75239 DECEMBER 2012 ABOUT THE AUTHOR FARES T. ZAKI IFC at an Inflection Point: is a Senior Manager in the Manufacturing, Agribusiness and Services (MAS) department for Time for a New Business Delivery Model? the LAC region. He has 32 years of experience at the IFC and the World Bank Group. As IFC continues to further scale up its operations, seeking to deliver more development impact, could it be in danger of inadvertently becoming an increasingly slower and higher-cost delivery mechanism, and thus a less relevant change agent? This SmartLesson—growing out of the author’s observations during 32 years with IFC—proposes an alternative business delivery model with particular relevance to fragile states and frontier regions in middle income countries, in hopes of sparking a lively and productive debate around how IFC defines, delivers and measures success in its poverty reduction effort. Background The world has changed dramatically since At present, IFC heroically, proudly -and at 1957, when IFC was promoting half a dozen times, miraculously- delivers its annual private sector investments annually and commitment targets every year! hoping the world would notice. Following the largely disappointing outcome of the But if we were to step back and contemplate postcolonial public sector investment wave, our annual achievements, what does IFC many governments and societies increasingly actually deliver in terms of development came to recognize the private sector as a impact through its annual commitment primary engine of economic growth and volumes and, given its tremendous delivery efficient delivery of goods and services. effort, where does IFC lie on the relevance However, egregious instances of curve (defined as effectiveness on the y axis environmental depredation and corporate and scale on the x axis, see Figure 1). greed cast a major shadow on capitalism. Furthermore, is the current IFC business Not until relatively recently has a redefinition model scalable as currently structured and of capitalism’s ultimate purpose through an executed? emphasis on corporate social responsibility began to emerge. And the latest To answer this fundamental question we development is the emergence of a new must (a) revisit how IFC defines, delivers and class of social entrepreneurs eager to bridge measures its development impact and (b) the delivery gap between public sector step back from our business as usual and ask: institutions and private sector corporations. In its response to these different phases, IFC Figure 1: The Relevance Curve found itself gradually morphing from the world’s leading private sector “development finance corporation� into the world’s leading “socially responsible and environmentally sustainable development finance corporation.� Recognized worldwide for its remarkably thorough financial due diligence, structuring expertise, and risk mitigation, IFC has sought to develop the same capabilities and brand in its environmental and social due diligence. Having introduced with authority and success its Equator Principles and its Performance Standards, IFC is now recognized as a leader in these key domains of corporate social responsibility. SMARTLESSONS —DECEMBER 2012 1 • Is the current emphasis on DOTS and IDG attribution In essence, this is an attempt to break the mold, factors leading project teams to substitute documentation disassemble the delivery machinery’s gears, and re- and reporting tools for an actual operational strategy to assemble them differently to allow IFC to engineer an deliver development impact and poverty reduction on inflection point on the relevance curve: the ground? 1) It posits that a carefully executed decoupling of IFC • Is IFC on the positive segment of the curve? That is, can IFC investment processing activities from current IDG/DOTS deliver more development impact through linear growth, driven processing activities would free IFC core staff to relying primarily on scaling up commitment volume through devote its investment skills to the structuring and continued streamlining and decentralization of its current delivery of a larger universe of financially and business model? economically sustainable projects. This core effort would be leveraged, in parallel, by special purpose partnerships • Is IFC on the flat side of the curve, simply stuck in its to effectively deliver development impact, guided by attempt to deliver more? IDGs and focused on targeted delivery on the ground, with better results through enhanced knowledge • Or is IFC on the negative side of the curve, actually management and quality assurance. fraying at the seams, absorbing its energy and resources in largely internal debates and laborious decision– 2) This attempt deliberately suspends the urgency of making? Is IFC thus in danger of poor delivery, decreasing Board-oriented do-or-die delivery of the commitment impact and ultimate irrelevance? volume and its consequent attitude of maximum focus on annual corporate and departmental performance While an objective debate about the exact position of IFC scorecards, in favor of a long-term perspective of on the relevance curve is a welcome opportunity for development effectiveness. renewed focus on productivity and effectiveness, it is even more pertinent from a strategic perspective to ask 3) It deliberately posits that IFC and IBRD Boards and the following question: Senior Management will overcome the challenges posed by the short- to medium-term internal rigidities and Should IFC revisit its development impact definition and constraints that discourage consideration of an delivery and accordingly restructure its business delivery alternative business model. model to engineer an inflection point to scale up its development impact? 