World BankInternational Business Management

Presented toProf. Kaushal Kishore

Presented byDarshit Paun 20131010Monik Gandhi 20131023Rachit Shah 20131035Sandip Goldar 20131047Vishal Nadgir 20131059

INTRODUCTION

The World Bank was created at the 1944 Bretton Woods Conference, along with three other institutions, including the International Monetary Fund (IMF). The World Bank and the IMF are both based in Washington, D.C., and work closely with each other.

The Bank focuses on six areas:

•Overcome poverty by spurring growth in the poorest countries, focusing on Africa.

•Offer reconstruction to poor countries emerging from war, a major contributing factor to extreme poverty.

•Provide a customized development solution to help those middle-income countries overcome problems that could throw them back into poverty.

•Spur governments to act on preventing climate change, controlling communicable diseases, (especially HIV/AIDS and malaria), managing international financial crises, and promoting free trade.

•Work with the League of Arab States to improve education, build infrastructure and provide micro-loans to small businesses in the Arab world.

•Share its expertise with developing countries, and its knowledge with anyone via reports and its interactive online database.

Voting power

• In 2010, voting powers at the World Bank were revised to increase the voice of developing countries, notably China.

• The countries with most voting power are now the United States (15.85%), Japan (6.84%), China (4.42%), Germany (4.00%), the United Kingdom (3.75%), France (3.75%), India (2.91%), Russia (2.77%), Saudi Arabia (2.77%) and Italy (2.64%).

• Most developed countries' voting power was reduced, along with a few poor countries such as Nigeria.

• The changes were brought about with the goal of making voting more universal in regards to standards, rule-based with objective indicators, and transparent among other things.

• Now, developing countries have an increased voice in the "Pool Model," backed especially by Europe.

World Bank and Business environment

• The World Bank Entrepreneurship Survey (WBGES) was conceived to answer the demand of scholars and government for a reliable and internationally comparable indicator to measure entrepreneurial activity.

• The WBGES data continue to show that a good regulatory environment can boost entrepreneurial activity in developing countries.

• The WBGES aims to understand the dynamics of private enterprises around the world through the collection of data on business creation at the international level that can be compared across heterogeneous legal, economic, and political systems.

• As its spring meetings approach — they will be held jointly with the International Monetary Fund in mid-April — the bank said it would increase its annual lending to middle-income countries to as much as $28 billion, up from $15 billion.

• Over the next decade, the lending capacity for those countries through the International Bank for Reconstruction and Development, a part of the World Bank, will total about $300 billion.

• Through a system called the Doing Business (DB) rankings, the World Bank uses its considerable financial and political power to make it as easy as possible for these visible and tradable assets to exchange hands.

• The DB rankings encourage this kind of economic activity by awarding points to countries when they act in favour of the “ease of doing business”, which are published in an annual report.

• Forty-five countries pledged US$25.1 billion in "aid for the world's poorest countries", aid that goes to the World Bank International Development Association (IDA) which distributes the loans to eighty poorer countries.

World Bank and Business environment

• We shall focus on three major trends at the World Bank: (1) changes in lending, including amount of lending, type of lending, and recipient countries; (2) changes in income sources; and (3) the growth of trust funds.

World Bank – Group at a Glance

WORLD BANK LENDING

• In 1950s and 1960s, investments in industry and infrastructure dominated the Bank’s portfolio.• Later 1970s,Bank veered into more direct approaches to poverty

reduction, pioneering strategies like ‘basic human needs’ and ‘integrated rural development.• 1980s, the Bank focused on structural adjustment, macroeconomic

policies, debt, and efforts to increase private capital flows• 1990s and 2000s, the Bank focused on sustainable development and

continued to strengthen its brand as a ‘knowledge bank’ helping solve Development Issues.• Recently, the Bank expanded its footprint to address global public goods

problems, like climate change

AMOUNT OF LENDING

• World Bank’s cumulative lending now stands in excess of $1 trillion.• World Bank Group committed $52.6

billion in total loans, grants, equity investments and guarantees IN 2013• World Bank (IBRD and IDA)

committed $31.5 billion in loans, credits, grants, and guarantees

$15.2 billion – IBRD (92 operations – 35 Countries)

$16.3 billion from IDA (184 operations – 59 Countries)

TRENDS IN LENDING

The exceptions to this trend are two spikes in lending, in response to the 1997 Asian financial crisis and the 2008 global financial crisis.

