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 7E: Increase the number of MIGA-supported projects in IDA FCS using CAFEF.
Indicator: Number of MIGA âsupported projects in IDA FCS using CAFEF.
Baseline: None
Target: 10 MIGA-supported projects in FCS using CAFEF.
Timeline: FY14-FY19.
Action 7F: MIGA will produce a Knowledge Note on MIGA guarantee operations in FCS, focused on best practices and lessons of experience, based on evidence from project-level evaluations by MIGA and IEG.
Indicator: Knowledge Note published and disseminated, including a seminar (BBL).
Baseline: Historically,
MIGAâs Knowledge initiatives on FCS have been limited.
Target: For FY15, MIGA will use the evaluation evidence from the projects covered in the FCS evaluation for producing the Knowledge Note on MIGA Guarantee Operations in FCS. Thereafter, MIGA will produce the Knowledge Notes on a five-yearly basis, given the relatively small number of MIGA-supported projects evaluated every year.
Timeline: FY15-19.
IEG notes the contributions of the CAFEF during FY14-17 to MIGAâs engagements in FCS, and the increase in IDA FCS guarantee coverage in FY17. However, overall, MIGAâs support to cross border investments in FCS has not shown a sustained trend of growth during this period. In particular, MIGAâs guarantee issuance has not shown an increase in focus on IDA FCS countries compared to the preceding period due to the availability of the CAFEF facility. MIGA has not articulated how the facility has allowed it to support projects beyond what it could have done on its own balance sheet. Overall, during FY14-17, MIGAâs annual guarantee issuance in IDA FCS has averaged 6 percent of MIGAâs total, compared with 17 percent in the four years prior (FY10-13). IEG takes note of MIGAâs intention to update its knowledge base based on lessons in FCS and looks forward to receiving an update.
(Action 7E):Since its launch on July 1, 2013, the Conflict-Affected and Fragile Economies Facility (CAFEF) has supported MIGA's activities in Fragile and Conflict-affected states (FCS). The Facility is designed to address the need for greater support of cross-border investment and lending in FCS through the provision of political risk insurance (PRI) and non-honoring of sovereign financial obligations (NHSFO).In FY2017, MIGA issued $611.4 million of new coverage for seven projects in the following FCS: Burundi, Cote d'Ivoire, Madagascar and Myanmar. MIGA's support for FCS projects represented 13% of the total $4.3 billion in guarantees issued in FY2017, similar to previous years, indicative of MIGA's continued commitment to FCS projects.The Budeca SA, Bugestal SPRL and Bucafe SU projects in Burundi support the existing operations of three companies that procure, process and export coffee beans in Burundi. The project will strengthen the competitiveness of Burundi's coffee sector, support economic livelihoods in the Burundi coffee supply chain particularly for smallholder farmers and provide permanent job opportunities, including women who make up the majority of staff.The HKB Bridge project ion Cote d'Ivoire supports the design, construction, and operation of the toll bridge over the Ebrié lagoon in Abidjan, with access roads to the north and south residential areas. The bridge will help address significant congestion and pollution in Abidjan. The project will also provide important demonstration effects for transport sector projects, since it is one of the first private-sector led foreign direct investments in the country since the civil strife.The Ravinala Airports project in Madagascar consists of the financing, rehabilitation/expansion, operation and maintenance of the Ivato airport in Antananarivo and the Fascene airport in Nosy Be.The project is expected to help upgrade and improve Madagascar's most important international and local gateways to deliver better services and offer more efficient air travel options. The project is also expected to provide a platform for the implementation of further public-private partnerships (PPPs).The Myingyan Gas Power project in Myanmar involves the development, financing, construction, testing, commissioning, operation, and maintenance of a 225-megawatt gas-fired combined cycle power station in the Taung Thar Township, Myingyan District on a build-operate-transfer basis. The project will help address the severe power shortage in Myanmar and create significant employment opportunities during the construction and operational phases. The project is the first IPP project in Myanmar awarded on the basis of a competitive bidding process.The HyalRoute project in Myanmar involves the construction of a 4,500 km fiber optic cable network in Myanmar. The project is expected to: increase access to telecom services in urban and rural areas provide additional tax revenues for the government and boost economic activity and employment opportunities, directly and indirectly, during the construction and operational phases.(Action 7F):MIGA's FY15 Knowledge Note (KN) on the Lessons from MIGA's support for FCS based on the IEG evaluation of WBG Assistance to Low-Income FCS has continued to be a source of knowledge for MIGA Staff. The KN will be updated with findings and lessons from evaluation findings from other FCS guarantee projects and will be disseminated to Staff.
