IFC Annual Portfolio Review FY11 DEVELOPMENT RESULTS

IFC Annual Portfolio Review FY11 DEVELOPMENT RESULTS

12 DEVELOPMENT RESULTS IFC s Development Outcome Tracking System (DOTS) 2.1 IFC s Development Outcome Tracking System known as DOTS measures the development results of IFC s investments and advisory services. This section focuses on DOTS for investments. The launch of DOTS was accompanied by major training efforts, reaching about 1,500 staff in both FY06 and FY07. Beginning with the FY07 Annual Report, IFC was the first multilateral development bank to report on current development results for its entire portfolio, and to have an external firm review the application of its methodology and reported results as part of assurance for nonfinancial aspects of our reporting. Training efforts have continued over the years, reaching over 1,000 staff in nearly 80 events many of which in the field during FY11. After certain exclusions, 5 DOTS covers almost all active companies in supervision in IFC s portfolio as well as in new business. The reporting universe for the FY11 Annual Report consisted of projects approved between 2002 and 2007 that are still active in IFC s portfolio. We always report on a rolling time frame such that we do not include investments that are too immature to measure results reliably or too old and thus less relevant for today s operations. Furthermore, a development results portal (www.ifc.org/results) complements the information provided in the Annual Report. 2.2 DOTS allows for real-time tracking of results throughout the project cycle. At the outset of a project, staff identify clear, standardized, and monitorable indicators, with baselines and targets. They then track progress throughout supervision, which allows for contemporaneous feedback into operations. DOTS uses a ratings framework similar to that used by IFC s Independent Evaluation Group (IEG), which is also in line with established good practice standards for private sector evaluation agreed among multilateral development banks (MDBs). Development outcome is rated on a six-point scale (from highly unsuccessful to highly successful) and is a synthesis rating based on four underlying performance areas: (1) financial, (2) economic, (3) environmental and social, and (4) private sector development impact, all of which are rated on a four-point scale. The top half of the ratings (highly successful, successful, and mostly successful for development outcome; excellent and satisfactory for the four performance indicators) is categorized as being rated high. Cooperation with other Development Finance Institutions 2.3 IFC has long fostered collaboration on development results measurement among MDBs. For example, in the context of the private sector portion of the Common Performance Assessment System (COMPAS) since 2007. 6 2.4 Following meetings in 2008 and 2009, IFC along with the European Bank for Reconstruction and Development (EBRD) and several European Development Finance Institutions (EDFIs), formed also a small working group that explored how to further collaborate in the area of development results measurement and harmonization of indicators, and expanded its membership over time. 5 DOTS coverage is determined after certain exclusions, typically in cases where the development results are tracked under a different company or project, such as projects that do not count separately (e.g. fund management companies), splits (e.g. holding and operating company), rights issues, etc. Some projects are tracked on a program basis, such as the Global Trade Finance Program. After these exclusions, DOTS covers almost all 1,232 companies in IFC s active portfolio in supervision. 6 http://www.mfdr.org/compas/index.html 1

13 2.5 During FY11, IFC continued its work on collaboration and harmonization among multi- and bilateral development finance institutions (DFIs). IFC has focused on three different areas: 1) continued collaboration with other MDBs in the context of the Management for Development Results (MfDR) working group and the COMPAS report; 2) work with other DFIs on harmonization of indicators; 3) and provision of training and presentations to a large numbers of DFIs and other organizations. COMPAS 2.6 Public sector oriented MDBs had started to report on how they manage themselves for improved development results in 2005. In 2007, under IFC s leadership and in collaboration with other MDBs, private sector indicators were added and reported on in 2007 and 2008. The ECG of the MDBs evaluated COMPAS in 2009/10, finding that COMPAS was the only comprehensive source of comparable information on how MDBs manage themselves for improved development results, that the majority of indicators had strong links to development results, and that the data and information provided in the four COMPAS reports had progressively improved in terms of content, clarity, and coverage. The evaluation also found that COMPAS was a useful networking opportunity and that on the private sector side this opportunity was used relatively more for knowledge sharing and lessons learning. However, the evaluation also highlighted that to enhance the usefulness of the report there was a need to improve the completeness and consistency of information, to systematically use COMPAS for knowledge sharing and lessons learning also on the public sector side, and to better integrate the results frameworks that have been developed in different MDBs into the report. 2.7 After the ECG evaluation, the participating MDBs engaged in a series of meetings focused on how to best improve the usefulness of COMPAS, agreeing to streamline indicators while preserving valuable information, and also refreshing the format in which the report is structured. On an exceptional basis, the WBG led the publication of the 2009 COMPAS, which due to the ECG evaluation and the follow-on debate among MDBs, was only published in May 2011. MDBs are currently working on the 2010 volume, expected to be published in September 2011, with a view to publish COMPAS 2011 in the spring of 2012. Harmonization 2.8 Following a July 2010 meeting in Washington hosted by IFC that focused on indicators for private sector operations, with participation of almost all MDBs and the German Investment and Development Company, representing the EDFIs, IFC continued its collaboration and harmonization efforts with other DFIs throughout the year. The central idea behind the work on indicator harmonization is threefold: 1) increase comparability among DFIs; 2) be able to tell a common story based on harmonized indicators; and 3) reduce the reporting burden imposed on shared clients by standardizing the information requested. During FY11, DFIs participating in the Working Group on Development Results Indicators Harmonization agreed to move forward the work on harmonization focusing on a limited number of core indicators, and to take the lead on harmonizing different indicators and definitions, with the intention, where possible, to start using the harmonized indicators across all participant DFIs. IFC took charge of the work on the financial sector indicators. All participant organizations will meet again in Washington on September 19, 2011, with the goal of finalizing the harmonization work on this first set of indicators. Training and Presentations 2.9 In FY11, IFC continued to engage DFIs bilaterally on development results measurement, providing training, giving presentations and exchanging information with a large number of DFIs, donors, foundations, private companies and funds. The highlight was in November 2010, when IFC 2

