IFC and MIGA should adapt their business models, risk tolerances, product mix, sources of funds, staff incentives, procedures, and processes to be more responsive to the special needs of FCS and to achieve their strategic priorities of increasing engagement in FCS.abc
The private sector in FCS countries presents different types of opportunities and business challenges to the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA). IFC and MIGA have approached doing business in FCS in much the same way as in non-FCS countries even though sponsor quality is lower and capacity is weak project risks are higher than in IDA countries. IFC projects that integrated tailored capacity building for clients into project appraisal, design, and implementation of investments to account for the weak capacity environment tended to have a better chance of success. But IFC lacked the resources to offer firm-level capacity building to noninvestee companies which have the potential for local private sector development or future IFC financial engagement.
IFC and MIGA's products are not specifically tailored to needs and conditions in FCS IFC's business model as a development financier may not be conducive to reaching private firms in FCS, which are on average smaller, with weaker capacity, and more informal compared with other types of organizations. IFC and MIGA lack flexibility similar to the Bank's OP 8.0, and appraisal and approval processes are perceived as cumbersome and lengthy.
Staff incentives and performance measurement systems linked to project performance and volume targets are not aligned with increasing IFC engagement in FCS. Similarly, results measurement frameworks may not be fully adapted to FCS contexts. IFC has relatively few investment officers deployed to country or regional offices dedicated to working on FCS and MIGA has not developed specialized staff expertise with knowledge of FCS markets for business development and risk assessment and underwriting. Both IFC and MIGA have little specialized training and knowledge management products to support learning from experience and, over time, improving portfolio performance.
WBG: Agree. IFC recognizes that FCS face different types of challenges than other client countries, and since 2012 it has embarked on a number of special initiatives to adapt its business model to better serve FCS. In October 2013, IFC Management rolled out a new approach designed to reduce these barriers and increase investments and development impact in FCS. This pilot program consists of an allocation of $70 million in economic capital and up to $250 million in nominal capital depending on investment product type to support projects of $10 million or less in FCS, primarily in the manufacturing, agribusiness, services, and financial markets sectors. It will enable IFC to take more risk in FCS by funding projects that fall outside the organization's typical risk tolerance. The program will also provide operational flexibility needed to complete investments in the challenging conditions of FCS, such as streamlined procedures and documentation. As an additional aspect of the program, IFC will be creating dedicated support within legal and credit teams to guide and facilitate these investments, and aligning Advisory Services with investee companies to increase the development impact of these projects.
IFC is also making concerted efforts to address inadequate access to power, the number one constraint for firms in most FCS, as highlighted by the WBG's Enterprise Surveys. IFC is now working in conjunction with the WBG to identify opportunities for private sector power investments in FCS, and to develop the solutions necessary to enable these investments. IFC also realizes that in some situations, the additional risk involved in power projects may need to be covered through a separate funding source. IFC is actively exploring ways to work with development partners and donors to develop the funding stream that can address the factors that contribute to the lack of commercially viable power projects in FCS.
In addition, Advisory Services will continue to support the CASA program, currently present in eight Sub-Saharan African FCS. The second phase, CASA II, has just commenced and will expand the program to additional FCS in the region and focus on delivery of advisory services in alignment with investments in priority areas.
IFC will also continue exploring additional staff incentives to encourage greater staff engagement in FCS.
MIGA: Agree. MIGA already recognizes that FCS face different types of challenges than other client countries, and since FY05 has embarked on a number of special initiatives to adapt its business model to better serve FCS. In 2005 MIGA rolled out the Small Investment Program (SIP) with streamlined processes to specifically cater to smaller investors, many of which are operating in FCS.
The Agency's support of projects in FCS has grown significantly due to proactive business development, increased risk appetite, and the comfort provided by MIGA as a multilateral institution. Over the five year period ending in June 2010, MIGA averaged approximately US$50 million of new guarantees (5 projects) per annum. However, MIGA's new guarantees in FCS increased to US$ 228 million (8 projects) in FY11, and US$327 million (12 projects) in FY12.
