Does the IDA Private Sector Window Deserve More Funding? Only with Major Changes

No decision by aid donors this year is more important than how much they pledge to the IDA replenishment negotiations. IDA, the World Bank’s lending window for the poorest countries, is the single largest multilateral source of grants and concessional finance to poor countries for both development and climate-related investments. It is chiefly funded by a combination of donor grants—which must be replenished every three years—reflows from earlier loans, and market borrowing.

This replenishment, IDA21, comes at a critical juncture: many IDA borrowers are mired in high-debt, low-growth traps and buffeted by external shocks—climate change, sharp increases in borrowing costs, food price inflation, and other supply disruptions related to Russia’s invasion of Ukraine. IDA has excelled among multilateral development bank (MDB) funders for its rapid and robust response to these shocks. But to meet urgent and looming needs, this IDA replenishment has to be the largest ever, reaching at least $100 billion in finance capacity over three years, which requires at least $30 billion coming from donors.

Decisions about how the money will be spent are as important as pledges. And one critical choice donors must make is how much is allocated to funding governments vs. the private sector.

The IDA Private Sector Window (PSW) was launched in 2018 to address a basic challenge: poor countries cannot grow and reduce poverty without private investment. But the World Bank’s private sector arms—IFC and MIGA—have struggled to manage the risks of financing the private sector in poor and fragile countries. The objective of the PSW was to use IDA subsidies to help IFC and MIGA manage those risks, thereby increasing the volume and share of their finance in those countries and accelerating private sector development.

The PSW was an experiment, but enough time has passed to form judgments about its performance, effectiveness, and scalability. Such judgments cannot be avoided. Tradeoffs in this replenishment are as difficult as they have ever been. Donors must set a high performance and evidence bar for allocating their scarce donor funding between governments and the private sector.

Our paper and this blog aim to help donors and other stakeholders assess evidence, set the right performance bar, and make judgments. We conclude that after three PSW replenishments, with a cumulative allocation to the PSW of $5.5 billion, the evidence on PSW performance is mixed, and the market-building impact of the model is still unclear. This judgment is partly based on the evidence we have and partly based on gaps in evidence. Therefore we recommend significant reforms—operational and policy changes—as conditions for any further funding of the PSW.

How should PSW performance be judged?

The PSW got off to a slow start and struggled to deploy its subsidy allocation, but the pace of PSW commitment has picked up. All of the $5.5 billion allocated to the PSW to date is expected to be committed by the end of the IDA20 cycle in June 2025, although disbursement rates are much lower at $1.8 billion. So attention must now turn to the scale, efficiency, and effectiveness of IFC and MIGA commitments supported by the PSW.

To judge performance, we, like others (here and here), asked the following questions and summarize answers below:

  • Has the volume and share of IFC and MIGA commitments in PSW-eligible countries increased, especially for long-term finance (LTF)?

For IFC, the answer is not much. The evidence shows a small (6 percent) increase in average annual PSW-supported LTF commitments for IFC compared to the three years prior to PSW launch, but no upward trend in the share of PSW-eligible countries in total IFC LTF commitments (8 percent in 2023). For MIGA, the average annual increase and share (26 percent in 2023) are larger.

Moreover, IFC has used a large portion of PSW funds to subsidize short-term finance (STF): trade credits and working capital. Nearly half of PSW-supported IFC commitments in 2023 were STF. It is difficult to make the case that deploying scarce IDA resources for trade credit subsidies—well after the pandemic—constitutes an optimal use. This seems especially clear because IFC commitments of trade finance to PSW-eligible countries were already a significant share of their overall STF commitments before the advent of the PSW, suggesting that subsidies were not needed.

  • Are PSW subsidies deployed in transactions with higher development impact and are those transactions demonstrably additional?

Limited data on impact scores suggest yes. Ex ante impact scores for PSW-supported transactions are higher for both IFC and MIGA than for their portfolios as a whole. For IFC they are also higher when the investment has been executed—i.e., all funds have been disbursed. But more disaggregated data from Anticipated Impact Measurement and Monitoring (AIMM) scores, an impact assessment tool developed by the IFC, is needed to help us assess the broader market-building impact of the subsidies, beyond the transaction-specific benefits.

Non-PSW supported IFC commitments are falling in eligible countries, suggesting that we are not seeing broader positive market spillovers from PSW-supported transactions. These data raise questions about the additionality of PSW-supported projects and whether they have diverted staff effort from non-PSW supported projects in eligible countries.

As our colleague Charles Kenny argues, we do not see evidence to support the assertion that the underlying trend in private finance to IDA countries from development finance institutions was downward, and the PSW therefore was necessary to prevent IFC/MIGA commitments from an even larger decline.

  • Do PSW-supported projects mobilize more private finance per dollar of IFC and MIGA commitments?