14 provided intensive training on development results measurement to the Islamic Corporation for the Development of the Private Sector (ICD) at their headquarters in Jeddah, Saudi Arabia. The training focused on a comprehensive overview of IFC s DOTS, including its role within IFC and use in the different stages of the project cycle, and resulted in a greater engagement of ICD in the collaboration with other DFIs. Financial Performance, Value Added and Development Results 2.10 Overall, IFC (and other, private sector-oriented development institutions) have found that financial performance tends to be closely correlated with development results. This is not surprising, given that as long as markets are undistorted, private and social benefits will be aligned. The main reasons why financial performance may differ from development results are externalities or market distortions. IFC addresses both of these aspects in its screening and monitoring, for example by not supporting projects that depend for their financial viability on subsidies and protection. IFC also assesses and mitigates environmental and social risks ex-ante and actively assists client companies in improving their environmental and social performance. IFC s clients mention this as being a key of IFC s value addition. 2.11 One way to assess tradeoffs is to compare financial rates of return (FRRs), which measure returns from the point of view of the financiers, with economic rates of return (ERRs), which measure returns from the point of view of society as a whole (including the financiers). IEG evaluated projects between 2007-2009 shows that benefits for society as a whole clearly exceeded those for financiers alone in about 90% of cases, compared to 10% where the reverse was true. We estimate that these 76 projects generated $11.6 billion in value-added over and above their project costs of $9.8 billion (of which IFC financed $1.8 billion and mobilized $1.3 billion from B-lenders). The financiers of these projects captured some 65% of these benefits, and other stakeholders about 35%. The median economic rate of return was 16%, and the median financial rate of return was 11% (both in real, i.e. inflation adjusted terms). 2.12 Based on past results, we calculated how much leverage IFC obtained from its investments and what development results were achieved. Using both historical portfolio data and a random, representative sample of IFC projects that had been evaluated by IEG over a relatively long timeframe spanning both bad and good economic conditions for emerging markets, we extrapolated the results using the latest DOTS results and IEG results as of last year (updated financial and economic rates of return were not yet available). 2.13 IFC provides both loans and equity investments. Although equity investments require IFC to set aside more capital, they typically enable IFC to raise more funding from other investors. Loans, on the other hand, require IFC to set aside less capital, but usually leverage less capital from other investors. In the past, IFC was able to support projects that typically leveraged about $14-$18 per dollar of IFC capital. With IFC s Asset Management Company (AMC), IFC is likely to achieve higher leverage in the future. 2.14 These projects, in turn, generated benefits above and beyond a risk-free return. Their added value accrued to investors in the form of profits and to a variety of other stakeholders in many different ways: customers who got new, more affordable, or better products and services; employees who got better job opportunities; suppliers whose sales increased; governments that received more in taxes and other payments; and neighbors who benefited from community development programs. Based on FY11 results, we estimate that for every dollar of IFC capital invested, the value added generated was some $4 3

15 or about 55 cents per dollar of project costs over and above a risk free return (estimated at 5% in real term). 2.15 DOTS data also show that financial performance is strongly correlated with development outcome, and all three other indicators economic performance, private sector development impact and to a lesser extent environment & social performance (Figures 2.1 to 2.4). This pattern is not surprising for overall development outcome and economic performance, since financial performance is a component of both. Figure 2-1: Better Development Results with Better Financial Performance 100% 94% 97% Development Outcome: % Rated High 90% 80% 70% 50% 40% 30% 20% 10% 8% 0% Unsatisfactory Partly Unsatisfactory Satisfactory Excellent Financial Performance Rating Figure 2-2: Better Economic Performance with Better Financial Performance Economic Performance: % Rated High 100% 90% 90% 80% 70% 50% 40% 34% 30% 20% 10% 5% 98% 0% Unsatisfactory Partly Unsatisfactory Satisfactory Excellent Financial Performance Rating 4

16 Figure 2-3: Weak Environmental & Social Performance with Unsatisfactory Financial Performance 100% E&S Performance: % Rated High 90% 80% 70% 50% 40% 30% 20% 56% 64% 77% 72% 10% 0% Unsatisfactory Partly Unsatisfactory Satisfactory Excellent Financial Performance Rating Figure 2-4: Better PSD Impacts with Better Financial Performance 100% 90% 93% 94% PSD Performance: % Rated High 80% 70% 50% 40% 30% 20% 37% 72% 10% 0% Unsatisfactory Partly Unsatisfactory Satisfactory Excellent Financial Performance Rating However, the positive correlation between financial and environmental & social performance contradicts at least for IFC's client companies a view held by some observers that strong financial performance is being achieved at the expense of environmental and socia1 performance. On the contrary, IFC's experience shows that well managed companies tend to perform well on financial as well as on environmental and social matters; and that companies with financial problems also tend to apply 5

