IEG 41791 Independent Evaluation Group INDEPENDENT EVALUATION IFC'S OF DEVELOPMENT RESULTS 2007 Lessons and Implications from 10 Years of Experience THE WORLD BANK GROUP WORKING FOR A WORLD FREE OF POVERTY TheWorld Bank Group consists of five institutions ­ the International Bank for Reconstruction and Development (IBRD); International Finance Corporation (IFC); the International Development Association (IDA); the Multilateral Investment Guarantee Agency (MIGA); and the International Center for the Settlement of Investment Disputes (ICSID). Its mission is to fight poverty for lasting results and to help people help themselves and their environment by providing resources, sharing knowledge, building capacity, and forging partnerships in the public and private sectors. THE INDEPENDENT EVALUATION GROUP ENHANCING DEVELOPMENT EFFECTIVENESS THROUGH EXCELLENCE AND INDEPENDENCE IN EVALUATION The Independent Evaluation Group (IEG) is an independent, three-part unit within the World Bank Group. IEG-IFC independently evaluates IFC's investment projects and Advisory Services operations that support private sector development. IEG-World Bank is charged with evaluating the activities of the IBRD (TheWorld Bank) and IDA,and IEG-MIGA evaluates the contributions of MIGA guarantee projects and services. IEG reports directly to World Bank Group's Boards of Directors through the Director-General, Evaluation. The goals of evaluation are to learn from experience, to provide an objective basis for assessing the results of the World Bank Group's work, and to provide accountability in achieving its objectives. IEG seeks to improve World Bank Group work by identifying and disseminating lessons learned from experience and by framing recommendations drawn from evaluation findings. I N D E P E N D E N T E V A L U A T I O N G R O U P Independent Evaluation of IFC's Development Results 2007 Lessons and Implications from 10 Years of Experience 2007 http://www.ifc.org/ieg Washington, D.C. 2008 © International Finance Corporation (IFC) 2121 Pennsylvania Avenue NW Washington, D.C. 20433, USA Telephone: 202-473-1000 Internet: www.ifc.org All rights reserved This volume, except for the "IFC Management Response to IEG-IFC" and "Chairperson's Summary" is a product of the Independent Evaluation Group (IEG) and the findings, interpretations, and conclusions expressed herein do not necessarily reflect the views of IFC Management, the Executive Directors of the World Bank Group or the governments they represent. This volume does not support any general inferences beyond the scope of the evaluation, including any inferences about IFC's past, current, or prospective overall performance. 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World Bank InfoShop Independent Evaluation Group­IFC E-mail: pic@worldbank.org E-mail: AskIEG@ifc.org Telephone: 202-458-4500 Telephone: 202-458-2299 Facsimile: 202-522-1500 Facsimile: 202-974-4302 Printed on Recycled Paper Contents vii Abbreviations ix Acknowledgments xi Foreword xiii Avant-propos xv Prólogo xvii Executive Summary xxi Résumé analytique xxvii Resumen xxxiii IFC Management Response to IEG-IFC xxxix Chairperson's Summary: Committee on Development Effectiveness (CODE) 1 1 Development Results of IFC-Supported Projects, 1996­2006 1 Substantial Increases in IFC Investment and Advisory Services Activities 3 Most IFC-Supported Projects Achieved High Development Ratings 8 Further Improvement Is Anticipated 10 No Trade-off between Development Results and IFC Investment Returns 11 Comprehensive Evaluation of IFC's Development Effectiveness Remains a Major Challenge 15 2 Lessons from 10 Years of Private Sector Development Evaluation 15 Development Results Are Driven by Five Factors 15 A. Changes in the Quality of a Country's Business Climate Following Project Approval 17 B. Type of Industry Sector 18 C. Quality of the Sponsor 20 D. Level of Product Market, Client Company, and Project Type Risks 20 E. IFC Work Quality 24 Type of Financing Has Implications for Development Performance 25 Nature of Linkages between Investment and Advisory Services Activities Is Also Important 25 Evaluation Provides a Basis for Better IFC Results i i i I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 29 3 Strategic Implications for IFC 29 IFC Is Pursuing an Ambitious Growth Plan While Further Decentralizing 30 Stakeholder and Client Perspective: Need to Adopt a Deeper Country Focus and Emphasize Distributional Issues 35 Internal Process Perspective: New Incentives and Mechanisms for IFC­World Bank Cooperation Required 37 Human Capital Perspective: Ensure Robust Work Quality as IFC Decentralizes 40 Financial and Measurement Perspective: Prepare for the Next Major Market Correction and Improve Development Impact Measurement 43 4 Recommendations 43 Meeting Stakeholder and Client Needs 44 Developing More Seamless World Bank Group Processes 44 Addressing Learning and Growth Needs 44 Financial and Measurement Issues 47 Appendixes 49 A: Evaluation Methodology 53 B: Performance of IFC-Supported Projects and the Profitability of IFC Investment Operations: Further Analysis 63 C: Definitions of Evaluation Terms 65 Endnotes 71 References Boxes 4 1.1 IEG Independently Rates the Development and Investment Performance of IFC Operations 5 1.2 Examples of Successful and Less Successful IFC Projects 13 1.3 IFC Is Deepening Its Development Results Measurement but Methodological Challenges Remain 14 1.4 IFC and World Bank Development Results Are Generally Not Comparable 19 2.1 Examples of IFC Transport Investments in Brazil 21 2.2 IEG Evaluates IFC Work Quality across Three Underlying Indicators 22 2.3 IFC Faced Considerable Challenges Pursuing Sustainable PSD in Africa 34 3.1 Examples of Successful Agribusiness and Rural Finance Operations 35 3.2 Examples of World Bank Group Cooperation 41 3.3 Examples of IFC's Countercyclical Role during Previous Crises Figures 2 1.1 IFC Has Increased Its Private Investment Operations Sixfold since 1991 5 1.2 IFC Operations Can Help Reduce Poverty through a Chain of Events 7 1.3 Trends in Project Development Performance, 1996­2006 8 1.4 Projects with More High-Risk Factors Achieve Lower Development Ratings i v C O N T E N T S 9 1.5 Reduced Business Climate Risk Implies Higher Development Ratings in 2007 11 1.6 IFC-Supported Projects Show No Trade-off between Development Results and IFC Investment Returns 14 1.7 EBRD and IFC Achieved Similar Development Ratings on One Subindicator 16 2.1 Much Riskier Business Climates in Africa, with Some Improvement since 2003 16 2.2 Much Lower Private Investment in Africa Than Elsewhere 18 2.3 IFC Development Ratings Varied Considerably by Industry Department 23 2.4 Supervision Quality Has Improved since 2001, Reflecting Several Quality Enhancement Steps 25 2.5 IFC Is Increasing Its Provision of Local Currency Financing 31 3.1 Many Nonfrontier Countries Are as Lacking in Banking Capacity as Frontier Countries 36 3.2 Implementation of World Bank Group Cooperation Differed from What Was Planned in CASs 37 3.3 Follow-through on Cooperation Was Modest in Many Countries 39 3.4 IFC Faces a Knowledge-Retention Challenge Tables 3 1.1 IFC Is More Concentrated Than Other Private Capital in Frontier Countries 6 1.2 Most IFC-Supported Projects Achieved High Development Ratings, 1996­2006 12 1.3 More Loan Than Equity Operations Achieved High Investment Ratings 17 2.1 IFC Success Rates Are Significantly Better Where Country Business Climate Risk Is Improving, or Not Deteriorating 19 2.2 IFC Project Development Results Improve Significantly with the Presence of a High-Quality Sponsor 20 2.3 Product Market Risk Has a Strong Influence on IFC Project Development Results 23 2.4 Good Quality Supervision Cannot Compensate Fully for Weak Appraisal Quality 27 2.5 Evaluation Findings Have Provided a Basis for Better IFC Results in Three Main Areas 33 3.1 IFC's Financial Sector Development Success Rates Are Lower Where Banking Capacity Is Weak 38 3.2 Drivers and Inhibitors of World Bank­IFC Cooperation 39 3.3 With Decentralization, the South Asia Region Improved Its Risk Management in Key Areas v ABBREVIATIONS CAS Country Assistance Strategy DOTS Development Outcome Tracking System EBRD European Bank for Reconstruction and Development FI Financial intermediary FY Fiscal year GDP Gross domestic product IEG Independent Evaluation Group IFC International Finance Corporation MIC Middle-income country PSD Private sector development SME Small and medium enterprise XPSR Expanded Project Supervision Report v i i Acknowledgments This report was prepared by a team led by Dan IEG-IFC; and Linda Morra-Imas, Head of Macro Crabtree and Hiroyuki Hatashima, drawing upon Evaluation, IEG-IFC, and under the overall lead- research and contributions from Susan Chaffin, ership of Marvin Taylor-Dormond, Director, Jouni Eerikainen, Nisachol Mekharat, Maria Elena IEG-IFC. Pinglo, Stephen Pirozzi, Miguel Angel Rebolledo, Cherian Samuel, and Victoria Viray-Mendoza. Yvette The report benefited substantially from the con- Jarencio, Marylou Kam-Cheong, and Rosemarie structive advice and feedback from many staff at Pena provided general administrative support to IFC, and also from a number of Independent the study team. Helen Chin edited the report; and Evaluation Group (IEG) colleagues in both IFC and Sid Edelmann, Sona Panajyan, and Vivian Jackson in the World Bank. Peer review was provided by managed its production and dissemination. Nils Fostvedt (IEG-Bank) and David McKenzie (Development Research Group, World Bank). The evaluation was written with the guidance of Nicholas Burke, Head of Micro Evaluation, i x Director-General, Evaluation, World Bank Group Vinod Thomas Director, IEG-IFC Marvin Taylor-Dormond Acting Manager Denis Carpio Head of Macro Evaluation Linda Morra-Imas Head of Micro Evaluation Nicholas Burke Head, Communication, Knowledge and Quality Sidney Edelmann Task Managers Dan Crabtree Hiroyuki Hatashima Study Team Senior Environmental Specialist Jouni Eerikainen Senior Evaluation Officer Stephen Pirozzi Senior Evaluation Officer Miguel Angel Rebolledo Evaluation Officer Cherian Samuel Evaluation Analyst Nisachol Mekharat Evaluation Analyst Maria Elena Pinglo Evaluation Analyst Victoria Viray-Mendoza x Foreword A s part of the World Bank Group, IFC's overriding objective is to help reduce poverty and support sustainable development in developing countries. IFC pursues this mission by supporting the private sector to create jobs and stimulate markets. This report, which assesses the impact of IFC toward that mission, appears at a time of unprecedented levels of pri- vate investment in the emerging markets. The report takes a look back at the development The report finds that IFC-supported project per- results that IFC-supported projects have achieved formance is closely linked to the quality of a coun- in the last 10 years, the main lessons that have try's business climate, the presence of a high- emerged at the project level, and the strategic im- quality sponsor, well-managed company and prod- plications for IFC going forward, in the context of uct market risk, and in particular, to IFC's work rapid organizational growth. quality (especially at the appraisal and structuring stage, and including oversight of the environ- In the last decade, 59 percent of IFC-supported mental and social effects of projects). There are projects (65 percent by volume) achieved high de- also several other factors that improve IFC's qual- velopment ratings. In addition, profitability and ity of development impact: IFC's ability to offer development impact have tended to go together, local currency financing, its reach to small and with about half of projects delivering high devel- medium enterprises through financial interme- opment results and acceptable IFC returns, and diaries, and the nature of linkages between its in- about one-third of projects achieving low devel- vestment and advisory services. opment rating and a less than acceptable IFC re- turn. These results are expected to be sustained Going forward, the report highlights major chal- for projects to be evaluated in 2007 and 2008, due lenges IFC faces to achieving overall develop- to improved project risk layering by IFC at ap- ment effectiveness. IFC will need to adopt a proval and reduced business climate risk in many sharper country focus and better exploit synergies client countries since project approval (in 2002 and with the Bank and other development partners 2003, respectively). in improving business climates in developing x i I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 countries. Furthermore, rapid and increasingly management systems and risk-mitigation products decentralized growth will need to be managed will have to continue to evolve to help IFC pre- carefully to ensure high work quality. Finally, risk- pare and deliver improved services to clients. Vinod Thomas Director-General, Evaluation x i i Avant-propos E n tant qu'institution du Groupe de la Banque mondiale, la Société fi- nancière internationale (IFC) a avant tout pour objectif de promouvoir la réduction de la pauvreté et de favoriser un développement durable dans les pays en développement. Elle s'acquitte de cette mission en aidant le secteur privé à créer des emplois et à stimuler les marchés. Ce rapport, qui évalue la contribution de l'IFC à cette mission, paraît à un moment où l'in- vestissement privé sur les marchés émergents atteint des niveaux sans précédent. Le rapport fait le bilan des accomplissements des d'une meilleure segmentation des risques liés projets financés par l'IFC au cours des dix dernières aux projets par l'IFC au moment de l'approbation années au plan du développement, reprend les et de la réduction des risques liés au climat des principales leçons qui se dégagent au niveau des affaires dans de nombreux pays clients après l'ap- projets et analyse leurs implications pour la stra- probation des projets (respectivement en 2002 et tégie future de la Société dans le contexte de la en 2003). croissance rapide de l'organisation. Le rapport conclut que la performance des projets Au cours des dix dernières années, 59 % des pro- financés par l'IFC est étroitement liée à la qualité jets soutenus par l'IFC (65 % en volume) ont ob- du climat des affaires dans un pays, à la présence tenu des notes élevées pour leur impact sur le d'une solide entité parrainante, à la bonne gestion développement. Rentabilité et impact sur le dé- de l'entreprise, à la maîtrise du risque de marché veloppement vont, par ailleurs, généralement de et, en particulier, à la qualité des interventions de pair : la moitié environ des projets affichent de l'IFC (notamment au stade de l'évaluation et de la bons résultats en termes de développement et un structuration, et durant la supervision de l'impact taux de rentabilité acceptable pour l'IFC, et en- environnemental et social des projets). Plusieurs viron un tiers des projets obtiennent une note mé- autres facteurs améliorent la qualité de l'impact des diocre en termes de développement et un taux interventions de l'IFC au plan du développement : de rentabilité moins qu'acceptable pour l'IFC. Il la possibilité qu'elle a de proposer des finance- devrait en être de même pour les projets dont ments en monnaie nationale et de faire profiter les l'évaluation est prévue en 2007 et en 2008 par suite petites et moyennes entreprises de son action x i i i I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 par le biais d'intermédiaires financiers, et la nature la Banque et les autres partenaires de dévelop- des liens existant entre ses opérations d'investis- pement pour améliorer le climat des affaires dans sement et ses services-conseil. le monde en développement. Elle devra aussi gérer avec soin la rapide expansion et décentra- Le rapport expose les difficultés majeures que lisation de ses activités pour en assurer la qualité. rencontrera l'IFC à l'avenir pour assurer l'effica- Enfin, il importera que les systèmes de gestion et cité générale de son action de développement. La les produits d'atténuation des risques continuent Société devra axer davantage ses interventions sur d'évoluer pour lui permettre de concevoir et de chaque pays et mieux exploiter les synergies avec fournir de meilleures prestations à ses clients. Vinod Thomas Directeur général, Évaluation x i v Prólogo C omo parte del Grupo del Banco Mundial, el objetivo principal de la Cor- poración Financiera Internacional (IFC, por su sigla en inglés) es ayu- dar a reducir la pobreza y apoyar el desarrollo sostenible en países en desarrollo. La IFC trata de cumplir este objetivo brindando apoyo al sector pri- vado, a fin de crear puestos de trabajo y estimular a los mercados. Este informe, en el que se evalúa el impacto de la IFC en el contexto de esa misión, se pu- blica en un momento en el que la inversión privada registra niveles sin pre- cedentes en mercados emergentes. El informe contempla los resultados de desarro- riesgo del proyecto por parte de la IFC al mo- llo que han logrado los proyectos respaldados mento de la aprobación y una reducción del por la IFC en los últimos 10 años, las principales riesgo del ambiente para los negocios en mu- lecciones que se obtuvieron a nivel de los pro- chos países clientes desde la aprobación de los yectos y las consecuencias estratégicas a futuro proyectos (en 2002 y 2003, respectivamente). para la Corporación, en el contexto de un rápido crecimiento institucional. El informe concluye que el desempeño de los pro- yectos respaldados por la IFC está íntimamente re- En la última década, el 59% de los proyectos res- lacionado con la calidad del ambiente para los paldados por la IFC (un 65% en términos de vo- negocios de un país, con la presencia de un pa- lumen) logró altas calificaciones de desarrollo. trocinador de calidad, con una buena gestión del Además, el impacto sobre el desarrollo y la ren- riesgo de empresas y del mercado de productos y, tabilidad han tendido a producirse en forma con- en especial, con la calidad del trabajo de la IFC (es- junta: cerca de la mitad de los proyectos generó pecialmente en la etapa de evaluación y estructu- resultados altos en términos de desarrollo y re- ración, y también en la supervisión de los impactos tornos aceptables para la IFC, mientras que un ter- ambientales y sociales de los proyectos). Existen cio de los proyectos alcanzó una baja calificación muchos otros factores que mejoran la calidad del de desarrollo y retornos para la IFC por debajo de impacto de la IFC en términos de desarrollo: la lo aceptable. Se espera que estos resultados se capacidad de la IFC para ofrecer financiamiento mantengan en los proyectos a evaluar en 2007 y en moneda nacional, su alcance a pequeñas y 2008, gracias una mejora en la estructuración de medianas empresas a través de intermediarios x v I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 financieros y el carácter de la integración entre llo, a fin de mejorar el ambiente para los negocios sus servicios de inversión y asesoría. en los países en desarrollo. Además, será preciso gestionar cuidadosamente el crecimiento rápido A futuro, el informe destaca algunos importantes y cada vez más descentralizado si se pretende ga- desafíos que enfrenta la IFC al momento de lograr rantizar la calidad del trabajo. Por último, es ne- eficacia en términos de desarrollo general. La IFC cesario que los sistemas de gestión de riesgo y los tendrá que adoptar un enfoque más específico productos de mitigación de riesgo sigan evolu- para cada país y aprovechar de mejor manera las cionando para que la IFC pueda preparar y pres- sinergias con el Banco y otros socios de desarro- tar mejores servicios a los clientes. Vinod Thomas Director General, Evaluación x v i Executive Summary T his is the tenth annual review by the Independent Evaluation Group of the International Financial Corporation (IEG-IFC).1 In each review, IEG assesses IFC's performance in promoting sustainable private sec- tor development in all developing countries. The 2007 review affords IEG the opportunity to look back at a decade of results for IFC's private sector oper- ations, and to ask · Have IFC-supported projects achieved sound ate opportunities for people to escape poverty development results--financially, economically, and improve their lives. IFC uses two types of de- environmentally, and socially? velopment intervention: financial products and · What has been learned about private sector de- advisory services. velopment after 10 years of evaluation? · What are the strategic implications for IFC in im- Since 1991, IFC has increased its financial activities proving its development performance in the approximately sixfold, investing approximately $50 next few years? billion in developing countries through its loan and equity operations. Including funds provided by Development Results of IFC-Supported cofinanciers, IFC-supported projects have consis- Projects, 1996­2006 tently made up about 4 percent of all private cap- IFC's development role is clearly mandated in its ital flows to developing countries. IFC investments Articles of Agreement and Mission Statement. are more than twice as concentrated as foreign di- Article 1 states that IFC will "seek to stimulate, and rect investment in what the institution considers to help create conditions conducive to the flow to be frontier countries--defined as low-income by of private capital, domestic and foreign, into pro- the World Bank, and/or high risk.2 IFC investments ductive investment in member countries." In also account for about 30 percent of International seeking to deliver development impact, IFC pur- Finance Institution private sector volumes. The sues a fourfold mission: to promote open and World Bank provided approximately $340 billion of competitive markets, to support companies and assistance to the governments of developing coun- other private sector partners, to generate pro- tries during this time, with much more static, year- ductive jobs and deliver basic services, and to cre- on-year volume changes than those of IFC. x v i i I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 Majority of Evaluated Projects Achieved High (low development results; less than acceptable Development Ratings IFC investment return). This shows that IFC has Out of 627 investment operations approved dur- not actively supported projects where there was ing 1991­2001, and evaluated between 1996 and a trade-off between development results and in- 2006 (as the projects reached operating matu- vestment returns. Projects fail to achieve high-high rity),3 59 percent (65 percent by volume) achieved ratings for a number of reasons, including the in- high development ratings at the project level. That herent commercial risk in different industry sec- is, most projects were, on balance, delivering (and tors, adverse business climates, poor sponsor were expected to deliver in the long run) sustain- quality, or shortfalls in IFC's work quality. able results--across indicators measuring their fi- nancial, economic, environmental, and social Comprehensive Assessment of IFC's performance--as well as contributing to private sec- Development Effectiveness Is Challenging tor development generally. These results in part re- IFC is making significant improvements in how it flect the market test that IFC projects face, meaning measures development performance at the proj- they cannot be compared directly with those of ect level, but methodological challenges remain public-sector-oriented development institutions before IFC can fully identify its overall develop- such as the World Bank.4 Performance has varied ment effectiveness at the sector, country, regional significantly by sector and by region, with the re- and global levels. IFC's monitoring and self- sults of IFC-supported projects in Africa lagging evaluation systems have advanced such that IFC those in other regions, mainly due to the more chal- is starting to measure its development results lenging business climates and weaker environ- across its portfolio of investment and advisory mental and social compliance among IFC's clients. operations (primarily through a Development Outcome Tracking System introduced in 2005). Profitability and Development Impact Usually Building on that progress, these systems will need Go Hand-in-Hand to evolve to capture the wider sector and coun- In addition to evaluating the development re- try impacts of the projects that IFC supports. sults of IFC-supported projects, IEG also examines whether its investment operations contribute There has been gradual progress toward harmo- positively to IFC's own profitability (and thus its nizing the private sector evaluation standards of ability to fund its future operations from retained multilateral development institutions. While this earnings). To achieve a high investment return has resulted in an agreed set of good practice rating, a loan must be expected to be repaid as standards, with which IFC is largely compliant, scheduled, while an equity investment should comparing IFC's performance against those of provide IFC with a return above that of a loan, other private sector international finance institu- commensurate with the extra instrument risk. tions remains challenging­not least because of Although fewer equity investments are judged varying institutional mandates and objectives. successful on this basis (31 percent had above- benchmark returns, compared with 74 percent for Lessons from 10 Years of Private Sector loans), those that are deemed so contribute to Development Evaluation high overall portfolio returns for IFC. Five Factors Have Driven Project When the investment results of IFC operations Performance are considered alongside project development There is no magic formula guaranteed to deliver results, about a half of IFC projects evaluated sustainable private sector development across all during 1996­2006 had high-high ratings (high IFC operations. Nonetheless, after 10 years of development ratings at the project level and an evaluation, five factors are seen to significantly in- acceptable IFC investment return from the op- fluence IFC's development performance at the eration) while about a third had low-low ratings project level: x v i i i E X E C U T I V E S U M M A R Y · Changes in the quality of a country's business ment impact, improved World Bank Group co- climate following project approval; operation, leadership in standard setting, im- · Type of industry sector in which an investment proved client satisfaction, sound finances, and a is made; strong staff. · Quality of the sponsor; · Level of product market, client company, and IFC Must Develop a Sharper Country Focus, project type risks; and Especially in Middle-Income Countries · IFC work quality. IFC has successfully mobilized funding from a variety of sources to support operations in high- The extent to which IFC is able to offer local cur- risk and low-income countries in pursuit of its fron- rency options, whether it offers financing directly tier strategy. IFC could now seek to define more or indirectly to small and medium enterprises, and sharply its role and priorities in nonfrontier the nature of the linkages between advisory ser- middle-income countries (MICs),6 where approxi- vices and investment activities also have impor- mately one-third of all people who subsist on less tant consequences for private sector development. than $2 a day live, and where IFC carries out most of its investment operations. Lack of capacity in IFC Work Quality Has Been Most Important domestic financial markets means that many MICs The quality of IFC's own project execution and su- are like low-income countries in having limited or pervision (particularly of environmental and social zero availability of long-term, local currency fi- effects) has been the most critical influence on the nance, as a result of which exposure to devalua- development results of IFC-supported projects. tion risk is a widespread problem for enterprises This is especially so in Africa, where IFC has, in cer- forced to borrow in foreign currency. Infrastruc- tain cases, mitigated very high business climate risk ture to support production and trade is another through high-quality due diligence and appro- challenge in many MICs, as is tackling large pock- priate project structuring. However, IFC's work ets of rural poverty. A valuable role for IFC there- quality in Africa has generally lagged behind other fore still exists in many MICs. However, IFC has regions (work quality was rated high in 45 percent achieved very weak development results when it of operations in Africa, compared with 68 per- has supported projects in which its additionality cent of operations in other regions), highlighting in MICs was not clear, emphasizing the need for the greater risks that IFC was willing to take his- IFC to understand clearly the private sector de- torically in the region, as well as challenges in velopment dynamics in a country and to identify recruiting and retaining suitably experienced staff. where its comparative advantage lies so that it can effectively complement existing capital flows. Strategic Implications for IFC New Incentives and Mechanisms for World IFC Has Made Sound Strategic Choices Overall Bank Group Cooperation Are Needed but Challenges Remain A stronger country focus could complement IFC's Evaluation findings from the past decade broadly sector and regional efforts, in part by helping to support IFC's core directions and priorities. identify opportunities for enhanced coopera- Operations in strategic frontier countries and sec- tion with the World Bank7 in areas of synergy such tors have generally yielded above-average devel- as business climate improvement, deepening of opment results, and IFC has improved its balancing financial sector capacity, infrastructure develop- of project risks at approval and its quality of proj- ment and environmental and social impact. Co- ect supervision overall. At the same time, evalua- operation in these areas has brought development tion findings also point to potential areas of risk gains in counties as diverse as Mexico, the Philip- and of opportunities for IFC in the context of the pines, and Senegal, and is of utmost importance in challenges it set for itself in its 2006 Strategic Di- Africa, which has fallen far behind other developing rections paper.5 These include greater develop- markets. In practice, cooperation between IFC x i x I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 and the World Bank in areas of synergy has not · From a client and stakeholder perspective, reached the level envisaged in Country Assistance (i) Adopt more tailored country strategies, Strategies (CASs), and evaluation has uncovered to complement its strong sector and re- as many inhibitors as facilitators of cooperation. gional approach, including through the CASs have seldom provided a good framework for development and pursuit of a set of cooperation, and new incentives and mechanisms country-specific private sector develop- to complement the CAS would be desirable. ment indicators. (ii) In its country strategies, flag opportunities IFC Must Ensure Sound Work Quality as It to work on the nexus of rural poverty and Decentralizes sustainable natural resources, on which IFC's current strategy seeks greater development poor people depend, and to identify and impact through a scaling up of investment and develop high-impact agribusiness and rural advisory services operations, and stronger local microfinance projects with widespread representation through further decentraliza- demonstration effects, while at the same tion of IFC operations. IFC will need to be fully time providing leadership for promoting cognizant of the possible trade-offs among rapid socially and environmentally sustainable growth, organizational change, and project exe- practices. cution quality. During a previous period of sig- · From an internal process perspective, enhance nificant organizational change in 1998­2001, cooperation with the World Bank in areas of supervision quality fell sharply. Effectively retain- synergy, ing staff and knowledge are already areas needing (i) By considering, with the Bank, new in- attention and such challenges are amplified with centives and mechanisms for cooperation further decentralization. IFC might learn from the to complement the CAS process. World Bank's experiences with knowledge man- (ii) By identifying investments at approval that agement under highly decentralized structures. were facilitated by Bank policy or regula- tory assistance to a government, and track- Continued Strengthening of Risk Mitigation ing them throughout the project cycle Required (through IFC's Development Outcome Experience highlights how markets can quickly Tracking System or other means) to judge withdraw financial support for companies in re- their success. sponse to adverse economic or political events. · From a human capital perspective, monitor the Despite the current investment optimism among decentralization process closely to ensure that investors in much of the developing world, IFC IFC work quality remains robust and is sup- could explicitly address in its strategy the threat ported by a rigorous training program for new of a global investment decline, its likely impact on investment staff. clients, and any mitigating actions that would · From a financial and measurement perspective, be necessary. Planning now to improve risk- (i) Make continued efforts to improve its management systems, and developing new risk- risk-management systems and to pre- mitigating products to soften the impact for pare for the next correction in the inter- clients, would strengthen IFC's ability to respond national markets, including perhaps the to future economic shocks as well as enhance its extended use and development of new countercyclical role. risk-mitigation products. (ii) With IEG's support, advance its metrics to Recommendations understand better (and derive lessons In seeking to address the many challenges that the about) the wider sector and country-level IFC faces, IFC Management will need to pursue impacts of the projects that IFC supports. the following recommendations (see chapter 4 for further details): x x Résumé analytique C et examen est le dixième effectué sur une base annuelle par le Groupe indépendant d'évaluation de la Société financière internationale (IEG- IFC)1. Dans le cadre de chaque examen, l'IEG évalue la mesure dans laquelle l'IFC a réussi à promouvoir un développement durable du secteur privé dans tous les pays en développement. L'examen 2007 a été l'occasion pour le Groupe de faire le point des résultats des opérations menées par l'IFC dans le cadre du secteur privé au cours des dix dernières années pour tenter de répondre aux question suivantes : · Les projets soutenus par l'IFC ont-ils abouti à objectifs principaux : promouvoir des marchés de bons résultats en matière de développe- ouverts et compétitifs, appuyer les entreprises et ment -- aux plans financier, économique, en- autres partenaires du secteur privé, générer des vironnemental et social ? emplois productifs et fournir des services de base, · Quels enseignements peut-on tirer des évalua- et créer des opportunités pour permettre aux po- tions réalisées au cours des dix dernières années pulations d'échapper à la pauvreté et d'améliorer pour le développement du secteur privé ? leurs conditions de vie. L'IFC poursuit son action · L'amélioration de l'impact de l'IFC sur le dé- de développement en ayant recours à deux ins- veloppement au cours des prochaines années truments : les produits financiers et les services- a-t-elle des implications stratégiques ? conseil. Résultats au plan du développement des Depuis 1991, l'IFC a approximativement sextuplé projets soutenus par l'IFC, 1996­2006 ses activités de financement et a investi environ Le rôle de l'IFC en matière de développement 50 milliards de dollars dans des pays en déve- ressort clairement de ses Statuts et de sa mission. loppement dans le cadre de ses opérations de prêt L'Article 1 stipule que l'IFC « s'efforcera de sti- et ses prises de participations. Si l'on prend en muler et de promouvoir les conditions favorisant compte les montants qu'elle a mobilisés sous le courant du capital privé local et étranger vers forme de cofinancements, les projets appuyés des investissements de caractère productif dans par l'IFC ont systématiquement absorbé l'équi- les pays membres ». Dans le but de produire un valent d'environ 4 % du total des entrées de ca- impact sur le développement, l'IFC poursuit quatre pitaux privés dans les pays en développement. La x x i I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 proportion des investissements de l'IFC destinés capacité de financer ses opérations futures à par- aux pays qu'elle considère pionniers -- c'est-à-dire tir des bénéfices mis en réserve). Pour qu'une note des pays à faible revenu (tels que définis par la élevée soit attribuée au titre de la rentabilité de Banque) et/ou présentant des risques élevés2 -- l'investissement, il faut pouvoir compter, s'il s'agit est deux fois plus élevée que celle des investis- d'un prêt, qu'il sera remboursé conformément au sements étrangers directs allant à ces pays. Les in- calendrier établi et, s'il s'agit d'une prise de par- vestissements de l'IFC représentent également ticipation, qu'elle aura un taux de rendement su- environ 30 % des volumes alloués au secteur privé périeur à celui d'un prêt compte tenu du risque par les institutions financières internationales. supplémentaire qu'elle comporte. Bien que la Pendant cette période, la Banque mondiale a ac- proportion des prises de participation affichant cordé aux gouvernements des pays en dévelop- de bons résultats à cet égard (31 % ont produit pement une aide à hauteur de 340 milliards de des rendements supérieurs à la référence, contre dollar environ, affichant des variations bien moins 74 % des prêts), celles qui sont jugées profitables prononcées en glissement annuel que celle de contribuent aux bons rendements du portefeuille l'IFC. global de l'IFC. La majorité des