IFC ROAD MAP FY Maximizing Impact, Unlocking Our Potential INTERNATIONAL FINANCE CORPORATION

IFC ROAD MAP FY11-13 Maximizing Impact, Unlocking Our Potential INTERNATIONAL FINANCE CORPORATION Released in accordance with IFC s Policy on Disclosure of Information following discussion by IFC s Board on April 8, 2010

IFC S VISION That people should have the opportunity to escape poverty and to improve their lives IFC S VALUES Excellence, commitment, integrity and teamwork IFC S PURPOSE To create opportunity for people to escape poverty and improve their lives by: Promoting open and competitive markets in developing countries Supporting companies and other private sector partners where there is a gap Helping to generate productive jobs and deliver essential services to the underserved Catalyzing and mobilizing other sources of finance for private enterprise development In order to achieve its Purpose, IFC offers development impact solutions through: firm-level interventions (direct investments, advisory services and the Asset Management Company); standardsetting; and business enabling environment work.

TABLE OF CONTENTS Executive Summary... 1 I. Setting the Scene... 3 II. External Environment and Demand for IFC Services... 3 The Global Economic Environment... 3 Outlook and Emerging Challenges... 4 Outlook... 4 Emerging Challenges... 5 Global Development Challenges in the New Normal... 9 Demand for IFC Services... 11 III. A Strong Foundation for Realizing our Potential... 13 IFC s Comparative Advantage... 13 Highlights of FY09 Development Impact and Program Achievements... 16 Highlights of Progress on the Five Pillars... 20 Increased World Bank Group Cooperation... 23 Crisis Response... 25 Mobilization and Partnerships... 25 Progress on Efficiency and Effectiveness... 26 Sustainable Business Model... 28 Strategic Communications... 30 IV. Maximizing Impact, Unlocking Our Potential... 31 Development Impact... 31 Sustainable Business Model... 36 Program... 37 V. IFC 2013... 40 Building on Vision 2010... 40 IFC 2013 Diagnostic and Improvement Opportunities... 40 IFC 2013 Recommendations... 42 New Performance Management Approach... 43 Organization and Role Changes... 44 Global Industry Leadership... 44 Regional Client Service Groups and Operations Centers... 46 Risk Management... 48 Expected Productivity Improvement... 48 Other Benefits... 49 Conclusion and Next Steps... 49 VI. Conclusion... 51 Annex 1. Regional Strategies... 52 Sub-Saharan Africa... 52 Middle East and North Africa... 55 South Asia... 57 East Asia and Pacific... 59 Latin America and the Caribbean... 62 Europe and Central Asia... 65 Annex 2. WBG Response to the Crisis: IFC-Led Initiatives for the Private Sector... 68 Annex 3. IFC Corporate Scorecard... 74 Box 1. Innovation and Opening Markets... 15 Box 2. Doing Business... 15 Box 3. IFC s Five Pillars... 16 Box 4. IEG-IFC Evaluation Findings: Informing IFC s Strategic Directions... 19 Box 5. IFC/MIGA Cooperation... 24 Box 6. IFC Development Goals: Illustration of Work in Progress... 32 Box 7: Indonesia and Brazil Country Strategies... 35 Box 8. IFC 2013 Improvement Opportunities... 41

Box 9. IFC 2013 Timeline (June 2009 March 2010)... 42 Box 10. Global Leadership in Microfinance... 45 Box 11. Opportunities for Leadership in Water... 46 Box 12. IFC 2013 Key Milestones... 50 Box 13. Pacific Islands Special Initiative... 61 Box 14: Latin America and Caribbean and Special Initiatives... 64 Box 15: Central Asia and Azerbaijan Special Initiative... 67 Table 1. GDP Growth by Region...6 Table 2. Summary of Key Development Impact Indicators from Corporate Scorecard... 17 Table 3. Highlights of the Development Reach of IFC s Portfolio Clients... 18 Table 4. Selected Reach Results for IFC s Advisory Service Activities, FY06-09... 18 Table 5. Commitments in the Frontier... 21 Table 6. FY11-13 Advisory Service Program Projections... 39 Figure 1. Unemployment Rates (%)...5 Figure 2. Real GDP Growth (PPP weighted YoY)...7 Figure 3. Monthly International Bond and Loan Issuance by Developing Country Group...8 Figure 4: Financing Needs in IDA Countries...9 Figure 5: Debt Flows in IDA Countries...9 Figure 6. IFI Private Sector Volumes... 12 Figure 7. IFC IDA Investments... 21 Figure 8. Vision 2010 Objectives and Impact... 40 Figure 9. IFC 2013 Survey Results... 41 Figure 10. Performance Objectives... 43 Figure 11. Role of Global Industry Groups vs. Regional Client Service Groups... 44 Figure 12. Possible Evolution of Operations Centers... 47 Figure 13. Organizational Structure of an Operations Center... 47 Figure 14. Impact on Productivity of the New Operating Model: Investment Operations... 49 Figure 15. Current Productivity Levels: Investment Operations... 49 Figure 16. Productivity Improvements: Investment Operations... 50