17 inadequate resources (and attention) to environmental and social matters and vice versa. This was born out by DOTS data, which show that, with particularly weak financial performance (i.e. unsatisfactory ratings), environmental and social performance was also weaker. Better environmental and social performance was associated with better financial performance. 2.16 Private sector development impact is also positively correlated with financial performance. It is rare for investments with poor financial performance to still have strong impacts on private sector development. In summary, good financial performance is a necessary, albeit not sufficient, condition for good development results and is closely associated with other development aspects. Investment Results 2.17 IFC s overall development outcome score for FY11 was 67 percent, 2 percentage points higher than IFC s target of 65 percent, but 4 percentage points lower than FY10 score. As Figure 2.5 shows, while some sectors such as Oil, Gas and Mining, and Infrastructure saw an improvement in scores, there was a significant decline in other sectors such as the Financial Markets and Consumer and Social Services. The development results were impacted largely by macro level events in Middle East and Northern Africa and the economic crises in Europe, details of which are given in the regional analysis later. Figure 2-5: Development Results Weakened in Most Industry Group Sectors 90% 80% 70% 71% 67% 83% 80% FY10 77% 76% 73% 73% 70% 68% FY11 72% 66% 70% 64% 64% 62% 59% 59% 700 600 500 50% 400 40% 300 30% 20% 10% 0% 493582 20 23 66 74 59 64 49 63 174196 20 25 39 68 66 69 IFC Total Oil,Gas,MiningInfrastructureAgribusiness & Forestry Funds Financial Markets Telecom & IT Consumer & Manufacturing Social Services 200 100 0 Numbers at the bottom of each bar are the total number of companies rated. FY11: DOTS data as of June 30, 2011 for projects approved in calendar years 2002-2007. FY10: DOTS data as of June 30, 2010 for projects approved in calendar years 2001-2006 6

18 2.18 On the positive side, Oil, Gas and Mining continued to have a strong development impact in FY11 with a DOTS score of 83 percent (3 percentage points above last year s result), the highest among the industry groups and notably above the IFC average. Compared to FY10, the improvement was due to newer, high-rated projects entering the reporting universe (6 out of 6 projects entered the reporting cohort this year were rated high), while the portfolio remained largely stable when considering clients featured both in FY10 and FY11. 2.19 The Infrastructure industry group also posted an improvement of 4 percentage points with a DOTS score of 77 percent in FY11, reflecting a partial recovery from the global financial crisis which affected scores last year. Better performance of both existing and newer investment projects in the Transportation and Sub-National Finance sub-sectors, in particular in Eastern Europe, contributed to the upturn. 2.20 Agribusiness and Forestry continued to be one of the strongest performing sectors with 70 percent of projects rated high in FY11. Its scores decreased marginally compared to FY10 due to weaker performance of existing and new investment projects particularly in the Pulp and Paper subsector, which comprises a large percentage (23 percent) of the rated portfolio for this group. 2.21 On the other hand, Private Equity and Investment Funds, and Global Financial Markets, witnessed a significant decline from FY10 results. Private Equity and Investment Funds DOTS score, which partially recovered last year from the 10 percent drop due to the aftermath of the global financial crisis, regressed back to peak-of-crisis levels, reversing the positive route to recovery begun in FY10. Difficulty in some of the portfolio companies caused by the lingering effects of the financial crisis, particularly in Eastern Europe, Middle East, and North Africa, contributed to the lower DOTS score in FY11. In contrast, Global Financial Markets deteriorated for the third consecutive year, suffering from the lower ratings of both existing and new projects entering the reporting cohort for the first time this year, and from the results in Sub-Saharan Africa, Middle East, and North Africa where investments deteriorated significantly during FY11. However, IFC continued to develop commercially sustainable microfinance institutions clients as reflected in the expanding reach of MSME loans from 101 billion to 128 billion. 2.22 In the Information and Communication Technology sector, intense competition and challenging regulatory environments were the primary reasons for the decline in DOTS results to 64 percent in FY11. However, when weighted by investment size, the DOTS scores for this sector improve significantly. This reflects the riskier nature of smaller venture capital type investments inherent in this sector. 2.23 Finally, the Consumer and Social Services, and Manufacturing sectors also witnessed a decline in development results, with DOTS scores of 59 percent each for FY11. Weaker performance of the new investment projects in the Consumer and Social Services (only 15 out of 33 new projects rated high) was one of the main reasons for the decline, partly impacted by the macro level events in MENA and Europe. On a positive note, IFC clients in these two sectors contributed to a 16 percent increase in employment over last year. Particularly encouraging is female employment that increased from 151,928 to 211,311 this year. 7