projets évalués ont été jugés Lorsque l'on considère à la fois la rentabilité des avoir un fort impact sur le développement opérations de l'IFC et leur impact sur le déve- Sur les 627 opérations d'investissement approu- loppement, la moitié environ des projets de l'IFC vées durant la période 1991-2001 et évaluées évalués pendant la période de 1996 à 2006 affi- entre 1996 et 2006 (une fois que les projets ont chent une double note élevé-élevée (un impact atteint leur régime de croisière)3, 59 % des pro- élevé du projet au plan du développement et jets (65 % en volume) ont été jugés avoir un fort une rentabilité de l'investissement acceptable impact sur le développement. En d'autres termes, jugée par l'IFC) tandis qu'environ un tiers des pro- la plupart des projets affichent dans l'ensemble jets affichent une double note faible-faible (ils ont des résultats durables (qui devraient perdurer à un faible impact sur le développement et ont une long terme) pour l'ensemble des indicateurs de rentabilité jugée moins qu'acceptable pour l'IFC). performance aux plans financier, économique, On peut en déduire que l'IFC n'a pas cherché à environnemental et social -- tout en contribuant appuyer des projets pour lesquels il importait t au développement général du secteur privé. de trouver un compromis entre l'impact sur le dé- Ces résultats traduisent en partie le fait que les pro- veloppement et la rentabilité de l'investissement. jets de l'IFC subissent l'épreuve du marché, de La note élevé-élevée peut ne pas être attribuée à sorte qu'ils ne peuvent pas être directement com- un projet pour diverses raisons, notamment le parés avec ceux d'institutions de développement risque de marché associé à différentes branches dont les activités sont axées sur le secteur public d'activité, un climat des affaires défavorable, des comme la Banque mondiale4. Les performances entités parrainantes présentant des insuffisances varient considérablement selon les secteurs et ou la qualité insuffisante des travaux de l'IFC. les régions ; les résultats des projets appuyés par l'IFC sont moins bons en Afrique que dans d'autres Il est difficile d'évaluer précisément régions en grande partie parce que le climat des l'efficacité de l'action de l'IFC au plan du affaires y est moins favorable et que les clients de développement l'IFC y respectent moins les normes environne- L'IFC a entrepris d'améliorer considérablement la mentales et sociales. façon dont elle mesure l'impact sur le dévelop- pement au niveau des projets, mais il lui faudra Rentabilité et résultats au plan du encore résoudre des problèmes méthodologiques développement vont habituellement de pair pour pouvoir pleinement identifier son efficacité Outre qu'il évalue l'impact sur le développement globale en matière de développement au niveau des projets soutenus par l'IFC, IEG examine si ses sectoriel, de même qu'à l'échelle nationale, ré- opérations d'investissement contribuent à assu- gionale et mondiale. Les systèmes de suivi et rer la rentabilité de l'IFC elle-même (et donc sa d'autoévaluation de l'IFC ont été perfectionnés de x x i i R É S U M É A N A LY T I Q U E sorte que l'institution commence à mesurer ses treprises, et la nature des liens entre les services- résultats de développement pour l'ensemble de conseil et les activités d'investissement ont aussi son portefeuille d'opérations d'investissement et des conséquences importantes pour le dévelop- de services-conseil (essentiellement grâce à un sys- pement du secteur privé. tème de suivi de l'impact de ses opérations d'in- vestissement mis en place en 2005). Sur cette La qualité des interventions de l'IFC est un base, les systèmes devront évoluer de manière à facteur d'une importance majeure permettre de prendre en compte les impacts plus La qualité de l'exécution et de la supervision des vastes des projets bénéficiant de l'appui de l'IFC projets par l'IFC (surtout en ce qui concerne leurs au niveau sectoriel et à l'échelle nationale. effets environnementaux et sociaux) est le facteur le plus déterminant des résultats des projets Les efforts d'harmonisation des normes d'éva- appuyés par l'IFC en matière de développement. luation du secteur privé utilisées par les institutions C'est le cas tout particulièrement en Afrique, où de développement multilatérales progressent. l'IFC a parfois atténué les risques très élevés as- S'ils ont bien débouché sur l'adoption d'un en- sociés au climat des affaires grâce à des travaux pré- semble de normes de bonne pratique, que suit de paratoires minutieux et une conception bien manière générale l'IFC, il reste difficile de comparer adaptée des projets. Toutefois, la qualité des in- la performance de la Société à celles d'autres ins- terventions de l'IFC est généralement moins bien titutions internationales de financement du sec- notée en Afrique que dans les autres régions (la qua- teur privé, ne serait-ce que parce qu'elles ont une lité a été jugée élevée dans 45 % des opérations me- mission et des objectifs institutionnels différents. nées en Afrique, contre 68 % des opérations effectuées dans d'autres régions), ce qui montre Les leçons tirées de l'évaluation du que l'IFC est généralement disposée à prendre développement du secteur privé sur une des risques plus importants dans la région et té- période de dix ans moigne de la difficulté de recruter, de former et de conserver un personnel doté d'une expérience Cinq facteurs contribuent à déterminer les suffisante. résultats des projets Il n'existe pas de formule magique qui garantisse Les implications stratégiques pour l'IFC que toutes les opérations de l'IFC produiront un développement durable du secteur privé. Il res- L'IFC a, dans l'ensemble, effectué de bons sort néanmoins des évaluations réalisées sur une choix stratégiques mais des problèmes période de dix ans que cinq facteurs ont un im- persistent pact considérable sur les résultats obtenus par Les conclusions des évaluations effectuées au l'IFC au plan du développement au niveau de cours des dix dernières années confortent les ses projets : orientations et les priorités fondamentales de l'IFC. Les opérations entreprises dans des pays et · l'évolution de la qualité du climat des affaires des secteurs pionniers d'importance stratégique dans un pays après l'approbation d'un projet ; ont en général produit des résultats supérieurs à · le secteur d'activité dans lequel un investisse- la moyenne et l'IFC a amélioré sa capacité de ges- ment est réalisé ; tion des risques des projets au stade de l'appro- · la qualité de l'entité parrainante ; bation ainsi que la qualité globale de ses activités · le niveau de développement du marché pour de supervision. Les conclusions de l'évaluation les produits, la société cliente et les risques identifient cependant certaines sources poten- liés au type de projet ; et tielles de risques et d'opportunités pour l'IFC au · la qualité des interventions de l'IFC. regard des défis qu'elle s'est fixée dans ses Notes d'orientation stratégique 20065. Au nombre de ces La mesure dans laquelle l'IFC peut proposer des orientations, on peut citer un plus grand impact financements en monnaie nationale, directement sur le développement, une coopération plus ou indirectement, aux petites et moyennes en- étroite avec les autres institutions du Groupe de x x i i i I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 la Banque mondiale, un rôle moteur dans la défi- qu'elle déploie aux niveaux sectoriel et régional, nition des normes, une amélioration de la satis- en partie en l'aidant à identifier les possibilités faction de ses clients, une assise financière solide d'une coopération renforcée avec la Banque mon- et un personnel de haut calibre. diale7 dans des domaines où il existe des syner- gies comme l'amélioration du climat des affaires, L'IFC doit cibler ses interventions plus le développement des circuits financiers, le dé- précisément sur les pays, en particulier les veloppement des infrastructures et l'impact en- pays à revenu intermédiaire vironnemental et social. Les travaux menés en L'IFC a réussi à mobiliser des financements au- collaboration dans ces domaines ont eu un impact près d'une variété de bailleurs pour appuyer des positif sur le développement dans des pays aussi opérations dans des pays présentant des risques divers que le Mexique, les Philippines et le Séné- élevés et à faible revenu afin de poursuivre sa stra- gal, et ils revêtent une importance primordiale tégie axée sur les marchés pionniers. Elle pourrait dans le cas de l'Afrique, qui a pris beaucoup de désormais s'efforcer de mieux définir son rôle et retard par rapport à d'autres marchés en déve- ses priorités dans les pays à revenu intermédiaire loppement. Dans la pratique, la coopération entre non pionniers6, où vit environ un tiers de ceux qui l'IFC et la Banque mondiale dans les domaines où ont moins de deux dollars par jour pour subsister il existe des synergies n'a pas été aussi étroite et où l'IFC réalise la plupart de ses opérations que prévu dans les Stratégies d'aide-pays (CAS), d'investissement. Compte tenu de la capacité in- et les évaluations ont révélé autant de facteurs suffisante des des marchés des capitaux natio- pouvant inhiber la coopération que de facteurs naux, de nombreux pays à revenu intermédiaire pouvant la favoriser. Les CAS ont rarement consti- n'ont, dans le meilleur des cas, qu'un accès limité, tué un bon cadre de coopération ; il serait donc comme les pays à faible revenu, à des capitaux à souhaitable de mettre en place de nouvelles me- long terme en monnaie nationale ; de ce fait, les sures incitatives et de nouveaux mécanismes pour entreprises sont obligées de contracter des em- compléter ces dernières. prunts en devises, et sont donc de manière gé- nérale exposées au risque d'une dévaluation. Les L'IFC doit veiller à la bonne qualité de ses infrastructures nécessaires aux activités de pro- interventions alors qu'elle poursuit son duction et aux échanges sont un autre problème processus de décentralisation auquel se heurtent beaucoup de pays à revenu in- La stratégie actuelle de l'IFC vise à accroître son termédiaire, tout comme l'élimination de vastes impact en termes de développement en élargis- poches de pauvreté rurales. L'IFC a donc encore sant l'ampleur de ses opérations d'investissement un rôle important à jouer dans de nombreux pays et de services-conseil et en étant plus présente sur à revenu intermédiaire. Elle a toutefois obtenu le terrain grâce à la poursuite de la décentralisa- des résultats médiocres au plan du développe- tion de ses activités. La Société devra être plei- ment lorsqu'elle a appuyé des projets dans ces pays nement consciente des compromis qu'elle sans que l'additionalité de sa contribution ait été pourrait devoir accepter entre une rapide ex- clairement établie, ce qui montre que l'IFC doit pansion, les transformations organisationnelles et bien comprendre la dynamique du développe- la qualité de l'exécution des projets. Lorsqu'elle ment du secteur privé d'un pays et identifier les a procédé à un profond remaniement de sa struc- domaines dans lesquels elle jouit d'un avantage ture en 1998­2001, la qualité des activités de comparatif de manière à pouvoir compléter effi- supervision a chuté. L'IFC doit déjà veiller à conser- cacement les flux de capitaux existants. ver son personnel et à maintenir son savoir ins- titutionnel de manière efficace, et les difficultés Nécessité de mettre en place de nouvelles qu'elle peut rencontrer à ces égards iront en s'ag- incitations et de nouveaux mécanismes de gravant avec la poursuite du processus de dé- coopération pour le Groupe de la Banque centralisation. Elle pourrait profiter des leçons mondiale de l'expérience de la Banque mondiale en matière Un ciblage de ses interventions au niveau natio- de gestion du savoir dans le cadre de structures nal permettrait à l'IFC de compléter les efforts fortement décentralisées. x x i v R É S U M É A N A LY T I Q U E L'expérience montre la rapidité avec laquelle les monstration, tout en menant les efforts marchés peuvent retirer leur soutien financier de promotion de pratiques durables dans aux entreprises lorsque surviennent des pro- les domaines social et environnemental. blèmes économiques ou politiques défavorables. · Au niveau des procédures internes, elle devra Malgré l'optimiste dont font preuve les investis- coopérer davantage avec la Banque mondiale seurs dans une grande partie du monde en dé- dans les domaines où il est possible d'exploi- veloppement, l'IFC pourrait clairement définir ter des synergies, sa stratégie de manière à faire face à la menace i) en examinant, avec la Banque, de nou- d'une contraction des investissements à l'échelle velles incitations et de nouveaux méca- mondiale, à l'impact probable de cette contraction nismes de coopération pour compléter le sur ses clients et à considérer toute mesure d'at- processus des CAS ; ténuation qui pourrait s'avérer nécessaire. Plani- ii) en identifiant au stade de l'approbation fier d'ores et déjà les dispositions à prendre pour les investissements qui ont été facilités par améliorer les systèmes de gestion des risques et l'assistance fournie par la Banque dans le mettre au point de nouveaux produits d'atté- domaine de l'action publique ou du cadre nuation des risques pour amortir les impacts sur réglementaire et en assurant leur suivi du- ses clients renforcerait la capacité de l'IFC de rant tout le cycle du projet (grâce au sys- faire face à de futurs chocs économiques et de tème de suivi des réalisations au plan du conforter son rôle de stabilisation conjoncturelle. développement ou par d'autres moyens) pour déterminer leurs résultats. Recommandations · Du point de vue du capital humain, l'IFC devra Pour relever les nombreux défis auxquels la SFI suivre attentivement le déroulement du pro- se trouve confrontée, son équipe de direction cessus de décentralisation pour s'assurer que devra mettre en oeuvre les recommandations sui- la qualité de ses interventions demeure satis- vantes (décrites plus en détail au chapitre 4). faisante et que les nouveaux chargés d'inves- · Pour ses clients et parties prenantes, tissement bénéficient d'un programme de i) elle devra adopter des stratégies mieux formation rigoureux. adaptées au contexte national pour com- · S'agissant du financement et de l'évaluation, pléter son approche axée sur les secteurs i) l'IFC devra systématiquement s'efforcer et les régions, notamment en élaborant et d'améliorer ses systèmes de gestion du en utilisant une série d'indicateurs du dé- risque et se préparer à faire face à la pro- veloppement du secteur privé propre à chaine correction sur les marchés interna- chaque pays ; tionaux, notamment peut-être en utilisant ii) dans le cadre de ses stratégies par pays, elle de manière plus générale des produits d'at- devra signaler les opportunités de traiter ténuation des risques et en formulant de les questions indissociables de la pauvreté nouveaux. rurale et de la gestion durable des res- ii) l'IFC devra, avec l'appui d'IEG, développer sources naturelles dont les populations son système d'indicateurs pour mieux dé- pauvres sont tributaires ; et identifier et terminer les impacts plus généraux des développer des projets d'agroindustrie et projets soutenus par l'IFC au plan sectoriel de microfinance rurale ayant un fort impact et à l'échelle nationale, et en tirer les en- et pouvant avoir de vastes effets de dé- seignements nécessaires. x x v Resumen É sta es la décima revisión anual de la Corporación Financiera Internacional (IFC, por su sigla en inglés) que realiza el Grupo de Evaluación Inde- pendiente (GEI)1. En cada revisión, el GEI evalúa el desempeño de la IFC en la promoción del desarrollo sustentable del sector privado en los paí- ses en desarrollo. La revisión de 2007 le ofrece al GEI la oportunidad de ana- lizar retrospectivamente una década de resultados para las operaciones de la IFC en el sector privado y preguntarse · Si los proyectos respaldados por la IFC logra- apoyo a empresas y a otros asociados del sector ron resultados sólidos en términos de desa- privado, la generación de puestos de trabajo pro- rrollo financiero, económico, ambiental y social; ductivos y la prestación de servicios básicos, y la · Qué se aprendió acerca del desarrollo del sec- creación de oportunidades para que las personas tor privado luego de 10 años de evaluación, y escapen de la pobreza y mejoren sus vidas. La IFC · Si hay consecuencias estratégicas para la IFC en utiliza dos tipos de intervención para el desarro- la mejora de su desempeño en términos de de- llo: los instrumentos financieros y la asistencia de sarrollo en los próximos años. asesoría. Resultados en términos de desarrollo de Desde 1991, la IFC ha aumentado sus actividades los proyectos respaldados por la IFC, financieras aproximadamente seis veces, con una 1996­2006 inversión de cerca de US$50.000 millones en paí- El rol de la IFC en relación con el desarrollo está ses en desarrollo, a través de sus operaciones de claramente establecido en su Convenio Consti- préstamos e inversiones en capital social. Si se in- tutivo y en su Misión. El Artículo 1 establece que cluyen los fondos provistos por cofinanciadores, la IFC "tratará de estimular y de ayudar a la crea- los proyectos respaldados por la IFC han repre- ción de condiciones que favorezcan el flujo de ca- sentado de manera sostenida cerca del 4% de pital privado, local y extranjero, hacia una inversión todos los flujos de capital privado hacia países en productiva en los países miembros". Para generar desarrollo. Las inversiones de la IFC tienen más un impacto en términos de desarrollo, la IFC del doble de concentración que la inversión lleva a cabo una misión con cuatro facetas: la pro- extranjera directa en los países que la institución moción de mercados abiertos y competitivos, el denomina "de frontera" (aquéllos que el Banco x x v i i I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 Mundial define como "país de ingreso bajo" y/o paí- un mayor nivel de retorno sobre la inversión, ses de alto riesgo)2. Las inversiones de la IFC tam- debe esperarse que un préstamo se reembolse en bién representan cerca del 30% de los volúmenes el tiempo estipulado, mientras que una inversión del sector privado en la Institución Financiera In- en capital debería suministrar a la IFC un retorno ternacional. El Banco Mundial suministró aproxi- superior al de un préstamo, proporcional al riesgo madamente US$340.000 millones en concepto extra que implica el vehículo. Aunque son menos de asistencia para los gobiernos de países en de- las inversiones en capital que se consideran exi- sarrollo durante este período, con cambios año a tosas en estos términos (un 31% registró retornos año en los volúmenes mucho más estáticos que por encima de los puntos de referencia, propor- los de la IFC. ción que en el caso de los préstamos fue de un 74%), aquéllas que en efecto se consideran exi- La mayoría de los proyectos evaluados logró tosas contribuyeron con los elevados retornos altas calificaciones de desarrollo generales de la cartera de la IFC. De las 627 operaciones de inversión aprobadas du- rante el período 1991­2001 y evaluadas entre Cuando se analizan los resultados de inversión de 1996 y 2006 (a medida que los proyectos alcan- las operaciones de la IFC junto con los resultados zaban la madurez operativa)3, el 59% (un 65% en de los proyectos en términos de desarrollo, cerca términos de volumen) logró altas calificaciones de de la mitad de estos proyectos evaluados durante desarrollo a nivel de los proyectos. En otras pa- el período 1996­2006 recibió calificaciones alta- labras, la mayoría de los proyectos, en términos alta (calificaciones altas en términos de desarro- generales, generó resultados sostenibles (y se llo a nivel de los proyectos y un retorno sobre la espera que sigan generándolos a largo plazo) en inversión de la IFC aceptable), mientras que un relación con los indicadores que miden el de- tercio recibió calificaciones baja-baja (resulta- sempeño financiero, económico, ambiental y dos pobres en términos de desarrollo y retorno social, además de contribuir en general con el sobre la inversión de la IFC por debajo de lo acep- desarrollo del sector privado. Estos resultados table). Esto muestra que la IFC no ha respaldado reflejan en parte la prueba de mercado que en- activamente los proyectos donde había un dese- frentan los proyectos de la IFC, es decir, que no quilibrio entre los resultados en términos de de- pueden compararse directamente con los de ins- sarrollo y los retornos sobre la inversión. Son tituciones de desarrollo orientadas al sector pú- varias las causas por las que los proyectos no lo- blico, como el Banco Mundial4. El desempeño gran calificaciones alta-alta: los riesgos comer- ha variado en forma significativa entre los distin- ciales inherentes de distintos sectores industriales, tos sectores y regiones: por ejemplo, los proyec- ambientes adversos para los negocios, baja cali- tos respaldados por la IFC en África estuvieron dad de los patrocinadores o deficiencia en la rezagados respecto de los de otras regiones, prin- calidad del trabajo de la IFC. cipalmente debido a ambientes más desafiantes para los negocios y al menor cumplimiento am- La evaluación integral de la eficacia en biental y social entre los clientes de la IFC. términos de desarrollo de la IFC constituye un desafío El impacto en términos de desarrollo y la Si bien la IFC está logrando mejoras significativas rentabilidad suele producirse en forma en relación con la forma de medir el desempeño conjunta en términos de desarrollo a nivel de los proyec- Además de evaluar los resultados en términos de tos, aún debe resolver algunos desafíos metodo- desarrollo de los proyectos respaldados por la IFC, lógicos antes de determinar su eficacia en términos el GEI también analiza si las operaciones de in- de desarrollo general a niveles sectoriales, nacio- versión contribuyen en forma positiva con la pro- nales, regionales e internacionales. Los sistemas pia rentabilidad de la IFC (y, por lo tanto, con su de control y autoevaluación de la IFC han pro- capacidad para financiar proyectos futuros a par- gresado a punto tal que la IFC está comenzando tir de utilidades no distribuidas). A fin de lograr a medir sus resultados de desarrollo en toda su car- x x v i i i R E S U M E N tera de operaciones de asesoría e inversión (prin- forma directa o indirecta a pequeñas y medianas cipalmente a través de un sistema de seguimiento empresas y el carácter de la integración entre de sus operaciones introducido en 2005). Sobre los servicios de asesoría y las actividades de la base de ese progreso, estos sistemas tendrán que inversión. evolucionar para reflejar los efectos más amplios (a nivel sectorial y regional) de los proyectos que La calidad del trabajo de la IFC ha sido muy apoya la IFC. importante La calidad de la ejecución y la supervisión de pro- Se ha registrado un progreso gradual al momento yectos por parte de la IFC (en especial de los de armonizar los estándares con los que las ins- efectos sociales y ambientales) ha representado tituciones multilaterales de desarrollo evalúan el la influencia más crítica sobre los resultados en tér- sector privado. Si bien esto ha generado un con- minos de desarrollo de los proyectos respaldados junto consensuado de estándares de prácticas por la IFC. Esto es especialmente claro en África, modelo respecto del cual la IFC muestra un ele- donde la IFC, en algunos casos, ha logrado miti- vado grado de cumplimiento, la comparación del gar riesgos muy altos en el ambiente para los ne- desempeño de la IFC con la de otras institucio- gocios mediante un procedimiento de diligencia nes financieras internacionales del sector privado debida de calidad y una estructuración de pro- sigue siendo un desafío, debido en gran parte a yectos adecuada. Sin embargo, la calidad del tra- las diferencias que existen entre los cometidos y bajo de la IFC, en general, se ha visto retrasada los objetivos de las instituciones. respecto de otras regiones (la calidad del trabajo se calificó como "alta" en el 45% de las operacio- Lecciones extraídas de los 10 años de nes de África, proporción que llegó al 68% en las evaluación del desarrollo del sector operaciones realizadas en otras regiones), lo cual privado resalta los mayores riesgos que la IFC ha estado dispuesta a aceptar históricamente en la región, Los cinco factores que han intervenido en el además de reflejar los desafíos al momento de con- desempeño de los proyectos tratar, capacitar y retener personal con experien- No existe una fórmula mágica que garantice un de- cia adecuada. sarrollo sostenible del sector privado en todas las operaciones de la IFC. Sin embargo, tras 10 Consecuencias estratégicas para la IFC años de evaluación, todo indica que hay cinco fac- tores que influyen significativamente sobre el de- En general, la IFC ha tomado decisiones sempeño de la IFC en términos de desarrollo a estratégicas acertadas, pero aún quedan nivel de los proyectos: desafios Los resultados de la evaluación de la última dé- · Cambios en la calidad del ambiente para los ne- cada apoyan, en general, las orientaciones estra- gocios de un país luego de la aprobación del tégicas y las prioridades de la IFC. Las operaciones proyecto; en países y sectores de frontera estratégicos pre- · Tipo de sector industrial en el que se hace una sentaron, en su mayoría, resultados superiores al inversión; promedio en términos de desarrollo, mientras · Calidad del patrocinador; que la IFC logró un mejor equilibrio entre los · Nivel de riesgos del mercado del producto, de riesgos del proyecto al momento de la aprobación la empresa cliente y del tipo de proyecto, y y una mejor supervisión general de los proyectos. · Calidad del trabajo de la IFC. Al mismo tiempo, los resultados de la evaluación también resaltan algunas posibles áreas de ries- Existen otros factores que tienen importantes gos y oportunidades para la IFC en el contexto de consecuencias para el desarrollo del sector privado: los desafíos que se planteó en su documento de hasta qué punto la IFC puede ofrecer opciones en Orientación Estratégica de 20065, tales como moneda nacional, si ofrece financiamiento en mayor impacto en términos de desarrollo, mejor x x i x I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 cooperación con el Grupo del Banco Mundial, nales de la IFC, lo cual permitiría en parte detec- liderazgo al momento de definir estándares, mejor tar oportunidades de mejorar la cooperación con satisfacción del cliente, finanzas sólidas y perso- el Banco Mundial7 en áreas de sinergia como la nal capacitado. mejora del ambiente para los negocios, la pro- fundización de la capacidad del sector financiero, La IFC debe desarrollar un enfoque más el desarrollo de infraestructura y el impacto am- específico para cada país, en especial en biental y social. La cooperación en estas áreas ha países de ingreso mediano traído mejoras en el desarrollo en países tan di- La IFC ha logrado movilizar financiamiento de versos como Filipinas, México y Senegal, y es ex- una variedad de fuentes para apoyar operaciones tremadamente importante en África, región que en países de alto riesgo e ingreso dentro del marco se ha rezagado respecto de otros mercados en de- de su estrategia con respecto a los países de fron- sarrollo. En la práctica, la cooperación entre la IFC tera. La IFC podría tratar ahora de definir con y el Banco Mundial en áreas de sinergia no ha mayor exactitud su rol y sus prioridades en países alcanzado el nivel previsto en las Estrategias de de ingreso mediano no calificados como "de fron- Asistencia a los Países (EAP), y las evaluaciones de- tera"6, donde vive aproximadamente un tercio terminaron que existen tantos factores que obs- de las personas que subsisten con menos de dos taculizan la cooperación como factores que la dólares por día y donde la IFC realiza la mayor promueven. En general, las EAP no han suminis- parte de sus operaciones de inversión. La falta de trado un buen marco para la cooperación, por lo capacidad en los mercados financieros internos im- que sería bueno contar con nuevos incentivos y plica que muchos países de ingreso mediano se mecanismos para complementarlas. asemejan a países de ingreso bajo porque tienen una disponibilidad nula o reducida de financia- La IFC debe asegurar una sólida calidad de miento en moneda nacional a largo plazo, a raíz trabajo a la par de la descentralización de lo cual la exposición al riesgo de devaluación La estrategia actual de la IFC busca un mayor im- pasa a ser un problema generalizado para las em- pacto en términos de desarrollo a través de la in- presas que se ven obligadas a pedir préstamos tensificación de las operaciones del servicio de en moneda extranjera. La infraestructura que res- asesoría y la inversión, y una representación local palda la producción y el comercio constituye otro más sólida por medio de una mayor descentrali- desafío en muchos países de ingreso mediano, zación de las operaciones de la IFC. La IFC deberá como lo es enfrentar el problema de los grandes estar consciente de los posibles equilibrios entre focos de pobreza rural. Por lo tanto, aún existe una el rápido crecimiento, la reestructuración y la ca- función valiosa que puede cumplir la IFC en mu- lidad de la ejecución de los proyectos. Durante un chos países de ingreso mediano. Sin embargo, la período anterior de considerables cambios insti- IFC ha conseguido resultados muy débiles en tér- tucionales en 1998-2001, la calidad de la supervi- minos de desarrollo cuando brindó apoyo a pro- sión disminuyó drásticamente. La retención yectos en los que la adicionalidad en países de efectiva del personal y los conocimientos ya son ingreso mediano no estaba clara, lo cual enfatiza áreas que requieren atención, y estos desafíos se la necesidad de que la IFC comprenda claramente magnifican con la mayor descentralización. La la dinámica de desarrollo en el sector privado en IFC podría aprender de las experiencias del Banco un país y determine dónde están sus ventajas Mundial en la gestión de los conocimientos bajo comparativas, a fin de poder complementar con estructuras altamente descentralizadas. eficacia los flujos de capital existentes. La experiencia pone de relieve cómo los merca- Se necesitan nuevos incentivos y mecanismos dos pueden retirar rápidamente el apoyo finan- para la cooperación dentro del Grupo del ciero para las empresas en respuesta a los Banco Mundial acontecimientos políticos o económicos adversos. Un enfoque más específico para cada país podría Pese al actual optimismo respecto de la inver- complementar las iniciativas sectoriales y regio- sión entre los inversores de gran parte del mundo x x x R E S U M E N en desarrollo, la IFC podría tratar explícitamente mentar prácticas ambiental y socialmente en su estrategia la amenaza de un descenso glo- sostenibles. bal de la inversión, sus posibles efectos para los · Desde una perspectiva de proceso interno, in- clientes y cualquier medida que pueda ser nece- crementar la cooperación con el Banco Mun- saria para mitigarlos. Planificar ahora la mejora de dial en las áreas de sinergia los sistemas de gestión del riesgo y desarrollar nue- i) Analizando, junto con el Banco, nuevos in- vos productos para mitigar los riesgos y así amor- centivos y mecanismos de cooperación tiguar los efectos para los clientes fortalecería la para complementar el proceso de EAP. capacidad de la IFC de responder a los futuros im- ii) Identificando inversiones en proceso de pactos económicos, y también incrementaría su aprobación que fueron facilitadas por el rol contracíclico. asesoramiento del Banco a un gobierno en materia de regulación o políticas, y su- Recomendaciones pervisándolas a lo largo del ciclo del pro- Para abordar los diversos desafíos que enfrenta la yecto (a través del Sistema de Seguimiento institución, la administración de la IFC deberá de Operaciones de la IFC o por otros me- seguir las siguientes recomendaciones (véase el ca- dios) para evaluar su éxito. pítulo 4 para obtener información más detallada). · Desde una perspectiva de capital humano, con- trolar de cerca el proceso de descentralización · Desde una perspectiva de clientes y partes para asegurar que la calidad del trabajo de la IFC interesadas, se mantenga sólida y se vea respaldada por un i) Adoptar estrategias de país más persona- riguroso programa de capacitación para el lizadas, para complementar su sólido en- nuevo personal de inversión. foque sectorial y regional, incluso a través · Desde una perspectiva de la medición y las fi- del desarrollo y la búsqueda de una serie nanzas, de indicadores de desarrollo del sector i) Realizar esfuerzos duraderos para mejo- privado específicos para cada país. rar sus sistemas de gestión del riesgo y ii) En sus estrategias de país, resaltar las opor- prepararse para la próxima corrección en tunidades para trabajar en el vínculo entre los mercados internacionales, incluyendo la pobreza rural y los recursos naturales quizás el uso extendido y el desarrollo de sostenibles, del que depende la población nuevos productos para mitigar los riesgos. pobre, y para identificar y desarrollar ne- ii) Con el respaldo del GEI, mejorar sus in- gocios agrícolas de alto impacto y pro- dicadores para comprender mejor los im- yectos de microfinanzas rurales con efectos pactos en el sector más amplio y en los de demostración generalizada, y al mismo países de los proyectos que respalda la tiempo proporcionar el liderazgo para fo- IFC, y aprender de ellos. x x x i IFC Management Response to IEG-IFC Independent Evaluation of IFC's Development Results 2007: Lessons and Implications from 10 Years of Experience* M anagement greatly welcomes IEG-IFC's tenth, independent, annual review of evaluation findings. This year's annual review takes stock of eleven years of project approvals, from 1991 to 2001 (evaluated in 1996­2006). Introduction visory operations in frontier counties (high risk Management notes that IEG-IFC's independent and low income) and in priority sectors, such as evaluation found that IFC had positive develop- infrastructure. More importantly, the report shows ment impacts and profitable investment opera- that investment operations have largely yielded tions. The report indicates that most of IFC's above-average development results in these pri- projects have consistently performed well in terms ority areas. of financial, economic, environmental, and so- cial aspects, and have had good impacts on pri- We also note that the report indicates that im- vate sector development. This performance was pacts on private sector development of IFC's proj- achieved while IFC's projects were exposed to all ects have been strong and reached well beyond the the risks that are associated with private sector in- project company. Among other results, these proj- vestments in the developing world. ects had broad positive demonstration effects, stimulating follow-on investments by other in- We are encouraged by IEG-IFC's independent find- vestors, downstream and upstream business link- ing that IFC has generally made sound corporate- ages, and increased competition. Some contributed wide strategic choices. The report found that IFC to domestic capital markets development by pro- has successfully scaled up its investment and ad- viding increased access to finance and introducing new financing instruments. * Distributed to IFC's Board of Directors on April 11, 2007, and The report also found a consistently strong posi- discussed by the Board's Committee on Development Effec- tiveness on April 25, 2007. Released by IFC in accordance tive correlation between development and in- with IFC's Policy on Disclosure of Information. vestment results. This supports IFC's long-standing x x x i i i I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 operating principle of pursuing projects that are Responses to Specific Recommendations both developmentally and financially viable over the long term. IEG-IFC Recommendation: Develop a deeper, more differentiated country approach. IFC takes on more risks than other investors, cat- As IFC decentralizes, it has the opportunity to alyzing private investments where the private sec- adopt more tailored country strategies, to com- tor would not go alone. In some markets, such as plement its strong sector and regional approach. in Sub-Saharan Africa, IFC took on higher coun- This strategy might include, in consultation with try risks, in line with its development agenda. the Bank and country governments, the devel- The evaluation findings should be interpreted in opment and pursuit of a set of country specific pri- this context, recognizing that success rates will re- vate sector development indicators (such as for flect the higher risks the Corporation undertakes. the level of private, gross fixed capital formation; banking sector capacity; and private provision of The 1991­2006 period in which the evaluated infrastructure). projects operated saw major financial crises, in- cluding those in Asia, Argentina, Mexico, Russia, Management Response Turkey, and Brazil. IFC remained focused during Management agrees with the recommendation these years of high risk and market volatility, quickly to develop a more differentiated country approach. responding to crises through countercyclical in- Current IFC strategic processes already involve vestments, as well as enhanced portfolio operations developing country level strategies that feed into to support its existing clients. This allowed IFC to Country Assistance Strategies (CASs) and into mobilize scarce capital for the private sector in IFC's regional strategies that form part of IFC's difficult times and help boost liquidity in affected Strategic Directions Paper. Because of the com- economies. At the same time, IFC remained monality of certain characteristics, regional de- forward-looking by pursuing a strategy to reach partments are also able to group countries with markets and sectors where it can deliver greater similar needs and issues for the purpose of de- development impacts and strong additionality. veloping a coordinated