83856 DEVELOPMENT EFFECTIVENESS UNIT IFC’s Countercyclical Role and Development Results When country conditions deteriorate, IFC needs to be ready to step in. Our analysis shows that during country crises, when foreign investors tend to withdraw, IFC increases its exposure. We continue to support strong projects and sponsors that would ordinarily have access to financing, but who suddenly find themselves without it. From a development results perspective, projects approved during the aftermath of a crisis perform in line with IFC’s overall average. In such contexts, it is precisely when the corporation’s value added increases. Projects approved prior to or during crisis do take a toll in their development results performance, which is to be expected, as prior analysis has demonstrated that development results are closely linked with financial performance. The IFC also invests in even more adverse conditions, such as in conflict countries. In such environments, projects take an even higher toll in their developments results performance. Again, the highest toll is for projects approved prior to conflict onset, while development results performance for projects approved in a conflict’s aftermath is closer to the current development results performance of those countries. DEVELOPMENT RESULTS IN COUNTRIES AFFLICTED BY ECONOMIC CRISIS IFC’s role of fostering sustainable economic growth by financing private sector investment, mobilizing capital, and providing advisory services to businesses and governments becomes more crucial during periods of financial and economic crisis. Emerging markets themselves are typically riskier and are characterized by difficult business environments that prevent the development and sustainability of robust private sector activity. When emerging markets suffer financial and economic crisis these negative factors are exacerbated, producing high uncertainty for investors and entrepreneurs, and negative flows of Foreign Direct Investment (FDI). Precisely in such environments IFC’s additionality becomes imperative in continuing to influence the inflow of investment capital which is essential in reactivating fragile post crisis economies. DEVELOPMENT EFFECTIVENESS DEVELOPMENT EFFECTIVENESS UNIT True to the Corporation’s mission, IFC actually increased its exposure in recovering post-crisis economies by more than 15%, during the three years following crisis, in 12 of 17 countries which suffered economic-financial crises between 1 1994 and 2001 . Moreover, 67% of projects approved 3 years post-crisis have high development results performance, which is in line with IFC’s average (71% for the FY08 approval cohort). IFC was able to invest in high-performing enterprises, despite these difficult environments and the inherent lack of opportunity. The high development results performance for projects approved post-crisis is closely linked to strong increase in the proportion of projects that have shown better financial performance, which increased from 33% for crisis-year-approvals to 60% for post-crisis approvals. This is to be expected, as development results have been shown to be highly correlated with financial performance. DEVELOPMENT RESULTS IN CONFLICT COUNTRIES Beyond investing in countries experiencing financial or economic crises, IFC also invests in conflict‐countries. Here, the situation is even direr, as countries experiencing such situations have as a consequence a highly risky socio‐economic and political environment in which to conduct business. Given the unpredictable nature of conflict and its onset, it is no surprise that projects approved prior to conflict-start take the highest toll in their development results performance. We identified 32 conflict-countries in which IFC has investments, and only 36% of projects approved prior to conflict-onset received high development results ratings. The weak results were largely driven by financial performance – for which high-performers were limited to the same proportion. Achieving positive development results and sustainability without financial viability is very difficult. When conflict threatens the socio-political fabric of a country’s economy, financial viability is greatly compromised. The performance of projects approved during conflict situations in countries where conflict is ongoing or intermittent is much better, as is that for projects approved within a 5-year period after conflict end. 1 Source: IEG‐IEDR 2008 DEVELOPMENT EFFECTIVENESS UNIT For both, the percent of projects rated high is about 55%. This shows that IFC is still able to identify viable businesses in such fragile states given that on average only 50% of businesses typically beat market-based benchmarks. Nonetheless, the proportion of high-performing projects is depressed relative to the IFC average, but this is to be expected in such unstable economies. That is why a more appropriate benchmark is the current performance of investments in these same countries, some of which are still in the midst of conflict. For the cohort of 1999-2004 approvals, 65% of investments in these 32 states achieved high development outcomes. Relative to this, the proportion of high-performing investments approved during or post conflict is only depressed by 10%, a small toll when considering the added risks of investing in such unfavorable investment climates. Thus, IFC is able to play a countercyclical role in continuing to promote investments in dire situations at times when private capital flight naturally ensues. Methodology Notes: ‐ The universe of projects for the Crisis Country Analysis includes active projects approved 3 calendar years before, during and after the economic crisis took place in that country. ‐ The universe of projects for the Conflict Country Analysis includes active projects approved 5 calendar years before, during and after the conflict took place in that country. ‐ Percent rated high refers to the proportion of active projects rated high (top 3 ratings of six‐prong scale) over the total active project sample for the specified time period. Projects rated “too early to tell” on development results were excluded. Development Effectiveness Unit International Finance Corporation Authors: Carlos Numen Ferro 2121 Pennsylvania Avenue, NW Jacqueline Bueso-Merriam MSN F4K-409 Manager: Roland Michelitsch Washington, DC 20433 www.ifc.org/results DEVELOPMENT T: 202.47.DOTS2 EFFECTIVENESS