IFI governance


Questioning the IFC’s impact “without embarrassment”

5 October 2007

In August, the World Bank’s Independent Evaluation Group (IEG) released its evaluation of the development results of the World Bank’s private sector arm, the International Finance Corporation (IFC), finding that of the 627 projects surveyed, 59 per cent are claimed to have achieved a ‘high development’ rating.

According to the report, the IFC has increased its annual investments six-fold between 1991 and 2006, financing almost $50 billion in total. Projects are first self-evaluated by the relevant IFC department, and the ratings are then verified by the IEG. The four indicators to assess development outcome are:

  • project business performance: measures the project’s long-term impact on the client’s profitability;
  • economic sustainability: evaluates the project’s benefits and costs for the local community);
  • environmental and social effects: measures the client’s commitment to environmental management, not actual impact – despite this, 33 per cent of projects still had a negative rating; and
  • private sector development: assesses the extent to which the project has developed into a “corporate role model”, creating an “enabling business environment”.

However, it is unclear from IFC documentation how the final assessment is arrived at: “the development outcome rating is a bottom-line assessment of the project’s results on-the-ground, and not an ‘average’ of these four indicators”. The guide on preparing the reports warns staff that “for any rating of ‘mostly successful’ or better, IFC should be able to explain convincingly (without embarrassment) to a public audience why it rates this project a ‘success'”.

The evaluation says that measured by lending volume, only 49 per cent of all projects in Africa, and 50 per cent in Asia were able to generate successful development ratings, compared with 68 per cent in Europe and Central Asia. Overall, 65 per cent of projects were found to have high development ratings. These findings are skewed by the fact that large projects were found to be more profitable than small ones.

The trend is towards funding large projects, and dealing with small and medium enterprises increasingly through financial intermediaries (FIs). Over a third of the IFC’s portfolio is already invested in FIs. The IFC is behind in helping intermediaries develop the capacity to carry out adequate internal environmental and social monitoring. In Africa, for instance, only 40 per cent of FI projects had a high development rating.

The report recommends an increased focus on middle-income countries. However, over 50 per cent of the IFC’s portfolio is already concentrated in just ten countries, of which all but two, India and Nigeria, are classified as middle-income. This contradicts the IFC’s commitments to work increasingly in ‘frontier countries’.

Surprisingly extractive and infrastructure industries had the highest development rating, close to 80 per cent. Sectors which had weak results include health and education. Investment in these sectors has increased since 2000 with the IFC’s commitment to increase its presence in so-called ‘frontier sectors’.

Recommendations for the future include closer alignment with the Bank’s public sector arms and the development of country-specific private sector growth indicators. The authors also call for a greater focus on rural poverty, and suggest that the IFC acknowledge the importance of income distribution in line with its mission statement.

In their response to the report, IFC management acknowledges the need to “enhance its development effectiveness”. Strategies for doing this include developing specific country-oriented approaches, as well as grouping together regions with common needs for a more coordinated strategy. In addition, IFC “may consider flagging opportunities to work on the nexus of rural poverty and sustainable natural resources”. Environmental sustainability is to be dealt with by ensuring implementation of the existing performance standards. IFC also agrees with the recommendation that it work more closely with the World Bank, leveraging its ‘strengths’ in order to make more effective ‘systemic’ interventions.