IFC ROAD MAP FY Creating Innovative Solutions in Challenging Times INTERNATIONAL FINANCE CORPORATION

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1 IFC ROAD MAP FY13-15 Creating Innovative Solutions in Challenging Times INTERNATIONAL FINANCE CORPORATION Version redacted and disclosed in accordance with IFC s Access to Information Policy following discussion by IFC s Board on April 12, 2012

2 IFC S VISION That people should have the opportunity to escape poverty and to improve their lives IFC S VALUES Excellence, commitment, integrity, teamwork and diversity IFC S PURPOSE To create opportunity for people to escape poverty and improve their lives by catalyzing the means for inclusive and sustainable growth, through: - Mobilizing other sources of finance for private enterprise development - Promoting open and competitive markets in developing countries - Supporting companies and other private sector partners where there is a gap - Helping generate productive jobs and deliver essential services to the poor and vulnerable To achieve its Purpose, IFC offers development-impact solutions through firm-level interventions (direct investments, Advisory Services, and the IFC Asset Management Company); promoting global collective action, strengthening governance and standard-setting; and business-enabling-environment work.

3 TABLE OF CONTENTS EXECUTIVE SUMMARY... 1 I. EXTERNAL ENVIRONMENT... 5 BASELINE MACRO-ECONOMIC GROWTH OUTLOOK... 5 CAPITAL FLOWS TO DEVELOPING COUNTRIES... 6 RISKS AND UNCERTAINTIES... 7 LONG-TERM DEVELOPMENT CHALLENGES... 9 THE ROLE OF THE PRIVATE SECTOR IN DEVELOPMENT THE EVOLVING DEVELOPMENT FINANCE LANDSCAPE IMPLICATIONS FOR IFC II. IFC S STRONG FOUNDATION AND RESULTS IFC S UNIQUE OFFERING IFC S TRACK RECORD IN INNOVATION DEVELOPMENT IMPACT RESULTS ADDITIONALITY HIGHLIGHTS OF PROGRAM IN FIVE STRATEGIC FOCUS AREAS HIGHLIGHTS OF FINANCIAL SUSTAINABILITY MOBILIZATION WORLD BANK GROUP COOPERATION THE CHANGE PROCESS III. FY13-15: CREATING INNOVATIVE SOLUTIONS IN CHALLENGING TIMES DEVELOPMENT IMPACT LONG-TERM STRATEGIC FOCUS AREAS SHORT-TERM FOCUS AREAS ADVISORY SERVICES CONTRIBUTION TO STRATEGIC FOCUS AREAS SUMMARY OF REGIONAL STRATEGIES MOBILIZATION AND PARTNERSHIPS EQUITY STRENGTHENING OPERATIONS AND DELIVERY MODEL IV. PROGRAM ANNEX 1. REGIONAL STRATEGIES EAST ASIA AND PACIFIC EUROPE AND CENTRAL ASIA LATIN AMERICA AND THE CARIBBEAN MIDDLE EAST AND NORTH AFRICA SOUTH ASIA SUB-SAHARAN AFRICA ANNEX 2. IFC S POVERTY FOCUS ANNEX 3. IFC CORPORATE SCORECARD... 98

4 Box 1: IEG-IFC Evaluation Findings: Informing IFC s Strategic Choices Box 2: IFC S Five Strategic Focus Areas Box 3: Components Of Economic Capital Box 4: IFC Change Process Implementation Highlights Box 5: IFC s Development Goals Illustration Of Work In Progress Box 6: The Where, What, How And Why of IFC s Strategic Focus Areas: Staff Communication Box 7: Leading The Response To Political Events In Box 8: IFC And Resource Scarcity Box 9: IFC And Local Currency Markets Box 10: GTFP DOTS Framework And Roll-Out Status Box 11: Trade And Supply Chain Products And Contribution To Strategic Focus Areas Box 12: IFC s Focus On SMEs Box 13: IFC And Women In Business Box 14: Expanding The Development Impact Of Advisory Services With Individual Firms Box 15: Lessons Learnt From The Crisis _Toc Table 1: Real GDP Growth (% Change From Previous Year)... 5 Table 2: Net Private Capital Flows To Developing Countries... 6 Table 3: Emerging Market Linkages to Western European Banks... 8 Table 4: Development Reach of IFC's Investment Portfolio Clients Table 5: Selected Advisory Results In FY Table 6: IFC Commitments in IDA Countries and Frontier Markets Table 7 : Investment Business Projections FY Figure 1: Net Private Inflows To Developing Countries... 7 Figure 2: IFI Private Sector Volumes Figure 3: Conceptual Framework For IFC s Additionality In Different Countries Figure 4: The WBG s Five Strategic Priorities And IFC s Strategy Figure 5: Investment Business Projections FY Figure 6: Advisory Services Program (Client-Facing Project Spend) Figure 7: Supporting Poverty Reduction Through Inclusive And Sustainable Growth... 94

5 1 Executive Summary 1. There is significant economic and political uncertainty in the world today. The World Bank Group (WBG) foresees a further slowdown in real GDP growth in 2012, both globally and for most developing regions, with a gradual recovery starting in However, this outlook is subject to considerable risks that could create much less favorable conditions for developing countries. Progress in addressing poverty and other long-term development challenges, such as rising inequality, food security, access to infrastructure, and climate change will also be affected in such uncertain circumstances. 2. The private sector is now recognized as a critical driver of and partner in economic development, a provider of income, jobs, goods and services to improve people s lives and provide them opportunity to overcome poverty. Demand for IFC s services continues to increase as the role of the private sector in developing countries grows, and IFC continues to strengthen its capabilities and innovate its product offerings. The current difficult market environment as well as substantial risks will require a readiness to respond to evolving client needs. 3. IFC is the largest global development finance institution focused exclusively on private sector development. It has a unique offering, including being part of the WBG, its global reach and its ability to craft client solutions through the combination of three complementary and strategically aligned lines of business Investment Services (IS), Advisory Services (AS) and the IFC Asset Management Company (AMC). Continuing its leadership in measuring and reporting on development results, IFC is now in the second year of refining the IFC Development Goals (IDGs), with the aim of a gradual roll-out starting fiscal year (FY) IFC continued to show strong results in FY11, including: High development outcomes for 69 percent of AS projects (the highest level to-date), and for 67 percent of IS projects; $18.7 billion of financing, including a record $6.5 billion in mobilization; more than $180 million in AS project spend; and $0.7 billion in AMC commitments; A continued focus on IDA countries, which accounted for 48 percent of investment projects, 40 percent of own-account investment volume, 43 percent of AMC commitment volume, and over 60 percent of IFC s AS program. IFC also made a $600 million contribution to IDA out of FY11 net income of $2.2 billion; and Strong results in Sub-Saharan Africa (SSA) which accounted for $2.2 billion of own-account investment volume (18 percent of IFC), nearly $650 million in mobilization, and 26 percent of IFC s AS program. 5. IFC also played its counter-cyclical role in the Middle East and North Africa region (MENA), committing nearly $1.5 billion for its own account between January, 2011 and February, 2012, mobilizing around $900 million in addition, and approving 20 new AS projects worth $16 million in the Arab World. 6. Cooperation with other institutions within the WBG continued to be critical, especially in areas such as the business-enabling environment, public-private partnerships (PPPs) and infrastructure, and cooperation on strategy, policy, systems and individual projects. Less than two years into operation, the joint IFC/MIGA business development partnership has proven to be a successful example of such cooperation. In FY11, IFC and MIGA teams closed several joint transactions that accounted for 7.5% percent of MIGA's total issued guarantees. Greater cooperation within the WBG will continue, including through the Arab World Initiatives, and in other important areas for development such as in climate change, infrastructure, food safety and access to finance.

6 2 7. In FY13-15 IFC will continue to lead and innovate through uncertain times with a dynamic, creative approach to addressing long-term development challenges and evolving client needs within a stable strategic framework for action. 8. IFC will retain its emphasis on its long-term strategic objectives, while providing a focused counter-cyclical response to client needs in the current difficult market environment. IFC s key corporate goals will remain greater development impact and financial sustainability, and these screens will continue to drive IFC s strategic choices, along with selectivity based on IFC s additionality. IFC s five long-term Strategic Focus Areas, in line with the five post-crisis directions of the WBG, remain unchanged from prior years, except for the explicit inclusion of water. IFC recognizes that water is an important crosscutting theme, with a strong interconnection in particular among water, energy and food, which is also impacted by climate change. IFC will also place a strong emphasis on gender as a cross-cutting theme. 9. The long-term Strategic Focus Areas are: Strengthening the emphasis on frontier markets - IDA countries, Fragile Situations, and frontier regions in non-ida countries; Addressing climate change, and ensuring environmental and social sustainability; Addressing constraints to private-sector growth in infrastructure, including water; health, education, and the food supply chain; Developing local financial markets through institution-building, the use of innovative financial products and mobilization, and focusing on micro, small and medium enterprises; and Building and maintaining long-term client relationships with firms in developing countries, using the full range of IFC s products and services, and assisting their cross-border growth. 10. In the near term, IFC will place emphasis on three areas with the aim of doing more: Implementing its strategy in the areas of infrastructure (especially in Africa), agribusiness and the food supply chain, and small and medium enterprises (SMEs), jobs and growth; Responding to the current difficult market environment; and Investing in people and improving the effectiveness of the institution. 11. IFC will maintain the target of 45 percent 50 percent of investment projects in IDA countries. It will also set a climate change target, with at least 20 percent of its annual long-term finance and at least 10 percent of its annual Trade and Supply Chain commitments to be climate-friendly by FY15. IFC will also continue to expand the climate share of its AS program, increase focus on Fragile Situations, grow in SSA, conduct counter-cyclical activities in MENA, step up PPPs across sectors, increase its focus on local financial market development (including local currency), and increase South-South investments and partnerships. 12. IFC will continue to contribute to poverty reduction across its Strategic Focus Areas with activities that support private-sector-led inclusive and sustainable growth, with care for the environment. IFC s activities across IS, AS and AMC contribute to poverty reduction by promoting both broad-based growth, which indirectly benefits the poor and underserved, and promoting inclusiveness, which more directly addresses the needs of the poor and underserved. IFC is now sharpening its poverty focus as it refines and implements a Poverty Action Plan. 13. The Corporation will build on its track record of innovation for private sector solutions in the Strategic Focus Areas through products and approaches such as AMC funds, blended finance, trade and supply chain products, climate finance, education for employment, inclusive business models and agricultural price risk management. IFC continues to innovate in response to client needs in the current

7 3 difficult market environment, such as through the Critical Commodities Finance Program and capital release transactions in support of trade and SMEs. 14. IFC will also be pro-active in the management of its portfolio, profitability and economic capital in its focus on financial sustainability. 15. As part of its important catalytic role IFC will continue to increase impact through mobilization and partnerships. Its flagship Syndicated Lending Program, which contributed a record $4.7 billion to FY11 mobilization, is expected to remain a key component of its mobilization volumes, and banks in emerging markets are expected to become even more prominent as mobilization partners. AMC will keep the momentum as the existing funds continue to make investments, four additional funds proceed to closing, and other funds are developed in line with IFC s development objectives. IFC will also continue to mobilize significant resources through its role as lead adviser in PPPs across sectors and regions. IFC will continue to deploy concessional funds from donors through its blended finance mechanisms, in very selective fashion within a strictly defined framework, scheduled to be discussed with the Board on March 15, IFC will continue to build on its broader development partnerships. IFC will strengthen its partnerships with development finance institutions, building on the joint report on International Finance Institutions and Development through the Private Sector, the Corporate Governance Development Framework and the Deauville Partnership process, and the G-20 on trade, food security, SMEs and financial inclusion. It will also strengthen its innovative partnership with private banks, such as JPMorgan Chase and Société Générale in the area of food security, and with its extensive client networks. South-South investments and advice originating in emerging markets, as well as local and regional partnerships, will continue to increase. 17. IFC will continue to strengthen its delivery model for greater impact. Progress has been made around IFC s change process in several key areas, and Management will continue to focus on improving efficiency in operations, maintaining and fostering global knowledge, leveraging people and talent, and improving the effectiveness of the institution. IFC will also continue to deepen alignment between IS and AS, employ more programmatic approaches to increase impact, and work across departments to create innovative solutions in cross-cutting areas such as agribusiness and the food supply chain, climate change, water, Fragile Situations, SMEs, and gender. The IDGs are powerful tools to help align staff around their indicators and targets. 18. IFC will continue to manage its own-account investment program growth efficiently within its projected capital and budget resources. IFC projects that its total commitment volume (including mobilization) will grow from $18.7 billion in FY11 to $24-27 billion in FY15, a compound annual growth rate (CAGR) of 6 to 10 percent. This is based on an increase in own account commitments from $12.2 billion in FY11 to $18 - $20 billion in FY15, with a strong increase in trade and supply chain products, mainly in response to the current difficult market environment. Long-term finance commitments for own account are projected to increase from $7.2 billion in FY11 to $ $12 billion in FY IFC s investment business projections for FY13-15 include the following elements: Long-term investments (LTF), which include the traditional long-tenor products of equity and longterm debt, as well as some supply chain products such as the Global Warehouse Finance Program 1. Equity is expected to increase to an average 27 percent of LTF over the planning period in line with IFC s equity strategy. 1 Products have been mapped between LTF and TSC according to economic capital treatment, with GWFP (currently being weighted similarly to loans) in LTF.

8 4 Trade and Supply Chain Products (TSC), primarily the Global Trade Finance Program (GTFP), and also including the crisis-related Critical Commodities Finance Program (CCFP) and the Global Trade Liquidity Program (GTLP). IFC expects to request an increase in the GTFP product ceiling in FY13, at which time it will also present preliminary GTFP DOTS analysis. TSC is expected to grow from $5 billion in FY11 to $7.5 - $8 billion in FY15. CCFP and GTLP commitments are expected to occur primarily in FY12 and FY13. Mobilization as currently projected 2 - through IFC s Syndicated Lending Program, AMC and the GTLP and CCFP - will remain between $6 and $7 billion throughout the FY13-15 planning period, a saving of IFC s capital of up to $5 billion, had IFC invested similar amounts for its own account. 20. Following a period of consolidation to implement reforms, Advisory Services resumed targeted growth in FY12. Total AS spend is expected to grow at around six percent a year between FY12 and FY15, with increased efficiency enabling project expenditures to grow around nine percent a year during that period. IDA, Fragile Situations, climate change and sustainability and Women in Business will continue to be important cross-cutting focus areas. 21. In the current difficult market environment, building on prior experience, IFC has already stepped up its solutions to meet client needs, primarily in the areas of trade and commodity and SME finance and through targeted Advisory Services, and it continues to implement pro-active portfolio management. IFC s continued response to the difficult environment in some of its markets will not displace the emphasis on its long-term strategic priorities (such as IDA countries and infrastructure development) and will be focused and innovative. 22. Should there be a significant deterioration in the external environment, IFC will implement a comprehensive investment and advisory counter-cyclical response, in conjunction with other members of the WBG, multilateral and bilateral development institutions, and other partners, taking into account any deterioration in its own capital position as result of such a downturn. IFC stands ready to deploy and/or scale up an array of crisis-related mechanisms and approaches in response to increased and evolving client demand, without losing sight of its long-term strategic focus areas and the importance of ensuring its financial sustainability. Broad IFC crisis response categories in a significant downturn include ramping up IFC's trade and commodity finance crisis response programs, substantially stepping up long-term debt and risk mitigation to banks to sustain and increase SME lending, responding to corporates shift to medium-term finance, a significantly enhanced equity focus, and stepping up IFC s AS response. There could also be specific regional responses, such as in the ECA region. Although there may be a temporary adjustment in product mix or geography from what is currently projected, crisis-response efforts would not divert IFC from its focus on long-term development objectives. 2 Including amounts mobilized through the CCFP and GTLP in FY12-13

9 5 I. EXTERNAL ENVIRONMENT BASELINE MACRO-ECONOMIC GROWTH OUTLOOK 1.1 In the six months since June, 2011, the World Bank cut its estimate of real GDP growth for the global economy in 2012 from 3.6 percent to just 2.5 percent. Most of the adjustment is driven by a sharp correction in high income countries forecasts for 2012 from 2.7 percent in June, 2011 to only 1.4 percent in January Growth in developing countries has also been adjusted down from 6.2 percent in June, 2011 to 5.4 percent in 2012 and just 3.8 percent if China and India are excluded. These numbers are in line with the International Monetary Fund (IMF) forecast of January, TABLE 1: REAL GDP GROWTH (PERCENT CHANGE FROM PREVIOUS YEAR) e 2012f 2013f World (WB forecasts) World (IMF Forecasts using WB methodology) High Income Countries Developing Countries Developing Countries (ex-china & India) World (IMF Forecasts) World (WB forecasts using IMF methodology) Source: Global Economic Prospects January 2012 (WB); World Economic Outlook Update, January 2012 (IMF) Note: WB forecasts aggregated using constant 2005 dollars GDP weights; IMF forecasts aggregated using 2005 PPP weights 1.2 Euro-zone outlook impacts global growth. Most of this adjustment in economic forecasts has been driven by economic and political developments in the Euro zone over the last six months, in particular the fiscal and debt sustainability challenges that some core European Union (EU) members face, together with the perceived viability of various solutions that have been tried over the past year. In June, 2011, the Euro area had been expected to grow around 1.8 percent in Now it is expected to contract by around 0.3 percent - a dramatic change that is already impacting global growth. The European Central Bank s speedy actions to inject liquidity through long-term refinancing operations have alleviated the pressure on interbank funding spreads, but medium-term challenges remain. The forecasts for the US and Japan for 2012 growth have been adjusted 0.7 and 0.4 percentage points respectively, but both are projected to keep growing at around two percent - implying an acceleration from 2011 rates. 1.3 Developing countries. Except for the Middle East and North Africa (MENA) and Sub-Saharan Africa (SSA), all regions are expected to slow down in 2012, in particular Europe and Central Asia (ECA), where growth is expected to decline from 5.3 percent in 2011 to 3.2 percent in 2012, and where the immediate risks associated with a further deterioration are the largest, through financial and trade channels. East Asia and Pacific (EAP) will remain the fastest-growing region in the world despite a minor slowdown from 8.2 percent in 2011 to 7.8 percent in 2012 as China achieves a soft landing and global trade slows down. A more significant slowdown is expected in South Asia (from 6.6 to 5.8 percent) and Latin America and the Caribbean (LAC) (from 4.2 percent to 3.6 percent). The slowdown in LAC is driven by softer growth in Mexico and Argentina, and somewhat lower commodity prices. 1.4 Growth in MENA is expected to accelerate from 1.7 percent in 2011 to 2.3 percent in 2012 as political turbulence is expected to ease in countries that experienced transitions in However, growth 3 The World Bank projections are reflected in the Global Economic Prospects January 2012 (GEP), while the International Monetary Fund s appeared on the January 2012 update of the World Economic Outlook. To note, however, that the reports use different methods of aggregation. The World Bank aggregates individual country growth rates using constant 2005 dollars GDP weights, while the IMF uses 2005 PPP weights, thus giving higher weights to developing countries. For comparison purposes, Table 1 shows WB numbers using the IMF aggregation methodology and the IMF numbers using the WB s aggregation methodology.

10 6 will remain constrained relative to pre-crisis levels because of uncertainties concerning unresolved conflicts in a few countries that may pose significant downside risks both for the regional economy and for the world economy, in particular, if oil supplies are affected. Also constraining growth in MENA are lower oil prices relative to their 2010/11 levels. Growth in SSA is expected to pick up in 2012, to 5.3 percent, 0.4 percent higher than in The region will maintain healthy growth as long as the global economy does not deteriorate significantly, because it has vibrant local economies with relatively weaker financial ties to the rest of the world. 1.5 The projected slowdown in emerging markets is a result of softer growth in developed markets (as developing markets growth is still tied to that of developed markets) and to the tightening in domestic policy introduced in late 2010 and early 2011 to prevent further acceleration in inflation in many overheating middle-income economies. As growth gets weaker, some developing countries may start to ease monetary policy in an effort to counterbalance softer external growth. In the final months of 2011, there was an important decline in exports in those developing countries that have reported data negative export growth in ECA, LAC, and South Asia are the first signs of the slowdown that is likely coming and will probably be the characteristic of World trade volume is expected to grow 4.7 percent in 2012, down from 6.6 percent in CAPITAL FLOWS TO DEVELOPING COUNTRIES 1.6 Flows by asset class. After a strong rebound to slightly more than $1 trillion in 2010, net private inflows (equity and debt) to developing countries decreased to $954 billion in 2011 as the global economy slowed down and problems in the Euro zone intensified. Foreign direct investment (FDI) flows increased by around $50 billion, medium - and long-term debt flows remained the same and bank lending increased by $24 billion. Yet, there has been a sharp decline in portfolio equity flows (down $77 billion, or a 60 percent decline) and in short-term debt flows (down $89 billion, or a 33 percent decline). As the global economy is expected to slow down further in 2012, net private inflows to developing countries are projected only to total $807 billion in 2012 (a $150 billion decline), a level similar to the 2008 level. Portfolio equity flows could recover marginally, and FDI flows are forecasted to contract by around $33 billion in A rebound in private capital flows is projected for 2013, but to levels still below those seen in 2010, assuming no further deterioration in the baseline scenario. TABLE 2: NET PRIVATE CAPITAL FLOWS Net TO DEVELOPING Private Capital COUNTRIES Flows to Developing Countries $ billions e 2011f 2012f 2013f Net private inflows (equity + debt) Equity Net FDI Net Portfolio equity Debt M/L Term Short term Other Medium/Long Term Debt flows not shown Banks Bonds Source : Global Economic Prospects, January Flows by region. SSA was the only region that saw an increase in net private capital flows in 2011 relative to 2010 levels flows to SSA increased 19 percent to $48.2 billion, a positive development in a world where capital is generally scarcer. Despite political problems in the region, flows to the MENA region only suffered marginally in 2011, falling by four percent from However, the region could see a large decline in flows during 2012 a likely drop of 35 percent to levels last seen in 2003, which would make the MENA level just one-third the level expected for SSA. Flows to EAP and LAC declined eight percent and 10 percent respectively, while South Asia saw a decline of 18 percent and ECA experienced a 19 percent decline. Private flows to ECA in 2011 were less than 30 percent of the record $426 billion recorded in 2007

11 7 and they may decline an additional 35 percent or more in 2012 relative to the 2011 levels under a baseline scenario. Most regions will feel the credit squeeze much harder in FDI flows are recovering much more slowly than initially expected. They are not expected to return to 2008 levels until 2013, a year later than previously thought. Several developments during 2011 generated additional uncertainties that have been delaying investment projects the political events in the Middle East, the Tohoku earthquake and tsunami, the EU debt situation, and the sovereign-rating downgrades for large countries such as the United States and France. In 2011, FDI flows to LAC increased by 29 percent while those to SSA and South Asia increased by 25 percent and those to EAP by seven percent. Declines also occurred in MENA (16 percent) and ECA (12 percent). In 2012, a decline is expected in all regions but SSA, with a strong rebound expected in MENA should suffer the largest decline by far in 2012, with a projected fall in FDI flows of 27 percent relative to 2011 levels. A rebound in 2013 is conditional on the relatively fragile assumptions supporting the baseline scenario. FIGURE 1: NET PRIVATE INFLOWS TO DEVELOPING COUNTRIES ($ billions) 1200 Net Private Debt Flows Portfolio Equity 1000 FDI Source: World Bank, Global Economic Prospects Declining flows already in late The second half of 2011 has already shown a significant decline in the rhythm of capital flows to all regions with the exception of SSA. That decline was particularly marked for equity placements and bond issuance, the two asset types that had rebounded faster after the global crisis and recovered (or surpassed in some cases) to pre-crisis levels to compensate for subdued bank lending. Bank lending, however, increased in ECA, LAC, and SSA in the second half of 2011, with minor declines in EAP and South Asia. Bank lending nonetheless remains weak relative to pre-2008 levels when they represented the main source of flows to developing countries. RISKS AND UNCERTAINTIES e 2012f 2013f 1.10 The assumptions and forecasts presented above, however, are subject to several downside risks that could create much less favorable conditions for developing countries. The World Bank has estimated that GDP in developing countries could be significantly impacted in the case of a severe deterioration in economic conditions, where the credit squeeze spreads to larger Euro Area economies that account for around 30 percent of Euro Area GDP. In that case, developing countries could end up growing only around 2.4 percent in 2012 and 1.2 percent in 2013 (compared with six percent and 5.6 percent in the baseline). To put these numbers in context, it should be noted that developing countries growth was only two percent in 2009 with the global crisis. Moreover, this time they would enter such a crisis in a much weaker position (in terms of fiscal policy tools in particular) than in The main risks for the baseline assumptions are the evolution of the Euro zone situation, fiscal and debt sustainability issues in other non-eu high income countries, the spread of social unrest in response to

12 8 unmet economic and political demands (both in rich and poor countries), a potential hard landing in one or more relatively large middle-income countries (MICs), and the negative impact from geopolitical tensions that could escalate in several parts of the world. Euro Area Outlook 1.12 An extreme case would be the deterioration in the economic situation of some of the Euro zone countries, resulting in a disorderly collapse. This represents the largest risk for the baseline assumptions. The scope of potential damage to the world economy will depend on the steps taken to prevent contagion to other larger EU countries. If stresses within the banking sector fail to be contained within the affected countries, the situation could have severe implications, such as a broader freezing up of capital flows and the unwillingness of markets to finance deficits and maturing debt balances. Such economic and financial fragmentation would bring a severe contraction in both global trade and credit, and a spike in risk aversion, with investors rushing to the relative safety of cash Fast deleveraging and financial links. Among the risks for emerging markets of such a negative outcome is a much faster deleveraging in the financial sector. There might be issues related to the liquidity and solvency of some of the European banks, already signaled in downgrades by credit rating agencies. Many banks in ECA depend on cross-border flows from parent banks to service their loan portfolios. Also, key European banks account for large shares of domestic bank assets in developing countries (e.g. Spanish banks in Mexico and Chile, Portuguese banks in Angola and Mozambique, and Greek banks in the Balkans). Western European banks have a strong impact on credit and domestic demand growth in emerging markets through the linkages created by: (a) their local market presence (subsidiaries and stakes in key local banks); (b) cross-border funding to emerging market sovereigns, banks and the nonfinancial sector; and (c) support of trade flows. Their exposure to emerging markets through the three factors mentioned above totals about $7.6 trillion. Domestic regulators in some of the European markets may limit further lending to regional subsidiaries, as was recently suggested to Austrian banks. Funding pressures on banks are likely to remain elevated. Furthermore, banks will be required to mark-to-market their sovereign debt holdings, and should they experience losses, they would then need to raise sufficient capital to offset any loss. TABLE 3: EMERGING MARKET LINKAGES TO WESTERN EUROPEAN BANKS $ billions ECA LAC AFR MENA ASIA TOTAL EM Systemic Subsidiaries $608.2 $611.2 $38.7 $67.7 -* $1,325.8 Cross-Border Lending $1,362.7 $792.2 $196.5 $325.8 $866.8 $3,544.0 Trade Finance $1,102.0 $160.0 $294.0 $195.0 $953.0 $2,704.0 TOTAL $3,072.9 $1,563.4 $529.2 $588.5 $1,819.8 $7,573.8 * No emerging market systemic subsidiaries in Asia Source: For cross-border lending - BIS Quarterly Review, for trade - WTO International Trade Statistics; for emerging market systemic subsidiaries IFC staff analysis based on Central Bank websites, parent and subsidiary bank Annual Reports and websites 1.14 Fewer policy options. A significant difference with respect to the crisis is that most countries have much less fiscal and monetary space to embark on countercyclical policies. Recent events have reinforced politicians and policymakers beliefs that a greater role of the state in the economy is warranted to reign in past excesses. Governments are becoming more active in providing needed liquidity to the financial sector, but now require greater regulation and oversight. However, their ability to deliver further fiscal and monetary stimulus is constrained at this time, which may prevent a speedy recovery in the economy and markets. Austerity measures in countries with more urgent fiscal needs are likely to exacerbate the cycle This is also true for developing countries where many countries (more than in 2008) are running relatively large fiscal deficits, as stimulus policies implemented during the last crisis have not been

13 9 completely withdrawn. Monetary policy in developing countries has been facing relatively new challenges (strong capital flows, appreciating currencies, domestic inflation pressures), and their response has not been uniform across all countries, sometimes focusing more on growth than on price stability. Central banks are now at the forefront of efforts to stabilize the global financial system, and can ill afford to lose credibility and effectiveness Challenging financing needs. Financing current accounts and government deficits may become more challenging with tighter financial conditions, generating balance-of-payments pressures on some countries. Developing countries with high debt levels or those relying on capital inflows to finance large external deficits may face funding pressures. Although financing needs as a share of GDP have diminished relative to 2008 levels in all regions, South Asia is the exception. Financing needs in ECA make the region the most vulnerable to a sudden stop or reversal of capital flows Trade links. Strong direct trade links will first affect countries in Eastern and Southern Europe if the situation in the Euro zone deteriorates further. However, once second and third round effects are added into a global model, regions more exposed to global trade will be hit harder. EAP is vulnerable and may suffer as a result. Other Sources of Risk 1.18 Perception of debt sustainability in the US and Japan. Beyond Euro zone-related factors, markets could be concerned by the appearance of fiscal/debt sustainability issues in the US and Japan. The lack of progress in developing medium-term fiscal consolidation plans in both countries may generate additional volatility and uncertainties in global bond and currency markets 4. So far, US Treasuries have provided a safe haven for global investors, but a reversal of such confidence could come with severe consequences for the global economy Hard landing in an economically important developing country. Another potential source of trouble that would destabilize the already fragile status quo in the baseline assumptions would be a hard landing in an economically large developing country. In the past few years, as capital has flowed to large MICs, there has been a boost to private credit growth and asset prices, leading to an overheating of local economies Tensions in the MENA region. A few countries are undergoing a difficult political transition while others see forces pushing for a systemic change. Those tensions may escalate in such a way that could create disruptions in the oil supply, with the consequent impact on soft commodity prices that could lead to an episode of global stagflation Social unrest. During , social unrest has been seen all over the world in countries (both rich and poor) where populations have urgent economic and/or political demands. In some countries, large portions of the population are seeing declining living standards, lack of job opportunities, and lackluster income growth. They are becoming more vocal about their grievances, which sometimes lead to demonstrations against the establishment. With large portions of unemployed youth, those movements may trigger social unrest and become a destabilizing force. LONG-TERM DEVELOPMENT CHALLENGES 1.22 Last year s Road Map highlighted several of the most important long-term development challenges, all of which remain relevant areas for IFC to help address, and some of which are highlighted below. The difficult environment in many markets and depressed global growth outlook have only exacerbated the situation in many of these areas. 4 IMF, World Economic Outlook Update, January 2012.

