International financial institution investments



International Financial Institutions (IFI's) like World Bank Group and other regional developing banks helps reduce poverty and promote investments in less developed countries.

This article outlines the role of IFI's in financing projects in tourism and hospitality industry in developing countries, in terms of how much has been invested in these countries, type of investment, the effects of these investments on local economy and the results of these investments.

Article opens with background on the tourism sector in developing countries its role in the economy. As the demand for tourism services has increased among World Bank Group member countries, so has the World Bank technical assistance focused on attracting foreign direct investment (FDI) in the tourism sector. So, in the second part of the article a brief analysis of policy and instruments used by the IFI's to finance projects in less developed countries has been made especially by the International Finance Corporation which investments and advisory work in countries served by International Development Agency (IDA) now account for 40 percent of it's projects.

The next section focuses on investment promotion activity, including the work of Multilateral Investment Guarantee Agency (MIGA) and International Finance Corporation (IFC). An overwiev of the investments made by IFC in projects in tourism and hospitality industry in developing countries and guarantees issued by MIGA has been made. Article analyses total investments made by the IFC and guarantees issued by MIGA in tourism and hospitality industry for the period from 1991 - 2009, in developing countries.

Finally, in concluding remarks of the article we analyze the issues of international funding for the development of tourism and hospitality industry in developing countries.

Key Words: IFI, World Bank, IFC, MIGA, hotel investments, tourism and hotel projects, tourism and hospitality industry, developing countries, pro-poor tourism, tourism financing.


For many developing countries, tourism is a significant vehicle for economic progress that creates jobs, foreign exchange, and tax revenues - all of which contribute in one way or another to improving poor people's lives. While poor countries command only a minority share of the international tourism market, tourism can make a significant contribution to their economies, says the UK's Department for International Development (DFID). "Tourism can play a critical economic role in developing countries, especially for those with limited income-generating alternatives," says Motomichi Ikawa, executive vice president of the Multilateral Investment Guarantee Agency (MIGA), a private sector branch of the World Bank Group. "While tourism accounts for less than 1 percent, or $269 million, of our cumulative guarantees portfolio, we believe this sector offers our developing member countries tremendous growth potential", says Motomichi Ikawa (MIGA, 2009).

Tourism is one the world's fastest growing industries, expected to overtake agriculture as the world's largest industry by 2010. In the past year, an estimated one out of every 13 workers was employed either directly or indirectly by tourism, according to the World Travel and Tourism Council. In the year ahead, the travel and tourism economy is expected to contribute $3.5 trillion to world GDP and account for 11.6 percent (or $1.1 trillion) of total world exports, the council says.

Tourism can generate significant revenues for governments through a variety of taxes, including sales tax, value added tax, room or "bed" tax, airport or exit tax, aircraft landing fees, corporate income tax, payroll tax, social security tax, import duties, and property tax. Urban facilities, such as hotels and airports, are often essential for emerging and transitional economies that lack the basic infrastructure to attract international investors and business people. Upscale hotels can have the broadest economic impact per unit of capital invested, and a well-planned, integrated resort development is generally more cost-effective in terms of infrastructure use and a better guardian of the environment than mass tourism or ad hoc developments throughout the country.


Travel and tourism is a vital sector of the world economy. Extensive data and literature point to the particular and growing importance of tourism in developing countries. The UN's World Tourism Organization (UNWTO) cites the following statistics (Caroline Ashley, et. al. 2007):

  • Growth in tourism arrivals: World tourism Organization (WTO) statistics indicate that between 1950 and 1993, international tourist arrivals grew by 7.2% p.a., from 25 million to 500 million. The annual average growth rate of international tourism arrivals in developing countries for the years 1990-2005 was 6.5%, compared to 4.1 % growth worldwide over the same period. Close to 1 billion of international arrivals are projected for the year 2010.
  • Growth in tourism revenues: The average annual growth rate of international tourism receipts in developing countries for the years 1990-2005 was 9.7% compared to 6.3% worldwide over the same period. In 2005, developing countries recorded $205 billion in international tourism receipts.
  • Contribution to gross domestic product (GDP): The UNWTO does not have data on the global contribution of tourism to GDP, but estimates that at the country level broadly-defined tourism accounts for between two and 12% of GDP in advanced, diversified economies, and up to 40% of GDP in developing economies, and up to 70% of GDP in small island economies.

A recent literature review for the World Bank by the Overseas Development Institute concludes that rigorous, empirical national - and global-level analysis of tourism's economic and poverty alleviation impacts is lacking, but nevertheless it is clear that the industry is having substantial impact on local people and local economies in many developing countries.

