Portfolio review: 2006

This portfolio performance report (PPR) has two purposes: (i) to provide the Executive Board with an overview of the performance of the loans and grant portfolio in delivering results to its target group; and (ii) to complement and, where necessary, amplify the management response to the annual report on results and impact of IFAD operations evaluated in 2005 (the ARRI 2005 report – document EB 2006/89/R.10). In doing so, this report analyses the status and trends of IFAD's portfolio of loans and grants, identifies key strengths and weaknesses associated with the management of the portfolio, and provides a strategic overview of the operational effectiveness and impact against a range of development indicators.

IFAD's Action Plan for Improving its Development Effectiveness (EB 2005/86/R.2) constitutes the principal vehicle for change over the period 2007-2009 and therefore has established a set of targets for improving IFAD's performance in terms of relevance, efficiency, effectiveness and sustainability and it has identified three action areas: (a) strategic planning and guidance to establish the priority areas for the organization's operation, (b) strengthened country programmes rooted in a new operating model, and (c) knowledge management and innovation. In this light, this report compares the results achieved with the major Action Plan targets (paragraphs 46-62) and refers to the changes already under way to address issues identified in the Independent External Evaluation (IEE) and past ARRI reports.

This report also presents the progress made in terms of improving organizational
processes and instruments, such as the Results and Impact Management System (RIMS) for projects, the Direct Supervision Pilot Programme (DSPP), the Field Presence Pilot Programme (FPPP), the Flexible Lending Mechanism (FLM), and private-sector development.

This report builds mainly on the divisional portfolio reviews undertaken by the
Programme Management Department and on this year's ARRI report prepared by the Office of Evaluation (OE). A summary of each of the regional divisional reports is annexed hereto. The information source for the divisional reviews consisted ofsupervision reports, mid-term review reports, project completion reports, the Results and Impact Management System (RIMS), and the reports of OE.

Each regional division in IFAD prepares project status reports, which include
performance ratings. In past years, these ratings have been relatively satisfactory, but have not always been confirmed subsequently by the project completion reviews and independent evaluations. IFAD has learned from this and is setting standards for more accurate rating of the performance of its projects. IFAD has designed a system that accurately reflects project status and generates early warning sufficiently in advance. Other international financial institutions (IFIs) use different systems to identify and classify "at risk" projects. Many have not yet raised their standards, and therefore continue to experience performance rating inflation. We believe that IFAD's reporting is an accurate reflection of the at-risk status of the portfolio.

This year's report also utilizes, first, a review of the 25 project completion reports
(PCRs) issued this year and, second, a review of 21 lead adviser's memorandums (LAMs) dealing with the projects in the advanced pipeline. These instruments are being used for the first time and are expected to enhance the robustness of the results generated by the self-evaluation system while also making the assessments more contemporary and forward-looking.

The PCRs that were reviewed were prepared following the guidelines issued in 1999 and do not, therefore, specifically report performance against the impact domains defined under the Methodological Framework for Evaluation approved in September 2003. The reviews were based on a careful reading of the PCR to distil evidence with which to make judgements. Although the result is a reasonably comprehensive picture, the veracity of these assessments can only be regarded as tentative. In this light, the disconnect in project performance ratings with the ARRI 2005 report has been calculated in terms of rank differences. Some of the discrepancy between the ARRI report and the PCR review also results from the fact that, while the samples in the PCR review consist only of completed projects, the ARRI 2005 report is based on the evaluation of some ongoing projects as well.

A. The investment portfolio

Portfolio size

IFAD's current portfolio of investment projects1 consists of 222 projects, with a
commitment of US$3.6 billion.2 It is distributed over 86 countries and one territory. About 23 per cent of the projects are in 9 countries with 5 or more current projects and an additional 20 per cent are in 11 countries with 4 projects.