1 EXECUTIVE SUMMARY External Environment. Since the discussion of last year s Road Map, the external environment is slowly recovering. While the consensus is that the worst of the crisis is behind us, the ongoing global economic recovery remains fragile. The most likely recovery scenario, and the basis for this paper, is a slow and uneven recovery, with growth led by developing countries. The crisis set back the fight against poverty and made development challenges even more formidable. The demand for the private sector as the main engine of growth and job creation, and as provider of innovative solutions to development challenges, has never been greater. The demand for IFC s services has never been greater. Track Record and Achievements. IFC is well positioned to respond to this tremendous opportunity for the delivery of more private sector-led development impact. As part of the World Bank Group (WBG), we share the comparative advantages of presence, knowledge, finance, leadership in global public goods, and convening power. In addition, we have a proven track record as the world s preeminent development institution focused exclusively on the private sector. IFC s clients and programs are delivering development impact, and IFC is a leader in measuring and reporting on its development results. IFC s IDA project count in FY09 already met the FY11 objective of 50% of overall commitments, and growth in Sub-Saharan Africa since FY08 reached 32%. Despite the crisis, 71% of IFC s investment operations had high development outcomes in FY09, its portfolio showed increases in most areas of development reach, and its investment commitments, including mobilization, totaled $14.5 billion, despite many pipeline projects not reaching commitment as a result of the crisis. IFC s advisory program grew strongly between FY06 and FY09, has been delivering solid results, and following a period of consolidation is set to resume measured growth. IFC also achieved a small operational profit and remains financially sustainable. In partnership with other IFIs and governments, IFC was responsive to the crisis-related needs of the private sector through initiatives restoring liquidity and trade, rebuilding financial and physical infrastructure, managing troubled assets, and alleviating specific regional difficulties. We launched the IFC Asset Management Company LLC (AMC) and actively pursued mobilization and partnership development. We have further increased cooperation within the World Bank Group: in addition to the crisis response, in areas such as strategy, policies and systems and projects, and by the creation of a joint IFC-MIGA unit to help grow MIGA s operations. IFC continues to make progress in improving its delivery model, including through accelerating decentralization. Unlocking our Potential. However, IFC has significant potential to do even more, and do so even better. To seize this opportunity, IFC will work at both the strategic and operational levels. IFC has now launched the IFC 2013 initiative to enhance its ability to realize greater development impact in a financially sustainable way, including through an improved delivery model. Building on our leadership in results measurement, IFC is now taking on the next challenge, and is starting work to define a set of high level ex ante development goals to guide strategy development, with measurable indicators of progress. IFC will also maintain a sustainable business model to position itself for the long-term sustainable delivery of development impact. An important aspect of this business model will be the increasing significance of mobilization, through both traditional and more innovative mechanisms, such as the AMC. The ability to crowd in finance for the private sector will expand the development impact of IFC s activities, bringing finance to countries and companies which might otherwise not have such access. In order to achieve these ambitions, IFC will be moving to the next level of client service, taking full advantage of its global nature in a fully decentralized organization, including bringing a critical mass of support skills to the same time zone as clients, and strengthening IFC s global industry leadership. This is part of the Corporation s IFC 2013 initiative, which is expected to lead to significant improvements in client service, efficiency and effectiveness, with the goal of delivering greater development impact in a financially sustainable manner.

2 Maximizing Impact. IFC s strategy, through investments, advisory services and the AMC, aims to respond to clients great needs in a focused manner, prioritizing activities where development impact and additionality would be greatest. We also plan to further expand development impact through mobilization and partnerships. IFC s strategy is a critical part of the World Bank Group s efforts in the five priority areas as set out in the WBG s Post-Crisis Directions Paper (PCD), namely targeting the poor and the vulnerable, creating opportunities for growth, promoting global collective action, strengthening governance and managing risks and preparing for crises. IFC s activities will address the great development challenges of the post-crisis new normal external environment. To address poverty, unemployment and the needs in fragile and conflict-affected states, IFC would continue with its geographic focus on IDA countries, frontier markets, Fragile Situations and Africa, and more broadly focus on the needs of those living at the base of the pyramid and of micro, small and medium enterprises. Climate change is a focus area for all regions, for both investments and advisory services. We will help address food security by supporting an effective and sustainable agribusiness value chain, from farm to consumer. Through investments and advisory services in physical and social infrastructure and water, IFC will address the challenges and opportunities brought about by population growth and increasing urbanization. In middle income countries, where 70% of the world s poor live, IFC will continue to engage in a focused manner, thereby also laying the foundation for more prosperity and stability for poorer surrounding countries in an age of regional and sub-regional dependencies. Conclusion. In a world slowly recovering from a crisis, the demand for private-sector-led solutions is tremendous, and the demand for IFC s services has never been greater. IFC is well positioned to respond to the demand through its investments, advisory services and the AMC, while building on its comparative advantage as a member of the WBG, its track record as a leader in private sector development in developing countries, its innovative and successful response to the global economic crisis, and its development impact achievements prior to and despite the crisis. IFC will maximize impact through a focused approach, prioritizing activities where development impact and additionality would be greatest, and further expanding development impact through mobilization as part of its new business model and partnerships. IFC s strategy will be a critical part of the WBG s efforts in the five priority areas as set out in the WBG s PCD, as it works towards the WBG goal of inclusive and sustainable globalization. IFC will start unlocking its potential to deliver much more development impact by setting measurable ex ante development goals, maintaining a sustainable business model, and further simplifying processes and the way we work.

