World Bank: U.S. Interests Supported, but Oversight Needed to Help Ensure
Improved Performance (Chapter Report, 09/26/96, GAO/NSIAD-96-212).
Pursuant to a congressional request, GAO evaluated the World Bank,
focusing on the: (1) Bank's role in enhancing the flow of private
investment capital into developing countries; (2) extent to which Bank
projects achieve their development objectives; (3) Bank's progress in
reforming its operations to improve effectiveness; and (4) extent to
which the Bank supports U.S. foreign policy goals.
GAO found that: (1) while the available data do not allow an analysis of
whether the Bank negatively distorts international capital flows, nearly
90 percent of private-sector representatives surveyed said that the Bank
enhances the environment for private investment in developing countries
by reducing risk; (2) Bank projects have had significant difficulty in
achieving their objectives, and the most successful projects have been
involved in building physical infrastructure; (3) the Bank is
undertaking efforts to systematically assess country performance and
target lending to countries that have made progress in project
implementation and market and policy reforms; (4) the Bank is also
trying to be more proactive in identifying and resolving problems during
project implementation; (5) the Bank often supports U.S. foreign policy
objectives, and serves as a leveraging mechanism for U.S. foreign
assistance funds; and (6) while compromise is sometimes necessary in any
multilateral environment, including the Bank, U.S. views on the overall
direction of the Bank's operations have generally prevailed.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: NSIAD-96-212
TITLE: World Bank: U.S. Interests Supported, but Oversight Needed
to Help Ensure Improved Performance
DATE: 09/26/96
SUBJECT: Bank management
Foreign loans
Lending institutions
International organizations
Economic policies
Foreign economic assistance
International economic relations
Economic growth
Developing countries
Foreign policies
IDENTIFIER: China
India
Kenya
Tanzania
Armenia
World Bank Next Steps Program
World Bank Country Assistance Strategy Program
World Bank Mid-Year Operational Work Program
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Cover
================================================================ COVER
Report to Congressional Requesters
September 1996
WORLD BANK - U.S. INTERESTS
SUPPORTED, BUT OVERSIGHT NEEDED TO
HELP ENSURE IMPROVED PERFORMANCE
GAO/NSIAD-96-212
World Bank
(711164)
Abbreviations
=============================================================== ABBREV
CAS - Country Assistance Strategy
CODE - Committee on Development Effectiveness
FIAS - World Bank Foreign Investment Advisory Service
GAO - General Accounting Office
IBRD - International Bank for Reconstruction and Development
IDA - International Development Association
IFC - International Finance Corporation
IMF - International Monetary Fund
MIGA - Multilateral Investment and Guarantee Agency
OED - Operations Evaluation Department
OPIC - Overseas Private Investment Corporation
USAID - U.S. Agency for International Development
Letter
=============================================================== LETTER
B-272937
September 26, 1996
The Honorable John Kasich
Chairman, House Committee on the Budget
House of Representatives
The Honorable James Leach
Chairman, House Committee on
Banking and Financial Services
House of Representatives
This report responds to your request that we undertake a review to
determine whether continued participation in the World Bank is in the
U.S. interest. To address this question, we assessed (1) the Bank's
role in enhancing the flow of international private investment
capital into developing countries, (2) the extent to which Bank
projects achieve their development objectives, (3) the Bank's
progress in reforming its operations to improve effectiveness, and
(4) the extent to which the Bank supports U.S. foreign policy goals.
We are sending copies of this report to the Secretaries of the
Treasury and of State; the Administrator, U.S. Agency for
International Development; the President of the World Bank; and other
interested parties. Copies will also be made available to others on
request.
This report was prepared under the direction of Benjamin F. Nelson
and Jayetta Z. Hecker, Director and Associate Director,
respectively, International Relations and Trade Issues. They can be
contacted on (202) 512-4128 if you or your staff have any questions
concerning this report. Other major contributors are listed in
appendix VII.
Henry L. Hinton Jr.
Assistant Comptroller General
EXECUTIVE SUMMARY
============================================================ Chapter 0
PURPOSE
---------------------------------------------------------- Chapter 0:1
With the end of the Cold War, some political and economic analysts
have questioned the underlying rationale for U.S. participation in
multilateral institutions such as the World Bank. The recent rapid
increase in private investment in developing countries (more than a
threefold increase since 1988) has raised questions about whether the
Bank works to enhance or inhibit this trend. Weaknesses in project
effectiveness have raised questions about the ability of the Bank's
programs to promote economic development. Finally, the Bank has had
difficulty demonstrating the impact of reforms designed to improve
its effectiveness.
Prompted by such concerns, the Chairmen of the House Committees on
the Budget and on Banking and Financial Services requested that GAO
undertake a review to determine whether continued participation in
the Bank is in the U.S. interest. To address this question, GAO
assessed (1) the Bank's role in enhancing the flow of international
private investment capital into developing countries, (2) the extent
to which Bank projects achieve their development objectives, (3) the
Bank's progress in reforming its operations to improve effectiveness,
and (4) the extent to which the Bank supports U.S. foreign policy
goals.
To conduct its assessment, GAO obtained access to Bank officials and
information through the Department of the Treasury, which has the
lead role within the executive branch regarding U.S. policy toward
the Bank, and through the staff of the U.S. member of the Bank's
Board of Executive Directors. GAO analyzed data and internal reports
on Bank operations, project performance, and management reforms. In
addition, GAO examined trend data on international private and public
sector financial flows to developing countries and obtained
information from international private investors on their experiences
with the Bank. GAO also discussed the Bank's role and performance
with officials from nongovernmental organizations, academics, and
foreign government agencies.
BACKGROUND
---------------------------------------------------------- Chapter 0:2
The purpose of the World Bank is to promote economic growth and the
development of market economies by providing finance on reasonable
terms to countries that have difficulty obtaining capital. Following
its initial efforts to reconstruct Europe after World War II, the
Bank expanded the scope of its activities to the rest of the world.
The Bank's development strategy has evolved to include emphasis on
poverty alleviation; economic adjustment; and, most recently, private
sector development. Implicit in Bank actions during most of its
history was the need to ensure the availability of capital for
countries that might otherwise turn to communism.
To achieve its goals, the Bank developed four major institutions:
the International Bank for Reconstruction and Development (IBRD), the
International Development Association (IDA), the International
Finance Corporation (IFC), and the Multilateral Investment Guarantee
Association (MIGA). IBRD and IDA make loans to developing country
governments, with IBRD lending at market-based terms and IDA lending
to the poorest countries on highly subsidized terms. IFC and MIGA
work directly with the private sector to spur investment in
developing countries. Between fiscal years 1993 and 1995, the United
States contributed an average of
$1.2 billion per year to support these institutions. In fiscal year
1996, the United States contributed $824 million to support the
Bank,\1 $700 million of which was directed to IDA.
--------------------
\1 This includes $35 million for the Global Environment Facility,
which is technically separate from the Bank.
RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3
Bank operations support U.S. economic and foreign policy goals and
leverage other donors' funds to do so. However, performance
weaknesses have limited the effectiveness of many of the Bank's
projects. The Bank has recognized many of its problems and has
developed a reform program that holds promise for improving projects'
effectiveness. However, it is too soon to assess whether the reform
program will result in better outcomes. The United States can, by
virtue of its leadership role, continue to influence Bank actions and
advance reform efforts to ensure that Bank projects make a greater
contribution to development in the future.
Through the Secretary of the Treasury and the U.S. Executive
Director, the United States influences the Bank to take actions
consistent with the U.S. post-Cold War foreign policy agenda. These
include providing assistance to countries making the transition from
communism to market economies and financing economic reconstruction
in areas of foreign policy importance to the United States (e.g.,
Bosnia, Haiti, and the West Bank). The Bank promotes economic
development consistent with U.S. interests. It provides financing
for countries that have little access to private capital. It also
works to expand opportunities for private investment in developing
countries by reducing the associated investment risk and encouraging
banking and legal system reforms. Such Bank services generally do
not displace the private sector.
Although the Bank's goals are generally in accord with U.S. foreign
policy interests, the institution has performance problems that have
proven difficult to address. More than a third of the IDA and IBRD
projects most recently evaluated by the Bank itself were rated
"unsatisfactory" (that is, they had not met most of their major goals
or achieved acceptable contributions to development), and over half
of the projects in sub-Saharan Africa were rated unsatisfactory. In
terms of achieving project objectives, the Bank's rate of success is
much higher in meeting physical objectives (e.g., completing
buildings and administering social services) than in improving market
and policy conditions for economic growth.
The Bank has undertaken a reform program that holds promise for
improving project effectiveness. For example, the Bank is taking
steps to reduce funding to countries that do not adopt
growth-oriented market and policy conditions and to increase funding
to those countries that do. Although institutional change is still
ongoing, clear improvements in project design and portfolio
management are not yet evident. Continued monitoring and reporting
by Treasury on the progress of these reforms, as GAO recommends, is
important to help ensure that the reforms improve performance.
PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4
WORLD BANK'S IMPACT ON
PRIVATE INVESTMENT IN
DEVELOPING COUNTRIES
-------------------------------------------------------- Chapter 0:4.1
While concerns have been raised that the Bank negatively distorts
international capital flows and developing country decision-making,
the available aggregate data does not permit an analysis of the
distortion directly attributable to Bank programs.\2 However, GAO
obtained 65 private sector firms' views on whether Bank programs have
displaced private investment and whether the Bank's efforts have
enhanced the environment for private investment in developing
countries.
Nearly 90 percent of the private sector representatives we spoke with
said that Bank Group operations serve to enhance the environment for
private investment in developing countries by reducing the risks
associated with such investments. For example, MIGA's political risk
insurance program helps promote the flow of foreign direct investment
by insuring investments against political and other noncommercial
risks. IFC loans to private sector borrowers act as incentives for
businesses to become involved in new projects or markets. IBRD's
guarantee programs, thus far limited in use, help address private
sector concerns about the ability of borrowers to repay their
obligations. The Bank's advisory services help borrowing countries
strengthen their regulatory and legal systems.
According to firms GAO interviewed, the World Bank has displaced
private sources of capital only in a few developing country markets
where private sector interest had become well established. These
firms were concerned primarily about IFC, which in certain cases
displaced private sector firms in particular projects. IFC is
working to address these concerns by reducing its presence in
contested markets and has revised its guidelines to better clarify
the importance of not competing with private investment. Little or
no concern about displacement was raised regarding the Bank Group's
other elements, which tend to operate in countries and sectors where
conditions are not conducive to private international investment. In
fact, despite the rapid rise in the flow of private funds to the
developing countries as a whole, less than 8 percent of foreign
resources flowing into countries that borrow from IDA comes from the
private sector.
--------------------
\2 Public funding can positively or negatively affect or distort the
underlying variables of a given market (e.g., prices and quantities
demanded and supplied) when compared to a market that does not have
public funding.
DEVELOPMENT EFFECTIVENESS OF
WORLD BANK PROJECTS
-------------------------------------------------------- Chapter 0:4.2
It is extremely difficult to measure the impact of Bank activities on
borrowing countries' overall level of development. However, the Bank
collects data on IDA and IBRD projects' effectiveness. These data
show that the projects have had significant difficulty in achieving
their objectives. About 36 percent of the most recently completed
projects, evaluated by the Bank in 1993 and 1994, have been judged
unsatisfactory. Though Bank projects are inherently risky and some
unsatisfactory results are to be expected, the Bank's President
agreed that this performance level needed to be raised.
The Bank projects have had their greatest rate of success in building
physical infrastructure. The record of Bank projects in achieving
goals in other critical areas, such as improving market and policy
conditions, has been weaker: only about one-third of Bank projects
with such objectives have substantially achieved them.
The Bank and borrowing countries share responsibility for performance
problems. A major 1992 report on portfolio performance commissioned
by the Bank cited project design problems, unfavorable country
conditions, and a volatile international economic environment as
major factors. A recent Bank study also indicates that greater use
of economic and sectoral analyses prior to lending funds might have
led to better results in many cases. According to Bank officials,
projects have also become increasingly demanding, complex, and risky,
making it more difficult to achieve development objectives.
BANK REFORM EFFORTS
-------------------------------------------------------- Chapter 0:4.3
The Bank has implemented a reform program aimed at improving its
portfolio performance. Many of these efforts are in their early
stages, and their final impact may not be seen for several years.
However, some indicators are available to evaluate the preliminary
progress of these reform efforts, and they show mixed results thus
far.
A key component of the reform effort has been to systematically
assess country performance and direct lending to countries that have
demonstrated progress in project implementation and in market and
policy reform. Recent data on IDA lending show that an increased
proportion of loans has been directed to top-performing countries and
that allocations for poorer performers have been reduced.
Improvement of project design, or "quality at entry," has been
another major focus of reform. Recent Bank studies show that some
small improvements have been made in the quality of new projects but
that significant project design problems remain. According to one
study, nearly 40 percent of recently approved projects have been
based on less than acceptable economic analyses.
The Bank has also worked to improve project management by being more
proactive in identifying and attempting to resolve problems during
project implementation. Results in this area have been mixed. The
Bank has been successful at resolving long-standing problem projects
and at more realistically assessing problems. Overall, however, the
percentage of problem projects has not decreased since 1992.
Furthermore, implementation problems are often not detected early
enough in the project cycle, and the results of increased efforts to
review and restructure projects have been inconclusive.
Other reform efforts appear promising, though GAO could not measure
the extent of these reforms or their impact. They include greater
emphasis on policy and market reform objectives in projects,
increased use of nonlending services, and more focused Bank
management attention to reforms. The Bank's greater emphasis on
policy and market reforms, in particular, may increase the potential
for Bank projects to positively impact development in borrowing
countries. However, since these objectives are often difficult to
achieve, increased emphasis in this area may impede the Bank's
ability to raise the portion of its projects rated as satisfactory.
U.S. FOREIGN POLICY
CONSIDERATIONS
-------------------------------------------------------- Chapter 0:4.4
The United States has played a leading role in shaping the Bank's
agenda, and Bank projects often support U.S. foreign policy goals.
For example, the Bank is providing resources to assist in the
transition of central Europe and the countries of the former Soviet
Union from communist to market-based systems. The Bank has also
directed significant resources to crisis areas where the United
States has strong interests, such as Bosnia, Haiti, and the West Bank
and Gaza. Compromise is sometimes necessary in the Bank as in any
multilateral organization. For example, the United States favored
immediate graduation of China from eligibility for IDA credits but
agreed that new IDA lending to this country should end in 1999 after
other members, particularly Japan, opposed the U.S. position.
However, insofar as the United States can ensure that Bank projects
support U.S. foreign policy goals, U.S. contributions are
multiplied many times over by those of other member countries.
RECOMMENDATION
---------------------------------------------------------- Chapter 0:5
The benefits of U.S. participation in the Bank are limited by
problems with the effectiveness of Bank projects. Through its
leadership, the United States is positioned to ensure that the Bank
reforms continue to progress and have a positive impact on
development effectiveness.
To ensure that the Bank reforms have the desired impact, GAO
recommends that the Secretary of the Treasury monitor and
periodically report to the Congress measurable indicators of
progress, such as the extent to which (1) the Bank allocates
financing to those countries that make Bank-advocated policy and
market reforms, (2) projects substantially achieve policy and market
reform objectives, (3) project design problems decrease, and (4)
implementation problems are identified and resolved early in the
project cycle. If the indicators do not show satisfactory progress,
the Secretary should report on the actions being taken by the
Treasury to improve progress.
