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AN INTEGRATED REPORT

This year, IFC is consolidating our former Annual Report, Sustainability Report, and Report to Donors, as well as new reporting on our development effective-ness. The report covers fi scal year 2007 and discusses the year’s new business as well as the performance and development results of our portfolio. It also in-corporates 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 commu-nities 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, fi nancial 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 fi nancial auditors, this report features for the fi rst time an independent assurance statement on its nonfi nancial information.

Untitled-1 2 9/24/07 6:36:41 AM

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

Nonfi nancial Assurance Statement ...................................97

Management’s Discussion and Analysis ..........................101

Responsibility for External Financial Reporting ..............133

Financial Statements .........................................................135

Acronyms, Notes, and Defi nitions ...................................168

IFC, a member of the World Bank Group, fosters

sustainable economic growth in developing

countries by fi nancing private sector investment,

mobilizing private capital in local and international

fi nancial 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 fi nance 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 fi scal year the Board of Directors maintained close oversight of IFC’s ef-

forts to increase and measure its development impact. Directors reaffi rmed

their support for IFC’s strategic directions, including more specifi c 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 collabora-

tion, both across the World Bank Group and with partners and stakeholders.

Specifi c issues that Directors discussed with management included IFC’s

strategy for Africa, the joint Bank Group strategy for the fi nancial sector, the

launch of a new IFC–World Bank department focusing on subnational fi nance,

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 fi nancing 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

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 fi nancial statements to the Board of Governors.

The Directors are pleased to report that for the fi scal year ended June 30, 2007, IFC expanded its sustainable development

impact through private sector project fi nancing operations and advisory activities.

MESSAGE FROM THE PRESIDENT

In beginning my tenure as President with the start of the new fi nancial year,

I am seeing at fi rst hand the role that IFC plays within the World Bank Group

and the unique and expanding contribution it makes to development. I am

pleased to introduce a report that gives the fullest picture yet of the breadth

and impact of this work.

By focusing on the private sector, IFC complements the World Bank—IBRD

and IDA—as well as MIGA, and this allows us to offer a full range of products

and services that help developing countries combat 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.

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 exper-

tise to offi ces around the world. And as part of the Bank Group, IFC can ensure

that it invests and offers advice in ways that help the private sector broaden

benefi ts to people and places that would not otherwise be reached.

Already I have seen up close how IFC’s investments in Cambodia’s ACLEDA

Bank have helped microfi nance reach many thousands of 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 as well

as advice to support and enable the country’s private sector. Wherever I look

in our client countries, I am impressed that IFC is part of the equation in what

the Bank Group can do.

This report shows how IFC works through joint departments and programs

across the World Bank Group and in collaboration with donors and other

partners, the Doing Business report being a prime example. In infrastructure,

fi nancial 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 fi ndings for the fi rst time.

I look forward to working closely with IFC and to ensuring that we leverage

the private sector to bring a better life to people in the countries we serve.

Robert B. Zoellick

IFC ANNUAL REPORT 2007 3

MESSAGE FROM THE PRESIDENT

Robert B. Zoellick

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

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 OPPORTUNITYis IFC’s business


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 fi nancial 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

fi nancial 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 fi nancing to fi rms

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 fi rms are based in emerging markets, and there is wide acknowledgment

that the private sector plays a critical role in addressing the needs of people in

developing countries. Many of the fi rms we invest in are also expanding into other

emerging markets, bringing capital, technology, management expertise, and jobs.

We fi nance more than 20 such “South-South” transactions each year.

A LEADERSHIP PERSPECTIVE FROM LARS THUNELL,EXECUTIVE VICE PRESIDENT AND CEO


6 IFC ANNUAL REPORT 2007

We are also transforming IFC’s operations. Today just over

half our workforce is based in fi eld offi ces and better posi-

tioned to help local clients. With support from our sharehold-

ers, IFC is energetically pursuing opportunities even in higher-

risk emerging markets. This approach has helped us achieve

strong profi tability, and that in turn lets IFC reinvest where the

needs are greatest. Beyond fi nancing, we continue to increase

our advisory services, more and more of which lead to IFC

investments or are delivered alongside fi nancing. This work

allows us to provide comprehensive solutions to our clients’

business needs.

Despite strong growth and capital fl ows, challenges remain

in emerging markets, and these are driving IFC’s strategy.

Many millions of people in smaller, less developed markets and

in confl ict-affected countries have not yet shared in the ben-

efi ts 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 fi nancing 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 in-

novative products in higher-risk and underserved markets, such

as local currency fi nancing 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 coun-

tries 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 invest-

ment. 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 confl ict-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 previ-

ous year’s commitments. Investments also topped $1 billion

for the fi rst 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 work-

ing. 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

37 percent of IFC’s total; 33 percent of this total was

in frontier countries.

IFC spending on advisory services projects in IDA 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

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

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 Defi nition: 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 classifi cation.

IFC ANNUAL REPORT 2007 7IFC 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, ambi-

tious 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 sec-

tor 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

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 op-

portunities 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 com-

mitment to measuring results. With ongoing support and co-

operation 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. Thunell

8 IFC ANNUAL REPORT 200788888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888 IFCIFCIFCFCIFCFFCIFCFCFCFCFFCIFCIFCFCFCFCIFCCCCFCCFCFCIFCCCIFCFCIFCFCIFCIFIFIIFIFCFCFCFFCIFCIFCFFCFCFCCCCCCIFCFCFCFCIFCIIFFFFCFCIFCFFCCCCCFCFCFCFCIFCFFFFCFCIFCIFIFCCCCCCIFCFCFCFCFCFFFFCIFCCCCCFCCFCFCIFCFCFFCFCCCCCCCCIFCFCFCCCCCFCIFFCIFFFFCCIFCCCFCFCIFFFCCCFCFCCIIIFFFFIFCCCCIFIFCFCCFCFCIFFFCFFCCFCCCCIIFCFFFFCCFCCIIFCCCCIFCFCFCFFCFFCCCCIIFCFCCCCCCFFCFCCCCCCCFCCCCCCCCCCCC ANANANAN AN ANANANANAANANAAAAA AN ANANANAANAAANAAAANANNANANANNANANANNANANN ANNA ANAN ANANANANANA ANAAANAAAAAANANAAANANANANNNANNANNANANANANAANANAAAAAANAANAAAANA ANNANNANAANAAAAANAAAAANNANNANANANAANAAAN ANANAAANANANNNANAAAAAAANNNANANAANNN ANANANAAANAANNNNAAAAAAAAAAANANAAAAAAANANNN AAANANANAAAAAAAANAAAANNANNANANANAAAAANAAAAAAAAANNNNNAAAANAAAANANAAAAAAAAAAANAAAAAANANNNANAAAANAANAAANNAAANNNAAAAANNAAAA NUANUANUANUANUANUANUANUANUANUANUANUANUANUANUANUAUANUANUAUUUAUNUAUUUUUANUANUANUANUAAAANUANUANUAUAUAANUANUANUAANUAUAAANUANUAUANUANUANUANNUANUANUANUNNUANUANUAUAUANUANUUNUAUUUAUUUAUNUAUUAUUAUAUAUAAAANUAUAAAAANUAUANUANUANUAUAUANUANUANUNNUNUANUNNUANUNUAUAUUNUNUAUNUAUAAAAUAAUAANUANUANUANUAUAUNUUAUUUNUAUANUAAANUAAANUANUANUNUANUANNUUUUNUAANUNUNUANUUAUUUANUANUANUNUAAAAANUANUANUANUANUAUANUAUUUUNUAUNUUAANUAANUAUAANUAUANUNUANUANUANUAUAUUUUNUANUAUANUNNNUAUUUNUNUUAUUUAUUNUUAANUNNUAUNUUUUAUUUNUNUNUNUAAAAUANUANNNNUANUAAAANNUAUAUNUUUAAAUANUANUANNNUUUAUAAAUANNNNNNUUANNNNNNNUAUUUAAANUAAANNUAAAAUUUUAAAAANUNNNNNUAAAANNNUNNNNUUUUUUAAAANNNNNNN AUU L RL RL RL RL RL RL RL L RL RLL RRRRRL RL RRRRL RL RRL RL RL RL RRRRRL RL RLL RL RL RLL RL RL RL RRL RLL RRRRL RRRLLLL RLLLL RL RRL RRL RRRRL RRRL RL RLLLLLL RL RL RL RL RRRRRRL RLL RRRRRRRRRRL RLLLL RLLL RRRRL RRRRLL RRRRRRRRRRLL RL RL RL RL RRRRRL RRL RRLLLL RL LLL RLLL RL RL RL RRRRRRLL RLL RLL RRL RRRRL RRL RLLLLL RRL RRRRRL RLLLLLLL L RL RRRL RLLL RL RRL RRRL RRRL RRRLLL L RRRL RRRRRRRRRRRRRRRRRLL RRREPOEPOEPOEPOEPOEPOEPOEPOEPOEPEEPOEPEPOEPOEPOEPOEPOEPOEPEPOEPOEPOPOEPOEPOEPOEPOEPOOEPOEPOEPOEPOOOEPOEPOEPOEPOEPOEPOEPEEPOEPOEPOEPOEPOEPOOOOOEPOOOPOEPOEPOEEPOEEEPOEPOEPEPOEPOEPOPOEPOPOOOOOPOEPOOEPOOOOEEPOPPOEPOPOPOEPOOOOOOOPOEPOPOOOPOEEPOOOPOPOPOOEPOOOEPOEPOEPOEPOEPOOEPOOEEPOOEPOEPPOEPOPPPEPEPOEPOPEPEPPPOPOEPOEPOEPEPPPPOEPEPOORTRTRRTRTRRRTRRRT RT TRTRTRTRTTTRTRT RTRTRTRTRRRT RTTRTRTTRT RRRTRTRRT RTTTRTRTRTRTRRTTRTRTT TRRRRRTTTTTRTRTRRRTRRRTTRTRTRTRTRTRRTRTRTRTRTRTRRRTRTRTTRRTRRTRTTRTRTTTRTTTTRTTRRTRTT 220020020020200200200220020020020020000020020020020000000000000000002002002002002002220000000000000020020200200000000200000000200002002000000000000200000000000000000000000000000000000000000000000000200000000020000000000000000000000000000000000000000 7777777777777777777777777777777777777777

CREATING OPPORTUNITYis a long-term commitment


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 profi table 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 fl ows 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.



CHALLENGES ON THE FRONTIER

Despite progress, many of the poorest countries and regions are

not yet able to access the growing capital fl ows 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 fi nancial 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, includ-

ing the basics of the business environment, reliable infrastruc-

ture, and development of capital markets. And much of our

work targets the economic frontier of low-income or high-

risk countries and regions. For the most part, these are also

recipients of assistance from IDA, the World Bank’s International

Development Association.

Inve

stm

ent

clim

ate

Percent positive ratings

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 oth-

erwise attain fi nancing. 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 profi table 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 fi nancial 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 benefi ts to

local communities. We also invest in fi nancial intermediaries

that serve new entrepreneurs and smaller businesses.

IFC’s profi tability allows us to invest in more private enter-

prises and innovate in the fi nancial products we offer. Proceeds

from investments help us grow our business—annual commit-

ments have increased sixfold since our last capital increase in

1991—and demonstrate that responsible investors can make a

strong profi t in emerging markets.

These proceeds also help fund advisory work aimed at open-

ing markets and helping fi rms 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 BETTER BUSINESS ENVIRONMENT, INVESTMENTS PERFORM BETTER

Data based on a random sample of 584 projects evaluated by IFC’s Independent Evaluation Group 1996-2006.

$ b

illio

ns

5

10

15

20

25

30

FY03 FY04 FY05 FY06 FY07

For IFC's own account

Held for others

IFC COMMITTED PORTFOLIO, FY03 TO FY07


IFC’S CONTRIBUTION TO THE

MILLENNIUM DEVELOPMENT GOALS

The international community’s Millennium Development

Goals for 2015 set specifi c targets in areas ranging from

child mortality to environmental sustainability. IFC address-

es the MDGs directly through, for example, investments

in sectors like agribusiness, which has important impact

on jobs and incomes in rural areas, and pharmaceuticals,

where locally produced and generic drugs can make

life-saving medicines more affordable for millions. We are

active, along with the World Bank, in promoting innova-

tive partnerships in sectors like water and sanitation that

are critical for improving health and increasing economic

opportunity. We work with our investment clients to ad-

dress HIV/AIDS in the workplace and the community. More

broadly, we help address the MDGs through our efforts to

improve the environment for private sector development.

A study by IFC’s Independent Evaluation Group fi nds that

countries with a better investment climate are also better

positioned to reach the MDGs.

OUR STRATEGIC APPROACH

As IFC works to advance private sector development, we have

set ambitious goals for growth and for development impact.

These focus on fi ve key areas or “strategic pillars”:

Strengthening our focus on the frontier—the countries and k

regions where needs are greatest

Building long-term partnerships with emerging players k

Ensuring environmental and social sustainability k

Promoting private sector growth in key sectors such as infra- k

structure, health, and education

Supporting the development of local fi nancial markets k

IFC has a unique status as a global multilateral institution,

working at the intersection of the public and private domains.

We have always emphasized the value we can bring to clients,

and we have continuously developed new products and ser-

vices to meet clients’ evolving needs.

IFC’s fi nancing role is guided by our Articles of Agreement:

“the Corporation shall not undertake any fi nancing for which

in its opinion suffi cient private capital could be obtained on

reasonable terms” (article III). Through the design of our

fi nancing, IFC provides clients with advantages they would not

otherwise have, including longer maturities, better amortizia-

tion patterns, better security structures, and products such as

equity, local currency fi nancing, and structured fi nance. IFC’s

preferred creditor status and global brand bring other benefi ts,

allowing client companies to manage political risks and improve

their access to fi nance, especially in frontier markets.

Beyond fi nancing, IFC’s advisory services, global knowledge,

objectivity, results measurement, and strong client relationships

also add value. Increasingly, we provide integrated solutions to

meet the individual needs of our clients:

Promoting standard-setting for social and environmental per- k

formance and good corporate governance, while investing in

ways that help implement these standards.

Spreading global best practice through advisory services and k

demonstration projects, including in the critical sectors of

health, education, and infrastructure.

Pairing our investments in frontier fi nancial markets with k

advice to strengthen the regulatory foundations of these

markets, while focusing our free-standing advisory work with

governments on laws and regulations that support a better

business environment.

IFC will continue striving to make a real difference in our

fi nancing and advisory work, adding to and adjusting our ap-

proaches as business conditions and our clients evolve.

Declan Duff VICE PRESIDENT, INDUSTRIES

“IFC is growing rapidly in areas

where we bring high impact

and add value. This growth is

consistent and balanced among

the sectors where we invest and

advise, and it is

rooted in our

long-term

commitment

to our client

countries.”



STRATEG

SCALING UP OUR DEVELOPMENT IMPACT

In the last fi ve years, IFC has committed $28.9 billion of its

own funds and arranged over $6.4 billion in loan participations

for 1,240 investments. We have also mobilized $5.61 billion

through structured fi nance during that time and have been at

the forefront of domestic capital market development. In addi-

tion, over the last fi ve years we have provided more than $650

million of advisory services, funded to a large extent through

the generosity of donor partners.

New investment commitments for IFC’s account amounted

to $8.2 billion in FY07, an increase of 22 percent compared to

$6.7 billion in FY06. IFC also mobilized $1.78 billion through

loan participations and $2.08 billion through structured fi nance

in FY07. The disbursed outstanding investment portfolio stood

at $16.2 billion on June 30, 2007, compared with $13.4 billion

on June 30, 2006.

IFC’s committed portfolio, including off-balance sheet

guarantees and risk management products, increased by 18

percent to $25.4 billion on June 30, 2007, from $21.6 billion at

the end of FY06. This increase is after taking into account new

commitments, repayments, sales, cancellations, prepayments,

write-offs, and translation adjustments. During the fi scal year,

the disbursed loan portfolio grew by 19 percent, while the

disbursed equity portfolio grew by 21 percent.

Farida Khambata VICE PRESIDENT, ASIA AND LATIN AMERICA

“IFC recognizes that challenges

vary across the globe. We can

tailor our approaches, from the

smallest and poorest markets

to the emerging middle-income

economies, with

a focus on

people who are

not yet seeing

the benefi ts of

growth.”

IFC ENGAGES IN FRONTIER MARKETSIn frontier countries and regions, IFC provides expertise to build

markets and strengthen fi rms, as well as fi nancial products and ser-

vices that would not otherwise be available. Providing investment

and advisory services side by side can produce strong results: we

have achieved our best results when we invest in frontier countries

that subsequently improve their business environment.

This year, frontier countries accounted for 38 percent of IFC

investments and 37 percent of our advisory work. Our engagement

here is much larger, relative to GDP or foreign direct investment,

than in other client countries. And it continues to expand, with a

strong focus on Africa and the Middle East and an increasing em-

phasis on frontier regions of middle-income countries, such as Brazil

and China, as well as postconfl ict countries.

HELPING THE PRIVATE SECTORIN CONFLICT-AFFECTED COUNTRIESIFC has 195 active advisory service projects in 25 confl ict-affected

countries, and we are reaching thousands of smaller businesses in

these countries with investment fi nance. In Africa, we are replicat-

ing successful access to fi nance projects, fi rst in the Democratic

Republic of Congo and more recently in Liberia. This is helping

people disenfranchised by confl ict start new businesses with micro-

credit loans.

In Lebanon, where the 2006 confl ict destroyed infrastructure

worth some $3.6 billion, some 1,500 local companies will get loans

for working capital and business expansion as a result of $250-275

million that IFC has pledged to support recovery. The fi nancing

mostly targets smaller businesses, the main drivers of economic

growth in the country. Our efforts here also include more trade

fi nance funding, investment in the retail sector, and an expanded

corporate governance program.

IC PILLARSIFC INVESTS IN INFRASTRUCTURE, HEALTH, AND EDUCATIONBasic services—including infrastructure, health, and education—are vital

to growth in developing countries, as these help poor people participate

in the broader economy and emerge from poverty. Across the developing

world, however, households and companies suffer from poor access and

inadequate and unreliable services. Infrastructure poses many bottlenecks

in both frontier and middle-income economies, especially for fi rms that rely

on exports and seek to emerge as global players.

IFC has dedicated substantial resources to these strategic sectors, and

the effort is now showing results. Commitments grew from $679 million

in FY05 to $1.14 billion this year, but the needs remain substantial. We

help develop new ways to encourage investment in these sectors, including

through innovative public-private partnerships and advice on privatization.

This year, we launched a joint department with the World Bank to provide

funding and advice to the subnational entities that provide basic services.

HELPING UNIVERSITY STUDENTS FINANCE THEIR EDUCATION In Indonesia, a shortage of affordable student loans has been a barrier

for students from middle-class and disadvantaged households who

seek a university education. Less than 10 percent of young people are

enrolled in higher education, and less than 4 percent complete their

university studies. To help, IFC is partnering with the Sampoerna Foun-

dation, a local nonprofi t dedicated to improving the education sector,

and with Bank Internasional Indonesia Tbk in the country’s fi rst private

fi nancing facility for student loans. This effort is creating a risk-sharing

facility that enables philanthropic contributions from the foundation to

leverage a portfolio of student loans. This is the fi rst facility worldwide

designed to leverage soft funds from a foundation. It is expected to

help some 15,000 new students cover the cost of tuition and university

entrance fees.

IFC HELPS DEVELOP LOCAL FINANCIAL MARKETS IFC recognizes that local fi nancial markets are fundamental to develop-

ment in emerging markets. We invest and provide advisory services to

fi nancial institutions, many of which serve smaller enterprises; help put in

place the infrastructure, such as credit bureaus and bond markets, that

the fi nancial sector needs to function; and work with the World Bank to

create effective policy and regulatory frameworks.

Financial markets are IFC’s largest business, representing 41 percent of

our new commitments (almost $3.4 billion) in FY07 and 37 percent of our

portfolio. By taking a wholesale approach, working with fi nancial interme-

diaries, we are seeking to open up and strengthen markets in such areas

as housing fi nance, student loans, lending for energy effi ciency initiatives,

and lending to micro, small, and medium enterprises—$1.67 billion in

new investments this year targeted MSMEs. The IFC Global Trade Finance

Program, launched in late 2005 to assist trade to and among emerging

markets, has already issued 884 guarantees in support of transactions

worth over $1.5 billion. IFC also helps develop emerging capital markets

through structured fi nance, the swap market, and bonds that fund our

own operations. Through these transactions as well as loans, IFC supports

a growing amount of fi nancing in local currency.

FINANCING FOR WOMEN-OWNED BUSINESSES Women entrepreneurs are a large untapped market in developing coun-

tries. Financing them is good for business—and it fuels development, as

increasing poor women’s economic empowerment leads to greater spend-

ing on family welfare, nutrition, and children’s education. In Bangladesh,

for example, IFC client BRAC Bank has established a unit to serve women

entrepreneurs, part of its larger effort to expand its reach in rural areas for

clients with loans just above the threshold for microcredit.

In Africa, IFC’s integrated program of policy reform, investment,

and advisory services is helping banks engage in this market. We have

provided pioneering local fi nancial institutions in Nigeria, Tanzania, and

Uganda with a combined $41 million in fi nancing and hands-on sup-

port from industry leaders in Australia, Canada, Ireland, and the United

States. Since October 2006, when IFC disbursed its fi rst-ever line of

credit dedicated to women, Access Bank in Nigeria has on-lent $10.8

million to 103 women-owned businesses and a microfi nance institution

that reaches 1,500 women.


IFC BUILDS LONG-TERM PARTNERSHIPSIFC seeks to nurture both new and long-standing clients, helping them grow

and, in many cases, expand into new markets, including other developing

countries and regions. Long-term partnerships allow us to help emerging

market companies make sustained improvements in their corporate gover-

nance and sustainability, as well as contribute more to their local communities.

Hence our engagements with long-term partners yield relatively high develop-

ment impacts.

Among this year’s investments, 38 percent were in frontier markets and

16 percent involved South-South investment into other developing countries.

Domestic sponsors accounted for 64 percent of our investments overall.

BRINGING WATER TO POORER COMMUNITIES IN MANILA The recipient of this year’s IFC Client Leadership Award is Manila Water Compa-

ny, a successful private water and wastewater concessionaire in the Philippines

that is making considerable contributions to sustainable development.

Manila Water has had considerable operational and fi nancial success in supplying

the East Concession for metropolitan Manila. It serves 870,000 households, up from

325,000 a decade ago. Over 98 percent of its customers today have a 24-hour wa-

ter supply, up from 26 percent in 1997. More than a million urban poor people now

have clean, safe, and affordable drinking water, and cases of waterborne diseases

have dropped by nearly a third. But what makes Manila Water stand out is its skill in

turning its orientation on clients and the community into a highly successful opera-

tion. It engages local communities in informal settlements to ensure that collective

billing is timely and effective. It employs small-scale entrepreneurs to develop local

business, supports microlending to broaden opportunities for its customers, and

brings affordable water to schools, hospitals, markets, and households. Manila Wa-

ter has translated its strategic objectives into measurable goals and action plans for

clients, the environment, fi nanciers, and the government, thus linking its business

success to overall performance. Its decentralized structure fosters a strong sense of

ownership and responsibility among employees and local communities.

IFC has provided a total of $90 million in loans and $15 million in equity to

support the company’s network rehabilitation and expansion, helping transform

an ineffi cient public utility into a world-class operation. By incorporating the needs

of the poor into innovative programs, Manila Water has demonstrated that water

privatization can succeed economically and improve water quality and effi ciency

while expanding service into poorer communities.

IFC PROMOTES SUSTAINABLE DEVELOPMENT Expertise on sustainability is an important component of the

value IFC offers in a competitive marketplace—and some-

thing clients increasingly see as helpful to their business.

Attention to environmental and social performance and

good corporate governance helps our clients’ businesses

thrive and grow.

RESPONDING TO CLIMATE CHANGEIFC’s performance standards require client companies to re-

duce, manage, and mitigate the climate change impacts of

their businesses. Clients increasingly seek support in prepar-

ing for new types of risk because of climate vulnerability, as

well as guidance on risk management, including the types

of insurance coverage needed. We also encourage the

insurance markets to adapt to the private sector’s changing

needs. As a global investor, we work with partners to foster

and invest in the development and uptake of sustainable

energy and cleaner technologies, as well as innovative

fi nancial products designed to help lower carbon emissions.

In carbon fi nance, this year IFC delivered the fi rst certifi ed

emission reductions to the Dutch government; these came

from Eco Power in Sri Lanka, which is generating clean,

renewable energy with several small hydroelectric projects.

IFC is an active partner in the World Bank Group’s 2004

Bonn commitment to scale up support for renewable en-

ergy and energy effi ciency by 20 percent annually. In FY07,

IFC’s investments in these areas totaled $450 million. A key

development here was the launch of a program to promote

energy effi ciency through Chinese banks. IFC will also

begin reporting on the carbon footprint of our portfolio in

FY08, data that should help identify ways to reduce these

impacts.



LEARNING AND ADAPTING AS WE GROWIFC’s impact and value to clients depend on our ability to track and learn from results. This means taking innovative approaches to mea-

suring not only fi nancial performance, but also our development impact and the sustainability of our engagements. It means learning

and adapting, while building on successes. Evaluations allow us to assess investments and advisory projects during their life cycle and

make improvements if needed. They also inform the design of new engagements.

Building on our successes, learning from our failures … … helps us increase our impact on development.

The quality of the investment climate is an important driver of development results.

We are helping countries around the world reform their investment climate by simplifying regulation and strengthening local institutions and business-related legislation.

We are more effective in reaching larger numbers of smaller clients through fi nancial intermediaries.

We use local intermediaries to increase our reach to MSMEs, improving access to fi nance for these important drivers of development at a more competitive cost. In Africa, we support one-stop shops to provide smaller businesses with advice and other services.

Working with repeat clients helps deepen our development impact.

We focus on developing long-term partnerships with emerging country clients. In our portfolio, we seek to balance enhancing our development impact through repeat engagements and building relationships with new partners.

A strong focus on socially critical sectors like agribusiness can improve both our development and our sustainability impact.

We have made agribusiness a strategic priority. We will scale up our support for the sector, working with companies to improve sustainability and increase economic impacts, including employment, to help lift rural people out of poverty.

A STRONGER FOCUS ON RESULTS

This year, for the fi rst time, IFC is bringing together in one

report information about our fi nancial performance, our per-

formance in enhancing the environmental and social impact of

our engagements, and our broader development impact. In the

pages that follow, you will fi nd more information about:

how we approach results measurement k

our latest results by product line, by region, by industry, and k

in our advisory services

our work with partners in government, the private sector, k

and civil society

our internal governance and processes, including efforts to k

model in our own organization the high standards we seek

to bring to our private sector clients in emerging markets

While some aspects of IFC’s reporting remain a work in prog-

ress, this report provides the fullest picture to date of the work

we are doing to reduce poverty and improve lives in emerging

markets worldwide.



APPLYING DOTS TO IFC INVESTMENTS

DOTS enables ongoing tracking of the good practice standards

applied by IEG in its evaluations. We distinguish four areas of per-

formance: fi nancial performance, broader economic performance,

social and environmental performance, and private sector develop-

ment impacts.

For fi nancial success, which measures return to the fi nanciers, we k

compare returns to our client companies’ cost of capital.

For economic returns, which measure returns to society as a k

whole, we compare benefi ts against a benchmark of 10 percent

annually, plus infl ation.

To assess social and environmental performance, we look at com- k

pliance with IFC’s performance standards.

To assess private sector development impacts, we look at how k

investments contribute to private sector development beyond the

client company.

We use an aggregate index, based on these four components, to

measure overall development success. Results from DOTS are prov-

ing consistent, overall, with evaluations by IEG.

The most meaningful measure of fi nancial performance is the

market test. To be a commercial success, a company has to outper-

form the competition and beat market benchmarks to continue to

attract private funding. In a market environment, only about half of

all projects succeed, and this has also been IFC’s experience in terms

of fi nancial performance.

Unlike with fi nancial performance, there is no simple number to

measure how IFC’s investments contribute to private sector develop-

ment beyond the client company. Sometimes an investment has

demonstration effects—when it shows how the private sector can

succeed in a diffi cult country environment; when it improves environ-

mental, social, or corporate governance standards; or when it uses

new technologies. Sometimes the added impact comes from links

to the local economy: for example, our manufacturing and services

clients alone purchased over $24 billion of goods and services locally in

2006. Sometimes IFC investments help bring changes in the business

environment, particularly when we combine them with advisory ser-

vices: for example, IFC helps governments revise laws and regulations

to allow leasing and is also able to help fi rms enter this new market.

Financial performance and development results are closely aligned:

IFC’s profi ts are a reliable indicator that we are achieving our mission.

HOW WE MEASURE IFC’S PERFORMANCE

INTRODUCING DOTSIFC has a long-term commitment to measuring

results. The World Bank Group’s Independent

Evaluation Group has a well-established role

in evaluating IFC’s development impact for

representative samples of mature projects, and its

approach is considered the best among its peers.

To enhance our measurement of the

development effectiveness of our investment and

advisory work, IFC launched the Development

Outcome Tracking System in October 2005. The

new system is consistent with the ongoing work

of IEG but differs in permitting contemporaneous

monitoring of development results throughout a

project’s life cycle. This earlier feedback gives IFC an

ability to make mid-course corrections in investment

operations and advisory work. It enables us to

capture more systematically the developmental

reach of our engagements—for example, how

they help create jobs or expand critical services.

Information captured in DOTS also informs IFC’s

incentive system at the corporate, departmental,

and individual levels, and it feeds into the

formulation of strategy.

Some 2,300 IFC staff have received DOTS

training, and the system now covers IFC’s entire

active investment portfolio and all advisory projects.


IEG 2007 REPORT: RESULTS, LESSONS, AND IMPLICATIONS FROM 10 YEARS

OF PRIVATE SECTOR DEVELOPMENT EVALUATION

This year, a new IEG report looked back on 10 years of evaluating IFC’s development results. The review found a

good overall result, that 59 percent of investments (65 percent by volume) evaluated between 1996 and 2006

achieved high development ratings—they were, on balance, delivering sustainable results across fi nancial, eco-

nomic, environmental, and social performance, as well as contributing to private sector development generally.

The report underscores that profi tability and development impact usually go hand in hand, and that our develop-

ment impact is further enhanced when we work with repeat clients. It also underlines the critical importance the

quality of IFC’s own project execution and supervision (particularly of environmental and social effects) for our

development results.

The report generally endorses IFC’s strategic directions, but also provides guidance for coming years. It recom-

mends that IFC adopt more tailored, sharply focused country strategies, especially for middle-income countries,

as well as strengthen cooperation with the World Bank in key areas such as business environment and fi nancial

sector work, infrastructure development, and environmental and social impact.

IFC’S DEVELOPMENT RESULTS FOR INVESTMENTS

71

75

61

56

63

20% 40% 60% 80% 100%

Private Sector Development Impact

Environmental andSocial Performance

Economic Performance

Financial Performance

Development Outcome

Success Rate (percent of positive ratings)

DOTS data as of June 30, 2007, for projects approved in calendar 1998-2003.

Historically, as evaluated by IEG, about 60 percent of IFC’s invest-

ments have managed to meet the combined conditions of success

described above. As of June 30, 2007, DOTS showed that 63 percent

of our mature investment portfolio had high development outcome

ratings, similar to success rates reported by IEG. Some 75 percent of

these investments had successful environmental and social perfor-

mance, while 71 percent had signifi cant private sector development

impacts, such as positive demonstration effects or an improved busi-

ness environment. Aid agencies that focus on activities for which clear

market benchmarks do not exist can evaluate success only by compar-

ing stated intentions with achievements, not whether the activity did

better than competitors. Hence they typically report success rates at or

exceeding 80 percent, but these ratings are subjective.

WHICH INVESTMENTS DOES DOTS COVER?

The DOTS results reported here are for investment

projects that IFC started between 1998 and 2003 and

that are still active in our portfolio. We do not report on

newer investments, since they are too immature for us

to be able to judge their success reliably. We also do not

report success rates on older investments, since they are

less relevant for today’s operations, and because many of

them are already closed.



HOW WE MEASURE IFC’S PERFORMANCE

56

72

84

72

89

70

20% 40% 60% 80% 100%

Impacts

Outcomes

Outputs

Efficiency

Strategic Relevance

Development Effectiveness

Projects Rated Satisfactory or Better

IFC’S DEVELOPMENT RESULTS FOR ADVISORY SERVICES

Data based on a random sample of 293 projects evaluated by IFC’s Independent Evaluation Group.

APPLYING DOTS TO IFC ADVISORY PROJECTS

For advisory projects and programs, DOTS enables ongoing monitor-

ing of key measures of performance against objectives. All projects

are required to specify objectives with output, outcome, and impact

indicators, as well as targets for these indicators. These are moni-

tored during the life of the project, and they are compared at project

completion to achieved results. DOTS, like IEG, looks at fi ve dimen-

sions of advisory project performance, which are synthesized into an

overall rating of development effectiveness: Immediate deliverables, or k outputs.

Medium-term k outcomes, measured in terms of changes in knowl-

edge, behavior, or performance.

Longer-term k impacts, such as higher productivity, higher income,

and growth.

Strategic relevance, and the fi t of the advisory service engagement k

to the issues at hand.

The effi ciency of the engagement: project costs in relation to k

potential results.

As evaluated by IEG, where calculable, the overall development

effectiveness success rate for advisory projects that were completed

between July 2004 and December 2006 is 70 percent. While outputs

can be observed during project implementation, outcomes and

impacts tend to come only after a project ends and are thus harder

to measure. Hence IFC is putting in place a mechanism to track, for

selected projects, longer-term impacts.

OUR SYSTEMS IN CONTEXT

Good practice standards for assessing development results of invest-

ment projects have been agreed upon by multilateral development

banks. In 2005, a consultant study commissioned by the MDBs found

that IFC’s evaluation system was the most consistent with these stan-

dards. Since then, many institutions have strengthened their results

measurement. A subsequent 2007 consultant review found that IFC’s

results measurement and reporting continues to be at the forefront

both for investment and for advisory services, for example by publish-

ing development results of its portfolio, by seeking external assurance

for this report, and by innovating through control group experiments.

IFC’s private sector investments constitute over 30 percent of the

volume among all development fi nance institutions that provide such

fi nancing in emerging markets. IFC leads in terms of profi tability, with

equity returns double the average of such institutions for almost every

year in the past decade. Development results are not comparable

across peer institutions, largely due to differences in systems, ap-

proaches, and implementation.

Understanding how our investments

and advisory work contribute to

development goals — and learning

how to enhance this contribution —

depends on a clear and consistent

approach to results

monitoring. DOTS

is an important up-

grade to our capacity,

enabling us to moni-

tor results as our

projects unfold.

Michael Klein VICE PRESIDENT, FINANCIAL AND PRIVATE SECTOR DEVELOPMENT, AND IFC CHIEF ECONOMIST

ENHANCING OUR RESULTS MEASUREMENT OVER TIMEFOR INVESTMENTS

As we continue to improve our measurements, we gain insights into

the impacts of our activities. For investments, one fi rst step was to

collect a systematic set of indicators of development reach at the

company level. In this report, we have aggregated these indicators by

sector and region for the fi rst time to show the reach of IFC clients in

developing countries.

We have also started to standardize indicators and to set specifi c

benchmarks for the results we expect them to achieve. Standardizing

indicators allows us to compare performance across projects and to

aggregate results. This includes aggregating across industries to pro-

vide a regional view. However, more work remains in this area.

For our investments, this report also shows how much IFC expects

client companies to expand their reach, for example by providing jobs to

people, improving access to fi nance or infrastructure for businesses and

households, or paying revenues for governments. It will be some years

before we will be able to report on the extent to which these expectations

have been fulfi lled.

IFC is tracking changes in reach over time. Using the previous year

as a baseline, we can see how many new businesses were established

or new jobs created. For example, the 99 fi nancial market clients for

which we had portfolio data for 2005 and 2006 had increased their

portfolios of micro, small, and medium enterprises by 23 percent,

adding some 650,000 loans. Investment volumes increased by 33

percent, or over $6.5 billion.

FOR ADVISORY SERVICES

IFC uses a number of evaluation tools to measure the development

outcomes and impacts of our advisory work. These range from cost-

benefi t analyses to inform decision making at the outset, to before-

and-after analyses, to randomized experiments with large-scale data

collection efforts.

Randomized experiments are the most advanced method for

evaluating results, as they allow us to assess whether the recipients

of advisory services are better off than a control group. IFC leads in

developing the use of such experiments for advisory work in emerg-

ing markets. As of the end of FY07, we are implementing 25 such

experimental designs to evaluate advisory programs.

For example, a quasi-experimental evaluation of IFC’s alternative

dispute resolution program in Serbia showed signifi cant reductions in

time and cost as businesses used mediation rather than the court sys-

tem. By contrast, for a farm forestry program in India and a seaweed

farmer cooperative program in Indonesia, randomized trials and

quasi-experimental evaluations showed the diffi culty of doing better

than other market participants, because of the high cost of discover-

ing market information that is relevant to individual farm operations.

The data provided on our advisory services in this year’s report

refl ect our ongoing and evolving work to quantify the outcomes and

impacts of these engagements.

BEFORE AND AFTER COMPARISON

New business registrations Relative to previous three years

El Salvador Up 100%

FYR Macedonia Up 78%

Georgia Up 55%

EVOLUTION OF RESULTS MEASUREMENT


2003 2004 2005

DOTSLaunch

2006 2007 GoingForward

Measuring additionality

Full standardization of indicators

Comparing vs. expectations

Reporting of aggregate results

Results inform strategy

DOTS full portfolio coverage

Evaluation of representative sample

Evaluation framework

Independent evaluation

IFC’S REACHReach indicators give an indication of the people touched by IFC’s activities.

INVESTMENTS, 2006Hospital patients treated: 4 million

Students educated: 350,000

Electricity customers served: 9.5 million

Water customers served: 15.3 million

MSME loans: 5 million

New phone connections: 53 million

Local purchases by IFC clients: $31 billion

Community development spending by clients: $250 million

ADVISORY SERVICES, 2002-2006Assisted 1,768 banks

Assisted 40,000 entrepreneurs


IFC PERFORMANCE STANDARDS


STRONGER STANDARDS

IFC’s new policy and performance standards for social and envi-

ronmental sustainability took effect on April 30, 2006. Some 182

new projects have been screened against them as of June 30,

2007, and we have improved procedures and internal monitoring

systems to keep pace.

The standards enable our clients to meet environmental and

social challenges and IFC to process complex projects more ef-

fectively. With the performance standards we are doing more

and better deals. Our clients are implementing the standards and

meeting IFC’s requirements; these include, among other things,

comprehensive environmental and social management systems;

safe working conditions; avoidance of child labor; free, prior, and

informed consultations of affected communities; and mitigation of

threats to biodiversity.

The standards apply to all new IFC investments. For a given

project or company, certain standards are particularly relevant de-

pending on levels of risk, location, and the nature of the business,

and the application of these standards results in specifi c items that

the client is expected to act on.

The new performance standard on Labor and Working Condi-

tions has strengthened IFC’s engagement with clients on these

issues, including the International Labour Organization’s core

labor standards. IFC now assesses the client’s management sys-

tems on labor and working conditions and looks at how these are

implemented with the company’s employees and contractors, as

well as how the company addresses child labor and forced labor

among its suppliers. In such industries as agribusiness and global

manufacturing and services, we pay particular attention to trace-

ability and monitoring of labor and working conditions across the

supply chain.

Our Board expects us to work more quickly, effectively, and

without compromising on quality. Initial results indicate that

applying the new standards has not signifi cantly increased IFC’s

cost of doing business or the time we need to process projects.

We continue to share our experiences with the rest of the private

sector. In May 2007 we convened the fi rst Community of Learn-

ing Event for Equator Banks and other bilateral and multilateral

fi nancial institutions.

A NEW GLOBAL BENCHMARK In April 2006, IFC reinforced a long-standing commit-

ment to sustainability by adopting a new policy and

performance standards for managing environmental

and social risk. We also support the use of our stan-

dards by commercial banks, export credit agencies, and

other fi nancial institutions. Previous IFC safeguards

were adopted as the basis for the Equator Principles in

2003. Today our standards form the basis of a revised

set of Equator Principles for fi nancing projects with

capital costs above $10 million. Over 50 leading fi nan-

cial institutions have signed on—including some key

players from emerging markets—and the principles are

estimated to cover nearly 90 percent of global, cross-

border project fi nance. During FY07, 18 of the Equator

institutions provided 46 percent of new loan participa-

tions in IFC investments. In June 2007, the Organisation

for Economic Co-operation and Development updated

the Common Approaches for Export Credit Agencies

with references to IFC’s performance standards.

IFC INVESTMENT PROJECT CATEGORIES

A Expected to have signifi cant adverse social or

environmental impacts that are diverse, irreversible, or

unprecedented

B Expected to have limited adverse social or

environmental impacts that can be readily addressed

through mitigation measures

C Expected to have minimal or no adverse impacts;

includes certain fi nancial intermediary projects

FI Investments in fi nancial intermediaries that have no

adverse social or environmental impacts but that may

fi nance subprojects with potential impacts


ASCERTAINING COMMUNITY SUPPORT FOR COMPLEX PROJECTS

To ensure the support of the local people their projects will affect, IFC’s clients are required to undertake free, prior, and informed con-

sultation wherever communities are subject to risks or adverse impacts as the result of a new IFC investment project. In such cases—and

before seeking Board approval of the project—IFC verifi es that the process has enabled the informed participation of the affected com-

munities and has led to broad community support for the project. Such consultations were required in seven instances during FY07: two

category A and fi ve category B projects.

MANAGING ENVIRONMENTAL AND SOCIAL RISK

AND PERFORMANCE IN OUR PORTFOLIO

IFC monitors the environmental and social performance of investments

and manages associated risks as part of our portfolio management. We

have been calculating an environmental and social risk rating (ESRR) for

applicable investments since 2000. This rating is given and updated, typi-

cally once a year, by our environmental and social specialists and is based

on reports provided by clients and on supervision site visits. The frequency

of visits depends on an investment’s risk rating and how it performs.

With the launch of new performance standards in 2006, IFC intro-

duced an expanded methodology that allows us to disaggregate data on

performance and risk components for all projects following the perfor-

mance standards. We give an ESRR to companies that have some degree

of risk in their projects (as refl ected by their categorization as A, B, or FI)

and that have passed their fi rst reporting period. IFC has environmental

and social risk knowledge on 70 percent of the portfolio, including proj-

ects with no expected risk (category C) and projects that have not passed

their fi rst reporting milestone (normally after 14 months). We do not

update ESRRs on projects that have no remaining IFC investment.

IFC’s goal is to have an ESRR for all investment projects that have

potential adverse environmental and social impacts and have passed their

fi rst reporting milestone. Suffi cient information for an ESRR is particularly

diffi cult to obtain where companies run into fi nancial or legal diffi cul-

ties. In these cases, IFC regards these investments as no longer reporting,

although from an environmental and social risk management perspective

we still seek to assure ourselves that there is not a signifi cant risk to IFC,

the environment, or local communities.

The DOTS rating includes IFC’s assessment of the extent to which

companies in the portfolio are meeting environmental and performance

requirements, drawing from the ESRR.

IMPLEMENTATION OF THE STANDARDS

Highlights since April 2006 have included the following:

Adopting an environmental and social review procedure that k

guides staff and formalizes new components in the appraisal

and supervision process.

Creating a central information management system that con- k

solidates related decision making for all projects.

Introducing a new quality assurance system and team to en- k

sure higher standards of supervision and monitoring.

Training 1,228 IFC employees, including 532 investment staff, k

in sessions at headquarters and in the fi eld.

Providing additional training on standards related to labor and k

working conditions and security personnel.

Running nine external training sessions for consultants and k

clients in China, Ghana, India, Indonesia, Kenya, Russia, South

Africa, and Turkey.

Issuing new versions of the World Bank Group’s Environmental, k

Health and Safety Guidelines on April 30, 2007, which offer

technical guidance on pollution prevention and abatement to

both public and private sector users.

Publishing guidance on lessons of experience from two k

major oil pipeline projects, BTC and Chad-Cameroon; a

handbook on stakeholder engagement; and a guide to ap-

plying the International Labour Organization’s code regard-

ing indigenous peoples.


IFC AT A GLANCE

OUR MEMBER COUNTRIES

LARGEST COUNTRY EXPOSURES (JUNE 30, 2007)

Global rank Country name Portfolio ($ millions)

Percent

1 Russian Federation 2,238 9%

2 India 2,117 8%

3 China 1,680 7%

4 Brazil 1,618 6%

5 Turkey 1,342 5%

6 Mexico 1,228 5%

7 Argentina 768 3%

8 Colombia 756 3%

9 Indonesia 743 3%

10 Nigeria 684 3%

This map was produced by theMap Design Unit of The World Bank.The boundaries, colors,denominationsand anyother information shownon thismap do not imply, on the part ofThe World Bank Group, any judgment onthe legalstatus of any territory,or anyendorsement or acceptance of suchboundaries.


United States 24%

Japan 6%

Germany 5%

United Kingdom 5%

France 5%

Canada 3%Italy 3%

India 3%

Russia 3%

170 othercountries 43%

STRONG SHAREHOLDER SUPPORT

IFC Frontier Countries

Other Active Client Countries

IFC fosters sustainable private sector growth in developing countries.

DEVELOPMENT RESULTS BY REGION

10 20 30 40 50 60 70 80 100

IFC

East Asia and the Pacific

Middle East and North Africa

Sub-Saharan Africa

Latin America and the Caribbean

South Asia

Europe and Central Asia

World (multiregion)

Percent Success Rate

Reg

ion

al D

epar

tmen

t

63%

54%

56%

57%

60%

73%

76%

78%

OUR DEVELOPMENT IMPACT

DOTS data as of June 30, 2007, for projects approved in calendar 1998-2003

INVESTMENT PORTFOLIO For IFC’s own account as of June 30, 2007: $25.4 billion

COMMITTED PORTFOLIO BY REGION COMMITTED PORTFOLIO BY INDUSTRY

Latin America and the Caribbean 27%

Middle East and North Africa 10%

Global 1%

South Asia 10%

Sub-Saharan Africa 11%

East Asia and the Pacific 14%

Europe and Central Asia 28%Global Information and Communication Technologies 4%

Global Financial Markets 37%

Health and Education 2%

Infrastructure 15%

Agribusiness 7%

Global Manufacturingand Services 21%

Oil, Gas, Mining, and Chemicals 11%

Private Equity and Investment Funds 4%Subnational Finance 1%


DEVELOPMENT RESULTS BY INDUSTRY

10 20 30 40 50 60 70 80 100Percent Success Rate

Ind

ust

ry D

epar

tmen

t

IFC

Health and Education

Agribusiness

Global Manufacturing and Services

Private Equity and Investment Funds

Global Information and Communication Technologies

Oil, Gas, Mining, and Chemicals

Global Financial Markets

Infrastructure

63%

39%

48%

50%

57%

63%

75%

78%

78%

FINANCIAL PERFORMANCE AND DEVELOPMENT OUTCOME

5

10 20 30 40 50 60 70 80 90 100

DO

TS F

inan

cial

Pe

rfo

rman

ce R

atin

g

Development Outcome % Rated High

99

Unsatisfactory

Partly Unsatisfactory

Satisfactory

Excellent

42

97



FY07 COMMITMENTS BY ENVIRONMENTAL AND SOCIAL CATEGORY

Category* Commitments ($ millions)

Number of investments

A 593.2 8

B 3,522.6 112

C 1,462.9 94

FI 2,640.9 85

CUMULATIVE COMMITMENTS BY ENVIRONMENTAL AND SOCIAL CATEGORY

Category* Commitments ($ billions)

Number of investments

A 4.7 132

B 27.9 1,677

C 8.1 792

FI 14.1 796

N** 7.5 1,196

U** 2.0 299

SUSTAINABILITY

*See category descriptions on p. 20.**N and U refer to projects committed before IFC began implementing environmental policies and guidelines in 1993.

FY07 Investments in Renewable Energy and Energy Effi ciency: $450 million

Visit IFC’s Annual Report on the Web—www.ifc.org/annualreport—for more

information on sustainability, including a Global Reporting Initiative index.


IFC INVESTMENT OPERATIONS AND RESOURCES ($ MILLIONS)

FY03 FY04 FY05 FY06 FY07Five-year

total

Investment commitments

Number of projects‡ 204 217 236 284 299 1,240

Number of countries 64 64 67 66 69 —

Total commitments signed*** 5,037 5,632 6,449 8,275 9,995 35,388

For IFC’s own account*** 3,856 4,753 5,373 6,703 8,220 28,905

Held for others 1,181 879 1,076 1,572 1,775 6,483

Structured fi nance mobilization** 751 480 1,049 1,245 2,083 5,608

Investment disbursements

Total fi nancing disbursed 4,468 4,115 4,011 5,739 7,456 25,789

For IFC’s own account 2,959 3,152 3,456 4,428 5,841 19,836

Held for others 1,509 964 555 1,311 1,615 5,954

Committed portfolio*

Number of fi rms 1,378 1,333 1,313 1,368 1,410

Total committed portfolio*** 23,379 23,460 24,536 26,706 30,954

For IFC’s own account*** 16,777 17,913 19,253 21,627 25,411

Held for others 6,602 5,546 5,283 5,079 5,543

‡Includes fi rst commitment to projects in the fi scal year. Projects involving fi nancing to more than one company are counted as one commitment.*Total committed portfolio and held for others include securitized loans.**This fi nancing is not included on IFC’s balance sheet.***Includes loan guarantees and risk management products.


FY07 INVESTMENTS For IFC’s own account as of June 30, 2007: $8.2 billion

BY REGION BY INDUSTRY

*Some amounts include regional shares of investments that are offi cially classifi ed as global projects. See regional sections for details.

Latin America and the Caribbean 22%

Middle East and North Africa 15%

Global <1%

South Asia 13%



Europe and Central Asia 22%Global Information and Communication Technologies 4.9%

Global Financial Markets 41%

Health and Education 2.4%

Infrastructure 11.4%

Agribusiness 7.6%

Global Manufacturingand Services 16.7%

Oil, Gas, Mining, and Chemicals 12%

Private Equity and Investment Funds 3%Subnational Finance 1%

IFC AT A GLANCE


FY07 ADVISORY SERVICES

The FY07 Financial Statements and Management’s Discussion and Analysis

appear later in this volume and provide full fi nancial information.

Environment and Social Sustainability 13%

Business Enabling Environment 21%

Value Addition to Firms 29%

Access to Finance 21%

Infrastructure 16%

Latin America and the Caribbean 8% Middle East and

North Africa 10%

World 14%

South Asia 6%



Europe and Central Asia 20%

U.S. dollar 44%

Japanese yen 11%

South African rand 27%

Chinese renminbi 4%

Australian dollar 4%Hong Kong dollar 3%

New Zealand dollar 2%CFA franc 2% Turkish lira 1%

Mexican peso 1%

Euro 1%

BY PRODUCT EXPENDITURES BY BUSINESS LINE

FY07 INVESTMENTS BY SIZE OF IFC COMMITMENTS

EXPENDITURES BY REGION

FY07 BORROWING ON INTERNATIONAL MARKETS

* Includes loan-type, quasi-equity products.** Includes equity-type, quasi-equity products.

Loans* 68.7%

Guarantees 11.9%

Equity** 19.3%

Risk Management Products <1%

10

20

30

40

50

60

70

0.26 to 3 10.1 to 20 50.1 to 80 120 or greater

IFC Commitment Amount ($millions)

Pro

ject

Co

un

t

IFC also mobilized $3.9 billion in FY07 through structured fi nance, loan participations, and parallel loans.


26 IFC ANNUAL REPORT 20072222222222222222266666666666666622222622266666666622226666666666222222222222666666666622222222666666222222262666666622222266666662222226666666662222666666262266622266626666622226666222666222222666662222226666666622226666666222226666666222266662266666 IIIFCIFCFCFFCFCIFFCFCFCFCFCFCFCFCFCFFCFCFCCFCFCFCFCCFCIIIIFIFCFCFCFCFCFFCIIIFCFFFCFCFCFCCCFCCIIFCFCFCFCFFFCFFFFCCCCCIFCCCFCFCFFCCCIIFCFFCFCCCIIIFFFFFFCCFCIIIFFFCCI CIFFCFFCCFCIFFCFIFFCCFCIFFCCCCIFFCFFCIFCCIIFFCCC ANAN AANANANANAANANANANANANANAAANANA AN ANAANANAANAANNANNANANNANANANANANNNANNANANANANAAANAAAAAANNANNANN ANAAAAAANAN AAAAAANANNNNNN ANAANAAAAAAAAAANNANANAN ANN ANANANAANAANAAAANANNNNANANANAANAAAAANANNNNNANANAAAAAANNNNNANN ANNNNANANNNNNANNNNNNNAAANAANNNANAAANNNNAANNNNNANNNAANNNNANNNNN AANNNNNNNUANNUANUANUANUANUANUANUANUANUANUANUANUANUANUANUANUANUAUAUANUAUAUAUAANUANUANNUNUANUANUANNUANUAUNUAUAUANUAANNNUNUANNUNNNUNNUNUANUAUUUUUAUUAUAUANUUAAUAAAANUANUANNNNNNUNUAUUAUUUAUAUUAAUAAUAANUNUNUANNUAUANUNUUUAAUAANUANUANNNUNNNUAUAUAAUAAAAUAAANUANNNNNUAN ANNNUNNNUUUANNUAAANN ANUAANUNUAANUUAAANNNNUAANNUAUNUNNNUAN AAAAANUAUUAAAAUAU L RL RL RL RL RL RL RLL RL RL RRL RL RL RL RL RL RL RL RRL RL RL RL RL RL RRRL RRL RL RL RLL RL RL RL RRL R RRRRLL RL RL RRLL RRRRL RLL RL RL RL RRRRLL RRL RL RL RRRRLLL RRRRRRL RLL RRLL RL RL RRL RL RL RLL L RRRRRLL RL RRRL RRLLL RRRRRLL EEEEEPEPEEPEPEPPEPPOEPPOEPEPEPEPPOPPOPOPOPOPOPOPOPOOOPOPOOPOOOOPOOEEPEPEPEPEPEPPEPPPPPOPOPOOPOPOPOOOEEEEEPPOPOOOOPOPOEEEEEPPEPEPEPOOOPOOOOOOOPOEPEEEEEEEPPPPPOOEEPPPPPPOEPPPOOOEEPPOPOOPOOOOPPPOPPOOOEEPPPOPOPPOPPPOPOEEEPPEEEEEPOPOOOEPPPPOEEPOOEPPOOEEEEPOOOEPOOOOORTRTRRTRRTRTRRTRTRTRRTRTRTTRTTTTTTRTRTRTRTRTRTTTTTTTTTRTRRRRRRTRRTRRRTTTTTTTTTTTRTRTRRTRTRRTRTRTRTTTTTTTTRRRTRRRTTTTTTTTTRRTRRRTTTTTTTRRRTRTRTTTTTTTTRRTTTTTRTTTTTRTTRRRTTTTRTRRRTTTRRRRTTTTTTRRTTTRRRRTTTTT RRTRRTTTTT 2222222222222000000000000000000000000000000000000000000000022220000000000000002222222200000000000002222222200000000000000000222222200000000000000222222200000000000022222220000000000000002222222220000000000222000000002220000002222200000020000002220000022222222000000000000222220000002222000000222000000000222200000002220000222220000077777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777

CREATING OPPORTUNITYcalls for innovation


IFC’s fi nancial products and advisory

services go beyond those that developing

country markets and private investors can

provide on their own.

IFC is the largest provider of multilateral fi nancing for the private sector in the

developing world. In FY07, IFC invested $8.2 billion for our own account and

mobilized an additional $3.9 billion through loan participations, structured

fi nance, and parallel loans. Altogether, we supported 299 investments in 69

countries, typically funding about 25 percent of the total project cost. We also

approved 349 new advisory projects in 84 countries; total expenditures for

advisory services were $197 million.

