Conclusions

The usage of PSW funds has increased over the IDA cycles, and allocations to the PSW facilities have been adjusted based on usage. 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). The uptake of IDA funds has also accelerated in IDA19 and IDA20. Usage has been strongest for the BFF and weakest for RMF. In each IDA cycle, allocations to PSW facilities have been adjusted based on use in the previous cycles.

PSW projects address a variety of challenges to private sector investment and have enabled IFC and MIGA to increase their engagements and mobilize capital. The constraints on private sector investment addressed by PSW projects include lack of long-term finance and local currency financing; disruptions as a result of exogenous factors, such as the COVID-19 pandemic and the energy and food crises; and unfavorable business environments because of macroeconomic instability, political risks, and inadequate regulatory and legal frameworks. The PSW has enabled IFC and MIGA to increase their investments in countries and sectors in which they were already active and to enter new ones. Statistical evidence indicates that the scale-up would not have happened without PSW funds and that the PSW mitigated the effects of the COVID-19 crisis on IFC and MIGA’s financing in eligible countries. PSW projects mobilized third-party private and public capital, helping the market generate information about the viability of transactions.

Concessionality enabled PSW projects to materialize, and the IDA PSW meets the minimum concessionality principle. Without the IDA PSW, IFC and MIGA could not execute high-risk projects in PSW-eligible countries because their cost of risk would make their pricing uneconomical for local borrowers. The IDA PSW does not provide more than the minimum concessionality necessary to induce the intended investment; thus, it meets the minimum concessionality principle and does not distort markets.

IDA capital is underleveraged. All PSW exposures are 100 percent covered by IDA capital—a $1.2 billion nominal outstanding amount for 2023. The implied assumption about risk is unlikely to materialize, considering that total payouts under IDA PSW guarantees have been only $1 million after six years of operations.

Nearly three-quarters of PSW projects anticipate a combination of financial and nonfinancial additionalities, but PSW projects underuse nonfinancial additionalities. This percentage is similar to that of the non-PSW portfolio in PSW-eligible countries (70 percent). Financing structure, particularly long-term and local currency financing, is the most common form of anticipated financial additionality in PSW projects. Financing innovation is also high. In the PSW portfolio, financing innovation 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 women-owned SMEs and climate-smart firms. We find that 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 PFLGs 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.

Issues for Further Consideration

This evaluation uncovered several areas that IDA, IFC, and MIGA or IEG could consider in their future assessments. This IEG interim assessment is focused on specific aspects of the IDA PSW, and it was produced under a tight timeline to inform the December 2023 IDA midterm discussions. Although this evaluation broadened and deepened the analysis conducted in IEG’s FY21 PSW early-stage assessment, it also uncovered several aspects that could be further explored in the future to exploit the full potential of the PSW to develop markets in PSW-eligible countries and to identify lessons that could be useful for blended finance interventions at large. Some of these topics include the following: (i) assessing the optimal size of the PSW, including the optimal allocation of IDA funds between public sector and PSW interventions and the optimal allocation to each PSW facility and to various instruments supported by the PSW; (ii) assessing the costs and benefits and the feasibility of extending the PSW concessions to IFC and MIGA final clients with a view to increasing capital mobilization; (iii) assessing whether the PSW has contributed to helping IFC and MIGA develop markets and achieve broad development outcomes, including an analysis of the outcomes of the various facilities and of different types of IFC and MIGA instruments (this can be done only after several PSW projects have been completed and validated) and an analysis of PSW use versus private capital mobilized over time; and (iv) assessing the use and market development effects of the PSW transactions in specific sectors, including the effectiveness of sector-level strategic approaches, and whether investment, advisory, policy support, and concessional financing have been coupled together effectively to build markets in these sectors.