4) It reduces the current emphasis placed on the DOTS reporting system and IDG attribution factors in favor of In concrete operational terms, would IFC benefit from a field-based development of infrastructure and supply taking a step back from its annual performance scorecards chain linkages and delivery of bottom-of-the-pyramid to consider whether an alternative business model could (BOP) goods and services. This would be achieved position it as a key player in a new development strategy through operational partnerships between IFC, private partnership model? Could IFC thus become an even more corporations, civil society organizations (CSO), and public effective delivery vehicle for the ultimate objective of institutions. Such private/civil/public partnerships, development impact and poverty alleviation on the ground? defined hereafter as PCPs, would be constituted for the specific purpose of leveraging the beneficial impact of This is a highly opportune moment, given both external the cash flow and payroll generated by the project and internal factors, to confront this fundamental supported by an IFC investment. question with leadership and lucidity. 5) It posits that, in parallel to the already significant External factors include the growing complexities and challenge of structuring resilient and growing cash challenges of the world around us: the increasingly strained flows, the optimal use of IFC’s current expertise in social, financial capability of our shareholder governments, the environmental and advisory services is through quality potential role of an increasingly active civil society, and the control and knowledge management focused exclusively emergence of a new class of social entrepreneurs with on the delivery of the PCPs’ objectives (see Box 1 on the innovative approaches and technologies. next page for an alternative model). Internally, new leadership at the helm of IFC and the WBG Operational Relevance means high expectations. But challenges also remain, particularly the increasing strain at all levels as the WBG Although they may appear idealistic or aspirational, the attempts to deliver more every year in the face of ever- suggested components of the model in Box 1 are actually increasing and often contradictory demands while grappling derived from experience in the field and—whether based with constrained budgets, internal rigidities, and ever on success or lessons derived from failure—merit further greater pressure to actually prove development impact. consideration. The three examples below illustrate the potential of this An Alternative Strategy alternative model, which can be particularly relevant to fragile states and frontier regions in middle income In contrast with conventional budget-oriented strategy countries, and more broadly, wherever the following presentations which often make a pitch for additional circumstances apply: resources, this strategy exercise considers whether a reconfiguration of the way current resources are deployed • civil society is motivated to bridge the gap between and used could yield to a new growth phase, without the the private sector impact and the public sector current bottlenecks of a linear expansion. capabilities; 2 SMARTLESSONS — DECEMBER 2012 Box 1: What Might an Alternative Delivery Model Look Like? The proposed model is driven by the ultimate objective of defining, delivering, and monitoring development impact through the upfront identification and coordination of PCPs to deliver a package of mutually supportive and coordinated investments, direct and ancillary, that will have maximum impact on reducing poverty and improving development impact. First Component: engaging partners from public and private sectors, plus civil society—an externally-oriented collaboration based on partnerships between the client, civil society, the municipality, and provincial and sovereign governments (as applicable), wherein IFC and IBRD play an incubator role in the identification and coordination of such PCPs. Second Component: a governance framework for PCPs—a clearly bounded, upfront partnership predicated on the following: 1) an upfront and collective sharing of the overall desired outcome in development impact, 2) an upfront specialization in which each party brings to the table its own area of strength and expertise and recognizes candidly where it can leverage its impact through the expertise of its carefully selected partners, and 3) an upfront policy to launch such PCPs only after the creditworthiness of the IFC investment is ascertained. Third Component: programmatic complementarities between IFC, WBG, and CSOs—The challenge is two-fold: 1. To find the right balance between collaboration and integration. Despite daily progress, the current state of collaboration leaves too much discretion to each institution to actually harness or reallocate resources in a targeted and timely manner to support the objective of the other institution. Similarly, full integration is likely to dilute the intrinsic character and culture of each institution and absorb too much energy internally, whereas the priority is to harness and deliver more energy externally. 