AGENCY COMMENTS AND GAO'S
RESPONSE
---------------------------------------------------------- Chapter 0:6
GAO received comments on a draft of this report from the Department
of the Treasury and, through it, the World Bank; the Department of
State; and the Agency for International Development. These comments
are reprinted in appendixes III-VI.
Treasury agreed with many of the report's basic findings and
conclusions, stating that they tracked well with its own views and
with major positions taken by successive U.S. administrations. In
addition, Treasury supported GAO's recommendation that Treasury
monitor and periodically report to the Congress on Bank progress in
improving project quality and effectiveness. However, Treasury
expressed concern that GAO's analysis did not fully reflect the
impact of ongoing reforms on Bank operations.
The Bank disagreed with many of the report's findings and criticized
its "exclusive reliance" on quantifiable indicators of project
effectiveness. The Bank contended that GAO's failure to evaluate the
entire scope of the Bank's operations, including policy dialogue and
other activities undertaken outside the framework of lending
projects, prevented GAO from presenting a balanced view of the Bank's
operations and effectiveness. The Bank also commented that GAO did
not give the Bank adequate credit for the progress it has made in
implementing reforms. In addition to these overall comments,
Treasury and the Bank offered clarifications, technical corrections,
and updated information, which GAO incorporated throughout the report
as appropriate.
The State Department and the U.S. Agency for International
Development highlighted the important role that the World Bank plays
in development as well as in the furthering of U.S. foreign policy
interests. The State Department also commented that the report did
not fully acknowledge the Bank's role in promoting market-oriented
reform in developing countries.
GAO agrees with the Bank that the effectiveness of projects financed
by IDA and IBRD is only a partial measure of the overall impact of
the Bank's efforts. We report performance data for these projects in
detail because they capture the effectiveness of a large portion of
the Bank's activities; indeed, IDA and IBRD lending represented 86
percent of the Bank's outlays in fiscal year 1995. Similar data is
not available to capture the overall effectiveness of the Bank's
other activities, and GAO did not consider anecdotal information to
be a satisfactory substitute.
In reaching its overall conclusions, however, GAO acknowledges the
breadth of the Bank's operations, as well as its shortfalls in
performance. The report states that the Bank is a focal point for
official efforts aimed at facilitating economic development; that in
addition to functioning as a source of investment capital it provides
a broad range of nonlending services, such as advice on legal,
regulatory, and policy reform; and that the Bank is a key player in
the transition to market economies.
GAO believes that the Bank's reform agenda addresses key performance
problems and holds promise for improving project effectiveness.
However, progress in some areas has yet to be demonstrated, and it is
too soon to assess actual results. GAO believes this report provides
a good baseline for the Congress and the executive branch to use in
evaluating the Bank's implementation of its reform program.
Continued monitoring and reporting by Treasury of the progress of
these reforms, as GAO recommends, is important to help ensure that
the reforms improve performance.
INTRODUCTION
============================================================ Chapter 1
During the closing days of World War II, the United States and its
allies created the original "World Bank"--the International Bank for
Reconstruction and Development (IBRD)--as well as the International
Monetary Fund and the General Agreement on Tariffs and Trade--to
provide the underpinnings for a new international economic order.\1
The economic and political leaders of the time developed these
multilateral mechanisms to prevent a return to the destructive trade
and investment isolationism of the 1930s. Among other concerns,
these leaders feared that private capital markets would not provide
the investment capital needed to stimulate growth, raise living
standards, and promote political stability in war-torn and
underdeveloped countries. Creation of a new public sector
institution was deemed necessary to supplement private lending and
investment in these countries. By guaranteeing the financial
integrity of the institution, the member countries would enable it to
borrow private capital on the open market to lend to needy countries
at reasonable rates.
To expand the potential impact of IBRD, the member countries
subsequently created three affiliated institutions: the
International Finance Corporation (IFC) and the Multilateral
Investment Guarantee Agency (MIGA),\2 created specifically to
encourage private investment in developing countries, and the
International Development Association (IDA), which lends to the
poorest countries in the world at concessional rates.
Operationally, IBRD and IDA are one organization. Similar procedures
are followed by the Bank's core staff to generate, administer, and
evaluate IBRD and IDA loans. IFC and MIGA have independent staffs
and procedures.\3 Collectively, these four institutions are known as
the World Bank Group.\4 Figure 1.1 and table 1.1 provide additional
information on each institution.
Figure 1.1: World Bank Group
Institutions
(See figure in printed
edition.)
\a IBRD and IDA can also lend to private or public bodies whose
national governments guarantee repayment.
\b As of June 1995, eligible countries ranged from Argentina (1994
income per capita of over $8,000) to Indonesia (1994 income per
capita of under $800).
Table 1.1
Assistance Provided by Bank Group
Institutions in Fiscal Year 1995
(U.S. dollars in billions)
Value of
Type of assistance assistance
-------------------------------------------------------- ------------
IBRD disbursements $12.67
IDA disbursements 5.70
IFC loans and equity investments (disbursements) 1.81
MIGA guarantees\a 0.67
Other nonlending services\b 0.54
----------------------------------------------------------------------
Note: Contributions made to projects by other donor agencies,
borrowing country governments, and the private sector are not
included.
\a Total amount of coverage issued.
\b Includes economic and sector work, research, policy work, trust
funds, and development training.
Source: Analysis of World Bank data.
The Bank is the world's single largest official source of investment
capital for developing countries. While data published by the
Organization for Economic Cooperation and Development show that other
donors frequently provide more resources in individual countries, the
Bank is generally acknowledged as a focal point in the world
community's official efforts to facilitate economic growth and
development in poor countries.
As explained in figure 1.1, three of the four Bank Group institutions
do not rely primarily on annual donor contributions for support. The
one exception is IDA, which has absorbed about 88 percent of the
approximately $8 billion appropriated by the Congress for the Bank
Group in fiscal years 1990-96. Table 1.2 provides detailed
information on annual appropriations for Bank Group institutions
during the 1990s.\5
Table 1.2
U.S. Appropriations to Support Bank
Group Institutions
(U.S. dollars in millions)
Bank Group institutions 1990 1991 1992 1993 1994 1995 1996
------------------------ ------ ------ ------ ------ ------ ------ ------
IDA $961 $1,032 $1,044 $1,024 $1,024 $1,175 $700
IBRD 50 111 69 62 28 23 28
IFC 75 40 40 36 36 69 61
MIGA 0 0 0 0 0 0 0
GEF\a 0 0 0 30 30 90 35
================================================================================
Total $1,086 $1,183 $1,153 $1,152 $1,152 $1,357 $824
--------------------------------------------------------------------------------
\a The GEF (Global Environment Facility) is not a Bank Group
institution. It is a financial mechanism, implemented by the Bank in
partnership with the United Nations Development and Environment
Programs, that provides grant and concessional funds for projects
intended to protect the global environment. U.S. contributions to
GEF are included in annual appropriations for the international
financial institutions.
--------------------
\1 In 1994 the members of the General Agreement on Tariffs and Trade
replaced that agreement's organizational structure with the new World
Trade Organization.
\2 Membership in other Bank Group institutions is open to IBRD
members. As of June 1995, IBRD had 178 member countries, while IDA
had 158 members, IFC 165, and MIGA 128.
\3 IDA pays IBRD a fee for its share of common administrative
expenses. Similarly, IFC and MIGA pay IBRD for administrative
services that IBRD provides to them.
\4 The Bank Group also includes the International Center for the
Settlement of Investment Disputes. This organization was not
included within the scope of our review because its quasijudicial
functions are fundamentally different from those of the other four
institutions.
\5 These figures do not include U.S. support for IBRD in the form of
"callable capital"--a contingent liability created to back Bank
borrowings on world financial markets. As of June 30, 1995, the
total callable capital committed to support IBRD market operations
amounts to over $165 billion, with the U.S. share amounting to about
$29 billion. The Bank may only call upon these member country
guarantees in the event that it encounters such severe financial
difficulty that it is unable to pay its own creditors. This has not
occurred.
THE UNITED STATES HAS EXERCISED
SUBSTANTIAL INFLUENCE OVER BANK
OPERATIONS
---------------------------------------------------------- Chapter 1:1
As the largest provider of financial support to the Bank and a
recognized leader in the international community, the United States
has exercised leadership within the Bank Group since its creation.
The United States proposed the basic design of IBRD and provided much
of the impetus for the subsequent creation of IDA. Much of these
institutions' management and staff comprise Americans or foreign
nationals educated in U.S. universities, and the Bank President has
traditionally been a U.S. citizen.\6
Support for the Bank has been the subject of periodic controversy in
the United States, and the Congress has enacted a number of measures
directing the U.S. Executive Director to vote against certain
categories of loans (e.g., for countries that have expropriated U.S.
property without compensation).\7 Nonetheless, the Bank continued to
receive support from the executive branch and the Congress through
the Cold War era. The need to continue U.S. participation was
challenged during the early 1980s. Even then, however, a
comprehensive executive branch review of the World Bank and the
regional development banks concluded that these banks continued to
serve U.S. foreign policy interests and that the United States
should, with some qualifications, continue to support them.\8 (App.
I explains how Bank projects are developed and approved.)
In the years immediately following World War II, the U.S. government
and financial markets were the primary sources of capital for the
Bank. The U.S. contribution to support the Bank has declined
substantially over the years as other member countries have increased
their contributions and the Bank's financial dealings have
diversified. For example, the U.S. share of donor contributions to
IDA declined from about 42 percent when the association was formed to
about 21 percent during the first half of the 1990s. Nonetheless, as
of June 30, 1995, the United States still held the greatest share of
the votes in each Bank Group institution's Board of Executive
Directors. This preserves the U.S. leadership position and allows
the United States to keep the Bank's headquarters in Washington, D.C.
The United States retains sufficient votes to veto changes in IBRD's
basic articles of agreement. Table 1.3 lists the percentage of
voting share the United States has in each Bank Group institution,
along with the relative voting share of the four other largest
donors.
Table 1.3
Voting Share in Bank Group Institutions
as Percentage of Total Votes (as of June
1995)
Donor IBRD IDA IFC MIGA
-------------------------------------- ------ ------ ------ ------
United States 16.98 15.34 21.96 17.39
Japan 6.24 10.51 7.38 4.43
Germany 4.82 6.90 5.57 4.41
France 4.62 4.13 5.23 4.23
United Kingdom 4.62 5.08 5.23 4.23
----------------------------------------------------------------------
--------------------
\6 U.S. nationals made up more than one-quarter of the Bank Group's
staff as of September 1994.
\7 The Board of Executive Directors considers and decides on specific
project proposals presented by the President of the Bank and also
decides policy issues that guide the Bank's general operations.
Though appointed by the President of the United States with the
advice and consent of the Senate, the U.S. Executive Director is an
official of the World Bank.
\8 United States Participation in the Multilateral Development Banks
in the 1980s, Department of the Treasury, Washington D.C. (Feb.
1982).
POST-COLD WAR EVALUATION OF
U.S. FOREIGN OPERATIONS
INCLUDES CHALLENGES TO
CONTINUED SUPPORT FOR THE BANK
---------------------------------------------------------- Chapter 1:2
U.S. policymakers have supported participation in the World Bank as
a means for advancing U.S. humanitarian, economic, and security
interests through alleviating poverty and encouraging economic growth
and political stability in developing countries. However, much of
the impetus behind U.S. participation in the Bank during the Cold
War era was derived from the perceived utility of the Bank in
containing communist expansionism in the developing world. One Bank
official commented, for example, that because of U.S. concern about
communist insurgency in the area, the Bank remained active in several
sub-Saharan African countries long after the corrupt nature of these
countries' governments became evident.
The fall of the Berlin Wall in 1989 and the subsequent collapse of
the Soviet bloc have dramatically altered the international status
quo. In the post-Cold War environment, the need to actively oppose
communist expansionism no longer serves as an underlying rationale
for U.S. foreign policy activities. Virtually all traditional U.S.
foreign policy assumptions and instrumentalities, including support
for the Bank, have come under increased scrutiny. Mounting
government budget deficits in the United States (and other donor
countries) have lent added urgency to scrutiny regarding the
effectiveness of foreign operations spending.
A variety of critics have opposed the continuation of traditional
levels of U.S. support for the Bank, stressing that the Bank is not
an effective agent for economic development. The critics argue that,
good intentions aside, the Bank has not effectively facilitated real
economic growth in the developing world or made progress toward
reducing poverty. They point out, for example, that the number of
impoverished persons in the world continues to rise despite the
efforts of the Bank and other multilateral and bilateral assistance
agencies. Some of the harshest criticism of Bank intervention has
been leveled at the Bank's activities in sub-Saharan Africa, where
the gross domestic product per capita continues to decline. Some
critics argue that the availability of Bank financing permits
developing countries to avoid tough choices that, if made, would lead
to a better investment climate and, hence, increased private
investment. Some critics point out that the Bank's own data show
significant shortfalls in the ability of IBRD and IDA to achieve
their objectives. In fact, as shown in figure 1.2, the Bank's
evaluation results showed a significant decline during the 1980s in
the portion of IBRD/IDA projects achieving satisfactory results.
Figure 1.2: Projects With
Satisfactory Outcomes by Year
of Evaluation (1974-94)
(See figure in printed
edition.)
Note: For a project to be rated satisfactory, its goals must be
consistent with the Bank's country and sectoral assistance strategies
and it must have achieved, or be expected to achieve, most of its
major goals in a timely and cost-efficient manner.
Source: World Bank, Operations Evaluation Department (OED).
Concern about the performance of the Bank's portfolio led the
President of the Bank to establish a Portfolio Management Task Force
in February 1992. The Task Force's report concluded that the Bank
needed to adopt a comprehensive plan of action to remedy problems
with project design, management, and implementation. It emphasized
that a contributing factor was the Bank staff's preoccupation with
getting loan funds committed rather than with effectively managing
existing projects. In June 1993 the Bank adopted a plan of action to
remedy the problems identified by the Task Force. We reported on two
occasions on the Bank's progress toward implementing these reforms.\9
--------------------
\9 Multilateral Development: Status of World Bank Reforms
(GAO/NSIAD-94-190BR, June 6, 1994) and Multilateral Development:
World Bank Reforms on Schedule but Difficult Work Remains
(GAO/NSIAD-95-131BR, Apr. 5, 1995). Our 1994 report includes a
complete list of the actions in the Bank's reform plan.
OBJECTIVES, SCOPE, AND
METHODOLOGY
---------------------------------------------------------- Chapter 1:3
Our review of the World Bank was requested by the Chairmen of the
House Committees on the Budget and on Banking and Financial Services.
On the basis of our preliminary examination of the issues, the
results of an expert panel on the Bank that we convened in September
1995, and discussion with the staffs of the requesters' committees,
we focused our review on
-- the Bank's role in enhancing the flow of international private
investment capital into developing countries,
-- the extent to which Bank projects achieve their development
objectives,
-- the Bank's progress in reforming its operations to improve
effectiveness, and
-- the extent to which Bank activities are aligned with U.S.
foreign policy goals.
To obtain official U.S. views on these issues, we met with
representatives of the Department of the Treasury, which has the lead
role within the executive branch regarding U.S. policy toward the
Bank,\10 and with officials from the Department of State and the U.S.
Agency for International Development. We also obtained the views of
academic experts and representatives of nongovernmental organizations
on relevant topics.