14 Persistent poverty and rising inequality. The uncertainty in global prospects casts a shadow onto global progress in poverty reduction. Even as aggregate global poverty has been reduced, between 38 percent and 43.8 percent of SSA s population will still be living below the $1.25 poverty line by More than 70 percent of people living on less than $1.25 per day (i.e. in extreme poverty) are estimated to reside in MICs 6. There are currently around 330 million people in EAP and around 580 million people in South Asia living below the $1.25 poverty line In addition to faster growth and better policies, more inclusive growth and equality within countries lift more people out of poverty. According to the World Bank, despite reduced inequality across countries over the last 25 years, within-country inequality has generally increased in most developing countries since Unemployment and underemployment. The outlook for global job creation has been worsening, with a backlog of global unemployment of 200 million an increase of 27 million since the onset of the crisis. More than 400 million new jobs will be needed over the next decade to avoid a further increase in unemployment 9. Furthermore, the labor productivity gap between the developed and the developing world remains substantial: an average output per worker in developing countries was $13,600 in 2011, less than one-fifth of the average in the developed countries ($72,900) Widespread concern about unemployment and underemployment and about income distribution and wealth inequality is leading to social and political instability in some parts of the world. That makes the need to ensure more inclusive and less unequal growth more important than ever. Youth are particularly hard-hit by the crisis. The global youth unemployment rate is 12.7 percent, a full percentage point higher than the pre-crisis level, and unemployment is likely to be persistent Demographic changes and urbanization. The world population is now around seven billion and is projected to surpass nine billion by Most of the population increase will occur in developing countries. The population of developing countries is still young, with the working-age population (ages 15 to 59) rising continuously and set to reach 3.6 billion in Urbanization will continue at an accelerated pace: roughly 70 percent of the world s population is expected to live in urban areas by 2050, compared to 50 percent in More than one-third (35 percent) of the urban population in developing countries lived in slums in , and in low-income countries this proportion increases to 71 percent. Population growth and rapid urbanization will continue to put pressure on physical and social infrastructure needs and on demand for food and commodities. Lack of access to safe drinking water and adequate sanitation are also typical problems of urban slums Food security. Food production (net of food used for biofuels) will need to increase by 70 percent in order to meet demand from a global population of nine billion people by Developing country agriculture alone would require an average annual net investment of $83 billion 12. In mid-2008, international food prices reached their highest level in 30 years which, added to the global economic crisis, contributed to push an additional 115 million people into poverty and hunger 13. By 2009, the total number of hungry people in the world topped one billion, representing more hungry people than at any time since the 1970s. After a brief respite in 2009, the FAO Food Price Index reached another record in February, World Bank Global Economic Prospects IFC calculations, based on Andy Sumner, Global Poverty and the New Bottom Billion: What If Three-Quarters of the World s Poor Live in Middle-Income Countries?, Institute of Development Studies, September IFC cakculations based on most recent World Bank poverty figures for each country, for IFC regions 8 World Bank Global Monitoring Report Global Employment Trends 2012: Preventing a deeper jobs crisis, International Labor Organization, January 24, UN World Urbanization Prospects, Urban Population, Development and the Environment 2011, United Nations. 12 FAO: How to Feed the World in

15 Climate change. Climate change remains a tremendous development challenge, also exacerbating other challenges related to water, food, health, and conflict, and it will disproportionately affect the poorest countries. By 2030, the incremental investment needs for mitigation in developing countries could be $ billion per year, and for adaptation another $ billion per year 14, over 80 percent of which is expected to come from the private sector. Developed countries reaffirmed their Copenhagen Accord pledges 15 to provide $30 billion as fast-track climate financing through 2012 and to help catalyze $100 billion per year by 2020 to address climate-change challenges in developing countries. Yet these commitments still fall short of what is needed. Almost 70 developing countries have now enacted favorable policies or regulations to promote renewable energy. In Durban in December 2011, developing countries agreed for the first time to negotiate curbs on growth in their GHG emissions Resource scarcity. Since 2000, hydrocarbon and other resource prices have more than doubled, as demand fueled by accelerated economic growth, particularly in the major developing countries, has outstripped supply. The availability of key resources such as water, air, land, hydrocarbons, minerals and ecosystems is affected through increased demand as result of factors such as population growth, urbanization, industrialization, and greater economic wealth, and through constrained supply as result of factors such as logistical and geopolitical issues, climate change, and damage to the environment. Moreover, there is a strong interconnection among water, energy and food, which heightens scarcity concerns. Global water requirements could grow from 4,500 billion cubic meters today to 6,900 billion cubic meters by , which is about 40 percent above the current accessible and reliable supply. Agriculture today accounts for approximately 3,100 billion cubic meters, or 71 percent of global water use, and without efficiency gains will increase to 4,500 billion cubic meters by Demand for a more varied and higher protein diets increases the water and energy intensity of food. As water tables fall and countries increasingly turn to desalination and major water transportation projects, the energy intensity of water increases. Increased demand for energy increases demand for water and higher energy costs increase the delivered cost of all commodities. Climate change further exacerbates water scarcity and energy costs Conflict. Scarce resources can catalyze conflict, and countries affected by conflict are vulnerable to persistent poverty. Climate change in particular could lead to conflict scenarios, as could scarcity of food, water and other resources. As discussed in last year s World Development Report (WDR) 17, there are already 1.5 billion people living in countries affected by fragility, conflict or violence Economic opportunities for women. Women in the private sector represent a powerful source of economic growth and opportunity. Across developing countries, it is estimated that small and medium enterprises (SMEs) with full or partial female ownership represent 31 to 38 percent of formal SMEs in emerging markets 18. The financial power of women is expanding at a faster rate today than at any other time. However, factors such as lack of collateral and poor educational and training opportunities often compound their challenges to access finance, along with legal differences that may hinder women s economic opportunities. Moreover, women also make up 40 percent of the world s workforce Many of the sectors that are critical for economic growth in some of the poorest countries rely heavily on women employees. However, in some developing countries women are particularly hard-hit by unemployment and vulnerable employment. 14 World Development Report, At the December 2011 United Nations Framework Convention on Climate Change summit in Durban, South Africa Water Resources Group, "Charting our Water Future; Economic Frameworks to Inform Decision-Making, World Development Report 2011: Conflict, Security and Development 18 IFC-led G-20-Report: Strengthening Access to Finance for Women-owned SMEs in Developing Countries, endorsed by the G-20 in November, 2011.

16 12 THE ROLE OF THE PRIVATE SECTOR IN DEVELOPMENT Growth. The private sector is now recognized as a critical driver of economic growth. In its 2008 report, the Commission on Growth and Development found five common characteristics of countries with high, sustained growth. Many of these characteristics relate to actions that governments need to take, but also prominent is the market allocation of resources, led by the private sector. Higher private investment is associated with faster-growing economies. A key mechanism for economic growth is higher productivity and knowledge transfer, and the private sector can be a critical facilitator of this process. Economic growth contributes significantly to poverty reduction and to higher living standards for poor people 19. The private sector can contribute to poverty reduction and inclusive growth - for example, inclusive business focuses on providing products, services and economic opportunities that particularly benefit poor populations. The private sector accounts for over 90 percent of jobs in developing countries 20. Firms that are more productive can also pay better wages and invest more in training. The private sector provides critical goods and services, including those related to infrastructure, food security and climate change. Private sector participation in infrastructure and other services has become more important as governments have sought alternatives to public funding and looked for more efficient ways to deliver services, including through new PPP models. Private firms are also critical to food security and reduced GHG emissions. The private sector and private sector employees are the providers of most of the taxes that support government operations. This leads to a natural synergy between the public and private sectors, whereby the public sector enables a stronger private sector through appropriate regulations, rule of law, institutions, public investment and security, while the private sector generates innovation, wealth and taxes. Efficient allocation of credit. Access to finance supports broad-based growth as well as inclusiveness. Private sector financial institutions (FIs) are critical to ensure the efficient flow of capital, and are especially important for SMEs, which account for most of the employment in developing countries. THE EVOLVING DEVELOPMENT FINANCE LANDSCAPE 1.34 The private sector financing activities of the multilateral and bilateral development institutions (IFIs) have continued to grow in recent years, although at a slower rate than the very rapid growth through 2007 (see figure 2). This continued growth contrasts sharply with global commercial flows which declined substantially after Total IFI own-account private sector financing was $41 billion in 2010 (down from $43 billion in 2009). While overall IFI volumes declined slightly, about half of all institutions showed an increase and there was significant variation among multilaterals as well as among bilaterals. Preliminary numbers for 2011 indicate that volumes are likely to stay near the 2010 levels Following the pattern of previous years, the private sector operations of IFIs have had a strong focus on the financial sector and infrastructure. This year some additional areas of emphasis included the Middle East, renewable energy, and food security. The European Bank for Reconstruction and Development (EBRD) continued to move toward full engagement in the Middle East Collaboration among IFIs continued to expand in FY11. Collaboration is occurring in several areas - through the G-20 programs (such as for SMEs and agribusiness), through new joint initiatives in the Middle East in such areas as SME finance, infrastructure and equity, through expanded participation in the Master Cooperation Agreement (MCA) (see paragraph 2.44) through participation in the high-level forum in Busan, 19 For a recent review of the research, see Francisco Ferreira and Martin Ravallion, Global Poverty and Inequality: A Review of the Evidence (Policy Research Working Paper 4623, World Bank). Also see Commission on Growth and Development, Growth Report, p World Development Report 2005: A Better Investment Climate for Everyone

17 13 and through continued cooperation in IFI working groups, for example on development results, sharing of risk data, cross-debarment and integrity. Several IFIs partnered on projects over the last year in sectors such as housing finance, power generation, and microfinance funds. There were also joint agreements among a number of institutions for closer cooperation, such as between the Development Bank of Latin America and Société de Promotion et de Participation pour la Coopération Économique (Proparco), and EBRD and the Asian Development Bank The Corporate Governance Development Framework, a common set of guidelines to support sustainable economic development in emerging markets, was adopted by the leaders of 30 development finance institutions in September Additionally, the joint-ifi report, International Finance Institutions and Development Through the Private Sector, was launched during the World Bank Group (WBG) Annual Meetings in September FIGURE 2: IFI PRIVATE SECTOR VOLUMES Note: IFC figures are based on fiscal years, e.g. for 2010, FY11 (July 2010 to June 2011) is used; other IFI figures are based on calendar years. Own account volumes only Donors and aid agencies increasingly recognize the role of private sector development, which can create opportunities for IFC s mobilization and advisory activities even within the context of reduced Official Development Assistance (ODA) envelopes resulting from ongoing fiscal pressures. Non-traditional donors, including private foundations and philanthropies, are also coming to the fore, and the G-20 is expected to become an increasingly important partner of development institutions Overall, the global development architecture has broadened and become more complex. In addition to the WBG, the IMF, regional development banks, the United Nations agencies and the traditional bilateral aid providers, there are now over 150 other multilateral agencies and private foundations, a private sector that plays an increasingly important role in development, the burgeoning field of impact investment 21 and rapidly expanding South-South exchanges of financial resources, development experiences and trade and investment opportunities. IMPLICATIONS FOR IFC 1.40 For IFC, as well as for other IFIs, this is a period of uncertainty in which agile response will be critical. Demand for IFC s services is expanding as the private sector in developing countries continues to grow, IFC continues to strengthen its capabilities and innovate its product offerings, global commercial finance continues to provide less to developing countries than it has since 2007, and aid from governments continues to be constrained. In this environment the demand for IFC s (as well as other IFI s) core 21 Defined by the Monitor Institute as investors who actively seek to place capital in business and funds that can provide solutions at a scale that purely philanthropic interventions cannot usually reach

18 14 development products is high, to help foster long-term inclusive growth, create jobs, reduce poverty, and address critical global issues such as food security, access to water, and energy efficiency. IFIs will also need to address critical needs in developing countries for social and physical infrastructure, SME finance and financial sector development, improvements in the investment climate, and innovation to help countries continue to grow. Continued innovation and cooperation with other IFIs will be an important part of this agenda At the same time there are substantial risks in the current environment which will require ongoing readiness for a downturn even as IFC is continuing to implement the core agenda. IFC is already proactively managing its portfolio and responding in focused fashion to the needs of specific regions, countries, and sectors, such as trade, commodity and SME finance. In a significant downturn, important effects may be felt in global finance, trade, and growth, and there may be issues related to banking sector problems, availability of trade finance, commodity price changes, reductions in market demand, and company financial problems. This may require a stepped-up IFC response is such areas as portfolio protection, provision of liquidity, provision of equity, and other changes in lending, advisory services, sector focus and country focus. II. IFC S STRONG FOUNDATION AND RESULTS IFC S UNIQUE OFFERING 2.1. IFC is the largest global development finance institution focused exclusively on private sector development, and is uniquely placed to provide innovative solutions for individual clients needs and help shape the field for sustainable and inclusive private sector development. IFC has demonstrated its global leadership, standard-setting, and innovation in many areas, including environmental and social (E&S) sustainability and corporate governance, as well as its broad range of investment and advisory products Relative to commercial funders, IFC has many comparative advantages. Synergies exist across the WBG, and being part of the WBG enhances IFC s convening power on critical development challenges, and allows it to frame solutions that require close public-private collaboration. IFC can also invest in markets where private finance would not go alone, and take a longer-term view than other market participants. Synergies exist across the WBG, including with IDA, the World Bank and MIGA Relative to other IFIs, IFC s comparative advantages include its global reach allowing it to leverage lessons of experience across regions while diversifying risk - and its ability to craft client solutions drawing from combinations of three complementary and strategically aligned lines of business - Investment Services (IS), Advisory Services (AS), and the IFC Asset Management Company (AMC) Investment Services: As of June 30, 2011, IFC had a committed portfolio of $42.8 billion in equity, loans, guarantees and risk management products, in countries across all developing regions, and in a wide variety of sectors. As of that date, it had a disbursed and outstanding portfolio of $31.8 billion. Among multilateral development banks it has the only global trade finance program, active in the largest number of countries, with the highest commitment volume. IFC is also a leading mobilizer of third-party resources for its projects through several mechanisms (see Mobilization). In addition, IFC has shown significant growth in volumes and project count in IDA countries and other frontier markets and in the development reach of its portfolio Advisory Services: AS is recognized as a critical tool for delivering IFC s mission. Since the 1990s, AS has grown to become a substantial part of IFC s offering to private sector and public sector clients, with about half of the current overall program in each group. As of June 30, 2011, IFC had an active program of 643 advisory projects in 97 countries, representing funding commitments of $822 million. AS plays an important role in helping government clients create an effective enabling environment for private investment,

19 15 and in strengthening the capacity, standards and know-how of private sector clients. AS can be sequenced with IS to expand opportunities for investment by IFC and others, thereby extending IFC s reach into challenging markets. AS can also be combined with IS to deepen and broaden the impact of individual investments AMC: Established in 2009, this wholly-owned subsidiary further builds on IFC s equity investment expertise by crowding in commercial long-term investors from outside IFC s traditional investor pool to emerging markets, and allows IFC to scale up its equity investment activities in a capital-efficient manner. As of June 30, 2011, AMC had more than $4 billion in assets under management in three funds IFC s staff, both in Washington, D.C., and in 105 offices worldwide (as of January 2012), are its biggest asset. IFC s client survey underscores that IFC has significant comparative strengths relative to other finance providers with regard to the professionalism of its staff. IFC S TRACK RECORD IN INNOVATION 2.8. IFC has a long history of innovation, from its start as the world s first global development finance institution focused exclusively on private sector development and offering only long-term loans, to its current wide range of investment and advisory services and the recent establishment of AMC as its first-ever subsidiary As the role of the private sector in addressing development challenges has increased, IFC has developed innovative solutions to support private sector development and meet clients changing needs, in particular in response to challenging circumstances such as exist today. As illustrated throughout this paper, IFC offers innovative ways to leverage the private sector to achieve results for the poor across its strategic focus areas. Some recent examples include: As part of its frontier markets focus, IFC has developed ways to support inclusive business models, playing a critical role in enabling companies to service those at the base of the pyramid (BOP). Through its Women in Business Initiative, IFC aims to promote opportunities for women across IS and AS (see Box 13), and the World Bank and IFC jointly developed a methodology for gender mainstreaming in key regulatory reforms affecting women. In climate change, IFC continues to lead and innovate, including through tools such as for climate risk assessment for the private sector, and funding mechanisms such as the Cleantech Innovation Facility (see paragraph 3.23) and the Clean Technology Fund (CTF). This fund, which is a joint effort with the World Bank, pioneered an innovative approach to donor funding by enabling donors to contribute through long-term concessional loans, in addition to conventional grants, thereby allowing donors to tap into new budgetary funding sources. In infrastructure, IFC has expanded the scope of its PPP work to include health and education, agribusiness, irrigation and banks and insurance. IFC has also obtained Board approval for a global equity fund for infrastructure to invest across a range of infrastructure sub-sectors one of the new AMC funds currently in the fund-raising phase. IFC has introduced several innovative mechanisms to support the private sector in agribusiness, such as the Agricultural Price Risk Management (APRM) program, which helps clients manage agricultural price risk through a mechanism to take credit exposure together with a sponsor bank toward emerging market counterparties. Other recent areas of innovation include the private sector window of the G-20 Global Agribusiness & Food Security Program (GAFSP), managed by IFC, supporting farmers and enhancing food security, and the Critical Commodity Finance Program (CCFP), both further discussed later in this paper. In health and education there are many recent examples of innovation, including the Lesotho PPP Hospital and Health Clinic, a joint project of IFC AS with the Global Partnership for Output Based

20 16 Aid, the Dutch and Swedish governments and the Development Bank of Southern Africa, financed with a combination of commercial financing, a government contribution and private equity; and the Education for Employment (e4e) Initiative for Arab Youth (see Box 7), jointly with the Islamic Development Bank. In financial markets, IFC has a strong focus on micro, small and medium enterprises (MSMEs). IFC pioneered commercial microfinance in the early 1990s, and has continued to lead innovation in microfinance, using developments in technology, financial products, and policy to help FIs reach a greater number of people in a more cost-effective way by effectively combining IS and AS for a range of financial intermediaries. IFC s Trade and Supply Chain Finance Programs (see Box 11) help companies to access much-needed financing, especially as global economic conditions constrain the availability of trade and commodity financing, particularly for smaller markets and clients. In addition to direct support for projects, IFC has also led innovations in strengthening financial infrastructure, for example through its leadership, in collaboration with the World Bank, in developing credit reporting systems: in 2010 and 2011, IFC supported credit reporting systems in 13 countries in SSA, South Asia and EAP. IFC has also increased its local currency financing mechanisms, particularly critical during financial crises to avoid foreign exchange volatility (see Box 9). IFC s recent South-South innovations include working with successful non-bank financial institutions in their base countries to see if an integrated package of IS and AS can be provided at one time to multiple countries in another region. As part of its catalytic role, IFC continues to find new ways to crowd in financing to emerging markets with innovative mobilization mechanisms. In addition to its traditional B - Loan program, itself an innovation when introduced in the 1960s, IFC has introduced A - Loan sales, special crisis initiatives, and innovative syndications with participation of emerging market banks, official finance institutions, and insurance companies and, most recently, mobilization through AMC (more on IFC s mobilization is in subsequent sections) In addition to the innovative work for its clients, IFC is a leader in delivering, measuring and evaluating, and reporting development results, and its results measurement system 22 is considered best practice among multilateral development banks. IFC s recent introduction of the IFC Development Goals (IDGs) is another step in being able to measure the impact of its activities. The IDGs were informed by IFC s strategic priorities and inspired by the Millennium Development Goals, and will allow IFC to integrate results measurement with business strategy and operational decision-making, a further demonstration of its leading position among IFIs. DEVELOPMENT IMPACT RESULTS Building on its ex-post evaluation system (XPSR) 23 in 2005 IFC introduced its monitoring system, the Development Outcome Tracking System (DOTS). Building on DOTS, over the last two years IFC has been testing to what extent this experience with results measurement can be used to set forward-looking corporate goals, the IDGs IFC measures development results through DOTS - at the client and project levels, for IS, AS and the AMC. The overall development outcome of an investment project is a synthesis of four performance areas - financial, economic, E&S, and private sector development. For AS, the overall development effectiveness is a synthesis of strategic relevance, effectiveness (as measured by project outputs, outcomes, impacts), and efficiency of the services. 22 IFC s results measurement system has three strongly linked components, IDGs (which are forward-looking goals), monitoring and evaluation. 23 The ex-post evaluation system has three times been benchmarked as the best among multilateral development banks.

21 17 BOX 1: IEG-IFC EVALUATION FINDINGS: INFORMING IFC S STRATEGIC CHOICES IEG s two recent flagship evaluations, the two-phase evaluation of the WBG s Response to the Global Economic Crisis and the 2011 Report on the Results and Performance of the WBG, provide a valuable and timely insight on the formulation of IFC strategy. Responding to Crises: Portfolio Defense: Preparedness and ability to respond appropriately and quickly to a crisis are important. IFC had, to some degree, anticipated the 2008/2009 financial turmoil. It moved quickly to implement a strong and effective action plan on its portfolio, protecting both its clients and its financial sustainability. IFC s loan portfolio remained healthy during the crisis with NPL of 4.5 percent compared to over 11 percent in previous crises. However, IFC appeared less prepared on the equity side. IFC had substantial unrealized capital gains at the onset of the crisis which had to be written down. In hindsight, IEG opines that IFC could have done more in divesting during the years of economic expansion. Collective Actions: IFC established targeted crisis initiatives with global development partners and participated in others, leveraging IFC s funding and sending strong positive market signaling effects as in the case of the Joint IFI Action Plan for Central and Eastern Europe. The initiatives involved new delivery platforms aimed at trade finance, infrastructure, microfinance, bank capitalization and distressed asset management. However, except from the trade finance initiatives, implementation was at a slower pace than intended, underscoring the complexity of executing global collective actions and need to be equally quick in setting middle and back office operations to support new initiatives. For future crises, IEG suggests giving priority to established initiatives as appropriate. Investment Commitment Volume: IFC kept its long term strategic focus during the crisis, increasing its investment commitments in IDA countries, especially in Africa. Measured by overall commitments in FY09, the evaluation finds that IFC was not countercyclical overall. The report notes that IFC s aggregate portfolio risk rating spiked early in the crisis, although it finds that based on other indicators, IFC could have taken more risks. It adds that IFC s stress-test methodology led IFC to overestimate the impact of the crisis, which contributed to IFC s cautious investment decisions. IEG suggests IFC continue refining its stress-test methodology. Being Systemic in a Crisis: IFC s crisis response included investments in countries hit hard by the crisis and banks that are likely to have systemic impact. However, this did not represent the majority of investments and did not appear to be a strategic approach. The report implies that IFC could have a greater impact by being systemic in a crisis by focusing on countries most severely hit by the crisis and on systemic banks. IFC s Short-term Focus Areas: Infrastructure and Africa: IFC s short-term strategic focus on infrastructure, especially Africa, is supported by strong developments results. Infrastructure and Africa were top sector and regional performers, respectively. Infrastructure in Africa, while based on a small sample of projects dominated by the telecoms sector, showed a remarkable success rate. IEG finds that IFC infrastructure investments had wide positive effects including: testing new legal and regulatory frameworks; introducing competition; supporting second-tier companies; systematically establishing SME linkages programs; and ensuring responsible social and environmental practices. Agribusiness and food supply chain. IEG finds that IFC has focused on a range of activities across the food supply chain and had achieved better than average development outcomes. In Sub-Saharan Africa where IFC has relatively limited interventions, the report confirms the difficult business conditions IFC faces, including shortage of indigenous entrepreneurs, small size of potential investments, lack of access to markets, poor farm to market transport infrastructure, underdeveloped financial sectors, and higher weather-related and disease risks. SMEs: Previous IEG finding on the effectiveness of IFC assistance to SMEs through financial intermediaries has been reaffirmed. IEG finds that trade finance is a relatively low-risk pathway to reach SMEs in tough investment environments and requires limited capital. In addition, IEG notes that local currency lending, where IFC has had limited capacity, will be key in supporting SMEs in low income markets. It finds that IFC s capacity to offer local currency finance was again lacking during the 2008/2009 crisis, creating considerable risks for SME clients with local-currency revenue streams The DOTS standardized framework 24 allows for an assessment of the contribution of each project to IFC s purpose and strategy (including private sector development in the host country), as well as for various levels of aggregation to reflect the development effectiveness of IFC s operations overall. These development results feed into scorecards, incentives and reporting For investment operations, DOTS follows the Good Practice Standards for measuring the development results of private sector operations that was agreed by the Evaluation Cooperation Group of Multilateral Development Banks. 25 IFC s development results reporting is assured by an external assurance provider.

22 IFC also routinely measures and reports on the reach and other measurable development results of its investment and advisory portfolio, and tracks and reports on its performance in its Strategic Focus Areas An integral part of IFC s results measurement system is its recently developed evaluations strategy, which focuses resources on areas of strategic importance to verify the links between IFC s activities and the development outcomes that the project teams are aiming to achieve. The evaluation strategy aims to identify and communicate, both internally and externally, successful practices and lessons learned across IS and AS. The evaluation portfolio includes in-depth studies at project, programmatic and/or thematic levels, as well as assessments of donor-funded facilities, often conducted by external evaluators. These evaluations are designed to be complementary to the work undertaken by the Independent Evaluation Group (IEG) 26 (see Box 1) and together they inform IFC s strategy formulation and operational decisions FY11 development results for investments. On an unweighted basis, 67 percent of IFC s investment operations had high development outcomes in FY11 27 (rated mostly successful or better), above IFC s long-run target of 65 percent, but slightly lower than in FY10 (71 percent). As in prior years, results weighted by IFC investment amount were stronger, at 77 percent (82 percent in FY10) indicating that, on average, larger investments tend to have better results for a variety of reasons By region, results weakened significantly in MENA and ECA as a result of macro-level events in those regions. In EAP, however, results continued the significant improvements underway since FY07. By industry, some sectors, such as extractive industries and infrastructure, saw an improvement in development results compared to FY10, mostly because of the recovery in commodity prices and turnarounds in the transportation sector in Eastern Europe. Other sectors experienced a significant decline compared to the previous year. For financial markets, the decline during FY11 (to 66 percent from 72 percent) is largely explained by the overall effect of the aftermath of the global financial crisis. For Consumer and Social Services, results were mixed: while tourism results improved compared to FY10, retail and health care and education sectors declined on account of weaker performance of more recent investments in the cohort, particularly in MENA Development reach of the investment portfolio. IFC has been measuring the development reach of its investment portfolio since calendar year (CY) 05 and reporting on it in its Annual Report since FY07. Table 4 shows IFC s client companies development reach for CY09 and CY10. These results were those of IFC s clients, and IFC s contribution to bring them about varied. While phone connections provided by IFC's clients increased to almost 180 million people, the number of customers reached with power generation and water distribution decreased, reflecting both varying business results and changes in IFC s portfolio (mainly the exit of large contributors from the portfolio) FY11 development results for AS. Results were the best to - date: 69 percent of 135 AS projects that closed in FY11 had high development results 29 (compared with 64 percent in FY10), above the 65 percent corporate target. A variety of factors contributed, such as improved project design for these projects, better results tracking, intensive training, and a recovery from the impact of the prior financial crisis on ratings. Increased attention from management and operational teams has resulted in improved articulation of project objectives, evidence, and documentation. An IFC study of the remaining 31 percent of projects identified project design as an area for greater focus, and project design training is now being offered to operational teams in regions. 26 In FY12, IFC expects 10 completed evaluations, encompassing agribusiness, manufacturing, water treatment, regulatory reform, infrastructure, microfinance, and knowledge-management, and focused on critical issues such as jobs, economic growth, gender, and poverty alleviation. 27 Based on rating as of June 2011, for projects approved in calendar years Such as a greater ability to overcome difficulties in a challenging investment climate and take advantage of economies of scale, and are often managed by larger companies with better corporate governance. 29 High development results are mostly successful, successful and highly successful Development Effectiveness ratings.

23 19 TABLE 4: DEVELOPMENT REACH OF IFC'S INVESTMENT PORTFOLIO CLIENTS Portfolio CY09 Portfolio CY10 Investments Employment (millions of jobs) Microfinance loans outstanding * Number (million) Amount ($ millions) 10,790 12,620 SME loans outstanding * Number (million) Amount ($ millions) 101, ,820 Microfinance loans disbursed* Number (million) Amount ($ millions) 23,230 15,330 SME loans disbursed * Number (million) Amount ($ millions) 171, ,150 Customers reached with services Power generation (millions)** Power distribution (millions) Water distribution (millions)*** Gas distribution (millions) Phone connections (millions) Patients reached (millions) Students reached (millions) Farmers reached (millions) Payments to Suppliers and Governments Domestic purchase of goods and services ($ millions) 38,020 39,510 Contribution to government revenues or savings ($ millions) 20,080 20,280 *In *In many cases, results reflect also contributions from AS. Disbursed figures correspond to loan amounts disbursed over the course of the year. **IFC has revised its methodology for estimating residential power customers served. Estimates for past years have been revised accordingly. ***CY09 water figure has been corrected. It included 7 million customers of sewage services The largest improvements were in SSA and ECA, with lower ratings in MENA. This is the first year that SSA has surpassed the corporate target of 65 percent, and its quality of Project Completion Reports was also significantly improved with the incorporation of results from independent evaluations conducted for several investment climate projects. The decline in MENA s results is mainly due to the challenging operating environment, particularly for six projects in Pakistan and Jordan.

24 Table 5 shows selected results for AS projects in FY TABLE 5: SELECTED ADVISORY RESULTS IN FY11 Microfinance loans outstanding* SME loans outstanding* Microfinance loans disbursed* SME loans disbursed* FY10 FY11 Number (million) Amount ($ million) 3,460 4,320 Number (million) Amount ($ million) 44,240 39,220 Number (million) Amount ($ million) 3,610 8,570 Number (million) Amount ($ million) 38, ,220 Value of financing facilitated by Advisory Services** Amount ($ million) 844, ,000 People expected*** to receive new/improved infrastructure services as result of PPP advisory mandates Increased sales revenues for MSME clients from IFC project- relevant revenue streams Number (million) Amount ($ million) Number of investment climate reforms implemented Direct compliance cost savings**** Amount ($ million) N/A 70.3 *In many cases, results also reflect contributions from IFC Investment Services. Outstanding loan figures are as of end - CY 2009 and Loans disbursed correspond to amounts disbursed over the course of CY 2009 and 2010, respectively. ** Includes financing that IFC clients, including governments, were able to receive as result of the AS provided. *** At the time of closing of the transaction. **** In FY11, a new methodology was introduced, consistently applied across regions, to calculate "Direct Compliance Cost Savings to the private sector as a result of Investment Climate interventions. Forty-one projects in 31 countries across all regions are now using this indicator to measure Direct Compliance Cost Savings, and 14 projects reported actual cost savings of $70 million in FY Progress in testing the IFC Development Goals. The IDGs are a small set of high-level development outcomes that IFC aims to achieve across IS, AS and the AMC, each with associated indicators and numerical targets. The intent is for the IDGs to be sufficiently representative of the underlying strategy that they may be used to help drive business decision-making, alongside existing measures The IDGs set corporate-level targets for a sub-set of reach indicators as well as for other tangible development outcomes, and only reflect incremental outcomes above the project baseline that can reasonably be attributed to IFC's support where IFC has a sizable stake in a project, using simple attribution principles. The ex-post IDG reach contributions would therefore be a sub-set of the portfolio reach of IFC s clients. Regular portfolio monitoring will be used to verify that IDG targets are met on a portfolio level During FY11 IFC continued testing six IDGs, assessing the robustness of the chosen goals, indicators and targets. Based on extensive feedback from staff as well as stakeholders at a conference with other development institutions, clients and civil society, some indicators and methodologies were adjusted for continued testing during FY12. One of the key changes was to replace the goal on helping MSMEs increase their revenues with an IDG that captures broader contributions to economic growth, as measured by the Gross Value- Added (GVA) by IFC s clients to the economy. This was for two reasons: first, a large part of IFC s work with MSMEs was already captured in IDG3 ( increase access to financial services for SME clients and 30 IFC is currently in the process of harmonizing the reporting periods for IS and AS, so that next year's Road Map would contain reach results for both during the same reporting period (CY).

