Development Through the Private Sector A joint report of 31 multilateral and bilateral development finance institutions © International Finance Corporation 2011. All rights reserved. 2121 Pennsylvania Avenue, N.W. Washington, D.C. 20433 Internet: www.ifc.org The opinions and analysis presented in this report do not necessarily reflect the official views of each of the contributing IFIs and should not be attributed to their respective Executive Directors or the countries they represent. IFC does not guarantee the accuracy, reliability or completeness of the content included in this work, or for the conclusions or judgments described herein, and accepts no responsibility or liability for any omissions or errors (including, without limitation, typographical errors and technical errors) in the content whatsoever or for reliance thereon. 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International Finance Institutions and Development Through the Private Sector i Table of Contents Preface iii Executive Summary 1 Chapter 1: Role of the Private Sector in Development 3 Development Challenges 4 Broad Development Challenges 4 Millennium Development Goals 5 Role of the Private Sector in Addressing the Development Challenges 7 Growth 7 Jobs 8 Poverty Reduction and Inclusive Growth 8 Service Delivery 11 Addressing Food Security, Climate Change, and Environmental Sustainability 12 Taxes 12 Role of Government 12 Conclusion 14 Chapter 2: Role of the IFIs in Private Sector Development 15 Private Sector Challenges 16 IFIs’ Role in Addressing Private Sector Challenges 18 The Three Channels of Development Assistance 18 Overview: Role of Private Sector-Oriented IFIs in Addressing Private Sector Challenges 20 Finding High Development Impact Investment Areas and Approaches 22 Special Role/Additionality 26 Partnerships 30 Lessons from Experience 33 Conclusion 34 Chapter 3: Results and Case Studies 35 Overview 36 Commitment Volumes 36 Development Outcome or Transition Success Rates 36 Reach Indicators 38 Demonstration Effects 38 IFI Role in Specific Sectors 38 Private Infrastructure and Public-Private Partnerships 38 SMEs and Microenterprises 42 Financial Sector 45 Agribusiness 47 Inclusive Business Models 49 Investment Climate Reform 51 Climate Change 53 Innovation 54 Results and Case Studies Summary 56 Chapter 4: Conclusion 57 Annex: Profiles of International Finance Institutions with Private Sector Operations 60 ii International Finance Institutions and Development Through the Private Sector International Finance Institutions and Development Through the Private Sector iii Preface The private sector is recognized as a critical clear or adequately communicated to stake- stakeholder and partner in economic develop- holders and the public. It is the aim of this ment, a provider of income, jobs, goods, and report to help bridge that gap—to increase services to enhance people’s lives and help the information and understanding about both them escape poverty. Multilateral development the value of the private sector in development, banks and bilateral development finance institu- and the role of international development tions (together in this report called International finance institutions in supporting development Finance Institutions, or IFIs, see box 1) play a through the private sector. significant role in supporting the private sector in developing countries. They provide critical The report is a joint effort of 31 multilateral capital, knowledge, and partnerships; help and bilateral development institutions that manage risks; and catalyze the participation of have significant programs to promote private others. They support the kind of entrepreneurial sector investment and assistance. The con- initiatives that help developing countries achieve tent benefited from an extensive interchange sustainable economic growth. This role is be- of ideas and materials among all participat- coming increasingly important for development ing institutions. This report was initiated institutions, along with more traditional aid and under the sponsorship of the Private Sector loan programs to governments. Development Institutions Roundtable, which is an annual meeting of the heads of IFIs Yet the important development contributions focusing on private sector development, and that IFIs make when engaging with the private was coordinated by the International Finance sector in developing economies are often not Corporation (IFC). iv International Finance Institutions and Development Through the Private Sector Box 1: International Finance Institutions with Private Sector Operations Examples of Multilateral Development Banks or Finance Institutions with Private Sector Operations • African Development Bank (AfDB) • Asian Development Bank (ADB) • Black Sea Trade and Development Bank (BSTDB) • Development Bank of Latin America (CAF) • European Bank for Reconstruction and Development (EBRD) • European Investment Bank (EIB) • Inter-American Development Bank (IDB) • Inter-American Investment Corporation (IIC) • International Finance Corporation (IFC) • Islamic Corporation for Development of the Private Sector (ICD) • Multilateral Investment Fund (MIF) • Multilateral Investment Guarantee Agency (MIGA) • Nordic Investment Bank (NIB) • OPEC Fund for International Development (OFID) Examples of Bilateral Private Sector Development Finance Institutions • Belgian Corporation for International Investment (SBI-BMI) • Belgian Investment Company for Developing Countries (BIO) • CDC Group (British Development Finance Institution) • COFIDES (Spanish Development Finance Institution) • Danish Industrialization Fund for Developing Countries (IFU) • DEG (German Development Finance Institution) • Development Bank of Austria (OeEB) • Entrepreneurial Development Bank of the Netherlands (FMO) • Finnish Fund for Industrial Cooperation (Finnfund) • French Investment and Promotions Company for Economic Cooperation (Proparco) • Japan Bank for International Cooperation (JBIC) • Norwegian Investment Fund for Developing Countries (Norfund) • Overseas Private Investment Corporation (OPIC, US) • SIMEST (Italian Development Finance Institution) • SOFID (Portuguese Development Finance Institution) • Swedfund • Swiss Investment Fund for Emerging Markets (SIFEM) International Finance Institutions and Development Through the Private Sector 1 Executive Summary IFIs support the private sector gaps in finance, knowledge, and standards and en- The private sector is recognized as a critical deavor to create high-impact, sustainable stakeholder and partner in economic develop- development projects and programs. The ment, a provider of income, jobs, goods, and private sector in developing countries faces services to enhance people’s lives and help many constraints in such areas as finance, them escape poverty. Multilateral develop- infrastructure, employee skills, and the invest- ment banks and bilateral development finance ment climate. IFIs focusing on private sector institutions (together in this report called development can help address these con- International Finance Institutions, or IFIs) play straints and can be most effective by targeting a significant role in supporting the private sec- high-impact sectors and projects, ensuring tor in developing countries. They provide criti- sound business practices, leveraging part- cal capital, knowledge, and partnerships; help nerships, and focusing on segments where manage risks; and catalyze the participation IFI assistance is needed most and where IFI of others. They support the kind of entrepre- additionality, or the value brought to a project neurial initiatives that help developing coun- beyond what private financial institutions tries achieve sustainable economic growth. could offer, is greatest. As shown in chapter 2, This role is becoming increasingly important IFIs’ additionality is particularly evident in their for development institutions, along with more greater engagement in higher-risk countries traditional aid and public sector financing. and products where private capital is often scarce, their countercyclical operations, and Yet the important development contributions their recognized special contributions to that IFIs make when engaging with the private knowledge, standards, risk mitigation, and sector in developing economies are often not catalyzing others. clear or adequately communicated to stake- holders and the public. It is the aim of this IFIs have reached a significant scale in report to help bridge that gap—to increase global private sector finance and achieved the information and understanding about both notable success in projects and in key sec- the value of the private sector in development, tors. Over the past decade, IFIs have achieved and the role of international development substantial growth in private sector operations. finance institutions in supporting development Current results measurement systems show through the private sector. positive development outcomes in terms of returns to the economy, environmental and The main messages of this report include: social performance, private sector develop- ment, financial returns, and people reached. As Growth, poverty reduction, and improv- discussed in chapter 3, IFI projects have had ing people’s lives require a vibrant private significant impacts