As an agency of the United States, we have no direct authority to
review the operations of multilateral institutions such as the World
Bank. However, we obtained broad access to Bank officials (including
the President) and information through the staff of the U.S. member
of the Bank's Board of Executive Directors. We also met with a
number of other Executive Directors to broaden our understanding of
member country views on Bank operations. We met with appropriate
Bank officials, including representatives of IBRD, IDA, IFC, and
MIGA, with a concentration on those offices that are particularly
concerned with private sector development, such as the
Vice-Presidency for Finance and Private Sector Development, the
International Economics Department, and the Foreign Investment
Advisory Service.
To assist us in assessing the Bank's role in providing international
financial flows to developing countries, we examined data on the
composition of these flows compiled by the Bank, the International
Monetary Fund (IMF), and the Organization for Economic Cooperation
and Development. To better understand the relationship between Bank
operations and private sector flows, we interviewed 65
representatives of major commercial banks, investment houses,
multinational corporations, and investment rating services that do
business in developing countries and are familiar with the Bank's
operations in these countries. These firms are listed in appendix
II. To ensure that we obtained a broad perspective in this area, we
interviewed representatives of such firms in four of the world's most
important international financial centers--New York, London, Tokyo,
and Hong Kong--and in Washington, D.C., Los Angeles, and San
Francisco; and national financial centers in the developing countries
that we visited. We particularly sought these companies' views on
the Bank's role, if any, in encouraging or discouraging the flow of
foreign investment capital into developing countries.
To better understand the nature and impact of Bank interventions in
developing countries and the impact of the Bank's recent reforms, we
examined Bank operations in five countries: China, India, Kenya,
Tanzania, and Armenia. While China, India, and Armenia are also
eligible to borrow from IBRD (and are, therefore, known within the
Bank as blend countries), all five of these countries are eligible
for IDA assistance. We concentrated on IDA recipients because IDA
absorbs most of the funds provided to the Bank Group by the United
States and is the object of most of the discussion of reducing U.S.
support to the Bank.
We selected Kenya and Tanzania because some of the sharpest criticism
has been directed at the Bank's operations in sub-Saharan Africa. We
selected Armenia, formerly a part of the Soviet Union, to provide us
with a better understanding of the utility of the Bank in
facilitating a peaceful transition toward democracy and open markets
among former Eastern bloc countries. We included the two largest
blend countries for a number of reasons. China and India absorb a
large portion of the Bank's annual lending. As of mid-1995, the two
countries combined had received more than one-third of the IDA
credits ever granted and about 16 percent of all IBRD loans. The two
countries continue to absorb a significant share of IDA's
concessional credits (over a billion and a half dollars in new
commitments in fiscal year 1995) despite their recent success in
attracting international private investment. Some critics have
proposed that these countries, particularly China, be graduated from
eligibility for IDA credits because of their increased access to
international capital markets. Data on the portion of IDA, IBRD, and
IFC resources directed to the countries we visited, as well as the
portion of current foreign private investment in developing countries
going to these countries, are displayed in table 1.4.
Table 1.4
Percentage of Bank and Private Sector
Resources Directed to Each Country We
Visited (weighted averages for 1993-94)
IFC loan/
equity
disburseme Net
IBRD nts foreign
IDA gross gross (average private
disburseme disburseme for sector
Country nts nts 1990-95) investment
---------------------- ---------- ---------- ---------- ----------
China 14.2 9.7 0.8 29.6
India 15.0 8.1 13.3 3.1
Kenya 3.0 0 0.3 -0.1
Tanzania 3.0 0 0.1 0
Armenia 0 0 0 0
======================================================================
Total 35.2 17.8 14.4 32.7
----------------------------------------------------------------------
Note: Zeros indicate less than 0.05 percent. Totals entries may not
add due to rounding.
Within the countries we visited, we discussed Bank operations with
Bank field staff, U.S. embassy officials, officials of relevant
national and local government bodies (e.g., ministries of finance and
agencies using Bank funds in their operations), local representatives
of the foreign assistance agencies of other major donor countries,
concerned nongovernmental organizations, and the local business
community. In each country, we visited several sites where
Bank-funded operations were underway and spoke with project
administrators and intended beneficiaries.
To assess the development effectiveness of IDA and IBRD projects, we
analyzed numerous studies and annual reports from the Operations
Policy Department, which monitors the performance of ongoing
projects, and the Operations Evaluation Department, which evaluates
completed projects.
In several cases we requested additional data from the Operations
Evaluation Department's database on evaluation results. The Bank
declined to provide us with much of the data we requested, citing its
disclosure policy and concerns about confidentiality. The lack of
detailed data significantly limited the extent of our analysis. We
interviewed several OED evaluators and reviewed their reports to
become familiar with their methodology and ensure that evaluations
are conducted with an appropriate degree of independence and subject
area expertise.
To evaluate the Bank's reform efforts, we again obtained relevant
studies from the Operations Policy and OEDs. The former is
responsible for overseeing implementation of the reforms, while the
latter has evaluated many of those efforts and their results. We
also reviewed the report of a working group convened to study the
Bank's nonlending services. We discussed many of these studies with
representatives of the Operations Policy and OEDs to ensure that our
interpretation of the results was appropriate.
We performed our review from October 1995 to June 1996 in accordance
with generally accepted government auditing standards.
--------------------
\10 By executive order, the President has delegated to the Secretary
of the Treasury, in consultation with the National Advisory Council
on International Monetary and Financial Policies, his authority under
law to instruct the U.S. representatives at the international
financial institutions. In practice, Treasury takes the lead in
working with the staff of the U.S. Executive Director's office on
developing and implementing U.S. policy toward the Bank.
WORLD BANK'S IMPACT ON PRIVATE
FOREIGN INVESTMENT IN DEVELOPING
COUNTRIES
============================================================ Chapter 2
The recent expansion of private foreign investment in developing
countries has renewed interest in the relevance of the Bank to
economic development and in the relationship between the Bank and
private capital flows. Critics have asserted that Bank involvement
in markets inhibits private investment. However, supporters of the
Bank claim that its efforts are enhancing the environment for private
sector investment. Private sector firms we interviewed said that,
with the exception of a limited number of markets that have
substantial private sector activity, the Bank did not appear to
displace the flow of private capital. In fact, these firms cited the
Bank's guarantee programs and efforts to promote legal and regulatory
reform as important elements in attracting private sector investment.
RAPID GROWTH IN PRIVATE CAPITAL
INVESTMENT RAISES QUESTIONS
ABOUT THE RELEVANCE OF THE BANK
---------------------------------------------------------- Chapter 2:1
Since 1991, net resource flows from the private sector to developing
countries have grown rapidly and have substantially exceeded the
amount provided by the IBRD, IDA, and IFC (see fig. 2.1).\1
Figure 2.1: Comparison of Bank
and Private Sector Net Resource
Flows to Developing Countries
(fiscal years 1975-94)
(See figure in printed
edition.)
Source: Compiled from 1996 World Bank Debt Tables.
Net resource flows from the private sector accounted for nearly
three-quarters of the $194 billion invested in developing countries
in 1994 (see fig. 2.2).
Figure 2.2: Composition of Net
Foreign Resource Flows to All
Developing Countries (fiscal
year 1994)
(See figure in printed
edition.)
Note: World Bank category includes IBRD, IDA, and IFC.
Source: Compiled from 1996 World Bank Debt Tables.
The U.S. government has long promoted the idea that the private
sector should have an important role in development. The recent
growth in private capital is clearly consistent with that goal. As
private sector flows have dramatically increased, the share of net
resource flows attributed to the Bank has rapidly fallen and only
accounted for about 3.3 percent in 1994, down from about 6.8 percent
in 1991.
This rapid fall in the Bank's share of net resource flows has raised
some concern about the Bank's continued importance in development.
However, this recent rise in private capital flows has not been
experienced by lower income developing countries. As shown in figure
2.3 private capital represented less than 8 percent of total net
resources flowing to IDA-only countries in 1994. The private
sector's share is lower than the World Bank's share and much lower
than the share from bilateral donors.
Figure 2.3: Composition of Net
Foreign Resource Flows to
IDA-Only Countries (fiscal year
1994)
(See figure in printed
edition.)
Note: World Bank category includes IBRD, IDA, and IFC.
Source: Compiled from 1996 World Bank Debt Tables.
Somewhat paradoxically, concerns have also arisen as to whether the
Bank's involvement in developing countries inhibits the flow of
private capital to those countries. This issue and concerns
regarding the continued importance of the Bank are subsets of a
larger discussion on the "distortionary" impact of Bank programs and
policies.
--------------------
\1 The financial data presented in this report were obtained from the
World Bank, are based upon net foreign resource flows, and include
World Bank-eligible borrowers only. "Net foreign resource flows" are
the sum of net financial flows on long-term debt, including IMF
loans, plus net foreign direct investment, portfolio equity flows,
official grants, and technical cooperation grants. As of June 30,
1995, the World Bank listed 140 countries as eligible for IBRD loans
and/or IDA credits. Of these, 63 low-income countries were eligible
only for IDA credits. Sixty-two middle-income countries (1994 per
capita gross national product between $790 and $8,060) were eligible
only for IBRD near-market rate loans. Fifteen countries are eligible
for a blend of IBRD and IDA funds with the four highest income
countries being small island economies. These data exclude countries
such as South Korea, Portugal, and Singapore, which have already
graduated from eligibility for World Bank financing. While these
countries may continue to receive disbursements from the Bank Group,
they are no longer eligible for new financing.
MARKET DISTORTION IS
DIFFICULT TO MEASURE
-------------------------------------------------------- Chapter 2:1.1
The World Bank states that it acts as a catalyst for private sector
investment by covering risks that the market is not willing to bear,
thus reducing overall financing costs and aiding development. Bank
officials also point out that, at least in recent years, the Bank has
worked with governments to create better investment climates that
will encourage the growth of markets in general and private foreign
investment in particular.
Critics counter that these public finance services, provided at
subsidized rates, displace companies that are subject to market
rates, distort market signals, and inhibit business development.
Also, the presence of lower cost public money may enable recipient
governments to delay necessary market reforms, further inhibiting the
growth of the private sector.
Public funding affects or distorts the underlying variables of a
given market (e.g., prices and quantities demanded and supplied) when
compared to a market that does not have public funding. This
distortion can have either positive or negative consequences
depending on the goals and effectiveness of the intended public
policy, the initial conditions of a given market, the occurrence of
any unintended consequences, and the impact of unforeseen external
events, such as the subsequent collapse of commodity prices or the
worsening of civil discord. This basic principle applies to the
programs supported by the World Bank. However, measuring the impact
of public funding can be quite speculative. Since public financing
is available to developing countries from a wide variety of sources,
both domestic and foreign (multilateral and bilateral), it is
extremely difficult to establish the conditions that would have
existed in the absence of public funding or to assess the amount of
distortion directly attributable to the World Bank. The available
aggregate data do not permit such an analysis, and thus we cannot
establish a causal link between the Bank's efforts and the success or
failure of a particular country's development effort.
In lieu of such analysis, we obtained 65 private sector firms' views
regarding their experiences with the World Bank and with private
investment in developing countries.\2
Specifically, we asked these firms whether Bank policies and programs
interfered with or displaced their investment in developing
countries. We also explored the views of these private firms on the
effectiveness of Bank efforts to enhance the environment for private
sector investment.
--------------------
\2 See appendix II for a list of the 65 firms we visited. The firms
came from a total of 47 companies in 12 different locations across 8
different countries. The reason that the number of firms exceeds the
number of companies is that we spoke with representatives of 10 of
these companies in 2 or more locations. The responses of these
duplicate companies often varied across location, due to differing
experience in investment and with the World Bank. Of our total of 65
firms, 58 were directly engaged in private investment, while 7 worked
to support it. In our analyses on the frequency of displacement and
enhancement, we used only the data from the 58 firms engaged in
investment.
CONCERN ABOUT DISPLACEMENT IS
CONFINED TO A LIMITED NUMBER OF
IFC MARKETS
---------------------------------------------------------- Chapter 2:2
According to the firms we interviewed, the World Bank inhibited
efforts to invest in a limited number of developing country markets.
Their concern has been mostly with the activities of IFC, which is
taking steps to address this issue. Few concerns were raised
regarding the other Bank Group institutions, which tend to operate in
countries where conditions are not yet favorable to international
investment or in sectors of little interest to the private sector.
IFC DISPLACEMENT IDENTIFIED
AS A PROBLEM BY SOME FIRMS
-------------------------------------------------------- Chapter 2:2.1
More than one-quarter of the private sector officials we spoke with
cited instances in which IFC's presence conflicted with their
participation in a given project. These instances occurred in
commercially viable sectors, including pulp and paper, oil and gas,
power generation, and telecommunications, where private firms were
increasing their level of participation. Some private sector
officials commented that IFC regularly takes equity positions in
projects they are considering investing in. Such involvement acts as
a disincentive for their firms' participation because they either
prefer not to share equity or perceive that IFC exerts more influence
than merited by its financial position in the project.
We were also told that IFC's nonlending services (e.g., advisory
services) have displaced commercial and investment banks that wanted
to provide these services for development projects. A former U.S.
Executive Director told us that during his tenure, he heard
complaints from private sector officials that IFC competed with
private companies in contracting for advisory services. Some
business officials told us that IFC encourages borrowing entities to
use IFC nonlending services or to have IFC review previously
completed services, even when private partners do not see the need.
Several commercial bank officials in Hong Kong and Japan also noted
that IFC displaces the private sector by arranging financing, a
service they would like to provide.
Private sector officials provided several examples in which IFC
displacement occurred in specific markets. One commercial bank
official described a situation in which IFC displaced a small
investment firm where he was formerly employed. The firm, which
helped create local capital markets, had an opportunity to invest in
a single-family housing project in a suburb of Jakarta, Indonesia.
His firm was asked by local businessmen to participate as an equity
holder and provide a medium-term loan for the project. Subsequently,
IFC became involved in the project, offered a lower interest rate for
the same services, and edged out the small firm.\3 The commercial
bank official said that he doubted that IFC should have been involved
in the project because it already had sufficient commercial interest.
In another instance, a commercial bank official told us that his bank
wanted to arrange financing for a telecommunications project in
Indonesia but lost out to the IFC. He said that the project's
sponsors selected IFC to arrange financing for the project without
going through a bidding process. He believed that the IFC typically
obtained information about projects earlier than commercial banks,
allowing it to outpace commercial banks that want to arrange
financing.
Problems with IFC stem, to some extent, from its somewhat
contradictory mandate. According to a Managing Director of the Bank,
IFC is supposed to achieve two goals: make profits and have a
developmental impact (that is, catalyze investment where the private
sector would otherwise be unwilling to go). He told us that Bank
management had received complaints from World Bank board members that
IFC is excessively oriented toward earning profits. IFC's Executive
Vice President emphasized that IFC does not seek to maximize profit
but instead to achieve an acceptable rate of return on its
investments. He acknowledged, however, that IFC at times may choose
projects where the occurrence of competition was a judgment call.
Nonetheless, he explained that IFC is now committed to addressing not
only the possibility but also the perception that it is competing
with the private sector.
--------------------
\3 This commercial bank official also told us that the project was
subsequently terminated, but he was not aware of the reason for
termination.
IFC WORKING TO MINIMIZE
FUTURE DISPLACEMENT
-------------------------------------------------------- Chapter 2:2.2
Citing increased activity and overlap with the international private
sector, IFC reviewed its operating practices and guidelines in
November 1995 to clarify the importance of not competing with private
investors. This review of selected policies and practices stressed
collaboration with the private sector to underscore the supplemental
value of IFC's basic services: project finance, stand-alone advisory
services, and securities underwriting and placement. The review
emphasized three guiding principles for IFC's mandate:
-- to participate in projects that otherwise would not be possible
at all or would not be completed in a timely fashion;
-- to stimulate the flow of private capital, both domestic and
foreign, to productive enterprises; and
-- to bring the discipline of the market (i.e., profitability) to
bear upon the investments in which it participates.