The ODI World Bank review identifies three main pathways through which tourism affects poverty reduction (Caroline Ashley, et. al. 2007):

  • First are tourism's direct effects, the wages and earnings of those who participate directly in the sector as workers or entrepreneurs. International evidence shows that tourism is more labor-intensive than other non-agricultural sectors. It also uses a relatively high proportion of unskilled or semi-skilled labor. For these reasons, in some countries, tourism is an important source of employment for poor people. Tourism's employment impact can also be highly significant in urban and coastal areas with higher population densities.
  • Secondly, indirect effects occur through the tourism value chain. Tourism draws on inputs from the food and beverage, construction, transportation, furniture, and many other sectors. Evidence suggests that in developing countries, this inter-sectoral impact adds an extra 60-70% on top of the direct effects of tourism.
  • Finally, tourism has a wide range of dynamic effects. Tourism development can affect the livelihood strategies of local households, the business climate for small enterprise development, patterns of growth of the local or national economy, and the infrastructure or natural resource base of the destination. Tourism also tends to employ a relatively high proportion of women and to purchase products, such as foods and crafts, produced by women in the informal sector and as a result, may be able to enhance women's economic positions and help overcome gender barriers.

It is important to note that tourism can also have negative impacts on local livelihoods and economies. By pushing up local prices and the country's exchange rate, for example, it can leave those outside the tourism sector worse off. It can also deprive local people of access to the natural resources on which they rely, such as fishing grounds, forests, and water. Although there are many examples in which the improvements in infrastructure that accompany tourism development - such as electricity, water, transport, and telecommunications - have benefited the poor, in certain situations they can cause harm. For instance, if a certain resource is scarce, such as water, constructing hotels, golf courses, and other world-class facilities can come at the expense of the local (and particularly the local poor) population (Caroline Ashley, et. al. 2007).

In each of these categories - direct, indirect and dynamic - scale of impact will be affected by conditions in the host economy, supply side factors, government policies, the type of tourist, and, of course, by tourism companies' business practices.


In 1969 the World Bank created a Tourism Projects Department (TPD). Based on observations of Mediterranean and Adriatic countries and Mexico, tourism was perceived to be a major generator of foreign exchange and of direct and indirect employment, as well as an activity that stimulated substantial economic linkages to production and other service sectors. Worldwide, the major economic development concerns were lack of debt-servicing capacity and high rates of unemployment. Furthermore, in poorer countries where tourism - and very often longhaul tourism - was the only development option, the Bank realized that considerable planning and new policy formulation would be required for efficient sector management. At the time, few, if any, lending institutions could provide such technical assistance. By the mid-seventies a specialized tourism staff of about thirty professionals was in place and tourism was given the same status as other productive/service sectors in the Bank's project and analytical work. The TPD was involved in land development by providing serviced infrastructure, lines of credit for hotel development, hotel and tourism training, and some investment in hotels and other tourism related projects, such as museums and wildlife. Tourism sector studies in some 31 countries provided the basis for policy advice to governments about sector management. Tourism staff regularly participated in Bank macro-economic missions, where they estimated the potential growth of tax revenues, foreign exchange and direct and indirect employment, and investment requirements, and identified constraints to growth and the policy instruments to address these.

In 1978, the Bank decided to close the TPD. The formal reason was the high manpower costs per project - both in country and in the Bank itself. At the time of its closure, the TPD had processed loans and credits totaling $337 million for 18 projects in 14 countries and the World Bank had become the major source of expertise, funds and technical assistance for tourism development. As an element of the 1978 decision to terminate free-standing tourism projects, the World Bank's Executive Directors allowed the Bank to continue to finance supporting infrastructure for tourism and the IFC to continue to finance hotels, mostly for business. As financing for stand-alone tourism projects ended and the staff in the TPD were assigned elsewhere, the Bank's capacity to provide expert policy analysis and technical assistance for the sector also ended. Occasionally, consultants were employed on economic missions in areas where there is a high dependency on tourism, such as the Caribbean. Knowing that tourism projects were ineligible for financing, governments no longer requested Bank assistance for this sector and Bank staff disregarded it even in countries with a high dependency on tourism.