Our operations create opportunity for progress in developing regions

and sectors and contribute to economic, fi nancial, environmental, and social

sustainability. This year, 38 percent of our investments were in frontier countries,

and there was strong growth across all of our product lines. Guarantees, primarily

for trade fi nance and structured fi nance, registered the largest increase on our

balance sheet (69 percent), followed by equity investments (37 percent). New

loans increased 13 percent to our largest-ever volume of $5.6 billion, while loan

participations grew 12 percent to $1.8 billion. Our resource mobilization increased

by over $1 billion (36 percent) compared to FY06.

IFC has been consistently profi table since 1956, and our fi nancial results refl ect

the success and growth of enterprises in emerging markets around the world.

IFC OPERATIONS AND FINANCIAL RESULTS BY PRODUCT LINE



OVERVIEW OF FINANCIAL RESULTS

IFC’s performance for FY07 continued its recent strong trend.

Income after expenditures (operating income) was $2.61 billion

in FY07, an increase of $1.2 billion when compared with FY06

results. Operating income comprises revenue from client ser-

vices operations (primarily corporate and project fi nance) and

income from treasury services, after administrative expenses,

advisory services, expenditures for performance-based grants,

and grants to IDA.

IFC’s net worth consists of retained earnings and paid-in

capital. Our paid-in capital remains $2.4 billion, while net

income of $2.62 billion this year increased retained earnings to

$11.3 billion. The Corporation’s net worth at the end of FY07

was $14.1 billion.

Overall, our operating return on average net worth was

21.2 percent in FY07, compared to 13.7 percent in FY06. Net

income reported for FY07, including gains (losses) on nontrad-

ing fi nancial instruments, was $2.6 billion, compared with

$1.3 billion for FY06. The main contribution to the increase in

net volume in FY07 was the signifi cant rise in realized capital

gains on equity sales and dividend income, while interest and

fees from loans and debt securities, and liquid asset portfolio

income also rose in FY07.

IFC’s liquid asset portfolios earned an absolute return well

in excess of that recorded in FY06, but they underperformed

when compared to benchmarks in certain portfolios. Income

from liquid assets, net of allocated funding cost, amounted

to $320 million, including $14 million of spread income from

market-funded liquid assets, as compared to $178 million and

$92 million, respectively, in FY06.

Administrative expenses on the fi nancial statements rose 11

percent to $482 million in FY07, compared to an increase of 8

percent to $436 million in FY06.

The preponderance of profi ts this year came from realized

capital gains on equity investments IFC had made in countries

that now may be as classifi ed as middle income. Three such

countries, Romania, Russia, and Kazakhstan, together account-

ed for over 60 percent of total capital gains in FY07.

IFC’S FINANCIAL RESULTS ($ MILLIONS)

FY07 FY06

Client services—operating income 2,291 1,231

Loan 108 106

Equity/quasi-equity, including debt securities 2,401 1,318

Expenditures for advisory services (96) (55)

Expenditures for performance-based grants - (35)

Grants to IDA (150) -

Corporate charges and other 28 (103)

IFC treasury services—operating income 320 178

IFC operating income 2,611 1,409

Investment Commitments

New investment commitments for IFC’s account amounted to

$8.2 billion, including $982 million in signed guarantees. This

represents an increase of 22 percent compared to $6.7 billion in

FY06. IFC also mobilized $1.8 billion through loan participations

and $2.1 billion through structured fi nance and parallel loans.

The largest share of commitments for IFC’s own account

went to Europe and Central Asia (22 percent), Latin America

and the Caribbean (22 percent), and Sub-Saharan Africa (17

percent). We saw the greatest increase in South Asia. The

business sectors with the highest volume of new commitments

were Global Financial Markets with 41 percent, followed by

Global Manufacturing and Services with 17 percent.

Disbursements for IFC’s own account in FY07 were $5.8

billion, up from $4.4 billion in FY06. Loan disbursements were

$4.7 billion, and equity disbursements were $1.1 billion. IFC

also disbursed $1.6 billion in loan participations with other

fi nancial institutions.


Investment Portfolio

IFC’s committed portfolio, including off-balance sheet guaran-

tees and risk management products, increased by 17.5 percent

to $25.4 billion on June 30, 2007, from $21.6 billion at the end

of FY06. In addition, we managed $5.5 billion in loan partici-

pations. At the end of FY07, the committed portfolio included

investments in 1,410 companies in 116 countries. Some 24

percent of these investments were in frontier countries.

The net increase in committed portfolio was $3.8 billion

after taking into account new commitments, repayments, sales,

cancellations, prepayments, write-offs, and translation adjust-

ments. Loan principal repayments and prepayments totaled

nearly $2.6 billion, and $596 million in equity investments were

sold or redeemed.

The total disbursed and outstanding investment portfolio

(before fair value and other adjustments) stood at $16.2 billion

at the end of FY07, compared with $13.4 billion at the end of

FY06. The disbursed loan portfolio grew by 18.9 percent, while

the disbursed equity portfolio grew by 21.2 percent.

LOCAL CURRENCY FINANCING

IFC uses local currency fi nancing to help clients mitigate

foreign exchange risk and to develop local capital

markets. Using market-based instruments, we provide

fi nancing in several forms: loans in local currency, risk

management swaps that allow clients to hedge foreign

currency liabilities back into local currency, and credit

enhancement structures that enable clients to borrow in

local currency from other sources.

To date, IFC has committed over $3.8 billion equivalent

in local currency, using derivatives for 137 transactions

in 18 currencies. In FY07, we committed our fi rst local

currency loans in Nigeria, Romania, and Vietnam, and

we have been particularly active in providing fi nancing

in Brazilian reais, Indian rupees, Mexican pesos, and

Russian rubles. This form of fi nancing requires long-term

derivatives markets, and we work closely with market

counterparts and government regulators to extend the

availability and liquidity of these markets.

IFC is at the forefront of domestic capital market

development. Through participation in the structuring

and credit enhancement of transactions, IFC has helped

introduce new asset classes. Transactions have enabled

IFC’s clients to secure attractive long-term local currency

fi nancing and have been catalysts in expanding numer-

ous domestic markets. IFC has completed 58 domestic

market structured transactions in 21 currencies for an

exposure of $753 million equivalent and assisted in

mobilizing over $4.6 billion equivalent since 2001.



PRODUCT LINES

IFC provides a range of fi nancial products and advisory services

to clients in developing countries. These include loans for our

own account and for the account of participating fi nancial

institutions, equity and quasi-equity investments, structured

fi nance transactions, and advisory services that support private

sector development. A growing number of investments provide

or promote fi nancing in local currency, and our involvement in

trade fi nance is expanding rapidly.

Loans

We fi nance projects and companies through loans for our

own account, generally for seven to 12 years, though some

loans have been extended for tenors as long as 20 years. We

also make loans to intermediary banks, leasing companies,

and other fi nancial institutions for on-lending, for example to

smaller businesses. IFC extends loans in major or local curren-

cies, depending on the needs of our clients, and we hedge

against currency risk by using swap-based instruments.

In FY07, we made commitments for $5.6 billion in new

loans. Interest and fi nancial fees from loans (including guar-

antee fees) increased 33 percent in FY07 to $1.01 billion, from

$807 million in FY06. Total reserves against losses on loan

investments decreased to $832 million in FY07, representing

6.5 percent of the disbursed loan portfolio, down from 8.3

percent in FY06.

Equity

IFC risks its own capital by buying shares in project companies,

other project entities, fi nancial institutions, and portfolio or

private equity funds. This is a strategic and expanding part of

our portfolio, with commitments growing from $612 million

in FY05 to $1.59 billion in FY07. Equity investments provide

the long-term developmental support that entrepreneurs and

private enterprises most need, with the deliberate assumption

of risk as well as participation in gains. These investments

also provide opportunities to support reforms, particularly in

corporate governance.

We generally subscribe to between 5 and 20 percent of

a company’s equity. We are long-term investors and usually

exit by selling shares in a trade sale or, if liquidity permits, in a

capital market following a public offering. We also invest in

quasi-equity instruments, which may have either debt or equity

characteristics. Our equity and quasi-equity investments are

funded from IFC’s retained earnings.

Income from our equity investment portfolio increased 88

percent in FY07 to $2.31 billion. As of June 30, 2007, the

estimated fair value of the equity portfolio was $10.00 billion,

compared to a book value of $3.14 billion representing IFC’s

original cost less impairment, of which $187 million is classifi ed

as debt securities on IFC’s balance sheet. Capital gains realized

on equity sales were $1.94 billion in FY07, up from $928 mil-

lion in FY06.


Loan Participations

IFC’s loan participation program mobilizes fi nancing from

commercial banks and other fi nancial institutions. Participat-

ing institutions benefi t from IFC’s preferred creditor status

while sharing fully in the credit risk of the project. This gives

emerging market companies better access to fi nance: in FY07,

IFC introduced about 90 investors to borrowers they had never

lent to before. This product also enables lenders to stretch

maturities, providing borrowers with longer-tenor fi nancing

than otherwise available: in FY07, the average fi nal maturity of

IFC loan participations was 7.3 years, versus 4.5 years for other

commercial loans in the same countries.

In FY07 the program saw its third consecutive year of

growth, with $1.8 billion in new loan participations. Of 29

deals, 12 were to borrowers in frontier countries. The largest

amounts went to Europe and Central Asia (44 percent) and

Latin America and the Caribbean (17 percent). For the fi rst

time, 15 percent of new loan participations were for African

borrowers.

Innovative transactions included the fi rst syndication of Tier

II capital (Banco Davivienda, Colombia), the fi rst international

syndication for a Pakistani borrower since the 1998 crisis

(Dewan Petroleum), and a syndicated ruble-linked U.S. dollar

loan (Concordia, Russia). IFC is developing new investor bases

and bringing pension funds, insurance companies, and asset

managers to emerging markets.

Structured Finance

IFC uses structured fi nance to provide clients with cost-effective

forms of fi nancing that would not otherwise be readily ac-

cessible. Products include partial credit guarantees, structured

liquidity facilities, portfolio risk transfer, securitizations, and

Islamic fi nance. IFC uses expertise in credit due diligence along

with our international triple-A credit rating to help clients

diversify funding sources, extend maturities of fi nancings, and

obtain fi nancing in their currency of choice. Through structured

fi nance transactions, IFC mobilized a total of $2.08 billion for

clients this year with only $318 million from our own account.

We worked in such new markets for structured fi nance as

Algeria, Indonesia, Jordan, Kenya, and Saudi Arabia, as well

as with repeat and new clients in established markets. IFC also

launched several new products: the Matching Assets through

Currency Hedging, or MATCH, fund, to facilitate direct local

currency lending by IFC in frontier countries to clients involved

in the health, education, microfi nance, and SME sectors; the

“IFC takes the mandate for

development seriously. We

have a good opportunity to

help develop markets in a

sustainable way.”

Nina Shapiro VICE PRESIDENT, FINANCE AND TREASURER

Guarantee of an Offshore Liquidity Facility, or GOLF, to help

mitigate the risk associated with currency convertibility and

transferability; and IFC’s fi rst partial credit guarantee that com-

plies with Islamic fi nance rules as part of the fi rst true securiti-

zation in the Gulf Cooperation Council countries.

Advisory Services

IFC provides advisory services to promote sustainable private

sector investment in developing countries. Through this work,

which is funded in partnership with governments and other

donors, IFC contributes to development where opportunities

for investments may be limited. This year we organized our

advisory services in fi ve business lines that correspond with our

operational strategy (see p. 68 for full information on these

business lines).

In FY07, our total expenditures for advisory services were

$197 million, and we began 349 projects in 84 countries.

The largest shares of our advisory activity went to Sub-Saharan

Africa (23 percent) and Europe and Central Asia (20 percent).

The most active business lines were value addition to fi rms (29

percent) and the business enabling environment (21 percent).

Donor governments account for the largest share of partner

contributions, but IFC’s share has increased due to the greater



protecting the portfolio against downside risk.

IFC management determines specifi c reserves against loan

losses on the basis of portfolio reviews and recommendations by

the portfolio management units in the investment departments.

The entire loan portfolio is reviewed quarterly. The Corporation’s

external auditors examine the recommendations, policies, and

methods for determining the reserves against losses.

Investments are required to comply with IFC’s Performance

Standards, the strongest, most comprehensive of environmen-

tal and social risk management frameworks among fi nancial

institutions. IFC monitors the related performance and risks

of investments on an ongoing basis. Where problems occur,

specialists help clients fi nd solutions and mitigate impacts on

the environment and affected communities.

When fi nancial diffi culties arise, operational departments

evaluate projects and set appropriate reserves. For projects with

severe problems, the Special Operations Department deter-

mines appropriate remedial action. It seeks to negotiate agree-

ments with all creditors and shareholders to share the burden

of restructuring so that problems can be worked out while the

project continues to operate. In exceptional cases, when the

parties reach an impasse, IFC takes all necessary and appropri-

ate measures to protect its interests.

TREASURY SERVICES

IFC funds its lending activities by issuing bonds in international

capital markets and has been the fi rst multilateral, or among

the fi rst, to issue bonds in the local currencies of many emerg-

ing markets. In FY07, IFC became the fi rst nonresident institu-

tion to issue domestic bonds in the eight-country CFA franc

market in West Africa.

Most of the Corporation’s lending is denominated in U.S.

dollars, but IFC borrows in a variety of currencies to diversify

access to funding, reduce borrowing costs, and develop local

capital markets. Because most loans made by IFC are denomi-

nated in U.S. dollars on a fl oating-rate basis, most borrowings

were swapped into fl oating-rate U.S. dollars. IFC’s borrowings

FUNDING FOR ADVISORY SERVICES (IN $ MILLIONS)

Source FY06 FY07

IFC $54.8 36% $95.6 49%

Donor & Other* $96.7 64% $101.3 51%

Total $151.5 100% $196.9 100%

* Other includes client fees and investment income

use of our retained earnings as a funding mechanism. Fee in-

come from clients is also increasing, in part because IFC estab-

lished pricing guidelines for its advisory work during FY07. The

policy has two guiding principles. Where possible, all clients

should make some contribution, to demonstrate commitment;

and pricing is determined according to the nature of the prod-

uct or service—for example, a public good or a private good.

PORTFOLIO MANAGEMENT

IFC monitors compliance with investment agreements, visits

sites to check on project status, and helps fi nd solutions to

problem projects. To strengthen supervision, we have portfolio

management units in all investment departments. This helps

identify problems and address them early on. An investment

credit risk-rating system also supports this process. We ensure

that banks participating in IFC loans are kept regularly informed

of project developments, consulting them or seeking their

consent as appropriate.

IFC manages fi nancial risks and exposures for its investment

portfolio through market-based risk management instruments,

tools, and strategies. These include instruments to perform hedg-

ing transactions on the IFC loan and equity portfolio as well as

exit strategies. All transactions and strategies share the goal of


continued to keep pace with its lending activities. New borrow-

ings in the international markets totaled $2.8 billion equivalent

in FY07.

Liquidity Management

Liquid assets on the balance sheet totaled $13.3 billion on

June 30, 2007, compared with $12.7 billion a year earlier. The

majority of liquid assets are held in U.S. dollars, with small euro

and Japanese yen balances. The level of liquid assets is de-

termined with a view to ensuring adequate resources to meet

commitments even during times of market stress.

CAPITAL ADEQUACY AND FINANCIAL CAPACITY

All of IFC’s operations require that we maintain our capital

adequacy and fi nancial capacity.

Our capital adequacy ratio at the end of FY07, which

includes paid-in capital, retained earnings (adjusted for some

accounting items that do not count as available capital), and

general reserves compared with risk-weighted assets, both on-

and off-balance sheet, stood at 57 percent. This is well above

the policy minimum of 30 percent, defi ned under the capital

adequacy framework adopted by the Board of Directors in

May 1994. IFC’s leverage ratio—outstanding borrowings and

guarantees measured in relation to the sum of subscribed capi-

tal and retained earnings—was 1.3 to 1, well within the limit

of 4 to 1 prescribed by the Corporation’s fi nancial policies.

IFC’s paid-in capital, retained earnings, and general loan

loss reserves constitute its fi nancial capacity. This fi nancial

capital serves to support the existing business; accommo-

date medium-term growth opportunities and strategic plans;

and provide a buffer to withstand shocks or crises in some

member countries or more general market downturns, while

retaining capacity to preserve our triple-A rating and play a

countercyclical role.

IFC’s current and projected capacity over the medium term

is considered adequate for these purposes.

TAKING RISKS—AND MANAGING THEM

As part of our strategy to increase IFC’s impact on develop-

ment, we are looking more closely and comprehensively than

ever at the risks we can afford to take in support of the private

sector in our client countries. This integrated approach should

allow us to do more when markets are favorable, as they have

generally been in the last several years, and as we continue

implementing our plans to grow and decentralize more of our

operations, so that we are closer to our clients. Risk manage-

ment also allows us to guard against downturns, so that we

can continue our work and provide fi nancing in the markets

that are experiencing crises. The specifi c aspects of our risk

management are detailed in the Management’s Discussion and

Analysis, later in this volume.


“Managing risk comprehensively

is not just about safeguarding

IFC’s resources—in my view,

it is also a powerful lever that

enhances our capacity to create

tangible opportunities

for underserved

people in the

developing world.”

Michel Maila VICE PRESIDENT, RISK MANAGEMENT

34 IFC ANNUAL REPORT 200734343434343433434 IFCIFCFCIFCFFCFCCFC ANAN ANANAN ANANANANNNNNNNUANUANUNUNUNUAUANUANUAAAAAAAAAAAAAAAAANUNUUNUAAAAAAAAAAAAAAAAANUANUANUAUAAAAAAAAAAAAAANUANUANUAUAAAAAAAAAAAAAAANNNNNNNNNUANNNUAUUAUUUUUUANUAAAAAAAAAAAAAANNNNUNNUANNNUANNNNNUUUANUAUNUANUAAAAAAAAAAAAAANUNUNUNUANUNUANNUNUANNNNUUNUUANUAAUAAAAAAAAAAANUANUANUANUNUNNUNNUNNNNNNNNNUNUNUUUUNUUNUUNUUNUAAAAAAAAAAAAANUANNUNNNNUNNNNUNNNNUNUUANUUUUUUUAAAAAUAAANUNUNNUNUNUNNUANUNUNUNUNUUUUUNUNUNUAAAAAAAAAAAAAAAANNUNNUNNUUUUNUUUUAAAAAAAANUNUNNUNUUUUUNUAAAAAAAAAAAAANNUNNNNNNUUUUUUUUUNUAAAAAAAAAAAAAAANNNNUNUNNNUNNUUUUUUUUUUAAAAAAAAAAAAAAAANNNNNNUNUNNUNUUUUUUUNUAANUAAAAAAAAAAAAAAANNNNNNNUUUUUUUUAAAAAAAAAAAAAAAANUNUUUNUAAAAAAAAAAAAAAANNUUAAAAAAAAAAAAAANUUUAAAAAAAAAAANUUUAAAAAAAAAAAU L RL RLLLLL RLL RLL RRRL RRRRRRRRRL RRRLLL RL RLLL RLLLL RRRRRL RRRRRRRRLLLLLLLLL RRRRRRRRRRRRRRRLLLLLLLLL RRRRRRRRRRRRL RLLLLLLLLLL RRRRRRRRRRRLLLLLLLLLL RRRRRRRRLLLLLLL RRRLLLLLLLLLL RRRRRRRLLLLL RRRRRRRRLLLLLLLLLL RRRRRRRRLLLLLL RRRRRRLLLLLLLL RRRLLLLLLLLL RRRRLLLLLLLLLLLL RRRLLLLLLL RLLLLL LL RRRL LLLLL RLLLLLLLLL RL RRRRRRLLLLLL RRRRRRRRLL RRRRRRRRRRREPEPOPEPEPEPOEPEPOEPPOPEPOEPEPOEPOEPOEPOPOEPOEPOPOPPOOEPOEPOEPPOEPOEPOEPOEPEPEPOEPEPOEPOEEPOEEEEPEPOEPPEPOPEPEPOEPOOPOEPOPOPOOEPOPOOPOOOEPOEPOEPOEPOEPOEPOEEPEPEEPPPEPOPEPOEPOEPPOEPEPOEPOEPOPOEPOPOPOPOEPOEPOEPOEPOEEEPEPOEPOEEPEPEPEPOPPPPOPPEPOEPOPOEPOPOEPOOOPOEPOEPOEEPPOPOEPOOOOEPOOEPOEPOEPOEPOEEPOEPEPOPPOEPOOPOOOOOEPOEEPEPOEPEEEPOPPPPPOEPOPOPOOPOPOOEPOEEEEEPOPPPPPOEPEPOPOOOPOOOOOEPOEPOEPOEPOPOPOEPOPOEPPPOOOOOOOOOOPOEPOOOEPEPEPOEPEPOPPPOOOOEPOPOOOOOOOOEPOEEEPOPOPPOOOOPOOOOOPOOOEEPOEEEEPPPOPOPPOOPOOOOOOOOOOOEPEEPOPPPPPOOOOOOOOOOPOOOOEPEEEEPPPPOOOOOOOOOOOEPPPPOOOOOOOOOOEEEE OOOOOOOEEPOEPPOOOOOOOOOEPOEEPPOOOOOOOEPPPOPOPPPPOEEPPPPOOOEPPPPPPPPPPOOOOOORRRRRRTRTRRTRTRTRRRTRTRTRTTTTTTRTTTTTRRRRTRRRRTRTRTRTTTTTTTTTTRTTTTTTRTRTRRTRRTRRRRTRRRRTTTTTTTTTTTRRRTRTRTRRRTRTTTTTTTRTRTRTRTTTTTRRTRRRRTRRRRTTTTTRTTTTTTRRRRRRRTRRRTRTRTTTTTTRRTRRTRRTRRTTRTTTTTTRRRRRTRRRTRTTTRTRRRRRRRRRRTTTTTTTTTTRRTRRRRRRTTTTTTTRRRRRRTTTTTTRRTRRRRRTTRTTTTTTRRRRTRRRRRRRRTTTRTTTTTTTRRRRTRRRRRTTTTTRTTTTTTRTRRRRRRRRRRTTTTTTTTTTTRRRRRRRRRRTTTTTTTTTTTRRRRRRRRTTTTTTTTTTTTTRRRRRRRRRRRTTTTTTTTTTTTTRRRRRRRTTTTTTTTTTT TRRRRRRRTTTTTTTTTT 2202220200022000000000000000000000000022022220202022222200000000000000002022022202022202020200000000002220202020202022000000000000000022220220202020200000000000002222020220000000002222202002020020020002000000000020202202020202020200000000000202220220220200000000000000202220220202000000000000222022200000002000000002222000000000000002200000000222222220200000002222000222222222200000200000222222222000000000022000000000002222222000000000000222000000000000022220000000000000000222200000000000077777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777

CREATING OPPORTUNITYwhere IFC is needed most


IFC is an organization with truly global

reach, serving all developing regions.

We focus not on where the business is

easiest, but on places where we can make

the biggest difference.

Fiscal year 2007 saw strong growth in new investment commitments for developing

regions, with corresponding expansion in our advisory work. In fi nancing for IFC’s

account, South Asia registered the largest increase (over 110 percent), followed by

Sub-Saharan Africa (97 percent). In both of these regions, over 90 percent of the

new investments are in frontier countries, refl ecting our commitment to reach more

of the neediest people and places. Commitments for the Middle East and North

Africa also grew signifi cantly, with an 82 percent increase over FY06. The largest

share of commitments went to Europe and Central Asia (22 percent), Latin America

and the Caribbean (22 percent), and Sub-Saharan Africa (17 percent).

Our advisory services continued to grow throughout the regions, with the

largest shares of our $197 million in expenditures going to Sub-Saharan Africa (23

percent) and Europe and Central Asia (20 percent). Over half our expenditures on

advisory services in these regions went to frontier countries.

We have made signifi cant progress in measuring our development impact and

the sustainability of our investment and advisory projects across the regions. The

share of our tracked investments with successful development results has been

most encouraging in Europe and Central Asia, with a 76 percent success rate, and

in South Asia, at 73 percent. These compare to an IFC average of 63 percent across

the regions.

IFC OPERATIONS AND RESULTS BY REGION



OVERVIEW

Sub-Saharan Africa’s political and economic environment is improving. Macroeconomic

reforms and reduced confl ict have spurred sustained growth in many countries, averag-

ing 5.3 percent in 2006, and confi dence has improved among African investors. Fueled

by high commodity prices, natural resources remain drivers of growth in many African

countries. Governments across the region increasingly look to the private sector to play

a role in tackling many pressing development challenges: to help reduce poverty for over

300 million people living on less than a dollar a day, to upgrade and maintain the region’s

infrastructure, and to help fi nd practical solutions to communicable diseases. African

women contribute about 50 percent to GDP, but their economic activity is confi ned mainly

to the informal sector.

SUB-SAHARAN AFRICA

IFC’S STRATEGY

IFC expects to increase investments in Africa

further over the coming years. Our priorities are

to improve the investment climate, support small

and medium enterprises, and help develop

commercially viable, large-scale investment

projects, especially in infrastructure. We also

support regional integration and South-South

investments from one developing country to

another. SMEs make up the bulk of Africa’s

businesses, and we help them gain better access

to fi nance and business consulting services. We

aim to increase our activities in frontier countries,

especially those emerging from crisis. We help

ensure that the benefi ts from extractive

industries, an important sector in many African

countries, are transparently managed and widely

shared. And we work with our clients to help

them address gender issues as well as HIV/AIDS

in their workforces and local communities.

NEW BUSINESS AND PORTFOLIO

Investment commitments reached $1.38 billion

for 52 projects in FY07, and we mobilized an

additional $294 million through loan participa-

tions, structured fi nance, and parallel loans.

Excluding projects classifi ed as regional, 94

percent are in frontier countries. Our portfolio is

concentrated in the fi nancial sector, extractive

industries, and general manufacturing and

services; and a signifi cant share of our portfolio

in information and communications technologies

is located in Africa. We have improved the quality

of our portfolio in recent years, for example, by

supporting smaller businesses through fi nancial

intermediaries rather than investing directly. Our

advisory services have an active portfolio of 223

projects valued at $223 million. Based on value,

52 percent are in frontier markets, with the

emphasis on improving value addition to fi rms

(31 percent) and access to fi nance (25 percent).

Major partners in regional advisory work include,

among others, Switzerland, the Netherlands, the

African Development Bank, Germany, and

Denmark.

PROJECT FINANCING AND PORTFOLIO ($ millions)

DEVELOPMENT OUTCOME SCORES

COMMITMENTS

FY06* FY07

Financing committed for IFC’s account $700 $1,379

Loans $393 $823

Equity $72 $160

Guarantees and risk management $235 $397

Loan participations signed $0 $261

Total Commitments Signed $700 $1,640

Committed portfolio for IFC’s account $2,033 $2,712

Committed portfolio held for others (Loan and guarantee participations)

$168 $386

Total Committed Portfolio $2,201 $3,098

Development Outcome

FinancialPerformance

EconomicPerformance

Environmentaland SocialPerformance

Private Sector Development Impact 0% 20% 40% 60% 80% 100%

% of projects rated successful

Department IFC

FY04 FY05 FY06 FY07

Number of projects 25* 30 38** 52

Number of countries 12 14 11 17

Financing for IFC’s own account

405 445 700 1,379

Loan participations 0 0 0 261

ANGOLA • BENIN • BOTSWANA • BURKINA FASO • BURUNDI • CAMEROON • CAPE VERDE •

CENTRAL AFRICAN REPUBLIC • CHAD • COMOROS • DEMOCRATIC REPUBLIC OF CONGO •

REPUBLIC OF CONGO • CÔTE D’IVOIRE • DJIBOUTI • EQUATORIAL GUINEA • ERITREA • ETHIOPIA •

GABON • THE GAMBIA • GHANA • GUINEA • GUINEA-BISSAU • KENYA • LESOTHO • LIBERIA •

MADAGASCAR • MALAWI • MALI • MAURITANIA • MAURITIUS • MOZAMBIQUE • NAMIBIA • NIGER •

NIGERIA • RWANDA • SENEGAL • SEYCHELLES • SIERRA LEONE • SOMALIA • SOUTH AFRICA • SUDAN •

SWAZILAND • TANZANIA • TOGO • UGANDA • ZAMBIA • ZIMBABWE

FRONTIER COUNTRY OTHER CLIENT COUNTRY

* Includes regional shares of Veolia Water AMI investments, which is offi cially classifi ed as a global project. Committed portfolio for IFC’s account includes regional share of BAPTFF, which is offi cially classifi ed as a global project.

* Includes LNM Holdings.** Includes Veolia AMI.


BOND ISSUE SUPPORTS LOCAL CURRENCY FINANCING

IFC made its fi rst local currency bond offering in Sub-Saharan

Africa during FY07, a fi ve-year bond equivalent to $44.6

million that was sold to funds, banks, insurance companies,

and pension funds in the eight countries that use the West

African franc. All of the proceeds will be invested locally,

where they will help deepen capital markets and support

domestic companies that need long-term fi nancing in local

currency. IFC hopes the bond will establish a framework for

future issuance, not only by supranationals but eventually by

other classes of approved borrowers. So far we have

identifi ed four local companies in which we will invest the

proceeds: a cement plant in Senegal, hotels in Mali and

Burkina Faso, and a rubber company in Côte d’Ivoire.

CONTRIBUTING TO STABILITY FOLLOWING CRISES

IFC is helping the private sector increase its role in ensuring

stability where countries are emerging from crises. A special

initiative for confl ict-affected countries was approved by

IFC’s Board in June 2006 to enhance our activities in the

Democratic Republic of Congo, Liberia, and Sierra Leone. In

Liberia, we are providing a trade facility to expand

opportunity for business institutions and reintroduce the

country’s fi nancial institutions to international business

transactions and counterparts. We are advising the

government on the selection of a private operator to supply

Monrovia with electricity until a permanent solution can be

achieved. IFC supported a private sector investment

conference for Liberia in February 2007, and a joint World

Bank Group team has studied the country’s informal sector,

suggesting ways to reduce barriers that small businesses

face in joining the formal economy.

DEVELOPMENT RESULTS

IFC investments have made a signifi cant

developmental contribution. In 2006, for

example, our clients in the extractive industries

contributed over $1.74 billion to government

revenues, and our fi nancial sector clients had

roughly 144,000 outstanding loans to MSMEs,

with a volume of just over $1 billion. Our projects

in Africa have achieved moderate development

outcomes compared with other regions.

Generally strong outcomes of larger projects,

particularly in extractive industries, are

moderated by the weaker performance of a

signifi cant number of small projects with

inexperienced sponsors in agriculture,

manufacturing, and services. Despite marked

improvement in recent years, environmental and

social performance continues to be comparatively

weak: the poor performance of fi nancially

struggling fi rms and small companies, as well as

weak regulatory frameworks and enforcement,

can make it challenging to achieve compliance

with our global performance standards. To help

improve our performance, we have added

senior-level environmental and social specialists in

our African country offi ces.

SUSTAINABILITY

IFC helps clients improve their environmental and

social management systems and address the

environmental and social impacts of large-scale

investment projects, such as in mining and

infrastructure. In Ghana, at the Idupariem mine,

we helped AngloGold Ashanti bring in a

community development coordinator and a

nonprofi t organization to set up livelihood

projects. We also helped establish a forum for all

stakeholders. With our guidance, the company

has markedly improved its community relations,

though there are still issues to be resolved. We

are also helping smaller businesses meet

international standards of sustainability while

identifying opportunities to improve effi ciency

and reduce costs. In Kenya and Rwanda, we have

helped assess and plan for energy effi ciency at

hotels and industrial sites.

WHAT WE HAVE ACHIEVED, AND WORK STILL TO BE DONE

Over the past year, IFC made progress in helping

improve Africa’s investment climate and in

supporting the development of infrastructure.

We cooperated with our fellow World Bank

Group organizations, for example with MIGA in

the Bujagali Hydropower Project in Uganda. We

have strengthened our advisory programs with a

focus on smaller businesses, including through a

joint program with IDA. In the next two years, we

expect to provide advisory services that improve

access to basic services—including electricity,

water, telecommunications, health, and

education—for almost 2 million people in Africa.

A number of countries have begun signifi cant

reforms that improve conditions for private

companies; in Ghana, Kenya, Tanzania, and

Uganda, IFC has also helped governments

understand the gender dimensions of this effort.

Within two years, we expect to help at least 13

African countries raise their ranking in the

IFC–World Bank Doing Business report by some

27 percent.

LARGEST COUNTRY EXPOSURES

Portfolio ($ millions)

Nigeria

FY07 684

FY06 544

Success Rate* 50%

South Africa

FY07 349

FY06 206

Success Rate* 45%

Kenya

FY07 185

FY06 152

Success Rate* 86%

* Percent of tracked companies with successful development results ratings.

CY 2005 Portfolio

CY 2006 Portfolio

FY07 New Business Expectations

MSME loans (amount / number of loans)

$1.07 billion / 143,862

$1.62 billion / 166,194

Average annual portfolio growth

SME: 111%Microfi nance: 110%

Power generated (number of customers)

5 million 5.9 million 2.3 million

New phone connections

20 million+ 11 million 4.1 million

Employment 29,879 32,706 10,549

Local purchase of goods and services

$397.9 million $541.7 million $889 million

Payments to government

$810.6 million $1.76 billion $177.6 million

DEVELOPMENTAL REACH

“IFC is serving clients better

by leveraging the full range

of our products and services,

increasing cooperation across

the World Bank Group, and

expanding into new markets—

in a way that will ultimately

improve our impact on the

lives of Africans.” – IFC Director for Sub-Saharan

Africa Thierry Tanoh

Reach data for select industries; indicator defi nitions and reporting periods vary somewhat across select industries.+New phone connections created, 1996-2005.



OVERVIEW

Economies in East Asia and the Pacifi c have been expanding at robust rates—averaging

about 9.2 percent in 2006—but the region remains one of paradoxes. It is the fastest-

growing developing region, but over half a billion people live on less than $2 a day. It is

a large net lender to developed countries, yet its unmet investment needs—particularly

in infrastructure—are immense. The region sends its excess savings to Europe and North

America because its own fi nancial systems are weak. Asians enjoy higher incomes but live

in some of the most polluted cities, face prospects of acute water shortages, and are at risk

of losing much of the region’s biodiversity.

EAST ASIA AND THE PACIF IC

IFC’S STRATEGY

IFC seeks to balance the development impact by

seeking out private sector investment

opportunities in frontier areas and countries. IFC

partners with emerging domestic companies to

address the region’s most pressing development

challenges: improving physical and fi nancial

infrastructure, which has not kept pace with

rapid urbanization and growth; and increasing

access to credit for smaller businesses and

fi nancing for housing, trade, student loans, and

energy effi ciency. To improve environmental

sustainability, we support the development of

cleaner energy, sustainable forestry, and energy

effi cient products. We work to broaden our

impact in frontier countries and small states by

combining advisory services and fi nancing to

improve the investment climate, promote

reform, and support private investment through

innovative fi nancing structures.


Investment commitments reached $944 million



tions and structured fi nance. Excluding projects

classifi ed as regional, 35 percent are in frontier

countries. Our committed portfolio in East Asia

and the Pacifi c is $3.58 billion. Our portfolio is

concentrated in the fi nancial sector (32 percent)

and general manufacturing (26 percent), and a

signifi cant share of IFC’s portfolio in private

equity and investment funds is located in the

region. Supported by 14 donor partners, our

advisory services have an active portfolio of 194

projects valued at $128 million. Based on value,

41 percent are in frontier markets, with the

emphasis on improving access to fi nance (32

percent) and environmental and social

sustainability (29 percent). Major partners in

regional advisory work include, among others,

Australia, Canada, the Netherlands, Finland, and

the United Kingdom.

COMMITMENTS

FY04 FY05 FY06 FY07

Number of projects 40 40 41* 38


Financing for IFC's own account

730 740 982 944




FY06* FY07**

Financing committed for IFC’s account $982 $944

Loans $624 $654

Equity $310 $220



Total Commitments Signed $1,225 $1,072



$689 $599


Development Outcome


EconomicPerformance

Private Sector Development Impact 0% 20% 40% 60% 80% 100% % of projects rated successful

Department IFC


CAMBODIA • CHINA • FIJI • INDONESIA • KIRIBATI • LAO PEOPLE’S DEMOCRATIC REPUBLIC •

MALAYSIA • MARSHALL ISLANDS • FEDERATED STATES OF MICRONESIA • MONGOLIA • MYANMAR •

PALAU • PAPUA NEW GUINEA • PHILIPPINES • REPUBLIC OF KOREA • SAMOA • SOLOMON ISLANDS •

THAILAND • TIMOR-LESTE • TONGA • VANUATU • VIETNAM


* Includes regional share of Soco Facility and Avenue Asia investments, which are offi cially classifi ed as global projects.

** Includes regional share of Italcementi investment, which is offi cially classifi ed as global project.

* Includes Soco Facility and Avenue Asia.


DEVELOPMENT RESULTS

The developmental contribution of IFC’s projects

has been signifi cant. Our investments have

contributed to higher employment, better supply-

chain linkages, signifi cant tax payments in the

manufacturing sector, and greater access to

fi nance for poorly served market segments. In

2006, our clients had loans outstanding to

315,000 MSMEs, provided 10 million new phone

connections, and generated power for 18.5

million customers. Development success rates for

projects in East Asia and the Pacifi c are

somewhat weaker than those of other regions.

They began to improve in line with the recovery

after the Asian crisis, but have recently worsened

again due to weak performance of manufactur-

ing companies and some early private equity

funds, particularly in the Philippines, and the

relatively weak performance of our China

portfolio, where we focus on the most diffi cult

frontier regions. The environmental and social

performance of our projects has been solid,

however, and we expect it to improve further as

we move additional specialists to the region.

SUSTAINABILITY

IFC promotes the use of cleaner energy

throughout the region, accelerating the transition

to more sustainable fuels such as ethanol, which

is also a potential raw material in manufacturing.

In China, we are helping increase fi nancing to

commercial, industrial, and residential customers

that are implementing energy effi ciency projects.

We also help companies enter the carbon fi nance

market, for example Deqingyuan in China, which

aims to capture methane from chicken litter,

reducing emissions while generating a new

revenue stream. In the Philippines, we are

supporting development of new power sources,

while in Indonesia our advisory services support

trade in sustainable wood, helping combat illegal

logging.


IFC has made great strides in strengthening the

fi nancial sectors of many countries in the region,

and our portfolio of investments supporting

sustainability innovations and cleaner energies is

growing. Our advisory services have supported

key reforms. We provided advice on China’s new

property law, which is expected to open doors to

fi nancing for farmers and small businesses. We

also supported a groundbreaking policy reform

project in Vietnam, leading to passage of two key

business laws that signifi cantly improve the

investment climate. Going forward, we will

emphasize better integration of investment and

advisory services to deliver greater development

impact. We intend to expand our activities,

particularly in infrastructure.



China

FY07 1,680

FY06 1,498

Success Rate* 43%

Indonesia

FY07 743

FY06 606

Success Rate* 60%

Philippines

FY07 411

FY06 407

Success Rate* 53%


CY 2005 Portfolio

CY 2006 Portfolio



$20.5 billion / 286,361

$12.95 billion / 315,113


SME: 9%

Power generated (# of customers)

8.1 million 18.5 million 5 million

Water distribution (# of customers)

400,000 5.1 million --

Patients reached 1.34 million 479,269 1.32 million


5.8 million+ 10 million 76,000

Employment 87,134 85,296 40,978


$1.34 million $3.4 billion $1 billion


$348.9 million $377.6 million $106 million

DEVELOPMENTAL REACH

NEW APPROACHES TO INFRASTRUCTURE

IFC has provided about $10 million in advisory services in

the region’s infrastructure. In FY07, we signed mandates to

advise on privatization of power generation in the

Philippines, on private participation in power in Vietnam,

and on water supply and light rail projects in the Philippines.

We are also working with subnational entities to develop

and demonstrate new models of public-private partnerships.

We provided fi nancial support to PNOC-Energy Develop-

ment Corporation, an integrated producer of geothermal

steam and electric power, as the company went through an

IPO on the Manila stock exchange. PNOC-EDC will use the

resources to develop new geothermal energy projects,

which will help the country reduce its dependence on

imported fossil fuels and accelerate a shift toward more

sustainable sources of energy.

ADVISORY SERVICES PAVE THE WAY FOR INVESTMENT

A lack of competition has constrained development of

modern banking in the Lao People’s Democratic Republic, a

small, mountainous country where less than a quarter of the

population can access fi nancial services. In FY07, IFC’s

advisory services program in the Mekong region helped the

government improve its legislation covering commercial

banks. In just seven months, a new law was written, passed,

and promulgated. This has facilitated IFC’s fi rst fi nancial

sector investment in the country. It has also led to the

start-up of a new local bank, while established banks are

planning to expand. Within a few years, tens of thousands

more individuals and smaller enterprises are expected to

have the fi nancial services they need to prosper.

Reach data for select industries; indicator defi nitions and reporting periods vary somewhat across select industries+ New phone connections created, 1996-2005.



OVERVIEW

South Asia, with 1.3 billion people, is home to half the world’s poor, and about a

third of the population here lives on less than a dollar a day. Rapid economic growth

in recent years—averaging 8 percent last year—is largely home-grown. Large foreign

investments remain the exception, and the highly regulated economies of South Asia

receive the least foreign direct investment relative to their GDP of any region of the

world. Despite overall growth, the benefi ts remain uneven and have yet to reach rural

populations. The development of infrastructure—physical, fi nancial, and social—needs

urgent attention if growth is to be sustained and broadly shared. And an expanding

working-age population needs jobs.

SOUTH ASIA

IFC’S STRATEGY

IFC helps the private sector fulfi ll its role in meeting

South Asia’s needs. We focus on removing

infrastructure bottlenecks through investments and

advisory services, and we are working with

governments to simplify and strengthen the

regulatory framework for private enterprise. We

help the region integrate into the global economy

and benefi t from best practices by bringing in

foreign investors. We aim to help deepen fi nancial

markets, and we work with fi nancial intermediaries

to help poorly served segments, including smaller

companies and rural people, access fi nance. To help

rural areas benefi t from growth, we encourage

investment in agribusiness, rural fi nance, and rural

infrastructure. We provide equity and long-term

debt fi nancing to midsize enterprises, particularly in

manufacturing and agribusiness, and target

advisory services to smaller companies. We

encourage clients to reduce their environmental

impact through more use of renewable energy and

greater energy effi ciency, and we help mobilize

carbon fi nance to support these efforts.


Investment commitments reached $1.07 billion for

30 projects in FY07, and we mobilized an


tions. Of these projects, 93 percent are in frontier

countries. Our portfolio spreads across eight

sectors, with the largest concentration in the

fi nancial sector and manufacturing; and a

signifi cant share of IFC’s portfolio in information

and communications technologies is located in

South Asia. Three-quarters of our $2.6 billion

regional portfolio is in India, with Bangladesh at

$147 million the second largest. Our investments

in fi nancial services and infrastructure are growing

rapidly. Our advisory services have an active

portfolio of 94 projects valued at $80 million.

Based on value, 40 percent are in frontier markets,

with the emphasis on improving infrastructure (52

percent) and value addition to fi rms (20 percent).

Major partners in regional advisory work include

the European Commission, Norway, the

Netherlands, Canada, and the United Kingdom.

COMMITMENTS

FY04 FY05 FY06 FY07

Number of projects 19 20 25* 30



405 443 507 1,073




FY06* FY07**


Loans $367 $885

Equity $130 $170






$584 $669


Development Outcome


EconomicPerformance


Department IFC


BANGLADESH • BHUTAN • INDIA • MALDIVES • NEPAL • SRI LANKA


* Includes regional shares of Avenue Asia investments, which is offi cially classifi ed as a global project.

** Includes regional share of Italcementi investment, which is offi cially classifi ed as global projects.

* Includes Avenue Asia.


DEVELOPMENT RESULTS

IFC activities in the region have produced

tangible development results, such as job

creation, higher wages and tax revenues, and

better supply-chain linkages. We helped women’s

business membership organizations, for example,

increase the sales of women-owned enterprises

by $1.7 million in two years. In 2006, our clients

had loans outstanding to nearly 755,000 MSMEs,

provided 25 million new phone connections, and

generated power for 27 million customers. Our

projects in South Asia have high development

outcome ratings compared to other regions. This

is mainly because of strong performance in

manufacturing and IT, due to Indian companies’

restructuring and cost-cutting efforts in the early

2000s. A small number of fi nancial markets

projects with weaker outcomes moderate the

overall success somewhat. In particular, Indian

housing fi nance companies have struggled to

compete with commercial banks. Building on

these lessons, we have shifted our focus to help

build the mortgage insurance sector and facilitate

funding alternatives, such as securitization. The

environmental and social performance of our

projects has been solid.

SUSTAINABILITY

IFC has a growing portfolio of renewable energy

investments, and we help mobilize fi nancing for

our clients through carbon credits. Our efforts are

helping displace coal power generation and

reduce emissions of greenhouse gases. They also

reduce the cost of renewable energy technology.

IFC has investments in four hydropower projects

in India and Nepal, as well as carbon credit

investments with Eco Power in Sri Lanka (see p.

14) and with one of the region’s largest wind

turbine manufacturers, Enercon India. We are

also helping four IFC client companies with

HIV/AIDS programs.


IFC has made good progress in South Asia, with

noteworthy successes in the manufacturing,

fi nance, and infrastructure sectors. We have

helped create many world-class companies, such

as Moser Baer, one of the world’s leading

producers of CDs and DVDs, and India’s HDFC

and IDFC, which target fi nancing for the housing

and infrastructure sectors. Helping South Asia’s

lagging regions catch up continues to be a

challenge, and we aim to focus more investments

on the rural economy. Our initial advisory work

with partner fi nancial institutions in Bangladesh

is now bolstered by equity investments, loans,

and trade fi nance facilities; here we are also

helping expand SME fi nance to women. We also

need to fi nd ways to respond quickly to support

the private sector in postconfl ict countries, such

as Nepal. In view of the pressing needs, we will

also continue to scale up our support for

infrastructure development.



India

FY07 2,117

FY06 1,261

Success Rate* 72%

Bangladesh

FY07 147

FY06 161

Success Rate* 71%

Maldives

FY07 66

FY06 71

Success Rate* 100%


CY 2005Portfolio

CY 2006 Portfolio



$3.15 billion / 557,268

$4.8 billion / 754,890


SME: 10%


23.2 million 27.4 million 13.3 million

Patients reached 97,800 65,907 800,000


21 million+ 25 million --

Employment 37,175 61,379 19,460


$894 million $2.574 billion $558 million


$280 million $398 million $54 million

DEVELOPMENTAL REACH

HELPING MICROFINANCE REACH RURAL INDIA

IFC is investing risk capital to promote the growth of

commercial microfi nance in India. We invested $1.6 million in

Aavishkaar Microfi nance, a fi rm that will invest in 35 to 40

start-up microfi nance institutions and promote their growth

through an innovative franchise model. We have also taken a

$5 million equity stake in Financial Information Network and

Operations, a start-up technology service provider that helps

banks reach rural markets through a “smart card” solution. If

successful, it will serve a large segment of India’s population.

Our advisory work is helping microfi nance institutions

improve the effi ciency, scale, and transparency of their

fi nancial and operational management systems. We also

support mobile banking solutions that enable rural banks,

cooperatives, and microfi nance institutions to provide

cost-effective services and generate employment.

CREATING ECONOMIC OPPORTUNITIES FOR FARMERS

IFC is helping enhance rural productivity in India. Our

investment of $11 million in equity in Suguna Poultry Farms

Limited, a fi rst for the country’s poultry sector, will help the

company expand its breeder farms, hatchery, and feed mill

capacity. Pioneering an integrated poultry business, which

revolutionizes the way chicken is grown and marketed in

India, Suguna has sales of $243 million and net profi t of

$16 million. IFC will also help the company improve its

supply chain management, sourcing feed inputs directly

from farmers. The project will create opportunities for more

than 10,500 contract poultry farmers, who will benefi t from

Suguna’s guaranteed prices and purchase volume, as well as

from hands-on advisory services in poultry rearing.

“South Asia demonstrates

huge potential in its

growth rate, and huge

challenges in its poverty

levels. I hope we can help

make economic growth

more inclusive of the

poor.” – IFC Director for

South Asia Paolo Martelli

Reach data for select industries; indicator defi nitions and reporting periods vary somewhat across select industries.+New phone connections created 1996-2005.



OVERVIEW

Nearly two decades after the fall of the Berlin Wall, economies in the region continue to

progress from central planning to free markets. Countries here are diverse, ranging from

the newest members of the European Union to the poorer countries of Central Asia. Many

rank among the fastest-growing worldwide over the past decade, fueled by strong exports,

integration in global markets, better access to credit, and, for energy-exporting coun-

tries, high commodity prices. At the same time, private sector development faces many

challenges in the region, including poor infrastructure, persistent weaknesses in fi nancial

markets, cumbersome regulatory regimes, weak institutions, and corruption.

EUROPE AND CENTRAL ASIA

IFC’S STRATEGY

IFC assists the transition to market economies by

supporting investments that diversify economies

and modernize industries and infrastructure. We

help establish a sound fi nancial sector, concentrat-

ing on access to credit for smaller enterprises;

institution-building; and the introduction of new

products, such as leasing. We encourage

intraregional investments and are increasingly

involved in infrastructure development and

public-private partnerships. In frontier countries

where governance remains weak, we often start

with donor-funded advisory services to help

simplify regulation and strengthen local

institutions and corporate legislation. In

middle-income countries, we develop and test

new products, such as fi nancing for energy

effi ciency, housing fi nance, and alternative

mechanisms for dispute resolution. In more

developed countries, such as Russia and Turkey,

we focus on expanding investments to second-tier

clients and in frontier regions. IFC takes a selective

approach in EU member countries, investing

where our development role is crucial, for example

in socially and environmentally sensitive sectors.




additional $1.55 billion through loan participa-


classifi ed as regional projects, 20 percent are in

frontier countries. The majority of new business

went to Russia and Turkey, both among IFC’s top

10 country exposures. Half our portfolio is in the

fi nancial sector, with manufacturing and services

and infrastructure also signifi cant portions. The

portfolio’s fi nancial performance has been above

IFC’s average since the mid-1990s, and this year

the region contributed 61 percent of IFC’s profi ts.

This year, our advisory services launched 20 new

projects in 12 countries with new donor

commitments of $19.1 million, including $7.5

million from IFC. In FY07 we completed 13

projects. Our advisory services have an active

portfolio of 159 projects valued at $147 million.

Based on value, 53 percent are in frontier

markets, with the emphasis on improving access

to fi nance (29 percent) and value addition to

fi rms (27 percent). Donors contributed $16.7

million and IFC $10.3 million to FY07 expendi-

tures. Major partners in regional advisory work

include, among others, Switzerland, Sweden,

Canada, Austria, and Norway.

Development Outcome


EconomicPerformance

Private Sector Development Impact 0% 20% 40% 60% 80% 100%

% of projects rated successful

Department IFC




FY06* FY07**

Financing committed for IFC’s account $2,084 $1,786

Loans $1,710 $1,163

Equity $231 $513






$995 $1,387


ALBANIA • ARMENIA • AZERBAIJAN • BELARUS • BOSNIA AND HERZEGOVINA • BULGARIA • CROATIA •

CZECH REPUBLIC • ESTONIA • GEORGIA • HUNGARY • KAZAKHSTAN • KYRGYZ REPUBLIC • LATVIA •

LITHUANIA • FORMER YUGOSLAV REPUBLIC OF MACEDONIA • MOLDOVA • MONTENEGRO • POLAND •

ROMANIA • RUSSIAN FEDERATION • SERBIA • SLOVAK REPUBLIC • SLOVENIA • TAJIKISTAN • TURKEY •

TURKMENISTAN • UKRAINE • UZBEKISTAN


* Committed portfolio for IFC’s account and held for others includes regional share of BTC Pipeline, which is offi cially classifi ed as a global project.

** Includes regional share of Melrose II, Melrose II Expansion, and Italcementi investments, which are offi cially classifi ed as global projects.


COMMITMENTS

FY04 FY05 FY06 FY07

Number of projects 65* 67** 80*** 67****



1,667 1,938 2,084 1,786


* Includes BTC Pipeline, LNM Holdings.** Includes RI Facility, Arcelik, Melrose.*** Includes EECFII.**** Includes Melrose II and Melrose II Expansion.

DEVELOPMENT RESULTS

IFC projects in the region have had very strong

development outcomes, outperforming all other

regions, with the environmental and social

performance of our portfolio particularly high.

Strong results in global manufacturing and

services, and in the fi nancial sector, where we

addressed major gaps during transition, have

driven high development ratings. Our invest-

ments in Russia and Turkey have performed

especially well; in Turkey, we attribute the strong

development results to a strategy of seeking

long-term partnerships with local companies.

Weaker results in Central Asia refl ect diffi cult

business environments. Our developmental

contribution from advisory services has also been

signifi cant. For example, our programs have

enabled $2.9 billion in investments by local and

foreign companies, led to a $392 million growth

in the availability of lease fi nancing, removed red

tape in ways that have allowed businesses to

save an estimated $83 million since 2000, and

released $58 million in funds that were tied up in

commercial disputes.

SUSTAINABILITY

IFC continues to promote sound corporate

governance in the region, working with

governments to strengthen corporate legislation

and advising companies and banks on best

practices. We help clients engage with local

communities, especially in environmentally and

socially complex sectors, such as extractive

industries and intensive manufacturing; the focus

includes community engagement, public disclosure,

and supply chain linkages. IFC continues to develop

fi nancing mechanisms for projects that use or

promote energy effi cient technologies. We help

agribusiness clients introduce effi cient waste

management and strengthen food safety standards

at production facilities. In the Balkans, IFC is helping

develop the capacity of SMEs that provide recycling

services, with an emphasis on working conditions

for waste collectors.


IFC has increased commitments in the region’s

frontier countries in recent years, and they remain a

priority for us. We pay particular attention to

designing advisory programs in these countries that

aim to address constraints to private sector growth,

particularly in fi nancial markets, agribusiness, and

infrastructure. In the more developed markets of

Russia, Turkey, and Ukraine, our priority is to invest

in low-income regions and, as more private capital

becomes available, to focus our support on smaller,

second-tier companies, whose growth we assist

with both capital and advice.



Russian Federation

FY07 2,238

FY06 1,974

Success Rate* 89%

Turkey

FY07 1,342

FY06 1,197

Success Rate* 76%

Romania

FY07 491

FY06 530

Success Rate* 75%


CY 2005 Portfolio

CY 2006 Portfolio



$17.97 billion / 717,388

$26.28 billion / 833,120




16.2 million 19.6 million --

Patients reached 374,546 1.78 million 400,000

Students reached 13,541 12,200 --


7.8 million+ 2 million 6.6 million

Employment 157,366 126,420 23,380


$4.15 billion $10.66 billion $1.29 billion


$1.68 billion $2.01 billion $180 million

DEVELOPMENTAL REACH

TURKEY: AN EMERGING REGIONAL PLAYER

IFC is helping Turkish fi rms expand into other developing

and transition countries. This year our investment helped

Turkish glass producer Sisecam expand to become the

fi fth-largest glass producer in Europe and a major regional

player in investment and technology transfer. IFC supported

Sisecam in the privatization, purchase, and rehabilitation of

a soda ash plant in Bosnia and Herzegovina, preserving

about 800 jobs. Over the last several years, IFC has

supported Arcelik, a Turkey-based home appliance

manufacturer, in acquiring Romania’s only refrigerator

producer, Arctic, and establishing a greenfi eld manufactur-

ing facility in Russia. In Georgia, IFC provided $27 million to

TAV Georgia, jointly owed by four Turkish companies, to

support the expansion and modernization of Tbilisi

International Airport.

BUILDING THE MORTGAGE INDUSTRY

IFC is helping establish residential mortgage fi nance in the

region, investing $872 million for housing fi nance in 34

institutions since 2000. Our work includes setting up shared

instruments and procedures across the industry, which can

lower costs for banks and their customers as well as allow

banks to securitize mortgages and access additional capital.