2. To astutely choose development clusters that lend themselves to such programmatic complementarities. The PCP approach must also be fully mapped and articulated from the outset in terms of key partnerships. Guiding Principles: The objective is to respect the independence and specialized expertise of all parties involved but enter into programmatic agreements that 1) embrace the emerging role of the CSO in filling the delivery gap between private and public sector institutions and 2) adopt PCPs as an organizational tool for the delivery of development impact through targeted poverty reduction. Such programmatic agreements would be made, on a country-specific basis, by main sectors of emphasis, and would serve to establish the governance framework of a fully identified and structured partnership involving, as appropriate, other parties tapped to contribute their expertise and policy actions. For these components to yield operationally relevant results, IFC and its prospective partners must accept that no partner can be the primus inter pares—in setting priorities, allocating financial resources, or delivering expertise. The idea is to let the ultimate objective of reducing targeted poverty determine the upfront structure of a partnership in which an IFC investment is contemplated with identified government institutions and CSOs, within a clearly established PCP with a fully articulated governance mechanism. A Development Partnership Model SMARTLESSONS —DECEMBER 2012 3 • social entrepreneurs have stepped in to fill the gap, DOTS champions chasing investment officers and clients supported by IFC and WBG programmatic to produce reports, must be replaced by the upfront complementarities; and mapping and structuring of PCPs to ensure that actual development impact is achieved and that mid-course • a political/strategic agreement exists around a corrections are implemented as necessary once the project desired outcome to structure a PCP with clearly defined is under portfolio supervision. objectives and the appropriate governance structure. To address this specific situation, IFC is working on a pilot 1. Brazil—Missing link in transport for unleashing export phase of a consortium established in partnership with potential of agricultural cooperatives: The Valley of Sao Ashoka, a highly reputable CSO, to leverage the payroll Francisco in the Northeast of Brazil, a frontier region, is generated by IFC’s client to deliver infrastructure and potentially one of the most competitive regions in the supply chain linkages as well as BOP goods and services to world in high-value horticulture, with significant promise the Ouanaminthe community, since the provision of of job creation in production, post-harvest, cold storage, and logistics activities. However, a 200-mile railroad gap adequate infrastructure and affordable BOP goods and inhibited the transportation of fruit to the coast, thereby services have the largest impact in boosting disposable frustrating the Brazilian government’s ability to reap an income for the poor. The pilot phase (please refer to adequate return on the significant irrigation investment www.osiic.org) has already been launched with IFC it had made in the region. support and if successful, will be scaled up into a full- blown PCP model, deploying social entrepreneurs and A few years ago, an IFC Agribusiness mission identified engaging the GOH and the IBRD/IDB to deliver basic road, this need but could not find a willing godfather for this water and lighting infrastructure to Ouanaminthe. project within the WBG. The IFC Agribusiness and Infrastructure Departments could not get any traction Without the multi-pronged contributions of the PCP with the corresponding IBRD departments and the IBRD partners, stand-alone projects may simply contribute, Brazil Country program, which invoked a “completed� despite their best positive intent, to the creation or CAS (country assistance strategy) process as a rationale persistence of slums, as happened already in Cité Soleil, for not promoting the project. Yet, completion of these near Port-au-Prince. 200 miles of railroad track might have been one of the key success factors in the take-off phase of large-scale 3. Argentina—IFC 1991 investment in Argentine dairy high-value horticulture, with all the multiplier effects of company benefits 100,000 farmers: Several lessons of generating businesses and jobs all along the value chain, experience could be drawn from this specific investment, from R&D activities, to irrigation and green houses, to in contrast with how IFC would approach it today and post-harvest activities, to cold storage chains and inter- could approach it under a PCP. modal logistics, etc. (a) First, IFC would probably have to overcome its reflexive In this case, the construction of the missing railway link, reservations about investing in a first tier $1 billion either through a public sector project or a private sector turnover company. Yet, given its sheer capillarity and concession, which could have been delivered through a cashflow, it is precisely this profile of company that an IFC PCP, did not materialize. investment, if financially and economically viable, which could deliver maximum development impact and poverty 2. Haiti—Private sector investment in an isolated area alleviation, if a PCP is structured. that needs basic service provision to stop the propagation of and reverse slum conditions: IFC financed Codevi, a (b) Were IFC to proceed currently with such investment, a garment manufacturing project in an isolated area in DOTS-driven approach or an IDG attribution factor would Ouanaminthe, northern Haiti. Today, Codevi