IFC's Executive Vice President told us that a contact point within
the institution had been established to receive complaints from the
private sector regarding its experience with IFC. He also said that
IFC is working to reduce its participation in markets where private
sector interest is well established, such as Thailand. He said that
IFC has generally withdrawn from competitive bidding against the
private sector for contracts to provide advisory services to
recipient governments.
U.S. and foreign private sector officials suggested to us that IFC
should provide financial services in more risky markets and sectors,
such as constructing road systems, or to facilitate projects that
would have difficulty gaining access to foreign exchange. The
Executive Vice President of IFC explained that both the IFC Board and
the market are primary factors in directing where IFC financing goes.
For example, he said that prior to the Mexican peso crisis, the IFC
portfolio in that country was declining; however, after the crisis,
due to the shortage of private sources of long-term financing, the
Board decided IFC financing in Mexico should increase. He also said
that both aggregate economic data and IFC's own experience can
determine whether continuing IFC assistance is required in particular
markets. He pointed to the Czech Republic as an example of a country
where IFC financing was needed over 3 years ago; however, IFC's role
has since been reduced, and it is currently participating only in
special privatization projects.
DISPLACEMENT NOT AN ISSUE
FOR IDA, IBRD, AND MIGA
-------------------------------------------------------- Chapter 2:2.3
Private investors we spoke with expressed little interest in
investing in IDA-eligible countries, and none of them said that IDA
loans displaced their investments. Figure 2.3 showed that very
little private capital is going to IDA-only countries. Private firms
also indicated to us that the activities of the IBRD tend to be in
sectors and markets in which the international financial sector has
very little interest. IBRD also lends to the governments of
developing countries, further limiting the potential interest of the
private sector. However, three of the private sector firms we spoke
with noted that IBRD potentially displaces private institutions by
lending at low rates for projects that may have been commercially
funded instead.
MIGA's political risk insurance services do not displace private
sector insurers. Privately provided insurance is currently not
available for the length of time investors require and does not offer
the full range of coverage offered by MIGA. MIGA provides investment
insurance against noncommercial risks, such as currency
inconvertibility, expropriation, war and civil disturbance, and
breach of contract, particularly for the longer term (8 to 20 years).
One private provider of political risk insurance is planning to
expand its coverage in the future, but the duration of insurance (up
to 7 years) will still be less than what is offered by MIGA.
WORLD BANK PROGRAMS AIM TO
ENHANCE PRIVATE CAPITAL FLOWS
---------------------------------------------------------- Chapter 2:3
Despite instances in which private sector officials noted that the
IFC displaced their involvement in projects, nearly 90 percent of the
firms we spoke with said that Bank Group services enhance
opportunities for international private capital by reducing the risks
associated with investing in developing countries. These services
include guarantee and political risk insurance programs as well as
loans and technical assistance that help borrowing countries
strengthen their regulatory and legal systems.
BANK ACTIVITIES HELP
MINIMIZE RISKS FOR INVESTORS
-------------------------------------------------------- Chapter 2:3.1
In September 1994 IBRD revitalized its guarantee program and now uses
partial risk and credit guarantees to address lenders' concerns about
borrowers' ability to repay loans. These two programs have had very
limited use thus far, but several private sector firms expressed
interest in their potential for reducing noncommercial risk. Partial
risk guarantees cover risks associated with the borrowing
government's contractual commitments to a project (also known as
sovereign risk)--for example, the stability of the regulatory regime,
tariffs, and nonpayment by a publicly owned utility. Partial credit
guarantees cover all events of nonpayment (both sovereign and
noncommercial) for a designated period of financing. These
guarantees encourage extension of maturities by covering repayments
in the later years of the project (e.g., beyond 10 years). According
to Bank officials, both guarantees can be used for large, expensive,
long-term projects, such as infrastructure projects, to meet the
needs of commercial bankers. World Bank officials added that as a
substitute for typical IBRD loans, which are provided to governments,
the Bank Group has recently been combining IFC loans with World Bank
guarantees to focus more resources toward the private sector.
Several private sector officials noted that the Bank's guarantee
programs encouraged their participation in projects. For example,
IBRD provided a partial risk guarantee for the Hub Power Project in
Pakistan. Officials from some of the Japanese banks that
participated in the project said the guarantee was helpful because it
would have been impossible to get a guarantee from the private sector
for the length of the project (about
12 years). The private sector would have guaranteed only 2 to 3
years of the project. Officials from a U.S. investment bank told us
that the partial credit guarantee program was instrumental in the
successful financing of a power project in the Philippines. They
doubted the project would have been financed without the guarantee.
They also said they are working with IBRD's partial risk guarantee
program to help create an infrastructure development corporation in
the Philippines. If this project goes forward, the guarantee program
will significantly reduce the interest rate offered by the
development corporation to finance infrastructure projects.
Some private sector officials told us that political risk insurance,
such as the type offered by MIGA, was critical to their operations in
some developing countries. MIGA was established to help promote the
flow of foreign direct investment by insuring investments against
noncommercial risks. Although MIGA has a lower insurance limit than
bilateral providers of political risk insurance, such as the U.S.
Overseas Private Investment Corporation (OPIC), it offers businesses
a multilateral alternative when bilateral insurance is unavailable.
For example, some U.S. private sector officials said that they use
MIGA in countries where OPIC does not operate because of U.S.
foreign policy concerns or because OPIC has already reached its
exposure limits.
LENDING ACTIVITIES AIM TO
INCREASE PARTICIPATION OF
PRIVATE INVESTORS
-------------------------------------------------------- Chapter 2:3.2
Some of the World Bank's lending activities are designed to encourage
private sector participation in development projects. For example,
the volume of cofinanced World Bank assisted operations totaled $8.2
billion in fiscal year 1995.\4 In cofinancing arrangements,
commercial banks typically provide loans for up to 10 to 12 years,
with the World Bank and other lenders (e.g., regional multilateral
development banks and bilateral financing agencies) providing the
remainder of the loans. Commercial lenders told us that their level
of confidence of being repaid is greater when they are involved in
World Bank projects because borrowing countries are less likely to
default on a World Bank loan than on a commercial loan. According to
the Bank's Cofinancing and Financial Advisory Services officials,
cofinancing creates an umbrella effect, fostering increased
participation by commercial banks in the development process. They
estimate that about 42 cents for every $1 the Bank loans is
cofinanced.
IFC deals exclusively with private sector development, primarily
providing lending services and advice. According to its Executive
Vice President, IFC has devoted about one-fourth of its work to
capital market development, another one-fourth to one-third to
development of private infrastructure, and the remainder to other
purposes (e.g., privatization and small enterprise development). IFC
provides loans for its own account, called A loans, and mobilizes
international private capital for projects through syndicated loans,
called B loans. For B loans, IFC shares the commercial risks of
projects with cofinancing partners and is the lender of record.\5
Loan syndications and underwriting have represented almost half of
IFC financing for investment approvals since 1991.
Several private sector officials we interviewed said that IFC
involvement in some projects has acted as an incentive for their
participation. For example, IFC arranged a syndicated loan for a
textile project in Suzhou, China. While the officials acknowledged
that the project was strong on its own merit, they said project
financing in China was difficult because China does not have a sound
legal structure and a convertible currency. Business officials told
us that IFC participation helped increase investors' confidence and
attract private financing.
IFC involvement can also help businesses enter new markets. One
private sector official told us that his company is trying to
establish a presence in the securities market to finance costly
infrastructure projects. His company has joined with IFC and other
private sector investors to establish a new entity that would provide
credit enhancement to developing countries by issuing securities.
The new company would be able to facilitate both domestic and
cross-border investments. According to the chief executive officer,
the company could not have undertaken such a project on its own
because of the need for regulatory backing from the host country
government (governments trust the World Bank/IFC's advice) and the
high risks involved.
--------------------
\4 Fifteen of 114 Bank cofinanced projects in fiscal year 1995 were
with the private sector.
\5 As the lender of record, IFC incorporates provisions in its loan
agreements for the loans for its own account and for the accounts of
the remaining participants, and IFC is the sole contract party with
the borrower. In this capacity, IFC has rights and responsibilities
vis-a-vis the participants, borrowers, and IFC's shareholders that
arise from the operation of law and from the contractual undertakings
set in various agreements. These responsibilities include monitoring
the project/borrower, informing banks about any material
developments, administering the loan documentation, and distributing
to the participants their respective shares of payments received.
NONLENDING SERVICES ADDRESS
FOREIGN INVESTORS' INTERESTS
-------------------------------------------------------- Chapter 2:3.3
The Bank's nonlending services, such as economic and sectoral work,
policy dialogue, and training, help host governments establish
regulatory and legal structures to protect investors' interests and
create an environment that is conducive to private sector investment.
Private sector officials told us that sound regulatory and legal
structures are important elements in determining whether to invest in
a market. Because borrowing countries view the Bank as a neutral and
objective intermediary, the Bank has a unique role in encouraging
regulatory and legal changes that help attract foreign investment.
According to the Bank's Vice President for Finance and Private Sector
Development, the Bank is the world's largest force for this kind of
work.
This Bank official also told us that this division is working in 70
countries to advise governments in areas such as
-- reforming their banking systems through training in bank
supervision, accounting and auditing standards,
payment/settlement systems, and bank insurance systems;
-- modernizing their legal systems, including commercial and
bankruptcy laws, and establishing arbitration systems; and
-- privatizing their assets by helping them establish privatization
ministries and auction and voucher systems and by providing
legal advice.
In addition, the Bank and IFC have together prepared a series of
private sector assessments in various countries to gauge the
individual needs of a particular country. According to the Bank's
Vice President for Finance and Private Sector Development, a private
sector assessment helped the government of Morocco develop a program
jointly financed by the public and private sector to help overcome
constraints to private sector development.
IFC also provides technical assistance for projects that seek to
develop capital markets, draft securities market laws and
regulations, and create or develop stock exchanges. According to
Bank officials, this type of assistance helps prepare the way for
infrastructure privatization. For example, an investment company
official stated that U.S. custodial banks are reluctant to provide
complete custodial services to clients in Russia because of the lack
of efficient share registration facilities. He added that the Bank
and IFC are best suited not only to provide the necessary finance but
also to persuade the host government to adopt more efficient and
safer systems.
In the mid-1980s, IFC established the Foreign Investment Advisory
Service (FIAS) to review government policies and laws with respect to
foreign direct investment. Now a joint venture of IFC and the Bank,
this Service advises countries on how to eliminate impediments to
foreign direct investment and, in some cases, helps countries develop
investment promotion agencies. Using IFC's financial experience in
developing countries, FIAS works as a consultant to any government
that wishes to increase foreign direct investment. Working only on
requests by developing country governments, FIAS can provide a wide
range of assistance, including diagnostic reviews of policy
impediments, reviews of specific investment policies, and
institutional strengthening. The distribution of FIAS reports is
typically restricted. China and several other countries have sought
FIAS advice on policies governing foreign direct investment in
infrastructure sectors. Altogether, FIAS has worked in over 90
developing countries.
In addition to technical assistance, the Bank provides information on
macroeconomic policies of borrowing countries. Private sector
officials told us that the Bank provides information on various
markets, which is useful for analyzing industries and for making
investment decisions. Officials from two rating agencies told us
that World Bank information is useful to them in their analysis of
country risk. One rating agency official added that the private
sector does not have the resources to do the kind of in-depth
analyses that the World Bank does and that insufficient information
would result in poorly functioning markets and inefficient investment
decisions.
DEVELOPMENT EFFECTIVENESS OF WORLD
BANK PROJECTS
============================================================ Chapter 3
The most current information available from the World Bank indicates
that IDA and IBRD projects have experienced significant problems in
achieving their stated development objectives during the last decade.
A significant portion of recently completed Bank projects are judged
by the Bank itself as unsatisfactory. Bank projects have had a much
greater rate of success in building physical infrastructure than in
transforming the underlying structure of developing economies.
Weaker performance in leveraging needed sector policy reforms and
facilitating private sector development through lending is of
particular concern, as the Bank itself has concluded that progress in
these areas is critical for economic growth and poverty alleviation.
Prominent among the causes of weak performance have been project
design and implementation problems, borrowing countries' inadequate
commitment and capacity, and the increasingly challenging nature of
Bank projects.
MEASURING DEVELOPMENT
EFFECTIVENESS
---------------------------------------------------------- Chapter 3:1
It is difficult to demonstrate the impact of Bank projects on
countries' overall development. The Bank's contributions to
development cannot usually be separated from those of other donors,
the countries themselves, and private sector investors. Furthermore,
it is not reasonable to use country macroeconomic indicators alone to
judge the effectiveness of the Bank, especially since one can only
speculate about the course of a country's development in the absence
of Bank assistance.
Given these limitations, we relied on project-specific data to assess
whether Bank projects achieved their goals. The most comprehensive
data the Bank provided to us on project performance were IBRD and IDA
project evaluation data. These data do not reflect the outcome of
the contributions that the Bank makes through MIGA guaranties; IFC
private sector investment; and nonlending services, including
economic and sectoral work, research, policy work, trust fund
projects, and development training. In fiscal year 1995, the Bank's
outlay for IDA and IBRD loans was six times greater than for these
other activities combined.\1 Few evaluation data are available for
these other activities, though the Bank is now developing evaluation
systems for them.\2 In future years, as evaluation becomes more
systematic, the Bank and other observers may be better able to
evaluate the overall performance and effectiveness of all Bank
programs. Even with these limitations, Bank and U.S. Treasury
officials have indicated that, among all bilateral and multilateral
donors, the Bank has the most rigorous and systematic methodology for
evaluating the performance of its projects.
--------------------
\1 Outlays for other activities consist of IFC disbursements for
loans and equity investments, MIGA's maximum aggregate liability, and
the cost of providing nonlending services (estimated at 38 percent of
the Bank's administrative budget for fiscal year 1995).
\2 IFC does not systematically report on the development
effectiveness of its investment portfolio as the Bank does for IDA
and IBRD projects. IFC assesses the development effectiveness of
many of its projects, but these assessments were not made available
to us at the time of our review. The Bank did provide some
aggregated IFC project evaluation data, but this information did not
address development effectiveness, focusing instead on financial
returns.
SIGNIFICANT PERCENTAGE OF
IBRD AND IDA PROJECTS JUDGED
UNSATISFACTORY
-------------------------------------------------------- Chapter 3:1.1
The most recent IBRD and IDA project evaluations available reflect
the outcomes of 737 projects that were implemented primarily between
1985 and 1993. The results of these evaluations are displayed in
figure 3.1. The Bank judged 36 percent of these projects to be
unsatisfactory and 64 percent satisfactory.\3
Figure 3.1: Outcomes of
Projects Evaluated in 1993-94
(See figure in printed
edition.)
Source: World Bank, OED.
The Bank generated these data from an extensive evaluation process
that determined completed projects' relevance, efficiency, and
efficacy. Evaluation data were compiled by the Bank's OED from a
combination of self-assessments prepared by project managers and
audits of those self-assessments prepared by OED evaluators. For
each project, the specific objectives and other aspects of the
project were examined, and an overall outcome rating was assigned,
ranging from highly unsatisfactory to highly satisfactory. Ratings
based on self-assessments done by Bank managers, which represent
about 65 percent of all project ratings, tended to be more optimistic
than those based on OED audits.\4 An unsatisfactory project is one
that, in the evaluators' judgment, has not met its major relevant
goals or has not made an acceptable contribution to development.