3 I. SETTING THE SCENE 1.1 In the wake of the global economic crisis, demand for private-sector-led development, and for IFC s services in particular, has never been greater. This offers an historic opportunity for IFC to live its Vision that people should have the opportunity to escape poverty and to improve their lives - even more boldly, and deliver even more development impact while remaining financially sustainable. 1.2 This Road Map, in four parts, describes IFC s strategy which aims to seize the opportunities for private-sector-led development in the post-crisis world. The first part discusses the external environment and its impact on developing countries, and the resulting demand for IFC services; the second reflects on IFC s strong track record and achievements in both investments and advisory services; the third describes IFC s proposed fiscal year (FY) 11-13 strategy; and the fourth describes the steps IFC is taking to unlock its potential to do more through its IFC 2013 initiative. Annex 1 to this paper contains an overview of IFC s regional strategies, Annex 2 provides an update on IFC-led private sector initiatives, especially in response to the crisis, and Annex 3 contains the full IFC Corporate Scorecard. 1.3 As was the case last year, the Road Map is accompanied by a Background Paper which provides a more detailed progress update on IFC s achievements in its Five Pillars. II. EXTERNAL ENVIRONMENT AND DEMAND FOR IFC SERVICES 2.1 In response to the deepest global recession since the Great Depression, governments stabilized financial markets with exceptional monetary and quantitative easing, liquidity injections and fiscal stimulus, and the world is slowly coming out of the crisis. Markets believe that the worst part of the crisis is over. However, the ongoing global economic recovery remains fragile, and the fallout from the crisis is expected to change the landscape for several years to come. 2.2 The most likely recovery scenario, and the basis for this paper, is a slow and uneven recovery, with growth led by developing countries. However, considerable uncertainty remains, and both a downside and upside scenario cannot be ruled out. 2.3 The crisis set back the fight against poverty and made development challenges more pressing and formidable. These global challenges in the new normal include unemployment and underemployment, climate change, food security, urbanization, water and the potential for conflict. 2.4 The demand for private sector-led development has never been greater. Despite a return to positive growth, it is expected to take several years before economies recoup the losses already suffered. Within an environment of reduced financing flows to developing countries and budget constraints, governments are struggling to address these enormous challenges. 2.5 The demand for IFC s services has never been greater. The private sector itself faces a financing gap that is likely to persist for years, and the investment climate and gaps in local private sector know-how in most developing countries continue to constrain the potential for sustainable private-sector-led solutions. Other IFIs are stepping up activity, but the response falls far short of meeting the need. THE GLOBAL ECONOMIC ENVIRONMENT 2.6 Since early 2001, the global economy had benefited from abundant liquidity and low interest rates. With traditional goods inflation contained, asset values rose on the back of investors search for yield. Securitization entered into high gear with housing and consumer debt being pooled on a large scale. When interest rates started to rise in 2004, the sustainability of previous investments was slowly tested and cracks started showing in the US housing market as early as 2006. On the back of declining housing prices, as well as from headwinds coming from high food prices and volatile energy quotes, investors started paring back on

4 riskier assets with unprecedented speed. The market dislocations that ensued culminated in the first global recession since the Great Depression. 2.7 Governments stabilized financial markets with exceptional monetary and quantitative easing, liquidity injections and fiscal stimulus. The world is slowly coming out of this crisis, but global growth will remain below potential for some time. Markets believe that the worst part of the crisis is over as both consumer and business confidence has bounced back and industrial production has firmed on the back of a rebuilding of depleted inventories. 2.8 Developed economies are feeling the brunt of the adjustment and are expected to grow below potential for an extended period of time. Developing countries are faring much better as these were not exposed directly to the financial excesses. Trade with developing countries was hit but their local economies remained resilient fueling growth and attracting capital from developed nations. 2.9 A quick return to strong growth (in developed countries) is hampered by high unemployment, tight bank lending, weak consumer spending and low business investment. The financial sector is still fragile as balance sheets get repaired and additional strains loom in the horizon (consumer debt and commercial real estate). Concerns over fiscal sustainability have emerged as countries have traded external for fiscal imbalances as governments spend to spur growth. As deleveraging of the private sector continues, high unemployment and poverty ensue in both developed and developing countries. OUTLOOK AND EMERGING CHALLENGES Outlook 2.10 Base Case: Fragile Global Economic Recovery. The recovery of the global economy remains fragile and will likely slow down in the second half of 2010 as the effect of the several stimulus measures implemented at the outset of the crisis start to wane and the inventory restocking process stops. After contracting 2.2% in 2009, the world economy is expected to expand 2.7% in 2010 and 3.2% in 2011 1. 2.11 Downside Scenario. The global economic crisis exposed the fragility of the economic conditions both in developed and developing countries. A more pronounced slowdown in the second half of 2010 and in 2011 cannot be ruled out and will depend on the strength of household and business spending. As the massive monetary and fiscal government stimulus is partially withdrawn in 2010, the private sector must pick up the slack for the economic recovery to endure. With weak consumer and business spending, high unemployment and tight bank credit, the private sector may not fully offset the government withdrawal and economic growth could weaken again. The market wonders what could be the likely timing for the removal of generous monetary and fiscal policies tighten too early and kill the recovery, tighten too late and potentially risk inflation. Also, as liquidity is removed, business models that rely on loose and readily available money may be tested, and negatively affect investor confidence and growth. 2.12 Upside Scenario. Faster than expected growth in some leading developing countries, such as China and India, but also Brazil or Indonesia, may drive higher growth globally and help restore some confidence in developed countries. Household savings in the US and other developed countries may decline faster than expected and investment and business confidence may pick up mildly due to continued low interest rates. However, unemployment will remain high for some time in developed countries even in an upside scenario. In any case, the engine of any upside scenario is likely to be found in stronger performance in developing countries. 1 The World Bank, Global Economic Prospects 2010. Figures in this section are from Global Economic Prospects 2010, unless otherwise noted.

