Conversations: Creating Markets, what are the drivers of success?
An expert panel discussion about the factors underlying the success of IFC's new corporate strategy.
IFC’s new corporate strategy (IFC 3.0) focuses the institution on creating markets and mobilizing private capital, with increased support to countries where private capital flows are the most inadequate to address major development gaps, including those linked to the sustainable development goals.
IEG recently held a panel discussion about the factors underlying the success of market creation efforts as the IFC embarks on its new corporate strategy, and the ways the World Bank and MIGA can contribute to that strategy.
Participating in the discussion were IFC Chief Operating Officer Stephanie von Friedeburg, IEG Senior Evaluation Officer Stefan Apfalter, IFC Digital Finance and Microfinance Teams Manager Martin Holtmann, World Bank Agriculture Global Practice Manager for South Asia Loraine Ronchi, IFC Director, Corporate Strategy and Operational Policies and Procedures Aisha Elaine Williams, and Center for Global Development Senior Policy Fellow Nancy Lee.
The event highlighted findings from IEG’s evaluation Creating Markets to Leverage the Private Sector for Sustainable Development and Growth.
Watch this short video to find out what IEG discovered in its evaluation:
The excerpts below have been edited for brevity and clarity.
What is meant by “Creating Markets?” And what did IEG find as part of its evaluation of past IFC activities with the goal of creating markets?
Stefan Apfalter: For markets to work, they require an enabling environment that means for instance, very basic that property rights are respected, and that we have principles of business operations. Second, we need access to finance, so that companies can invest and grow, and we need access to physical infrastructure so that people and goods can travel. And third—very important—we need physical access to markets and that can entail for instance, literally a market square (think of your farmers’ market), but it can also mean integration into global value chains, or export markets.
Also very important when we talk about creating markets, we rarely ever refer to creating genuinely new markets. In most cases, it is about improving the performance of severely underperforming markets or expanding markets into new territories. So, issuing the first green bond in a new country for instance, or introducing leasing services to a country that hasn't had them before, or within the country expanding a market to population groups that have not yet benefited from it. For instance, bringing financial services to micro enterprises that were excluded from the banking system.
To find out what worked and what did not, IEG conducted 16 case studies to assess World Bank Group's interventions in agribusiness, financial inclusion and information and telecommunications.
The results are overall positive. IEG found that IFC assistance together with World Bank support contributed to creating markets, such assistance made markets more inclusive, competitive and sustainable. Yet more efforts are needed to promote better diagnostics improve access to the poor and monitor risk capacity.
View the event highlights
What were IEG’s recommendations, and how is IFC responding to them?
Stephanie von Friedeburg: Creating markets is one of the two core pillars of our IFC 3.0 strategy, and it will help us increase our focus in IDA and FCS. And while the World Bank Group assisted in market creation activities well before IFC 3.0 was introduced, it was not done so systematically, nor with a strong corporate focus. As such, IEG’s evaluation was designed to have more of a learning focus as it reviewed market creation activities, which for the most part actually predated our strategy. The study included three recommendations, all of which we take into consideration as we move forward implementing IFC 3.0.
The first recommendation is to enhance the understanding of market creating opportunities and constraints at the country level, and to ensure that this knowledge is adequately reflected in the country partnership frameworks.
We have been strengthening our analytics at the country level through our country strategies and through our country private sector diagnostics. These enhanced diagnostics as well as our sector deep dives help us to better understand and articulate the challenges and solutions to unlocking creating markets opportunities at a country and a sector level.
The second recommendation is to enhance access to markets to underserved groups, including the poor, which includes adequate monitoring and evaluation. IFC is committed to developing the private sector in a sustainable manner, generating opportunities for all.
Creating markets is a means to improve conditions for the underserved, including the poor. Part of the challenge is actually measuring the impact of ultimate beneficiaries. But efforts are well underway to enhance our ability in this area. For example, we now use the SWIFT tool, the Survey of Well-being via Instant and Frequent Tracking, a poverty assessment tool developed by the World Bank. Also we are jointly implementing a grant for the poverty and equity GP to develop tools for estimating distributional impacts of IFC projects.
The third recommendation in the report is to regularly assess our risk-taking capabilities to carry out market creation activities.
Projects in IDA and FCS tend to be smaller, take longer and may not have a strong financial performance as the rest of our portfolio. IFC has developed specific instruments such as the IDA PSW and other blended finance facilities with this exact problem in mind. But even with continuous efforts and innovations, FCS IDA countries are, by definition, the most difficult markets in which we work and represent greater risk.