According to OED, however, even projects rated unsatisfactory have
made useful contributions to development to the extent that some of
their objectives were achieved. OED also cautions that development
projects are inherently risky enterprises and some unsatisfactory
outcomes should be expected. We could not identify any objective,
widely accepted criteria as to what percentage of unsatisfactory
projects would be deemed acceptable.\5 However, the Bank's President
has expressed concern about this record of performance and the need
to improve.
--------------------
\3 For a project to be rated satisfactory, its goals must be
consistent with the Bank's country and sectoral assistance strategies
(relevant), and it must have achieved, or be expected to achieve,
most of its major goals (efficacious) in a timely and cost-efficient
manner (efficient).
\4 In fiscal year 1995, OED audited the results of self-assessments
and found that they overstated the number of projects with
satisfactory outcomes by about 9 percentage points.
\5 The Bank President told us that it was his goal to reduce the
number of unsatisfactory projects to 20 percent.
VARIATIONS IN PERFORMANCE BY
REGION AND SECTOR
-------------------------------------------------------- Chapter 3:1.2
The overall satisfactory rate of recently evaluated Bank projects
masks substantial differences in achievement among regions, as shown
in
table 3.1. In sub-Saharan Africa, where about one-third of these
projects were implemented, only about half of the projects were
judged satisfactory. In the East Asia and Pacific region, on the
other hand, 81 percent of the most recently evaluated Bank projects
achieved a satisfactory rating.
Table 3.1
Satisfactory Project Outcomes by Region
and Loan Type (for projects evaluated
1993-94)
Region IDA IBRD Overall
-------------------------------------------- ------ ------ --------
Sub-Saharan Africa 51 51 51
East Asia and Pacific 71 85 81
Europe and Central Asia 100\\a 60 60\
Latin America and the Caribbean 73 61 62
Middle East and North Africa 67 69 68
South Asia 70 76 71
======================================================================
Total 59 68 64
----------------------------------------------------------------------
Note: IDA data include a small number of projects financed jointly
by IDA and IBRD.
\a Reflects performance on only one IDA project in this region.
Source: World Bank, OED.
Bank evaluation data also show mixed results across sectors and
between IBRD and IDA projects (see table 3.2). While IBRD projects
have fared better than IDA projects overall, this was not the case in
all sectors. Most notably, projects that provided some of the most
basic needs--water and sanitation and human resources projects\6 in
IDA countries--had the highest rate of satisfactory outcomes of any
type of project (91 percent and 86 percent satisfactory,
respectively). Two types of projects with primarily nonphysical
objectives, namely technical assistance and financial sector
projects, were among the least successful (49 percent and 43 percent
satisfactory, respectively). According to OED, financial sector
reform is a key component of the Bank's private sector development
efforts.
Table 3.2
Satisfactory Project Outcomes by Sector
and Loan Type (for projects evaluated
1993-94)
Sector IDA IBRD Overall
-------------------------------------------- ------ ------ --------
Agriculture 57 64 60
Energy 62 73 69
Finance 38 56 49
Human resources 86 76 80
Industry 50 64 58
Pollution control and solid waste
Power 63 74 68
Program and policy 60 68 64
Technical assistance 38 57 43
Telecommunications 75 50 63
Tourism
Transport 52 71 62
Urban 73 83 80
Water and sanitation 91 62 70
======================================================================
Total 59 68 64
----------------------------------------------------------------------
Note: IDA data include a small number of projects financed jointly
by IDA and IBRD. No pollution control and solid waste or tourism
projects were evaluated in these years.
Source: World Bank, OED.
--------------------
\6 These include education, population, health, and nutrition
projects.
GREATEST RATE OF SUCCESS IN
PHYSICAL OBJECTIVES
-------------------------------------------------------- Chapter 3:1.3
Bank evaluation data show that the area with the greatest rate of
success for projects evaluated in 1993 and 1994 was in meeting
physical objectives. As illustrated in figure 3.2, 67 percent of
these projects substantially achieved their physical objectives, such
as constructing buildings and infrastructure and providing social
services to project beneficiaries.\7 In contrast, other objectives
were substantially achieved in only one-third or fewer of the
projects in which they were included. Thus, Bank projects have had
markedly less success in leveraging market and policy reforms and
furthering the growth of the private sector.\8
Figure 3.2: Evaluation Results
by Project Objective (for
projects evaluated in 1993-94)
(See figure in printed
edition.)
Note: Data on private sector development objectives available only
for projects evaluated in 1993.
Source: World Bank, OED.
In addition to being more often substantially achieved, physical
objectives were more often included in these projects than most other
types of objectives. As shown in figure 3.3, 76 percent of projects
evaluated in 1993 and 1994 included physical objectives. Data on
project objectives also indicate that Bank projects frequently
impacted borrowing country institutions, because, although the
success rate in this area was low (as shown in fig. 3.2),
institutional development was the most common objective, included in
94 percent of Bank projects. Bank projects less frequently attempted
to achieve other nonphysical objectives, such as macroeconomic reform
(included in 16 percent of the projects), private sector development
(included in 33 percent), financial reform (included in 36 percent),
and sector policy reform (included in 54 percent). Given the absence
of such objectives in many projects and the poor success rates in
achieving such objectives when included, it appears that Bank
projects overall have had considerably less impact in improving
countries' underlying market and policy conditions than in building
physical and institutional infrastructure.
Figure 3.3: Objectives
Included in Projects (for
projects evaluated in 1993-94)
(See figure in printed
edition.)
Note: Data on private sector development objectives available only
for projects evaluated in 1993.
Source: World Bank, OED.
According to senior Bank officials, many of these projects did not
include market and policy reform objectives because at the time that
these projects were approved the Bank's preferred vehicle for
achieving such reform was "adjustment" lending. Adjustment projects,
which since the early 1980s have represented about a quarter of the
Bank's portfolio, provided hard currency loans in exchange for an
agreement by the borrowers to make certain policy and market reforms
(or adjustments) and did not include physical objectives.\9
Regardless of the instrument used, success in achieving policy and
market reform objectives has important implications for the
development effectiveness of Bank projects. A 1995 OED study on the
social impact of structural policy adjustment showed that when Bank
projects achieved policy reform objectives, the results for
development were very positive. According to the report, countries
that successfully implemented the adjustment policies agreed to with
the Bank have achieved growth in per capita income and reduced the
proportion of their populations in poverty. This study also
indicates that substantial success in meeting policy reform was very
important. It concluded that the most common reason why adjustment
operations failed was that the agreed policies were only partly
adopted or were soon abandoned.
A project in one sub-Saharan African country illustrates the
limitations of achieving only physical and institutional objectives.
This project was aimed at promoting tourism by improving the
protection of wildlife, a major tourist attraction that was being
threatened by poaching. By providing funds for equipment and game
park infrastructure, the project enabled government rangers to stem
poaching, especially in the rhinoceros population. However, since it
was considered an emergency project, it did not include any policy
reform requirements. According to a U.S. embassy official and the
Bank official who monitors this project in the field, despite
improvements in wildlife protection, the tourism industry continues
to decline, in large part because of poor government policies, such
as opposition to private sector tourism promotion and the lack of
maintenance of tourist-related infrastructure. The Bank official
commented that economic and sectoral research was needed to convince
the borrowing government of the economic importance of protecting the
environment. Officials responsible for the Africa Region at Bank
headquarters believe that, although this project did not include
policy reform objectives, it has strengthened the government's
policy-making capability and will facilitate the achievement of
policy reform objectives in future projects.
--------------------
\7 Projects that were judged to have highly or substantially achieved
these types of objectives are included in this category. Projects
that were judged to have achieved their objectives only moderately or
negligibly are not included.
\8 "Private sector development" refers to activities specifically
aimed at promoting private enterprises, such as privatization of
state-owned operations, and may not include some policy reforms that
would more generally foster private sector development.
\9 In general, adjustment projects have been somewhat more successful
than their investment-oriented counterparts in meeting policy and
market reform objectives. For example, 44 percent of adjustment
projects evaluated in 1993 and 1994 substantially achieved their
sector policy reform objectives. Only 24 percent of the investment
projects that had this type of objective substantially achieved it.
Overall, 27 percent of all projects with this objective substantially
achieved it.
CAUSES OF WEAK PERFORMANCE
---------------------------------------------------------- Chapter 3:2
The 1992 Portfolio Management Task Force's report identified three
basic, closely interrelated factors as causes of portfolio
performance problems. These factors are (1) problems with the way
projects are structured; (2) unfavorable country conditions, such as
poor macroeconomic policies, changing development priorities, and
poor capacity of local institutions; and (3) a volatile international
economic environment. The report identified many project design
problems and made a series of recommendations to the Bank to
ameliorate these problems, and the Bank has been making efforts to
improve in this area.
Data from the 737 IBRD and IDA projects evaluated in 1993 and 1994,
displayed in table 3.3, confirm that this combination of factors also
negatively impacted these project outcomes. They show that the lack
of borrowing countries' commitment and the poor quality of
institutions in borrowing countries were the most prevalent negative
factors--each identified as such in nearly one-third of evaluated
cases. Bank performance was a negative factor for about one-fifth of
the projects, as were domestic shocks external to project management,
such as political upheaval, natural disaster, and economic
disruption.
Table 3.3
Major Factors Negatively Influencing
Project Outcomes (for projects evaluated
1993-94)
Percentage
of projects
negatively
Major factors negatively influencing outcome affected
------------------------------------------------------ --------------
Government commitment 32
Quality of implementing agency management 32
World Bank performance 22
Domestic shocks 22
----------------------------------------------------------------------
Source: World Bank, OED.
PROJECTS INCREASINGLY
CHALLENGING
-------------------------------------------------------- Chapter 3:2.1
Bank projects have become more challenging in recent years, which
could also help explain poor performance. OED analysis indicates
that during the 1980s Bank projects became increasingly complex,
risky, and demanding on the borrowers. Complex projects may involve
a wide range of reforms; a large number of institutions, project
components, and cofinanciers; or wide geographic dispersion. Risky
projects are ones that are based on key assumptions about the
underlying conditions in a country that may be especially vulnerable
to changes. Demanding projects may stretch the country's
implementation capacity. According to OED, given this increased
difficulty, the recent stabilizing trend in outcome ratings may
actually represent a noteworthy achievement by project implementers.
ECONOMIC AND SECTOR WORK
UNDERUTILIZED IN PROJECTS
-------------------------------------------------------- Chapter 3:2.2
Another important factor identified more recently as affecting
portfolio performance is the use of economic and sector work to
support the development of new projects. The Bank conducts economic
and sector work to identify and diagnose countries' development
problems. This work includes specialized sectoral studies, policy
research that supports project development, and other analytical and
advisory work. A 1995 Bank study found that when sector- and
project-related economic and sector work is conducted, it can
contribute to the eventual success of a project. This work has the
advantage of focusing on issues of institutional support, budgetary
provisions, project alternatives, and risks. The report concluded
that "relatively small expenditures by the Bank on economic and
sector work can leverage up large increases in development impact on
the ground in client countries."
However, the results of the study suggest that not enough economic
and sector work has been done. The study indicates that only 39
percent of the 431 completed projects that were examined for this
study had been preceded by relevant economic and sector work in the 3
years prior to approval.\10 The report stated that for the 35 poorest
performing countries, "greater attention to country fiscal
performance--a function of economic and sector work--might have
reduced the number of poorly performing projects." Another OED study
concludes that more attention to policy research during project
preparation and appraisal and policy dialogue with stakeholders can
significantly overcome borrowing governments' reluctance to press
ahead with policy reforms.
--------------------
\10 Some Bank officials commented that the Bank's economic and sector
work effort may be understated in this study because some relevant
analyses were not considered as economic and sector work. However,
the report did not include this qualification.
WORLD BANK REFORM EFFORTS
============================================================ Chapter 4
The Bank has taken a number of steps in recent years to improve IDA
and IBRD portfolio performance. Some of these reforms appear
promising, especially increased efforts by the Bank to link lending
to countries' performance in establishing a market and policy
environment conducive to development. Other reforms, however, such
as improving project design and implementation, have been slow to
take hold, and their discernible impact on portfolio performance has
been limited. However, it is too early to assess the long-term
impact of these reforms on development effectiveness. Decisive
evidence on this issue may not be available for several years, when
projects designed and implemented under the new environment are
completed and evaluated.
PORTFOLIO MANAGEMENT PROBLEMS
BEING ADDRESSED
---------------------------------------------------------- Chapter 4:1
Since the 1992 report of the Portfolio Management Task Force, the
Bank has undertaken a wide variety of initiatives to address its
performance problems. The Bank has taken measures to implement this
report's recommendations under the Next Steps Program, which involves
-- linking country portfolio performance to the bank's core
business practices,
-- providing for more active project and portfolio restructuring,
-- improving the quality of projects entering the portfolio,
-- defining the Bank's role in and improving its management of
project performance,
-- enhancing OED's role as an instrument of independent
accountability and giving greater emphasis to evaluation of
completed projects,
-- creating an internal environment that promotes better portfolio
management, and
-- giving attention to generic and institutional factors that
affect portfolio performance.
Many of these efforts are in their early stages, and for some of them
it is too early to see results reflected in current performance
measures. However, in some cases, data are available to evaluate to
what extent specific reforms are taking hold and are having a
discernible impact.
LINKING LENDING LEVELS TO
COUNTRY PERFORMANCE
---------------------------------------------------------- Chapter 4:2
The 1992 report of the Portfolio Performance Task Force criticized
the Bank for not assessing its overall program in particular
countries but instead assessing proposed loans largely on their
individual merits. A key component of the Bank's reform efforts has
been to make IBRD and IDA lending decisions based on an in-depth
reexamination of the portfolio performance and policy reform progress
of each country. Through the Country Assistance Strategy (CAS)
process, established in 1992, the Bank can set lending levels for a
country and periodically reassess them on a well-reasoned basis.
These levels can be changed based on a country's performance, as the
Bank has done in several of the countries we visited. Linking
performance to lending levels could be an effective way for the Bank
to (1) leverage change in country practices and (2) increase the
likelihood that Bank projects will achieve their development
objectives.
QUALITY OF CASS UNEVEN BUT
IMPROVING
-------------------------------------------------------- Chapter 4:2.1
The effort to create well-researched CASs, backed up by in-depth,
country-specific analyses of poverty, private sector performance, and
government expenditures, is a demanding one. Early efforts were very
uneven in quality. In January 1995, the Bank issued updated guidance
for CAS preparation. Among other things, the new guidance calls for
clear linkages between country performance and lending levels as well
as defined scenarios to justify lending decisions. According to OED,
CASs prepared in the last half of 1995 expanded their coverage of
portfolio performance issues. However, while OED officials and a
senior Bank officer agreed that the format and content of more
recently prepared CASs have improved, they also commented that the
overall quality of CASs is uneven and further improvements are still
needed. According to a January 1996 status report on the Bank's
Mid-Year Operational Work Program, CASs need to demonstrate better
linkages between portfolio management and new lending and create more
measurable benchmarks for evaluating progress and the size of the
country program. According to a Bank official, the recognition of
this problem by Bank management in this report is, in itself, an
important indicator that the Bank is taking the CAS process seriously
and discussing its portfolio in relation to country performance.
