22 August 2007
The Independent Evaluation Group (IEG) of the International Finance Corporation (IFC), found that 41% of the IFC projects studied had low development ratings. IFC performed particularly poorly in Africa and Asia, where only half of its projects had positive development outcomes. In Africa, the quality of IFC work was particularly poor, rated as “high” in only 45% of projects, as compared to 68% in other regions.
In early August, the Independent Evaluation Group (IEG) of the International Finance Corporation (IFC), the World Bank's private sector arm, publicly released their “Independent Evaluation of IFC’s Development Results 2007: Lessons and implications from 10 Years of Experience.”
The study examined the performance of 627 IFC projects under implementation between 1996 and 2006. Its findings reveal that over 40% of all IFC projects were unsuccessful at generating positive development results, and that in Africa, more than half of IFC investments had low development ratings.
The IEG study found that the quality of project sponsors (IFC’s corporate clients) and the quality of IFC’s own work, both at the preparation phase – prior to the approval of financing – and during supervision, were key determinants of overall project performance. This finding further reiterates several observations made in previous research conducted by the IFC’s Compliance Advisor Ombudsman (CAO). IEG’s findings regarding the quality of IFC work underscore the need (throughout the entire World Bank Group) to better align staff incentives with development results. The study noted that the quality of IFC’s work was a particularly significant determinant of a project’s development success: “IFC work quality, especially at approval, has been the most important driver.” Where IFC work quality was low, only 20% of projects achieved “high development impact quality."
Although the report does not provide a breakdown of results by project, the IEG suggests that projects’ profitability for IFC and development impact “have tended to go together.” The report says very little about the 10% of projects that were highly profitable for IFC, but unsuccessful at generating development results. A closer look at these projects may be meaningful, particularly since a small number of highly profitable investments can account for a large portion of IFC’s overall earnings. According to IEG, the study’s results show that “IFC has not actively supported projects where there was a trade-off between development results and investment returns.” Since the beginning of the period covered by the evaluation, IFC’s portfolio has grown nearly six times in size, and IFC has made record earnings in recent years, with gross portfolio income topping $2 billion in FY06 – its highest level ever.
The IEG report claims that IFC infrastructure and extractive industry projects achieved better development success rates than other sectors. However, there may be reason to question whether IEG’s measure of “development outcomes” gives adequate weight to environmental and social impacts, as compared to commercial and economic factors. According to the methodology outlined in the IEG report, development outcome is evaluated across four indicators: project business success; economic sustainability; environmental and social effects; and private sector development impact. Thus a project's environmental and social impacts only constitute one quarter of its overall development outcome rating, significantly outweighed by economic factors. Furthermore, IEG appears to base its assessment of environmental and social effects on whether or not project operations meet or exceed IFC environmental and social standards (as well as applicable local standards), not necessarily on actual impacts on communities and ecosystems. Compliance with policies and standards is an imperfect proxy for sustainable social and environmental outcomes.
Compounding these concerns about the accuracy of IEG’s development outcome ratings is the fact that IEG’s evaluations of success rates are based largely on self-evaluation of projects by the responsible IFC investment departments. Although the investment departments’ own ratings are “verified” by IEG, this reliance on IFC self-reporting may introduce some inherent risks of bias in the evaluation results.
In the years since the projects covered in the IEG study were approved, IFC has introduced a new (although still not publicly disclosed) "Development Outcomes Tracking System" (DOTS) to measure the impacts of its operations, beginning at an earlier stage in project implementation than the IEG’s evaluation. The first full results from the DOTS are expected to be publicly announced in October 2007. It remains to be seen, however, whether this system will more accurately reflect social and environmental consequences of IFC operations, and capture net (positive and negative) project impacts.
The IEG review also revealed that IFC’s small- and medium-enterprise (SME) projects and financial market investments performed especially poorly in Africa, with only 40% of IFC financial intermediary (FI) projects on the continent achieving high development ratings. This raises particular concerns given that the IFC’s new Africa strategy emphasizes greater activity in precisely the SME and financial market sectors.
Confirming some long-standing civil society concerns, the IEG found that the “supervision quality of the FI portfolio is much lower compared with real-sector projects.” The IEG described what it found to be a “serious gap in IFC’s knowledge of project environmental and social effects in FI operations,” and explained that evaluators themselves had had difficulty accessing information about FI activities. These are particularly important observations when one considers that well over a third of IFC’s portfolio in 2006 was in the financial services sector. Despite the significant (and until recently, rapidly growing) portion of IFC’s operations that support FIs, the IEG found that IFC has “a low role and contribution” in the sector, due often to IFC’s failure to deliver on its expected contributions, “including helping [FIs] develop adequate in-house environmental and social monitoring capability.”
Looking forward, the IEG offers several recommendations for IFC’s future strategic direction. The suggestions include the oft-repeated call for closer collaboration between the IFC and World Bank, and for more attention to the quality of staff work as the IFC decentralizes. More critically, the IEG emphasizes the need for IFC to improve the quality of its supervision of environmental and social effects of FI operations. Interestingly, IEG recommends that IFC consider increasing its provision of local currency financing, find ways to work more on rural development, and intensify its country-specific investment strategies, so as to more effectively complement existing capital flows.
As the IFC continues to grow in size and strives to remain a competitive financier in the coming years, particularly in middle income countries, it may well develop new financial instruments and take on riskier investments. It is more important than ever to ensure that IFC’s objective as an arm of the World Bank Group, “to help reduce poverty and support sustainable development,” is the guiding principle by which IFC selects its future investments, and that social and environmental impacts of its operations are fully and transparently reflected in assessments of IFC’s performance.