At 1 July 2006, Asia and the Pacific (AP) accounted for about 30 per cent of the net commitment, followed by East and Southern Africa (ESA, 19 per cent), Latin America and the Caribbean (LAC, 18 per cent), the Near East, North Africa, Central and Eastern Europe, and the Newly Independent States (NENACEN, 17 per cent) and West and Central Africa (WCA, 16 per cent). Since the average size of investments and IFAD commitments vary significantly, the average number of projects per division is far more equally distributed than the loan value (Appendix 1, Volume II).

Of the US$4.7 billion in IFAD financing approved since 1994/95, rural financial services and credit has taken the largest chunk (19 per cent), followed by technology transfer (11 per cent), local capacity-building and institutional development (10 per cent), and community-driven development (10 per cent). Investment in agriculture and natural resource management accounts for almost one third of the total over the past 12 years. In recent years, there has been some decrease in financing for activities related to agriculture and natural resource management and to rural finance. This has been offset mainly by the increase in human development, local capacity-building, marketing, small and microenterprises, and community-driven development.

Approvals and disbursement

In the review period beginning on 1 July 2005 and ending on 30 June 2006, 23
projects – with a commitment of US$419 million – were approved.3 An additional US$35 million was allocated for four post-tsunami projects. This brought IFAD's total approvals over the past five years to 127 projects, with a commitment level of US$2.1 billion, and the total approvals since its establishment to 711 projects, with US$9.1 billion committed. Financing of projects in sub-Saharan Africa (SSA) countries during the period totalled US$152 million, equivalent to 36 per cent of funds committed as compared with a historical average of 38 per cent. In value terms, financing of projects on highly concessional terms was about US$332 million, or 79 per cent of lending during the period, somewhat below the five-year average (82 per cent).

The average financing size of projects approved in the review period is US$18.2 million. IFAD's average loan size is much lower than that of other IFIs.4 This allows IFAD to respond to opportunities that can absorb only limited investments, and also assists IFAD in experimenting with innovative ideas with limited risk exposure. This, however, also tends to increase IFAD's cost relative to its portfolio size, as most costs associated with designing and implementing projects tend to be fixed in nature and are related to the number of projects rather than the amount invested.

The upward trend in disbursement continued during the review period and reached a new high of US$347 million. Of this, about US$161 million (46 per cent) was for countries in sub-Saharan Africa, an increase over previous years. Disbursement lags of over 40 per cent are reported for 43 projects; this is a slight improvement over last year. Improved disbursements have resulted mostly from increased implementation support and follow-up and, when that does not produce results, clean-up of the non-performing part of the portfolio.

Cofinancing

Of the total amount approved for financing in the period under review, about
US$405 million was mobilized from host-country partners and about US$105 million from non-domestic cofinanciers (other donors). Historically, non-domestic cofinancing has been erratic, making it difficult to identify a pattern. The drop of US$88 million over the past year could therefore be a short-term aberration. The relative lack of commitment of other donors to agriculture and rural development is making it difficult for IFAD to raise cofinanced funds.

In the current portfolio, the number of projects exclusively financed by IFAD has increased to 40 per cent, while another 55 per cent are IFAD-initiated and cofinanced and 5 per cent are initiated by other donors and cofinanced by IFAD. This indicates a movement away from cofinancing and stands in contradiction with the emphasis that IFAD placed in recent years on building partnership and working closely with other donors.

To resolve the problem of declining cofinancing will require that IFAD become more present at the country level, where cofinancing is arranged. IFAD's donor partners have decentralized in recent years creating a need to engage more at the country level. Enhanced emphasis on alignment and harmonization following the Rome and Paris declarations is likely to intensify this process and put further pressure on IFAD to enhance its in-country engagements.

Cancellations

The emphasis laid in recent years on portfolio "clean-up" is bearing fruit, reflecting
cancellations worth SDR 65 million, an increase of SDR 32 million over the previous period. This was mainly due to the full cancellation of two loans (Dominican Republic and Indonesia) and the cancellation of the undisbursed balance of three loans to Zimbabwe. Enhanced disbursement rates have led to a lower proportion of cancellations at loan closing – about 13 per cent in 2005/06, which is in line with recent years but significantly better than the long-term average of 18 per cent. While this signifies improvement in the timely utilization of resources, there is still scope for bringing about further improvements, especially by resorting to partial cancellations, whenever opportunities arises.