5 Emerging Challenges 2.13 Large External imbalances. The global crisis has led to a substantial narrowing of global external imbalances, with substantial declines in the US trade and current account deficits as well as the Chinese trade surplus. In the new normal, there seems to be a shift from large external imbalances towards large fiscal imbalances, especially in developed countries as a result of fiscal stimulus in the form of large countercyclical policies and rescue packages. 2.14 Concerns of Fiscal Sustainability in Developed Countries. In some countries, corporate deleveraging has been more than offset by government borrowing to levels well exceeding 100% of GDP (i.e.: Greece, Italy, Japan). Such high levels of debt raise concerns regarding the sustainability of public finances should spending and deficits remain unabated. Also, the prospect of high indebtedness may preclude governments from stimulating the economies at a future date should they be required to do so. 2.15 Weak Recovery in Developed Countries. The recovery of developed countries will be weak and led by the US and non-oecd countries. After an almost flat 2008 and a GDP contraction of 3.3% in 2009, developed countries are expected to grow 1.8% in 2010 and 2.3% in 2011. While the US is expected to grow on average 2.6% in 2010-11 (more than in 2007, when it grew 2.1%), both Japan and the Euro Area will show growth rates well below the group s average and below the pre-crisis 2007 rates between 1 and 1.8%. 2.16 A Jobless Recovery. The recovery expected in developed countries will not be enough to create the jobs lost during the crisis. A jobless recovery could be the norm for 2010-11, with high-income countries growing with unemployment rates much higher than before the crisis. Unemployment rates almost doubled in the US to 10%, and average 10% in Euro countries, with Spain getting closer to the 20% mark. Such jobless recovery creates further pressure on consumer spending, thereby reducing the much needed private demand for a more robust economic recovery. Although consumer confidence in the US, Germany and Japan rebounded in January 2010, it remains low by historical standards. Most developing countries are also showing substantially higher unemployment (Figure 1). FIGURE 1. UNEMPLOYMENT RATES (%) 12 10 8 6 4 2 2007 2008 2009 2010 0 Source: Economist Intelligence Unit 2.17 Large Fiscal Deficits, Constrained Credit and Depressed Spending. As developed countries underwent rapid fiscal and monetary expansion to offset private sector contraction, the question on fiscal sustainability has emerged as a new concern for developed countries. This takes place at a moment when the private sector is retrenching. Despite the banking sector s high liquidity, lending volumes remain depressed with small and medium enterprises (SMEs) still having limited access to capital. The private sector is also deleveraging and saving as evidenced by: (i) the rapid contraction both in consumer and

6 commercial/industrial lending; and (ii) increased consumer savings (personal savings rate in the United States jumped from around 2% in 2008 to around 5% in late 2009) and depressed business spending as companies run low levels of inventories to keep high levels of liquidity on hand. As a result, anemic consumer and business spending contribute to the sluggish recovery. 2.18 Crisis Hit Developing Countries in 2009; Strong Recovery in 2010-11, but still Below Pre-Crisis Levels. Developing countries were hit by the global crisis through a sharp slowdown in private capital inflows, a sharp reduction in investment demand, falling commodity prices, and declining export demand. GDP growth in developing countries decelerated drastically from 8.1% in 2007 to only 1.2% in 2009 excluding China and India, developing countries contracted 2.2% in 2009. Europe and Central Asia and Latin American and the Caribbean contracted in 2009, with a significant decline in GDP growth observed also in Sub-Saharan Africa. Even the regions with positive growth in 2009 saw their growth rates almost cut in half with respect to 2007, the last year before the crisis (Table 1). GDP growth rates in Europe and Central Asia for 2009 were more than 10% lower than in 2008 and more than 13% below the pre-crisis 2007 levels. The perspective for 2010-11 is significantly better, with a strong rebound, but growth rates will remain significantly below the pre-crisis levels some countries will still record negative growth rates for one or more quarters. TABLE 1. GDP GROWTH BY REGION Real GDP Growth by Region (%) Change in GDP Growth Region 2007 2008 2009 2010 2011 2009-2008 2009-2007 Developing Countries 8.1 5.6 1.2 5.2 5.8-4.4-6.9 Developing Countries (ex-china and India) 6.2 4.3-2.2 3.3 4-6.5-8.4 Europe and Central Asia 7.1 4.2-6.2 2.7 3.6-10.4-13.3 Latin America and the Caribbean 5.5 3.9-2.6 3.1 3.6-6.5-8.1 Sub-Saharan Africa 6.5 5.1 1.1 3.8 4.6-4 -5.4 Middle East and North Africa 5.9 4.3 2.9 3.7 4.4-1.4-3 East Asia and Pacific 11.4 8 6.8 8.1 8.2-1.2-4.6 South Asia 8.5 5.7 5.7 6.9 7.4 0-2.8 Source: Global Economic Prospects 2010, The World Bank 2.19 Uneven Growth. As seen in Table 1 above, there will be significant differences among regions within developing countries, with GDP growth being driven in 2010-11 by East Asia and Pacific and South Asia (with growth rates of 7-8% in 2010-11), and with Europe and Central Asia and Latin America and the Caribbean as the main laggards, with an average growth of only about 3% in 2010-11, well below their precrisis growth rates. The difference in growth is more prominent for different income groups: the BRICT 2 countries are leading the developing countries growth, while growth rates are more moderate for poorer countries (Figure 2). 2.20 Trade Will Remain Depressed, and Impact on Employment. After a collapse in 2009, world trade is expected to pick up gradually, but will not be able to recover to the levels observed in 2008 in the immediate future. The volume of world trade declined 14.4% in 2009, and by 2011 is projected to remain depressed and around 5% below 2008 levels. To illustrate the severity of the impact of crisis on business and trade, more than 70% of firms in Eastern Europe say the main effect of the crisis is a drop in demand for their products or services 3. The decreased level of global demand not only reduces trade but is also disruptive to employment, particularly in countries with large export-oriented industries. While some laid-off urban 2 Brazil, Russia, India, China, and Turkey 3 The World Bank, the Financial Crisis Survey.

