Background and objectives (see paragraphs 69-71).¹ Upon approving IFAD's Private-Sector Development and Partnership Strategy in 2005 (hereafter referred to as the private-sector strategy), the Executive Board requested the Independent Office of Evaluation to undertake a subsequent evaluation. The evaluation objectives were to: (i) assess the relevance and evaluate the implementation of the strategy; (ii) evaluate the emerging results of IFAD-supported projects designed after its adoption; (iii) assess the evolving approaches, as well as good and less good practices, to IFAD's private-sector development efforts; (iv) examine the instruments and experiences of other development organizations in engaging the private sector in agriculture and rural development, with the aim of identifying lessons that could be pertinent for IFAD; and (v) generate a series of findings and recommendations that could serve as building blocks for IFAD's future engagement with the private sector.

The importance of the private sector (see paragraphs 4-14). Private-sector entities have a central role to play in smallholder agriculture and rural development, offering opportunities for the creation of employment and wealth in rural areas. Their contribution in promoting access to markets, undertaking innovations, providing essential services - including technical assistance, training and rural finance - and supplying inputs has proven to be complementary and critical to the services provided by government agencies, NGOs and civil society organizations. However, the private sector is not a homogenous group of actors. Smallholder farmers, farmers' associations, agribusinesses and other commercial firms, as well as large national and international conglomerates, all form part of the growing private sector in developing countries.

IFAD's role and comparative advantage (see paragraphs 15-23). Given its mandate and taking into account the private sector's key role in smallholder agriculture and rural development, IFAD can aspire to take a leadership role globally in developing innovative approaches to engage the private sector to the benefit of the rural poor. IFAD's commitment to make the private sector an integral partner has been tenuous and not universally well received among staff until recently. In the last two years, however, IFAD Management has forcefully articulated a vision that sees small agriculture as a profitable business and building block for a more prosperous and dynamic rural society.

The relevance of IFAD's private-sector strategy (see paragraphs 84-99). The goal "to engage the private sector to bring more benefits and resources to IFAD's target group" and the immediate objective "to increase pro-poor private-sector operations and investments in rural areas" of the strategy were and remain relevant. However, there were little or no roll-out actions to facilitate implementation of the strategy; and the strategy did not consider adequately the need for ensuring corporate social responsibility and promoting fair trade practices and sound environmental management, in a context of wider private-sector participation. Nor did the strategy sufficiently address the risks inherent in engaging with the private sector, such as the implications for poor people who are unable to take advantage of the resulting opportunities.

The 2005 strategy included the first IFAD-specific definition of the rural private sector. The evaluation concluded that this definition is too broad-based and does not adequately differentiate among private-sector operators working in agriculture and rural development, who often have very different needs, requirements, capabilities and opportunities. Rather, the definition lumps together operators at the smaller (rural) end of the private-sector continuum including agroprocessors and other rural microentrepreneurs, as well as national, regional and international operators. It also includes private-sector operators from both the formal and informal economy.

The three broad lines of action of the strategy were as follows: (i) policy dialogue for local private-sector development; (ii) investment operations to support local private-sector development; and (iii) partnerships with the private sector in order to leverage additional investments and knowledge for rural areas. They were well chosen to achieve its goal and objective. The strategy's results framework was however weak, well defined incentives and accountability were lacking, and no provision was made for systematic outreach and dissemination following its approval. Preparation of the strategy was not adequately organized, and did not entail any consultation with a cross section of IFAD staff or partners from developing countries and other organizations.

The implementation of the strategy (see paragraphs 105-150) was examined according to the strategy's three broad lines of action and implementation requirements. With regard to policy dialogue, about half the new generation country strategic opportunities programmes (COSOPs) - those considered by the Board between 2007 and 2010 - cover policy dialogue on the private sector and consultation with private-sector entities. There is however room for improvement in promoting a favourable policy and institutional environment for private-sector engagement at the country level, as well as scope for wider engagement in key policy arena that would create a more conducive international and regional trade environment.

Projects designed in 2009, as compared to those designed in 2004, made better provision for private-sector development through greater attention to rural micro and small enterprises, commodity value chains, market linkages and agricultural productivity. However, this was attributable to the gradual increase in IFAD's investment in marketing and rural enterprise development, rather than a result of implementing the strategy. Projects have not generally emphasized the role of the private sector in research and extension, analysed the potential risks associated with the value chain approach, made full use of information and communication technology to promote market access, or built gender and environmental concerns into projects with major private-sector components.

The targets set in the strategy's results framework for mobilizing resources from the private sector for IFAD-funded projects have been met and exceeded. However, the evaluation found only a few concrete examples, as with the Alliance for a Green Revolution in Africa (AGRA), of partnerships to leverage investments from private foundations or philanthropic organizations. The Fund has some partnerships at the institutional level with other multilateral organizations (e.g. the OPEC Fund for International Development) specifically for private-sector development, but on the whole these are less developed than its partnerships in other areas.