LENDING LEVELS ADJUSTED
BASED ON COUNTRY PERFORMANCE
-------------------------------------------------------- Chapter 4:2.2
Our review of CASs for five borrowing countries supports the Bank's
claim that it has begun to develop performance criteria that will
serve as a basis for adjusting lending volumes. Furthermore, the
Bank has, in some instances, reduced or withheld lending to countries
that do not meet established performance criteria. For example, new
IBRD commitments to one major borrower in fiscal year 1994 were
reduced to about $100 million, down from a planned $1 billion,
because of the government's slow progress toward policy reform
associated with specific projects. Due to poor economic management
practices, one sub-Saharan African country received only about 30
percent of the new IDA credits that the Bank had originally
envisioned. In addition, IDA reduced its lending to another
sub-Saharan African country in fiscal years 1994 and 1995 because of
years of inadequate policy reform and macroeconomic management. Bank
officials have not yet reached agreement on new funding levels for
this country.
The Bank is also rewarding strong performance. For example, the Bank
responded to one small eastern European country's commitment to
reform by providing about $145 million in loans in fiscal years 1994
and 1995. The Bank's strategy for this country provides for as much
as $250 million in additional loans over the 3 ensuing years if
progress is sustained in implementing stabilization and structural
adjustment measures or as little as $50 million if this expectation
is not met. In the case of one major Asian borrower, the Bank has
refrained from linking lending levels to specific performance
triggers because a major slippage in this country's reform program is
viewed as unlikely. Almost all of the completed Bank projects in
this country have achieved satisfactory results, and, as pointed out
in a March 1996 CAS progress report, the quality of this country's
portfolio remains high.
Data provided by the Bank suggest an increased focus on performance
in allocating funds among IDA-eligible countries. As table 4.1
indicates, the top-performing countries\1 tended to receive more
assistance under IDA-10 than under IDA-9,\2 while weaker performers
received less. In fiscal
years 1994-95, the top fifth of IDA performers received an average
per capita increase of about 30 percent, while the bottom fifth
experienced a reduction of about 53 percent.\3
Table 4.1
IDA Commitments and Country Performance
(IDA-only countries)
IDA-9 IDA-10
(fiscal (fiscal Change from
years 1991- years 1994- IDA-9 to
Level of performance 93) 95) IDA-10
---------------------------- ------------ ------------ ------------
Top 20% $7.0 $9.1 30%
Upper 20% 6.5 6.1 -6%
Middle 20% 10.1 6.0 -41%
Lower 20% 6.7 5.7 -15%
Bottom 20% 1.7 0.8 -53%
----------------------------------------------------------------------
Source: World Bank, Resource Mobilization Department.
Comparable data for IBRD lending was not available at the time of our
review, and we did not find evidence of a similar shift in IBRD
lending toward better performing countries.
--------------------
\1 Performance ratings were based on evaluations of macroeconomic
stability, structural reforms, poverty reduction, and the quality of
portfolio implementation.
\2 IDA categorizes its loans according to the number of the
replenishment in which IDA members donated the funds for the loans.
Thus, the terms IDA-9 and IDA-10 refer to loans made under the 9th
and 10th replenishments, respectively, of IDA's concessional loan
fund.
\3 While the correlation between lending levels and country
performance appears to be stronger in IDA-10 than in IDA-9, other
factors, such as shifts in lending priorities and the absorption
capacity of certain countries, may also have affected lending
patterns.
QUALITY OF PROJECT DESIGN
---------------------------------------------------------- Chapter 4:3
One of the Bank's major reform initiatives, resulting from the 1992
report of the Portfolio Management Task Force, has focused on
improving the quality of projects entering the portfolio. According
to this report, ensuring quality at entry is critical to achieving
project success; this entails, among other things, demonstrating
borrower commitment and careful analysis of the risks. Since 1992,
units throughout the Bank have reported initiatives to improve
quality at entry through the use of clear and realistic goals, better
defined studies, detailed action plans that can be monitored,
performance indicators, regular project reviews, and emphasis on
borrower ownership, beneficiary participation, and application of
lessons learned.
DESIGN PROBLEMS PERSIST IN
NEW PROJECTS DESPITE SOME
IMPROVEMENT
-------------------------------------------------------- Chapter 4:3.1
Despite the Bank's efforts, recent studies indicate that project
design problems continue. A 1994 OED assessment of Bank initiatives
to improve quality at entry concluded that "these initiatives have
yet to show their effects on quality at entry." A staff survey
conducted by OED supported the conclusion that improvements in
quality at entry have been slow to take hold, especially in assessing
risks.
In a 1995 Bank study, the quality of the Bank's project economic
analysis--a key element in ensuring new project quality--was strongly
criticized. The study concluded that economic analyses were less
than satisfactory in 38 percent of the projects approved in calendar
year 1993 and that the ratings had shown no significant improvement
since 1991.\4 The report commented that "this finding is cause for
concern, since there is every indication that the quality of economic
analysis makes a significant difference in project performance. . .
and is a robust proxy for quality-at-entry more generally." According
to a senior OED official, unpublished results from a new study show a
small improvement in the quality of economic analyses for new
projects in the first half of fiscal
year 1996.
The Bank undertook a special study of 34 policy adjustment projects
approved in fiscal years 1993 and 1994 to assess their quality at
entry. The results of this study indicated that the following
project design problems were common:
-- insufficient consideration of borrowers' level of political
commitment,
-- inadequate implementation capacity in borrowing countries,
-- inadequacies in risk assessments, and
-- borderline to excessive complexity.
OED has independently assessed quality at entry as part of its review
of a sample of recent project proposals and concluded that quality at
entry appeared to be improving but that problems remained. For the
128 project proposals OED reviewed in fiscal years 1994 and 1995,
progress was mixed--problems worsened in some areas and other areas
showed improvement (see table 4.2). Most noteworthy among the
improvements is a substantial decrease in project proposals with
unsatisfactory provisions for monitoring and evaluation. However,
project managers declined to take OED's comments into account in 50
percent of the 1994 project proposals that OED could track.
Table 4.2
Quality at Entry Problems in New Project
Proposals
Project design deficiency 1994 1995
------------------------------------------------------ ------ ------
Poorly defined project objectives 27 36
Inadequate use of evaluation experience 60 65
Unrealistic risk assessments 48 34
Unsatisfactory provisions for monitoring and 67 32
evaluation
----------------------------------------------------------------------
Source: World Bank, OED.
--------------------
\4 The Portfolio Management Task Force report cited work carried out
in 1990-91 by the Working Group on Economic Analysis, which concluded
that economic analysis was less than acceptable in 45 percent of the
reviewed projects. The 1995 study concluded that this
7-percentage-point change was not statistically significant.
PROJECT MANAGEMENT REFORMS
---------------------------------------------------------- Chapter 4:4
Among the criticisms included in the 1992 report of the Portfolio
Management Task Force was the Bank's reluctance to take action to
remedy ongoing problem projects. In response to this criticism, the
Bank has increased the amount of staff resources devoted to project
supervision. Intensity of project supervision has increased
steadily, from an average of 12.5 staff weeks per project per year in
fiscal year 1991 to 17.2 in fiscal year 1995. This supervision has
included use of mid-term reviews and country portfolio performance
reviews to identify and assess implementation problems and project
restructuring to resolve them. In addition, individual regional
offices within the Bank have undertaken a wide range of complementary
initiatives to further enhance the quality of new projects and
portfolio management. The Bank has also made a greater effort to be
more realistic when assessing performance so that it can identify and
remedy problems that arise during project implementation.
LIMITED IMPACT ON PROBLEM
PROJECTS
-------------------------------------------------------- Chapter 4:4.1
The Bank measures the performance of its portfolio of ongoing
projects by the number of projects it deems to be problem projects.
A problem project is one in which managers have concluded that
unsatisfactory progress has been made in implementation or in meeting
development objectives. The Bank's increased supervision efforts are
beginning to show some promising results for long-standing problem
projects, which were of particular concern in the 1992 task force
report. The percentage of projects that have been in problem status
for 3 or more consecutive years has declined by 16 percentage points
from fiscal year 1993 to fiscal
year 1995.
However, data on problem projects indicate that little or no
improvement has been made in the overall performance of ongoing
projects. Assessments of progress in the implementation of projects
and the extent to which the projects are likely to meet their
development objectives, updated annually, provide an early indication
of the likely effectiveness of the Bank's current portfolio. Table
4.3 presents recent results of these assessments. The data indicate
that virtually no improvement has been made in implementation or the
prognosis for projects' eventual impact on development. For ongoing
projects, the Bank does not differentiate among types of development
objectives as it does after completion. Therefore, we were unable to
separately evaluate the Bank's progress in meeting physical and
nonphysical objectives for these projects.
Table 4.3
Extent of Problem Projects in World Bank
Portfolio
Type of problem 1991 1992 1993 1994 1995
------------------------------ ------ ------ ------ ------ ------
Poor implementation progress \a \a 16.9 18.4 17.8\
Low likelihood of meeting 12.7 11.8 12.1 13.4 11.5\
development objectives
----------------------------------------------------------------------
\a No data was available for implementation progress prior to fiscal
year 1993.
Source: World Bank, Operations Policy Department.
It is too early to discern how the Bank's greater use of
restructuring, mid-term reviews, and country portfolio performance
reviews has affected portfolio performance. Assessments of ongoing
projects in fiscal
years 1993-95 did not show consistent improvement in projects that
had undergone special reviews or restructuring. However, Bank
studies show that these tools are potentially valuable for improving
portfolio performance if used more effectively. OED has found that
many mid-term reviews need to be more extensive and that country
portfolio performance reviews should be done more frequently for
smaller countries, which tend to have more problem projects.
SOME PROGRESS IN ABILITY TO
RECOGNIZE PROBLEMS
-------------------------------------------------------- Chapter 4:4.2
In the past, the Bank has had difficulty recognizing deep-seated
problems in ongoing projects that require additional supervisory
attention. Typically, a significant number of projects were not
identified as problem projects during implementation but were
ultimately judged unsatisfactory after completion. This disconnect
is partly attributable to undue optimism about potential outcomes
during implementation. This optimism is especially pronounced for
projects in their early stages, because problems are rarely expected
and are more difficult to discern. The 1992 Portfolio Performance
Task Force report highlighted excessive optimism, and it is
recognized within the Bank as a barrier to resolving problems and
improving portfolio performance.
The disconnect in ratings between implementation and completion of
projects has improved considerably in recent years. In fiscal year
1988, 29 percent of projects rated satisfactory at the time of their
final supervision rating were downgraded to unsatisfactory by OED
after completion. The disconnect was reduced in fiscal year 1994 to
12 percent--its lowest point since the Bank started measuring this
phenomenon in 1980.
Despite the encouraging progress in reducing the disconnect in
ratings, OED pointed out in 1995 that overoptimism is still a major
concern because problems are often not identified early enough to be
remedied. For example, during fiscal years 1991-95, less than
one-fourth of projects ultimately judged to be unsatisfactory were
flagged as problem projects midway through implementation. OED found
that to improve, the Bank needed a better definition of project
objectives and greater attention to those objectives during
supervision. According to OED, "what is needed is a change in
supervision culture, to one which emphasizes early recognition of
problems related to development objectives."
STAFF MONITORING AND
EVALUATION STILL DEFICIENT
BUT IMPROVING
-------------------------------------------------------- Chapter 4:4.3
A 1994 OED report on staff monitoring and evaluation in ongoing
projects and projects completed in the previous 20 years concluded
that performance in this area had been "dismal." A 1995 follow-up
study indicated that some significant improvements had been made but
that major monitoring and evaluation deficiencies remained. The
study reported that 47 percent of the projects appraised by the Bank
in fiscal year 1995 had inadequate or negligible provisions for
monitoring and evaluation. Moreover, the institutional support
promised by Bank management in response to the 1994 study had not
materialized by the end of 1995. One Bank Executive Director we
spoke to cited the slow pace of Bank action in this area as a major
cause for concern but added that in the spring of 1996 management had
finally taken meaningful steps toward providing needed support for
monitoring and evaluation.
INCREASED MANAGEMENT
ATTENTION TO PROBLEMS HOLDS
PROMISE
-------------------------------------------------------- Chapter 4:4.4
Bank management has sharpened its focus on reform and performance
issues and taken steps that have potential for improving oversight
and project quality. In 1994, the Board of Directors formed a
Committee on Development Effectiveness (CODE) to oversee the
operations evaluation function. CODE is intended as a vehicle for
focusing in-depth Board attention on evaluation studies and
management responses to OED recommendations. According to one CODE
member, CODE was instrumental in prompting increased management
commitment to improved monitoring and evaluation systems.
In June 1996 the Bank's Operations Policy Department and OED took
stock of all OED recommendations and management responses and
presented a report of their findings to CODE. This report indicated
that substantial progress had been made overall in implementing
actions promised by Bank management in response to these
recommendations.
In addition, Bank management has created a Quality Assurance Group
that will enable management to undertake objective, independent
project evaluations throughout the project life cycle. However, the
Quality Assurance Group just became active in 1996, and it is too
early to assess its impact.
GREATER EMPHASIS ON MARKET AND
POLICY CONDITIONS AND
NONLENDING SERVICES
---------------------------------------------------------- Chapter 4:5
As described in chapter 3, Bank lending projects have achieved
relatively little success in fostering market and policy reform in
borrowing countries compared to their achievement of other project
objectives. In addition, the Bank has not made optimal use of
economic and sector work to maximize the effectiveness of its lending
services. According to senior Bank officials, the Bank has
recognized these shortcomings and has been taking steps to remedy
them. If successfully implemented, such reforms could be very
positive, since Bank research has concluded that these activities
have strong potential for boosting development effectiveness.
However, the magnitude of these reforms and, hence, their probable
effectiveness in the future are difficult to determine.
Bank officials stated that they have increased and broadened their
focus on policy and market reform. According to these officials, the
Bank has moved away from pursuing policy reform primarily through
adjustment loans, which represent only about a quarter of the Bank's
portfolio.\5 Instead, the officials indicated that emphasis on reform
has been broadened by a greater use of conditionality in loans
throughout the portfolio. One indicator of the shift toward policy
reform is that, according to OED, the number of Bank lending
operations with private sector development components increased
almost 30 percent between fiscal
years 1988 and 1995. The Bank's revised policy on electrical power
projects also indicates a shift toward market and policy reform
objectives. This policy, revised in 1993, places less emphasis on
providing electricity to the poor and greater emphasis on transparent
regulation, commitment to reform, commercialization and
corporatization, and greater private investment in this sector. In
its strategy statement for fiscal years 1997-99, the Bank's Africa
Region indicates that it intends to devote greater attention to
economic reform, including public finances and macroeconomic
stability. However, since the Bank does not maintain detailed data
on project objectives for new and ongoing projects, we could not
measure the extent to which it has shifted toward policy and market
reform objectives.
Senior Bank officials have also indicated that the Bank will devote
more attention and resources to nonlending services, including
economic and sectoral work. The Bank had been reducing its funding
for these activities: in fiscal year 1996, for example, the budget
for economic and sector work was cut 17 percent from the previous
year, while lending was cut by less than 4 percent. However, in
studying the effects of economic and sector work as part of its
reform efforts, the Bank concluded that conducting this work can
contribute to eventual project success and increase development
impact. According to senior Bank officials, an increase in the
budget allocation for economic and sector work is planned for fiscal
year 1997. The Bank's President told us that he intends to devote to
nonlending services a level of effort on par with that devoted to
lending.
--------------------
\5 Adjustment loans provide funds in exchange for an agreement by the
borrowers to make certain policy and market reforms. These
operations do not involve the construction of physical
infrastructure.
