RECOMMENDATION 2: WBG management should refine its SME approaches to enhance relevance and additionality by shifting benefits from better-served firms and markets to frontier states (those with underdeveloped financial systems, especially low income and FCS countries), frontier regions and underserved segments.
A key indicator of whether such a shift is occurring would be the evolution of the distribution of the TSME portfolio as well as the composition of beneficiary institutions and firms.
WBG relevance is greater when it operates at or near the frontier, especially in low income and FCS countries or regions where SMEs are not served and in countries where the financial sector has not yet developed to serve SMEs. For example, the current portfolio commitment value is relatively concentrated in upper middle income countries, so careful attention is needed to relevance and additionality, to assure resources are being used to fully realize their benefit for addressing market failures and making markets and services more equitably available to smaller enterprises, thus maximizing poverty alleviation and shared prosperity. Sequencing can be important to build basic system capacities and legal frameworks in low capacity countries to ensure a reasonable opportunity for success of targeted investments.
Management agrees with the thrust of this recommendation, notably of enhancing the relevance of WBG interventions when it operates in frontier, and especially FCS markets, but with caveats outlined below.
The WBG is increasing its focus on frontier segments and markets, for example women-led enterprises, smaller firms, and underserved markets. Over half (40 out of 73) of WB targeted SME projects are already in IDA countries, as well as 156 of 349 TSME IFC projects. The report does not appear to have conducted sufficient analysis on these trends to underpin this recommendation. It is important to note that there are also frontier markets and underserved segments in Middle-Income Countries.
For IBRD/IDA, as highlighted in the text, systemic programs of support can be more appropriate than standalone targeted SME activities in some low-income and fragile and conflict state contexts, given the need to first put in place a basic enabling environment (legal, regulatory, institutional, policy), and the relative prominence of micro and informal enterprises. Additionally, as noted in the IEG report, informal and microenterprises employ more workers than SMEs in low income countries. Thus, approach in lower income and FCS countries will continue to comprise targeted interventions as part of a broader set of support activities.
IFC will continue to emphasize frontier geographies and segments in its targeted SME work through, for example, (i) its products targeting women, climate, and agribusiness SMEs (ii) its blended finance programs (iii) its increased focus on FCS and (iv) its increased focus on financial technology and innovation. In addition, the Financial Institution Group's new focus on Partners in Development is designed to work more intensely with clients that are aligned with IFC in their interest and ability to have development impact and where IFC can have strong additionality.
MIGA will continue to focus on frontier markets and FCS for targeting SMEs as part of its internal review of SIP.
Also in FY13, MIGA launched the multi-country Conflict Affected and Fragile Economies Facility (CAFEF) to further expand MIGA operations in FCS, which has the potential to increase MIGA support for SMEs in FCS. MIGA has developed a Business Development (BD) strategy for FCS, which will be rolled out over the next few years with the help of CAFEF.
Action 2B [IFC FIG]: Analyze proposition of SME work that includes frontier regions and segments and ensure strategy is aligned with recommendation to further expand benefits to those markets
Indicator: Percent of FIG SME projects in frontier regions and underserved SME segments
Baseline: More than half of FIG SME investment projects focused on frontier geographies and segments in FY12-14
Target: 45% FIGï¾s SME investment projects to be in IDA and 40% of FIG SME investments in non-IDA to focus on in frontier geographies and segments
IEG notes the continuing consistency of IFC's portfolio in frontier regions and segments with its stated targets, as well as the observed decrease in IDA financing. As the timeline established covers the period through FY19, there is opportunity to strengthen IDA financing in its portfolio.
In FY16, IFC has met one component of the indicator related to Action 2B and fell short on the other component. 42% of non-IDA SME projects were focused on underserved segments, in line with the target of 40%, including blended finance commitments through the Global SME Finance Facility, commitments in FCS countries, inclusive business commitments, banking on women projects, climate-related commitments, projects in frontier regions of non-IDA countries, and agri/food chain related projects. 32% of SME-flagged projects were in IDA countries in FY16, lower than the target of 45%. The drop is in line with a corporation-wide decrease in % of projects in IDA over the past year. Going forward, IFC Management will continue to guide the business towards the frontier through increased selectivity and enhanced incentives for work in frontier geographies and segments.
(Note: Dan Goldblum has completed the recommendation update and rating as the Task Leader. The Reviewing Manager, Wendy Teleki, has also reviewed and cleared the update and rating for this recommendation and has authorized Abdul-Rahman Akande to clear in the MAR system on her behalf)
On action 0339-01, IFC has made a commitment over the period FY15-19 to attain a high average proportion of SME work in frontier regions and segments. IEG accepts evidence provided that the proportion of projects in IDA countries and underserved segments met its targets for FY 15 and will continue to monitor over the relevant period. IEG notes that the recommendation was framed in terms of commitment value, while the monitoring covers only number of projects. Both are important.
In FY15 IFC has met both components of the indicator related to Action 2B: 53% of the SME flagged projects were in IDA countries (vs. a target of 45%), and 50% of non-IDA SME projects were focused on underserved segments (vs. a target of 40%), including blended finance commitments through the Global SME Finance Facility, commitments in FCS countries, inclusive business commitments, banking on women projects, climate-related commitments, projects in frontier regions of non-IDA countries, and agri/food chain related projects. IFC Management will continue to guide the business towards the frontier through increased selectivity and enhanced incentives for work in frontier geographies and segments.