approach. For example, in Sub-Saharan Africa, countries are grouped in four Looking forward, Management welcomes IEG- categories: (i) post-conflict (such as the Demo- IFC's finding that more recent commitments are cratic Republic of Congo and Liberia); (ii) natural poised to have greater development impacts. The resource rich (such as Nigeria and Tanzania); report indicates that IFC's overall work quality, a (iii) middle income (such as South Africa and Mau- key driver of success, is on the uptrend and proj- ritius); and (iv) others (such as Mali and Niger). ect risks are better mitigated. In addition, the im- Similar approaches are used in other regions. proving investment climates in many countries where IFC operates suggests greater develop- Building on this base of activity, IFC is seeking ment results, given IEG-IFC's finding that devel- to strengthen its country focus. As discussed in opment impacts are better when investment IFC Strategic Directions, FY08-10: Creating Op- climates are improving. Nevertheless, as IFC con- portunity (chapter 2), IFC is working to develop tinues to take on significant project risks, actual greater systemic approaches to its activities, which results will depend on many factors, including will be done at the country or sector level. In market performance. addition, increased IFC staff country presence through its phased decentralization should also fa- Management recognizes that there may be op- cilitate a more country-focused strategic approach. portunities for IFC to enhance its development ef- fectiveness and finds this report valuable in With respect to the suggestion to develop macro informing IFC in this regard. Management agrees private sector development targets, we need to with the general direction of the report's rec- study this more carefully to determine what is ommendations. Specific responses to each rec- feasible and meaningful, considering the difficulty ommendation follow. in attributing country-wide macro indicators to IFC x x x i v I F C M A N A G E M E N T R E S P O N S E T O I E G - I F C operations. IFC could also benefit from IEG-IFC tion effects, while simultaneously providing lead- findings on which private sector development tar- ership in promoting socially and environmentally get indicators have worked in other institutions. sustainable practices. In the meantime, IFC is working on advancing its Management Response metrics on outcomes and impacts that can clearly In the FY08­10 Strategic Directions paper, IFC in- be attributed to IFC's projects, advisory activi- corporated agribusiness into the five strategic ties, and systemic approaches. These metrics priorities. Over the past five years, IFC's com- could serve as IFC targets, but they will have to mitments in the agribusiness sector have grown be tried on perhaps one or two countries on a pilot significantly and development outcomes have basis. There may be some issues with respect to also improved. IFC is now intending to further in- the burden on clients for certain types of re- crease its involvement in this sector by, for ex- porting. Therefore, IFC will need to assess the fea- ample, developing wholesale financing solutions sibility of this approach. using financial intermediaries, processors, and traders. In addition, IFC has on-going work with the World Bank in providing broad indicators that coun- IFC is also doing some rural microfinance. How- tries may use to track private sector develop- ever, beyond agribusiness and a few rural micro- ment. The joint World Bank/IFC annual Doing finance projects, further study is needed to Business report is one example which has been understand how to be effective in rural areas, given increasingly used by many countries in setting that the results so far appear to be mixed. Man- targets in their reform agenda for improving in- agement would welcome IEG-IFC's input on les- vestment climates. sons learned from successful models of private sector rural finance to inform this recommendation. Another joint World Bank/IFC initiative in indicator- setting is the on-going development of the "Private With respect to the suggestion of providing lead- Sector at a Glance" tables. These one-page per ership to promote socially and environmentally country tables cover almost 60 key private sector sustainable practices, IFC addresses this through indicators encompassing: (i) economic and so- its sustainability pillar. Following Board approval cial context (such as inflation rate and size of labor and formal launch of the performance standards force); (ii) investment climate (such as ease of in 2006, IFC's focus has been on sound imple- doing business ranking and number of proce- mentation of the performance standards. To main- dures to start a business); (iii) private sector tain its environmental and social sustainability investment (such as private participation in infra- leadership, IFC will continue to provide support structure and net private FDI); (iv) regulation and for the further adoption and implementation of taxes (such as time dealing with government of- the Equator Principles. In addition, IFC is com- ficials and corporate tax rate); (v) finance and mitted to scaling up its activities in renewable banking (such as total financial system deposit energy and energy efficiency sectors. and bank branches per one hundred thousand people); and (vi) infrastructure (such as paved IEG-IFC Recommendation: Pursue new roads and electric power outages). incentives and mechanisms to enhance cooperation with the World Bank in areas of IEG-IFC Recommendation: Place an emphasis synergy. on rural development. To enhance cooperation with the World Bank in In its country strategies, IFC may consider flagging areas of synergy, IFC could (i) consider new in- opportunities to work on the nexus of rural centives and mechanisms to complement the poverty and sustainable natural resources, on CAS process (with the Bank); and (ii) identify in- which poor people depend, and to identify and vestments at approval that were facilitated by develop high-impact agribusiness and rural mi- Bank policy or regulatory assistance and track crofinance projects with widespread demonstra- them throughout the project cycle (through the x x x v I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 Development Outcome Tracking System (DOTS) IEG-IFC Recommendation: Manage the trade- or other means) in order to judge their success. offs inherent in the decentralization process to achieve the highest possible work quality. Management Response IFC will need to monitor the decentralization Management agrees with the recommendation of process closely to ensure that its work quality re- enhancing cooperation with the Bank. Leveraging mains robust, and support this with a rigorous the strengths of the whole World Bank Group training program for new investment staff. will become more important as IFC aims to in- crease its development impact and increase its sys- Management Response temic interventions. In past years, IFC has taken Management agrees with the recommendation of several steps in this direction, from increased ensuring that work quality remains high as IFC focus by IFC Senior Management (including in- implements its phased decentralization. IFC is tak- viting senior World Bank staff to IFC's strategy ing a number of steps to help ensure sustained discussions), to including World Bank Group co- work quality. More experienced/senior industry operation as part of the performance appraisal for staff will be located in regional operations cen- managers in Sub-Saharan Africa, to a World Bank ters to mentor and provide leadership to more jun- Group review of advisory services to assess syn- ior investment staff. Credit officer(s) will similarly ergies. In addition, the World Bank and IFC have be stationed in operations centers and will be in- a joint Vice Presidency Unit (VPU) for Financial and volved in field-based investment decisions. Field Private Sector Development; the Vice President presence of environment and social specialists of this VPU is also IFC's Chief Economist. There will be increased to further mainstream sustain- are also joint departments in a number of core sec- ability into IFC's investment work, mitigate envi- tors: oil, gas, mining, information and communi- ronmental and social risks, and ensure sustainability cation technology, and subnationals. in clients' operations. In addition, as discussed below, IFC is undertaking several steps to enhance Going forward, IFC envisages increasing cooper- its risk management function in connection with ation with the World Bank as the Corporation the decentralization. Finally, the decentralization adopts systemic and programmatic approaches to is being undertaken in a phased approach, first in scaling up activities. Typically, a systemic approach Asia, and then in other regions over three years. to a sector would start with upstream advisory This approach allows IFC to learn from experi- work on the business-enabling environment and/or ence and revise implementation processes, as privatization, often building on efforts of the World needed, based on these experiences. Bank and the government. IFC can then partici- pate in the financing of associated projects, as IFC is also developing a knowledge manage- appropriate. In addition, IFC and World Bank co- ment initiative to maintain global expertise as operation will be enhanced by the implementation decentralization deepens. This would include of IFC's phased decentralization program. This department-level training at entry (on-boarding) should provide more opportunities for increased and structured activities for sharing knowledge. World Bank-IFC staff contacts in the field. This initiative would complement the current IFC induction program and credit courses, which With respect to the recommendation to identify have proven to be effective. and track performance of investments with World Bank/IFC cooperation, IFC will consider this along IEG-IFC Recommendation: Ensure sound with the other work it is doing on metrics, such risk-management systems and develop as DOTS, systemic metrics, and advisory metrics. risk-mitigation products. An important issue to consider is the extent to IFC will need to make continued efforts to im- which the performance of projects can be partly prove its risk-management systems and to prepare attributed to good World Bank Group cooperation. for the next correction in the international mar- x x x v i I F C M A N A G E M E N T R E S P O N S E T O I E G - I F C kets, including perhaps the extended use and vance its metrics to better understand (and derive development of new risk-mitigation products. lessons about) the wider sector and the country- level impacts of its operations. Management Response Management agrees with this recommendation. Management Response IFC has in the past responded well to such crises IFC agrees with the recommendation of deepen- by supporting its portfolio projects and under- ing its evaluation and monitoring system in con- taking countercyclical investments such as trade fi- sultation with IEG-IFC. In the past, IFC has nancing, as well as debt and equity funding. IFC's consulted with IEG-IFC on the development of FY08-10 Strategic Directions paper acknowledges its monitoring and self-evaluation system, that that current conditions in markets where it oper- is, DOTS for investment operations and the proj- ates could change should there be financial crises. ect completion report (PCR) for advisory services. IFC's growth strategy takes into consideration the Both DOTS and PCRs are already contributing need to maintain financial capacity to accommo- to increased development focus through clear date the impact of possible financial crises. IFC objective-setting and tracking of outcomes. The stands ready to play a countercyclical role, with in- PCR for advisory services, which is in the pilot struments such as trade lines and other support, stage, is being supplemented by thematic impact including advisory services, to select clients. evaluations. IFC is undertaking several steps to improve over- As the report mentions, DOTS is starting to sup- all risk management and thereby better prepare plement expanded project supervision reports IFC for the next crises. As part of the decentral- (XPSRs) by providing results that cover IFC's en- ization initiative, the risk-management function will tire portfolio (rather than a sample) and are more be transformed to facilitate improved client ser- up-to-date. DOTS provides an earlier, prelimi- vice and efficiency, while retaining appropriate nary indication of results, and takes into account checks and balances on decentralized decision developments after the XPSR is written. The data making. Steps in this direction include: (i) the from DOTS feed into IFC's strategic decision ongoing Business Process Review to streamline making. Both XPSRs and DOTS already cover and strengthen operational procedures; (ii) shift- broader impacts beyond the client company. ing credit review and, eventually, most aspects of risk management decision-making to the field; On evaluating country and sector-wide impacts of (iii) enhanced corporate tools for risk manage- IFC's operations and drawing lessons from them, ment, including improved risk-rating systems; IFC already routinely considers the results of its (iv) integration of development-impact metrics projects, including impacts beyond the client com- with financial risk-return metrics; (v) enhanced re- pany. IEG-IFC's country and sector evaluations porting of all metrics; and (vi) strengthening of in- are also providing valuable insights. Tracking coun- formation technology (IT) for more efficient and try and sector-wide metrics will, however, not effective document processing and management. make sense in all cases, because IFC's investments are often a relatively small share of private in- IEG-IFC Recommendation: Strengthen the vestment, making attribution of country-level re- capacity for evaluation and its application. sults to IFC's activities difficult or even meaningless. As it deepens its self-evaluation and monitoring However, as noted earlier, there could be scope systems, IFC could, with IEG-IFC's assistance, ad- for a pilot test. x x x v i i Chairperson's Summary: Committee on Development Effectiveness (CODE) O n April 25, 2007 the Committee on Development Effectiveness (CODE) met to discuss the Independent Evaluation Group­IFC (IEG) report entitled Independent Evaluation of IFC's Development Results 2007: Lessons and Implications from 10 Years of Experience and the Draft Man- agement Response. Summary of Evaluation Report (2) place emphasis on rural development, espe- This tenth IEG annual review of evaluation findings cially through support for agribusiness and rural took stock of the performance of 627 investment microfinance projects; (3) pursue new incentives operations approved during 1991­2001 and eval- and mechanisms to enhance cooperation with uated in 1996­2006, and drew on other evaluative the Bank in areas of synergy; (4) manage the fric- materials to highlight lessons and strategic impli- tions resulting from a combination of the decen- cations for IFC going forward. The report's main tralization process, scaling up of operations, and findings were: (i) 59 percent of IFC-supported improving work quality; (5) ensure sound risk projects (65 percent by volume) achieved high management systems, and develop risk mitigation development ratings at the project level; (ii) de- products for clients, to cope with the risks ema- velopment outcomes and IFC profitability tend nating from the next correction in the global fi- to go hand in hand; (iii) five factors--changes in nancial market; and (6) strengthen the capacity business climate; type of industry sector; quality for evaluation and its application. of the sponsor; level of product market, client company, and project type risks; and IFC work Draft IFC Management Response quality--have significantly influenced the devel- Management appreciated IEG's evaluation, and opment outcomes of IFC-supported projects; and agreed with the general direction of its report's rec- (iv) IFC has generally made sound strategic choices. ommendations. It took note of the overall IEG find- ing that IFC has had positive development impact IEG recommended that IFC should: (1) develop in most of its projects and profitable investment a deeper, more differentiated country approach; operations overall, and has made sound strategic x x x i x I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 decisions over the years. Management also noted focus. There were also comments on the differ- the report's findings that quality at entry of recent ent role of Country Assistance Strategies (CASs) commitments is likely to have better outcome in the Bank and IFC, the possibility of strength- than the evaluated sample, and the positive cor- ening joint CASs, and the importance of paying relation between development impact and prof- due attention to private sector development in the itability. Management agreed on the importance overall Bank Group strategy. of coordination with the Bank. It informed the meeting of its plans to hold an internal workshop Next Steps to further consider the IEG's findings and rec- Since the main topics of the IEG evaluation were ommendations, including the improvement of central to the discussion of IFC strategic directions, IFC measurement and evaluation system. CODE recommended that it be considered by the Board under an absence-of- objection proce- Overall Conclusions dure (without a meeting). For the future, mem- Members commended IEG for the useful and in- bers requested that the schedules be set to allow formative report, and noted Management's gen- CODE to discuss the IEG report well before the eral concurrence with the recommendations. discussion of IFC's strategic directions. They were reassured by Management that IFC's strategic directions incorporated the lessons dis- The following main issues were raised during the tilled by IEG. One main issue discussed was mea- meetings: suring development impact and the related perceived trade-offs with profitability. While ac- Development impact. Speakers were generally knowledging the ongoing efforts in this area, satisfied with the overall positive link between speakers also commented on the need to im- developmental impact and profitability. However, prove the existing methodology to capture they also took note of low development impact broader impacts, beyond financial and economic and low investment return in almost one-third of results. CODE noted that ex-post IFC profitabil- projects, and asked whether performance was ity and development impact have tended to go to- linked to work quality, particularly at approval and gether but also remarked on the IEG statement supervision levels. Questions were also raised on in the report that implies IFC support was limited how to address trade-offs between development for projects where there was a trade-off between and investment return. A few speakers sought the two. more information on outsourcing supervision in projects with financial intermediaries. Manage- CODE also considered risk mitigation instru- ment pointed out that work quality has been im- ments, and relative performance of equity vs. proving in recent years based on IEG's report. loan investments. Other issues discussed included Management also explained that the case of less the variability across sectors and regions, small vs. than satisfactory work quality in the past was due large projects, and aggregation of indicators to to a number of reasons, including exogenous country or sector portfolios. Specific comments factors and certain opportunities or risks not and questions were raised about IFC's role in being captured at the outset. Management also middle-income countries (MICs), environmental remarked that the critical stage for identifying de- and social practices, performance of intermediary velopment impact is project appraisal. Man- operations, and evaluation criteria including those agement indicated that IFC considers not only used for assessing additionality. Several speakers development impact, additionality, and financial remarked on the expanded decentralization ef- viability, but also other factors such as quality of forts, its implications on work quality including sponsors, or reputational risks. during the transition, and the challenges to man- agement and Board oversight. It was hoped that A number of members were concerned that the decentralization would contribute to country current methodology for measuring development x l C H A I R P E R S O N ' S S U M M A R Y: C O M M I T T E E O N D E V E L O P M E N T E F F E C T I V E N E S S ( C O D E ) impact was heavily focused on financial and eco- few members felt that more could be done to nomic results; there was a need to deepen as- strengthen and institutionalize the CAS. One sessment of qualitative impact; and development speaker agreed with IEG's calls for IFC to define impacts at the sector, country, regional, and global roles and priorities in MICs, and whether it should levels were not being fully captured. Some speak- focus on key priority areas affecting the poorest, ers remarked on the perceived trade-offs between e.g. infrastructure, and frontier markets. Another additionality and development impact, although proposed a model for looking at a country-level there was a sentiment in favor of a more in-depth development impact analysis, which may facili- discussion of this issue at the subsequent meet- tate the analysis of a project and its implications ing on IFC's strategic directions. IEG indicated in a particular market. Management informed that the evaluation methodology incorporates that IFC is moving towards a more country- quantitative as well as qualitative assessments focused strategy under the current decentral- on environmental and social impact, economic ization efforts, and when appropriate to pro- sustainability, and private sector development grammatic approaches. impact e.g., demonstration effect. World Bank Group (WBG) synergies. A few Portfolio performance. Comments were made members encouraged improving the interaction on the varied performance of projects across re- between the Bank and IFC, including division of gions and sectors, particularly the weak per- labor and consistency of country approaches. formance in Africa. In this regard, one member One member suggested addressing alignment of asked why smaller projects performed badly in incentives and remuneration. comparison to larger projects, and the reasons for poor performance of direct investment and tech- Specific areas for engagement. IFC's focus nical assistance to SMEs in Africa. Management on rural projects particularly agribusiness and elaborated on the lessons learned in trying to rural microfinance was encouraged. There was manage small projects in Africa from Washing- also a proposal to focus on climate change and en- ton. In this regard, it said that some changes ergy efficiency. Management replied that fol- have been introduced such as using more in- lowing IEG's recommendation to place an termediaries, and increased staffing in Africa emphasis on rural development, agribusiness through decentralization. was selected as one of IFC's five priorities, par- ticularly in frontier areas Concerning the lower evaluated success rates for equity compared to loans, despite the fact that eq- Decentralization. There were comments and uity has a higher overall contribution to IFC's questions on the cost-effectiveness of decentral- profitability, one member found it reasonable that ization, and the impact on human resources in- higher return was linked to risk-adjusted return; cluding maintaining adequate staffing, diversity, Management added that the profitability of IFC's and incentives to share knowledge while in- equity investment should be looked at on a port- creasing efficiency. Relatedly, one member was folio basis whereby successful projects drive over- concerned about tensions raised during mana- all outcome. Others asked about IFC's criteria, gerial and organizational changes. A speaker cau- other than customer's demand, for offering eq- tioned about the use of incentives focused on uity and loan. volume. Others sought further elaboration on the delegation of operational authority to the Country approach. Some members stressed field, and the quality of supervision of projects. the importance of strengthening IFC's country Management responded that its Industry De- approach taking into account the different needs partments are working on enhancing knowl- for private sector development in frontier and edge sharing in a decentralized organizational nonfrontier countries and markets. In this regard, structure, and across the WBG. While noting the x l i I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 possibility of higher operational and oversight Disclosure of IEG report. Through the full costs, Management stressed the benefits of de- disclosure of the report, IEG expected better ac- centralization such as closer knowledge of local countability. A few speakers welcomed the pub- markets including risks, and empowerment of lic disclosure of the report, and the impact on staff through more delegation. Management in- accountability and transparency, which could ben- formed that it was piloting successfully an in- efit other multilaterals and private investors, and centives system where Bank staff are credited promote monitoring and evaluation. in their annual performance assessment for sub- national assets added to IFC book. Management emphasized the importance of using a system that will promote innovation and creativity rather than one focused on a checklist. Makoto Hosomi, Acting Chairperson x l i i 1 Development Results of IFC-Supported Projects, 1996­2006 T he Independent Evaluation Group of the International Finance Cor- poration (IEG-IFC) has conducted evaluations of the development results of IFC-supported private sector projects since 1996.1 This chapter presents a 10-year retrospective of on sustained improvements, or nondeterioration, the development performance of IFC's invest- in the business climate quality of emerging market ment operations and a directional forecast of fu- economies as well as improved project risk layer- ture results. (IFC did not establish a systematic ing by IFC at approval. approach for evaluating project-level results of its advisory operations until 2006.)2 To enable a comprehensive view of IFC's devel- opment impact, performance metrics will need to Amid considerable variation in private capital flows evolve further to capture the wider sector and to emerging markets, IFC has been successful in country-level impacts of IFC-supported projects. increasing the level of its investment and advisory services activities in the last 15 years, investing Substantial Increases in IFC Investment about $50 billion (approximately 4 percent of pri- and Advisory Services Activities vate capital flows, including funds from cofi- Private capital flows to developing countries nanciers). Out of 627 IFC investment operations fell in the wake of several crises in the late approved during 1991­2001 that had reached early 1990s, but are again at record levels. Net operating maturity and were evaluated between private capital flows to developing countries grew 1996 and 2006, IFC's year-on-year development dramatically between 1991 and 1997, from less success rates (the proportion of IFC-supported than $100 billion per year to about $300 billion per projects that achieved high development ratings) year. Capital flows then fell to under $200 billion have not generally departed greatly from an over- in 2002 following various regional and country all average of 59 percent (65 percent by volume). political and economic crises (including those in In the last three years, however, IFC's develop- Asia in 1998 and Argentina in 2001). Since 2003, ment success rates have fluctuated significantly-- private capital flows have again achieved new from 58 percent in 2004, to 51 percent in 2005, and record levels, reaching $647 billion in 2006, ap- to 66 percent in 2006--reflecting industry sector proximately 5 percent of the gross domestic prod- dynamics as well as variations in business climate uct (GDP) of developing countries. This pattern quality. Continued higher success rates will hinge of growth contrasts sharply with declining official 1 I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 Figure 1.1. IFC Has Increased Its Private Investment Operations Sixfold since 1991 Since 1991, net private capital flows (of debt and equity) have varied considerably. They rose steadily in 1991­97, before falling back in 1998­2002, and are again at record levels. The volume of IFC investments has, however, grown almost year-on-year since 1991. IFC was consistent with its mission of moving counter- cyclically to the market during a downturn (1998­2002). IFC investments represent about 1 percent of all private capital flows to developing countries (4 percent, including the funds of cofinanciers), but make up about 30 percent of international finance institution private sector volumes. 8 700 to 7 600 6 billions) flows billions) 500 ($ ($ 5 400 4 capital 300 3 countries 2 200 private investments 1 100 IFC otalT 0 0 developing 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 IFC investments Private capital flows Source: IFC and World Bank databases. aid to developing country governments. Net of- proximately $340 billion of assistance to the gov- ficial flows (debt plus aid) fell from $78 billion in ernments of developing countries during this 1998 to minus $5 billion in 2006, reflecting a ris- time, with much smaller year-on-year volume ing trend in the substitution of official capital in changes than those of IFC.4 financing for development.3 IFC's countercyclical growth during 2000­02 in part IFC has increased its investment activities reflected the successful implementation of a new sixfold. During 1991­99, IFC's investment com- growth strategy. The strategy called for a reposi- mitments almost doubled, with minor dips in 1995 tioning of IFC ahead of the market on multiple and 1999. Since 1999, IFC has grown its investment fronts, including leading the private sector into new operations in every year, with an increase in new countries, particularly frontier countries (defined investments per year from approximately $2 bil- by IFC as being high risk and/or low income, see lion in 1999 to $6 billion in 2006 (figure 1.1). In table 1.1), and sectors (infrastructure, financial total, IFC invested about $50 billion in developing markets, and health and education), as well as countries between 1991 and 2006, a sixfold in- making a significant push toward second-tier com- crease overall. Including funds provided by cofi- panies and small and medium enterprises (SMEs). nanciers (IFC normally provides around 25 percent A prime example of IFC's countercyclical role was of total project costs), IFC-supported projects its support for large industrial clients in Turkey have consistently made through several periods of market turbulence Between 1991 and up about 4 percent of (since the mid-1990s), and their emergence as 2006, IFC invested all private capital flows major engines of economic growth in the country.5 about $50 billion in to developing countries. Over the same period, the IFC has also grown its advisory services op- developing countries. World Bank provided ap- erations. The country coverage of active advi- 2 D E V E L O P M E N T R E S U LT S O F I F C - S U P P O R T E D P R O J E C T S , 1 9 9 6 ­ 2 0 0 6 Table 1.1. IFC Is More Concentrated Than Other Private Capital in Frontier Countries If a country meets the criteria of being high risk (with an Institutional Investor Country Credit Rating of less than 30) and/or low income (gross national income of less than $826 per capita),6 then IFC classifies it as a frontier country. As the table below shows, frontier countries accounted for about 15 percent of developing country GDP in 2005. In line with its strategy, IFC has a far higher share of the commitments in these countries relative to foreign direct investment. Share of Share of developing country Share of IFC Risk and developing country foreign direct commitments income level Examplesa IFC classification GDP (2005) investment (2005) (2006) High risk and/or Bangladesh; India; Frontier 15% 12% 29% low income Nigeria; Pakistan; (ratio to GDP (ratio to GDP Vietnam share of 0.8) share of 1.9) Neither high risk Brazil; China; Mexico; Nonfrontier 85% 88% 71% nor low income Russia; Turkey (ratio to GDP (ratio to GDP share of 1.0) share of 0.9) Sources: IEG, derived from IFC documentation and databases; and the Institutional Investor. a. In the each case, the country examples are those with the five largest economies (measured by GDP) in 2005. sory services operations has increased from 72 in draw about the wider development impacts of 1996, to 134 in 2005, with frontier countries ac- IFC. This is partly because of the difficulty in at- counting for the majority of new advisory services tributing project-level impacts to wider develop- commitments. The volume of advisory services ment in a country and the often indirect nature by commitments has, accordingly, increased from which IFC operations help promote private sec- about $53 million per year in 1996, to $222 million tor development and contribute to the reduction in 2005.7 of poverty (see figure 1.2). Most IFC-Supported Projects Achieved Fifty-nine percent of operations (65 percent High Development Ratings by volume) achieved high development rat- IEG8 evaluates the development and in- ings. On average, based on a random sample of vestment performance of IFC's operations. 627 operations, 59 percent of IFC-supported proj- Each year, IEG-IFC assesses the performance of a ects between 1996 and 2006 achieved high de- random sample of IFC's investment and advisory velopment ratings (65 percent when weighted by services operations (see appendix A), as a way to the size of IFC's investment in each case). The provide accountability for the performance of IFC project development rating is a synthesis of four operations and to identify lessons that will inform subindicators: project business success; economic future strategy and operations (box 1.1). As such, sustainability; environmental and social effects; IEG-IFC assesses the development and IFC in- and impact on private sector development. These vestment results arising from individual projects, indicators are explored in more detail in box 1.1; and synthesizes performance at the sector, the- box 1.2 illustrates how the indicators describe matic, country, regional, and global levels to pres- successful and less successful IFC-supported proj- ent aggregate accounts of IFC's development ects. Development ratings are higher by volume impacts (or effectiveness). There are, however, because larger operations tend to be more suc- accordant limitations in the inferences one can cessful than smaller operations. 