Since 2005, the International Finance Corporation (IFC, the Bank’s private sector arm) has used the Development Outcome Tracking System (DOTS) to track the development impact of all its investments and advisory work. The IFC uses DOTS throughout the project cycle, from approval until the project ends, and says the system allows for real-time feedback into operations.
IFC investments are given an overall DOTS score based on their rating against a number of quantitative and qualitative indicators identified in four performance categories: financial performance, economic performance, environmental and social performance, and private sector development. A synthesis rating is given to the overall development outcome of the investment ranging from highly unsuccessful to highly successful. For an investment project to receive a positive rating it must “make a positive contribution to the client, the private sector, the host country, and the environment and communities”.
Typical indicators for the four performance categories include:
- Financial: returns to financiers such as invested capital and return on equity;
- Economic: returns to society such as people employed and tax payments;
- Environmental and social: improvements in environmental and social management, effluent or emission levels and community development programmes;
- Private sector development: project contributes to improvement for the private sector beyond the project company.
The IFC believes jobs, which are mainly provided by the private sector in developing countries, are “the surest way out of poverty” and therefore the IFC “promotes private enterprise with the objective of creating more and better jobs and sustaining economic growth”. This is why the IFC argues “job creation and economic growth are good proxies for IFC’s development impact”.
Examples of qualitative indicators include whether a new technology has been adopted or whether international accreditation has been received. These indicators are tailored to focus on outcomes that are relevant for specific economic sectors and must be “relevant, aggregatable, time-bound and easy to track”. For IFC advisory services a rating is given based on a synthesis of the overall strategic relevance, effectiveness (as measured by project outputs, outcomes, and impacts), and efficiency of the services.
The IFC makes it clear that as a minority investor it does not claim credit for the overall development results of its client companies which the indicators capture. While not all investments are covered by DOTS, it does cover almost all advisory services provided by the IFC. Excluded projects could be in the early stage of the project cycle, an expansion of existing projects or a project split up into several investments, among others. The DOTS system includes economic impacts on stakeholders affected by the project beyond the project company itself, such as consumers, suppliers, workers, government and host communities. The World Bank Group’s Independent Evaluation Group (IEG) completes an ex-post evaluation of a random sample of ratings of finished projects.
In October 2013, 25 international financial institutions, including the IFC, agreed to work towards harmonising their development result indicators with the aim of reducing variations in data, the reporting burden on clients and facilitating lesson learning.
Criticism of DOTs
The IFC is accused of having a limited understanding of the impact of its investments because the indicators only track outputs and outcomes of IFC client companies. Other criticisms include that the evidence that is used to judge development impact is inconclusive and does not reflect the context-specific nature of investments, i.e. that the planned effect might be caused by something else. Another criticism is that there is insufficient transparency on how the IFC chooses how it invests based on predicted development impact because the DOTS system only tries to evaluate impact once the decision to invest has already been made. Additionally, DOTs ratings are initially given by the same investment team that agrees the project, creating conflicts of interest and potential bias in the ratings.
DOTs and financial intermediaries
Over half of the IFC’s portfolio is now in financial intermediaries ($41 billion between 2009-2013). When assessing the development impact of financial intermediaries, the IFC uses purely financial indicators such as return on invested capital and return on equity. However, a January 2013 IEG report on the monitoring and evaluation system of the IFC found: “in practice, DOTS tracking is based on ‘proxy’ figures from the financial institutions’ portfolio, such as number of loans given to a targeted business segment and the quality of that portfolio. IFC has limited knowledge about the underlying results on its end-beneficiaries, and any claims would be difficult to attribute to the IFC intervention.”