25 21 micro/individual clients ); second, teams concluded that the ex- post calculation of domestic purchases as a proxy for MSME revenues did not help influence new business decision-making. Another key change relates to IDG6 on climate change. From the start of the IDG development process, it was the plan to replace the interim IDG of Percent of New Investment Commitments that are Climate Positive with a more appropriate impact-related IDG. IFC has now selected two replacement sub-goals: (a) GHG emission reduction for new projects, which was successfully piloted in three regions in FY11 and is currently being tested across all regions; and (b) the GHG intensity of IFC s portfolio, which is currently being piloted in three regions, before a decision is made whether to roll it out for full testing IFC has also successfully tested normalized infrastructure access (percentage of country population reached by projects) and capacity addition (increase of country capacity due to a project) in FY11, which will be used internally as complementary metrics in FY12. ADDITIONALITY The need for IFC to employ additionality as a screen for its activities stems from its Articles 31, and the concept reflects IFC s comparative advantage or unique contribution in a project. In many cases, development outcomes can be maximized by pursuing opportunities where IFC s additionality is greatest. In selecting engagements, IFC therefore prioritizes the areas where it can add value to its clients that others cannot, as IFC should not displace other private sector financing. As previously discussed with the Board, IFC delivers this additional value to its investment clients in four main areas: Risk Mitigation: Financial Risk Mitigation is when IFC provides financial products and services that are not readily available elsewhere, particularly in underserved frontier markets, and in high risk projects. Non-Financial Risk Mitigation is when IFC provides comfort to clients and investors that can be a catalyst in mobilizing resources, for example because of IFC s stamp of approval. Knowledge and Innovation: This stems from IFC s expertise in financial reform, and the technical, market and industry knowledge it offers to its clients. Standard-Setting: This is when IFC provides leadership, for example through its expertise in areas such as E&S standards, energy efficiency and renewable energy and corporate governance. Policy Work: IFC works together with the World Bank to improve the investment climate for the private sector through advice to governments AS continue to be an important part of the additionality provided to investment clients, in particular through knowledge and innovation, standard-setting, and policy work In last year s Road Map, IFC described its differentiated approach to additionality in different country situations, using the chart in Figure 3 as the proposed framework. The framework stimulated discussions and improved the analysis of additionality, which has helped staff to increase focus on areas of high additionality, particularly in MICs IFC continues to strengthen the tools available to staff to ensure that the necessary focus is placed on additionality as projects are selected, designed and implemented. The guidance and training materials both online and in regular training programs - have recently been updated, and management at all levels reinforces the critical importance of additionality in project decision meetings. While there is still progress needed, this increased management focus has led to an improvement in the handling and communication of additionality, and IFC is now working to ensure even fuller additionality coverage in its monitoring systems and reporting. 31 Article III, Section 3 (i): The Corporation shall not undertake any financing for which in its opinion sufficient private capital could be obtained on reasonable terms.

26 22 FIGURE 3: CONCEPTUAL FRAMEWORK FOR IFC S ADDITIONALITY IN DIFFERENT COUNTRIES Innovative Projects, Inclusiveness, Frontier Regions Project Additionality Special IDA (e.g. climate change) Core LMIC Core UMIC Innovation Inclusiveness Examples: Innovation/leading edge SME/ BoP /Frontier Region Renewable energy PPP Water/Roads Ag supply chain E&S Climate change funds, VC IT Health and Education Large Co./ Traditional Project Core IDA Temporary (e.g. crisis response) Country Additionality (Less Country Risk) HIGHLIGHTS OF PROGRAM IN FIVE STRATEGIC FOCUS AREAS In FY11, IFC invested $18.7 billion in more than 500 projects in 102 countries, of which $12.2 billion was for IFC s own account and $6.5 billion mobilized from other investors. Total commitments increased by over three percent, while mobilization increased significantly, by over 20 percent. There was strong performance across strategic focus areas and in addressing key challenges of poverty reduction and private sector development. IFC s committed portfolio grew by almost 10 percent to $42.8 billion at yearend FY11 and the number of companies in the committed portfolio grew by five percent to 1,737. The disbursed investment portfolio grew by almost 16 percent to $31.8 billion in FY11, and the total resources required (TRR) for investments grew by 13 percent to $14.4 billion. In the first half of FY12, IFC total commitments were $7.7 billion, of which $5.9 billion was for IFC s own-account and $1.8 billion was mobilized After a period of consolidation, IFC s AS program is expanding, with client-facing project expenditures reaching over $182 million in FY11. As of December 31, 2011, AS had an active portfolio of 616 projects reflecting funding commitments of $830 million. BOX 2: IFC S FIVE STRATEGIC FOCUS AREAS 1: Strengthening the focus on frontier markets (IDA countries, Fragile Situations, and frontier regions in non-ida countries) 2: Addressing climate change, and ensuring environmental and social sustainability 3: Addressing constraints to private sector growth in infrastructure, including water; health, education and food supply chain 4: Developing local financial markets through institution-building, the use of innovative financial products and mobilization, focusing on micro, small and medium enterprises 5. Building and maintaining long-term client relationships with firms in developing countries, using the full range of IFC s products and services, and assisting their cross-border growth The Five Strategic Focus Areas in Box 2, in place since 2004 (with some evolution) and consistently endorsed by the Board, remained the framework within which IFC delivered development impact and responded to the great development challenges of the day As depicted in figure 4, IFC s Strategic Focus Areas and activities have a strong strategic fit with the five strategic priorities of the WBG s Post-Crisis Directions, especially in the areas of targeting the poor and vulnerable and creating opportunities for growth.

27 23 FIGURE 4: THE WBG S FIVE STRATEGIC PRIORITIES AND IFC S STRATEGY IFC has been tracking its performance under its Five Strategic Focus Areas in its Corporate Scorecard (see Annex 2) since FY05. Below is more detail on accomplishments in each of these areas. Frontier Markets IDA countries In FY11, even though own account volume decreased in FY11, from $12.7 billion in FY10 to $12.2 billion, commitment volume in IDA countries for IFC s own account remained steady at $4.9 billion (40 percent of IFC s overall own account volumes, a slight increase from 39 percent), representing a more than fourfold increase from $1.1 billion in FY05. Project count in IDA was 251 projects (48 percent of total), increasing at a compound annual growth rate (CAGR) of 20 percent since FY06. In the first half of FY12, IFC committed 148 projects in IDA countries (50 percent of all projects committed), a 10 percent increase compared to the first half of FY11. The commitment volume in IDA countries for IFC s own account also increased significantly in the first half of FY12, reaching $2.4 billion, compared to $2 billion in the same period of FY11. In FY11, 19 percent of total mobilization was for projects located in IDA countries. AMC committed $289 million in IDA countries and mobilized $178 million (39 percent of AMC mobilization). The AS program (client-facing project expenditures) in IDA countries more than doubled since FY07 to $106 million in FY11; with an active portfolio of 358 projects valued at nearly $390 million at end-fy11. IDA continues to account for over 60 percent of the overall AS program (excluding world projects). During the first half of FY12, the share of AS program in IDA countries increased to 65 percent, compared to 61 percent a year previously. In FY11, IFC committed about $1 billion in local currency through Treasury operations, of which $136 million in IDA countries. During the first half of FY12, local currency commitments reached $326 million, including $16 million in IDA countries. The Rwanda initiative (swap arrangement with the Rwandan Central Bank) marked the first time a multilateral financial institution has entered into a longterm swap with an African Central Bank, helping the private sector as well as the development of local capital markets. IFC has transferred $2.23 billion to IDA replenishments between FY07 and the first half of FY12. Fragile Situations IFC continues to strengthen its focus on Fragile Situations through investment and advisory work, despite challenging conditions. During FY11, IFC committed $515 million in 43 investment projects in 19 of the 33 countries and territories on the FY11 WBG Fragile Situations List, and 16 percent of the AS program was focused on these markets, with AS activity in 25 Fragile Situations. During the first half of

28 24 FY12, IFC committed 24 investment projects in Fragile Situations, for a total of $139 million, compared to 15 projects and $88 million in the first half of FY11. TABLE 6: IFC COMMITMENTS IN IDA COUNTRIES AND FRONTIER MARKETS Frontier Markets - IDA FY08 FY09 FY10 FY11 FY12 (Actual) (Actual) (Actual) (Actual) (Forecast) Total IFC Commitments ($ million) 11,399 10,547 12,664 12,186 14,000-15,500 Total IFC Commitments (# of projects) IDA Commitments for Own Account ($M) 3,529 4,424 4,881 4,867 4,900-6,000 As a % of Total IFC Commitment for Own Account 31% 42% 39% 40% 35% - 39% IDA Commitments (# of projects) As a % of Total IFC Commitment 47% 50% 48% 48% 46% - 52% IDA Advisory Services Program ($M)* As a % of Total Advisory Services Program 49% 59% 62% 64% 63% - 65% Transfers to IDA Replenishment ($ million) ** Frontier Markets - Other FY08 FY09 FY10 FY11 FY12 (Frontier Other Frontier Regions Markets of non-ida Commitments + Fragile Situations for Own Account (Actual) (Actual) (Actual) (Actual) (Forecast) ($M) 1,826 1,587 2,160 1,638 1,680-2,700 * For projects excluding World Region; "Advisory Services Program" equals client-facing project spend ** Actual replenishment as of first half of FY12 *** Most Fragile Situations are IDA countries, so only non-ida Fragile Situations are added to IDA and Frontier Regions for the Frontier Markets aggregate Frontier regions in non-ida In FY11, IFC s total investment in Frontier Regions remained stable at $1.9 billion, including $1.1 billion for IFC s own account and a doubling of mobilization to $791 million. Project count was also stable 57 projects, compared to 58 in FY10. In FY11, 26 percent of total B-Loans was for borrowers in Frontier Regions. Beyond Frontier Regions, IFC is increasing its focus on inclusion and targeting the poor wherever they are in these countries. For example, in LAC in FY11, in addition to the $128 million in frontier regions, IFC committed $437 million to projects supporting inclusive growth in other areas. Sub-Saharan Africa As a % of Total IFC Commitment 16% 15% 17% 13% 12% - 17% Frontier Regions Commitments 1, ,575 1,123 1,120-1,800 As a % of Total IFC Commitment 10% 9% 12% 9% 8% - 12% Fragile Situations Commitments As a % of Total IFC Commitment 6% 6% 5% 4% 4% - 6% Other Frontier Markets Commitments (# of projects) As a % of Total IFC Commitment 17% 22% 22% 19% 19% - 25% Frontier Region Commitments As a % of Total IFC Commitment 9% 9% 11% 11% 9% - 12% Fragile Situations Commitments As a % of Total IFC Commitment 8% 13% 11% 8% 10% - 13 % Frontier Markets - Total FY08 FY09 FY10 FY11 FY12 (IDA + Frontier Regions of non-ida + non-ida Fragile Situations*** (Actual) (Actual) (Actual) (Actual) (Forecast) Frontier Markets Commitments for Own Account ($M) 4,714 5,419 6,540 6,011 7,000-8,250 As a % of Total IFC Commitment 41% 51% 52% 49% 50% - 53% Frontier Markets Commitments (# of projects) As a % of Total IFC Commitment 56% 60% 60% 60% 56% - 63% IFC invested over $2 billion in SSA for the second year in a row, with investments reaching $2.2 billion in 95 projects. In addition, IFC mobilized $647 million. The committed portfolio increased by 18 percent

29 25 to $5.9 billion in FY11 (14 percent of overall committed portfolio). During the first half of FY12, IFC committed (own account) $967 million in 69 projects, of which 66 projects in IDA countries. This included $378 million in 31 MSME projects, of which 29 were in IDA countries. IFC also mobilized $234 million. The AS program is expected to increase from $48 million in FY11 to above $55 million by the end of FY12, including an increase in IDA from about $44 million in FY11 to above $50 million. The investment climate program accounts for about one-third of the overall AS program in this region. As the Doing Business Report (2011) indicates, there was a record of 71 positive reforms in 36 countries in Africa, of which 51 reforms were supported by IFC s advisory work. Middle East and North Africa Despite the challenging environment, IFC was able to deliver a relatively strong program. Since the start of the political events in January 2011 through February 2012, IFC has played its counter-cyclical role by committing nearly $2.4 billion (including around $900 million in mobilization and around $380 million in equity) and approving 20 new AS projects worth $16 million in the Arab World (MENA excluding Afghanistan and Pakistan). In the broader MENA region, and in FY11, IFC committed nearly $2.4 million in total volume (including just over $790 million in mobilization), of which 20 projects worth $702 million were in IDA countries. IFC s AS expenditures in client-facing projects rose from $15 million in FY10 to almost $16 million in FY11. Climate Change and Environmental and Social Sustainability In FY11, IFC invested $1.7 billion (own account) in climate-friendly projects while the climate-related AS client-facing project expenditures almost doubled from FY10, reaching $26 million in FY11. During the first half of FY12, commitments in climate-friendly projects reached $727 million, a significant increase from $517 million during the same period in FY11. The AS client-facing project expenditures in the first half of FY12 were about $12 million. IFC remains a leader among IFIs in offering structured carbon finance products for its own account. The revised Sustainability Framework, which includes IFC s Performance Standards on Social and Environmental Sustainability (PS), is now in place. The PS are reflected in the Equator Principles, now used by 72 FIs around the world. In addition, other FIs reference the PS, including 15 European development finance institutions and 32 export credit agencies from countries belonging to the Organization for Economic Co-operation and Development. MIGA continues to use the PS for its operations, and EBRD has modeled its performance requirements on these standards. In addition, the Green Credit Guidelines, recently approved by the China Banking Regulatory Commission and applicable to all Chinese banks, are benchmarked against the PS. IFC is also the first development finance institution to require systematic corporate governance analysis of every investment transaction. Infrastructure, Health, Education and Food Supply Chain CY10 portfolio clients in power and water increased their reach to over 111 million people, while in telecommunications and information technology projects the portfolio clients reached about 180 million people. In FY11, IFC s commitment volume (own account) in power, water and transport reached $1.6 billion, the same level as in FY10. At the end of FY11, the portfolio of PPP advisory mandates reached 67 projects in 41 countries. IFC signed 21 PPP advisory mandates in FY11, 62 percent of which were in IDA countries. Fifty percent of FY11 project expenditures were in IDA, and 16 percent were in Fragile Situations. IFC signed 13 mandates in the first half of FY12, of which 69 percent were in IDA countries and three in Fragile Situations.

30 26 IFC remains the largest multilateral investor in private health care and education in developing countries. CY10 portfolio clients reached 7.5 million patients and 1 million students. During the first half of FY12, IFC commitments in health and education reached about $280 million, a significant increase from $83 million in the same period of FY11. CY10 portfolio clients increased farmers reached to 2.5 million, up from 2.1 million in CY09. Over the past four years, the WBG has increased its annual agriculture investments from $4.1 billion to $5.6 billion, more than a third of which comes from IFC. In FY11, IFC committed $1.9 billion in the agribusiness value chain. Local Financial Markets Development In CY10, IFC s FI clients held a portfolio of $9.7 million MSME sub-loans worth $140 billion. FY11 also saw a record $6 billion in MSME commitments, most of which through financial intermediaries, up by 14 percent from $5.3 billion in FY10. In FY11, nearly half of IFC s investments in financial intermediaries and two-thirds of Access to Finance expenditure went to IDA countries. During the first half of FY12, IFC committed $2.4 billion in MSMEs of which $1 billion was in IDA countries. In FY11, IFC commitments for own account in financial markets increased by 16 percent, reaching $7.7 billion, compared to $6.7 billion in FY10. Of this, $4.7 billion was in trade finance, up 34 percent from FY10. In the the first half of FY12, IFC committed $3.9 billion in financial markets, of which $2.9 billion was in trade finance. In the first half of FY12, IFC successfully issued a $3 billion five-year Global Bond as part of IFC s program of fundraising for private sector development lending. Building and Maintaining Long-term Client Relationships IFC continues to strengthen its long-standing strategic partnership with key clients, donors and policymakers, and other IFIs to help create a favorable investment climate and support growth and private sector development. Reversing the decline in FY11, South-South commitments increased significantly to $482 million in 14 projects in the first half of FY12, compared to $299 million in 11 projects in the same period of FY11. HIGHLIGHTS OF FINANCIAL SUSTAINABILITY Profitability. IFC reported Income before Grants to IDA of about $2.2 billion in FY11. After the transfer of $600 million to IDA, IFC reported net income of about $1.6 billion in FY11, amounting to a return of 8.2 percent on average capital (GAAP-basis). For the first half of FY12, IFC reported net income of $213 million, after transferring $330 million to IDA, compared to net income of $645 million for the same period of FY11 (after transferring $600 million to IDA), as discussed in IFC s Quarterly Report to the Board 32. As discussed in FY12 Business Plan and Budget Paper (IFC/ R ), the Corporation continues to closely monitor underlying drivers of profitability as to plan for the impact on financial sustainability. Based on year to-date performance and anticipated income for remainder of the current fiscal year, the Corporation expects sound profitability results in FY12, in the range of $1.3 - $1.7 billion. Projected profitability for FY13-15 is closely monitored and reviewed on a periodic basis in the context of projected growth and portfolio performance for determining the Corporation's ability to maintain required economic capital levels as well as amounts available for IDA designation under the Board approved sliding scale formula Portfolio Performance. IFC has continued to focus on portfolio operations to help mitigate the impact of difficult market conditions faced in the past year. IFC s total disbursed and outstanding 32 IFC/Sec M

31 27 investment portfolio for loans and equity increased to $29.1 billion at the end of the first half of FY12, up by about $400 million from $28.7 billion at end-fy11, while the committed loan and equity portfolio (disbursed balances before reserves plus undisbursed balances of signed commitments) decreased to $37 billion at the end of the first half of FY12, down from $38.4 billion at the end of FY IFC continues to closely monitor its portfolio. Key loan performance indicators improved marginally during the first half of FY12, however, IFC anticipates a continued deterioration of the portfolio as it lags leading credit ratings indicators, as evident in the increase in arrears and specific provisions. The amount of arrears increased slightly by $10 million to $619 million from end-fy11 to the end of the first half of FY12. Principal outstanding on non-accruing loans decreased by $98 million to $845 million. The level of nonaccruing loans declined to 3.9 percent of disbursed outstanding principal from 4.4 percent over the same period. The equity portfolio saw a decrease in both valuation and unrealized gains as the equity markets moved lower and from equity sales. During the first half of FY12, IFC realized about $1.2 billion in gross equity income. Unrealized capital gains at the end of the first half of FY12 were $4.7 billion, down from $6.9 billion at the end of FY11. BOX 3: COMPONENTS OF ECONOMIC CAPITAL Total Resources Required (TRR) is the minimum capital required to maintain IFC s AAA rating, given the risk profile and size of the portfolio; TRR is determined by the absolute size of the committed portfolio and by the product mix (equity, loans, shortterm finance, Treasury portfolio assets, as well as operational and other risks) Total Resources Available (TRA) is the total capital of the Corporation, consisting of (i) paid-in capital; (ii) retained earnings net of designations and some unrealized gains/losses; and (iii) total loan loss reserves; TRA grows based on retained earnings (profit minus distributions) and increases in reserves The Conservation Buffer, which is set at 10 percent of TRA, is similar to the regulatory capital conservation buffer adopted by Basel 3; its purpose is to absorb short-term fluctuations that result from the volatile nature of our portfolio Deployable Strategic Capital (DSC) is the capital available for additional commitments, over and above the current program; it is calculated as capital available (TRA) minus capital required (TRR) and the conservation buffer DSC is expressed as a percentage of TRA: DSC(percent) = DSC($) / TRA($) Economic capital. IFC is exposed to many types of financial and operational risks through its investment operations and Treasury activities, as well as operational risk in AS and the AMC. In line with industry best practice and regulatory guidance (Basel 2 and Basel 3), IFC uses economic capital as a primary measure to manage capital adequacy and to monitor and manage risk. Under this framework, which was implemented in 2007, the Corporation is able to compare different products in a consistent manner and to manage its risk exposure, both in aggregate and at the individual project level. Deployable Strategic Capital (DSC) at the end of FY11 was ten percent Funding for AS. IFC s AS is funded from three sources: donors, clients, and IFC. IFC makes the bulk of its contribution through designations of net income through the Funding Mechanism for Technical Assistance and Advisory Services (FMTAAS). Since FY10, IFC has been pursuing a three-pronged strategy for strengthening the sustainability of its AS funding model: To further diversify funding, efforts have been launched to increase the leverage of IFC s contribution, with greater reliance on clients and donors. In FY11, IFC accounted for 44 percent of AS funding, compared with 47 percent in FY10. The longer-term goal is for IFC to contribute around 33 percent. Part of IFC s financial contribution to AS is being mainstreamed by shifting funding for certain backbone positions from FMTAAS to IFC s administrative budget. Phase One was launched in FY12; a proposal for a second phase, expected to be implemented from FY14, is currently in preparation. IFC financial management systems are being updated to support the particular needs of the AS business Fund-raising of donor resources for AS projects continues to be successful in spite of a challenging ODA environment and constrained donor resources. Total donor funds committed for AS in FY11 amounted

32 28 to $204 million, up from $181 million in FY10. Donor commitments in the first half of FY12 were $146 million, up from $126 million for the same period in FY11. This included several new partnerships, including with private foundations. It is expected that total commitments from donors in FY12 will exceed FY11 levels, reflecting increased donor support for private sector solutions to development and continued donor commitment to IFC s AS Clients have also been responsive to requests to increase their contribution to projects, which also helps to strengthen their commitment to implement IFC s advice. MOBILIZATION On the investment side, IFC tracks and reports on Core Mobilization, that is financing from non- WBG entities that becomes available to IFC clients due to IFC s direct involvement in raising resources, at the time of its deployment at project level. In FY11, IFC had a record year for Core Mobilization, deploying $6.5 billion of third-party resources to clients through its projects, an increase of 20 percent over FY10 ($5.4 billion). Relative to investment for IFC's own account of $12.2 billion, this translated into a mobilization ratio of $0.53 for every $1.00 invested by IFC ($0.42 in FY10) 33. In the difficult market environment in the first half of FY12, mobilization decreased to $1.8 billion, translating into a lower mobilization ratio of $0.31 relative to IFC s own-account investment volume of $5.9 billion. In FY11 the following contributed to Core Mobilization: IFC s Syndicated Lending Program, AMC, and Initiatives created in response to the crisis IFC s Syndicated Lending Program. IFC mobilized $4.7 billion in FY11, and $1.5 billion in the first half of FY12 (more than 70 percent and 80 percent of Core Mobilization, respectively) through this Program, which includes syndicated B-Loans, Parallel Loans, Unfunded Risk Participations and A-Loan Participation Sales. There was an increasing number of emerging market banks as co-financiers (39 percent of total number of participants compared with 26 percent in FY10). Of the nearly $1 billion provided by such banks in FY11, 26 percent came from banks in MENA, 25 percent from banks in Asia, 24 percent from banks in LAC, 18 percent from banks in SSA, and seven percent from Southern and Eastern European banks Since the establishment of the MCA in 2009, which details the manner in which development institutions work together to co-finance projects when IFC is the mandated lead arranger, IFC has syndicated $2.7 billion in parallel loans for clients, with MCA signatories providing $1.2 billion thereof. Signatories now include thirteen development institutions In addition, IFC and the European Investment Bank (EIB) signed a Collaboration Agreement in December, 2011 which provides guiding principles for cooperation in cases where IFC and EIB are the only co-financiers. This agreement covers private sector projects in Africa, the Caribbean, the Pacific, and in EIB s Mediterranean partner countries under the Facility for Euro-Mediterranean Investment and Partnership, and allows for reciprocity, that is, either IFC or EIB can lead AMC. AMC, a wholly-owned subsidiary of IFC, manages third-party capital in the form of private funds for investments in developing countries. It was created in 2009 to mobilize third-party capital to expand the supply of long-term capital to these markets, enhancing IFC s development goals and generating profits for investors by accessing IFC s global reach, investment approach and standards and track record. 33 Defined as Core Mobilization amount divided by the total volume for IFC s investments for its own account plus the IFC portion of AMC fund investments, plus the IFC portion of investments in IFC Initiatives. 34 Belgium s Investment Company for Developing Countries (BIO), France s Proparco, Germany s Deutsche Investitions- und Entwicklungsgesellschaft mbh (DEG), the Development Bank of Japan (DBJ), the Netherlands Nederlandse Financierings-Maatschappij Voor Ontwikkelingslanden N.V (FMO), the OPEC Fund for International Development (OFID), the Black Sea Trade and Development Bank (BSTDB), the Development Bank of Austria, Oesterreichische Entwicklungsbank (OeEB), the Arab Petroleum Investments Corp (APICORP), the Eurasian Development Bank (EDB), the United States Overseas Private Investment Corporation (OPIC), the Islamic Corporation for the Development of the Private Sector (ICD) and Export Development Canada (EDC).

33 At the end of FY11, AMC had more than $4 billion of assets under management across three existing funds, which invest alongside IFC in various investment opportunities. These are: IFC Capitalization Fund (comprised of an Equity Fund and a Subordinated Debt Fund, collectively called the CapFund ). The CapFund is a $3 billion investment fund established by IFC and Japan Bank for International Cooperation in February 2009, focused on making equity or equity-related investments in, and subordinated loans to, major private banks or state-owned banks on a clear path to privatization in emerging markets. The CapFund aims to support systemic banks considered vital to the financial system of an emerging market country. Since inception, the CapFund has committed $1,178 million of which $529 million (45 percent) has been in IDA countries. Africa Capitalization Fund ( AfCap Fund ). The AfCap Fund invests in equity and equity-related investments in banking institutions in continental Africa. The AfCap Fund invests alongside the IFC Cap Fund or, in cases where the investments do not qualify for the IFC Cap Fund, alongside IFC. The target size for the AfCap Fund is up to $200 million and it has currently raised $145.5 million from multilateral and development finance institutions. The AfCap Fund had its first closing on August 16, 2010 for an amount of $54.5 million and its final closing is expected by March 31, Fund-raising efforts are on-going with advanced discussions with Sumitomo Mitsubishi Banking Corporation. Since inception, AfCap Fund has committed $4 million (jointly with the CapFund) in one investment, and that in an IDA country. IFC African, Latin American and Caribbean Fund ( ALAC Fund ). The ALAC Fund is a $1 billion fund that has commitments from six sovereign and pension investors and IFC. The ALAC Fund was launched in April 2010 and is focused on making equity, quasi-equity and equity-related investments in Sub-Saharan Africa, Latin America and the Caribbean. Since inception, the ALAC Fund has committed $339 million of which $141 million (42 percent) has been in IDA countries In addition, AMC, in close coordination with IFC, has launched and is fund-raising for four new funds. These are: IFC Russian Bank Opportunity Fund ( RBOF ). Approved by the IFC Board on May 13, , RBOF is targeting commitments of up to $1 billion. The Russian Federation has committed $50 million and the State Corporation Bank for Development and Foreign Economic Affairs (Vnesheconombank), which is affiliated with the Russian Federation, has committed $250 million to the Fund through a trust arrangement with IFC. IFC s commitment will be 33 percent of total fund size, up to $250 million. RBOF, a Russia-only fund, will make investments in licensed commercial banks, bank holding companies, and other bank-related investment vehicles, either privately-owned or government-owned on a clear path to privatization. The RBOF objectives include providing more effective banking services to SMEs across the country, enhancing the competitiveness of private regional and Tier II banks and demonstrating their investment potential, and supporting local capital market development in line with government strategy by targeting exits through IPOs. IFC Global Infrastructure Fund ( GIF ). GIF was approved by the IFC Board on May 19, GIF is targeting commitments of $1 billion and will invest primarily in projects and companies that require capital expansion or new construction (greenfield) and in brownfield infrastructure assets that exhibit growth potential in developing countries across all geographies. IFC is in discussion with a large Asian sovereign investor to be the anchor investor in GIF. IFC s commitment is 20 percent of total fund size, up to $200 million. IFC Climate Catalyst Fund ( CCF ). CCF was approved by the Board on November CCF is targeting commitments of $500 million and will invest in emerging markets private equity funds 35 Russian Federation Proposed Investment in Russia Bank Capitalization Fund (RBCF) - IFC/R World Region Proposed Investment in IFC Global Infrastructure Fund ( GIF ) IFC/R World Region Proposed Investment in IFC Climate Catalyst fund - IFC/R /R

34 30 focusing on companies and projects whose business activities contribute to addressing climate change challenges and building a low emission economy. IFC s commitment is 20 percent of the total fund size, up to $75 million. The Government of the United Kingdom is the anchor investor in CCF with a commitment of 50 million. IFC Middle East and North Africa Fund ( MENA Fund ). The MENA Fund was approved by the Board on November 10, The MENA Fund is targeting commitments of $300 million and will invest in the MENA region across all sectors. IFC s commitment is 20 percent of the total fund size, up to $100 million In FY11, AMC-managed funds committed $677 million of which 43 percent were in IDA countries. The breakdown by Fund is as follows: IFC Cap Fund committed $567 million of which $277 million (49 percent) was in IDA countries; ALAC Fund committed $106 million of which $7.5 million (seven percent) was in IDA countries; and AfCap Fund committed $4 million (jointly with IFC CapFund) in one investment, an IDA country. Of this FY11 commitment amount, $454 million was mobilized, that is funded by third parties Initiatives. At the onset of the financial crisis, IFC launched a targeted and innovative set of crisis-related initiatives to restore liquidity and trade, rebuild financial infrastructure, manage troubled assets, and alleviate specific regional difficulties. In FY11 IFC deployed $1.3 billion, around 20 percent of total mobilization, to its clients through two crisis initiatives, the Global Trade Finance Liquidity Program (GTLP) and the Infrastructure Crisis Facility (ICF). While the GTLP has recently been extended, the ICF has been closed - the Debt Pool has been spun off, and the GIF, when implemented, will follow a similar strategy to what was initially envisaged for the Equity Fund of the ICF in 2009 and most other crisis facilities have been mainstreamed, including the AS Financial Crisis Response Initiative Beyond its activities related to the crisis initiatives and recognized as Core Mobilization, IFC continued to implement several other initiatives, described in more detail in the Quarterly Report to the Board, some of which are described below, such as GAFSP (see paragraph 3.47) and e4e (see Box 7) IFC-MIGA mobilization 39 continues to be included in IFC-internal scorecards and performance metrics. In FY11, IFC staff enabled $157 million in MIGA guarantees in this way. WORLD BANK GROUP COOPERATION Close cooperation with the World Bank is essential to achieving the WBG corporate goals. IFC continues to build on the past close cooperation in the areas of strategy, policies and systems, as well as on individual country programs and projects. The growth of IFC involvement in IDA countries over recent years has strengthened IFC s joint work with other members of the WBG and other IFIs. Progress has been achieved, especially in IDA countries, including joint programmatic approaches and country strategies At the strategy level, IFC s focus areas and current initiatives support the WBG s strategic priorities as illustrated in figure 4. At sector and thematic levels, IFC is an integral part of the WBG s strategy, including in climate change, knowledge management, investment climate, infrastructure and financial and private sector development. The joint IFC, MIGA, and World Bank infrastructure strategy Transformation Through Infrastructure: World Bank Group Infrastructure Strategy Update FY12-15 which was completed in late 2011 is one of the most recent examples of this joint work. 38 Middle East and North Africa Region Proposed Investment in IFC Middle East and North Africa Fund - IFC/R Defined as MIGA guarantee issued to Client resulting from documented IFC referral reported when IFC receives compensation payment from MIGA. 40 Please also see Figure 4 on the strong strategic fit between the five strategic priorities of the WBG s Post-Crisis Directions and IFC s five Strategic Focus Areas and activities.