MIGA's performance in support of fragile and conflict-affected states has been disappointing. The precipitous decline of MIGA activities in FCS over the past 3 years has accelerated in FY16. New guarantee issuance in FCS was a mere 1.5 percent of MIGA's total. It is now well below the share reached during the FY02-12 period covered by the IEG evaluation when MIGA's guarantee volumes in FCS averaged 7 percent pa. This result points to the need for MIGA to step up its game and develop an action plan to enhance its relevance and activities in FCS countries to reverse this decline and get back on track to achieve its strategic priorities. These results also indicate that MIGA has not been able to leverage the CAFEF facility to increase its support in FCS beyond what MIGA could do on its own. IEG also notes that efforts to strengthen business development in FCS countries have been delayed by several years, until FY17, and management has not provided an update on rolling out a BD strategy to develop a more sustainable project pipeline in FCS mentioned in the original management response (2013).
To help address this trend, MIGA may wish to review critical aspects of its business model, risk tolerances, internal incentives to staff to pursue projects in FCS countries, arrangements for business development and more systematic project and sector-level collaboration with the Bank Group and other partners. It may also wish to upgrade its knowledge base and encourage specialization among its staff for underwriting projects in FCS.
(Action 7E):
Since its launch on July 1, 2013, the Conflict-Affected and Fragile Economies Facility (CAFEF) has supported MIGA's activities in Fragile and Conflict-affected states (FCS). The Facility is designed to address the need for greater support of cross-border investment and lending in FCS through the provision of political risk insurance (PRI) and non-honoring of sovereign financial obligations (NHSFO).
During FY16, MIGA issued $88.2 million of coverage for three projects through CAFEF: one in the Democratic Republic of Congo (DRC Bartrac Equipment) and two in West Bank and Gaza (National Beverage Company (NBC) - Gaza Branch Jerashi Flexible Packaging Company). MIGA's support for FCS projects represented 12% of the 26 total projects issued in FY16, similar to previous years, indicative of MIGA's continued commitment to FCS projects.
The NBC project involves the expansion of the Gaza Branch operations, including the addition of a beverages manufacturing facility for the domestic market. The expansion is expected to create 300 new direct jobs and an estimated 1,000 indirect jobs. The project will also contribute to the development of the private sector in Gaza through linkages and demonstration effects.
The Jerashi Packaging project involves the operation of a flexible packaging production facility and provision of packaging design services in West Bank and Gaza. The project is expected to have a positive impact on the local economy through direct employment, knowledge transfer related to flexible packaging technology, and serve medium, small, and micro businesses.
The Bartrac Equipment project in DRC involves the establishment and ongoing operations of a dealership for Caterpillar earthmoving equipment as well as power generating equipment in the Katanga region. The dealership's main activities include the sales, rental, and service of machines and generations sets, as well as parts sales. The project is expected to generate significant development impacts, since its products and support services are important for copper production, the primary revenue earner in the Katanga region. Increased availability of earthmoving equipment and maintenance services will also enhance the productivity of the mining sector, the main driver of economic growth in DRC.
(Action 7F):
MIGA's FY15 Knowledge Note (KN) on the Lessons from MIGA's support for FCS--based on the IEG evaluation of WBG Assistance to Low-Income FCS has continued to be a source of knowledge for MIGA Staff. The KN will be updated with findings and lessons from evaluation findings from other FCS guarantee projects and will be disseminated to Staff.
