CIF - Annual Report 2007

1@3/B7<5 =>>=@BC<7BGAn IntegrA ted report this year, IFC is consolidating our former Annual report, Sustainability report, and report to donors, as well as new reporting on our development effectiveness. the report covers fiscal year 2007 and discusses the year’s new business as well as the performance and development results of our portfolio. It also incorporates information on partnerships that fund many of our advisory services. our goal is to provide in one place a full picture of what IFC does and how we are performing, and to report in a way that is relevant to many of our stakeholders: client companies, partners, member governments, local communities affected by our activities, advocacy organizations, investors, and our staff. We are doing this to enhance our accountability and because these four themes—development results, financial success, sustainability, and work with partners—combine to drive IFC’s success. the principles of the global reporting Initiative have helped us improve our reporting and conform to international best practice; a full grI index is available at the Annual report’s Web site, www.ifc.org/annualreport. In addition to the statement from the financial auditors, this report features for the first time an independent assurance statement on its nonfinancial information.IFC Board of Directors ...........................................................2 Message from the President ................................................3 Message from the Executive Vice President and CEO ........4 Creating OppOrtunity .........................8 How We Measure IFC’s performance ............... 16 IFC at a glance ................................................22 operations and results By product Line ..........................................26 By region ...................................................34 By Industry .................................................48 Advisory Services ........................................68 Working with partners .....................................76 How We Work .................................................84 Nonfinancial Assurance Statement ...................................97 Management’s Discussion and Analysis ..........................101 Responsibility for External Financial Reporting ..............133 Financial Statements .........................................................135 Acronyms, Notes, and Definitions ...................................168 IFC, a member of the World Bank group, fosters sustainable economic growth in developing countries by financing private sector investment,

Management’s Discussion and Analysis ..........................101 Responsibility for External Financial Reporting ..............133 Financial Statements .........................................................135 Acronyms, Notes, and Definitions ...................................168 IFC, a member of the World Bank group, fosters sustainable economic growth in developing countries by financing private sector investment, mobilizing private capital in local and international financial markets, and providing advisory and risk mitigation services to businesses and governments. IFC’s vision is that poor people have the opportunity to escape poverty and improve their lives. In FY07, IFC committed $8.2 billion and mobilized an additional $3.9 billion through loan participations and structured finance for 299 investments in 69 developing countries. IFC also provided advisory services in 97 countries.Directors AlternAtes Svein Aass Pauli Kariniemi Abdulrahman M. Almofadhi Abdulhamid Alkhalifa Gino Alzetta Melih Nemli Felix Alberto Camarasa Francisco Bernasconi Joong-Kyung Choi Terry O’Brien

E. Whitney Debevoise (vacant)

Mat Aron Deraman Chularat Suteethorn Eckhard Deutscher Ruediger Von Kleist Pierre Duquesne Alexis Kohler Jorge Familiar Jose Alejandro Rojas Ramirez Alex Gibbs Caroline Sergeant Merza H. Hasan Mohamed Kamel Amr Makoto Hosomi Masato Kanda Mulu Ketsela Mathias Sinamenye Dhanendra Kumar Zakir Ahmed Khan Alexey Kvasov Eugene Miagkov Giovanni Majnoni Nuno Mota Pinto Michel Mordasini Jakub Karnowski Louis Philippe Ong Seng Agapito Mendes Dias Shuja Shah Sid Ahmed Dib Rogerio Studart Jorge Humberto Botero Samy Watson Ishmael Lightbourne Herman Wijffels Claudiu Doltu Zou Jiayi Yang Jinlin As of June 30, 2007 IFC BoArd oF dIreCtorS this fiscal year the Board of directors maintained close oversight of IFC’s efSamy Watson Ishmael Lightbourne Herman Wijffels Claudiu Doltu Zou Jiayi Yang Jinlin As of June 30, 2007 IFC BoArd oF dIreCtorS this fiscal year the Board of directors maintained close oversight of IFC’s efforts to increase and measure its development impact. directors reaffirmed their support for IFC’s strategic directions, including more specific emphasis on agribusiness and small and medium enterprises, as well as IFC’s growth strategy. the Board approved a number of investments and joint World Bank–IFC–MIgA country assistance strategies and continued to encourage stronger collaboration, both across the World Bank group and with partners and stakeholders. Specific issues that directors discussed with management included IFC’s strategy for Africa, the joint Bank group strategy for the financial sector, the launch of a new IFC–World Bank department focusing on subnational finance, and several proposals for new products and services with potential to expand IFC’s reach in client countries. the Board continued to monitor new methods for measuring outcomes of IFC’s investments and advisory services, as well as progress in implementing IFC’s environmental and social performance standards. the Board welcomed IFC’s strong performance in FY07. these include record levels of financing and expansion of advisory activity in Africa and the Middle east, as well as measurable progress in a number of frontier markets and strategic sectors.