In FY13 MIGA launched the multi-country Conflict Affected and Fragile Economies Facility (CAFEF) to further expand our operations in FCS.
MIGA has recently developed a BD strategy for FCS, which will be rolled out over the next few years with the help of CAFEF. MIGA is planning to place a BD officer in Africa and to further strengthen our partnership with IFC/WB in FCS.
MIGA will continue to use evaluations (self-evaluations & IEG evaluations) to generate lessons of experience from FCS operations.
Action 7A: Enhance synergies through IDA-IFC-MIGA joint implementation plans in IDA FCSs, including joint frameworks to measure results.
Indicator: Number of joint implementation plans.
Baseline: No formal and structured joint implementation plans as of end of FY 12.
Target: At least 7 IDA FCS have a joint implementation plan between IDA-IFC-MIGA.
Timeline: FY16.
Action 7B: Increase the number of small investment project (under $10m) in IDA FCS.
Indicator: Number of small investment projects (under $10m) in IDA FCS.
Baseline: Average of 12 smaller projects (under $10m) per fiscal year over the period of FY12-13 in IDA FCS (on the list of that FY).
Target: 18 small investment projects (under $10m) in IDA FCS per fiscal year.
Timeline: FY16.
Action 7C: Increase number of IFC power projects in IDA FCS.
Indicator: Number of IFC power projects in IDA FCS.
Baseline: 10 IFC power projects over the period of FY10-13 (cumulatively) in IDA FCS on the list of that FY.
Target: 15 power projects (cumulatively).
Timeline: FY15-FY18.
Action 7D: Conduct a review of existing FCS incentives and identify potential areas for improvement.
Indicator: Document summarizing existing FCS incentives and identifying potential areas for improvement.
Baseline: Ongoing work by the HR World Bank working group on FCS.
Target: Completion of an assessment of existing FCS incentives and identification of potential areas for improvement.
Timeline: End of FY15.
IEG notes IFCâs continued engagement in FCS markets. The decline in IFCâs commitments and the number of projects compared to the previous year indicates the challenge to maintaining and sustaining the growth of quality business in FCS. (IFC commitments were $274 million in FY17 compared with $846 million in FY16). The introduction of the Private Sector Window under IDA18, which will benefit low income and FCS countries. IEG would appreciate an update of the implementation and early results from the PSW, in particular as relates to the key findings and recommendation from the FCS evaluation related to the need for IFC to adapt its business model, risk tolerance and product mix to respond to the specific needs and circumstances in FCS countries.
IEG also notes the update of the number of Joint Implementation Plans. It would also appreciate an update on the extent to which these have been effective tools for IFC to increase its engagements in FCS countries, based on the implementation experience since their introduction in FY14. IEG also appreciates managements update regarding the pace and complexity of power sector investments in FCS, which indicates partial progress towards meeting IFCâs target.