19 Figure 2-6: Volume-Weighted Development Results Stronger than Unweighted Weighted Unweighted 100% 96% $30,000 90% 80% 70% 77% 67% 83% 86% 64% 80% 79% 77% 78% 70% 66% 76% 68% 64% 61% 59% 59% $25,000 $20,000 50% $15,000 40% 30% $10,000 20% 10% 0% 582 23 25 64 74 196 63 69 68 $27,184 $1,119 $692 $2,781 $2,798 $15,123 $829 $2,447 $1,396 IFC Total Oil,Gas,Mining Telecom & IT Agribusiness & Forestry Infrastructure Financial Markets Funds Manufacturing Consumer & Social Services $5,000 $0 Numbers at the bottom of each bar are the total number of companies rated and the total IFC investment (US$ millions) in those projects. FY11: DOTS data as of June 30, 2011 for projects approved in calendar years 2002-2007. Unweighted: by number of projects. Weighted: by project disbursement. 2.24 As in FY10, results weighted by IFC s investment volume proved to be stronger, with 77 percent of investments rated high. Figure 2.6 shows that weighted results were higher in all industry group sectors, indicating, on average, that larger investments and companies tend to perform better. This, in part, is due to the higher risk profile for small business and smaller investments, and the economies of scale of larger companies, often with better management and corporate governance, that make it easier for companies to overcome difficult environments and external shocks. In the Middle East and Northern Africa region, for instance, weighted results were 16 percentage points higher than unweighted results, confirming that larger projects were able to overcome the region s challenges and produce strong development results, while smaller investments were particularly vulnerable to the market turmoil and difficult investment climates that recently affected some of the countries in the region. Similar to last year, the largest increase in weighted results occurred in Telecommunication and Information Technologies, where the percentage of operations rated high increased by 22 percent when considering weighted results as a consequence of the larger size of their high-rated investments (591 million on average) versus those rated low (112 million). This reflects the high risk profile of small venture capital type investments, where it is quite normal that on a portfolio basis, a few highly successful projects compensate for less successful projects. 2.25 The primary drivers of IFC s development results decline to 67 percent in FY11 were macro level trends: foremost being the events in the Middle East and North Africa, and also the knock-on effects of the regional debt crisis in Europe and, both of which specifically impacted the MENA and ECA regional performances negatively. Particularly affected were financial performance and private sector development impacts. Conversely, as Figure 2.7 shows, East Asia continued its second year of improving performance in development results, with better results on all four performance areas. 8

20 Figure 2-7: East Asia was the FY11 Best Performing Region with a 76% DOTS Score 90% 80% 70% 76% 71% 72% 67% 77% 74% FY10 FY11 79% 72% 66% 66% 63% 70% 56% 700 600 500 50% 400 40% 300 30% 20% 10% 0% 493 582 85 86 120 131 47 64 62 92 126 134 43 66 IFC East Asia and the Pacific Latin America and the Caribbean South Asia Sub-Saharan AfricaEurope and Central Asia Middle East and North Africa 200 100 0 Numbers at the bottom of each bar are the total number of companies rated. The graph does not include 9 projects in World Region FY11: DOTS data as of June 30, 2011 for investments approved in calendar year 2002-2007. FY10: DOTS data as of June 30, 2010 for investments approved in calendar year 2001-2006. 2.26 The Middle East and North Africa region witnessed the most significant drop of 14 percent in development scores from last year, declining from 70 percent in FY10 to 56 percent in FY11. The political turmoil in the region was the primary driver as the events in the region severely impacted economic activity and investor confidence. This volatile environment resulted in a decline in economic and financial performances of clients. Most severely affected by these external trends were financial markets, manufacturing, and consumer and social services. Portfolio stress tests were conducted in the second half of FY11 to identify sectors with increased portfolio risks in the most affected countries (Egypt, Tunisia, Jordan). Our portfolio in Yemen was also adversely affected as the IFC program continues to be on hold. 2.27 Europe and Central Asia development results further declined to 60 percent in FY11 from 66 percent last year. While last year s results reflected the negative fallout of the global financial crises, this year the decline was due mostly to the effect of the European debt crisis on the peripheral Southern European countries, where the financial markets, manufacturing and consumer and social services sectors were especially affected. In addition, the Central Asia projects have had relatively low development results to date. Almost all these projects are in IDA and post-conflict countries and were carried out in a challenging operating environment. 7 On the other hand, Eastern Europe saw a postcrisis rebound in economic activity. For example, following a contraction of 7.8% in 2009, Russian GDP 7 The analysis from the European Bank for Reconstruction and Development (EBRD) shows similar development results and patterns for the region as IFC. For example, EBRD's Annual Evaluation Overview Report for 2010 notes that countries of Central Asia still achieve lower ratings for overall performance and transition impact than projects in other regions. Further EBRD (and other IFIs) also note higher success rates for results weighted by investment volume, similar to IFC's experience. 9

