terms of the concession agreements, the concessionaires were uIFCteamry commstemd thao twew concessio a..re. is striceure to be responsible for funding all MWSS debt service obligations. unitary lVIWSS system mto two new concession areas. This structure Sicthsagemnsfetvlyrqrdfrmoeapatxe- was seen as a means of promoting competition in the bidding process, Since these agreements effectively requited far more capital expen- balancing the potential negotiating power more evenly between the ditures in Zone East, the concessionaire in this area was given concessionaires and the post-privatization MWSS regulator, and pro- responsibility for assuming only 10% of MWSS's existing govemn- viding an independent benchmarking of performance. It also offered ment-guaranteed debt obligations of more than US$400 million to the availability of an alternative if one concessionaire failed to meet its obligations and needed to be temporarily replaced. But each area's single concessionaire was to have the sole right and duty to manage, "W hat we re going to have is operate, repair, and upgrade its water and sewerage area. better service for lower prices." The existing service area, covering all of the metropolitan area of Manila, was consequently divided into two geographically separated - MWSS Administrator zones: Zone West, including the old Manila and the southern province of Cavite, representing 60% of the population; and Zone Angel Lazaro East, including much of the Makati business district and the Impact Fall 1997, Vol. 1, No.2 the World Bank, Asian Development Bank, and others. The larger On January 6, 1997, each of the four bidding consortia submitted Zone Wlest, lying alongside Manila Bay, needed less investment and bids for each of the two concession zones. Bids comprised two thus would otherwise be more attractive to bidders. It was saddled sealed envelopes: one containing a technical proposal, the other with the remaining 90%. the financial proposal (i.e., the rate to be charged the consumers). The one with the technical proposal was immediately opened and In late 1996, MWSS reduced its workforce from 8,000 to under subjected to an intensive two-week period of assessment by an IFC 6,000 in recognition of serious overmanning. It subsequently devel- working group chaired by MWSS that judged the technical com- oped an arrangement where all its employees who wanted them were petence of each consortitum's business plan on a "pass" or "fail" to receive jobs with the new concessionaires for at least an initial six- basis. With four of the world's most prestigious international water month probationary period. All employees were to receive a retire- companies and the Philippines' most successful commercial enti- ment package prior to transfer to the concessionaires, at a combined ties involved in each consortium, it was reasonable to expect that cost to MWSS of more than each should pass. They did. US$70 million, while any staff losing their positions after the On January 23 the financial probationary period would .-bids were opened in a public receive a top-up payment from cercmony held at the thie concessionaires. - --- Development Bank of the Philippines. When the bids Whilte there were some were opened, the consor- inevitable political fireworks tium consisting of at first about these labor - s.Philippine conglomerate issues, IFC's colleagues at the ; Ayala Corp., United World Bank atranged for both Utilities of the United MWSS labor representatives . Kingdom, and Bechtel and managemesnt to visit Enterorises of the United Buenos Aires to review how States had bid so aggressive- the Aguas Argentinas privati- t ly that it was the clear win- zation had been carried out, net of both concessions. They saw that the former According to the bidding public sector workers there wate supl mechanism, it was then who stayed on with the new awarded only one: Zone private operators received bet- east. The concession for eti work terms and conditions Zone West then went to the than before, and that those runner-up for that conees- who left received generous ~ inarea, the group led by severanee packages and often the another Philippine conglom- found good jobs elsewhere in erate, Benpres Holdings the local water industry. This Corp., and Aguas exposure helped alleviate Argentinas' lead sponsor, MWSS labor leaders'fears of Lyonnaise des Eaux of thie privatization's effect on Frace employees. The way the gov- ernment handled many of the . .. The average price cuts for privatization issues ultimately -- consumners contained in the meant that the awarding of winning bids were dramatic, the concessions would have Eric Westbrook In Zone E-ast, they dropped few visible critics in Manila. by 74%; in Zone West by 43%. In both cases this was much more than it had been in Auction Block Buenos Aires, where the immediate rate drop was about 17%. Since most expertise in private water supply caiiie fromi outside the How was it possible? Because of the long-termn atttaction of busi- country, bidding terms allowed international consortia to be ness opportunities in a system that was due to be greatly expanded formed, as long as ownership was at least 60% Filipino, as the and rapidly cuit its losses. Projected demand growth and additional national constitution requires of any enrity that controls utilities, efficienicies in the system made it an attractive proposition for Ultimately, 10 firms each paid US$25,000 for the right to under- investors over the full 25-year term of the concession, and allowed take due diligence, with eight of thiem later linking into four com- thiemi to charge less than the current government operators. peting bidding consortia. ClW Impact Fall 1997, Vol. 1, No. 2 Number One The Timetable 'These Manila concessions clearly rank as the number one water The contacne privatization in thc world to date," said Nigel Hendley of United IFlits