In FY17, IFC invested US$878 million in 31 projects in FCS, of which US$368 million in own account investment and US$510 million in mobilization. In Advisory Services FCS spend amounted to 20% of the overall advisory program and 15% of active client engagement were in FCS. FY17 marks an important milestone in IFC's approach to FCS. The new "IFC 3.0" strategy dedicates special focus to stimulating more investment activity in FCS and Low-Income Countries by emphasizing two pillars: creating markets and mobilizing private capital. The IDA18 $2.5 billion Private Sector Window (PSW) launched on July 1, 2017 is an important tool to mobilize private sector investment in FCS and IDA-only countries, and help create markets for greater private sector involvement. The PSW will be particularly important in the following areas: (i) infrastructure transactions in high-risk countries that are bankable except for government counterparty or off-taker risks (ii) high-impact technology and entrepreneurial initiatives in areas such as broadband, off-grid power, fintech, and high growth/innovative small and medium enterprises (SMEs) (iii) manufacturing and services to create jobs and improve competitiveness in agribusiness, and affordable housing, including support for pioneering investments that create demonstration effect (iv) financial intermediaries to support financial access for trade, SMEs, agribusiness, manufacturing, women entrepreneurs.In addition to de-risking tools, expanding the pipeline of bankable private sector projects FCS will require upstream reforms that address market failures and other constraints to private sector investment, bringing together expertise from across the WBG and beyond. IFC continues to collaborate within the WBG through the design and implementation of the Joint Implementation Plants (JIPs). In FY17, there were 11 JIPs in progress focusing primarily on agribusiness and power sectors. Another important tool is IFC's Conflict Affected States in Africa (CASA) Program/FCS Africa, which provides an enabling platform through a combination of presence on the ground and flexible funding for advisory services, removing bottlenecks to investments and generating knowledge on operating in high-risk environments. IFC also established the Creating Markets Advisory Window (CMAW), operational on July 1, 2017, that will enable the institution to respond to the increased demand for advisory services and capacity building in FCS/IDA, including multi-year support for direct project costs out of IFC earnings. These new tools and approaches represent an unprecedented opportunity for IFC to scale up in FCS and other challenging markets.IFC also continues to work jointly with the WBG FCV HR Working Group to improve the value proposition for staff working in FCS. In recognition of the importance of the FCS agenda, the number of Corporate Awards dedicated to teams working in FCS and Low-Income IDA countries was increased from 4 to 6 in FY17.Action-specific updates: The actions 7A, 7B and 7D were successfully completed over the period FY15-16. Regarding action 7C, IFC committed 3 power projects in IDA FCS countries in FY17, bringing the total number of power projects committed over FY15-17 to 6. The relatively slow pace of increase in the number of power projects is a result of persisting risks related to high government or off-taker risks and reflects the need for broader sector reforms to enable private sector's participation in the power sector. The creation of the Risk Mitigation Facility under IDA18 PSW aims to mitigate these risks, and extensive work with focus on Africa is taking place between IFC's Global Infrastructure & Natural Resources Dept. and WB's Energy & Extractives GP to implement upstream and sectoral reforms. These new tools and collaborative efforts are expected to result in a growing pipeline of bankable power projects in FCS.
As the management update indicates, IFC has had a good year in terms of increasing commitments in FCS countries, exceeding its objective of increasing FCS investment commitments by 50% compared to the FY12 level. However, as noted in previous updates, IFC's investment performance in FCS countries has been volatile (in FY15, IFC commitments in FCS were just $338 million as compared with $771 million in FY16 -- using the harmonized FCS list). Thus, the challenge will be to sustain the recent gains -- driven in part by one large investment -- in future years.
IEG is aware of IFC's recent analytical and conceptual work on enhancing its role in FCS -- culminating in a Board paper on "What It Would Take for IFC to Scale Up in FCS and Low-Income IDA Countries" as well as preparatory work for the planned Private Sector Window under IDA18. The challenge will be to use the momentum to translate these analytical efforts into the necessary changes to help increase IFC's investments n FCS. This will involve identifying the necessary changes to IFC's business model, risk tolerances, staff incentives, adaptation of its product offerings, and partnering with the Bank and others. IEG has provided some suggestions to strengthen the design of the PSW and is looking forward to engaging with IFC on this further.
Furthermore, IFC has adopted an enhanced risk envelope for FCS in FY16 (IEG would welcome an update on this initiative in next year's management update), and has increased the number of smaller investments supported in these countries. There are also 7 Joint Implementation Programs currently being implemented and designed in FCS IDA countries (again, IEG would appreciate an update on the experience/effectiveness of JIPs under implementation). Progress in assisting FCS countries address in reconstruction the infrastructure gap in FCS has been limited, with no new projects in FY16 in IDA FCS. Finally, IEG considers that addressing the issue of staff incentives to work on projects in FCS environments remains on IFC's agenda. While IFC has implemented special rewards and recognition to teams working on FCS, the main challenge is that corporate incentives remain to be driven by commitment volumes and project financial and development performance: benchmarks that are inherently more difficult to achieve in FCS contexts.