We have engaged with governments in Central Asia to

reform mortgage-related legislation, contributing to a new

law on mortgages in Uzbekistan and helping reduce transac-

tion costs for property purchases both there and in the

Kyrgyz Republic. In Russia, we created a working group of

77 major industry players that has standardized the key

terms and conditions of a mortgage loan, as well as drafted

a code of ethics for mortgage lenders in conjunction with

the country’s government. We also partnered with Moody’s

Investors Service to issue the fi rst Russian-language

mortgage glossary.

Reach data for select industries; indicator defi nitions and reporting periods vary somewhat across select industries+New phone connections created 1996-2005. IFC ANNUAL REPORT 2007 43


OVERVIEW

The region has seen several years of growth and low infl ation. It has also been boosted by

sound fi scal policies, high prices for export commodities, and good global fi nancial condi-

tions, including strong growth in trading partners. But inequality and growth rates that

trail most emerging regions persist, as well as an investment gap, particularly in upgrading

manufacturing competitiveness and infrastructure and in the social sectors. Further reforms

are needed for sustainable growth—in pensions, labor, infrastructure, and the fi nancial

sector—and some countries are advancing on these fronts. Growth also needs to be

achieved while protecting natural resources and biodiversity.

LATIN AMERICA AND THE CARIBBEAN

IFC’S STRATEGY

Helping make markets work for all remains IFC’s

focus. We work to improve the region’s business

environment; broaden and deepen access to

fi nance, especially for micro, small, and medium

enterprises; and we encourage the sustainable

development of physical and social infrastructure,

including through innovative public-private

partnerships. We seek to partner with companies

over the long term, helping them compete

globally and set benchmarks for responsible

business practices. We work closely with the

World Bank and engage with stakeholders from

the earliest stages of project development to

maximize social and economic benefi ts. We

increasingly take a country-level or regional

approach to a sector, such as fi nancial markets,

health and education, agribusiness, and general

manufacturing. To increase our impact in frontier

countries and regions, we are broadening our

engagement in the Eastern Caribbean states,

Haiti, and Central America.







countries. Investments are increasing particularly

in Peru, Central America, and the Caribbean. The

main concentration is in fi nancial markets,

infrastructure, and manufacturing; and a

signifi cant share of IFC’s agribusiness portfolio is

located in the region. Our portfolio continues to

be healthy and is growing; it is also well

diversifi ed across countries and sectors. Our

advisory services have been expanding,

supporting our investment activities, improving

the business environment, and setting

benchmarks in corporate governance,

environmental, and social standards. Our advisory

services have an active portfolio of 117 projects

valued at $95 million. Based on value, 61 percent

are in frontier markets, with the emphasis on

improving environmental and social sustainability

(59 percent) and infrastructure (12 percent).

Major partners in regional advisory work include

Switzerland, the Netherlands, Canada, and the

United Kingdom.

Development Outcome


EconomicPerformance


Department IFC




FY06 FY07


Loans $1,371 $1,229

Equity $265 $295






$2,328 $2,005


ANTIGUA AND BARBUDA • ARGENTINA • THE BAHAMAS • BARBADOS • BELIZE • BOLIVIA • BRAZIL •

CHILE • COLOMBIA • COSTA RICA • DOMINICA • DOMINICAN REPUBLIC • ECUADOR • EL SALVADOR •

GRENADA • GUATEMALA • GUYANA • HAITI • HONDURAS • JAMAICA • MEXICO • NICARAGUA •

PANAMA • PARAGUAY • PERU • SAINT KITTS AND NEVIS • SAINT LUCIA • TRINIDAD AND TOBAGO •

URUGUAY • VENEZUELA



COMMITMENTS

FY04 FY05 FY06 FY07

Number of projects 45 54 69 68



1,218 1,398 1,747 1,781


DEVELOPMENT RESULTS

Overall, our investments in the region have led to

signifi cant development results by increasing

employment and access to fi nance. Our projects

in the region have had solid development results,

in line with IFC’s average for every development

component. For example, our investments

reached over 1.3 million microentrepreneurs in

eight countries. We have achieved above-average

results in our top industry exposures and our oil

and gas transactions. Similarly, our advisory work

has led to signifi cant developmental impact, for

example, in helping our fi nancial sector clients

reach new market segments and making it easier

for entrepreneurs to start a business or register it

with the government. In Lima, Peru, for instance,

we helped reduce business registration time from

60 days to two, resulting in a tenfold increase in

new registrations. Peru’s government is now

taking this effort to the national level.

SUSTAINABILITY

IFC continues to help clients with projects that

involve complex environmental and social issues,

such as mining in Peru and Guyana, agribusiness

and forestry in the Amazon, and labor rights in

the Dominican Republic and Haiti. In the

extractive industries, we also advise on revenue

management and community engagement. This

year, we helped the local government of

Cajamarca in Peru improve its use of royalties

from the Yanacocha mine. We are also

supporting new markets in renewable energy.


IFC focuses on where we add the most value and

have mapped out the key sectors that correspond

to core country needs, with an emphasis on

those with signifi cant impact potential, such as

fi nancial markets, infrastructure, agribusiness,

and the extractive industries. We work to ensure

that the benefi ts from our investments are widely

shared. We have increased our activities in

housing fi nance, support to smaller businesses,

and improvements to the business environment.

We take a long-term view in addressing the

region’s development challenges, working not

only with client companies but also with

governments and the World Bank to help

develop a favorable investment climate. We will

continue to expand our advisory services to

support private sector investments, notably

through public-private partnerships and

subnational fi nancing for basic infrastructure.



Brazil

FY07 1,618

FY06 1,505

Success Rate* 58%

Mexico

FY07 1,228

FY06 1,093

Success Rate* 69%

Argentina

FY07 768

FY06 810

Success Rate* 8%

* Percent of tracked companies withsuccessful development results ratings.

CY 2005 Portfolio

CY 2006 Portfolio


MSME loans (amount / # of loans)

$4.46 billion / 2.1 million

$9.15 billion / 2.76 million




3.4 million 35.6 million 900,000

Patients reached 553,774 1.43 million --


21 million+ 4 million 1.4 million

Employment 302,328 283,253 41,421





DEVELOPMENTAL REACH

EXPANDING ACCESS TO FINANCE

IFC’s work on the business enabling environment is creating

new market opportunities. Our program of municipal

simplifi cation, for example, has helped register 20,000 fi rms,

bringing them into the formal economy and improving their

access to fi nance. We are working in 35 municipalities in

eight countries: Brazil, Bolivia, Colombia, Ecuador,

Honduras, Mexico, Nicaragua, and Peru. This year we also

fi nanced four microcredit projects worth $22 million,

supporting over 400,000 microenterprises. Our long-term

housing strategy has resulted in $317 million in fi nancing

for four projects that represent over 170,000 mortgages.

Our advisory work has helped open new markets by

completing housing fi nance diagnostics in El Salvador,

Honduras, Nicaragua, and Peru. Our experience in Mexico

and Colombia led us to create Peru’s fi rst secondary

mortgage market company, together with Grupo Credito

and Titulizadora Colombiana; this will make home fi nancing

affordable for more Peruvians.

BUILDING SUCCESS IN SUSTAINABLE AGRIBUSINESS IN PERU

During seasons when there is no local produce, grocery

shoppers around the world can now buy high-quality

Peruvian asparagus and table grapes, sustainably produced

by Agrokasa, an IFC client since 1999. Our ongoing

fi nancing and advisory support have helped this $55 million

company achieve double-digit revenue growth. It is seeing

bottom-line benefi ts after adopting a client-focused strategy

and deciding to make high social and environmental

standards core business values. Agrokasa has created more

than 6,000 new, full-time equivalent jobs in rural areas of

Peru where most people live below the poverty line. Its

committed management team has driven strong adherence

to social and environmental standards. Agrokasa and other

pioneering fi rms are setting an example in the agricultural

export market that is being emulated elsewhere across Peru,

a country that has seen its agricultural exports grow by a

factor of fi ve in the last seven years.

Reach data for select industries; indicator defi nitions and reporting periods vary somewhat across select industries+New phone connections created 1996-2005.

* Includes Avenue Asia.



OVERVIEW

Amid high oil prices, the economies in the region continue to grow at solid rates, averaging 6.2

percent over the past three years. The diverse economies here are increasingly integrating into

the global economy, and there are extensive cross-border investments. A number of countries

have started to liberalize their traditionally public sector–dominated economies, and abundant li-

quidity and strengthening fi nancial markets are creating opportunities for private sector growth.

Challenges remain signifi cant: many countries are affected by confl ict and political instability,

the business environment is costly, physical and fi nancial infrastructure remains inadequate, and

corporate governance is often weak. There is high youth unemployment in many countries, as

job creation has not kept pace with population growth. Women in the region are relatively well

educated, yet their participation in the formal labor market is the lowest in the world.

MIDDLE EAST AND NORTH AFRICA

IFC’S STRATEGY

IFC is increasing capacity on the ground so that

we can better address gaps in the region’s

markets. Our investment and advisory activities

help improve the business environment, broaden

and deepen access to fi nance for small and

medium enterprises, encourage private sector

participation in infrastructure, and stimulate the

housing sector. We also support the cross-border

emergence of regional champions as they invest

in less developed countries, and we help

domestic companies grow and set benchmarks

for responsible business practices.







countries. New clients accounted for 72 percent

and South-South investments for 56 percent of

investment volume. Our portfolio is spread across

the region, with more concentration in the

fi nancial, manufacturing, infrastructure, and

hydrocarbon sectors. Our advisory services have

an active portfolio of 123 projects valued at $48

million. Based on value, 37 percent are in frontier

markets, with the emphasis on improving

infrastructure (32 percent) and access to fi nance

(31 percent). In advisory services, we are active in

17 countries; we approved 60 new projects in

FY07, 32 of them in frontier countries. We spent

$17.2 million: 57 percent for projects related to

access to fi nance and value addition to fi rms, 15

percent on the business enabling environment,

and 10 percent on projects for infrastructure,

including public-private partnerships. Major

partners in regional advisory work include,

among others, the United States, Japan, the

United Kingdom, Spain, and the Islamic

Development Bank.

COMMITMENTS

FY04 FY05 FY06 FY07

Number of projects 18* 21** 29*** 40***



236 315 668 1,217


Development Outcome


EconomicPerformance


Department IFC




FY06* FY07**


Loans $504 $879

Equity $100 $205






$314 $497


AFGHANISTAN • ALGERIA • BAHRAIN • ARAB REPUBLIC OF EGYPT • ISLAMIC REPUBLIC OF IRAN • IRAQ •

JORDAN • KUWAIT • LEBANON • LIBYAN ARAB JAMAHIRIYA • MOROCCO • OMAN • PAKISTAN •

SAUDI ARABIA • SYRIAN ARAB REPUBLIC • TUNISIA • UNITED ARAB EMIRATES • WEST BANK AND GAZA •

REPUBLIC OF YEMEN


* Includes regional shares of Soco Facility and Veolia AMI investments investments, which are offi cially classifi ed as global projects. Committed portfolio for IFC’s account includes regional share of BAPTFF, offi cially classifi ed as a global project.

** Includes regional share of Melrose II and Melrose II Expansion investments, which are offi cially classifi ed as global projects.

* Includes LNM Holdings.** Includes BAPTFF and Melrose.*** Includes Soco Facility, and Violia AMI.**** Includes Melrose II and Melrose II Expansion.


DEVELOPMENT RESULTS

IFC’s activities in the region have generated

tangible results, as they increased employment,

mobilized additional fi nancing for projects, and

provided support to MSMEs, and as investee

companies contributed tax revenues. In 2006,

our clients had just over 206,000 loans

outstanding to MSMEs, and our extractive

industries investments generated $772 million in

government revenues. Our activities have also

helped enhance regulatory reform in the

countries across the region. Some of our early

projects in the region had weak development

outcome ratings relative to IFC’s average. Political

instability and confl icts led to commercial failure

of a number of projects in West Bank and Gaza

that relied on mobility of goods and people for

their success, with projects in neighboring

countries like Jordan also affected, especially in

the tourism sector. Our projects performed best

in infrastructure and telecommunications, while

operations in some small nonbank fi nancial

institutions and some small manufacturing

businesses had only partly satisfactory

performance. The environmental and social

performance of our projects in the region was

favorable, in line with IFC’s average.

SUSTAINABILITY

IFC is helping businesses upgrade their corporate

governance so that they are able to attract and

retain investment, improve performance, and

foster trust among stakeholders. During FY07,

we implemented nine corporate governance

projects spanning 11 countries, including 92

learning events for 2,488 offi cers and directors

from 946 banks and businesses. We also

supported 10 countries in the drafting or

adoption of 15 corporate governance

regulations, codes, or guidelines. To foster

sustainable business development in Jordan, we

helped the government implement comprehen-

sive inspection reforms to make requirements

and procedures clear and transparent, reduce the

time and cost burden of inspections, and reduce

duplication among inspectorates.


IFC has substantially increased investment and

advisory services in the region in the last two

years, reaching many new clients. This is helping

markets work better and helping many

companies become more competitive. Going

forward, we will increase our focus on

infrastructure, on strengthening underdeveloped

capital markets, on supporting the development

of smaller businesses, and on helping improving

corporate governance across the region. We will

continue to work on increasing access to fi nance

and management training for women-owned

businesses to tap their inherent potential to spur

development. Assisting the private sector in

postconfl ict situations will remain a priority, and

we will continue to tailor approaches to specifi c

market conditions of our client countries.



Pakistan

FY07 522

FY06 345

Success Rate* 75%

Egypt

FY07 517

FY06 290

Success Rate* 75%

Oman

FY07 181

FY06 202

Success Rate* n/a

* Percent of tracked companies withsuccessful development results ratings.

CY 2005 Portfolio

CY 2006 Portfolio



$1.28 billion / 47,218

$2.32 billion / 206,240




9.4 million 16.6 million --

Employment 49,554 72,994 6,764





DEVELOPMENTAL REACH

PAKISTAN: ALTERNATIVE DISPUTE RESOLUTION

Pakistan’s smaller businesses face lengthy court processes

when there are business and legal disputes. Contract

enforcement on average takes 55 procedures and a fi ve- to

10-year litigation process. Courts are backlogged with about

1.5 million cases, a third of them commercial, and some 90

percent are expected to go to trial. To set up an alternative,

IFC has helped establish a pilot mediation center, which

began work in February 2007. The center is supported by

leaders from Pakistan’s judiciary and business community.

The center has already trained international accredited

mediators and has received 20 cases so far.

CREATING OPPORTUNITIES AT SIWA IN EGYPT

In Egypt’s remote Siwa oasis, an IFC initiative is promoting

ecotourism, sustainable agriculture, women’s artisanship,

and renewable energy. Under the women’s artisanship

project, 300 women have built their needlework skills

through on-the-job apprenticeships and formal training and

are seeing their incomes increase as their products are

exported and sold to the international haute couture

industry. The unique nature of Siwa and its status as an

ecotourism destination provided an opportunity to use

tourism to market local products to high-end international

tourists. The project is empowering Siwa’s population,

promoting entrepreneurship, and helping preserve the

delicate environmental and cultural balance of a threatened

ecosystem.

Reach data for select industries; indicator defi nitions and reporting periods vary somewhat across select industries


48 IFC ANNUAL REPORT 2007484848448448484848448484848488848848884444484848488484888888848484888888888844444888884844484884884484844888888488444844888884444488488488488884888884 IFIFCFIFFIFCIFCIFCFCIFFFCCFFFIFCIFCFCCCCFCCCFCCIFFFIFFCCCCIFIFCFFCFFCFCCCIFCCIFCFFFIFCCCFCFCIFCCCIFIFFFFFCCIFIIFFFIFIFCCIIFFFFFFCCCIIFFFFFCCCCIIIFFFFFFCFFFCCIFFFCCCIFCCCCCIFCCCCCCFFCCCCCCII CCCFCCFFII ANANANANAANANANAAAAANANANAANAANAN ANANAANANANANANANAN ANAN ANAAAAAAANAANANANANANANANANANANAAAANAANNANAAAAAAAANAAAANANANANNAAAAAANANAANANAANANANA ANAAAAANANAANAAANANNNAANNAANAAAANANANNANNANANANNNNAAAAAAANAANAAANANANNNUNUANUANNNUNNNUNUANUNNNUANUNUANNUAUNUANUAUUNUANUNUUANUANUANUAANUAUANUANUANUANUANUANUAAAAAAANUNUANUNUNUANNNNNUNUNUANNUANUANUUUANUNUAUAUAUAUAUAANUAUAAAUAUANUAANUAAAAANUANUNNNNNNUNUNUANUUUAUAAAUANUAAAAAANNNUNNNUNNUNUNUAUNUAUNUAANUANUAAAAANUANNNUUAUAAANUAAAAUAAANNUAAAANUNUAAAAANUAAANUNUNNUNUUUAAAAAANUNUANUAANNUAANUNNUNUAAAUUAAANUANNUNUN AANN AANUAAANNUAAANUAAAUAAL RL RL RL RL RL RL RL RLLL RLL RL RL RL RL RL RRRL RL RL RL RL RL RL R RLLLL RL RL RL RRL RRLL RLL RRRRL RRL RRLL RL RRL RL RLL RL RRLL RL RRRL RRRRRRLL REPOEPOOEPOEPOEPOEPOEPOEPOEPPEPOEPEPOEPOEPOEPOPOEPOEPOEPOEPOEPOEPOEPOEPOPOEPOEPOEPOEEPPOOEPOEPOPOPOEPOOEPOOOPPOPOEPEPOPPOOEPOEPOEEEPOPOPOOEPEEEPEPOPOEEEEPOEEPPOOEEEEPOOEPOEEPOOOE OOOE ORRTRTRRRRRTRTRRRTRTTTTTTTTTTTTTRRRRRRTRTRRTRTRTRTRTTTTTTTTTTTTRTRRRRTRTRRTRTTTTTTTTTTTTRRRRRTRTRTRTTTTTRRTRRRTTTTTTTTTRTRTRRRTTTTRTRTTTRTTRRRRRRTTTRRRRRTTTTRTTTTTRR RRRT 200200200200200200020020020020020002000200202002200002000020020000200000002002002002002002002200202000020020020020000020200000220000002220000000000200200200002002002 0200220002002002002200220000022220000000000000000000000000200020000000000000000000000000777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777

CREATING OPPORTUNITY requires global knowledge


IFC OPERATIONS AND RESULTS BY INDUSTRY

IFC brings global expertise to the private

sector in a wide range of industries.

We offer innovative products and

approaches to funding, and we help

companies upgrade environmental and

social performance.

IFC investments continue to grow in many industries, increasingly alongside

advisory work that helps companies, for example, upgrade environmental and

social performance, improve corporate governance, meet regulatory standards,

build links with local suppliers, or improve relations with their community.

Among departments focusing on IFC’s strategic sectors, Health and Education

registered the largest increase in FY07 (58 percent), followed by Agribusiness (38

percent), and Global Financial Markets (37 percent), based on fi nancing for IFC’s

account. Departments with the largest shares of commitments include Global

Financial Markets (41 percent); Global Manufacturing and Services (17 percent);

Oil, Gas, Mining, and Chemicals (12 percent); and Infrastructure (11 percent). Part

of the growth in new commitments for fi nancial markets (over $900 million) can

be attributed to the IFC Global Trade Finance Program’s more than $750 million in

guarantees for trade transactions, almost half of which benefi ted banks in Sub-

Saharan Africa.

We have made signifi cant progress in measuring our development impact and

the sustainability of our investment and advisory projects across industries. The

share of our tracked investments with successful development results has been

most encouraging in Infrastructure and Global Financial Markets, each with a 78

percent success rate, and in Oil, Gas, Mining, and Chemicals, at 76 percent. These

compare to an IFC average of 63 percent across industry departments.



OVERVIEW

Agribusiness comprises various functions in the food supply chain for domestic and inter-

national markets: production, marketing, logistics, processing, and distribution. Most of the

world’s poor people still live in rural areas and are directly involved in agriculture, which ac-

counts for 34 percent of GDP on average and employs 64 percent of the labor force in the

least developed countries. Food security is still a challenge for the poorest countries. But the

demand for food and agricultural products in developing countries is increasing along with

population growth and better living standards, even as high energy prices drive up the price

of biofuel-related feedstocks and as domestic and international markets remain character-

ized by protectionism. Meeting this demand while safeguarding scarce natural resources

presents a major challenge.

AGRIBUSINESS IFC’S STRATEGY

IFC made agribusiness a priority sector this year

because of its high potential for a broad

development impact. We use investments and

advisory services to help the sector meet an

increasing demand for food in an environmen-

tally sustainable and socially inclusive way. To

spread the benefi ts from this sector widely, we

focus on how supply chains function and support

projects with strong links to individual farmers.

We also promote the emergence of commodity

initiatives that need the support of multiple

stakeholders to ensure sustainability. To broaden

and leverage our impact on small farmers, we are

working with trading companies and fi nancial

intermediaries to channel fi nancing and advisory

services effectively.





tions. Excluding projects classifi ed as regional, 27

percent are in frontier countries. We expect that

these commitments will provide 87,500 jobs, and

reach over 357,100 farmers and 27,600 MSMEs.

Our portfolio, with outstanding commitments of

$1.7 billion, has started to perform better.

Driving improvements are a stricter standard for

selecting of clients, a focus on sectors where

countries have a comparative advantage, more

favorable commodity markets, and the improved

growth and stability of emerging countries.

COMMITMENTS

FY04 FY05 FY06 FY07




314 377 456 628


Development Outcome


EconomicPerformance


Department IFC




FY06 FY07


Loans $424 $555

Equity $19 $23



Total Commitments Signed $675 $816



$329 $444



DEVELOPMENT RESULTS

IFC projects show the signifi cant potential that

agribusiness yields for development: in 2006 our

portfolio companies employed 138,893 workers

and reached 538,295 farmers and 56,995

MSMEs. Our overall development outcome

success rate in the sector has been relatively

moderate, but recent results are improving. The

moderate success rates refl ect an earlier rapid

expansion of our portfolio, during which we

supported a number of projects that have not

been commercially successful, as well as some

diffi cult years in global markets. Our experience

demonstrates better results with nonperishable

products (beverages, grains, oilseeds, sugar) and

with agribusiness infrastructure than with animal

products or fresh produce.

SUSTAINABILITY

Agribusiness companies increasingly recognize

that the sector relies on a healthy base of natural

resources, many of which are at risk. The sector

also faces social challenges, including the need to

raise labor standards. IFC seeks commercially

viable solutions and helps companies set

benchmarks of responsible production so that

these solutions become widely adopted. In such

areas as sequestering carbon, managing

watersheds, preserving biodiversity, and

producing renewable energy resources, this work

can also help generate new income through envi-

ronmental services. This year we helped ECOM

Agroindustrial Corporation raise environmental

and social practices among its coffee suppliers in

Central America; the aim is to help them gain

premium prices for more sustainable products

while lowering operational costs and enhancing

productivity. The project seeks to move the

broader supply chain to exceed minimum

compliance standards.


IFC is helping raise clients’ awareness of

environmental and social sustainability, and

companies that aspire to a high level of social

responsibility increasingly seek our assistance. We

aim to reach greater numbers of small farmers by

increasing their access to targeted fi nancial

services, and we working on this with processors

and traders as well as fi nancial intermediaries.

CY 2005 Portfolio CY 2006 Portfolio FY07 New Business Expectations*

Employment 122,082 138,893 87,500

Number of farmers reached

494,195 538,295 357,100

Number of MSMEs reached

45,761 56,995 27,600

DEVELOPMENTAL REACH

FINDING SUSTAINABLE MODELS FOR AGRIBUSINESS IN BRAZIL

Brazil’s natural geographic advantages place it well to help meet growing global demand for foodstuffs, including

through soybean and cattle production. The country’s expanding activity in these sectors, however, brings itunder

heightened scrutiny because of the risk they can pose to the Amazon. For the Amaggi soybean project and the

Bertin cattle project, we have helped companies respond to concerns about their environmental and social

impacts. Amaggi has improved its environmental and social management systems and joined other initiatives led

by industry and nongovernmental organizations to ensure that it is not involved in deforestation. Bertin is

developing and implementing procedures to address environmental and social issues in its cattle supply chain, an

approach that others are already viewing as a model. We have found that working in complex projects such as

these requires a substantial amount of IFC’s time and resources, but our impacts on the sustainability of the

agribusiness sector as a whole are likely to be signifi cant.

*Expectations projected through 2012.



OVERVIEW

Financial markets are key facilitators of development. Sound fi nancial institutions ensure

that an economy’s resources are allocated where they are most productive, enhancing

development in all other sectors. Financial markets and institutions have been transformed

by globalization, market liberalization, and revolutions in information technology. But most

fi nancial systems in developing countries still have vulnerabilities, degrees of illiquidity, and

a lack of distinct product markets such as long-term fi nance in local currency, insurance,

and derivatives instruments. And access to fi nancial services is still quite limited for large

segments of society.

GLOBAL F INANCIAL MARKETS

Development Outcome


EconomicPerformance


Department IFC




FY06 FY07


Loans $1,593 $1,818

Equity $388 $679






$401 $404


IFC’S STRATEGY

IFC prioritizes investments in the fi nancial sector

because it underpins the development of all

other sectors. It is also our largest business,

accounting for 30 to 40 percent of IFC’s new

commitments and overall investments each year.

We take three approaches to developing the

sector: working directly with fi nancial institutions,

helping build fi nancial infrastructure such as

rating agencies and credit bureaus, and working

with the World Bank and development partners

to create supporting policy and legal and

regulatory frameworks. IFC’s investments here

include loans, equity, guarantees, and risk

management products. Our equity investments,

in particular, help strengthen fi nancial institutions

through our involvement as a long-term

shareholder. We adopt a wholesaling approach

to facilitate the development of markets in such

developmentally critical areas as housing fi nance,

student loans, energy effi ciency fi nancing, and

MSME fi nance. We also provide advisory services

to help build effi cient fi nancial intermediaries.







countries. About two-thirds of our fi nancial

exposure is to commercial banks, and the remain-

der is invested in nonbank fi nancial institutions

such as leasing, housing fi nance, insurance, and

microfi nance companies. Our portfolio, with

outstanding commitments of $9.5 billion, has

been healthy, with loan loss reserves of 0.4

percent, their lowest level in over eight years.

COMMITMENTS

FY04 FY05 FY06 FY07




1,683 2,183 2,468 3,374



DEVELOPMENT RESULTS

IFC’s investments in fi nancial markets reach many

smaller businesses: in 2006, our clients’

outstanding portfolio for small and medium

enterprises totaled 719,000 loans for $52.2 billion,

and for microfi nance, 4.3 billion loans for $5

billion. We have worked extensively on access to

housing fi nance, committing nearly $2.9 billion in

FY01-07 in 40 countries to mortgage-providing

commercial banks and fi nancial institutions, as well

as to secondary mortgage conduits. IFC has

supported over 75 individual microfi nance

institutions and has investments in several funds

and holding companies that have attracted

signifi cant private capital into the microfi nance

sector. In FY07, IFC committed $196 million in 26

microfi nance projects. In FY07, IFC committed

$196 million in 26 microfi nance projects. Financial

markets are sensitive to market movements, and

any volatility has a signifi cant impact on our

development outcomes. In recent years, these

outcomes have benefi ted from economic

expansion and stable exchange rates in many of

our member countries. Following a major portfolio

cleanup, the best regional results are in Africa,

showing the potential for impact in the least

developed countries.

SUSTAINABILITY

Solid environmental and social risk management

in the fi nancial sector enhances sustainability for

the entire private sector. IFC helps clients

capitalize on opportunities to lend with a

sustainability focus. Our clients now offer

targeted sustainability fi nancing instruments

aimed at energy effi ciency and renewable energy,

cleaner production, corporate governance,

sustainable supply chains, gender-based lending,

and lending to disadvantaged social groups. This

year IFC made a $43 million investment in

risk-sharing facilities for commercial banks in

China to support up to $100 million in energy

effi ciency equipment loans, mostly to smaller

businesses. The program made a strong start in

FY07, with $17 million in loans already disbursed

to Chinese businesses.


IFC has made progress in supporting lending to

SMEs, microfi nance companies, and housing

fi nance, and we expect to increase activities in

these sectors further. In addition, the IFC Global

Trade Finance Program expanded in FY07 to a

program of $1 billion. IFC issues partial or full

guarantees related to trade transactions, and the

program has greatly benefi ted banks in

underfi nanced markets, particularly in Africa,

which accounted for 49 percent of the total

volume of guarantees issued in FY07. SMEs have

accounted for 71 percent of the total volume of

trade fi nance provided by the local banks

through this program.

SME and microfi nance reach indicators

CY 2005 1 Outstanding portfolio

CY 2006 2 Outstanding portfolio

FY07 New Business Expectations 3

SME loans (amount / number of loans)

$44.67 billion / 517,000 $52.18 billion / 719,000 23% per year growth

Microfi nance loans(amount / number of loans)

$3.77 billion / 3.350 million $4.95 billion / 4.313 million 40% per year growth

Global Trade Finance Program indicators FY 2005 FY 2006 FY 2007

Amount/ number of guarantees

- $267 million / 320 $767 million / 564

SME (by number of guarantees)

Africa (by $ amount)

South-South (by number of guarantees)

-

--

81.3%

70.0%38.1%

71.0%

49.1%36.0%

Total trade supported - $395 million $1.16 billion

DEVELOPMENTAL REACH

SERVING AFRICA’S MICRO, SMALL, AND MEDIUM ENTERPRISES

The MSME sector accounts for 90 percent of the fi rms in

developing countries, typically employing over half the

working population. IFC has proven most effective at

reaching this sector through fi nancial intermediaries. This

year we started a new Africa MSME Finance Program that

combines advisory services and fi nancial products to put

loans, trade fi nancing, mortgage fi nancing, and other

products within reach of small entrepreneurs, who generally

have little or no access to fi nance. Based on lessons from

previous efforts, the program is designed to grow fl exibly

and adapt to market demand. It gives banks a strong

incentive to lend to smaller businesses, with interest rate

structures adjusting upward or downward depending on

whether they meet agreed lending targets. We expect the

new program to facilitate an additional 10,000 loans to

MSMEs for a total of $200 million over the next fi ve years.

RECOGNIZING LEADERSHIP IN SUSTAINABLE BANKING

Emerging market banks are shifting their focus from

avoiding risks to seeking new and better ways to tap the

business opportunities offered by sustainable development.

The benefi ts range from higher profi tability and market

value to a stronger reputation and better image in the

community. In June 2007, IFC and the Financial Times

hosted the second annual Sustainable Banking awards to

recognize banks for leadership and innovation in integrating

social, environmental, and corporate governance objectives

into their business models. A global event, the 2007 awards

drew entries from more than 100 banks in 51 countries.

The awards highlighted regional leadership for the fi rst time

under a new emerging markets category, with winners from

Brazil (Banco do Brasil), India (ABN Amro Bank India), the

Slovak Republic (Dexia Banka Slovensko), and South Africa

(Nedbank). 1,2. Portfolio reach fi gures represent SME and microfi nance subloans issued by IFC portfolio clients in CY 2005 and 2006. 177 and

178 clients were required to report their end-of-year SME and microfi nance portfolios in 2005 and 2006, respectively. 142 and 140 clients did so as of June 30, 2006 and 2007, respectively. The missing data were extrapolated.

3. Average portfolio per year growth fi gures are based on IFC FY07 commitments for 23 SME and 14 microfi nance clients.



OVERVIEW

Information and communication technologies are important catalysts of development. They

enable communities and local businesses to access important information and make it pos-

sible for rural and local markets to integrate with the global economy. The opportunities are

signifi cant. A study on the impact of mobile phones in Africa has shown that a 10 percent

increase in telephone penetration can lead directly to a direct gain in GDP of 0.6 percent

and a substantial multiplier effect on indirect growth, while IFC’s anecdotal experience

shows that this relationship is even stronger. Investments in mobile telephony over the last

decade have been signifi cant, with 75 percent of the global population now covered. With

this mobile footprint covering only 30 percent of the world geographically, however, much

remains to be done to extend access to rural and less developed areas.

Global Information and Communication Technologies is a joint IFC–World Bank department.

GLOBAL INFORMATION AND COMMUNICATION TECHNOLOGIES

IFC’S STRATEGY

IFC focuses on improving access to information

and communication technologies, ensuring that

they play a role in development, and helping

create innovation in the use of these technolo-

gies. Access to telecommunications and IT

services is fundamental to closing the digital

divide and expanding the reach of development.

As other fi nanciers have become active in the

mobile sector, IFC has focused investments on

frontier and postconfl ict markets such as the

Democratic Republic of Congo, Haiti, Samoa,

and Sierra Leone, where the development impact

is greatest. In middle-income countries, we now

focus on rural access and the Internet’s

underlying infrastructure—backbone and wireless

broadband technologies—as new sources of

growth and development impact. We help

mainstream industry best practices so that ICT

can contribute to a private sector–led business

environment. Drawing on the policy and

regulatory work of the department’s World Bank

units, IFC works with other fi nanciers to invest in

viable business models that can be replicated in

other markets. Because innovation creates

valuable intellectual property and establishes

skilled jobs in developing countries, IFC is making

venture capital investments in IT products,

services, and infrastructure companies and is

facilitating innovative IT-enabled services, such as

mobile banking, that extend access to services to

poorer people. These investments are creating

world-class companies and helping reverse brain

drain, and they have a powerful demonstration

effect for entrepreneurs.


Investment commitments reached $399 million for

17 projects in FY07, and we mobilized an


tions and parallel loans. Excluding projects


countries. Over the next fi ve years, we expect that

these new commitments will give an additional

12.2 million people telephone connections, create

1,800 new highly skilled jobs in the IT and media

sectors, and contribute a total of $2 billion in fi scal

revenues and license, spectrum, and numbering

fees. Our portfolio, with outstanding commit-

ments of $970 million, has been healthy, with no

nonperforming loans, an average net spread of

3.5 percent, and strong rates of return across the

board in telecommunications, IT, and media.

Development Outcome


EconomicPerformance


Department IFC




FY06 FY07


Loans $299 $376

Equity $67 $22




Committed portfolio for IFC’s account $986 $970


$67 $469



COMMITMENTS

FY04 FY05 FY06 FY07




129 200 366 399


DEVELOPMENT RESULTS

IFC’s investments in this sector have led to

tangible development results. Mobile telephone

projects have been drivers of strong perfor-

mance—our clients have added telephone

connections for over 79 million customers since

1996, often in the most challenging countries.

The sector overall enjoyed solid success rates in

line with IFC’s average. Although early-stage IT

projects are considered relatively risky due to the

uncertainty of the underlying business models

and market uptake, we are encouraged by the

results, which are steadily improving. Since 2000,

investments in the IT and media sectors have

helped create 17,500 jobs, most of them highly

skilled and well-paying.

SUSTAINABILITY

Environmental and social risks from the

information and communication technology

sector are limited and can be avoided or

mitigated by following generally recognized

performance standards, guidelines, and design

criteria. IFC helps clients meet these standards

when the client does not already have an

adequate environmental management system in

place. For example, in Turkey, IFC has helped

Avea, one of the country’s largest mobile

telephone operators, implement environmental,

health, and safety standards that meet

international best practice. This includes an

emergency response plan to prepare staff for

natural disasters such as fi res and earthquakes.


There are enormous opportunities for businesses

in developing countries to use ICT as a

springboard to introduce new services and move

beyond established business models. Hence we

are committed to continuing our focus on

extending access, in particular to frontier markets

and postconfl ict countries, and in supporting the

application of these technologies for develop-

ment. As we are starting to see the benefi ts of

our long-term commitment to invest in ICT

projects, we will also continue to strengthen our

relationships with global strategic sponsors and

investors, helping transfer successful models

across emerging markets. Around 10 percent of

our clients are prepaying our loans, a good

indicator that we can move toward riskier

investments in less developed markets, where we

can make the biggest difference.

Actuals up until 2005 CY 2006 Portfolio FY2007 New Business Expectations*

IT and media employment 45,000 53,114 -

New IT and media employment (between 2000 and 2005 for CY05, and between 05 and 06 for CY06 fi gures)

17,500 9,916 1,800

Total phone connections 93 million 121 million -

New phone connections(between 1996 and 2006 for CY05, and between 2005 and 2006 for CY06 fi gures)

79 million 53 million 12.2 million

Payment to government (taxes and fees)

- - $2 billion

DEVELOPMENTAL REACH

TRANSFORMING MOBILE COMMUNICATIONS IN HAITI

IFC has helped fi nance the largest foreign investment to date

in this impoverished island nation: a $260 million network

build by Digicel, the Caribbean’s largest mobile operator. We

fi rst provided a $15 million loan as part of a $64 million debt

facility, then a further $15 million loan to fi nance the

expansion of Digicel’s network. Before Digicel Haiti launched

commercial operations in May 2006, the country’s mobile

penetration was estimated at 4.4 percent. Already, mobile

penetration has grown to more than 15 percent, and Digicel

has more than a million subscribers. Our investment has

brought a remarkable change in the communications

landscape. Mobile coverage has quadrupled, and Digicel has

made mobile telephony affordable by lowering the price of a

handset from $120 to as low as $20. Alongside user-friendly

features, such as per second billing and roaming capabilities

in more than 70 countries, a unique remittance system

enables the Haitian diaspora to buy phones and airtime for

friends and relatives at home.

INCREASING CELLULAR ACCESS IN AFRICA

IFC has supported Celtel in expanding its business in the

Democratic Republic of Congo, Madagascar, Malawi, Sierra

Leone, and Uganda, helping modernize telecommunications

and increase access in regions with low penetration. In the

DRC and Sierra Leone, our fi nancing is helping postconfl ict

countries rebuild their communications infrastructure,

providing a basis for future economic growth. By mobilizing

loans from international commercial banks—including the

fi rst IFC loan participations by three South African

banks—we have encouraged investor confi dence in other

sectors of these high-risk countries. The fi ve subsidiaries

employ more than 2,000 staff, over 95 percent of whom are

Africans, including the majority of their management teams.

Better cellular access also helps create employment indirectly

in a wide range of industries. *Expectations projected for end 2011.



OVERVIEW

The manufacturing and services sectors account for 40 percent of developing countries’

GDP. Overall, the sector has been growing at an average of 9 percent in recent years, three

times the rate in high-income countries. Driven by GDP and income growth, the demand

for manufacturing products and services in developing countries has increased signifi cantly,

and they generally require capital intensive investments. These sectors encompass a wide

range of industries, including building materials, forest products, retail, tourism, metals,

transport equipment, electronics, pharmaceuticals, and textiles. Developing countries gain

from higher investment levels, which bring better management and technology, higher-

quality products, better wages, higher profi ts, and improved social and environmental

performance. These sectors drive signifi cant growth opportunities, through job creation

and extensive supply chains and distribution networks.

GLOBAL MANUFACTURING AND SERVICES

IFC’S STRATEGY

IFC invests and advises where we can make the

most difference for clients and sectors. In

middle-income countries, we focus on frontier

regions and on helping local second-tier

companies move to the next level of competitive-

ness and improve their access to capital markets.

With larger companies, we accompany fi nancing

with expertise that ranges from political risk

mitigation to ways of improving management

and technical performance, governance, and

social and environmental sustainability. We

support an increasing number of South-South

investments, helping emerging market fi rms

expand regionally or globally. In frontier

countries, we provide companies with long-term

fi nancing where local sources of funding are

unavailable and help strengthen business

practices.






percent are in frontier countries. Roughly 70

percent of our commitments were in building

materials, retail, hotels, and forest products. The

main recipient countries were widely dispersed,

with China, India, Egypt, Uruguay, Yemen,

Colombia, and Turkey accounting for almost 50

percent of commitments. In some of the most

diffi cult frontier markets, particularly those with

weak fi nancial sectors, we made small direct

investments in local businesses with experienced

sponsors and also provided ongoing advisory

services. The outstanding portfolio is $5.2 billion

and includes 427 projects. As of end 2006,

portfolio companies reported sales of $42.6

billion, employment of 414,500 workers, and

profi ts of $3.3 billion. They paid taxes of $1.1

billion and undertook local purchases worth

$24.6 billion.

COMMITMENTS

FY04 FY05 FY06 FY07




1,239 1,275 1,218 1,375


Development Outcome


EconomicPerformance


Department IFC




FY06 FY07


Loans $1,070 $1,180

Equity $147 $179






$1,509 $1,696



DEVELOPMENT RESULTS

Macroeconomic contractions and devaluations,

particularly in Brazil, and increased competition

and falling prices in textiles have led to moderate

development results for IFC’s general manufac-

turing projects. A third of our investments did

not achieve high development outcomes due to

low profi tability: but most of these companies

continue to contribute to their countries’

economies. Our results were strongest in South

Asia and Southern Europe. Africa has the

weakest results, measured by the number of

projects. This refl ects a large proportion of small

projects, often with inexperienced sponsors that

have lacked technical support to develop their

businesses. Taking into account IFC’s disbursed

investment amount, however, our overall

development outcome improves to 67 percent,

with Africa’s results only slightly below the

average. In East Asia, some IFC investments have

suffered because fi nal product prices failed to

keep up with higher costs for raw materials, a

problem affecting several metals projects in

China, for example.

SUSTAINABILITY

IFC clients increasingly seek help to strengthen

labor practices, improve relationships with

communities, and lower carbon emissions. IFC

also helps clients adopt systems that ensure

sound environmental and social management,

enhancing their brand and improving productiv-

ity, processes, and operational stability. This year,

we worked with the Arab Yemen Cement

Company to improve the design of a new plant

for lower greenhouse gas emissions. We

supported clients investing in forestry, including

Sonae Novobord in South Africa and Khai Vy

Corporation in Vietnam, to upgrade environmen-

tal management and boost rural employment. In

Azerbaijan we helped a new food retail chain

establish an environmental, health, and safety

function and develop good practices in fi re safety

and food hygiene.


IFC clients have made great strides in adapting to

a changing world economy. They are putting

capital to its most productive use, creating

benefi ts for shareholders, lenders, workers,

consumers, government, communities, and the

environment. Our clients differentiate themselves

through proactive management of their

sustainability impacts. Assisting smaller clients in

diffi cult and small frontier countries continues to

be a challenge, but we are making inroads. We

have developed a system for effi cient processing

of small direct investments and aim to build on

this experience. To broaden our impact, we

increasingly collaborate with the World Bank.

CY 2005 Portfolio CY 2006 Portfolio FY2007 New Business Expectations*

Employment 477,788 414,517 44,100


$15.35 billion $24.58 billion $4.3 billion

Net income $3.21 billion $3.29 billion $1.1 billion

Net sales $55.03 billion $62.57 billion $10.9 billion

Taxes paid $1.66 billion $1.1 billion $430 million

DEVELOPMENTAL REACH

ENGAGING ALONG THE SUSTAINABLE FORESTRY SUPPLY CHAIN

In recent years, IFC has substantially increased its

investments in sustainable forestry projects around the

world. IFC supports sustainable businesses along the

entire forest supply chain, from plantations to

production of pulp, paper, tissue, furniture and other

goods. In these engagements, we seek to play a global

leadership role by ensuring that our projects set an

example of environmental and social stewardship, and

we aim to select projects that pilot innovative

approaches to revitalizing forests, reducing pollution

and recycling waste. We work to ensure that our

projects draw on sustainably managed forests and are

designed in accordance with best available technolo-

gies. IFC has committed $203 million in loans in the

forest sector this year, including projects in India (West

Coast Paper Mills), Nigeria (Star Paper Mills), Pakistan

(Packages Limited), and Uruguay (Orion Pulp Mills).

REPUBLIC OF YEMEN: GREENFIELD CEMENT PLANT

IFC has contributed signifi cantly in providing and

mobilizing long-term funds for a large, capital-inten-

sive investment to support a $250 million greenfi eld

cement plant in eastern Yemen, one of the poorest

parts of the country. IFC’s investment will mitigate

perceived country risks for potential participating

colenders. IFC has also provided technical advice that

will result in energy cost savings as well as help reduce

carbon emissions through better use of local materials.

IFC will ensure the project’s compliance with World

Bank Group environmental, social, and safety policies

and guidelines.

*Expectations projected for 2012.



OVERVIEW

The high private sector and social returns to investing in health and education have been

well documented in most developing countries. Education is an important driver of social

mobility and underpins a country’s economic growth and technological advancement, and

private higher education in many countries increasingly caters to lower- and middle-income

households. Likewise, good health is fundamental for children to learn and for adults to

lead productive working lives. But public resources have not been able to meet quality or

quantity needs of the health and education sectors. The private sector plays a growing role

in providing, and in some cases fi nancing, these services in developing countries, comple-

menting the public sector. In poorer countries, reliance on the private sector tends to be

greater, as the public sector is often unable to deliver essential services. Many governments

are now seeking to broaden the private sector’s role as a way to reach underserved groups,

increase effi ciency, and promote innovation.

HEALTH AND EDUCATION

IFC’S STRATEGY

IFC uses fi nancing and advisory services to help

clients in these strategic sectors expand and

improve operations, introduce new means of

delivering services, and move into new markets

within and across national boundaries. Our

global expertise is highly valued, particularly as

health and education remain predominantly local

businesses. We play a signifi cant role in providing

long-term fi nancing—still unavailable to many

health and educational institutions—and

mobilizing fi nancing from other investors. We

invest in local companies—including K-12

schools, higher education institutions, hospitals

and clinics, laboratories, and companies that

provide services to health and education

institutions—that have the potential to grow and

generate signifi cant development impact. We

work with emerging regional or global players,

such as hospital groups and universities, that can

innovate and improve the quality of services. We

also channel fi nancing to smaller clients and

student fi nancing through risk-sharing

arrangements with fi nancial intermediaries. Our

advisory services help clients with business

development, fi re and life safety, and corporate

governance.




additional $28 million through structured

fi nance. Excluding projects classifi ed as regional,

48 percent are in frontier countries. We expect

that our new commitments will reach 5.2 million

patients and 684,000 students. Our portfolio,

with outstanding commitments of $466 million,

has performed well for the past two years.

Driving performance are an increase in capital

gains from our equity investments and the

much-improved performance of our loan

portfolio.

COMMITMENTS

FY04 FY05 FY06 FY07




41 81 126 199


Development Outcome


EconomicPerformance


Department IFC




FY06 FY07


Loans $119 $79

Equity $7 $91






$8 $6

Total Committed Portfolio $310 $472


DEVELOPMENT RESULTS IFC began investing in health and education in

the late 1990s; hence we have only a small

sample of projects that are suffi ciently mature to

assess the overall impact. The development

results of these early projects have been weak,

mainly due to problems with project sponsors.

We have, however, gained signifi cant global

expertise in appraising projects and are better

able to advise clients on the content and scope

of their projects. We are adapting by providing

more advisory services, conducting better project

screening, and helping install sound manage-

ment principles and teams. Our more recent

results have improved. We fi nd that our

investments are more successful where regulatory

environments are predictable and there are

strong links with local communities. Last year,

our clients reached close to 2.4 million patients

and 320,000 students.

SUSTAINABILITY

Environmental and social risks in the health and

education sectors may appear limited, but they

can imply signifi cant impacts for occupants,

visitors, and host communities. The most

important include life and fi re safety standards

for public buildings, medical waste management,

occupational health, and safety and hygiene for

health projects. IFC’s support sets an example of

how these potential risks can be managed

responsibly and helps build the capacity of local

teachers, doctors, and nursing staff in the

market. We help clients meet our standards and

advise on energy use and effi ciency, hygiene

standards, and disease prevention, so that

companies can better protect lives and the

environment. Clients we helped improve fi re and

life safety this year include Dar Al Fouad Hospital

in Egypt and Saudi German Hospital.


IFC aims to realize the enormous development

potential of the health and education sectors. We

are learning from past experience and improving

the quality of our investments; despite

challenges, we remain committed to these

sectors. Reaching lower- and middle-income

households and less developed regions remains

an important goal. Going forward, we will scale

up our investments, focus on emerging regional

and global providers, and use new instruments,

such as risk-sharing facilities, to reach smaller

players and greater numbers of students. An

important way to benefi t poor and middle-

income households is by helping them access

quality and affordable health care, for example,

through health insurance and better delivery

mechanisms. We also aim to work with

institutions seeking to move down-market with

lower-cost but still high-quality services, and we

will support public-private partnerships in both

health and education.

CY 2005 Portfolio CY 2006 Portfolio FY2007 New Business Expectations *

Number of patients reached


Number of students reached

324,444 353,011 684,000

Taxes paid - $7.62 billion $14.55 billion

DEVELOPMENTAL REACH

SAUDI GERMAN HOSPITALS GROUP EXPANDS REGIONALLY

Private health institutions are generally local businesses in

emerging markets, but some larger groups are expanding

across borders. This can boost access for underserved

populations, raise the quality of care, and establish

benchmarks for best practices. In 2007, IFC partnered with

Saudi German Hospitals Group, one of the largest private

health care providers in the Middle East and North Africa, to

establish tertiary care hospitals in Egypt and Yemen. The

hospital group seeks to improve health care across the region,

especially in poorer, non-Gulf states. The need is acute: the

World Health Organization ranks Egypt 114 and Yemen 141

out of 188 countries on health status. Before this investment,

there was no quality tertiary hospital in Yemen, and about

120,000 Yemenis travel abroad for care annually, at a cost of

$300-400 million. The hospitals will also offer better

employment opportunities to local professionals, helping

reduce brain drain in the health care industry.

GHANA: INNOVATIVE FINANCING FOR PRIVATE SCHOOLS

The poor quality of public primary education in Ghana has

created enormous demand for private schools. Private

schools, which have been shown to produce better

educational outcomes, have seen enrollment grow by 22

percent a year in Accra since 2003—more than twice as fast

as public schools. But much demand remains unmet, largely

because schools have little access to affordable, long-term

fi nancing and little training in fi nancial management. IFC’s

help with strategic planning, self-evaluation, and human

resource management is allowing private schools to

strengthen operations, enhance the quality of education

they offer, and reach more students. We are working with a

local bank that has thus far provided fi nancing of $1.8

million in local currency to 13 schools serving 6,000

students, and a similar program was recently introduced in

Kenya. The objective is to build a lasting market for

commercial fi nancing of private schools. This in turn

supports a higher objective—helping reach the Millennium

Development Goal of universal primary education by 2015.

*Expected results by project lie between CY 2009 and 2012.



OVERVIEW

Infrastructure is central to economic growth, better living standards, and broader develop-

ment. Basic services such as water, sanitation, and electricity improve health and social wel-

fare, and they are essential for modern industry and commerce. Companies cannot compete

when they are burdened with high-cost, unreliable, or low-quality infrastructure. Transport

infrastructure (roads, ports, railway, airports) and services (shipping, airlines) are necessary for

domestic and international trade. Yet infrastructure remains inadequate in many developing

countries. The investment needs are immense: estimates range from 5.5 to 9 percent of GDP,

well beyond what the public sector alone can meet. Engagements in frontier countries have

long lead times and require time-intensive structuring efforts. Infrastructure sectors also need

more effi cient management, which is often lacking in the public sector.

INFRASTRUCTURE IFC’S STRATEGYIFC has made infrastructure a priority because of

its impact on living standards and its role

underpinning the development of all other

sectors. We support a number of initiatives to

develop commercially viable projects, and we

make direct investments. We provide advisory

services to help governments develop regulatory

frameworks that facilitate public-private

partnerships and private sector investments in

infrastructure, and we provide expertise and

analysis to prepare transactions such as

privatization of power utilities and railways in

Africa or wind power projects worldwide. We

focus our efforts where the needs are greatest:

helping to connect the underserved and working

in diffi cult country environments. In the

transportation and energy sectors, IFC balances a

development role with support for activities to

reduce greenhouse gas emissions.




additional $93 million through loan participations

and structured fi nance. Of these projects, 43

percent are in frontier countries. We expect our

new commitments in 2007 to serve, directly or

via third parties, 21.5 million electricity

consumers and 2.2 million water consumers and

to transport over 10 million airline and 9.2

million railway travelers in 2010. Our portfolio,

with outstanding commitments of $2.2 billion,

has been healthy, with utility and international

transport sectors driving strong overall economic

and fi nancial performance.

COMMITMENTS

FY04 FY05 FY06 FY07




847 598 955 936


Development Outcome


EconomicPerformance


Department IFC




FY06 FY07


Loans $779 $789

Equity $127 $134



Total Commitments Signed $1,338 $985



$1,739 $1,332



DEVELOPMENT RESULTS

IFC’s infrastructure investments have benefi ted

many people in developing countries. Last year

alone, companies in our portfolio delivered power

directly to 9.5 million customers and supplied

water to 15.3 million customers, mostly

households where a number of individuals benefi t

from the services. Our client companies in power

generation enabled 124 million customers to

receive electricity. Some 269 million vehicles drove

on roads built or maintained by our clients, and

46.4 million passengers traveled on our clients’

airlines. Ports we invested in also helped facilitate

international trade.The development results of our

infrastructure investments have been higher than

the IFC average. The best performing sectors are

utilities and internationally oriented transport

sectors, such as ports and air transport.

Domestically oriented transport sectors, such as

roads and railways, have produced weaker

fi nancial and economic results, as they are more

exposed to national economic risk.

SUSTAINABILITY

Infrastructure projects can carry social and

environmental risks, such as resettlement and

economic displacement of local communities. In

such cases, IFC works with clients to ensure that

affected communities are not only compensated

but also share in the opportunities created by

new or improved infrastructure. We also help

clients improve environmental and social

management in such areas as energy effi ciency,

waste management, and labor standards. In

Cameroon, IFC identifi ed an opportunity to use

Dutch donor funds to help AES Sonel, an electric

utility, combat river blindness, a disease prevalent

in areas around the company’s plants and

reservoirs. In Mexico, IFC is working with Petstar,

a plastics recycling company, to improve the

welfare of waste pickers and reduce the

incidence of informal child labor.


IFC has increased investments in the sector,

where historically we have had a high

concentration in Latin America and, to a lesser

extent, East Asia and the Pacifi c. Though the

share of other regions in new commitments has

increased since 2003, more needs to be done to

meet infrastructure demand in less developed

areas of Africa, the Middle East, and South Asia.

Long lead times and the need for time-intensive

project development and structuring efforts are a

serious impediment to infrastructure develop-

ment in frontier countries, and we are exploring

new approaches to help address this constraint.

Public-private partnerships remain a priority, and

we will work closely across the World Bank

Group to put in place suitable regulatory

frameworks, as well as to ensure that public

sector participation in these partnerships is

appropriately structured. We will also identify

new approaches to continue our leadership in

helping address climate change.


Power generated: (# of customers)

65.2 million 124 million 21.5 million

Power distribution: (# of customers)


Water distribution (# of customers)


Airport passengers 10 million 13.2 million 10.7 million

Airline passengers 16.3 million 46.4 million 15 million

Container ports/moves 3.3 million 4.9 million 700,000

Cargo/grain ports (tons) 10.1 million 13.4 million --

Roads – number of vehicles 309.1 million 269.3 million 266.3 million

Railway passengers -- 2.4 million 9.2 million

Rail Freight (tons) -- 200.2 million 3.7 million

Gas distribution (number of customers)

-- 10.6 million --

Gas throughput (billion cubic meters)

-- -- 25.4

Waste recyling (tons) -- -- 30,000

Payments to government -- $4.849 billion --

DEVELOPMENTAL REACH

RELIEVING ELECTRICITY SHORTAGES IN PAKISTAN AND UGANDA

Uganda has experienced power shortages and a sharp rise

in electricity tariffs due to reliance on expensive diesel-based

power. To help, IFC is leading a group of investors to fi nance

the Bujagali hydropower project, one of the largest private

sector investments in Africa’s power sector to date. It will

allow Uganda to meet electricity demand and retire

expensive diesel plants when the plant is commissioned in

2011. By substituting thermal power, the project will reduce

greenhouse gas and other pollutant emissions. IFC, the

World Bank, and MIGA have worked closely together and

with the company, Uganda’s government, and the regulator

over several years to help create the conditions that make

this project feasible.