adMisory contract in the privarization of the Manila wate Utilities, which has 2C million water customers in the United utit MwS calledsfortis ambiro within14mnns Kingdom, Australia, Mexico, Malaysia, and other countries. "They on the new concessions to occur within 14 months: are the largest competitively bid water concessions and pioneer a path for miiany of the world's inegacities to follow. We were very * advisory contract signedlIFC team starts work: keen to be the international operator for such a prestigious project, and our partner Bechtel Enterprises was equally keen to take a lead- November 1995 ing role in the development, financing, and capital investment man- U pre-marketing to investors: March 1996 agement program. And our local partner. Ayala Corp., was also . start of investor due diligence: May 1996 extremely interested in adding to its portfolio of infrastructure ven- tures and strengthen its move into utilities. * MWSS board approves structure: August 1996 * investor pre-qualification: October 1996 "The transparency and fairness of the whole process set out from the U bids submitted: December 1996 start by IFC and MWSS was a major attraction," he added. "Now, our consortium will be able to manage the system more effectively * bids opened: January 1997 than government for reasons of clarity of management objectives, U contracts awarded and signed: February 1997 incentives to maximize efficiency, and freedom to raise finance to achieve defined service obligations. This is not to denigrate the pre- U all legal conditions of contract satisfied: July 31, 1997 vious management or workforce, but simply to recognize the free- U start of private sector operations: August 1, 1997 dom to manage, together with clear accountability, that privatization brings." With the price cuts in place, the burden for irmproved service is now on the private operators, who havc christened themselves as "Manila Water Co." in the East Zone and "Maynilad Water Services" in the West. They will have to live uip to the performance standards set in the concession agreement. But there is no denying the way the high-profile assignment and its profit potential present World-class operators, in partnlership with highly respected Philippine strong motivations to do so, as do their combined obligation to pay partners, had taken control of the MWSS system and pledged to in US$200 million in capital and post US$180 million in initial improve it dramatically, and at a far lower cost to consumers than gov- performance bonds. ernment could have done. The world's knowledge base of water priva- tization had been significantly widened, and the contribution of the President Fidel V. Ramos's strong political leadership was invaluable. USS7 billion in new investment will provide significant support and When he announced the commencement of the concessions at the stimulation for the expansion of the Philippine economy. Malacafiang Palace on August 1, the Philippines had every right to be proud. Noting that this anticipated capital investment figure exceeds the total amount of demand, savings, and time deposits in the national e financial system, Philippine Senator Raul S. Roco summed it up well: "We should make sure that the news about the Philippines remnains good. Our water project must become a ease study for the world in how a democracy adroitly balances the interest of govem- ment, business, and the public at large." U 'IFCs MWSS Prit;atization Team: Tony Clamp, Luc Dejonckheere, Jerry 1 2Sti5F- . - S -' - Esmay, Brenda Gbolie, Tony Lim, Scott MacLeod, Adil Marghub, 1- -g; - X w.r ;. = = Josette Mendoza, Michael Oraro, Partho Sanyal. August 1, 1997: Philippine President Fidel V Ramos (second from left) raises the privatization agreement marking handover of Manila water utili- ty MWSS to the private sector. Joining him (from left): Pub/ic Works and Highways Secretary Grigorio Vigilar, MWSS Administrator Angel Lazaro, Eugenio Lopez, Jr. of Benpres Holdings, and Fernando Zobel de Ayala of the Ayala Group of Companies. Impact Fall 1997, Vol. l, No.2 Managing for Change ...in Af ria Alexander Nicolas Keyserlingk, President and CEO and Charles Minor, Training Director African Managenent Services Co. (AMSCO), Amsterdam harsh reality has emerged throughout X the business world. Companies that want to com- pete today and excel tomorrow can no longer afford to distin- guish between management and training. To be blunt, he who separates is lost. In today's highly competitive global economy, managers who fail to invest in developing staff skills can quickly fall at a disad- vantage, and often with disas- trous consequences. Bankruptcy courts are filled with companies that thought they were "safe" but The Management-Training Link soon lost market share, either to nimbler rivals shown to be in bet- * e privatesetor rain in Atav ter touch with the times or through economic forces far beyond Donor-financed private sector development programs in Africa have their control. Only when it was too late did they see how valuable long tried to address this problem. They have occasionally financed investing in employee skills-enhancement programs might have individual projects in either management or training but rarely been. addressed both needs simultaneously as the market demands. This very linkage, however, lies at the heart' of AMSCO, an international These dynamics are global in nature. But they are especially seen in joint venture uniting the donor community, multi- and bilateral Africa, where the private sector is hindered by one additional overrid- development finance institutions (DFIs), and the corporate world to ing social constraint: chronically weak human resource development. help build sustainable businesses in Africa. AMSCO was created in 1989 to carry out a United Nations Development Programme With edlucation levels so low continentwide, African business