On balance, IFC has made progress compared with implementation during FY15 but important challenges remain to make more systematic and sustained progress in FCS -- including translating analytical work into institutional changes necessary to support a more significant IFC program and impact in FCS.
In FY16, IFC invested $989 million in 39 projects in FCS, of which $840 million in own account investments and $149 million in mobilization. IFC far exceeded the commitment made in IFC Road Map FY14-16 to increase own account investment in FCS by 50% in FY16 over FY12 levels the actual increase was 135%. In Advisory Services FCS spend amounted to $43.2 million, 21% of the overall AS program, an increase from $37.3 million in FY15.
This strong delivery in FY16 was accompanied by continued enhancements to IFC's processes in FCS. In October 2015, IFC launched an enhanced FCS Risk Envelope, increasing the economic capital allocation to $200 million and the nominal limit to $700 million. The FCS Risk Envelope is designed to help stimulate more investments in FCS and increase IFC's development impact in these most difficult operating environments by allowing teams to take additional, defined risks (such as working with less experienced project sponsors). The enhanced Risk Envelope removes the restrictions on the maximum project size (previously up to $10 million), and allows for using it in conjunction with IFC blended finance programs (such as GAFSP and SME Facility). For more information, please FCS Risk Envelope Procedures: https://spark.worldbank.org/docs/DOC-146954?et=watches.email.document. In addition, the Streamlined FCS Documentation has been designed by the Risk VPU to help facilitate and expedite transactions under the FCS Risk Envelope as well as reduce transactions cost in FCS. For more information, please see here: https://spark.worldbank.org/docs/DOC-147500.
In FY16 IFC announced a revised framework for Corporate Awards for the FY15 accomplishments, which included 4 FCS Corporate Team Awards, and 108 Individual Performance Awards for special accomplishments in FCS. These new awards were widely welcomed by staff and helped boost staff commitment to working in challenging environments.
In FY16 IFC also undertook analytical work on FCS, which was summarized in the paper entitled "What It Would take for IFC to Scale Up in FCS and Low-Income IDA countries" presented to the Board in spring 2016. Based on the findings of the paper, IFC is planning to take two fundamental approaches to overcome challenges to support private sector and investment in FCS: (i) develop new tools to lower risks for potential project investors, and (ii) undertake additional efforts to engage in "upstream" work to help bring projects to markets, help push forward reforms, and build in-country capacity of both government and private sector. Currently, IFC, in partnership with IDA and MIGA, is seeking to develop additional risk-mitigation instruments like expansion of guarantees and blended finance solutions as well as a market-risk hedging facility that would take local currency risk for projects subject to significant sovereign and country risks, such as regulatory interference, off-taker risk, and political instability. Such new and enhanced risk mitigation instruments are expected to lower the risks and incentivize private sector investment to enable transformational infrastructure projects in high risk countries and support pioneering investments in other sectors. In addition, in order to create an ecosystem that is conducive to investments, IFC will work closely with the World Bank and other partners to help improve the overall investment climate, eliminate sector specific-bottlenecks to investments, provide complementary public investments and technical assistance to support governments in negotiating complex/pioneering private investments. Efforts will also be made to strengthen capacity of the private sector in areas such as financial, accounting, technical environmental, social and corporate governance and additional resources will be dedicated to expand project preparation and upstream support for companies operating in FCS.
