Background

The private sector is essential for creating jobs and prosperity in poor countries, but developing it is challenging, especially in fragile and conflict-affected situations (FCS). The private sector provides 90 percent of jobs and is the largest source of income for people living in International Development Association (IDA) countries (World Bank 2017), in turn contributing to economic development, poverty reduction, and achievement of the Sustainable Development Goals. However, weak macroeconomic and regulatory environments, infrastructure bottlenecks, and limited skilled labor forces make it difficult for domestic and international investors to engage, particularly in FCS, which also present security risks. As a result, poor countries have limited abilities to attract private investment and grow the local private sector, which hinders their development.

Blended finance, which mixes public development resources with private funds, can help attract private investment and grow the local private sector in poor countries. Blended finance complements macroeconomic and regulatory reforms by deploying public development resources to improve the risk-return profile of individual investments in developing countries, demonstrating the viability of projects, and contributing to building markets. It is a powerful tool to finance development because achieving the Sustainable Development Goals and the commitments under the Paris Agreement requires substantially more financing than official development assistance and development finance institutions can provide.

The IDA Private Sector Window (PSW) is a Blended Finance Facility (BFF) that enables the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA), and third-party private sector investors to conduct high-risk transactions in IDA and FCS countries. The private sector is reluctant to invest in IDA and FCS (PSW-eligible) countries because of challenges including (i) limited financing, particularly long-term and local currency financing; (ii) disruptions triggered by exogenous factors, such as global crises; and (iii) unfavorable business environments. The World Bank Group aims to address these challenges through several interventions, including supporting policy changes to stabilize the macro conditions, develop capital markets, and improve legal rights. The IDA PSW was introduced by the Board in 2017 as an additional tool that the Bank Group could deploy to help address constraints on private investment in IDA and FCS countries. It focuses on enabling IFC and MIGA investment transactions in these countries by partially mitigating risks and potential losses of IFC, MIGA, and third-party private sector investors. The cumulative IDA amount allocated to the PSW between fiscal year (FY)18 and FY23 is $6.7 billion. The PSW was created in recognition that expanding support to the private sector is critical to help IDA, IFC, and MIGA to advance the IDA special themes—climate change; fragility, conflict, and violence; gender; governance and institutions; and jobs and economic transformation.

The PSW comprises the following four facilities:

1. BFF combines PSW funds structured as guarantees, loans, and equity alongside IFC investment (and, in some cases, also investment from third parties) to benefit sectors with high development impact, including agribusiness, climate finance, energy access, health and education, digital technology, small and medium enterprise (SME) finance, and other innovative sectors.
2. The Local Currency Facility provides hedging for local currency loans in countries where capital markets are undeveloped.
3. The MIGA Guarantee Facility uses PSW support to expand MIGA’s participation in PSW-eligible countries through reinsurance and first-loss guarantees.
4. The Risk Mitigation Facility offers project-based guarantees to attract private investment in IFC infrastructure projects and public-private partnerships.

To be approved, PSW projects have to meet three eligibility criteria: (i) being located in PSW-eligible countries, including IDA-only countries and IDA countries experiencing subnational fragility; (ii) having finance activities that align with IDA’s poverty focus and special themes, Bank Group country strategies, and the Bank Group’s approach to supporting private sector investments and creating markets; and (iii) aiming at maximizing additionality and creating sustainable markets while minimizing concessionality.

Evaluation Objectives, Scope, and Methods

This evaluation reviews IDA PSW projects approved in FY18–23; it updates the 2021 Independent Evaluation Group (IEG) early-stage assessment of the PSW and complements the 20th Replenishment of IDA (IDA20) PSW Mid-Term Review. At the request of the Board’s Committee on Development Effectiveness, this evaluation updates the 2021 IEG early-stage assessment of the PSW, which covered the first three years of implementation of this instrument (FY18–20). This evaluation assesses the PSW across three IDA cycles: IDA18, which covers FY18–20; IDA19, which covers FY21–22; and IDA20, which covers FY23–25. The evaluation covers IFC and MIGA (because the two institutions originate the projects) and IDA (which offers concessional support). This is a “focused evaluation” (like the IEG 2021 early-stage assessment) because it assesses a specific Bank Group blended finance mechanism—the PSW—and not other IDA activities. The evaluation complements the IDA20 PSW Mid-Term Review, which was prepared jointly by IDA, IFC, and MIGA. The evaluation is part of IEG’s Maximizing Finance for Development workstream and harmonizes with other IEG evaluations in this area of work.