Finally, the evaluation found that IFAD's governing bodies (especially the Executive Board, Evaluation Committee and replenishment consultations) have generally encouraged it to take a more favourable stance towards private-sector development. However, the Board did not exercise adequate oversight in the strategy's implementation including monitoring the fulfilment of "implementation requirements" (section VII of the strategy) such as reporting on achievements against specified key performance indicators.

Emerging results from the new portfolio (see paragraphs 152-159). The emerging results of projects with a significant private-sector component that started up after the strategy was approved in 2005 – as recorded by IFAD's self-evaluation system - reveal better overall performance than similar projects approved before 2005. In particular, projects approved in recent years are performing better on 12 of the 18 indicators included in the project status reports prepared by country programme managers (CPMs) annually for each operation, including in terms of their "likelihood of achieving their development objectives". This is important, as the ultimate aim of IFAD-supported projects is to promote private-sector engagement as a means of achieving better poverty reduction results on the ground, rather than supporting private-sector development and engagement as an objective per se. Finally, recent data from the Results and Impact Management System surveys show that the performance of most ongoing projects is moderately satisfactory in specific areas related to private-sector development, such as the "likelihood of sustainability of market, storage, processing facilities".

Among other issues, the seven country studies brought out three key insights that could contribute to further strengthening IFAD's work on the private sector (see paragraphs 181-192): (i) government commitment to and support for private-sector development is key to IFAD's ability to design effective investment operations in agriculture and rural development; (ii) IFAD needs to use all its instruments (and not just investment operations) more effectively for promoting private-sector development in borrowing countries; and (iii) very little use has been made of the grants programme to support private-sector development, for example in terms of promoting policy dialogue and knowledge management.

The importance of corporate business process for better results (see paragraphs 195-238). The strategy made provision for adjustments to some key corporate business processes such as training, learning, knowledge management, and monitoring and reporting. In particular, it specified a number of "implementation requirements" to ensure that the strategy could be appropriately implemented to achieve the desired results on the ground. Some of those requirements were not met at all (e.g. appointing a staff member to oversee implementation, developing guidelines or a toolkit to operationalize the strategy, training staff); and most others only in part. The evaluation concludes that this has impeded the achievement of results on the ground.

IFAD's existing organizational architecture and workforce (see paragraphs 207-211) are insufficient to promote partnerships and engage the private sector. In addition to the lack of a senior technical adviser on private sector issues, ² a large number of front line staff (i.e. CPMs) have limited knowledge of and experience with the private sector including in terms of resource mobilization, which requires specialized skills, competencies and know-how. Efforts to conduct systematic training on the topic have also not been forthcoming. In spite of this, IFAD has done relatively well in adjusting the focus of recent operations to encompass value chains, market access and employment creation. But if IFAD is to develop a comparative advantage in linking smallholders to markets, it will need to build up the skills and global experience of its staff.

Instruments for private-sector development (see paragraphs 226-238). The evaluation concludes that IFAD has not yet fully leveraged its existing instruments (loans, grants, policy dialogue, partnership building and knowledge management) to promote partnerships with the private sector. At the same time, the evaluation underlines the limitations of the existing instruments and explains why using loan-funded investment projects (i.e. sovereign lending) – the main instrument currently at IFAD's disposal for rural poverty reduction - is not effective for private-sector promotion in support of the rural poor. For example, governments are often reluctant to use public money to support private-sector entities, and when they are prepared to do so they often cannot ensure efficient management of such funds. Nor is the private sector keen to work in direct partnership with government institutions. Hence the bulk of assistance from other multilateral development banks (MDBs) for private-sector development is provided on a non-sovereign direct lending basis.

The evaluation concludes that if IFAD were able to lend directly to the private sector, including small and medium enterprises, agroprocessors, microfinance institutions, cooperatives, farmers' associations, commercial banks and others who face challenges in mobilizing financial resources, this could provide significant advantages to the rural poor. Direct lending to the private sector, which can take a variety of forms (e.g. equity investments, loan guarantee funds, venture capital, investment finance.) would contribute to spurring market-led development among the rural poor, especially if used in a coherent and synergistic manner in country programmes with IFAD's traditional instruments for agriculture and rural development.

Recommendations. The evaluation suggests that consideration of a new corporate private-sector strategy would be timely, and offers the following recommendations as inputs.

Strengthen existing instruments to support private-sector development. IFAD provides loans to governments, has a grants programme and is involved in non-lending activities (policy dialogue, knowledge management and partnership building). However, all these instruments must be used to their full potential, in particular ensuring that they are mutually reinforcing and can in a holistic manner contribute towards IFAD's private-sector development objectives.

Strengthen the design, supervision and implementation support of loan-funded projects that include private-sector development. More thorough analysis of the requirements for generating pro-poor benefits and possible risks of collaboration with private-sector entities involved in commodity value chains should be undertaken, with due attention to gender and environmental considerations. The grants programme should be used to provide complementary support to private-sector entities involved in IFAD operations, including technical assistance and advisory services to strengthen the capacities of private-sector entities. This might eventually necessitate an expansion of IFAD's grant policy.