21 grew at 4% in 2010, spurred by growth in the manufacturing, industrial production and transport sectors. The effect was seen in improving performance of IFC investments in these sectors; though speed of recovery varied by country. 2.28 South Asian development results also declined to 72 percent this year, a drop of 7 percentage points from 79 percent in FY10, though it continues to be 5 percentage points above the IFC average. The driving factor for the drop was poor financial performance of new investments in Manufacturing, Agribusiness, and Consumer and Social Services. Clients witnessed cost pressures on key inputs resulting in lower than expected margins. Further, growth of some companies via acquisitions led to an adverse impact on their balance sheets, which was magnified by the impact of the financial crisis. 2.29 In Africa, telecom and financial sector investments drove down the regional results from 66 percent in FY10 to 63 percent in FY11. While investments in the former were impacted negatively by an unstable environment and increasing market competition, performance of new investments in the financial market industry group deteriorated on their development indicators reflecting the continuing challenges of operating in a difficult business environment. However, it is encouraging to see that the new investments in manufacturing and consumer and social services performed well driven by strong economic growth in the countries of these operations and better selection of projects. 2.30 The Latin America and Caribbean region continued to be one of the high performing regions in development results, though the DOTS score declined to 74 percent this year from 77 percent last year. The decline was due to the heavy impact of the global crisis on Mexico, which hit the country much harder than other countries in the region. Mexico s housing, hospitality, and consumer goods industries were especially hard hit by the crisis as is reflected in the poor performance of new investments in the real sector. 2.31 On the positive side, East Asia was one region where the DOTS score went up from 72 percent in FY10 to 76 percent in FY11. This now marks the second year of improvement in the region s development ratings which have gone up by a cumulative 12 percent in the last two years. Compared to other regions, East Asia was one of the first regions to emerge from the global financial crises. Further, continuing better selection of projects across all industry groups contributed to higher performance among new investments, specifically in China and the Philippines. As two of the largest countries of operations in the region their improving performance positively impacted the overall regional results. 10

22 Figure 2-8: All Regions did Better when Weighting Development Results by Investment Amount weighted unweighted 100% $25,000 90% 80% 70% 77% 67% 86% 76% 83% 72% 79% 74% 73% 72% 56% 66% 63% $20,000 $15,000 50% 40% $10,000 30% 20% $5,000 10% 0% 582 86 64 131 134 66 92 $21,784 $4,024 $2,118 $7,975 $6,582 $2,853 $3,450 IFC East Asia and the Pacific South Asia Latin America and the Caribbean Europe and Central Asia Middle East and North Africa Sub-Saharan Africa Numbers at the bottom of each bar are the total number of companies rated and the total IFC investment (US$ millions) in those projects. FY11: DOTS data as of June 30, 2011 for investments approved in calendar year 2002-2007. FY10: DOTS data as of June 30, 2010 for investments approved in calendar year 2001-2006. Unweighted: by number of projects. Weighted: by IFC investments. $0 2.32 In line with the years before, Figure 2.8 shows that development results weighted by IFC investment amount fared better across all regions in FY11. Overall, IFC development results were 10% better when the size of investment was taken into account, and similar trends were witnessed in the rating analysis of other development finance institutions. As mentioned in the earlier analysis of sectors, larger investments tend to have a greater ability to overcome difficulties in a challenging investment climate, take advantage of economies of scale and are often managed by larger companies with better corporate governance. This effect is most evident in the weighted results for MENA and ECA, where the variation versus unweighted results was 16% and 13%, respectively. While the regional macro events impacted the results, the larger investments were clearly better able to perform in this difficult environment. 11

23 Advisory Services Results 2.33 IFC's donors are familiar with and typically use the Logical Framework approach for Advisory Services. The Framework is used to facilitate better communication and reporting among donors and stakeholders, in addition to planning and managing our work. Using the Logical Framework approach, each project assigns a development effectiveness rating at project completion. Development effectiveness is a composite rating based on five dimensions, which include the strategic relevance, outputs, outcomes, impacts, and efficiency of a project. 2.34 IFC s Advisory Services development effectiveness results registered their best-ever performance in calendar year 2010. Sixty-seven percent of advisory projects that closed during the year and could be assessed for development effectiveness were rated high at the end of the year. 2.35 IFC s system for measuring development effectiveness for Advisory Services was established in September 2007. In the past, we have reported results for the previous fiscal year. This year, for the first time, we are reporting results by calendar year, in order to provide more recent results and also align the Advisory Services reporting system with that of Investment Services. 2.36 To provide historic context for our performance, we are comparing 2010 results with the rolling average of results over the calendar years 2008 through 2010. When compared with that average, Advisory Services results in 2010 were better in every business line and every region except for Sub- Saharan Africa. Figure 2-9: Advisory Services Results Higher than ever in CY10 CY2008 to CY2010 CY2010 Advisory Services Public-Private Partnerships Investment Climate Sustainable Business Advisory Access to Finance 63% 67% 58% 61% 64% 65% 67% 65% 73% 0% 10% 20% 30% 40% 50% 70% 80% 2.37 Figure 2.9 shows that the 2010 results represented an increase of four percentage points over the rolling three-year average of 63 percent. They are based on a review of 179 completion reports filed between January 1 and December 31, 2010. Of those, 139 could be assessed for development effectiveness. The three-year rolling average is based on a review of 507 completion reports filed between January 1, 2008, and December 31, 2010. Of those, 364 could be assessed for development effectiveness. Projects that could not be assessed for development effectiveness were excluded from the analysis, because they were non-client facing projects or their outcome and impact results had not been achieved by the review dates. Grassroots Business Initiative projects are also excluded from the review, 12