IBRD’s set a statutory lending limit of a 1:1 gearing ratio, meaning outstanding loans may not exceed the sum of subscribed capital, reserves, and surplus.

Outstanding loans and guarantees of $141 billion are 57% of the $250 billion lending limit

IBRD currently targets an equity-to-loan ratio of between 23% and 27%

This ratio decreased since 2010, due to an increase in lending and decrease in useable equity, but remains at the upper end of the target risk coverage range, at 26.8%

There is reduced demand for IBRD loans stemming increased competition from other funding sources and low global interest rates

To counter the trends, President Kim announced recently that the maximum loan book IBRD can support will increase by $100 billion, reaching $300 billion in a decade

Increase supported by changes to minimum equity-to-loan ration, allowing the World Bank to take on more loans relative to its total capital.

TRENDS IN LENDING

Lending from the four regional development banks has been increasing significantly, especially in the aftermath of the financial crisis.

At the same time, middle income countries are increasingly financing their own development.

The China Development Bank had about $886 billion in loans outstanding in 2011, compared to only $136 billion in outstanding IBRD loans in FY2012

During the financial crisis, Chinese lending surpassed World Bank lending: the China Development Bank and the China Export-Import Bank committed more than $110 billion to developing countries from 2008 to 2010, while IBRD and IFC together committed only $100 billion

TYPES OF LENDING

World Bank lending can be differentiated into three categories:

1.Investment lending (Goods and services needed for development over the longer term)

2.Development policy lending (Development policy operations)

3.Results-based lending (P4R – Funding governments programs that support government projects, but the disbursement of funds is linked to the achievement of measureable and verifiable development results)

Top Recipients of IBRA and IDA Development Policy Lending, 2013

WORLD BANK SOURCES OF FUNDING

• The World Bank’s lending, investments, and general operations are funded by:

i)equity (paid-in capital and retained earnings)

ii)borrowing (debt issuance).

Funding by Equity• Each World Bank Group institution is owned by

member countries—its shareholders.• Ownership and therefore voting rights are

proportional to each shareholder’s capital contributions.

• The World Bank is governed by a Board of Governors (one from each country) and a Board of 25 Executive Directors.

• By convention, the Executive Directors of IBRD, IDA, IFC, and MIGA are the same.

Source: IBRD (2013)

• IBRD members purchase shares of the bank, but pay in only 6% of the cost of shares purchased.

• The rest of the capital remains “on call.” If the IBRD suffers large losses—for example, if several large borrowers defaulted on their loans at the same time—the Bank could collect “on call” capital from its shareholders in order to pay its creditors, although the Bank has never needed to make a call on capital.

• IDA raises funds through “replenishments” that occur every three years. The level of funding it receives depends on how much its donors commit.

• The sixteenth IDA replenishment, finalized in December 2010, netted SDR 32.8 billion ($49.3 billion) for FY2012-2014.

• The seventeenth IDA replenishment, recently completed, brought in $52 billion. (SDR, or special drawing rights, are a kind of foreign exchange asset created by the IMF; at current rates, 1SDR = $1.53; see IMF 2012.) This amount includes transfers from the IBRD and IFC of $3 billion.

Funding by Borrowing• The World Bank raises the majority of its capital by

issuing debt to both institutional and retail investors.• Since 1947, the Bank has issued bonds in 54 different

currencies, and in FY2012 it issued bonds in 23 currencies.

• Funding levels depend on lending activity as well as broader macroeconomic conditions.

• Bond maturities generally range from 2 to 10 years, and the issue size is typically USD$1-3 billion.

• Moody’s rates the World Bank AAA, the highest possible rating. It cites the Bank’s strong capital base, status as a preferred creditor, and sound financial management.

Operating Income of World Bank• The World Bank’s operating income depends

primarily on the margin it makes on the loans it issues (net of funding costs), the return on its investments, and its noninterest expenses, of which the largest is staff costs.

• Operating income has been positive every year since Moody’s began evaluating the Bank, and it has averaged around $1.1 billion over the past five years. Operating income was $876 million in 2013.

INTERNATIONAL FINANCE CORPORATION (IFC)

The International Finance Corporation focuses on private sector investment in emerging markets. Its three main lines of business include investment services, advisory services, and asset management.