own- African management training project and was put under the aegis of ers often cannot find enough experienced managers locally and must IFC as executing agency. While it draws on both private and public import costly foreign expatriates for senior positions. No matter how sector funding, it is run as a business, not an aid project, and seeks qualified they may be, these expats can leave their companies espe- full cost-recovery for its operations. Like IFC, it firmly believes that cially vulnerable if they go back home without having built up the the objectives of the business and development communities can be skills of local staff. This does nothing to break the vicious circle of complementary, not contradictory. private sector development in Africa. With few suitable business schools available, promising students generally seek their manage- RFesults ment degrees abroad and stay there to build careers. This leaves few A London consulting firm, Norman International, measured the indigenous managers on the scene and means staff with advance- impact of AMSCO's work in an independent evaluation of 11 ment potential lack the role models to help them climb the ladder. AMSCO client firms in Africa. It found "a clear indication of sig- The number of Africans in senior management of Africa's compa- nificant improvement in economic performance by the sample nies has consequently stayed unacceptably low for many years. clients during the AMSCO intervention," such as: Impact . Fall 1997, Vol. I, No. 2 * doubling of annual local currency sales and even greater rise in The Vicious Circle of export earings; African Management * average turnarounds of US$478,200 in annual net losses to US$378,000 in net profits; and * protection of 2,218 jobs that would otherwise have been at severe risk of being eliminated and creation of 324 new ones. Lack of Funds for Small Private Local Manag5ement Sector Such results have always been the goal of both the DFIs such as IFC, - the African Development Bank and others that hold 70% of Need for E.pathate Limited Career AMSCO's US$9 million in share capital, and the 53 intemational Managers Opportunites companies active in Africa that hold the rest, including Philips, - - Nestle, IBM, Carl Bro., British Petroleum, Marconi, Swiss invest- Fev- Expenenced E,odus of ment fund managers EDESA, the Mehta Group of India, and others. Managers Local Talent The DFIs and the private shareholders recognize the importance of - - competent senior executives to manage the African businesses in which they invest and see AMSCO as a cost-cffcctive source of the - - management needed to make their investments in Africa succeed. The large multinationals, on the other hand, may also see their par- ticipation as a form of corporate philanthropy consistent with self- AMSCO's Alternative interest. S$7 AUI,onEq.fty But whatever their motivation, the private shareholders are (75 c 30.. Pr'U-t, AMSCO's largest single group of owners and chair its board, provid- , exkcLaarnc i id ing a level of strategic vision, management discipline, and account- CONTRACTED ability rare in government agencies. MANAGERS TRAINING Part ally Donor Average FRacaned uS5$45,000/yr Over its eight-year history, AMSCO has worked with more than 2-3 ye-aof 75/25 cost shar- 100 different companies in a wide range of industries across Sub- uS$20,0G00/yr. vlth cl ent company Saharan Africa. Its clients typically are locally owned medium-sized enterprises, not the large multinational resource extraction ventures A Ca that dominate so many economies. It is currently assisting 51 African Companies African firms, all on a contractual, fee-for-service basis. AMSCO has 109 managers in the field in 18 African countries. How It EBegins Each operation begins with an inquiry from an African business Client expectations run high at this price, and finding the right per- owner or financial institution needing new management at a senior son for the job is essential. AMSCO's unique structure gives it an level, such as CEO, COO, CFO, or marketing director. In response, advantage in this regard. One is the UNDP affiliation that allows it AMSCO combs its large network of contacts in the donor, business, to offer client companies contracted managers who are tax-free, an and independent consultant communities to identify candidates important asset in attracting first-rate personnel to work in chal- with the special qualifications requested such as relevant industry lenging African environments at rates local firms can afford. and African experience, language, and inter-cultural communication Another is the sponsorship of AMSCO by large intemational insti- skills. If the African business owner hires the recommended candi- tutions that allows AMSCO to attract highly qualified senior execu- date or management team, he or she signs a two- or three-year con- tives who would not otherwise be willing to accept such positions tract with AMSCO covering all costs involved, including salary, on their own. benefits, and housing allowance. AMSCO charges a fee to cover its project management services such as recruitment, client relations, If the African business owner cannot meet all of the costs of this and shareholder liaison. assistance, AMSCO sometimes arranges access to government subsi- dies such as those offered by the Dutch government through the The cost of this service is not insignificant, nor should it be expect- FMO. Although these subsidies are widely used, the African compa- ed to be. Since the African business owners seek experienced mid- nies still must attach value to the AMSCO contract by paying at career professionals who can provide immediate leadership, the least half the costs from their own pockets, and thus have a direct contracts reflect competitive intemational private sector rates. financial stake in the eventual outcome. Their fees contribute to a They