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IFI governance

Background

World Bank lending facilities

3 October 2012

The World Bank’s investment lending (IL) has been joined in recent years by new lending instruments, whilst IL itself faces an overhaul, as the Bank’s operational policies come under review and pilots for the use of ‘country systems’ mature. The Bank is presently using four lending instruments: IL, development policy lending (DPL), Program-for-Results, and the World Bank Guarantee Program.

Investment lending

IL, or ‘project lending’, represents the traditional mode of Bank lending for individual projects and are the primary lending instrument of the International Bank for Reconstruction and Development (IBRD) and International Development Association (IDA), the Bank’s middle- and low-income arms, respectively.

IL incorporates loans, credits and grants for “activities aimed at creating the physical and social infrastructure necessary to reduce poverty and create sustainable development”, including “capital-intensive investments, rehabilitation and maintenance, service delivery, credit and grant delivery [including micro-credit], community-based development, and institution building”. Funds are disbursed to cover project expenditures, including pre-identified equipment, civil works, and technical and consulting services. IL may be accompanied by conditions for specific project components.

IL has a long term focus of 5 – 10 years and, during the last 20 years, has accounted for 78 to 80 per cent of the Bank’s portfolio. At present, IL represents more than 90 per cent of the Bank’s active lending portfolio, whilst accounting for roughly two-thirds of IBRD and IDA annual commitments. Since 2000, investment loans have ranged from $500,000 to $3.75 billion, averaging $83 million. In the past, IL operations have been governed by more than 30 operational policies. However, reforms are presently underway which aim at consolidating the policies, procedures and guidelines into one policy statement and an accompanying procedure statement.

Development policy lending

DPL replaced adjustment lending in 2004. DPL is available in the form of rapid financial assistance to provide funding for programmes of policy and institutional actions. IDA-eligible countries get DPL in the form of grants.

The release of DPL funds is dependent on “satisfactory assessment of performance against a set of indicators in the form of institutional or policy reform measures that reflect progress in implementing a country-owned reform programme.” This conditionality is a traditional feature of Bank lending, but has been criticised for lack of sensitivity to countries’ individual contexts and a focus on liberalisation, deregulation and privatisation.

In fiscal year (FY) 2009, in response to the financial crisis, 40 per cent of Bank commitments took the form of DPL, rising from 27 per cent in 2008. IBRD DPL commitments peaked in 2010 at $20.6 billion, falling to $9.5 billion in FY 2011. IDA DPL commitments hit $2.8 billion in FY 2009, falling to $2.1 billion in FY 2011. Since 2000, development policy loans ranged from $500,000 to $2 billion, averaging $189 million.

Program-for-Results

Program-for-Results (PforR) is a new lending instrument, which was approved by the Bank’s board in January 2012 (see Update 79). PforR ties the disbursement of funds to the achievement of tangible development results and provides direct support for government programmes in order to help countries “strengthen institutions, build capacity, and enhance partnerships with stakeholders to achieve lasting impact”. According to the Bank, PforR can provide support for a wide range of government projects, such as increased immunisation coverage for children or provision of sanitation services. Disbursements fund expenditure programmes rather than individual transactions.

The Bank will pilot the PforR instrument for two years, during which time eligibility for new operations will be limited to 5 per cent of annual IBRD and IDA lending (about $1.5 billion), and category A operations (those with the highest environmental and social risks) will be excluded. As of September, two PforR projects of $60 million and $300 million had been approved.

World Bank Guarantee Program

The Guarantee Program offers partial guarantees of private debt, which are designed to “attract long-term commercial financing in sectors such as power, water, transport, telecom, oil and gas, and mining”. Guarantees are available to all IDA- and IBRD-eligible countries and take three forms: partial risk guarantees “cover private lenders against the risk of a public entity failing to perform its obligations with respect to a private project”; partial credit guarantees “cover private lenders against all risks during a specific period of the financing term of debt for a public investment”; and policy based guarantees “help to improve governments’ access to capital markets in support of social, institutional, and structural policies and reforms”. The guarantee instrument has evolved to include new aims such as “improving investors’ interest in privatisations”.

Country systems

The implementation of Bank projects has been managed by special units running parallel to the government’s core activities. However, the Bank is moving towards a ‘country systems’ approach, whereby Bank projects use a country’s “national, subnational, or sectoral implementing institutions and applicable laws, regulations, rules and procedures”.

Following approval by the Board in 2005, the Bank is presently undertaking a pilot programme which “explore[s] using a country’s own environmental and social safeguard systems”, across Bank lending. The pilot first applied to individual projects, but in 2008 the board approved a proposal to scale up the initiative to apply nationally and sub-nationally and launched another pilot to trial the use of country procurement systems. A 2011 update to the pilot published by the Bank, Use of country systems for environmental safeguards, recognised that the country systems pilots to date had achieved “limited success” in realising their goals of impact, ownership, donor harmonisation, simplification and cost-reduction.

The experience of the pilots’ use of country’s environmental and social safeguards systems will be reviewed as part of the review and update of the Bank’s environmental and social safeguard policies (see Update 82).