35 The enhanced cooperation at the thematic and sector levels is reflected in improved cooperation on individual country programs and on investment and advisory projects, particularly in Africa and the finance and energy sectors. Although the number of joint projects is relatively modest, the numbers themselves do not do justice to the value in expected development outcomes of the broader cooperation which exists Finally, in policies and systems, IFC is actively engaged with the World Bank in a number of areas, including the ongoing compensation review and development of a WBG integrated communication platform as part of the WBG Information Management and Technology (IMT) strategy. Further, the World Bank and IFC business continuity management teams continue to work closely together to develop and coordinate effective responses to business disruptive events globally and to jointly develop the management tools and systems that meet the requirements of each organization Less than two years into operation, the IFC/MIGA business development partnership has proven to be a successful example of WBG collaboration, providing joint business solutions to clients with high development impact. In FY11, IFC and MIGA teams jointly screened a total of 115 projects across all three industry clusters. Of these, 14 resulted in closed transactions totaling $157 million, which represented 7.5 percent of MIGA s FY11 total issued guarantees. Importantly, the initiative strongly focused on IDA countries, with nine closed projects out of 14. Europe and Africa had the largest share of the total volume. In the first half of FY12, the partnership delivered $150 million of new business in eight transactions. In addition, the capital optimization product 41 was successfully tested with ProCredit Holding AG in 16 countries. THE CHANGE PROCESS IFC s change process builds on the significant benefits brought on by decentralization and the development of a strong local capacity, with nearly 1,980 staff in 105 offices outside Washington D.C. as of January 2012, which brought a steep rise in new investments and allowed IFC to more than double the number of investment projects in IDA countries. It aims to bring decision-making, execution capacity and support functions for IS closer to IFC s clients, facilitate collaboration between IS and AS, increase accountability, strengthen knowledge management and address strains on work-life balance In September, 2011, the Corporate Task Force on IFC 2013, closing their mandate, noted a clear commitment by the Management Team to engage and focus on solutions, and handed over its mandate to IFC s leadership. In the change process, the Management Team s focus remains on four priority areas: (i) improving efficiency in operations; (ii) maintaining and fostering global knowledge; (iii) leveraging people and talent; and (iv) improving the effectiveness of the institution. Box 4 contains an update on some of the key implementation elements since the last Road Map. Detailed information on the status of the change process can be found in the update presented to the Board in October, MIGA can now offer the capital optimization product to banks with operations in emerging markets, which provides relief for the banks' risk exposures in emerging markets and frees up capital at the consolidated level that can be used as additional equity in their emerging market subsidiaries, thereby enhancing their investments in emerging markets, especially in lower income countries.

36 32 BOX 4: IFC CHANGE PROCESS IMPLEMENTATION HIGHLIGHTS Improving Efficiency in Operations The Istanbul Operations Center (IOC) is now fully operational; productivity metrics have been established, and are starting to be monitored. The IOC has helped address some of the challenges that staff were facing regarding the proximity of support staff (such as credit, legal, and environment and social staff) who can facilitate the efficient execution of investment operations. An initial survey in the EMENA region also indicates that staff appreciate the local presence of a strong management team. The Investment Portfolio Middle Office piloted in EMENA has provided Portfolio Managers and investment staff with a forward looking way of managing operational risks on investment projects. It has provided staff across the region an opportunity to share best practices, gain practical knowledge on systems and processes, and share lessons of experience on how to mobilize resources more effectively. In May 2011, the Client Relationship Management data-base rolled-out with 3000 clients and partners from 170 countries across Investment Services and Advisory Services (AS). Relationship Managers were assigned for all clients and partners. This will improve the way IFC handles its relationship with clients and partners, provide increased coordination, efficiency and professionalism so as to better respond to their needs. AS: Complementary reforms have been taken to strengthen the efficiency of AS, which have traditionally been more decentralized in their operations. These reforms include better leveraging of back-office and specialist expertise, and more joint AS-IS client engagements. There have also been ongoing refinements in AS product offerings, and improvements in business systems and processes. Maintaining & Fostering Global Knowledge The Global Knowledge Office has built a foundation for professionalizing a knowledge management career stream at IFC through a new competency model and worked to embed knowledge management in operations. This will be key for IFC to maintain leadership in expertise for its clients. Leveraging People and Talent To support IFC s decentralized operating model and ensure that the organization works together for the benefit of its ultimate stakeholders, IFC is investing in its talent and supporting staff development in specific ways: Strengthening talent management. IFC is now in the fourth year of an annual talent review process where staff are evaluated vis-à-vis their potential contributions to the corporation. In FY12, this process has been further strengthened and will also now include steps to identify staff that are mobile and/or are at risk of leaving the corporation, thereby better enabling organizational succession planning. Enhancing supervisory skills. IFC augments staff management by using staff supervisors in its Performance Evaluation Process (PEP). Typically, PEP supervisors are grade GG+ staff with at least four years of IFC experience. IFC is now scaling up its Team Leaders Training, designed to enhance the management skills of these supervisors. This also mitigates the institutional risk for staff working in small country offices. Improving global relocation support. IFC has taken steps in FY12 to improve global relocation support by recruiting fully dedicated mobility coordinators in each regional office and undertaking a comprehensive review of current third-party services and providers. As of January 1, 2012 all mobility coordinators are in place and onboarded. IFC is also partnering with IBRD to review mobility benefits. This review is being undertaken in two phases. Phase I, targeted for FY13 implementation, focuses on providing enhanced mobility benefits to staff recruited into local positions outside their home country. Phase II will consider overall elements of the Bank Group's global mobility strategy, support and other mobility benefits. Broadening the focus on diversity and inclusion. IFC s strong presence in country offices broadens the scope and importance of diversity and inclusion. In FY12, IFC has prioritized country office micro-diversity, to ensure that country offices include staff whose nationality is different from that of the duty station and region in which they work. Further developing HR capacity to support the business. IFC is currently taking steps to further develop its HR capacity. In addition to the mobility coordinators mentioned above, IFC has developed an onboarding and learning program designed to strengthen core HR skills. Improving the Effectiveness of the Institution Building and promoting a culture of trust, respect and collaboration amongst Management Team, Directors, Managers and staff remained a key priority across the Corporation. As a result, the concept of building One IFC became the cornerstone of this effort. The annual June Global Leadership Meeting strongly allied IFC s leadership around this concept. Following this meeting, in January, staff across the corporation gathered in sessions to engage in activities designed to increase understanding of their team's contribution to the strategy of IFC and the whole WBG, and how they could work together to achieve the strategic goals.

37 33 III. FY13-15: CREATING INNOVATIVE SOLUTIONS IN CHALLENGING TIMES 3.1. In a very uncertain external environment, which also affects progress in addressing long-term development challenges, IFC will continue to lead the way with thought leadership and innovative private sector solutions that create opportunities for the poor and respond to evolving client needs in the current difficult market environment Building on its solid foundation, track record of innovation and experience of more than 55 years in addressing development challenges, IFC will address these challenges with a dynamic, creative approach within a stable strategic framework that has been in place since IFC will retain its emphasis on its long-term strategic objectives, while providing a focused counter-cyclical response to client needs in the current difficult market environment taking into account its capital and resource position IFC s key corporate goals remain greater development impact and financial sustainability. These screens will continue to drive IFC s strategic choices, along with selectivity based on IFC s additionality. Its five Strategic Focus Areas remain in place as the framework for setting priorities across IS, AS, and AMC, and it will continue to sharpen its focus on results. Starting FY13, the IDGs will be implemented in a gradual fashion. In the near term, IFC will put particular emphasis on aligning its product offerings across all sectors as well as cooperating across the broader WBG to increase impact in key strategic areas such as agribusiness, infrastructure, and SMEs, jobs and growth. IFC will also be pro-active in the management of its portfolio, profitability and economic capital Mobilization and partnerships will remain key, leveraging funding platforms, innovation experience, and comparative advantages to increase development impact. Further strengthening partnerships within the WBG will be critical to achieve WBG goals. IFC will also continue to improve its delivery model, including through deeper IS and AS partnerships and collaboration across IFC on cross-cutting issues, in order to enhance development impact, client service and financial sustainability. DEVELOPMENT IMPACT 3.5. IFC s clients will continue to deliver development impact through activities that support inclusive and sustainable growth as a means to reduce poverty, and doing so with care for the environment. IFC has now explicitly outlined its poverty focus 42 for better articulation and measurement thereof, by providing a framework of who the poor are in the context of its operations, and how these operations contribute to poverty reduction. In IFC context, people are poor by income, lack of access to basic socio-economic services, or lack of access to income-generating activities, and its operations can contribute either directly or indirectly to poverty reduction Some IFC operations contribute to poverty reduction directly by improving poor people s access to basic goods, services and income generation opportunities. In many locations and instances, this is achieved by reaching the BOP. This is done in two ways- helping create effective markets to provide income opportunities for the poor, and by improving basic delivery of socio-economic goods through market mechanisms Within this context, IFC has a specific focus on inclusive business. The private sector is increasingly offering goods, services, and livelihoods to the BOP in financially sustainable and scalable ways. IFC will continue its focus on investing in inclusive business models, providing much-needed advice to clients serving the BOP, and playing a broader convening and catalytic role in this area. This is a leading area for IFC innovation. During FY11, IFC invested in 67 inclusive business projects amounting to more than $800 million in commitment volume. Financial markets accounted for around 40 percent, followed by 42 Please see Annex 3 for more detail on IFC s poverty focus.

38 34 infrastructure (around 26 percent), health and education (around 10 percent), and agribusiness (around eight percent). Regionally, commitment levels were spread across all regions: LAC around 28 percent, MENA around 22 percent, ECA around 18 percent, SSA around 12 percent, South Asia around 11 percent, and EAP around nine percent In addition to these direct channels of contributing towards poverty reduction, many IFC operations impact the poor indirectly, through stimulating broad-based sustainable growth that has been shown by research and evidence to be a prerequisite for expanding opportunities for poor people. As such, all IFC interventions that are strongly pro -growth are also pro-poor IFC will continue to measure and report on its clients development results through DOTS, for IS, AS, and AMC. Building on progress in FY11, IFC will continue with its leadership in results measurement, concluding the second year of refining the IDGs in FY12 (see box 5). Feedback from staff indicates that the IDGs are powerful tools to help align IS, AS and the AMC activities, and that they are already becoming a useful additional tool to help drive implementation of IFC s strategy During FY12, two IDGs are being piloted for the first time in select regions - IDG5, contribution of IFC s clients to economic growth (GVA), and IDG6 (b), an additional goal of GHG intensity in IFC s portfolio. IFC has also begun exploring the feasibility of a possible additional IDG on employment, to be informed by the findings of an IFC study on job creation and by the upcoming WDR On current expectations, IFC will start full implementation of two IDGs at the start of FY13 - IDG2 on access to health and education services, and IDG3, on access to financial services for micro/individual and SME clients, the latter with additional focus indicators for women and women-owned businesses served. This means that these two IDGs will be fully integrated into IFC s incentive and management systems. IFC plans to move ahead gradually with implementation of the other IDGs, in each case when methodological issues are settled and accountabilities established. The current estimate is to move to full implementation of the remaining four IDGs in FY IFC aims to remain the leader among IFIs as it continues to develop a robust development results framework incorporating DOTS, the IDGs and evaluation results into one interlinked system. This will continue to be complemented by other work to better understand and express IFC s additionality and the demonstration effects of IFC activities.

39 35 BOX 5: IFC S DEVELOPMENT GOALS ILLUSTRATION OF WORK IN PROGRESS IFC is currently testing the following six Development Goals (IDGs) with provisional targets for FY IFC will support projects that: IDG Unit FY11 IDG Targets FY11 IDG Contributions Target (FY13-15) 1. Increase or improve sustainable farming Million people opportunities for: 2. Improve health and education services for: Million people (a) Increase access to financial services for Million clients micro/individual clients for: 3. (b) Increase access to financial services for SME Million clients clients for: 4. Increase or improve infrastructure services for: Million people Gross Value Added $ million N/A N/A N/A 6 (a) Greenhouse Gas Emissions Reduced* (tco2 eq/yr) N/A N/A 16.2 Note FY11 Contributions refers to IFC's progress in signing or committing projects that during implementation are expected to achieve the anticipated development results. Based on experience during FY11, targets for IDGs3 and 4 were subject to methodological revisions, IDGs5 and 6 were replaced by new metrics, with the IDG5 still at the initial pilot stage with no targets. Herewith more detail: IDG 1 - IFC is exploring complementing the indicator of farmers reached, with additional indicators that might better capture the objectives of the Agribusiness Strategic Action Plan. IDG 2 - No changes IDG 3 - The revised IDG being tested in FY12 includes additional services, such as deposits, housing finance and insurance IDG 4 - The methodology was amended to take better account of electricity from power projects that goes to commercial use IDG 5 - The revised IDG being piloted by in two regions in the Manufacturing, Agribusiness and Services Industry Group measures the gross value added by IFC s clients to their economies. GVA is the difference between revenues and costs, disaggregated into payments to different stakeholders - payments to employees, capital providers, governments (including taxes), local communities and the economic value retained in the companies. This goal replaces the previous IDG5 on MSME Revenues. IDG 6 *- The interim FY11 volume goal was replaced with a goal on emissions reductions, being tested in all regions in FY12. An additional sub-goal, IDG 6(b) on GHG intensity, is being piloted in three regions in FY12. The expected timeline for IDG implementation, revised since last year s Road Map to allow more time for learning : FY12: continued testing/piloting of goals FY13: First IDGs (Health & Education; Financial Services) to be implemented FY14: Tentative: move to full implementation of the remaining four IDGs LONG-TERM STRATEGIC FOCUS AREAS The Five Strategic Focus Areas (see box 2), will remain the framework for priority development areas across IS, AS and the AMC. While restated for clearer internal communication to staff this year (see box 6), the same focus areas remain in place, with the explicit inclusion of water. While this important development theme is presented as part of the Infrastructure priority, IFC recognizes that water cuts across several of the other focus areas, with a strong interconnection in particular among water, energy and food, as also impacted by climate change. Frontier Markets IFC will continue to focus on IDA countries and other frontier markets. Its work in the frontier provides high levels of additionality as it supports the private sector to spur growth and inclusiveness in these areas, thereby reducing poverty and unemployment, and to address other development challenges, which can also be particularly prevalent in the frontier In IDA countries IFC investment projects is expected to remain at around 50 percent of overall project count, and investment volume to be around 40 percent of overall own-account volume. IDA countries are also expected to continue to account for more than 60 percent of the overall advisory program (excluding

40 36 world projects). IFC will also aim to expand its activities in several small states in Africa, the Caribbean and the Pacific. BOX 6: THE WHERE, WHAT, HOW AND WHY OF IFC S STRATEGIC FOCUS AREAS: STAFF COMMUNICATION Our strategy is guided by our Vision: that people should have the opportunity to escape poverty and improve their lives Where: Our geographic focus is Frontier Markets: IDA (45-50 percent project count target) Fragile Situations Frontier regions in non-ida countries Other frontier dimensions to be considered (e.g. inclusive business models, urban poor; requires further analysis and definition) What: Our priority sectors are: Infrastructure, including water; health; education; and the food supply chain Local financial market development, with an emphasis on MSMEs Climate change and environmental and social sustainability And we recognize gender as an important cross-cutting theme. How: We will pursue our strategy by: Building long-term partnerships, including through support for cross-border growth Mobilizing for maximum impact And by harnessing our comparative advantage including our local presence, global knowledge, track record of innovation, and aligned IS/AS and AMC - as well as by living our Values: Excellence, Commitment, Integrity, Teamwork, and Diversity. Why: To achieve greater development impact and financial sustainability - our key corporate goals. In this way, we will be fulfilling our Purpose: to create opportunity for people to escape poverty and improve their lives by catalyzing the means for inclusive and sustainable growth, through: Mobilizing other sources of finance for private enterprise development Promoting open and competitive markets in developing countries Supporting companies and other private sector partners where there is a gap Helping generate productive jobs and deliver essential services to the poor and vulnerable To achieve its Purpose, IFC offers development-impact solutions through firm-level interventions (direct investments, Advisory Services, and the IFC Asset Management Company); promoting global collective action, strengthening governance and standardsetting; and business enabling environment work Fragile Situations, as defined by the WBG 43, is primarily a sub-set of IDA countries with a high proportion in SSA, and will remain a very important area for IFC IS and AS. The WBG plan to operationalize the 2011 WDR on Conflict, Security and Development contained two broad action areas relevant to IFC increasing attention to jobs and private sector development, and striving for WBG excellence in Fragile Situations work. Within this context, IFC will continue to focus on areas where the private sector can play an important role, such as through support for agricultural value chains and the enhancement of skills and employability Advisory activities are typically IFC s first engagement in Fragile Situations and provide IFC with a vanguard presence, in particular with investment climate work, but also through PPP and Access to Finance Advisory. IFC also foresees more firm-level AS to help build the E&S and other capacity of private sector companies to help unlock more investment activity. IFC expects to increase its Advisory project spend in Fragile Situations (those countries and territories on the FY12 WBG List) by nearly 80 percent between FY11 and FY15, and a soon-to-be appointed program coordinator will help guide the scale-up of IFC's efforts across IS and AS and to further strengthen WBG cooperation On the investment side, the Global Trade Finance Program (GTFP) has opened the door for IFC to engage in many Fragile Situations for the first time. IFC also continues to examine means of taking 43 On its regularly updated Fragile Situations Harmonized List

41 37 additional risk on investments in Fragile Situations, and the proposed SME Facility (see paragraph 3.72) and GAFSP are expected to play an important role in addressing special challenges in these markets, including through the use of blended finance. IFC will continue to strengthen its contribution to global thought leadership and knowledge management on private sector development in these countries, including through a position supported by the government of Denmark. BOX 7: LEADING THE RESPONSE TO POLITICAL EVENTS IN MENA Despite the difficult operating environment, IFC is leading the IFI community in responding to the political events in MENA. IFC has played its counter-cyclical role, committing nearly $2.4 billion (including around $900 million in mobilization and about $380 million in equity) in several high impact projects, and approving 20 new Advisory operations worth $16 million, in the Arab World (MENA excluding Afghanistan and Pakistan) between January, 2011, and February, IFC has also accelerated its regional initiatives (e4e, MSME Facility, AFFI) and developed a MENA Fund which aims to help restore investor confidence and bring investment back to the region. IFC has ramped up its equity program in an effort to support regional champions who have actively sought IFC's support in 2011 for expansion into new markets. This is evidenced by several large transactions committed including Hikma Pharmaceuticals ($137.5 million equity & loan), Bank Muscat ($170 million sub-debt), and MedGulf ($124 million equity). In Egypt, IFC's confidence boosting investment package of $375 million in Orascom Construction Industries (OCI) has been well received by the market and government. IFC s Advisory Services are active in the areas of MSME finance and training, PPPs (hospital, waste management), capacity building, resource efficiency, and business registration and licensing, and are an increasingly important tool to engage in several of the transition countries. Of the four initiatives, all but the MENA Fund are joint IS and AS multi-year programs, and have been prepared and are implemented jointly with the IBRD as part of the Arab World Initiative. IFC has been coordinating very closely with other IFIs as part of the Deauville Partnership process, especially in rolling out the four regional initiatives: e4e initiative for Arab Youth: a joint IFC and IsDB initiative with World Bank support, which seeks to address the mismatch between the needs of labor markets and education outcomes in the Arab World through combined advisory and investment engagement to increase the private sector s role in the finance and provision of education; a full e4e team is on board and business development has begun; needs assessments have been completed for Tunisia and Jordan and a pipeline of projects being developed; funding has been secured for developing Country Road Maps for Egypt and Morocco. MENA SME Facility and MSME Technical Assistance Facility: a comprehensive regional initiative in collaboration with the IBRD, EIB and KfW, to enhance SME access to finance and support job creation and broad-based economic growth. Advisory work has begun and financing of investment facility underway. Arab Financing Facility for Infrastructure (AFFI) and a complementary Technical Assistance Facility (TAF): a joint initiative between the World Bank, IsDB, IFC and other partners (possibly EBRD) to provide financing and advisory assistance for cross-border infrastructure, infrastructure PPPs, and other innovative infrastructure projects that have a regional demonstration effect. The private window, Arab Infrastructure Investment Vehicle (AIIV) was IFC Board approved in February 2012 and fundraising to begin by selected Fund Manager EMP. TAF up and running. MENA Fund that will leverage investment opportunities in the region, support capital markets, help scale up access to finance, and increase employment opportunities, thereby restoring investors' confidence in the region. Marketing documents have been finalized and fundraising has begun. One example of increased activity at country-level is Tunisia, where IFC is scaling up its program with recent investments in the financial, health and oil and gas sectors, and increased AS to support MFIs and banks, corporate governance, the tourism sector, and improving skills for youth. IFC s strategy seeks to support the private sector through a joint investment and advisory program which seeks to (a) mobilize investments which improve investor confidence; (b) expand access to finance to MSMEs, with a focus on women and youth entrepreneurs; (c) invest in labor intensive and high value added manufacturing; (d) invest and advise on improving skills of youth for private sector jobs; and (e) improve the quality and access to infrastructure and social services especially in lagging regions Increased partnership with the World Bank and MIGA is very important in these markets, given the long-term engagement needed with continued focus on institution-building and public sector policy reforms. MIGA can also provide useful tools to mitigate political risks. IFC will also participate in a World Bank global community of practice. IFC will support the World Bank Global Center for Conflict, Security, and Development in Nairobi as appropriate with new postings of relevant IFC staff. In FY12 IFC hired an additional staff member for Afghanistan, established field presence in Baghdad for the first time with a

42 38 Senior Operations Officer co-located with the World Bank, and posted full time staff in Juba, South Sudan. IFC staff have also recently returned to Sana a from their temporary basis in Amman after their evacuation from Yemen last year IFC will continue to focus on frontier regions in non-ida countries, and to target projects which support inclusive growth - in these countries and IDA countries - addressing the needs of the poor wherever they are. These include not only the inclusive business models projects, but also those which more generally focus on increasing access to finance, infrastructure and other basic goods and services, as well as those which target women and indigenous populations SSA is expected to show robust growth, with share of IFC own- account investment volume reaching an expected 23 percent by FY15 (18 percent in FY11), and of IFC total investment volume (own account and mobilization) reaching an expected 21 percent by FY15 (15 percent in FY11). Its share of AS client-facing project spend is expected to increase to around 31 percent in FY15 (26 percent in FY11). In MENA ownaccount and total investment volume is expected to grow in line with overall IFC investment growth, with the AS client-facing project spend expected to increase by nearly 75 percent in FY15 compared to FY11. By FY15 the South Asia share of IFC own-account investment volume is expected to reach 10 percent (six percent in FY11), of total investment volume nine percent (six percent in FY11), and of client-facing advisory project expenditure 16 percent (12 percent in FY11). Together, client-facing advisory project expenditure in South Asia and Sub-Sahara Africa is expected to account for about half of overall clientfacing advisory project spend by FY15. For more information on regional strategies, see paragraphs and Annex 1, and for an update on IFC s activities in response to the political events in MENA, see box 7. Climate Change and Environmental and Social Sustainability As a pressing development challenge and important cross-cutting topic, IFC continues to mainstream climate considerations into all of its activities across all industries and regions. In FY11, IFC committed $1.7 billion in climate-related investments, representing 14 percent of own-account volumes (13 percent in FY10). By FY15, IFC expects to commit more than $3 billion in annual climate business, with at least 20 percent of its annual long-term finance (LTF) and at least 10 percent of its annual Trade and Supply Chain (TSC) commitments to be climate-friendly. The climate change share of overall client-facing advisory project expenditure is expected to continue its growth path from FY10 onwards (10 percent in FY10, 16 percent in FY11) to 24 percent by FY15. IFC is reinforcing its focus on impact through IDG6(a), by testing the goal of GHG emission reductions for new projects across the institution, and IDG6(b), by piloting the additional goal of GHG emission intensity of IFC's investment portfolio, based on ongoing tracking of this metric Climate business encompasses a broad spectrum of private sector opportunities for mitigation and adaptation. IFC s Climate Business Group will continue to support innovation and collaboration across IFC investment departments and all four AS business lines, and help catalyze cross-cutting solutions to client needs. Grid-connected renewable energy will continue to be an important focus area and expansion in other areas will be key, in particular: resource efficiency (such as green buildings), off-grid renewable energy, waste management, sustainable value chains, and sustainable agribusiness. Climate business will also support low carbon development in other strategic focus areas such as the food supply chain and infrastructure. Scaling up sustainable energy finance with banks will remain a core component of IFC s climate work. IFC also plans to expand the volume and scope of its early-stage cleantech investment business, including with the launch of the blended-finance Cleantech Innovation Facility 44 which targets highly innovative young companies originating in, or transferring technology and/or business models to, developing countries. 44 IFC/R

43 Private sector-focused advisory work supports market transformation related to energy access (for example Lighting Africa and Lighting Asia), clean energy (such as solar, biomass, wind and geothermal), and resource efficiency (such as the work underway with the Confederation of Indian Industries on best practices in the cement sector). Climate change is a key area for WBG cooperation, and IFC and the Bank will continue to cooperate closely to help transform markets, including through PPPs, funding mechanisms such as the Global Environment Facility and the Climate Investment Funds (CIF), and on analytics and tools, such as for adaptation IFC will continue to build on its leadership role in innovation and analytics. It will continue to coordinate with the Bank and other multilaterals on metrics and tools, pilot GHG intensity metrics for the IFC investment portfolio, and extend GHG metrics for new projects to client financial intermediaries. It will also continue work on climate risk/adaptation tools for the private sector in collaboration with the Bank, clients, business associations, and the public sector. With the inclusion of climate risk in IFC s revised PS, IFC plans to scale up its four-year old program of adaptation/climate risk assessments for clients. IFC AS are also developing adaptation-oriented programs, such as helping to introduce saline-resistant seeds in Bangladesh IFC s work in climate is done on a commercial basis, although there are instances where barriers in the market prevent such investment. IFC will continue to include blended finance (see Blended Finance below) in its overall climate funding solution to clients, on a selective and targeted basis designed to address those barriers and create the demonstration effect needed to catalyze investment and transform markets. AS will often be deployed alongside these investments to facilitate and accelerate the intended market transformation IFC will also continue to seek innovative ways to mobilize additional private sector funds for climate financing, such as through the AMC-managed CCF and potentially through green bonds. IFC remains actively engaged with the G-20, the World Economic Forum, and other stakeholders on how best to use limited public funds to catalyze private capital flows and market transformation through innovation While private sector innovation and resources are key, governments have an important role in creating the appropriate enabling environment, including through public policy and catalytic and complementary funding, and in this context IFC and the World Bank will continue to work closely together. IFC will continue to apply a climate lens to its PPP work, and regulatory advice, for example on green building codes. PPP engagements are now systematically screened for potential climate components, resulting in the creation of new models for catalyzing private sector investment in renewables, energy efficiency, green buildings, municipal and industrial solid waste management and public transportation IFC will continue to be a global standard-setter in Environmental and Social risk management for private companies and FIs, and build on its leadership in Sustainability as demonstrated by the update of its Performance Standards. An important focus will be to help strengthen the capacity of IFC clients through IS and AS collaboration. Among other innovative approaches, this includes toolkits, guidance notes and handbooks for clients, and a web portal, FIRST for Sustainability, in particular for FI clients. AS will continue to work at the firm and sector level to promote broad market uptake of good standards and practices IFC will continue to build on the corporate governance leadership established through the DFI Corporate Governance Development Framework ( which is based on IFC's methodology. It also it expects a significant increase in its corporate governance activities to support investees, broaden impact and strengthen IFC global leadership through a deeper partnership between IS and AS. A focus on women is an important cross-cutting theme for IFC, and a growing component of IFC s investment and advisory work in areas such as access to finance for women entrepreneurs and investment

44 40 climate reform. Indicators on women are also included in DOTS and IDG3 on access to finance. IFC s work on Women in Business (see Box 13) is an opportunity to showcase IFC, and WBG, leadership. Infrastructure (including water), Health, Education and the Food Supply Chain IFC will continue to sharpen its focus in all these sectors, which are critical to sustainable development in many countries, engaging across the spectrum of inclusiveness and broad-based growth. Within this context, the IDGs are useful additional tools to help drive the implementation of strategy; IFC also recognizes the substantial development contribution of infrastructure investments such as ports, which indirectly benefit the poor and underserved by stimulating much-needed broad-based growth. Within this broad Strategic Focus Area, infrastructure activities, such as transport and logistics, rural electrification, water investment and resource efficiency, also support agricultural productivity and food security IFC will continue to mainstream sustainability and climate change throughout its operations in these sectors. Renewable energy accounted for more than two-thirds of IFC's power sector commitments in FY11, and is expected to remain a core activity. IFC will also continue to pursue energy efficiency and other climate change mitigation opportunities across these sectors. IFC AS is working to improve the enabling environment and encourage more competitive markets to allow private participation in renewable energy. Resource efficiency more broadly is also common thread in our strategy in these sectors (see box 8) PPPs are playing an increasingly important role in all these sectors, not only in infrastructure development. As part of the implementation of the WBG Infrastructure Strategy update, as well as the G-20 development agenda which has infrastructure as a core pillar, IFC investment and advisory operations are working closely across the WBG to scale up PPP investment. Traditionally, IFC s PPP projects focused on physical infrastructure, such as transport, power, water, and telecom, but over the past decade IFC has expanded the scope to include PPPs in health and education, and more recently, also in agribusiness, irrigation, banks and insurance, water and climate-related projects, reflecting the growing demand of its clients. IFC will also be working with donors on a study to establish a gender analysis framework for PPPs The IFC office in Singapore, opened in September 2011 as part of a WBG scale-up that co-locates the World Bank, IFC and MIGA, will contribute to consolidating the WBG's work on PPPs and infrastructure financing solutions to deliver a range of integrated services and products to private and public sector clients globally. IFC experts will in particular focus on bringing private sector expertise into stateowned infrastructure such as power, transportation and water distribution IFC expects to increase the share of physical infrastructure as a percentage of its own-account investments by FY15. In addition, IFC would seek to mobilize a significant amount of financing from third parties for its investment and advisory projects, including through PPP Mobilization. Its client-facing advisory project spend on infrastructure, including PPPs, investment climate reform and clean energy, is expected to increase by about 65 percent to around $38 million by FY15 ($23 million in FY11), with a strong ramp-up in CAF and CSA, and increased focus on IDA countries and Fragile Situations. The GIF (see paragraph 2.48) a $1 billion fund directed at infrastructure sub-sectors to be managed by the AMC, is currently in fund-raising stage and is expected to reach first closing by the third quarter of calendar year Infrastructure in SSA remains a key focus area. The Special Initiative for Infrastructure in Africa aims to expand the overall market for private infrastructure in Africa, and provides dedicated resources for collaboration with IDA on upstream sector reforms, project development efforts, PPP policy and structuring, and a focus on infrastructure associated with extractive industries and agribusiness development projects. These efforts will be focused on a group of high potential countries, currently identified as Ghana, Kenya, Nigeria, Côte d Ivoire and Senegal. Launched in July 2011, the Initiative aims for early results during its first three years, and a step-change in the volume of private/ppp infrastructure financing in six years.