typically amount to an average of US$120,000 per year per revenue stream that enables AMSCO to operate without total manager. reliance on donor funds for day-to-day operations. Impact Fall 1997. Vol. 1, No.2 AMSCO: While providing hands-on management personnel, AMSCO also Management and designs and implements management training programs in each training support to client company. This training over the two to three years of the African industry. AMSCO contract is intended to raise local teams' management. Again, AMSCO requires the client companies to bear part of these training costs with the balance paid out of donor funds that AMSCO manages. The training and management linkage is the essential goal of AMSCO shareholders, who have no desire to merely increase the number of costly foreign consultants already flooding the continent. Instead, they want to offer the owners of Africa's promising compa- nies an integrated package that helps make the most of their own human resources. The key: combining access to top-flight contract- ed managers with the financial resources for customized staff train- ing programs offered on-site, elsewhere in Africa, or in developed enterprises' performance before their sale. This assistance can countries. increase the market value of the firms by lowering the demands on future owners to implement costly restructuring and retraining pro- Trainhing Resources grams and thereby increasing the ultimate sales value. AMSCO is AMSCO's Management Development Fund (MDF) has received doing preprivatization work with a majority state-owned wood prod- some US$13 million in contributions from IFC, UNDP, the African ucts company in Gabon. It has also sent a general manager, deputy Development Bank, and from the Dutch, Finnish, Italian, Portuguese, general manager, and training director into a Southern African Swedish, Swiss, and U.S aid programs.Itsgrantsdefrayucountry's svstem of state-owned savings and loan institutions whose Swedish, Swiss, and U.S. aid programs. ItS gransdefa up ton5 s balance sheets will require extensive cleaning up if they are to stem of the costs of the training programs AMSCO provides. These funds chronic losses and drain on the national budget. are used to train everyone from business owners and senior managers themselves to middle and jtnior management. The goal is to help Th African companies nor only improve their performance while under Tese management and trainig services can be provided in con- AficantacttompAneS nt onlso improv their mperfovemanent whleuner Junction with privatization support programs of bilateral or multilat- contract to AMSCO but also sustain this improvement long after eral donors. The Southern African intervention, for example, has these relatively brief AMSCO interventions end. been carried out with partial European Union funding. The assign- ment in Gabon involves support from the Caisse Frangaise de AMSCO also helps provide the first managers and training pro- grams for greenfield projects of interational joint ventures. This is Dcveloppement, Finnfund of Finland, and FMO of the Netherlands, gras fr geeniel prjecs o itemtioal oin veturs. hisis and a reen ASCO privarization seminar in Togo was funded currently the case in several businesses that involve AMSCO share- und an AMCredit.g holders. Examples of such projects are the new cashew and mango under an IDA credit plantation in Guinea-Bissau, backed by Banco de Fomenro of plnttin nGune-Bsau bckdbyBacod Fmetoo Not all of AMSCO's assignments have been successful. Personality Portugal, and the successful merchant bank in Ghana in which IFC Nlall oftMee ' ssignents an ccessful. Person and the Commonwealth Development Corp. arc shareholders. Both clashes between strong-willed owners and contracted managers can and the Commonwealth Developmen Corp.areshasometimes lead to cancellation of contracts, and tumnaround opera- are carrying out intensive training programs and creating new jobs tions are sometimes impossible to turn around despite all parties' and skillIs in economies that sorely need them. efforts, especially when unforeseeable financial setbacks occur. But in a region as needy of private sector development as Sub-Saharan Other needs arise from the incipient privatization process in Africa. Africa, these are risks well worth taking U After years of government mismanagement that had resulted in its closure, the Grand Hotel de Bamako has reestablished itself as Alexander Keyserlingk, a Canadian, has been with IFC since 1971. Before Mali's premier business class hotel, with thanks to AMSCO support. taking a leave of absence to head AMSCO in 1994, he was involved in IFC It was sold to a local investor who contracted a strong French man- investment activities in Latin America, the Middle East, and Africa, and agement team from AMSCO that quickly rebuilt it to three-star had earlier been a chartered accountant with Price Waterhouse and Ernst status. The reopening of the hotel has created nearly 100 new jobs, and Young in Canada, Venezuela, and Germany. almost all of them going to Malians whom AMSCO had trained to Charles Minor, a Liberian national, joined AMSCO in 1993. He previously serve business guests at the same standards demanded in the cities of served as acting managing director of the Liberian Produce Marketing major industrial countries. Customer satisfaction has reached the Corporation and as a management consultant with Arthur D. Little in point that the hotel is frequently used by the World Bank's resident Cambridge, Massachusetts, and in Accra, Ghana, where he also ran his office for meetings and has hosted both James D. Wolfensohn and own consulting practice specializing in management development projects IMF Managing Director Michel Camdessus on their visits to Mali. across Africa. AMSCO is increasingly seeking to add value in the privatization process, by supplying new management