IFI governance


IFC’s intermediaries neglect environment: evaluation

17 June 2008

The Independent Evaluation Group (IEG) found ‘high development outcomes’ but failing environmental, health and safety performance in small businesses which it supports via financial intermediaries.

The International Finance Corporation (IFC) has come to deal with micro, small and medium enterprises (MSMEs – businesses with annual sales less than $15 million and fewer than 300 employees) almost exclusively through financial intermediaries (FIs). FIs include commercial banks, micro-finance institutions and non-bank financial institutions such as leasing and insurance companies. The IFC is channelling a rapidly increasing share of its financing via FIs; nearly $500 million went to MSME-FIs in fiscal year 2006, just under nine per cent of total disbursements.

The IEG found that 71 per cent of FIs serving microenterprises and 61 per cent of FIs serving SMEs achieved “high development outcomes”. Development outcomes are based on four indicators: project business success, economic sustainability, impact on private sector development, and environmental sustainability. Each is assessed against “what would have occurred without the project”. Numerous development economists have slated this approach. David Ellerman, formerly economic advisor to the Bank’s chief economist, scoffs: “A real evaluation would compare the benefits of plan A with the benefits of the best alternative plan B using the same resources.” The four indicators are rated on a six point scale, with the bottom three described as “low” outcomes and the top three described as “high” outcomes. Finally, the weighting of the four indicators is determined on a case-by-case basis.

The environmental picture is very different. While financial intermediaries serving microenterprises achieved high ratings on environmental, health and safety performance, only one quarter of FIs serving SMEs did. The IEG said this failure was “partly due to noncompliance by subprojects, and partly due to a failure by the SME-FIs to install an environmental management system or to regularly report to the IFC, which, in turn, was fostered by inadequate IFC supervision”. This failure of IFC supervision echoes the findings of the Compliance Advisor Ombudsman on the IFC’s performance in several large projects (see Update 61).

The IEG has recommended that the IFC set a time-bound, specific goal to improve its environmental supervision and compliance rate. In response, management repeated a familiar ‘that was then, this is now’ refrain, saying that since the IEG evaluation, the IFC has doubled the number of environmental specialists working on FI projects (though from what base is unclear) and plans “100 per cent annual supervision” of “high-risk” FIs. During the board discussion of the evaluation, one executive director felt that management “was not fully responsive” to the IEG recommendations on the issue.

On another front on which the IFC is feeling pressure from shareholders (see Update 58), the IEG evaluated the development impact and value-added of IFC investments in middle-income countries (MICs). It found that 62 per cent of IFC projects in MICs achieved ‘high development outcomes’. Better results were achieved in infrastructure, commercial banks and agribusiness, while performance in non-bank financial services and in the social sectors lagged. On the question of additionality, the IEG found that the IFC has provided “at least one form of financial additionality” in around four-fifths of projects, and that non-financial additionality (such as providing advice on business strategy and management selection) “seems to be increasing in importance”.