In Pakistan, IFC is investing $125 million in KESC, the

power utility that supplies electricity to Karachi, the country’s

industrial and commercial hub. This will help KESC connect

new residential and business customers to the grid,

eliminate power shortages, reduce distribution losses, and

lower carbon emissions. The project is expected to

demonstrate the benefi ts of privatizing the power sector in

Pakistan and the region.

IMPROVING EAST AFRICA’S RAIL NETWORK

IFC has played a major role in the privatization of the Kenya

Railways Corporation and the Uganda Railways Corporation,

which together form a critical component of East Africa’s

transportation infrastructure. The joint concession is

expected to benefi t neighboring countries as well by increas-

ing transportation effi ciency, reducing pressure on the

regional road network, and stimulating regional trade and

economic growth. IFC’s loan of $22 million and up to $10

million in a subordinated loan will be used to rehabilitate,

operate, and maintain the railway assets, which a private

company will manage under a 25-year concession. The

project illustrates IFC’s increasingly successful collaboration

with the World Bank—both IBRD and IDA—in large-scale

development projects.

*Expectations projected for 2010.



OVERVIEW

The oil, gas, mining, and chemicals sectors are important for many of the poorest countries.

They hold enormous development potential but also well-recognized challenges. They

can yield large tax and royalty revenues to governments and create valuable jobs in remote

regions, business for local suppliers, links to downstream industries, infrastructure that can

be used by others, and a range of local community programs. Engagements in these sectors

are also highly complex. They require diligent environmental management, while revenues

have to be managed and used well to maximize benefi ts. Companies need to take sensitive

and inclusive approaches that generate sustainable benefi ts for local communities. The global

growth in energy demand coincides with increased awareness of the potential consequences

and risks of climate change. Greater effi ciency in energy use and production and an increase

in the use of natural gas offer opportunities to reduce greenhouse gas emissions.

Oil, Gas, Mining, and Chemicals is a joint IFC–World Bank department.

OIL, GAS, MINING, AND CHEMICALS

IFC’S STRATEGY

IFC engages in these sectors when we can add

value, helping countries leverage their resources

for development impact in ways that go beyond

what the market might normally provide. In

addition to providing fi nancing, we work with

investors and others to enhance the benefi ts of

projects we support. For example, we help

strengthen investors’ capacity to manage

environmental and social issues; we support the

growth of related local businesses; and we work

to address relevant governance issues. We give

particular focus to early engagement in a

project’s life cycle, to local companies, to projects

in Africa, and to gas investments.






percent are in frontier countries. We expect that

our new commitments will generate strong

development benefi ts, including over $410

million in government revenues and around $631

million in locally sourced goods and services. Our

portfolio, with outstanding commitments of [$xx

billion], continues to perform well. One key

factor contributing to this performance is the

high prices and margins the industry has seen in

recent years.

COMMITMENTS

FY04 FY05 FY06 FY07




659 478 788 984


Development Outcome


EconomicPerformance


Department IFC




FY06 FY07


Loans $684 $802

Equity $94 $183






$1,024 $1,192



DEVELOPMENT RESULTS

IFC investments have consistently generated

positive development outcomes, with the strong

results largely driven by signifi cant fi nancial and

economic benefi ts. In 2006 alone, companies in

our portfolio generated an estimated $8.8 billion

in revenues to local and national governments

and created or preserved over 100,000 direct and

indirect jobs. They also spent over $252 million

on community development programs and

purchased over $6.7 billion in goods and services

domestically, in many cases through linkage

programs IFC had set up with small local fi rms.

SUSTAINABILITY

IFC helps extractives projects achieve broad local

support through careful mitigation of environmen-

tal and social impacts, including proactive

engagement with affected communities to ensure

that benefi ts are felt locally. We help clients handle

the diverse impacts of these complex projects,

such as protecting the water supply and

biodiversity, reducing greenhouse gas emissions,

and managing resettlement and economic

displacement. We also help broaden the positive

impact of our projects through programs to link

local businesses with IFC projects. In the Guyana

Goldfi elds exploration project, for example, we

have helped assess impact on biodiversity from the

proposed mining development, so that this can

factor into project planning.


IFC is making good progress in promoting sector

sustainability and transparency in the projects we

support. We are helping increase transparency at

the local government level by raising awareness

of revenues in the community and strengthening

local capacity to assess and spend resources

effectively. An ongoing challenge is to track

development and poverty impacts beyond direct

project outcomes; we propose to review our

approach and supplement it through in-depth

project studies. Our experience in complex

projects in the extractive industries has proved

useful to other sectors, and we now apply some

of the same principles to all high-risk projects. To

help promote sustainable energy solutions, we

have increased our activities in renewable energy

and energy effi ciency.


Employment 66,828 100,211 11,500

Outlays for community development programs

$241.1 million $252.4 million $31.8 million


$2.3 billion $6.7 billion $631.5 million

Payments to government $5.3 billion $8.8 billion $410.7 million

DEVELOPMENTAL REACH

PROMOTING TRANSPARENCY

IFC is making progress at promoting transparency in the oil,

gas, and mining sectors at the national and project levels.

Sponsors of all projects IFC has supported in the last two

years have agreed to disclose material payments to the

government. At the national level, the World Bank Group is

working to promote transparency in many of the 28

countries that are participating in the Extractive Industries

Transparency Initiative. Nigeria is one example where

implementation is well-established and beginning to show

clear results, through a transparent and comprehensive

disclosure of audited petroleum revenues and payments, as

well as a public debate on the fi ndings of a 2006 report

from the transparency initiative and its recommendations for

improvement.

SUPPORTING COMMUNITY DEVELOPMENT

This year IFC committed $10 million and raised $2 million

from the Norwegian government to launch CommDev, a

program that engages and empowers local communities

and governments around our investments in extractive

industries. Working with stakeholders is critical to the

projects’ success and to sustaining development beyond the

life of a well, pipeline, or mine. Hence CommDev is an

integral component of each World Bank Group extractives

project, helping ensure value-added support beyond the

compliance requirements of IFC investments and World

Bank loans. It works with local and regional governments,

building capacity to manage royalty fl ows; identifi es ways to

integrate local smaller business into the supply chain of our

client companies; and helps set up community foundations

as well as programs on the environment, gender, and HIV/

AIDS. In Guatemala, for example, CommDev is funding a

community-based committee, representing a broad array of

stakeholders, to monitor the environmental impact of the

Marlin mine. In Guinea, it is working with the government

and industry to establish a unifi ed framework for long-term

community development in the country’s mining regions,

based on international best practice.

“We are in the business of helping all partners—

companies, governments, and communities alike—

derive tangible benefi ts from the private sector

investments we support. Doing good business and

doing good for people go hand in hand.” – Somit Varma, Director, Oil, Gas, Mining, and Chemicals

*Expectations projected for end of calendar year 2007.



OVERVIEW

Private equity funds play an important role in deepening capital markets, as they provide

fi nancing to companies, including start-ups, small businesses, high-growth companies,

and turnarounds, that are not served adequately by traditional lenders. For the mid-market

and SME clients in emerging markets where IFC invests, private equity focuses on growth,

effi ciency, transparency, and governance to create value. Successful managers facilitate the

growth of companies through involvement in improving company operations, and these

high-growth companies create higher than average employment growth. Record levels of

capital have been raised in recent years for a select few emerging markets that have seen

sustained high growth, high liquidity, and improving returns after poor results in earlier

years. But the overall penetration of private equity as a percentage of GDP in emerging

markets remains low compared to developed markets.

PR IVATE EQUITY AND INVESTMENT FUNDS

IFC’S STRATEGY

IFC has been a pioneering investor in private

equity and alternative assets in emerging

markets. As global capital fl ows to some

emerging markets have increased, we have been

sharpening our focus on adapting the private

equity business model to the characteristics and

challenges of underserved and frontier markets,

using a combination of advisory and investment

support to improve access to equity fi nance and

build local asset management industries. We seek

to be an early supporter of fund managers that

subsequently attract ample commercial support

and “graduate” from IFC as fi rst-rate regional

fund managers. We negotiate fund terms and

take a role on fund advisory committees, helping

improve governance and transparency to

international standards, as well as the investor

friendliness of funds in which we invest. We also

ensure that funds in which we invest adopt IFC’s

environmental and social standards. This range

of IFC activities makes funds more attractive to

investors. Going forward, we will increase our

support to growth equity funds, to back

companies that stimulate job creation; small

business funds, to reach more deeply into the

frontier; venture capital funds, to support this

nascent sector; sustainability funds; and

industry-focused funds, such as those focusing

on infrastructure or agribusiness.



for 14 projects in FY07. Excluding projects


countries. This year’s new investments are expect-

ed to support 56 high-growth companies and 73

MSMEs and generate higher job growth than the

relevant regional average, totaling over 10,000

new jobs. About 40 percent of the new

investments are frontier funds, and around 76

percent of the fund managers we work with are

based in client countries. The investment

portfolio grew to $1.7 billion for 149 projects in

FY07.

COMMITMENTS

FY04 FY05 FY06 FY07




171 181 273 250


Development Outcome


EconomicPerformance


Department IFC




FY06 FY07


Loans $0 $0

Equity $273 $250




Committed portfolio for IFC’s account $958 $1,071


$0 $0

Total Committed Portfolio $958 $1,071


DEVELOPMENT RESULTS

IFC activities in the sector have produced tangible

development results. Over the last seven years,

IFC-supported funds have provided capital and

management expertise in more than 300

companies, and they are expected to support an

additional 200 companies by the end of these

funds’ lives. Over half the companies supported

have been SMEs, and employment growth has

on average been 3.7 times higher than the

relevant regional employment growth rate. Some

22 percent of fund investee companies are

located in frontier countries. In total, these funds

have mobilized $12.9 billion of equity and

quasi-equity in emerging markets. Our early fund

investments had poor results, mirroring the

experience of private investors in the early 1990s.

In 2000, we reviewed our approach, centralized

these investments in one specialized department,

and took a more structured approach, working

mainly with experienced fund managers. This led

to better results: post-2000 funds have

performed better, measured by both develop-

ment impact and fi nancial indicators, than

pre-2000 funds.

SUSTAINABILITY

Fund managers understand the value of sound

corporate governance and environmental and

social management. These infl uence a company’s

commercial success and help determine whether

fund managers can achieve a good sale through a

public offering or to a private buyer. IFC supports

private equity funds with advisory services that

help them manage business risk and opportunities

resulting from their investee companies’

sustainability performance. For example, we

provided training this year in IFC’s new perfor-

mance standards and business risk management to

Asian Lion Fund, which targets investments in

mining companies in Southeast Asia.


With improved results and more experience, we

are now able to work increasingly in underdevel-

oped countries, including frontier markets, and

with less experienced local managers to help

develop the sector. This creates a shift in the

balance of the development impact of our funds.

Working with experienced fund managers

increases the chances of supporting companies

that will become successful, with a larger impact

on the ground through job creation. Working

with credible but less experienced managers and

in underdeveloped countries is expected to create

fewer jobs but have a larger impact on market

development. Taking this approach, we go where

we are needed most.

CY 2005 Portfolio * CY 2006 Portfolio * FY2007 New Business Expectations**

Number of emerging managers

26 37 10

Number of supported investee companies

192 299 138

Numbers of MSMEs reached

106 164 73

New jobs 57,259 60,576 10,050

Number of investee companies with frontier exposure

35 66 58

Number of high-growth investee companies

77 89 56

DEVELOPMENTAL REACH

ACTIVE STRUCTURING AND SUPERVISION

IFC’s management of our funds portfolio instills comfort in

many commercial investors who invest alongside IFC.

Recently, we led investors in improving the quality of a fund

management team by convincing the fund manager to

bring in new senior local staff. As a result, an expected loss

was turned into a modest gain. In another case, we

supported a fund manager in restructuring a fund and

introducing a parallel listed vehicle, a novel structure in

emerging markets that would help raise needed funds but

had raised concerns among investors about a potential

confl ict of interest. We provided legal advice and

suggestions that improved the structure and transparency of

the proposed new structure, helping align the interests of

investors in the two vehicles. This gave comfort to existing

investors and helped the manager raise the fund success-

fully, with minimal disruption.

CONNECTIONS WITH OTHER IFC ACTIVITIES

Homex, Mexico’s home development company, has provided

affordable entry-level and middle-income housing for more

than 100,000 families to date. Zephyr-Nexxus Mexico Fund I,

a private equity fund for midsize companies, invested in

Homex in 1999 and helped the company’s strong perfor-

mance and its successful initial public offering in New York

and Mexican stock exchanges in 2004. IFC’s Private Equity

and Investment Funds Department introduced this fund

manager to Su Casita, a mortgage lender in which IFC’s

Financial Markets Department had invested. This relationship

increased the availability of mortgage loans for affordable

housing and complemented IFC’s work on primary and

secondary mortgage markets in Mexico.

* Calculations are based on new business committed between 2000 and the respective year, and not on the total portfolio of projects.

**Expectations are projected for 2012.



OVERVIEW

As many developing countries decentralize their government structures, local governments

are being entrusted to provide infrastructure services such as water and sanitation, waste

disposal, energy, and transportation. Effi cient and reliable infrastructure improves living

standards and enables local businesses to thrive and compete. Local governments are often

in a better position to assess demand, foster local participation, and be responsive and ac-

countable to their citizens. Their management capabilities and regulatory frameworks are

still catching up with the new responsibilities, however, and raising funds in local capital

markets is often diffi cult.

A new joint IFC–World Bank subnational fi nance department was created this year, building

on the previous work of the Municipal Fund. This enables us to meld IFC transaction experi-

ence and World Bank experience in working with municipalities and state-owned enterprises

so that we can deliver well-targeted interventions.

SUBNATIONAL F INANCE IFC’S STRATEGY

Since 2003, IFC has been helping local

governments gain access to fi nancing for basic

infrastructure services, and helping develop local

capital markets in the process. This year, this pilot

effort became a full department for IFC and the

World Bank. This new approach allows us to

provide funds and advisory services to local

governments and to selected national and

subnational public utilities that meet our fi nancial

and governance criteria. Employing credit

guarantees and risk-sharing facilities, among

other fi nancial products, we encourage local

investors to fi nance subnational projects,

generally in local currency. Drawing on World

Bank expertise in project processing and

assistance to governments, we also now work

with nationally owned utility enterprises.


Investment commitments reached $75 million for

two projects in FY07. To date we have made

eight subnational transactions for a total of $285

million. In aggregate, these projects catalyze over

$800 million in infrastructure investments for

municipalities in Latin America, Sub-Saharan

Africa, Eastern Europe, and East Asia. Over the

next fi ve years, we expect to invest in projects

that will help 30 subnational clients improve their

fi nancial performance and sustainability. We also

plan to assist several hundred smaller local

governments through fi nancial intermediary

investments, which we expect to benefi t more

than 20 million people.

COMMITMENTS

FY04 FY05 FY06 FY07




50 0 52 75



FY06 FY07


Loans $0 $50

Equity $0 $25






$0 $0

Total Committed Portfolio $48 $148


DEVELOPMENT RESULTS

Subnational fi nance is a relatively new line of

business for IFC; operations are not yet

suffi ciently mature to evaluate their results fully.

One early example is the IFC-funded Bus Rapid

Transit system in Guatemala City, which has

reduced commuting times and increased the

availability and safety of public transportation.

Our local currency loan to Russia’s Chuvash

Republic will provide all-weather access to

markets and services for rural communities and

help the republic extend the life of its existing

road assets.

SUSTAINABILITY

Since local governments are usually responsible

for providing water, sewerage, and solid waste

services, many of the subnational projects we

fi nance result in positive environmental and social

impacts. For example, this year IFC made a $50

million investment in PNOC-EDC, an integrated

geothermal steam and electricity producer in the

Philippines. This will enable development of new

energy projects and lower the country’s

dependence on imported fossil fuels. The project

is also expected to improve the effi ciency and

competitiveness of the country’s geothermal

sector. IFC is helping the company improve its

corporate governance and social environmental

risk management.


The World Bank Group plans to scale up work at

the subnational level, and we are setting up a

dedicated facility for advisory services in

partnership with the World Bank and other

donors. This will help municipalities improve

their creditworthiness and prepare viable

projects, with a focus on frontier countries.

DEVELOPMENTAL REACH

Actuals as of June 2007 *

FY2007 New Business

Expectations**

Power customers -- 2.5 million

Water and sewerage customers

830,000 --

Transport and road customers

150,000 50,000

Other customers served

70,000 --

MUNICIPAL FINANCE FOR INFRASTRUCTURE

The Chuvash Republic, a small frontier region of Russia, has worked with the World Bank Group to build a

reputation for fi scal responsibility and access fi nancing to upgrade its rural infrastructure. The republic’s

progressive budget management attracted IBRD loans in 2002 and made it a solid candidate in FY07 for a partial

credit guarantee under the joint IFC/World Bank subnational fi nancing program. Our guarantee of the republic’s

bond issue, equivalent to $35.1 million, helped raise the capital needed to repair miles of neglected roads and

corroded water pipes as well as renovate aging hospitals and schools. The republic plans to raise further capital

for infrastructure, and we are planning a second investment to support its road modernization program, as well as

similarly structured transactions in other regions of Russia to help meet the country’s development needs.

*For FY07 portfolio, fi gures are best estimates.**Expectations projected for end 2012.


68 IFC ANNUAL REPORT 20076868668686686868688868686666686666666686668686868868888888888 I CFCIFCFCFCIFCCFCCFFIFCFCFCFCCFCFCIIIIIFCIFCIFCCCCCFCFCFCFCFCIIIIFFFCCCCCCCCFCCIIFFFCCCCCCCCCCIIFIFFFCCFCFCCCCFCIIIIFFCCCCCCCFCIFCIIIIFFFCCCCCCCCCIFCFCFCIIFFCFCCCCCCCCCCIIFFFFCCCIFFIFFFFFIFCCFCCCCIFCFCFFFFFFCFFFCIFCCCIFCFIFCFCFFCCIFCFCIFCCCFIFCIFCCIIIFCFCCCFCIFCCIIFCCIFCCFIFCCCCFCFFCFCCCFFFCFCCI CC AAAAAAAAAAAAAAAANANANNNANNNNNAAAAAAAANANNNNAAAAAAAAAANNNNAAAAAAAAAAANAAAAAAANANNNAAAAAAAAANAAAAAANAAAAAAAAANNNAAAAAAANNAAANNAAAAANNAAAAAAANAAAAAANAA AAANANNUNNUNUNUNNUANUANUNUNUNUNUNUUUUUUAAAAAAAAANUAAAAAAAAAANNUNNUNUANUUUUAAAAAANUAAAANUANUUUAAAAAAANUANUANNUUUUUAAAAAAAAANUUUUUAAAAAAAAAAAAANUNUUUUUAAAAAUUUUAAAANUAUUUAAAAANUUUUUUUAUAAAAANUANUANNUUUUUAUAAANUUUUAAAAAUANUUUUUUAAAUUUUAAANUUUAAAAAAAAAAAAAUUAAAAAAAAAALLLLLLLLLLLLLLLL RRRRRL RL RL RL RRRRL RL RL R RRLLLLLLLLLL RRRL RL RRL RL RLLLLL RRL RRL RRLLLL RRRRRRRRLLLLLL RRRRRRL RRRL RRL RLL RRRRRRRRRRLLLLLL RRRRRRRRRRRLLLLLLL RRRRRRRRRRLLLL RRRRRRRR RRRRRRLLLLL RRRRRRRRRLL RRRRRLLL R RRRL RRRLLL RRRLLLL RLL RRL RRLL RREPOEPOPOOEPOPOOOOEPOOOOOOOEPOEEEPOOOEPEEEEEEEEEPEEEEEEEP RRRRRRRRRRRRTTTTTRTRTRTRTRTRTRTTTTTT RRRRRRRTTTTTTTRTRTTRRRRRRRTTTTTTTTTTTT RRRRRTTTTTTTTRRRTTRTRTRTTRTRTRTTRTRRRRTTTTTTRTRTT TTRRRRRRRRTTRTRTRT RTRRRRRRRRRTRTTRRRRRRRRTTTRTRTRTTRRRRRRRRRRRTRTTRT RRRRRRRRRRRRRTTRRTTTRTTTTTTTRTRRTRRTTRTRRTRR 20020020020020002022000000000002000000000000200222200000000000000202220022000000200000002020020020020000000022000002000000002000220020000202002220020000000002200222020000200200002020020200220000000020020020000000000200000202000000222 0000000020000000007777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777

CREATING OPPORTUNITY with integrated solutions


IFC OPERATIONS AND RESULTS ADVISORY SERVICES

IFC advises businesses and governments

to support the private sector. Especially

in frontier markets, this helps us address

basic challenges and prepare the way for

private investment and growth.

IFC Advisory Services is a growing and dynamic business. This part of our work

has grown nearly 30 percent a year, reaching $197 million this year. By design,

advisory projects are less sensitive to many of the risks that constrain IFC’s

investment work. Those same risks also contribute to the demand that makes

advisory services the lead instrument for IFC in many countries.

IFC is working to integrate advisory work more closely with investments.

We are also enhancing coordination with the World Bank, which leads in

providing broader policy advice to governments in such critical sectors as

fi nancial market development and reform of the infrastructure sectors.

IFC had advisory work active in 97 countries during FY07, and projects in

frontier countries represent 62 percent of the value of new approvals. Of the

35 confl ict-affected member countries, IFC has advisory projects committed in

23, including Afghanistan, Haiti, Liberia, Nigeria, and Rwanda. Advisory Services

employs over 1,100 full time staff, a 125 percent net growth since FY02.

The work is organized into fi ve business lines: Business Enabling

Environment, Access to Finance, Environmental and Social Sustainability,

Infrastructure, and Value Addition to Firms.



WHAT WE DO

IFC’s advisory services are helping client countries improve their

investment climate. In a work program coordinated through a

joint IFC–World Bank–MIGA vice presidency, our efforts focus

in four areas: regulatory simplifi cation (in business registration,

licensing, taxation, collateral, access to land, and trade facilita-

tion); subnational expansion of the Doing Business project;

alternative dispute resolution; and investment policy and

promotion. In FY07, we were active in 76 countries through

221 advisory projects, with expenditures of $18.4 million. The

largest share of this work was in Sub-Saharan Africa (22 per-

cent) and East Asia and the Pacifi c (22 percent); 60 percent of

projects were in frontier markets.

HOW WE DO IT

We advise on design and implementation of reforms at the

national and subnational level. In January 2007, MIGA’s Board

decided to integrate its advisory work into FIAS, the Invest-

ment Climate Advisory Service, a multidonor facility of IFC and

the World Bank that has global expertise in attracting foreign

investment to developing countries. IFC is also a founding

member of the Investment Climate Facility for Africa, a public-

private partnership to catalyze reform in Africa, and of the

Bangladesh Investment Climate Fund.

HOW WE MEASURE SUCCESS

In Lima, Peru, we helped cut the time required to register k

a new business from more than 60 to about six days and

helped combine fi ve separate inspections into one. In 2006,

BUSINESS ENABLING ENVIRONMENT

DOING BUSINESS PROJECT INSPIRES 109 REFORMS Since its launch in 2004, the Doing Business project has evaluated progress with regulatory reforms in 178 countries. A joint product of IFC and the World Bank, it has inspired 109 reforms, 53 of which are complete and yielding benefi ts to businesses. A third are taking place in Africa, which Doing Business 2007 identifi ed as the region with the sharpest increase in reforms. The top reformer in 2006 was Georgia, followed by Romania, Mexico, China, and Peru. FIAS and IFC Advisory Services experts are assisting the governments of Azerbaijan, Burkina Faso, Egypt, and three dozen other countries in ex-panding reforms and focusing these reforms on the creation of new jobs.

Dispute Resolution 7%Industry-specific 11%

Subnational 16%

Business Advocacy 8%

Diagnostic and Monitoring &Evaluation 20%

Policy, Regulation, and Institutions 34%

Cross-border 4%

Other <1%

FY07 EXPENDITURES

over 8,500 businesses registered with the municipality, a 653

percent increase over 2005.

In Kenya, we helped eliminate 110 unnecessary business k

licenses and simplify eight others in 2006. The reform effort

targets private sector concerns: it simplifi es or eliminates 23 of

the 26 licenses that businesses have found most burdensome.

In Sierra Leone, we helped lower the cost of starting a business k

from about $1,500 to a $50 fi ling fee. We also helped simplify

customs, introducing risk-based inspections for traded goods.

In the Balkans, IFC piloted a new approach to measuring re- k

sults, comparing our alternative dispute resolution clients with

a control group that used the court system between 2005 and

2007. While 93 percent of the alternative dispute resolution

cases were settled within two weeks at an average cost of 500

euros, some 60 percent of the court cases took three to fi ve

years at a cost of more than 3,000 euros.


WHAT WE DO

IFC’s advisory services expand the availability of fi nancial servic-

es to micro and small businesses and low-income households.

Projects and programs cover banking, credit bureaus, hous-

ing and property fi nance, insurance, microfi nance, municipal

fi nance, securities markets, and trade fi nance.

HOW WE DO IT

IFC provides advisory services at two levels:

Institution-building for individual banks and nonbank fi nan- k

cial institutions. This includes advice on expanding lending to

small businesses, credit underwriting, risk management, and

product development.

Improving the enabling environment. This involves legal and k

regulatory advice, awareness-raising events, market studies,

and other sector development work.

ACCESS TO F INANCE

INTEGRATING ADVISORY SERVICES WITH INVESTMENTSAbout half of IFC’s investments are with fi nance institutions that serve small businesses, and over 70 percent of our advisory services focus on these clients. As of December 2006, IFC’s clients held about 5 million small business loans worth over $57 billion. IFC’s strategy is to integrate investment and advisory work through efforts that began in Africa in 2005-2006, ex-panded to Latin America last year, and are now spreading to Asia. An independent evaluation recently found that from 2003 to 2006 IFC achieved greater outreach when investment and advisory services were provided as a combined service to clients.


Projects in banking for smaller businesses generated $74 k

billion in new investment fi nancing and helped improve access

to fi nance for 1.2 million small and medium business owners

in 2006.

Microfi nance advisory services have generated over $4.6 bil- k

lion in new investment fi nancing to over 2.3 million microentre-

preneurs in 2006.

Leasing advisory services generated, from 2003 to 2006, k

$17.5 million in IFC fi nancing to leasing companies and over

37,000 leasing transactions worth $688 million in Central and

Eastern Europe.

FY07 EXPENDITURES

Other 2%

Nonbank Financial Institutions 12%

Securities Markets 1%

SustainableFinance 10%

Trade Finance 6%

Housing and Property Finance 14%

Banking 31% Credit Bureau 9%

Microfinance 15%

IFC helped create or improve credit bureaus in eight k

countries, resulting in 9.3 million credit inquiries and helping

generate an estimated $4.7 billion in new investment fi nancing

in 2006.



WHAT WE DO

IFC develops and tests innovative environmental and social

business models. With our support, these business models be-

come commercially viable and deliver environmental and social

benefi ts in the areas of biodiversity, carbon fi nance, cleaner

technologies, corporate social responsibility, sustainable energy,

and sustainable investing. In FY07, 22 of our 39 sustainability-

related projects were in frontier markets.

HOW WE DO IT

IFC helps demonstrate that sustainability is good business.

We train fi nancial institutions on how to achieve social and

environmental benefi ts and work with environmental consult-

ing fi rms in clean production and energy effi ciency. IFC also

promotes sustainable business by building the capacity of

NGOs and entrepreneurs to deliver services for local communi-

ties, particularly around extractive industries, and by supporting

income-generating activities around areas with outstanding

biodiversity such as rainforests in Brazil, coral reefs in Indonesia,

and a nature reserve in the Kyrgyz Republic.


Since 2003, IFC has helped establish lending targeted to k

energy effi ciency in six Central European countries. Through

the end of 2006, the program had generated energy savings

equivalent to $30 million per year and reduced carbon emis-

sions by 52,800 tons a year.

In India, Kenya, and Morocco, IFC has helped develop the k

market for solar energy products with advice, equity invest-

ments, and loans to businesses. Through July 2006, we helped

GOING GLOBAL WITH CLEAN, AFFORDABLE DRINKING WATEROne important way IFC measures success is by replicating and expanding initiatives in which we played a defi ning role. In 2002, a start-up company with a robust, energy-effi cient, and low-cost water purifi cation technology approached IFC for funding. We provided advice and funding that helped the company redefi ne its approach from selling equipment to selling water. Today, 500 WaterHealth International systems deliver clean water to an estimated 500,000 people in the Philippines, Sri Lanka, and rural India. These businesses are staffed by villagers and funded by local banks. Users pay just $2 a year for clean water. WaterHealth International recently raised $11.3 million with new investors and is poised to accelerate its expansion.

FY07 EXPENDITURES

Sustainable Energy 22%

SustainableInvesting 14%

Other 1%

Cleaner Technologies 4%

Biodiversity 39%

Cleaner Production 4%

Social Responsibility 16%

businesses install 28,000 solar systems for families. The effort is

reducing carbon emissions by 10,900 tons annually.

IFC provided funding to develop a Corporate Sustainability k

Index on behalf of Brazil’s Bovespa stock market. The fi rst of its

kind in the region, the index rose 34 percent in its fi rst year, out-

performing the market’s 32 percent rise. As of December 2006,

the market capitalization of the indexed stocks was $374 billion.

In Vietnam, IFC has helped improve farming practices and k

raise incomes for bamboo farmers and rural people. Training

conducted through mid-2006 led to the planting of 533 hect-

ares and the creation of 140 jobs in new bamboo processing

centers, with pay averaging about three times the per capita

income in the area.

ENVIRONMENTAL AND SOCIAL SUSTAINABIL ITY


WHAT WE DO

IFC extends development impact by improving access to basic

services in road infrastructure, telecommunications, water and

energy utilities, health, and education. Our advisory work in

this area is closely coordinated with our investments.

HOW WE DO IT

IFC provides advisory services to national and municipal

governments for structuring and implementing private sector

participation in ways that balance the interests of investors with

public policy considerations. In doing so, we help governments

achieve policy objectives and create investment opportunities,

both for IFC and for our fellow investors in industrialized and

developing countries. This year, we completed 14 advisory

projects, including work in Romania’s health sector, rural electri-

fi cation in the Philippines, Nigeria’s Abuja Airport, the Jeddah

desalination plant and Hajj Airport Terminal in Saudi Arabia,

a logistics hub in Panama, telecommunications in Kenya, and

Jordan’s main airport. Another 11 projects are ongoing.


Our advisory services laid the groundwork for mobilizing k

$1.4 billion in private investment.

Our advice generated $640 million in concession fees and k

other payments to governments from public-private partner-

ships in infrastructure.

One project brought electricity to 60,000 households in the k

Philippines. The government decided to introduce private sector

PUBLIC-PRIVATE PARTNERSHIPSMany developing countries are establishing innovative partnerships, combining elements of private capital and expertise with well-defi ned and limited public funding, to address bottlenecks and infrastructure and deliver essential public services. IFC’s ability to tap both our global experience in infrastructure and the public policy expertise of the World Bank positions us uniquely to support member countries in developing these solutions. This support comes both through IFC investments in public-private partnerships and through our advisory work for developing, tendering, and implementing such arrangements. IFC has over 30 ongoing advisory mandates to help government implement PPPs, with Africa and the Middle East being the most active regions. In FY07, we concluded eight such mandates, which are expected to lead to $1.5 billion in investment.

FY07 EXPENDITURES

Other 1%Infrastructure 66%

Health and Education 17%

Subnational Finance 16%

participation in power generation in an effort to reduce the

subsidy burden and improve reliability. IFC was hired as advisor

to develop contractual rules and enable private participation.

In October 2006, we successfully concluded the fi rst full-scale

transaction for the island of Masbate. The new private provider

was selected through a competitive tender based on the lowest

price and has entered into 15-year power supply agreements

with rural electric cooperatives.

INFRASTRUCTURE



WHAT WE DO

IFC helps private fi rms enhance their competitiveness and

productivity, and we promote the growth of small businesses

through the development of supply chains. Our programs also

help clients improve corporate governance and prevent and

treat HIV/AIDS in their workforce and local communities. We

are active in developing grassroots organizations and business

associations, and we work on many fronts to expand economic

opportunities for women.

HOW WE DO IT

IFC’s advisory service specialists work with investment teams to

provide value-added services such as supply chain linkages or

corporate HIV/AIDS programs. IFC has also developed tools and

products, especially for small business development, that are

used in combination with other projects. These include a range

of training programs for new entrepreneurs.


In corporate governance, IFC has assisted 7,983 companies k

in Eastern Europe and Central Asia, mobilizing $631 million

in investment between 2000 and 2006. In the Middle East,

company directors from 1,995 fi rms were trained between

2005 and 2007.

IFC’s Linkages Program enabled small businesses to win con- k

tracts from IFC clients worth an estimated $300 million in 2006.

HELPING LOCAL BUSINESSES ACCESS E-PROCUREMENTIn December 2005, ExxonMobil turned to IFC for support in expanding its e-procurement system, an initiative to reach local suppliers. IFC used its Enterprise Center in Chad, a program developed in partnership with the local chamber of commerce, to address poor Internet access, low computer literacy, and language barriers. To date, 53 local fi rms have submitted bids resulting in 16 contracts worth over $30 million. The e-procurement effort is part of a larger local business opportunity proj-ect that includes assessment of potential suppliers, training, and mentorship. The results of this partnership are promising: the average local contract has grown from $100,000 in 2004 to $800,000 in 2007.

FY07 EXPENDITURES

Other 3%

Gender 6%

Grassroots Organizations 13%

HIV/AIDS 2%Linkages 27%

Direct Assistance to SMEs 20%

Business Service Providers 3%

Corporate Governance 20%

Entrepreneurship 6%

VALUE ADDITION TO F IRMS

Through its SME management training product, Business k

Edge, in 2006 IFC trained 9,998 entrepreneurs in Yemen; 3,895

in the Mekong region; and 11,534 in China.

Some 22 projects are helping our client companies respond k

to HIV/AIDS. These are linked to $911 million in IFC invest-

ments in nine countries; the programs reach 88,000 employ-

ees, with total community outreach estimated at 640,000

people.

76 IFC ANNUAL REPORT 2007767676767777777667767676767677777777767676767777777766667677767766667677777676766677777676766676676776767676667777767676766777777676676776666666766677777777677766766667767666677766777 FFIFFCFCFCFFFFCCCCCCIFCCCCCCIIIIIIIIIFCFFFFCFCFCCCCCCCCCCIIIIFCFFCFCCCCCCCCIIIII CCCCCIIIFFCFFCCCCCCCCIIFCIFIFIFFCFCCCCCCIIIFCFFFCFCCCIFFFFFFCCCCCCIFFFIFIFCCCCCCIIIFIFCFFCCCCCCCCII CCCCCCCIFFFCCCCCCCCCFCCCCCCCIFCCCCI CCCCCCIFCCIII CCCCCCCCIIIIFCCCCIIIIIIFCCCCCCI CCCCCCIIIFFFCCCCCCCCCCCCIIIIFFCCCCCCCCC ANANANANANAAAANANANANANAAAAAAANANANANAANANANANANANANANNANNAANANAANANAAAANAAAAAAAANNANANANANNANAAAAAAAANAAANAANANANANAAAAANNNANAANNANAAANANANANAAANAAANAAAANNAAAAANNNAAAANANNAAANNNAAANAAAANNNNAAANNNNNNNNNNNAANNNNNNNNNNNNNNNANNNNNNN AANNNNNNNNNNUANUANNUANNUANNNNNNNUAUNUAUUANUNUNUUUUUUANUNUUAUAUAAAAAAAAAAAAAAAAAAANUAANNNNNNNNUANUANUNUNUANUNUANNNUANUAUUUUUUNUUUUAAAAAAAAAAAAAAAAAAAANUANNNUANUANNNUANUNUNNUANUAUUUUANUAUUUNUAUUUAAAAAAAAAAAAAAAAAAAAAANNUANNNNUNNNNNUAUUUAUUUNUNUUUUAAAAAAAAAAAAAAAAAANUAANUANNUANNNUANUANNNNUAUNUNUUUUANUAAAAAAAAAAAAAAAAAAAAANUANUANNNUAUUAAAAAAAAAAAAAAANNNNNNNUNUAAAAAAAAAANNNNNNNNUANNUUUUAAAAAAAAAAAAAAAAANUANNNNNNNUUUUUUAAAAAAAAAAAANNUANUNUUAAAAANUAAANNNNUAUUNUUAAAAAANNNNUANNUANUUNUUUAAAAAAAAANNNNNNNNNNUAUNUNUUUAAAAAAAAAAAAAAAANNNUANNNNNNNNNNUUUNUNUUUUAUNUUAAAAAAAAANNNNNNNNUUUUUUNUUUAAAAAAAAAAANNNNNNNUUUUNUUUAAAAAAAAAANNNNNNNUNUUUUUAUAAAAAAAAANNNNUANNUUUUUUUAAAAAAUAAANNNNNUUUAAAAAAANNNNNNUUUAAAAUU L RLLL RLLLLLLLL RL RRRRRRRRRRL LL RL L RLL RLL LLL RRRRRRRRRRRLL RL RLLLL RRRRRRRRRRRL RLLLL RL RRRRRRRRRLLLL RRRRRRL RRRRRRRRRRRL LLL RRRRRRRRRRL RRRRRRRRL RRRRRRRRRRRRLLL RRRRRRRRRRRRRRL RL RRRRRRRRRRLLL RRRRRRRRRRRRLL RRRRRRRRRRRRRRRLLL RRRRRRRRRRRLLL RLL RRRRRRRRRRRRRLLLL RRRRLLLLLLL RRRRRRRLLL RRRRRRRRRL RRRRRRRRRREPOEPOEPOEPOEPOOEPOPEPEPPOEPOEPOEPOEPOEPOPEPOPOPOPPPPPOOOOEPOEPOEEPOEEPOEPOEPOEEEPOEEEPOEPOPPOPOPPPPOOOOOOOOOOOEPOEPOEPOEPOEEEEPOEPEPEPOEPOEPOPPPPPPPOOOOOOOOOOOOPOEPOEPOEPOEEEEEPOEPOEPOEPOEPEPOPPPOPOPPOOPOOOOOOOOPOOOEPOEPOEPOEEEEEEPOEPOEEPPOPOPPPOEPOOOOOOOOOOOOOEPOEEEEEPPPPPPPOPOPOOOOOOOOOEEEEEEEPOEPOEPEPOPOPPPPEPOOOOOOOOEPOEPOEEEEEPOPPPOPPPOOOOOOOOOOOOEPOEEEEEPPPPOOOOOOOOPOOOEPOEEEPOEPEEPPPEPPOOOOOOOOOOOOOEEEEEPOPOPOPOPPOOOOOOOOOOOOOEPOEPEPOPPPOOOOOOOOEPOEEEPOPPPPEPOOOOOOOOOPOPOPOOOOOOOOPOOOOOPOOEEEEPOOOOOOEEE OOOOOEPOOEPE OOOOOOEPOEEPOEEPOOOOOEEEPOOOOOOEEEEEEEPPPOOOOOOEEEEPPPPPPOOOOOOOORRRRRRRRRTRTRTRTRTRTRT RT TTTRTTTTRTRTT TRRRRRRRRRTRRTTT TTTRTRTRTRTTRRRRRRRRTRRTTTTTTRTRTTTTTTRRRRRRRTRRTRTTTRTRTRTRRRRRRRRRRRRRTRTTTTTTTRRRRRTTRRRRRTTTRRRRRTTRRRRRRTRRRRRRRRTRRRRRRRRRRTTRRRRTTTTTRTRRRRRRTTTRTRRRTTTTTRRRRRRRTRRRRRRRRRRRRRRTTTTRRRRRRRRRRRRRT 2222220202002000002000200002000200020020000020020020020022222222200200000020020020020000200200002002222222220020020000002222222020200200200002222222200200222222 002222222202000020000200022222202200200000022222220000000002222222220200000200222222220022000000020022222200220000002222220022222000222220222002222222222200002222222222 00222222 022220 7777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777

CREATING OPPORTUNITY through a range of partnerships


IFC’s impact on development refl ects broad

and innovative collaboration with partners,

including governments, foundations, and

civil society.

IFC works with a wide range of partners and through many different channels to

maximize our impact on private sector development. We value the skills, experiences,

and insights that each of our partners brings to the table. By collaborating, we

maximize the positive impact of our work as well as pool and leverage resources, all

while capitalizing on the competitive advantages of each partner.

We strive to demonstrate to all of our partners how funds are being invested

and what results these investments bring. Proper measurement of results also

improves program design and implementation. IFC employs the latest thinking and

approaches in evaluation methodology, and we benchmark our activities against

the leaders in the fi eld.

Sharing knowledge and maintaining an ongoing, strategic dialogue with

partners are also at the core of what we do. We work with academic institutions—

partners from emerging markets include the University Católica in Peru, the

Institute for Microfi nance Research in India, China’s Agricultural University—as well

as with nonprofi t organizations such as the Poverty Action Lab and the Grameen

Foundation. Each year we host an international conference on results measurement

that brings together leading experts in the fi eld, including donor governments,

multilaterals, academics, consulting fi rms, civil society, and foundations.

Our work with partners on knowledge-sharing and research this year included

a global contest on best practices for evaluating business enabling projects that

we launched jointly with the U.K. Department for International Development

and German Technical Cooperation. Each year, more than 5,000 partners in 175

countries from Afghanistan to Zimbabwe collaborate in developing our yearly

Doing Business report.

WORKING WITH PARTNERS



Donor governments support our advisory services with a

regional or thematic focus. Over the years, these partners have

played a key role in the development of our advisory services,

helping us become a global leader and innovator in private

sector development.

In FY07, governments contributed $75.71 million to our

advisory services, allowing us to begin 349 new advisory

projects. Demand for these services remains high, and although

we earmark a portion of our retained earnings to this work

each year, government partners continue to play an essential

role. Austria’s Finance Ministry, the Flanders region of Belgium,

and the European Agency for Reconstruction became new IFC

donor partners in FY07.

Governments are strategic partners for IFC: we encour-

age them to have an ongoing dialogue with us and become

involved in project or program development. We also maximize

results when we have a long-term engagement with these

partners. Other innovative approaches include joint research

and staff sharing or exchanges. For example, our partner SECO,

the Swiss Secretariat for Economic Affairs, and our advisory

services in Sub-Saharan Africa make joint use of staff and facili-

ties, ensuring close cooperation and better program design and

implementation across the region.

An increasing number of governments have opted to enter

into partnership agreements with IFC. In FY07, we signed an

agreement with Luxembourg, and others are in place with the

European Commission, Japan, the Netherlands, Norway, and

Switzerland. With the Netherlands’ Ministry of Foreign Affairs

we are developing a new framework agreement that will give

IFC a greater role in allocating our partners’ resources across

regions and business lines.

We encourage our government partners to “untie” their

trust funds—giving us fl exibility in the hiring of consultants

beyond those from the donor country—as this increases the

effectiveness of advisory services. Already, Austria, Ireland,

Luxembourg, and the Netherlands have done so. Some other

governments, including Spain and the Flanders and Wal-

lonia regions of Belgium, are taking a phased approach and

introducing greater fl exibility into their trust fund arrangements

with us.

WORKING WITH GOVERNMENTS

TARGETED HELP FOR WOMEN

In February 2007, IFC and the World Bank, under the

auspices of the German Federal Ministry for Economic

Cooperation and Development, launched the World

Bank Group Gender Action Plan, which targets women’s

economic empowerment. It covers a wide range of

economic sectors that are crucial to women’s participa-

tion in private sector development, including agribusi-

ness, the fi nancial sector, and infrastructure—energy,

transport, and water and sanitation. The $24.5 million,

four-year initiative will intensify IFC and the Bank’s gen-

der work, with a focus helping improve women’s access

to fi nancial services, labor, land, and product markets.

It draws half its funds from the World Bank Group and

half from donor governments, including Canada, Ger-

many, Norway, and the United Kingdom.


“Visa International is committed

to extending the effi ciencies of

electronic payments to communities

and economies around the world.

When coupled with the judicious

use of credit, electronic payment

systems can play a critical role

in helping small business grow.

The development of strong credit

bureaus is vital to that process.”Christopher Rodrigues, Former President and CEO, Visa International

IFC AND SECO:

PARTNERING FOR GREATER IMPACT

One of our most intensive partnerships has been with

SECO for projects that promote corporate governance.

Switzerland’s expertise in banking has helped the

projects generate a positive impact in companies, banks,

and national regulatory agencies. The partnership has

trained professors and introduced corporate governance

curricula at 75 universities, helping ensure that the next

generation of business leaders understand and promote

good corporate governance. The partnership has led

to the adoption of Ukraine’s fi rst corporate governance

code and has helped the Central Bank of Russia develop

its corporate governance regulations. This work has

helped companies access more than $1.3 billion in ad-

ditional fi nancing through better corporate governance.

FINANCIAL COMMITMENTS TO IFC ADVISORY SERVICES (US$ MILLIONS EQUIVALENT)

Governments FY06 FY07

Australia 26.98 11.37

Austria 2.86 3.35

Belgium 0.65 2.69

Canada 11.24 2.98

Denmark 0.94 2.77

Finland 2.69 4.78

France 4.64 1.29

Greece 0.04 0.00

Iceland 0.24 0.16

Ireland 1.30 2.45

Japan 4.80 2.62

Kuwait 0.00 2.00

Luxembourg 0.46 2.49

The Netherlands 13.91 15.24

New Zealand 2.50 0.31

Norway 7.22 5.14

Slovenia 0.00 0.30

South Africa 0.63 0.63

Spain 1.20 2.00

Sweden 8.82 1.69

Switzerland 17.35 7.48

United Kingdom 29.82 0.99

United States 6.50 0.51

Cape Verde* 0.00 0.57

Nigeria* 0.00 1.40

Rwanda* 0.00 0.50

Total 144.79 75.71

Unaudited fi gures.*Client governments’ contributions.



We are also taking a more strategic approach in reporting

to government partners. In FY07, we launched a brochure

series for major partners. The brochures cover the full range of

the relationship with IFC and are being made available in the

languages relevant to the specifi c partner.

We coordinate with other international fi nancial institutions,

multilateral organizations, and bilateral donor agencies by

holding regular strategic discussions on such items as our re-

gional strategies and private sector development initiatives. In

FY07, our peer community of international fi nancial institutions

also attended the World Bank Group’s annual Donor Forum.

Examples of collaboration with governments and multilaterals

in FY07:

We launched a project to help develop access to securities k

markets products in Sub-Saharan Africa, with initial grant

funding from Sweden to be supplemented by in-kind contri-

butions from IFC and World Bank.

A joint project concluded with the Finnish government, k

which has led to $400 million in actual or planned invest-

ment in the forestry sector of northwest Russia.

IFC agreed with the United Kingdom’s DFID and the Euro- k

pean Commission to serve as an implementing agency for

the Bangladesh Investment Climate Fund.

With KfW, we launched the Microfi nance Initiative for Asia, k

which builds on our successful partnership in Africa and

Eastern Europe and aims to commit $1 million in support of

microfi nance over the next three years.

We worked with the International Labour Organization to k

develop a program for better labor standards in global supply

chains for various industries.

We are expanding our work with nongovernmental donors.

Visa International is the fi rst corporate donor to establish a

trust fund with IFC; this supports our work to establish credit

bureaus in developing countries alongside the governments

of Australia, Italy, Netherlands, Norway, New Zealand, and

Switzerland. Similarly, in FY07 we teamed with BP in Azerbaijan

and Georgia. Our fi nancial expertise enabled BP to set up a $15

million fi nance facility in Azerbaijan that will help entrepreneurs

access fi nancing and start new businesses.

FINANCIAL COMMITMENTS TO IFC ADVISORY SERVICES (US$ MILLIONS EQUIVALENT)

SUMMARY FY06 FY07

Governments $144.79 $75.71

Institutional/Multilateral Partners $31.32 $30.39

Private Partners/Foundations $4.21 $6.28

Total $180.32 $112.38

Unaudited fi gures. FY06 donor government contributions were higher due to the launch of a number of new programs with three-to-fi ve year cycles as well as the replenishment and renewal of several existing programs.

“At IFC we value our

partnerships, and we are

committed to creating strong

synergies and to maximizing

the impact of our

joint efforts on

private sector

development.”

Edward Nassim VICE PRESIDENT, EUROPE, AFRICA, AND THE MIDDLE EAST


Foundations have emerged as a key source of funding for

international development, and many organizations have a vi-

sion for social change that complements IFC’s efforts to reduce

poverty in emerging markets. In FY07, our work in this area

included projects with:

The Asia Foundation, developing a business environment k

scorecard for Cambodia’s provinces and municipalities.

The Bill and Melinda Gates Foundation, jointly funding k

research on ways to improve health care in Africa.

The IBM International Foundation, designing a new business k

management platform to deliver interactive tools, online col-

laboration, and educational content for small businesses in

the developing world.

The Jolie-Pitt Foundation, launching pilot projects to help k

farmers in the Mekong region reduce their use of harmful

pesticides and better preserve crops after harvest.

The Kauffman Foundation, developing a report on women’s k

entrepreneurship, in particular initiatives that promote

women business owners’ access to fi nance.

The Lex Mundi Pro Bono Foundation, analyzing investor k

protections and contract enforcements in 175 countries and

conducting a study on transparency in government.

Going forward, we will focus on long-term partnerships with

foundations that are active in our client countries. We aim to de-

velop partnerships focusing on innovative product development.

WORKING WITH FOUNDATIONS

PARTNERING WITH THE GATES FOUNDATION

ON HEALTH CARE IN AFRICA

Sub-Saharan Africa is not on track to meet the three

Millennium Development Goals on health by 2015. The

region has the highest maternal mortality and almost

half the world’s deaths of children under age fi ve, while

diseases—especially HIV/AIDS, malaria, and tuberculo-

sis—pose major threats to health. Hence IFC and the Bill

and Melinda Gates Foundation launched a $3.5 million

initiative in September 2006 for research to determine

the business models that provide health services to poor

people. The work builds on fi ndings that the region’s

poorest people already seek out private health services

more often than public services. Through this partner-

ship, we hope to raise understanding of the value of

the private sector in Africa’s health care market and fi nd

ways to help it grow.

“Private health care has the potential

to play an important role in improving

health in Africa. Through this

initiative, IFC can help identify new

ways to assist African families and

communities that are unable to access

public sector health services.”Joe Cerrell, Director of Global Health AdvocacyBill and Melinda Gates Foundation



IFC engages with civil society to ensure that the benefi ciaries

of projects derive the greatest possible development impact.

Civil society offers a complementary perspective to IFC’s core

constituency of private enterprises, and dialogue brings broader

expertise and a respected voice to the table. Nongovernmen-

tal organizations also help us design and implement projects,

bringing in-depth knowledge to the table.

Highlights of our work with civil society in FY07 include

cooperation with the Rainforest Alliance and other partners to

help 8,000 coffee growers in Central America and southern

Mexico improve their income and make their business more

sustainable through higher production standards and links with

international buyers. We teamed up with Oxfam Hong Kong

to develop a niche market for sustainable tourism in Cambodia

and the Lao PDR. We also shared an award from the UN-Hab-

itat/Dubai Municipality with the International Crane Founda-

tion for our joint wetland conservation work in Vietnam. We

worked with the World Resources Institute to quantify the

market at the base of the pyramid, as detailed in the new pub-

lication The Next 4 Billion, and with the International Business

Leaders Forum to develop a human rights impact assessment.

PROMOTING SUSTAINABLE FORESTRY WITH WWF

IFC and the World Wildlife Fund’s Global Forest Trade

Network are helping forest communities in Bolivia become

competitive and responsible lumber providers to leading

fi rms. In Southeast Asia’s Mekong region, IFC and WWF

are helping 70 furniture companies source wood and

manufacture with more sustainable practices, connect

with international buyers, and gain certifi cation from the

Forest Stewardship Council, a stakeholder-owned system

for responsible management of the world’s forests that

WWF is championing. IFC is helping client companies

invest in forestry in ways that move the demand for certi-

fi ed wood closer to the suppliers. Discussions are even

underway to export plentiful but lesser-known timber spe-

cies from WWF-certifi ed forestry projects in Latin America

to producers in the Mekong region.

“We welcome the opportunity to deepen our collaboration with IFC

by taking advantage of the complementary strengths of our respective

organizations. IFC’s expertise in fi nance and business development, coupled

with the GFTN’s ability to assist companies throughout Latin America in

producing quality products from well-managed forests for the discerning

global marketplace, should prove a powerful combination for the pilot

project countries, and in the future, other Latin American countries.”Steve GretzingerGFTN’s Latin American CoordinatorWorld Wildlife Fund

WORKING WITH CIVIL SOCIETY

84 IFC ANNUAL REPORT 20078484884848484848488488484848484884484 FIFCIIFCIIFIFCIFCIFCIFCFCFCFCIFCIIFCFCCFCCFCFFCFCI AN AN ANA A ANAN ANANA AANANANNNAANANNNNNUNUNUNNUNNUNNUNUANUANUUAUANUUUANUAUAAAAAAAAAANUNUANUUUAAAUAAANUAUAAANNNUUAL RLLLLLL RL RL RL RRL RRL RRLL RRL RL RL RL RL RL RRL RL RRL RL RLL RL RL RRL LLL RRL RL RREPOEPOEPOEPOEPOEPOEPOEPOEPOPOEPOEPOEPOOEPOOOEPOEPOEPOEPOEPOOEPOOEPPEPOOOEPOEPOEPORTRTRTRTRTRTRTRRTRTRTRTRTRTRTTRTRTRTRTTTRTTRTRTRRRTRTTTRTTRTRTRTRTRT RTRTTTRRTRTTTTRTRTTRTRTRTTRTRTRTTRRRT TTRTT TTTT T TTR 22222222202020202020020020200000000000000002222200002020020000000000000002222000002000000000000200200000002000000222000000000000002000002002002002002000000020000000200202220020020020020000020000200002002000200002002002002002002020022020002002002002000000002022220000000000200220000000000000000002000000000022200000000000000000000220000000000000000000020000020020020020020000000200200020020000020002022020220200200002002022220222000200200022000000002022 7777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777

CREATING OPPORTUNITY begins at IFC


A concern for people—stakeholders, local

communities, employees and their famillies—

is fundamental to good business, at IFC and

in our client companies.

In IFC’s line of business—creating opportunity through private sector development—

diligence, responsibility, and passion defi ne business results. Success comes

from commitment to best practice in every aspect of our operations, be it in our

governance, accountability to our stakeholders, our focus on sustainability, or

investment in our staff.

Managing our diverse and expanding operations effectively requires sound

organizational structures and principles: good governance and leadership within IFC

and in cooperation across the World Bank Group; attention to detail in monitoring

and evaluating our investments and advisory services throughout their life cycle;

and dedication to working responsibly with clients and other stakeholders to ensure

transparency, accountability for our actions, and a commitment to continuous

improvement.

Sustainability is central to our business strategy and a vital part of our operations

in offi ces worldwide. Managing our environmental and social footprint in our day-

to-day activities is an important part of living our mission and being consistent with

what we ask of our clients.

Above all, converting our work into signifi cant development impact happens

because of the people at IFC. We are committed to recruiting, rewarding, and

training the best and most dedicated staff. By mobilizing our most valuable

resource, our people, we continuously push for greater impact in reducing poverty

and improving lives.

HOW WE WORK



IFC is an international organization established in 1956 to

further economic growth in its developing member countries by

promoting private sector development. It is part of the World

Bank Group, which also includes the International Bank for

Reconstruction and Development and the International Develop-

ment Association (which together constitute the World Bank), the

Multilateral Investment Guarantee Agency, and the International

Centre for Settlement of Investment Disputes. It is a legal entity

separate and distinct from the other Bank Group institutions, with

its own Articles of Agreement, share capital, financial structure,

management, and staff. Membership in IFC is open only to mem-

ber countries of the World Bank. As of June 30, 2007, IFC’s entire

share capital was held by 179 member countries.

Member countries guide IFC’s programs and activities. Each

country appoints one governor and one alternate. Corporate

most powers to a board of 24 directors. Voting power on

issues brought before them is weighted according to the share

capital each director represents. The directors meet regularly at

World Bank Group headquarters in Washington, D.C., where

they review and decide on investments and provide overall

strategic guidance to IFC management.