MIGA's guarantee volume in FCS countries has dropped off considerably since reaching a peak in FY13 (over 40% of guarantee volume) -- accounting for 8 percent of its gross guarantee volume in FY15. Meanwhile, there has been limited use of the CAFEF trust fund (which provided first loss coverage to two projects since its inception in FY13). Going forward, MIGA will need need to step up its efforts if it is to meet and sustain its strategic objective of increasing engagements in FCS. In this context, MIGA may wish to revisit some elements of IEG's original recommendation above.
IEG welcomes MIGA's initiative to produce knowledge notes based on its experiences in FCS countries. However, the attached note--focusing on findings from individual projects--does not provide guidance and directions to MIGA staff working on projects in FCS environments, or discuss implications for MIGA from implementing the findings and recommendations from IEG's FCS evaluation. Providing this type of learning and direction would be particularly relevant for MIGA given that it does not have a dedicated focal point for underwriting guarantees in FCS.
(Action 7E):
Since the launch of CAFEF (July 1, 2013), the first project was approved by the Board (Nov 26, 2013) was Helios Towers (HTD) in DRC ($95m guarantee, $7m from CAFEF). The project's development impact objectives include: (i) Expand mobile telephony access - With the construction of additional tower sites, existing mobile operators will be able to expand the reach of their services both in terms of geography and capacity. In addition, since HTD is not affiliated with any operator, and as its business model is predicated on sharing and co-location, the benefits of the expanded access through HTD will also be available to new market entrants. Co-location reduces the incremental cost of expanding service for all carriers thereby allowing them to service remote and economically less developed areas where Average Monthly Revenue per User (ARPU) and usage will be lower (ii) Increase competition: The presence of HTD in DRC will allow smaller and newer wireless operators to benefit from reduces barriers to entry as they will have access to leased tower facilities rather than having to build their own (iii) Expand access to other ICT technologies: HTD will be building a tower network that is capable of supporting not only mobile cellular networks, but also wireless broadband thereby improving the penetration of these technologies. Profitability in lower income/peri-urban and rural areas can only be possible if operators share common infrastructure (iv) Contribute to mitigating environmental impact: This project will provide a cost effective opportunity to telecommunication operators to reduce their carbon emission footprint by sharing infrastructure. A significant benefit of sharing tower infrastructure arises from the material, energy and emissions savings that ensure from building only one tower instead of three or four and (v) Economic Rate of Return: The Economic Rate of Return (ERR) for the project is 28.3 percent because of other positive externalities associated with the project, the actual ERR is expected to be higher. The expansion of the Helios Tower project was underwritten by CAFEF in FY15 (total coverage of $129 million with $21 million allocated to CAFEF).
Also, a renewable energy project was underwritten in West Bank and Gaza in FY15. CAFEF supported $0.7 million of the total $1.8 million investment for a pilot project involving the establishment of a biogas plant that will provide renewable energy and bio fertilizers to local farmers. An educational center will provide training and include a research lab for the biogas plant and other activities. The project will also support agricultural development by providing local farmers a source of high-quality fertilizer, as imports are prohibited. The project is the first of its kind in the Palestinian Territories and thus there will be substantial knowledge transfer and the creation of nearly 30 jobs.
To further support MIGA's work in FCS and utilization of the Facility, a business development mission was undertaken by a Team of experienced MIGA Staff to: Senegal (IFC regional hub for West Africa), Mali, Kenya (WB FCS Regional Hub), Burundi, South Sudan and Afghanistan.
(Action 7F):
During FY15, MIGA drafted a Knowledge Note (KN) based on the IEG evaluation of the World Bank Group Assistance to Low-Income Fragile and Conflict-Affected States (FCS). The Knowledge Note draws on the IEG evaluation findings and lessons relevant for MIGA as well as provide additional MIGA perspectives. Going forward, the KN will be updated with findings and lessons from valuation findings from other FCS guarantee projects and may be presented at a BBL.