Tuesday 19 November 2019
Home      All news      Contact us     
reliefweb - 1 month ago

World: The International Finance Corporation’s Engagement in Fragile and Conflict-Affected Situations, Results and Lessons

Source: World Bank Country: World
Overview Background. Fragility, conflict, and violence (FCV) pose a major challenge for development and for reaching the Bank Group’s twin goals. Enabling appropriate private sector activities can be a means to break free of the “fragility trap” by supporting economic growth, promoting local employment and income-earning opportunities, generating government revenues, and delivering goods and services. However, the private sector faces substantial constraints in fragile and conflict-affected situations (FCS). Scope and Objective. This report takes stock of available evidence regarding the effectiveness of support from the International Finance Corporation (IFC) in FCS. It aims to inform IFC’s strategy in FCS as IFC seeks to scale up its activities in FCS as part of its commitments under the Capital Increase Package, and to provide inputs for the Bank Group’s fragility, conflict, and violence (FCV) strategy currently being developed. IFC’s strategy and engagement in FCS. IFC’s corporate strategies have included a specific focus on FCS since 2009 and it adopted an FCS strategy in 2012. IFC has refined its approach over the past decade and introduced several initiatives and instruments to support its engagement in FCS and expanded its engagements in new areas such as forced displacement. Under its current 3.0 strategy (fiscal year [FY]17), IFC has introduced several mechanisms aimed at supporting FCS, such as Creating Markets (which offers sector reform, standardization, building capacity, and demonstration to expand investment opportunities in key sectors); de-risking (Private Sector Window, guarantees, blended resources); and the Creating Markets Advisory Window and other upstream support to project preparation. Additionally, as part of the 2018 Capital Increase Package, IFC committed to a significant scale-up of its business program in FCS countries, to deliver 40 percent of its program in International Development Association (IDA) countries and FCS and 15–20 percent of its program in low-income IDA and IDA FCS countries, by 2030.
IFC’s investment volume in FCS has been modest and has not shown an increasing trend over the last decade. In FY10–19, investments reached 4.5 percent of its total new commitments and 7.5 percent of the number of projects. IFC’s portfolio in FCS countries is diversified across industry groups but has been concentrated in countries that already attract relatively high levels of foreign direct investment. Advisory services are a key modality for IFC’s engagement in FCS. They are more highly concentrated in FCS compared with its inves FCS account for 16 percent of advisory projects and 14 percent of project expenditures (both numbers exclude regional advisory services projects). Results of IFC investments and advisory services. Evaluated IFC investment projects in FCS perform similarly to those in non-FCS: 54 percent of projects in FCS countries are rated mostly successful or above for their development outcome compared with 58 percent for projects in non-FCS countries. These results indicate that it is feasible to implement developmentally and financially successful projects in complex and risky FCS environments. They also reflect IFC’s current business model, approach and policy and risk parameters, which may, however, also constrain IFC’s ability to scale up business in FCS as the flat business commitment volumes in FCS countries since FY10 suggest. Evaluated investments have a range of positive development outcomes in their FCS host countries, including increased employment and income-earning opportunities, upstream and downstream links with local businesses, the generation of government revenues, lower consumer prices, and increased access to infrastructure and services. Evaluations observed that IFC’s due diligence standards have generally been high and did not find any significant adverse effects on the environment, local communities or private sector development in FCS. By industry group, projects in telecom and infrastructure and natural resources performed well, while manufacturing, agribusiness and services projects faced challenges in meeting their financial and development objectives. In the financial sector, IFC investments helped catalyze microfinance institutions in FCS countries, but most of the projects did not achieve their expected profitability targets. Stronger results among evaluated investments were associated with larger investment sizes and larger economies – characteristics that may be limited in FCS countries and may constrain scaling up IFC engagement in future. In some cases, risks related to fragility and conflict such as security risks adversely affected project performance. The quality of IFC clients in FCS was strong, which likely supported positive outcomes. However, a focus on stronger clients may also indicate