Evaluation standards for private sector projects

By Ichiro Toda*

There is a growing interest in how to measure the contribution of private sector activities to development of low income countries. Rigorous impact evaluation methodologies, with randomized control trials, have been applied in private sector initiatives, including support for microfinance institutions, business development or SME support.

In terms of measuring private sector activities’ reach, there is an ongoing effort by impact investors to standardize the taxonomy of indicators, such as IRIS (Impact Reporting and Investment Standards).

Multilateral Development Banks, including the Inter-American Development Bank, developed a common evaluation framework for their investment operations (mainly through equity, debt and/or guarantees) in 2001, called the “Evaluation Cooperation Group’s Good Practice Standards for Evaluation of Private Sector Investment Operations” (ECG-GPS).

So, what are these standards?

The ECG-GPS is based on the belief that MDBs should finance private clients’ projects only when (i) the projects bring benefits not only to the clients but also broader stakeholders, including consumers, suppliers, competitors, employees, communities, and/or governments, as well as (ii) the MDBs bring valued added to the projects, including improvement of the projects in design, developmental, social and/or environmental terms.

The ECG-GPS also emphasizes that a financial return is a prerequisite for the projects to achieve a sustainable contribution to development, despite some conventional views that there is a trade off between financial profitability and development impact for private sector projects.

Since its inception, ECG-GPS have gone through several revisions, which have been accompanied by benchmark exercises to review the MDBs’ implementation of ECG-GPS.

The 4^th edition, dated November 2011, provides more criteria for broader types of operations, organizing projects into five types of operations, as well as allowing more flexibility in terms of rating benchmark application. It also includes, for the first time, the concept of evaluability, which the IDB has been emphasized in the past.

One of the strengths of ECG-GPS is its comprehensiveness, which covers a broader range of evaluation approaches, including cost-benefic analysis, performance indicators to measure the projects’ expanded reach and improved quality, as well as qualitative assessments focused on the projects contribution to private sector development and additionality.

It also involves process evaluation for the assessment of the MDB’s work quality, both during structuring and monitoring phases.  Rigorous impact evaluation can also be carried out as a part of the Extended Project Supervision Report (XPSR). Finally ECG-GPS intends to promote the identification of lessons learned and their application to new projects as well.

As stated in the latest version of ECG-GPS, by implementing the newly improved edition of good practice standards, we hope to identify and disseminate and share best practices and lessons. By doing so, we can actively contribute to improve the monitoring and evaluation framework and practices of private sector activities across the world.

 

Ichiro Toda is Lead Development Effectiveness Officer of the Structured and Corporate Finance Department of the IADB.