45 Progress to-date includes hiring a manager for the Initiative, and building the team through extensive recruitment. In addition, existing IFC Africa Infrastructure staff have undertaken Special Initiative-type activities from July 2011 to date, involving engaging in sector reforms, and upstream business development and structuring activities to convert some early PPP opportunities into bankable projects. These activities, primarily in the power sector, have focused on Nigeria, Ghana and Côte d Ivoire. Through this process, IFC has been coordinating within the WBG with IDA and MIGA, and with key external partners such as the AfDB and specialized infrastructure funds to ensure complementarity. By FY15, IFC expects its ownaccount infrastructure volumes in SSA to be at levels about three times of those achieved in FY11, and also seeks to increase the levels of third-party mobilization This year IFC has reinforced its commitment to the water and waste sectors by explicitly incorporating water into its Strategic Focus Areas. IFC continues to work towards broader transformation in these sectors through a substantially re-focused Water and Waste Sector Business Plan. The plan points to the need for a holistic management of the water resource by both the public and private sectors, and considers water and waste to be key enabling resources for economic growth and development. In this regard, integrated water and waste management are considered vital to the food-water-energy nexus and to the growing awareness of a resource-constrained future. Building on IFC's experience and results in the sectors over the last decade, the plan supports a value chain approach to sector where focused interventions to improve both the enabling sector environment and the financial and institutional capacity to create projects are expected to result in robust and sustainable public, private and PPP projects Within the context of the business plan, IFC, with a group of external partners, implemented the 2030 Water Resources Group (WRG), a public-private platform housed at IFC which works with governments in catalyzing sustainable water sector transformation to support economic growth. WRG was officially launched on January 26, 2012 during the World Economic Forum's Annual Meeting in Davos, with its first Executive Director and broader governance structure in place IFC aims to significantly increase its deal flow in water and waste across all industry groupings as well as partnership with AS, by working on both the supply and demand sides of the sector IFC recognizes that these are challenging sectors, in particular due to an extensive public sector role, and is therefore pursuing a strong alignment of investment and advisory approaches and partnerships with the World Bank, other multilaterals and donors. IFC's objective is to reach a steady state of up to $500 million in water and waste business per year from FY14 onwards, and about $ million in FY12 and FY13, reaching many millions of people and conserving fresh water thereby ensuring a more robust resource. IFC will continue to build on its AS progress in FY11 across PPPs, investment climate reform and resource efficiency, water savings interventions with manufacturing companies, and work with small scale providers of water to those living at the base of the economic pyramid. Other initiatives include a partnership with the World Bank and potentially other multilateral institutions, to establish a water innovation platform to help bring innovative technologies and delivery models to emerging market countries Within the framework of the WBG Information and Communications Technologies strategy, IFC will continue to focus on high impact and innovative areas, such as satellite and sub-marine cables, wireless, fiber backbones, broadband, shared/managed infrastructure services, media, information security and privacy, venture investments, epayments and IT-enabled services. IS and AS operations in these areas will help lower costs, enable access to the under-served, enhance local productivity and open up new business areas to small businesses IFC will continue to selective support extractive industry projects with a focus on broadening the development impact of these projects in conjunction with AS, and will also continue partnering with others to identify good practices in extractive- industries-related areas such as community development, local government revenue management and payment and contract transparency. IFC will also continue to apply

46 42 lessons learnt from its extractive industries work on community development and social sustainability to other infrastructure projects, such as large-scale wind and hydro IFC s work will continue to complement that of the public sector in health and education. IFC s IDG on improved health and education services is one of the first two IDGs which are expected to be implemented in FY13, and it also expects to double its commitments in these areas by FY15 from FY11 levels IFC will continue to focus on the implementation of the IFC-World Bank Health in Africa Initiative through funds, other investments and policy work and to look for opportunities to apply lessons learnt from this initiative in its Health in South Asia Initiative. IFC is also increasingly focusing on skills development as a foundation for employment opportunities and better paying jobs, and is making progress with its e4e initiative (see box 7) IFC s Agribusiness Strategic Action Plan (ASAP), approved by the Board in August 2011, calls for increased investment and advisory focus on agribusiness and the food supply chain and an increasingly programmatic approach. The ASAP is aligned with the 2008 WDR and the WBG Agriculture Action Plan FY10-12, and is a collaborative World Bank/IFC effort integrating the joint contributions of the respective agriculture-related teams. The ASAP has three strategic objectives, with enhancing food security (e.g. through increased investment and enhanced productivity) being primary, complemented by enhancing economic development and inclusiveness (e.g. integrating smallholders into global supply chains, women and risk management) and E&S sustainability as a business driver (e.g. resource efficiency) Beyond its ongoing refinement of the most appropriate IDG in this area, IFC expects to more than double its FY11 agribusiness value chain commitments, from farming inputs through retail operations, to about $4.3 billion by FY14. Farmers reached through ASAP are expected to more than double from 360,000 in FY12 to 800,000 by FY14. It plans to do so through an integrated value chain approach, involving a crossdepartmental effort with strong alignment of IS and AS, with an expanded product range, an increased focus on high impact areas such as inputs, warehouse receipts financing, risk management and infrastructure, and increased investment in intermediaries such as traders, distributors and retailers. It will also tailor its inventions to specific country conditions. IFC expects to nearly double its share of overall AS client-facing program in this area by FY15, increasing activity in all regions with a special emphasis on IDA countries and Fragile Situations, and on SSA and South Asia. Its PPP focus on Agribusiness is expected to expand, for example into grain storage There are increasing opportunities for partnering, convening, innovation, thought leadership, and standard-setting. One of the key areas of partnership is GAFSP, a WBG/G-20 program launched in 2009 to carry out a $20 billion food security initiative for IDA countries, with $2 billion targeted for the private sector. The GAFSP Private Sector Window, developed and managed by IFC, seeks to increase (i) reach to smallholders, farmers, and SMEs, and (ii) food productivity on a sustainable basis in IDA countries with a combination of IS and AS. The first public call for proposals under the Private Sector Window was launched in July Donor contributions are now reaching a critical mass, and as a result IFC has committed dedicated resources to focus on the management and implementation of this initiative. Deployment of funding on private sector investment projects is currently underway. IFC s first project to be funded by GAFSP has been submitted for Board approval Pran, an agro-processing company, located and operating in Bangladesh with a closing date of March 6, IFC and the World Bank are also collaborating on a food safety platform tailored to the needs of emerging markets (see WBG cooperation), and IFC has participated in the new WBG Blue Oceans report. There is also cross-institution learning between staff from the agriculture and private sector development sectors of the World Bank and staff from IFC in the development of several new World Bank agriculture commercialization projects. IFC and the World Bank are collaborating on the Responsible Agro-Investment

47 43 (RAI) initiative, including the recently launched RAI Toolkit, and on the Ukraine Agriculture Investment Policy Note. In addition, the IFC strategy for engagement in the palm oil sector is an essential part of an integrated WBG approach. IFC is also partnering with private banks, such as JPMorgan Chase and Société Generale, on the innovative APRM program to enable wider availability of agriculture commodity price riskhedging tools and therefore more food security in emerging markets. BOX 8: ADDRESSING RESOURCE SCARCITY Resource scarcity, exacerbated by climate change, is a fundamental constraint to economic growth. Thus IFC is increasing its focus on energy, water, and other resource efficiency across all sectors in both investment and advisory work. IFC will continue to pursue resource efficiency for utilities (water, power, transport) within both investment and PPP advisory work. Demand-side solutions will also be key, for example smart irrigation in agribusiness, energy efficiency for industry, including through ESCOs (Energy Service Companies), and a focus on green buildings which will include hospitals and universities. IFC will maintain our strong focus on renewable generation and increase its renewable supply chain investments. IFC will also support the integration of renewable power into other infrastructure investment projects, for example telecommunications and desalination projects as well as advisory projects targeting low-carbon rural electrification (eg. Lighting India). To support young, highly innovative cleantech companies, IFC will strengthen its early stage investment team and launch the recently approved Cleantech Innovation Facility to extend the reach of this team s work to earlier stage companies and frontier regions. Local financial markets development Empirical evidence shows that improved access to finance supports broad-based growth as well as inclusiveness, thereby reducing income inequality and poverty. Better access to finance can promote new firm entry and firm innovation and growth, also promoting growth at the aggregate level. Lowering financial barriers, alongside efforts to tackle productivity constraints, can be especially beneficial for SMEs Financial inclusion particularly reaching under-served SMEs - supported by sound financial markets, therefore remains central to development. Through continued innovation in its products and approaches, IFC will continue to increase financial inclusion for households and enterprises, primarily MSMEs and increasingly in local currency, to sustainable levels that support growth and job creation. It will do so within the context of the WBG approach to responsible financial inclusion through a range of investment, advisory, and Treasury activities, a leading role in the G-20 Global Partnership for Financial Inclusion, and leveraging its client network for financial inclusion. IFC s advice and investment in this area often go hand- in-hand Within the context of the broad development impact of the financial sector 45, IFC will continue to capture the development impact of its financial intermediary clients work through DOTS and the IDGs. IDG3, one of the first two IDGs that IFC expects to start implementing in FY13 (see box 5 and paragraph 3.11), is focused on increased access to financial services for micro/individual clients and SME clients, and includes focus indicators for women and women-owned businesses served. IFC s extensive financial market client base also greatly extends IFC s reach and serves as an important channel to deliver development impact more broadly, through joint infrastructure, agribusiness, climate and sustainability projects Developing financial infrastructure is also key to local financial market development. The often pioneering joint work by IFC AS and the World Bank/IFC Financial and Private Sector Development (FPD) Vice Presidency to develop collateral registries, credit bureaus, retail payment systems, securities markets and other supporting infrastructure will continue. AS also remain essential to other aspects of financial inclusion. AS can be an effective door opener in difficult markets, notably in IDA countries and Fragile Situations, and a close partnership between IS and AS is often essential for building resilient FIs that grow in a responsible, sustainable manner. Areas for IS/AS partnership include reaching households - through 45 See more detailed discussion in last year s Road Map: IFC M/ /4

48 44 microfinance, insurance, mobile banking and housing finance; and reaching firms through SME finance, trade finance, leasing, agrifinance, energy efficiency finance and programs to include women. IFC also expects to more than double its institution-building work (corporate governance and risk management advisory) with investee institutions over the next three years. The share of AS focused on expanding access to finance is expected to remain at around one-third of the overall AS program in the FY13-15 period IFC also supports the development of local capital markets, using innovative approaches in both its investment and advisory services. IFC and FPD staff are currently involved in a range of activities that directly and indirectly support the development of these local markets. IFC will selectively focus on countries that have, or will soon be able to have, credible, rated government bond markets, with significant external institutional investor interest, and with public stock markets that have a minimum number of listed companies that are rated and covered by local analysts on an ongoing basis. In countries that do not or cannot meet these conditions, capital markets are unlikely to develop and provide meaningful financing. In these countries, IFC will continue to focus on providing access to finance through the banking system and private equity. Where it can help develop local bond markets and support the public listing of additional companies, it will actively seek to do this, and will seek to bring institutional investors into local markets as co-investors along-side IFC. IFC and FPD may also consider developing regional capital markets when there is appropriate cross-country support for such an initiative IFC also plays an important role in supporting the development of private equity (PE) funds, a significant source of equity finance in many developing countries. PE funds are often the only option to bring equity to unlisted companies and SMEs in these countries, and to bring additional equity to companies in countries and sectors not well-served by public markets. IFC will continue to diversify and expand reach across a range of PE funds in developing countries, with a focus on Small Business funds that can reach frontier companies, Climate Change Funds which catalyze new opportunities, and Growth Equity funds which more widely support SMEs and job creation. BOX 9: IFC AND LOCAL CURRENCY MARKETS IFC Treasury's new strategy of long-term engagement with regulators and markets through setting up program based domestic bond issuance programs has seen some initial success in CFA region and Ghana where Ghana and the eight member countries of the West African Monetary Union gave approval to IFC in December 2011 to establish local currency bond programs to strengthen domestic capital markets and support private sector development in the region. The approvals enable IFC to issue over $1 billion equivalent in bonds in Ghanaian cedis and CFA francs over the next ten years. This also provides a powerful instrument to fund local currency loans made by IFC. As of FY11 year end, IFC has offered over $9.1 billion in local currency financing in 54 currencies using a wide variety of local currency products, such as, local currency domestic bond issuances, long-dated currency swaps and structured and securitized products. IFC was the first foreign borrower in 2007 to issue a CFA bond in the West Africa Economic and Monetory Community and used the proceeds to fund IFC projects. Since 2002, IFC has done 10 local currency bond issuances and several of these were used to finance IFC long-term local currency investments. Using derivatives, IFC has committed more than $7.5 billion in 282 projects in 37 currencies and at the time of offering, executed longest dated currency swaps in Nigeria, Tanzania, Zambia, Russia, Philippines and Vietnam. IFC structured first partial credit guarantees for bond issuance in India, Russia, Saudi Arabia and Thailand and has channeled 110 local currency financing projects through structured and securitized products in 37 countries mobilizing over $7 billion with an IFC exposure of $1.6 billion. IFC helped to launch the first local currency covered bond transaction in Turkey, executed first ever interest rate swap in Trinidad and Tobago, facilitated first mortgage backed securities issuance in Colombia, Mexico, Russia, Saudi Arabia and South Africa. Recently, IFC signed NAFMII (National Association of Financial Markets Institutional Investors) Master Swap Legal Agreement with China Development Bank and Export-Import Bank of China and has started offering swap funded Renminbi loans IFC will contribute another vital component of local capital market development by developing new ways to expand its local currency bond issuance program as well as its suite of local currency derivatives and structured products, for example the introduction of program-based bond issuances, as illustrated in Box 9. The current difficult market environment serves as a reminder of the advantage of being able to borrow in local currency, as financial crises typically introduce an element of foreign exchange volatility and cross-

49 45 border funding risk. To scale up the issuance of local currency bonds, increase impact, deepen partnerships with regulators and markets, and improve operational efficiency, IFC is currently making the upfront investment of resources to develop program-based bond issuances in addition to individual issuances IFC Treasury works closely with IFC s client-driven operations, managing overall funding, liquidity and asset management risks and acting as a knowledge center. To better serve its clients and partners, IFC is aligning its Treasury organization more closely with its regions and sectors, and is also planning to develop a local Treasury presence, currently envisaged for Asia, Africa and Eastern Europe. Building on IFC s track record of Treasury innovation, it will establish a small team dedicated to new product development, such as for innovative risk management products, and will also start offering knowledge-based services alongside and in addition to AS IFC and the Bank Treasuries capture synergies where possible. The two Treasuries cooperate on joint policy matters, discuss developments in markets, and present joint market updates to the Audit Committee of the Board. The Treasuries use the same assumptions for stress testing, share experience on initiatives and transactions, and coordinate on the timing of bond issuances. Increased cooperation related to regulatory approvals for local currency matters in client countries could be very helpful, such as for local currency issuances, investing in local currency instruments such as sovereign bonds, or making local currency products available to clients in general. BOX 10: GTFP DOTS FRAMEWORK AND ROLL-OUT STATUS IFC is the first institution to measure the development impact of trade finance, and continues its M&E leadership among multilateral development banks with the roll-out of a DOTS framework for its Global Trade Finance Program (GTFP) in FY12 after a comprehensive and inclusive design process. As with DOTS for IFC s other operations, this systematic framework assesses development impact of GTFP operations at both the program and project level and synthesizes ratings across financial, economic, environmental and social, and private sector development performance. The DOTS for GTFP goes one step further, not only measuring development impact at the transaction level, but also at the institution level, that is at the level of the developing country issuing banks who are IFC s GTFP clients. These institutions receive both beneficial linkages to cross-border counterparties and opportunities to upskill through IFC s investment, and develop across the four key performance areas mentioned above. In addition, these banks are a direct link to the businesses either importers or exporters- that they serve, which in turn deliver development impact to local communities, offering employment, sources of income and goods and services to the economy. IFC is currently collecting preliminary data from its existing portfolio to establish a baseline for the DOTS. IFC s Trade Finance Officers have been trained on the new framework, and are now reaching out to their client banks with a comprehensive survey and data request. All new banks joining the program are being on-boarded immediately, and all existing banks are expected to be on-boarded within three years, with 20 percent of banks expected to be on-boarded by the end of FY12. In addition, to expedite assessment of the entire portfolio, a light-touch client survey is being launched in parallel to collect preliminary, high level information on GTFP s development impact and additionality through a few questions. Complementing the surveys and specific data from each Issuing Bank, IFC will communicate GTFP s development impact through case studies. An assessment of GTFP s additionality will take into consideration IFC s role within the context of both the client bank s trade finance experience and the perceived risk for supporting trade finance in the host country. As the GTFP DOTS framework progresses, findings will be reported in a comprehensive GTFP Development Impact Annual Report IFC will also continue to innovate in other areas to meet evolving client needs, such as through IFC s Trade and Supply Chain (TSC) programs. Current programs include the six-year old flagship GTFP, the Global Trade Supplier Finance (GTSF) program and Global Warehouse Finance Program (GWFP), both approved in FY11, and the GTLP and CCFP, two facilities recently extended and approved, respectively, that target support to the currently disrupted global markets 46. IFC s trade finance activities are recognized as a key pillar of the WBG Trade Strategy, and IFC s pipeline of new TSC products, all of which incorporate development indicators, align with WBG development objectives. These innovative projects will provide 46 IFC/R

50 46 working capital across value chains in critical sectors, targeting the smaller, poorer or otherwise under-served segments by partnering with financially sound intermediaries along those chains While TSC programs are in general based on long-term client relationships, and have provided a series of those investment opportunities, the individual structures and risk profiles of the underlying investments/assets determine their capital weight. In this light, the GTFP, GTLP, CCFP and GTSF have lower charges than IFC s traditional long-term products, and the GWFP currently has a similar capital treatment to long-term debt. IFC is currently also developing other debt products with a shorter tenor than traditional long-term loans, in particular in response to the current difficult market environment. BOX 11: TRADE AND SUPPLY CHAIN PRODUCTS AND CONTRIBUTION TO STRATEGIC FOCUS AREAS The Global Trade Finance Program (GTFP): IFC launched the GTFP In 2005 to facilitate the provision of trade finance for banks in emerging markets, with particular emphasis on IDA countries and smaller institutions. The GTFP guarantees trade-related payment obligations of approved financial institutions, extending and complementing the capacity of banks to finance trade. GTFP has also introduced and strengthened relationships between emerging market banks and potential trade finance counterparty banks, as well as supported increased trade finance opportunities for lesser know companies within these markets. Since inception in September 2005 through January 2012, the program has issued over 11,400 guarantees without loss, and supported trade for a volume of $20 billion. GTFP has issued guarantees for a total of $16.1 billion in terms of commitments, of which 52 percent supported banks in IDA countries, 27 percent agri-business trades, 38 percent banks in conflict-affected countries, and 35 percent south-south trades. In addition, 81 percent of the number of transactions has supported SMEs. In the first half of FY12 alone, GTFP has issued $2.8 billion in guarantees to support $3.8 billion of trade, $608 million of which was for guarantees in Africa. The GTFP has also opened the door for IFC s first-time engagement in more than 15 post-conflict and severely challenging markets, and has added over 110 banks to IFC s client base, of which at least 45 have benefitted from additional IFC products. The Global Trade Liquidity Program (GTLP): As a rapid-response to the 2009 crisis, GTLP had a significant impact and contribution to IFC s strategic focus areas. Of the approximate $ 20 billion in trade supported with about 14,000 transactions over the life of the program, 81 percent of the transactions represented SME finance, 30 percent of trade supported low/low middle income countries, 12 percent of which was in Sub-Saharan Africa. While IFC was intending to wind this program down, IFC s Board approved an extension in January, 2012, in response to the current difficult market environment for trade finance, and the GTLP is expected to support up to 18 billion in trade finance, much of which in these strategic focus areas, over the next three years. The Critical Commodities Finance Program (CCFP): Also approved by IFC s Board in January, 2012, the CCFP leverages the GTLP s unique structure to support both agricultural commodity trade finance globally, and energy imports into IDA countries. The CCFP is expected to support up to $18 billion of trade over the next three years, in addition to that supported by the GTLP. The Global Warehouse Finance Program (GWFP): In 2010 IFC began leveraging its expertise to address the need for working capital across critical sectors. The GWFP was approved in September 2010 by IFC s Board and aims to increase working capital financing to agricultural players, including SMEs and farmer producers, against warehouse receipts as collateral. It facilitates agricultural warehouse financing by banks through liquidity for on-lending and risk mitigation solutions. To date, IFC has committed $15 million to Sudameris in Paraguay, $100 million to BNP Paribas for its Africa and Eastern Europe exposures, and $20 million to Techcombank in Vietnam. It is anticipated that this will generate about $1.3 billion of commodity finance to transactions involving a range of agricultural commodities, with about 50 percent of the program in IDA countries. The program expects to reach up to 570,000 farmers and contribute to food availability for 15.3 million people by GWFP plans to propose an increase to the size of the program from $200 million to $500 million during the third quarter of FY12. IFC Global Trade Supplier Finance (GTSF): IFC s Board also approved the GTSF in September, 2010, which will provide better access to working capital finance in emerging markets, especially for SMEs, by discounting their sales receivables. GTSF provides shortterm financing to producers in emerging markets that sell to large, established international or domestic companies on open account terms by discounting invoices accepted for payment by approved buyers, effectively taking buyer credit risk. Current and pipeline programs are expected to establish credit facilities with seven to ten buyers and their emerging-market suppliers, primarily in Latin America and South and East Asia. Over the next two years more than 60 percent of GTSF suppliers and more than 40 percent of volume are expected to be in IDA countries Each of the programs has an approved product ceiling, and, as discussed with the Board during last year s Road Map discussions, IFC will revert to the Board should a further increase in these ceilings be required, in the case of the GTFP supported by results from the new GTFP DOTS. IFC expects to revert to

51 47 the Board with such a request for the GTFP in FY13, especially given the significantly increased client demand in the current difficult market environment, at which time it will also present its first preliminary GTFP DOTS analysis. IFC also expects to revert to the Board in FY12 to approve an increase in the GWFP ceiling from $200 million to $500 million. For the roll-out status and structure of GTFP DOTS, please see box 10, and for TSC products description and contribution to IFC s strategic focus areas, please see box IFC will continue to play an important convening and catalytic role in responsible finance, primarily through its co-organization of the Responsible Finance Forum, a collection of development agencies and development finance institutions. IFC will help to shape global responsible finance principles more concretely by harnessing IFC clients' institutional experiences and by scaling up best practices that focus on reaching households and businesses responsibly and sustainably. In its own operations, IFC seeks to drive responsible finance mainly through (i) working with financial intermediaries and industry associations to build the practice and culture of responsible provision of credit and non-credit products, followed by (ii) its Global Credit Bureau program which helps reduce over-indebtedness by giving lenders better information about a borrower's existing liabilities, and (iii) promoting financial awareness, including through retail/payments services A key component of IFC's financial inclusion strategy is to leverage its extensive global network of more than 800 FI clients with 30,000 direct outlets and even broader reach through mobile banking networks. IFC will increasingly shift its focus from building its network to more fully utilizing it to further development objectives (see Partnership below). Long-term relationships The profile of IFC's clients has changed over time - evolving from primarily international sponsors to a majority of local clients, and now including an increasing number of South-South sponsors. IFC will continue to develop long-term client relationships with firms and other partners in developing countries, while also increasing its focus on developing new clients. According to IEG, development outcomes associated with IFC investments are higher when investing with existing clients Emerging market players are increasingly investing on a global scale, and South-South FDI has increasingly become a key source of financing for LICs and some MICs, as well as a means to transfer standards, knowledge and winning business models. Based on its track record and global presence, IFC is well-positioned to be the partner of choice for sustainable South-South partnerships and investments, helping to build regional champions and enable knowledge transfer As discussed in last year s Road Map as well as the Business Plan and Budget Paper, IFC has now begun implementation of a special South-South Emerging Markets to Africa initiative to catalyze investment especially from LAC and Asia, but also other regions, into SSA. IFC is working on building up its knowledge of the South-South flows into Africa to help IFC target its business development efforts, and is also has hired dedicated staff to serve as a focal point for South-South efforts in Africa, alongside the senior staff member in Africa already designated to lead this effort along with dedicated staff in India and China. IFC is undertaking business development efforts in Brazil for this initiative, as the most promising market for origination of new investments from Latin America into Africa. IFC s efforts in Asia for this initiative are focusing not only on single transactions but also mobilization from Asian investors as well as knowledge sharing through AS. Some recent examples of progress in developing a South-South pipeline include possible investments from Asia in a healthcare center in Nigeria and housing company in East Africa, and from LAC in the food and banking sectors Independent Evaluation of IFC s Development Results.

52 In addition, IFC participated in a South-South roundtable between India and Africa in February and is supporting the World Bank in performing a scan of the investment climate for consumer electronics, and the potential of relocating private companies in this sector from China to countries in Africa For South-South more broadly, IFC is looking at ways to measure and incentivize inter-regional South-South projects to harness IFC s global knowledge and experience for the benefit of all regions through South-South investments. SHORT-TERM FOCUS AREAS Given the current difficult external environment, the need to increase IFC s activity across the Corporation in key areas and the importance of investing in IFC s staff, in the near term IFC will place particular emphasis on implementation in the following three areas: Implementing its strategy in the areas of infrastructure (especially in Africa), agribusiness and the food supply chain, and SMEs, jobs and growth; Responding to the current difficult market environment; and Investing in people and improving the effectiveness of the institution With concerted efforts to align its product offerings across all sectors as well as cooperate across the broader WBG to increase impact, IFC has already helped boost infrastructure, agribusiness and SME activity. IFC s response to the current difficult market environment is described in Chapter 4, and its investment in people and efforts to improve the effectiveness of the institution are described in box 4 and in Strengthening Operations and Delivery Model. BOX 12: IFC S FOCUS ON SMES The breadth and depth of IFC s offering has led to significant results, which it is getting better at measuring. At the end of FY11, IFC had an extensive network of 391 FI investment clients focused on SMEs, including 94 private equity Funds, and $9.8 billion FM committed portfolio. This portfolio supported 1.7 million sub-loans to SMEs worth $128 billion. An additional 3,678 SME Trade transactions worth $2.9 billion were committed. Outside of Financial Markets, IFC has about 100 SME clients and $535 million committed. On the advisory side, IFC spent $141 million on client-facing advisory projects that targeted SMEs as beneficiaries. This included capacity building for banks who expanded lending to 700,000 SMEs, as well as financial infrastructure improvement programs which have supported financing of over $1 trillion to SMEs in China alone. Direct capacity building to SMEs included 140,000 participants trained in IFC s Business Edge training program and over 5 million online users per year of IFC s SME toolkit. This work is supported by improved business climates as a result of IFC s work in tax reform, business registration and Doing Business reforms. IFC has also taken an increasing leadership role on SME issues, including as a Technical Advisor to the G-20 SME Finance Working Group. Recently IFC has been asked by the G-20 to host the SME Finance Forum, a knowledge platform for stakeholders to share experiences and collaborate to push the frontier of SME finance. IFC is a leader of the IFI and Donor Committee groups focused on SMEs, the G-20 SME Finance Data Working Group and administrator of the G-20 SME Finance Challenge which is providing grants to 14 competitively selected innovators in the SME finance space. This year, IFC has published a number of flagship publications, including reports on financing women, agribusiness finance and a stocktaking report on SME finance. IFC continues to innovate and test its ability to better monitor and measure results and evaluate its experience. DOTS and IDG indicators are important elements. IFC also has ongoing research efforts to look at the link between its work with SMEs and jobs and poverty reduction Given the important role of SMEs in developing countries, IFC has developed a broad range of products and services focused on supporting SMEs in its markets. This includes a broad range of investment and advisory products to improve SME access to finance, including for women-owned businesses, climaterelated businesses and agribusiness; support for SMEs in the value chain through real-sector investments with larger companies and trade finance activities; infrastructure projects with huge impacts on SMEs; capacity-building programs for SMEs, and investment climate work supporting formalization and reduced red-tape (see box 12 for more detail).