Ensure that COSOPs coherently articulate how synergies will be established between investment operations and non-lending activities to support private-sector development at the country level. Specific recommendations with regard to policy dialogue and partnerships are summarized below:

Policy dialogue. IFAD needs to: (i) use the COSOP formulation process to more systematically discuss opportunities and constraints for rural private-sector development and to promote a dialogue within the country on these issues; (ii) work more closely with other MDBs to ensure that issues affecting private-sector development related to agriculture are on the agenda for dialogue with governments; and (iii) use the grants programme more strategically to fill gaps in IFAD's and the governments' understanding of these issues and provide the analytical underpinnings for enhanced policy dialogue.

Partnerships. It would be important for the Fund to engage more widely with foundations and philanthropic organizations with a strong private-sector orientation, at the corporate and country levels, that can provide knowledge and financing for IFAD-funded activities. In addition, the Fund should strengthen its collaboration with MDBs at both the corporate and country levels, inter alia, focusing on policy dialogue, knowledge management, cofinancing of operations, and identifying opportunities for scaling up successfully piloted innovations on private-sector development through IFAD operations. In particular, opportunities for partnership should be explored with agencies such as the International Finance Corporation (IFC), which can lend directly to the private sector and whose funding is seen as additional by governments. Under such partnerships, IFAD could support smallholders with seed capital, technical know-how and business development services, to engage in higher productivity activities and move up the value chain.

Establish a private-sector development financing facility. The evaluation concludes that IFAD should leverage its existing instruments to their full potential, but this would provide only incremental improvements to IFAD's target groups – especially small farmers. Therefore, in addition to implementing the above recommendation, the evaluation further recommends that IFAD establish a private-sector development financing facility to directly channel resources for private-sector operations in rural areas, with non-sovereign guarantees.

The proposed facility would support selected elements in the value chain that would have a direct impact on enhancing the productivity of small farmers and provide them with better incomes. However, the new corporate private-sector strategy will have to determine what type of direct support (e.g. equity investments, loan guarantees, venture capital, investment finance, technical assistance and advisory services) it would consider a priority for the rural poor.

The facility could include initial financing of US$200 million for a five-year period. Voluntary contributions would be invited from Member States, foundations and philanthropic organizations, and others. The evaluation recognizes that direct lending would have significant implications for IFAD's legal, financial and supervision systems, as well as require IFAD to put in place standards of corporate social responsibility as a basis for due diligence in order to minimize the risks of lending directly to private entities. Additionally, it would necessitate developing staff capacities and expertise, as well as an adequate organizational structure. The evaluation recognizes that direct lending to private-sector entities (i.e. non-sovereign loans) will require the concurrence of the Board.

The facility would have a clear governance framework, and a systematic monitoring, evaluation and reporting system. In particular, ongoing monitoring and annual reporting to Senior Management and the Board throughout the five-year period will be essential to success. A thorough assessment of the facility and the projects funded at the end of the five years would serve as a basis for deciding together with IFAD governing bodies whether direct lending to the private sector ought to become a regular instrument at the disposal of IFAD for its rural poverty reduction efforts, as well as the size and administrative location of the facility.

Assess IFAD's human resources and organizational architecture. Management should undertake a thorough assessment of IFAD's organizational architecture and human resource capabilities and requirements for private-sector development, including management of the facility and promoting private-sector development in general. In this regard, the option of further reconfiguration by establishing a specific organizational unit (division³ or department) responsible for promoting IFAD's work on private-sector development and engagement should be explored. The reconfiguration could group together existing key staff currently working on private sector-related issues (senior technical advisers on private-sector development, rural finance and others). The assessment should also lead to the definition of an appropriate incentives and accountability framework for IFAD's work with the private sector. In addition, it is recommended that IFAD organize periodic peer reviews on its private-sector activities and architecture.

Definition of private sector. The new strategy should adopt a clearer and more focused IFAD-specific definition of the private sector, in light of the Fund's mandate to assist the rural poor. It should recognize that the private sector is a heterogeneous group of actors who have different capabilities and requirements. It should promote partnerships with private enterprises that can provide resources and services that improve the livelihoods and incomes of the rural poor.

Process for preparation of the new IFAD private-sector strategy. It is recommended that the strategy be developed based on consultation within IFAD to ensure that all key inputs are duly captured and as a means to building ownership for its implementation. Selective consultations with outside partners should also be conducted to obtain a wider view and feedback on the strategy. This could include farmers' organizations, NGOs, other international financial institutions and development organizations that are currently working with the private sector (International Finance Corporation, United States Agency for International Development, African Development Bank, etc.), as well as private-sector entities.

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1/ The paragraph numbers in the executive summary refer the reader to the main report, where additional information can be found on the same topic. 

2/ Notwithstanding the lateral transfer in April 2011 of a staff member from the Near East, North Africa and Europe Division to work on private-sector development in the Policy and Technical Advisory Division.

3/ For example, along the lines of the recent establishment of a central Environment and Climate Division, including the assignment of dedicated staff in each PMD regional division working on the same topic.