For IFC, the answer is no. Sixty cents of private finance was mobilized per dollar of IFC own-account finance in PSW-supported transactions, less than half that for non-PSW-supported IFC commitments in the same countries. This finding is in some ways not surprising given that PSW subsidies are mostly used to take risk off IFC’s balance sheet, not to share risk with the private sector. It is possible that this policy works to incentivize IFC to take larger transaction shares. IFC argues rather that lower private sector participation stems from generally higher risks in PCW-supported projects. If so, it suggests that more private finance might be mobilized—with associated market-building gains—if risk-mitigating subsidies were shared between the IFC and the private sector. In any case, more disaggregated mobilization data would allow identification of the kinds of PSW subsidies that tend to mobilize more private finance. For MIGA, we lack data to judge.

  • Are PSW subsidies deployed effectively as part of a whole-of-bank approach to developing the private sector and building markets?

No. The World Bank’s Independent Evaluation Group concludes that IFC country strategies and diagnostics do not refer to the PSW as a tool to enable investments or to address constraints to investments. (MIGA does not use county strategies.) IFC is, however, making progress in substantially ramping up in-country staff based in PSW-eligible countries to address the limited investment pipeline problem.

  • Do PSW subsidies adhere to the principle of minimum concessionality?

Yes as far as we know. Average subsidy levels are low (6.7 percent of the transaction value), though details of the methodology are not known so independent verification is not possible.

  • Has the availability of PSW subsidies changed IFC and MIGA risk tolerance?

The evidence is mixed. Data on the risk ratings of counterparties in PSW-supported transactions do indicate that the PSW is facilitating IFC investments with weaker counterparties than in non-PSW-supported investments. But extremely low realized losses for the PSW, along with revenues that are five times greater than losses, suggest the possibility that IFC may be overestimating risk in these countries and therefore could do more with and without PSW subsidies.

IDA deputies, representatives from the donor countries that govern IDA, have already agreed on one step as a consequence of these data: to reduce the 100 percent provisioning requirement for PSW commitments to 60 percent, which will enable more efficient use of IDA subsidies. Whether this share is efficient enough is not clear at this point, and donors should revisit the issue as projects close and more data become available.

What changes would boost performance?

This mixed and partial evidence after seven years of experience suggests to us that additional IDA allocations to the PSW should not be made unless conditioned on some fundamental operational and policy changes. These changes should be focused on: (1) boosting project pipeline development and more rapid growth in IFC and MIGA own-account LTF commitments in PSW-eligible countries, (2) better targeted, more effective subsidies to achieve more impact, additionality, and mobilization by focusing on building markets, and (3) much improved reporting and transparency.

Our recommendations are as follows.

  • Whole-of-bank approach. Integrate strategies for using PSW resources into private sector diagnostics and country strategies for PSW-eligible countries to prioritize relevant investment climate reforms, identify capital market gaps, direct subsidies to market-building obstacles, and expand project pipelines (both PSW and non-PSW supported projects).

  • Long-term finance to build capital markets. Reserve PSW subsidies for long-term finance, except when major crises or significant shocks temporarily disrupt short-term finance channels.

  • Share private sector risk. Establish the principle that PSW subsidies will be used to share risk with the private sector (rather than IFC/MIGA) when warranted by market-building benefits, including impact, additionality, and private finance mobilization.

  • Competition for subsidy access. Channel a greater share of subsidies through competitive tenders, where applicable, that reward higher impact and private finance mobilization.

  • Focus on capital market gaps. Target subsidies to gaps in capital markets, such as early-stage finance for infrastructure and for innovative firms/financial service providers, new equity and debt funds, and currency risk management tools.

  • Enable a powerful MIGA tool in poor countries. Use PSW resources to support MIGA non-honoring contract insurance for lower-rated counterparties.

  • Build market ecosystems. Use a portion of PSW funds as grants to build market ecosystems (e.g., finding and training first-time fund managers), reduce first mover costs and risks, and fill market information gaps.

  • Increase risk tolerance. Incentivize staff to take additional risk when justified by relatively high AIMM scores (especially the market impact dimension of scores) and potential for large private finance mobilization and market building gains.

  • Better reporting. Report annually at a granular level on: commitments and disbursements, ex ante and ex post impact (including at the market level), private finance mobilization per dollar of commitments, realized losses and revenues, and default and loss recovery rates (which will promote more accurate private investor risk assessments).


The PSW experience so far demonstrates that the mere presence of billions of dollars of subsidies does not guarantee success. Further, significant data gaps impede external efforts to fully assess performance. Rather success requires significant further changes in the way IFC and MIGA operate, in staff incentives, and in the way subsidies are deployed, as well as a significant boost in transparency 

These recommendations substantially raise the bar for PSW performance and will be challenging to execute. World Bank, IFC, and MIGA leadership and senior managers will need to play a more proactive role in driving the requisite whole-of-bank approach. And IDA donors will have to play a more active oversight role, insisting on much better information flows. We would argue that both are justified by the imperative of promoting more impactful use of scarce IDA resources.


CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.

Image credit for social media/web: Heather Elliott / World Bank