53 To further strengthen its focus on SMEs, in the last year IFC has (i) created an SME & Jobs Steering Committee to coordinate and deepen SME work across the Corporation, (ii) developed a Global SME Finance Facility ( SME Facility ), currently scheduled to be discussed with the Board on March 15, 2012, (iii) established an SME Finance Forum under the auspices of the G-20 and housed at IFC, (iv) continued to implement the MENA MSME Facility, and (v) strengthened its range of SME advisory products and services and its ability to measure their impact The proposed SME Facility is a comprehensive global initiative in collaboration with IFIs, other development institutions and donors to reduce the significant SME financing gaps in emerging markets identified by the G-20. It will mobilize both commercial and concessional funding for FIs to expand finance to underserved SMEs, provide technical assistance to FIs to strengthen their SME operations, and enhance financial infrastructure to reduce the costs and risks of financing SMEs. A priority will be placed on target SME groups, including segments that are difficult to reach (women-owned businesses, agribusiness SMEs and green growth SMEs) and SMEs in distressed markets (fragile or crisis-affected states). The first phase will be focused on Africa and South Asia. IFC will cooperate with the IDA-IFC program to the extent possible, and coordinate with the Bank in areas such as financial infrastructure. BOX 13: IFC AND WOMEN IN BUSINESS Women in the private sector represent a powerful source of economic growth and opportunity, yet their potential is often hindered by legal differences and other barriers, as further discussed in para IFC aims to promote business opportunities for and through women across IFC s investment and advisory services through specific programs by (i) increasing access to finance and access to markets for women entrepreneurs; (ii) reducing gender based barriers in the business environment; and (iii) creating business opportunities for IFC s clients to promote improved working conditions for female employees, woman-focused market segmentation and the inclusion of men and women in community relationships. To this end, analyzing and addressing the business case for creating opportunities for women is an integral part of IFC s approach. IFC s recent Women and Business activities include: Access to finance: by the end of FY11, increasing the participation of women in business by working with IFC s investment services to provide $113 million to commercial banks which disbursed $86 million to 22,200 women-owned SMEs and trained 3,000 women entrepreneurs. IFC is a lead sponsor of the Global Banking Alliance for Women, bringing together 31 FIs committed to leveraging the women s market around the world. Business management training: in 2011, almost 40 percent of the 22,000 people trained using Business Edge, a world-class business training system backed by IFC, were women. Launch of G-20 Report: the report Strengthening Access to Finance for Women-owned SMEs in Developing Countries was endorsed by the G-20 in November, 2011 Board diversity: IFC promotes diversity on boards, and through IFC s Global Corporate Governance Forum, supports training for senior women executives. About 19 percent of IFC s nominee directors are women; IFC aims to increase this share to 30 percent by Investment climate reform: in collaboration with the World Bank, developing a methodology for gender mainstreaming in key regulatory reforms affecting women; IFC s methodology is being implemented in reform programs in more than a dozen countries in five regions, with tangible results. Policy and Standards: gender is now more fully addressed in IFC s updated Sustainability Framework Employment: As a follow-up to the Private Sector Leaders Forum (PSLF), one of WBG President Robert Zoellick s six commitments on gender equality, IFC will in 2012 launch WINvest (Women-specific investments), a WBG global partnership initiative to create win-win outcomes for business and development by improving working conditions and employment opportunities for women IFC and its clients play an integral role in facilitating job creation. The 2.4 million jobs that IFC s investment clients provided in 2010 are only a small proportion of the total job creation effects of IFC s investments, including through activities that boost access to finance, access to infrastructure, ease investment climate constraints or promote education and skills. IFC engagement in improvements in youth skills and job placement is primarily at the post-secondary level, where IFC is engaged in both investment and advisory areas. Looking forward, the IFC/IsDB e4e initiative can serve as a model for comprehensive employment education programs in other regions. IFC has also financed a number of projects in Technical

54 50 and Vocational Education and Training and in related tertiary education programs. AS projects focus on skills building, entrepreneurship training, and job placement assistance, and a number of these have also focused on youth employment, for example Business Edge. IFC s Women In Business work (see box 13) supports job creation through SMEs, as SMEs with full or partial female ownership represent percent of formal SMEs in emerging markets, and these firms represent a significant share of employment generation and economic growth potential IFC is working on a study aimed at understanding the dynamics of job creation in varying contexts, focusing on practical aspects on what we can do to help create jobs in different circumstances. It covers direct, indirect and induced job creation by IFC investments and advisory projects (including, for example, jobs for women and youth), and more broadly private sector activities. The findings of the study will feed directly into the upcoming WDR and is supported with funding from the Netherlands, UK (DFID) and Switzerland (SECO). ADVISORY SERVICES CONTRIBUTION TO STRATEGIC FOCUS AREAS AS make a substantial contribution to IFC s development reach and impact, whether through helping client governments improve the enabling environment for private sector investment, or helping private sector clients build their know-how in areas such as E&S responsibility, corporate governance, or energy efficiency financing. Indeed, AS is often IFC s first offering in new or challenging markets. During FY11, results included: IFC s Investment Climate Business Line supported more than 60 regulatory reforms in 30 countries, with around 25 percent of the work focusing on the special challenges faced by governments in Fragile Situations. The Public-Private Partnerships Business Line completed eight advisory mandates, which were expected to improve access to services for 4 million people, generate private investment of $61 million, and yield fiscal benefits to governments of $40 million. The Access to Finance Business Line helped expand financial inclusion by supporting 189 financial intermediaries in 55 countries, including 36 IDA countries. The Sustainable Business Advisory Business Line helped firms adopt and model sustainable business practices by supporting over 9,000 entities in 80 countries. BOX 14: EXPANDING THE DEVELOPMENT IMPACT OF ADVISORY SERVICES WITH INDIVIDUAL FIRMS IFC Advisory Services works with both firms and governments with about half of the overall program in each group. Our work with firms focuses on capacity building and awareness raising, while our work with governments focuses on helping to improve the enabling environment for private sector investment. The two forms of intervention are increasingly combined - in parallel, or sequentially - through programmatic approaches to achieve broader development impact. Our AS with individual firms has stronger development impact when we focus on helping early movers in an activity with high development impact demonstrate the commercial viability of that activity to others. Examples range from helping clients improve their corporate governance or environmental and social practices, to helping financial intermediaries develop new offerings in SME lending or energy efficiency financing. The demonstration effects constitute a form of positive externality or public good. IFC's pricing policy for AS takes into account the balance of private and public benefits --- clients are expected to contribute to the costs of an AS project to the extent they capture the private benefits. An element of subsidy to cover the expected public benefits of a project helps encourage firms to take on the higher costs and risks associated with adopting new ways of doing business. IFC experience, confirmed by IEG findings, shows that working with IFC investees can provide even stronger development impact IFC s experience, confirmed by IEG findings, shows that the development impact of AS can be magnified when strategies for AS and IS are aligned. IFC s work with governments to improve the enabling environment, for example, can have a more substantial impact when IS helps to mobilize an investment response, strengthening the demonstration effect of reforms. Examples include our work to help the Government of Lao PDR to modernize its banking framework, which paved the way for the first foreign

55 51 strategic bank investment in the country, a project in which IFC co-invested. Similarly, providing AS to individual firms has greater impact when an investment relationship helps to strengthen the client s commitment to implement the advice, and provides the resources to implement advice to scale. Examples range from pioneering efforts to introduce SME banking in many underserved markets in Africa to the introduction of energy-efficiency financing to financial intermediaries in China Reflecting these benefits, IFC is increasingly aligning its IS and AS strategies. Today, AS makes a significant contribution to IFC s strategic priorities, including SMEs, agribusiness and food security, infrastructure, and climate change, as well as typically providing a beachhead presence in Fragile Situations. These synergies are reinforced by the shared IDGs, and a growing number of joint sub-regional, country, and industry strategies. For example, a joint strategy in Indonesia helped to identify common priorities for IFC, as well to inform the most effective way of sequencing or combining AS and IS for greatest impact. Similar approaches are now being applied to global industry strategies, including for key sectors such as agriculture. Synergies between AS and IS are also being captured by more joint client engagement approaches and by the more systematic sharing of back-office and specialist resources These measures are being complemented by ongoing efforts to continually strengthen IFC s AS business. Recent and ongoing reforms have touched just about every aspect of our AS business, including refinement of product offerings, strengthening of results measurement systems, harmonization of delivery models, and strengthening of talent and funding models. SUMMARY OF REGIONAL STRATEGIES Regional strategies are discussed in more detail in Annex 1, and the below provides a summary Sub-Saharan Africa. SSA is proving remarkably resilient to the deteriorating economic environment in other parts of the world. Continued progress on structural reforms, improved macroeconomic management, and reductions in conflict continue to drive strong growth and investment The region s strategy continues its focus on the three pillars of the Strategic Initiative for Africa (2004): (i) improving the investment climate; (ii) supporting MSMEs; (iii) proactive project development, focusing on infrastructure and agribusiness, as well as equity and South-South. Overall, SSA is projected to account for around 23 percent of own account investment commitments in FY15, compared to 18 percent in FY11, and 21 percent of total volumes (including mobilization) compared to 15 percent in FY11. Should global market conditions deteriorate substantially, IFC would focus on expanding short-term finance, including trade, supporting infrastructure and large-scale natural resource projects, and expanding local currency operations to insulate against exchange rate volatility. Strong collaboration with other members of the WBG is critical, and the IDA collaboration is already bearing fruit especially for infrastructure projects and PPPs. In addition, there is strong collaboration on SME finance and on improving Africa s investment climate IFC expects significant expansion in its infrastructure business. The special initiative launched in FY12 will further expand the resources available for project development, including engagement in upstream sector reform with the World Bank, as further discussed above. In financial markets, most of the activity will continue to focus on expanding MSME access to finance in priority sectors, leveraged job creation and helping to close the gap for access to finance. Financial markets activities will also help support IFC s reach through wholesaling in other areas such as agribusiness and health. IFC s agribusiness strategy aims to increase rural incomes, build a commercial agriculture base for food security, create sustainable farming opportunities and diversify exports, wholesaling medium-term finance through intermediaries, and direct project finance in processing and large-scale agriculture. IFC is expanding collaboration in agriculture and agribusiness across the WBG to help African countries achieve greater food security and productivity.

56 IFC has made good progress in implementing the South-South Emerging Markets to Africa Initiative approved last year, as further discussed above. IFC and the World Bank are working closely to support sustainable investment from China into Africa, and to identify key sectors which are likely to emerge in the next wave of investment into Africa IFC will continue to have a strong focus on the Fragile Situations in the region. In the more challenging IDA countries, IFC will focus on advisory services, in particular to improve the investment climate as well as support SMEs and expanded access to finance, and entry investment products such as trade finance. In more mainstream IDA countries, IFC will focus on programmatic initiatives, infrastructure, deepening financial markets, private health and education services and support for competitive sectors in agribusiness and manufacturing. In MICs, the focus will be on support for outward investment, development of competitive regionally networked firms, development of SMEs and advanced innovation in areas such as renewable energy Middle East and North Africa. The political events since January, 2011 have weakened many of the region s economies and increased perceptions of risk. Economic growth has been significantly affected in several countries and a limited recovery is expected in The ongoing events in Europe could further dampen growth and push up unemployment. At the same time events in the region could provide significant opportunities to address the key development challenges IFC s priorities in the region are more valid today than ever. The six elements of IFC s strategy are: (i) addressing unemployment by increasing access to finance and supporting high value added and employment-generating industries; (ii) improving infrastructure services; (iii) improving the quality of education and health services; (iv) reducing the costs of doing business and improving transparency and governance in the private sector; (v) increasing regional-global integration by catalyzing south-south investments; and (vi) addressing climate change challenges. IFC s own account investment business in the region is projected to continue to grow despite the challenges. As part of the Deauville partnership process, IFC is working closely with the World Bank and other IFIs including exploring coordinated mechanisms for investment and economic growth. Examples of WBG cooperation include the MENA SME Facility and associated technical assistance, the Arab Financing Facility for Infrastructure, and the e4e initiative, as further discussed above IFC is adopting a two-tiered approach in response to the recent events: (i) supporting regional champions and well-established local players seeking to expand in the region; and (ii) continuing IFC s support to MSMEs. Should there be an overall deterioration in the global economy compounded by a worsening of events in Europe, IFC would further increase focus on portfolio management, and scale up support for portfolio clients as well as projects with large employment creation/preservation effects, and infrastructure PPPs. IFC would also strengthen collaboration with other IFIs in support of MENA initiatives In the Maghreb, IFC s strategy is to promote a competitive private sector which can create the necessary jobs for unemployed youth. Examples include: in Morocco, a focus on access to finance for MSMEs, as well as supporting South-South projects into SSA; a ramping up of activity in Tunisia; in Algeria, where the private sector remains small, focusing on energy-related infrastructure opportunities and increasing access to finance for MSMEs, and improving the business environment; and in Libya, where IFC is at the very early stages of engagement, focusing on the financial sector In the Mashreq, IFC s engagement is primarily in infrastructure, especially PPPs, access to finance and MSME support, investment climate, education and climate change. In Egypt, IFC s largest portfolio in the region, IFC s short-term strategy is focused on restoring confidence, catalyzing FDI, supporting portfolio clients, helping local banks and companies, and increasing public private dialogue. IFC has ramped up its program in Iraq and Jordan. The program in Yemen was on hold in 2011, and IFC is collaborating with donors to re-engage as the situation stabilizes.

57 In Pakistan, under a challenging security and economic environment, IFC has played a strong counter-cyclical role resulting in a seven-fold increase in commitments over the last seven years, from $43 million in FY05 to $696 million in FY11, mainly driven by the increased need for trade finance. The trade finance program has provided cumulatively about $1.3 billion of guarantees since its start in FY06. IFC s strategy in Pakistan is to focus on removing power sector constraints, improving access to finance, including a strong emphasis on trade finance, supporting agribusiness and retail, increasing supply chain linkages and improving health and education service delivery. In Afghanistan, IFC s focus is on access to finance to the underserved and selective investments in the financial sector, infrastructure, telecom and health and education, complemented by advisory services aimed at developing the financial infrastructure and supporting MSMEs. In Gulf Cooperation Council Countries, IFC s engagement is highly selective and shortterm to catalyze other private players and build capacity South Asia. After strong growth in 2009 and 2010, growth has begun to ease, due to both softening export markets in Europe and domestic issues. Several countries also have persistent high inflation and weak fiscal positions. Moreover, there is high and rising income inequality IFC s strategic pillars continue to be: (i) inclusive growth; (ii) climate change; and (iii) global/regional integration. The inclusive growth pillar focuses on making an impact on the base of the pyramid, low-income states and low income households through access to finance, infrastructure and markets. The climate change pillar emphasizes renewable, energy efficiency, and agricultural and irrigation efficiency. To promote integration, IFC supports South-South investments, knowledge transfer, improvements in the investment climate, inclusive business models and trade and logistics. IFC is working closely with the World Bank on joint advisory projects, such as investment climate advisory activities in Bangladesh, Nepal and Bhutan, and low-income housing in India, and is also working with the World Bank in India to help develop a sound, responsible and sustainable microfinance sector. Should global market conditions deteriorate significantly, South Asia will probably be most affected by reductions in capital inflows, exports, and remittances. IFC stands ready to respond by scaling up counter-cyclical finance, including expanding short-term, trade and liquidity finance facilities and enhancing investments in priority sectors such as infrastructure and access to finance In the Low Income States in India, IFC will work to increase rural incomes through a variety of means, and will also help to catalyze growth by supporting investment climate reform. IFC also plans to continue its strong support for innovative renewable and green projects, including PPPs. In India more broadly, IFC is supporting financial inclusion through a variety of activities, as India has a third of the world s poor and an estimated 120 million financially excluded households In the other countries in the region 48, IFC s efforts in climate change will focus on renewable energy to promote local financing for climate projects. IFC will also support smallholder productivity and job creation activities as a way to increase rural and poorer households incomes. Sustainable urbanization, improving access to finance, investment climate initiatives (especially in Bangladesh and Nepal), catalytic investments and increasing access to infrastructure will also be a focus East Asia and Pacific. After a solid recovery in 2010, economic growth remained strong throughout 2011, but continued to moderate. Recent months saw a marked slowdown in industrial production and exports of major regional industrial supply chains, while demand for commodities and raw materials remained strong, helping resource-rich economies sustain high levels of exports and growth IFC s priorities are to: (i) mitigate climate change; (ii) promote inclusive growth; and (iii) promote global/regional integration, including South-South investment. In the context of the deepening global crisis, There are many joint activities between IFC and other members of the WBG in this region, including the 48 Bangladesh, Bhutan, Maldives, Nepal, Sri Lanka

58 54 new Mongolia PPP program, new collaboration in the Pacific fisheries sector, and Papua New Guinea Risk Sharing Facility. This successful implementation of the IDA-IFC SME access to finance project has increased the demand for similar initiatives across the Pacific region In the Pacific, IFC is delivering impact with an investment and advisory sector-based programmatic model that also considers development challenges unique to each country. In the Mekong, IFC s strategy focuses on supporting rural income growth, promoting sustainable urbanization, removing barriers to business start-ups and providing market-based solutions to climate change. In Mongolia, IFC is looking to help the financial sector s recovery and support diversification of the economy through investing in new sources of growth, particularly in extractive industries, MSMEs, agribusiness and renewable energy In Indonesia, Philippines and Thailand, IFC is concentrating its programs on key development challenges, including reducing the impact of climate change, increasing rural incomes in frontier regions, promoting sustainable urbanization and helping to address governance constraints to private sector development. In China, IFC s strategy centers on climate change, equitable rural-urban growth and sustainable South-South engagement, particularly into Africa Latin America and the Caribbean. Growth in Latin America continues to slow, as global and domestic economic outlooks worsen. Old challenges persist: high inequality, limited access to finance, infrastructure deficiencies, low productivity, and weak education systems. Dislocation in Europe could have significant effects on the region. The EU as a whole takes 15 percent of the region s exports, and is the first or second trade partner for most Latin American countries. Furthermore, the EU is traditionally a major source of FDI for the region, and this has fallen significantly in the last few years IFC s strategy continues to focus on (i) inclusive growth, with an increasing emphasis on targeting women and the indigenous; (ii) competition and innovation, improving the investment climate and expanding vocational and tertiary education; (iii) regional and global integration; and (iv) climate change. Should the global situation worsen, IFC s trade products are likely to play a key role in the region. In addition to support for portfolio clients, experience from the crisis highlighted the importance of supplying liquidity to key second-tier banks that finance MSMEs and low-income communities. IFC works closely with other members of the WBG throughout the region, including developing a joint approach to infrastructure and PPPs in the Andean countries, and helping governments respond to the opportunities for reform highlighted in the Doing Business report in Central America In IDA countries, IFC will work to develop physical and social infrastructure, develop local financial markets and access to finance, promote economic integration and reduce reliance on imported fossil fuel. In the Caribbean, IFC s approach includes support of regional companies, infrastructure solutions, financial markets focus on MSMEs and trade, development of tourism linkages and a special focus on reconstruction and job creation in Haiti. In Brazil, IFC will focus on inclusive growth, competitiveness and climate change, and is working closely with the World Bank and others to set standards in the Amazon Europe and Central Asia. Although overall real GDP remained stable in 2011, there is significant variation by country. Most Eastern European countries are being negatively affected by the debt crisis in the Euro Area through significant trade linkages and heavy exposure to Western European banks. In addition, pre-crisis structural challenges remain, including infrastructure gaps, energy inefficiency, rural poverty and lack of competitiveness. Regional GDP growth is expected to slow significantly, especially in Central and Eastern Europe. In the event of an overall deterioration in the global economy, commodity exporters would see rising fiscal imbalances and lower growth IFC will continue to focus on its three main pillars: (i) improving access to infrastructure services; (ii) strengthening the financial system and increasing access to finance; and (iii) enhancing competitiveness and diversification; with a cross-cutting theme of mitigating climate change the high energy intensity CEU

59 55 countries have some of the highest levels of GHG emissions in the world. Should the crisis deepen, IFC could increase investment volume by up to $2 billion between FY11 and FY13 as part of the recently announced WBG initiative. In the context of the new crisis, IFC will also aim at reducing systemic risk in the Western Balkans, and in larger markets, will focus on projects that generate important demonstration effects and maintain credit flows to priority sectors of the economy In IDA countries, IFC will continue to reach the poor and promote economic diversification through an integrated investment and advisory approach targeting MSMEs in agribusiness, manufacturing and services. In lower middle income countries, as well as middle income countries with less developed private sectors, IFC is ready to increase financing to support the banking sectors which are heavily exposed to foreign banks. In addition, IFC s increased focus on agribusiness is expected to help these countries to realize their comparative advantages while reaching poor people. In more mature markets, IFC seeks to be innovative, with a focus on competitiveness and employment creation. IFC also uses these countries as platforms for testing new products before replicating them elsewhere. MOBILIZATION AND PARTNERSHIPS Mobilization Mobilization is one of the key components of IFC s Purpose in its Articles 49 and has become central to IFC s strategy and business model. As described in more detail in last year s Road Map, IFC has been a mobilization leader and innovator since the 1960s, a trusted convener with a range of mobilization mechanisms, the ability to assume a variety of roles including structuring complex mobilization solutions with multiple stakeholders, technical leadership in combining IS and AS in PPP structures, and experience in managing the private sector windows of blended pools of funds such as in food security and climate change The launch of AMC and the crisis initiatives, in particular, was the start of a significant evolution in IFC s business model, unlocking its potential to further scale up impact through several financing platforms while efficiently managing its own-account growth within its capital and budget resources. This provides a great opportunity for IFC, in particular against the backdrop of a changing external environment for mobilization, with development agencies, donor governments and foundations looking for more efficient ways to channel funding for private sector development to developing countries, and the evolution of funding models blending and pooling private and public funds from the complementary but parallel approach up to a few years ago IFC s Syndicated Lending Program is expected to remain a key component of IFC s overall Core Mobilization volumes. Given the current difficult market environment, syndication levels for FY12 as a whole are expected to be around $3.2 billion only ($1.5 billion in FY12H1); however, this will still be higher than FY09 ($2.2 billion) and FY10 ($2.0 billion). In keeping with the macro-economic outlook for a gradual recovery starting FY13, projected syndication levels are expected to increase to near FY11 levels again by FY15. Emerging market banks are expected to become even more prominent mobilization partners as both B-lenders and parallel lenders, in line with the increasing South-South investment trend, and IFC is also adapting its products to increase cooperation with insurance companies and other institutional investors, as well as increasing the universe of other development institutions to mobilize from. IFC is also increasingly bringing local banks into syndicated loans under local currency tranches, thereby providing much needed local currency funding to clients AMC will continue to support IFC s strategic Focus Areas through its three existing funds and the four funds it is currently fund-raising for. Going forward, the AMC will continue to support IFC s 49 IFC s Articles of Agreement Article I: the Corporation shall (iii) seek to stimulate, and to help create conditions conducive to, the flow of private capital, domestic and foreign, into productive investment in member countries.

60 56 development objectives by developing funds that follow-on existing funds, such as a global financial markets fund, complement IFC industries or regions where currently there are no funds, or respond to events in the global markets As to Initiatives, the CCFP has been approved and the GTLP extended to specifically respond to the current difficult market environment. Given the increasingly important role of PPPs across IFC sectors and regions, since January FY12, IFC is also recognizing PPP Mobilization the non-ifc, non-government portion of financing mobilized due to IFC's mandated lead advisor role 50 - as Core Mobilization. Expected mobilization volumes from this new category are not yet known, though there is potential for non-linear volatility in high and low amounts reported for PPP Mobilization depending on the size and scale of the relevant PPP project activity. IFC is also considering adding blended finance (see next section) to its definition of Core Mobilization As its mobilization activities grow, IFC is continuing to refine measures to better demonstrate its results. It is also taking steps to address governance issues, including the proper management of conflicts of interest, enhance middle-office support for mobilization products as well as reporting functions, and to have a more strategic and coordinated approach to IFC-wide fundraising. IFC believes that seeding this business for consolidation and growth beyond its current start-up phase can be done even within the current disciplined budget environment. As reported last year, IFC is using the fees generated by these activities in a prudent and transparent manner in order to support its mobilization business and proposes to do the same this year. Blended finance IFC has on occasion used blended finance in IFC context, financing provided to a project at below market terms, due to the complementary use of concessional funds with IFC s own resources (also known as blending ) - to achieve certain development objectives that otherwise could not be achieved without such funding IFC has chosen to use the term blended finance to describe these concessional approaches to avoid confusion with the term concessional finance, which has a particular definition in the context of ODA, and implies a minimum grant element of 25 percent. Many funds that IFC blends with its own are sourced through donor s ODA budgets and are considered concessional by the donors; however, it is not always appropriate or necessary to provide a 25 percent implied subsidy to private sector projects, and IFC s approach to blending aims to minimize the subsidy element to only what is needed to catalyze an investment promising strong development impact IFC has been partnering with donors for over a decade to deploy their funds, on concessional terms, to help catalyze private investment in priority development areas, working across a range of grant and nongrant instruments. Since FY07, IFC has started to refine its approach to deploying concessional funds alongside IFC financing by using blended mechanisms, particularly non-grant instruments such as debt and risk management products As IFC brought more operational structure to the management of concessional donor funds during FY07-11, these funds were blended and deployed more consistently, with various blending mechanisms supporting 30 projects in all regions. While the bulk of these projects focused on addressing global climate change, IFC has also more recently been asked by donors to expand its approach to include other areas with high development impact, such as SME finance and food security. 50 Full definition: Non-IFC, non-government portion of financing made available for PPP project due to IFC's mandated lead advisor role to national/local government or other government entity/parastatal. Recognition of such amount only upon: (i) in case of asset sales, signed documents requiring payment to government of acquisition price; or (ii) successful financial closure when all necessary financing documents are signed by private sector winning bidder, its financiers and government, as applicable.

61 IFC has now formalized its measured and focused approach to blending funds with its own across the Corporation, regardless of sector. IFC had presented an informational paper to the Board, scheduled for discussion on March 15, 2012, that will outline this approach, which is within strictly defined principles which ensure additionality and adherence to IFC s comparative advantages, and within a strong governance and monitoring and evaluation framework. The principles for selective deployment include the need to minimize the embedded subsidy element in order to promote long-term sustainability. Given that the concessional funds used for blending activities are de facto subject to higher risk than IFC s own, the brief will include the internal governance required for placing donor funds in investments alongside IFC s own IFC expects to continue to deploy and blend concessional funds to catalyze climate change projects, and is also starting to develop a pipeline of projects in response to donor requests to catalyze investment through blended finance in the areas of food security and SME lending. Given the nature of these interventions and IFC s approach, IFC does not expect blended finance to be a large part of IFC s mobilization volumes. Partnerships World Bank Group. Strong cooperation among members of the WBG will continue to be important in helping the WBG achieve its common goals. The joint WB-IFC FPD Network serves as an important catalyst for IFC activities, particularly in the areas of investment climate and financial market reforms. The annual Doing Business report is a joint effort that helps set the agenda for IFC s investment climate reform advisory services: recent joint projects include in Tajikistan (reform to improve the business environment), Haiti (job creation and growth project), Guinea Bissau (improve the business environment) and Malawi (insolvency reform). The creation of FPD s six Global Practices opens new opportunities for IFC s investment and advisory services to leverage and shape Bank lending operations and analytical work. In particular, the new Competitive Industries Global Practice aims to facilitate new growth industries in client countries, to support new opportunities for investments, employment and income generation In addition to the G-20 initiatives and other initiatives mentioned elsewhere in this paper, there are a number of important joint activities which will help IFC and the whole WBG to have an impact in many of IFC s strategic focus areas, including: Climate Change, Sustainability, Renewable Energy: Joint initiatives include: i) the Global Index Insurance Facility to help develop effective and sustainable markets for index-based weather and catastrophic risk insurance to foster sustainable agricultural development; ii) the CIF, where the World Bank acts as trustee and IFC as the implementing agency, to scale up investments in low carbon technology; and iii) efforts to establish a framework for sustainable development of the palm oil industry. The IFC sustainable forestry program in Indonesia is collaborating with the World Bank and the Ministry of Forestry to design the Forest Investment Program (FIP) for Indonesia (one program of the Strategic Climate Fund set up under the Climate Investment Funds). The Indonesia FIP Investment Plan will be submitted for approval in May 2012, with IFC leading an investment and technical assistance project oriented to private sector forest enterprises. Infrastructure: A new infrastructure strategy (Transformation Through Infrastructure - World Bank Group Infrastructure Strategy Update FY12-15) was completed in late 2011, jointly with the World Banl and MIGA, to transform the WBG s engagement in infrastructure across all sectors (energy, information and communication technologies, transport and water) in order to respond to demands for more cross-cutting and integrated solutions that can lead to increased growth and more sustainable development. For example, in the power sector in Africa joint projects in FY12 (IFC financing, combined with IDA guarantee/financing) include Kribi in Cameroon.

