Private sector investment is a key ingredient to support the 2030 Sustainable Development Goals agenda and foster economic growth in all IDA countries, including those experiencing fragile and conflict-affected situations (FCS).

Supporting the private sector in both conflict-affected and the least developed countries, however, is extremely challenging and requires constant innovation, experimentation, and learning. The Private Sector Window (PSW) is one such innovation. Launched in 2017 by IDA, the World Bank Group’s fund for the world’s poorest countries, the PSW aims at catalyzing private sector investments in high-risk countries. At the Independent Evaluation Group (IEG) of the World Bank Group, we recently conducted an assessment of the early implementation of the PSW to gather insights on how well the instrument is working, and what might be needed to boost its relevance and impact.

The PSW is the most recent, and IDA’s first, blended finance instrument that aims to use non-commercial, development funds to mobilize private sector investments in underserved sectors and markets by reducing their financial risk. It was set up to address the challenges posed by risks and unpredictability in IDA-FCS countries that deter private sector investment. Specifically, the PSW seeks to make projects commercially viable by de-risking an investment or by limiting IFC’s and MIGA’s own exposure to project risk. It does so by using concessional finance, or a subsidy, in the project or guarantee structure to enhance credit and mitigate the risk of possible losses.

How the Private Sector Window Is Designed to Work

Source: Independent Evaluation Group.
Note: IFC = International Finance Corporation; MIGA = Multilateral Investment Guarantee Agency.

We looked at the early implementation of the PSW in IDA18, from financial years 2018 to 2020, and focused on four features:  usage of the PSW, its additionality (relating to the growth of IFC and MIGA investments and guarantees in PSW-eligible countries, and IFC’s and MIGA’s entry in new markets or sectors) , the level of concessionality (the determination of subsidies to make IFC and MIGA investments commercially viable), and its governance. We did not assess the impact of PSW-supported projects on the ground as it is too early to evaluate their development outcomes.

Our main findings:

We concluded that the risk mitigation the PSW provides addresses only one of the factors deterring private sector investment in eligible countries. The PSW is designed with a focus on  de-risking IFC and MIGA financial risks but it is not designed to address other risks and constraints limiting the supply of bankable projects in high-risk markets.  Non-financial risks often pose as big a constraint for private sector investments as financial risks. The poor quality of the business climate in IDA countries and especially in FCS (such as the quality of the macro and fiscal policies, quality of public sector governance, regulatory barriers to trade); reputational risks related to weak environmental, social and governance (ESG) standards; and issues related to integrity and due diligence are all examples of non-financial risks present in PSW-eligible countries. 

Our findings and conclusions invite a reflection on the trade-offs related to the PSW’s limited deployment in IDA18, and course corrections and complementary efforts to support private sector investment in FCS, where needed:

• Investing in scaling up project development and preparation efforts can grow the PSW pipeline. IFC has committed resources to increase upstream activities, which might address some nonfinancial constraints to develop a pipeline of projects, but these have yet to develop a pipeline of commercially viable projects in PSW-eligible countries.
• In some markets, more concessionality may be required to overcome non-financial risks to make private investment commercially viable. Higher concessionality, however, may affect other market participants, and maintaining a level playing field will require a careful balance of commercial versus concessional finance to prevent market distortions.
• The World Bank Group could explore alternative coordinated approaches and instruments to mitigate non-financial risks related to governance, uncertainty, and underdeveloped institutions and markets.
• Technical assistance to private sector actors the PSW aims to support is an important ingredient. Early evidence suggests that the inclusion of technical assistance in IFC and MIGA projects may have helped increase and sustain the PSW pipeline.
• Finally, large doses of realism and flexibility when setting targets are called for around what the PSW and other blended-finance instruments can achieve in FCS and IDA countries.

The findings from our assessment have informed current discussions around the twentieth replenishment of IDA, which was launched early to support ongoing efforts to help the world’s poorest countries contain the impacts of the pandemic and lay the groundwork for recovery. The private sector, as an engine of jobs and growth, has a vital role to play in the recovery. The PSW can help unlock that potential, which we hope to strengthen by contributing with our insights to the cycle of innovation, experimentation, and learning.

Read IEG's report: The World Bank Group’s Experience with the IDA Private Sector Window: An Early-Stage Assessment

Pictured above: A worker sorts the green leaf tea before it reaches the main processing floor. The Kitabi Tea Processing Facility in Kitabi, Rwanda has a capacity of 48 000 tons of green leaf per day. The facility employs 200 people during its peak season and about 70 during the rest of the year. Photo: A'Melody Lee / World Bank