The overall objective of this evaluation is to assess the usage, market development potential, and enabling factors of the PSW. This evaluation assesses how the usage of the PSW has changed from inception to 2023 and explores two aspects of the PSW that IEG’s early-stage PSW assessment did not evaluate: its potential market development effects and its enabling factors—namely, concessionality (for IFC and MIGA) and additionality (for IFC). Concessionality is the level of subsidy needed for IFC and MIGA to offer transactions in PSW-eligible countries at market prices. Additionality is the unique support IFC brings to private investments (on a project basis) that is not offered by commercial sources of finance (IFC 2018). It includes financial and nonfinancial additionality.

This evaluation answers two main sets of questions:

• Usage and market development. Has the usage of the PSW enabled IFC and MIGA to adequately address challenges to private sector investment and increase the scope and scale of their portfolios in PSW-eligible countries? Is there any early evidence that PSW-supported investments are (or are not) creating the conditions that lead to market development?
• Enabling factors. Has concessionality enabled usage of the PSW? To what extent have the PSW subsidies followed the minimum concessionality principle (the principle that the concessionality embedded in a financing package should not be greater than necessary to induce the intended investment)? Is IDA PSW capital adequately leveraged to increase usage? Is financial reporting on the PSW adequate for decision-making purposes? What types of financial and nonfinancial additionality features do PSW projects include? Have these features created the conditions for PSW transactions to have potential market development effects?

This evaluation uses a mixed methods approach, combining qualitative and quantitative data to address the evaluation questions. The methods included review of blended finance literature, analysis of the PSW portfolio and concessionality levels, econometric work, and semistructured interviews with staff, experts, and clients. We also conducted virtual country case studies in Burkina Faso, Cambodia, Nigeria, and Tanzania to assess PSW projects’ contributions to addressing challenges to private sector investment and creating the conditions for market development.

The evaluation has several limitations. Because only 20 (out of 220) PSW projects have closed to date, and none have been independently evaluated or validated by IEG, the evaluation draws on a mix of ex ante and (when available) ex post evidence based on case studies, portfolio supervision documents, and interviews. Our analysis of development outcomes is limited to intermediate outcomes. For example, we have assessed the PSW’s impact on IFC’s and MIGA’s ability to enter new markets and sectors, expand their presence in existing markets, and mobilize third-party capital. We were, however, unable to assess the development outcomes and impacts of the PSW projects (such as jobs created or incomes increased), which limited the scope of the analysis. The country case studies conducted for the evaluation covered 35 projects. We triangulated their findings with other evidence so we could generalize some of them to the entire portfolio.

Evaluation Findings

The findings addressing the first evaluation question center on creating the conditions for PSW usage and market development. The analysis focused on PSW usage across the three IDA cycles, its ability to address constraints on private sector investment, and its potential to contribute to market development.

After a slow start in IDA18, PSW usage accelerated in IDA19 and IDA20. PSW funds were underused in IDA18 (with only 53 percent of the initial $2.5 billion allocation used) but almost entirely used in IDA19 (97 percent of the $1.68 billion allocation) and are on course for full use in IDA20 (36 percent used to date of the $2.5 billion allocation). Uptake of IDA funds, measured as the percentage of the allocation approved in the first year of the IDA cycle, has also been quicker in IDA19 and IDA20 (33 percent and 36 percent, respectively) compared with IDA18 (6 percent). Usage has varied by each of the four PSW facilities. Across all three IDA cycles, the BFF has been the most used, whereas the Risk Mitigation Facility has been the least used. The allocations for these two facilities were significantly adjusted between IDA replenishment cycles, with the BFF allocation growing from $600 million in IDA18 to a range of $1.2 billion–$1.4 billion in IDA20 and the Risk Mitigation Facility decreasing from $1 billion in IDA18 to a range of $150 million–$300 million in IDA20. Usage of the Local Currency Facility was below its $400 million allocation in IDA18 but increased beyond its allocation in IDA19 and is on course for overutilizing its $500 million–$650 million allocation for IDA20. Usage of the MIGA Guarantee Facility (which had an allocation of $500 million in each IDA cycle) has been relatively stable across all three IDA cycles, with an increase in IDA20.

PSW-supported IFC and MIGA projects aim to address a variety of constraints that inhibit private investment in PSW-eligible countries. These include limited long-term finance, the absence of local currency financing, market disruptions as a result of exogenous factors (such as the trade collapse and increases in input prices during the COVID-19 pandemic and the energy crisis), and barriers to private investment because of poor business environment (high political risks, difficult macroeconomic conditions, and limited legal rights).