to improve state-owned Impact f Fall 1997, Vol. 1, No. 2 Chiapas::: =::: -:A- - ChtX ance for Can ge Rob Wright, iFC Co4orate Relations Unit Chiapas, Mexico "T e -are the only Mexicans who ever decided to be Mexicans," the hotel manager says. "Everybody else VYalready was." His hotel is in Palenque, home of spectacular Mayan ruins that draw thousands of international visitors each year, anxious to discover a lost world. Like others in Chiapas, he knows his state intimately and loves to talk about it, especially to dispel misconceptions of its being a haven of guerrilla activity that is unsafe to visit, let alone invest in. He is recaLling the 1827 referendum in which Chiapas voted to separate from Guatemala, from which it was ruled during the Spanish colonial era. While no one is complaining about that faX decision today, it did leave Chiapas under thc political control of a far more distant capital -one with many more urgent priorities than development of a state that, on the surface at least, seems far more like Central America than the rest of Mexico: small, poor, and behind the rest of the country in social and political evolution. The agrictiltutal, not big, rich, and industrial. rapid emergence of a middle class elsewhere in the nation at the beginning of the twentieth century did not happen in Chiapas, Statistics tell the story, or at least part of it. Per capita income in which today seems to have remained closer to the Mexico of the Chiapas is roughly half the Mexican national average, with health nineteenth. and educational levels also far lower. About a third of the state's population of 3.2 million are Mayan Indians, many of whom prefer In 1994 and 1995 Chiapas was world news, thanks to the uprising of to speak their traditional languages over Spanish and maintain a the Zapatista rebels who took up arms in an attempt to call atten- separate culture in many other ways. Likc their ancestors who built, tion to, if not redress, their state's social imibalances. The govem- and then mysteriously let fall, the most advanced pre-Colombian ment's inability to qucll thc movemcnt contributed to thc myriad of civilization, they live for the most part in the state's mountainous, factors that led to the peso's collapse and Mexico's subsequent severe jungle-covered eastern section, and with far less in the way of infra- cconomic contraction. Today the rebels are no longer as much of a structure than one might expect in a middle-income Latin factor in daily life, but the pressing issues of poverty and inequality American country. It is a verdant area, one with jaguars and tou- that appear to have given rise to their movement remain. Paved cans in the forest and mouth-watering tropical fruit ready for the roads, potable water, and electric power have traditionally been in asking, a place that could hardly be more different from the arid short supply in the lowest-income regions, as have schools, health Mexican north. Indeed, the differences between Chiapas and the care, jobs, and farm land. All of these problems are compounded by rest of the country are so overwhelming that local tourism authori- a state population that is growing at an alarming 4.2% a year, more ties have recently begun promoting it with a slogan their counter- than twice Mexico's national rate and not too far behind that of the parts in the United States also use at the other end of the NAFTA fastest-growing country in the world (Yemen, 5.2%). As a result the land mass, Alaska: "the last frontier." population of Chiapas has doubled in the last 20 years and will dou- ble again in the next 15. This puts ever more strain on local institu- At the same time, Chiapas is rich in natural resources, with plenty tions, especially given the widespread poverty, sectarian religious of water and fertile land -both of which are scarce in the industri- tensions, and disputes over the fundamental basis of such a heavily alized north of Mexico. Historically, however, it has lagged far agricultural economy: land. Impact Fall 1997, Vol. 1, No. 2 If ignored, these issues could create disaster. But the government has V increased social spending considerably in recent years to address the Size: 4 sac root causes of poverty and population growth. It has also partnered and Nca with the business community in a groundbreaking for-profit initia- Populi 3 r tive to capitalize on the state's abundant untapped resources to cre- natioa e ate jobs and economic opportunity for the local population. Its Indi name: Fondo Chiapas.bewnnieaoray "It's a little bit venture capital, a little bit adventure capital, a little aver s ea bit of a development fund," says Mario Alonso of IFC, which is Of e apt~I putting US$5 million into the effort. "You can never separate this Edao exercise from the context in which it operates: the social, the envi- a ronmental, the poverty, and so on. Every time you hear Fondo Hae o 1 Chiapas described from a purely venture capital perspective, you natioFn must remember that it has strong developmental objectives even HOme w,hot though ithe profit motive is its first consideration, the very reasons Homeswtou in for which IFC was set up in the first place." Ldi l and baaa)Iyr~ In the Beginning Staei Cl Fondo Chiapas' origins date to the fall of 1994, when Subcommandante San ntbjd ac4 Marcos and his Ejcrcito Zapatista Liberaci6n Nacional (EZLN) were still very much on people's minds. Troubled by his state's inability to S generate anything but unflattering publicity worldwide, a ruling party gubernatorial candidate named Eduardo Robledo offered business lead- ers matching funds for a small investme-nt fund to pursue projects in agribusiness, tourism, and other sectors. medium-sized enterprises. IFC also became actively involved in Enrique Molina, head of the hotel-sugar-soft drink conglomerate marketing the fund's proposed capital increase, helping interest new