From left to right: (standing) Samy Watson, Svein Aass, Alexey Kvasov, Terry O’Brien, Eli Whitney Debevoise, Tom Scholar, Pierre Duquesne, Herman Wijffels, Michel Mordasini, Eckhard Deutscher, Gino Alzetta, Makoto Hosomi, Jorge Familiar, Merza Hasan, Dhanendra Kumar, Felix Alberto Camarasa, Jorge Botero; (seated) Sid Dib, Giovanni Majnoni, Abdulrahman Almofadhi, Mulu Ketsela, Mat Aron Deraman, Louis Philippe Ong Seng, Zou Jiayi Letter to the Board of Governors

Jorge Botero; (seated) Sid Dib, Giovanni Majnoni, Abdulrahman Almofadhi, Mulu Ketsela, Mat Aron Deraman, Louis Philippe Ong Seng, Zou Jiayi Letter to the Board of Governors the Board of directors of the International Finance Corporation has had this annual report prepared in accordance with the Corporation’s by-laws. robert B. Zoellick, president of IFC and chairman of the Board of directors, has submitted this report with the accompanying audited financial statements to the Board of governors. the directors are pleased to report that for the fiscal year ended June 30, 2007, IFC expanded its sustainable development impact through private sector project financing operations and advisory activities.MeSSAge FroM tHe preSIdentDirectors AlternAtes Svein Aass Pauli Kariniemi Abdulrahman M. Almofadhi Abdulhamid Alkhalifa Gino Alzetta Melih Nemli Felix Alberto Camarasa Francisco Bernasconi Joong-Kyung Choi Terry O’Brien

E. Whitney Debevoise (vacant)

Mat Aron Deraman Chularat Suteethorn Eckhard Deutscher Ruediger Von Kleist Pierre Duquesne Alexis Kohler Jorge Familiar Jose Alejandro Rojas Ramirez Alex Gibbs Caroline Sergeant Merza H. Hasan Mohamed Kamel Amr Makoto Hosomi Masato Kanda Mulu Ketsela Mathias Sinamenye Dhanendra Kumar Zakir Ahmed Khan Alexey Kvasov Eugene Miagkov Giovanni Majnoni Nuno Mota Pinto Michel Mordasini Jakub Karnowski Louis Philippe Ong Seng Agapito Mendes Dias Shuja Shah Sid Ahmed Dib Rogerio Studart Jorge Humberto Botero Samy Watson Ishmael Lightbourne Herman Wijffels Claudiu Doltu Zou Jiayi Yang Jinlin As of June 30, 2007 robert B. Zoellick

IFC ANNUAL REPORT 2007 3

In beginning my tenure as President with the start of the new financial year, I am seeing at first

Herman Wijffels Claudiu Doltu Zou Jiayi Yang Jinlin As of June 30, 2007 robert B. Zoellick