Robert B. Zoellick is President of IFC and the other World

Bank Group institutions: the International Bank for Recon-

struction and Development, the International Development

Agency, the Multilateral Investment Guarantee Agency, and the

International Centre for Settlement of Investment Disputes. Mr.

Zoellick also serves as chairman of the boards. Lars H. Thunell is

IFC’s Executive Vice President and CEO and leads the Corpora-

tion’s overall strategic directions.

WORKING ACROSS THE WORLD BANK GROUP

Effective coordination and cooperation with our fellow organizations in the World Bank Group—the World Bank and

MIGA—is a key corporate goal for IFC. This allows IFC to play an integrated role in delivering on broader World Bank Group

objectives, supporting growth and alleviating poverty. We also benefit from synergies with our Bank Group counterparts.

Coordination begins at the strategic level, as we increasingly work with the World Bank on joint Country Assistance Strat-

egies. At the advisory and project level, we coordinate in such critical areas as business environment reform; public-private

partnerships to improve and expand the delivery of basic services, including water and sanitation, energy, education, and

health; and financial market development. In Lima, for example, work by the Bank on land registries is complemented by

IFC’s detailed advisory work and financing to support development of mortgage finance markets.

IFC can play an investment role in a number of sectors where World Bank engagement focuses on policy. Reflecting these

complementary roles, IFC and World Bank staff work side by side in several units:

The joint Bank/IFC/MIGA vice presidency focuses on financial and private sector development, in which we collaborate

to strengthen the business environment, enhance SMEs’ access to finance, and improve corporate governance. This vice

presidency houses the IFC/Bank Doing Business project and FIAS, a joint IFC/Bank/MIGA advisory service, which together

play key roles in business environment reform, documenting challenges and helping governments address them.

Joint IFC/World Bank departments focus on information and communication technologies and on oil, gas, mining,

and chemicals.

A new joint subnational finance department focuses on investments in key infrastructure sectors.

We recognize that where there are synergies there can also be conflicts of interest—and we manage this risk through a

mechanism modeled on best practice from the private sector.

GOVERNANCE

powers are vested in the Board of Governors, which delegates


PARTNERING ON LEARNING:

IFC–WORLD BANK COLLABORATION ON

PRIVATE EDUCATION IN AFRICA

IFC and the World Bank are partnering to undertake an

impact evaluation of IFC’s Kenya Private Schools Advisory

Services and Financing Program, using a control group

approach to address such questions as:

Does the program improve the sustainability of partici- k

pating schools?

Does the program increase access to education for the k

target student population?

Does the program improve educational outcomes? k

A simpler version of this evaluation is being conducted

in Ghana, and our plan is to use these evaluations as

IFC rolls out its schools support programs in additional

countries in Sub-Saharan Africa.

IFC is an international organization established in 1956 to

further economic growth in its developing member countries by

promoting private sector development. It is part of the World

Bank Group, which also includes the International Bank for

Reconstruction and Development and the International Develop-

ment Association (which together constitute the World Bank), the

Multilateral Investment Guarantee Agency, and the International

Centre for Settlement of Investment Disputes. It is a legal entity

separate and distinct from the other Bank Group institutions, with

its own Articles of Agreement, share capital, fi nancial structure,

management, and staff. Membership in IFC is open only to mem-

ber countries of the World Bank. As of June 30, 2007, IFC’s entire

share capital was held by 179 member countries.

Member countries guide IFC’s programs and activities. Each

country appoints one governor and one alternate. Corporate

powers are vested in the Board of Directors, which delegates

most powers to a board of 24 directors. Voting power on

issues brought before them is weighted according to the share

capital each director represents. The directors meet regularly at

World Bank Group headquarters in Washington, D.C., where

they review and decide on investments and provide overall

strategic guidance to IFC management.

Robert B. Zoellick is President of IFC and the other World

Bank Group institutions: the International Bank for Recon-

struction and Development, the International Development

Agency, the Multilateral Investment Guarantee Agency, and the

International Centre for Settlement of Investment Disputes. Mr.

Zoellick also serves as chairman of the boards. Lars H. Thunell is

IFC’s Executive Vice President and CEO and leads the Corpora-

tion’s overall strategic directions.


PARTNERING ON LEARNING:

IFC–WORLD BANK COLLABORATION ON

PRIVATE EDUCATION IN AFRICA

IFC and the World Bank are partnering to undertake an

impact evaluation of IFC’s Kenya Private Schools Advisory

Services and Financing Program, using a control group

approach to address such questions as:

Does the program improve the sustainability of partici-

pating schools?

Does the program increase access to education for the

target student population?

Does the program improve educational outcomes?

A simpler version of this evaluation is being conducted

in Ghana, and our plan is to use these evaluations as

IFC rolls out its schools support programs in additional

countries in Sub-Saharan Africa.

COMPENSATION

IFC’s compensation guidelines are part of the World Bank Group’s

framework. The international competitiveness of compensation is

essential to our capacity to attract and retain highly qualified, di-

verse staff in jobs subject to international recruitment. The salary

structure of the World Bank Group for staff recruited in Wash-

ington is determined with reference to the U.S. market, which

historically has been globally competitive. This competitiveness

is reviewed every four years. Salaries for staff hired in offices and

countries outside the United States are based on local competi-

tiveness, determined by independent local market surveys.

Based on the World Bank Group’s status as a multilateral

organization, staff salaries are determined on a net-of-tax basis.

EXECUTIVE COMPENSATION

The salary of the President of the World Bank Group is deter-

mined by the Board of Directors. The salary structure for IFC’s

Executive Vice President and CEO is determined by positioning

a midpoint between the salary structure of staff at the highest

level, as determined annually by independent U.S. compensa-

tion market surveys, and the salary of the World Bank Group

President. The compensation of our executive leadership is

transparent. IFC’s President, Robert Zoellick, receives a salary of

$420,930 net of taxes; and IFC’s Executive Vice President and

CEO, Lars Thunell, receives a salary of $324,610 net of taxes.

There are no executive incentive compensation packages.

PERFORMANCE AWARD PROGRAMS

IFC makes a number of performance awards each year to

recognize and reward individuals and teams for superior perfor-

mance and results. Performance metrics emphasize both devel-

opment effectiveness and financial performance. Awards range

from on-the-spot payments of up to $400, to as much as 15

percent of salary for outstanding annual results and as much

as 20 percent of salary for long-term outstanding contributions

by staff in investment operations. A maximum of 25 percent

of staff may receive performance awards each year, with most

individual awards falling in a range of 5-10 percent of annual

salary. The average individual award in FY07 was about $8,300.

The Executive Vice President and CEO and the members of

IFC’s Management Group do not receive performance awards

or any other form of variable compensation.

“IFC and its Board work

together to ensure that the

Corporation helps further

economic development by

encouraging the growth

of productive

private enterprise

in member

countries.”

W. Paatii Ofosu-Amaah VICE PRESIDENT AND CORPORATE SECRETARY


Three independent units oversee IFC and increase our accountability.

COMPLIANCE ADVISOR/OMBUDSMAN

The CAO audits compliance with IFC’s social and environmental

policies, guidelines, procedures, and systems; advises the World

Bank Group’s president and management on our environmental

and social policies; and, as ombudsman, answers complaints by

people who are affected by projects in which we are involved and

who seek fair resolutions.

In 2006-2007, the CAO updated its operational guidelines to

clarify the processes that underpin its three distinct roles. Since

its inception in 1999, the CAO has received 65 cases. The CAO

Ombudsman received all of these as external complaints, except

for two compliance audits that were requested by IFC senior

management and the World Bank Group President. More infor-

mation about the CAO, including the revision of the operational

guidelines, can be found at www.cao-ombudsman.com.

INDEPENDENT EVALUATION GROUP

Since 1996, IFC’s private sector operations have been evaluated

by the Independent Evaluation Group, an independent unit that

reports to IFC’s Board of Directors through the World Bank Group

Director-General, Evaluation. Although independent, IEG is not

isolated from IFC staff—there are many opportunities for us to

learn from IEG’s work and to incorporate recommendations that

we believe will contribute to the achievement of our development

mandate. For example, IEG works closely with our staff to ensure

that they understand and correctly apply our evaluation method-

ology for private sector investment projects. IEG also participates

in many of our training programs in Washington and the fi eld to

raise staff awareness of evaluation fi ndings and to convey lessons

from experience.

During FY07, we benefi ted from four IEG evaluation reports

that addressed specifi c aspects of our operations. These reports

will be publicly available in FY08 and will provide civil society,

governments, industry, and others with the same IEG analysis that

contributes to our strategic directions. One example is IEG’s 10-

year review of IFC’s development effectiveness, which has already

begun to inform our activities at the country level.

We have also worked closely with IEG to develop our new

evaluation methodology for advisory services projects. The imple-

mentation of this project evaluation pilot benefi ted greatly from

IEG’s validation of the fi rst 171 self-evaluations we completed.

IEG publishes a wide range of information on its Web site at

www.ifc.org/IEG.

INTERNAL AUDITING DEPARTMENT

IAD provides objective assurance and advice to help the World

Bank Group enhance risk management, control, and governance,

as well as to improve accountability for results. Assurance services

are generally initiated by IAD, while advisory services are generally

initiated by internal client requests. Advisory services are con-

ducted primarily to answer specifi c questions aimed at improv-

ing risk management, control, or governance processes. Typical

advisory services include analyzing controls built into systems

under development, providing recommendations for analyzing

operations, assisting in fraud and corruption investigations, and

raising awareness of internal control activities.

ACCOUNTABIL ITY

INTEGRITY AND CONFLICT RESOLUTION

IFC staff and members of the public have a number of

mechanisms to address ethical issues, harassment, and

other issues of confl ict.

The World Bank Group’s Confl ict Resolution System

offers staff ombudsman services, mediation, advice on

ethics and business conduct, and an appeals committee

and administrative tribunal.

The following telephone hotlines are anonymous, toll-

free, staffed 24 hours a day, and multilingual.

The Ethics Helpline. Calls can relate to issues of any k

scale, such as staff misconduct, discrimination, or con-

fl icts of interest. See www.worldbank.org/ethics.

The Department of Institutional Integrity hotline. The k

department investigates allegations of fraud and cor-

ruption in World Bank Group operations and allega-

tions of misconduct. See www.worldbank.org/integrity.


WORKING RESPONSIBLY

IFC is committed to working with clients and other stakehold-

ers to achieve our shared goals of reducing poverty and improv-

ing lives through private sector development. We recognize

that we need to be transparent in our operations and to set an

example of good governance, with high standards for ourselves

as well as for our clients. We have developed internal processes

that help us ensure transparency, accountability for decisions

and impacts, support to people, and consistency with what we

ask of clients. We are also committed to continuous improve-

ment through learning and knowledge-sharing.

ENGAGING WITH STAKEHOLDERS

As a global multilateral fi nance institution with operations

in many regions and sectors, IFC has an impact on a diverse

range of stakeholders. In addition to client companies, our

stakeholders range from communities and nongovernmental

organizations at the project level, to governments and civil so-

ciety at the global level. The extent to which we engage with

particular groups varies depending on the issues at hand, the

stakeholders most directly affected by our operations, and the

opportunities offered by collaboration.

Through investments

and advisory services,

we engage with clients,

partners, and communities.

We draw on feedback to

identify issues of impor-

tance to stakeholder groups, and we frequently adapt our

strategies and procedures in response. Feedback includes an

annual client survey and ongoing engagement with stakehold-

ers, including representatives of civil society, local commu-

nities affected by a specifi c project, industry associations,

governments, other international fi nance institutions, and the

academic community.

IFC discloses information about investment projects prior to

their approval as part of a commitment to transparency and

accountability. Sharing information strengthens public trust in

IFC and our clients. Following adoption of our updated Dis-

closure Policy in 2006, we have established a demand-driven

system for disclosure inquiries, in addition to enhanced project

disclosure for all proposed investments. We aim to provide all

or part of any requested information within 30 days or explain

why the request has been delayed or denied. For members of

the public who feel that an initial request for project informa-

tion has been unreasonably denied or that our policy has been

incorrectly applied, we have established a complaints mecha-

nism. Complaints are reviewed by the Disclosure Policy Advisor,

who reports directly to IFC’s Executive Vice President and CEO.

For full information, see www.ifc.org/disclosure.

ACCOUNTABILITY IN DECISION MAKING

We manage investments closely throughout their life cycle. This

involves a number of processes: fi nding appropriate sponsors

who will be partners with us; managing and mitigating risk

along the way; monitoring and measuring results; and ensuring

accountability for decisions taken throughout the project cycle.

This year we moved more decision-making authority to the

fi eld, allowing our regional offi ces to be more responsive to

client needs and local conditions.

Disclosure Inquiries in FY07

Full disclosure 19

Partial disclosure 3

No disclosure 7

Total 29



COMMITMENT TO CONTINUOUS IMPROVEMENT

Our ability to learn and improve the way we work is crucial to

our long-term success and lasting development impact. IFC

produces analysis and good practice material to support clients,

other practitioners, and staff. We also develop and publish

lessons from our investments and advisory projects. We seek to

create a culture in which experiences where things did not run

smoothly are an opportunity to learn with and from our clients,

partners, and stakeholders.

Learning Before

Before we make an investment or launch a new initiative, we

use lessons from previous projects and the expertise of staff to

evaluate the proposed course of action. Peer review meetings,

for instance, have become a formal part of our environmental

and social review procedure, allowing our specialists to pool

their knowledge. Similarly, formal decision points, such as the

investment review meeting, allow senior staff to contribute

insights based on a wide understanding of the organization’s

history in specifi c industries and regions.

BUSINESS DEVELOPMENT

Guided by IFC’s strategic

goals and develop-

ment objectives at the

country and sector level,

our business develop-

ment staff identify

suitable investments.

An initial conversation

with the client helps us

understand their needs

and determine whether

there is a role for IFC.

EARLY REVIEW

Staff prepare a descrip-

tion of the proposed

investment, IFC’s role, the

anticipated contribution

to development and

benefi ts to stakeholders,

and any potential deal-

breakers. Lessons from

previous engagements are

considered and, in some

cases, a preappraisal visit

is conducted. IFC senior

management then

decides whether to

authorize appraisal.

APPRAISAL (DUE DILIGENCE)

The investment team

assesses the full business

potential, risks, and oppor-

tunities through discussions

with the client and visits to

the project site. Questions

include: Is the investment

fi nancially and economically

sound? Can it comply with

IFC’s social and environmen-

tal Performance Standards?

Have lessons from prior

investments been taken into

account? Have disclosure

and consultation require-

ments been met? Can

IFC help the client further

improve sustainability and

development results?

INVESTMENT REVIEW

Based on assessment of ex-

pected fi nancial, economic,

environmental, and social

performance, the project

team makes recommenda-

tions to its departmental

management, which

decides whether to approve

the investment. Expected

development results are

identifi ed by stakeholder

group, and appropriate re-

sults indicators are identifi ed

for tracking. The team and

departmental management

must be confi dent that the

client is able and willing to

meet IFC’s standards and

work with us to improve

the sustainability of

their enterprise.

NEGOTIATIONS

The project team

negotiates the terms

and conditions of IFC

participation. These

include conditions

of disbursement and

covenants, perfor-

mance and monitoring

requirements, agree-

ment of action plans,

and resolution of any

outstanding issues.

PUBLIC NOTIFICATION

A Summary of Proposed In-

vestment for the project and

the environmental and social

review, where applicable, are

posted on IFC’s Web site be-

fore the project is submitted

to the Board for review. The

SPI presents the anticipated

development impact and

IFC’s expected contribution to

bring it about. The length of

the disclosure period is deter-

mined by the environmental

category of the project,

as outlined at

www.ifc.org/projects.

1 2 3 4 5 6

IFC INVESTMENT CYCLE


BOARD OF DIRECTORS’ REVIEW AND APPROVAL

The proposed investment is

submitted to IFC’s Board for

consideration and approval

through regular or streamlined

procedures. “Streamlined’’ means

that Board members review the

documents but do not meet

to discuss the investment. This

option is available to smaller,

low-risk projects, which can be

approved by IFC management

under delegated authority. (The

due diligence process and public

disclosure remain the same in

all cases.) Each investment to be

approved should have a clear role

for IFC and a positive expected

development impact, refl ect-

ing our commitment to social,

environmental, economic, and

fi nancial sustainability.

COMMITMENT

IFC and the company

sign the legal agree-

ment for the investment.

This includes the client’s

agreement to comply with

applicable Performance

Standards and reporting

requirements (for example,

to report any serious

accident or fatality imme-

diately), including regular

monitoring reports. The

legal agreement will also

covenant the client’s

action plan.

DISBURSEMENT OF FUNDS

Funds are often

paid out in stages

or on condition of

certain steps being

completed as set

forth in the legal

agreement.

SUPERVISION

IFC monitors investments

to ensure compliance with

conditions in the loan

agreement and to track

development results. The

company submits regular

reports on fi nancial as well

as social and environmental

performance and on key

development indicators,

and information on other

factors that might materi-

ally affect the enterprise.

Ongoing dialogue during

supervision allows IFC to

support clients, both in

solving issues and in identi-

fying new opportunities.

EVALUATION

To supplement ongo-

ing tracking and help

improve operational

performance, each

year IFC investment

staff carry out more in-

depth evaluations of a

representative, random

sample of investments

that have reached

early operating matu-

rity, typically fi ve years

after approval. These

evaluations are then

validated by

IFC’s Independent

Evaluation Group.

CLOSING

We close our books when

the investment is repaid in

full, when we exit by selling

an equity stake, or, in rare

cases, when we have to write

it off. We make an assess-

ment of the investment’s de-

velopment results up to that

point. But our goal is to help

the client reach a high level

of sustainability, with benefi ts

that continue long after our

involvement has ended.

7 8 9 10 11 12

Learning During

During the implementation phase, monitoring is used to make

adjustments as well as transfer lessons from one investment to

another. Communities of practice are emerging as a very useful

tool for IFC staff to share information, transfer lessons, and

replicate successful models across the World Bank Group.

Learning After

IFC increasingly evaluates investments and advisory projects

internally after completion to capture lessons. Lessons learned

from the BTC and Chad-Cameroon pipelines were published

this year in collaboration with the clients involved. We also use

the evaluation of new business models to improve their future

application. SmartLessons, a new initiative in our advisory oper-

ations, is aimed at dramatically scaling up the exchange of les-

sons by staff for staff, with the long-term goal of making these

available to our partners and the wider public. Lessons are also

continuously developed and integrated into the training of new

staff. Case studies used in training increasingly cover all aspects

of doing business in a sustainable way.

GROWING COMMUNITIES OF PRACTICE

Two networks connecting World Bank Group staff have

proved particularly effective for shared learning:

BEEnet, a community of practice for over 300 practi- k

tioners working on reforms of the business enabling

environment.

The SME Finance Network, over 150 staff working k

to increase access to fi nance for micro, small, and

medium enterprises.

Both use virtual platforms and network meetings to

connect practitioners worldwide. BEEnet’s 10 best prac-

tice toolkits present operational recommendations for

IFC task managers and have become industry standards

for other development practitioners.


CARING FOR THE ENVIRONMENT

Sustainability is a central focus in our work with clients. IFC

also considers it an integral part of our day-to-day work in

offi ces worldwide. Our commitment extends to the individual

and collective decisions we make as staff. We consider it part

of living our values and business strategy, as well as being

consistent with what we ask of our clients. We also see direct

benefi ts from strengthening our reputation, stimulating creativ-

ity and staff morale, and identifying cost savings.

In FY07, we continued to improve our impacts on the envi-

ronment and on local communities affected by our headquar-

ters and regional offi ces. Highlights included:

Assigning environmental footprint champions in more than k

half of fi eld offi ces and conducting the fi rst study of these

offi ces’ impacts

Launching awards to recognize individuals and offi ces that k

have taken steps to demonstrate IFC’s commitment to

sustainability

Extending IFC’s carbon-neutral commitment to cover 50 k

percent of fi eld offi ces

Since June 2006, IFC has offset 100 percent of carbon emis-

sions for our headquarters facilities and for operational travel

from headquarters, through renewable energy certifi cates and

carbon credit purchases. We are also improving sustainability at

headquarters by using higher-content recycled paper and energy-

effi cient lighting and recycling electronic equipment and supplies.

For full information on these activities, visit www.ifc.org/

footprint.

BUSINESS DEVELOPMENT

Guided by IFC’s strategic

goals and development

objectives, IFC advisory

and investment staff re-

spond to client demands

for advice. In addition,

donor governments, oth-

er partners, and member

country stakeholders look

to IFC to help address

market and governance

failures affecting the

private sector.

EARLY REVIEW

Advisory staff prepare a brief

concept document describ-

ing IFC’s role, the intended

result of the project, a

description of the planned

intervention refl ecting

lessons from other projects,

and a high-level budget.

Leadership from the relevant

region and Business Line

decide if the concept

should go ahead.

APPROVAL

Advisory staff prepare a

detailed project proposal

refl ecting peer review from

relevant Bank Group staff.

The document also includes

standardized measures of

project results: outputs,

outcomes, and impacts. Use

of standard measures allows

aggregation of results across

similar projects over time.

The proposal also includes a

detailed budget and planned

sources of fi nancing from

donor governments, other

partners, and clients. Leader-

ship from the relevant region

and Business Line decide if the

project should be approved.

IMPLEMENTATION / SUPERVISION

Project management signs an

agreement with the client.

Implementation is carried out

by either IFC staff or contrac-

tors managed by IFC or IFC’s

partners. Supervision reports

are prepared semiannually.

These include performance

ratings regarding project

spending, project timeline,

and achievement of planned

results. Regional and Business

Line leaders review their

portfolios periodically.

PROJECT COMPLETION

When a project

ends, the transaction

leader submits a Project

Completion Report.

This provides a rating

of performance regard-

ing project spending,

project timeline, and

achievement of planned

results. The form

includes a development

effectiveness rating

using the same scale as

applied to investments.

IEG reviews a sample of

these reports for inde-

pendent evaluation.

EVALUATION

Measurement of results

occurs throughout the life of

the project. In addition, IFC

engages external experts in

cross-cutting program reviews

and coordinates experimental

design evaluations led by

external experts, such as the

MIT Poverty Action Lab. IEG

also includes advisory programs

in its annual work program

for evaluation.

1 2 3 4 5 6

IFC ADVISORY SERVICES CYCLE


Fuel use412 tonnes CO2

2%

Electricity 9,056 tonnes CO2 45%

Air travel* 10,479 tonnes CO2

53%

FY07 CARBON EMISSIONSFor headquarters building and travel by Washington-based staff

*Air travel emissions are based on the number of miles fl own by World Bank Group staff. IFC’s share is based on our percentage of total staff.


OUR STAFF

IFC has exceptional people.

What makes IFC staff different? Their passion and commitment

to improving people’s lives and reducing poverty. IFC staff pur-

sue these goals by promoting open and competitive markets

and providing investment and advisory support to private

sector clients. They seek to create opportunities and progress in

emerging markets.

IFC invests in staff by providing the tools and learning

programs that improve their ability to assist clients in meeting

environmental, social, and corporate governance standards and

to identify opportunities through sustainability. IFC also rewards

staff based on the development impact and fi nancial perfor-

mance of their projects.

IFC’s success is due to the tireless efforts of its most impor-

tant asset—our people. None of our good work can happen

without high-quality, committed staff.

WHO WE ARE

IFC staff are your neighbors in cities around the world. We work

in 78 countries and represent 138 nationalities. Today 51 per-

cent of our staff are in fi eld offi ces, up from 32 percent in FY01.

Diversity is one of IFC’s greatest strengths. It enriches our

perspectives, allows for fresh ideas, and helps us respond more

effectively to clients and stakeholders. Over the last few years,

IFC has increased the representation of people from developing

countries, who now represent 63 percent of staff.

WHERE WE WORKWASHINGTON, D.C., VS. FIELD STAFF (END OF FY07)

Field Offi ces Washington Total

1,584 1,550 3,134

51% 49%

REGIONAL ORIGINSALL FULL-TIME STAFF

Developed (Part I) Countries Developing (Part II) Countries Total

1,164 1,970 3,134

37% 63%

ALL STAFF AT OFFICER LEVEL AND HIGHER

Developed (Part I) Countries Developing (Part II) Countries Total

809 939 1,748

46% 54%

GENDER DISTRIBUTIONALL FULL-TIME STAFF

Women Men Total

1,636 1,498 3,134

52% 48%

ALL STAFF AT OFFICER LEVEL AND HIGHER

Women Men Total

647 1,101 1,748

37% 63%



HOW WE ARE CHANGING

We are growing. IFC’s staff increased by 51 percent from FY02

to FY07, from 2,068 to 3,134 staff. The core job stream of

investment staff represents 18 percent of IFC’s workforce and

has increased by 77 percent, from 325 to 576 staff, since FY02.

The fastest-growing areas of IFC’s business, advisory services,

has grown from 405 staff in FY02 to 1,073 in FY07, and it now

accounts for 34 percent of the workforce.

We are going local. IFC’s workforce profi le is substantially

different from six years ago. The decentralization of IFC staffi ng

is not new; it started to increase gradually in FY01. The number

of fi eld-based investment staff has nearly tripled in the past fi ve

years, from 98 to 276 staff, with 48 percent of IFC’s investment

staff and 51 percent of managers in investment departments

now based in the fi eld. About 870 advisory service staff, more

than 80 percent, are based in the fi eld.

IFC’s large-scale recruitment drive in the last two years has

allowed us to strengthen and diversify our talent pool—and

diversity of staff is a key priority for IFC. As a result of FY06-07

recruitment efforts, IFC substantially improved diversity in the

profi le of selected staff on whom the Board has asked us to

report. (The following fi gures are limited to professional-level

staff on the administrative budget.)

Staff representation from developing countries, at offi cer k

level and higher, increased from 42 to 50 percent

Offi cer-level female staff increased from 38 to 41 percent k

Sub-Saharan African and Caribbean regional representation k

of staff on international contracts: increased from 7 to 9

percent, the equivalent of 36 net staff members

One key challenge is retention of staff whose knowledge

and experience are highly valued in the global marketplace.

The competition for skilled fi nance and investment talent in

emerging markets is at a historic high, and compensation is

rising as a result. Hence IFC’s turnover of investment offi cers is

now 7.7 percent a year, up from 3.5 percent in FY05. Some 39

percent of investment offi cers hired at entry level in fi scal years

1998 to 2001 have already left IFC.


INVESTING IN IFC STAFF

IFC provides a wide range of benefi ts and professional develop-

ment opportunities. We strive to create an environment that

enables staff to perform their best.

Health Care

IFC provides staff with comprehensive medical insurance.

Washington-based staff are covered by Aetna, contracted

through an open procurement process. Other staff are covered

by the international health care provider La Garantie Medicale et

Chirurgicale, or GMC. Medical insurance costs are shared, with

75 percent paid by IFC and 25 percent paid by the individual.

Pension Management

IFC’s pension is part of the World Bank Group plan. One com-

ponent is a defi ned benefi t based on the years of service as a

participant, salary, and retirement age. A second component,

the cash savings plan, includes a mandatory contribution of

5 percent of each staff member’s salary, to which IFC adds 10

percent annually. Legacy pension benefi ts from earlier World

Bank Group pension plans include termination grants and ad-

ditional cash payouts.

Professional Development

IFC takes learning seriously. All new staff attend a mandatory

set of core courses that emphasize our mission, values, and

diversity and inclusion. Other courses include credit, core skills,

and leadership development. An increasing number of offerings

are held in the regions. In FY07, 60 percent of corporate-spon-

sored learning opportunities were in the fi eld. Many eLearning

courses are also available on demand anywhere in the world.

“Our people are the source

of IFC’s success. We strive

to build a high performance

organization to enable our

staff to make a real difference

with our clients

and in the lives

of those less

fortunate.”

Dorothy Berry VICE PRESIDENT, HUMAN RESOURCES AND ADMINSTRATION

WORKFORCE TRENDS SINCE FY01

1,331 1,3261,240 1,291 1,351

Washington Staff 1,498

1,550

626742

9631,082

1,9572,068 2,107

2,254 All IFC Staff

2,433

3,134

1,584

1,382

867Field Staff

2,880

500

1,000

1,500

2,000

2,500

3,000

3,500

FY01 FY02 FY03 FY04 FY05 FY06 FY07

STAFF PARTICIPATION IN TRAINING

Core Skills Areas

Completions 8,218

Hours 67,198

Credit

Completions 740

Hours 45,969

Leadership Development

Completions 191

Hours 6,714

Total Course Completions 9,149

Total Hours of Learning 119,881



“From its beginnings in

our Legal Department,

A Chance to Work has given

IFC and our partners a way

to help neighbors—

disadvantaged

people who need

work experience

to transform

their lives.”

ighbors—

aged

o need

rience

rm

”

REACHING OUT TO LOCAL COMMUNITIES

IFC’s employees help their communities in a number of ways.

This year, for example, staff in Istanbul got involved at a

center for disabled children, donating medical equipment and

furniture for a playroom and sponsoring a holiday party. They

also made donations and frequent visits to an orphanage and

a shelter for victims of domestic abuse. In Washington, staff

volunteer at public schools, and IFC experts met this year with

teachers to discuss how global warming can be approached

with students. IFC also invites the public to free cultural perfor-

mances and fi lms at headquarters. In Russia, A Chance to Work

continues to gain momentum: this IFC program helps orphans

gain job skills through paid internships with private companies.

Today 30 private companies are participating, two of which

have become donors to the effort as part of a commitment

to corporate social responsibility. Through FY07, 114 of 140

interns had secured permanent jobs, and 38 had entered uni-

versities to continue their education.

Life Is More Than “9 to 5”

IFC encourages staff to give back to their communities.

Staff are given time off each year for volunteer work.

They devoted 562 community service days during FY07.

There is an annual Community Connections Campaign,

which this year raised $209,000 for various charities,

with 48 percent of headquarters staff participating.

The World Bank Group matched this with an additional

50 percent.

In addition to encouraging extracurricular volun-

teering, some IFC managers have led group outreach

events at local soup kitchens, food banks, and homeless

shelters to help those less fortunate.

Staff are also active in their communities in areas be-

yond IFC’s support. They volunteer in schools, churches,

mosques, synagogues, community centers, and non-

profi t organizations. This commitment to helping people

is integral to who we are and why we work at IFC.

Jennifer Sullivan GENERAL COUNSEL


IFC Annual Report 2007

Summary of external assurance statement and commentary on nonfinancial aspects of the report

Introduction

IFC has commissioned The Corporate Citizenship Company to provide IFC's

management with external assurance and commentary on certain nonfinancial

aspects of its 2007 Annual Report, specifically the portions contained in pages nine to 96, described below, that are intended to address sustainability and development

outcome results. IFC�s management has prepared the report and is solely

responsible for its content. Our objectives were to review specific aspects of its content and presentation as identified below, to conduct selected checks of

underlying corporate records, and to provide this statement, for which we have sole

responsibility, all in accordance with instructions from IFC's management and the terms of reference we signed with IFC. We also tested the Development Outcome

Tracking System (DOTS) that IFC uses for assessment of the economic, social, and

environmental effects of its investments and advisory services.

The full statement of our external assurance and commentary is available at

www.ifc.org/annualreport. This includes details about The Corporate Citizenship

Company, our relationship with IFC, and the assurance process we have adopted. This summary statement presents our principal findings.

Our opinion

In our opinion, having reviewed relevant underlying IFC systems, the sustainability

and development outcome aspects of the Annual Report provide a fair and balanced representation of the progress IFC is making in carrying out its stated commitments,

as set forth in the text sections �IFC�s Contribution to Development� and �Our

Strategic Approach.� We have relied entirely on data and information provided by

IFC, except where we expressly state to the contrary in our note on the assurance process, published on IFC�s Web site. Where we have identified material gaps in

available performance data and stakeholder views, these are noted below in our

Commentary. In reviewing DOTS, described on page 16, nothing came to our attention to suggest that the methodology agreed by the multilateral development

banks (referred to on page 18) had not been applied, nor that information had been

materially misstated.


TEXT_P97_kb_mr_mr_mr.indd 97 9/24/07 6:27:48 AM


In forming our opinion and making our comments, we have referred to the

principles underlying the international assurance standard AA1000

(www.accountability21.net), notably those concerning materiality, completeness,

and responsiveness. We have also referred to the reporting guidance for content

and the principles for defining quality contained in GRI's G3 sustainability reporting

guidelines (www.globalreporting.org). Our methodology for testing the DOTS system

is presented in our note on the assurance process.

Commentary

IFC has chosen for the first time to combine its sustainability report and its report to

donors within its annual report to demonstrate the centrality of sustainable

development, including development outcomes, to IFC�s objectives and strategies.

We believe that this approach, when further refined, could be considered a model

for other institutions or companies that are seeking to present sustainability

considerations as being core to their businesses.

Such reports should explain how an institution impacts society, taking account of the

key economic, social, and environmental concerns of its stakeholders. Reports

should show how crucial decisions are made and differing interests balanced. They

should be honest about shortcomings. On this basis, we believe the sustainability

aspects of IFC�s fully integrated 2007 Annual Report, together with IFC�s efforts to

report on the development outcomes of its activities, mark a step forward from the

previous sustainability report for fiscal year 2005.

As IFC�s internal systems for monitoring environmental and social impacts and

supervising projects, including the DOTS development indicators, are embedded

and strengthened, we would expect the quality of data and indicators to improve

year on year.

On page 20, IFC has made progress in meeting its 2005 commitment to report on

the implementation of its Performance Standards, and on its Web site, which is

outside the scope of this assurance, it is making steps toward reporting the volume

of business to which individual standards are being applied. We welcome IFC�s

commitment to begin publishing the carbon footprint of its portfolio, as stated on

page 14.

IFC cannot report on projects in detail for reasons of client confidentiality. However,

we believe the sustainability aspects would be more comprehensive if the report

detailed IFC and its clients� approaches to managing challenging projects during the

year.



IFC regularly requires or recommends that clients for its investments and advisory

services undertake stakeholder engagement, and our research has found IFC itself

to be responsive to a wide range of stakeholders. However, we believe IFC�s

responsiveness would be better reflected if this report addressed more directly the

views of diverse stakeholders. For example, some audiences may not readily accept

IFC�s view that private sector investment automatically benefits development,

particularly in such sectors as oil, gas and chemicals or the private provision of

education and water.

In our opinion the materiality of the content is strong, reflecting that IFC�s greatest

impacts are generated through its investments and advisory services. However, this

report aspires to follow the Global Reporting Initiative, and it would be both more in

keeping with the GRI guidelines and more complete if it were to cover in greater

detail IFC�s own operational impacts. For example, it should provide more data on

employee and community engagement, detail compliance with World Bank Group

policies on integrity and corruption, and discuss procurement processes.

The Corporate Citizenship Company

22 August 2007




I. OVERVIEW The International Finance Corporation (IFC) is an international organization, established in 1956, to further economic growth in its developing member countries by promoting private sector development. IFC is a member of the World Bank Group, which also comprises the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the Multilateral Investment Guarantee Agency (MIGA), and the International Centre for Settlement of Investment Disputes (ICSID). It is a legal entity separate and distinct from IBRD, IDA, MIGA, and ICSID, with its own Articles of Agreement, share capital, financial structure, management, and staff. Membership in IFC is open only to member countries of IBRD. As of June 30, 2007, IFC’s entire share capital was held by 179 member countries. IFC’s principal investment products are loans and equity investments, with relatively small debt securities and guarantee portfolios. IFC also plays a catalytic role in mobilizing additional funding from other investors and lenders, either through cofinancing or through loan participations, underwritings and guarantees. In addition to project finance, corporate lending and resource mobilization, IFC offers an array of financial products and technical advisory services to private businesses in the developing world to increase their chances of success. It also advises governments on how to create an environment hospitable to the growth of private enterprise and foreign investment. Unlike most multilateral development institutions, IFC does not accept host government guarantees of its exposures. IFC raises virtually all of the funds for its lending activities through the issuance of debt obligations in the international capital markets, while maintaining a small borrowing window with IBRD. Equity investments are funded from net worth. During the year ended June 30, 2007 (FY07), IFC had an authorized borrowing program of up to $3.5 billion, including $500 million to allow for possible prefunding during FY07 of the funding program for the year to June 30, 2008 (FY08).

IFC’s capital base and its assets and liabilities are primarily denominated in US dollars. IFC seeks to minimize foreign exchange and interest rate risks by closely matching the currency, rate bases, and maturity of its liabilities in various currencies with assets having the same characteristics. IFC manages any residual currency and interest rate risks by utilizing currency and interest rate swaps and other derivative instruments.

MANAGEMENT’S DISCUSSION AND ANALYSIS of Financial Condition and Results of Operations




II. FINANCIAL SUMMARY Basis of preparation of IFC�s consolidated financial statements The accounting and reporting policies of IFC conform to accounting principles generally accepted in the United States (US GAAP). Up to and including the year ended June 30, 1999, IFC prepared one set of financial statements and footnotes, complying with both US GAAP and International Financial Reporting Standards (IFRS). However, principally due to material differences between US Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (collectively SFAS No. 133), and its counterpart in IFRS, IAS No. 39, Financial Instruments Recognition and Measurement, it has not been possible for IFC to satisfy the requirements of both US GAAP and IFRS via one set of financial statements since the year ended June 30, 2000. IFC is actively monitoring developments related to accounting standards and the primary basis for preparation of its consolidated financial statements, all with a view to the necessary systems and controls to manage its various lines of business. IFC plans to change presentation of its consolidated financial statements from US GAAP to IFRS in the year ending June 30, 2010. Unless stated otherwise, discussions of financial performance herein refer to income after (i) expenditures for advisory service (referred to as technical assistance and advisory services, or TAAS, prior to FY07; (ii) expenditures for performance-based grants (PBG); and (iii) grants to IDA (operating income). Operating income excludes the effects of net gains (losses) on non-trading financial instruments pursuant to SFAS No. 133. The effects of SFAS No. 133 on net income are discussed in Section VII.

Financial performance summary From year to year, IFC�s operating income is affected by a number of factors, principally income (dividends and realized capital gains) generated from its equity investment portfolio; the magnitude of provisions for losses against its loans and guarantees; impairment of equity investments; loans in nonaccrual status; and recoveries of interest on loans formerly in nonaccrual status. A significant part of IFC�s liquid assets trading portfolio is invested in fixed income securities, which are also subject to external market factors that affect the value of such securities, adding variability to operating income. Net income also includes net gains and losses on non-trading financial instruments, pursuant to SFAS No. 133. IFC has been profitable since its inception in 1956, and recorded operating income for FY07 of $2,611 million, as compared with $1,409 million for the year ended June 30, 2006 (FY06), and $1,953 million for the year ended June 30, 2005 (FY05). Operating income in FY07 was a record high for IFC, reflecting strong contributions across each of IFC�s main product lines: loans, equities, debt securities and treasury operations. IFC reported net income in FY07, including the effects of SFAS No. 133, of $2,618 million, as compared with $1,278 million for FY06 and $2,015 million for FY05.

IFC�s operating income for the past five fiscal years ended June 30 is presented below:



The table below presents selected financial data for the last five fiscal years (in millions of US dollars, except where otherwise stated): As of and for the years ended June 30

2007 2006 2005 2004 2003

Net income highlights:

Interest income and financial fees from loans and debt securities 1,075 807 660 518 477

Income from liquid asset trading activities 618 444 358 177 475

Charges on borrowings (801) (603) (309) (141) (226)

Income from equity investments 2,306 1,228 1,365 658 145

Of which:

Realized capital gains on equity sales 1,942 928 723 386 52

Dividends and profit participations 398 327 258 207 147

Unrealized income from LLPs and certain LLCs 19 56 191 - -

Changes in carrying value of equity investments - - 269 69 (50)

Equity investment impairment write-downs (40) (57) (62) - -

Other (13) (26) (14) (4) (4)

Release of (provision for) losses on loans & guarantees 43 (15) 261 103 (48)

Other income 116 115 79 79 93

Other expense (500) (477) (423) (383) (360)

Income before expenditures for advisory services, expenditures for PBG, grants to IDA

and net gains (losses) on non-trading financial instruments

2,857 1,499 1,991 1,011 556

Expenditures for advisory services (96) (55) (38) (29) (28)

Expenditures for PBG - (35) - - -

Grants to IDA (150) - - - -

Income after expenditures for advisory services, expenditures for PBG, grants to IDA and

before net gains (losses) on non-trading financial instruments (operating income)

2,611 1,409 1,953 982 528

Net gains (losses) on non-trading financial instruments 7 (131) 62 11 (41)

Net income 2,618 1,278 2,015 993 487

Consolidated balance sheet highlights:

Total assets 40,550 38,420 39,560 32,361 31,543

Liquid assets, net of associated derivatives 13,269 12,730 13,325 13,055 12,952

Loans, equity investments, and debt securities, net 15,812 12,731 11,489 10,279 9,377

Borrowings drawn-down and outstanding 15,879 14,967 15,359 16,254 17,315

Total capital 14,130 11,076 9,798 7,782 6,789

Of which:

Undesignated retained earnings 10,723 7,859 6,871 5,193 4,425

Retained earnings designated for advisory services 391 487 312 225 -

Retained earnings designated for PBG 215 215 250 - -

Retained earnings designated for grants to IDA - 150 - - -

Capital stock 2,365 2,364 2,364 2,361 2,360

Accumulated other comprehensive income 436 1 1 3 4

Key financial ratios: (1)

Return on average assets (2) 6.6% 3.6% 5.4% 3.1% 1.8%

Return on average net worth (3) 21.2% 13.7% 22.6% 13.7% 8.2%

Cash and liquid investments as a percentage of next

three years� estimated net cash requirements (4) 85% 112% 142% 116% 107%

Debt to equity ratio (5) 1.3:1 1.5:1 1.8:1 2.3:1 2.6:1

Capital adequacy ratio (6) 57% 54% 50% 48% 45%

Total reserve against losses on loans to total disbursed loan portfolio (7) 6.5% 8.3% 9.9% 14.0% 18.2% 1. Key financial ratios are generally calculated excluding the effects of SFAS No. 133. 2. Return on average assets is defined as operating income for the fiscal year as a percentage of the average of total assets at the end of such fiscal year and the previous fiscal year. 3. Return on average net worth is defined as operating income for the fiscal year as a percentage of the average of total net worth (excluding payments on account of pending subscriptions) at the

end of such fiscal year and the previous fiscal year. 4. At June 30, 2007, IFC�s liquidity, consisting of proceeds from external funding, stood at 95% of the sum of: (i) 100% of committed but undisbursed straight senior loans; (ii) 30% of committed

guarantees; and (iii) 30% of committed client risk management products. 5. Debt to equity ratio is defined as the ratio of outstanding borrowings plus outstanding guarantees to subscribed capital plus retained earnings at the end of the fiscal year. 6. Capital adequacy ratio is defined as the ratio of capital (including paid-in capital, retained earnings, and general loan loss reserve) to risk-weighted assets, both on- and off-balance sheet. The ratio

at June 30, 2007 does not include the impact of designations of retained earnings related to FY07 net income which are expected to be approved by the Board of Directors during FY08. 7. Total reserves against losses on loans to total disbursed loan portfolio is defined as reserve against losses on loans as a percentage of the total disbursed loan portfolio at the end of the fiscal year.




III. CLIENT SERVICES Business overview In partnership with private investors, IFC assists in financing the establishment, improvement, and expansion of private sector enterprises by making investments where sufficient private capital is not otherwise available on reasonable terms. IFC seeks to bring together domestic and foreign private capital and experienced management and thereby create conditions conducive to the flow of private capital (domestic and foreign) into productive investments in its developing member countries. In this way, IFC plays a catalytic role in mobilizing additional funding from other investors and lenders, through parallel loans, loan participations, partial credit guarantees, securitizations and risk sharing facilities (resource mobilization). In addition to project finance, corporate lending and resource mobilization, IFC offers an array of financial products and technical advisory services to private businesses in the developing world with a view to fulfilling its developmental mission. IFC also advises member governments on how to create an environment hospitable to the growth of private enterprise and foreign investment. IFC�s investments are normally made in its developing member countries. The Articles of Agreement mandate that IFC shall invest in productive private enterprise. The requirement for private ownership does not disqualify enterprises that are partly owned by the public sector if such enterprises are organized under local commercial and corporate law, operate free of host government control in a market context and according to profitability criteria, and/or are in the process of being totally or partially privatized. IFC�s main investment activity is project and corporate financing. This encompasses �greenfield� projects, expansions, and modernizations. IFC also provides corporate credits to selected companies to finance ongoing investment programs. In addition, IFC facilitates financing through financial intermediaries, covering project and general purpose lending and specialized lending products such as leasing, trade, and mortgage finance. These financial intermediaries function either as IFC�s borrower, on-lending to private sector companies at their own risk, or as IFC�s agent, identifying companies for direct loans from IFC. IFC applies stringent tests of enterprise soundness, project viability, additionality, and developmental impact in determining the eligibility of projects for its investments.

Advisory services IFC has historically delivered its mission primarily through loans, equity investments, and debt securities. As a result of an enhanced focus on frontier markets and achievement of sustainable development impact, the demands on IFC for associated advisory work have increased significantly. In FY04, IFC established a funding mechanism for advisory services, funded by designations of IFC�s retained earnings. Amounts available to be designated for advisory services are determined based on IFC�s annual operating income in excess of $150 million, contemplating the financial capacity and priorities of IFC, and are approved by IFC�s Board of Directors. Expenditures for the various approved advisory services projects are recorded as expenses in IFC�s consolidated income statement in the year in which they occur, and have the effect of reducing retained earnings designated for this specific purpose. Prior to FY07, IFC�s Board of Directors had approved designations of $580 million of IFC�s retained earnings. IFC incurred expenditures for advisory services of $38 million in FY05, $55 million in FY06, and $96 million in FY07, thereby reducing the amount of retained earnings designated for advisory services at June 30, 2007, to $391 million. Additional information on the funding mechanism for advisory services can be found in Notes A and N to IFC�s FY07 consolidated financial statements.

Performance-based grants In FY05, IFC began the analysis to create a program to fund performance-based grants, targeted at specific industries in developing countries, particularly frontier areas. The performance-based grants initiative (PBGI) establishes a pool of resources for funding performance-based grants to individual private-sector projects in developing markets. The PBGI furthers IFC�s frontier strategy by opening new opportunities to generate developmental impact. The initiative had been discussed by IFC�s Board of Directors during the second half of FY05 but no decisions on the principles or modalities of the initiative were made at that time. As a result, IFC designated $250 million of retained earnings for the initiative, with further deliberations to occur in FY06 on the principles and specifics of the initiative. On March 30, 2006, IFC�s Board of Directors approved an implementation mechanism for the initiative and an initial pilot phase of $65 million. During FY06, IFC provided $35 million to IBRD�s Global Partnership on Output Based Aid under the pilot phase; this amount was recorded as an expense in FY06. There were no expenditures in FY07. The amount of retained earnings designated for performance-based grants at June 30, 2007 was $215 million.



Grants to IDA In order to encourage the growth of productive private enterprise in countries that are members of both IFC and IDA, on August 7, 2006, IFC�s Board of Directors approved the designation of $150 million to IDA. On February 27, 2007, IFC disbursed $150 million in grants to IDA and has recorded an expense of $150 million in its FY07 consolidated income statement.

Designations of retained earnings Designations of retained earnings related to FY07 net income are expected to be approved by the Board of Directors during FY08.

Investment process and portfolio supervision IFC�s investment process can be divided into twelve main stages:

IFC carefully supervises its projects to monitor project performance and compliance with contractual obligations and with IFC�s internal policies and procedures. IFC�s Board of Directors is informed of such matters and of recommended courses of action at regular intervals.

! Business development ! Early review ! Appraisal (due diligence) ! Investment review ! Negotiations ! Public notification ! Board of Directors� review and approval ! Commitment ! Disbursement of funds ! Project supervision ! Evaluation ! Closing

1 Other includes debt securities, quasi-equity, guarantees and client risk management

Investment program summary

Commitments In FY07, IFC entered into new commitments totaling $8.2 billion, compared with $6.7 billion for FY06. Investment commitments pending disbursement at June 30, 2007 were $7.7 billion ($6.9 billion at June 30, 2006). Guarantees and client risk management facilities committed but not utilized at June 30, 2007, were $0.7 billion ($0.8 billion at June 30, 2006). FY07 and FY06 commitments1 comprised the following:




Disbursements IFC disbursed $5.8 billion for its own account in FY07 ($4.4 billion in FY06). IFC�s disbursed and outstanding loan portfolio for its own account, including the unamortized SFAS No. 133 transition adjustment and unamortized deferred loan origination fees, net (disbursed loan portfolio), grew 18.8% to $12.7 billion at June 30, 2007 ($10.7 billion at June 30, 2006). IFC�s equity investment portfolio, net of impairment write-downs and including adjustments to investments accounted for under the equity method and unrealized gains on equity investments held by consolidated variable interest entities (VIEs) (disbursed equity portfolio), grew 20.4% to $3.2 billion at June 30, 2007 ($2.7 billion at June 30, 2006). IFC�s debt securities portfolio grew 218% to $0.7 billion at June 30, 2007 ($0.2 billion at June 30, 2006). 42% of the increase was due to growth in the portfolio and 58% was due to increases in fair value.

Approvals In FY07, IFC approved new investments for its own account, including guarantees and client risk management facilities, totaling $9.3 billion, compared with $7.1 billion in FY06. In addition, IFC approved loan participations (B-loans) arranged to be placed with financial institutions (Participants) for loans approved by IFC�s Board of Directors totaling $2.0 billion in FY07, compared with $2.2 billion in FY06. FY07 and FY06 approvals2 comprised the following:

Approvals pending commitment for IFC�s own account at June 30, 2007, including guarantees and client risk management facilities, were $5.1 billion ($3.6 billion at June 30, 2006).

2 Other includes debt securities, quasi-equity, guarantees and client risk management



Disbursed investment portfolio IFC�s disbursed investment portfolio is widely diversified by sector and geographic region. The following charts show the distribution of the portfolio (before adjustments to investments accounted for under the equity method, unrealized gains on equity investments held by consolidated VIEs, unamortized deferred loan origination fees, net and the unamortized SFAS No. 133 transition adjustment) as of June 30, 2007, and June 30, 2006:




Disbursed B-loans The portfolio of disbursed and outstanding B-loans which are serviced by IFC at June 30, 2007, totaled $4.4 billion, as compared with $3.9 billion at June 30, 2006. Additional information on IFC�s investment portfolio as of and for the years ended June 30, 2007, and June 30, 2006, can be found in Notes C, D , E, F, G and H to IFC�s FY07 consolidated financial statements. Investment products

Loans Loans account for the major part of the financing provided by IFC, representing 77% of IFC�s disbursed investment portfolio as of June 30, 2007, compared with 79% at June 30, 2006. Loans will generally have the following characteristics:

IFC offers local currency loan products to certain clients, provided that IFC is able to hedge its local currency exposure through mechanisms such as cross-currency swaps or forward contracts. Fixed-rate loans and loans in currencies other than US dollars are normally transformed, using currency and/or interest rate swaps, into US dollar variable rate loans. On June 30, 2007, IFC�s disbursed loan portfolio was $12.7 billion ($10.7 billion at June 30, 2006). At June 30, 2007, 73% (76% at June 30, 2006) of IFC�s disbursed loan portfolio, excluding unamortized deferred loan origination fees, net, and the unamortized FSAS No. 133 transition adjustment, was US dollar-denominated. The currency composition of the disbursed loan portfolio, excluding unamortized deferred loan origination fees, net, and the unamortized SFAS No. 133 transition adjustment, at June 30, 2007, and June 30, 2006, is shown on the accompanying diagram:

! Term: typically amortizing with final maturities of up to 12 years ! Currency: primarily in major convertible currencies, principally US dollar, and to a lesser extent, Euro, Swiss franc and

Japanese yen ! Interest rate: typically variable ! Pricing: reflects such factors as market conditions and country and project risks; variable rate loans are generally tied to

the 6-month LIBOR index in the relevant currency.



Equity investments Equity investments accounted for 19% of IFC�s disbursed investment portfolio at June 30, 2007, compared with 20% at June 30, 2006. IFC�s equity investments are typically in the form of common or preferred stock which is not mandatorily redeemable by the issuer or puttable to the issuer by IFC and are usually denominated in the currency of the country in which the investment is made.

Debt securities Debt securities accounted for 4% of IFC�s disbursed investment portfolio at June 30, 2007, compared with 1% at June 30, 2006. Debt securities are typically in the form of bonds and notes issued in bearer or registered form, securitized debt obligations (e.g., asset-backed securities, mortgage-backed securities, and other collateralized debt obligations) and preferred shares, which are mandatorily redeemable by the issuer or puttable to the issuer by IFC.

Quasi-equity In addition to traditional loans, equity investments, and debt securities, IFC provides financing through a variety of quasi-equity instruments. Quasi-equities include subordinated or convertible loans, asset-backed securities, mortgage-backed securities, and certain common or preferred shares with put and/or call features. Depending upon their characteristics, quasi-equities may be classified as loans, equity investments, or debt securities in IFC�s consolidated balance sheet. At June 30, 2007, IFC�s disbursed quasi-equity portfolio, before the unamortized SFAS No. 133 transition adjustment, adjustments to investments accounted for under the equity method, unrealized gains on equity investments held by consolidated VIEs, and unamortized deferred loan origination fees, net, totaled $2,725 million ($1,935 million at June 30, 2006), of which $2,416 million was classified as loans ($1,768 million at June 30, 2006), $80 million was classified as equity investments ($96 million at June 30, 2006), and $229 million was classified as securities ($71 million at June 30, 2006) in IFC�s consolidated balance sheet.

Guarantees and partial credit guarantees IFC offers partial credit guarantees to clients covering, on a risk-sharing basis, client obligations on bonds and/or loans. IFC�s guarantee is available for debt instruments and trade obligations of clients and covers commercial as well as noncommercial risks. IFC will provide local currency guarantees, but when a guarantee is called, the client will generally be obligated to reimburse IFC in US dollar terms. Guarantee fees are consistent with IFC�s loan pricing policies. During FY07, IFC signed $1.0 billion of guarantees, $0.6 billion in FY06.

Resource mobilization Resource mobilization is defined as financing from entities other than IFC that becomes available to clients due to IFC�s direct involvement in raising resources. lFC finances only a portion, usually not more than 25%, of the cost of any project. All IFC-financed projects, therefore, require other financial partners. IFC mobilizes such private sector finance from other entities through participations, parallel loans, partial credit guarantees, securitizations, and risk sharing facilities. B-loans The principal direct means by which IFC mobilizes such private sector finance is through the sale of participations in its loans (B-loans), known as the B-loan program. Through the B-loan program, IFC has worked primarily with commercial banks but also with nonbank financial institutions in financing projects since the early 1960s. Whenever it participates a loan, IFC will always make a loan for its own account (an A-loan), thereby sharing the risk alongside its loan participants. IFC acts as the lender of record and is responsible for the administration of the entire loan, including the B-loan. IFC charges fees to the borrower at prevailing market rates to cover the cost of the syndication of the B-loan. B-loan commitments were $1,775 million in FY07 ($1,572 million in FY06). Structured finance Structured finance comprises partial credit guarantees, securitizations and risk sharing facilities. Structured finance commitments, net, defined as the amount of financing with a risk position equal to, or senior to, that of IFC�s risk participation in the transaction, totaled $2,083 million in FY07 ($1,245 million in FY06). Parallel loans Loans from other financial institutions that IFC helped raise for clients and received a fee, but for which IFC is not the lender of record, arranged by IFC in FY07 were $29 million ($67 million in FY06).




Resource mobilization ratio The resource mobilization ratio is defined as:

Loan participations + parallel loans + non-IFC investment portion of structured finance Commitments (IFC investments + IFC portion of structured finance)

For each dollar that IFC committed, IFC mobilized (in the form of B-loans, parallel loans, and the non-IFC portion of structured finance) $0.47 in FY07 ($0.43 at June 30, 2006).