The Bank's re-entry into tourism in 1990s appears justified (Christie, I. and D. Crompton, 2001):

  • To tackle the multi-sectoral aspects of tourism development and concomitant multi-faceted policies that determine the success and sustainability of tourism development;
  • To resume the research work initiated in the 1970s on the economic costs and benefits of tourism, the direct and indirect employment resulting from investments in tourist accommodation, the terms of financing of hotels (where IFC has expertise), methods of creating linkages between tourism and production and other service sectors, and other related themes;
  • To ensure that tourism developments are designed to protect natural resources whether in coastal zones or the interior;
  • To maximize poverty alleviation and protect cultural assets that are part of the national heritage; and
  • The involvement of the World Bank once more in financing of tourism could encourage the entry on a larger scale of the regional development banks, which would make even more widespread the campaign to make tourism sustainable and ensure that the distribution of benefits is equitable.


The International Finance Corporation (IFC) is the only World Bank Group agency to have financed tourism projects continuously and to have maintained an in-house small team of tourism experts for the past three decades. The IFC finances private sector investment, mobilises capital in the international financial markets and provides technical assistance and advice to governments and businesses in developing countries. In partnership with private investors, the IFC provides loan and equity finance for business ventures in developing countries (IFC, 2007).

3.1. Technical Assistance and Financing for SMEs and Small Hotels and Tourist Services

IFC's role and responsibilities for smaller locally owned and managed enterprises has been expanded in recent years through its donor-supported technical assistance (TA) programmes. This TA is channelled through five different programmes each with specific purposes: promotion of private sector development, special environmental technical assistance initiatives, privatisation support in selected countries of the former Soviet Union, a joint IFC-World Bank service to facilitate growth of foreign investment in client countries, and four regional special-purpose programmes, comprising:

  • Africa: Project Development Facility (APDF) and Training and Management
  • Services project/ Management Services Company (ATMS/AMSCO);
  • Mekong: Project Development Facility (MPDF;)
  • South Pacific Project Development Facility (SPPF).

The main purpose of the facilities is to provide technical assistance support to small and medium enterprises in the areas of project preparation and structuring, training and operational assistance. In addition to the TA facilities, IFC has established a Small Enterprise Fund (SEF) and specific regional funds to assist small and medium enterprises (SMEs) with financing of $100,000 to $1.5 million. The MPDF has an associated Mekong Financing Line; the Africa facilities have the Africa Enterprise Fund (AEF); and the SPPF has the Pacific Islands Investment Facility (PIIF).

In other regions, the IFC has provided longer-term funds for small and medium enterprises through conventional credit lines and support for equity investment funds directed at unlisted medium-size enterprises.

3.2. IFC Tourism Portfolio

IFC's total portfolio for tourism lending increased significantly from $189 million in FY90 to $2 bilions in FY07.

Tourism investments are well diversified geographically with projects in 42 countries and are fairly evenly spread regionally in terms of amounts. Some characteristics of IFC's tourism portfolio are:

  • tourism investments are frequently IFC's first investment in a country and in some cases still the only project (Angola, Laos, the Maldives, Vanuatu and Cyprus);
  • recent investments still recognise the need for luxury hotels in certain city markets and resort destinations in an attempt to upgrade the overall destination; and
  • IFC continues to invest in both city/commercial hotels and resort hotels.

But, recent investments have been made in secondary cities and industrial areas, particularly in countries that are well supplied with hotels in capital cities. In comparison with earlier tourism investments, the current portfolio reflects more midscale investments directed at the regional and domestic markets.

3.3. IFC Tourism Portfolio Performance

As of June 30, 2007, IFC has invested over $2 billion in more than 220 projects across all developing regions:

3.4. IFC Investments in tourism and hotel industry

IFC has invested in tourism projects since 1967. Prior to 1989, IFC only approved 2-3 projects per year. Since 1990, approvals have averaged 12 per year, reflecting the growth of the industry and strong demand for IFC finance. In 1992, IFC established a Tourism Unit to centralize industry expertise. While the Unit's emphasis has been on hotel investments, IFC supports other forms of tourism development, most notably infrastructure projects which support the growth of tourism, through other units in the Corporation (IFC, 1992).

To date, IFC has invested over 2 billion in 220 hotel projects in more than 80 countries. Hotels play an important role in the development of many IFC client countries, as they catalyze tourism and business infrastructure. IFC supports hotel projects and companies that are commercially viable, have a positive development impact, and ?t with the country's needs and tourism priorities. IFC seeks to partner with strong, stable ?rms that have a good understanding of local and regional markets and that seek it's support to invest in emerging markets.

Some characteristics of ortant role in the development of many IFC client countries, as they catalyze tourism and business infrastructIFC's hotel investments are (IFC, 2007):

  • Create thousands of jobs, directly and indirectly;
  • Generate government revenue, contributing funds for critical infrastructure and improvements to health, social welfare, and education;
  • Support the market for business travel: more hotel, retail, and conference capacity attracts business meetings, increasing business opportunities in a country and revenue for local small businesses;
  • Improve economic opportunity for small local suppliers, such as farmers, through supply chain linkages;
  • Generate foreign exchange;
  • Improve sustainable access to natural and cultural heritage sites.