is one of the only provide a statistic of “100,000 farmers reached� largest employers in Haiti, having grown from 600 jobs in without actually providing insight into whether these 2000 to 6,500 jobs in 2012. Employees are fully trained, farmers and their farming communities were able to receive adequate pay under unionized conditions, and leverage the relationship with the dairy company or their working conditions are in compliance with IFC’s remained confined to an essentially dependent and limited performance standards. Development results, as measured buyer-seller relationship. by DOTS, would suggest that development impact has been achieved. Yet, the migration of 6,500 workers and (c) Even in middle-income countries such as Argentina their families away from the devastated earthquake areas and Brazil, a cash flow and a payroll from a first or second of Port-au-Prince, without accompanying investments in tier company can be effectively leveraged through PCPs basic infrastructure and services, has resulted in a slum to deliver development impact wherever CSOs are already area without drinking water, sewage treatment, roads, quite active and local government institutions can be basic health and education, and other social services. expected to be reasonably effective. IBRD studies have However, to date, Government of Haiti (GOH) and IBRD shown that poverty in middle income countries can still attention is largely absorbed by the challenges of be substantial in absolute terms and that poverty rebuilding Port-au-Prince. So far, CSO partnerships have alleviation efforts need not be confined to IDA countries. filled the gap (see Figure 2), but further delivery from IFC role and additionality should not be defined narrowly such community efforts also depends critically on further in terms of what IFC can bring in financing and/or advisory physical and social infrastructure investments. services, but more broadly in PCP terms, where role and additionality are based on the ability of the PCP partners The expectation that IFC can set up the investment and to leverage the cashflow generated by the IFC transaction “things will eventually happen� in the community and and deliver actual impact on th ground as opposed to an that IFC can demonstrate development impact through ex-ante and ex-post DOTS report. 4 SMARTLESSONS — DECEMBER 2012 Such approach would allow IFC to have a more neutral externally, through an enhanced knowledge management approach to the origin of the cashflow (first tear vs second function in PCP activities. tier) and to the ultimate destination (MICs or IDA countries). Lesson 4: IFC and IBRD should be ready to support PCPs Operationally, PCP would be considered essential in IDA wherever a development cluster in a client country is countries and still highly desirable in MICs. identified, whether requested by a client government or suggested by a private sector client. Lessons Learned: The PCP approach toward a development cluster is Lesson 1: We need to take a fresh look at the way we particularly suitable to fragile countries and frontier define, plan, and measure development impact. countries but clearly could be applied to any development cluster that is the focus of the client government in IFC’s strategy should no longer confine itself to an ex-ante agreement with the WBG. and ex-post DOTS accounting and documentation approach (intended as a tracking system for reporting to Conclusion the Board) as a proxy for an effective IDG-guided strategy to deliver development impact and reduce poverty. Operational experience in the examples above suggests Instead, IFC must identify the largest possible set of that the only viable way forward to actually deliver partnerships that will ensure or improve the actual development impact is to decouple the processing of our delivery of the IFC-supported project’s development core investment activity from the design and impact, with targeted on-the-ground delivery. implementation of our development impact work, and to For the IFC project development impact to be truly deliver both through a new business model. effective, we must structure it upfront in partnership with all parties involved. At the outset, we need to identify This alternative delivery model is predicated on a PCP each potential partner’s mandate, interest, and approach focused on field-oriented delivery of expertise—and then select the best partners to work with infrastructure and supply chain linkages as well as BOP to deliver effective and targeted development impact services and goods to the community, through effective where it is intended. partnerships with IBRD (and other international financial institutions) and local and foreign CSOs. Under such a Lesson 2: From the outset, the strategy should take model, IFC would focus its investment staff (and related full advantage of the capabilities offered by budgets) on core investment tasks, while carefully partners to assure delivery of development impact. identifying its PCP partners and entrusting them with their areas of specialization and related reporting, thus IFC should be prepared to embrace, depend on, and learn leveraging the development impact of IFC projects with from more specialized partners—primarily social the parallel and mutual support of IFC mobilization, entrepreneurs and carefully selected CSOs—to shoulder quality assurance, and knowledge management functions the task of structuring, implementing, and reporting on (see also Box 2 for further thoughts of the