24 as these projects are now managed and results are recorded by the Grassroots Business Fund, a separate entity from IFC. As shown by Figure 2.10, development results were strongest in Latin America and the Caribbean, followed by South Asia and East Asia and the Pacific. Figure 2-10: Stronger Development Results in Latin America and the Caribbean CY2008 to CY2010 CY2010 Advisory Services 63% 67% Middle East and North Africa Sub-Saharan Africa 49% 53% 55% 53% East Asia and the Pacific Europe and Central Asia South Asia Latin America and Caribbean 76% 73% 78% 73% 78% 78% 83% 0% 10% 20% 30% 40% 50% 70% 80% 90% Comparing DOTS and IEG Results 2.38 Despite differences between IEG and DOTS approaches 8, DOTS results are highly consistent with IEG evaluation results for comparable time periods, as shown by Figure 2.11. The reason for lower DOTS scores for the pre-2000 approvals is that DOTS currently reports only on companies with active investments. The fact that successful projects among pre-2000 approvals have typically already been repaid or sold, whereas projects that have run into difficulties (e.g. restructuring, litigation or even liquidation) are often still on IFC s books, results in a negative bias apparent in lower DOTS score. The slightly weaker performance of 2006/2007 approvals is driven by events affecting the MENA and ECA regions as well as increased competition and poor regulatory environment for investments in telecom sector in Africa (see development results for region for more detail). 8 For example, DOTS ratings are company-, rather than project-, based and use proxies (e.g. annual returns on invested capital) rather than the more in-depth evaluation methods (e.g. life-of-project re-estimated financial and economic returns) used at the evaluation stage. Also, IEG covers closed projects, whereas DOTS focuses on the active portfolio. Over time, since DOTS ratings are updated prior to project closure, DOTS reporting will also be able to cover either only the active portfolio, or the active and closed portfolio. 13

25 Figure 2-11: DOTS Ratings are Highly Consistent with IEG Ratings for Comparable Periods, and also Provide Indicative Performance for more Recent Approvals DOTS IEG 80% 70% 58% 58% 73% 74% 72% 72% 66% 50% 46% 40% 30% 20% 10% 0% Pre-2000 2000-2001 2002-2003 2004-2005 2006-2007 2.39 An IEG evaluation 9 in FY09 found that DOTS for investments had developed within a very short period of time into a reliable management tool, with a high degree of consistency with IFC s longestablished evaluation system that is considered best-practice among multilateral development banks. Comparing the latest DOTS ratings with XPSR ratings in the last four years, the incidence where ratings diverged was not substantial, albeit higher. The difference in binary ratings between DOTS and IEG increased in 2010, even though there is no net downgrade. In part the differences are due to different timing of the assessment between IEG and DOTS. Nevertheless, DOTS has proven to complement IEG s in-depth evaluation system by providing current and unbiased assessments of the development results of IFC s entire active portfolio, and information about project performance both before and after the once-in-a-lifetime evaluations. 2.40 With DOTS providing indicative performance of projects up to two years earlier than the evaluation system, Management is able to feed results earlier into strategy and operations. For example, the latest DOTS ratings indicate a declining trend in development results (Figure 2.11). This helps inform Management, allowing them to adjust operational priorities and incentives accordingly. The information on results feeds back into strategy via multiple venues such as regional portfolio review meetings, LOTS strategy sessions, and the Senior Management retreat. This helps Management to make informed decisions with regard to operational priorities and incentives for staff. DOTS is thus used as an operational tool to track progress on the corporate scorecard and other strategic analyses. As a result, IFC is recognized for being at the forefront in development results-based performance management among multilateral development banks. 9 Biennial Report on Operations Evaluation in IFC 2008: Enhancing Monitoring and Evaluation for Better Results, IFC/R2008-0293 14

26 Monitoring Environmental and Social Performance (E&S) 2.41 In 2006, IFC s Board of Directors approved the policy framework governing the social, environmental, and disclosure of information aspects of IFC s operations. Under this framework IFC monitors environmental and social performance (E&S) of its investments and manages associated risk. On May 12th, IFC s Board of Directors approved a revised version of the Policy and Performance Standards on Social and Environmental Sustainability and the new Access to Information Policy. This new framework will be enforced in January 2012. 2.42 E&S portfolio-management activities include, among others, maintaining current information on regional and industry portfolios and risk profiles (including a CES high-risk list), onsite supervision visits to clients, desk review of annual monitoring reports, phone interviews, and discussions with clients. IFC developed an Environmental and Social Risk Rating (ESRR), which is assigned and updated as supervision information on a client s performance is obtained. The ESRR summarizes IFC s current assessment of a company s project-management capacity, compliance with its contractual requirements (such as E&S reporting), and action-plan completion and the quality of communications with its stakeholders. Projects with ESRR of 3 or 4 are performing below IFC expectations. ESRR 3 and 4 projects are only 13% of the current active portfolio (excluding SOU, litigation, liquidation and zero balance projects). Figure 2.12 shows a distribution of low performance projects by region. Figure 2-12: Low Performing Projects by Region and by Environmental Category 2.43 In 2006, IFC management also endorsed a revised approach to supervision, which included a dedicated supervision budget and a risk-based supervision program that targeted high-risk projects, poorly performing projects, and projects with limited or missing information. In 2011 CES conducted almost 400 supervisions. The diagram below shows the progression in terms of supervision activities in the last three years. Annual Monitoring Reports (AMR) are yearly reports prepared by clients to inform 15