Action-specific updates
IEG recognizes implementation progress across several areas. However, overall IFC needs to step up efforts if it is to reach its objective of increasing its engagements in FCS countries and reach the target it set in the FY14-16 IFC Roadmap of increasing annual IFC commitments in FCS countries by at least 50 percent by FY16 above FY12 levels. Thus far, over the FY10-15 period, IFC's long term finance in FCS does not show a sustained upward trend. This would suggest that further efforts are warranted to review IFC's business models, risk tolerances, product mix, incentives, and processes and adapt them where needed to FCS contexts, per IEG's recommendation.
IEG commends IFC for focusing on staff incentives and introducing special awards for projects in FCS. However, the attached presents a tabulation of awards given to FCS projects rather than an in-depth review of incentives that determine behavioral patterns of staff towards working on projects in FCS--including reflecting staff views on these issues. Going forward, IFC needs to actively monitor these issues to ensure that incentives and behaviors of staff and management are aligned with corporate priorities in FCS. (7D)
IEG finds little rationale for IFC's departure from the harmonized list of FCS adopted by 3 MDBs in light of ongoing work across the WBG to revise the definition and criteria for FCS categorization. Using the harmonized list, IEG's data suggests that the number of small investments in FCS is significantly below that reported in the management update (7B) and notes that Nepal is no longer considered FCS (7C).
Action 7A:
In FY15, IDA-IFC-MIGA made significant progress in the design and implementation of joint implementation plans (JIPs), with 6 JIPs in progress in IDA FCS, focusing primarily on agribusiness and power sectors:
- Under implementation: Burundi (power and agribusiness), Myanmar (power), and Nepal (hydropower)
- Design stage: Mali (Sahel irrigation) and Sierra Leone (infrastructure and agribusiness)
- Early stage: Great Lakes and Horn of Africa.
To ensure appropriate progress in design and implementation of JIPs, IFC appointed 16 program leaders, some of whom are responsible to coordinate the delivery of JIPs.
Action 7B:
In FY15, IFC committed 17 small projects (under $10m) in IDA FCS versus an average of 12 per year during the FY12-13 period. IFC also committed an additional small project in an IDA-blend country.
Action 7C:
In FY15, 3 power transactions were committed in Nepal. The current medium-term power project pipeline for FY16-18 indicates 18 potential power projects in IDA FCS.
Action 7D:
A review of existing FCS incentives was conducted in FY15 (please see attachment) and presented to the IFC Management Team on April 1, 2015.
In recognition of FCS as one IFC's top strategic priorities, the following FCS awards were instituted in FY15 for staff working on FCS:
(1) A special category of Corporate Awards (one of 5 Corporate Awards categories) for "Exceptional Achievements in FCS countries" was created, with 4 awards (2 investment and 2 advisory/corporate initiatives). These awards will recognize teams working on (i) an investment/treasury project, including those that might not have been committed, but has reached significant milestones (2 awards) and (ii) an advisory project with high impact in FCS (for example a project that helps unlock investment opportunities) or initiative aimed at increasing IFC's engagement in FCS (2 awards). For more information, please see the link: http://ifcintranet.ifc.org/wps/wcm/connect/HR_ADMIN_INT_CONTENT/IFC+Web…
(2) A new category of "Targeted award for strategic priorities" under Annual Performance Awards, where FCS Activities is one of the 3 priority areas considered. This category consists of up to 300 individual awards for $7,500 or 15% of midpoint of the staff's grade. The awards will recognize staff working on investment/advisory/treasury projects at all key stages - pipeline development, execution, disbursement - of the work flow with highest impact in FCS whether through efforts on i) developing project ideas with greatest relevance to address gaps in the country while working across IFC areas and the WBG system to do so, ii) helping unlock investment opportunities regardless of immediate outcome, or iii) facilitating completion to commitment of complex projects. For more information, please see the link:
http://ifcintranet.ifc.org/wps/wcm/connect/HR_ADMIN_INT_CONTENT/IFC+Web…
Note on FCS tracking methodology: Please note that for operational purposes, IFC is tracking FCS commitments based on the methodology described in the attached memo.