3 I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 Box 1.1. IEG Independently Rates the Development and Investment Performance of IFC Operations Each year, IEG-IFC independently assesses the development re- contributed positively to the intermediary's profitability, financial sults of a random sample of IFC's investment and advisory services condition, and business objectives. operations, as a way to provide accountability for past perform- · Economic sustainability. Where measurable, operations gen- ance and to identify lessons that will inform IFC and World Bank erated an economic rate of return of at least 10 percent. This in- Group strategy and operations going forward. IEG is independent dicator takes into account net gains or losses by nonfinanciers, in reporting directly to the Board of Directors of the World Bank unquantifiable impacts, and contributions to widely held devel- Group rather than to IFC Management. opment objectives. IEG-IFC carries out two types of evaluations--micro and macro · Environmental and social effects. Operations met or exceeded evaluations. Micro evaluations are assessments of the perform- IFC's environmental, social, health, and safety requirements at ance of individual IFC investment and advisory services operations, approval, and (since 1998) Bank Group policies and guidelines, which are first self-evaluated by IFC staff before being validated as well as local standards that would apply if the project were by IEG-IFC. Micro evaluations provide the building blocks for macro appraised today. evaluations of sector, country, regional, and global performance, · Private sector development impacts. Whether a project's private or on a theme, such as IFC's experiences with small and medium sector development impact beyond the project is positive, par- enterprises. Macro evaluations link project-level outcomes to ticularly its demonstration effect, in creating a sustainable en- prevailing country and regional conditions, as well as internal fac- terprise capable of attracting finance, increasing competition, tors, such as the way IFC organizes itself and its work processes and establishing linkages. and procedures. The timing of an evaluation depends on its nature. For invest- IFC's investment rating is an assessment of the gross profit con- ment operations, IEG-IFC evaluates project performance at "early tribution quality of an IFC loan and/or equity investment, that is, with- operating maturity" (usually 18 months into commercial operations, out taking into account transaction costs or the cost of IFC equity which is generally five years after approval), while for advisory ser- capital. vices operations, the evaluation is carried out after the project closes. Macro evaluations are often carried out to tie in with · Loan. Loans are rated satisfactory provided they are expected IEG-World Bank evaluations of the same sectors, countries, or re- to be repaid in full with interest and fees as scheduled (or are gions, but such evaluations also address issues specific to IFC's prepaid or rescheduled without loss). operations and strategic priorities. · Equity. Equities are rated satisfactory if they yield an appropri- All evaluations look at the development results, as well as the ate premium on the return on a loan to the same company (a nom- investment success (in the case of investment operations) of IFC's inal, dollar, internal rate of return greater than or equal to the fixed operations. The project development rating is a bottom-line as- loan interest rate,10 plus a premium). sessment of the project's results across four development di- mensions, relative to what would have occurred without the Unlike other development financial institutions that focus on the project.9 Operations are judged to be at least satisfactory based public sector, IFC's private sector projects face competition and, on the following criteria. therefore, the evaluation framework for investment operations captures the inherent commercial risks and market factors af- · Project business success. For real-sector projects, operations fecting the projects. Accordingly, results cannot be directly com- generated a project financial rate of return at least equal to the pared with those of public sector institutions such as the World company's cost of capital (inclusive of a 350-basis-point spread Bank, which employ different evaluation approaches, including in to its equity investors over its lenders' nominal yield); for finan- terms of focus, timing of evaluation, and benchmarks used11 (see cial sector projects, the associated subportfolios or asset growth box 1.4 and appendix A). There has been some variability in the de- cial effects, and economic sustainability (all were velopment subindicators. IFC operations have above the synthesis success rate of 59 percent be- done better in terms of private sector development tween 1996 and 2006, see table 1.2). IFC operations impacts beyond the project, environmental and so- have done less well in terms of project business suc- 4 D E V E L O P M E N T R E S U LT S O F I F C - S U P P O R T E D P R O J E C T S , 1 9 9 6 ­ 2 0 0 6 Figure 1.2. IFC Operations Can Help Reduce Poverty through a Chain of Events IFC activities can help to reduce poverty via a sequence of steps. For instance, an investment operation can have positive demonstration effects, leading to a num- ber of companies entering a market, thus creating jobs and economic growth, which ultimately helps to reduce poverty among workers and consumers alike (on the basis that prices fall and/or quality improves with increased competition). Inputs Outputs Outcomes Impacts Investment Demonstration operations effects Poverty reduction Sustainable private Sustainable investment PSD Economic growth Improved living standards Improved Advisory services business climate Source: IEG. Box 1.2. Examples of Successful and Less Successful IFC Projects Successful project: The project was the installation of a new dig- Less successful project: The project was a pilot credit agency line ital cellular network in an Asian country, to provide 55 percent cov- serving wood processors and furniture manufacturers in a post- erage by area and increase access to telephone services among conflict transition economy in Europe. The companies were pre- poor rural communities. At the start time of the project, the coun- viously part of a state-owned conglomerate which collapsed. try had one of the lowest telephone density rates in the world and Project business success was unsatisfactory because all of the a wait time of more than 10 years for a fixed telephone line. The companies financed through the agency line fell into financial dis- project was a major commercial success (an excellent project tress. IFC provided technical assistance to build management ca- business-success rating), with a subscriber base of nearly half a pacity (ahead of a planned privatization) but it was insufficient to million, more than twice what was anticipated. Economic sus- bridge their lack of expertise, and problems were compounded by tainability was rated as excellent because the project yielded out- difficult trading conditions. Economic sustainability was also un- standing returns to the economy, including taxes and duties paid satisfactory because none of the companies had proved to be a to the government, revenue-sharing payments to the regulator, li- sustainable source of employment, tax revenues, or added value. cense fees, and lease payments to a railway company for using Their expected contribution to postwar reconstruction was limited. its fiber-optic backbone. Environmental and social effects were Environmental and social effects were unsatisfactory because rated as satisfactory, with the company committed to sound en- the companies did not meet the prescribed standards, with one fur- vironmental and social performance, in compliance with World niture manufacturer polluting local air quality, soil, and surface and Bank Group guidelines. Private sector development impacts were ground waters. Finally, private sector development impacts were excellent, with the project increasing cellular competition, and unsatisfactory because no privatization occurred due to a lack of resulting in lower tariffs, increased range, and improved quality for interest from domestic and foreign investors. Moreover, the agency users, as well as improving the essential infrastructure for other line failed in its objective to help build expertise within the agent private sector development. banks to support future private enterprise in the country. 5 I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 Table 1.2. Most IFC-Supported Projects Achieved High Development Ratings, 1996­2006 Most IFC-supported projects were, on balance, delivering (and were expected to deliver in the long run) sustainable development across the four dimensions that IEG rates: their financial, economic, environmental and social performance, as well as their contribution to private sector development beyond the project (see box 1.1 for more details on the criteria used to rate each dimension, and box 1.4 on the general noncomparability of these results with those of other institutions such as the World Bank). IFC projects have performed better, in terms of private sector development impacts beyond the project, environmental and social effects, and economic sustainability--all were above the overall rating of 59 percent. IFC projects have done less well in terms of project business success (46 percent by number, 50 percent by volume), which reduces the overall development rating. Weaker performance on project business suc- cess is mainly due to the inherent commercial risk of a private sector business--IFC projects face the test of market competition--combined with business climate risk. However, some businesses that achieve only marginal commercial performance (they achieve a positive return but fail to achieve the satisfactory financial rate of return "hurdle rate") can still operate in an economically sustainable manner, and have posi- tive environmental and social effects and private sector development impacts. Success rates are higher by volume because larger operations tend to be more successful than smaller operations. Percentage with high Percentage with high development ratings, development ratings, weighted by Development Indicator by number commitment volume Overall development rating (a bottom-line assessment of the below indicators) 59 65 (i) Project business success 46 50 (ii) Economic sustainability 62 65 (iii) Environmental and social effects 67 72 (iv) Private sector development impact (beyond the project) 72 76 Source: IEG. Note: Performance reported above is based on the evaluations of 627 projects between 1996 and 2006. cess (46 percent by number, 50 percent by volume), Performance has also differed across re- reflecting in large part the inherent commercial risk gions and sectors. By region, project devel- of a private sector business. However, even some opment results have been weaker in Africa, driven businesses that achieve only marginal commer- by persistently high-risk business climates, to- cial performance, can still operate in an econom- gether with below-average IFC work quality, the ically sustainable manner, and have positive willingness by IFC to take greater project risks in environmental and social effects and private sec- the region, and below-average project environ- tor development impacts. Environmental and so- mental and social compliance. By sector, IFC- cial effects ratings for IFC-supported projects have supported projects in the infrastructure and the varied in the past decade due to the introduction extractive sectors have achieved better develop- of stricter requirements,12 the examination of ment performance, with more mixed results in a growing number of issues in environmental and general manufacturing and services, funds, and social assessments and evaluations, and the vary- health and education operations. Chapter 2 dis- Development ing complexity and industry cusses regional and sector performance varia- sectors of evaluated projects. tions in more detail, in the context of what we have performance is assessed Appendix B provides trend in- learned about private sector development in the across four dimensions. formation for each indicator. last decade. 6 D E V E L O P M E N T R E S U LT S O F I F C - S U P P O R T E D P R O J E C T S , 1 9 9 6 ­ 2 0 0 6 Performance has fluctuated substantially in small in number, exhibit lower suc- IFC projects face the last three years. Previous IEG reviews of cess rates than investments in other the test of market IFC's development results have focused on the de- sectors. That time also coincided with velopment performance of IFC-supported projects the technology and Internet bubble, competition. that were evaluated in the most recent three years, and in line with the high-risk nature to ensure their relevance for informing IFC strat- of that sector, few of IFC's investments in Inter- egy and operations going forward. While this re- net firms proved to be successful.14 IFC's invest- view, overall, adopts a longer-term perspective, this ments in general manufacturing also did not fare section addresses the quality of IFC's develop- well, compared with the all-sector average or ment results since 2004. Figure 1.3 shows that compared with general manufacturing invest- project development ratings have varied sub- ments by IFC historically, in part due to increased stantially, from 58 percent in 2004, to 52 percent competition between IFC-supported operations in 2005, and to 66 percent in 2006. and Chinese producers. Recent variations in project development Factors outside of IFC's control also con- results in part reflect sectoral specifics. tributed to development impact quality. The fall in the proportion of projects with high de- There were a number of political and economic velopment ratings, from 58 percent in 2004, to crises in the emerging markets before and during 52 percent in 2005, coincided with the start of 2000 (including the after-effects of the Asian cri- IFC's frontier growth strategy and with signifi- sis in 1998). The country risk ratings for 37 percent cant organizational changes. In pursuit of its fron- of projects approved in non-high-risk countries ac- tier growth strategy, IFC faced new risks in its tually deteriorated to high risk after project ap- operations, with investments in new countries13 proval, while the country risk ratings for 79 percent and in new sectors. For example, a Health and of high-risk approvals remained high risk. As pre- Education Department was created in 2000, and vious evaluations have shown, deterioration in a the number of investments in the social sectors country's business climate risk adversely affects the peaked around that time. These investments--ap- development performance of projects in that proved in 2000 and evaluated in 2005--while country. By contrast, most operations evaluated in Figure 1.3. Trends in Project Development Performance, 1996­2006 Based on 627 evaluations of IFC-supported projects between 1996 and 2006, 59 percent achieved high development ratings. Performance was above average between 1996 and 1998, below average in 2005, and then above average in 2006. 100 90 80 with 70 rating 60 projects 50 of 40 1996­2006 average development 30 20 high Percentage 10 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Source: IEG. 7 I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 2006 benefited from the fact that their host coun- operating maturity. In the absence of ex-post in- tries achieved a significant improvement in busi- formation, IEG analyzes the level of project risk in ness climate risk after approval. This helped boost recent commitments to provide an ex-ante, companies' business success and economic sus- directional indication of the trend in future suc- tainability in particular. cess rates. IEG screens projects for eight risk fac- tors: sponsor quality, market risk, debt service Further Improvement Is Anticipated burden, project type, sector risk, country busi- Project high-risk intensity affects develop- ness climate at approval, IFC credit review inten- ment performance. The projects that IFC sup- sity, and non-repeat-project risk. Appendix A ports, by their nature, typically face intrinsic describes IEG's methodology and each risk factor business risks. To an extent, IFC can control the in further detail. level of project risk, first by screening out proj- ects with unmanageable risks, and for projects The high-risk intensity of IFC projects at ap- processed through to approval, mitigating risks proval has fallen. Fifty-nine percent of projects through appropriate project and investment struc- evaluated between 1995 and 2000 carried four or turing. IEG has found that, in aggregate, high lev- more high-risk factors, compared with 46 per- els of risk can detract from the quality of a project's cent between 2002 and 2005.15 This pattern re- development impact. As figure 1.4 shows, projects flects a declining trend almost year-on-year since with more high-risk factors present achieve lower 1995.16 The decrease in high-risk layering is likely development ratings, with the presence of four a result of various quality-enhancement steps or more high-risk factors generally equating to taken by IFC since 1998. IFC has made a number lower-than-average development success. For proj- of organizational changes, such as the creation of ects approved since 2002, there is no independ- a Credit Department, portfolio units, equity desks, ently validated evaluation and deploying more investment staff in the field, IFC can control the data because these projects as well as several procedural changes that have in- level of project risk. have not yet reached early creased the rigor of front-end review, facilitated Figure 1.4. Projects with More High-Risk Factors Achieve Lower Development Ratings Project risk layering in new approvals has a significant impact on the development ratings of IFC-supported projects. Based on the risk profil- ing of 388 operations, the proportion of projects with high development ratings fell as the number of high-risk factors per project increased. 100 90 with 80 rating 70 60 projects 50 of 40 development 30 20 high Percentage 10 0 0­1 2 3 4 5 6 7+ Number of high-risk factors Source: IEG. Note: IFC investment success rates have a similar relationship with the number of high-risk factors, although the dropoff in success rates with four or more high-risk factors is even sharper for investment success rates than it is for development success rates. 8 D E V E L O P M E N T R E S U LT S O F I F C - S U P P O R T E D P R O J E C T S , 1 9 9 6 ­ 2 0 0 6 Figure 1.5. Reduced Business Climate Risk Implies Higher Development Ratings in 2007 The level of country business-climate risk following project approval has a large impact on project development ratings. Where business climate risk is improving, IFC-supported projects are more likely to be successful, whereas when business climate quality is deteriorating, projects are less likely to be successful. Among operations being evaluated in 2007, the positive shift in average business climate risk that they have faced since project approval (mea- sured by changes in Institutional Investor Country Credit ratings and weighted according to the evaluation sample) is the greatest it has been since the current evaluation system was introduced in 1996. Accordingly, it is reasonable to expect IFC-supported projects to achieve higher development ratings in 2007. 15 100 90 80 with country rating 70 in 10 rating 60 projects risk 50 of change 40 credit 5 development 30 verageA 20 high Percentage 10 0 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Average change in country credit risk rating (since approval) Percentage of projects with high development rating Sources: IEG and Institutional Investor. Note: The development performance of the 2007 cohort of projects is currently being evaluated. closer portfolio management, and strengthened factors achieved high development impact qual- environmental appraisal of real-sector projects. ity 77 percent of the time. In those cases, IFC was Accordingly, the share of new operations with able to effectively manage high project risks to de- high review risk and financial structuring risk fell liver high development results. sharply between periods 1995­2000 and 2002­05. Assuming IEG's risk profiling retains its predictive Sustained higher development success rates capability, other things being equal, this trend in are anticipated in 2007, due to improved project high-risk intensity bodes well for IFC proj- business climate risk. As reported above, IEG ect development results in the coming years. has found that improving business climate con- ditions between project approval and evaluation Even with high-risk intensity, IFC may be increase development impact quality. In recent able to achieve sound development results. years, the business climates of many countries in The development performance of projects sup- which IFC is active have improved considerably. ported through recently approved IFC invest- In addition to the 25 countries that have gradu- ments will also hinge on the quality of IFC ated from the high-risk group since 2001, within structuring, appraisal, supervision, and its role the 2007 evaluation sample (as yet to be evaluated and contribution. This is illustrated in the fact ex post), the level of positive change in country that with high work quality (good structuring, ap- risk ratings is unprecedented (figure 1.5).17 Early praisal, supervision, and IFC role and contribution), indications of how the business climate risk pro- evaluated IFC projects with four or more high-risk files of the 2008 evaluation sample will look are also 9 I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 positive.18 Combined with better risk mitigation over time, with an increase in high-high results im- at approval, we can reasonably expect that the plying improved project execution by IFC. The re- above-average development performance ob- lationship is robust among three of the four served in 2006 will likely be sustained in 2007. component development indicators and IFC investment success: project business success, eco- With higher investment volumes, IFC's de- nomic sustainability, and private sector develop- velopment impact ought to increase com- ment (PSD) impacts, but not environmental and mensurately in the coming years. Given social effects (with effective environmental and so- higher investment volumes, with commitments in- cial performance typically still being achieved creasing twofold from $3 billion per year in 2001 when IFC's investment return is low).19 to $6 billion per year in 2006, and expectations of further significant increases over the coming IFC has not actively supported projects years, IFC's corporate development footprint where there was a trade-off between prof- should expand commensurately. This expecta- itability and development results. Only 23 tion rests on two key assumptions. First, the busi- percent of the 627 evaluated operations had ness climate risk in the countries in which IFC is mixed results (high development success with investing will continue, on average, to improve. low investment success in 13 percent of cases; low It remains too early to predict the impact of busi- development success and high investment success ness climate changes on post-2004 IFC invest- in 10 percent of cases). Consequently, it is ap- ment approvals, because these will not reach parent that there is not a necessary trade-off be- early operating maturity (and hence not be eligi- tween development results and IFC investment ble for full evaluation) for three or more years. returns and that IFC has not consciously sup- Second, as in the past, the development impact ported projects where there was likely to be a quality of IFC-supported projects will, in the fu- trade-off between these two dimensions. Projects ture, hinge on factors internal to IFC, such as failed to achieve high-high ratings for a number how effective IFC is in increasing its field presence, of reasons. These include the inherent commer- maintaining transaction quality and ensuring that cial risk in different industry sectors, adverse busi- lessons from past operations are internalized ness climates, poor sponsor quality, or shortfalls (which is to say that IFC repeats successes that can in IFC work quality. Of the 23 percent that be replicated, and avoids past mistakes). Some of achieved mixed results, IFC's choice of financing the issues raised by IFC's efforts at greater de- instrument was the most common reason. Pro- centralization are explored further in chapter 3. portionately, more operations involving equity achieved high development success and low in- No Trade-off between Development vestment returns (some four-fifths of these cases), Results and IFC Investment Returns while more operations involving loans achieved Between 1996 and 2006, 46 percent of eval- low development success and high investment re- uated projects achieved both high devel- turns (in about nine-tenths of the cases), for rea- opment and investment ratings. Considering sons described below. As appendix B shows, loans development results alongside IFC investment re- featuring high IFC work quality are the most likely turns, out of the 627 projects evaluated between combination to achieve high-high ratings. 1996 and 2006, 46 percent achieved high-high re- sults (high development success as well as high IFC Loans have been more likely than equity in- investment return, as defined in box 1.1). Mean- struments to achieve high (above bench- while, 31 percent delivered low-low results (low mark) investment ratings but, in aggregate, IFC development success as well as low IFC investment has achieved higher returns from its equity port- return). By volume of commitments, some 53 folio. Considered individually, loans have a higher percent of projects achieved high-high results, chance of performing successfully than equity in- while 26 percent delivered low-low results (figure vestments (see table 1.3), reflecting the different 1.6). This pattern of performance has strengthened inherent risks of each instrument. In the case of 1 0 D E V E L O P M E N T R E S U LT S O F I F C - S U P P O R T E D P R O J E C T S , 1 9 9 6 ­ 2 0 0 6 Figure 1.6. IFC-Supported Projects Show No Trade-off between Development Results and IFC Investment Returns Of the IFC operations evaluated between 1996 and 2006, about three-quarters (by number and volume) resulted in high-high ratings (high development result/high IFC investment return) or low-low ratings (low development result/low IFC investment return). For the most part, therefore, IFC has not supported projects where there was an apparent trade-off between development results and investment returns. Where project development results and IFC investment returns were not correlated (23 percent of cases), proportionately more operations involving equity achieved high development success and low investment returns (square 2), while more oper- ations involving loans achieved low development success and high investment returns (square 3), reflecting different investment risk associated with each instrument. 59% 65% 2 1 2 1 46% 53% HIGH 13% HIGH 12% High development High development High development High development rating rating rating rating High IFC return High IFC return Low IFC return Low IFC return 56% 62% rating 4 3 rating 4 3 31% 10% 26% 9% Low development Low development Low development Low development rating rating rating rating Development LOW Low IFC return High IFC return Development LOW Low IFC return High IFC return LOW HIGH LOW HIGH IFC investment return IFC investment return By number of operations By volume of commitments Source: IEG. loans, IFC has a ranking claim on company cash- erations in recent years. IFC has achieved higher flow for loan service as well as the collateral security Maintaining this level of prof- returns from its equity package, which together provide some downside itability will, however, de- protection. Equity investments, however, must pend on continued investor portfolio. meet rigorous return standards to compensate for optimism in the emerging the instrument's subordination and currency risk. markets and consequent high valuations--par- Accordingly, while 68 percent of equity invest- ticularly given the high ratio of unrealized to ments generated a positive return, only 31 percent realized gains (about a 4:1 ratio). Appendix B pro- achieved high (above benchmark) investment rat- vides further details on the profitability of IFC's ings. In aggregate, IFC has been rewarded with whole portfolio of investment operations. higher returns on its portfolio of equity invest- ments in recent years. In common with all com- mercial equity portfolios, the few successful Comprehensive Evaluation of IFC's investments tend to be major contributors to Development Effectiveness Remains a overall profitability. In IFC's case, its equity in- Major Challenge vestments in Africa have recently helped IFC's Substantial progress has been made in portfolio of investment operations in the region measuring project development results, become profitable (after losses each year during but challenges remain. IFC has increased the 1990s). Equity investments, in general, have the breadth and depth of its monitoring and self- made a significant contribution to IFC's retained evaluation systems, such that IFC is now tracking earnings and hence its capacity to scale up the vol- its development results across its portfolio of in- ume of its investment and advisory services op- vestment and advisory operations. Preliminary 1 1 I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 Table 1.3. More Loan Than Equity Operations Achieved High Investment Ratings Loans are more than twice as likely as equity operations to achieve high investment ratings, due to the different inherent risk involved in each instrument. In the case of loans, IFC has a ranking claim on company cashflow for loan service and the collateral security package that together provide some downside protection. Equity investments, however, must meet rigorous return standards to compensate for the instrument's sub- ordination and currency risk. Accordingly, while 68 percent of equity investments generated a positive return, only 31 percent achieved high (above benchmark) investment ratings. In aggregate, however, IFC has been rewarded with higher returns on its portfolio basis of equity investments in recent years (see appendix B). Percentage of Percentage of equity Percentage of operations with operations with positive Number of operations with high high ratings, by returns (real internal Instrument operations ratings, by number commitment volume rate of return >0) All instruments, 1996­2006 627a 56 62 Loans, 1996­2006 473 74 78 Equity investments, 1996­2006 329 31 30 68 (70 by volume) Source: IEG. a. Some operations involved a combination of loan and equity instruments. The total number of operations is, therefore, not a straight sum of the number of loan and equity operations. data are emerging under the Development Out- are still in the process of implementing these come Tracking System (DOTS), and IEG will re- standards. Although substantial progress toward port in next year's Independent Evaluation of harmonization of private sector evaluation ap- IFC's Development Results on its validation of proaches has been made, continued differences this data. Building on the above progress, IFC mean that IFC's results are not yet comparable to could advance its metrics to better capture the those of other international financial institutions. wider impacts of its operations, including those These differences generally reflect different or- covering broader environmental and social ef- ganizational mandates and objectives and varying fects, as well as undertaking more rigorous impact degrees of adoption of the standards.20 For evaluation, to get a better understanding of its true example, while the European Bank for Recon- development footprint (box 1.3). struction and Development (EBRD) focuses on as- sisting countries in their transition process, the Comparing the development performance World Bank Group tasks itself with poverty re- of IFC-supported projects with those of other duction and sustainable private sector develop- development organizations is problematic. ment (and even within the Bank Group there are A Multilateral Development Bank Evaluation Co- differences; see box 1.4). operation Group was established in 1996, with the aim of harmonizing evaluation standards among There is some degree of comparability with development banks. Based on a January 2005 EBRD on one subindicator. Despite differ- benchmarking report by an independent con- ences in operational mandates, IFC's private sec- sultant of the Evaluation Cooperation Group, tor development impact rating (one of the four IFC's standards are currently closely aligned with components of the synthesis development impact the harmonized standards, while other institutions rating) is somewhat comparable to EBRD's "tran- 1 2 D E V E L O P M E N T R E S U LT S O F I F C - S U P P O R T E D P R O J E C T S , 1 9 9 6 ­ 2 0 0 6 Box 1.3. IFC Is Deepening Its Development Results Measurement but Methodological Challenges Remain IFC Has Introduced a New Development Outcome Tracking velopment results arising from advisory services projects. The System for All Investment Operations results of these pilots are also expected to be included in IFC's In July 2005, IFC established a new Development Effectiveness Unit annual report. Appendix A contains further details on the method- within the office of the Chief Economist. The unit seeks to sys- ology IFC employs to measures its development results in this tematically track IFC's development results for all investment proj- area. ects throughout their life cycles. To perform this work, the unit employs the Development Outcome Tracking System (DOTS), A Key Challenge Is to Capture the Wider Sector and which is distinct from IFC's existing monitoring and self-evaluation Country-Level Impacts of IFC-Supported Projects system--the Expanded Project Supervision Report (XPSR) sys- While these are steps forward in the monitoring and evaluation tem--in that DOTS: of IFC's development effectiveness, they will not completely cap- ture the full development impacts of IFC's activities. For example, · Examines potential development effectiveness before early these systems will not always pick up the wider, non-project- operating maturity; level effects of IFC's operations, such as the impact on energy ef- · Does not assess IFC's work quality; ficiency in a sector or country from a series of power sector · Currently covers the whole population of active investment investments. operations (the XPSR system covers a random sample of both closed and active operations), although in future, DOTS ratings Time Will Tell Whether the Development Results Identified will also be available for closed projects; and through DOTS Are Reliable · Updates development ratings with each new Project Supervision Because DOTS assigns ratings before operating maturity (when Report (whereas the XPSR system assesses performance once, operational performance tends to stabilize, according to the trend at early operating maturity). in IFC's own project credit ratings, as well as an assessment The two systems are expected to complement, rather than of the stability of equity ratings postevaluation),22 anticipated re- compete with one another. The first full results arising from sults from recently approved operations will need to be treated DOTS (preliminary results were announced in November 2006)21 with caution. DOTS ratings assigned to operations that IEG has are expected to be announced publicly in October 2007. already evaluated are similar to the ratings reported by IEG, which is not surprising because these operations have reached early op- IFC Is Also Piloting a Monitoring and Self-Evaluation System erating maturity and therefore their performance has stabilized. for Its Advisory Services Operations It remains to be seen whether ratings assigned under DOTS to proj- Since 2006, IFC has been piloting a monitoring and self-evaluation ects not yet operationally mature (and not yet validated by IEG) system, a DOTS for advisory services, which tracks the de- are reliable. sition impact." Based on 2000­05 evaluations, ferent timings for evaluation (EBRD evaluates EBRD's "transition impact" success rate was ap- performance after 12 months of operations while proximately the same as IFC's PSD success rate IFC evaluates performance after 18 months of in EBRD countries over the same period (see operations) and hurdle rates for effective per- figure 1.7). Nonetheless, there is no common formance (for example, in determining what con- basis for benchmarking the overall development stitutes a satisfactory investment rating) may also effectiveness of the two institutions.23 Slightly dif- have an impact on results comparability.24 1 3 I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 Box 1.4. IFC and World Bank Development Results Are Generally Not Comparable A Shared Mission to Reduce Poverty . . . but Different Means against their own stated objectives. At the project level, this and Clients to Deliver on This Mission methodology focuses on relevance, efficacy, efficiency, sustain- The World Bank--which is comprised of the International Bank for ability, and institutional development impact of Bank operations.25 Reconstruction and Development, and the International Develop- IFC evaluations, however, assess IFC's development performance ment Association--IFC, and the Multilateral Investment Guaran- in terms of whether the projects IFC supports achieve project tee Agency all work to promote sustainable economic growth and business success, economic sustainability, positive environmen- poverty reduction. tal and social effects, and beneficial private sector development In pursuing the goal of sustainable economic growth and impacts beyond the project. Unlike Bank projects, IFC-supported poverty reduction, each institution uses different mechanisms and projects are assessed against market parameters and face mar- structures to reach its often distinct clients. For example, while the ket competition once they are operational. Given the close link Bank provides loans and advisory services to governments for var- between investment and development results, this may have a con- ious development purposes, IFC invests in, and provides techni- sequence for their ability, relative to Bank projects, to achieve cal assistance to, private sector companies. Sometimes, IFC does high development ratings. Finally, IFC evaluations are carried out work with governments directly, for instance, in seeking to improve at early operating maturing, typically 18 months into operations, the ease of doing business or in facilitating municipal finance, but which is approximately 5 years after project approval, rather than most often its clients are private sector companies. at project close, as with Bank operations. Appendix A provides a Different types of development engagement are also associated more detailed comparison of the different evaluation approaches with different levels of risk (including the risk of market competi- employed by the two institutions. tion in IFC's case), as well as different timescales and account- abilities. Each institution has historically organized itself along Possible Comparability of Performance in Advisory Services different lines, the Bank by country and regional teams, and IFC by IFC is now starting to systematically monitor and evaluate the ef- industry department and region. fectiveness of its advisory services operations (see box 1.3). Be- cause IFC's approach in evaluating its advisory services is relatively IFC Projects Are Assessed against Market Parameters similar to that used by the Bank for its own advisory services, In the Bank, evaluation systems assess how the results of the there may be the potential for a comparison of success rates, es- Bank's development interventions with governments measure up pecially where both institutions are working with governments. Figure 1.7. EBRD and IFC Achieved Similar Development Ratings on One Subindicator While not comparable in overall terms, there is some degree of comparability between the development performance of IFC and EBRD on one specific subindicator. IFC's private sector development impact rating (one of four subcomponents of the synthesis development impact rating) can generally be compared to EBRD's "tran- sition impact" ratings. Looking at the period 2000­05, for the countries in which both EBRD and IFC have operations, IFC's private sector development impact rating was below that of EBRD's transition impact rating in three years (2000, 2003, and 2004); above it in two years (2001 and 2002); and about the same in 2005. 