27 IFC of project s E&S performance. The so-called AMR Capture Rate is an indicator of the percentage of companies with E&S reporting requirements that effectively had reported to IFC. 2.44 The E&S information indicator, referred to as the E&S knowledge gap (KG) indicates the percentage of projects for which IFC was not able to assess its performance for 2 years or more. The KG is an indirect measure of risk in our portfolio. Figure 2.13 shows that the knowledge gap has been dropping due to our supervision strategy from 12.5% in FY08 to 3.1% in FY11. Figure 2-13: Supervision Visits, AMR Reviews Completed, Knowledge Gap and AMR capture Rate, FY09-FY11 Supervision visits AMR reviews completed E&S Net Knowledge Gap AMR Capture rate 600 500 72% 73% 84% 95% 85% 75% 400 65% 55% 300 200 512 516 393 388 396 563 45% 35% 25% 100 6% 4% 3% 15% 5% 0 FY 09 FY 10 FY11-5% 16

28 Table 2.1 shows a break-down of the E&S Knowledge Gap (KG) by the end of FY11. The current KG target of 6% has been surpassed by most of the industry groups and regions. Table 2-1: Most Industry Groups and Regions Surpassed the 6% E&S Knowledge Gap (KG) by the End of FY11 Department # of KG companies % of Total Industry Portfolio CBG 0 0.0% CF1 12 7.4% CF2 0 0.0% CF3 5 2.0% CFG 0 0.0% CM1 6 4.4% CM2 8 3.5% CM3 2 1.1% CN1 9 10.7% CN2 5 3.1% CN3 1 1.2% CNG 1 5.0% Total/average 49 3.0% Regions # of KG companies % of Total Regional Portfolio CAF 4 1.3% CEA 17 8.1% CEU 3 1.5% CLA 9 2.4% CME 5 1.6% CSA 10 5.6% WLD 1 3.2% Total/average 49 3.0% 2.45 Training and capacity building for internal and external audiences continues to be a key element of the framework implementation strategy. For instance, IFC has implemented a number of measures to strengthen its environmental and social risk management approach and implementation of the Performance Standards for financial intermediaries (FIs). Supervision focuses both on the overall environmental and social risk management system of the FI and at the sub-project level. IFC support targeted at the sub-project level includes IFC review of select environmental and social due diligence undertaken by FIs to determine the effectiveness of an FI s social and environmental management system and to enhance client capacity. Further, for private equity funds, IFC has established the practice of a right to review the due diligence conducted for the first few investments and all Category A subproject investments before these are made. 17

29 IFC Investments and Advisory Services in IDA Countries 2.46 Since 2004, one of IFC's strategic priorities has been investments in frontier markets, where poverty is structural and business environment is frequently too risky for private companies to invest. In an effort to target the poor, IFC continues its focus on IDA countries, fragile situations, Africa, frontier regions of Middle-Income Countries, and engagement at the base of the pyramid, even though it is often more resource intensive to do business there. FY11 development results reflect the difficult environment in IDA countries where 59% of the companies were rated high, compared to 72% in non-ida countries. 2.47 Combined gross domestic product (GDP) of IDA countries only accounted for 16% of GDP of emerging markets. IFC's investments continue to be significantly more concentrated in IDA countries than global foreign direct investment (FDI) see Figure 2.14. There is an apparent need for IFC to continue investing and creating business environment that will help IDA countries attract more foreign direct investment. At the end of FY11, more than 30% of IFC's portfolio was committed in IDA countries - compared to only 21% of global FDI. For FY11 new business, 40% of IFC's commitment volume and 48% of number of commitments were in IDA countries. 2.48 Advisory services continue to be an area where IFC has most heavily concentrated its IDA operations (65%). When investing in the difficult business environment of IDA countries, IFC often starts off by providing advisory services to improve investment climate, which incidentally is the business line with the most concentrated activities in IDA (79%). In many instances, IFC accompanies its investments with advisory services, which helps businesses by increasing access to financial services or by conducting training for SME entrepreneurs. Our analysis has shown that combining investment with advice significantly improves the chances of success of both investment and advisory projects. Figure 2-14: IFC Investments and Advisory Services are More Concentrated in IDA Countries than FDI and GDP IDA countries in percent of IFC Client Countries 70% 50% 40% 30% 20% 10% 0% 16% GDP 2009 21% FDI, Net Inflows 2009 Source: IFC and Global Development Finance and World Development Indicators, April 2011 31% IFC Portfolio FY11 40% IFC Commitment Volume FY11 48% IFC Commitment Number FY11 65% IFC AS Project Expenditure FY11 Note: - IFC commitment volume does not include mobilization - All program figures (except portfolio) include client facing projects and regional projects - Low- and middle-income countries are the denominator for GDP and FDI; IFC program is used for all other calculations 18