Loan signing and effectiveness

Twenty-five projects with IFAD financing worth about US$354 million became effective during the review period. As at the end of June 2006, 40 approved projects had yet to become effective, however. Loans for 34 projects were signed during the review period, with an average of 6.4 months elapsing between Board approval and signing, somewhat higher than the long-term average of just over four months. The average time elapsed between Board approval and effectiveness was reduced. Overall, there is an urgent need to significantly improve efficiency from Board approval to signing and effectiveness.

The factors affecting the time taken for effectiveness tend to be varied and are not
always amenable to generalization. The institutional arrangements proposed for project implementation often require a longer preparatory phase, particularly for projects designed with participatory processes. Demand for more transparency in conducting the business of government is on the increase and has led to involvement of more stakeholders in the approval and ratification process and, consequently, to delays. The Field Presence Initiatives have been a useful instrument in helping to facilitate effectiveness. There is also a need to improve the implementation readiness of projects before approval. IFAD is undertaking measures to reduce those problems. This would also help to reduce implementation delays.

Extensions, completions and the ongoing portfolio

Loan extension as a management tool was used more sparingly during the review period, with only 22 projects being extended. Some extensions were to provide for the restated implementation period and thus were automatic.5 Thirty-two projects were completed. This led to a further reduction of the ongoing portfolio to 182 projects.

Project supervision

As at 1 July 2006, 181 projects required supervision. Of these, only 6 per cent were directly supervised by IFAD. The remainder fell under the cooperation arrangements for supervision. The United Nations Office for Project Services (UNOPS) was assigned 125 projects, or 69 per cent of the total; the World Bank stood at a distant second with 17, or 11 per cent of the projects; and of the remaining projects, the Andean Development Corporation (CAF) and West African Development Bank (BOAD) had the largest number, with 10 projects each.

B. The grants portfolio

Grants approved and disbursed in 2006

The grant policy approved in 2003 was fully in effect during the period under review6 and all 75 grants – amounting to US$31.60 million – were approved under the new policy.7

During the review period, under the global/regional window, 8 grants benefiting seven institutions supported by the Consultative Group on International Agricultural Research (CGIAR) – amounting to US$7.07 million – and 12 grants to other institutions – amounting to an additional US$14.77 million – were approved. Similarly, 32 small grants to non-CGIAR institutions and 3 for CGIAR institutions were approved. Of the 23 grants under the country-specific grant financing, 4 amounting to US$1.71 million were for development projects, mainly for local capacity-building and to enhance policy dialogue; an additional 4 were for countryspecific activities.

During the review years 2002 to 2004, IFAD's annual disbursements under grants
ranged from US$18 million to US$23 million. In the review year 2006, disbursements improved to US$25.5 million.

Current and ongoing grants

At 244, the number of grants in IFAD's portfolio is large. This is indicative of the preponderance of many small grants. Forty-three grants await effectiveness, indicating the need to improve pre-implementation activities, including design. Of the amount approved for grants under the ongoing portfolio, a little less than half has been disbursed on a cumulative basis.


1 As some projects are financed by loans as well as grants, the term "investment projects" has been used.

2 The current portfolio consists of all projects approved but not completed and thus includes also those which are not yet effective. The ongoing portfolio excludes the projects yet to become effective.

3 The review period thus has been changed from earlier PPRs which were based on the calendar year.

4 For example, the Inter-American Development Bank's average loan size in the current portfolio stood at almost US$70 million at 31 December 2003. For the International Development Association (IDA), the World Bank window comparable to IFAD, it stood at US$51 million in fiscal year 2005.

5 IFAD calculates the implementation period as from the date of effectiveness, hence the need for restatement if any delay occurs in declaring a project effective.

6 For ease of reference and reporting, the new grants policy is assumed to have taken effect on 1 January 2004; all text and tables reflect that date.

7 Figures exclude financing for the Programme Development Financing Facility (PDFF), considered part of the country specific window.