53899 Number 1 FAST TRACK BRIEF July 2008 Independent Evaluation of IFC’s Development Results 2008 About IEG-IFC IFC’s Additionality in Supporting Private Sector Development Independent Evaluation Group IFC’s Independent Evaluation Group (IEG-IFC) independently T evaluates IFC’s investment and his year’s annual Independent Evaluation of IFC’s Development Results (IEDR) advisory services operations reviews the development results related to 174 IFC-supported investment operations and reports its findings to IFC’s that reached early operating maturity during 2005-07. It also reviews, for the first time, management and Board of preliminary results for IFC Advisory Services based on a pilot that evaluated 293 operations Directors. IEG-IFC is a resource completed during 2004-06. As a second theme, the report provides a first ex-post look at the for helping staff understand what IFC has learned and how IFC can “additionality” (or unique role and contribution) of IFC’s operations. do better business in the future. The report’s main messages are: About Fast Track Briefs ■■ Sixty-three percent of evaluated investment operations by number (71 percent in 2007) achieved Fast Track Briefs help inform results that on balance met or exceeded specified development benchmarks and standards. The the World Bank Group (WBG) evaluation also shows that pursuing development effectiveness need not come at the expense of IFC’s managers and staff about new evaluation findings and profitability on its investments. Nearly 60 percent of projects combined high development outcomes recommendations. The views with acceptable financial returns for IFC investments while at the same time, some 25 percent of expressed here are those of IEG projects achieved low development ratings together with a less-than-acceptable IFC financial returns. and should not be attributed to the WBG or its affiliated ■■ Results were, on average superior in Europe and Central Asia (ECA) and Latin America and the organizations. The findings Caribbean (LAC), but much weaker in Africa, Asia, and Middle East and North Africa (MENA) International Finance Corporation here do not support any general and in smaller projects, mainly due to factors such as a country’s business climate, sector choices, the inferences beyond the scope of quality of the sponsor, project risks, and IFC’s own work quality. the evaluation, including any inferences about the WBG’s past, ■■ In IEG’s first look at IFC’s additionality, the report finds that at least one form of financial additionality current or prospective overall (in the form of loan tenor or other features), appears to be present in 85 percent of cases, and at least performance. one form of operational or institutional additionality in about a third. At the same time, the quality of IFC’s role and contribution lagged in Africa and Asia, and in the financial and social sectors. Online access http://www.ifc.org/IEG ■■ Going forward, IFC must ensure strong work quality and portfolio risk management while its operations are growing rapidly (particularly in riskier countries, sectors, and client groups), substantially improve environmental and social performance in Africa, continue efforts for improving the quality of advisory services performance reporting, and increasingly stress the strategic thrust, operationalization, and tracking of the institution’s additionality. independent evaluation of ifc’s development results 2008 Development results of IFC-supported projects ■■ Less than half of projects in Africa and MENA, and only a half in Asia met or exceeded development benchmarks and standards. The results of investment operations reaching early operating This finding is especially important as IFC’s operations are grow- maturity during 2005-07 show an improvement over the previous ing quickly in these regions. 10 years. Of a randomly selected, representative sample of 174 out of ■■ Environmental and social effects continued to be poor in Africa. 332 operations, worth over $3.3 billion (approximately $13 billion By sector, project performance was strongest in infrastructure including funds from co-financiers), 63 percent (75 percent by and finance, and weakest among general manufacturing and volume) achieved results that on balance met or exceeded specified services and information technology projects. market, financial, economic, environmental and social performance benchmarks and standards. In 2007, 71 percent of 65 evaluated The projects IFC supports face country, sector, sponsor, and specific operations met or exceeded development benchmarks and standards project risks. These risks, and IFC’s effectiveness in managing them, (figure 1). have a significant impact on project development results. In 85 percent of projects that IFC supported, high or low development Improved market risks in most regions contributed positively to results corresponded to high or low IFC profitability respectively. evaluated results, while continued high-risk business environments Where there was a divergence between the two (in 15 percent of the constrained performance in many countries in Africa, and specific cases), this usually reflected IFC’s choice of financing instrument and country and sector conditions appear to have adversely affected results the associated investment risk. in Asia and MENA. The evaluation finds the following shortcomings: Weak sponsor quality and high project risk posed substantial ■■ Results continue to be much weaker in smaller projects challenges to achieving successful development outcomes outside of (particularly those where IFC’s investment is less than $5 LAC and ECA – although it is central to IFC’s role as a development million); institution to help overcome these risks. Generally, where IFC work Figure 1: Project Development Results - 1996-2007 90% 80% 70% Percent of projects rated high 60% 50% 40% 30% 20% 10% 0% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Developm ent outcom e IFC investm ent return Note: Based on 692 investment operations evaluated between 1996-2007, “high” means met or exceeded specified benchmarks/standards. Source: Independent Evaluation Group independent evaluation of ifc’s development results 2008 quality was high, so were project development results. However, the ■■ The quality of IFC’s role and contribution was satisfactory in incidence of high work quality was notably lower in Asia and Africa most cases (in line with IFC’s operating principles of making a than in other regions. special contribution and being catalytic), but lagged in Asia and Africa and in the financial and social sectors; Based on a preliminary examination of 293 evaluated advisory ■■ Additionality, the project’s development results and IFC services operations, 70 percent achieved satisfactory development profitability seem to move together. effectiveness (DE) ratings. However, a third of the evaluated projects did not report DE ratings, and the quality of IFC documentation Additionality refers to the unique inputs—financial and non- was variable. financial—that a development institution such as the IFC is providing to developing countries. At the end of the day, IFC’s additionality IFC’s Additionality is expected to lead to development impacts on the ground, i.e. the As part of the World Bank Group, IFC is expected to do more results of the institution’s interventions. Given this connection, it than just provide financing to its clients, namely provide unique would seem that the greatest additionality for IFC would potentially inputs (“additionality”) that help catalyze sustainable private sector lie in areas where the prospects for development impact – economic development. growth, poverty reduction, environmental and social sustainability – through support to private sector development are the best. IFC’s corporate strategies have generally discussed IFC’s unique role and contribution in terms of investing in so-called “frontier” Overoptimism about what IFC could deliver, lack of client countries, sectors, products, and market segments and in supporting commitment to changes that IFC sought to bring about (particularly environmental and social sustainability. However, most regional, where the project was not a commercial success), unexpected shifts sector and country strategies have contained limited explicit discussion in the external conditions appear to have played their part in cases of of IFC’s unique role and contribution or advantages. less-than-satisfactory role and contribution. But further investigation, including field-based assessment, is needed to arrive at more conclusive It is difficult to measure ex-post additionality precisely, but proxy judgments about drivers. indicators show that: ■■ At least one form of financial additionality was apparent in 85 percent of evaluated investment operations, with operational or institutional additionality identifiable in around a third; C o n c l u sio n s a n d reco m m e n d atio n s To enhance its development effectiveness IFC should: ■■ Pay strong attention to work quality and portfolio risk management as it continues to grow and decentralize its operations, particularly in new markets and in view of a possible downturn in global economic growth; ■■ Ensure that it addresses continued environmental and social performance shortcomings in Africa, particularly as they relate to IFC supervision quality and client commitment to sustainability issues; ■■ Continue, with input from IEG, to improve the data on the performance of advisory services operations. including efforts to improve understanding among staff about results measurement, quality assurance by managers, as well as performance monitoring beyond project close; ■■ Clearly map out the additionality in its strategies and develop guidelines and incentives to help staff better identify and deliver additionality. IFC could complement these efforts by advancing its metrics for estimating and tracking additionality through the project lifecycle, taking account of the analytical framework outlined in this report; ■■ Carry out further analysis of IFC’s additionality in lagging regions, sectors, and client groups, in order to identify what specific steps are required to enhance performance. independent evaluation of ifc’s development results 2008 I E G p ro d u cts Studies Independent Evaluation of IFC’s Development Results 2008: IFC’s Additionality in Supporting Private Sector Development Supporting Environmental Sustainability: An Evaluation of World Bank Group Experience Doing Business, An Independent Evaluation: Taking the Measure of the World Bank-IFC Doing Business Indicators Financing Micro, Small, and Medium Enterprises: An Independent Evaluation of IFC’s Experience with Financial Intermediaries in Frontier Countries IFC Advisory Services in Eastern Europe and Central Asia: An Independent Evaluation of the Private Enterprise Partnership Program IFC in Ukraine: 1993 - 2006, An Independent Country Impact Review Independent Evaluation of IFC’s Development Results 2007: Lessons and Implications from 10 years of Experience An Evaluation of IFC’s Investment Climate Activities Extractive Industries and Sustainable Development: An Evaluation of the World Bank Group Experience Evaluation Briefs and Notes Improving Results in Sub-Saharan Africa IFC’s Experience and Additionality in Middle-Income Countries IFC’s Experience in the Transport Sector IFC Operations in Romania An Evaluation of IFC’s Frontier Country Strategy IFC and the Millennium Development Goals Resources Task Managers: Director-General, Director, IEG-IFC: Head of Knowledge, IEG-IFC Help Desk: Daniel J. Crabtree Evaluation: Marvin Taylor-Dormond Dissemination, and (202) 458-2299 Hiroyuki Hatashima Vinod Thomas Quality, IEG-IFC: AskIEG@ifc.org Sid Edelmann