100 90 80 70 (percent) 60 rate 50 40 30 Success 20 10 0 2000 2001 2002 2003 2004 2005 IFC PSD impact "EBRD transition impact" Source: IEG and EBRD. Note: EBRD typically evaluates performance after 12 months of operations, while IFC evaluates performance after 18 months of operations. 1 4 2 Lessons from 10 Years of Private Sector Development Evaluation T his is IEG's tenth annual review of the development results of IFC- supported projects, a good point at which to take stock of what eval- uation findings tell us about the conditions for effective private sector development. A decade of evaluation1 has revealed five key drivers of IFC's project development results, most notably, IFC's work quality throughout the project cycle. Development Results Are Driven by A. Changes in the Quality of a Country's Five Factors Business Climate Following Project From 10 years of PSD evaluation, IEG has identi- Approval fied five factors that have a significant impact on Business climate quality materially affects a project's development results: levels of private investment, as the con- trasting experiences of Asia and Africa il- A. Changes in the quality of a country's busi- lustrate. As discussed earlier in the report, the ness climate following project approval; overall pattern among developing countries in re- B. Type of industry sector; cent years is one of improving business climate C. Quality of the sponsor; risk--as proxied by changes in the Institutional In- D. Level of product market, client company, vestor Country Credit Risk ratings of these coun- and project type risks; and tries. There is, nonetheless, considerable variation E. IFC work quality. by region. As figure 2.1 shows, the East Asia and Pa- cific Region has had better country risk ratings Taken together, these factors successfully explain than other regions. Other regions, particularly Eu- the development performance of about two-thirds rope and Central Asia, have "caught up," except for of IFC-supported projects. Appendix A provides Africa, which has improved little since 1996. This details on the statistical significance of individual variation has had a material impact on the level of factors, as well as their subcomponents, in pre- private investment in each region (see figure 2.2). dicting IFC project development results. Africa not only has the lowest proportion of private 1 5 I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 Figure 2.1. Much Riskier Business Climates in Africa, with Some Improvement since 2003 50 40 rating risk 30 100) High risk of X X X X X X X X X X X X credit (out 20 X X X X X Country 10 1996 1998 2000 2002 2004 2006 East Asia and Pacific Europe and Central Asia Latin American and Carribean Middle East and North Africa South Asia X X Africa Average Source: Institutional Investor. Figure 2.2. Much Lower Private Investment in Africa Than Elsewhere 20 18.5% 18 16.7% 16.5% GDP) 16.2% of 16 14.5% 13.2% (% 14 fixed-capital 12 10 8 private 1996­2005 6 4 verageA 2 formation, 0 East Asia Europe and Latin American South Asia Middle East and Africa and Pacific Central Asia and Carribean North Africa Source: World Bank Group, Global Development Finance database. investment relative to gross domestic product low-income and/or high-risk countries. In 2006, (GDP), but also by far the lowest in monetary terms this proportion was 29 percent, which reflected because African GDP is much lower than the GDP the graduation of a number of large economies of other regions. (including China and Russia) to nonfrontier sta- tus, but also shows that IFC has successfully pur- In the last 10 years, IFC has been active in sued investments in frontier countries against a difficult business environments. Thirty-seven decline in their share of GDP (from 40 percent to percent of IFC's 1997 commitments (the year be- 15 percent) and a dearth of capital inflows (as fore the frontier strategy was articulated) were in proxied by their low share of foreign direct in- 1 6 L E S S O N S F R O M 1 0 Y E A R S O F P R I VAT E S E C T O R D E V E L O P M E N T E VA L U AT I O N Table 2.1. IFC Success Rates Are Significantly Better Where Country Business Climate Risk Is Improving, or Not Deteriorating IFC has been approximately 20 percentage points more successful, in development and investment terms, where the business climate risk in the country in which the operation is taking place has improved from high risk to non­high risk. Conversely, where business climate quality has worsened from non­high risk to high risk, IFC has been roughly 25 percentage points less successful. Percentage of Percentage of Change in country business- projects with high projects with high climate risk postentry Number of operations development ratings investment ratings Improved from high risk 102 75 72 Stayed high risk 168 54 51 Stayed non­high risk 216 60 56 Deteriorated from non­high risk to high risk 40 35 33 Source: IEG, based on Institutional Investor country credit risk ratings. vestment). If IFC's commitments in frontier re- risk.2 Conversely, where business climate qual- gions within its top 10 middle-income countries ity deteriorated during the life of a project, (MICs) are included, the frontier share of com- ratings were 25 percentage points lower. mitments increases to 38 percent. It is accordingly crucial that IFC work closely Where a country's business climate risk with partners to help sustain the trend of im- has improved following project approval, proving business climates. IFC carries out development performance has been bet- many activities to help improve business climates, ter. Projects in high-risk business climates are such as investment financing for demonstration ef- typically exposed to macroeconomic instabil- fects, technical assistance to the public sector on ity, weak physical and financial infrastructure, legal and regulatory issues, and advisory assistance cumbersome regulatory burdens, and high lev- to the private sector for capacity building.3 Nonethe- els of corruption and informality. It is not sur- less, bringing about improvements in the business prising, therefore, that improvements in these climate to enable successful private sector growth attributes have a beneficial effect on IFC in- needs the help of governments and other devel- vestments and, by extension, on private sector opment partners to be successful. The extent of development more widely in a country. In fact, IFC­World Bank cooperation in this direction is dis- IFC has been approximately 20 percentage cussed in chapter 3. points more successful, in development and in- vestment terms, where the business climate B. Type of Industry Sector risk in the country in which the operation is IFC-supported projects have achieved bet- taking place has improved from high risk to ter development results in infrastructure, non-high risk between approval and evalua- extractive sectors, and financial markets. tion (see table 2.1). The potential for business As illustrated in figure 2.3, IFC has achieved above- climate improvement is, of course, particu- average development performance in infrastruc- larly great in conflict-affected countries, and ture projects (78 percent), which, by their nature, project evaluations show that IFC can achieve have provided large economic benefits and pos- high development ratings even from such weak itive externalities (see Brazil transport examples starting points in terms of country investment in box 2.1), and in extractive industry operations 1 7 I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 Figure 2.3. IFC Development Ratings Varied Considerably by Industry Department Based on 627 projects evaluated between 1996 and 2006, IFC has achieved the best development results in its infrastructure projects (78 per- cent). IFC has also achieved above-average success rates in the extractive industries (74 percent) and in financial markets projects outside of Africa (63 percent, not shown). On the other hand, IFC has achieved lower development results in the funds (46 percent), and general manufacturing and services sectors (51 percent). Health and education projects also show below-average ratings, although only 13 projects have been evaluated to date, and these are relatively new sectors for IFC. Health and education (13) 38% Funds (46) 46% General manufacturing and services (178) 51% Finance (182) 59% Food and agribusiness (70) 59% Extractive (55) 75% Infrastructure (83) 78% 0 20 40 60 80 100 Development success rate, 1996­2006 (percent) Source: IEG. Note: Numbers in parentheses refer to the number of evaluated projects; Infrastructure classification includes Information Communications Technology projects as well as transport and utilities projects. (75 percent). The overall success rate of financial in funds tend to carry greater risks than invest- sector operations was the same as the all-sector ments in other sectors, while the relatively few average of 59 percent over the last decade, al- evaluated investments in the social sectors have though this success rate was depressed by below- tended to face substantial structuring and market average performance in Africa (40 percent) and risks (for example, in developing commercially was above average in the last five years (during viable business models that are acceptable to the which time financial markets became a strategic public in the country in which the investments sector for IFC) (see Appendix B). are being made, given that the government re- mains the lead provider of these services in many Project development results were weaker countries). in the general manufacturing and services, funds, and health and education sectors. C. Quality of the Sponsor Figure 2.3 also shows that performance in IFC- A low-quality sponsor can jeopardize the supported projects in the general manufactur- success of a project. Lower-quality sponsors-- ing and services sector (51 percent), and funds defined in terms of experience, financial capacity, sector (46 percent) is below the all-sector average commitment, and reputation--are associated of 59 percent. Reflecting the fact that health and with much lower development ratings (see table education are relatively new sectors for IFC in- 2.2). Low sponsor quality was prevalent in about vestments, social sector projects that have been 40 percent of IFC commitments between 2002 and evaluated (13 to date) show below-average per- 2005, but sponsor quality can vary considerably formance. Different levels of risk are a factor by sector, and even within the same sector. For ex- contributing to lower success rates. Investments ample, IFC investments in information and com- 1 8 L E S S O N S F R O M 1 0 Y E A R S O F P R I VAT E S E C T O R D E V E L O P M E N T E VA L U AT I O N Box 2.1. Examples of IFC Transport Investments in Brazil In the early 1990s, Brazil's ports were suffering from low produc- area, and to construct a warehouse and administration buildings. tivity, high operating costs, and inadequate maintenance. Handling The private operator played an important role in increasing charges in Brazil were roughly double those of international ports, overall container volumes by nearly 300 percent between 2000 and these high charges and inefficiencies were estimated to cost and 2005. As a successful project in a relatively poor and less Brazilian exporters up to $5 billion per year in lost export oppor- developed part of Brazil, it played a vital role in increasing ex- tunities. As part of its program to increase the competitiveness of ports from the region, attracting other firms into the area (in- the Brazilian economy, the government of Brazil passed a ports cluding companies such as Continental, Bridgestone, Pirelli, modernization law in 1993, which transferred port administration Monsanto, and Ford), and inducing follow-on investments in to state port authorities and required that the private sector operate local transportation logistics. the ports. IFC assisted in this privatization process by providing fund- · The government-built (and previously unused) container and ing to the new private operators for upgrading and expanding port steel-products terminal of Sepetiba is being operated under a 25- facilities. year lease awarded by the Port Authority of Rio de Janeiro in 1998. IFC is assisting the new private operator in a phased $140- · IFC supported the rehabilitation and expansion of the container million redevelopment of the container terminal, including the pur- terminal at the Port of Rio Grande, following the awarding of a chase of seven cranes, conversion of an existing dolphin berth 25-year lease in 1997 to a private consortium. IFC helped the com- into a straight quay, and construction of a rail connection. Largely pany purchase four cranes, expand the length of the quay, and owing to an intense competitive reaction from the neighboring repair and upgrade existing facilities. The $50 million project port of Rio, Sepetiba's operations, in terms of container moves has enhanced transport logistics in southern Brazil, resulting in and profitability, have not yet met expectations. The project has, increased exports and higher local employment, with more however, helped reduce congestion at ports across southeast skilled and better-paid jobs.4 Brazil, and the increased competition has resulted in a dramatic · The Port of Salvador in the Bahia state, in northeastern Brazil, drop in tariffs for importers and exporters. was privatized in 2000 with the awarding of a 25-year lease to a private company. IFC arranged funding for part of a $20 million IEG's recent evaluation brief of IFC investments in the transport project to purchase two portainers (container cranes) and sector provides more detailed analysis of IFC's performance in this container-handling equipment, to pave the container storage sector.5 Table 2.2. IFC Project Development Results Improve Significantly with the Presence of a High-Quality Sponsor When sponsor quality is high, projects are around 25 percentage points more likely to achieve high development ratings. Percentage of Percentage of Percentage of Percentage of projects with projects with projects with high projects with high high investment high investment Sponsor quality development ratings investment ratings ratings--equity ratings--loans High-quality sponsor 67 63 33 77 Low-quality sponsor 42 37 23 50 All projects 57 53 28 68 Source: IEG. Note: Based on the risk profiling of 388 IFC investment operations that were approved during 1995­2000 and evaluated during 2000­05. 1 9 I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 Table 2.3. Product Market Risk Has a Strong Influence on IFC Project Development Results Where a project's product market risk is high, projects are around 25 percentage points less likely to achieve high development ratings. Percentage of Percentage of Percentage of Percentage of projects with projects with projects with high projects with high high investment high investment Product market risk development ratings investment ratings ratings--equity ratings--loans Low product market risk 73 70 49 77 High product market risk 49 44 21 62 All projects 57 53 28 68 Source: IEG. Note: Based on the risk profiling of 388 IFC investment operations that were approved during 1995­2000 and evaluated during 2000­05. munications technology (soft infrastructure) are tainable. Similarly (but by project rather than client more often promoted by sponsors that are less type), development results are generally better well known and undercapitalized, and thus are for expansion projects than for greenfield proj- riskier, than those involved in IFC transport op- ects, with engineering and other risks generally erations (hard infrastructure). more predictable for the former than the latter. D. Level of Product Market, Client E. IFC Work Quality Company, and Project Type Risks IFC work quality, especially at approval, has IFC has had difficulties with assumptions been the most important success driver. about future product market changes, with Project development impact quality has been a tendency to overestimate a company's growth highly dependent on IFC work quality. When IFC prospects. Where a project's product market risk work quality was rated high (satisfactory or ex- was high, projects were about 25 percentage points cellent, see box 2.2 for a discussion of work qual- less likely to achieve high development ratings ity metrics), IFC-supported projects achieved high than when product market risk was low (table development ratings 80 percent of the time. Con- 2.3). The presence of high product market risk in versely, where work quality was low (less than newer commitments (those approved during satisfactory), IFC-supported projects achieved 2002­05) is almost the same as in older commit- high development impact quality only 20 percent ments (those approved during 1995­2000), with of the time. High work quality can help mitigate around 60 percent of newly committed projects ex- other risk factors, such as business climate risk-- hibiting high product market risk. IFC will need to as evidenced by the achievement of good results manage this risk very carefully going forward. in Africa through good project execution, despite the generally unfavorable business climates (al- Client company and project type risks can though work quality in Africa has generally lagged also affect the development performance. IFC what has been achieved in other regions, see box has achieved better development results in carry- 2.3).6 As discussed in chapter 1, the decision that ing out follow-on or ancillary projects with known IFC takes at project entry, in terms of selecting vi- clients (67 percent) than with new clients (56 per- able projects and structuring them appropriately cent). This likely reflects the fact that with repeat to mitigate risk, sets the tone for a new investment clients an investor such as IFC can build up a long- in terms of its likely development results. This is term partnership with the company and help make confirmed by project evaluations, which show it more economically and environmentally sus- that where appraisal and structuring work qual- 2 0 L E S S O N S F R O M 1 0 Y E A R S O F P R I VAT E S E C T O R D E V E L O P M E N T E VA L U AT I O N Box 2.2. IEG Evaluates IFC Work Quality across Three Underlying Indicators IFC's overall work quality is rated on a four-point scale (excellent, · Role and contribution (additionality). Aligned with IFC's Article satisfactory, partly unsatisfactory, and unsatisfactory) across the 1 guiding principles, this indicator describes the extent to which following three indicators: IFC played a catalytic role in an investment, and made a special contribution. For example, did IFC adhere to its corporate, coun- · Screening, appraisal, and structuring (at approval). The extent try, and sector strategies and business principle, and was IFC to which IFC followed good practice standards, such as those timely and efficient in its dealings with the client? identified in IFC credit notes. For example, with hindsight, did IFC identify key risk factors, mitigate them as much as possible, and As much as possible, IFC's work quality is evaluated independ- arrive at realistic expectations for project and company per- ently of the project's outcome, to avoid bias in the ratings. For ex- formance? Actual results are compared with expectations and ample, 12 percent of projects with high development ratings were the main reasons for variance are analyzed, to assess whether nevertheless judged to have had low overall IFC work quality; and IFC's assumptions were well-grounded in good practices, due dili- 32 percent of projects with low development ratings were still rated gence, and structuring, and the extent to which differences in high for overall IFC work quality. Occasionally, however, actual actual results were due to extraneous effects, such as recog- project results can influence work quality ratings. Projects per- nized but uncontrollable risks. forming poorly can expose or exaggerate the weaknesses in · Supervision and administration (after approval). Following ap- IFC's structuring or supervision, which in the absence of signifi- proval and commitment, and through to eventual closure, this in- cantly negative project performance might have gone unde- dicator assesses how well IFC carried out its supervision of an tected. Conversely, a project that is performing very well may be investment. For example, whether IFC was able to detect emerg- doing so despite shortfalls in IFC's work quality, which might, ing problems in a company and respond expeditiously with ap- under different circumstances, have been more critical for out- propriate and effective interventions. come quality. ity was high, IFC-supported projects achieved a work quality at approval was The most important 76 percent development success rate. Conversely, low, high supervision work driver of project where appraisal and structuring work quality was quality was not always able to low, IFC-supported projects achieved only a 21 per- compensate for shortfalls in development cent development success rate. due diligence or structuring at performance has been the front end, with 42-percent IFC work quality. Supervision quality is important, and im- high development ratings in proving, but insufficient to make up for low this situation, compared with work quality at approval. Effective supervision 88 percent when both appraisal and supervision also has a positive influence on development per- quality were high. These combinations of front-end formance, with 73 percent of projects achieving and supervision work quality have a similar impact high development ratings when supervision qual- on investment success rates (see table 2.4). Most ity was high. This success rate fell to 32 percent individual project evaluation lessons relate to work when supervision quality was low. IFC supervi- quality at approval, further stressing its signifi- sion quality is currently the highest it has been since cance to project development performance.7 the current evaluation system was introduced in 1996 (85 percent satisfactory). This suggests that Good supervision is nevertheless critical in various quality enhancement steps taken by IFC be- ensuring strong client commitment to sound tween 1998 and 2001, while associated with a fall environmental and social practices. A forth- in quality as they were being introduced (which coming evaluation covering IFC's support for en- may reflect in part the need to meet more rigor- vironmentally sustainable enterprises in Brazil, ous criteria from 1998), have started to have a China, the Arab Republic of Egypt, Ghana, India, positive effect (see figure 2.4). However, where Kenya, Russian Federation, and Uganda8 shows 2 1 I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 Box 2.3. IFC Faced Considerable Challenges Pursuing Sustainable PSD in Africa IFC is embarking on a bold growth plan in Africa, where it is weaker environmental and social effects than other projects, with seeking to double its investments by 2009 lower compliance among IFC's clients. Two types of instruments Between 1990 and 2006, IFC committed to 696 projects in Africa, did not work well: direct investments in SMEs and direct techni- with a total value of $4.6 billion. This represents 10 percent of IFC cal assistance to SMEs. This is important in the context of the rel- total commitments during this period, almost twice Africa's share atively large presence of SMEs in the region, many of them of developing world GDP (5.6 percent). During the same period, operating in the informal sector, and given the priority role they play Africa received just over $230 million (approximately 29 percent) in IFC's Africa Strategy and the Africa Action Plan. of IFC's advisory services funding. Going forward, IFC is seeking to more than double its investments to about $900 million per year Scaling up successfully will require better project execution by 2009. quality and concerted efforts to improve African business climates Ten years of evaluation show that IFC has faced major The main reasons for the weak performance of private sector proj- challenges doing business in Africa ects were a challenging business climate, a high operating-cost en- While it is too early to evaluate the development results, invest- vironment (administrative costs in Africa were twice those in other ment success, and work quality of IFC's projects deriving from its regions),12 the relatively weak quality of IFC's work (45 percent of 2007 Africa Strategy and the 2005 Bank Group Africa Action Plan,9 operations in Africa had high work quality, compared with 68 per- reviewing 10 years of evaluation history of IFC's involvement in cent for operations in other regions), and IFC's willingness to take Africa highlights the challenges of doing business in the region. The greater risks in its projects there,13 as compared with other regions. development performance of IFC investment projects in Africa Where the business climate and quality improved, so did IFC's re- was below average (49 percent, compared with 61 percent for other sults. For the success of its current strong scale up of operations regions between 1996 and 2006). Similarly, past results for IFC ad- in Africa, IFC will need to follow through on its efforts to improve visory services programs--the African Management Services quality control, including design, appraisal, and supervision through- Company and the African Project Development Facility--have not out the project cycle, especially on smaller projects, and continue been particularly strong (although these programs were recently its focus on enhancing business climates in the region. Efforts to revamped).10 Low development ratings in IFC investment projects strengthen IFC­World Bank cooperation and to actively promote reflected the lower quantifiable economic benefits of projects in donor partnerships on initiatives for improving the business envi- Africa. IEG-IFC estimated that projects with at least satisfactory de- ronment are, therefore, fundamental for private sector development velopment results generated net quantifiable economic benefits and for better development impact of IFC's operations in Africa. of $1.50 for every $1 invested; whereas the yield from unsuccess- There have been several recent IFC strategic initiatives to sig- ful projects was just $0.10 for every $1 invested.11 nificantly scale up and improve investment levels in Africa, in par- IFC's experience also shows that smaller projects (below $5 mil- allel with its high increase in commitments. These initiatives include lion) in Africa performed less well (41 percent success rate, com- the reorganization of advisory services into the Private Enterprise pared with 56 percent for larger operations) and that the quality Partnership for Africa program, with a strong focus on business of work (37 percent) was below average compared with larger proj- climate, financial market development, public-private partner- ects (56 percent).The evaluation of IFC's experience also shows that ships in infrastructure and SMEs, as well as the strengthening of financial market projects performed poorly and that financial mar- IFC's capabilities on the ground through stronger decentraliza- ket and general manufacturing projects were associated with tion, all of which are a response to the above evaluation results. that the most important success factor in deliver- environmental and social risks in a project, and ing high environmental and social effects ratings proactively engage with project stakeholders and (achieved in 67 percent of IFC operations overall) communities.14 IEG evaluations find that where is a client's commitment to good environmental and clients are developing sound environmental man- social management. If the client is committed, with agement systems, with close supervision by IFC, IFC's help it can build environmental management projects are more likely to deliver sustainable en- capacity and resources to identify and mitigate the vironmental and social performance.15 2 2 L E S S O N S F R O M 1 0 Y E A R S O F P R I VAT E S E C T O R D E V E L O P M E N T E VA L U AT I O N Figure 2.4. Supervision Quality Has Improved since 2001, Reflecting Several Quality Enhancement Steps IFC took a number of quality enhancement steps between 1998 and 2001. The impact of these steps is showing up in better supervision rat- ings since 2001. Assessing the impact of these steps on appraisal quality is more difficult because of the 5-year lag between appraisal and evaluation (meaning appraisal quality has not yet been evaluated ex post for those operations appraised since 2001). This issue does not arise in the case of supervision quality, which is already evident at the time of evaluation (that is, up to and including 2006). That said, improved risk management at approval (which IEG assesses ex ante) suggests that these quality enhancements steps should have a positive impact on evaluated appraisal ratings in the coming years. 100 90 80 70 (percent) 60 50 40 quality 30 High 20 Period of major 10 IFC quality steps 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Appraisal quality (at approval) Supervision quality (at evaluation) Role and contribution (at evaluation) Source: IEG. Table 2.4. Good Quality Supervision Cannot Compensate Fully for Weak Appraisal Quality Based on 627 operations evaluated between 1996 and 2006, appraisal and supervision quality have been key determinants of development success rates. High appraisal quality adds approximately 45­46 percentage points to IFC's development success rates while high supervision quality adds approximately 23­24 percentage points. The pattern is similar, though to a slightly lesser degree, for IFC investment success rates. Accordingly, high supervision quality cannot compensate fully for weak appraisal quality. Percentage of projects with Percentage of projects with Work quality rating high development ratings high investment ratings High appraisal quality, high supervision quality 88 77 High appraisal quality, low supervision quality 64 59 Low appraisal quality, high supervision quality 42 44 Low appraisal quality, low supervision quality 19 26 Source: IEG-IFC. IFC's environmental and social effects work 2004, IFC's environmental appraisal for both FI and quality at appraisal is good but FI super- non­FI projects is good, but supervision quality of vision is insufficient. Based on evaluations of the FI portfolio is much lower compared with environmental and social effects work quality since real-sector projects. New annual monitoring report 2 3 I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 templates, adopted in 2003, for various real- particularly if exposed to exchange rate devalua- sector industries improved reporting quality and tion.18 This is because of the mismatch between allowed IEG to better track the project compliance income (in local currency) and expenditure com- with at-appraisal objectives. IFC achieved high en- mitments (in foreign currency). An extreme ex- vironmental and social effects appraisal ratings in ample is that of the Argentinean banks that 100 percent of the FI operations that were evalu- borrowed heavily in dollars in the 1990s, and fol- ated in 2005 and 2006, mainly because IFC's lowing a one-time, drastic, 70-percent devaluation generic requirements for FI projects are quite of the Argentinean peso in 2001, were left with straightforward and have been diligently trans- large deficits in their balance sheets. Other ex- lated into legal documents and commitment let- amples include devaluations in Turkey and Brazil ters. There has, however, been a downward trend in the 1990s, which had particularly adverse im- in the success rate of FI-project supervision work pacts on second-tier companies in which IFC in- quality between 2004 and 2006, with only 47 per- vested.19 cent of operations achieving high environmental and social effects supervision ratings in 2006. IFC IFC is seeking to address the need for more has allocated most supervision resources to A- local currency financing, with increased category and high-risk B-category projects.16 As a loans and guarantees in local currency. consequence, IFC has not visited some lower-risk As figure 2.5 shows, IFC has substantially increased B-category projects and most FI projects. Some FIs its local-currency-denominated financial products that IFC finances may have thousands of subpro- in recent years. IFC is able to offer medium- to jects--if even only a small percentage is screened long-term loans and hedges in 28 emerging mar- to the B­category, incorporating environmental ket currencies. IFC's largest recipient of local cur- and social effects risks, the cumulative impact of rency loans has been Mexico, followed by India and many subprojects could be significant. There is China (by amount), although IFC has now pro- thus a serious gap in IFC's knowledge of project vided local currency operations to 16 African coun- environmental and social effects in FI operations, tries (the CFA franc zone, which includes Benin, and in environmental and social effects ratings Burkina Faso, Cameroon, Chad, Côte d'Ivoire, themselves, a fourth of which IEG has been unable Mali, Senegal, Togo, plus, the Gambia, Ghana, to validate, given the lack of information or liti- Guinea, Kenya, Madagascar, Nigeria, Swaziland, and gation/legal barriers to obtaining information. In South Africa). IFC has also facilitated a number of response to observed gaps in environmental and local-currency bond issues, including in Brazil social effects supervision, IFC is taking a number and Morocco. IFC nonetheless recognizes it could of steps to improve its performance, including provide more local currency products, given the visiting FI projects with a high-risk profile or with high demand for them. IFC is exploring ways to deficiencies in their environmental management provide local currency financing in markets where systems every three years. Environmental and so- there are no hedging alternatives available, through cial management system deficiencies may be ad- the crea-tion of a global fund that provides local dressed without a site visit. Time will tell whether currency hedges for loans disbursed by IFC.20 IFC these steps are successful.17 is also carrying out preparatory work for a CFA franc, domestic-currency bond issue, which will Type of Financing Has Implications for allow IFC to establish its credit in the market so Development Performance it can support local financial institutions by offer- Foreign currency financing can be prob- ing structured products to finance the private lematic, especially for nonexporting SMEs. sector throughout the region. A common theme highlighted by IEG evaluations in last 10 years is the lack of term local-currency In reaching SMEs generally, direct en- financing, especially in Africa, and the substantial gagement has not proven to be very suc- investment constraints placed on firms with a cessful for IFC. An internal IEG evaluation in high dependence on domestic currency revenues, 2000 found that direct lending to SMEs was nei- 2 4 L E S S O N S F R O M 1 0 Y E A R S O F P R I VAT E S E C T O R D E V E L O P M E N T E VA L U AT I O N Figure 2.5. IFC Is Increasing Its Provision of Local Currency Financing Prior to 2001, IFC made one or two low-value loans each year in local currency, each typically under the value of $10 million-equivalent. Since 2004, IFC has increased its local currency lending, averaging nearly $25 million-equivalent per investment, and has also started to provide a broadly similar number of local currency guarantees. 