International Finance Corporation (IFC) management welcomes the Independent Evaluation Group (IEG) report International Finance Corporation Additionality in Middle-Income Countries and appreciates the engagement and collaboration that IEG’s task team extended to IFC throughout the preparation of the evaluation.

The broad scope of the evaluation offers IFC a good opportunity to reflect on evaluation findings and the progress made since the introduction of the new IFC Revised Additionality Framework and take into consideration useful recommendations for strengthening our additionality in middle-income countries (MICs). The evaluation is timely, given the ongoing discussions of the Evolution Roadmap of the World Bank Group.

Management expresses its appreciation for the analysis and recognition of IFC’s comprehensive approach to additionality and welcomes the finding that IFC is the leading institution among development finance institutions with respect to additionality identification and articulation. Additionality is a core feature of IFC, a threshold condition for IFC involvement, and integral to our mission to promote private sector development. As such, it is IFC’s unique input to a project or for a client and has the capacity to strengthen a project, improve its chances of success, and enhance its development impact—regardless of location. With the launch of IFC 3.0 in 2017 and the Revised Additionality Framework in 2018, additionality has come into greater strategic focus.

IFC notes that most projects realize additionality outlined at approval from the Board of Executive Directors, with financing structure and standard setting being the most frequent sources of expected and realized additionality. With respect to standard-setting, IFC appreciates IEG’s recognition for standing out among development finance institutions for monitoring and enforcing compliance with environmental and social standards. At the same time, IFC acknowledges that we are comparatively less successful in realizing nonfinancial additionality than financial additionality, including where advisory services are an important vehicle for delivery. We agree that IFC needs to be more deliberate, as nonfinancial additionality is usually significant in the context of programmatic and upstream advisory interventions under IFC 3.0. However, IFC would also like to affirm the importance of client commitment to realizing nonfinancial additionality.

Although this report finds that the expectation that innovation and knowledge as comparatively predominant sources of additionality in MICs does not hold, IFC would like to highlight that in the past years we have delivered a substantive number of projects with innovative features in MIC-heavy regions (Latin America and the Caribbean, Europe, and Central Asia). But teams may underreport on this type of additionality compared with other sources of financial and nonfinancial additionality for which more quantitative indicators and evidence may be available. Given that half of the evaluation period predates both IFC 3.0 and the Revised Additionality Framework, the evaluation’s findings may not fully capture the progress of IFC’s approach to additionality.

IEG notes that there is an alignment gap between IFC’s strategic approaches and its activities in MICs. Although IFC’s Revised Additionality Framework states that additionality in the client relationship typically evolves from financial to nonfinancial additionality, the report notes that IFC has generally more frequently identified and successfully delivered more on financial additionality compared with nonfinancial additionality in these markets. This is, at least in part, a response to market need—while the availability of capital tends to be greater in MICs compared with lower-income countries, the financing needs to address development gaps continue to far exceed supply. As such, the greater availability of funding sources in MICs does not necessarily imply lack of relevance of financial additionality. We fully agree with the importance of correctly identifying and articulating IFC’s nonfinancial additionality in MICs in areas such as standard setting and innovation that have likely been underreported.

Finally, while noting the evaluation’s portfolio-driven criteria for sector selection with regard to country case studies, we would like to highlight that a broader approach is needed to obtain a holistic view of IFC additionality in a particular MIC. This is especially true in the financial sector, where IFC additionality in debt capital markets, housing, and financial technology, for example, is strong. In this case, limiting the scope of analysis to commercial banking and microfinance may not be representative of IFC’s overall added value in the country. Similarly, the analysis comparing upper-middle-income countries (UMICs) with lower-middle-income countries could have been further strengthened by the incorporation of other differentiators like the size and development of financial markets, for example. India, which accounts for a large share of lower-middle-income country projects, is in many ways a more developed financial market than many UMIC countries.

Recommendation 1. “To enhance institutional accountability, learning, and transparency, address gaps in internal systems related to monitoring, supervision, and reporting of additionality at the project and portfolio level” (xvii).

IFC management agrees with this recommendation. We note useful recommendations on how to improve internal processes and systems, which IFC management will work to address. IFC’s Development Impact Measurement Department will work to update our monitoring system for additionality.

IFC’s Revised Additionality Framework allows for a more consistent assessment of additionality, better ability to benchmark and compare different sectors and countries as evidenced by widespread adoption of the additionality framework, and adherence to the requirements for evidence. This provides a strong foundation to build on.