IFC ANNUAL REPORT 2007 3

In beginning my tenure as President with the start of the new financial year, I am seeing at first hand the critical role that IFC plays within the World Bank Group and the unique and expanding contribution it makes to development, growth, and overcoming poverty. I am pleased to introduce a report that gives the fullest picture yet of the breadth and impact of this work. Already I have seen up close how IFC’s investments in Cambodia’s ACLEDA Bank have helped microfinance reach many thousands of small-scale entrepreneurs, especially women and people in remote areas of the country. In Vietnam, I have seen a country moving closer to the ranks of middle-income economies, in part thanks to half a billion dollars invested by IFC and its partners in leading banks and companies like Khai Vy—a furniture manufacturer and exporter that is finding sustainable sources for its wood—as well as to IFC advice that supports the country’s private sector. In Africa, IFC is backing innovative private financing for schools, women-owned businesses, and basic services. Wherever I look in our partner countries, I am impressed that IFC is a key catalyst for empowering private sector energy to drive development and offer opportunity. By focusing on the private sector, IFC complements the other entities of the World Bank Group—IBRD, IDA, MIGA, and ICSID. IFC’s talented and innovative staff enables us to offer a full range of products and services that help developing countries overcome poverty and improve the lives of their people. Through this comprehensive approach, the World Bank helps governments set policy and improve the investment climate, and IFC helps companies through advice and catalytic investments that create jobs, mobilize savings, and build skills. As the role of the private sector in generating and sustaining economic growth has become more widely recognized, IFC has been uniquely positioned to increase its role, given its global knowledge of industries, its more than 50 years of investment

that create jobs, mobilize savings, and build skills. As the role of the private sector in generating and sustaining economic growth has become more widely recognized, IFC has been uniquely positioned to increase its role, given its global knowledge of industries, its more than 50 years of investment experience, and its steady decentralization of staff expertise to offices around the world. Working as part of the Bank Group, IFC can ensure that it invests and offers advice in ways that help the private sector broaden benefits to people and places that would not otherwise be reached. This report shows how IFC works through joint departments and programs across the World Bank Group and in close cooperation with donors and other partners. The successful and respected Doing Business report offers a prime example. In infrastructure, financial services, energy, manufacturing, and agribusiness—to name a few industries among many—IFC offers solutions that help companies innovate, grow, and improve the sustainability of their operations and use of resources. IFC is also leading the way in measuring the results of its work, and this report details the findings for the first time. Ultimately, the work of IFC—along with that of the other entities of the World Bank Group—is about linking markets and incentives with targeted private and public assistance to empower the poor in developing countries. With a little support, fathers and mothers can build better lives for their children, local entrepreneurs can mobilize savings to create jobs and hope, and governments can establish the conditions and foundations for participating in inclusive and sustainable globalization. I have greatly enjoyed meeting the highly motivated, dynamic, and creative staff of IFC. It seems that in every meeting they bring a new idea to better accomplish our mission. I certainly look forward to working closely with them so as to ensure that we leverage the private sector to bring a better life to people in the countries we serve.Creating OppOrtunity is iFC’s businessIFC ANNUAL REPORT 2007 5 Taking IFC to the next level Financial year 2007 was a remarkable one for IFC. We delivered strong, measurable development impact and continued to show how the private sector creates