7 workers who had migrated have returned to rural communities, others have remained in urban areas looking for new jobs or entering into the informal sector. FIGURE 2. REAL GDP GROWTH (PPP WEIGHTED YOY) 10.0 8.0 6.0 4.0 2.0 0.0-2.0-4.0 EM's EM's ex-brict Developed Countries Source: IFC Calculations based on World Economic Outlook 2009, IMF 2.21 Risk of a Bubble in Developing Countries in the Medium Term? Loose monetary policy in developed countries is creating carry trade opportunities, contributing to the resurgence of capital flows into larger and high-growth developing countries. The risk of asset price bubbles is prominent in some of the larger developing countries as investors direct their investments in both financial and real assets to take advantage of the very favorable growth differentials. Over time, such strong capital flows can contribute to appreciating currencies, rising financial assets and strong credit growth at the expense of smaller countries where capital is more desperately needed. 2.22 Weaker Than Needed Capital Flows Especially in Smaller Countries. Net private capital flows to developing countries in 2009 are estimated to have fallen by $795 billion from 2007 and are projected at only $517 billion in 2010, or 3.2% of GDP. The low levels of capital flows affect low-income countries in particular since their already small share of total capital flows in 2007 almost vanishes in 2010. Although developing countries have regained access to international markets after the crisis, with sovereign borrowing generally on track and corporate borrowing picking up in the second part of 2009, higher-risk corporate borrowers are facing higher costs and more difficult access to the markets (Figure 3). 2.23 Depressed Bank Lending. International bank lending remains weak and will continue to be muted for some time as global banks continue to consolidate and deleverage in order to rebuild their balance sheets and face other problems (consumer debt and commercial real estate). Syndicated bank lending has declined strongly, in particular in the Europe and Central Asia region, where it fell from around $110 billion in 2008 to slightly over $30 billion in 2009. The collapse in syndicated loans has been more pronounced for low income countries where the local financial sector is unable to compensate for the lack of capital inflows. Although the capital flows to larger developing countries are expected to be robust, this in turn could create the pressure for a rapid asset price appreciation, as mentioned above. 2.24 FDI Subdued. FDI into developing countries has also fallen more than expected for a relatively more stable component of international capital flows. Despite a rebound in the second half of 2009, it has ended the year at $385 billion, significantly below the levels observed in 2008 at $436 billion. All components of FDI equity capital, reinvested earnings and other capital flows were affected by the downturn 4. For the private equity industry, 2009 has proven to be among the most difficult years for 4 UNCTAD, Global and Regional FDI Trends in 2009.

1-07 3-07 5-07 7-07 9-07 11-1-08 3-08 5-08 7-08 9-08 11-1-09 3-09 5-09 7-09 9-09 11-1-10 8 fundraising, with only $19 billion raised for 116 funds as of September 30, 2009 compared to $55 billion for 193 funds raised in the same period of 2008, proving a shrinking pool of capital 5. The outlook for 2010 onwards remains uncertain. FIGURE 3. MONTHLY INTERNATIONAL BOND AND LOAN ISSUANCE BY DEVELOPING COUNTRY GROUP US$ bn 160 140 120 100 80 60 40 20 0 Loan Sovereign Bond Corproate Bond Source: Dealogic 2.25 Remittance flows to developing countries are estimated to be less than expected in 2009, around $317 billion, down from $338 billion in 2008. The decline has not been bigger due mainly to strong remittances in South Asia and East Asia and Pacific. Remittances dropped more than expected in Latin America and the Middle East in 2009. However remittances are expected to have a weak and slow recovery in 2010 and 2011, especially if unemployment rates remain high. 2.26 Challenges in Meeting Financing Needs. Developing countries face the increasing challenge of meeting their tremendous financing needs with sharply lower capital inflows 6. Financing needs of developing countries have been calculated at $1.2 trillion in 2009 and $1.1 trillion in 2010. The largest needs are in Europe and Central Asia, around 14% of GDP ($447 billion), followed by Sub-Saharan Africa with 12% of GDP. Financing needs in East Asia and also in the Middle East and North Africa represent 8% of GDP, while they total 7% of GDP both in South Asia and in Latin America and the Caribbean ($280 billion in the LAC region). 2.27 Still High Financing Gap in 2010. Estimates from the World Bank place the total financing gap as high as $315 billion for developing countries, once private sector financing is added. Borrowing costs are expected to be higher and countries will also face credit rationing as less capital is available. The gap will need to be closed by a combination of factors such as a decline in imports or a narrowing of the trade deficit, official assistance (World Bank, IMF, other multilaterals), and international reserves the World Bank estimates that developing countries have already consumed $362 billion of their international reserves during the initial phases of the crisis. Some developing countries are likely to operate in a capital-constrained environment that negatively affects their growth. 2.28 IDA Financing Need Acute. Financing needs for IDA countries 7 have doubled with the crisis compared to the 2000-05 average (Figure 4). FDI and portfolio flows to IDA countries are expected to be $15 billion lower in 2010 than the peak in 2007-08, but debt flows are estimated to be $7-8 billion higher than in the 2007-08 period. The increase in debt flows is driven by a significant increase in official flows (IMF credit and officially guaranteed loans) that more than offset the decline in bank lending (Figure 5). This highlights once more the importance of financing by international financial institutions (IFIs) for IDA 5 Emerging Markets Private Equity Association, December 2009. 6 Financing needs are defined as current account deficit plus private foreign debt coming due. 7 Numbers for this paragraph and associated graphs have been prepared with a sample of 26 IDA countries using data from The Economist Intelligence Unit.