What are the implications for the IFC of IFC 3.0 and its emphasis on creating markets?
Martin Holtmann: Number one, we're more strategic, way more strategic with our partners in terms of discussing things with them in terms of wanting to reach a certain impact, not just a sustainable institution, not just some kind of return on investment, but for instance, market size, those kinds of things. And in terms of the opportunities to focus our firepower to those markets, where the opportunities are biggest. So more strategic.
Another one is more coordinated within the World Bank Group. I'm part of an effort in Uzbekistan, where we're working with FCI on building more inclusive finance. The AIM framework is helping us a lot because it forces us to be more strategic. We have presented a deep dive to the Board strategy. We're working with CGAP, for instance, on access to finance, and Ghana has greatly improved through CGAP's work.
And then the last one is of course, better M&E. I'm trying to put together the funding for much deeper study, for instance, on these indirect effects of the institution building.
So that is what's changing, more strategic, more coordinated, and hopefully more impactful. In fewer markets, however, that is the downside of it. It means there's probably a few markets were we're just going to say, no, we're not going to go there.
From the agriculture sector point of view, and from the point of view of the World Bank, what are the implications of IFC's renewed emphasis on creating markets?
Loraine Ronchi: The IFC’s renewed emphasis on creating markets gave a kind of breath and a body to the important skeleton or framework of the MFD cascade process.
It's a way of coordinating our World Bank Group efforts to bring in resources towards development objectives, that's what the D is for in MFD from everywhere, basically, and private sector included. So pure public investments, which I think most people easily understand in the context of the Bank's traditional contribution, are a level of the cascade, a part of the cascade. And when you go up to the other levels, they're basically just questions about whether the private sector can contribute to that D in MFD, whatever it is. Whatever development objective we're discussing with our government client, we need to be asking ourselves these questions. This is the implication of this creating markets focus about what the private sector is doing. Are they doing anything? No? Then why not?
And that leads exactly into the other implication, raising the expectations we have of each other. If we see the potential, where the financing gap is, to meet our development objectives, you expect those of us working on the public side, both in investment and in reform, to be working in a more coordinated fashion with the private sector, with the IFC in particular. And we're still working out the how of that across many examples, in a range of environments with agriculture in MIGA and IFC in Afghanistan. We're making it work in many places. But we have to calibrate our expectations of each other and modify our respective business as usual to try to meet them. And those are the main implications I see of this welcome renewed focus on creating markets.
What are the main challenges of the creating markets agenda?
Aisha Elaine Williams: Market creation, upstream work is difficult, and a testament to that is the fact that the Bank is probably the first and the only MDB that is explicitly trying to include this market creation lens and project development lens as part of our mandate. If it were easy, others would be doing it.
What we often hear in IFC and in the financing world is that the challenge of particularly lower income countries is not the lack of financing, but the lack of bankable transactions. And that's what the market creation agenda is trying to do—increase the pipeline of bankable transactions that will then help to bring in the financing that's needed. But among the challenges, let's be clear, let's start with the long gestation needed for these projects, the potential for a low conversion rate, the cost and resources that are necessary to develop these types of efforts.
The challenges are, I think, clear and we need to go into that with our eyes wide open. But the payoffs, the benefits, I think, are also clear.
So given the why we're doing this, how do you operationalize this? For us, that has involved two shifts, it's a shift from project financing to project development. And it's a shift from predominantly reactive to proactive. Because in order to do market creation, rather than waiting for a sponsor to come to us and seek financing for a particular engagement, you need to be able to proactively assess what are the specific needs of the country. I want to emphasize the word specific, the level of specificity that is needed to identify what is the particular gap or barrier that exists to market creation is where we are at, at this point, because that's what is necessary.
Understanding at that level of specificity is what is necessary for us to effectively address the problem. [Our] country strategies, we now have around 30 of them, those attempt to integrate all of the various diagnostics that the World Bank Group does, the country partner, the CPSD, the sector deep dives, the info saps, trying to integrate it so that you get to a very specific discussion of what are the key barriers, what are the key reforms that are needed. If those reforms take place, then IFC or the private sector can be expected to bring this amount of financing or support to the table. That allows for a very different conversation with government ministers, regulatory authorities, than a more generic discussion of what we want to do. So that's why being very specific and being very targeted around our diagnostics has been so important.