• IFC’s Asset Management Company (AMC) mobilizes and manages third-party capital from institutional investors, like sovereign funds and pension funds. AMC manages seven funds, with $5.5 billion under management. These are :

(1) the Equity Capitalization Fund

(2) the Sub-Debt Capitalization Fund

(3) the ALAC Fund

(4) the African Capitalization Fund

(5) the Russian Bank Capitalization Fund

(6) the Catalyst Funds

(7) the Global Infrastructure Fund

MULTILATERAL INVESTMENT GUARANTEE AGENCY (MIGA)

• The goal of the Multilateral Investment Guarantee Agency (MIGA) is to stimulate foreign direct investment into developing countries.

• It does this by providing political risk insurance (guarantees) to protect against expropriation, breach of contract, non-honoring of financial obligations, currency inconvertibility, terrorism and civil disturbance, and other non-commercial risks.

MULTILATERAL INVESTMENT GUARANTEE AGENCY (MIGA)

• In 2013, MIGA issued $2.8 billion in guarantees, with an additional $3.5 million issued under MIGA-administered trust funds (MIGA 2013). This is double (in nominal terms) the $1.4 billion in guarantees issued five years ago, in 2009.

• Over the past five years, MIGA has supported about 27 new projects and 33 total projects per year, and it supported 30 total projects and 26 new projects in 2013.

MULTILATERAL INVESTMENT GUARANTEE AGENCY (MIGA)

• MIGA’s strategy for 2014-2017 calls for work on infrastructure, power generation, transportation, manufacturing, agriculture, and finance.

• MIGA will work to expand its product line and reach a broader client base. It will continue to prioritize work in IDA-eligible countries and fragile and conflict-affected states.

TRUST FUNDS• Trusts funds were initially designed to give bilateral

donors a mechanism for co-financing specific projects. For example, the first World Bank trust fund, established in 1960, allowed co-financing of the Indus Basin Project in Pakistan.

• Since 2007 alone, the total value of World Bank Group trust funds has increased almost 73%, growing from $17.3 billion to $29.2 billion

IBRD/IBA Trust Funds• IBRD/IDA trust funds account for 33% of World Bank

Group trust funds by value.• Since 2008, funds held in trust in IBRD/IDA trust funds

have increased from $8.7 billion to $9.7 billion, cash contributions have increased from $4.0 billion to $4.4 billion, and disbursements have increased from $3.3 billion to $4.3 billion.• The IBRD and IDA use two types of trust funds: Bank-

Executed Trust Funds (BETFs) and Recipient-Executed Trust Funds (RETFs).

FIF’s• The World Bank’s role in financial intermediary funds

is as a trustee: it receives, holds, invests, and transfers funds, often to multiple implementing agencies. As a trustee, the World Bank does not supervise the use of funds, but it may serve as a partner in implementation.• FIFs account for 61% of World Bank Group trust funds

by value, and they are also the major source of trust fund growth at the Bank.

FIF’s

IFC TF’s• IFC trust funds account for only about 1% of the total

value of the World Bank Group’s trust funds, but they are important because they support 80% of IFC’s advisory services.• IFC offers these services to businesses and

governments in four categories: access to finance, investment climate, public-private partnerships, and sustainable business.• Over the past five years, the United Kingdom has

been the largest donor to IFC trust funds, providing 25% of all contributions.

Trust Fund Reform• Advantages: Trust funds…• Help fill gaps in existing development efforts by, for

example, providing funds to post-disaster or post-conflict countries that are ineligible for IBRD/IDA support or by catalyzing investment in global public goods like climate change mitigation • Promote the coordination/harmonization of bilateral aid

efforts and support the formation of new development partnerships • Secure broader support for and complement existing

Bank work • Allow doors to use the broader capacities of multilateral

institutions • Reduce transaction and administrative costs and provide

economies of scale

Trust Fund Reform• Disadvantages: Trust funds…• Are often not well-integrated into other Bank efforts

and activities or into existing country programs • Often do not allow recipient countries to participate

in their design and use, particularly for global funds • Reduce the visibility of individual donors and

therefore the credit they receive • Reallocate existing ODA but do not increase it • Reduce transparency, especially because data is

difficult to compile and sources conflict • Are not (or are not as easily) subjected to World Bank

safeguards

Thank You