$ billions 9 countries in an environment when most countries have seen their access to international capital markets sharply reduced. 2.29 Due to the reduced availability of private capital flows for low income countries, these would have to rely further on official development assistance (ODA), which is already more than 50% of their total external financing. However, as developed countries fiscal pressure mounts, it is less likely that ODA will be increased, and it is also projected to be more volatile. Such pressure on ODA flows endangers the recent progress made in social and core infrastructure spending in these countries. 60 FIGURE 4: FINANCING NEEDS IN IDA COUNTRIES FIGURE 5: DEBT FLOWS IN IDA COUNTRIES 50 40 30 20 10 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: The Economist Intelligence Unit (both) GLOBAL DEVELOPMENT CHALLENGES IN THE NEW NORMAL 2.30 The crisis set back the fight against poverty and made development challenges more pressing and formidable. These global challenges in the new normal external environment include unemployment and underemployment, concerns about food security, climate change and water scarcity, and physical and social infrastructure needs brought on by population growth and increasing urbanization. 2.31 Progress in Poverty Reduction Jeopardized. The crisis set back the recent progress in poverty reduction. It is estimated that four billion people currently live at the base of the economic pyramid, both in IDA countries and middle income countries (MICs). 8 The World Bank 9 estimates that 64 million more people will be pushed into extreme poverty in 2010 as a result of the crisis. Record high food prices already pushed an estimated 160 to 200 million people into extreme poverty, and between 30,000 and 50,000 additional children are calculated to have died of malnutrition in 2009 due to the crisis. 2.32 The Bank estimates that an additional $35-50 billion in funding is required for IDA countries to maintain the current social program levels, without taking into account the additional funds required to meet the needs of those who entered into poverty as a result of the crisis. Going forward, the progress in poverty reduction is likely to be sporadic and concentrated in the high growth MICs. It will also be important to address gender issues in many countries in order to alleviate poverty more broadly. 2.33 Unemployment and Underemployment. A recent (January 2010) update of global unemployment scenarios by the International Labor Organization (ILO) 10 indicates that the number of unemployed in 2009 have risen by around 34 million since 2007, with the vast majority in developing countries. Global unemployment is calculated at around 212 million in 2009, of which almost 169 million are in developing 8 WRI/IFC, The Next 4 Billion: Market Size and Business Strategy at the Base of the Pyramid, 2007. 9 World Bank Global Economic Prospects, 2010. 10 International Labor Organization, Global Employment Trends, January 2010.