Our case study evidence indicates that PSW projects expect to address more investment constraints than non-PSW projects in PSW-eligible countries. All PSW projects aimed to address one or more of the four aforementioned constraints. In contrast, most non-PSW projects in PSW-eligible countries focused on a lack of long-term finance, whereas a few aimed to address disruptions as a result of exogenous factors. Hardly any aimed to tackle local currency financing, and none aimed to mitigate risks arising from an unfavorable business environment. PSW projects addressed constraints on private investment through various instruments. These included, for example, first-time issuance of bonds in local currencies (Cambodia and Tanzania) to provide access to finance to priority target groups (such as women and rural farmers) and to help establish a benchmark for pricing, structure, and public disclosure of future bond issuance. They also included BFF pooled first-loss guarantees supporting IFC Working Capital Solutions Crisis Response Facilities (Cambodia, Nigeria, and Tanzania). PSW pooled first-loss guarantees and the PSW Local Currency Facility were also deployed to support Base of the Pyramid platform projects in several countries. The Base of the Pyramid platform provided liquidity to private companies in PSW-eligible countries to counter market disruptions caused by the COVID-19 pandemic. MIGA has addressed unfavorable business environments by providing insurance to private investors against political, macroeconomic, regulatory, and transactional risks, notably to develop the solar power sector in Burkina Faso.

The PSW has enabled IFC and MIGA to increase their investments in various countries, enter new countries, and contribute to mitigating the effects of recent crises. One intermediary outcome of the PSW is that it has steadily increased its country coverage from 8 countries in 2018 to 39 countries in 2023; however, several small economies remain uncovered. Our statistical analysis confirms that the PSW has allowed IFC to commit on a larger scale in eligible countries than it might otherwise have and that the PSW has been used to mitigate the effects of recent crises. In PSW-eligible countries overall, IFC average annual commitments were lower in the six years after PSW launch than in the six years before PSW launch, but they dropped by a significantly smaller margin in countries that received PSW support than in PSW-eligible countries that did not receive PSW support. IFC commitment volumes in countries with PSW projects were highest at the onset of the COVID-19 crisis in FY20, with most projects providing short-term financing to “keep the private sector going.”

PSW support has also enabled IFC and MIGA to enter new sectors in PSW-eligible countries. A growing number of PSW-supported projects were committed in sectors these institutions had never invested in. Examples of these projects include private equity investment in Ethiopian SMEs and infrastructure lending to a subnational government in Nigeria. Examples of MIGA guarantees in new sectors include mobile money projects (Chad, the Democratic Republic of Congo, and Niger), hydropower projects (Nepal and the Solomon Islands), and solar power projects (Burkina Faso and Malawi).

IFC uses PSW funds to finance the riskiest clients and projects. We compared the credit ratings by commitment volume for a sample of IFC PSW projects with those of non-PSW projects committed in the same sectors of the same countries. We found that, compared with non-PSW projects, PSW projects have significantly more commitments in the riskiest credit-rating categories.

PSW mobilizes third-party capital in transactions that investors might otherwise have refrained from. Each US dollar of PSW funds committed since inception in FY18 has blended $2.7 of additional capital from IFC and MIGA’s own account and mobilized an additional $2.0 from third-party public and private sources. By mobilizing capital into projects perceived as unviable, PSW helps the market generate information about the viability (or otherwise) of these transactions.

The findings addressing the second evaluation question center on whether concessionality has enabled PSW projects to occur and whether, along with financial and nonfinancial additionality, it has created the conditions for market development. We look at concessionality for both IFC and MIGA and at financial and nonfinancial additionality for IFC only because MIGA does not track and measure these features in its projects.

We find that concessionality enables PSW projects to materialize—without the IDA PSW, IFC and MIGA could not execute high-risk transactions in PSW-eligible countries because their cost of risk would make their pricing uneconomical for local borrowers. The level of concessionality provided by IDA PSW is estimated based on the difference between (i) a “reference price” (either a market price, if available, or the price calculated using IFC’s pricing model) and (ii) the “concessional price” being charged by the IDA PSW. Our estimates indicate that the pricing of IFC and MIGA transactions without IDA PSW would be 5–30 percentage points higher (depending on the client and country) than without IDA PSW. The fact that concessionality is an enabling condition for PSW transactions was confirmed by evidence from case studies and interviews in which staff, clients, and experts indicated that operating without concessionality may still allow IFC and MIGA to provide financing to the higher-rated enterprises in PSW-eligible countries but would allow them to work only with a limited number of the target groups they need to reach (for example, microfinance companies, high-risk manufacturing firms, and banks providing services to women and SMEs).