Christie and Crompton (2001) also reviewed projects on tourism supported by the IFC (the private sector arm of the World Bank Group). The assessment showed that hotel-related projects yielded a real ex post economic rate of return of 12%, which is acceptable but not as high as the private sector demands in developing countries due to the risky nature of investments and the shortage of capital. Moreover, it is important to note that the return on hotel investment derives largely from the additional direct expenditures of visitors outside the hotel complex.

In terms of employment, the average number of employees per hotel room in developing countries is estimated at 2, depending on the type of hotel and the local skill base. These jobs are generally considered "good jobs" as they have good working conditions (compared to other industry) and relatively good pay. A major factor that determined the scale of local benefits from tourism projects is "leakage", which can be defined as the proportion of monies invested or earned in the tourism sector that end up overseas. The level of "leakage" of tourism investment and earnings is an issue that has been given some attention in World Bank work and in the wider literature on the linkage between tourism and sustainable development.

A number of studies have calculated the leakage rates of tourist expenditure, and a recent IFC study found that leakage is quite significant for some countries. For underdeveloped countries, particularly islands, the leakage rate is 55% (i.e. only 45% of foreign exchange earnings from tourism remain in the country); while for other countries, including Mexico, Thailand, Turkey and the Dominican Republic, the leakage rate is less that 15% (Christie and Crompton,2001).


Tourism is an important industry in the global economy, and of growing significance to developing countries. The economic impacts of tourism are considerable and governements are increasingly prioritizing tourism as a vehicle for achieving economic development objectives. The latest research from the World Travel and Tourism Council suggests that the travel and tourism industry generates 234 million direct and indirect jobs worldwide, contributes over 10 percent of global GDP, and accounts for a third of all international trade in services. International visitors spend close to $900 billion on goods and services annually, with tourism-related in?ows often the primary source of foreign exchange in many developing countries. Tourists spend more than $200 billion annually in emerging market nations. No other sector spreads wealth and jobs across poor countries in the same way as tourism: statistics indicate that 1 in 12 jobs globally is related to travel and tourism.

Since 1956, IFC has invested over $2 billion in 220 hotel projects in more than 80 countries. Hotels play an important role in the development of many IFC client countries, as they catalyze tourism and business infrastructure. Hotels bring great potential for job creation, growth in tax revenues, improvements in foreign exchange earnings, and opportunities for related smaller businesses. This ability to facilitate local, regional, and national economic growth, thus helping reduce poverty, is the reason IFC is deeply committed to the industry.

Tourism is one of three key sectors for which MIGA receives the most requests for assistance from governments, reflecting the increasing focus on tourism as a means to achieve economic development. MIGA has been active since 1991 in tourism through its political risk mitigation instruments and through its promotion of foreign direct investment and marketing of destinations. The tourism portfolio currently stands at $56 million, accounting for one percent of MIGA's outstanding gross portfolio.


1. Anil Markandya, Tim Taylor, Suzette Pedroso, 2004. Tourism and Sustainable Development: Lessons from Recent World Bank Experience, University of Bath, UK and FEEM, Italy, World Bank.

2. Caroline Ashley, Peter De Brine, Amy Lehr and Hannah Wild, 2007. The Role of Tourism Sector in Expanding Economic Opportunity, Corporate Social Responsibility Initiative Report No. 23, Cambridge, MA: Kennedy School of Government, Harvard University.

3. Caroline Ashley, and C. Mitchell, J., 2007. Pathways to Prosperity - How can tourism reduce poverty: A review of pathways, evidence and methods. World Bank / ODI.

4. Christie, I. and D. Crompton. 2001. "Tourism in Africa" Africa Working Paper Series Number 12, The World Bank, Washington DC.

5. IFC/World Bank/MIGA, 2000. "Tourism and Global Development." Washington: World Bank.

6. IFC, 2007. Developing Tourism and Bussines Infrastructure - Enhancing Economic Growth in Emerging Markets, International Finance Corporation, Washington.

7. IFC, 1992. Lessons From IFC's Experience in the Tourism Sector, International Finance Corporation, Washington, May.

8. MIGA, 2009. Supporting Tourism and Hospitality Investments, MIGA, Washington, February.

9. MIGA, 2008. Investment Guarantee Guide, MIGA, Washington.





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