10 countries. The ILO estimates that the number of workers with vulnerable employment may have increased between 42-110 million in the 2008-09 period, interrupting the improving trends observed in the last decade. It is also estimated that an additional 215 million workers (or 7% of total workers) may have fallen below the extreme poverty line ($1.25 per day) between 2008 and 2009, again interrupting the declining trend of the last decade. As noted above, a jobless recovery is expected in developed countries, with growing unemployment and underemployment and increasing informality in developing countries, where vulnerable or informal forms of employment are already a problem. 2.34 Climate Change. Climate change remains a tremendous development challenge, and will disproportionately affect poor countries. By about 2030 the incremental costs of mitigation in developing countries could be $140-175 billion per year, and for adaptation another $30-100 billion per year. 11 The expectation is that 80% or more of the investment needed to transition to a low carbon economy must come from the private sector. 2.35 Food Security. While agricultural commodity prices have fallen from the highs of 2008, they remain high by historical standards and have been on the rise again in 2009. The Food and Agriculture Organization of the United Nations estimates that more than 1 billion people worldwide have been undernourished in 2009, representing more hungry people than at any time since the seventies. 12 Agriculture commodity markets are becoming more volatile, and reduced access to finance is accelerating more mergers and acquisitions activities among agribusiness companies. High expected population growth in developing countries (see below) will also put more pressure on food demand, reinforcing the need to scale agricultural production and efficient supply chains. 2.36 Demographic Changes and Urbanization. The world population stood at 6.8 billion in 2009, and is projected to reach 9 billion in 2050. Most of the population increase will be concentrated in developing countries, whose population is projected to rise from 5.6 billion in 2009 to 7.9 billion in 2050. The population of the 49 least developed countries alone is projected to double to 1.7 billion by 2050. In the least developed countries children under 15 currently constitute 40% of their population and young people account for a further 20%. 13 Urbanization will continue at an accelerated pace, and about 70% of the world s population is expected to live in urban areas by 2050, compared to 49% today. 14 2.37 Such population growth, combined with rapid urbanization, will continue putting upward pressure on physical and social infrastructure needs, such as health and education and infrastructure development, and on demand for food and commodities. In key emerging markets leading the economic recovery, growing younger populations also bring opportunities, for growing purchasing power and a rising middle class demanding improved living standards and access to consumer goods and health and education services, which are currently unmet or underserved. Urban migration creates a shift from rural subsistence farming to urban-based service and manufacturing jobs, mostly in micro, small and medium enterprises (MSMEs). Successful urbanization is a key factor in improving productivity and reducing poverty. 2.38 Water. Water resources worldwide are also getting scarcer. By 2030 15, global water requirements will grow from 4,500 billion m 3 today (or 4.5 thousand cubic kilometers) to 6,900 billion m 3. This is a full 40% above current accessible, reliable supply. The drivers of this water supply and demand gap are fundamentally tied to economic growth and development. Agriculture accounts for approximately 3,100 billion m 3, or 71% of global water withdrawals today, and without efficiency gains will increase to 4,500 billion m 3 by 2030. The water challenge is therefore closely tied to food provision and trade. Industrial withdrawals account for 11 World Development Report, 2010. 12 FAO, How to Feed the World in 2050, 2009. 13 UN World Population Prospects, 2008 Revision. 14 FAO, How to Feed the World in 2050, 2009. 15 2030 Water Resources Group, "Charting our Water Future; Economic Frameworks to Inform Decision-Making, 2009.

11 16% of today s global demand, growing to a projected 22% in 2030. Demand for water for domestic use will also grow, especially in developing countries. 2.39 Conflict: Increasing poverty, food and water security can all exacerbate conditions in Fragile Situations 16 and increase the potential for conflict elsewhere. Various WBG stakeholders are increasingly prioritizing the role of the private sector in these areas, and the 2011 World Development Report will focus on Conflict, Security and Development. DEMAND FOR IFC SERVICES 2.40 Long-Term Investment Needs for the Private Sector in Developing Countries. Developing countries have a growing share of global GDP and are playing an increasingly important role in the global economy and are expected to lead post-crisis growth. The critical needs in developing countries in areas such as social and physical infrastructure, climate change, SME finance and financial sector development must be met. However, the gap in financing these sectors remains large and the availability of financing has been worsened by the crisis, particularly in some countries whose fiscal resources are constrained. These challenges are exacerbated by weaknesses in the investment climate and gaps in the know-how of the local private sector in most developing countries. The current economic crisis has underscored the importance of a competitive private sector, and dynamic export sector, as the main engine of growth and job creation, and also as provider of innovative solutions to development challenges in these countries. The demand for private sector financing and related solutions is expected to increase. 2.41 The private sector itself faces a financing gap that is likely to persist for years. This financing shortage has especially been felt by MSMEs, which account for the major share of employment in developing countries. There is now an even more acute need to develop local financial markets, including building financial infrastructure, to compensate for the reduction in and rising volatility of international capital flows. The past two years showcased the ability of developing countries with well functioning local markets to better weather the crisis. 2.42 Increase in Private Sector IFI Volume, but Far Short of Needs. Reflecting the increased demand for private sector financing support, private sector activities by the multilateral and bilateral development finance institutions have grown significantly in recent years, amounting to $37 billion in 2008 ($39 billion in 2007, $27 billion in 2006) (Figure 6). Multilateral development banks (MDBs) including the Asian Development Bank, African Development Bank, and Inter-American Development Bank increased their share of private sector activities during 2008, but most other IFIs saw a slight decline in their 2008 volume compared to 2007. The European bank for Reconstruction and Development (EBRD) has announced an increase of nearly 60% in its 2009 investments due to increased demand in the wake of the global crisis. 2.43 The IFIs set up various initiatives to respond to the crisis in areas such as MSMEs, trade finance and liquidity and banking. A number of institutions are increasing their focus on climate change through carbon credits, clean energy, emissions tracking, and renewable investments. Collaborations are also found in joint crisis initiative programs, trade facilitation programs, regional cooperation to climate change, and infrastructure financing. 2.44 Although many of the major MDBs are increasing their emphasis on the private sector, IFC is the largest and continues to have a predominant role. Even if the regional MDBs outside EBRD would increase private sector financing by as much as 20% per year, it would take five years for their combined total to equal IFC today. 16 This is a recently renamed WBG term, from prior Fragile and Conflict-Affected States. Fragile Situations now include IDA countries only, except for West Bank and Gaza and Western Sahara.