IFC and MIGA follow the minimum concessionality principle. On the basis of a review of pricing and project documents and interviews with clients and staff, we find that IDA does not provide more than the minimum concessionality that is necessary to induce the intended investment (thus, they meet the minimum concessionality principle) and that IFC and MIGA do not distort markets, where they exist, because of IDA concessionality. IFC, MIGA, and IDA follow a rigorous process to approve the concessionality for each project or portfolio. IFC and MIGA use their pricing model to calculate and document prices, consistently comparing them with market prices. In several cases, clients pointed out that IFC prices were higher than those of competitors. In cases where there are no market prices for comparison, as in most MIGA guarantees, IFC or MIGA pricing models are used to establish pricing benchmarks to calculate concessionality. This process is documented with clear approvals from investment teams and the Blended Finance Units, which include IDA participation.

IDA capital is underleveraged. Currently, IDA sets aside capital assuming that all PSW obligations would result in full losses—a $1.2 billion nominal outstanding amount for 2023. This assumption is unlikely to materialize, considering that, after six years of operations, total payouts under IDA PSW guarantees have been only $1 million. The very low payout rate indicates the potential to leverage PSW capital more, allowing IDA, IFC, and MIGA to extend more support to PSW-eligible countries.

To optimize leverage, IDA, IFC, and MIGA would benefit from better modeling the risks of the PSW facilities based on historical data. Without appropriate modeling of the risks, IDA, IFC, and MIGA are unlikely to leverage the PSW resources optimally. Modeling of the PSW portfolio could be based on the track record default data of the past six years and other proxy sources of data for similar risk profile portfolios under different stress scenarios. Modeling would require (among other things) analyzing the potential unexpected loss for each PSW facility and various instruments used under each facility. IFC and MIGA routinely conduct this type of modeling on their overall portfolios, which could be used as a reference to model the PSW portfolio.

The Bank Group does not currently produce financial management reports that calculate the profits and losses of the PSW for IDA, IFC, and MIGA. Reporting on the PSW is currently fragmented, with no single unit having a full view of the financial costs and benefits of the PSW operations. Both management and the Board would benefit from periodic reports on the profitability and losses of PSW operations for IDA, IFC, and MIGA overall and for its facilities and instruments. These reports would allow management and the Board to understand, for example, to what extent risks move between IFC or MIGA and IDA.

Nearly three-quarters of PSW projects anticipate a combination of financial and nonfinancial additionality, but PSW projects underuse nonfinancial additionalities. This percentage is similar to that of the non-PSW portfolio in PSW-eligible countries (70 percent) and slightly below that of the IFC portfolio in middle-income countries, which anticipated both financial and nonfinancial additionality for 82 percent of investment projects. Financial additionality is the unique support that IFC brings to a client based on the features of the financial package offered by IFC. Financing structure, particularly long-term financing and local currency financing, is the most common form of financing additionality, and its incidence is similar across PSW and non-PSW portfolios. Financing innovation is particularly high in PSW projects. It refers, for example, to using flexible financing structures (such as risk-sharing facilities in local currency that provide short- and long-term loans) to reach important target groups, such as women-owned SMEs and climate-smart firms. Nonfinancial additionality is the unique support that IFC brings to a client by deploying knowledge and standards. IFC PSW projects underuse nonfinancial additionalities, including standard setting, noncommercial risk mitigation, catalyzing policy or regulatory changes, and (to a lesser extent) knowledge and capacity building.

Recommendations

The evaluation provides the following two recommendations aimed at better leveraging the PSW and, in turn, improving IFC’s and MIGA’s contributions to creating the conditions for market development.

1. IDA, IFC, and MIGA would benefit from enhanced modeling of the risks taken by the PSW. The modeling could consider scenarios with various allocations of IDA capital to PSW facilities, instruments, and levels of concessionality. Analyzing the usage of pooled first-loss guarantees and assessing the impact of reducing first-loss coverage may, for example, suggest ways to better deploy IDA capital without increasing IDA losses in the future.
2. IDA, IFC, and MIGA should assess and report the financial results of the PSW to Bank Group management and the Board. IDA, IFC, and MIGA should develop annual financial management reports that show their profits and losses for PSW activities—per agency, per facility, and by instrument—so that the effects of risk transfers among the three agencies can be clearly tracked. This reporting can be tied into IFC’s and MIGA’s existing risk reporting systems that cover all projects.