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                                                  Results Measurement for Investments

A Look at Development Results by Project Size
Larger IFC investments tend to have higher development outcome success rates. This find-
ing holds across IFC sectors, and highlights the challenges small projects face in the market
place. Factors driving the development results of IFC’s small investments are client manage-
ment and product quality, but also IFC’s own work quality.
Analyzing the development results of IFC’s direct investments by investment size shows that IFC’s larger investments have con-
sistently yielded superior development outcomes. This analysis highlights results by size and looks at characteristics of success-
ful investments to help understand these findings.

                                                                                             Notes on the analysis
  We assessed all active IFC investments that were approved between 1998 and 2003, a total of 469 companies. These invest-
  ments are generally sufficiently mature to be adequately evaluated. We analyzed information captured in IFC’s Development
  Outcome Tracking System (DOTS), and Expanded Project Supervision Reports (XPSRs) validated by IFC’s Independent Evaluation
  Group (IEG) for 57 larger investments that were evaluated between 2005 and 2006. This includes 49 2006 XPSRs, plus eight
  2005 evaluations in cases where 2006 evaluations alone amounted to less than two for a given industry department.

Better Development Results with Larger Investments
Larger IFC investments have higher development outcome success rates. While only 46 percent of the companies with IFC total
disbursements of less than US$5 million achieved high development outcome ratings, 85 percent of the companies with dis-
bursements higher than US$20 million succeeded to do so (see figure 1). This pattern held true across industries (see figure 2).
In-depth evaluations by IFC’s Independent Evaluation Group (IEG) show similar results.

                          Figure 1:
           Better development results with larger                                                       What makes a project a development success?
                      IFC investments                                                                 In order for IFC to consider a project a development success,
                           D e v e lopme nt O utcome
                                                                                                      it must:
                        (S ucce ss R ate U nwe igh te d)                                                  I Be profitable (its financial return exceeds the average
   10 0%                                                                                                    cost of capital),
                                                                              8 0%          86%
    8 0%                                                                                                  I Generate benefits to society above and beyond those
                                                 6 7%

    6 0%                53 %
                                                                                                            to its financiers (usually, the economic rate of return is
                                                                                                            expected to exceed ten percent), and
    4 0%
                                                                                                          I Be socially and environmentally sustainable (meet or
    2 0%
                                                                                                            exceed our performance standards).
                                                                                                      We also assess a project’s broader private sector develop-
             < $ 5M   $5M-$10M               $10M-$15M                 $ 1 5 M- $ 2 0 M   >$ 2 0 M

                               C u m u la t iv e IFC D is b u r s e m e n t
                                                                                                      ment impact (e.g. a project’s demonstration effects.)
                         Figure 2:
        All industries show better development                                                                                                                IFC industry departments
              results for larger investments                                                                                                  I   CHE – Health and Education
                                     D e v e lo p m e n t re s u lts b y in d u s tr y                                                        I   CAG – Agribusiness
    1 0 0%
                                                                                                                                              I   CGM – Global Manufacturing and Services
     8 0%                                                                                                                                     I   CFN – Private Equity and Funds
     6 0%                                                                                                                                     I   CIT – Information and Telecommunication
                                                                                                             Success Rate
     4 0%
                                                                                                             (W eighted by
                                                                                                                                              I   COC – Oil, Gas, Mining, and Chemicals
                                                                                                             IFC investment)
     2 0%                                                                                                                                     I   CGF – Global Financial Markets
                                                                                                             Success Rate

                                                                                                             (Unweighted)                     I   CIN – Infrastructure
                  IF C      C HE       C AG C G M C F N             C IT    COC    C GF         C IN

                                                   In d u str y

Why do larger projects have superior development results?
If larger IFC investments generate superior development results across the board, what are the drivers of this strong perform-
ance? What characterizes successful or unsuccessful operations of different sizes?

Financial and economic performance differentiate small projects most.
Weaker financial and economic performance appears to explain the relatively poorer development outcome success rates of
small investments: investments below $10 million achieved strong financial performance in only 42 percent of cases, whereas
the same was true for 70 percent of investments larger than $10 million.

                      Figure 3:
    Development outcome by performance dimensions

                                           De ve lopm e nt Outcome Com pone nts                                                                         Less than half of small projects are business suc-
   1 00 %
                 S m a ll ( < $ 1 0 M )     L a r ge (> $ 1 0 M )                                                                                       cesses. This performance pattern is consistent
    80 %
                                                                75%                       73%
                                                                                                   77 %                          79 %                   with the experience of the private sector in devel-
                                                                                                                       61%                              oped countries: For example, in the United States
    60 %
                      42%                                                                                                                               less than half (44%) of new establishments were
    40 %

                                                                                                                                                        still in existence four years later.
    20 %

                         F in a n c ia l                Ec o n o m ic                     En v . & S o c .           Pr iv a t e S e c to r
                    Pe r f o r m a n c e             Pe r f o r m a n c e             Pe r f o r m a n c e            D e v e lo p m e n t