700 30 600 25 500 millions) 20 ($ 400 projects 15 of 300 10 investment 200 Number IFC 100 5 0 0 1991­99 p.a. 2000 2001 2002 2003 2004 2005 2006 Volume of commitment Number of projects Source: IFC. Note: Figures do not include local currency options offered to, but not yet accepted by, IFC clients or some commitments that have yet to be disbursed. ther an effective nor an efficient model for IFC. that emerges from both evaluations is the po- The evaluation found that IFC faced unacceptably tential development gains for clients through high administrative costs lending directly to SMEs, IFC's synergies between its investment and advi- and should focus more on FIs as a vehicle to sory services activities. In the Private Enterprise reach SMEs. IFC subsequently shifted its SME Partnership, for example, sectorwide initiatives in- approach to a wholesale model through FIs, an tegrating advisory services with IFC investments approach for which a 2007 evaluation provides achieved higher development results than indi- continued support.21 IFC has also moved to a vidual transaction-based links. On the other hand, more wholesale approach on the advisory services advisory strategy and projects were largely de- side of its business (under the Private Enterprise veloped and delivered independently of IFC in- Partnership), by working with groups of SMEs as vestment staff expertise, diminishing potential part of a single project. synergies and results. In helping microfinance intermediaries, meanwhile, IFC has achieved suc- Nature of Linkages between Investment cessful results where it has provided, along with and Advisory Services Activities Is Also other multilateral development bank sharehold- Important ers, technical assistance grant funds to cover costs Two forthcoming evaluations highlight the involved with, for instance, establishment and potential benefits of linkages between in- training alongside equity investments. vestment and advisory services activities. IEG-IFC will soon report in detail on the per- formance of the Private Enterprise Partnership ad- Evaluation Provides a Basis for Better IFC visory services program in Eastern Europe and Results Central Asia,22 as well as on IFC's results in fi- Evaluation has helped promote a devel- nancing micro, small, and medium enterprises opment effectiveness culture within IFC. through financial intermediaries.23 One finding Building on IFC Management's initiative, in 1996, 2 5 I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 IFC and IEG copioneered a monitoring and self- mate risk and which sectors to emphasize or evaluation system for IFC's investment opera- de-emphasize. Evaluation findings on IFC appraisal tions. More recently, IFC constructed a monitoring and supervision performance, beginning with and self-evaluation system for its advisory ser- IEG's first annual review (covering operations eval- vices operations, developed broadbased per- uated in 1996), also helped inform some of the formance scorecards, and introduced real-time steps that IFC Management took in the late 1990s, development results tracking the project life cycle such as setting up a Credit Department, portfolio for the whole portfolio.24 These steps are aligned units, and an equity desk, as well as developing with evaluation report recommendations made tighter environmental and social appraisal and su- since the late 1990s for IFC to identify and mon- pervision procedures. Finally, country and sector itor development results from the point of proj- evaluations have fed into the Bank Group's coun- ect approval onward and to establish an incentive try and sector strategies. structure that emphasizes development-based effectiveness. Management has adopted the vast major- ity of IEG recommendations. Table 2.5 sets out Evaluation has revealed some key drivers key evaluation recommendations, findings, and of development results and areas for process impacts in the areas mentioned above. IFC Man- improvement and strategy. As presented agement and IEG, together, track IFC's progress throughout this chapter, a decade of evaluation has in implementing recommendations from evalua- identified several factors that have had a significant tion reports in a Management Action Tracking determinant effect on project-level development Record. An internal report found that, as of early results. The knowledge of these drivers influences 2006, about three-quarters of IEG recommenda- IFC decision making about issues, such as en- tions were rated as having a "high" or "substan- gagement in countries with high business cli- tial" level of adoption by IFC Management. 2 6 L E S S O N S F R O M 1 0 Y E A R S O F P R I VAT E S E C T O R D E V E L O P M E N T E VA L U AT I O N Table 2.5. Evaluation Findings Have Provided a Basis for Better IFC Results in Three Main Areas 1. Promoting a development 2. Identifying key development 3. Laying the foundations Year effectiveness culture success drivers for better IFC appraisal 1996 IEG (with IFC management) copioneers new evaluation system for investment operations 1997 IEG finding: More realistic market Recommendation: Ensure projections assessments (less optimism bias) take full account of identified risks would improve results 1998 IEG recommendation: establish Finding: Large investments tend to Recommendations: Set up development effectiveness objectives perform better independent appraisal and/or credit at approval committee to improve due diligence; adopt Project Supervision Records; carry out more supervision from field offices 1999 Recommendation: Introduce Finding: IFC performs best in high risk development-based incentives countries 2000 Recommendation: Describe expected Finding: Lack of local currency funding Recommendation: Improve FI development results at appraisal, and a major problem for IFC clients monitoring of environmental effects monitor during supervision of subprojects 2001 Recommendation: Consider wholesale approach to SMEs through FIs rather than direct lending 2002 Finding: Better results where business climates improved 2003 Recommendation: Establish self- Finding: Good IFC work quality evaluation systems for noninvestment especially key where business climate operations risk is high 2004 Finding: Four key results drivers Recommendation: Involve portfolio explain some two thirds of IFC results managers early on in the appraisal process 2005 IEG inputs into new evaluation system Finding: IFC performs well in countries Recommendation: Track IFC's role and for advisory services operations with improving business climates contribution through the supervision stage 2006 Finding: Local currency finance key for Recommendation: Ensure effective nonexporting SMEs mainstreaming of environmental appraisal and supervision Overall Better measurement of, and incentives Influences IFC decision making, Strengthened procedures and impact for, development impact including how to target and tailor structures for appraisal and operations in high-risk countries supervision Example Real-time Development Outcome IFC is increasing the availability of IFC established a credit department in of impact Tracking System and Long-Term local currency financing 1998 Performance Awards (linked to achieved development impact) since 2005 Note: All findings and recommendations cited above are contained in IEG-IFC evaluations. 2 7 3 Strategic Implications for IFC E valuation findings have shown that IFC has generally made sound cor- poratewide strategic choices over the past decade. IFC has extended its reach in frontier markets and has achieved above-average develop- ment results, overall, in its strategic countries and sectors--particularly through its infrastructure operations. Nonetheless, performance can always be improved IFC has pursued in recent Overall, IFC has and IFC is rightly looking for ways to strengthen years: (i) greater focus on achieved above- its development contribution. IFC is seeking to in- frontier markets; (ii) build crease its development impact by growing its busi- long-term partnerships average development ness rapidly and decentralizing its operations. As with emerging global play- performance in strategic it pursues a higher level of activity under a new or- ers in developing countries; countries and sectors. ganizational structure, IFC must develop more (iii) differentiate through country-focused planning, adopt new incentives sustainability; (iv) address constraints to private and mechanisms for IFC­World Bank coopera- sector growth in infrastructure, health, and edu- tion in areas of synergy (such as business climate cation; and (v) develop local financial markets. development), and pay extra close attention to Evaluation results from the past decade broadly work quality issues. It is also crucial that IFC in- support these priorities, with IFC generally achiev- corporate in its strategic vision the possible growth ing better development and investment results in and institutional implications of the next major cor- the projects it has supported in its strategic coun- rection in the international markets. tries and sectors (with the exception of the social sectors), as well as with larger, repeat clients. IFC Is Pursuing an Ambitious Growth Plan While Further Decentralizing In 2005, IFC embarked on an ambitious Since 1998, IFC has broadly pursued five new growth plan. IFC's 1998 strategy also en- strategic priorities, generally with above- visaged a potential doubling of IFC approvals by average development performance. IFC's 2005 (from about $3 billion per year, to about $6 1998 strategy (the first major strategic review billion per year).1 This goal was broadly achieved. since 1991) provided the initial market and sec- In light of better development performance in tor grounding for the five strategic priorities that most of its areas of strategic focus, IFC's 2005 2 9 I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 strategy called for IFC to accelerate the imple- tries and regions, and to expand its invest- mentation of its strategic priorities, as a means to ments in infrastructure, health, and education, maximize its development impact and optimize as well as strengthen the development of local the use of its capital base. In this context, the financial markets. Meanwhile, IFC is offering a strategy called for an increase in investment op- value proposition to its clients, based on pur- erations by approximately 35 percent overall, and suing differentiation through sustainability, by nearly 100 percent in frontier countries by promoting "South-South" investment part- 2008. nerships, supplying a range of complementary technical assistance and investment instru- This growth plan was supplemented in 2006 ments, and improving client relations and with six high-priority goals, and a chal- satisfaction. lenge to further decentralize operations. · Internal process perspective. To meet these The 2006 strategy extended the growth plan until objectives toward its stakeholders and clients, 2009, and set out six high-priority goals to be IFC is internally undertaking major initiatives for achieved during the 2006­09 period. These goals decentralization, strengthening World Bank co- are: (i) greater development impact, (ii) improved operation, improving client relations processes, World Bank Group cooperation, (iii) leadership and reducing processing time.4 in standard setting, (iv) improved client satisfac- · Human capital perspective. The above strate- tion, (v) sound finances, and (vi) strong staff. The gic objectives have led to the pursuit of further revised strategy also laid out the challenges to IFC redeployment of staff that would allow the of further decentralizing its operations, bolster- creation of a global/local institution. This has ing its human resources (for example, building and created demands for careful institutional knowl- developing diverse talent, enhanc- edge management based on local business The latest ing corporate and staff incentives, originators and portfolio managers, and global decentralization and accelerating decentralization), specialists that will transfer international de- initiative is bolder developing sufficient risk manage- velopment knowledge. ment and financial capacity, and · Financial and measurement perspective. Fi- than previous ones. ensuring effective management of nally, IFC strategy is underpinned by the pur- its advisory services. There has been a conscious suit of stronger risk-management capacity to trend toward the decentralization of IFC opera- support growth, sound finances, and a tech- tions in the last 10 years, with the number of IFC nological platform that can facilitate internal investment officers in the field more than doubled processes to help IFC be more effective with during that time.2 The latest decentralization ini- its clients. tiative, confirmed by IFC Management in early 2007, is bolder than previous ones, however, in Going forward, there are opportunities for im- that it proposes the same level of relative growth provement for IFC across each perspective. in field-based investment staff in just three years, by 2010. Stakeholder and Client Perspective: IFC Needs to Adopt a Deeper Country Focus For analytical purposes, IFC's strategic and Emphasize Distributional Issues objectives can be seen to cover four per- Prioritizing high-need countries remains a spectives of a strategy-focused organiza- highly relevant approach for IFC. IFC has tion.3 IFC's strategy would map onto these achieved high development ratings through its perspectives as follows: pursuit of a frontier strategy, catalyzing invest- ment in high-risk and low-income countries (in- · Stakeholder and client perspective. To meet the cluding a number that have been affected by expectations of its stakeholders, in strength- conflict) and sectors. The subsequent graduation ening its development impact, IFC is propos- of many frontier countries into environments ing to scale up its activities in all of its focus more conducive to private sector investment is the sectors and regions, especially in frontier coun- driving force behind these positive results, and 3 0 S T R AT E G I C I M P L I C AT I O N S F O R I F C Figure 3.1. Many Nonfrontier Countries Are as Lacking in Banking Capacity as Frontier Countries In terms of banking capacity (proxied by the proportion of private-sector domestic credit to GDP), there is close similarity between frontier and nonfrontier countries. Excluding China, which accounts for approximately 23 percent of developing country GDP, the average banking capacity of nonfrontier MICs has stagnated in the last 10 years at about 40 percent. Average banking capacity in frontier countries has, however, grown to the point where there is little to distinguish the banking depth of frontier from nonfrontier countries. 140 sector 120 GDP) 100 private of to 80 60 credit 40 (percentage 20 Domestic 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Frontier LICs and MICs Nonfrontier MICs (excluding China) China Source: World Bank Group, Global Development Finance database. thus highlights the importance of Bank and IFC one-third of all people who live on less than $2 efforts to improve business climate quality. This per day reside): is of utmost importance in Africa, which has fallen far behind other developing markets in terms of · The banking capacity of non- There are significant investment risk and private investment. frontier countries is generally constraints to doing no deeper than frontier coun- Major private sector development needs try banking capacity (see fig- business in middle- are not, however, found exclusively in fron- ure 3.1), and is much lower income countries. tier countries. Many nonfrontier MICs, the than in high-income coun- mainstay of the developing world, also have sub- tries.5 Financial markets are particularly un- stantial PSD needs. The binary split of the world derdeveloped in Latin American MICs.6 Lack of into frontier/nonfrontier has its shortcomings. banking capacity keeps the cost of doing busi- First, many countries have migrated from the ness high for many countries, especially where former to the latter category (such that frontier term local-currency financing has been lacking markets account for a much smaller share of and limits poverty-reducing growth.7 developing country GDP than they did in 1997). · Infrastructure shortages are notable in many Second, many countries that are currently clas- nonfrontier MICs. The Private Provision of In- sified as nonfrontier have similar enabling infra- frastructure average for these countries, at 1.6 structure needs as do frontier countries. More- percent of GDP, is higher than the average 0.9 over, there are significant constraints to doing percent of GDP for frontier countries.8 How- business in nonfrontier MICs, relative to high- ever, the cost of trading across borders nonethe- income countries, including financial markets less remains high, keeping the cost of doing and infrastructure development that hinder the business higher than it might be otherwise.9 In- competitiveness of firms in these countries frastructure shortcomings of this kind are par- (which account for about 85 percent of devel- ticularly important for many MICs, such as oping country GDP and where approximately Egypt, Mexico, and the Philippines, which are 3 1 I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 heavily dependent on otherwise low-cost share of private sector credit to GDP has been industrial exports.10 greater than 35 percent). Sixty-seven percent of IFC · High informality that reduces the produc- financial sector commitments between 1996 and tivity of the law-abiding, otherwise efficient 2006 were in countries with low banking sector companies.11 depth, while 25 percent of IFC financial sector · There are sizable low-income and/or high-risk commitments were in countries with high bank- regions within nonfrontier MICs, which reflects ing sector depth.13 However, the development re- the unequal development of the private sector sults of IFC-supported financial sector projects in and economic growth in these countries. IFC countries where banking sector depth was low-- is starting to measure its commitments in the which includes 39 countries in Africa--were lower frontier regions of 20 MICs, but does not yet than those in countries with high banking capac- know to what extent it is reaching low-income ity. Only 55 percent of IFC-supported financial sec- and/or high-risk regions across all MICs. tor projects were rated highly in low banking capacity countries, compared with 71 percent in When private capital flows have been more countries with above-average banking capacity abundant, IFC has made less of a unique, (see table 3.1). These results highlight the need for pioneering contribution in MICs--empha- IFC to work closely with governments and other sizing the need for IFC to carefully consider coun- development partners to optimize IFC's addi- try dynamics in defining its additionality. When tionality and the development potential of these private capital flows were relatively high in the mid- investments, for example, in financial intermediaries 1990s, the institution was less successful in pro- providing support to micro, small, and medium en- viding a unique role and contribution. IFC also terprises (which a forthcoming evaluation con- achieved noticeably worse development and in- firms is an effective way for IFC to reach them).14 vestment ratings in MICs when its role and con- IFC also has a role to play in identifying and facil- tribution were rated as less than satisfactory. When itating regulatory changes that reduce corruption role and contribution was rated low, only 6 per- and/or the pursuit of anticompetitive practices cent of IFC-supported projects achieved high de- (which have been a problem in low banking ca- velopment ratings, generally, compared with 71 pacity countries such as Senegal and Malawi).15 percent when IFC's role and contribution was rated high--a bigger differential than for IFC op- A forthcoming evaluation of the Private erations in low-income countries.12 Enterprise Partnership also shows that greater country tailoring is needed in some The need for a deeper country approach is of IFC's advisory services operations. In its amplified when looking at IFC's below- Private Enterprise Partnership program, a forth- average results in countries with low bank- coming evaluation shows that IFC has tended to ing capacity. While IFC prioritizes investments replicate product line initiatives rather than tailor in the financial sector (together with infrastructure them to individual country needs. Moreover, sen- and social sector investments) and is, on the whole, ior staff took brief needs-assessment trips to as- reaching countries with below- certain the appropriateness of new projects, but Where IFC's role and average banking capacity (where these assessments were not thorough enough to the share of private sector credit prepare or sufficiently adapt many projects ade- contribution was low to GDP has been less than the quately to country-specific needs and conditions in MICs, only 6 developing country average of before project launch.16 percent of projects 35 percent), its results in these countries are much weaker than IFC could strengthen its commitment to achieved high in countries with above-average country needs through the use of systematic development ratings. banking capacity (where the indicators for PSD progress. Clearly identi- 3 2 S T R AT E G I C I M P L I C AT I O N S F O R I F C Table 3.1. IFC's Financial Sector Development Success Rates Are Lower Where Banking Capacity Is Weak Percentage of Percentage of projects with high projects with high Level of banking capacity Number of projects development ratings investment ratings Above-average (private sector credit share > 35%) 38 71 76 Below-average (private sector credit share < 35%) 121 55 58 Total 159 59 62 Source: IEG; and World Bank Group, Global Development Finance database. Note: Projects were evaluated between 2001 and 2006. fying individual country needs is challenging and though evaluation findings suggest that the cost the ability of IFC to respond to these needs will basis of rural schemes may be higher than for depend on IFC's own capacity in the country, urban-based microfinance institutions because of particularly in relation to other sources of pri- the greater geographical spread of clients.20 Box vate finance. Nonetheless, together with the Bank 3.1 provides examples of successful agribusiness and country governments, IFC could develop and rural microfinance operations. As IFC decen- and pursue a set of PSD indicators that would help tralizes further, one priority would be an envi- guide its strategy and operations in each country, ronmental and social strategy at the country level bearing in mind its own capacity constraints. to identify and develop high-impact projects with These indicators could include the level of private, widespread demonstration effects. Such projects gross, fixed-capital formation; banking sector include those with meaningful and effective depth; and other indicators of access to finance safeguards to offset environmental and social dam- as well as private provision of infrastructure in a ages, projects aimed at capitalizing on the possi- country. Some indicators along these lines were bilities for developing countries to make money included for select countries in the 2005 World from environmental and social protection, and Bank Group Africa Action Plan.17 also those designed to facilitate greater involvement of women entrepreneurs. From IEG's ongoing Tackling quality of growth and pure mar- study in the area of environmental performance, ket distributional issues will be impor- actions relating to the environment and climate tant, as will recognizing that poverty has a strong change are emerging as a priority area.21 Finally, rural origin. Evaluation has shown that the qual- given its growing and evident impact upon lower- ity of economic growth and the distribution of in- income groups, in this same area of market dis- come matters in reducing the number of poor tribution considerations, IFC might evaluate its people.18 Poverty continues to show a strong rural role in the remittances market, either in the efforts origin, and an explicit recognition of this in IFC's that many are making to reduce the costs of trans- strategy would be appropriate. A focus on the fers or in the provision of better financial services agribusiness sector, where IFC operations have to the population involved in these flows.22 had beneficial impacts for farmers and producers through linkage programs, could be useful in this IFC will need to continue efforts to increase respect.19 Rural microfinance is equally important, the provision of local currency financing. As 3 3 I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 Box 3.1. Examples of Successful Agribusiness and Rural Finance Operations An agribusiness operation in West Africa with substantial social equity together with a pre- and post-investment advisory services impacts: The project was a palm oil operation in a west African program (the client microfinance institution realized that apart country. Operations would include the planting of palm trees as well from microcredit, rural households have a significant need for ad- as establishing a mill to extract oil. The expansion was a follow- visory assistance to improve their microbusinesses). Subsequently, up investment following the privatization of a rubber plantation (the IFC reoriented its strategy to provide three services in an integrated palm operation was a new project on the plantation). The client com- manner: pany inherited workers as well as the social services infrastruc- ture (schools and health care) of the region. The project allowed (i) Financial services--microcredit and microinsurance (for for more productive use of the labor force and facilitated mainte- example, life, rainfall, crops); nance of the social infrastructure. The company also provided (ii) Agricultural/business development services--advisory two smallholder programs with extension services around the in- services on productivity enhancements (vaccinations, dustrial plantation. The outgrower scheme supported by the com- pest management) and alternate input/output market link- pany provided linkages to surrounding planters and for local private ages; and businesses. The project brought improved living standards to the (iii) Institutional development services--advisory services on small outgrowers as they gained access to new plantation tech- the formation of producers' groups for enhancing bar- niques and practices, with the outgrowers earning more revenues gaining power and lowering transaction costs, capacity than they would have earned from subsistence farming, as well as building, accounting, and information technology systems. gaining access to improved physical infrastructure. IFC is now engaged in providing credit as well as technical assis- An integrated approach to microfinance, including fee-based ad- tance and advisory services to rural small-enterprise owners, visory services, with significant rural development impacts: The farmers, village self-help groups and other rural service providers. project was to support the expansion and development of one of The revised strategy has been appreciated by its target customers, the first private-sector microfinance institutions responding to the with the total client base increasing to almost 20,000 by the end of credit needs of the rural poor, a large market segment not prop- 2005. IFC has not only generated additional fee income, but also erly served by the formal and informal financial system. IFC invested significant goodwill among its clients. various evaluations have shown in the last 10 years, Finding a workable model for social sector term local-currency financing is insufficient in many investments is also an area for improve- countries. Where term local-currency financing is ment. Based on the 13 evaluations to date, IFC unavailable and companies resort to hard-currency has had a weak record in its social sector invest- financing, they are often unable to match their as- ments. Nonetheless, it has achieved some suc- sets (denominated in local currency) and liabilities cesses, notably through innovative structuring (borrowings, typically denominated in foreign cur- (through Public Private Partnerships) and where rency), thus making them especially vulnerable to the operations have targeted a market segment exchange rate fluctuations. This has been a partic- that is not significantly exposed to foreign ex- ular problem in Africa, where exchange rate volatil- change risk.24 Since education and health care is ity, combined with commodity price fluctuations typically paid for in local currency, some opera- in economies with limited diversity, has meant that tions have failed due to currency devaluations foreign currency borrowing has that have made their foreign currency exposures Tackling quality of proven costly for African firms.23 (including IFC foreign-currency loans) an unsus- growth and While IFC has increased its local- tainable burden. IFC is, encouragingly, increasing currency financial products, the its use of innovative, nonconventional structuring, distributional issues need for more local currency although public acceptance of the role of private will be important. financing remains substantial. provisioning in social services remains variable. 3 4 S T R AT E G I C I M P L I C AT I O N S F O R I F C Box 3.2. Examples of World Bank Group Cooperation Improving Business Climates Deepening Financial Sector Capacity Morocco: As in a number of other countries, IFC and the Bank have, Mexico: Housing Finance. Since 1995, in the wake of the country's in recent years, carried out joint studies of the administrative and financial crisis, the Bank, with assistance and loans, has helped regulatory costs of doing business in Morocco, while IFC has pro- authorities to rebuild the systemic foundations for the provision of vided contributions to the most recent Bank-led investment climate housing finance. IFC has provided funding and equity to housing assessment for the country. In 2006, Morocco was the top re- finance lenders in the primary and secondary mortgage markets. former in the Middle East and North Africa region, in terms of Following these interventions, the housing finance system has reducing the costs to doing business. There is still room for im- evolved substantially, with, for example, bond funding and risk- provement though; Morocco ranked 115 out of 175 countries over- based regulations. Among other things, IFC has helped develop- all by this measure.25 ers to access bonds to finance residential construction. Ukraine: Private Credit Bureaus. The Bank assisted the govern- Developing Physical Infrastructure ment on legislative reform to help enable private credit bureaus. Philippines: Water. After the Bank helped the city of Manila de- IFC followed with implementation assistance that resulted in the cide to restructure its water and sanitation services in 1997, IFC creation of three private credit bureaus. advised it on how to structure the concessions, and later invested in one of the competitively selected concessionaires (which has Environmental and Social Knowledge Building been largely successful). The Bank, for its part, financed a closely Cambodia. The Bank and IFC cohosted a workshop on "Profitable linked, publicly funded project to upgrade and expand access to Financial Services for Sustainable Energy Projects," as a means sewerage, a project ultimately rated moderately satisfactory be- to sensitize financial institutions in the East Asia region to the op- cause of (among other things) delays, due to limited contact with portunities in sustainable finance. Cohosting of the event by the two the concessionaires. As a result of the projects, the population institutions attracted top officials in the private sector and gov- served by water connections increased 64 percent. Those with for- ernment from across the region. The workshop resulted in more mal sewerage connections or de-sludged septic tanks increased than 20 of the regional banks present at the workshop signing up 92 percent (though this still represented only 15 percent of all for further training on energy efficiency issues. water connections). Senegal: Power. Close cooperation was a necessary condition for the completion of a major power project, which three years of tech- nical assistance could not otherwise bring to completion.26 Internal Process Perspective: ronment, as well as those geared toward deep- New Incentives and Mechanisms for ening the physical and financial infrastructure in IFC­World Bank Cooperation Required client countries. Cooperation to ensure that pri- Close cooperation between IFC and the vate sector development is carried out in an en- World Bank in areas of synergy could po- vironmentally and socially sustainable manner is tentially bring development gains, although also an important area of institutional overlap these gains are not systematically tracked. While (see examples in box 3.2). The opportunities to IFC and the World Bank generally have different exploit these synergies vary by country but are means, and work with different clients, to achieve particularly great in Africa, which has fallen far be- poverty reduction, there are opportunities for the hind other developing markets in each of these two institutions to cooperate to bring about de- dimensions. At the thematic level, IFC and the velopment gains. Areas of synergy in the work of World Bank have, in recent years, created joint the two organizations include efforts to diag- departments to foster greater cooperation on nose and improve the business-enabling envi- SME development, in the area of information 3 5 I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 Figure 3.2. Implementation of World Bank Group Cooperation Differed from What Was Planned in CASs 40 70 35 60 30 50 rate 25 activities 40 of 20 30 15 (percent) Number 10 20 Implementation 5 10 0 0 Infrastructure Business Financial Rural/regional Other development environment services development Planned Implemented Implementation rate Source: IEG. communications technology, and on private sec- erations, respectively) operational cooperation28 tor development overall. The Bank Group has in the previous decade had been modest relative also pursued a number of special initiatives tar- to what was envisioned in CASs. By theme, coop- geted at Africa, including a joint International eration activity was highest but much less fre- Development Association/IFC micro, small, and quent than envisaged in the areas of synergy medium enterprises program, which now sup- outlined above, and it was especially low in the ports 25 banks in 7 countries.27 It is, however, too areas of rural and regional development, reflect- early to fully evaluate the effectiveness of these re- ing IFC's relative lack of emphasis on these is- cent efforts. More generally, a lack of up-front sues in the past. (See figures 3.2 and 3.3). identification and tracking of IFC investment operations that have benefited from Bank policy Evaluation has uncovered some signifi- or regulatory assistance cant inhibitors to Bank Group coopera- There are opportunities means that the ultimate tion, which imply new incentives and for cooperation to bring development gains of co- mechanisms to complement the CAS. IEG's about development gains. operation that have oc- evaluation found that the CAS process has not gen- curred to date cannot be erally provided a good basis for within-country co- systematically evaluated. operation. The evaluation of 15 major Bank Group client countries found a number of inhibitors of Country-level cooperation between IFC and cooperation, such as major structural differences the World Bank, as envisioned in Country between the two institutions (IFC has tended to Assistance Strategies (CASs), has been mod- structure itself by sector and region; the World est. In spite of the numerous efforts that the Bank Bank by country and region, meaning the CAS Group has made to improve cross-institutional holds less sway on IFC's deliverables than the cooperation, in 15 client countries that IEG eval- Bank's), differences in organizational culture, and uated in 2006 (countries that account for about half lack of rewards for working across institutional of IFC and World Bank investment and lending op- boundaries, which together have more than bal- 3 6 S T R AT E G I C I M P L I C AT I O N S F O R I F C Figure 3.3. Follow-through on Cooperation Was Modest in Many Countries 18 70 16 60 14 50 rate 12 activities 10 40 of 8 30 (percent) 6 20 Implementation Number 4 10 2 0 0 n China Jordan Brazil Egypt Russia Africa MoroccoAzerbaijanUkraine Mexico Angola PhilippinesArgentina Uruguay Kazakhsta South Planned Implemented Implementation rate Source: IEG. anced out the factors that facilitate cooperation establishment of a Credit The CAS holds less sway (see table 3.2).29 Incentives to cooperate with Department and portfolio on IFC's deliverables the Bank and exploit synergies, within a better desks, and introduced new country-level operational framework, particularly environmental review pro- than the World Bank's. to develop the enabling infrastructure for private cedures. Despite these mea- sector development, are urgently needed. Efforts sures (or because of them, since they raised announced by IFC in March 2007 to create more standards in some cases for projects that had al- structured processes to enable greater input into ready been approved), supervision quality was its advisory services operations by Bank staff are, high in only 56 percent of IFC investment oper- in this respect, encouraging.30 ations in these years, compared with an average of 73 percent in other years. The quality en- hancement steps have, overall, helped IFC to im- Human Capital Perspective: Ensure prove supervision quality, though with lagged Robust Work Quality as IFC Decentralizes implementation (supervision quality started im- IFC's strategy predicts greater develop- proving from 2002). ment impacts through a higher level of ac- tivities and better quality. However, this is IFC has improved risk management and difficult to achieve in the short run, as the expe- supervision quality in South Asia as it has rience in the late 1990s illustrates. Change is usu- decentralized, but with more modest volume ally disruptive, and change in several dimensions growth than in other regions. IFC has improved at the same time can be especially disruptive. its risk management at approval in South Asia During a previous period of major organizational with decentralization of activities in the region, re- change, 1998­2001, IFC supervision quality--an ducing sponsor risk and market risk (table 3.3), important driver of development success rates-- while also achieving above-average supervision fell sharply. In these years, IFC carried out nu- quality.31 This suggests that decentralization has merous quality enhancement steps, including the improved quality at different stages of the project 3 7 I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 Table 3.2. Drivers and Inhibitors of World Bank­IFC Cooperation Factor Example as driver Example as inhibitor Institutional level High-level direction Strong top-down messages encourage staff to seek out cooperative opportunities Organizational structure Joint departments increase information Different reporting lines: IFC investment sharing between staff with similar department and regional strategy units interests vs. Bank country office; modest IFC ownership for CAS deliverables Cross-institutional recognition Lack of recognition for contributions to and incentives work of the other institution Country level Level of country manager Greater information exchange and Limited interaction constrains interaction strategic planning through joint information sharing and/or breeds management teams, regular, systematic misperceptions information exchanges (e.g., through joint staff meetings) Country office setup (i) Strong IFC country office staff presence (i) Lack of IFC country office staff (ii) Co-located offices (ii) Offices in different cities or another part of the same city Client govenment demand Strong government push for cooperation Project level Project timeline Similar timetables for completion Incompatible timelines slow project Perceived conflicts of interest Reputational and commercial risks from inappropriate information flows Individual level Personality, relationships, and Some staff more likely to communicate (i) Perception that culture of other perceptions across institutional boundaries; prior institution is too different to exploit working relationships provide openings synergies (ii) Staff too busy to seek out counterparts Source: IEG. cycle. However, this improvement has occurred 1990s was a key reason IFC was behind EBRD in with more modest volume growth than in other realizing investment opportunities in the country)33 regions.32 Employing more staff in the field and in- but could take time. This suggests the need for a creased volumes of operations may go hand-in- steady roll-out in the decentralization of IFC ac- hand (lack of local presence in the Ukraine in the tivities while pursuing a growth agenda, and care- 3 8 S T R AT E G I C I M P L I C AT I O N S F O R I F C Table 3.3. With Decentralization, the South Asia Region Improved Its Risk Management in Key Areas South Asia: Other regions: Change in operations exhibiting a Change in operations exhibiting a high-risk factor between periods high-risk factor between periods High-risk factor 1995­2000 and 2002­05 (percent) 1995­2000 and 2002­05 (percent) Product market risk ­22 ­6 Sponsor risk ­14 ­3 Review intensity risk ­23 ­3 Source: IEG. ful monitoring and management of the inherent knowledge-retention challenge in that the ma- risks, so as to learn from experience and mitigate jority of staff attending core credit training in any volume/project-execution quality trade-offs. 2001 and 2002 are no longer active with IFC (im- plying inefficient use of training resources by IFC The greatest risk in a decentralization as well as a knowledge drain). This sort of reten- process is the loss of global knowledge. tion issue is amplified in an organization that, Knowledge is one of the most important intangible as previous evaluations have shown, does not assets that IFC uses to promote private sector have the best record in knowledge capture and development. As figure 3.4 illustrates, IFC faces a sharing, and where knowledge often resides with Figure 3.4. IFC Faces a Knowledge-Retention Challenge Since 2001, all new IFC investment officers are required to attend core credit training, as a means to ensure that IFC transaction quality is con- sistent and of a high quality. An analysis of past attendees of this core credit training shows that more than a half of attendees who completed the course in either 2001 or 2002 are no longer working at IFC. While there are more new trainees now than in 2002 (192 in 2006 compared with 52 in 2002) this still pres- ents a major knowledge-retention challenge for IFC, as it seeks to increase transaction work quality, unless IFC develops a better record of retaining staff that have completed the training more recently. 