Advisory services Advisory services are a growing and dynamic business that allows IFC to carry out its development mission beyond its investment activities. Beginning in FY05, IFC established a funding mechanism for advisory services, funded by designations of IFC�s retained earnings, in order to address its increased efforts in the provision of advisory services. IFC provides such services to promote sustainable private sector investment in developing countries. Through this work, which is funded in partnership with governments and other donors, IFC contributes to development where opportunities for development may be limited. During FY07, IFC organized its advisory services in five business lines that correspond with IFC�s operational strategy:

Expenditures for advisory services totaled $96 million in FY07 ($55 million in FY06 and $38 million in FY05). The advisory services portfolio at June 30, 2007 included 1,018 projects with approved funding from IFC and donors of $846 million. Of this, 362 new projects were approved in FY07 with funding of $386 million. The average planned duration of advisory service projects now exceeds 24 months. The average size of new projects exceeds $1 million. During FY07, expenses were incurred in 943 projects (both IFC and donor funds). FY07 exposures by business line and, region are as follows:

! Access to Finance: to expand on the availability of financial services to micro and small businesses and low-income households.

! Business Enabling Environment: to enable micro, small, and medium businesses to grow, invest, become more productive, and create jobs.

! Environment and Social Sustainability: to develop innovative business models that deliver social and environmental benefits.

! Infrastructure: to improve access to basic services in road infrastructure, telecommunications, water and energy utilities, health, and education.

! Value Addition to Firms: to help private firms enhance their competitiveness and productivity and to promote the growth of small businesses through the development of supply chains.



IV. TREASURY SERVICES

Liquid assets IFC invests its liquidity in highly rated fixed and floating rate instruments issued by, or unconditionally guaranteed by, governments, government agencies and instrumentalities, multilateral organizations, and AAA-rated corporate issuers; these include mortgage- and asset-backed securities, time deposits and other unconditional obligations of banks and financial institutions. IFC manages the market risk associated with these investments through a variety of hedging techniques including derivatives, principally currency and interest rate swaps and financial futures. IFC�s liquid assets are invested in five separate portfolios, namely P0 through P4. PORTFOLIO

MARKET VALUE ($ billions) *

COMPRISING

MANAGED BY

INVESTED IN

BENCHMARK

P0 $1.9 ($1.2)

Funds awaiting disbursement or reinvestment

IFC�s Treasury Department

Short-term deposits Overnight US dollar LIBID

P1

$3.9 ($5.2)

Proceeds from market borrowings invested pending disbursement of operational loans


Principally global government bonds, asset-backed securities, and other AAA-rated corporate bonds generally swapped into 6-month US dollar LIBOR

Adjusted 3-month US dollar LIBID **

P2 $6.0 ($4.9)

Primarily IFC�s paid-in capital and accumulated earnings that have not been invested in equity and quasi-equity investments or fixed-rate loans


US Treasuries and other sovereign and agency issues

Lehman Brothers US Intermediate Treasury Index ***

P3 $1.1 ($1.0)

Proceeds from market borrowings

External managers appointed by IFC

Global government bonds and mortgage-backed securities

Same as for P1

P4 $0.4 ($0.4)

An outsourced portion of the P2 portfolio

External managers appointed by IFC

US Treasuries and other sovereign and agency issues

Same as for P2

Total $13.3bn ($12.7bn)

* at June 30, 2007 (June 30, 2006) ** adjusted 3 month US dollar LIBID=US dollar LIBOR-12.5 basis points. The net duration of the P1 and P3 benchmarks is approximately 0.25 years. *** duration of P2 portfolio plus fixed-rate loans

The P3 portfolio is not permitted to exceed 12% of the total value of liquid assets at any time. All portfolios are accounted for as trading portfolios. IFC has a flexible approach to managing the liquid assets portfolios by making investments on an aggregate portfolio basis against its benchmark within specified risk parameters. In implementing these portfolio management strategies, IFC utilizes derivative instruments, including futures, and options, and takes long or short positions in securities. All liquid assets are managed according to an investment authority approved by IFC�s Board of Directors and investment guidelines approved by IFC�s Finance and Risk Committee, a subcommittee of IFC�s Management Group.




Borrowings The major source of IFC�s borrowings is the international capital markets. Under the Articles of Agreement, IFC may borrow in the public markets of a member country only with approvals from that member and also the member in whose currency the borrowing is denominated. IFC borrowed $2.8 billion during FY07 ($1.8 billion in FY06 and $2.0 billion in FY05). In addition, IFC�s Board of Directors has authorized the repurchase and/or redemption of debt obligations issued by IFC. During FY07, IFC repurchased and retired $16 million of outstanding debt ($209 million in FY06). IFC diversifies its borrowings by currency, country, source, and maturity to provide flexibility and cost-effectiveness. Outstanding market borrowings have remaining maturities ranging from less than one year to almost 30 years, with a weighted average remaining maturity of 9.8 years at June 30, 2007 (10.7 years at June 30, 2006). Market borrowings are generally swapped into floating-rate obligations denominated in US dollars. As of June 30, 2007, IFC had gross payables from borrowing-related currency swaps of $8.8 billion ($8.5 billion at June 30, 2006) and from borrowing-related interest rate swaps in the notional principal amount of $6.7 billion ($6.7 billion at June 30, 2006). After the effect of these derivative instruments is taken into consideration, substantially all of IFC�s market borrowings at June 30, 2007, and June 30, 2006, were variable rate US dollar-denominated. The weighted average cost of market borrowings after currency and interest rate swap transactions was 5.0% at June 30, 2007 (4.9% at June 30, 2006).

Capital and retained earnings As of June 30, 2007, IFC�s net worth (presented as Total Capital in IFC�s consolidated balance sheet) amounted to $14.1 billion, up from the June 30, 2006 level of $11.1 billion. At June 30, 2007, net worth comprised $2.4 billion of paid-in capital, unchanged from June 30, 2006, $11.3 billion of retained earnings ($8.7 billion at June 30, 2006), and $0.4 billion of accumulated other comprehensive income ($0 at June 30, 2006). As of June 30, 2007 and 2006, IFC�s authorized capital was $2.45 billion, of which $2.36 billion was subscribed. Over 99% of this was paid in ($2.37 billion at June 30, 2007, $2.36 billion at June 30, 2006). IFC has agreed to defer the payment dates for certain member countries. Pursuant to these arrangements, $1 million of subscribed shares remained unpaid at June 30, 2007, unchanged from June 30, 2006. At June 30, 2007, retained earnings comprised $10.7 billion of undesignated retained earnings ($7.8 billion at June 30, 2006), $0.4 billion of retained earnings designated for advisory services ($0.5 billion at June 30, 2006), $0.2 billion of retained earnings designated for PBG ($0.2 billion at June 30, 2006), and $0 of retained earnings designated for grants to IDA ($0.2 billion at June 30, 2006).

IFC�s capitalization as of June 30, 2007 and June 30, 2006 is as follows:



V. ENTERPRISE RISK MANAGEMENT In executing its sustainable private sector development business, IFC assumes various kinds of risks. IFC�s management has defined a comprehensive enterprise risk management framework, within which it recognizes four main risk groupings: strategic risk, credit risk, financial risk, and operational risk.

Financial� Market� Liquidity� Funding

Credit� Customer� Country � Counter-

party

Strategic� Development

Mission� Environment &

Social� Reputation

Operational� People� Systems� Processes� External Events

IFC EnterpriseRisk

Architecture

Active management of these risks is a key determinant of IFC�s success and its ability to maintain a stable capital and earnings base, and is an essential part of its operations. As part of its enterprise risk management framework, IFC has adopted several key financial and exposure policies and a number of prudential policies.

FY07 enterprise risk highlights IFC established a stand-alone Risk Management Vice Presidency in FY07. The risk management function in IFC is being enhanced to rationalize and expand existing functions and in some cases, establish new capacity for additional functions.


IFC ENTERPRISE RISK ARCHITECTURE



Plans and steps taken in this regard include:

IFC has been experiencing strong growth in all its businesses and is focused on implementing its strategic objective of becoming a client-driven organization, providing global knowledge and local expertise with decentralized decision making. In parallel, IFC has stepped up its efforts to maintain asset quality, enhanced the independence of its risk management function, and reaffirmed the enterprise-wide nature of its mandate. IFC set up a pilot program in FY07 to increase risk management staffing and placed key credit risk managers and other risk oversight disciplines in the Asia regional hub in order to improve the timeliness and quality of the risk decision process. The comprehensiveness of the risk process at IFC necessitates reviews of economic and social risks, corporate governance standards for clients, and reputation risk reviews in addition to the more traditional credit quality and operational concerns. This pilot program has become operational at the beginning of FY08. Based on lessons learned, IFC will continue to decentralize in FY08, and risk management resources may be deployed to other regional hubs as needed. IFC believes that the move to put key decision risk makers in the regions will significantly improve the quality of its enterprise risk management coverage.

Strategic risk IFC defines strategic risk as the potential reputation, financial and other consequences of a failure to achieve its strategic mission and, in particular, its sustainable development mandate. The overall management of strategic risk is effected through the definition and implementation of an annual strategy for meeting IFC�s mission and guidelines for its investment operations, advisory services, and treasury activities. The strategy is developed with Senior Management by the Operational Strategy Group, and is approved by the Board of Directors. The Independent Evaluation Group conducts ex post evaluations of the implementation of IFC�s strategy on an ongoing basis. IFC�s commitment to quality enterprise risk management, particularly on the environment and social front, continues to gain acceptance with our strategic partners, as the �Equator Principles� announced in FY05 have now become an established standard for financial institutions engaged in finance in the emerging markets. Responsibility for managing these economic and social risk principles both internally and in liaison with other financial institutions rests with the Environment and Social Development Department.

� Enhancing risk/return metrics and other corporate tools for risk-rating and active portfolio management including economic capital allocation, improved risk rating systems and associated principles that allow for greater decentralization and accountability for pricing, performance measurement and portfolio management.

� Establishing a new Market and Liquidity Risk unit which will among other things look into the development of a Corporate Value at Risk measurement system for IFC.

� Implementing a Corporate-wide Value at Risk measurement and management system. � Expanding IFC�s operational risk assessment and management capabilities beyond investment operations, anti-money

laundering and anti-corruption efforts to encompass advisory services and reputation risk management. � Streamlining and strengthening operating processes and enhancing reporting effectiveness and accountability through

an ongoing Business Process Review. � Integrating development impact metrics with financial risk-return metrics. � Strengthening internal controls especially around financial reporting, advisory service activities and information

technology expenditures. � Working toward enhanced and harmonized reporting of all risk metrics and uses of delegated authorities from the

Board. � Establishing a platform for a Corporate-wide compilation of risk and financial management policies for IFC activities and

operations and their dissemination across the Corporation alongside decentralization efforts. � Preparing a framework for, and anticipating, potential financial risks in IFC member countries or general portfolio

deterioration. � Piloting and using an economic capital approach for capital adequacy, capital allocation and internal risk management

purposes as well as for setting general loan loss reserves. This approach brings IFC in line with industry best practice in the measurement of risk.

� The Project Risk Management function merged into an Operational Risk unit within the Business Risk Department in order to take a more systematic approach to operational risk, with the mandate to expand its framework across other businesses of IFC.

� As of July 1, 2007, the Insurance Services group was also integrated into the Business Risk Department.



In addition, IFC is focused on ensuring the evolving principles of corporate governance are accepted and practiced by our clients, and we place great emphasis on developing these standards as part of our development activities. Responsibility for managing corporate governance both internally and within our clients� operations rests with the Corporate Governance Department. More broadly, the responsibility for the management of the fundamental reputation risk associated with the selection of project sponsors and the review of aspects relating to integrity rests with the operational departments, which are supported by the Business Risk Department. The key guiding principles and policies established as part of the framework for controlling strategic risk are as follows:

FY07 strategic risk highlights IFC�s Environmental and Social Policies have become widely recognized as best practice when twelve international commercial banks adopted them in the form of the Equator Principles. To date, more than 50 leading international financial institutions have adopted these principles.

As of January 1, 2007, IFC adopted a stricter enforcement of its approach to combating fraud and corruption related to newly initiated investment financing, as well as advisory services. In conjunction with its sister organizations in the World Bank Group, and as part of this new approach, IFC adopted new and expanded definitions of fraud and corruption, which were harmonized with other multilateral development institutions. A process for sanctions and debarment of customers committing these bad acts has been put in place. The enhanced emphasis on combating fraud and corruption does not change the high expectations IFC has always held for its staff, clients and projects, including our due diligence and commitment to good corporate governance.

Guiding principles for IFC�s operations Catalytic role: IFC will seek above all to be a catalyst in facilitating productive investments in the private sector of its developing member countries. It does so by mobilizing financing from both foreign and domestic investors from the private and public sectors. Business partnership: IFC functions like a business in partnership with the private sector. Thus, IFC takes the same commercial risks as do private institutions, investing its funds under the discipline of the marketplace. Additionality: IFC participates in an investment only when it can make a special contribution not offered or brought to the deal by other investors.

Environmental and social policies The Corporation has developed a comprehensive set of Guidelines and Safeguard Policies to promote environmentally and socially responsible private sector investments. Project sponsors are given the Safeguard Policies for environmental and social issues to review prior to conducting their assessments, as well as the environmental, health, and safety guidelines specific to the particular industry, sector, and type of project. When making investments, IFC applies its standards to the project and project performance is monitored against those standards. Projects are expected to comply with the applicable policies and guidelines, as well as applicable local, national, and international laws.

IFC sanctions procedures In FY07, IFC established a set of procedures to sanction parties involved in IFC projects committing corrupt, fraudulent, collusive, coercive or obstructive practices.



Credit risk IFC defines credit risk as the potential reduction in value of on- and off-balance sheet assets due to a deteriorating credit profile of its clients, the countries in which it invests, or a financial counterparty. Credit risk is incurred in two areas of IFC�s operations: (i) in its investment operations, where IFC provides loans, invests in debt securities and equity investments, provides guarantees and acts as a derivatives counterparty for clients in its developing member countries, and (ii) in its treasury and portfolio management operations, where credit risk is incurred with counterparties in IFC�s liquid asset, borrowing, asset-liability management, and portfolio management activities. As part of its mandate, IFC is prohibited from accepting host government guarantees of repayment on its investments and, therefore, incurs commercial and sovereign risk on its investments. IFC�s Risk Management and Financial Policy Department has oversight responsibility for overall financial risk management and, in addition, monitors and controls credit risk arising in IFC�s treasury activities. With respect to IFC�s credit risk exposures to clients in developing countries, the Credit Review Department plays a key role. At origination of new investments, the Credit Review Department analyzes information obtained from the investment departments and provides an independent review of the credit risk of the transaction. After commitment, the quality of IFC�s investment portfolio is monitored according to supervision principles and procedures defined in the Operational Policies and Procedures. Responsibility for the day-to-day monitoring and management of credit risk in the portfolio rests with the portfolio management units of individual investment departments. Their assessments are subject to quarterly review, on a sample basis, by the Loss Provisioning Division of the Controller�s and Budgeting Department and by the Credit Review Department. IFC�s investment portfolio is subject to a number of operational and prudential limits, including limitations on single project/client exposure, single country exposure, and segment concentration. Similarly, credit policies and guidelines have been formulated covering treasury operations; these are subject to annual revision by the Risk Management and Financial Policy Department, and approval by the Finance and Risk Committee. Specifically, IFC has adopted the following key financial policies and guidelines:

Investment operations 1. IFC does not normally finance for its own account more than 25% of a project�s cost. 2. An equity investment in a company does not normally represent more than 35% of the company�s total share capital,

provided further that IFC is not the single largest shareholder. Until IFC resumes presentation of its financial statements in accordance with IFRS, IFC�s equity investment in a company will not normally represent more than 20% of the company�s total share capital.

3. Total investment in a single obligor, net of specific reserves, may not exceed 4% of IFC�s net worth plus general reserves on loans.

4. Equity plus quasi-equity investments in a single obligor may not exceed 3% of IFC�s net worth plus general reserves on loans.

5. Straight equity investments in a single obligor may not exceed 1.5% of IFC�s net worth plus general reserves on loans.

Portfolio management 1. Review trigger levels ranging from 2.5% to 10% of net worth plus general reserves are set for each country�s outstanding

portfolio, net of specific reserves, based on the size of its economy and its risk rating. 2. IFC lender of record exposure in a country (outstanding) may not exceed 10% of a country�s total long-term external debt

for Heavily Indebted Poor Countries and 5% for all other countries. Exceptions for countries with low levels of external debt may be made by the Finance and Risk Committee. Lower trigger levels are set for certain countries.

3. IFC�s total exposure (outstanding net of specific reserves on loans) to a single risk sector may not exceed 12% of net worth plus general reserves. Lower review trigger levels are set for single sectors, and individually for the finance and insurance sector, based on IFC�s net worth plus general reserves and the country exposure level.

4. IFC�s committed exposure in guarantees that are subrogated in local currency is limited to $300 million for currencies for which there are no adequate currency and interest rate risk hedging instruments as determined by IFC�s Treasury Department at the time of commitment. There is a sublimit of $100 million for an individual currency under this limit.

Treasury operations 1. Counterparties are subject to conservative eligibility criteria, currently restricted to banks and financial institutions with a

minimum credit rating of A by leading international credit rating agencies. 2. Exposures to individual counterparties are subject to concentration caps. For derivatives, exposure is measured in terms of

�worst case� potential exposure based on simulations of market variables. Institution-specific limits are updated monthly based on changes in counterparty size or credit status.

3. To limit exposure, IFC signs collateral agreements with counterparties that require the posting of collateral when net exposure exceeds certain predetermined thresholds, which decrease as a counterparty�s credit rating deteriorates.

4. Because counterparties can be downgraded during the life of a transaction, the agreements provide an option for IFC to terminate all swaps if the counterparty is downgraded below investment grade or if other early termination events occur that are standard in the market.

5. For exchange-traded instruments, IFC limits credit risk by restricting transactions to a list of authorized exchanges, contracts and dealers, and by placing limits on the Corporation�s position in each contract.



FY07 credit risk highlights IFC does not recognize income on loans where collectibility is in doubt or payments of interest or principal are past due more than 60 days unless management anticipates that collection of interest is expected in the near future. The amount of nonaccruing loans as a percentage of the disbursed loan portfolio, excluding the unamortized SFAS No. 133 transition adjustment and unamortized deferred loan origination fees, net, a key indicator of portfolio performance, decreased to 3.0% at June 30, 2007 (4.2% at June 30, 2006). The principal amount outstanding on nonaccrual loans totaled $378 million at June 30, 2007, a decrease of $69 million (15%) from the June 30, 2006, level of $447 million. The quality of IFC�s investment portfolio, as measured by the aggregate risk level, improved further during FY07, continuing the trends noted during FY06 and FY05. Total reserves against losses on loans at June 30, 2007, decreased to $832 million ($898 million at June 30, 2006). This is equivalent to 6.5% of the disbursed loan portfolio, excluding the unamortized SFAS No. 133 transition adjustment and unamortized deferred loan origination fees, net, significantly below the level of 8.3% at June 30, 2006. The five-year trend of reserves against losses on loans as a percentage of the disbursed loan portfolio, excluding the unamortized SFAS No. 133 transition adjustment and unamortized deferred loan origination fees, net, is presented below:

IFC operates under the assumption that the guarantee portfolio is exposed to the same idiosyncratic and systematic risks as IFC�s loan portfolio and the inherent, probable losses in the guarantee portfolio need to be covered by an allowance for loss. The allowance at June 30, 2007, was $16 million ($18 million at June 30, 2006), based on the year-end portfolio, and is included in payables and other liabilities on IFC�s consolidated balance sheet. The decrease in allowance for the year, $2 million for FY07 ($5 million increase for FY06), is included in the release of provision for losses on loans and guarantees in the consolidated income statement. IFC has not suffered credit losses on its exposures to derivatives counterparties in its treasury operations.




Financial risk

IFC defines financial risk in three components: (a) the potential inability to realize asset values in its portfolio sufficient to meet obligations to disburse funds as they arise (liquidity risk); (b) the potential inability to access funding at reasonable cost (funding risk); and (c) a deterioration in values of financial instruments or positions due to changes in market interest and exchange rates and the volatility thereof (market risk).

Key financial policies and guidelines During FY07, IFC updated and, where appropriate, revised its liquidity and capital adequacy policies. IFC currently operates under a number of key financial policies and guidelines as detailed below, which have been approved by its Board of Directors:

Liquidity risk

Within the key financial policies and guidelines described above, in practice IFC maintains, as a prudential measure, an operating liquidity guideline ranging from 65% to 95% of the next three years� net cash requirements, including projected disbursement and debt service requirements. The primary instruments for maintaining sufficient liquidity are IFC�s liquid asset portfolios. As noted above, IFC distinguishes five such portfolios:

FY07 liquidity risk highlights At June 30, 2007, IFC�s liquidity level stood at $13.3 billion, or 85% of its projected net cash requirements for three years ($12.7 billion, and 112% at June 30, 2006).

1. Disbursed equity plus quasi-equity investments (net of impairment write-downs) may not exceed 100% of net worth. 2. Minimum liquidity (liquid assets plus undrawn borrowing commitments from IBRD) must be sufficient at all times to

cover at least 45% of IFC�s estimated net cash requirements for the next three years. 3. Loans are funded with liabilities having the same characteristics in terms of interest rate basis and currency and, for

fixed rate loans, duration except for Board-approved new products involving asset-liability mismatches. IFC maintains a minimum level of liquidity, consisting of proceeds from external funding, that covers at least 65% of the sum of: (i) 100% of committed but undisbursed straight senior loans; (ii) 30% of committed guarantees; and (iii) 30% of committed client risk management products.

4. For FY07, IFC�s capital adequacy policy requires a minimum ratio of capital to risk weighted assets of 30%. Under the

revised policy, IFC is required to maintain a minimum level of total resources (including paid-in capital, total loss reserves and retained earnings net of designations) equal to total potential losses for all on- and off-balance sheet exposures estimated at levels consistent with the maintenance of a AAA rating.

In addition, under IFC�s Articles of Agreement, as long as IFC has outstanding borrowings from IBRD, IFC�s leverage, as measured by the ratio of IFC�s outstanding debt (borrowings plus outstanding guarantees) to IFC�s net worth (using subscribed capital), may not exceed 4.0 to 1.

! P0, which is generally invested in short-dated deposits, money market funds, and tri-party repos, reflecting its use for short-term funding requirements.

! P1, which is generally invested in: (a) foreign sovereign, sovereign-guaranteed and supranational fixed income instruments (rated AA- or better); (b) US Treasury or agency instruments; (c) asset-backed securities rated AAA by at least two rating agencies and/or other AAA rated notes issued by Corporations; (d) interest rate futures and swaps to manage currency risk in the portfolio, as well as its duration relative to benchmark; and (e) cash deposits.

! P2, which is generally invested in US Treasuries, other sovereign and agency issues and mortgage-backed securities. ! P3, which comprises a global fixed income portfolio and a mortgage-backed securities portfolio (managed by external

managers). ! P4, which is an outsourced portion of the P2 portfolio (managed by external managers).



Funding risk IFC�s primary objective with respect to managing funding risk is, through the adoption of the key financial policies described above, to maintain its triple-A or AAA/Aaa credit ratings and, thereby, maintain access to market funding as needed at the lowest possible cost

FY07 funding risk highlights During FY07, IFC raised $2.8 billion ($1.8 billion in FY06) of funding at sub-LIBOR rates.

Market risk IFC�s exposure to market risk is minimized by adopting the matched-funding policy noted above and by using derivative instruments to convert assets and liabilities into floating rate US dollar assets and liabilities.

Investment operations Interest rate and currency exchange risk associated with fixed rate and/or non-US dollar lending is hedged via currency and interest rate swaps that convert cash flows into variable rate US dollar flows. Exposures to market risk resulting from derivative transactions with clients, which are intended to facilitate clients� risk management, are minimized by entering into offsetting positions with highly rated market counterparties.

Liquid asset portfolios The P0, P1 and P3 portfolios are managed to variable rate US dollar benchmarks, on a portfolio basis. To this end, a variety of derivative instruments are used, including short-term, over-the-counter foreign exchange forwards (covered forwards), interest rate and currency swaps, and exchange-traded interest rate futures and options. IFC also takes both long and short positions in securities in the management of these portfolios to their respective benchmarks. The primary source of market risk in the liquid asset portfolios is the P2 and P4 portfolios, which, in contrast, are managed to a three-year duration US dollar benchmark, with additional flexibility to deviate from the benchmark. P2 represents the portion of IFC�s capital not disbursed as equity investments, and the benchmark reflects the chosen risk profile for this uninvested capital. P4 represents an outsourced portion of the P2 portfolio. In addition, the P1 and P3 portfolios contain a degree of market risk (e.g., spread risk).

Borrowing activities Access to funding is maximized, and cost is minimized, by issuing debt securities in various capital markets in a variety of currencies, sometimes using complex structures. These structures include borrowings payable in multiple currencies, or borrowings with principal and/or interest determined by reference to a specified index such as a reference interest rate, or one or more foreign exchange rates. Market risk associated with fixed rate obligations and structured instruments entered into as part of IFC�s funding program is generally mitigated by using derivative instruments to convert them into variable rate US dollar obligations, consistent with the matched-funding policy.

Asset-liability management While IFC�s matched-funding policy provides a significant level of protection against currency and interest rate risk, IFC can be exposed to residual market risk in its overall asset and liability management. This residual market risk is monitored by the Asset-Liability Management group within the Treasury Department. Residual currency risk arises from events such as changes in the level of non-US dollar loan loss reserves. This risk is managed by monitoring the aggregate position in each lending currency and hedging the exposure when the net asset or liability position exceeds $5 million equivalent. Residual interest rate risk may arise from two main sources:

! Assets that are fully match-funded at inception, which can become mismatched over time due to write-downs, prepayments, or rescheduling; and

! Differing interest rate reset dates on assets and liabilities.




This residual risk is managed by: first, synchronizing interest rate reset dates on assets and liabilities at a portfolio level; and second, measuring the sensitivity of the present value of assets and liabilities in each currency to each basis point change in interest rates, with an action trigger of $50,000 for a one basis point parallel move in the yield curve. FY07 market risk highlights Total liquid asset returns (comprising interest, realized and unrealized gains and losses, and foreign currency transaction gains (losses)) were $618 million in FY07 ($444 million in FY06 and $358 million in FY05), of which $187 million was attributable to the P0, P1 and P3 portfolios ($378 million in FY06 and $212 million in FY05), and $306 million was attributable to the P2 and P4 portfolios ($66 million in FY06 and $146 million in FY05). Foreign currency transaction gains on non-trading activities for FY07 were $17 million ($6 million in FY06 and $7 million loss in FY05).

Operational risk IFC defines operational risk as the potential for loss resulting from events involving people, systems and processes. These include both internal and external events, whether caused by a lack of controls, documentation, or contingency planning, or by breakdowns in information systems, communications, physical safeguards, business continuity, supervision, transaction processing, or in the execution of legal, fiduciary, and agency responsibilities. As such, operational risk covers the risks emanating from the manner in which an entity is operated as opposed to the way it is financed. Consistent with the Basel II Capital Adequacy guidelines, IFC is developing a matrix framework to analyze operational risk by identifying, for each area (people, systems and processes), which risks IFC will: (i) manage internally, as part of its ongoing business; (ii) alleviate through contingency planning; or (iii) transfer to third parties, whether by subcontracting, outsourcing, hedging, or insurance. Responsibility for the development of the framework for managing and monitoring operational risk now rests with the Operational Risk Division of the Business Risk Department. Responsibility for contingency planning for recovery from emergencies rests with the Controller�s Department. In respect of insurable operational risk, IFC�s Insurance Services Division, which is now part of the Business Risk Department, performs insurance reviews to identify underlying risks and assess the adequacy of existing insurance policies and limits. IFC seeks to mitigate the risks it manages internally by maintaining a comprehensive system of internal controls that is designed not only to identify the parameters of various risks but also to monitor and control those areas of particular concern. Key components of this effort are listed below:

Key components of operational risk management ! In FY07, IFC established an Operational Risk Division which will develop assessments and measure areas of operational

risk in IFC, using well-defined market practices and tools. ! IFC has adopted the COSO1 control framework and a control self-assessment methodology to evaluate the effectiveness

of its internal controls in all significant business operations. In addition, the COBIT2 methodology is used to supplement the COSO review of the information technology function. The program includes compliance testing of key internal controls assuring the reliability of external financial reporting and has been applied to Donor Funded Operations as well.

! The Internal Audit Department of the World Bank Group performs ongoing independent review of the effectiveness of IFC�s internal controls in selected key areas and functions.

! To promote data integrity, the Corporation has formulated a Data Management Policy. The policy is enforced by the Information Quality Group within the Controller�s Department and through a network of Departmental Data Stewards.

! IFC has a New Products/Initiatives Assessment Group, with representation from key business and support functions, to ensure that processes and controls are in place to manage the risks in new products and initiatives before they are executed.

1. COSO refers to the Internal Control - Integrated Framework formulated by the Committee of Sponsoring Organizations of the Treadway Commission, which

was convened by the US Congress in response to the well-publicized irregularities that occurred in the financial sector in the United States during the late 1980s.

2. COBIT refers to Control Objectives for Information and Related Technology, first released in 1996, updated to the 3rd edition released in July 2000, sponsored

by the Information Systems Audit and Control Association (ISACA).



FY07 operational risk highlights IFC continues to focus on its preparedness to react to an emergency situation that could disrupt its normal operations. During FY07, IFC has:

IFC is continuing a multiyear effort to analyze and develop enhanced methodologies for measuring, monitoring and managing operational risk in its key activities. During FY07, IFC has:

In FY07, IFC continued its voluntary practice of conducting an annual assessment of its internal controls over external financial reporting based on the criteria for effective internal control over external financial reporting described in COSO. Based upon this assessment, management believes that IFC maintained effective internal control over external financial reporting presented in conformity with US GAAP, as of June 30, 2007. As a result of changes in applicable auditing standards, beginning with FY06, management has not sought the attestation to its published assertion on internal controls previously provided by IFC�s external auditors. IFC is adopting its own risk-based internal control initiative, and will continue to monitor year to year whether alignment between this and emerging external standards enable it to seek the external auditors� attestation once again. Management has carried out an evaluation of internal controls over external financial reporting for the purposes of determining if there were any changes made in internal controls during the year ended June 30, 2007, that had materially affected, or would be reasonably likely to materially affect, IFC�s internal control over external financial reporting. As of June 30, 2007, no such significant changes occurred. Internal controls and procedures are those processes which are designed to ensure that information required to be disclosed is accumulated and communicated to management, as appropriate to allow timely decisions regarding required disclosure by IFC. Management believes that these controls and procedures were effective as of June 30, 2007.

! Added applications and capabilities to back-up facilities available for its key strategic financial and support systems and continued extensive testing thereof.

! Reinforced and extended home computing arrangements for essential staff in all departments, as part of the IFC�s avian flu contingency planning.

! Conducted awareness training for Washington, DC-based departments and larger country offices, covering business continuity in general and pandemic preparedness in particular.

! Established Emergency Management Teams in all regions; conducted emergency simulation exercises in its Washington, DC offices and in the regional hub offices; and held emergency management workshops in the larger country offices in each region.

! As part of a Business Process Review, identified specific ways to speed up project processing in investment operations, improve risk management, and allow IFC to respond more efficiently and effectively to the needs of clients.

! Developed a framework for IFC�s strategic and operational risk functions within the enlarged Business Risk Department. ! Continued a process-mapping exercise to identify potential areas of exposure to operational risk in its investment and

advisory services processes and to provide a basis for quantifying potential risks;. ! Within the former Project Risk Management function (now the new Operational Risk Division) completed the

cataloguing of operational aspects to be tracked in portfolio projects, and rolled it out to all pipeline projects in investment operations.

! Made plans to expand these activities across IFC's other businesses.




VI. CRITICAL ACCOUNTING POLICIES The Notes to IFC�s FY07 consolidated financial statements contain a summary of IFC�s significant accounting policies, including a discussion of recently issued accounting pronouncements. Certain of these policies are considered to be �critical� to the portrayal of IFC�s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. These policies include: (i) determining the level of the allowance for losses in the loan portfolio; (ii) determining the level of impairment of equity investments; and (iii) determining the valuation of certain financial instruments with no quoted market prices. Additional information about these policies can be found in Notes A, C, O and P to the FY07 consolidated financial statements. Reserve against losses on loans IFC considers a loan as impaired when, based on current information and events, it is probable that IFC will be unable to collect all amounts due according to the loan�s contractual terms. The reserve against losses for impaired loans reflects management�s judgment of the present value of expected future cash flows discounted at the loan�s effective interest rate. The reserve against losses for loans includes an estimate of probable losses on loans inherent in the portfolio but not specifically identifiable. The reserve is established through periodic charges to income in the form of a provision for losses on loans. Loans written off, as well as any subsequent recoveries, are recorded through the reserve. The assessment of the adequacy of reserves against losses for loans is highly dependent on management�s judgment about factors such as geographical concentration, industry, regional and macroeconomic conditions, and historical trends. Due to the inherent limitation of any particular estimation technique, management utilizes a capital pricing and risk framework to estimate the probable losses on loans inherent in the portfolio but not specifically identifiable. This Board approved framework uses actual loan loss history and aligns the loan loss provisioning framework with IFC�s capital adequacy framework. The reserve against losses on loans is separately reported in the consolidated balance sheet as a reduction of IFC�s total loans. Increases or decreases in the reserve level are reported in the income statement as provision for losses or release of provision for losses on loans, and guarantees. The reserve against losses on loans relates only to the Client Services segment of IFC (see Note R to the FY07 consolidated financial statements for further discussion of IFC�s business segments). Equity impairment IFC assesses all equity investments for impairment each quarter. When impairment is identified and is deemed to be other than temporary, the equity investment is written down to its impaired value, which becomes the new cost basis in the equity investment. IFC has elected to assume that all impairments shall be deemed to be other than temporary. Impairment losses are not reversed for subsequent recoveries in value of the equity investment until it is sold. Prior to March 31, 2005, IFC had carried reserves against losses on the equity investment portfolio. During the year ended June 30, 2005, IFC changed its process of estimating impairment on equity investments to adopt an impairment methodology based largely on fair value estimates. As a result, IFC recorded a change in carrying value of the equity investment portfolio. In this regard, IFC determined that all impairments and changes in carrying value were deemed to be other than temporary. This change in carrying value of the equity portfolio was reflected in net income from equity investments in the FY05 consolidated income statement and in equity investments in the consolidated balance sheet.

Valuation of financial instruments with no quoted market prices As part of its compliance with SFAS No. 133, IFC reports at fair value all of its derivative instruments and certain borrowings that IFC has designated as components of fair value hedges. In addition, certain features in various loan agreements, equity investment agreements, and borrowing contracts contain embedded derivatives that, for accounting purposes, are separately accounted as either derivative assets or liabilities, including puts, caps, floors, and forwards. Few of these instruments have a ready market valuation. Therefore, the fair values of the financial instruments with no quoted market prices are estimated using complex pricing models of the net present value of estimated future cash flows. Management makes numerous assumptions in developing the pricing models, including the appropriate discount rates, interest rates, and related volatility and expected movement in foreign currency exchange rates. Changes in assumptions could have a significant impact on the amounts reported as assets and liabilities and the related gains and losses reported in the income statement. The fair value computations affect both the Client Services and Treasury segments of IFC (see Note R to the FY07 consolidated financial statements for further discussion of IFC�s business segments). Additional information can be found in Notes A, O and P to the FY07 consolidated financial statements.



Pension and other postretirement benefits IFC participates, along with IBRD and MIGA, in pension and postretirement benefit plans that cover substantially all of their staff members. All costs, assets and liabilities associated with the plans are allocated between IBRD, IFC and MIGA based upon their employees� respective participation in the plans. The underlying actuarial assumptions used to determine the projected benefit obligations, fair value of plan assets and funded status associated with these plans are based on financial market interest rates, past experience, and management�s best estimate of future benefit changes and economic conditions. For further details, please refer to Note S to the FY07 consolidated financial statements.




VII. RESULTS OF OPERATIONS

Overview The main elements of IFC�s net income, and influences on the level and variability of operating and net income from year to year, are:

ELEMENTS SIGNIFICANT INFLUENCES Operating income:

Spread on interest earning assets Nonaccruals and recoveries of interest on loans formerly in nonaccrual status and income from participation notes

Liquid asset income Realized and unrealized gains and losses on the liquid asset portfolios

Income from the equity investment portfolio Performance of the equity portfolio (principally capital gains, dividends)

Provisions for losses on loans and guarantees Level of provisions for losses on loans and guarantees

Equity impairment write-downs Amount of impairment write-downs

Noninterest income and expense Level of advisory services provided by IFC to its clients, the level of expense from the staff retirement and other benefits plans, and the approved administrative and other budgets

Net income:

Net gains and losses on non-trading financial instruments Principally, differences between changes in fair values of derivative instruments and changes in fair value of hedged items in fair value hedging relationships

The following paragraphs detail significant variances between FY07 and FY06, and FY06 and FY05, covering the periods included in IFC�s FY07 consolidated financial statements. As disclosed in Note A to IFC�s FY07 consolidated financial statements, certain amounts in FY06 and FY05 have been reclassified to conform to the current year�s presentation. Where applicable, the following paragraphs reflect reclassified prior year comparative information. Such reclassifications had no effect on operating income, net income or total assets.

FY07 versus FY06 Operating income IFC�s income before expenditures for advisory services, PBG, grants to IDA and net gains (losses) on non-trading financial instruments for FY07 was $2,857 million. Expenditures for advisory services for FY07 totaled $96 million and grants to IDA totaled $150 million, resulting in operating income for FY07 of $2,611 million. The record operating performance in FY07 was mainly attributable to significant equity income (principally capital gains and dividends). In addition, there was a continued overall improvement in the quality of the loan and equity investment portfolio, as measured by portfolio impairment and portfolio risk levels, although at a slower pace than in FY06. The aggregate risk level within the portfolio has been reduced principally due to: (i) the successful restructuring or rescheduling of problem projects; (ii) the growth in the outstanding portfolio in new investments with better risk ratings; (iii) the write-off of investments with worse risk ratings than the average risk rating of the portfolio; and (iv) an overall improvement in country risk ratings. This improvement began during the latter stages of FY03 and has continued through FY07. Additionally, IFC�s liquid asset portfolios yielded significant positive contributions to IFC�s operating income, totaling $618 million in FY07. A more detailed analysis of the components of IFC�s operating income follows.

Interest and financial fees from loans and debt securities IFC�s primary interest earning asset is its loan portfolio. Interest and financial fees from loans and debt securities (including guarantee fees) for FY07 totaled $1,075 million, compared with $807 million in FY06, an increase of $268 million, or 33%. The growth in the loan portfolio and the overall increase in average interest rates during FY07, when compared with FY06, contributed $211 million of the increase in interest income. Recoveries of interest on loans being removed from non-accrual status, net of reversals of income on loans being placed in nonaccrual status, were $12 million lower in FY07, compared to FY06. Income from IFC�s participation notes, over and above minimum contractual interest, was $24 million higher in FY07 than in FY06. Commitment and financial fees, after the effects of deferring and amortizing net loan origination fees, were $45 million higher than in FY06, principally reflecting growth attributable to strong commitments and disbursements.



Charges on borrowings IFC�s charges on borrowings increased by $198 million, from $603 million in FY06 to $801 million in FY07, largely reflecting the increased US dollar interest rate environment, when comparing FY07 and FY06. Charges on borrowings in FY07 includes $8 million in respect of interest expense on secured borrowings ($6 million in FY06). The weighted average cost of IFC�s borrowings outstanding from market sources, after the effects of borrowing-related derivatives, rose during the year from 4.9% at June 30, 2006 to 5.0% at June 30, 2007. The size of the borrowings portfolio, net of borrowing-related derivatives and before the effects of SFAS No. 133, increased by $0.3 billion in FY07 from $15.3 billion at June 30, 2006, to $15.6 billion at June 30, 2007.

Income from liquid asset trading activities Income from liquid asset trading activities comprises interest from time deposits and securities, net gains and losses on trading activities, and a small currency translation effect. The liquid assets portfolio, net of derivatives and securities lending activities, increased from $12.7 billion at June 30, 2006, to $13.3 billion at June 30, 2007. Liquid asset income totaled $618 million in FY07 ($444 million in FY06). In a year when US interest rates were relatively stable, although higher on average than in FY06, IFC has been able to increase the level of absolute income from its liquid asset portfolios. In FY07, the P0 and P3 portfolios outperformed their respective benchmarks, while the P1, P2, and P4 portfolios underperformed their respective benchmarks. In FY06, all of IFC's liquid asset portfolios outperformed their respective benchmarks. The P1 portfolio generated income of $211 million in FY07, a return of 4.61%. In FY06, the P1 portfolio generated a return of $288 million, or 5.20%. The P3 portfolio, managed against the same variable rate target as the P1 portfolio returned $59 million in FY07, or 5.82%, $16 million higher than the $43 million, or 4.31%, return in FY06. The P2 and P4 portfolios returned $247 million (4.54%) and $20 million (5.17%) in FY07, respectively, as compared to $64 million (1.38%) and $2 million (0.35%) in FY06. IFC�s P0 portfolio earned $81 million in FY07, a total return of 5.52%, as compared to $47 million (4.48%) in FY06.

Income from equity investments Income from the equity investment portfolio increased by $1,078 million from $1,228 million in FY06 to a record $2,306 million in FY07. IFC generated realized capital gains on equity sales, including recoveries of previously written-off equity investments and net of losses on sales of equity investments, for FY07 of $1,942 million, as compared with $928 million for FY06, an increase of $1,014 million. During FY07, IFC sold its shares in Banca Comerciala Romana S.A. and recorded a capital gain in the amount of $833 million. Total realized capital gains on equity sales from 13 investments generated individual capital gains in excess of $20 million and comprised 76% of the FY07 gains (before write-offs and losses on sales), compared to 11 investments that generated individual capital gains in excess of $20 million and comprised 42% of the FY06 gains. IFC continued to take advantage of buoyant markets throughout most of FY07 to sell equities and take some limited gains in investments where IFC�s developmental role was complete, and where pre-determined sales trigger levels had been met. Dividend income was also significantly higher in FY07 at $398 million, as compared with $327 million in FY06. Consistent with FY06, a significant amount of IFC�s dividend income in FY07 was due to returns on IFC�s joint ventures in the oil, gas and mining sectors accounted for under the cost recovery method, which totaled $64 million in FY07, as compared with $86 million in FY06. Income from LLPs, certain LLCs, and other investments accounted for under the equity method totaled $19 million in FY07 ($56 million in FY06). Release of provision for losses on loans and guarantees As noted above, the quality of IFC�s loan portfolio continued to improve during FY07 although at a slower pace than in FY06 and FY05. IFC recorded a release of provision for losses on loans and guarantees of $43 million in FY07 ($15 million provision in FY06), including $2 million in respect of guarantees ($5 million provision in FY06). On June 30, 2007, IFC�s total reserves against losses on loans were 6.5% of the disbursed and outstanding loan portfolio excluding unamortized deferred net loan origination fees and the unamortized SFAS No. 133 transition adjustment (8.3% at June 30, 2006).

Other income Other income of $116 million for FY07 was $1 million higher than in FY06 ($115 million).




Other expenses Administrative expenses (the principal component of other expenses) increased by 11% from $436 million in FY06 to $482 million in FY07, principally reflecting the significant increase in business volumes and staff complement in country offices in FY07 when compared to FY06. Administrative expenses include the grossing-up effect of certain revenues and expenses attributable to IFC�s reimbursable program and jeopardy projects ($34 million in FY07, as compared with $37 million in FY06). IFC recorded expense from pension and other postretirement benefit plans in FY07 of $15 million, as compared with $28 million in FY06.

Expenditures for advisory services

$55 million in FY06. The increase reflects the continued growth in demand for such services.

Grants to IDA During FY07, IFC transferred $150 million to IDA, recording an expense of $150 million.

Net income As more fully disclosed in Notes A, O and P to IFC�s FY07 consolidated financial statements, IFC has designated certain hedging relationships in its borrowing activities as fair value hedges. IFC generally matches the terms of its derivatives with the terms of the specific underlying borrowing hedged, in terms of currencies, maturity dates, reset dates, interest rates, and other features. However, differing valuation methodologies are applied to the derivative and the hedged financial instrument. The resulting ineffectiveness calculated for such relationships is recorded in net gains (losses) on non-trading financial instruments, in net income. The effects of SFAS No. 133 on net income in FY07 and FY06 can be summarized as follows (US$ millions):

FY07 FY06 Operating income $ 2,611 $ 1,409 SFAS No. 133 adjustments: Net gains (losses) on non-trading financial instruments 7 (131) Net income $ 2,618 $ 1,278

Net gains (losses) on non-trading financial instruments largely comprises the difference between the change in fair value of derivative instruments and the change in fair value of the hedged item under designated hedging relationships and the fair value of derivative instruments for which hedge accounting has not been elected in relation to borrowings and lending activities.

FY06 versus FY05 Operating income IFC�s income before expenditures for advisory services and PBG and net gains (losses) on non-trading financial instruments for FY06 was $1,499 million. Expenditures for advisory services for FY06 were $55 million, and expenditures for PBG for FY06 were $35 million, resulting in operating income for FY06 of $1,409 million. The continued strong operating performance in FY06, following on FY05�s record year, was mainly attributable to continued significant equity income (principally capital gains and dividends) and a continued overall improvement in the quality of the loan and equity investment portfolio, as measured by portfolio impairment and portfolio risk levels, although at a slower pace than in FY05. The aggregate risk level within the portfolio has been reduced principally due to: (i) the successful restructuring or rescheduling of problem projects; (ii) the growth in the outstanding portfolio in new investments with better risk ratings; (iii) the write-off of investments with worse risk ratings than the average risk rating of the portfolio; and (iv) an overall improvement in country risk ratings. This improvement began during the latter stages of FY03 and continued up to and including FY06. IFC�s liquid asset portfolios yielded strong positive contributions to IFC�s operating income. A more detailed analysis of the components of IFC�s operating income follows.

Interest and financial fees from loans and debt securities IFC�s primary interest earning assets is its loan portfolio. Interest and financial fees from loans and debt securities (including guarantee fees) for FY06 totaled $807 million, compared with $660 million in FY05, an increase of $147 million, or 22%.

Expenditures for advisory services in FY07 totaled $96 million, $41 million, or 75% higher than expenditures for advisory services of



Interest income increased from $574 million in FY05 to $743 million in FY06, an increase of $169 million, or 29%. The growth in the loan portfolio and the overall increase in average interest rates during FY06, when compared with FY05, contributed $231 million, including net interest income on lending-related swaps, of the increase in interest income. Recoveries of interest on loans being removed from non-accrual status, net of reversals of income on loans being placed in nonaccrual status, were $20 million lower in FY06, compared to FY05. Income from IFC�s participation notes, over and above minimum contractual interest, was $25 million lower in FY06 than in FY05. Interest income from loans serving as collateral under secured borrowing arrangements totaled $6 million in FY06 ($0 in FY05). Commitment and financial fees fell to $64 million in FY06 from $86 million in FY05, principally reflecting the change in accounting principle concerning the deferral of net loan origination fees which offset the growth attributable to strong commitments and disbursements.

Charges on borrowings IFC�s charges on borrowings increased by $294 million, from $309 million in FY05 to $603 million in FY06, largely reflecting the increased US dollar interest rate environment, when comparing FY06 and FY05. Charges on borrowings in FY06 includes $6 million in respect of interest expense on secured borrowings ($0 in FY05). The weighted average cost of IFC�s borrowings outstanding from market sources, after the effects of borrowing-related derivatives, rose during the year from 3.3% at June 30, 2005 to 4.9% at June 30, 2006. The size of the borrowings portfolio, net of borrowing-related derivatives and before the effects of SFAS No. 133 decreased by $0.7 billion in FY06 from $16.0 billion at June 30, 2005, to $15.3 billion at June 30, 2006.

Income from liquid asset trading activities Income from liquid asset trading activities comprises interest from time deposits and securities, net gains and losses on trading activities, and a small currency effect. The liquid assets portfolio, net of derivatives and securities lending activities, decreased from $13.3 billion at June 30, 2005, to $12.7 billion at June 30, 2006. Liquid asset income totaled $444 million in FY06 ($358 million in FY05). In a year when interest rates rose, IFC has still been able to increase income. In FY06, all of IFC's liquid asset portfolios outperformed their respective benchmarks. The majority of liquid asset income in FY06 was attributable to IFC's P1 portfolio, which is actively managed against a variable rate benchmark. This portfolio generated income of $288 million in FY06, a return of 5.20% ($162 million in FY05, a return of 2.24%). The P3 portfolio, managed against the same variable rate target, returned $43 million in FY06, $17 million higher than in FY05. The P2 and P4 portfolios delivered 156 and 54 basis points of excess return versus their Lehman Brothers Intermediate US Treasury Index. With rates on the rise, the benchmark actually lost 0.19% in FY06. The P2 and P4 portfolios returned $64 million (1.38%) and $2 million (0.35%) in FY06, respectively, as compared to $130 million (3.73%) and $16 million (4.51%) in FY05. The positive performance of the P2 portfolio was achieved due to directional and yield curve strategies designed specifically to take advantage of the tightening of monetary policy in the United States, Europe and Japan. IFC's holdings of US, European and Japanese inflation-indexed securities whose income varies with inflation in the P1and P2 portfolios was a significant contributor to the outperformance relative to benchmark.

Income from equity investments Income from the equity investment portfolio decreased by $137 million from $1,365 million in FY05 to $1,228 million in FY06. IFC generated realized capital gains on equity sales, including recoveries of previously written-off equity investments and net of losses on sales of equity investments, for FY06 of $928 million, as compared with $723 million for FY05, an increase of $205 million. Realized capital gains on equity sales from 14 investments comprised 50% of the FY06 gains (before write-offs and losses on sales), compared to 19 investments comprising 71% of the FY05 gains. IFC continued to take advantage of buoyant markets throughout most of FY06 to sell equities and take some limited gains in investments where IFC�s developmental role was complete, and where pre-determined sales trigger levels had been met. Dividend income was also significantly higher in FY06 at $327 million, as compared with $258 million in FY05. Consistent with FY05, a significant amount of IFC�s dividend income in FY06 was due to returns on IFC�s joint ventures in the oil, gas and mining sectors accounted for under the cost recovery method, which totaled $86 million in FY06, as compared with $106 million in FY05. Income from LLPs, certain LLCs, and other investments accounted for under the equity method totaled $56 million in FY06 ($191 million in FY05).




Provisions for losses on loans and guarantees As noted above, the quality of IFC�s loan portfolio continued to improve during FY06, although at a slower pace than in FY05. IFC recorded a small provision for losses on loans and guarantees of $15 million in FY06 ($261 million release of provision in FY05), including $5 million in respect of guarantees ($3 million release of provision in FY05). On June 30, 2006, IFC�s total reserves against losses on loans were 8.3% of the disbursed and outstanding loan portfolio excluding unamortized deferred net loan origination fees and the unamortized SFAS No. 133 transition adjustment (9.9% at June 30, 2005).

Other income Other income of $115 million for FY06 was $36 million higher than in FY05 ($79 million).

Other expenses Administrative expenses (the principal component of other expenses) increased by 8% from $403 million in FY05 to $436 million in FY06, principally reflecting IFC�s higher budget authority in FY06 when compared to FY05. Administrative expenses include the grossing-up effect of certain revenues and expenses attributable to IFC�s reimbursable program and jeopardy projects ($37 million in FY06, as compared with $33 million in FY05). IFC recorded expense from pension and other postretirement benefit plans in FY06 of $28 million, as compared with $14 million in FY05.

Net income As more fully disclosed in Notes A, O and P to IFC�s FY07 consolidated financial statements, IFC has designated certain hedging relationships in its borrowing activities as fair value hedges. IFC generally matches the terms of its derivatives with the terms of the specific underlying borrowing hedged, in terms of currencies, maturity dates, reset dates, interest rates, and other features. However, differing valuation methodologies are applied to the derivative and the hedged financial instrument. The resulting ineffectiveness calculated for such relationships is recorded in net gains (losses) on non-trading financial instruments, in net income. The effects of SFAS No. 133 on net income in FY06 and FY05 can be summarized as follows (US$ millions):

FY06 FY05 Operating income $ 1,409 $ 1,953 SFAS No. 133 adjustments: Net gains (losses) on non-trading financial instruments (131) 62 Net income $ 1,278 $ 2,015

Net gains (losses) on non-trading financial instruments largely comprises the difference between the change in fair value of derivative instruments and the change in fair value of the hedged item under designated hedging relationships and the fair value of derivative instruments for which hedge accounting has not been elected in relation to borrowings and lending activities.



VIII. GOVERNANCE

Management changes The Board of Directors (Board) is charged, under the Articles of Agreement, with the selection of IFC�s President. Mr. Paul Wolfowitz resigned on June 30, 2007. The Board of Directors unanimously selected Mr. Robert B. Zoellick to be the next President; his appointment became effective July 1, 2007. Mr. Michel G. Maila was appointed Vice President, Risk Management effective January 16, 2007.

Board of Directors In accordance with its Articles of Agreement, members of IFC�s Board are appointed or elected by their member governments. These Directors are neither officers nor staff of IFC. The President is the only management member of the Board, serving as a non-voting member and as Chairman of the Board. The Board has established several Committees including:

! Committee on Development Effectiveness ! Audit Committee ! Budget Committee ! Personnel Committee ! Ethics Committee ! Committee on Governance and Administrative Matters

The Board and its Committees function in continuous session at the principal offices of the World Bank Group, as business requires. Each Committee�s terms of reference establish its respective roles and responsibilities. As Committees do not vote on issues, their role is primarily to serve the full Board in discharging its responsibilities.

Audit Committee Membership The Audit Committee consists of eight members of the Board. Membership on the Committee is determined by the Board, based upon nominations by the Chairman of the Board, following informal consultation with the Directors. In addition, membership of the Committee is expected to reflect the economic and geographic diversity of IFC�s member countries. Other relevant selection criteria include seniority, continuity and relevant experience. Some or all of the responsibilities of individual Committee members are performed by their alternates or advisors. Generally, Committee members are appointed for a two-year term; reappointment to a second term, when possible, is desirable for continuity. Audit Committee meetings are generally open to any members of the Board who may wish to attend, and non-Committee members of the Board may participate in the discussion. In addition, the Chairman of the Audit Committee may speak in that capacity at meetings of the Board with respect to discussions held in the Audit Committee.

Key responsibilities The Audit Committee is appointed by the Board to assist it in the oversight and assessment of IFC�s finances and accounting, including the effectiveness of financial policies, the integrity of financial statements, the system of internal controls regarding finance, accounting and ethics (including fraud and corruption), and financial and operational risks. The Audit Committee also has the responsibility for reviewing the performance and recommending to the Board the appointment of the external auditor, as well as monitoring the independence of the external auditor and meeting with it in executive session. The Audit Committee participates in oversight of the internal audit function, including reviewing the responsibilities, staffing and the effectiveness of internal audit. The Committee also reviews the annual internal audit plan and meets with the Auditor General in executive session. In the execution of its role, the Committee discusses with management, the external auditors, and the internal auditors financial issues and policies which have a bearing on IFC�s financial position and risk-bearing capacity. The Audit Committee monitors the evolution of developments in corporate governance and the role of audit committees on an ongoing basis and revised its terms of reference in FY04.




Communications The Audit Committee communicates regularly with the Board through distribution of the following: ! The minutes of its meetings. ! Reports of the Audit Committee prepared by the Chairman, which document discussions held. These reports are distributed to

the Directors, Alternates, World Bank Group Senior Management and Vice Presidents of IFC. ! �Statement(s) of the Chairman� and statements issued by other members of the Committee. ! The Annual Report to the Board, which provides an overview of the main issues addressed by the Audit Committee over the

year. The Audit Committee�s communications with the external auditor are described in the Auditor Independence section, below.

