IFI governance


Evaluation asks what value the IFC adds

11 August 2008

An evaluation of the World Bank’s private sector lending finds that amidst overall high development outcomes, poor environmental and social performance continues to plague projects in Africa. For the first time, the evaluators look at the sensitive question of ‘additionality’.

In early August, the World Bank’s Independent Evaluation Group (IEG) released its annual Independent Evaluation of Development Results (IEDR) of the World Bank’s private sector arm, the International Finance Corporation (IFC). Since 1996 the IFC has measured its own development performance using four indicators: business success, economic sustainability, environmental and social effects, and private sector development impact. In late 2005, the IFC introduced a new system, the Development Outcome Tracking System (DOTS), to track development results throughout the lifecycle of a project (see Update 58). The IEG has yet to assess the differences between the old and new methodologies – but this is upcoming in a report due to be released in a few months’ time.

The main findings of this year’s report echoed those of previous years’ IEDRs (see Update 57):

  • 63 per cent of projects evaluated received “high development outcomes” (up from 59 per cent in 2007);
  • Large operations tend to be more successful than smaller ones; Project performance in Eastern Europe and Central Asia (ECA) and Latin America and the Caribbean (LAC) was much stronger than that in Asia, Africa and the Middle East;
  • Weak environmental and social effects continue to be a key feature of underperformance in Africa; and
  • Development outcomes were strongest in the infrastructure and finance sectors, and weakest in manufacturing, services and ICT.

The evaluation is important for two reasons. Firstly, IFC spending reached $10 billion last year, double the level of only five years ago, and representing nearly one-third of the entire World Bank Group. Secondly, this rapid growth has led to an embarrassment of riches. The build-up of retained earnings has led shareholder governments to question whether or not the IFC is taking enough risks (in, for example, less profitable sectors and/or in low-income countries). Some have asked whether the IFC should set a higher threshold in terms of the value-added or ‘additionality’ that it must bring to an investment.

Additional or better than nothing?

New this year was the IEG’s first attempt to examine ‘additionality’. The last two years have seen considerable debate at the IFC board over how to define the concept. Added to concerns about whether or not the IFC is taking enough risks by investing in countries and sectors that really need it, there is also worry that the IFC might be ‘crowding out’ the private sector.

The IFC 2007 strategy devoted a chapter to the topic, concluding that IFC additionality should be judged in terms of financing, expertise, results measurement and client relationships. A recent technical briefing to the IFC’s board classified additionality in four dimensions: risk mitigation; knowledge and innovation; standard setting; and policy work. Beyond hazy definitions, the IEG says that the IFC’s understanding of additionality has been based more on a priori assumptions (about the value that the IFC brings to its projects) than concrete results.

For its part, the IEG has attempted to measure additionality in three ways. Financial additionality means providing funds on better terms than otherwise available. Operational additionality means improving a project’s design or functioning with specialised advice. Institutional additionality means improving standards of corporate governance and environmental / social sustainability. The IEG finds that fully 85 per cent of projects showed financial additionality, while about one third exhibit either operational or institutional additionality.

The problem with all of these measures is the elusive nature of the concept of additionality. It is unclear where the IEG (or the IFC) put the threshold and say, yes, this project exhibits additionality on this measure. At one end of the spectrum is a project that could not have gone ahead without the IFC’s financial support or expertise. At the other end is virtually any project where the IFC, almost by definition, is able to provide cheaper financing than the company would have been able to get elsewhere, or offers minimal advice on improving environmental management. The failure of the IFC to divulge individual project assessments rules out the possibility of independent verification.

The IEG tries to get around this problem by assessing ‘additionality quality’, or the extent the IFC role was “catalytic and made a special contribution”. It finds that the quality of the IFC’s role and contribution was ‘excellent’ or ‘satisfactory’ in 80 per cent of projects, but ‘less than satisfactory’ or ‘unsatisfactory’ in the rest. Poor performance was especially marked in Africa and Asia, and was weaker in the financial and health/education sectors.

The IEG’s recommendations include:

  • Ensuring that continued shortcomings in environmental and social performance in Africa are addressed;
  • Improving the data on the performance of technical assistance;
  • Developing guidelines and incentives to help staff better identify and deliver additionality; and
  • Carrying out further fieldwork on additionality in lagging regions, sectors and client groups.

IFC management responded positively to most of the recommendations, promising more money and people – especially in the regions – to address the issues raised.