                                                                 Figures 4 & 5:
                                  Financial and economic performance are highly correlated with investment size

                                               Financia l Performance
                                                                                                                                                                   Economic Performance


                                                                                                                          75%                                                                                         81%
       80%                                                                                           70%                                          80%                                                  70%
                                                                                                                                                                                   6 4%
                                                                            5 6%
       60%                                        5 0%                                                                                            60%                5 0%
                                                                                                                                                           47 %
                            39 %
       40%                                                                                                                                        40%

       20%                                                                                                                                        20%

            0%                                                                                                                                    0%

                           < $ 5M             $5M- $10M                $ 1 0 M- $ 1 5 M         $ 1 5 M- $ 2 0 M        > $20M                            < $ 5M   $5M- $10M   $ 1 0 M- $ 1 5 M   $ 1 5 M- $ 2 0 M   > $20M

Drivers of success and failure
In-depth evaluations by IFC’s Independent Evaluation Group (IEG) show that larger projects tend to have better corporate gov-
ernance. High quality of management is crucial to success in both large and small projects. Smaller businesses are more vulner-
able and seem to require both sound management and high quality products to survive competitive pressures.
                                               Figure 6:
     Large investments -quality of management and sound corporate governance are critical to success

                                                                               Factors Affecting Outcome
                                                                                  Successful Projects

                                                     S m a ll ( < $ 1 0 M )    L a rge ( > $ 1 0 M )

                   Q u a lity o f M a n a g e m e n t
                                                                                                                                                     30 %
                   Co r p o r a te G o v e r n a n c e
                                                                                                       13 %
                                                                                                               17 %
          Q u a lity o f Pr o d u c t o r Se r v ic e                                                                                       26 %

                                                                                                                             2 0%
                             Ex te r n a l F a c to r s
                                                                                                               17 %

                          M a rket Competition             0%

                         In d u s tr y Kn o w h o w
                                             O t he r s

                                                          0%              5%           1 0%              15%          20 %           2 5%          30%      35 %

                                             Project example 1:
              Management quality and sound corporate governance drive successful banking in Africa
 After careful screening, IFC selected a local African bank                                      a resource previously non-existent in the country. The bank’s
 among 89 potential candidates for investment, recognizing its                                   recognized strengths contributed to establishing best practice
 management’s strong local knowledge, exemplary banking                                          standards and strengthening the country’s entire banking sec-
 standards and sound corporate governance. IFC committed                                         tor. IFC’s line of credit to the bank supported industries such
 US$ 20 million to the bank in the form of a credit line to lend                                 as manufacturing and construction, and the bank has grown
 on to private companies in various productive sectors,                                          from 14 branches in 2000 to 78 branches in 2005.

                                           Project example 2:
     Management skill and sound corporate governance drive performance of flour mill in the Middle East
 IFC disbursed US$ 8 million for a project to set up a flour mill                                uted to inadequate management and poor disclosure of
 and grain silos in the Middle East in 2000. Although the proj-                                  information that exacerbated problems faced by the com-
 ect entailed enhancements to the operational capabilities of                                    pany.
 the company’s management, unsatisfactory results were attrib-

Quality of Product or Service is Vital to Success of Small Projects
Innovative products or services are particularly important to the success of small projects. While all industries achieve higher suc-
cess rates for larger investments, this pattern is less pronounced for financial markets and infrastructure projects (figure 2). In
IFC’s financial market portfolio, smaller companies - often new entrants - have been able to build high quality loan portfolios
and enjoy relatively high success rates – comparable to larger projects at or above 70 percent (figure 7).
                                                     Figure 7:
                        Financial markets enjoyed high success rates for all investment sizes

                                    D e v e lo p me n t O u tc o me f o r F in an c ia l M ar ke t s
                                                (S u cc e ss R a te U n w e ig h te d )

                      80%          72%                 71%                                              70%




                                 < $ 5M           $ 5 M -$ 1 0 M          $ 1 0 M- $ 1 5 M         $ 1 5 M- $ 2 0 M            >$20M

                                                           C u m u l a t i v e IF C D is b u r s e m e n t

                                                  Project example 3:
                          Success through innovation in the insurance market in Latin America
 An IFC-supported life insurance company in Latin America – at US$ 4 million a small investment for IFC - emerged as a leader
 in the annuity insurance market, challenging existing players. The company offered new products and services to the mid-
 dle segment of the population, and effectively helped to promote long-term domestic savings and provided retirees with
 options for private pension plans. This small project’s success - its impressive operational performance, enterprise value build-
 up and market leadership - was driven by the quality of client management and innovative products and services.