is iFC’s businessIFC ANNUAL REPORT 2007 5 Taking IFC to the next level Financial year 2007 was a remarkable one for IFC. We delivered strong, measurable development impact and continued to show how the private sector creates opportunities in emerging markets—especially for the millions of poor people who most need help. We also achieved the strongest financial position in our history. IFC’s staff has worked hard to advance our mission, and they have had strong support and cooperation from our shareholders and partners, as well as colleagues across the World Bank group. I am pleased to present this annual report, which gives a more complete picture of IFC’s activities and results than ever before. We have integrated our financial reporting with information on our advisory services, our work with partners, and our efforts to promote sustainability through investments and advisory services. We are also providing extensive new data on the development effectiveness of our activities, which I believe tells a compelling story about the role of the private sector in growth, job creation, and human development. IFC’s market is evolving. In the past, IFC mainly provided financing to firms from industrialized countries as they invested in emerging markets, and this work was a relatively small part of World Bank group activity. today, nearly two-thirds of our client firms are based in emerging markets, and there is wide acknowledgement that the private sector plays a critical role in addressing the needs of people in developing countries. Many of the firms we invest in are also expanding into other emerging markets, bringing capital, technology, management expertise, and jobs. We finance more than 20 such “South-South” transactions each year. A LeAdership perspective from LArs thUNeLL, execUtive vice presideNt ANd ceo6 IFC ANNUAL REPORT 2007 We are also transforming IFC’s operations. today just over half our workforce is based in field offices and better positioned to help local clients. With support from our shareholders, IFC is energetically pursuing opportunities even in higherWe are also transforming IFC’s operations. today just over half our workforce is based in field offices and better positioned to help local clients. With support from our shareholders, IFC is energetically pursuing opportunities even in higherrisk emerging markets. this approach has helped us achieve strong profitability, and that in turn lets IFC reinvest where the needs are greatest. Beyond financing, we continue to increase our advisory services, more and more of which lead to IFC investments or are delivered alongside financing. this work allows us to provide comprehensive solutions to our clients’ business needs. despite strong growth and capital flows, challenges remain in emerging markets, and these are driving IFC’s strategy. Many millions of people in smaller, less developed markets and in conflict-affected countries have not yet shared in the benefits of private sector growth. poor infrastructure impairs such basic services as clean water, reliable electricity, and health care. Smaller businesses, often the major source of employment, struggle to obtain financing and face burdensome regulations. throughout the developing world, the environment, corporate governance, and social issues all pose challenges to a private sector seeking to become competitive and meet international standards. IFC is able to play a bigger role and tackle these challenges because we have made a strategic decision to take a larger number of well-managed risks. We are increasing our equity and quasi-equity investments, especially in markets where others are unable or reluctant to bear the risk. We are using innovative products in higher-risk and underserved markets, such as local currency financing that lets companies concentrate on building a business rather than worrying about exchange rate volatility. taking this approach further, we are preparing a global fund to provide local currency hedges for IFC loans in the health, education, and smaller enterprise sectors in countries where there are no hedging alternatives. our priority markets are what IFC calls the “frontier”: countries eligible for interest-free, public sector loans from the World Bank’s International development Association as well as

the health, education, and smaller enterprise sectors in countries where there are no hedging alternatives. our priority markets are what IFC calls the “frontier”: countries eligible for interest-free, public sector loans from the World Bank’s International development Association as well as countries that have high risk ratings for private sector investment. Just as important, the frontier includes low-income or high-risk regions in middle-income countries, such as northeast Brazil and western China. IFC also has an important role in supporting the private sector in conflict-affected countries, as detailed in this report. IFC made substantial progress in Sub-Saharan Africa, where our investments reached $1.4 billion in FY07, double the previous year’s commitments. Investments also topped $1 billion for the first time this year in the Middle east and north Africa. overall, in FY07 IFC invested more than $8 billion for its own account and mobilized nearly $4 billion more. Measuring the results of our investments and advisory work is critical to understanding how well our strategy is working. our new tracking system gives insights into the number of people we are reaching. In 2006, for example, 4 million people received hospital treatment, 9.5 million customers received electricity, 5 million loans helped smaller businesses, and 40,000 entrepreneurs received training and advice through engagements supported by IFC. these are encouraging numbers, and they keep our focus on people—farmers who have entered regional and even global IFC has an ongoing commitment to step up our investment and advisory services in frontier markets. Overall activity in FY07: Investment commitments in IdA countries represented k k 37 percent of IFC’s total; 33 percent of this total was in frontier countries. IFC spending on advisory services projects in IdA k k countries was 62 percent of the total; 54 percent of this total was in frontier countries.

The growth this represents: Investment commitments in IdA countries grew k k more than 75 percent over FY06, reaching $3 billion

in frontier countries. IFC spending on advisory services projects in IdA k k countries was 62 percent of the total; 54 percent of this total was in frontier countries.

The growth this represents: Investment commitments in IdA countries grew k k more than 75 percent over FY06, reaching $3 billion in FY07, while investment commitments in frontier countries grew more than 80 percent over FY06, to $2.7 billion in FY07.

IFC spending on advisory services projects in IdA coun-k k tries increased by 51 percent, to $63 million in FY07, while such spending in frontier countries went up 50 percent over FY06, to $54 million in FY07.