Consorcio Industrial Escorpi6n, signed on as chairman and with his investors by offering to put its own equity at risk, and offering paral- colleagues from other finns brought not only risk capital but a level lel loan financing for Chiapas projects through a debt facility with of big business sophistication simply not found in the state. Crucial BBV-Probursa. The response from some of Mexico City's largest local support came from 12 Chiapas business leaders who came companies soon became favorable. together to form a new body, Grupo Empresarial El Porvenir, that also put money at risk and offered contacts for project development. What drove the interest of these hard-nosed businessmen? Talk to By January of 1995 the fund was in business on a pilot basis with a them on their own turf, and it becomes clear that where others looked total capitalization of about US$2.3 million Although Robledo at Chiapas and saw crisis, they saw potential. They are the first to would soon resign as part of the state's fast-changing political kalei- admit that in tenms of natural endowment, Chiapas ranks as one of doscope, the initiative has continued ever since under private sector Mexico's richest states, abounding in resources for agribusiness, leadership and with strong support from Robledo's successor. tourism, energy, and other industries. But a history of neglect, ineffi- cient government spending, and near-exclusive reliance on raw mate- In July 1995 World Bank President James D. Wolfensohn visited rials rather than higher-priced finished or intermediate goods, they Chiapas. Responding to concerns expressed by the Mexican authori- say, has kept it from sharing in the country's broader economic gains. ties, he oversaw the start of the Southern States Initiative, a new World Bank Group effort to address the socio-economic problems Until recently, many of these local businessman maintain, the rest of facing both Chiapas and Oaxaca. As part of its contribution, IFC the country has essentially run Chiapas as a colony, taking out with- began working with Fondo Chiapas, which was then still in early out putting much of anything back in. They quickly recite the num- stages. IFC helped it change its emphasis, turning from an invest- bers: Chiapas produces more than a third of Mexico's hydroelectric ment promotion vehicle to a true equity investment fund with the power, accounts for about a quarter of its petroleum at present and management structure and focus on rates of return that would help has its largest untapped oil and gas reserves, and is the top source of it become a sustainable entity and to raise new capital from coffee and bananas. Yet add it all up, and the state income is still Mexican private investors. Nothing was guaranteed, but potential only 1.9% of the national total. As they watch the population and returns were projected in the 15-20% range over the course of the land pressures worsen, local business leaders know it is no longer fund's 10-year lifetime, mainly through the sales of its equity posi- enough to get by on a few raw materials. Neither can they afford to tions back to project sponsors, directly to other investors, or perhaps keep ignoring others the state is ideally suited to produce or to fail to on Mexico's emerging over-the-counter exchange for small- and attract the private capital needed to build an economy on them. Impact Fall 1997, Vol. I, No.2 W here's the Beef? Our role is not to replace govemment, but to support and comple- Consider the cow. Chiapas is the second biggest cattle producer in ment it, performing the functions that it cannot do as well." Mexico, yet has virtually no slaughterhouses. Its ranchers sell most LFC approved its investment in the fund in late 1996 after its of their herds to middlemen in the far more developed northemr state of Sonora. These buyers command higher prices by fattening founders had demonstrated the concept's viability. By pledging to st ate an Se. lling,themrs beef a which few in C apas c put US$5 million of equity to help leverage even more from other rdt eat in any treard. private Mexican sources, the Corporation is raising the fond's total capitalization to US$12.5 million. IFC has also taken an extra step "Our cows leave the state walking, not frozen. That's the way it is of staff support beyond what it usually does for funds in which it with everything," says a Fondo Chiapas investment analyst, Eduardo invests, sending to Mexico Astra Michels, a senior investment offi- Gonzalez. "We are very good producers. Producing is not our prob- cer with extensive prior experience in difficult operating environ- lem. The problem is marketing, promotion, and our complete lack ments. In addition to giving her a mandate to work closely with l . t . . ~~~~~~~~~~Fondo Chiapas as part of the Southern States Initiative, IFC also of value-added and increased productivity. That is what has created F p the gap between Chiapas and the rest of Mexico." has made available technical experts in key industries when needed to help evaluate specific investment proposals. This input is expect- "What Chiapas really needs is management support and seed capi- ed to raise the fund's standards, and thus its development impact, ta ,, and that's why the ICsupporissoimportanttous,"add considerably over time. Given the track record of the initial, pre- tat, and that's why the IFC support iS so important to us," adds the IFinetns,hepoecsokgod initiative's chairman, Enrique Molina. "IFC is teaching us an awful C lot of how to do things, and having their analytical support is giv- ing us a lot of help in building up our exposure nationally and The Rubber Hits the Road internationally. Otherwise we'd end up eating the whole enchilada The cosponsor of two of these first projects is Grupo Agros, a ourselves." Mexico City agribusiness investment fund best know for its tomato and citrus fruit operations in other states. In 1993 it diversified for the first time into rubber, a tropical product then virtually nonexis- :tent in Mexico. The firm sensed an import-substitution opportunity IBRD 28989 in Mexico's US$100 million trade deficit in rubber and the chance UNITED STATES O F AMERICA for an even-bigger long-term NAFTA payoff from its proximity to the import-dependent U.S. and Canadian markets. X&t \ .