12 FIGURE 6. IFI PRIVATE SECTOR VOLUMES Note: IFC figures are based on fiscal years, e.g. for 2008, FY09 (July 2008 to June 2009) is used; the other IFI figures are based on calendar years. 2.45 The Need for IFC is Greater than Ever. Expanded IFI activities are not sufficient to support the ever greater needs of developing countries. IFC s stakeholders are demanding that IFC does more, and in more difficult places. The need for IFC is greater than ever, both for its long-term financing and integrated solutions to development challenges. 2.46 As the largest multilateral provider of finance to the private sector in developing countries, and as part of the World Bank Group (WBG), IFC is uniquely able to address the global challenges of the new normal across regions and sectors, through its investment, advisory and mobilization activities, and in bringing together a combination of public and private approaches. (See next Chapter for more details on IFC s comparative advantage.)

13 III. A STRONG FOUNDATION FOR REALIZING OUR POTENTIAL 3.1 IFC now has an historic opportunity to live its Vision even more boldly, and to deliver even greater development impact in a financially sustainable way. 3.2 IFC is well positioned to do so. With a foundation of its comparative advantages and those of the whole WBG, IFC has established a strong track record as the world s preeminent development institution focused exclusively on the private sector. Its clients and programs are delivering, and IFC is measuring and reporting on, development impact. It has stepped up cooperation within the WBG. Over the past year, IFC was responsive to the crisis-related needs of the private sector, and launched the IFC Asset Management Company LLC (AMC) as an innovative way of crowding in more private sector investment to developing countries. IFC has actively pursued mobilization and partnership development beyond its traditional mechanisms, and has made good progress towards efficiency and effectiveness. IFC made a small operational profit in FY09 despite the crisis, and has become even more disciplined in all its operations to ensure a sustainable business model for the longer term. IFC S COMPARATIVE ADVANTAGE 3.3 IFC is well positioned to provide leadership in addressing the vastly expanded development needs across regions and sectors. To do this, IFC will build on its comparative advantages. As discussed in the recent WBG Post-Crisis Directions Paper (PCD) titled, "New World, New World Bank Group: (I) Post- Crisis Directions 17, the WBG s comparative advantages lie in five broad areas: Presence: a global, local and cross-sectoral presence with the competence to work with public and private sectors, and with MICs and low-income countries, in partnership with developed countries. Knowledge: a continually expanded and upgraded repository of best practice in development, combining global implementation experience, research and learning, as well as the ability to mobilize and connect global knowledge and customize it to local conditions. Finance: world-class risk management and banking competencies and the capability to leverage a strong balance sheet. Leadership in GPGs: a leadership role in the growing global public goods agenda. Convening power: worldwide catalytic and convening powers in international arenas, which set it apart from regional organizations. 3.4 IFC has established a strong track record as the world s preeminent development institution focused exclusively on the private sector. Within these five broad areas, IFC's comparative advantages with respect to private sector development include the following: IFC s people are strongly motivated and diverse and have proved their commitment to development goals and client countries through IFC s decentralization efforts, and to the quality of IFC s work, as evidenced by the comparative resilience of IFC s portfolio results. They have been agile in their capacity to shift focus during the crisis to support IFC s existing clients and also identify and deliver on the new financing needs that emerged. At the same time, staff have sharpened their focus on developing developmental standards and measures that improve not only IFC s results but those of its partners and clients. Global knowledge and local delivery. IFC is the largest multilateral or bilateral provider of finance to the private sector, accounting for around 29% of IFI commitments to the private sector globally. IFC s global expertise includes key sectors such as financial markets, infrastructure and agribusiness. 17 SecM2010-0034

14 IFC has a strong investment and Advisory Services presence on the ground in its client countries with economies of scale that surpass other IFIs, with 101 offices in 85 countries housing 54% of IFC s staff as at December 31, 2009, 46 of those offices being in IDA countries. The ability to provide, and combine, both investment and advisory services as a solution to clients needs and to strengthen development impact. IFC s extensive advisory capacity, both thematic and geographic, helps (i) governments improve investment climate and address constraints to private sector growth, complementing the work of the IMF and the World Bank; and (ii) businesses, including SMEs, build capacity in key areas, including risk management, corporate governance, and sustainable business practices. A commitment to and leadership in measuring and reporting development results. Any IFI which seeks to build a strong private sector needs to be able to measure the impact of its investment and advisory work. IFC s evaluation system is considered best practice among MDBs (see paragraphs 3.11-3.18 below). Leadership in standard setting, through initiatives such as the Equator Principles and the Better Work Program. Experience with South-South investments, an important contributor to growth in developing countries, especially in the context of declining capital flows from developed countries. Convening power around development themes, bringing together strong networks of clients, banks and donor partners, such as on private sector health services in developing countries and sustainability in the supply chain. Providing financial inclusion at various levels of the economy, including through its global platform in trade finance, and its focus on the poorest countries (half of IFC's FY09 projects were in IDA countries), MSMEs and the Base of the Pyramid (BOP). Mobilization. Clients prize IFC s ability to enhance their access to other sources of finance, both through its stamp of approval on the quality of their projects as well as through mobilization. The ability to bring in other sources of finance was the third most popular reason for choosing IFC in the most recent investment client survey (after long-term partnership and loan maturity). Efficient use of development funds, with every dollar of capital leveraging approximately $18 of project costs and generating about $12 of benefits over and above project costs. Innovation. IFC has a track record of innovation, opening markets and other firsts (Box 1). IFC responded to the global economic crisis with speed, agility and innovation, helping restore liquidity and rebuild financial infrastructure while providing advice to help the private sector cope with the crisis and recover quickly. A track record in investment climate diagnostics and reform, a critical prerequisite for strong, sustainable private sector growth. (Box 2)