NEW DIRECTION'S IMPACT
UNCERTAIN
---------------------------------------------------------- Chapter 4:6
The full impact of the current reform efforts on the ability of the
Bank to achieve its objectives will not be apparent for several
years. The management improvements described above, especially the
use of the CAS process to direct greater Bank resources to those
countries that are most committed to positive change, should improve
the Bank's effectiveness. However, the Bank's commitment to
addressing key development challenges, while appropriate, may have an
adverse effect on the satisfactory ratings of Bank projects.
As described in chapter 3, the Bank's experience to date shows that
policy and market reform objectives have been relatively difficult to
achieve. These reform efforts rely on the active cooperation of the
recipient country, and national leaders are often reluctant to accept
the short-term economic and political costs of making many of these
changes. These political realities often limit what the Bank can
reasonably expect to accomplish. In one country, for example, Bank
officials working to rationalize the inefficient, state-dominated
banking system decided, out of political necessity, to retain a large
number of superfluous bank employees. The likely alternative would
have been intense labor union opposition.
Effective implementation of improved management practices and
concentration of resources on countries that display a greater
commitment to reform may enhance the ability of Bank projects to
achieve satisfactory outcomes. However, increased concentration on
more challenging tasks and more challenging environments (e.g.,
implementing effective basic policy changes in sub-Saharan Africa)
may make project success even more difficult to achieve in the
future. It is possible that the Bank's reforms will sharpen the
focus on efforts that have a greater potential for long-term positive
impact but may result in little or no improvement in the proportion
of projects that are judged to have achieved satisfactory results, at
least in the short run.
It is also possible that the Bank's increased emphasis on country
performance as a criterion for lending will hold overall lending
below the levels experienced in the past. Bank and Treasury
Department officials pointed out that 1994 and 1995 lending in
sub-Saharan Africa was already lower than expected as a result of the
Bank's holding back funds until policy environments improve.
U.S. FOREIGN POLICY
CONSIDERATIONS
============================================================ Chapter 5
The United States has influenced the Bank's policy orientation
through its leadership position. The Bank has supported important
U.S. foreign policy goals such as addressing transition difficulties
in the former Soviet Union and Central Europe and in directing
resources for crisis situations like those in Bosnia, Haiti, Mexico,
and the West Bank and Gaza. Insofar as U.S. leadership influences
the Bank's agenda, the United States multiplies its scarce foreign
assistance funds by directing them through the Bank. However,
compromise has sometimes been necessary since the United States has
not always concurred with the views of a majority of its fellow Bank
members.
CHANGES IN BANK ORIENTATION
REFLECT U.S. VIEWS
---------------------------------------------------------- Chapter 5:1
The United States maintains the largest voting share in the Bank
institutions and is the only member country that can veto changes in
IBRD's Articles of Agreement. U.S. government officials stressed,
and Bank officials concurred that, through the offices of the
Secretary of the Treasury and the U.S. Executive Director at the
Bank, the United States has played a leading role in shaping the
development of the Bank's general orientation and in shifting its
focus to new challenges. Treasury and State Department officials
commented that U.S. leadership has in recent years played a critical
role in the Bank's increased commitments to environmental
protection,\1 market-oriented reform, and private sector development
and concern for the impact of its programs on the poor in borrowing
countries. One senior bank official commented that no major Bank
initiative has gone forward without the support of the United States.
--------------------
\1 A high-level Bank official agreed that the Bank's efforts
regarding the environment can still be improved. However, the Bank
has adopted uniform environmental standards and is allocating $485
million in 1995 to environmental projects. Also, the Bank and the
United Nations created the Global Environmental Facility in 1991.
Through the end of fiscal year 1995, $558 million was allocated for
63 World Bank Global Environmental Facility investment projects.
BANK SUPPORTS U.S. FOREIGN
POLICY OBJECTIVES
---------------------------------------------------------- Chapter 5:2
Bank activities generally support U.S. foreign policy goals in the
post-Cold War environment. For example, the Bank is addressing
transition difficulties in Central Europe and the former Soviet
Union. Since the collapse of the former communist governments in
this region, the World Bank has been working to facilitate the
successor governments' movement toward market-oriented systems. The
Bank committed over $20 billion to Europe and Central Asia (including
the former Soviet republics) during 1990-95, including $4.5 billion
in 1995.\2
The U.S. foreign policy agenda has also been supported through the
Bank's ability to direct resources to crisis areas. Recent examples
where such support has been provided include Bosnia, Haiti, Mexico,
and the West Bank and Gaza. In Bosnia, Treasury officials commented
that the scale and rapidity of the Bank's response to the need for
resources to support the U.S.-brokered peace process was helpful in
furthering U.S. goals in that country. The Bank created a special
$150 million trust fund for Bosnia in February 1996 to provide
assistance in advance of the country's membership in the Bank and
announced in April 1996 that it intended to provide Bosnia with
substantial IDA reconstruction assistance over the ensuing 3 to 4
years.
The Bank also initiated a lending program that supported U.S.
interests in reconstruction in Haiti following the reinstatement of
President Aristide. IDA lending in that country was curtailed in
1996 in an effort to encourage reforms, an effort that is also
supported by the United States. In Mexico, the Bank provided $2
billion in loans and associated technical assistance in cooperation
with the U.S.-led effort to help that country address its 1994
financial crisis.\3 In the West Bank and Gaza, the Bank has played an
important role in support of U.S. foreign policy objectives. In
1993 the Bank prepared an initial economic strategy for these
territories that served as a basis for discussion at a donors
conference, at which over $2 billion was pledged. Since then the
Bank has continued to act as a conduit for donor funding and provided
its own funds through a $170 million trust fund.
--------------------
\2 This figure includes loans made to Turkey and to the following
former communist states: Albania, Armenia, Azerbaijan, Bulgaria,
Croatia, Estonia, Georgia, Hungary, Kazakstan, the Kyrgyz Republic,
Latvia, Lithuania, the former Yugoslav Republic of Macedonia,
Moldova, Poland, Romania, the Russian Federation, Turkmenistan,
Ukraine, and Uzbekistan.
\3 For more information on the events in Mexico, see Mexico's
Financial Crisis: Origins, Awareness, Assistance, and Initial
Efforts to Recover (GAO/GGD-96-56, Feb. 23, 1996).
U.S. CONTRIBUTIONS TO BANK ARE
HIGHLY LEVERAGED
---------------------------------------------------------- Chapter 5:3
Insofar as U.S. leadership influences the Bank's agenda, the United
States leverages its foreign assistance funds by directing them
through the Bank. The annual volume of activity generated by the
Bank far exceeds that which the United States could generate if it
were to apply its contributions to the Bank to U.S. bilateral
foreign assistance programs. The United States provides about 22
percent of total donor contributions to support the Bank Group
institutions, and these contributions are further augmented through
cofinancing with other donors and the private sector. For example,
as of July 31, 1996, about $2 billion in U.S. paid-in capital had
supported IBRD loans of nearly $286 billion.
The Bank's perceived neutrality helps to further increase the
potential impact of these funds. Developing country officials
generally perceive the Bank--a multilateral institution counting
their own governments as members--as a neutral institution that
provides objective advice. Bank officials, developing and donor
country officials, and private sector representatives commented that
Bank advice is less likely to be viewed as motivated by self-interest
than advice offered by private businesses or bilateral donors and is
therefore more likely to be acted upon, particularly in cases where
proposed changes are costly and politically difficult.
COMPROMISE NECESSARY IN
MULTILATERAL ENVIRONMENT
---------------------------------------------------------- Chapter 5:4
In some instances, the United States has not concurred with the views
of a majority of Bank members. The United States has voted against
proposed loans that were nonetheless approved. One former Bank
executive director commented that during the 1980s the United States
unsuccessfully opposed Bank lending to India, arguing that the Indian
government should be required to undertake reforms before further
credit was granted. More recently, the United States opposed the
granting of additional IDA credits to China, despite the fact that
China has a level of per capita income that justifies continued
access to IDA. U.S. government officials pointed to China's high
level of foreign currency reserves and its relatively high credit
rating on international capital markets, which provide it with
substantial access to other sources of finance. The United States
has taken the position that concessional IDA resources should be
reserved for countries that, unlike China, do not have the
creditworthiness to access alternative finance. In recent
negotiations, the United States proposed that China be denied
eligibility for IDA credits. However, other donor countries,
particularly Japan, opposed this position. In the end, a compromise
was reached wherein China's IDA borrowing will rapidly decline over
the next few years and end in 1999. Despite the need for such
compromises, many analysts agree that U.S. views on the overall
direction of the Bank's operations have generally prevailed.
CONCLUSIONS, RECOMMENDATION, AND
AGENCY COMMENTS
============================================================ Chapter 6
Bank operations support U.S. economic and foreign policy goals and
leverage other donors' funds for doing so. However, significant
performance weaknesses limit the effectiveness of Bank projects, and
management reforms intended to improve the quality of the Bank's
portfolio have had limited impact to date.
Bank efforts are enhancing the environment for private sector
investment. We found that the Bank's guarantee programs and legal
and regulatory reform efforts are important elements in attracting
private sector investment. We also found that the Bank did not
appear to displace private foreign investment in developing
countries, except in a limited number of markets with substantial
private sector involvement.
During the past decade, IDA and IBRD projects have experienced
significant problems in achieving development goals. Bank managers
and evaluators have judged 36 percent of the most recently evaluated
projects to be unsatisfactory and, thus, having made an unacceptable
contribution to development. The greatest rate of success of these
projects has been in building physical infrastructure. The projects
have had much more difficulty achieving policy and market reform
objectives, which the Bank has shown to be crucial for economic
development. Weak performance has been the result of a variety of
shortcomings on the part of both the Bank and the borrowers as well
as external factors. Pervasive project design and implementation
problems must be overcome in order for ongoing and future projects to
improve.
The Bank has implemented a series of reforms in recent years to
improve the performance of its lending portfolio. Preliminary
indicators show mixed results, though the full impact of these
reforms on development effectiveness will not be discernible for
several years. Among the more promising results is a greater linkage
between IDA lending and borrowing countries' performance in making
Bank-recommended policy and market reforms. Other reforms have made
slower progress, especially efforts to improve the quality of new
projects.
Through its historical position of leadership at the Bank, the U.S.
has ensured that Bank activities generally support the U.S. foreign
policy agenda. This continues to be true in today's post-Cold War
environment. For example, in countries in Eastern Europe and the
former Soviet Union the Bank has financed projects supporting
transition from communism. The Bank has also complemented U.S.
bilateral efforts in crisis areas, such as Bosnia, the West Bank and
Gaza, and Haiti. The United States has been able to magnify the
impact of its assistance by financing projects through the Bank and,
thus, leveraging funds from other donors. Occasionally, however, the
interests of the majority of members have taken precedence over U.S.
priorities, as in graduation of China from IDA eligibility.
RECOMMENDATION
---------------------------------------------------------- Chapter 6:1
Although continued participation in the Bank is in the U.S.
interest, the benefits of the Bank are limited by problems with
project effectiveness. Through its leadership, the United States is
positioned to ensure that Bank reforms continue to progress and have
a positive impact on development effectiveness.
To ensure that Bank reforms have the desired impact, we recommend
that the Secretary of the Treasury monitor and periodically report to
the Congress measurable indicators of progress, such as the extent to
which (1) the Bank allocates financing to those countries that make
Bank-advocated policy and market reforms, (2) projects substantially
achieve policy and market reform objectives, (3) project design
problems decrease, and (4) implementation problems are identified and
resolved early in the project cycle. If the indicators do not show
satisfactory progress, the Secretary should report on the actions
being taken by the Department to improve progress.
AGENCY COMMENTS
---------------------------------------------------------- Chapter 6:2
We received comments on a draft of this report from the Department of
the Treasury and, through it, the World Bank; the Department of
State; and the Agency for International Development. These letters
are reprinted in appendixes III-VI, along with our additional
comments where appropriate. In addition to their overall comments,
Treasury and the Bank offered several clarifications and technical
corrections as well as updated information, which were incorporated
throughout the report as appropriate.
COMMENTS FROM THE DEPARTMENT
OF THE TREASURY
-------------------------------------------------------- Chapter 6:2.1
Treasury agreed with many of the report's basic findings and
conclusions, stating that they tracked well with its own views and
with major positions taken by successive U.S. administrations. In
addition, Treasury supported our recommendation that Treasury monitor
and periodically report to the Congress on Bank progress in improving
project quality and effectiveness.
Treasury also noted that existing legislation already imposes heavy
reporting requirements on those elements of the Department that are
concerned with the multilateral development banks. As a general
principle, we support periodic reevaluation of reporting requirements
to ensure that they do not require agencies to invest scarce
resources in providing information that is not useful in
Congressional oversight. We believe, however, that the reporting
requirement recommended by this report will provide meaningful
information for effective oversight of the Bank's operations and
reform efforts.
Treasury commented that our analysis relied heavily on data from
projects that were completed prior to the 1992 report of the
Portfolio Management Task Force (Wapenhans report) and the start of
the Bank's recent reform efforts. Our analysis of 737 recently
evaluated Bank projects is based on systematic and reliable
performance data and provides the most current picture available of
project outcomes. This analysis also illustrates the effectiveness
problems that the Bank is currently attempting to resolve through its
reform efforts. Performance data from these evaluations provide an
essential baseline for the evaluation of improvement in the outcomes
of ongoing and future projects. Data on the outcomes of projects
initiated since the Wapenhans report will not be available for at
least several more years. However, in chapter 4 we present other
information, including performance data for all ongoing projects, to
reflect the impact of these reforms.
Treasury stated that the report's observation that Bank projects were
less successful in achieving policy reform than in achieving physical
objectives was based on a data set in which the vast majority of
projects discussed are investment projects. Treasury commented that
investment projects should be discussed separately from adjustment
loans, which are the Bank's primary instrument for promoting policy
reform. However, we found in our discussions with Bank officials
that investment lending has been a major tool for promoting sector
policy reform, and the Bank provided us with additional data to
support that this is the case. The principal focus of our discussion
of development effectiveness is on the Bank's rate of success in
achieving various types of objectives, including policy reform. As
discussed in chapter 3, adjustment lending has had a somewhat better
record in achieving policy reform objectives than investment projects
have; however, the rate of success of adjustment lending is still
relatively low. Our report acknowledges the impact that
Bank-promoted policy reforms have had when substantially implemented,
especially their generally positive effect on reducing poverty.
Treasury asserted that our report does not sufficiently highlight the
wide regional differences evident in project success rates. Treasury
believes that these differences suggest that local conditions rather
than inherent design flaws and implementation management are a key
determinant of project success. Our report does point out regional
differences in project success rates (see table 3.1), but our
analysis of available data did not indicate that local conditions
were necessarily a more important determinant of project success than
other factors such as the adequacy of project design or
implementation management. The Bank also considers factors other
than local conditions to be critical, and several of its reform
initiatives focus on them.
Finally, Treasury emphasized that the Bank is making a serious effort
at meaningful reform but that continued monitoring of the results of
these reforms is important to ensure that they have a positive
impact. Treasury also believes that continued U.S. leadership will
be indispensable for following through on the World Bank's reform
agenda. We concur with Treasury on these points.
COMMENTS FROM THE WORLD BANK
-------------------------------------------------------- Chapter 6:2.2
The Bank criticized our "exclusive reliance" on the results of the
Bank's project evaluation system as a vehicle for assessing
development effectiveness. The Bank stated that our failure to
evaluate the entire scope of its activities prevented us from
presenting a balanced view of the Bank's operations and
effectiveness. According to the Bank, the report missed the Bank's
catalytic role in development, because it overlooked the most
important areas of Bank involvement, including policy dialogue
undertaken outside the framework of specific projects and efforts to
enhance the underlying environment for private sector investment.
