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Insights for a Rapidly Changing World

Synthesizing Lessons from Private Sector Engagements

As the importance of the private sector to development came increasingly into focus, the Independent Evaluation Group (IEG) examined findings from evaluations on the work of the International Finance Corporation (IFC) with private sector–led projects, private sector activity in fragile and conflict-affected situations (FCSs), and the World Bank Group’s work with small and medium enterprises (SMEs). Across the synthesis reports, a persistent theme emerged of the importance of providing targeted solutions to specific problems, especially in areas affected by conflict and violence.

IFC Blended Finance

Lessons from the evolution of IFC’s blended finance approach—combining concessional and commercial funding in private sector–led projects—can inform how blended finance can be expanded to high-risk areas, such as innovative operations in countries affected by fragility, conflict, and violence.

Based on selected in-depth project evaluations reviewed in IFC’s Blended Finance Operations: Findings from a Cluster of Project Performance Assessment Reports, IFC blended finance mitigated financial risks and helped projects get off the ground, with a direct subsidy of about 2 percent to 5 percent of project costs. However, the evaluation pointed out that while blended finance can reduce the cost of financing, it did not “de-risk” projects per se, as many intrinsic project risks beyond financial ones remained. These risks needed to be addressed through different interventions, such as intense project preparation and provisioning of advisory services. In most instances, the cost of doing business is much higher for IFC in FCS than in non-FCS countries and, though IFC was repaid and compensated for their investment, the risk-adjusted return was significantly lower, representing a key constraint to scaling up IFC investment in FCS countries.

This report highlights the need to pay attention to the implicit subsidies in blended finance so as to have a complete picture of all the subsidies involved in a project. The synthesis suggests that combining blended finance with other Bank Group instruments can address a broader range of risks in certain project circumstances.

IFC in FCS Countries

The International Finance Corporation’s Engagement in Fragile and Conflict-Affected Situations: Results and Lessons takes stock of available evidence regarding the effectiveness of support from IFC in FCSs. In FCS countries, private sector activity can support economic growth, promote local employment and income-earning opportunities, generate government revenue, and deliver goods and services, helping countries escape the “fragility trap.” However, the private sector in FCSs faces significant constraints.

IFC’s investment volume in FCS countries has remained largely flat over the past decade, and commitments have predominantly been in countries that already attract foreign direct investment. Their success rates are nearly equal to success rates for investments in non-FCS countries. However, constraints related to IFC’s business model may explain the difficulties in scaling up investments in FCS countries.

This synthesis suggests further adapting IFC’s business model to FCS situations, focusing on several areas that need attention: IFC’s risk appetite and tolerance and the instruments available to mitigate risks; the operating costs of engaging in fragile environments; incentives and recruitment for IFC staff to work on such projects; and IFC’s modalities, instruments, and business development tailored to the diverse typologies of FCS markets and the types of private clients in FCSs. Overall, making progress on this agenda will require continuous experimentation, adaptation of business models, and learning by doing.

Small and Medium Enterprises

Support for SMEs remains a major focus of the Bank Group portfolio promoting private sector growth. The synthesis report World Bank Group Support for Small and Medium Enterprises: A Synthesis of Evaluative Findings reviewed previous IEG evaluations of 104 projects, research, and the experience of other multilateral development banks to bring evaluative evidence to the questions of how to build on the Bank Group’s past experience with SMEs and whether the size of an enterprise is a suitable criterion for support.

The lack of a consistent definition of SME complicates the interpretation of evidence on what works in delivering the right types of services and benefits to the right types of firms. Nevertheless, the synthesis report found some recurring problems, including weaknesses in monitoring and evaluation, technical design, project implementation, and risk assessment and mitigation. Conversely, successful projects tended to do well in these dimensions.

The IEG evaluations found that, given multifaceted SME needs, coordinated, continuous engagement using diverse instruments and informed by analytic work contributed to project success and the sustainability of benefits.