*> \ - -. 2+tLiking the feel of its first forays into rubber in the states of Veracruz X ' \ \ g~' and Oaxaca, Agros quickly became interested when Chiapas came "9§4Xt - \ h knocking. With Fondo Chiapas as 30% co-investor, it bought 2,000 OAFt ,} . - - X - _f hectares of former ranch land nearby and began a US$5 million 41 ~~ - L Gulf of Mexico fproject to convert it into a rubber plantation. Although it will take lup to six years for the first seedlings to reach maturity and be OCEAN T tapped, the plantation has already created 170 permanent jobs pay- ) --"" *,,~ 9 -- X In so ortin a transaction that just below that of national utility CEZ --- - < < iL - Q ~~In supporting a transaction that ' ,' Venezuelan Tnelecrn The Big Picture ai a I ' U ANT\ cs iiiea aktIs augers I ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Vn- in,. well r Ven eis tas i- advancing deregulattioi aind pri- Iis'o ftlcmuia - - ---v- arnation, enhancing credirswr- -- -':'. thiiness, and ree,tablishing lihuh nin nen ices is cariaica to sup- to ,lobal capital markes. Msta por ting dcvelcpintent iiid c-oin- nmerc,' savys Solan. "Every del- spectactilar has been the crilamp Lt vse n nrsrcue ny's role in leepeTning the local lai ins escd in intrasitt re, equity mlarketh te lPO pm-duced besides prosiding economic and1 m-re than 8C,000 D nesw share- social benictts to the existing batink pAylelnl, it can mICan the 3.2 mills in lines are projccted to holders ini Vene:uela alonie. coinmtinity, generally attracts difference between having or he inst:illed hr 2'10I elnough tn another dollar of nese invest- Tmenr in industry and commerce nor Niing Ij~Nr qJL," i~ch 15~, A he POPlati,,t mid TI)c 111prored t(rtuwhichf utiloes thE itifrastnrruc-uc Whoexer gets the credit, the duible the prepris\iti:rijin 1991 C'ANTV also ci,incide with the v rh is a thib sub- results has e been positive levels. lcroductivirv is also I n the World Bank (3roup's ultimaLte rtare. ti there is a tiite stib- "New people are filling over rie, with lilies per einployee din- gals of overall econ imic de\ el - -i,vl mnttile in t themiiselves LCI lend to the cern- Wing in 1991 97. Net incanme opmenit and po\ertt redUction, big ddvelpmentil role in what pany." lanighs Solan. Andl ro)ne friim US$72 iliillion in 1995 According to Glihski, the cam- we did."u beyond the enthusiasm of credi- to US$464 million in 1996, pany has increased its contribu- tors and investsrs, the compa- svhile the corripin'Ž iiverall dlebt tions to) commuInit develop- ny's operating Perfoirmance has load dropped frtm USL15 1.2 bil- iiicit projects, iicludiing locally been successful. Despite the ear- lion in 1994 to U IS$606.3 million run cahling centers in lose- lier trouble, CANTV Is nows an In Matrchi 1997, income and rural areas. More track to meer its cumuilative importarnt, perhaps, IS the enor- buildout requireacmts. Some IIOUS boost that a Prosperous Impact Fall 1997, Vol. 1, No.2 Philippine Business: Lending a Hand in Development Maria Aurora Francisco-Tolentino Execurive Director, Philippine Business for Social Progress, Manila could not eam enough to break approached PBSP, a private through the poverty line. nongovemmental organization wirhi a track record in community Change began the day Restituto organizing and development met a group of businessmen and He hoped to involve its board development wotkers from members, titans of business Philippine Business for Social known for using their clout and Progress (PBSP) that was work- influence to push social devel- _ ing with then-Cebu Mayor opment projects. For his part, Tummy Osmenat Knowing that he committed the municipal the rapidly i adustrializing city government to iystalling elec- below could not afford to let soil tricity and building roads in the f erosion harm its water supply, uplands. the team had jointty proposed a massive tree planting and water- Regional PBSP leader Errameon shfed management program, Aboitiz (now CEO of one of tui country's largest shipping com- Recurring inicidents of flooding panies) helped to) mobilize the Qfstau s and fast food chams. origin the lowlands was worrying business community to support Of Cabbages and Things: In7put esiriuto Baculifhase a theue local leaders and action communtyase pro to from top? Philippioe corporations busy day, ahead of him tree cal leade and actlth c enters, program Lo supports local vegetable growers w_ one filled witlmg oodvr ",as critical. Trees were being renew the watershed area. PBSF - an d helps preserve an? impor- one filled with dev-cfelled at an atarming rate in national board members started tant wat'ershed. onies of vegetables to hotels, Sudlon, where only 7% of the campaigning among their bpisi, restaurants, and fast food chains, original forest cover remained. ness colleagues to raise resourcea wekhis brcontl, calfowrnettpaycha His bli, cauowesr lettce Commercial logging and contin- for potable water, schools and aneraged plump tomatoes are fe ued tree cutting by the farmers health centers, spring systems for ing good prices. were quickly laying baet the rest. the farms, and seed capital for Since Restituts levega seling ys abackyard projects. They con- Sinse maresimuntroe selli tmsa But Restituto and the officers of vinced business chambers and week, his monthly net pay has the Sudlon community associa- medical associations to pitch in, ion said no. They were nor and in no time the upland com- averaged as much as P i0,000 interested in tree planting. munity had regular