implications of their specific contributions to the partnership that has such model at the IFC organizational level). been formed around the IFC-supported project, subject to a pre-agreed governance mechanism, anchored in poverty Using PCPs, IFC could indeed scale up its overall operations reduction objectives and WBG environment and social while delivering its maximum development impact in Performance Standards. terms of job creation and poverty alleviation through partnerships that can deliver BOP goods and services and Lesson 3: We need to seriously consider decoupling develop supply linkages through IFC’s financially and investment activities from development impact activities economically viable projects. by conducting them on mutually supportive parallel tracks and leveraging the expertise of investment, E&S and advisory staff to its maximum extent. Decoupling would free up and refocus investment and operations staff to deliver what they were trained and hired to do—structure and promote financially and economically sustainable investments—while refocusing support departments with environmental and social expertise to perform the critical quality assurance and knowledge management functions. Also, this would help focus Partnerships and Advisory Operations on the specific task of identifying, developing and monitoring the main partnerships engaged with IFC to ensure the delivery of development impact. For full benefit, special focus should be given to the leveraging of such specialized expertise, internally and SMARTLESSONS —DECEMBER 2012 5 Box 2: Further Thoughts at the IFC Organizational Level The IFC Financial Markets Department appears to have successfully cracked the nut: its business model and organizational structure currently allow it to scale up its operations without the challenge of documenting its development impact. By contrast, the real sectors of IFC are still, by and large, struggling to scale up without getting bogged down in proving their development impact, resulting in sub-optimal and slow decision making due to the laborious, internally- oriented task of describing and documenting potential development impact. The resulting strains on the IFC delivery machinery are likely to reach critical levels as we try to crank up the speed in response to reasonable and not so reasonable expectations. The recommended decoupling, which delivers an effective poverty reduction effort (as contrasted with the current emphasis on DOTS capture and documentation), is therefore also an internal organizational necessity and not just an option. While several organizational realignments can be envisaged to implement such decoupling, it is crucial that the fundamental concept is internalized and assessed in terms of functional workflow with the configuration and creation/elimination of organizational “boxes� only decided in a subsequent phase. Assuming the decoupling process is adopted, systematically for IDG countries, fragile economies and frontier regions, and desirably and opportunistically in all other instances, the functional workflow would be as as follows and in the following sequence: Business Promotion and Client Relationship development - (in broad alignment with IFC’s overarching strategic objectives) Investment Phase - (Structuring, Business Risk Assessment and Mitigation) Development Impact Delivery - PCP Structuring for IDA countries, Fragile Economies, Frontier Regions in MICs and wherever opportune. Otherwise: Focus on company job creation and consumer surplus in broad alignment with IFC IDGs. IFC could broaden the current remit of its pioneering Inclusive Business Department to leverage operationally the Partnerships and Advisory Operations department in the development, governance and syndication of PCPs, through regional divisions that ensure the delivery of BOP goods and services and supply linkages. Quality Assurance and Knowledge Management - IFC’s significant capabilities and expertise in E&S and Advisory would provide the crucial tasks of quality assurance and knowledge management that are vital to guide staff as they structure PCS, leverage stakeholders and reassure shareholders, as to the ultimate delivery of devlopment impact. A significant operational gain derived from the specific workflow sequence suggested above that it would help expedite decision making and scale up further delivery by freeing IFC DISCLAIMER management and staff from the need to establish role and additionality, in the current sense SmartLessons is an awards of the terms, while still exercising efficient selectiveness at entry point, in terms of broad program to share lessons learned strategic fit with IDGs. in development-oriented advisory services and investment Having adopted a modulated PCP delivery approach to planning, organizing, delivering, and operations. The findings, interpretations, and conclusions reporting on its development impact, IFC would gain significant degrees of operational expressed in this paper are those freedom, having clarified and justified how and why it is dealing with any private sector of the author(s) and do not company. necessarily reflect the views of IFC or its partner organizations, the Executive Directors of The World Bank or the governments they represent. IFC does not assume any responsibility for the completeness or accuracy of the information contained in this document. Please see the terms and conditions at www.ifc.org/ smartlessons or contact the program at smartlessons@ifc.org. 6 SMARTLESSONS — DECEMBER 2012