IFI governance


Donors finalise commitments to Bank’s low-income arm

10 April 2005

Under the heading of Working together to achieve the MDGs, donor countries finalised their new financial commitments to the International Development Association (IDA). In return, the Bank has agreed changes to allocation procedures based on new debt sustainability frameworks, and improvements in results-based monitoring, transparency and harmonisation.

At a meeting in Washington in February, donors gave the IDA $34 billion in new resources for it to lend or give as grants to low-income countries – a 26 per cent increase over the previous replenishment three years ago. Some donors are still exploring the possibility of additional pledges in order to achieve the desired 30 per cent increase in commitments.

Red light, green light

Negotiations centred around a new system of allocating IDA funds. According to this system (known as the ‘modified volume approach’), the total volume of funds available to low-income countries will be based on a ‘performance based allocation’ (or PBA). The PBA is a combination of measures of need (based on income per capita) and policy performance; the latter being drawn from controversial World Bank scorecards known as Country Policy and Institutional Assessments or CPIA (see at issue).

an incredible fudge

Once the total volume of funds available is calculated, the loan-grant mix is determined using a new debt sustainability framework. Countries judged at low-risk of getting into debt trouble will be given a green light. These countries will receive their funds as low-interest loans. Countries judged a high-risk will get a red light and will receive their funds as grants. Yellow light countries will receive 50 per cent loans and 50 per cent grants. Under the new ‘traffic light’ system 47 countries are grant eligible.

Complicating matters is that 20 per cent of all funds given as grants will be kept back to be re-allocated. This second allocation is subdivided into two parts. The first part (11 per cent) goes into an automatic incentive-based reallocation mechanism rewarding countries with ‘good’ policies. The traffic light system will be applied a second time to determine if countries receive this allocation as a grant or as a loan (this time without the 20 per cent discount being applied to funds given as grants). The second part of the re-allocation (9 per cent) is an administrative charge. The funds from this charge are to be made available to lend at favourable interest rates to countries which receive funds both from IDA and the IBRD (so-called ‘blend’ countries). This would constitute an investment for IDA, the revenues from which woudl finance foregone principal reflows and interest income.

Under this proposed new system, approximately 30 per cent of IDA funds will be given as grants.

Other key elements of the IDA replenishment include:

Growth, private sector development and infrastructure:
An emphasis will be placed on work on investment climate, public-private partnerships in infrastructure and small and medium enterprise support in Africa.
Results-based systems:
The Bank will assist countries in preparing national strategies for the development of statistics, and will back a pilot programme to harmonise internationally-sponsored household surveys. The Bank will be embarrassed by the independent evaluation of its own progress on implementing a results-based agenda (see ).
Transparency and accountability:
CPIA scores will be made available for IDA countries only.
The Bank is to better align strategies and financing with PRSs and increase use of country systems (see Update 42).

The OECD Development Assistance Committee’s (DAC) forum on aid harmonisation and alignment, jointly convened with the World Bank, took place in Paris 2 March. This was the first review of the Rome agenda that was adopted by donors in the wake of the Financing for Development Summit, in order to improve the effectiveness and accountability of development assistance. The meeting took place in the context of a recent DAC survey of 14 developing countries that shows negligible progress has been made to date in changing donor behaviour. Tellingly, it concluded that PRSPs had failed to force donors to “adjust their aid response”.

But instead of agreeing a forward looking strategy, donor bickering led to the indicators being put on ice until the MDG summit in September. In the interim, the DAC working group on aid effectiveness will aim to craft an agreement that satisfies all sides. Patrick Watt of UK NGO ActionAid, who attended the meetings as one of the few civil society observers, described this outcome as “an incredible fudge given that the donor preparatory process had lasted almost a year.”

Contingent UK top-up

The UK has offered up to an additional £100 million to the IDA replenishment. Half of this will be made available if the Bank is able to achieve chosen performance indicators by September 2005; the other half based on indicators to be achieved by the IDA mid-term review in eighteen months time. The indicators measure progress on the Bank’s harmonisation with other donors and success in first completing and then implementing the review of conditionality (see page 2). UK civil society groups had been pushing for additional funding to be linked to reform of the Bank’s governance structures and an independent assessment of the validity of the Bank’s policy scorecard.

The final IDA14 report has been circulated to executive directors for their approval. They will recommend to the board of governors that the paper be adopted at the spring meetings.