We acknowledge that project effectiveness is only a partial measure
of the overall impact of the Bank's efforts. We report these data in
detail because they capture, in coherent fashion, the effectiveness
of a very large portion of the Bank's activities (representing 86
percent of the Bank's outlays in fiscal year 1995). Similar data was
not available to capture the overall effectiveness of the Bank's
other activities, and in our view anecdotal information is not a
satisfactory substitute. Furthermore, as noted on the first page of
chapter 3, measuring the Bank's broader impact on developing
countries is virtually impossible, given the variety of other factors
at work and the fact that one can only speculate as to what might
have happened in particular countries in the absence of the Bank's
activities.
While we do not attempt to capture the overall impact of the Bank's
nonproject operations, our report does acknowledge and describe these
activities and comments on their effectiveness to the extent
possible. Chapter 5 reports that the Bank's overall efforts, both
lending and nonlending, support U.S. foreign policy goals. As the
Bank's response to our report noted, chapter 2 states that the
private sector officials with whom we spoke viewed the Bank as a
positive force for market-oriented reform in the developing world.
Chapter 4 reports that the Country Assistance Strategy (CAS) process,
initiated 4 years ago, is helping the Bank to focus its resources
more effectively. Chapter 4 also reports that we reviewed a number
of CASs and that this review, in addition to other available data,
shows that the Bank appears to be adjusting lending levels to reward
better performance in borrowing countries. As Bank officials have
often pointed out, the impact of these efforts on project performance
will not be fully demonstrated for several years.
The Bank also commented that the report neglected to credit IFC for
its wide range of activities promoting private investment throughout
the world. A significant portion of chapter 2 is devoted to
describing IFC's efforts to enhance private investment. The report
highlights IFC's lending and advice services as well as its efforts
to facilitate the entry of businesses into new markets.
The Bank commented that our report gave little attention to the
progress of its reform efforts. We reviewed the Bank's reform
actions and agree that the Bank has made some progress and that the
reform agenda addresses key performance problems. However, in
several areas the impact of the reforms has yet to be demonstrated or
it was too soon to assess actual results. Continued monitoring and
reporting by Treasury on the progress of these reforms, as we
recommend, is important to ensure that the reforms have a positive
impact.
COMMENTS FROM THE DEPARTMENT
OF STATE AND THE U.S.
AGENCY FOR INTERNATIONAL
DEVELOPMENT
-------------------------------------------------------- Chapter 6:2.3
In its comments, the State Department emphasized the important role
that the World Bank plays in development as well as in furthering
U.S. foreign policy. The State Department reiterated the World
Bank's concern that we did not fully acknowledge the Bank's role in
promoting market-oriented reform in developing countries. The State
Department also mentioned the importance of U.S. leadership in
promoting reform at the Bank.
The U.S. Agency for International Development stated that the World
Bank plays an important role in the effectiveness of the U.S.
bilateral aid program. USAID noted that at the country level the
Bank coordinates policy reform and donor assistance efforts of
bilateral donors, including the United States. USAID also stated
that the Bank has played a leadership role in coordinating donor
efforts in pursuing environmental concerns.
INTERNATIONAL BANK FOR
RECONSTRUCTION AND DEVELOPMENT AND
INTERNATIONAL DEVELOPMENT
ASSOCIATION PROJECT CYCLE
=========================================================== Appendix I
The International Band for Reconstruction and Development (IBRD) and
the International Development Association (IDA) project cycle
includes six phases: identification, preparation, appraisal,
negotiation and board presentation, implementation and supervision,
and evaluation. Each phase can last several months or years,
depending on the nature and complexity of the project. The following
description of the six phases is derived primarily from The Project
Cycle, a pamphlet by Warren C. Baum, published by the World Bank.
IDENTIFICATION
--------------------------------------------------------- Appendix I:1
The first phase of the cycle is identification of projects that are
suitable for Bank support within the context of the Bank's Country
Assistance Strategies in particular countries and that are a high
priority for the borrowing entities.\1 The Bank encourages and helps
borrowing countries develop their own planning capabilities, and it
often assists in planning by carrying out economic and sectoral
analyses to provide a framework for understanding a country's
problems and the potential for development. The Bank also assesses a
country's creditworthiness and, according to a senior Bank official,
reviews the potential for private sector support of proposed
investments. For a project to be considered for Bank financing, the
cost of likely technical and institutional solutions must be
commensurate with expected benefits. Once identified, projects are
incorporated into a multiyear lending program for each country.
--------------------
\1 A borrower from the Bank may include a member government, a public
agency or corporation, or a private body or corporation with the
government's guarantee. IDA credits are made only to governments, to
be passed on, if necessary, to the entity responsible for carrying
out the project.
PREPARATION
--------------------------------------------------------- Appendix I:2
In the preparation phase of a project, a brief is written that
describes the project's objectives, identifies principal issues, and
establishes a timetable for its further processing. Formal
responsibility for preparation rests with the borrower; only in
exceptional cases does the Bank itself do preparatory work. However,
the Bank can provide financial and technical assistance for project
preparation, either independently or in cooperation with other
bilateral and multilateral donors. Documents prepared during this
phase must identify and compare alternative approaches and address
the full range of technical, institutional, economic, and financial
conditions necessary to achieve the project's objectives.
APPRAISAL
--------------------------------------------------------- Appendix I:3
Appraisal constitutes a comprehensive review of the technical,
institutional, economic, and financial aspects of the project and
lays the foundation for implementing the project and evaluating it
when completed. Appraisal is solely the Bank's responsibility and is
done by Bank staff, who typically spend 3 to 4 weeks in the field for
this purpose.
-- Technical appraisal is done to ensure that the project is
soundly designed, appropriately engineered, and follows accepted
standards. Bank staff review the technical alternatives,
proposed solutions, and expected results.
-- Institutional appraisal addresses whether the institution
implementing the project is properly organized and its
management is adequate, local capabilities and initiatives are
used effectively, and policy or institutional changes outside
the entity are required to achieve project objectives.
-- Economic appraisal includes final review and assessment of the
cost-benefit analysis of alternative project designs to ensure
that the design selected contributes most to the country's
development objectives. Bank personnel also examine the
country's entire investment program for the sector, the
strengths and weaknesses of relevant public and private sector
institutions, and key government policies.
-- Financial appraisal is conducted to ensure that the borrower
will have sufficient funds to implement the project, that the
project is financially viable, and that pricing and cost
recovery policies are appropriate.
The Bank staff prepare a staff appraisal report that sets forth its
findings and recommends terms and conditions of the loan. A project
may be extensively modified or redesigned to correct flaws identified
during the appraisal. Bank management officials review the report
before approving further negotiations with the borrower.
NEGOTIATIONS AND BOARD
PRESENTATION
--------------------------------------------------------- Appendix I:4
At the negotiation phase, the Bank and the borrower come to agreement
on the measures necessary to ensure the success of the project.
These agreements are then converted into legal obligations, which are
set out in the loan documents. All of the principal issues that have
been raised prior to and during appraisal are addressed in the loan
documents.
After negotiations are completed and the project has been approved by
Bank management, it is presented to the Bank's executive directors
for final approval. The executive directors review and consider the
appraisal report (amended to reflect the agreements reached), the
loan documents, a memorandum and recommendation of the Bank
President/President's report, and the related Country Assistance
Strategy. These documents include a discussion of how the proposed
project takes into account the country's priorities and its portfolio
performance.\2 If the executive directors approve the project, the
loan documents are signed in a simple ceremony.
--------------------
\2 The requirement to submit the Country Assistance Strategy was
added in January 1995.
IMPLEMENTATION AND SUPERVISION
--------------------------------------------------------- Appendix I:5
Project implementation is the responsibility of the borrower,
although the Bank may provide assistance in such forms as
organizational studies, staff training, or the provision of
consultants to help supervise construction. The Bank supervises
implementation to ensure that the project achieves its objectives and
works with the borrowers to identify and deal with problems.
Supervision is also meant to ensure that the borrower procures goods
and services in accordance with agreed-upon guidelines.
During negotiation, agreements are reached on a schedule of progress
reports to be submitted by the borrower. Progress reports are
reviewed at headquarters, and problems are dealt with by
correspondence or in the course of the field missions periodically
sent to every project.
Using a standard evaluation form, Bank staff regularly assess the
performance of each project during implementation and upon the final
disbursement of loan funds. The assessments address implementation
progress and the likelihood that the project will achieve its
development objectives. Projects performing poorly in either of
these two areas are deemed problem projects. In addition, the Bank
and borrowers may jointly conduct mid-term reviews of individual
projects and more comprehensive country portfolio performance
reviews. If major problems are persistent or circumstances change
significantly, jeopardizing successful implementation of a project,
the Bank and borrower may restructure the project, modifying its
scope, objectives, and/or implementation methods.
EVALUATION
--------------------------------------------------------- Appendix I:6
In 1970, an evaluation system was established as the final phase of
the project cycle. After completion of a project, when the loan
funds have been fully disbursed, the Bank project staff--and/or the
borrower--prepare a completion report. In this report, the project
is assigned one of six ratings, ranging from highly unsatisfactory to
highly satisfactory. The Bank's Operations Evaluation Department
(OED),\3 reviews each report and provides evaluative comments to the
executive directors. In addition, for a portion of the projects
(currently about 25 percent), OED conducts an independent audit and
assigns its own project ratings. Most audits are based on a desk
review of all materials pertaining to the project and, when
necessary, a field review, sometimes as comprehensive as the original
appraisal. Borrowers are asked to comment on the OED audits.
Completion reports and audit reports include reestimation of the
economic rate of return, when applicable, on the basis of actual
implementation costs and updated information on operating costs and
expected benefits. OED also conducts impact evaluations at least 5
years after the last disbursement for a small number of carefully
selected projects.
--------------------
\3 OED is entirely separate from the operating staff of the Bank and
reports directly to the Board's executive directors.
PRIVATE SECTOR FIRMS INTERVIEWED
========================================================== Appendix II
Firm Location
-------------------------------------------------- ------------------
ANZ Securities, Inc. New York, New York
Chase Manhattan Bank, N.A. New York, New York
Chemical Bank New York, New York
Citibank New York, New York
Daiwa Securities America Inc. New York, New York
Financial Securities Assurance New York, New York
Merril Lynch New York, New York
Peregrine Securities New York, New York
TIAA-CREF New York, New York
Standard Chartered Bank Los Angeles,
California
Union Bank Los Angeles,
California
Bank of America San Francisco,
California
Bechtel San Francisco,
California
ANZ Grindlays Bank plc London, England
Chase Investment Bank Ltd London, England
Chemical Bank London, England
ING/Barings London, England
Standard Bank London London, England
West Merchant Bank Ltd London, England
AES China Generating Co. Ltd Beijing, China
Louis Berger International, Inc. Beijing, China
Motorola (China) Electronics Ltd. Beijing, China
Salomon Brothers Inc. Beijing, China
Westinghouse Electric (China) S.A. Beijing, China
Chemical Bank Shanghai, China
Citibank, N.A. Shanghai, China
ING/Barings Shanghai, China
Price Waterhouse Shanghai, China
American International Assurance Hong Kong
Bank of America Hong Kong
Caterpillar China Ltd Hong Kong
Chemical Bank Hong Kong
Citicorp International Ltd Hong Kong
Consolidated Electronic Power Asia Ltd Hong Kong
Credit Suisse Hong Kong
First Chicago Hong Kong
Goldman Sachs (Asia) L.L.C. Hong Kong
Hong Kong & Shanghai Bank Hong Kong
Mass Transit Railway Corporation Hong Kong
Morgan Stanley Hong Kong
Parsons Brinkerhoff (Asia) Ltd. Hong Kong
Standard Chartered Bank Hong Kong
Bank of Tokyo/Project Finance Tokyo, Japan
Bank of Tokyo/Capital Markets Tokyo, Japan
Fuji Bank and Fuji Research Tokyo, Japan
Sumitomo Bank Tokyo, Japan
Marubeni Tokyo, Japan
Mitsubishi Tokyo, Japan
Nomura Securities Tokyo, Japan
Yamaichi Securities Tokyo, Japan
Daiwa Securities Tokyo, Japan
Bank of America New Delhi, India
Chemical Bank Bombay, India
Citibank New Delhi, India
Standard Chartered Bank Singapore
Templeton International Singapore
Midland Armenia Bank jsc Yerevan, Armenia
Hill International Overseas, Inc. Yerevan, Armenia
Other private entities\a
American International Group, Inc. New York, New York
E.W. Payne Ltd/Sedgewick House London, England
HISCOX Syndicates Ltd (Lloyd's) London, England
Moody's New York, New York
Morrison & Foerster Hong Kong
Standard & Poor's New York, New York
Standard & Poor's Hong Kong
----------------------------------------------------------------------
\a These private sector companies were not included in the
displacement and enhancement analysis because they are not directly
involved in capital investment.
(See figure in printed edition.)Appendix III
COMMENTS FROM THE DEPARTMENT OF
THE TREASURY
========================================================== Appendix II
the end of this appendix.
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
The following is GAO's comment on the Department of the Treasury's
letter dated September 9, 1996.
GAO COMMENT
-------------------------------------------------------- Appendix II:1
1. We agree that the Bank's follow-through on its commitments is
critical. We also agree that the Bank generates a considerable
volume of information that is useful in assessing progress. We note,
however, that much of this information is not sufficiently
highlighted in Bank documents or is not publicly available. Our
recommendation is intended to provide Members of the Congress and
other interested observers with meaningful and readily available
information to objectively evaluate the Bank's progress toward
achieving greater effectiveness.
(See figure in printed edition.)Appendix IV
COMMENTS FROM THE WORLD BANK
========================================================== Appendix II
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
The following are GAO's comments on the World Bank's letter dated
September 9, 1996.
GAO COMMENTS
-------------------------------------------------------- Appendix II:2
1. We acknowledge that the Bank invests considerable resources in
evaluating its own operational effectiveness, that the Bank's
evaluation efforts are commonly held in high esteem by experts on
international development organizations in general, and that the
information generated by these efforts is very useful. However, we
did not attempt to evaluate the Bank's evaluation systems or compare
them to those employed by other multilateral or bilateral assistance
agencies.
2. To avoid as much misinterpretation as possible, we have used the
Bank's own nomenclature and published definitions and explanations of
that nomenclature to describe project performance. We also included
the Bank's own caveat that unsatisfactory projects may have made
significant contributions to development. Also, we specifically
avoided equating the term "unsatisfactory project" with failure.
(See figure in printed edition.)Appendix V
COMMENTS FROM THE DEPARTMENT OF
STATE
========================================================== Appendix II
(See figure in printed edition.)
(See figure in printed edition.)Appendix VI
COMMENTS FROM THE U.S. AGENCY FOR
INTERNATIONAL DEVELOPMENT
========================================================== Appendix II
(See figure in printed edition.)
MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix VII
NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON, D.C.
------------------------------------------------------- Appendix VII:1
Jaime Dominguez
John Hutton
Venecia Kenah
Bruce Kutnick
Michael McAtee
Thomas Melito
James Michels
Tetsuo Miyabara
Stanton Rothouse
Michael Zola
OFFICE OF GENERAL COUNSEL,
WASHINGTON, D.C.
------------------------------------------------------- Appendix VII:2
Mark Speight
LOS ANGELES FIELD OFFICE
------------------------------------------------------- Appendix VII:3
Joyce Akins
*** End of document. ***