30 Table 2.2: Investment Development Reach New Business Expectations Portfolio CY09 Portfolio CY10 FY11 ***** Investments Employment (millions of jobs) 2.2 2.4 0.2 - of which female (millions of jobs) 0.53 0.67 0.06 Microfinance loans* Number (million) 8.5 8.0 24.7 (a) Amount ($ billions) 10.79 12.62 13.73 (a) SME loans* Number (million) 1.5 1.7 1.0 Amount ($ billions) 101.32 127.82 49.12 Customers reached with services Power generation (millions)** 57.4 41.9 12.8 Power distribution (millions) 29.4 32.0 0.3 Water distribution (millions)*** 26.6 20.1 0.4 (b) Gas distribution (millions) 15.7 17.2 NA Phone connections (millions) 169.3 179.7 7.4 Patients reached (millions) 7.6 7.5 2.6 Students reached (millions)**** 1.4 1.0 0.5 Farmers reached (millions) 2.1 2.5 1.2 Payments to suppliers and governments Domestic purchases of goods and services ($ billions) 38.02 39.51 7.47 Contribution to government revenues or savings ($ billions) 20.08 20.28 6.44 *In many cases, results reflect also contributions from IFC Advisory Services. **IFC has revised its methodology for estimating residential power customers served. Estimates for past years have been revised accordingly. Previous estimates were based on total electricity expected to be generated from the power plants it financed. Estimates are now based on only on the amount of power assumed to be distributed to residential customers. ***CY09 water figure has been corrected. It included 7 million customers of sewage services. **** Number of students includes students reached with IT services in universities in Africa (500,000 in both CY09 and CY10). *****New Business figures for all reach indicators other than infrastructure or telecom are reported as targets and not increments (a) For FY11, expected Microfinance reach includes one project in South Asia which accounts for 12M loans and $4.2B of outstanding portfolio, by March 2016. (b) In FY11, in addition to water distributed, we expect to reach also 1.6 million sewerage and wastewater customers. 2.49 IFC supports firms that make a wide range of contributions in developing countries. Reach indicators are used to capture who these firms benefit and how. They tally the number of people that have benefited (and are expected to benefit) from specific goods and services provided (and utilized) by our clients. For some stakeholder groups, how they benefit from our clients' activities is best captured in dollar or other numerical terms. Ultimately, reach indicators give an indication of the different groups touched by IFC client companies. 19

31 2.50 However, we cannot claim that this reach is solely attributable to IFC. IFC is always a minority investor, and in some cases, IFC's investment may be small compared to the company's overall size. Nevertheless, knowing how many lives are being touched through our clients is important in assessing the indirect reach of IFC's activities. 2.51 There are two types of reach indicators reported: portfolio reach, which tell us the actual number of people that have benefited from clients in IFC's current portfolio, and new business expectations, which tell us the target number of people expected to benefit from projects committed by IFC during the Fiscal year in question. Time periods reported and definitions vary somewhat across departments. 2.52 Reach indicators are primarily aggregated within a particular industry department using available information from client companies for which that indicator is relevant. MSME loan figures, for example, are tracked and reported by financial markets only. Some corporate reach indicators, like employment, are aggregated across industry departments. 2.53 Reported reach figures are affected by changes in the portfolio and new business, and coverage. Our covered portfolio varies by year. This happens due to portfolio changes every year new clients (possibly in different sectors than before) enter the portfolio, some existing investments close, and we are also not always able to get information from our clients. For example, while all clients supposed to report on power distribution this year did so, for other reach indicators coverage is incomplete, though never lower than 80% (gas distribution). Hence, some of the reach indicators understate the actual reach of our client companies. 2.54 Table 2.2 shows our client companies development reach for CY09 and CY10, as well as the new business expectations for FY11. As we do since FY09, in addition to total employment figures we report also on the female employment provided by our client companies. 2.55 In 2010, IFC s client companies employed well over 600,000 women across all regions and industries, a record high since we started reporting on this indicator in FY09. Overall, nearly a third of the total workforce of the clients for which we have data on both total and female employment is composed by women, consistently with data from prior years. 2.56 Opportunities for women have been highest in the consumer and social services sector and in the telecom and IT industry, where women were 45% and 41%, respectively, of their overall labor force. Not surprisingly, there were fewer among clients in the typically male-dominated extractive industry about 11%. At the regional level, the ratio of female to total employment reflects both the composition of regional portfolios and the different extent to which formal employment opportunities are available to women in different areas the world. In Europe and Central Asia women were 43% of IFC clients total workforce; in the Middle East and North Africa and in South Asia they were 22%. 2.57 Overall, in 2010 IFC clients provided 2.4 million jobs, over 200,000 more than a year ago. As for any other indicator, these changes include both changes in IFC's portfolio (e.g., clients entering or leaving IFC's portfolio) and jobs added or lost in specific client companies. The East Asia and Pacific region provided 67,000 more jobs the largest increase across regions in absolute value. Jobs provided by IFC clients in Europe and Central Asia also increased by 61,000. Investments in funds provided the greatest number of jobs, with a 170,000 increase from 2009, while jobs provided by IFC clients in Consumer and Social Services increased by over 50,000. 2.58 Data for other reach indicators, show significant increases in the volume of both microfinance and SME loans, up 17% and 26%, respectively, and farmers reached (20%), while students reached, 20