Recommendation 2. “To enhance commitment to and fulfillment of IFC’s strategic objective, IFC should bring its strategy for additionality in MICs and its pattern of activity in MICs into closer alignment” (xviii).

We would first like to highlight that the recommendation refers to a “strategy.” IFC does not have a formal strategy for additionality but recognizes that approaches to additionality are dynamic and context driven. IFC management agrees in principle with the recommendation.

IFC notes that, a priori, there is an expectation of greater opportunity for nonfinancial additionality in relation to financial additionality in MICs. In reality, the type of additionality needed by companies and the opportunities for IFC reflect the development context and changes in the external environment, including the emergence of crises such as the COVID-19 pandemic or intensifying global challenges such as climate change, varies. Although the availability of capital is indeed greater in MICs—and in more affluent MICs—the financing needs continue to far exceed supply. This is particularly relevant in areas such as climate, where mobilization of capital can be challenging.

Further, we acknowledge that incidences of identifying and anticipating nonfinancial additionality are comparatively lower in UMICs than in lower-middle-income countries (though not significantly), and we will continue the effort to capture nonfinancial additionality particularly in relation to innovation and knowledge. We also suspect that the relatively lower incidence of nonfinancial additionality may stem from weak articulation or delivery rather than a need to bring IFC’s strategic approaches into closer alignment with its activities. As this report observes, certain types of innovations may be “challenging to document with compelling evidence and thus may be underreported” (37). The report also mentions that teams often focus on “additionality for which quantitative evidence could be provided to the exclusion of some other forms of additionality, such as innovative financing and mobilization” (58).

Moreover, the low proportion of projects claiming innovative financing structures in the anticipated additionality is likely the consequence of very specific criteria in the Revised Additionality Framework. This was acknowledged in the report as a possible reason; it points to examples where IFC did not declare innovative financing despite its presence or where it framed such innovations under a different category of additionality. It is thus noteworthy that IFC’s contribution to innovation is not limited to additionality categorized as innovative financing structure and might be framed as innovations under a different category of additionality. Specifically, older projects in the portfolio under review will not have been subject to the Revised Additionality Framework, which has yielded improvements in articulation and identification already. In the past few years in Latin America and the Caribbean and Europe, two regions with the highest concentration of UMICs, IFC delivered a large number of projects with innovative features (first blue bonds, first sustainability linked bonds, synthetic risk transfer instruments, climate tech, and so on). Many investment projects have been supported and enabled by upstream and advisory services (for example, gender advisory for banks, the EDGE [Excellence in Design for Greater Efficiencies] Green Buildings program, Utilities for Climate initiative’s upstream interventions to optimize efficiency in water and power utilities, and so on).

A related but separate point highlighted in the report is that IFC is comparatively less successful in realizing nonfinancial additionality than financial additionality, including where advisory services are an important vehicle for delivery. This point warrants further investigation by IFC, specifically in taking a closer look at delivery of advisory services. However, it is noteworthy that channels for delivery of knowledge and capacity building may not be recognized due to challenges inherent in assessing them ex ante or monitoring them later, thus leading to underreporting.

Recommendation 3. “To enhance its strategic approach to proactive creation of markets and mobilization of private capital to provide a critical contribution to the Sustainable Development Goals, IFC should incorporate its additionality approach into its country strategies and sector deep dives” (xviii–xix).

Management appreciates IEG’s recognition that IFC’s additionality approach is useful for market creation and private capital mobilization. As highlighted in the report, the evaluation applies country and sector lenses primarily for learning purposes to explore achievement of additionality beyond the project level.

Although we agree in principle with the recommendation, we would nonetheless like to emphasize that IFC captures and realizes additionality at the project level. It is an approach shared by other multilateral development banks and forms the basis of the banks’ harmonized additionality framework. IFC management will explore how project-level additionality considerations can inform country- and sector-level engagement, where feasible. Moreover, IFC’s approach to assessing strategic priorities and engagement areas at the country level is based on a number of factors, including development needs, comparative advantage, and our role.

Finally, in terms of Bank Group collaboration, it is noteworthy that joint Bank Group Country Partnership Frameworks provide the authorizing context for IFC operations at a country level. Bank Group collaboration enhances value added at the country and sector level, which is acknowledged in the report. The IFC 3.0 tool kit, which includes diagnostics such as Country Private Sector Diagnostics, Country Climate and Development Reports, and upstream activities, among others, has created a step change and provides a strong basis for both joint and sequenced Bank Group activities, enhancing overall value and delivery to clients. A stronger focus on the One World Bank Group Approach and the Cascade—as identified in the evolution roadmap—will support greater role and impact.