Additionality is a core feature of International Finance Corporation (IFC) development finance, which is essential to IFC’s mission. Simply put, it is the unique contribution that IFC and other multilateral development banks bring to a private investment project that other commercial sources of finance do not offer. This contribution can be financial, such as innovative financing through green bonds or a long loan tenor. Or it can be non-financial, including contributing knowledge and setting standards.
Proper articulation of additionality is especially important in middle-income countries (MICs) for IFC to avoid crowding out (displacing) private investment, which is much more abundant in these countries than official development assistance.
Additionality can enhance a project’s development impact, for instance when IFC helps the client reduce emissions by introducing environmental standards, or when IFC’s additionality reduces a project’s risk profile and contributes to the likelihood of the development outcomes being realized.
Our new report examines the additionality anticipated (promised at the time of approval) and realized (evaluated at project maturity) by IFC investment projects in MICs between 2011 and 2022. This included more than 579 projects which the IEG evaluated and other projects which it didn’t; nine case studies of MICs including South Africa, Colombia, and Bangladesh; a review of the academic literature; statistical and econometric analysis; and expert interviews.
IEG’s review shows that an impressive 96% of IFC investment projects in MICs realize some additionality. Yet, only 60 percent of projects deliver on all their anticipated additionalities. IFC is more successful at realizing financial additionality (87%) than nonfinancial additionality (65%). In contrast with financial additionality, nonfinancial additionality is usually realized over time rather than at financial disbursement. Thus, it often requires planning, monitoring, and continuing engagement.Yet realizing additionality, especially nonfinancial additionality, is positively associated with both project development outcomes and project investment outcomes.
In fact, IEG shows that for IFC to realize additionality, several conditions need to be in place. These conditions include identifying anticipated additionality, deploying tools to realize additionality, and addressing issues that may prevent it from being realized.Internal and external factors influence these conditions.Internal factors include IFC’s work quality, staff capabilities, and internal procedures (figure 1). External factors include client capacity and commitment, the political and policy environment, and competition and collaboration with other financiers.
Figure 1: Factors of success for realizing IFC additionality in MICs
From IEG’s detailed analysis, three principal findings and recommendations emerged:
- The IFC properly identifies and articulates additionality at the project level; however, internal procedures to monitor delivery and assess additionality are incomplete. We found the IFC to be a leader among development finance institutions in identifying and articulating additionality at the time a project is approved. It clearly and rigorously articulates additionality in project documents and provides useful guidelines to staff.Although procedures at project identification and appraisal and at evaluation are well developed, practices related to monitoring and aggregate reporting are not. To enhance learning and transparency, IEG recommends that IFC should address gaps in its internal systems related to monitoring, supervision, and reporting of additionality.
- Additionality patterns observed do not match IFC’s assumptions. IFC’s anticipated additionality IFC projects has diversified over time to include both financial and non-financial benefits. However, the patterns of anticipated additionality present in IFC’s portfolio do not match IFC’s assumptions about how additionality varies based on country income. For example, although IFC expected that knowledge and innovation would play a more prominent role in Upper Middle-Income countries than in Lower Middle-Income countries, it does not - contrary to IFC’s expectations. Therefore, IEG recommends IFC align its strategy for additionality in MICs with its actual IFC’s pattern of activity. This is likely to help IFC to plan for and deliver on its commitment to its strategic objectives.
- While IFC treats additionality primarily at the project level, the evaluation observed that by applying a country and sector lens, IFC can further enhance its additionality.
Although IFC has committed only to treating additionality at the project level, the evaluation found that IFC has the potential to add unique value at the country and sector level by discussing and planning for additionality in country and sector strategy documents.
Focusing strictly on projects can miss opportunities to realize greater additionality for clients, sectors, and countries. Therefore, IEG recommended that IFC use its commendable approach to additionality as a lens through which it approaches its country strategies and deep dives into sectors like renewable energy and fintech. This will support its strategic approach to proactively creating markets and mobilizing private capital to contribute to the Sustainable Development Goals.
Additionality should be a central objective for any development institution investing in the private sector, to assure its investments add value and don’t crowd out other sources of private investment. IFC’s best investments make unique contributions that would not otherwise be possible. We hope this report will help IFC to better support market creation and capital mobilization to achieve global development goals.