62 58 Food Safety: IFC and the World Bank are working together to develop a platform for food safety tailored to the needs of emerging markets, building on the ongoing WB programs and ECA food safety program as well as successful engagement with private sector operators. Improving Access to Finance: Improving access to financial services for underserved groups such as SMEs and microenterprises is also an important part of IFC s financial market development efforts. Examples of IFC and World Bank collaboration in this area are: in Indonesia, IFC and WB staff are working to expand mobile/branchless banking services through an advisory engagement with Bank Indonesia; in China, the IFC and World Bank are collaborating on China Foundation of Poverty Alleviation (CFPA) micro finance management company to assist the transformation and commercialization of CFPA s microfinance operations; and in India, IFC is working with the World Bank and the Bill and Melinda Gates Foundation to support the State Health Society in Bihar to streamline government payments to salaried health staff, private health care providers and beneficiaries under the state government s health schemes, facilitating access to formal financial services The accomplishments of the joint IFC/MIGA unit has now set the stage for mainstreaming with an emphasis on strengthening IFC/MIGA partnership for higher development impact in strategic priority areas and maximizing operational results; expanding outreach; innovating and diversifying product development including programmatic and regional approaches; and sharing knowledge and best practices. In the next three years, the scaling up efforts will be on strategic priority areas including IDA countries, conflict affected countries and South-South investments, with focus on agribusiness, financial and infra sectors. The main challenge will be to deliver on target with higher development impact. This strategic partnership can also play an important role in helping the WBG, in cooperation with other IFIs, to address the challenges of the current difficult market environment, and of a potential significant deterioration IFC continues to actively drive implementation of the WBG IMT strategy and federated model. IFC has fully participated in the strategic sourcing procurement process to select WBG's technology vendors, and is leveraging the World Bank s Chennai facility to establish an IFC captive center for offshore development. Additional initiatives will be pursued where there are opportunities for improved cost efficiency, service improvements, and other benefits Other partnerships. IFC will continue to play a leadership role in the IFI Cooperation Program, and otherwise strengthen its partnerships with IFIs, building on the joint report on International Finance Institutions and Development through the Private Sector, the Corporate Governance Development Framework and the Deauville Partnership process. Many areas of IFI collaboration are expected or ongoing, such as possible collaboration on efforts in youth employment, a possible revised Vienna Initiative to support banks in Eastern Europe, and joint work on a set of principles for engagement with the private sector. It will also strengthen its partnership with the G-20 on trade, food security, SMEs and financial inclusion IFC will build on its innovative work with private banks, such as with JPMorgan Chase and Société Générale on the APRM to support food security in emerging markets, and leverage its extensive client networks for increased impact. With the Partners in Development approach, outlined in last year s Road Map, IFC will work towards jointly agreed Client Relationship Plans that will include pre-approved investment facilities that can cover equity, debt or guarantees, and be aimed at one or several of IFC s strategic priorities. IFC expects that roughly 20 percent of its FI clients will initially be designated as Partners in Development. AS will be essential to this partnership approach and will help deepen relationships and extend development impact Partnerships are an essential feature of IFC s AS business, both as a source of mutual learning and financial support. IFC s approach to donor relations, including with private foundations and philanthropies,

63 59 will continue to emphasize the power of long-term partnerships, maintain a focus on results measurement and efficiency, and provide appropriate visibility for all parties involved. EQUITY Development and additionality rationale. All companies need a balance of equity and debt financing to succeed. As an equity investor, IFC becomes a partner in the company in a way which a lender cannot, and can add value in a variety of ways. These include its screening process, advice and standards and role as a patient, long-term minority investor; opening up new sources of finance; and increasing equity investments as part of its count-cyclical response, especially in the financial sector as banks need to raise additional equity to comply with new standards. IFC also plays an important demonstration role by investing in smaller IDA countries and frontier markets (about 21 percent of IFC s equity portfolio is in frontier markets) Contribution to financial sustainability. Because of the additionality that IFC brings to clients, it is able to negotiate good entry terms, and to add value to the company which is reflected in equity price appreciation at the time of exit. IFC s equity portfolio returned an average of 19.1 percent per annum over FY93-11, compared to the MSCI Emerging Markets Index return of 9.7 percent per annum. IFC equity income over the last 10 years (FY02-11) totaled $9.9 billion, or 82 percent of corporate income over this period. While equity contributes to IFC financial returns, it also increases the volatility of financial results from year to year. Increased equity investments will use up IFC s capital headroom more quickly than other products, but over the longer term, the enhanced returns on capital should contribute to expanding IFC s capital base Strategy. IFC s equity strategy was presented to the Board in the report IFC s Equity Framework in December, IFC is projecting that equity will account for around 27% percent of long-term finance over the medium term, taking account of market developments, as well as the need to manage IFC s capital headroom. To support the enhanced focus on equity investing, IFC has established teams of equity specialists in each of the Global Industry Departments The AMC enables IFC to supply more equity to companies than it could when investing only for its own account. The AMC has raised more than $4 billion for investment, of which $1.5 billion has already been invested ($949 million equity and $573 million sub-debt). The AMC also gives IFC more flexibility to finance equity opportunities while managing country and client exposures. The fees it generates contribute to the cost of increasing specialist equity staffing to originate and supervise more transactions IFC also has a strong track record in Early Stage Equity (ESE), particularly in the clean technology and telecom, media and technology sectors. This type of capital can be particularly catalytic in introducing new technologies and business models, but requires specialist skills which are very scarce in most markets. IFC aims to leverage this experience to support emerging industries with high development impact across a wider range of sectors. To do this, IFC has created a virtual network of ESE specialists across industries In addition to investing its own and AMC capital, IFC also allocates a proportion of its equity investments to PE funds, as described in more detail in paragraph 3.54 above. 51 IFC/SecM

64 60 STRENGTHENING OPERATIONS AND DELIVERY MODEL Change process. IFC s Management Team continues to be committed to further engage with staff on the key elements of the change process that need to be addressed. IFC recently conducted a Pulse Survey, which shows good progress on building One IFC. As compared to the last Staff Survey, a large majority of staff feels now more positive about how decentralization can improve the quality of services provided to IFC s clients and how further integration between IS and AS will also contribute to operational efficiencies At the same time, the Pulse Survey indicates that we must continue to focus on improving the way we work and strengthening staff understanding of IFC s strategy. Although progress has been made to-date, a number of activities still remain a critical focus area for IFC s management. Some of these key elements include: Improving efficiency in operations Staff indicate that policies and procedures remain cumbersome at a transactional level. This remains a critical focus area for IFC s management and we will continue to engage with staff across the corporation to further identify operational process efficiencies in a decentralized environment. The Istanbul Investment Operations Center and the Portfolio Middle Office in EMENA will continue to focus their efforts on identifying potential areas of improvements that will better leverage Investment staff and enable IFC to provide better service to our clients. Given the positive experience in EMENA, the Portfolio Middle Office will gradually expand its work to other regions and will continue to focus on further mitigating operational risk across the corporation. In AS, ongoing efforts to refine product offerings, harmonize delivery models, and harmonize costallocation approaches, will expand opportunities for benchmarking efficiency across regions and business units. Plans to update financial management systems for AS also promise to significantly improve operational efficiency. Maintaining and fostering global knowledge IFC and the World Bank will continue to learn from each other and explore common approaches to knowledge retention and expertise through membership on several of each others committees and practice groups. The Global Knowledge Office will continue to support departments and their knowledge management activities, including: the establishment of programs to promote vibrant and cross-departmental practice groups, the development of strategies for cross-regional knowledge exchange, and the further assessment and analysis of possible models for the development and leveraging of technical expertise across IFC Strategic staffing. IFC's decentralized delivery model has implications for the way the institution manages and deploys staff members; managing a global workforce from Washington DC and 105 country office locations demands a strategic approach to workforce planning. In FY12, IFC successfully piloted the inclusion of a staffing section in the strategy discussions. IFC s strategic staffing template allowed the early identification of key staffing implications of department, VPU and corporate strategies Moving forward, key areas of focus will include (i) the staffing skills and capabilities needed to support new business products and services and (ii) how staff presence in key locations can impact business delivery. Through this approach IFC should be able to respond more rapidly to client needs and meet opportunities in an evolving business landscape Cooperation and synergies. To strengthen development impact and operational efficiency, IFC continues to leverage the potential synergies between IS and AS, and to increasingly employ programmatic approaches. Each IFC region has had integrated strategies for IS and AS for several years, and these strategies are being cascaded down to sub-regional and country strategies. These strategies help focus IFC s

65 61 offering and identify the optimal sequencing and combination of IS and AS for greatest impact. They also create opportunities to leverage resources between IS and AS, creating potential efficiencies. The IDGs, which articulate common goals for IS and AS, help to reinforce the benefits of closer collaboration. Similar approaches are now being deployed through global industry strategies, with recent work in agribusiness and food security providing a promising example Cross-cutting areas in particular, such as agribusiness and the food supply chain, climate change, water, Fragile Situations, SMEs, and a focus on women, provide opportunities for staff across IS and AS, as well as across investment departments, to work together toward strategic goals and meeting client needs Risk management. IFC has continued to refine risk management tools for measuring and monitoring both operational and financial risk. IFC is currently adopting a full roll-out of Risk and Control Self Assessment (RCSA) as an annual exercise supporting the written management assertions on operational risk. RCSAs identify key operational risks in IFC s processes, associated causes and mitigating controls. From a financial risk management perspective, IFC has continued to integrate and refine the economic capital approach in setting and monitoring limits to ensure that risk differentiations are taken into account in investment decisions and has started reporting on economic capital exposure to the Board in FY Continued focus of IFC s investment and advisory operations on IDA and frontier markets, coupled with the decentralization of IFC operations, has translated into greater complexity and increased risk. In particular, integrity and Anti-Money Laundering/ Combating the Financing of Terrorism risks have come to the fore, requiring increased scrutiny. For FY12, IFC committed to strengthen its integrity risk oversight function, supporting the core businesses of the Corporation, and develop a more coherent approach in evaluating integrity risk. While an initial increase in resources has occurred, IFC management is considering a more hands-on role for the oversight function in high risk integrity situations Starting in FY10, IFC began producing an annual Integrated Risk Management Report (IRMR). Beginning with the FY11 report, the IRMR evolved into a joint report covering IBRD, IFC and MIGA. The FY12 IRMR is scheduled to be presented to the Audit Committee at the end of March, With the arrival of a Group Chief Risk Officer last year, the main focus this year is expected to be on the top risks faced by each institution, both common as well as unique Effective resource management. Measuring the efficiency of IFC s operations has proven to be a challenging exercise given the inherent complexities of its business model for investment and advisory operations. Since the introduction of its adjusted efficiency measurement in the form of weighted number of investment commitments per Investment Officer in FY11, the Corporation has made more progress in revising the complexities associated with short-term finance projects as well as application of weightings in order to distinguish portfolio supervision complexities in the form of environmental ratings, credit risk and performance of underlying assets. IFC is also piloting new ways to measure the efficiency of its advisory operations. Results and further details of IFC s efficiency will be presented in its FY13 Business Plan and Budget paper Strategic technology management. IFC s information technology (IT) department continues to make progress under its renewal program with the vision that by 2014 it would be a recognized innovator and leader, delivering the information and technologies that enable IFC to sustain its competitive advantage, serve its clients better, and help its staff work smarter The consumerization of IT and the volume of digital information offer many opportunities that require a partnership for innovation between IFC operations and IT, based on experimentation and agility. At the same time, IT must ensure reliable operations for core functions critical to IFC. The challenge will be to balance running the business and transforming the business to sustain IFC s competitive advantage.

66 Technology can be leveraged to capture, disseminate, and strengthen IFC s global knowledge while also driving the cultural change necessary for open exchange of ideas and collaboration. Priority must be given to find solutions to the technical complications associated with IFC s decentralized organization, such as limited bandwidth in the field, switching from an HQ-centric to a decentralized architecture, and combating the increase in the volume, sophistication and targeted nature of the cyber security threat Achieving the vision will require discipline when making decisions at every level, from the investment plan to the technology choices. Through the recently updated governance framework, IFC is well-positioned to make the tough decisions required to move IT from merely a support function to a strategic partner for the business Strategic communications. IFC s strategic approach to communications underpins its success as a development institution. It helps gain the support of key stakeholders, protects IFC s license to operate, and contributes to fostering a strong corporate culture In its external communications, IFC focuses on supporting the business and building the corporate brand by highlighting the distinctive elements of IFC activities. IFC s external communications also explain the complexities of IFC s work in priority areas such as infrastructure, SME finance, and climate change IFC produces a series of branded publications called Telling Our Story that give IFC s work a human face and illustrate the impact of its projects on people s lives. IFC s Annual Report takes a broader approach, demonstrating the results of IFC s activities in developing countries and illustrating how the Corporation strategically addresses the challenges of promoting development through the private sector IFC manages reputational risk by tracking and monitoring emerging issues, anticipating risks and developing strategic communications plans for potentially controversial projects and issues. IFC has increased its presence on social media platforms that allow the Corporation to better understand and respond quickly to issues of importance to its stakeholders and the general public. In addition, IFC launched its Access to Information policy this year to improve transparency and accountability In its internal communications, IFC s top priorities include building a strong corporate culture and a unified corporate identity through staff engagement on issues identified in staff surveys. Priorities also include facilitating the dissemination of high-level knowledge that staff need to help the Corporation achieve its strategic objectives. In addition, IFC works to promote staff collaboration across the WBG. IV. PROGRAM 4.1. IFC s business program projections for FY13-15 reflect its ongoing focus on its long-term development objectives, with a focused counter-cyclical response to the current difficult environment. Its program in both IS and AS will be targeted to deliver greater development impact, particularly in frontier markets, while ensuring the financial sustainability of the Corporation. Mobilization will continue to play a critical role in IFC s ability to extend its development impact Investment program. IFC will continue to pursue its own-account investment program growth within its projected capital and budget resources, directing these resources to where development impact is greatest, while also ensuring its own financial sustainability through diversification in the geography, sector and product mix of its projects. As already outlined in last year s Road Map, IFC will use effective capital utilization as a guide to help develop the level and mix of its business, and will increasingly consider economic capital and portfolio impacts IFC projects that its total commitment volume (including mobilization) will grow from $18.7 billion in FY11 to $24-27 billion in FY15, a CAGR of 6-10 percent. This is based on an increase in own account commitments from $12.2 billion in FY11 to $18-20 billion in FY15 (CAGR of percent), with a strong

67 US$ billion 63 increase in trade and supply chain products, mainly in response to the current difficult market environment. Figure 5 and Table 7 depict these projections. FIGURE 5: INVESTMENT BUSINESS PROJECTIONS FY FY11A FY12E FY13P FY14P FY15P Projected Range: IFC incl. Mob Projected Range: IFC Own Acct Projected Range: LTF IFC Total incl. Mob IFC Own Account ** LTF* * LTF includes traditional long-tenor products (equity and debt) as well as GWFP ** Total own account includes LTF as well as all TSC products. Amounts included for GTFP are illustrative of what a future program could look like, assuming Board approval of IFC's request for an increase in GTFP ceiling, likely to be requested in FY13 TABLE 7: INVESTMENT BUSINESS PROJECTIONS FY13-15 Commitment Volume $ Billions FY11A FY12E FY13P FY14P FY15P Trade & Supply Chain o/w GTFP Long-Term Finance (incl. GWFP) Total IFC Own Account Mobilization Total (Own Account + Mobilization) The above investment business projections for FY13-15 include the following elements: Long-term investments (LTF), which are projected to grow to $ billion from $7.2 billion in FY11, and include the traditional long-tenor products of equity and long-term debt, as well as some supply chain products such as the GWFP 52. Equity is expected to increase to an average 27 percent of LTF over the planning period, about $3 billion by FY15 (within IFC s goal range of percent of LTF) in line with IFC s equity strategy. TSC products (TSC), primarily the GTFP (which would only grow within the product ceilings approved by the Board and with an illustrative FY11-15 CAGR of percent) and also including the crisis-related CCFP and GTLP, with commitments expected to occur primarily in FY12 and FY13. GTFP is already seeing increased demand reflecting the current difficult market environment, and IFC expects to request an increase in the GTFP product ceiling in FY13, at which time it will also present preliminary GTFP DOTS analysis. TSC is expected to grow from $5 billion in FY11 to $7.5 - $8 billion in FY15. Mobilization as currently projected, through the Syndicated Lending Program, AMC and the GTLP and CCFP, will remain between $6 and $7 billion throughout the FY13-15 planning period; implying a saving of IFC s capital of up to $5 billion had IFC invested similar amounts for its own account over 52 Products have been mapped between LTF and TSC according to economic capital treatment, with GWFP (currently being weighted similarly to loans) in LTF

68 64 this period. Within mobilization, AMC mobilization is expected to be more than $3.3 billion over FY While IFC expects the share of commitments in SSA and in focus areas such as infrastructure and agribusiness to increase by FY15, an increase in trade and supply chain products combined with other focused responses to the current difficult environment may lead to a short-term increase in the relative share of Financial Markets and potentially in ECA Advisory program. Following a period of consolidation to implement reforms, AS resumed targeted growth in FY12. Total AS spend is expected to grow at around six percent a year between FY12 - FY15, with increased efficiency enabling project expenditures to grow of around nine percent a year during the same period. There will be growing emphasis on SSA and South Asia, which together are expected to account for about half of the AS program by FY15. IDA, Fragile Situations, Climate Change and sustainability and Women in Business will continue to be important cross-cutting focus areas. FIGURE 6: ADVISORY SERVICES PROGRAM (CLIENT-FACING PROJECT SPEND) FY10A FY11A FY12P FY13P FY14P FY15P $163m $182m $198m $218m $239m $260m Responding to the current difficult market environment 4.7. Focused and innovative responses to client needs. While it appears that the impact of the current difficult market environment has not yet been fully felt in many sectors and regions, IFC has already seen a marked increase in early project reviews, reflecting increased demand, starting the last half of calendar year It is likely that the number of client requests will increase into FY13 given the lag effect described in paragraph 4.25 below, covering more sectors and countries and including a broader range of product and tenor needs IFC s continued response to the difficult environment in some of its markets will be focused, providing innovative and tailored solutions to provide the biggest impact in regions, countries and sectors that are already affected or vulnerable to the current difficult environment, IFC will retain its focus on financial sustainability and in particular profitability, and will continue to pursue its high standards of conducting business Incorporating lessons learned from the crisis (see box 15), IFC will remain attuned to potential IS and AS response opportunities to enhance impact in difficult market conditions. IFC has already stepped up its solutions to client demand in the areas of trade and commodity and SME finance and through AS as described in more detail below. It is also continuing with pro-active portfolio management Leading global trade and commodity banks are reducing their lending across all asset classes and deleveraging their balance sheets to respond to significant and increasing liquidity and capital constraints. Trade and commodity finance are among the first asset classes to be affected given the short maturity and uncommitted nature of most of the lines. Evidence suggests that the current situation may be worse than in , when drops in trade finance, along with decreases in aggregate demand, were found to cause significant decreases in trade flows. The current difficult market environment is also already having a significant impact on financing for critical commodities. 53 European banks have $700 billion in public market debt scheduled to mature by 30 June 2012, in addition to more than 100 billion in equity that the European Banking Authority has requested as additional capital buffer. Details given by Tessa Wilkie in European Banking Crisis: Crunch Time, Euromoney, 21 September 2011 ( CRISIS-Crunch-time.html).

69 IFC was recognized for its global leadership, catalytic role and trade response platforms during the crisis, and is again assuming a leadership role through the Critical Commodities Finance Program (CCFP) and extended Global Trade Liquidity Program (GTLP) to support much-needed trade and commodity finance in developing countries, in conjunction with its program partners and utilization banks. In addition, demand for the Global Trade Finance Program (GTFP) has been increasing significantly even before the impact of the current market environment. Demand for agricultural inventory financing under the Global Warehouse Finance Program (GWFP) has also been growing rapidly IFC s expanded trade and commodity finance response would leverage existing platforms, with structures and banking relationships already in place, and can be flexibly ramped up or down to reflect changing market conditions. For more detail on IFC s trade, commodity and supply chain products please see paragraphs 3.58 to 3.60 and Box SMEs are finding it increasingly difficult to access credit as foreign bank lending to emerging market banks decreases, and local banks lending practices become more conservative as they preserve liquidity in the face of market uncertainty. IFC is already working on long-term debt and risk mitigation to both foreign and local banks to enable them to maintain or increase lending levels to SMEs. The SME Facility (see paragraph 3.72) would also serve as a mechanism to reduce the significant SME financing gaps in emerging markets An example of an innovative approach is the development of capital release transactions, where IFC, and the private investors that it crowds in, provide risk protection to banks for unexpected losses on targeted emerging market credit portfolios which remain on these banks' balance sheets. These transactions represent alternatives to conventional capital-raising by banks, which might be difficult at present due to challenging market conditions. A significant portion of the regulatory capital that is released as a result of these transactions must be redeployed by the relevant banks into additional credit exposure involving the targeted emerging market asset classes, while the rest is available to improve their overall capital adequacy indicators. IFC s mezzanine investments, complemented by funds mobilized from private investors, can therefore result in several billions of dollars of maintained, as well as incremental, emerging market credit extension. Capital release transactions are being structured involving banks exposures to emerging market SME loans and trade finance. A similar approach is being explored for banks' exposures to emerging market infrastructure and project finance assets IFC is complementing investment support with targeted AS interventions in priority areas. Building on a track record of innovation and thought leadership and its experience in the crisis, IFC AS is helping to establish supportive debt resolution and insolvency frameworks in close consultation and partnership with FPD and the IMF, improving financial market infrastructure such as collateral registries and credit bureaux, helping banks to upgrade their SME lending practices and improve their capacity in risk and non-performing loan (NPL) management and in trade and short-term finance, stepping up its corporate governance advice to banks as well as companies, and building resilience of SMEs through specialized, practical training on corporate governance, risk management, cost reduction, cash flow management, and debt management In ECA, the region most vulnerable to current difficulties and a potential significant downturn, AS is also working on the enabling environment and a flagship manual for the sale and purchase of distressed assets. Other examples of AS work in ECA include NPL and risk management for SMEs, where IFC had advised a total of 30 banks since the crisis, with nine ongoing mandates in Russia, Moldova and Azerbaijan, and a pipeline for in-depth mandates in Belarus and Kyrgyzstan; and debt resolution and insolvency frameworks, with Parliament in the Ukraine recently passing a revised insolvency law In addition, IFC continues to look out for equity opportunities in well-managed companies and banks with good medium-term growth prospects that provide opportunity for sustainable development impact,

70 66 given the good results from such investments in prior down-cycles. IFC has also seen some interest from corporates in medium-term financing, and is currently exploring appropriate solutions on a case by case basis The current difficult market environment serves as a reminder of the advantage of being able to borrow in local currency, as financial crises typically introduce an element of foreign exchange volatility and cross-border funding risk. IFC s work on developing local capital markets will therefore become increasingly important. In particular, IFC s local currency bond issuance program, which helps develop local bond markets, as well as a suite of local currency derivative and structured products, can assist IFC s clients to reduce reliance on cross-border funding Proactive portfolio management. This is critical to safeguard IFC s portfolio and be prepared for potential downturns, thereby supporting IFC s continued financial sustainability. Even within the current difficult environment, IFC s portfolio is sound. IFC continues to strengthen portfolio operations and procedures at all levels. The Corporate Risk Committee sets the overall risk strategy, and reviews all riskrelated policies and procedures. Portfolio is reviewed both at the industry and regional levels, through quarterly regional portfolio reviews, and reported through the Integrated Risk Management Report and the quarterly report to the Board. Regular stress testing is conducted across sectors and regions to understand the impacts under various stress scenarios and the consequences for IFC s capital. In difficult market conditions such as the present, additional reviews cover portfolio performance, significant exposures, pipeline and pricing, environment and social risks, country and obligor limits, and regions and sectors. The Annual Portfolio Review, a board document, provides a comprehensive overview of the portfolio and is published annually. The Financial Risk Management Paper, another board document, describes IFC s overarching financial risk framework and financial capacity. Furthermore, the Corporate Equity Committee monitors and determines the equity portfolio strategy and asset allocation quarterly IFC has recently reorganized oversight of the portfolio management function by integrating the central portfolio management and operational risk management teams within the Risk Vice Presidency. Management reinstituted periodic meetings and workshops of portfolio managers across IFC. Portfolio supervision policies and procedures continued to be reviewed and streamlined. An internal audit of the credit function has been performed, with suggestions for further strengthening of portfolio management. IFC s potential response to a significant downside scenario The uncertainty in the external environment and the downside risks require ongoing readiness for a significant downturn, even while IFC continues to implement its core agenda with focused responses in the current difficult market environment. IFC closely monitors capital usage to ensure that it has a rapid response capacity and can maximize development impact The impact of a significant deterioration in the external environment could be felt in emerging markets through financial linkages, as described in paragraph 1.13 and table 3, as well as through trade, growth, and investment linkages. All of these linkages are more fully described in the External Environment chapter above Comprehensive counter-cyclical response. In the case of such a significant deterioration, and building on prior crisis experience, especially the lessons learned from the crisis (see box 15), IFC will implement a more forceful and comprehensive investment and advisory counter-cyclical response, in conjunction with other members of the WBG, IFIs and other partners. IFC stands ready to deploy and/or scale up an array of crisis-related mechanisms and approaches in response to increased and evolving client demand. As it broadens and deepens the application of available mechanisms and continues to innovate, IFC would potentially assume more risk to enhance impact.

71 During times of crisis, being close to clients will be particularly beneficial. Compared to , IFC's decentralization has therefore enhanced its ability to quickly respond to a potential significant downturn, both in terms of providing new products to clients and safeguarding its portfolio. BOX 15: LESSONS LEARNED FROM THE CRISIS IFC has incorporated lessons learned from the crisis into its approaches to address future crisis impacts more effectively. Some of these lessons were discussed in the recent IEG reports on the WBG s Response to the Global Economic Crisis. The most important lessons include: Consider taking more risk by increasing investment commitments in a crisis, if opportunities materialize and capital position permits Seek systemic interventions for greater impact Rely on existing platforms as much as possible; new initiatives need to be timely with a high degree of flexibility to respond to changing market conditions and client needs Proactive portfolio management is critical Partnerships: important to leverage existing relationships to increase chances of success; however, the added complexities of working with partners can sometimes result in delays In times of crisis, long-term debt needs tend to go down, and working capital and equity needs tend to increase. The decline in long-term investment needs may, however, be exceeded by the pull-back in credit as happened in leading to an increase in financing demand from IFC and other IFIs, but often with a lag until first effects are felt Impactful solutions to client needs. Below are some of the broad crisis-response categories. These crisis-related measures would be implemented without losing sight of IFC s long-term strategic focus areas and of the importance of ensuring IFC s own financial sustainability. Although there may be a temporary adjustment in product mix or geography from what is currently projected, IFC s crisis-response efforts would not divert IFC from its long-term focus on frontier markets, in particular IDA countries, and on important challenges such as infrastructure development. Given that IFC s capital position could be significantly affected, IFC would have to optimize its responses, focusing on the highest impact and also taking into account that short-term interventions are more capital-efficient Ramping up trade and commodity finance. Responding to demand, IFC s crisis response trade and commodity finance programs, the GTLP and the CCFP, can be flexibly ramped up to their respective approved ceilings of $1 billion in outstandings. In addition, IFC s ongoing trade program, the GTFP, is wellpositioned to be responsive to fluctuations in market demand up to its Board-approved ceiling. IFC s GTFP exposure is currently still within its ceiling of $3 billion in outstandings. As described in paragraph 3.60, IFC expects to revert to the Board with a request for an increase in the GTFP ceiling in FY13, at which time it will also present its first preliminary GTFP DOTS analysis Substantially stepping up long-term debt and risk mitigation to banks to sustain and increase SME lending. SME lending through financial intermediaries could be significantly stepped up through additional loans, mezzanine and Basel II compliant subordinated debt, equity, and risk-sharing facilities and partial credit guarantees, including to key second-tier banks Responding to corporates shift to medium-term finance. As described in paragraph 4.25 above, in a significant downturn it is expected that emerging market companies would increasingly shift their focus from long-to medium-term financing needs as they defer long-term investments and focus on maintaining operations. IFC could see a significant increase in demand for medium-term financing, including working capital, rolling over maturing debt, or replacing credit from banks withdrawing liquidity. IFC would provide tailored solutions in response to the specific needs of each client.

72 Significantly enhanced equity focus. IFC could have an even greater role to invest in equity, given a potentially significant reduction in appetite for emerging market equities, leading to lower valuations. Banks may need to strengthen their balance sheets with equity and quasi-equity to allow them to increase lending to substitute for lending from foreign players withdrawing from these markets, meet increased risk due to the slowdown and financial market disruptions, and meet Basel II capital adequacy standards. Corporations may also need equity to strengthen their balance sheets and support operations and investments IFC will focus on systemically important banks and transactions which can have an important demonstration effect, crowding in other funding. IFC s equity participation can also facilitate banking sector consolidation and an orderly transfer process in the event of withdrawal from a country by foreign banking subsidiaries. In addition, IFC could, through its Debt and Asset Recovery Program (DARP), allow financial institutions to off-load their non-performing loans in order to strengthen their balance sheets, as well as to free up resources to extend new credit. Through DARP IFC could also invest in the acquisition and resolution of distressed assets, allowing corporations to put assets back into productive use and help preserve jobs Exceptionally, and in line with existing Board-approved policies, IFC could purchase bank or corporate equity in the secondary market where needed to signal confidence, where new equity issuance is not needed or would be excessively dilutive of existing equity holders. In addition, AMC responses could include an Eastern European Fund or investments in the emerging market subsidiaries of developed country banks. Any of these additional opportunities would build on IFC s existing equity framework, but could possibly accelerate usage of available capital Stepping-up IFC s AS response. AS interventions would be closely coordinated with IS for greatest impact. The immediate focus would be to step-up work with clients on standards and risk management to help them weather the storm. Greater priority would also be given to sustaining financing to SMEs, including through capacity building to banks and to SMEs directly. IFC would also strive to help governments improve their debt resolution and insolvency frameworks. Depending on the depth and the geographic scope of the downturn, existing AS programs may need to be redesigned and resources may need to be redeployed to meet priority needs As to regional responses, IFC stands ready to respond by increasing investment volume by up to $2 billion between FY11 and FY13 in ECA, the region most vulnerable in a significant downturn, as part of the recently announced WBG initiative. In the context of a significant downturn impacting financial markets in ECA, IFC will aim at reducing systemic risk in smaller markets (such as the Western Balkans), and in larger markets (such as Russia and Turkey), focusing on projects that generate important demonstration effects and maintain credit flows to priority sectors of the economy. In the real sector in ECA, IFC will closely monitor its portfolio clients performance and provide financing as needed. Close cooperation within the WBG and with other IFIs will be central to IFC s efforts to respond to ongoing economic challenges. IFC will also respond to specific needs in other regions as events unfold, for example it expects the financing gap for infrastructure and trade finance across regions to increase Continued portfolio management focus. IFC will continue to safeguard its portfolio and support its portfolio clients, reallocating resources to its portfolio management function and jeopardy unit to do so.