Executive sessions Members of the Audit Committee may convene in executive session at any time, without management present. Under the Committee�s terms of reference, it meets separately in executive session with the external and internal auditors.

Access to outside resources and to management Throughout the year, the Audit Committee receives a large volume of information, which supports the preparation of the financial statements. The Audit Committee meets both formally and informally throughout the year to discuss financial and accounting matters. Directors have complete access to the management of IFC. The Audit Committee reviews and discusses with management the quarterly and annual financial statements. The Committee also reviews with the external auditor the financial statements prior to their publication and recommends them for approval to the Board of Directors. The Audit Committee has the capacity, under exceptional circumstances, to obtain advice and assistance from outside legal, accounting or other advisors as deemed appropriate.

Code of Ethics The World Bank Group strives to foster and maintain a positive work environment that supports the ethical behavior of its staff. To facilitate this effort, the World Bank Group has a Code of Professional Ethics in place. The Code (Code of Professional Ethics � Living our Values) applies to all staff (including managers, consultants, and temporary employees) worldwide. The Code is available in nine languages on the World Bank Group�s Web site, www.worldbank.org. Staff relations, conflicts of interest, and operational issues, including the accuracy of books and records, are key elements of the Code. In addition to the Code, an essential element of appropriate conduct is compliance with the obligations embodied in the Principles of Staff Employment, Staff Rules, and Administrative Rules, the violation of which may result in disciplinary action. In accordance with the Staff Rules, senior managers must complete a confidential financial disclosure instrument with the Office of Ethics and Business Conduct. Guidance for staff is also provided through programs, training materials, and other resources. Managers are responsible for ensuring that internal systems, policies, and procedures are consistently aligned with the World Bank Group�s ethical goals. In support of its efforts on ethics, the World Bank offers a variety of methods for informing staff of these resources. Many of these efforts are headed by the following groups: ! The Office of Ethics and Business Conduct provides leadership, management and oversight for the World Bank Group�s ethics

infrastructure including the Ethics Help Line, a consolidated conflicts of interest disclosure/ resolution system, financial disclosure, ongoing training to both internal and external audiences, and communication resources.

! The Department of Institutional Integrity is charged with investigating allegations of fraud and corruption within the World Bank Group. The Department also investigates allegations of misconduct by World Bank Group staff, and trains and educates staff and clients in detecting and reporting fraud and corruption in World Bank Group-funded projects. The Department reports directly to the President and is composed of professionals from a range of disciplines including financial analysts, researchers, investigators, lawyers, prosecutors, forensic accountants, and World Bank Group staff with operational experience.

The World Bank Group has in place procedures for the receipt, retention and treatment of complaints received regarding accounting, internal controls and auditing matters.



The World Bank Group offers both the Ethics Help Line and a Fraud and Corruption hotline run by an outside firm staffed by trained specialists. This third-party service offers numerous methods of communication in addition to a tollfree hotline in countries where access to telecommunications may be limited. In addition, there are other methods by which the Department of Institutional Integrity may receive allegations, including directly by email, anonymously, or through confidential submission through its Web site, as well as the postal service and telephone.

Auditor independence In FY03, the Board adopted a set of principles applicable to the appointment of the external auditor for IFC. Key features of those principles include: ! Prohibition of the external auditor from the provision of all non audit-related services; ! All audit-related services must be pre-approved on a case-by-case basis by the Board, upon recommendation of the Audit

Committee; ! Mandatory rebidding of the external audit contract every five years; ! Prohibition of any firm serving as external auditor for more than two consecutive five-year terms; ! Mandatory rotation of the senior partner after five years; and ! An evaluation of the performance of the external auditor at the mid-point of the five year term. In FY04, IFC�s external auditor, Deloitte and Touche LLP, began a new five-year term and will have served eleven years as external auditor upon completion of that term, pursuant to a one-time grandfathered exemption from the above-referenced ten-year limit. Even within a five-year term the service of the external auditors is subject to recommendation by the Audit Committee for annual reappointment and approval of a resolution by the Board. As a standard practice, the external auditor is present as an observer at virtually all Audit Committee meetings and is frequently asked to present its perspective on issues. In addition, the Audit Committee meets periodically with the external auditor in private session without management present. Communication between the external auditor and the Audit Committee is ongoing, as frequently as is deemed necessary by either party. IFC�s external auditors follow the communication requirements with audit committees set out under U.S. generally accepted auditing standards. In keeping with these standards, significant formal communications include: ! Quarterly and annual financial statement reporting; ! Annual appointment of the external auditors; ! Presentation of the external audit plan; ! Presentation of control recommendations and discussion of the COSO report; and ! Presentation of a statement regarding independence. In addition to Committee meetings, individual members of the Audit Committee have independent access to the external auditor.




RESPONSIBIL ITY FOR EXTERNAL F INANCIAL REPORTINGMANAGEMENT’S RESPONSIBILITY




F INANCIAL STATEMENTS




INTERNATIONAL FINANCE CORPORATION

CONSOLIDATED BALANCE SHEET

as of June 30, 2007 and June 30, 2006

(US$ millions) 2007 2006 Assets Cash and due from banks .......................................................................................................... $ 382 $ 159 Time deposits ............................................................................................................................. 4,979 2,959 Trading securities � Note B ......................................................................................................... 14,297 16,286 Securities purchased under resale agreements ............................................................................ 230 1,190

Investments � Note C Loans �.................................................................................................................................. 12,744 10,727 Less: Reserve against losses on loans � Note D..................................................................... (832) (898) Net loans ........................................................................................................................ 11,912 9,829 Equity investments ................................................................................................................. 3,245 2,696

Debt securities ........................................................................................................................ 655 206 Total investments ............................................................................................................ 15,812 12,731 Derivative assets � Note P ............................................................................................................ 1,086 1,128 Receivables and other assets � Note I ......................................................................................... 3,764 3,967 Total assets ...................................................................................................................... $ 40,550 $ 38,420 Liabilities and capital Liabilities Securities sold under repurchase agreements and payable for cash collateral received ................................................................................................. $ 4,973 $ 8,805 Borrowings withdrawn and outstanding � Note J From market sources .......................................................................................................... 15,817 14,887 From International Bank for Reconstruction and Development ........................................... 62 80 Total borrowings ........................................................................................................... 15,879 14,967 Derivative liabilities � Note P.................................................................................................... 1,123 1,288 Payables and other liabilities � Note K ..................................................................................... 4,445 2,284 Total liabilities .................................................................................................................... 26,420 27,344 Capital Capital stock, authorized 2,450,000 shares of $1,000 par value each � Note L Subscribed ......................................................................................................................... 2,366 2,365 Less: Portion not yet paid .................................................................................................. (1) (1) Total capital stock .......................................................................................................... 2,365 2,364 Accumulated other comprehensive income ............................................................................ 436 1 Retained earnings .................................................................................................................. 11,329 8,711 Total capital ....................................................................................................................... 14,130 11,076 Total liabilities and capital ............................................................................................. $ 40,550 $ 38,420

The notes to the consolidated financial statements are an integral part of these statements.




CONSOLIDATED INCOME STATEMENT

for the three years ended June 30, 2007

(US$ millions) 2007 2006 2005 Interest and financial fees from loans and debt securities � Note C .................................$ 1,075 $ 807 $ 660 Income from liquid asset trading activities � Note B ....................................................... 618 444 358 Charges on borrowings � Note J .................................................................................... (801) (603) (309) Income from equity investments � Note F ....................................................................... 2,306 1,228 1,365 Release of (provision for) losses on loans and guarantees � Note D ................................. 43 (15) 261 Income from loans, equity investments, debt securities, and liquid asset trading activities, after release of (provision for) losses on loans and guarantees.................................................................................................... 3,241 1,861 2,335 Other income Service fees ............................................................................................................... 53 52 41 Foreign currency transaction gains (losses) on non-trading activities............................ 17 6 (7) Other � Note M ......................................................................................................... 46 57 45 Total other income ............................................................................................. 116 115 79 Other expenses Administrative expenses � Notes T and U ................................................................... 482 436 403 Expense from pension and other postretirement benefit plans � Note S ..................... 15 28 14 Other ......................................................................................................................... 3 13 6 Total other expenses .......................................................................................... 500 477 423 Income before expenditures for advisory services, expenditures for performance-based grants, grants to IDA and net gains (losses) on non-trading financial instruments .................................................................... 2,857 1,499 1,991 Expenditures for advisory services � Note N..................................................................... (96) (55) (38) Expenditures for performance-based grants � Note N ..................................................... - (35) - Grants to IDA � Note N................................................................................................... (150) - - Income after expenditures for advisory services, expenditures for performance-based grants, grants to IDA and before net gains (losses) on non-trading financial instruments ...................................................... 2,611 1,409 1,953 Net gains (losses) on non-trading financial instruments � Note O .................................... 7 (131) 62 Net income ...................................................................................................................$ 2,618 $ 1,278 $ 2,015






CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME


(US$ millions) 2007 2006 2005 Net income ..................................................................................................................$ 2,618 $ 1,278 $ 2,015 Other comprehensive income (loss) Unrealized gains on debt securities accounted for as available-for-sale ....................... 187 - - Reclassification to net income of net interest accruals on swaps in cash flow hedging relationships at June 30, 2000 .................................................. - - (1) Translation adjustments on investments accounted for under the equity method ......... 2 - - Total comprehensive income ............................................................................$ 2,807 $ 1,278 $ 2,014





CONSOLIDATED STATEMENT OF CHANGES IN CAPITAL


(US$ millions) Retained earnings Designated Accumulated for Designated for other advisory performance Designated for comprehensive Capital Total Undesignated services based grants grants to IDA Total income stock� capital At July 1, 2004 ��$ 5,193 $ 225 $ - $ - $ 5,418 $ 2 $ 2,362 $ 7,782 Year ended June 30, 2005 Net income �� 2,015 2,015 2,015 Expenditures for advisory services � Note N�� 38 (38) - - Other comprehensive income (loss) ��. (1) (1) Designations for advisory services � Note N�� (125) 125 - - Designations for performance-based grants � Note N��. (250) 250 - - Payments received for capital stock subscribed�� 2 2

At June 30, 2005 �� 6,871 312 250 - 7,433 1 2,364 9,798 Year ended June 30, 2006 Net income ��.. 1,278 1,278 1,278 Expenditures for advisory services � Note N��. 55 (55) - - Expenditures for performance-based grants � Note N ��.. 35 (35) - - Designated for advisory services � Note N��. (230) 230 - - Designated for grants to IDA � Note N��. (150) 150 - -

At June 30, 2006 ��$ 7,859 $ 487 $ 215 $ 150 $ 8,711 $ 1 $ 2,364 $ 11,076 Year ended June 30, 2007 Net income ��.. 2,618 2,618 2,618 Other comprehensive income (loss)��.. 189 189 Expenditures for advisory services � Note N��. 96 (96) - - Grants to IDA - Note N��.. 150 (150) - - Adjustments to initially apply SFAS No. 158 � Note S.. 246 246 Payments received for capital stock subscribed 1 1

At June 30, 2007 ��$ 10,723 $ 391 $ 215 $ - $ 11,329 $ 436 $ 2,365 $ 14,130 � Capital stock includes payments received on account of pending subscriptions.






CONSOLIDATED STATEMENT OF CASH FLOWS


(US$ millions) 2007 2006 2005 Cash flows from investment activities Loan disbursements ...................................................................................................$ (4,574) $ (3,647) $ (2,848) Equity disbursements ................................................................................................. (1,057) (665) (535) Investments in debt securities .................................................................................... (210) (116) (73) Loan repayments ....................................................................................................... 2,558 2,746 2,281 Equity redemptions .................................................................................................... 1 2 29 Debt securities repayments ........................................................................................ 4 6 2 Sales of loans and equity investments ........................................................................ 2,515 1,451 1,337 Sales of debt securities .............................................................................................. 2 5 1 Net cash (used in) provided by investing activities ......................................... (761) (218) 194 Cash flows from financing activities Drawdown of borrowings ......................................................................................... 2,843 1,816 1,989 Repayment of borrowings ......................................................................................... (2,326) (2,611) (2,497) Capital subscriptions................................................................................................... 1 - 2 Net cash provided by (used in) financing activities ........................................ 518 (795) (506) Cash flows from operating activities Net income ................................................................................................................ 2,618 1,278 2,015 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Realized capital gains on equity sales .................................................................... (1,942) (928) (723) Income from investments accounted for under the equity method�� (19) (56) (191) Equity investment impairment write-downs............................................................ 40 57 62 (Release of) provision for losses on loans and guarantees ....................................... (43) 15 (261) Changes in carrying value of equity investments .................................................... - - (269) Foreign currency transaction (gains) losses on non-trading activities ....................... (17) (6) 7 Net (gains) losses on non-trading financial instruments ......................................... (7) 131 (62) Change in accrued income on loans, time deposits and securities ......................... 1,100 (150) (470) Change in payables and other liabilities ................................................................. 2,531 (431) 459 Change in receivables and other assets .................................................................. (926) (168) (797) Change in trading securities and securities purchased and sold under resale and repurchase agreements ..................................................................... (832) 2,416 51 Net cash provided by (used in) operating activities ........................................ 2,503 2,158 (179) Change in cash and cash equivalents ............................................................................. 2,260 1,145 (491) Effect of exchange rate changes on cash and cash equivalents ...................................... (17) 35 (32) Net change in cash and cash equivalents ....................................................................... 2,243 1,180 (523) Beginning cash and cash equivalents ............................................................................. 3,118 1,938 2,461 Ending cash and cash equivalents .............................................................................$ 5,361 $ 3,118 $ 1,938 Composition of cash and cash equivalents Cash and due from banks ..........................................................................................$ 382 $ 159 $ 139 Time deposits ............................................................................................................ 4,979 2,959 1,799 Total cash and cash equivalents .......................................................................$ 5,361 $ 3,118 $ 1,938 Supplemental disclosure Change in ending balances resulting from exchange rate fluctuations: Loans outstanding .................................................................................................$ (233) $ (49) $ (9) Borrowings ........................................................................................................... 201 (355) (24) Currency swaps...................................................................................................... - (1) - Charges on borrowings paid, net ............................................................................... 790 555 241 Non-cash item: Loan and debt securities conversion to equity, net .................................................. 72 98 111




STATEMENT OF CAPITAL STOCK AND VOTING POWER

as of June 30, 2007

(US$ thousands) Capital stock Voting power Amount Percent Number Percent Members paid of total of votes of total

Afghanistan ........................$ 111 * 361 0.02 Albania ............................... 1,302 0.06 1,552 0.06 Algeria ................................ 5,621 0.24 5,871 0.24 Angola ............................... 1,481 0.06 1,731 0.07 Antigua and Barbuda .......... 13 * 263 0.01 Argentina ........................... 38,129 1.61 38,379 1.59 Armenia ............................. 992 0.04 1,242 0.05 Australia ............................. 47,329 2.00 47,579 1.97 Austria ................................ 19,741 0.83 19,991 0.83 Azerbaijan .......................... 2,367 0.10 2,617 0.11 Bahamas, The ..................... 335 0.01 585 0.02 Bahrain ............................... 1,746 0.07 1,996 0.08 Bangladesh ......................... 9,037 0.38 9,287 0.39 Barbados ............................ 361 0.02 611 0.03 Belarus ............................... 5,162 0.22 5,412 0.22 Belgium .............................. 50,610 2.14 50,860 2.11 Belize .................................. 101 * 351 0.01 Benin .................................. 119 0.01 369 0.02 Bhutan ................................ 720 0.03 970 0.04 Bolivia ................................. 1,902 0.08 2,152 0.09 Bosnia and Herzegovina ...... 620 0.03 870 0.04 Botswana ........................... 113 * 363 0.02 Brazil .................................. 39,479 1.67 39,729 1.65 Bulgaria .............................. 4,867 0.21 5,117 0.21 Burkina Faso ....................... 836 0.04 1,086 0.05 Burundi .............................. 100 * 350 0.01 Cambodia ........................... 339 0.01 589 0.02 Cameroon .......................... 885 0.04 1,135 0.05 Canada ............................... 81,342 3.44 81,592 3.39 Cape Verde ........................ 15 * 265 0.01 Central African Republic ..... 119 0.01 369 0.02 Chad ................................... 1,364 0.06 1,614 0.07 Chile ................................... 11,710 0.50 11,960 0.50 China ................................. 24,500 1.04 24,750 1.03 Colombia ............................ 12,606 0.53 12,856 0.53 Comoros ............................ 14 * 264 0.01 Congo, Dem. Rep. of ...... 2,159 0.09 2,409 0.10 Congo, Republic of ............. 131 0.01 381 0.02 Costa Rica .......................... 952 0.04 1,202 0.05 Côte d'Ivoire ....................... 3,544 0.15 3,794 0.16 Croatia ............................... 2,882 0.12 3,132 0.13 Cyprus ................................ 2,139 0.09 2,389 0.10 Czech Republic ................... 8,913 0.38 9,163 0.38 Denmark ............................ 18,554 0.78 18,804 0.78 Djibouti .............................. 21 * 271 0.01 Dominica ............................ 42 * 292 0.01 Dominican Republic ............ 1,187 0.05 1,437 0.06 Ecuador .............................. 2,161 0.09 2,411 0.10 Egypt, Arab Republic of ...... 12,360 0.52 12,610 0.52 El Salvador .......................... 29 * 279 0.01 Equatorial Guinea ............... 43 * 293 0.01 Eritrea ................................. 935 0.04 1,185 0.05 Estonia ............................... 1,434 0.06 1,684 0.07 Ethiopia .............................. 127 0.01 377 0.02 Fiji ....................................... 287 0.01 537 0.02 Finland ............................... 15,697 0.66 15,947 0.66 France .............................. 121,015 5.12 121,265 5.03 Gabon ................................ 1,268 0.05 1,518 0.06 Gambia, The ....................... 94 * 344 0.01 Georgia .............................. 961 0.04 1,211 0.05 Germany .......................... 128,908 5.45 129,158 5.36 Ghana ................................ 5,071 0.21 5,321 0.22 Greece ................................ 6,898 0.29 7,148 0.30 Grenada ............................. 74 * 324 0.01 Guatemala .......................... 1,084 0.05 1,334 0.06 Guinea ............................... 339 0.01 589 0.02 Guinea-Bissau ..................... 18 * 268 0.01 Guyana ............................... 1,392 0.06 1,642 0.07 Haiti ................................... 822 0.03 1,072 0.04 Honduras ............................ 495 0.02 745 0.03 Hungary ............................. 10,932 0.46 11,182 0.46 Iceland ................................ 42 * 292 0.01 India ................................... 81,342 3.44 81,592 3.39 Indonesia ............................ 28,539 1.21 28,789 1.19 Iran, Islamic Republic of ...... 1,444 0.06 1,694 0.07 Iraq ..................................... 147 0.01 397 0.02 Ireland ................................ 1,290 0.05 1,540 0.06 Israel ................................... 2,135 0.09 2,385 0.10 Italy .................................... 81,342 3.44 81,592 3.39 Jamaica .............................. 4,282 0.18 4,532 0.19 Japan ................................ 141,174 5.97 141,424 5.87 Jordan ................................ 941 0.04 1,191 0.05 Kazakhstan ......................... 4,637 0.20 4,887 0.20 Kenya ................................. 4,041 0.17 4,291 0.18 Kiribati ................................ 12 * 262 0.01 Korea, Republic of .............. 15,946 0.67 16,196 0.67 Kuwait ................................ 9,947 0.42 10,197 0.42 Kyrgyz Republic .................. 1,720 0.07 1,970 0.08 Lao People's Dem. Rep. ...... 278 0.01 528 0.02 Latvia .................................. 2,150 0.09 2,400 0.10

Capital stock Voting power Amount Percent Number Percent Members paid of total of votes of total

Lebanon ............................ $ 135 0.01 385 0.02 Lesotho .............................. 71 * 321 0.01 Liberia ................................ 83 * 333 0.01 Libya .................................. 55 * 305 0.01 Lithuania ............................ 2,341 0.10 2,591 0.11 Luxembourg ...................... 2,139 0.09 2,389 0.10 Macedonia, FYR of ............. 536 0.02 786 0.03 Madagascar ....................... 432 0.02 682 0.03 Malawi .............................. 1,822 0.08 2,072 0.09 Malaysia ............................ 15,222 0.64 15,472 0.64 Maldives ............................ 16 * 266 0.01 Mali ................................... 451 0.02 701 0.03 Malta ................................. 1,615 0.07 1,865 0.08 Marshall Islands ................. 663 0.03 913 0.04 Mauritania ......................... 214 0.01 464 0.02 Mauritius ........................... 1,665 0.07 1,915 0.08 Mexico ............................... 27,589 1.17 27,839 1.16 Micronesia, Fed. States of ... 744 0.03 994 0.04 Moldova ............................ 860 0.04 1,110 0.05 Mongolia ........................... 144 0.01 394 0.02 Montenegro ...................... 1,035 0.04 1,285 0.05 Morocco ............................ 9,037 0.38 9,287 0.39 Mozambique ..................... 322 0.01 572 0.02 Myanmar ........................... 666 0.03 916 0.04 Namibia ............................. 404 0.02 654 0.03 Nepal ................................. 822 0.03 1,072 0.04 Netherlands ....................... 56,131 2.37 56,381 2.34 New Zealand ...................... 3,583 0.15 3,833 0.16 Nicaragua .......................... 715 0.03 965 0.04 Niger ................................. 147 0.01 397 0.02 Nigeria ............................... 21,643 0.92 21,893 0.91 Norway .............................. 17,599 0.74 17,849 0.74 Oman ................................ 1,187 0.05 1,437 0.06 Pakistan ............................. 19,380 0.82 19,630 0.81 Palau ................................. 25 * 275 0.01 Panama ............................. 1,007 0.04 1,257 0.05 Papua New Guinea ............ 1,147 0.05 1,397 0.06 Paraguay ............................ 436 0.02 686 0.03 Peru ................................... 6,898 0.29 7,148 0.30 Philippines ......................... 12,606 0.53 12,856 0.53 Poland ............................... 7,236 0.31 7,486 0.31 Portugal ............................. 8,324 0.35 8,574 0.36 Romania ............................ 2,661 0.11 2,911 0.12 Russian Federation ............. 81,342 3.44 81,592 3.39 Rwanda ............................. 306 0.01 556 0.02 Saint Kitts and Nevis .......... 638 0.03 888 0.04 St. Lucia ............................. 74 * 324 0.01 Samoa ............................... 35 * 285 0.01 Saudi Arabia ...................... 30,062 1.27 30,312 1.26 Senegal .............................. 2,299 0.10 2,549 0.11 Serbia ................................. 1,803 0.08 2,053 0.09 Seychelles .......................... 27 * 277 0.01 Sierra Leone ....................... 223 0.01 473 0.02 Singapore .......................... 177 0.01 427 0.02 Slovak Republic .................. 4,457 0.19 4,707 0.20 Slovenia ............................. 1,585 0.07 1,835 0.08 Solomon Islands ................. 37 * 287 0.01 Somalia .............................. 83 * 333 0.01 South Africa ....................... 15,948 0.67 16,198 0.67 Spain ................................. 37,026 1.57 37,276 1.55 Sri Lanka ............................ 7,135 0.30 7,385 0.31 Sudan ................................ 111 * 361 0.02 Swaziland .......................... 684 0.03 934 0.04 Sweden ............................. 26,876 1.14 27,126 1.13 Switzerland ........................ 41,580 1.76 41,830 1.74 Syrian Arab Republic .......... 194 0.01 444 0.02 Tajikistan ........................... 1,212 0.05 1,462 0.06 Tanzania ............................ 1,003 0.04 1,253 0.05 Thailand ............................. 10,941 0.46 11,191 0.46 Timor-Leste ........................ 777 0.03 1,027 0.04 Togo .................................. 808 0.03 1,058 0.04 Tonga ................................ 34 * 284 0.01 Trinidad and Tobago .......... 4,112 0.17 4,362 0.18 Tunisia ............................... 3,566 0.15 3,816 0.16 Turkey ............................... 14,545 0.62 14,795 0.61 Turkmenistan ..................... 810 0.03 1,060 0.04 Uganda .............................. 735 0.03 985 0.04 Ukraine .............................. 9,505 0.40 9,755 0.40 United Arab Emirates ......... 4,033 0.17 4,283 0.18 United Kingdom ................ 121,015 5.12 121,265 5.03 United States ..................... 569,379 24.07 569,629 23.64 Uruguay ............................. 3,569 0.15 3,819 0.16 Uzbekistan ......................... 3,873 0.16 4,123 0.17 Vanuatu ............................. 55 * 305 0.01 Venezuela, Rep. Boliv. de ... 27,588 1.17 27,838 1.16 Vietnam ............................. 446 0.02 696 0.03 Yemen, Republic of ............ 715 0.03 965 0.04 Zambia .............................. 1,286 0.05 1,536 0.06 Zimbabwe .......................... 2,120 0.09 2,370 0.10 Total June 30, 2007 $ 2,365,102 100.00+ 2,409,852 100.00+ Total June 30, 2006 $ 2,363,891 100.00+ 2,408,391 100.00+

* Less than .005 percent. + May differ from the sum of the individual percentages shown because of rounding.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

International Finance Corporation (IFC), an international organization, was established in 1956 to further economic development in its member countries by encouraging the growth of private enterprise. IFC is a member of the World Bank Group, which also includes the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), and the Multilateral Investment Guarantee Agency (MIGA). IFC�s activities are closely coordinated with and complement the overall development objectives of the other World Bank Group institutions. IFC, together with private investors, assists in financing the establishment, improvement and expansion of private sector enterprises by making loans, equity investments, and investments in debt securities where sufficient private capital is not otherwise available on reasonable terms. IFC�s share capital is provided by its member countries. It raises most of the funds for its investment activities through the issuance of notes, bonds and other debt securities in the international capital markets. IFC also plays a catalytic role in mobilizing additional funding from other investors and lenders, either through cofinancing or through loan participations, underwritings and guarantees. In addition to project finance, corporate lending and resource mobilization, IFC offers an array of financial products and technical advisory services to private businesses in the developing world to increase their chances of success. It also advises governments on how to create an environment hospitable to the growth of private enterprise and foreign investment. NOTE A � SUMMARY OF SIGNIFICANT ACCOUNTING AND RELATED POLICIES The consolidated financial statements include the financial statements of IFC and three variable interest entities (VIEs) (see Note W). The accounting and reporting policies of IFC conform with accounting principles generally accepted in the United States of America (US GAAP). On August 2, 2007, the Board of Directors of IFC (the Board) approved these consolidated financial statements for issue. Consolidated financial statements presentation - Certain amounts in the prior years have been reclassified to conform to the current year�s presentation. Use of estimates - The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expense during the reporting periods. Actual results could differ from these estimates. A significant degree of judgment has been used in the determination of: the adequacy of the reserve against losses on loans and impairment of equity investments; estimated fair values of all derivative instruments and related financial instruments in qualifying hedging relationships; and net periodic pension income or expense. There are inherent risks and uncertainties related to IFC�s operations. The possibility exists that changing economic conditions could have an adverse effect on the financial position of IFC. IFC uses internal models to determine the fair values of derivative and other financial instruments and the aggregate level of the reserve against losses on loans and impairment of equity investments. IFC undertakes continuous review and respecification of these models with the objective of refining its estimates, consistent with evolving best practices appropriate to its operations. Changes in estimates resulting from refinements in the assumptions and methodologies incorporated in the models are reflected in net income in the period in which the enhanced models are first applied. Translation of currencies - Assets and liabilities not denominated in United States dollars (US dollars or $), other than disbursed equity investments, are expressed in US dollars at the exchange rates prevailing at June 30, 2007 and June 30, 2006. Disbursed equity investments are expressed in US dollars at the prevailing exchange rates at the time of disbursement. Income and expenses are recorded based on the rates of exchange prevailing at the time of the transaction. Transaction gains and losses are credited or charged to income. Translation adjustments on equity investments that are accounted for under the equity method are recorded in other comprehensive income. Loans - IFC originates loans to facilitate project finance, restructuring, refinancing, corporate finance, and/or other developmental objectives. Loans are recorded as assets when disbursed. Loans are carried at the principal amounts outstanding adjusted for net unamortized loan origination costs and fees. It is IFC�s practice to obtain collateral security such as, but not limited to, mortgages and third-party guarantees. Revenue recognition on loans - Interest income and commitment fees on loans are recorded as income on an accrual basis. Beginning in the year ended June 30, 2006, IFC began amortizing net loan origination costs and fees over the estimated life of the originated loan to which the fees relate. Prior to the year ended June 30, 2006, loan origination costs were expensed as incurred, and loan origination fees were recognized as income when received. The net of loan origination fees and loan origination costs was considered insignificant. All other fees are recorded as income when received in freely convertible currencies. IFC does not recognize income on loans where collectibility is in doubt or payments of interest or principal are past due more than 60 days unless management anticipates that collection of interest will occur in the near future. Any interest accrued on a loan placed in nonaccrual status is reversed out of income and is thereafter recognized as income only when the actual payment is received. Interest not previously recognized but capitalized as part of a debt restructuring is recorded as deferred income, included in the consolidated balance sheet in payables and other liabilities, and credited to income only when the related principal is received. Such capitalized interest is considered in the computation of the reserve against losses on loans in the consolidated balance sheet. Reserve against losses on loans - IFC recognizes impairment on loans in the consolidated balance sheet through the reserve against losses on loans, recording a provision or release of provision for losses on loans in net income on a quarterly basis, which increases or decreases the reserve against losses on loans. Individually impaired loans are measured based on the present value of expected future cash flows to be received, observable market prices, or for loans that are dependent on collateral for repayment, the estimated fair value of the collateral.

THE PURPOSE





Management determines the aggregate level of the reserve against losses on loans, taking into account established guidelines and its assessment of recent portfolio quality trends. The guidelines include internal country and loan risk ratings, and the impairment potential of the loan portfolio based on IFC�s historical portfolio loss experience on mature loans. The reserve against losses on loans reflects estimates of both probable losses already identified and probable losses inherent in the portfolio but not specifically identifiable. The determination of identified probable losses represents management�s judgment of the creditworthiness of the borrower and is established through review of individual loans undertaken on a quarterly basis. IFC considers a loan as impaired when, based on current information and events, it is probable that IFC will be unable to collect all amounts due according to the loan�s contractual terms. Unidentified probable losses are the expected losses over a three-year risk horizon, in excess of identified probable losses. The risks inherent in the portfolio that are considered in determining unidentified probable losses are those proven to exist by past experience and include: country systemic risk; the risk of correlation or contagion of losses between markets; uninsured and uninsurable risks; nonperformance under guarantees and support agreements; and opacity of, or misrepresentation in, financial statements. Loans are written-off when IFC has exhausted all possible means of recovery, by reducing the reserve against losses on loans. Such reductions in the reserve are offset by recoveries associated with previously written-off loans. Equity investments - IFC invests for current income, capital appreciation, developmental impact, or all three; IFC does not seek to take operational, controlling, or strategic equity positions within its investees. Equity investments are acquired through direct ownership of equity instruments of investees, as a limited partner in limited liability partnerships (LLPs) and limited liability companies (LLCs), and/or as an investor in a private equity fund. Revenue recognition on equity investments - Direct equity investments in which IFC does not have significant influence and certain investments in investment companies are carried at cost less impairment. IFC�s investments in companies where it has significant influence and certain investments in LLPs and LLCs that maintain specific ownership accounts are accounted for under the equity method. IFC�s investments in certain private equity funds in which IFC is deemed to be the Primary Beneficiary of a VIE, as the presumption of control by the fund manager or the general partner has been overcome, are fully consolidated into IFC�s books. Certain equity investments, for which recovery of invested capital is uncertain, are accounted for under the cost recovery method, such that receipts of freely convertible currencies are first applied to recovery of invested capital and then to income from equity investments. The cost recovery method is principally applied to IFC's investments in its oil and gas unincorporated joint ventures (UJVs). Conditional asset retirement obligations related to investments in UJVs are recorded when the fair value of the obligations can be reasonably estimated. The obligations are capitalized and systematically amortized over the estimated economic useful lives. Dividends and profit participations received on cost method equity investments are generally recorded as income when received in freely convertible currencies. Realized capital gains on the sale or redemption of equity investments are measured against the average cost of the investments sold and are generally recorded as income when received in freely convertible currencies or securities, which are readily convertible into freely convertible currencies. Capital losses are recognized when incurred. IFC enters into put and call option agreements in connection with equity investments; these are accounted for in accordance with Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities as amended. Impairment of equity investments - Equity investments are assessed for impairment each quarter. When an impairment is identified and is deemed to be other than temporary, the equity investment is written down to the impaired value, which becomes the new cost basis in the equity investment. Impairment losses are not reversed for subsequent recoveries in value of the equity investment until it is sold. Debt securities - Debt securities are classified as available-for-sale and carried at fair value on the consolidated balance sheet with unrealized gains and losses included in accumulated other comprehensive income until realized. Interest on debt securities is included in interest and financial fees from loans on the consolidated income statement. Guarantees - IFC extends financial guarantee facilities to its clients to provide credit enhancement for their debt securities and trade obligations. IFC offers partial credit guarantees to clients covering, on a risk-sharing basis, client obligations on bonds and/or loans. Under the terms of IFC's guarantees, IFC agrees to assume responsibility for the client�s financial obligations in the event of default by the client (i.e., failure to pay when payment is due). Guarantees are regarded as issued when IFC commits to the guarantee. Guarantees are regarded as outstanding when the underlying financial obligation of the client is incurred, and this date is considered to be the �inception� of the guarantee. Guarantees are regarded as called when IFC�s obligation under the guarantee has been invoked. There are two liabilities associated with the guarantees: (1) the stand-ready obligation to perform and (2) the contingent liability. The stand-ready obligation to perform is recognized at the inception of the guarantee unless a contingent liability exists at that time or is expected to exist in the near term. The contingent liability associated with the financial guarantee is recognized when it is probable the guarantee will be called and when the amount of guarantee called can be reasonably estimated. All liabilities associated with guarantees are included in payables and other liabilities, and the receivables are included in other assets on the consolidated balance sheet. When the guarantees are called, the amount disbursed is recorded as a new loan, and specific reserves against losses are established, based on the estimated probable loss. These reserves are included in the reserve against losses on loans on the consolidated balance sheet. Guarantee fees are recorded in income as the stand-ready obligation to perform is fulfilled. Commitment fees on guarantees are recorded as income on an accrual basis.






Designations of retained earnings - In the year ended June 30, 2004, IFC established a funding mechanism for technical assistance and advisory services through a designation of retained earnings. Beginning in the year ended June 30, 2007, technical assistance and advisory services are now referred to as advisory services. In the year ended June 30, 2005, IFC established a funding mechanism for performance-based grants (PBG) through a designation of retained earnings. Further, in the year ended June 30, 2006, IFC also designated retained earnings for grants to IDA for use by IDA in the provision of grants to further IFC�s mandates in certain IDA member countries. Total designations of retained earnings for advisory services, PBG, and grants to IDA are determined based on IFC�s annual income before expenditures for advisory services, expenditures for PBG, grants to IDA and net gains and losses on non-trading financial instruments in excess of $150 million, and contemplating the financial capacity and strategic priorities of IFC. Expenditures for advisory services, PBG, and grants to IDA are recorded as expenses in IFC�s consolidated income statement in the year in which they occur, also having the effect of reducing the respective designated retained earnings for such purposes. Expenditures are deemed to have occurred when IFC has ceded control of the funds to the recipient. If the recipient organization is deemed to be controlled by IFC, the expenditure is deemed to have occurred only when the recipient organization expends the funds to a non-related party. On occasion, recipient organizations which are deemed to be controlled by IFC will acquire certain investment assets other than cash. These investments have had no material impact on IFC�s financial position, results of operations, or cash flows. In such cases, IFC includes those assets on its consolidated balance sheet, where they remain until the recipient organization disposes of or transfers the asset or IFC is deemed to no longer be in control of the recipient organization. Liquid asset portfolio - IFC�s liquid funds are invested in government, agency and government-sponsored agency obligations, time deposits and asset-backed securities. Government and agency obligations include long and short positions in highly rated fixed rate bonds, notes, bills, and other obligations issued or unconditionally guaranteed by governments of countries or other official entities including government agencies and instrumentalities or by multilateral organizations. The liquid asset portfolio, as defined by IFC, consists of: time deposits and securities; related derivative instruments; securities purchased under resale agreements, securities sold under repurchase agreements and payable for cash collateral received; receivables from sales of securities and payables for purchases of securities; and related accrued income and charges. Securities within IFC�s liquid asset portfolio are classified as trading and are carried at fair value with any changes in fair value reported in income from liquid asset trading activities. Interest on securities and amortization of premiums and accretion of discounts are also reported in income from liquid asset trading activities. IFC classifies cash and due from banks and time deposits (collectively, cash and cash equivalents) as an element of liquidity in the consolidated statement of cash flows because they are generally readily convertible to known amounts of cash within 90 days of acquisition. Repurchase and resale agreements - Repurchase agreements are contracts under which a party sells securities and simultaneously agrees to repurchase the same securities at a specified future date at a fixed price. Resale agreements are contracts under which a party purchases securities and simultaneously agrees to resell the same securities at a specified future date at a fixed price. It is IFC�s policy to take possession of securities purchased under resale agreements, which are primarily liquid government securities. The market value of these securities is monitored and, within parameters defined in the agreements, additional collateral is obtained when their value declines. IFC also monitors its exposure with respect to securities sold under repurchase agreements and, in accordance with the terms of the agreements, requests the return of excess securities held by the counterparty when their value increases. Repurchase and resale agreements are accounted for as collateralized financing transactions and recorded at the amount at which the securities were acquired or sold plus accrued interest. Securities purchased under resale agreements, securities sold under agreements to repurchase and securities payable for cash collateral received are recorded at fair value. Borrowings - To diversify its access to funding and reduce its borrowing costs, IFC borrows in a variety of currencies and uses a number of borrowing structures, including foreign exchange rate-linked, inverse floating rate and zero coupon notes. Generally, IFC simultaneously converts such borrowings into variable rate US dollar borrowings through the use of currency and interest rate swap transactions. Under certain outstanding borrowing agreements, IFC is not permitted to mortgage or allow a lien to be placed on its assets (other than purchase money security interests) without extending equivalent security to the holders of such borrowings. Borrowings are recorded at the amount repayable at maturity, adjusted for unamortized premiums and unaccreted discounts. Where borrowings are part of a designated hedging relationship employing derivative instruments, the carrying amount is adjusted for changes in fair value attributable to the risk being hedged. Adjustments for changes in fair value attributable to hedged risks are reported in net gains and losses on non-trading financial instruments in the consolidated income statement. Interest on borrowings and amortization of premiums and accretion of discounts are reported in charges on borrowings. Risk management, derivative instruments, and hedge accounting - IFC enters into transactions in various derivative instruments for financial risk management purposes in connection with its principal business activities, including lending, client risk management, borrowing, liquid asset portfolio management and asset and liability management. IFC does not use derivatives for speculative purposes. All derivative instruments are recorded on the consolidated balance sheet at fair value as derivative assets or derivative liabilities. Where they are not clearly and closely related to the host contract, certain derivative instruments embedded in loans, equity investments, and market borrowing transactions entered into on or after January 1, 1999, are bifurcated from the host contract and recorded at fair value as derivative assets and liabilities. The value at inception of such embedded derivatives is excluded from the carrying value of the host contracts on the consolidated balance sheet. Changes in fair values of derivative instruments used in liquid asset portfolio management activities are recorded in income from liquid asset trading activities. Changes in fair values of derivative instruments other than those used in liquid asset portfolio management activities are recorded in net gains and losses on non-trading financial instruments.





Subject to certain specific qualifying conditions in SFAS No. 133, as amended, a derivative instrument may be designated either as a hedge of the fair value of an asset or liability (fair value hedge), or as a hedge of the variability of cash flows of an asset or liability or forecasted transaction (cash flow hedge). For a derivative instrument qualifying as a fair value hedge, fair value gains or losses on the derivative instrument are reported in net income, together with offsetting fair value gains or losses on the hedged item that are attributable to the risk being hedged. For a derivative instrument qualifying as a cash flow hedge, fair value gains or losses associated with the risk being hedged are reported in other comprehensive income and released to net income in the period(s) in which the effect on net income of the hedged item is recorded. Fair value gains and losses on a derivative instrument not qualifying as a hedge are reported in net gains and losses on non-trading financial instruments. IFC has designated certain hedging relationships in its borrowing activities as fair value hedges. IFC generally matches the terms of its derivatives with the terms of the specific underlying financial instruments hedged, in terms of currencies, maturity dates, reset dates, interest rates, and other features. However, the valuation methodologies applied to the derivative and the hedged financial instrument may differ. The resulting ineffectiveness calculated for such relationships is recorded in net gains and losses on non-trading financial instruments in the consolidated income statement. IFC has not designated any hedging relationships as cash flow hedges. The risk management policy for each of IFC�s principal business activities and the accounting policies particular to them are described below. Lending activities IFC�s policy is to closely match the currency, rate basis, and maturity of its loans and borrowings. Derivative instruments are used to convert the cash flows from fixed rate US dollar or non-US dollar loans into variable rate US dollars. IFC has elected not to designate hedging relationships for all lending-related derivatives. Client risk management activities IFC enters into derivatives transactions with its clients to help them hedge their own currency, interest rate, or commodity risk, which, in turn, improves the overall quality of IFC�s loan portfolio. To hedge the market risks that arise from these transactions with clients, IFC enters into offsetting derivative transactions with matching terms with authorized market counterparties. Changes in fair value of all derivatives associated with these activities are reflected currently in net income. Though hedge accounting is not applicable to these activities, the matching of terms between the offsetting transactions minimizes the impact on net income in net gains (losses) on non-financial instruments. Fees and spreads charged on these transactions are recorded as income on an accrual basis. Borrowing activities IFC issues debt securities in various capital markets with the objectives of minimizing its borrowing costs, diversifying funding sources, and developing member countries� capital markets, sometimes using complex structures. These structures include borrowings payable in multiple currencies, or borrowings with principal and/or interest determined by reference to a specified index such as a stock market index, a reference interest rate, a commodity index, or one or more foreign exchange rates. IFC uses derivative instruments with matching terms, primarily currency and interest rate swaps, to convert such borrowings into variable rate US dollar obligations, consistent with IFC�s matched funding policy. IFC has designated the majority of derivatives associated with borrowing activities as fair value hedges of the underlying borrowings. There are a small number of fair value-like and cash flow-like hedging transactions for which no hedge relationship has been designated. Liquid asset portfolio management activities IFC manages the interest rate, currency and other market risks associated with certain of the time deposits and securities in its liquid asset portfolio by entering into derivative transactions to convert the cash flows from those instruments into variable rate US dollars, consistent with IFC�s matched funding policy. The derivative instruments used include short-term, over-the-counter foreign exchange forwards (covered forwards), interest rate and currency swaps, and exchange-traded interest rate futures and options. As the entire liquid asset portfolio is classified as a trading portfolio, all securities (including derivatives) are carried at fair value, and no hedging relationships have been designated. Asset and liability management In addition to the risk managed in the context of its business activities detailed above, IFC faces residual market risk in its overall asset and liability management. Residual currency risk is managed by monitoring the aggregate position in each lending currency and reducing the net excess asset or liability position through spot sales or purchases. Interest rate risk due to reset date mismatches is reduced by synchronizing the reset dates on assets and liabilities and managing overall interest rate risk on an aggregate basis. Interest rate risk arising from mismatches due to writedowns, prepayments and reschedulings, and residual reset date mismatches is monitored by measuring the sensitivity of the present value of assets and liabilities in each currency to each basis point change in interest rates. IFC monitors the credit risk associated with these activities by careful assessment and monitoring of prospective and actual clients and counterparties. In respect of liquid assets and derivatives transactions, credit risk is managed by establishing exposure limits based on the credit rating and size of the individual counterparty. In addition, IFC has entered into master agreements governing derivative transactions that contain close-out and netting provisions and collateral arrangements. Under these agreements, if IFC�s credit exposure to a counterparty, on a mark-to-market basis, exceeds a specified level, the counterparty must post collateral to cover the excess, generally in the form of liquid government securities. Loan participations - IFC mobilizes funds from commercial banks and other financial institutions (Participants) by facilitating loan participations, without recourse. These loan participations are administered and serviced by IFC on behalf of the Participants. The disbursed and outstanding balances of loan participations that meet the applicable accounting criteria are accounted for as sales and are not included in IFC�s consolidated balance sheet. All other loan participations are accounted for as secured borrowings and are included in loans on IFC�s consolidated balance sheet, with the related secured borrowings included in payables and other liabilities on the IFC�s consolidated balance sheet.






Pension and other postretirement benefits - IBRD has a defined benefit Staff Retirement Plan (SRP), a Retired Staff Benefits Plan (RSBP) and a Post-Employment Benefits Plan (PEBP) that cover substantially all of its staff members as well as the staff of IFC and of MIGA. The SRP provides regular pension benefits and includes a cash balance plan. The RSBP provides certain health and life insurance benefits to eligible retirees. The PEBP provides pension benefits administered outside the SRP. All costs associated with these plans are allocated between IBRD, IFC, and MIGA based upon their employees� respective participation in the plans. In addition, IFC and MIGA reimburse IBRD for their share of any contributions made to these plans by IBRD. The net periodic pension and other postretirement benefit income or expense allocated to IFC is included in income or expense from pension and other postretirement benefit plans in the consolidated income statement. IFC includes a receivable from IBRD in receivables and other assets, representing prepaid pension and other postretirement benefit costs. Variable Interest Entities - In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities - an interpretation of ARB No. 51 (FIN 46). During December 2003, FASB replaced FIN 46 with FASB Interpretation No. 46, Consolidation of Variable Interest Entities - an interpretation of ARB No. 51 (FIN 46R). FIN 46 and FIN 46R define certain VIEs and require parties to such entities to assess and measure variable interests in the VIEs for the purpose of determining possible consolidation of the VIEs. Variable interests can arise from financial instruments, service contracts, guarantees, leases or other arrangements with a VIE. An entity that will absorb a majority of a VIE�s expected losses or expected residual returns is deemed to be the primary beneficiary of the VIE and must include the assets, liabilities, and results of operations of the VIE in its consolidated financial statements. IFC has a number of investments in VIEs which it manages and supervises in a manner consistent with other portfolio investments. Note W provides further details regarding IFC�s variable interests in VIEs.

Accounting and financial reporting developments � During the year ended June 30, 2006, IFC changed its accounting principle with respect to the amortization of loan origination fees and loan origination costs. Prior to the year ended June 30, 2006, the net of loan origination fees and costs was considered to be insignificant. Beginning in year ended June 30, 2006, IFC began amortizing loan origination fees and costs on an effective yield basis. During the year ended June 30, 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Instruments - an amendment of FASB Statements Nos. 133 and 140 (SFAS No. 155) and SFAS No. 156, Accounting for Servicing of Financial Assets - an amendment of FASB Statement No. 140 (SFAS No. 156). Both SFAS No. 155 and SFAS No. 156 are effective for fiscal years beginning after September 15, 2006, which would be the year ending June 30, 2008 for IFC. The adoption of SFAS No. 155 and SFAS No. 156 is not expected to have a material impact on the financial position, results of operations or cash flow of IFC.

In September 2006, the FASB issued SFAS No. 158, Employers� Accounting for Defined Benefit Pension and Other Postretirement Plans (SFAS No. 158). SFAS No. 158 requires employers to recognize on their balance sheet the funded status of their defined benefit postretirement plans, measured as the difference between the fair value of plan assets and the benefit obligations, and to recognize as part of Other Comprehensive Income the gains and losses and prior service costs or credits that arise during the period to the extent they are not recognized as components of the net periodic benefit cost. Additionally, upon adoption, SFAS No. 158 requires the unrecognized net actuarial gain or loss and the unrecognized prior service cost to be recognized in Accumulated Other Comprehensive Income and that these amounts be adjusted as they are subsequently recognized as components of net periodic benefit cost, based upon the current amortization and recognition requirements of SFAS No. 87, Employers� Accounting for Pensions (SFAS No. 87) and SFAS No. 106, Employers� Accounting for Postretirement Benefits (SFAS No. 106). SFAS No. 158 is applicable to IFC�s consolidated financial statements as of June 30, 2007 and the impact of its adoption is discussed further in Note S.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 defines fair value, establishes a fair value hierarchy and expands disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, which would be the year ending June 30, 2009 for IFC. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including any financial statements for an interim period within the fiscal year of adoption. IFC is currently planning to early adopt SFAS No. 157 beginning in the year ending June 30, 2008 and is evaluating the effects of this new standard.

In February 2007, the FASB issued SFAS No. 159, the Fair Value Option for Financial Assets and Financial Liabilities including an amendment of FASB Statement No. 115 (SFAS No. 159), which allows an entity the irrevocable option to elect fair value measurement for certain financial assets and financial liabilities on a contract-by-contract basis. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, which would be the year ending June 30, 2009 for IFC. Early adoption is permitted as of the beginning of the previous fiscal year (the year ending June 30, 2008 for IFC) as long as the entity also early adopts SFAS No. 157 concurrent with the adoption of SFAS No. 159. IFC is currently planning to early adopt SFAS No. 159 and to elect fair value measurement for virtually all of its market borrowings and certain equity investments. IFC is currently assessing the potential impact of any such early adoption on the financial position, results of operations or cash flow of IFC. In November 2006, the FASB ratified the consensus reached by the Emerging Issues Task Force (EITF) on Issue No. 06-9, Reporting a Change in (or the Elimination of) a Previously Existing Difference Between the Fiscal Year-End of a Parent Company and That of a Consolidated Entity or Between the Reporting Period of an Investor and That of an Equity Method Investee (EITF 06-9). EITF 06-9 is effective for IFC beginning on January 31, 2007. The adoption of EITF No. 06-9 did not have a material impact on the financial position, results of operations or cash flow of IFC.





In June 2007, the American institute of Certified Public Accountants (AICPA) issued Statement of Position No. 07-1 (SOP No 07-1), Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies. SOP No. 07-1 provides guidance for determining whether an entity is within the scope of the AICPA Audit and Accounting Guide for Investment Companies (the Guide). Investment Companies that are within the scope of the Guide report investments at fair value. SOP No. 07-1 is effective for fiscal years beginning on or after December 15, 2007, which would be the year ending June 30, 2009 for IFC. IFC is currently evaluating the provisions of SOP No. 07-1. In addition, during the year ended June 30, 2007, the FASB issued and/or approved various FASB Staff Positions, EITF Issues Notes, and other interpretative guidance related to Statements of Financial Accounting Standards and Accounting Principles Board (APB) Opinions. IFC analyzed and implemented the new guidance, as appropriate, with no material impact on either the financial position, results of operations or cash flows of IFC.






NOTE B � LIQUID ASSET PORTFOLIO The composition of IFC�s liquid asset portfolio is included in the consolidated balance sheet captions as follows (US$ millions): June 30, 2007 June 30, 2006 Assets Cash and due from banks $ 11 $ - Time deposits 4,958 2,911 Trading securities 14,297 16,286 Securities purchased under resale agreements 230 1,190 Receivables and other assets: Receivables from sales of securities 2,001 1,466 Accrued interest income on time deposits and securities 87 1,226 Accrued income on derivative instruments 18 37 Derivative assets 90 189 Total assets 21,692 23,305 Liabilities Payables and other liabilities: Due to banks - 12 Payables for purchases of securities 3,278 1,352 Accrued charges on derivative instruments 15 62 Securities sold under repurchase agreements and payable for cash collateral received 4,973 8,805 Derivative liabilities 157 344 Total liabilities 8,423 10,575 Total net liquid asset portfolio $ 13,269 $ 12,730 The liquid asset portfolio is denominated primarily in US dollars; investments in other currencies, net of the effect of associated derivative instruments that convert non-US dollar securities into US dollar securities, represent less than 1% of the portfolio at June 30, 2007 (less than 1% - June 30, 2006). The annualized rate of return on the trading portfolio during the year ended June 30, 2007, was 4.8% (3.6% - year ended June 30, 2006; 2.6% - year ended June 30, 2005). After the effect of associated derivative instruments, the liquid asset portfolio generally reprices within one year. Trading securities The composition of trading securities is as follows: Year ended June 30, 2007 At June 30, 2007 Fair value average Contractual daily balance Fair value maturity Average (US$ millions) (US$ millions) (years) yield (%) Government, agency and government-sponsored agency obligations $ 8,062 $ 5,838 4.1 4.4 Asset-backed securities 6,280 7,487 28.4 5.6 Corporate securities 837 431 2.0 5.3 Money market funds 882 541 - 5.4 Total trading securities $ 16,061 $ 14,297 Year ended June 30, 2006 At June 30, 2006 Fair value average Contractual daily balance Fair value maturity Average (US$ millions) (US$ millions) (years) yield (%) Government, agency and government-sponsored agency obligations $ 9,604 $ 10,182 4.8 3.9 Asset-backed securities 4,554 4,467 27.0 5.6 Corporate securities 1,819 1,318 2.7 4.8 Money market funds 307 319 - 5.2 Total trading securities $ 16,284 $ 16,286 The expected maturity of the asset-backed securities may differ from the contractual maturity, as reported above, due to prepayment features.