60 no 2007 50 staff 40 February trained in 30 of IFC 20 with 10 Percentage longer 0 2001 2002 2003 2004 2005 Year of credit training Source: IFC. 3 9 I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 a few very experienced individuals rather than a presence should help IFC improve the supervision unit or department.34 Finally, given the decen- of the environmental and social effects of its op- tralization process and redeployment of staff, IFC erations, and provide a greater role and contri- will need to ensure that it protects not only its bution, as it potentially enables IFC to work more brand but, more importantly, its organizational cul- closely with clients in promoting good environ- ture and global knowledge, guarding against the mental and social practices. To maximize this op- creation of numerous local cultures that adversely portunity, IFC will need to make sure it continues dilute IFC's "style" and impact. mainstreaming environmental and social respon- sibilities throughout its investment staff and that IFC might learn from the experiences of the the appropriate specialist capacity is provided to Bank in knowledge sharing within a more support effective supervision of the environmental dispersed organization. The Bank has exten- and social effects of FI operations. sive experience in trying to ensure effective global/ local knowledge synergies. The Bank's regions Effective local recruitment, especially in have developed internal knowledge-sharing tools Africa, will also be important. Overall, IFC and activities. However, as a 2003 evaluation faces fierce competition from the market to attract showed,35 in the absence of a mandate defining the high-quality investment officers. Recruitment chal- regions' internal knowledge-sharing responsibil- lenges are particularly acute in Africa. Despite its ities, their scope has varied. And since 2000, the increasing focus on development results, IFC's in- Bank's regions have increasingly focused on ex- centive regime is still geared toward the level of tending their knowledge-sharing activities to the activities and speed of delivery of projects. Africa, transfer and brokering of knowledge with clients, where projects outside the extractive and infra- but this has not been matched with enhanced at- structure sectors are usually quite small and ges- tention to internal knowledge sharing. Moreover, tation periods are lengthy, has historically not while Bank operations are increasingly multisec- been perceived as an attractive place to work. toral in approach, the bulk of knowledge capture IFC has found it difficult to attract significant and sharing is organized by network and sector. numbers of high-performing investment officers In interviews conducted for a study by IEG-World to commit to working in the region (although Bank, staff noted that the "silo" structure of the in- recent efforts to increase staffing in the regional ternal knowledge-sharing function did not meet office in Johannesburg appear to be gaining some the needs of multisectoral operational work. Ad- traction).37 Compensation is also a problem, par- ditionally, there was inadequate coordination be- ticularly in light of overall shortages in the num- tween network knowledge-sharing activities and ber of suitably qualified, locally based personnel. the country and project teams. Few network in- ternal knowledge-sharing activities were embed- ded directly in core work processes.36 Financial and Measurement Perspective: Prepare for the Next Major Market Leveling up the quality of IFC's environ- Correction and Improve Development mental supervision of FI operations should Impact Measurement be a central consideration. In addition to While risk management and business cli- below-average supervision in the financial sector, mate risk has improved, this pattern could discussed earlier, evaluation has also highlighted easily be reversed. IFC's development and in- a low role and contribution of IFC in this sector. vestment success rates are heavily influenced by More often than not this was due to IFC not hav- the quality of risk management of its projects, as ing delivered on its expected contribution--in- well as the quality of the business climates in which cluding helping these institutions develop they operate. IFC has improved its risk manage- adequate in-house environmental and social mon- ment at approval since 2001, to the extent that it itoring capability. In theory, greater on-the-ground been able to balance the increased risk associated 4 0 S T R AT E G I C I M P L I C AT I O N S F O R I F C Box 3.3 Examples of IFC's Countercyclical Role during Previous Crises Korea Russia Corporate restructuring: IFC helped foreign investors to take over Corporate restructuring and liquidity: IFC invested in a restruc- a failing security firm. The investors restructured the firm, introduced turing fund after the Russian Crisis of 1998. The fund was to pro- new marketing methods, and issued new financial instruments vide additional equity for corporate restructuring, capital investment, (dollar-denominated corporate bonds). The result was a successful and working capital. The investment was successful because it pro- corporate turnaround, with retention of jobs and regained market vided valuable capital to the portfolio companies to help them share. Other investors subsequently copied this deal structure, and weather the crisis when external capital was scarce. IFC's in- the company was ultimately bought by a domestic bank, as foreign vestment was catalytic in terms of enabling new capital injections investors exited. and helped the fund managers to stay intact during hard years of fundraising. Introduction of securitization: IFC helped in one of the first, cross- border, lease asset transactions in Korea in the wake of the Asian Turkey: crisis. The transaction was expected to provide much needed liq- uidity and term funding to the client company, and to demonstrate Helping industrial clients through market turbulence: IFC played the feasibility of securitization of domestic assets in the country. a similar countercyclical role in Turkey. IFC has supported its large Although placement of the securitized notes in international mar- industrial clients through several periods of market turbulence kets was limited, the transaction had a capacity-building effect on since the mid-1990s, and during the clients' emergence as major local agencies, institutions, and counterparts, and showed that engines of economic growth within the country.40 securitizing Korean assets could be done. with new investments in frontier markets with ap- systems38 and to prepare for the IFC is pursuing a propriate project and investment structuring. Pur- next major shift in the interna- rapid growth agenda suing a rapid-growth agenda while reorganizing IFC tional markets, including perhaps may have an impact on the quality of risk man- the development of new risk-mit- while decentralizing. agement, however, and IFC will need to carefully igating products, will need to be monitor this to avoid a decline in its success rates. at the forefront of IFC's strategic planning.39 Moreover, there is the growing threat of a signifi- cant global economic slowdown, including de- IFC's role as a countercyclical lender will veloping country economies, which would likely be more important than ever in the event affect the development effectiveness of IFC's op- of a global economic downturn. Box 3.3 out- erations. (In addition, it could have an impact on lines some examples of how IFC played a coun- IFC's profitability, which has depended heavily in tercyclical role in the respective crises in the recent years on returns of IFC's equity invest- Republic of Korea, Russia, and Turkey. Learning ments, and will depend in coming years on the abil- from past experiences, IFC will need to look for ity to convert considerable unrealized gains into similar opportunities for a value-added role in actual returns; see appendix B). An explicit recog- the event of a new economic downturn and a nition of the potential for a major correcting event, sudden cessation or withdrawal of private capital given a more complex global financial system, its flows directed at developing countries. possible impacts on the developing countries, and the risk-mitigating actions and products conceived Strengthening capacity for evaluation and by IFC to serve its clients, would strengthen IFC's its application will also be important. In- strategic vision. In general, within this context, creasingly in recent years, IFC's strategic directions continued efforts to improve risk-management have been informed by evaluation findings. This 4 1 I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 has been aided by the breadth and depth of IFC's IEG) advance its metrics to include the wider sec- evaluation systems, which have developed such tor and country-level impacts of its projects and that IFC is now starting to measure development portfolio, and thereby paint a more complete results across its portfolio of investment and ad- picture of IFC's contribution to development, visory operations. Building on that progress, as dis- economic growth, and the improvement of peo- cussed in box 1.3, IFC could (in consultation with ple's lives. 4 2 4 Recommendations Meeting Stakeholder and Client Needs ments, the development and pursuit of a set of country-specific private sector development in- Develop a Deeper, More Differentiated Country dicators (such as for the level of private, gross, Approach fixed capital formation; banking sector capacity; Background: IFC has achieved high develop- and private provision of infrastructure). ment success rates through the pursuit of its fron- tier strategy since 1998, catalyzing investments in high-risk and low-income countries, as well as Place an Emphasis on Rural Development through investments in strategic sectors. However, Background: Economic growth and its result- IFC does not have a defined strategy in nonfron- ing market distribution of income matters in re- tier MICs, where most poor people live and where ducing the numbers of poor people. IFC may IFC has most of its operations. These countries want to acknowledge these elements in its strate- face a spectrum of private sector development gic approach, in line with its mission statement. challenges, including a lack of capacity in do- Poverty continues to show a strong rural origin. mestic financial markets and poor infrastructure IFC has not, however, placed much emphasis on to support production and trade (see figure 3.1). rural development in the past. In this regard, IFC can play a valuable role in many MICs, even evaluation supports a focus on the agribusiness though IFC's additionality in these countries has sector, which has had beneficial impacts on farm- not always been clear. ers and producers through linkage programs, and all instruments to expand access to finance While IFC builds up its in-country capacity as part in rural areas. (See box 3.1) of the decentralization process, the institution has an opportunity to define clearly, at the country Recommendation: In its country strategies, IFC level, how it will bring additionality to both the fron- may consider flagging opportunities to work on tier and nonfrontier countries in which it operates. the nexus of rural poverty and sustainable natu- ral resources, on which poor people depend, and Recommendation: As IFC decentralizes, it has to identify and develop high-impact agribusiness the opportunity to adopt more tailored country and rural microfinance projects with widespread strategies to complement its strong sector and re- demonstration effects, while simultaneously pro- gional approach. This strategy might include, in viding leadership in promoting socially and envi- consultation with the Bank and country govern- ronmentally sustainable practices. 4 3 I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 Developing More Seamless World Bank volume growth than in other regions. In addi- Group Processes tion, IFC may be able to learn from the experiences of the Bank in its efforts to share knowledge across Pursue New Incentives and Mechanisms to regions and countries Enhance Cooperation with the World Bank in Areas of Synergy Recommendation: IFC will need to monitor Background: Cooperation with the World Bank the decentralization process closely to ensure in areas of synergy, such as in developing financial that its work quality remains robust, and support markets and infrastructure, has been more mod- this with a rigorous training program for new in- est than anticipated in CASs. While cooperation has vestment staff. been strong in a few countries, it has fallen below expectations in many others. CASs have not proven Financial and Measurement Issues to be a good basis for enhanced cooperation, and few staff have felt motivated to cooperate across Ensure Sound Risk-Management Systems and institutional boundaries (see figures 3.2 and 3.3, Develop Risk-Mitigation Products and table 3.2). Moreover, because of the lack of up- Background: Experience highlights how quickly front identification and tracking of investment financial support for companies can be with- operations involving IFC­World Bank coopera- drawn, precipitated by economic or political tion, the ultimate development impacts of coop- events. IFC has proved itself a valuable counter- eration are also unclear. cyclical investor. One prime example is its support for its large industrial clients in Turkey through pe- Recommendation: To enhance cooperation riods of market turbulence, and their emergence with the World Bank in areas of synergy, IFC could as major engines of economic growth. Despite the (i) consider new incentives and mechanisms to current exuberance in the developing world, IFC complement the CAS process (with the Bank); and should acknowledge in its strategy the threat of (ii) identify investments at approval that were fa- a cessation or decline in capital flows to the de- cilitated by Bank policy or regulatory assistance, veloping world, its likely impact on clients, and the and track them throughout the project cycle mitigating actions that would be needed. Planning (through DOTS or other means) in order to judge now to improve risk-management systems, and their success. developing new risk-mitigating products to soften the impact for clients, would strengthen IFC's Addressing Learning and Growth Needs response to an economic shock and enhance its countercyclical role. (See figure 1.1 and box 3.3.) Manage the Trade-offs Inherent in the Decentralization Process to Achieve the Recommendation: IFC will need to make con- Highest Possible Work Quality tinued efforts to improve its risk-management Background: IFC's strategy predicts greater de- systems and to prepare for the next correction in velopment impact through higher investment vol- the international markets, including perhaps the umes and stronger decentralization. IFC will need extended use and development of new risk-mit- to prevent any trade-offs among rapid growth, igation products. organizational change, and project execution qual- ity. During a previous period of significant orga- Strengthen the Capacity for Evaluation nizational change, 1998­2001, IFC's evaluated and Its Application supervision quality--a key driver of development Background: In recent years, IFC's strategic di- success quality and currently at an all-time high-- rections have been increasingly informed by eval- fell sharply (see figure 2.4). The institution has uation findings. Substantial progress has occurred achieved improved quality with decentralization in the development of IFC's monitoring and self- in South Asia (lower market and sponsor risk, evaluation systems, which in the last two years higher supervision rates), but with more modest have advanced to where IFC is now starting to 4 4 R E C O M M E N D AT I O N S measure its development results across its port- optimize development effectiveness. Better met- folio of investment and advisory operations, as well rics will allow for deeper performance evaluation as carry out impact evaluations of its advisory and further learning from IFC operations. services operations (see box 1.3). IEG will have an important role to play in validating IFC's re- Recommendation: As it deepens its self- ported performance under these systems and, evaluation and monitoring systems, IFC could, building on this progress, in helping IFC advance with IEG's assistance, advance its metrics to bet- the measurement of the cumulative effects of its ter understand (and derive lessons about) the operations and their wider environmental and wider sector and the country-level impacts of its social impacts. Improved metrics should help operations. IFC structure and manage its operations to further 4 5 APPENDIXES 4 7 APPENDIX A: EVALUATION METHODOLOGY This appendix explains the methodological ap- process first involves a self-evaluation of a project proach IEG uses to evaluate the performance of by an IFC investment department using corporate IFC investment operations, as well as the moni- guidelines. The ratings assigned by investment toring and self-evaluation framework IFC recently departments are then independently verified (or began piloting to assess the results of its advisory rerated) by IEG in terms of bottom-line outcome operations. The appendix also provides a dis- ratings and their respective subcomponents. cussion of the explanatory power of different fac- tors influencing IFC's success rates, and describes Investments are selected for evaluation on a ran- the differences between the monitoring and self- dom sampling basis. Between 1996 and 2006, 627 evaluation frameworks used by IFC (for its private projects were evaluated under the XPSR system, sector investment operations) and those of the representing 51 percent coverage of all qualifying World Bank (for its public sector loan operations). investment operations approved over the last decade. Based on a 95 percent confidence inter- Methodology for Evaluating IFC val, the true development success rate of the Investment Operations population of investment operations was between Since 1996, when the present evaluation system 57 percent and 62 percent (table A1). was introduced, IEG has rated the development and investment success of IFC investment oper- Further details of the evaluation framework for IFC ations once they reached early operating maturity, investment operations are available on IEG-IFC's generally when operations have recorded at least website. 18 months of operating revenue, reflected in at least two years of audited financial statements Evaluation of Future Success Rates (ex-post evaluation). More recently, since 2004, IEG's evaluation of future success rates involves IEG has assessed the prospects for the future de- analysis of key internal and external drivers of velopment and investment performance of IFC past IFC success rates: (i) Project high-risk inten- operations based on the high-risk intensity of sity at approval (internal driver); and (ii) the qual- IFC-supported projects at approval. IEG is now ity of the business climates that IFC operations are supplementing the latter (ex-ante) evaluation exposed to after approval but before operating ma- with a review of business climate trends affecting turity (external driver). IFC operations in the years after approval, for operations reaching operating maturity (and to be To examine project high-risk intensity at approval, evaluated) in 2007 and 2008. IEG assesses whether eight high-risk factors were present or absent at the time of project approval. Evaluation of Achieved Success Rates These high-risk factors are: IEG's evaluations of achieved success rates are based on project-level results derived from a sys- · Sponsor quality--the sponsor's experience, tem introduced in IFC in 1996, the Expanded Proj- financial capacity, commitment to the project, ect Supervision Report (XPSR) system. The XPSR and business reputation; 4 9 I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 Table A1. Sample of Evaluated Operations, 1996­2006 (in percents) Success rate in Estimate of 95% confidence interval the sampled success rate in evaluated the population Standard Sampling Lower Upper Indicator operations, of operations, error error bound bound Project development rating 59 59 1 3 57 62 IFC investment return 56 56 1 3 53 59 IFC's work quality 66 66 1 3 64 69 Source: IEG. · Product market--market distortions or having had been self-evaluated and the ratings of which no clear, inherent, competitive advantage and IEG had validated) and 259 "new" operations (op- risk; erations approved since the completion of vari- · Debt service burden--the burden of servicing ous IFC quality steps in 2003 and 2004). This a debt in the year when principal repayments profiling has evolved to the point where IEG has start; now risk-profiled 388 "mature" operations, which · Project type--greenfield projects (building on were evaluated in the last six years (approved previously undeveloped land) generally involve during 1995­2000) as well as a random sample of higher risks than expansions; "new" operations (290 in number) approved be- · Sector risk--sectors exposed to high price or tween 2002 and 2005. supply volatility (such as agribusiness), or weather and safety conditions (such as tourism) For each operation, IEG profiles the operation's are higher risk, as demonstrated in IFC's in- high-risk intensity according to appraisal infor- vestment experience; mation available at project approval. Because of the · Country business climate at project approval-- diverse nature of these projects, IEG does not as- IEG uses the Wall Street Journal/Heritage Foun- sign weights to these risk factors. The analysis fo- dation's Index of Economic Freedom--Overall cuses on a project's intrinsic high-risk intensity at Synthesis Ratings as the primary indicator of a approval, which, as the analysis in the main report country's business climate quality; shows, strongly influences their development im- · IFC review intensity--projects that do not go pact quality, and accordingly reflects some, but to the Credit Department for review or to the not all, elements of IFC quality-at-entry (such as the Corporate Investment Committee are consid- intensity of IFC credit review at appraisal but not ered to be higher risk; and the quality of transaction structuring). · Nonrepeat project--IFC's first-time clients are generally higher risk. To assess business climate trends after approval (but before operating maturity), IEG reviews the IEG began its profiling of high-risk factors in 2004, change in the level of country credit risk, as mea- in response to a 2003 request by the Board of Di- sured by the Institutional Investor Country Credit rectors for IEG to assess whether IFC's structural Risk ratings, that IFC operations are exposed to, and process improvements during 1998­ 2001-- following their approval and up until the most re- such as the establishment of a Credit Department cent date for which ratings are available. Because and Portfolio Units--had resulted in higher IFC of inherent uncertainty in global and emerging success rates in its operations. At the time, IEG pro- market conditions, which can have material im- filed 259 "mature" operations (operations that pacts on country credit risk ratings, IEG has lim- 5 0 A P P E N D I X A : E VA L U AT I O N M E T H O D O L O G Y ited its review of business climate trends to two · Outcome achievement. Clients were satisfied years ahead of the current evaluation sample; in with the assistance; most of the major out- this case, to operations that will be evaluated in comes were achieved; areas for improvement 2007 and 2008 (and which were approved in 2002 in environmental and social conditions were and 2003). communicated to the client, with some im- provements made or ongoing. The Institutional Investor ratings were first com- · Impact achievement. Most intended impacts piled in 1979, and are now published in March and on the direct recipient(s) were achieved; some September of every year, for an increasing num- impact beyond the direct recipient(s). ber of countries (174 countries in 2006). The rat- ings are numerical, ranging from 0 to 100, with In addition to the above five performance areas, 100 corresponding to the lowest chance of sov- IEG will also rate IFC's work quality and the work ereign default on its foreign currency debts. The quality of consultants or others involved (client Institutional Investor relies on evaluations, pro- and/or stakeholders) in the operation. vided by economists and international banks, of the creditworthiness of the countries to be Explanatory Power of Different rated, with respondents using their own criteria. Influences on IFC Development Responses are aggregated by the Institutional Peformance Investor, with greater weights being given to re- The factors that drive the development impact sponses from institutions with higher worldwide quality of IFC investment operations, as described exposure. in chapter 2, broadly explain about two-thirds of IFC's results. When two or more of the following Methodology for Evaluating IFC Advisory variables are present--country risk migration, Services Operations from high risk to non-high risk, between approval In 2006, IFC started to introduce a systematic ap- and evaluation; fewer than four high-risk factors; proach to evaluating its advisory services opera- high IFC work quality; and an investment in a tions. To date, IFC has completed two evaluation strategic sector (infrastructure, financial inter- pilots, involving 300 advisory operations. IFC is ests, or health and education)--the development expected to report its ratings for these operations rating for the operation is positive 68 percent of in its annual report in October 2007, with IEG pre- the time. senting its independent assessment of these ratings in the Report on Operations Evaluation, 2007. A project-level econometric investigation of the de- terminants of IFC success rates, based on data The evaluation framework covers the following from 388 operations evaluated during the 2000­05 areas of performance of IFC's advisory services period, reveals that IFC work quality is the operations, with an indication of what equates to strongest determinant of the development and in- satisfactory performance in each area: vestment performance of IFC-supported projects. Individual independent (or explanatory) variables · Strategic relevance. Assistance addressed major with high significance were: positive or negative priority issues to a large extent; was appropriate changes in country credit risk (measured by the for conditions at initiation and completion; and Institutional Investor); project type (greenfield achieved a majority of intended cost recovery. or expansion); sector risk; sponsor quality; prod- · Efficiency. Assistance had a positive cost- uct market risk; nonrepeat risk; whether the in- benefit ratio; resources used to provide assis- vestment was in a strategic sector; and each of the tance were expended economically; and re- component elements of IFC work quality (ap- sources used were reasonable in relation to praisal quality; supervision quality; IFC role and alternatives. contribution). All variables, with the exception of · Output achievement. Most of the major outputs changes in country credit risk (measured on a were achieved. continuous scale), were rated on a binary scale, 5 1 I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 Figure A1. World Bank and IFC Evaluate Operations at Different Stages IFC and the World Bank share the same mission of poverty reduction but follow different business models in pursuit of this mission. Their project cycles accordingly dif- fer, with IFC's project cycle ending at full repayment (in the case of a loan) or equity divestment, and with the Bank's cycle ending at or around project implementation. Bank: Project Cycle Loan Full disbursement repayment Approval Disbursement Closing Commitment Implementation Completion Evaluation Report (ICR) Project Supervision Report Project Performance Assessment Report (PPAR)(IEG-WB) Development IEG-WB ratings review IFC: Loan repayment/ Project Cycle Equity exit Early Operating Approval Disbursement Maturity Commitment Evaluation Supervision Expanded Project Credit risk rating (Credit Review Department) Supervision Report (XPSR) Project Supervision Report DOTS* (from 2006) Development IEG-IFC ratings review Source: IEG. *Development Outcome Tracking System with 1 denoting high risk or present (in the case ness models in pursuit of this mission. As the re- of strategic sector choice) and 0 as non-high risk, port discusses, IFC generally works with the pri- or absent (in the case of strategic sector choice). vate sector (and in some cases with governments, The analysis was carried out using Probit analysis, for instance, in the area of business climate diag- with significance determined on the basis of "z" val- nostics and development), while the Bank provides ues. We also checked for multicollinearity among its products and services to governments. Ac- the explanatory variables and found none. cordingly, the supervision, monitoring, and eval- uation systems that each institution uses are Differences between IFC and World Bank different. As the chart above illustrates, IFC's proj- Evaluation Frameworks ect cycle ends with full repayment (of a loan) or IFC and the World Bank share the same mission equity divestment, while the Bank's cycle ends at of poverty reduction, but follow different busi- or around project implementation (figure A1). 5 2 APPENDIX B: PERFORMANCE OF IFC-SUPPORTED PROJECTS AND THE PROFITABILITY OF IFC INVESTMENT OPERATIONS: FURTHER ANALYSIS The following tables and figures present further · Trends in development ratings of IFC-supported disaggregation of the development, investment, projects, by region, between 1996 and 2006 and work quality ratings of IFC-supported projects. (figure B2); In turn, they show: · Development rating trends of IFC-supported projects, by industry department, between · Rating trends (figure B1) and characteristics 1996 and 2006 (figure B3); and (table B1) of IFC-supported projects, by sub- · Combined development and investment suc- indicator, between 1996 and 2006; cess rates and characteristics of IFC-supported · Characteristics of IFC-supported projects, by projects, between 1996 and 2006 (figure B4). subindicator, in the last three years, 2004­06 (table B2); Figure B1. Rating Trends of IFC-Supported Projects, by Development Outcome, Investment Return, and Work Quality, 1996­2006 Project business success, 1996­2006 100 90 80 70 projects ratings 60 of 50 "high" 40 30 with Percentage 20 10 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Year of evaluation Source: IEG. (Figure continues on next page) 5 3 I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 Figure B1. Rating Trends of IFC-Supported Projects, by Development Outcome, Investment Return, and Work Quality, 1996­2006 (continued) Economic sustainability, 1996­2006 100 90 80 70 projects ratings 60 of 50 "high" 40 30 with Percentage 20 10 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Year of evaluation Environmental and social effects, 1996­2006 100 90 80 70 projects ratings 60 of 50 "high" 40 30 with Percentage 20 10 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Year of evaluation Private sector development impacts, 1996­2006 100 90 80 70 projects ratings 60 of 50 "high" 40 30 with Percentage 20 10 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Year of evaluation Source: IEG. 5 4 A P P E N D I X B : P E R F O R M A N C E O F I F C - S U P P O R T E D P R O J E C T S Figure B1. Rating Trends of IFC-Supported Projects, by Development Outcome, Investment Return, and Work Quality, 1996­2006 (continued) IFC loan success rates, 1996­2006 100 90 80 (percent) 70 rate 60 50 40 success 30 20 10 Investment 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Year of evaluation IFC equity success rates, 1996­2006 100 90 80 (percent) 70 rate 60 50 40 success 30 20 10 Investment 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Year of evaluation Appraisal work quality, 1991­2006 100 90 80 70 projects ratings 60 of 50 "high" 40 30 with Percentage 20 10 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Year of evaluation Source: IEG. (Figure continues on next page) 5 5 I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 Figure B1. Rating Trends of IFC-Supported Projects, by Development Outcome, Investment Return, and Work Quality, 1996­2006 (continued) Supervision work quality, 1996­2006 100 90 80 70 projects ratings 60 of 50 "high" 40 30 with Percentage 20 10 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Year of evaluation IFC role and contribution, 1996­2006 100 90 80 70 projects ratings 60 of 50 "high" 40 30 with Percentage 20 10 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Year of evaluation Source: IEG. 5 6 A P P E N D I X B : P E R F O R M A N C E O F I F C - S U P P O R T E D P R O J E C T S Table B1. Characteristics of High and Low Development, Investment Return, and Work Quality Ratings, by Subindicator, 1996­2006 (in percents) LOW HIGH Highly Mostly Mostly Highly unsuccessful Successful Successful Unsuccessful unsuccessful successful Development ratings, DEVELOPMENT RATING 7 16 18 21 28 10 1996­2006 41 59 6 13 16 24 31 10 (by commitment volume) 35 65 Partly Unsatisfactory Satisfactory Excellent unsatisfactory Project business success 35 19 22 24 54 46 Economic sustainability 21 18 40 22 38 62 Environmental effects 6 26 56 12 33 67 Private sector development 8 20 45 26 28 72 Partly Unsatisfactory Satisfactory Excellent unsatisfactory IFC investment return IFC INVESTMENT 33 11 42 14 ratings, 1996­2006 RETURN 44 56 (by commitment volume) 25 13 47 15 38 62 Loan 17 9 67 7 26 74 Equity 57 12 10 21 69 31 Partly Unsatisfactory Satisfactory Excellent unsatisfactory IFC work quality ratings, IFC WORK QUALITY 8 26 54 12 1996­2006 34 66 (by commitment volume) 6 20 58 15 26 74 Screening, appraisal, structuring 13 32 43 12 45 55 Supervision and administration 5 27 52 16 32 68 Role and contribution 7 12 54 27 19 81 Source: IEG. Note: (i) Following a similar approach since 1996, IEG uses a binary interpretation of these evaluation results, which describes operation ratings as either "high" or "low." The central dividing line in the above tables separates the two categories. (ii) By-volume figures are the percentages of the total committed IFC investment amounts in each outcome-rating group. (iii) The success rates above are the percentages of all assigned ratings. 