IFC Frontier Country definition: Countries that are either high risk (0-30 on a scale of 0-100) by the Institutional Investor Country risk ratings, or low income according to the World Bank classification.IFC ANNUAL REPORT 2007 7 supply chains, women entrepreneurs who are now able to join the formal economy, parents who can access quality medical care for their children. I have met many hardworking, ambitious individuals in our client countries since I joined IFC in early 2006. they are an inspiration for all of us. our Board of directors reaffirmed our five strategic pillars this year: a focus on frontier markets, including IdA countries; building long-term relationships with local companies; ensuring environmental and social sustainability; helping the private sector strengthen infrastructure, from ports and roads to schools and hospitals; and developing local financial markets. We are also stepping up our support of agribusiness, an industry that touches most of the world’s poor people.

IFC is committed to achieving broader development impact as we implement our strategy. this includes ensuring that the foundations for private sector development are in place: a sound business environment, environmental and social standards, basic infrastructure, access to finance, and support for firms with potential to expand into other developing economies. IFC can leverage the expertise of the larger World Bank group, with

foundations for private sector development are in place: a sound business environment, environmental and social standards, basic infrastructure, access to finance, and support for firms with potential to expand into other developing economies. IFC can leverage the expertise of the larger World Bank group, with World Bank assistance to governments on policy frameworks preceding advice and investments from IFC, which in turn spur additional private capital. the Doing Business report, a joint program helping streamline business regulations, is an excellent example of how IFC and the World Bank can work together, and we continue to explore opportunities for cooperation. IFC has made progress on the challenges facing emerging markets, especially in reaching the poorest people. the opportunities to do more are tremendous. We have the strategy, mandate, and resources to deliver greater impact for our clients and shareholders. IFC’s comparative advantage is our capacity to invest in frontier markets and to bring expertise, value-added services, and international standards. We also bring a commitment to measuring results. With ongoing support and cooperation from stakeholders, partners, and World Bank group colleagues, IFC will continue to create opportunities for millions of people to escape poverty and improve their lives. Lars H. thunell8 IFC ANNUAL REPORT 2007 Creating OppOrtunity is a long-term commitmentIFC ANNUAL REPORT 2007 9 ifc ANNUAL report 2007 IFC works with the private sector in emerging markets. This is a good business proposition for investors—and it is having a positive impact on the neediest people and places. IFC’s vision is that poor people have the opportunity to escape poverty and to improve their lives. By promoting open and competitive markets and providing investment and advisory support to private sector clients, we seek to create opportunities for progress in emerging markets. these opportunities take many forms: productive and profitable enterprises, new or better jobs, innovative products and services, lower prices, and new tax revenues that fund public

investment and advisory support to private sector clients, we seek to create opportunities for progress in emerging markets. these opportunities take many forms: productive and profitable enterprises, new or better jobs, innovative products and services, lower prices, and new tax revenues that fund public programs. they allow people to work, prosper, and live better and longer lives. the private sector plays a key role in the sustainable development of any economy. private markets drive growth in productivity, creating jobs and raising incomes. private initiative is also critical in expanding the basic services— infrastructure, health, and education—that empower poor people and create the conditions for sustained improvements in everyday life. More and more governments have put the private sector at the center of their development strategies. developing countries are growing faster than ever, with international capital flows reaching record highs. An increasing number of governments are reforming the laws and regulations that underpin private sector activity, bringing down barriers to initiative and growth. In this promising climate, IFC can focus more than ever on how we add value—making our engagements broader, developing new investment products, and enhancing the quality of our advisory work.10 IFC ANNUAL REPORT 2007 ChaLLenGes on the frontier despite progress, many of the poorest countries and regions are not yet able to access the growing capital flows and participate in economic growth. And for many of the 4 billion people at the base of the economic pyramid, the better jobs and higher incomes that markets can provide are still unattainable. IFC plays a crucial role in promoting the development of the private sector, so that opportunities can reach more of the neediest people and places. our financial products and advisory services go beyond those that developing country markets and private investors can provide on their own. We focus our efforts on the fundamental challenges facing the private sector, including the basics of the business environment, reliable infrastructure, and development of capital markets. And much of our work targets the economic frontier of low-income or highrisk countries and regions. For the most part, these are also

on the fundamental challenges facing the private sector, including the basics of the business environment, reliable infrastructure, and development of capital markets. And much of our work targets the economic frontier of low-income or highrisk countries and regions. For the most part, these are also recipients of assistance from IdA, the World Bank’s International development Association.