Supporting small players indirectly through financial intermediaries
achieves superior success rates
Lending to small financial intermediaries shows strong development results. Further, lending to large financial institutions with
specific targeted lending to micro, small and medium sized enterprises (MSMEs) also achieves comparatively strong develop-
ment results. Separating out this group of clients constitutes only a rough measure, because many of IFC’s financial markets
clients that do not specifically target MSME lending still lend to smaller clients.

                                                   Figure 8:
                 Strong development results: reaching MSMEs through financial intermediaries

                                           De velopm ent Outcome Succe ss Ra te s

                     10 0 %
                                8 6%            8 6%                 8 4%
                                                                                                                7 8%
                                                                                                                                 6 3%




                                M ic r o        S m a ll           M e d iu m         No n -S ME             F in a n c ia l      IFC
                                                                                                             M a r ke ts

High work quality can mitigate otherwise lower development results for smaller projects
IEG’s in-depth evaluations also assess the quality of IFC’s work, which comprises of (1) screening, appraisal and structuring of the
project, (2) supervision and administration, and (3) IFC’s role & contribution. IFC’s work quality was in general better for larger
investments. However, the finding also shows that when IFC’s work quality is high, it significantly increases the likelihood of
development success for investments under $10 million (figure 9).
                               Figure 9:
        Consistently high work quality can mitigate the lower                                                                                                  Project Example 4:
                   success rate of smaller projects.                                                                                                  IFC’s high work quality contributes
                                                                                                                                                     to successful development outcomes
                   Deve lopment Outcome Success Rates by Work Quality Ratings
                                                                                                                                                                of small project.
                                       Da t a f r o m I EG Ev a lu a t io n s 1 9 9 6 - 2 0 0 6 ( 6 2 4 P r o je c t s )                            IFC invested in an Eastern European bank to
                                                                                                                                                    help them develop and expand. During
           H ig h W o r k Q u a lit y Pr o je c ts O n ly : 4 0 8         A ll Pr o je c t s Ev a lu a te d : 6 2 4                                 appraisal in 2001, an IFC team identified
                                                                                                                      84%               84%
                                                                                                                                                    that the bank had excellent management
                             78%                          79%
                                                                                       76%                                    76%
                                                                                                                                                    reporting capabilities and accounting sys-
                                                                    58%                         60%                                                 tems, however, it was not utilizing the capa-
                                      47%                                                                                                           bility adequately in the decision making and
              40%                                                                                                                                   risk-management functions. The bank has
                                                                                                                                                    indicated that the IFC-sponsored technical
                                                                                                                                                    assistance directed management's attention
                                 <$5M                     $5M-$10M                     $ 1 0 M-$ 1 5 M                $ 1 5 M-$ 2 0 M    >$ 20M
                                                                                                                                                    to these areas and the subsequent assistance
                                                                                                                                                    received was instrumental in formalizing
                                                               C u m u la t iv e IF C Dis b u r s e m e n t
                                                                                                                                                    their focus on attention to the importance
                                                                                                                                                    of the internal audit function and use of
                                                                                                                                                    information. The project generated positive
                                                                                                                                                    effect on local economy, serving the needs
                                                                                                                                                    of 4,500 SME clients, about 20% market
                                                                                                                                                    share in the SME sector. The project also had
                                                                                                                                                    a demonstration impact for other investors
                                                                                                                                                    that followed IFC's example and provided
                                                                                                                                                    funding to the bank.

Implications for IFC
Consistent with private sector experience, IFC’s larger investments achieve superior development outcome success rates. Small
projects face particular challenges in the market place. For example, they are vulnerable to market shocks such as price fluctu-
ations, and bureaucracy and red tape hinder them disproportionately. Not surprisingly, small companies have higher failure
rates, including in OECD countries.

The relatively poorer performance of small investments can largely be explained by their poorer financial and economic per-
formance. It does not in itself mean, however, that IFC should disengage from making small investments: by challenging estab-
lished players, often with new and innovative products, small businesses perform a very important role in the functioning of
competitive markets. The question is how IFC can be most effective in reaching these smaller players that may have difficulty in
attracting funding from elsewhere.

IFC projects that reach small players indirectly through financial intermediaries generate strong development results. This find-
ing supports IFC’s strategy to reach larger numbers of small companies more efficiently and successfully through wholesale solu-
tions such as credit lines or capacity building through local institutions; activities that – where successful – promise to be sus-
tainable beyond IFC’s involvement.

Management quality, sound corporate governance and quality of product or service are key drivers of project performance.
Given these findings are based on evaluations of projects approved before 2001, there is reason to believe that more recent
projects will achieve better development results: since then, IFC has substantially strengthened its assessment of management
quality and corporate governance.

IEG analysis shows that IFC’s own work quality helps to improve development outcome success rates for small investments. This
finding suggests that IFC can enhance the performance of its small investments through targeted improvements in its own work
quality, for instance through staff training and incentive setting.

Monitor for Investments     October, 2007
Monitor shares key findings from the review of the development results of IFC's investments.
Development Effectiveness Unit, IFC

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