The second is institutionalizing the collaboration that everyone talks about. We've been talking about World Bank collaboration since I joined IFC 15 years ago. The only time I've seen it, work... the time I've seen it work the best was when I first joined, and I was in a combined IFC-World Bank department. But the challenge here is it works on an ad hoc basis, right? But how do you institutionalize it so that it's systematic?
And so a lot of effort has gone into creating those opportunities for systematic engagement through World Bank group sector groups, which occur at the sector level that allow the Bank, senior directors and the IFC senior directors to look across globally to figure out what our strategy is in that sector. How do we want to implement the cascade? And then in addition, the IFC has developed global upstream units, which are explicitly focused on identifying upstream opportunities. So these type of creating markets are also opportunities and helping to bridge the gaps within the institution to help systematically connect the dots with people. So we've made progress, but we still have ways to go on this.
What is it that the development community is expecting of the World Bank Group’s creating markets agenda?
Nancy Lee: From outside the institution expectation are quite high. The world wants the World Bank Group to play a much bigger role in the billions-to-trillions agenda, the SDG finance agenda. The world expects its stakeholders and shareholders realize that these gaps are not being financed, and that there has to be a larger role. And I think, while high expectations are not always a blessing, in some ways, it's fair, that those expectations are high. Because unique among all institutions, the multilateral development banks have the full range of tools to deal with all the issues that we've just been discussing. No other institutions have project development facilities, technical assistance for governments, and for the public sector, policy and institutional reform support, budget lending, project finance, debt equity guarantees and everything in between, country diagnostic help. Only the multilaterals have that.
What role do you think country diagnostic can play in your work?
Loraine Ronchi: A CPSD [Country Private Sector Diagnostic], can give a structured and an empirical assessment of the constraints across the economy that is blocking private sector investment, that's lending a lot of substance to the [Cascade Framework]. When we get to the sector level, we have the deep dives to start looking at where that hits in those specific sectors. [This is] super important, otherwise, how do you know which is the critical reform agenda? Which are the critical investments to make creating markets happen?
The fact is- and the CPSD and the deep dives and others are increasingly doing this, but that didn't used to be the case- is the extent to which any diagnostic that we run can or should identify market creating opportunities beyond the public sector reform agenda is effective is the extent to which they're really getting the private sector to articulate that. And I think that's something that has changed, recently, getting that reality check from the private sector in the diagnostics that we lead.
So I think we have when you talk about the role of the CPSD and similar diagnostics it's... and I'm speaking from the perspective of the World Bank, I think we do on any diagnostic effort, on any data effort, we have basically two responsibilities. One is to make sure that the private sector opinion is clearly heard. What we or government clients do with that opinion, that's a different story. As you balance, you optimize across the public good more broadly, but that reality check needs to be there. But the second one, that needs to be implemented across the World Bank Group, that's not just an IFC recommendation, is that we have to understand much better how market creation best draws in the poor. Otherwise, there's no D in MFD, right?
It is our business and our responsibility at the World Bank Group to disseminate to operationalize or find out if we don't know, under what conditions using what approaches what new technologies, digital or otherwise, are going to contribute most to inclusion in these private sector investments. So even as the CPSD at this macro level, is looking at enabling that investment in the first place, clearly a critical condition. It's part of a broader responsibility of all the GPs and the IFC according to their skill set to apply data and rigor and M&E to that inclusion agenda. We should be able to answer much more glibly questions like, what's the secret to having farmer smallholders included in all investments?
How do you think the FinTech revolution has changed the opportunities to reach the poor? And do you think that there is still a lot of room to grow?
Martin Holtmann: Data and the predictive analytics in FinTech create inclusion, and they create exclusion. When we think for instance, of algorithms, algorithms discriminate just like people do. We have examples of consumer lending bubbles, for instance, in Kenya, where hundreds of thousands of households are now excluded from credit because they defaulted on money loans that were pushed on them, including by some of our own investees.
So what are we doing about that is we're actually trying to beef up our own ability to measure these things. And we have a great starting point in Africa, we've done a lot of work with the help of the MasterCard foundation. We're trying to work on the behavioral issues using behavioral economics and behavioral science, for instance, to link credit with savings to make people think long term, give them opportunity to say no, those kinds of things. We've pushed that on our investees, and likewise, we have been convincing all of our investees to sign up to principles of responsible digital finance, which we have co-developed with other investors. That's a major effort to make sure that whatever happens in the FinTech space is consumer friendly and sustainable in the long run. But without FinTech, we're not going to get to covering access to the poor. I mean, almost every poor person in the world already has a mobile phone in their hand. So we just need to make sure that is used in order to get a decent and sustainable banking services to them.