a degree of risk aversion to work with new types of clients. Solid IFC work quality also paid off in FCS, likely supporting stronger outcomes. Doing business in FCS is costlier, with IFC’s operational cost for projects in FCS double that in non-FCS countries. An initial IEG review of IFC’s use of blended finance suggests the instrument can help support projects with high financial risk perceptions, but it does not provide significant risk reduction in nonfinancial risk areas. Projects supported by blended finance involved high operational costs for IFC due to their smaller size. Evaluated IFC advisory services interventions in FCS performed below those in non-FCS countries. Forty-seven percent of advisory services interventions achieved mostly successful ratings or above for their development effectiveness compared with 56 percent in non-FCS.
Several projects highlighted the importance of capacity building and absorptive capacity in FCS. Regarding assistance to investment climate reform, IEG evaluations conclude that reforming business environments is a necessary condition in the medium term but not sufficient to overcome constraints to private investment in FCS. Lessons. Adapting IFC’s business model, instrument mix and risk tolerances to FCS countries and to the characteristics and needs of the private sectors in such countries can help scale up business opportunities for IFC. IFC has adjusted its strategy and introduced several new mechanisms and instruments to support business in FCS. However, it has not systematically adapted its business model to work in FCS. Similarly, aligning internal incentives and performance metrics to IFC’s strategic objectives can support increased engagement in FCS. To this end, IFC recently added corporate targets and metrics for its commitments in FCS and low-income countries in its corporate scorecard and redesigned its corporate awards program. IFC can further link its corporate goals to individual performance metrics. Finally, past evaluations point to the importance of adequate staffing for FCS. These evaluations also found that IFC has deployed relatively few investment officers to FCS. The range of potential private sponsors in FCS countries suggests different pathways to increasing business in FCS – including through proactive upstream efforts to conceive projects, working with existing clients not yet invested in FCS, and engaging with nontraditional sponsors. Given the low capacity business environment in many FCS, advisory services may be important to enhance the capacity of some sponsors. IFC can have high additionality when it is working with smaller domestic sponsors or existing clients investing in an FCS for the first time. Its implied political risk insurance and implementation support helped enable several investments in FCS. In some cases, however, additionality was more limited where an established client may have been able to attract similar financing from commercial sources. Engaging with the private sector in FCS countries requires collaboration and offers opportunities for synergies among World Bank Group institutions. Implications. Promoting private sector development and private investment in high-risk FCS remains a major challenge. IEG evaluations emphasize the challenges related to leveraging the private sector for sustainable development in FCS countries, including investing in difficult operating environments with specific fragility risks (such as security, weak capacity of clients and governments), different characteristics of the private sectors and potential project sponsors, distinct features of investment opportunities, and higher cost of doing business. A key knowledge gap remains concerning which approaches and instruments are effective in engaging the private sector in FCS countries. While IFC has adapted its strategy and introduced some new initiatives and instruments for FCS, it has not been able to scale up business in FCS countries in line with its strategic priorities. Although some IFC initiatives are recent and have yet to be evaluated, IFC’s record to date may require it to enhance the ‘fitness for purpose’ of its strategy in FCS through continuous experimentation, adaptation of its model and approaches, and learning by doing. Past IEG evaluations have identified the following three areas of attention that can potentially strengthen IFC’s engagement and support the scale up of its investment and advisory activities in FCS countries: Tailor business development to different typologies of FCS markets and different types of potential private sector clients in FCS cou Address IFC staff incentives, skills, and staffing to enhance their ‘fit for purpose’ to FCS-related Adapt IFC’s approach, risk appetite, instruments, and metrics of success to the context of FCS countries.


Latest News
Hashtags:   

World

 | 

International

 | 

Finance

 | 

Corporation

 | 

Engagement

 | 

Fragile

 | 

Conflict

 | 

Affected

 | 

Situations

 | 

Results

 | 

Lessons

 | 
Most Popular (6 hours)

Most Popular (24 hours)

Most Popular (a week)

Sources