BETTER DEVELOPMENT AND

INVESTMENT RESULTS WITH IMPROVING INVESTMENT CLIMATE Based on a random sample of 584 projects evaluated by IFC’s Independent Evaluation Group 1996-2006

Percent positive ratings 5 10 15 20 25 30

FY03 FY04 FY05 FY06 FY07

For IFC's own account Held for others 71 75 61 56 63 20% 40% 60% 80% 100% Private Sector Development Impact Environmental and Social Performance Economic Performance Financial Performance Development Outcome Success Rate (percent of positive ratings) 56 72 84 72 89 70 20% 40% 60% 80% 100% Impacts Outcomes Outputs Efficiency Strategic Relevance Development Effectiveness Projects Rated Satisfactory or Better Improved Unchanged Deteriorated 0% 20% 40% 60% 80% 100% Development outcomeInvestment outcome ifC’s ContriBution to deveLopment IFC works with private investors, putting money at risk alongside theirs to support promising business projects that might not otherwise attain financing. our approach—taking debt and equity risks that the market would not otherwise bear—helps expand opportunities, especially in frontier countries and for poor people. We seek to support profitable businesses that contribute to sustainable development, and we add value to our clients while remaining fully accountable to our shareholders. In the process, we demonstrate that sustainability, development impact, and sound financial performance can, and do, go hand in hand. IFC makes many investments, both large and small, that

sustainable development, and we add value to our clients while remaining fully accountable to our shareholders. In the process, we demonstrate that sustainability, development impact, and sound financial performance can, and do, go hand in hand. IFC makes many investments, both large and small, that become cornerstones of growth in developing countries; and through our commitment to sustainability, we help increase their positive impact on the environment and their benefits to local communities. We also invest in financial intermediaries that serve new entrepreneurs and smaller businesses. IFC’s profitability allows us to invest in more private enterprises and innovate in the financial products we offer. proceeds from investments help us grow our business—annual commitments have increased sixfold since our last capital increase in 1991—and demonstrate that responsible investors can make a strong profit in emerging markets. these proceeds also help fund advisory work aimed at opening markets and helping firms grow and compete. We leverage the strengths of many partners, across the World Bank group and in the larger development community. With generous donor support, our advisory services focus on creating a robust environment for business and on helping companies enhance their performance, governance, and sustainability. In a Be TT er Bus Iness env IrOnmen T, InvesTmenTs PerFOrm BeTTer data based on a random sample of 584 projects evaluated by IFC’s Independent evaluation group 1996-2006.

BETTER DEVELOPMENT AND

INVESTMENT RESULTS WITH IMPROVING INVESTMENT CLIMATE Based on a random sample of 584 projects evaluated by IFC’s Independent Evaluation Group 1996-2006

Percent positive ratings 5 10 15 20 25 30

FY03 FY04 FY05 FY06 FY07

For IFC's own account Held for others 71 75 61 56 63 20% 40% 60% 80% 100% Private Sector Development Impact Environmental and Social Performance Economic Performance Financial Performance Development Outcome Success Rate (percent of positive ratings) 56 72 84 72 89 70

Held for others 71 75 61 56 63 20% 40% 60% 80% 100% Private Sector Development Impact Environmental and Social Performance Economic Performance Financial Performance Development Outcome Success Rate (percent of positive ratings) 56 72 84 72 89 70 20% 40% 60% 80% 100% Impacts Outcomes Outputs Efficiency Strategic Relevance Development Effectiveness Projects Rated Satisfactory or Better Improved Unchanged Deteriorated 0% 20% 40% 60% 80% 100% Development outcomeInvestment outcome IFC COmmITTed POr TFOlIO, FY03 TO FY07IFC ANNUAL REPORT 2007 11 ifC’s ContriBution to the miLLennium deveLopment GoaLs the international community’s Millennium development goals for 2015 set specific targets in areas ranging from child mortality to environmental sustainability. IFC ad