5 7 I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 Table B2. Characteristics of High and Low Development, Investment Return, and Work Quality Ratings, by Subindicator, 2004­06 (in percents) LOW HIGH Highly Mostly Mostly Highly unsuccessful Successful Successful Unsuccessful unsuccessful successful Development ratings, DEVELOPMENT RATING 8 17 19 18 31 7 1996­2006 44 56 4 14 16 22 38 5 (by commitment volume) 35 65 Partly Unsatisfactory Satisfactory Excellent unsatisfactory Project business success 34 16 28 22 50 50 Economic sustainability 19 19 42 20 38 62 Environmental effects 8 22 63 8 29 71 Private sector development 6 22 47 25 28 72 Partly Unsatisfactory Satisfactory Excellent unsatisfactory IFC investment return IFC INVESTMENT 30 9 44 18 ratings, 1996­2006 RETURN 39 61 (by commitment volume) 18 10 54 18 28 72 Loan 16 8 67 9 24 76 Equity 48 13 10 30 60 40 Partly Unsatisfactory Satisfactory Excellent unsatisfactory IFC work quality ratings, IFC WORK QUALITY 2 22 63 13 1996­2006 23 77 (by commitment volume) 4 12 66 17 16 83 Screening, appraisal, structuring 6 31 51 12 37 63 Supervision and administration 0 18 62 20 18 82 Role and contribution 3 15 52 30 18 82 Source: IEG. Note: (i) Following a similar approach since 1996, IEG uses a binary interpretation of these evaluation results, which describes operation ratings as either "high" or "low." The central dividing line in the above tables separates the two categories. (ii) By-volume figures are the percentages of the total committed IFC investment amounts in each outcome-rating group. (iii) The success rates above are the percentages of all assigned ratings. 5 8 A P P E N D I X B : P E R F O R M A N C E O F I F C - S U P P O R T E D P R O J E C T S Figure B2. Development Ratings of IFC-Supported Projects, by Region, 1996­2006 100 90 with 80 70 68% 66% 60 53% projects ratings 49% 50% 50 of 40 "high" 30 20 Percentage 10 0 Africa Asia Europe and Latin America Middle East and Central Asia and Caribbean North Africa Region Source: IEG. Figure B3. Development Rating Trends of IFC-Supported Projects, by Industry Department, 1996­2006 Extractive sectors Infrastructure Finance sector All sectors Food and agribusiness General manufacturing Industry and services Health and education Funds 0 20 40 60 80 100 Percentage of projects with "high" developing rating 2001­06 1996­2000 Source: IEG. 5 9 I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 Figure B4. Combined Development and Investment Ratings and Characteristics of IFC Operations, 1996­2006 A comparison of the characteristics of investment operations in each of the four rat- IFC's equity returns have nevertheless been impaired by factors such as illiquidity, ings groups reveals the following: weak exit mechanisms, and/or currency crises that have eroded U.S. dollar val- uations. While few of these investments have therefore yielded losses for IFC, · Operations with high-high ratings (square 1) featured high work quality in 91 per- their returns have been less than satisfactory. cent of cases, compared with 24 percent in operations with low-low ratings (square 4). High development ratings (squares 1 and 2) featured high work qual- Square 3: 94 percent of operations categorized as having achieved high in- ity in 89 percent of cases. vestment ratings but low development ratings featured straight loan investments. In these cases, the underlying projects have not, themselves, been sufficiently · Operations with high development ratings (squares 1 and 2) featured a very high profitable (their project business success rate was only 6 percent) and, conse- proportion (78 percent) of environmentally compliant projects, as compared with quently, have yielded little in the way of economic or social benefits, and/or operations with low development ratings (squares 3 and 4). may have featured material environmental performance shortfalls. Despite · There is significant variation in IFC's choice of investment instrument across the this, IFC has received repayment of its loan by virtue of its ranking claim on com- four ratings combinations: pany cashflow and the collateral security package. Also, the project's sponsor may have decided, for strategic reasons, to advance funds to the enterprise from Square 1: High-high ratings have tended to feature loan and/or equity invest- its own resources, thus keeping the business alive and repaying its lenders. ments in almost the same proportions as exist in the overall portfolio, at a ratio of 2:1, loan to equity, respectively. There is, therefore, nothing unusual about Square 4: Low-low ratings were substantially overweighted in equity invest- high-high ratings in terms of IFC instrument mix. ments compared with high-high ratings, and the success rate and aggregate returns of these operations were well below average. These returns did not com- Square 2: In 87 percent of evaluated operations that achieved high develop- pensate for the projects' materially higher-than-average risk intensity--coun- ment ratings but low investment returns, IFC had invested equity. In most try, sector, sponsor, and market risk were highest for projects in this square. These cases, investments in this square were made in businesses that had better-than- operations also featured the lowest level of satisfactory or above (that is, average project returns, have continued trading, and have therefore succeeded "high") IFC work quality (24 percent), including IFC's additionality through its in generating at least minimally satisfactory project development impacts. role and contribution. Number of operations: 84 Number of operations: 288 Commitments: $1,300m (12%) Commitments: $5,588m (53%) Project business success: 53% Project business success: 82% Environmental and social effects Environmental and social effects success rate: 76% success rate: 78% >=4 high-risk factors: 77% >=4 high-risk factors: 44% Instrument: ­Loan 13% Instrument: ­Loan 62% ­Equity 50% ­Equity 14% ­Loan and Equity 37% ­Loan and Equity 25% Equity success rate (26 invs.): 4% Equity success rate (110 invs.): 83% Equity aggregate real internal rate Equity aggregate real internal rate of return 1.7% of return 19% Work quality: ­High 87% 2 1 Work quality: ­High 91% ­Low 13% 46% ­Low 9% Country risk: ­Improved 10% HIGH 13% Country risk: ­Improved 38% ­Unchanged 77% High development High development ­Unchanged 58% ­Deteriorated 13% rating rating ­Deteriorated 5% % in strategic sectors (by #): 57% High IFC return Low IFC return % in strategic sectors (by #): 51% rating 4 3 31% 10% Number of operations: 192 Low development Low development Number of operations: 63 Commitments: $2,761m (26%) rating rating Commitments: $967m (9%) Project business success: 1% Low IFC return High IFC return Development LOW Project business success: 6% Environmental and social effects Environmental and social effects success rate: 44% LOW HIGH success rate: 48% >=4 high-risk factors: 73% IFC investment return >=4 high-risk factors: 24% Instrument: ­Loan 35% Instrument: ­Loan 88% ­Equity 30% ­Equity 6% ­Loan and Equity 35% ­Loan and Equity 6% Equity success rate (47 invs.): 0% Equity success rate (2 invs.): 100% Equity aggregate real internal rate Equity aggregate real internal rate of return ­10% of return 1.9% Work quality: ­High 24% Work quality: ­High 31% ­Low 76% ­Low 69% Country risk: ­Improved 7% Country risk: ­Improved 0% ­Unchanged 78% ­Unchanged 88% ­Deteriorated 15% ­Deteriorated 12% % in strategic sectors (by #): 29% % in strategic sectors (by #): 50% Source: IEG. 6 0 A P P E N D I X B : P E R F O R M A N C E O F I F C - S U P P O R T E D P R O J E C T S IFC Profitability from Investment IFC's development performance, given the close Operations, 1996­2006 connection between investment and develop- ment success. Figure B5 sets out the trends in the To supplement IEG's evaluations of achieved suc- profitability of IFC investment operations since cess rates (ex-post evaluation) and expected suc- 1996, by loan and equity instrument, and table B3 cess rates (ex-ante evaluation), IEG also reviews shows the profitability of IFC investment opera- the profitability of IFC's whole portfolio of in- tions for the whole of period 1996­2006. vestment operations. IEG carries out this analy- sis to discern patterns that may have an effect on Figure B5. Net Profitability of IFC Investment Operations, FY96­FY06 130 120 110 100 90 80 70 60 Percent 50 40 30 20 10 0 ­10 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY96 Average equity at cost as a percentage of average loan and equity outstanding: 19.3 19.6 19.7 19.0 19.0 19.8 19.6 18.6 17.9 18.3 19.0 Equity net profit (with unrealized capital gains) as a percentage of average equity outstanding at cost Equity net profit (without unrealized capital gains) as a percentage of average equity outstanding at cost Loan net profit as a percentage of average loan outstanding Source: Profitability analysis is derived from IFC annual financial reports and internal IFC databases. Note: Excludes income from IFC Treasury Department operations. The average outstanding balance for a fiscal year is the average of the out- standing amount at the beginning and the end of the fiscal year. 6 1 I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 Table B3. IFC Net Profitability Contribution of Investment Operations (as a percentage of average outstanding balance) Average FY96­FY06 (percent) Average loan outstanding 100 Average income from loans (interest and fees) 7.5 Average loan loss provisions 1.2 Average cost of funds after swap effects 3.0 Average administrative expenses 1.9 Loan net profitability rate 1.4 Average equity outstanding at cost 100 Average dividend income 7.0 Average realized capital gains on sold/closed investments 13.2 Active investments: Valuation at end-of-period 156.0 Original cost of shares held at end-of-period 101.7 Average unrealized gains on active investments 53.6 Average administrative expenses 2.5 Equity net profitability rate 71.3 Average equity at cost as a percentage of loan + equity at cost 22.1 Combined IFC Loan and equity net profitability rate 16.9 Source: Profitability analysis is derived from IFC annual financial reports and internal IFC databases. Note: Excludes income from IFC Treasury Department operations. The average outstanding balance for a fiscal year is the average of the out- standing amount at the beginning and the end of the fiscal year. 6 2 APPENDIX C: DEFINITIONS OF EVALUATION TERMS INVESTMENT OPERATIONS Company The entity implementing the project and, generally, IFC's in- vestment counterparty. For financial markets operations, it refers to the financial intermediary as distinct from its portfolio of IFC-financed sub-project companies. Investment IFC's financing instrument(s) in the evaluated operation, such as a loan, guarantee, equity, and underwriting commitment. Operation IFC's objectives, activities, and results in making and admin- istering its investment. Project The company objectives, capital investments, funding pro- gram, and related business activities being partially financed by IFC's investment selected for evaluation. For example, for one operation, IFC provided $55 million for the company's $100 million cement manufacturing expansion project in the form of a $20 million A-loan, a $30 million B-loan from com- mercial banks, and a $5 million equity investment. Financial markets All projects where the company is a financial intermediary or financial services company, including agency lines. Nonfinancial markets All other projects, except collective investment vehicles (investment funds); sometimes referred to as "real sector" projects. Development rating The development result(s) of an IFC-supported project, as- sessed in four respects: project business success; economic sus- tainability; environmental and social effects; and wider private sector development impacts. Project business success For real sector projects, such success is measured by the proj- ect's financial rate of return (FRR), as compared with the com- pany's cost of capital. For financial sector projects, success is measured by the positive contributions of the associated sub- portfolios or asset growth to the intermediary's profitability, financial condition, and business objectives. 6 3 I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 Economic sustainability Measured, where possible, by the project's economic rate of return (ERR), as compared with a minimum benchmark of 10 percent. This indicator takes into account net gains or losses by nonfinanciers, nonquantifiable impacts, and contributions to widely held development objectives. Environmental and social effects The degree to which a project meets IFC's environmental, so- cial, health and safety requirements at approval; and policies, guidelines, and standards that would apply if the project were appraised today. Wider PSD impacts A project's private sector development impact beyond the project company, particularly its demonstration effect in cre- ating a sustainable enterprise capable of attracting finance, increasing competition, and establishing linkages. Development success Based on performance in these four dimensions, the IFC- supported project was rated overall as having a high-quality de- velopment result. Development effectiveness The aggregation of project development results at the coun- try, sector, theme, regional, and global levels. IFC investment return rating An assessment of the gross profit contribution quality of an IFC loan and/or equity investment (without taking into account transaction costs or the cost of IFC equity capital). Loans are rated satisfactory provided they are expected to be repaid in full, with interest and fees as scheduled (or are pre- paid or rescheduled without loss). Equities are rated satisfactory if they yield an appropriate pre- mium on the return on a loan to the same company. NON-INVESTMENT OPERATIONS: Advisory services (could include technical assistance components) Outcomes Implementation of recommendations or advice. Impacts Changes that occurred following the implementation of a recommendation. For example, an operation recommends that a country amend its leasing law to incorporate best prac- tice in the region. The outcome is the country amends the leasing law in line with the recommen- dation. The impact is the leasing industry becomes attractive to potential sponsors, leading to the establishment of new companies after the amendment of the leasing law. 6 4 ENDNOTES Executive Summary 2. Indiqué par l'attribution par l'institution d'une 1. IEG changed its name from the Operations Eval- note de risque-pays inférieure à 30. uation Group in 2006. 3. Généralement, lorsque les opérations ont gé- 2. As determined by having an Institutional Coun- néré des recettes d'exploitation pendant au moins 18 try Credit Risk rating of less than 30. mois. 3. Generally, when operations have recorded at 4. Les deux institutions emploient de ce fait des least 18 months of operating revenue. cadres d'évaluation différents, notamment en ce qui 4. The two institutions accordingly employ differ- concerne le ciblage, le calendrier d'évaluation et les va- ent evaluation frameworks, including in terms of focus, leurs de référence. Par exemple, la Banque mondiale timing of evaluation, and benchmarks. For example, the évalue les projets immédiatement après le décaissement World Bank evaluates projects immediately after dis- du financement tandis que l'IFC le fait plusieurs années bursement while IFC does so a few years after dis- après le décaissement (une fois que le projet a atteint bursement (at early operating maturity). The Bank son rythme de croisière). La Banque évalue les résul- assesses results based on achievement of objectives, tats sur la base de la réalisation des objectifs, tandis que while IFC considers financial and economic results l'IFC examine les résultats financiers et économiques based on market benchmarks, along with environ- sur la base des références du marché, de même que les mental and social impacts, and private sector impacts impacts environnementaux et sociaux et les impacts sur beyond the project company. le secteur privé qui sortent du cadre de l'entreprise du 5. IFC 2006b. projet. 6. Middle-income countries that are non-high risk, 5. IFC 2006b meaning they have an Institutional Country Credit Risk 6. Les pays à revenu intermédiaire qui ne posent pas rating greater than 30. de risques élevés, c'est-à-dire ceux qui ont une note de 7. Cooperation is defined broadly to include any in- risque-pays supérieure à 30. teraction among World Bank Group institutions aimed 7. La coopération est définie au sens large comme at improving the development impact of World Bank toute interaction entre les institutions du Groupe de Group instruments by maximizing synergies and re- la Banque mondiale visant à améliorer l'impact sur le ducing duplication and inconsistencies. It includes développement des instruments du Groupe de la both coordination (efforts to integrate the strategies Banque mondiale en optimisant les synergies et en ré- of the two institutions to accomplish common objec- duisant les chevauchements et les incohérences. Elle tives, such as through division of labor, but which does recouvre aussi bien la coordination (efforts visant à in- not typically involve interaction on specific interven- tégrer les stratégies des deux institutions en vue d'at- tions) and collaboration (defined as interaction be- teindre des objectifs communs tels que la division du tween the two institutions on specific interventions). travail, mais qui n'implique pas le plus souvent d'in- teractions dans le cadre d'interventions particulières) Résumé analytique que la collaboration (définie comme les interactions 1. Le Groupe d'évaluation des opérations (OED) est entre les deux institutions dans le cadre d'interventions devenu le Groupe indépendant d'évaluation en 2006. particulières). 6 5 I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 Resumen evaluation of foreign investment advisory services in 1. El GEI cambió su nombre anterior, Departa- 1998. mento de Evaluación de Operaciones, en 2006. 3. World Bank forthcoming. 2. Según determina su calificación Institutional 4. This figure includes International Bank for Re- Country Credit Risk de menos de 30. construction and Development gross disbursements of 3. Por lo general, cuando las operaciones registra- about $232 billion and International Development As- ron al menos 18 meses de ingresos operativos. sociation gross disbursements of about $110 billion, but 4. Las dos instituciones utilizan distintos marcos de does not include the cost of trust funds. Except for a evaluación, incluso en términos de foco, momento de spike between 1997 and 1999, International Bank for evaluación y puntos de referencia. Por ejemplo, el Reconstruction and Development lending volumes fell Banco Mundial evalúa los proyectos inmediatamente between 1991 and 2006 (from $16 billion to $14 billion luego de los desembolsos, mientras que la IFC lo hace per year), while International Development Association unos años después de los desembolsos (al inicio de la volumes increased over the same period, from around madurez operacional). El Banco analiza los resultados $6 billion to $9 billion per year. basándose en el cumplimiento de los objetivos, mien- 5. See IEG-IFC 2006b. tras que la IFC considera los resultados financieros y 6. Determined using the Atlas Method, as of económicos sobre la base de los puntos de referencia 2004. del mercado, junto con los impactos sociales y am- 7. Total project funding, including donor contribu- bientales y los impactos del sector privado más allá de tions. la empresa del proyecto. 8. Unless specifically noted, IEG means IEG-IFC in 5. IFC 2006b. this document. 6. Los países de ingreso mediano que no tienen altos 9. While the rating seeks to examine what would riesgos, lo que significa que tienen una calificación have happened without the project, there are limita- Institutional Country Credit Risk superior a 30. tions to this judgment, in the sense that there is im- 7. Definida en términos amplios, la cooperación in- perfect information about other sources of financing cluye cualquier interacción entre las instituciones del available to clients, and about the opportunity cost, in Grupo del Banco Mundial dirigida a mejorar el im- development terms, to IFC of investing in one opera- pacto en términos de desarrollo de los instrumentos tion and not another. del Banco Mundial, maximizando las sinergias y redu- 10. The fixed loan interest rate is either the actual ciendo la duplicación y las inconsistencias. Abarca tanto interest rate of a fixed-rate loan, the fixed-rate equiva- la coordinación (los esfuerzos para integrar las estra- lent of an actual variable loan, or the notional interest tegias de las dos instituciones a fin de alcanzar objeti- rate IFC would have charged to a similar company in vos comunes, por ejemplo a través de la división del the same country. trabajo, pero que generalmente no implican la inte- 11. For example, the World Bank evaluates projects racción en las intervenciones específicas) como la co- right after disbursement while IFC does so a few years laboración (que se define como la interacción entre after disbursement (at early operating maturity). The las dos instituciones en las intervenciones específicas). Bank assesses results based on achievement of objec- tives while IFC considers financial and economic results Chapter 1 based on market benchmarks, along with environ- 1. Before 1996, IEG evaluated IFC's project per- mental and social impacts as well as private sector im- formance using Investment Appraisal Reports. In 1996, pacts beyond the project company. a systematic system for evaluating IFC's development 12. IFC has twice strengthened its environmental and and investment results was introduced, the Expanded social effects requirements for projects in the past Project Supervision Report (XPSR) System. 10 years. In 1998, IFC's Environmental and Social Review 2. Prior to 2006, a number of program-level evalu- of Projects came into force in conjunction with the new ations were carried out, including an evaluation of four World Bank Group Safeguard Policies and the 1998 Pol- small and medium enterprise facilities in 2004, and an lution Prevention and Abatement Handbook, which in- 6 6 E N D N O T E S cluded many updated technical guidelines. The latest up- 23. Between 1996 and 2005, IFC's evaluated success date to IFC environmental and social effects requirements rates in EBRD countries were as follows: 63 percent of took place in 2006, when the Board of Directors ap- operations had high development ratings, 50 percent proved new Policy and Performance Standards, and a new had high investment ratings, while 75 percent had high Environmental and Social Review of Projects. work-quality ratings. EBRD does not disaggregate its per- 13. IFC made its very first investments in Chad and formance in this way. Instead, it reports an overall suc- Armenia in 2000. cess rate of 57 percent between 1996 and 2005. See 14. Individual evaluations suggest that IFC adopted EBRD projects database at http://www.ebrd.com/ a speculative approach to its investments in the Inter- projects/eval/method.htm. net sector at this time, investing relatively small amounts 24. EBRD considers projects to be ready for evalu- of equity in start-up companies, with minimal follow- ation after at least 12 months of operations with 1 year up supervision. IFC was not alone in this strategy and, of audited financials, whereas IFC requires 18 months in common with many other investors and venture of operations, reflected in at least 2 years of audited capitalists, suffered losses on those investments with financials. the bursting of the technology sector bubble. 25. This evaluation approach has been extended to 15. In the 1995­2000 approval period, 388 operations country, corporate, sector, thematic, and global policy were profiled; and in the 2002­05 approval period, evaluations, by making suitable adjustments to the 290 operations. criteria. 16. Average high-risk intensity fell from 4.00 in 1995, to 3.16 in 2005. Excluding country risk, high-risk Chapter 2 intensity declined from 3.35 in 1995, to 2.34 in 2005. 1. During this time, IEG produced some 50 macro 17. This pattern is consistent with the population evaluation reports with over 1,000 findings and rec- of projects from which the 2007 sample was derived, ommendations. IEG also delivered 808 micro evalua- with 43 percent of high-risk country approvals show- tions: 627 Evaluation Notes--independent validations ing an improvement in their country risk ratings since of XPSRs, covering the results of IFC's investment op- approval in 2002. erations--and 181 Project Completion Report Reviews-- 18. Among the population of projects from which independent validations of Project Completion Reports, the 2008 evaluation sample will be drawn, 40 percent of covering the results of IFC's advisory services operations. high-risk country approvals have shown an improvement 2. Out of 22 evaluated operations in conflict- in their country risk ratings since approval in 2003. affected countries (defined as countries with an ongoing 19. The correlation between investment ratings conflict at the time of project approval, or a conflict in and environmental and social effects ratings is weaker the three years preceding approval), 64 percent than the correlation between investment ratings and achieved high development success, which is actually the other development ratings, although the correla- marginally higher than the 59-percent average of the tion is strong at the margins, where investment success rest of IFC. is rated as unsatisfactory. 3. For more detail, see IEG 2004. 20. See IFC 2005. 4. The private operator introduced new technology 21. IFC 2006a. and know-how and achieved a 234 percent increase in 22. IFC's own credit review ratings trend downward productivity over a five-year period, increasing container between project approval and early operating maturity, moves from 80,000 a year, to over 300,000, well ahead but stabilize from early operating maturity onward. A com- of forecasts. parison of expected equity returns at evaluation during 5. IEG-IFC 2007. the 2002­04 period, with realized rates of return on eq- 6. See, for example, IEG-IFC 2006a. uity at exit (carried out for the FY2005 Annual Review 7. This finding is reported in previous IEG-IFC of Evaluation Findings in IFC), shows that, overall, annual reviews of IFC performance. 84 percent of the ratings IEG assigned in 2002­04 would 8. IEG-IFC forthcoming(b). remain unchanged. 9. World Bank 2005. 6 7 I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 10. In 2005, a new management team, with new appraisal and capacity building for FIs with environ- control procedures and a refocused business model, was mentally risky portfolios. The Sustainable Financial Mar- introduced at the African Management Services Com- kets facility to establish FI capacity began implementation pany; and the African Project Development Facility was in 2003­04, and the results from this initiative are not replaced by the Private Enterprise Partnership for Africa. yet fully evident. A one-stop training facility (Competi- PEP-Africa has a broader mandate than APDF, and cov- tive Business Advance) was closed in 2006 because ers multiyear, sector-focused efforts based on three pil- one-stop training was insufficient for long-term capac- lars: (i) building SME capacity; (ii) improving business ity building. IFC plans to roll out environmental and so- climates (to reduce administrative barriers, regulatory cial effects training in the regions over time, but as a costs and other costs of doing business); and (iii) facil- permanent offering through a training partner. IFC will itating downstream IFC investments. The strategy en- invest in the partner's capacity; currently the India and visages working in close partnership to integrate IFC China regional partnerships are under way and four or sector expertise with the PSD investment climate and five other partnerships are planned for 2008. This will, the SME development expertise of the World Bank however, not reach all IFC clients immediately. There- Group. It is expected to mobilize donor funding to fore, in 2008, the Competitive Business Advance will be three times that of IFC funding--leading to total fund- turned into a Web-based e-learning module for any ing of about $160 million between 2006 and 2010. client with Internet access to obtain the training. Ad- 11. IEG 2006. ditionally, various tools such as a Web-based platform 12. IFC's administrative expenses in Sub-Saharan will be developed to further support client capacity Africa were 4.2 percent of average investment out- creation. standing, compared with 2.2 percent in the rest of IFC. 18. See, for example, IEG-IFC 2005b and 2006a. 13. As evidenced in a higher proportion of projects 19. See IEG-IFC 2006b, exhibiting high-risk intensity, according to IEG-IFC's 20. The fund will begin as a pilot program, with an project risk profiling. initial capitalization of $30 million, which is expected 14. Often, the foreign, committed sponsor brings to facilitate between $100 million and $200 million of resources and skills to raise the environmental and so- local currency loans (see IFC 2007). cial effects capacity of its local partner but, also, locally 21. IEG-IFC forthcoming(c). owned and managed companies have been committed 22. IEG-IFC forthcoming(a) to building strong environmental management capac- 23. IEG-IFC forthcoming(c). ity, especially if they export to markets with strict en- 24. These recommendations are being implemented vironmental requirements. by IFC Management, through the establishment of the 15. IEG-IFC forthcoming(b). Development Effectiveness Unit in 2005, and the sub- 16. A proposed project is deemed to be in category sequent introduction of a Development Outcome A if it is likely to have significant adverse environmen- Tracking System, as well as the introduction of Long- tal impacts that are sensitive, diverse, or unprece- Term Performance Awards for delivery of operations dented. These projects may affect an area broader than with high development effectiveness. the sites or facilities subject to physical works. A pro- posed project is classified in category B if its potential Chapter 3 adverse environmental impacts on human populations 1. This was the so-called "proactive" scenario. Under or environmentally important areas--including wet- a more reactive scenario, IFC expected its approvals to lands, forests, grasslands, and other natural habitats-- increase by about 50 percent, to $4.5 billion by 2005. are less adverse than those of category-A projects. 2. Between 1996 and 2006, the number of IFC in- 17. Other steps include developing the environ- vestment staff based in the field increased from 256 to mental management capacity in FIs that are not accus- 501, with the proportion of field-based to headquarters- tomed to appraising and supervising their subprojects based investment staff increasing from 13 percent to from an environmental and social effects perspective. 39 percent. This has been a challenge for IFC. Therefore, the new 3. See Kaplan and Norton 2001; and Kaplan 2004. Environmental and Social Reporting Procedures intro- 4. From an average of about 43 weeks, according duced in 2006 demand substantial engagement during to the 2006 IFC Client Survey. 6 8 E N D N O T E S 5. In 2005, average private credit/GDP in high- 18. IEG-WB 2006a. income countries was 167 percent, similar to the 1996­ 19. See IEG-IFC 2005a. 2005 period average of 169 percent. Source: World 20. From a 2006 XPSR evaluation note. See also IEG- Bank Group, Global Development Finance database. IFC forthcoming(c). 6. Despite representing over 4 percent of global 21. See IEG-IFC forthcoming(b). GDP, Latin America has less than 2 percent of the 22. Remittances are today a major component of in- world's total financial assets. See McKinsey & Com- ternational financial flows to developing countries, and pany 2006, p. 11. Weak banking sector depth is espe- in the last 10 years they have grown faster than private cially noticeable in Argentina, with 11.7 percent in capital flows or overseas development assistance. Re- private sector credit/GDP in 2005; Paraguay, with 15.6 mittances grew more than 300 percent between 1995 percent in private sector credit/GDP in 2005; and Mex- and 2005, compared with a 250 percent increase in pri- ico, with 17.9 percent in private sector credit/GDP in vate capital flows (see World Bank 2006, p. 88). 2005. Source: World Bank Group, Global Development 23. See IEG-IFC 2006a. Finance database. 24. For example, a business school and a clinic 7. See IEG-WB 2006a. geared toward tourists. 8. Derived from World Bank Group, Global Devel- 25. See World Bank 2007. opment Finance database. 26. World Bank and IFC 2006. 9. In nonfrontier MICs, the average cost of export- 27. See IEG-WB 2006c. ing one container overseas is $1,100, compared with 28. Cooperation is defined broadly to include any $1,450 per container in frontier countries. Source: interaction among World Bank Group institutions aimed Derived from the World Bank Group's Doing Business at improving the development impact of World Bank database indicators. Group instruments by maximizing synergies and re- 10. Shortcomings in Brazil's port capacity in the ducing duplication and inconsistencies. It includes early 1990s (referred to in box 2.1) is a case in point. both coordination (efforts to integrate the strategies See Farrell, Puron, and Remes 2005, on the need for a of the two institutions to accomplish common objec- strong enabling infrastructure and an effective regula- tives, such as through division of labor, but which does tory structure in helping MICs exploit their compara- not necessarily involve interaction on specific inter- tive advantages. ventions) and collaboration (defined as interaction 11. Informal economy output (as a percentage of between the two institutions on specific interventions). gross national income) in nonfrontier MICs averages 30 29. IEG's evaluation, Improving Investment Cli- percent. This is not dissimilar to the frontier average mates: An Evaluation of World Bank Group Assis- of 38 percent. By contrast, the informal economy out- tance (IEG 2006), reinforces these findings. It concludes put in high-income countries is only 17 percent. For a that Bank Group coordination on business climate is- case study on the dampening effects of the informal sues has been weak, both within the Bank as well as be- economy on growth in a MIC, see Elstrodt, Fergie, and tween the Bank and IFC. Furthermore, the study found Laboissiere 2006. 12. This contrasts with IFC's experience in low- that cooperation across the two institutions often de- income countries, where development success was 15 pends on personal relationships and the level of at- percent with a low role and contribution, and 66 per- tention given to cooperation by senior management. cent with a high role and contribution. 30. In March 2007, IFC announced new procedures 13. Excluding China, which accounts for just over for linking up IFC and Bank advisory services, including: 20 percent of developing country GDP and 5 percent (i) inviting representatives from other parts of the Bank of IFC financial sector commitments. Group to key strategy-setting meetings, where advisory 14. IEG-IFC forthcoming(c). services interventions requiring coordination are dis- 15. See IEG-WB 2006b, 2006c. cussed, for example, at the regional and sector level; (ii) 16. See IEG-IFC forthcoming(a). requesting that task managers seek input/advice from 17. The Africa Action Plan, approved in Septem- Bank colleagues at the conceptual stage of a project; (iii) ber 2005, includes, for example, targets to reduce the sharing information about IFC's portfolio of advisory costs of business and increase finance mobilization in services operations; and (iv) reimbursement of time-costs the region in at least nine countries by fiscal year 2008. associated with the use of Bank staff expertise. 6 9 I N D E P E N D E N T E VA L U AT I O N O F I F C ' S D E V E L O P M E N T R E S U LT S 2 0 0 7 31. Supervision quality was significantly above the tion of the wheel," and to scale up successful programs. average for other regions during 2003­05. As a result, internal knowledge-sharing activities are 32. Between 2001 and 2006, IFC commitment in not sufficiently relevant to the day-to-day operational South Asia increased by 51 percent, whereas they in- work of "frontline" staff. creased by 106 percent in other regions. Regulatory con- 37. IEG-IFC 2006a. straints in India were reportedly a factor in constraining 38. IFC's most recent strategy paper (IFC 2007) the level of overall investment activity in the region. sets out a number of risk-management steps IFC is 33. IEG-IFC's forthcoming report on Ukraine con- going to take to improve client service and efficiency. tains a comparison between IFC and EBRD activities in These include an ongoing business process review, to that country in greater detail. both streamline and strengthen operational proce- 34. From previous annual reviews and reports by dures; a shift in credit review (and, eventually, most as- IEG-IFC. pects of risk-management decision making) to the field; 35. IEG-WB 2003. integration of development-impact metrics with finan- 36. More activities are focused on providing access cial risk-return metrics, and enhanced tools, such as im- to knowledge and expertise than on ensuring that proved risk-rating systems. knowledge is shared in ways that promote its adapta- 39. The development of new risk-mitigation prod- tion and use, for example, by enhancing active team- ucts is in line with a World Economic Forum recom- based knowledge sharing. Also, activities have done mendation in 2006 that development finance institutions more to push out knowledge than to pull it in--thereby such as IFC expand their risk-mitigation activities. See missing opportunities to refresh the Bank's knowledge World Economic Forum 2006, pp. 13­16. through ongoing field experience, to reduce "reinven- 40. See IEG-IFC 2006b. 7 0 REFERENCES EBRD (European Bank for Reconstruction and De- tance Program in Eastern Europe and Cen- velopment). Projects database. http://www tral Asia. 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