Income from liquid asset trading activities Income from liquid asset trading activities for the years ended June 30, 2007, June 30, 2006 and June 30, 2005 comprises (US$ millions): 2007 2006 2005 Interest income $ 674 $ 673 $ 533 Net (losses) gains on trading activities: Realized (3) 72 (80) Unrealized (55) (302) (95) Net (losses) gains on trading activities (58) (230) (175) Translation adjustments 2 1 - Total income from liquid asset trading activities $ 618 $ 444 $ 358 Collateral The estimated fair value of securities held by IFC at June 30, 2007 as collateral, in connection with derivatives transactions and purchase and resale agreements, that may be sold or repledged was $291 million ($1,313 million - June 30, 2006). Collateral given by IFC to a counterparty in connection with repurchase agreements that may be sold or repledged by the counterparty approximates the amounts classified as Securities sold under repurchase agreements and payable for cash collateral received. NOTE C � LOANS, EQUITY INVESTMENTS, AND DEBT SECURITIES The distribution of the investment portfolio by sector is as follows (US$ millions): June 30, 2007 June 30, 2006 Equity Debt Equity Debt Loans investments securities Total Loans investments securities Total Finance and insurance $ 4,810 $ 1,424 $ 288 $ 6,522 $ 3,439 $ 1,010 $ 80 $ 4,529 Utilities 1,005 304 - 1,309 1,013 255 - 1,268 Oil, gas and mining 779 234 - 1,013 815 173 - 988 Transportation and warehousing 860 20 - 880 758 32 - 790 Nonmetallic mineral product manufacturing 803 60 - 863 703 15 8 726 Food and beverages 746 49 - 795 478 53 10 541 Chemicals 595 53 26 674 465 22 41 528 Industrial and consumer products 509 25 45 579 671 83 - 754 Information 439 123 12 574 463 148 - 611 Primary metals 483 14 2 499 233 30 - 263 Collective investment vehicles 31 402 53 486 43 383 5 431 Wholesale and retail trade 406 48 5 459 348 48 - 396 Agriculture and forestry 361 23 11 395 354 20 53 427 Paper and pulp 296 69 - 365 237 55 - 292 Accommodation and tourism services 213 28 16 257 277 30 - 307 Health care 174 10 2 186 111 6 - 117 Textile, apparel and leather 161 11 6 178 152 11 8 171 Plastics and rubber 42 34 - 76 52 44 - 96 Construction and real estate 30 - - 30 69 1 - 70 Other 59 20 2 81 86 16 1 103 Total disbursed portfolio 12,802 2,951 468 16,221 10,767 2,435 206 13,408 Adjustments to investments accounted for under the equity method - 282 - 282 - 255 - 255 Unrealized gains on equity investments held by consolidated VIEs - 12 - 12 - 6 - 6 Unrealized gains on debt securities accounted for as available-for-sale - - 187 187 - - - - Unamortized deferred loan origination

fees, net (64) - - (64) (46) - - (46) Unamortized SFAS No. 133 transition adjustment 6 - - 6 6 - - 6 Carrying value of investments $ 12,744 $ 3,245 $ 655 $ 16,644 $ 10,727 $ 2,696 $ 206 $ 13,629






The distribution of the investment portfolio by geographical region is as follows (US$ millions): June 30, 2007 June 30, 2006 Equity Debt Equity Debt Loans investments securities Total Loans investments securities Total Europe and Central Asia $ 4,390 $ 749 $ 130 $ 5,269 $ 3,764 $ 612 $ 38 $ 4,414 Latin America and Caribbean 3,697 803 118 4,618 3,425 644 57 4,126 Asia 2,724 947 146 3,817 2,050 814 57 2,921 Middle East and North Africa 999 187 20 1,206 726 125 - 851 Sub-Saharan Africa 982 189 - 1,171 792 188 - 980 Other 10 76 54 140 10 52 54 116 Total disbursed portfolio 12,802 2,951 468 16,221 10,767 2,435 206 13,408 Adjustments to investments accounted for under the equity method - 282 - 282 - 255 - 255 Unrealized gains on equity investments held by consolidated VIEs - 12 - 12 - 6 - 6 Unrealized gains on debt securities accounted for as available-for-sale - - 187 187 - - - - Unamortized deferred loan origination

fees, net (64) - - (64) (46) - - (46) Unamortized SFAS No. 133 transition adjustment 6 - - 6 6 - - 6 Carrying value of investments $ 12,744 $ 3,245 $ 655 $ 16,644 $ 10,727 $ 2,696 $ 206 $ 13,629 Loan portfolio At June 30, 2007, 23% of the disbursed loan portfolio consisted of fixed rate loans (20% - June 30, 2006), while the remainder was at variable rates. At June 30, 2007, the disbursed loan portfolio included $159 million of loans serving as collateral under secured borrowing arrangements ($88 million - June 30, 2006). The currency composition and average yield of the disbursed loan portfolio are summarized below: June 30, 2007 June 30, 2006 Amount Average Amount Average (US $ millions) yield (%) (US $ million) yield (%) US dollar $ 9,296 8.1 $ 8,210 8.1 Euro 1,681 6.2 1,498 5.3 Other currencies 1,825 8.4 1,059 8.1 Total disbursed loan portfolio 12,802 7.9 10,767 7.7 Unamortized deferred loan origination fees, net (64) (46) Fair value adjustments for loans in qualifying hedge relationships 6 6 Carrying value of loans $ 12,744 $ 10,727 After the effect of interest rate swaps and currency swaps, IFC�s loans are principally denominated in variable rate US dollars. Loans in all currencies are repayable during the years ending June 30, 2008 through June 30, 2012 and thereafter, as follows (US$ millions): 2008 2009 2010 2011 2012 Thereafter Total Fixed rate loans $ 530 $ 440 $ 391 $ 331 $ 275 $ 951 $ 2,918 Variable rate loans 1,341 1,402 1,352 1,275 1,284 3,230 9,884 Total disbursed loan portfolio $ 1,871 $ 1,842 $ 1,743 $ 1,606 $ 1,559 $ 4,181 12,802 Unamortized deferred loan origination fees, net (64) Fair value adjustments for loans in qualifying hedge relationships 6 Carrying value of loans $ 12,744 IFC�s disbursed variable rate loans generally reprice within one year. Loans on which the accrual of interest has been discontinued amounted to $378 million at June 30, 2007 ($447 million - June 30, 2006). Interest income not recognized on nonaccruing loans during the year ended June 30, 2007 totaled $70 million ($68 million - year ended June 30, 2006; $58 million - year ended June 30, 2005). Interest income recognized on loans in nonaccrual status, related to current and prior years, during the year ended June 30, 2007 was $21 million ($21 million - year ended June 30, 2006; $36 million - year ended June 30, 2005). The average recorded investment in impaired loans during the year ended June 30, 2007, was $552 million ($931 million - year ended June 30, 2006). The recorded investment in impaired loans at June 30, 2007 was $433 million ($671 million - June 30, 2006).





Debt securities Debt securities accounted for as available-for-sale comprise (US$ millions): June 30, 2007 June 30, 2006 Cost Unrealized Fair Cost Unrealized Fair gains value gains value Preferred shares $ 153 $ 140 $ 293 $ 76 $ - $ 76 Corporate debt securities 185 42 227 75 - 75 Asset-backed securities 90 - 90 15 - 15 Other debt securities 40 5 45 40 - 40 Total $ 468 $ 187 $ 655 $ 206 $ - $ 206 Accumulated other comprehensive income includes $187 million of unrealized gains on debt securities accounted for as available-for sale. There were no unrealized losses on debt securities accounted for as available-for-sale. Debt securities have contractual maturities during years ending June 30, 2008, through June 30, 2012 and thereafter, as follows (US$ millions): 2008 2009 2010 2011 2012 Thereafter Total Corporate debt securities $ 2 $ 4 $ - $ 20 $ 3 $ 156 $ 185 Asset-backed securities - - - - 26 64 90 Total $ 2 $ 4 $ - $ 20 $ 29 $ 220 275 Unrealized gains on debt securities accounted for as available-for-sale 42 Carrying value of debt securities $ 317 In addition, IFC has $338 million of redeemable preferred shares and other debt securities with undefined maturities ($116 million - June 30, 2006). The expected maturity of the asset-backed securities may differ from the contractual maturity, as reported above, due to prepayment features. Interest and financial fees from loans and debt securities Interest and financial fees from loans and debt securities for the years ended June 30, 2007, June 30, 2006, and June 30, 2005, comprise the following (US$ millions): 2007 2006 2005 Interest income $ 1,023 $ 743 $ 574 Commitment fees 23 21 17 Other financial fees 29 43 69 Total interest and financial fees from loans and debt securities $ 1,075 $ 807 $ 660 NOTE D - RESERVES AGAINST LOSSES ON LOANS Changes in the reserve against losses on loans for the years ended June 30, 2007, June 30, 2006 and June 30, 2005, are summarized below (US$ millions): 2007 2006 2005 Beginning balance $ 898 $ 989 $ 1,367 Release of (provision for) losses on loans (41) 10 (259) Write offs (39) (111) (136) Recoveries of previously written off loans 3 9 16 Foreign currency transaction adjustments 13 4 4 Other adjustments (2) (3) (3) Ending balance $ 832 $ 898 $ 989 The release of provision for losses on loans and guarantees in the consolidated income statement for the year ended June 30, 2007 includes $2 million release in respect of guarantees ($5 million provision - year ended June 30, 2006; $3 million release - year ended June 30, 2005). At June 30, 2007 the accumulated reserve for losses on guarantees, included in the consolidated balance sheet in payables and other liabilities, was $16 million ($18 million - June 30, 2006). Other adjustments comprise reserves against interest capitalized as part of a debt restructuring.






NOTE E � GUARANTEES Under the terms of IFC�s guarantees, IFC agrees to assume responsibility for the client�s financial obligations in the event of default by the client, where default is defined as failure to pay when payment is due. Guarantees entered into by IFC generally have maturities consistent with those of the loan portfolio. Guarantees signed at June 30, 2007, totaled $1,414 million ($1,150 million - June 30, 2006). Guarantees of $808 million that were outstanding (i.e., not called) at June 30, 2007 ($494 million - June 30, 2006), were not included in loans on the IFC�s consolidated balance sheet. The outstanding amount represents the maximum amount of undiscounted future payments that IFC could be required to make under these guarantees. NOTE F � INCOME FROM EQUITY INVESTMENTS

Income from equity investments for the years ended June 30, 2007, June 30, 2006 and June 30, 2005 comprise the following (US$ millions): 2007 2006 2005 Realized capital gains on equity sales $ 1,942 $ 928 $ 723 Dividends and profit participations 398 327 258 Amortization of UJVs conditional asset retirement obligations (2) (8) - Income from investments accounted for under the equity method 19 56 191 Changes in carrying value of equity investments - - 269 Equity investment impairment write-downs (40) (57) (62) Net losses on equity-related derivatives (9) (15) (12) Custody and other fees (2) (3) (2) Total income from equity investments $ 2,306 $ 1,228 $ 1,365 Realized capital gains include recoveries and are net of losses on sales of equity investments. On December 21, 2005, IFC entered into an agreement to sell its shares in Banca Comerciala Romana S.A. In addition, IFC entered into an agreement which includes certain payment covenants and potential indemnifications with respect to certain conditions and valuations in case such conditions and valuations become applicable. The transaction closed during October 2006. Accordingly, IFC recognized a capital gain in the year ended June 30, 2007, in the amount of $833 million.

Realized capital gains on equity sales for the year ended June 30, 2007 includes $95 million ($0 - year ended June 30, 2006; $0 - year ended June 30, 2005) related to settlements regarding loan to equity conversion options received in lieu of exercise. Dividends and profit participations include $64 million ($86 million - year ended June 30, 2006; $106 million - year ended June 30, 2005) of receipts received in freely convertible cash, net of cash disbursements, in respect of investments accounted for under the cost recovery method. NOTE G � INVESTMENT TRANSACTIONS APPROVED AND COMMITTED BUT NOT DISBURSED OR UTILIZED Investment transactions approved by the Board of Directors not committed, loan, equity and debt security commitments signed but not yet disbursed, and guarantee and client risk management facilities signed but not yet utilized are summarized below (US$ millions): June 30, 2007 June 30, 2006 Investment transactions approved but not committed: Loans, equity investments and debt securities $ 3,785 $ 2,860 Guarantees 1,212 679 Client risk management facilities 122 18 Total investment transactions approved but not committed 5,119 3,557 Investment transactions committed but not disbursed: Loans, equity investments and debt securities 7,654 6,911 Investment transactions committed but not utilized: Guarantees 634 656 Client risk management facilities 93 132 Total investment transactions committed but not disbursed or utilized 8,381 7,699 Total investment transactions approved but not disbursed or utilized $ 13,500 $ 11,256





NOTE H � LOAN PARTICIPATIONS Loan participations arranged to be placed with Participants in respect of loans approved by the Board of Directors, loan participations signed as commitments for which disbursement has not yet been made and loan participations disbursed and outstanding and serviced by IFC for the Participants are as follows (US$ millions): June 30, 2007 June 30, 2006 Loan participations arranged to be placed with Participants approved but not committed $ 1,803 $ 2,485 Loan participations signed as commitments but not disbursed 1,069 1,136 Loan participations arranged to be placed with Participants approved but not disbursed $ 2,872 $ 3,621 Loan participations disbursed and outstanding which are serviced by IFC $ 4,407 $ 3,878 NOTE I � RECEIVABLES AND OTHER ASSETS Receivables and other assets are summarized below (US$ millions): June 30, 2007 June 30, 2006 Receivables from sales of securities $ 2,001 $ 1,466 Accrued interest income on time deposits and securities 87 1,226 Accrued income on derivative instruments 341 299 Accrued interest income on loans 196 153 Prepaid pension and other postretirement benefit costs 686 393 Headquarters building: Land 89 89 Building 202 192 Less: Building depreciation (48) (43) Headquarters building, net 243 238 Deferred charges and other assets 210 192 Total receivables and other assets $ 3,764 $ 3,967






NOTE J � BORROWINGS Market borrowings and associated derivatives IFC's borrowings outstanding from market sources and currency and interest rate swaps, net of unamortized issue premiums and discounts, are summarized below: June 30, 2007 Interest rate swaps Currency swaps notional principal Market borrowings payable (receivable) payable (receivable) Net currency obligation Weighted Weighted Notional Weighted Weighted Amount (US average Amount (US average amount (US average Amount (US average $ millions) cost (%) $ millions) cost (%) $ millions) cost (%) $ millions) cost (%) US dollar $ 7,122 4.0 $ 8,535 4.9 $ 6,579 5.2 $ 15,349 5.1 (6,887) (3.8) Japanese yen 3,969 5.0 (3,969) (5.0) - - - - Pound sterling 1,816 5.5 (1,816) (5.5) - - - - South African rand 1,237 7.1 (1,237) (7.1) - - - - Australian dollar 506 4.7 (506) (4.7) - - - - Euro 474 5.5 (474) (5.5) - - - - Hong Kong dollar 370 6.2 (370) (6.2) - - - - New Zealand dollar 366 6.1 (366) (6.1) - - - - Canadian dollar 291 1.0 (291) (1.0) - - - - Chinese renminbi 263 3.3 - - - - 263 3.3 Malaysian ringgit 144 2.9 (144) (2.9) - - - - Moroccan dirham 120 4.5 (120) (4.5) - - - - Swiss francs 92 2.8 (92) (2.2) 81 2.3 - - (81) (3.0) C.F.A. francs 45 4.8 (41) (4.8) 4 4.8 New Turkish lira 38 18.3 (38) (18.3) - - - - Peruvian soles nuevos 32 6.3 (32) (6.3) - - - - Mexican pesos 18 7.0 (18) (7.0) - - - - Principal at face value 16,903 $ (979) $ (308) $ 15,616 5.0 Less: Unamortized discounts, net (591) Total market borrowings 16,312 Fair value adjustments (495) Carrying value of market borrowings $ 15,817 June 30, 2006 Interest rate swaps Currency swaps notional principal Market borrowings payable (receivable) payable (receivable) Net currency obligation Weighted Weighted Notional Weighted Weighted Amount (US average Amount (US average amount (US average Amount (US average $ millions) cost (%) $ millions) cost (%) $ millions) cost (%) $ millions) cost (%) US dollar $ 6,980 3.9 $ 8,078 4.6 $ 6,334 5.1 $ 14,725 4.9 (6,667) (3.8) - - Japanese yen 4,174 4.2 (4,174) (4.2) - - - - Pound sterling 1,712 5.4 (1,712) (5.4) - - - - South African rand 589 7.2 (589) (7.2) - - - - Hong Kong dollar 552 6.1 (552) (6.1) - - - - Euro 475 6.4 (475) (6.4) - - - - Australian dollar 397 4.7 (397) (4.7) - - - - Canadian dollar 276 1.0 (276) (1.0) - - - - New Zealand dollar 242 6.0 (242) (6.0) - - - - Colombian peso 235 12.5 (235) (12.5) - - - - Chinese renminbi 141 3.4 - - - - 141 3.4 Malaysian ringgit 136 2.9 (136) (2.9) - - - - Moroccan dirham 114 4.5 (114) (4.5) - - - - Swiss francs 91 1.9 (91) (1.3) 80 1.3 - - (80) (2.0) - - Peruvian soles nuevos 46 6.6 (46) (6.6) - - - - Principal at face value 16,160 $ (961) $ (333) $ 14,866 4.9 Less: Unamortized discounts, net (605) Total market borrowings 15,555 Fair value adjustments (668) Carrying value of market borrowings $ 14,887





The weighted average cost of IFC�s borrowings outstanding from market sources after currency and interest rate swap transactions was 5.0% at June 30, 2007 (4.9% - June 30, 2006). The weighted average remaining maturity of IFC�s borrowings from market sources was 9.8 years at June 30, 2007 (10.7 years - June 30, 2006). Charges on borrowings for the year ended June 30, 2007, include $8 million of interest expense on secured borrowings ($6 million - June 30, 2006). Net fair value adjustments to the carrying value of market borrowings comprises $(495) million at June 30, 2007 ($(668) million - June 30, 2006), representing adjustments to the carrying value of transactions in designated fair value hedging relationships. The net nominal amount receivable from currency swaps of $979 million and the net notional amount receivable from interest rate swaps of $308 million at June 30, 2007 ($961 million and $333 million - June 30, 2006), shown in the above table, are represented by currency and interest rate swap assets at fair value of $896 million and currency and interest rate swap liabilities at fair value of $699 million ($785 million and $(779) million - June 30, 2006), included in derivative assets and derivative liabilities, respectively, on the consolidated balance sheet. Borrowings from IBRD Borrowings outstanding from IBRD are summarized below: June 30, 2007 June 30, 2006 Principal Weighted Principal Weighted amount average amount average (US$ millions) cost (%) (US$ millions) cost (%) Saudi Arabian riyals $ 50 4.5 $ 50 4.5 US dollar 12 6.7 30 6.4 Total borrowings outstanding from IBRD $ 62 $ 80 The weighted average remaining maturity of borrowings from IBRD was 8.2 years at June 30, 2007 (7.5 years - June 30, 2006). Charges on borrowings for the year ended June 30, 2007, includes $3 million ($5 million - year ended June 30, 2006; $5 million - year ended June 30, 2005) in respect of IBRD borrowings. Maturity of borrowings The principal amounts repayable on borrowings outstanding in all currencies, gross of any premiums or discounts, during the years ending June 30, 2008, through June 30, 2012, and thereafter are summarized below (US$ millions): 2008 2009 2010 2011 2012 Thereafter Total Borrowings from market sources $ 1,875 $ 1,642 $ 2,629 $ 1,363 $ 1,376 $ 8,018 $ 16,903 Borrowings from IBRD 8 3 1 - 8 42 62 Total borrowings, gross $ 1,883 $ 1,645 $ 2,630 $ 1,363 $ 1,384 $ 8,060 16,965 Less: Unamortized discounts, net (591) Fair value adjustments (495) Carrying value of borrowings $ 15,879 After the effect of interest rate and currency swaps, IFC�s borrowings generally reprice within one year. NOTE K � PAYABLES AND OTHER LIABILITIES Payables and other liabilities are summarized below (US$ millions): June 30, 2007 June 30, 2006 Accrued charges on borrowings $ 267 $ 216 Accrued charges on derivative instruments 267 282 Payables for purchases of securities 3,278 1,352 Secured borrowings 159 88 Accounts payable, accrued expenses and other liabilities 406 286 Deferred income 68 60 Total payables and other liabilities $ 4,445 $ 2,284






NOTE L � CAPITAL TRANSACTIONS IFC's authorized share capital was increased to $2,450 million through two capital increases in 1992. The subscription and payment period for shares then allocated ended on August 1, 1999, but IFC has agreed to defer the payment date for certain member countries beyond this date. Pursuant to these arrangements, $1 million of subscribed shares remained unpaid at June 30, 2007 ($1 million - June 30, 2006). During the year ended June 30, 2007, 100 shares were subscribed and paid by member countries at a par value of $1,000 each ($0 - year ended June 30, 2006; 1,615 - year ended June 30, 2005). Under IFC�s Articles of Agreement, in the event a member withdraws from IFC, IFC and the member may negotiate on the repurchase of the member�s capital stock on such terms as may be appropriate under the circumstances. Such agreement may provide, among other things, for a final settlement of all obligations of the member to IFC. If such an agreement is not made within six months after the member withdraws or such other time as IFC and the member may agree, the repurchase price of the member�s capital stock shall be the value thereof shown by the books of IFC on the day when the member withdraws. The repurchase of capital stock is subject to certain conditions including payments in installments, at such times and in such available currency or currencies as IFC reasonably determines, taking into account the financial position of IFC. IFC�s Articles of Agreement also provide for the withdrawing member to repay losses on loans and equity investments in excess of reserves provided on the date of withdrawal. NOTE M � OTHER INCOME Other income for the year ended June 30, 2007, predominantly comprises $20 million of fees collected from clients for expenses incurred by IFC, included in administrative expenses ($20 million - year ended June 30, 2006; $16 million - year ended June 30, 2005), $7 million of income from consolidated entities ($17 million - year ended June 30, 2006; $5 million - year ended June 30, 2005) and income under other reimbursable arrangements of $7 million ($10 million - year ended June 30, 2006; $13 million - year ended June 30, 2005) NOTE N � ADVISORY SERVICES, PERFORMANCE-BASED GRANTS, AND GRANTS TO IDA As of June 30, 2007, IFC had designated retained earnings in the cumulative amount of $580 million for advisory services ($580 million - June 30, 2006). Of the amount approved by the Board of Directors as of June 30, 2007, IFC has recognized expenditures of $96 million in the year ended June 30, 2007 ($55 million - year ended June 30, 2006; $38 million - year ended June 30, 2005). At June 30, 2007, retained earnings designated for advisory services totaled $391 million ($487 million - June 30, 2006). As of June 30, 2007, IFC had designated retained earnings in the cumulative amount of $250 million for performance-based grants ($250 million - June 30, 2006). Of the amount approved by the Board of Directors as of June 30, 2007, IFC has recognized expenditures of $0 in the year ended June 30, 2007 ($35 million - year ended June 30, 2006; $0 - year ended June 30, 2005). At June 30, 2007, retained earnings designated for performance-based grants totaled $215 million ($215 million - June 30, 2006). During the year ended June 30, 2006, IFC provided $35 million to IBRD's Global Partnership for Output Based Aid under a pilot phase approved by IFC's Board of Directors in March 2006, which was recorded as an expense in the year ended June 30, 2006. Also under the pilot phase, IFC's Board of Directors has approved a further $30 million for a future performance-based small and medium sized enterprise initiative for Sub-Saharan Africa. No amounts have been expensed under this initiative in the year ended June 30, 2007. As of June 30, 2007, IFC had designated retained earnings in the cumulative amount of $150 million for grants to IDA ($150 million - June 30, 2006). Of the amount approved by the Board of Directors as of June 30, 2007, IFC recorded a grant to IDA of $150 million in the year ended June 30, 2007 ($0 - year ended June 30, 2006; $0 - year ended June 30, 2005), for IDA grant projects that encourage the growth of private enterprise in countries that are members of both IFC and IDA. At June 30, 2007, retained earnings designated for grants to IDA totaled $0 ($150 million - June 30, 2006).





NOTE O � NET GAINS (LOSSES) ON NON-TRADING FINANCIAL INSTRUMENTS Net gains (losses) on non-trading financial instruments for the year ended June 30, 2007, June 30, 2006 and June 30, 2005, comprises (US$ millions): 2007 2006 2005 Difference between changes in fair value of derivative instruments designated as a fair value hedge and change in fair value of hedged items attributable to risks being hedged $ (3) $ (63) $ (48) Change in fair value of non-trading derivative instruments not designated as a hedge 10 (65) 112 Amortization of difference between fair value and carrying value of hedged items at July 1, 2000 not designated for hedge accounting under SFAS No. 133 (1) (3) (3) Release from accumulated other comprehensive income of transition gain on cash flow-like hedges 1 - 1 Net gains (losses) on non-trading financial instruments $ 7 $ (131) $ 62 Of the total net gains (losses) on non-trading financial instruments, unrealized gains of $7 million (losses of $182 million - year ended June 30, 2006; gains of $44 million - year ended June 30, 2005) are attributable to borrowings and related derivatives transactions, unrealized gains of $0 (gains $51 million - year ended June 30, 2006; gains $15 million - year ended June 30, 2005) are attributable to loans and related derivatives transactions, and unrealized gains of $0 ($0 - year ended June 30, 2006; gains $3 million - year ended June 30, 2005) are attributable to client risk management activities. NOTE P � DERIVATIVE AND OTHER FINANCIAL INSTRUMENTS Many of IFC�s financial instruments are not actively traded in any market. Accordingly, estimates and present value calculations of future cash flows are used to estimate the fair values. Determining future cash flows for fair value estimation is subjective and imprecise, and minor changes in assumptions or methodologies may materially affect the estimated values. The excess or deficit resulting from the difference between the carrying amounts and the fair values presented does not necessarily reflect the realizable values, since IFC generally holds loans, borrowings and other financial instruments with contractual maturities with the aim of realizing their recorded values. The estimated fair values reflect the interest rate environments as of June 30, 2007 and June 30, 2006. In different interest rate environments, the fair value of IFC�s financial assets and liabilities could differ significantly, especially the fair value of certain fixed rate financial instruments. Reasonable comparability of fair values among financial institutions is not likely, because of the wide range of permitted valuation techniques and numerous estimates that must be made in the absence of secondary market prices. This lack of objective pricing standards introduces a greater degree of subjectivity and volatility to these derived or estimated fair values. Therefore, while disclosure of estimated fair values of financial instruments is required, readers are cautioned in using these data for purposes of evaluating the financial condition of IFC. The fair values of the individual financial instruments do not represent the fair value of IFC taken as a whole. The methodologies used and key assumptions made to estimate fair values as of June 30, 2007, and June 30, 2006, are summarized below. Liquid assets - The estimated fair value of time deposits and the trading securities portfolio are based on quoted market prices and the present value of estimated future cash flows using appropriate discount rates. Derivative instruments - Fair values for covered forwards were derived by using quoted market forward exchange rates. Fair values for other derivative instruments were derived by determining the present value of estimated future cash flows using appropriate discount rates. Loans and loan commitments - IFC generally has not sold its loans from the portfolio, and there is no comparable secondary market. Fair values for fixed rate loans and loan commitments were determined using a discounted cash flow model based on a discount rate comprising the fixed rate loan spread plus the year-end estimated cost of funds. Since rates on variable rate loans and loan commitments are generally reset on a quarterly or semiannual basis, the carrying value adjusted for credit risk was determined to be the best estimate of fair value. IFC also holds options to convert loans into equity of certain of its investee companies. Fair values of these conversion options are based on quoted market prices or other calculated values of the underlying equity investment. Equity investments - Fair values of equity investments accounted for at cost less impairment were determined using market prices where available, put option prices, book values or cost, certain of which were discounted based upon management�s estimate of net realizable value. Where market prices were not available or alternate valuation techniques were not practical, cost was determined to be the best estimate of fair value. Fair values of investments in LLPs and certain LLCs, other equity method investments and equity investments held by consolidated VIEs are not included.






Borrowings - Fair values were derived by determining the present value of estimated future cash flows using appropriate discount rates. Estimated fair values of IFC�s financial assets and liabilities and off-balance sheet financial instruments are summarized below (US$ millions). IFC�s credit exposure is represented by the estimated fair values of its financial assets. June 30, 2007 June 30, 2006 Carrying Fair value amount adjustments Fair value Fair value Financial assets Cash and due from banks, time deposits, securities and securities purchased under resale agreements $ 19,888 $ - $ 19,888 $ 20,594 Investments: Loans 12,744 486 13,230 11,168 Reserve against losses on loans (832) - (832) (898) Net loans 11,912 486 12,398 10,270 Cost method equity investments 2,670 6,285 8,955 6,385 Equity method and consolidated investments 575 134 709 582 Total equity investments 3,245 6,419 9,664 6,967 Debt securities 655 - 655 206 Total investments 15,812 6,905 22,717 17,443 Derivative assets: Liquid asset portfolio-related 90 - 90 189 Loans-related 33 - 33 123 Borrowings-related 896 - 896 785 Client risk management-related 22 - 22 29 Equity-related 45 - 45 2 Total derivative assets 1,086 - 1,086 1,128 Nonfinancial assets 3,764 - 3,764 3,967 Total assets $ 40,550 $ 6,905 $ 47,455 $ 43,132 Financial liabilities Securities sold under repurchase agreements and payable for cash collateral received $ 4,973 $ - $ 4,973 $ 8,805 Market and IBRD borrowings outstanding 15,879 (99) 15,780 14,967 Derivative liabilities: Liquid asset portfolio-related 157 - 157 344 Loans-related 241 - 241 135 Borrowings-related 699 - 699 779 Client risk management-related 22 - 22 28 Equity-related 4 - 4 2 Total derivative liabilities 1,123 - 1,123 1,288 Nonfinancial liabilities 4,445 - 4,445 2,284 Total liabilities $ 26,420 $ (99) $ 26,321 $ 27,344 The fair value of loan commitments amounted to $17 million at June 30, 2007 ($14 million � June 30, 2006).





NOTE Q � CURRENCY POSITION IFC conducts its operations for its loans, time deposits and securities and borrowings in multiple currencies. IFC�s policy is to minimize the level of currency risk by closely matching the currency of its assets (other than equity investments and quasi-equity investments) and liabilities by using hedging instruments. IFC�s equity investments in enterprises located in its developing member countries are typically made in the local currency of the country. As a matter of policy, IFC carries the currency risk of equity investments and quasi-equity investments and funds these investments from its capital and retained earnings. The following table summarizes IFC�s exposure in major currencies at June 30, 2007, and June 30, 2006 (US$ millions): June 30, 2007 Japanese Other Fair value US dollar Euro yen currencies adjustments Total Assets Cash and due from banks $ 5,112 $ 33 $ 1 $ 215 $ - $ 5,361 Trading securities 13,921 283 61 32 - 14,297 Securities purchased under resale agreements 230 - - - - 230 Investments: Loans 9,232 1,681 38 1,787 6 12,744

Less: Reserve against losses on loans (644) (103) (3) (82) - (832) Net loans 8,588 1,578 35 1,705 6 11,912 Equity investments - - - 3,245 - 3,245 Debt securities 487 54 - 114 - 655 Total investments 9,075 1,632 35 5,064 6 15,812 Derivative assets 3,590 557 4,195 4,823 (12,079) 1,086 Receivables and other assets 3,483 34 91 156 - 3,764 Total assets $ 35,411 $ 2,539 $ 4,383 $ 10,290 $ (12,073) $ 40,550 Liabilities Securities sold under repurchase agreements and payable for cash collateral received $ 4,973 $ - $ - $ - $ - $ 4,973 Borrowings 6,835 469 3,971 5,099 (495) 15,879 Derivative liabilities 8,969 1,870 319 1,607 (11,642) 1,123 Payables and other liabilities 4,060 27 87 271 - 4,445 Total liabilities $ 24,837 $ 2,366 $ 4,377 $ 6,977 $ (12,137) $ 26,420 June 30, 2006 Japanese Other Fair value US dollar Euro yen currencies adjustments Total Assets Cash and due from banks $ 2,960 $ 94 $ 1 $ 63 $ - $ 3,118 Trading securities 14,758 1,319 88 121 - 16,286 Securities purchased under resale agreements 1,190 - - - - 1,190 Investments: Loans 8,165 1,498 45 1,013 6 10,727

Less: Reserve against losses on loans (707) (107) (4) (80) - (898) Net loans 7,458 1,391 41 933 6 9,829 Equity investments - - - 2,696 - 2,696 Debt securities 90 - - 116 - 206 Total investments 7,548 1,391 41 3,745 6 12,731 Derivative assets 2,725 1,276 4,472 4,147 (11,492) 1,128 Receivables and other assets 3,658 91 88 130 - 3,967 Total assets $ 32,839 $ 4,171 $ 4,690 $ 8,206 $ (11,486) $ 38,420 Liabilities Securities sold under repurchase agreements and payable for cash collateral received $ 8,064 $ 741 $ - $ - $ - $ 8,805 Borrowings 6,681 468 4,177 4,309 (668) 14,967 Derivative liabilities 7,996 2,765 425 977 (10,875) 1,288 Payables and other liabilities 1,997 64 82 141 2,284 Total liabilities $ 24,738 $ 4,038 $ 4,684 $ 5,427 $ (11,543) $ 27,344






NOTE R � SEGMENT REPORTING For management purposes, IFC�s business comprises two segments: client services and treasury services. The client services segment consists primarily of lending, debt securities and equity investment activities. Operationally, the treasury services segment consists of the borrowing, liquid asset management, asset and liability management and client risk management activities. Consistent with internal reporting, net income (expense) from asset and liability management and client risk management activities in support of client services are allocated to the client services segment. The assessment of segment performance by senior management includes net income for each segment, return on assets, and return on capital employed. IFC�s management reporting system and policies are used to determine revenues and expenses attributable to each segment. Consistent with internal reporting, administrative expenses are allocated to each segment based largely upon personnel costs and segment head counts. Transactions between segments are immaterial and, thus, are not a factor in reconciling to the consolidated data. The accounting policies of IFC�s segments are, in all material respects, consistent with those described in Note A, �Summary of Significant Accounting and Related Policies.� An analysis of IFC�s major components of income and expense by business segment for the years ended June 30, 2007, June 30, 2006, and June 30, 2005, is given below (US$ millions): 2007 2006 2005 Client Treasury Client Treasury Client Treasury services services Total services services Total services services Total Interest and financial fees from loans and debt securities $ 1,075 $ - $ 1,075 $ 807 $ - $ 807 $ 660 $ - $ 660 Income from liquid asset trading activities 618 618 - 444 444 - 358 358 Charges on borrowings (510) (291) (801) (343) (260) (603) (151) (158) (309) Income from equity investments 2,306 - 2,306 1,228 - 1,228 1,365 - 1,365 Release of (provision for) losses on loans and guarantees 43 - 43 (15) - (15) 261 - 261 Service fees 53 - 53 52 - 52 41 - 41 Administrative expenses (475) (7) (482) (430) (6) (436) (397) (6) (403) Other income (expense) 45 - 45 22 - 22 18 - 18 Income before expenditures for advisory services, PBG, grants to IDA and net gains (losses) on non-trading financial instruments 2,537 320 2,857 1,321 178 1,499 1,797 194 1,991 Expenditures for advisory services (96) - (96) (55) - (55) (38) - (38) Expenditures for PBG - - - (35) - (35) - - - Grants to IDA (150) - (150) - - - - - - Net gains (losses) on non- trading financial instruments - 7 7 49 (180) (131) 18 44 62 Net income $ 2,291 $ 327 $ 2,618 $ 1,280 $ (2) $ 1,278 $ 1,777 $ 238 $ 2,015 Geographical segment data in respect of client services are disclosed in Note C, and are not relevant in respect of treasury services. NOTE S � PENSION AND OTHER POSTRETIREMENT BENEFITS

IBRD, IFC and MIGA participate in a defined benefit Staff Retirement Plan (SRP), a Retired Staff Benefits Plan (RSBP) and a Post-Employment Benefits Plan (PEBP) that cover substantially all of their staff members.

The SRP provides regular pension benefits and includes a cash balance plan. The RSBP provides certain health and life insurance benefits to eligible retirees. The PEBP provides certain pension benefits administered outside the SRP. IFC uses a June 30 measurement date for its pension and other postretirement benefit plans. The amounts presented below reflect IFC�s respective share of the costs, assets and liabilities of the plans. All costs, assets and liabilities associated with these pension plans are allocated between IBRD, IFC and MIGA based upon their employees� respective participation in the plans. Costs allocated to IBRD are then shared between IBRD and IDA based on an agreed cost sharing ratio. IDA, IFC and MIGA reimburse IBRD for their proportionate share of any contributions made to these plans by IBRD. Contributions to these plans are calculated as a percentage of salary.





The following table summarizes the benefit costs associated with the SRP, RSBP, and PEBP allocated to IFC for the fiscal years ended June 30, 2007, June 30, 2006, and June 30 2005 (US$ millions): SRP RSBP PEBP 2007 2006 2005 2007 1 2006 2005 2007 2006 2005 Benefit cost Service cost $ 59 $ 59 $ 48 $ 9 $ 9 $ 6 $ 4 $ 2 $ 2 Interest cost 86 101 100 10 8 7 2 2 1 Expected return on plan assets (146) (157) (145) (12) (10) (8) - - - Amortization of prior service cost 2 1 3 - - - - - - Amortization of unrecognized net loss - 9 - 2 4 2 - - - Net periodic pension cost $ 1 $ 13 $ 6 $ 9 $ 11 $ 7 $ 6 $ 4 $ 3 The expenses for the SRP, RSBP, and PEBP are included in expense from pension and other postretirement benefit plans. For the fiscal years ended June 30, 2007, June 30, 2006, and June 30, 2005, expenses for these plans of $16 million, $28 million and $16 million, respectively, were allocated to IFC. IFC�s net expense for these plans reported in the consolidated income statement was $15 million, $28 million, and $14 million for the fiscal years ended June 30, 2007, June 30, 2006, and June 30, 2005, respectively. As described in Note A under Accounting and financial reporting developments, on June 30, 2007, IFC prospectively adopted SFAS No. 158 as required, which resulted in a credit to accumulated other comprehensive income of $246 million. Further details are provided in the disclosures below.

The following table summarizes the projected benefit obligations, fair value of plan assets, and funded status associated with the SRP, RSBP, and PEBP for IFC for the fiscal years ended June 30, 2007, and June 30, 2006 (US$ millions). Since the assets for the PEBP are not held in an irrevocable trust separate from the assets of IBRD, they do not qualify for off-balance sheet accounting and are therefore included in IBRD's investment portfolio. IFC has recognized a receivable (prepaid asset) from IBRD and a payable (liability) to IBRD equal to the amount required to support the plan. The assets of the PEBP are invested in fixed income instruments. SRP RSBP PEBP 2007 2006 20072 2006 2007 2006 Projected benefit obligation Beginning of year $ 1,352 $ 1,631 $ 161 $ 162 $ 34 $ 23 Service cost 59 59 9 9 4 2 Interest cost 86 101 10 8 2 2 Employee contributions 17 15 2 1 - - Benefits paid (77) (51) (4) (4) (5) (2) Actuarial loss (gain) 67 (403) 1 (15) 3 9 End of year 1,504 1,352 179 161 38 34 Fair value of plan assets Beginning of year 1,892 1,670 142 118 - - Employee contributions 17 15 2 1 - - Actual return on assets 314 205 23 11 - - Employer contributions 42 53 18 16 - - Benefits paid (77) (51) (4) (4) - - End of year 2,188 1,892 181 142 - - Funded status 684 540 2 (19) (38) (34) Unrecognized amounts: Net actuarial loss (gain)3 - (202) - 43 - 15 Prior service cost (credit) - 10 - - - 1 Net unrecognized amount - (192) - 43 - 16 Amount reported in the balance sheet4 $ 684 $ 348 $ 2 $ 24 $ (38) $ (18) Accumulated benefit obligation $ 1,032 $ 1,024 $ 179 $ 161 $ 34 $ 28

1 The Medicare Prescription Drug, Improvement and Modernization Act of 2003 resulted in $1 million reduction in net periodic pension cost. 2 The Medicare Prescription Drug, Improvement and Modernization Act of 2003 resulted in $4 million reduction in RSBP�s accumulated benefit obligation. 3 Under SFAS No. 158, and as noted in the following table, amounts that were previously reported as part of prepaid pension costs or liabilities are now reported within accumulated other

comprehensive income on the consolidated balance sheet.

4 Net amount recognized is reported under receivables and other assets or payables and other liabilities on the consolidated balance sheet.






The $684 million relating to SRP at June 30, 2007 ($348 million - June 30, 2006), is included in receivables and other assets on the consolidated balance sheet. The $2 million relating to RSBP at June 30, 2007 ($24 million - June 30, 2006), is also included in receivables and other assets on the consolidated balance sheet. The following tables present the amounts recognized in accumulated other comprehensive income and the incremental effect of adopting SFAS No.158 on individual line items on the consolidated balance sheet on June 30, 2007 (US$ millions):

Amounts recognized in accumulated other comprehensive income on adoption of SFAS No. 158

SRP RSBP PEBP Total Net actuarial (gain) loss $ (303) $ 30 $ 18 $ (255) Prior service cost (credit) 8 1 - 9 Net (gain) loss recognized in accumulated other comprehensive income $ (295) $ 31 $ 18 $ (246)

Incremental effect of applying SFAS No. 158 on individual line items on the consolidated balance sheet

Before application SFAS No. 158 After adoption of of SFAS No. 158 adoption adjustments SFAS No. 158 Line item Receivables and other assets $ 3,500 $ 264 $ 3,764 Total assets 40,286 264 40,550 Payables and other liabilities 4,427 18 4,445 Total liabilities 26,402 18 26,420 Accumulated other comprehensive income 190 246 436 Total capital 13,884 246 14,130 Total liabilities and capital 40,286 264 40,550

The estimated amounts that will be amortized from accumulated other comprehensive income into net periodic benefit cost in the fiscal year ending June 30, 2008 are as follows (US$ millions):

SRP RSBP PEBP Total Net actuarial loss (gain) $ - $ 1 $ 1 $ 2 Prior service cost (credit) 1 - - 1 Amount to be amortized into net periodic benefit cost $ 1 $ 1 $ 1 $ 3 In December 2003, the United States Medicare Prescription Dug Improvement and Modernization Act of 2003 (the Act) was enacted. The Act established a prescription drug benefit under Medicare (Medicare Part D) and a federal subsidy to sponsors of retiree health care benefit plans that provided a benefit that is at least actuarially equivalent to Medicare Part D. During the fiscal year ended June 30, 2006, the U.S. Center for Medicare and Medicaid Services (CMS) approved IBRD�s participation in the Medicare Retiree Drug Subsidy Program. The effects of the subsidy and the related disclosures have been reflected in the financial statements for the fiscal year ended June 30, 2007, the year in which IBRD received its first subsidy payment of $0.7 million for Medicare Part D. This payment is for the joint benefit of IBRD, IFC and MIGA. Assumptions The actuarial assumptions used are based on financial market interest rates, past experience, and management�s best estimate of future benefit changes and economic conditions. Changes in these assumptions will impact future benefit costs and obligations. The expected long-term rate of return for the SRP assets is a weighted average of the expected long-term (10 years or more) returns for the various asset classes, weighted by the portfolio allocation. Asset class returns are developed using a forward-looking building block approach and are not strictly based on historical returns. Equity returns are generally developed as the sum of expected inflation, expected real earnings growth and expected long-term dividend yield. Bond returns are generally developed as the sum of expected inflation, real bond yield, and risk premium/spread (as appropriate). Other asset class returns are derived from their relationship to equity and bond markets. The expected long-term rate of return for the RSBP is computed using procedures similar to those used for the SRP. The discount rate used in determining the benefit obligation is selected by reference to the year-end AAA and AA corporate bonds. Actuarial gains and losses occur when actual results are different from expected results. Amortization of these unrecognized gains and losses will be included in income if, at the beginning of the fiscal year, they exceed 10 percent of the greater of the projected benefit obligation or the market-related value of plan assets. If required, the unrecognized gains and losses are amortized over the expected average remaining service lives of the employee group.





The following tables present the weighted-average assumptions used in determining the projected benefit obligations and the net periodic pension costs for the fiscal years ended June 30, 2007, June 30, 2006, and June 30, 2005: Weighted average assumptions used to determine projected benefit obligation (%) SRP RSBP PEBP 2007 2006 2005 2007 2006 2005 2007 2006 2005 Discount rate 6.25 6.50 5.25 6.25 6.50 5.25 6.25 6.50 5.25 Rate of compensation increase 6.50 6.80 5.90 Health care growth rates -at end of fiscal year 6.80 7.60 6.80 Ultimate health care growth rate 4.75 5.00 4.25 Year in which ultimate rate is reached 2012 2012 2012 Weighted average assumptions used to determine net periodic pension cost (%) SRP RSBP PEBP 2007 2006 2005 2007 2006 2005 2007 2006 2005 Discount rate 6.50 5.25 6.25 6.50 5.25 6.25 6.50 5.25 6.25 Expected return on plan assets 7.75 7.75 7.75 8.25 8.25 8.25 Rate of compensation increase 6.80 5.90 6.40 Health care growth rates -at end of fiscal year 7.60 6.80 7.30 -to year 2012 and thereafter 5.00 4.25 4.75 The medical cost trend rate can significantly affect the reported postretirement benefit income or costs and benefit obligations for the RSBP. The following table shows the effects of a one-percentage-point change in the assumed healthcare cost trend rate (US$ millions): One-percentage-point increase One-percentage-point decrease Effect on total service and interest cost $ 4 $ (3) Effect on postretirement benefit obligation 37 (30) Investment strategy The investment policy for the SRP and the RSBP is to optimize the risk-return relationship as appropriate to the respective plan�s needs and goals, using a global diversified portfolio of various asset classes. Specifically, the long-term asset allocation is based on an analysis that incorporates expected returns by asset class as well as volatilities and correlations across asset classes and the liability profile of the respective plans. This analysis, referred to as an asset-liability analysis, also provides estimates of potential future contributions and future asset and liability balances. Plan assets are managed by external investment managers and monitored by IBRD�s pension investment department. The pension plan assets are invested in diversified portfolios of public equity, fixed income, and alternative investments. The fixed-income and public equity asset classes are rebalanced on a monthly basis. The following table presents the weighted-average asset allocation at June 30, 2007, and June 30, 2006, and the respective target allocation by asset category for the SRP and RSRP (%): SRP RSBP Target % of Plan Assets Target % of Plan Assets Allocation Allocation 2007 2007 2006 2007 2007 2006 Asset class Fixed income 40 40 40% 30 30 30% Public equity 35 32 35 30 32 33 Alternative investments 25 28 25 40 38 37 Total 100 100 100 100 100 100 Alternative investments include: Private equity up to 12% 10.5% 8.3% up to 28% 14.3% 12.3% Real estate up to 8% 5.7 4.7 up to 18% 5.0 4.1 Hedge funds up to 12% 11.2 12.0 up to 23% 18.3 20.5






Estimated future benefits payments The following table shows the benefit payments expected to be paid in each of the next five years and subsequent five years. The expected benefit payments are based on the same assumptions used to measure the benefit obligation at June 30, 2007 (US$ millions): SRP RSBP PEBP Before Medicare Medicare Part D subsidy Part D subsidy July 1, 2007 - June 30, 2008 $ 55 $ 4 $ - $ 3 July 1, 2008 - June 30, 2009 63 4 - 3 July 1, 2009 - June 30, 2010 69 5 - 4 July 1, 2010 - June 30, 2011 75 6 - 4 July 1, 2011 - June 30, 2012 81 6 - 4 July 1, 2012 - June 30, 2017 509 48 1 26 Expected contributions IFC�s contribution to the SRP and RSBP varies from year to year, as determined by the Pension Finance Committee, which bases its judgment on the results of annual actuarial valuations of the assets and liabilities of the SRP and RSBP. The best estimate of the amount of contributions expected to be paid to the SRP and RSBP for IFC during the fiscal year beginning July 1, 2007, is $30 million and $8 million, respectively. NOTE T � SERVICE AND SUPPORT PAYMENTS IFC obtains certain administrative and overhead services from IBRD in those areas where common services can be efficiently provided by IBRD. This includes shared costs of the Boards of Governors and Directors, and other services such as communications, internal auditing, administrative support, supplies, and insurance. IFC makes payments for these services to IBRD based on negotiated fees, chargebacks and allocated charges, where chargeback is not feasible. Expenses allocated to IFC for the year ended June 30, 2007, were $28 million ($23 million - year ended June 30, 2006; $25 million - year ended June 30, 2005). NOTE U � MANAGEMENT OF EXTERNAL FUNDS IFC administers funds (Trust Funds) on behalf of donors that are restricted for specific uses in accordance with administration agreements with donors. Specified uses could include, for example, Advisory Services including feasibility studies, project preparation, and implementing global and regional programs, and research and training programs. These donor funds are placed in trust and are held in a separate investment portfolio which is not commingled with IFC�s funds, nor are they included in the assets of IFC.

Trust fund execution may be carried out in one of three ways: Recipient-executed, IFC-executed or Limited fiduciary arrangements.

IFC-executed Trust Funds involve IFC execution of activities as described in relevant administration agreements with donors which define the terms and conditions for use of the funds. Spending authority is exercised by IFC, subject to any restrictions contained in the administration agreements.

Recipient-executed Trust Funds involve activities carried out by a recipient third-party "executing agency." IFC enters into agreements with and disburses funds to these recipients, who then exercise spending authority to meet the objectives and comply with terms stipulated in the agreements.

IFC also enters into Limited fiduciary arrangements under which IFC�s services are limited to the role of fiscal agent. Funds are held and disbursed in accordance with instructions from the donors or donors� external governance structure.

The distribution of Trust Fund assets at June 30, 2007, and June 30, 2006, are summarized below (US$ millions): Total fiduciary assets June 30, 2007 June 30, 2006 Executed by IFC $ 553 $ 463 Recipient-executed 1 1 Limited fiduciary arrangements 18 1 Total $ 572 $ 465





NOTE V � CONTINGENCIES In the normal course of its business, IFC is from time to time named as a defendant or co-defendant in various legal actions on different grounds in various jurisdictions. Although there can be no assurances, based on the information currently available, IFC�s Management does not believe the outcome of any of the various existing legal actions will have a material adverse effect on IFC�s financial condition, results of operations or cash flows. NOTE W � VARIABLE INTEREST ENTITIES AND OTHER CONSOLIDATED INVESTMENTS An entity is subject to FIN 46R and is called a variable interest entity (VIE) if it lacks: (1) equity that is sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties; or (2) equity investors who have decision-making rights about the entity�s operations or who do not absorb the expected losses or receive the expected returns of the entity proportionally to their voting rights. A VIE is consolidated by its primary beneficiary, which is the party involved with the VIE that absorbs a majority of the expected losses or receives a majority of the expected residual returns or both. The primary beneficiary is required to initially measure the assets, liabilities and noncontrolling interests of the VIE at their carrying amounts at the date on which it first became the primary beneficiary. Because certain VIEs were created prior to the issuance of FIN 46R, it may not be practicable to determine the carrying amounts of the assets, liabilities and noncontrolling interests at the initial date, and in such cases, the primary beneficiary must measure the assets, liabilities and noncontrolling interests at their fair values on the date FIN 46R is first applied. The primary beneficiary is also required to disclose information about the nature, purpose, size, and activities of the VIE, and collateral and recourse creditors may have against the VIE. An enterprise may hold significant variable interests in VIEs which are not consolidated because the enterprise is not the primary beneficiary. In such cases, the enterprise is required to disclose information about its involvement with and exposure to the VIE, and about the nature, purpose, size, and activities of the VIE. An enterprise is not required to apply FIN 46R to certain entities if, after making an exhaustive effort, it is unable to obtain the information necessary to: (1) determine whether the entity is a VIE; (2) determine if the enterprise is the primary beneficiary of the possible VIE; or (3) perform the accounting required to consolidate a possible VIE. In such cases, the enterprise is required to disclose the number of entities to which FIN 46R is not being applied, why the information required to apply FIN 46R is not available, the nature, purpose and activities of the entities to which FIN 46R is not being applied, and the enterprise�s maximum exposure to the entities to which FIN 46R is not being applied. Primary beneficiary IFC has identified six VIEs in which IFC is deemed to be the primary beneficiary at June 30, 2007 (seven entities - June 30, 2006). Three of the VIEs in which IFC is deemed to be the primary beneficiary have been consolidated into IFC�s consolidated financial statements as of June 30, 2007 (four entities - June 30, 2006). All consolidated VIEs are in the Collective investment vehicles sector in the Latin America and Caribbean region. As a result of the consolidation of the three investments described above, IFC�s consolidated balance sheet at June 30, 2007 includes additional assets of $12 million in equity investments ($6 million - June 30, 2006), $3 million in receivables and other assets ($3 million - June 30, 2006), and additional liabilities of $4 million in payables and other liabilities ($2 million - June 30, 2006). Other income for the year ended June 30, 2007 includes $7 million of income from consolidated entities ($17 million - year ended June 30, 2006; $5 million - year ended June 30, 2005) and other expense includes $2 million of expenses from consolidated entities ($10 million - year ended June 30, 2006; $5 million - year ended June 30, 2005). The remaining three VIEs in which IFC is deemed to be the primary beneficiary have not been consolidated into IFC�s consolidated financial statements, as they are significantly impaired and information required to apply the provisions of FIN 46R is not available. Based on the most recent financial data available, total net assets of the three entities is $11 million. IFC�s net investment in these three entities totals $2 million, virtually all in the primary metals sector in the Asia region.






Significant variable interests IFC has identified 27 investments in VIEs in which IFC is not the primary beneficiary but in which it is deemed to hold significant variable interests at June 30, 2007 (14 - June 30, 2006). Based on the most recent available data from these VIEs, the size including committed funding of the VIEs in which IFC is deemed to hold significant variable interests totaled $1,639 million at June 30, 2007 ($602 million - June 30, 2006). IFC�s total investment in and maximum exposure to loss to these investments in VIEs in which IFC is deemed to hold significant variable interests, comprising both disbursed amounts and amounts committed but not yet disbursed, was $367 million at June 30, 2007 ($108 million - June 30, 2006). The regional and sectoral analysis of IFC�s investments in these VIEs at June 30, 2007, is as follows (US$ millions): June 30, 2007 Equity Debt Client risk Loans investments securities management Total Europe and Central Asia $ 140 $ 22 $ - $ - $ 162 Latin America and Caribbean 77 31 - - 108 Asia 13 13 2 - 28 Sub-Saharan Africa - 12 - - 12 Middle East and North Africa 8 - - - 8 Other 16 2 26 5 49 Total VIE investments $ 254 $ 80 $ 28 $ 5 $ 367 June 30, 2007 Equity Debt Client risk Loans investments securities management Total Transportation and warehousing $ 97 $ - $ - $ - $ 97 Finance and insurance 46 19 - 5 70 Collective investment vehicles - 41 26 - 67 Industrial and consumer products 56 4 - - 60 Air transportation 15 - - - 15 Agriculture and forestry 10 - - - 10 Other 30 16 2 - 48 Total VIE Investments $ 254 $ 80 $ 28 $ 5 $ 367



ACRONYMS

CAO ............ Compliance Advisor/OmbudsmanCEO ............. Chief Executive Offi cerCY ............... calendar yearDOTS ........... Development Outcome Tracking SystemESRR ............ environmental and social risk ratingEU ............... European UnionFIAS ............. FIAS, the Investment Climate Advisory ServiceFY ................ fi scal yearGDP ............. gross domestic productGRI .............. Global Reporting InitiativeIBRD ............ International Bank for Reconstruction and DevelopmentICSID ........... International Centre for Settlement of Investment DisputesICT ............... information and communication technologyIDA .............. International Development AssociationIEG .............. Independent Evaluation Group

IFC ............... International Finance CorporationIPO ............. initial public offeringIT ................. information technologyMDB ............ multilateral development bankMDGs .......... Millennium Development GoalsMIGA ........... Multilateral Investment Guarantee AgencyMSME .......... micro, small, and medium enterpriseNGO ........... nongovernmental organizationSECO ........... Swiss Secretariat for Economic AffairsSME ............. small and medium enterpriseUN .............. United Nations

NOTES AND DEFINITIONS

The fi scal year at IFC runs from July 1 to June 30. Thus, FY07 began on July 1, 2006, and ended on June 30, 2007.

Investment amounts are given in U.S. dollars unless otherwise specifi ed.

On-lending is the process of lending funds from IFC’s own sources through intermediaries, such as local banks and microfi nance institutions.

Loan participants and IFC fully share the commercial credit risks of projects, but because IFC is the lender of record, participants receive the same tax and country risk benefi ts that IFC derives from its special status as a multilateral fi nancial institution.

Quasi-equity instruments incorporate both loan and equity features, which are designed to provide varying degrees of risk/return trade-offs that lie between those of straight loan and equity investments.

Rounding of numbers may cause totals to differ from the sum of individual fi gures in some tables.

The World Bank includes both IBRD and IDA. The World Bank Group includes IBRD, IDA, IFC, MIGA, and ICSID.


FURTHER INFORMATION ONLINEIFC’s Web site, www.ifc.org, provides comprehensive IFC’s Web site, www.ifc.org, provides comprehensive information on every aspect of the Corporation’s activities, information on every aspect of the Corporation’s activities, including contact information for offi ces worldwide, news including contact information for offi ces worldwide, news releases and features, extensive data on results measure-releases and features, extensive data on results measure-ment, disclosure documents for proposed investments, ment, disclosure documents for proposed investments, and key policies and guidelines affecting IFC and its client and key policies and guidelines affecting IFC and its client companies. companies.

The online version of the IFC Annual Report 2007, at The online version of the IFC Annual Report 2007, at www.ifc.org/annualreport, provides downloadable PDFs www.ifc.org/annualreport, provides downloadable PDFs of all materials in this volume and translations as they be-of all materials in this volume and translations as they be-come available. The site includes the following additional come available. The site includes the following additional information: information:

Listings of FY07 investments and advisory projectsListings of FY07 investments and advisory projects k

IFC’s active investment portfolio as of June 30, 2007IFC’s active investment portfolio as of June 30, 2007 k

IFC’s Board of GovernorsIFC’s Board of Governors k

IFC’s Board of Directors and their voting powerIFC’s Board of Directors and their voting power k

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OUR VISION is that poor people have the opportunity to escape poverty and to improve their lives.

OUR VALUES are excellence, commitment, integrity, and teamwork.

OUR PURPOSE is to:

j Promote open and competitive markets

in developing countries

j Support companies and other private

sector partners

j Generate productive jobs and deliver

basic services

j Create opportunity for people to escape

poverty and improve their lives

ISBN 978-0-8213-7310-1

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Telephone 202-473-3800

www.ifc.org

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