Development impact evaluation results
FMO's investment selection process is focused on optimizing contributions to private sector growth and development, which in turn will lead to economic growth and development. To verify actual realization of expected impact, FMO evaluates projects after five years or on exit if earlier.
The evaluation assesses the business success of the project or client company and its impact on the local economy, community and environment. Furthermore, we look at our investment outcome and the role and contribution of FMO to the project's outcomes. In other words, was FMO's financing additional or catalytic to the market or did we provide guidance on for example ESG aspects. All this allows us to investigate to what extent the various outcomes are interrelated, and to learn how we can further improve development results.
As much as we expect our projects to succeed, some projects will fail, as a result of the high risk environment in which FMO operates, leading to poor development and investment outcomes. Reasons for success and failure include: external factors, internal (clients') circumstances, market-related factors and how FMO performed its role.
The graph is based on 77 project evaluations taken from all investments made in 2004-2006 for projects financed through FMO's own capital, referred to as FMO-A. Results once again show that FMO has in general not supported projects where there was a significant trade-off between development outcomes and project returns for FMO. More often than not, projects that realize good development outcomes concurrently realize good investment outcomes and vice versa.
Evaluation results of the three-year period provide similar evidence as those evaluated last year for the period 2003-2005, with 65% (2010: 74%) of projects realizing win-win outcomes (good development and good investment outcomes) and 13% (2010: 10%) realizing lose-lose outcomes. In other words, for 78% of projects FMO supported in the period, there was a direct correlation between project development outcomes and investment outcomes (returns for FMO). We can thus deduce that FMO has not necessarily sought profit at the expense of development effectiveness. Business success has been the most important driver for development impact as clients have to be profitable in order to be financially sustainable, which is necessary if they are to have lasting positive effects on the local economy, and to improve on environmental and social issues.
Projects, in which FMO's performance and contribution was minor, also produced disappointing development outcomes almost twice as frequently then projects where FMO's role and contribution were rated as satisfactory. Hence, we can conclusively say that a significant role by FMO in a project offers potential to increase development outcome success rates.
Where disconnect was observed between development outcomes and investment returns (outcomes) for FMO, this often reflected FMO's product choice. In 18% of the evaluated projects, with poor development outcomes and good investment outcomes, these involved mostly loans. Where FMO provides a loan, it has a ranking claim on assets/cash flow for loan servicing as well as security packages, which provides some downside protection. Hence, clients have the obligation to make payments when due, even though their underlying financial results (financial/business outcomes) due to the crisis are below expectations which in turn hampers their ability to make any substantial contribution to economic growth.
> Evaluations are performed five years after approval of a project on a stratified random sample of all projects and corrected to create a representative sample of the portfolio.
> The 77 investments evaluated were taken from all investments made in 2004-2006. Evaluation outcomes are thus based on the number of projects rather than volume and are combined average results of these evaluations.
> Outcomes of investments and development are rated as good when the outcome does not have a negative financial or development impact result.
For more on 2011 evaluation results, performance indicators and rating criteria, visit the FMO website: www.fmo.nl/reports