73 69 ANNEX 1. REGIONAL STRATEGIES EAST ASIA AND PACIFIC Current Situation and Outlook 1. After a solid recovery in 2010, economic growth in the developing countries of East Asia and Pacific (EAP) remained strong throughout 2011, but continued to moderate mostly due to weakening external and domestic demand and supply chain disruptions following the earthquake and tsunami in Japan and flooding in Thailand. A key channel of vulnerability for the region is trade exposure, with around half of trade of developing East Asia exported to the EU, US and Japan. Recent months saw a marked slowdown in industrial production and exports of major regional industrial supply chains, especially electronics, while demand for commodities and raw materials remained strong, helping resource-rich economies sustain high levels of exports and growth. 2. Uncertainties over fiscal sustainability in the U.S. and sovereign debt in the Eurozone led to greater financial volatility and deepened investors concerns over global growth and stability. With growing recognition that the current global economic slowdown would continue in the longer term, policymakers are rethinking their options putting monetary policy normalization on hold and cutting interest rates with focus shifting from fighting inflation to sustaining growth, which is currently their major concern. Domestic demand remains one of the key drivers of economic growth in the region, but has been easing in the course of 2011, driven by the normalization of fiscal and monetary policy. 3. The World Bank forecasts economic growth in developing East Asia reached 8.2 percent in 2011 (4.7 percent excluding China) and expects it to slow to 7.8 percent in In the short- to medium-term, East Asia s growth prospects are constrained by global uncertainty and by the impact of natural disasters. Based on the still robust current growth projections, the World Bank estimates that the proportion of people living on less than $2 a day in developing EAP decreased to around 24 percent in 2011 (down two percentage points from 2010), and an estimated 38 million people moved out of poverty. Overview of Recent Achievements 4. In FY11, IFC invested $1.9 billion in 69 projects for its own account in EAP, a record level for the region, and mobilized another $0.9 billion from other investors. These investments are expected to support 72,000 jobs, reach 157,000 farmers, improve access to health services for over 400,000 people and facilitate about $12.3 billion in loans to micro, small, and medium enterprises. More than half of the financing went to the region s poorest countries. The strategic focus on climate change allowed IFC to book $378 million in climate-positive investments for own account and mobilize another $150 million from other financiers. 5. During the first half of FY12, IFC delivered $839 million of financing in EAP ($794 million for its own account) in 27 projects. Over half of committed investment projects and AS spending was in IDA countries. IFC s climate-positive investments over the same period exceeded $120 million, while advisory climate change-related spending was at 17 percent of the total AS spend. Investments supporting MSMEs totaled $376 million. In the first half of FY12, IFC successfully advised the bidding out of a PPP transaction with Indonesia s state-owned electric utility PLN for the preparation and tendering of a 2,000MW power plant on IPP basis, which is expected to mobilize investment of over $3 billion and provide improved access to electricity to about 7.5 million people upon completion. IFC s Strategy 6. IFC s priorities for both IS and AS are to: (i) mitigate climate change; (ii) promote inclusive growth; and (iii) promote global/regional integration, including South-South investment. Beyond the core strategy, IFC is working with AMC to support its activity in EAP, and promoting coordination and synergy within the

74 70 WBG. There are many joint activities between IFC and other members of the WBG in this region, working to expand the comprehensive partnership on joint advisory and investment projects. Examples include the new Mongolia PPP program, new collaboration in the Pacific fisheries sector, and Papua New Guinea Risk Sharing Facility. This successful implementation of the IDA-IFC SME access to finance project has increased the demand for similar initiatives across the Pacific region. Finally, IFC is looking to build on its successful experiences in joint country and regional strategies. 7. In the context of the deepening global crisis, with tightening liquidity curbing MSME s access to finance, and increased borrowing costs and shorter tenors affecting larger corporates and deferring largescale infrastructure projects, IFC s regional countercyclical response focuses on: (i) supporting our clients with a full range of investment and advisory products, including short- and medium-term liquidity and trade facilities and MSME-dedicated lines for banks; (ii) exploring opportunities to further expand and diversify our equity portfolio; (iii) scaling up advisory services to help improve financial markets infrastructure, including credit bureaus and collateral registries; (iv) targeting Asian lenders for mobilization within and outside of the region; and (v) supporting the stability of the financial sector through AMC. Sub-Regions 8. IDA: Pacific. IFC is delivering impact in the Pacific with an investment and advisory sector based programmatic model that also considers development challenges unique to each country. IFC s overarching focus in the Pacific is: (i) catalytic investments and advisory work in sectors where Pacific countries have a natural advantage, such as tourism and the real sector, particularly agribusiness; one new area of WBG collaboration is fisheries, and a joint approach is currently being discussed, to align with the WBG Oceans Initiative being launched in February; (ii) infrastructure investment and innovative PPP models that help connect entrepreneurs to markets, increase competition and enhance the delivery of reliable services, such as telecommunications and transport: building on the transformative impact of the WBG s Pacific work on telecommunications liberalization of the mobile telephony market, efforts are now focused on expanding broadband capacity and access across the Pacific; (iii) supporting micro and small to medium size business growth through investment and advisory work to increase access to funding and financial services; (iv) improving the policy and regulatory environment to attract domestic and foreign investment, including in private infrastructure and for female entrepreneurs. 9. IDA: Mekong and Mongolia. IFC s strategy in the Mekong focuses on: (i) supporting rural income growth through investment in agribusiness and microfinance; (ii) promoting sustainable urbanization, by investing in infrastructure, best-in-class emerging local entrepreneurs and financial markets, including support for joint WBG PPPs in Vietnam; (iii) removing barriers to business start-ups and facilitating higher standards through investment climate reform, together with other members of the WBG; and (iv) providing market-based solutions to climate change including energy efficiency financing, renewable energy and adaptation to climate-related risk, such as through crop resilience. In Mongolia, IFC is looking to: (i) help the financial sector s recovery from the recent financial crisis; and (ii) support diversification of the economy thorough investing in new sources of growth, particularly in extractive industries, MSMEs, agribusiness and renewable energy. IFC and the World Bank work closely together in Mongolia in a number of areas, including on joint advisory work with the government on corporate governance and support of businesses, infrastructure planning, and mining. 10. MICs: In Indonesia, Philippines and Thailand IFC is concentrating its investment and advisory programs on key development challenges: (i) reducing the impact of climate change through PPPs, investments in biomass, geothermal and hydro energy, and sustainable forestry advisory; (ii) increasing rural incomes in frontier regions through investments in agribusiness, rural/micro and smallholder finance, warehouse receipts, index insurance, sustainable agribusiness advisory and access to finance to the unbanked and poorly banked populations; (iii) promoting sustainable urbanization through investment in urban

75 71 infrastructure, including financial infrastructure and gender- and MSME finance and PPP advisory; and, (iv) helping to address governance constraints to private sector development. In Indonesia, IFC and the World Bank have worked closely together in a number of areas, including the palm oil strategy, sustainable forestry, the Global Index Insurance Facility and mobile banking. In Thailand, IFC has mobilized rapidly to respond to the flood crisis, together with the World Bank. 11. China. IFC s strategy in China centers on: (i) climate change, using IFC s investment and Advisory Services to demonstrate market-based approaches to reduce GDP energy intensity and increase efficient use of water resources, with a focus on energy efficiency, renewable energy, water management, and green finance; (ii) equitable rural-urban growth, to reduce the gap between living standards in urban and frontier/rural areas principally through investments and advisory work in MSME finance, agribusiness, infrastructure, and food safety; and (iii) sustainable South-South engagement, particularly in SSA including as part of IFC s South-South Emerging Markets to Africa initiative. China's outbound FDI, including that going to Africa, which is the primary focus area, now accounts for over 20 percent of the total outbound FDI of developing countries. The WBG is discussing potential collaboration with the Chinese government to help China s South-South efforts, and IFC is taking an active role through support to Chinese companies. For example, the World Bank is performing a scan of the investment climate for consumer electronics, and the potential of relocating private companies in this sector from China to countries in Africa. IFC has been asked to support the market scanning in Nigeria. 12. Singapore office: The new IFC Singapore office will serve as a cluster of excellence in infrastructure. The Singapore team will focus on leveraging the local presence of various stakeholders in the infrastructure industry to source and process transactions in this sector. In addition, IFC will explore partnering with Singapore-based firms to invest in emerging markets around the world. Closer collaboration with Singapore-based banks will increase mobilization (co-financing) between commercial banks and IFC.

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77 73 EUROPE AND CENTRAL ASIA Current Situation and Outlook 13. Real GDP in the region grew an estimated 5.3 percent in 2011, in line with 2010 levels, although with significant variation in growth rates by country as a result of ongoing uncertainty in the external environment. Higher prices for non-food commodities supported a return to modest, below-trend growth for countries like Azerbaijan, Kazakhstan and Russia, while a bumper harvest boosted growth in Romania and Ukraine. Stronger domestic demand in these larger MICs, including Turkey, helped to compensate for ongoing vulnerabilities in the external environment and contributed to higher remittance flows to Central Asian countries, as well as Moldova, Armenia and Georgia. Domestic demand elsewhere remained weak due to persistent unemployment, high debt burdens, and lower household incomes, particularly in the Eastern and Southern European economies most exposed to the Euro zone through trade and financial linkages. These countries risk a further reduction in trade, a sharp contraction in wholesale funding, deteriorating asset prices, and an increase in non-performing loans if European debt troubles intensify. In addition to the negative external environment, pre-crisis structural challenges remain across the region, including a low level of competitiveness exacerbated by infrastructure gaps, energy inefficiency, and rural poverty. Jointly, these factors are expected to slow regional GDP growth to around 3.2 percent in In Eastern and Southern Europe, which would bear the brunt of a more severe economic downturn in Europe, growth could decline from over four percent in 2011 to two percent in In the event of an overall deterioration in the global economy, commodity exporters would also see rising fiscal imbalances and lower growth. Overview of Recent Achievements 14. The reach of IFC s investments in the region is significant. In 2010, for example, IFC's portfolio clients provided direct employment for over 333,000 people (including 120,000 women), made over $2.1 billion in payments to governments, and reached 38,500 farmers and 2.4 million patients. IFC's portfolio clients in the banking sector provided over 1.1 million MSME loans and held a combined outstanding MSME loan portfolio of $36.8 billion in In FY11, IFC committed $2.7 billion in 114 projects for its own account in the region. In line with IFC s overall strategic focus areas, IDA commitments were $275 million in 37 projects and 41 percent of advisory services expenditures were allocated to IDA countries; $370 million was invested in 23 projects with a clean energy component; $200 million invested in seven South-South investments; and $1.6 billion in projects targeting MSMEs. During the first half of FY12, IFC delivered $2.0 billion of financing, of which around $1.2 billion is for its own account in 57 projects. IFC s Strategy 15. IFC will continue to focus on three main strategic pillars to facilitate inclusive, sustainable growth across the region: (i) improving access to infrastructure services, (ii) strengthening the financial system and increasing access to finance; and (iii) enhancing competitiveness and diversification; addressing climate change remains a cross-cutting theme. IFC s priorities reflect key long term development challenges facing the region, including a general lack of competitiveness, low levels of productivity and innovation, underdeveloped financial markets, energy intensive industry and low quality of infrastructure services. These priorities are shared by the World Bank, facilitating close cooperation between the two institutions when formulating joint country strategies and implementing joint or complementary work in the areas of infrastructure and PPP development, resource efficiency, the financial sector and the regulatory and business environments. 16. In response to short term vulnerabilities created by difficulties in some developed countries, the WBG has announced that it is making $27 billion in funding available over the next two years for affected CEU countries. As part of this effort, IFC stands ready to increase its investment volume by up to $2 billion (or about 60 percent) between FY11 and FY13. IFC s financial markets program in the region is built upon

78 74 the response to the 2008 crisis, which never fully abated, aiming to achieve three main objectives: (i) ensuring that banks have sufficient risk capital to continue funding operations; (ii) provisioning liquidity for working capital and short-term trade finance to prevent a breakdown in the production chains and trade flows; and (iii) improving risk management, non-performing loan resolution and distressed asset management through advisory services. In the context of the new vulnerabilities, IFC will aim at reducing systemic risk in the Western Balkan countries. In larger markets, IFC investments will focus on projects that generate important demonstration effects and maintain credit flows to priority sectors of the economy. In the real sector, IFC will closely monitor its portfolio clients performance and provide financing as needed. Close cooperation within the WBG and with other IFIs is central to IFC s efforts to respond to ongoing economic challenges. 17. In investment climate advisory work, IFC will continue supporting broad reforms in IDA countries to increase competitiveness, particularly for SMEs. In Armenia, Bosnia, Moldova and Ukraine, where agribusiness development will greatly boost economic growth, IFC will promote reforms that support lower costs and facilitate more competitive production. IFC is also working to improve the regulatory environment in the renewable energy sector in Russia and Ukraine. Finally, through regulatory reform, IFC will help foster the integration and economic growth in the Western Balkans by helping to reduce trade logistics constraints and harmonize border clearance procedures. Sub-regions 18. IDA Countries. 54 IFC will continue to reach the poor and promote economic diversification through integrated investment and advisory work targeting MSMEs in agribusiness, manufacturing and services. Investment climate and corporate governance advisory will help to improve competitiveness, while financial infrastructure advisory will help to strengthen financial systems. Infrastructure work targeting municipal services and power, including through PPPs, will facilitate access to services and markets. In the Caucasus, IFC activities in transport and renewables will help develop the region s potential as a transit corridor and energy exporter. In Central Asia, IFC will continue to align investment and advisory to ensure sustainability of its growing program and develop new lines of business, using advisory services to develop challenging markets. For example, IFC is working with the World Bank in Tajikistan to improve the business environment for the private sector, in particular to ease the process of obtaining construction permits, registering business and improving the moveable collateral framework. In Bosnia & Herzegovina, Moldova and Kosovo, IFC will continue to support MSME access to finance, build competitiveness in the agribusiness sector, and promote private sector participation in infrastructure. 19. Lower Middle Income and Middle Income with Less Developed Private Sectors. 55 If needed, IFC will increase its financing to support the banking sector in Albania, Serbia, FYR Macedonia, and Montenegro, which are heavily exposed to the Western European banks. Advisory services and investments in infrastructure and value-added manufacturing aim to improve competitiveness, diversify the export base, create new jobs, and accelerate private sector participation in infrastructure. IFC s increased focus on agribusiness is expected to help these countries to realize their comparative advantages while reaching poor people, who are concentrated in rural areas. IFC will continue promoting cleaner production, renewables and energy efficiency to mitigate climate change in these countries. In Ukraine, IFC focuses on supporting banking sector stabilization and targeted finance, developing agribusiness, and modernizing infrastructure, as well as on two cross-cutting themes of improving business environment and promoting energy efficiency. In Belarus, IFC focuses on developing the nascent private sector and improving the business climate, while providing crisis support for existing private sector clients if required. 54 Armenia, Bosnia & Herzegovina, Georgia, Kosovo, Kyrgyzstan, Moldova, Tajikistan and Uzbekistan. 55 Albania, Azerbaijan, Belarus, FYR Macedonia, Kazakhstan, Montenegro, Serbia, and Ukraine.

79 More Mature Markets. 56 IFC seeks to be innovative in these markets, with a focus on improving competitiveness, deepening financial markets, increasing resource efficiency and creating jobs. IFC uses these countries as platforms for testing new products before replicating them elsewhere. Across sectors, IFC strives for regional impact, promotes South-South investment and helps strong local companies to invest in the region, mobilizing financing from partners to leverage its capital. A recent example is the IFC Russian Bank Opportunity Fund, developed with the Russian Government (see paragraph 2.48). In Bulgaria, Romania and Croatia, IFC focuses on strengthening the banking sector and export-led growth sectors. In Turkey, IFC will support domestic companies investing abroad, will target under-served segments of the economy such as MSMEs, municipalities and poorer regions, and will promote energy efficiency and renewable energy. In Russia, IFC will contribute to increased diversification and competitiveness of the economy through infrastructure investment, support for value-added manufacturing, mid-tier, private sector banks reaching MSMEs and frontier regions, integrated investment and advisory programs promoting resource efficiency and mobilization. 56 Bulgaria, Croatia, Romania, Russia, Turkey. The EU8 are excluded, as IFC does not have a local presence or active program, and very selectively supports projects that further the climate-change-related objectives of these countries. Some of IFC s multi-country regional crisis-response initiatives, in particular those relating to distressed assets, are also reaching these markets.

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81 77 LATIN AMERICA AND THE CARIBBEAN Current Situation and Outlook 21. Growth in Latin America continues to slow after a strong performance in 2010, as global and domestic economic outlooks worsen. Growth in 2012 is forecast at 3.6 percent, compared with 4.2 percent in 2011 and 5.9 percent the year before. Economic fundamentals remain relatively strong and poverty is at its lowest level in 20 years. However, fiscal constraints have tightened in several countries, which are also struggling with higher inflation. 22. Nearly all countries are running current account deficits. The entire region s current account deficit is expected to rise 57 percent to $130 billion in 2012, compared to a $17 billion surplus in Most of the larger economies can finance their deficits with ease through FDI flows. FDI is forecast to rise 2.5 percent to $144 billion in However, smaller and more vulnerable economies in Central America and the Caribbean have significant imbalances, such as a forecast 2012 deficit of 25 percent of GDP for Guyana and 18 percent of GDP for Nicaragua. 23. Latin America is heavily exposed to global commodity markets; agricultural and mineral commodities and energy make up half the region s exports. Countries with trade links to China (Argentina, Brazil, Chile and Peru) have in general performed better than those tied more closely to the United States (Central America, the Caribbean, and Mexico). However, old challenges persist: high inequality (average Gini ratio of 0.51), limited access to finance, infrastructure deficiencies, low productivity, and weak education systems. 24. Dislocation in the Eurozone could have significant effects on Latin America. The EU as a whole takes 15 percent of the region s exports, principally agricultural commodities. The EU is the first or second trade partner for most Latin American countries. It is the largest market for Brazil and Peru, taking 22 percent and 18 percent of total exports respectively. 25. EU banks hold about $800 billion in Latin American assets, equivalent to four percent of their total balance sheet. EU-based bank loans outstanding to Latin America dropped by $78.6 billion in September 2011, the biggest three-month drop since December Conditions in the syndication market have also deteriorated. European banks, which provide half of total syndicated loans to the region, face higher funding costs and remain cautious about increasing exposure to LAC. IFC total mobilization in Latin America for the first half of FY12 fell 45 percent to $584 million. This is the lowest first-half mobilization volume since FY The EU is traditionally a major source of FDI for the region. FDI inflows from core euro zone countries fell 60 percent to $14.9 billion in 2009 (the latest year for which there is complete data) from Initial reports indicate that 2010 was little better. 27. In the event of an overall deterioration in the global economy, IFC will take energetic countercyclical action. While supporting portfolio clients, IFC will focus on long term financing for strategic acquisitions and capitalizations and provide short term finance. Overview of Recent Achievements 28. IFC s clients in LAC have achieved significant development impacts: nearly 477,000 students reached, 23 million customers receiving power, and $11.6 billion in payments to government in the CY10 portfolio. LAC has achieved IFC s second-highest DOTS rating. In FY11, IFC committed 133 projects for a total of $5.3 billion, including $3 billion from its own account and an additional $2.3 billion in mobilization, an all-time high. This included 64 MSME, 20 IDA, three South-South, and 22 climate change projects. There was also a strong focus on Central America, where IFC has committed over $2 billion since

82 78 FY08, and which accounts for 22 percent of AS projects, principally in A2F for local banks to increase their SME and microfinance lending. Importantly, IFC scaled up its investments and Advisory Services engagements in Haiti. Cooperation with the World Bank is ongoing in several countries and across many industry and advisory projects. For instance, in Brazil, the World Bank and IFC are cooperating in the Amazon-Cerrado initiative; in Peru they are working on Municipal Capacity Building programs; in Brazil, Honduras and Mexico they are advising governments on PPP projects. IFC s Strategy 29. IFC s strategy focuses on (i) inclusive growth, (ii) competition and innovation, (iii) regional and global integration, and (iv) climate change. Trade finance programs such as GTFP as well as IFC s new Global Warehouse Finance, Global Trade Supplier Finance and Critical Commodity Finance programs are likely to play a key role. Experience from the crisis also highlighted the importance of supplying liquidity to key second-tier banks that finance MSMEs and low-income communities. IFC has also begun financing acquisitions by local groups of assets divested by European banks, and is supporting the recapitalization of select European-owned local banks. In some cases, IFC provided long-term quasi-equity and equity financing for banks active in key sectors such as housing and SMEs. IFC has also made use of structures that enable clients to mobilize financing beyond traditional banking markets, such as the use of surety bonds in infrastructure projects. 30. Inclusive growth. IFC will remain focused on increasing access to finance, micro equity and funding for SMEs, and expanding the provision of basic goods and services. In infrastructure, it will keep its focus on the poor and other underserved segments of the population, addressing gaps in urban development, transport, water and power supply. Going forward IFC will place greater emphasis on targeting the indigenous and women, in the latter case through investments in education and health service, financial services and AS projects. Women accounted for half of the 477,000 students enrolled in colleges financed by IFC in CY10, and IFC microfinance clients make over 3.3 million loans annually in CLA, with women benefiting disproportionately. 31. Competitiveness and innovation. IFC will continue to address infrastructure and logistics bottlenecks by increasing PPPs and improving the investment climate; expanding vocational and tertiary education; and supporting and developing new sectors and products, such as mobile banking and strengthening climate change supply chains. 32. Regional and global integration. Sustainable growth and competitiveness depend on close market integration. LAC is increasingly looking to the East (in particular, to China) for increased trade and foreign investment. IFC s strategy also calls for improving legal frameworks for trade logistics; integrating regional financial markets; and strengthening energy networks and transportation. IFC will coordinate with IBRD on the early conceptualization of infrastructure expansion networks and on improving access to long-term local currency funding through institutional reform. 33. Climate change. IFC will continue playing a strong role as a catalyst for private-sector involvement in addressing mitigation and adaptation issues in the region. Mitigation activities include renewable energy, cleaner production and land use; using financial intermediaries to focus on energy efficiency and renewable energy; and offering Advisory Services on green building codes, E&S standards, sustainable energy finance and PPPs. Greater collaboration with IBRD is expected through work on developing green building codes. Adaptation activities will focus on developing country-level strategies with priorities in cleaner production, wastewater treatment, catastrophe insurance and zoning codes. Sub-regions 34. IDA countries. To accelerate IDA countries transition to Middle Income status, IFC will work to develop physical and social infrastructure (through investments, Advisory Services and PPPs); develop local

83 79 financial markets and access to finance (particularly for women and indigenous populations); promote economic integration (through infrastructure and trade logistics); and reduce reliance on imported fossil fuel (through wind and geothermal projects). 35. Caribbean. IFC s approach includes support of regional companies with OECS focus; integrated investment-advisory work on infrastructure solutions; financial markets focus on MSMEs and trade; development of tourism linkages; and a special focus on reconstruction and job creation in Haiti. IFC committed a record $397.8 million to the Caribbean in FY11, including $51 million in mobilization. About half this volume was committed to FIs, and 40 percent to infrastructure projects. IFC has provided $734 million in financing to the Caribbean in the five years through FY Central America. This is a key IFC priority region as it grapples with severe poverty and violence as well as deteriorating external balances and major climate change impacts. IFC will foster investments in agribusiness and services; promote renewable energy and regional infrastructure projects; extend PPP infrastructure advisory in cooperation with IBRD; support regional integration; assist capital market development and microfinance; and coordinate an Advisory Services/World Bank response to the Doing Business report. 37. Andean. IFC will take a systemic investment/advisory Services/WBG approach to infrastructure and PPPs, building financial institutions and capital markets, facilitating regional integration, and guiding revenue management. 38. Mexico. IFC will focus on job creation, education and health; implementing a systemic investmentadvisory approach to climate change and investment climate. 39. Southern Cone. IFC will focus on supporting agribusiness; promoting education, SMEs, small farms and information technology; focusing on renewable energy and energy efficiency; building microfinance institutions and developing capital markets; and pursing infrastructure opportunities through PPPs. 40. Brazil. IFC has formulated a strategy to achieve significant impacts on inclusive growth, competitiveness, and climate change. This includes programmatic approaches to education, microfinance and housing, and close collaboration with the World Bank and other institutions to set standards in the Amazon. 41. Amazon. IFC will promote sustainable land use and alternative livelihoods in the rainforest through the dissemination of soy and beef standards; reforestation of degraded lands, forestry licenses and concessions; inclusive supply chains (small cash crops); and access to microfinance. In the savannah (cerrado), IFC will focus on degraded land and the business case for food security and biodiversity. IFC will build on its Advisory Services work and expand into investments in countries beyond Brazil, including Bolivia, Colombia, Peru and Ecuador.

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85 81 MIDDLE EAST AND NORTH AFRICA Current Situation and Outlook 42. The January 2011 events have affected many of the region s economies and increased investors perceptions of risks. Economic growth has been significantly affected in the countries in transition, and a limited recovery is expected in Fiscal and current account deficits have also increased due to rising social expenditures and declines in tourism revenues and FDI. The weakened economic context will likely be compounded by the ongoing uncertainty in the euro area, further dampening economic growth and pushing up unemployment. On the other hand, the events could provide a unique opportunity to better address key development challenges and move the region to a higher and more equitable economic growth trajectory. IFC has had a strong role over recent years in improving competitiveness of the private sector in many countries with a view to increasing employment opportunities in MENA. Since the Arab Spring, IFC has played a countercyclical role in attracting investment back into the region. As part of the Deauville partnership process, IFC is working closely with the World Bank and other IFIs on addressing the region s development needs and exploring coordinated mechanisms for investment and economic growth. Overview of Recent Achievements 43. Despite the difficult environment, IFC was able to deliver a relatively strong program in MENA. IFC clients reached 1.4 million patients, provided power to 2.6 million customers, and generated 1.5 million MSME loans. IFC committed $1.6 billion for its own account (and $794 million in mobilization) in FY11, of which 20 projects worth $702 million were in IDA countries. IFC s Advisory Services expenditures in client-facing projects rose from $15 million in FY10 to almost $16 million in FY11. Through our Advisory work in the region, IFC supported clients who delivered over 83,000 loans to MSMEs, trained over 6,300 individuals (of which 28 percent were women) in improved management and corporate governance practices and, working with Government clients, helped reduce red tape for nearly 5,000 private businesses. In the context of the prevailing environment, IFC has been approached by several large regional players with high risk appetite for entering new markets in MENA. IFC has hence played its countercyclical role in the region and between January 2011 and February 2012 committed nearly $2.4 billion (including around $900 million in mobilization) in the Arab World to restore confidence in the region. Some confidence boosting and high impact projects include: (i) $375 million ($250 million for IFC's own account) in Orascom Construction Industries in Egypt; (ii) $8 million equity in Comar health in Tunisia; and (iii) chemicals and manufacturing projects in Jordan (JIFCO $215 million - $125 million for IFC own account - and Hikma Pharmaceuticals $137.5 million). Since January 2011, IFC's Advisory Services approved 20 new operations worth $16 million in the Arab world in areas of MSME finance and training, PPPs, capacity building, resource efficiency, and business registration and licensing. IFC s Strategy 44. IFC's priorities in the region are more valid today than ever. The six prongs of IFC s strategy are: (i) addressing unemployment by increasing access to finance and supporting high value added and employment generating industries; (ii) improving infrastructure services; (iii) improving the quality of education and health services; (iv) reducing the costs of doing business and improving transparency and governance in the private sector; (v) increasing regional-global integration by catalyzing South-South investments and knowledge transfer; and (vi) addressing climate change issues. IFC s immediate response to the recent events has been to help restore investor confidence in the region. A key feature of the strategy is meeting the immediate needs of the private sector through a two-tiered approach of: (i) supporting regional champions and well-established local players seeking to expand in the region; and (ii) continuing IFC s support to MSMEs through capacity building programs and investments in financial intermediaries, as well as engaging with smaller firms. Four initiatives being rolled out in the region in partnership with IFIs are: (i) MENA

86 82 SME Facility and MSME Technical Assistance Facility; (ii) e4e initiative for Arab Youth; (iii) Arab Financing Facility for Infrastructure (AFFI) and a complementary Technical Assistance Facility; and (iv) MENA Fund to help restore investors confidence in long-term potential of the region. IFC s Advisory Services program has become an even more important tool today to engage in several of the transition countries. Of the four initiatives, all but the MENA Fund are joint investment and advisory multi-year programs. Three of the four initiatives (besides MENA Fund) have been prepared and implemented jointly and/or in close collaboration with the World Bank as part of the Arab World Initiative (AWI). 45. In the event of an overall deterioration in the global economy, possibly compounded by a worsening of the situation in Europe, the region will probably see rising unemployment, increased social pressures, and significant fall in FDI, exports and tourism. Under such a scenario, IFC will increase focus on portfolio management, support existing clients, increase the use of short-term finance instruments, and deepen our engagement through our Advisory arm. IFC will also aim to support projects with large employment creation/preservation effects, support infrastructure PPPs, and pursue equity opportunities. Sub-regions 46. Maghreb. 57 As in the rest of the region, IFC s strategy in the Maghreb is to promote a competitive private sector which can create the necessary jobs for the sub-region s unemployed youth. In Morocco, IFC focuses on (a) increasing access to finance for MSMEs through microfinance, supporting increased lending to SMEs by banks and funds, and providing advisory services and financing (including equity) to local banks as needed; (b) developing infrastructure and PPPs, including in the area of renewable energy and water; and (c) selectively investing alongside local players to improve real sector competitiveness. Mobilizing South- South investments with Moroccan players to Sub Saharan Africa is another area of focus. In Tunisia, IFC is scaling up its program, with recent investments in the financial, health and oil and gas sectors. Advisory work is also ramping up with projects supporting MFIs and banks, corporate governance, the tourism sector, and improving skills for youth. IFC s strategy in Tunisia places a greater emphasis on inclusion, and focuses on job creation through increased private sector participation and growth. IFC will support the private sector through a joint investment and advisory program which seeks to (a) mobilize investments which improve investor confidence; (b) expand access to finance to MSMEs, with a focus on women and youth entrepreneurs; (c) invest in labor intensive and high value added manufacturing; (d) invest and advise on improving skills of youth for private sector jobs; and (e) improve the quality and access to infrastructure and social services especially in lagging regions. Algeria s private sector remains small, and IFC s focus is on exploring energy-related infrastructure opportunities, increasing access to finance for MSMEs, PPPs and improving the business environment. In Libya, IFC is at the very early stages of exploring opportunities for engaging, primarily in the financial sector (especially trade finance) to begin with, followed possibly by a program of Advisory Services to support access to finance and PPPs. 47. Mashreq. 58 IFC s integrated investment and advisory engagement in the Mashreq is primarily in infrastructure (especially PPPs), access to finance (MSME support, corporate governance, financial infrastructure), investment climate, education, and climate change. IFC is also trying to deepen its Public Private Dialogue (PPD) in the Mashreq to better respond to the negative public perceptions of the private sector. Egypt remains IFC s largest portfolio in MENA, and the short term strategy is to (i) restore confidence in the country, by doing a few large deals with mobilization; (ii) support portfolio clients restructure/strengthen balance sheets; (iv) support local banks when needed, e.g., through short-term finance instruments, risk sharing facilities, SME credit lines, microfinance and equity, and SME banking advisory; (v) improve corporate governance, especially for Family Owned Enterprises; and (vi) expand the PPD program. IFC has ramped up its program in Iraq recently, and aims at developing market infrastructure to support a 57 Algeria, Libya, Morocco, Tunisia 58 Egypt, Jordan, Iraq, Lebanon, West Bank and Gaza, Yemen, Syria

87 83 competitive private sector, primarily focusing on MSMEs. While the investment program is focusing mainly on infrastructure and access to finance, Advisory plans include expanding access to microfinance, improving financial infrastructure; building capacity and skills of MSMEs, and creating a transparent and simplified regulatory framework for private investment. IFC s investment and Advisory program is also ramping up in Jordan in the areas of infrastructure (power, renewables), trade finance, PPP support, and financial infrastructure. In Lebanon, IFC s investment program is largely driven by the financial sector and an innovative Advisory program (MSME finance, especially for women-owned enterprises, sustainable energy finance with banks, and investment climate reform). IFC s program in Yemen (primarily Advisory Services) was on hold in 2011 due to the prevailing context. IFC is now collaborating with donors to re-engage as the situation stabilizes primarily in the areas of MSME support, Business Edge, and corporate governance. 48. Gulf Cooperation Council (GCC) Countries. 59 IFC s engagement in the GCC is highly selective and short-term to: (i) catalyze other private players into the market; (ii) build capacity and transfer technology; and (iii) mobilize and partner with regional private sector players. IFC s focus areas include climate change-related infrastructure (especially renewable energy), education, and financial sector support to increase access to finance for MSMEs, youth and women borrowers. IFC also actively promotes South- South investments by mobilizing and investing alongside GCC corporations in regional and cross-border projects. GCC countries have also been large contributors to numerous IFC initiatives over recent years. 49. Afghanistan and Pakistan. In Pakistan, IFC will continue to implement an integrated Investment and Advisory Services program to remove prevailing power sector constraints, improve access to finance (microfinance, SME banking, trade finance), support agribusiness and retail, increase supply chain linkages, enhance the quality and delivery of health and education services, and create a competitive environment for the private sector. IFC will place specific emphasis on (i) improving social and financial infrastructure through PPPs; (ii) strengthening the investment climate for MSMEs, especially family owned businesses; and (iii) expanding the Business Edge training for SMEs, corporate governance program, and Alternate Dispute Resolution. In Afghanistan, IFC s strategic focus is on: (i) increasing access to finance to the underserved through housing and microfinance as well as SME institutions; and (ii) selective investments in the financial sector (SME support and trade finance), infrastructure, telecom, and health and education. IFC will continue to provide Advisory Services to complement its investment activities, especially in the areas of financial sector development by supporting setting up a public credit reporting registry and facilitating secured lending, SME support through Business Edge and value chain development to increase the exports of horticultural products, and business enabling environment improvements through licensing reform. 59 Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, UAE

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