health ctinic (US$384) a 200% increase Water supply was nor their and mini-drugstores. The farmer from its level of seven years ago. problem. They needed job learned soil conservng tech- AtPhatiptime, hety was thatrvesting eltln i t inwuL o nespigbxS eeetb sA tamt of cr wan hvtin opportunities, potable water, niques and how to plant new smal aiiouns u con aid tma- and health care, especially for highi value crops such as broc- toes that he could hardly sell. It their children. coli. WVhen PBSP linked them to was the same story for 3,000 myarket outlets such as local farmers who cleared forests by hotels and restaurants, they the slash and burn methiod in Ir o W ybegan earning incomnes they Sudlon, a mountain village IStreet never bcfore imagined possible. inside Cebu, the second largest Raiigta prigevrn Phiippne ity Intha ara, 0% mental rehabilitation would not Once spring boxes were estab- of upland community residents be simple, Mayor Osmena lished as a source of water, these Impact Fall 1997, Vol. 1, No.2 Sudlon farmers began to under- companies leveraged another P stand how precious a resource 16.21 million (US$4.1 million) water was and why they had to from other donors, including protect the watershed. They Australian and German NGOs. started to reforest on their own In addition to reforestation, the and welcomed the tree-planting community received training in caravans organized by the busi- environmental awareness, finan- ness community. To date, more cial management, and possibili- than 650 hectares have been ties for eaming income in areas reforested. By strategies such as such as citronella oil processing, this that address the underde- basket weaving, and natural . velopment of the uplands, and soap and candle making. by making the necessary social S ~~~~~~~~~~~~~~~~~~~with thie community, busi- PBSP: Boardroom minds, 5 tt~~~~~~~~~~~~~~~~ ~~ness, government, and others grassroots hearts. pooling their resources to work in synergy. K!~~vdo~~ent ~"PBSP has legitimized for the > -- business community the impor- p~tax profits rance Of WOrking at the grass- - ~~~~~~~roots level," says Mary Racelis, 72fl%~of it chart-former Philippine representative SV the compa- of the Ford Foundation. i~s~ipline and Continually exploring the rW~K5 11 Partner- strategic role of business in _rotsps, long-term development while also seeking ad g,r,assroots to influence the way indlividual companies conduct operations 4~5t~J~QU IILHIVIIis the hallmark of PBSP. triiUoi lw-icoe Founded 27 years ago, it now ,Th The wrld of ahas 18 7 member companies ~fems of poverty natioiwide. Members niot only nrP-veIopment, pledge an annual financial con- arid ~~~~tribution of 1% of pretax income for projects but also go beyond writing checks to investments for long-term Cebu business leaders furnished extend business and technical development, the business com- resources for medical missions, expertise. From the outset, munity had helped ensure that potable water systems, and prominent Philippine CEO Cebu would become the premier water catchments for upland board members have applied city of the Philippine South. irrigation. They helped to build their managerial experience multipurpose centers and col- toward poverty alleviation. The Philippine Department of lected seedlings for reforesta- They have worked closely with Environment and Natural tion. And they took time to tell PBSP's professional staff to bring Resources today considers this schools and civic clubs why the about programs promoting self- so-called Hillyland project was important. reliance and a spirit of entrepre- Development Program and its neurship in communities, work with 684 local families a In this project, as others, PBSP believing this to be the key to model of community-based put a premium on social prepa- helping people help themselves. reforestation. The P 5.7 million ration and regular consultation (US$842,300) contributed by between the community and PBSP member and nonmember donors. The key is partnerships Impact Fall 1997, Vol. 1, No. 2 The Corporate Citizen Why Bother? flu ~~~~~~~~~~~~~But why? What bottom-line fac- In I4bia tors motivate such decisions? 'For n Asin copany,corprate hilathropy and PBSP recently surveyed I110 ntract with the Philippine companies with val- ues Of corporate citizenship and community.mTheicompanylobservestthisounwnconcer for the commnunity inte- tract not out f fearofbein picketedorpenalized, but grated in their corporate credos, becauseitis the only truly acceptable way to doer values that stemmed fron not business. 0 aired for free as public service ment and nongovernment - 0 announcements. They were work in social development. developed by McCann Erickson Until last year she represented Philippines, one of the country's the private sector in President _- ---=-sleading ad agencies. Creative Fidel V Ramos' Legislative- services were donated and the Executive Development government provided funds to Advisory Council. cover the cost of production. Th-is is corporate social responsi- bility in action. When rime, expertise, influence, and Measuing Up: School science lab puter and science laboratories resources are harnessed for the in Manila founded by PBSP's for public secondary schools; greater good, changes ate bound Center for Corporate Citizenship, training for science and math 5 happen Using their individ- invest cn education as bsell as the teachers; scholarship grants for uaL experiences in community er vironv inr erdt . the master's degrees of science relations and corporate philan- and math teachers; and televi- thropy as a springboard, Impact . Fall 1997, Vol. 1, No. 2 IFC International Finance Corporation 2121 Pennsylvania Avenue, NW Washington, DC 20433 USA www.ifc.org IFC is a member of the World Bank Group supporting private sector development in member countries through investment, advisory services, and technical assistance.