46145 Public Disclosure Authorized - World Bank · 2016. 7. 10. · GRAAA HD HDN HNP HR IBRD ICR...

FEBRUARY I S 9 2008 (MAIN REPORT)

QUALITY ASSURANCE GROUP

46145P

ublic

Dis

clos

ure

Aut

horiz

edP

ublic

Dis

clos

ure

Aut

horiz

edP

ublic

Dis

clos

ure

Aut

horiz

edP

ublic

Dis

clos

ure

Aut

horiz

edP

ublic

Dis

clos

ure

Aut

horiz

edP

ublic

Dis

clos

ure

Aut

horiz

edP

ublic

Dis

clos

ure

Aut

horiz

edP

ublic

Dis

clos

ure

Aut

horiz

ed

GiaffEVIATlQNS AND ACRONYMS

AAA ACS ADB AFR

AfDB APL ARPP ARDE BB

BW C-AAA CAE CAS CASCR CEM CFAA CMU CODE CPAR CPIA CPPR CSR

DGF DO DPL DPO DPR DRL EAP ECA ECO EMT ENV EP ERL ESW EXT FEU FIL FPD

FSE

Analytic and Advisory Activities Activity Completion Summary Asian Development Bank Africa Region

African Development Bank Adaptable Program Loan Annual Report on Portfolio Performance Annual Report on Development Effectiveness Bank Budget

Business Warehouse Country Analytic and Advisory Activities Country Assistance Evaluation Country Assistance Strategy CAS Completion Report Country Economic Memorandum Country Financial Accountability Assessment Country Management Unit Committee on Development Effectiveness Country Procurement Assessment Review Country Policy and Institutional Assessment Country Portfolio Performance Review Controller’s, Strategy and Resource Management Development Grant Facility Development Objectives Development Policy Lending Development Policy Operations Development Policy Review Debt Service Reduction Loan East Asia and Pacific Region Europe and Central Asia Region Expanded Co-Financing Operation Energy and Mining Environment Economic Policy Emergency Recovery Loan Economic and Sector Work External Affairs Department Finance, Economics and Urban Department Financial Intermediary Loan Finance and Private Sector Development++

Finance Network++

FY GEF GPP GRAAA

HD HDN HNP HR IBRD

ICR IDA IDB IEG IFA IG IP ISR INF INV LICUS LCR LIL

M&E MDGs MIC MNA MP MUV NLTA oc ODA OPCS PA PAD PDO PER PN PRC PPAR PREM

PSDN

Fiscal Year Global Environment Facility Global Programs and Partnership Global and Regional Analytic and Advisory Activities Human Development Human Development Network Health, Nutrition and Population Human Resources International Bank for Reconstruction and Development Implementation Completion Report International Development Association Inter-American Development Bank Independent Evaluation Group (formerly OED) Integrated Fiduciary Assessment Investment Grade Implementation Progress Implementation Status and Results Report Infrastructure Investment Operations Low-Income Countries Under Stress Latin America and the Caribbean Region Lending and Innovation Loans

Monitoring and Evaluation Millennium Development Goals Middle-Income Countries Middle East and North Africa Region Montreal Protocol Manufacturers Unit Value Non-Lending Technical Assistance Operations Committee Official Development Assistance Operations Policy and Country Services Poverty Assessment Project Appraisal Document Project Development Objective Public Expenditure Review Policy Note Poverty Reduction Support Credit Project Performance Assessment Report Poverty Reduction and Economic Management Network Private Sector Development Network++

++ In FY08, FSE and PSDN networks merged into FPD.

PSG PSL QAG QEA QER QSA RDV RETF RIL ROC S A L SAP

SAR S D N

Public Sector Governance Programmatic Structural Adjustment Loan Quality Assurance Group Quality-at-Entry Assessment Quality Enhancement Review Quality o f Supervision Assessment Rural Development Recipient Executed Trust Fund Rehabilitation Loan Regional Operations Committee Sector Adjustment Loan Systems Application and Products in Data Processing South Asia Region Sustainable Development Network

SDV SIL S I M SF S M U SND SP SSL SWAP TA TAL TF

TTL URB

Social Development Specific Investment Loan Sector Investment & Maintenance Loan Special Financing Sector Management Unit Sub-National Department Social Protection Special Structural Adjustment Lending Sector Wide Approach Technical Assistance Technical Assistance Loan Trust Fund

Task Team Leader Urban

ANNUAL REPORT ON PORTFOLIO PERFBRIWIGNCE FISCAL YEAR 2007

CONTENTS

EXECUTIVE SUMMARY .......................................................................................................................... i

I . I1 .

I11 .

Iv .

V .

V I .

Introduction .................................................................................................................................... 1

Approvals and Portfolio Size and Composition .......................................................................... 2 A . Aggregate Trends ................................................................................................................... 3 B . Focus o f Lending ................................................................................................................... 9 C . IDA and Fragile States ......................................................................................................... 11 D . IBRD .................................................................................................................................... 12 E . Innovations in Lending ........................................................................................................ 13 F . Infrastructure ........................................................................................................................ 14 G . Recommendations ................................................................................................................ 15

Portfolio Performance ................................................................................................................. 16 A . Development Outcomes o f Projects ..................................................................................... 17 B . Portfolio Perfomance and Measurement ............................................................................ 26 C . Recommendations ................................................................................................................ 33

Analytic and Advisory Activities ................................................................................................ 34 A . Trends in Expenditures and Deliveries ................................................................................ 35 B . Quality o f AAA .................................................................................................................... 41 C . Recommendations ................................................................................................................ 46

Development Outcomes of Country Programs ......................................................................... 47 A . Trends in Program and Project Outcomes ........................................................................... 47 B . Factors Contributing to Low Program Outcomes ................................................................ 50 C . Divergence between Program and Project Outcomes .......................................................... 52 D . Recommendations ................................................................................................................ 55

Recommendations ........................................................................................................................ 56

BOX 2.1: The Portfolio Dynamics ............................................................................................................ 4

F I G U R E S Figure 2.1: Figure 2.2: Figure 2.3: Figure 2.4: Figure 2.5: Figure 2.6: Figure 2.7: Figure 3.1 :

Trends in Approvals. Disbursements. and Portfolio (FY00-07) ............................................ 3 Approval Trends in Multilateral Development Banks (2000-07) .......................................... 4 Portfolio Concentration (FY02 vs . FY07) ............................................................................. 5 Preparation Time and Cost per Investment Lending Operation ............................................. 7 Preparation Time and Cost per Development Policy Operation ............................................ 8 Approvals for Fragile States (FY03-07) .............................................................................. 12 IBRD Approvals by Client Segment (3-Year Moving Average in Real Terms) ................. 13 Proportion of Operations with Satisfactory Outcomes ........................................................ 18

Figure 3.2: Figure 3.3: Figure 3.4: Figure 3.5: Figure 3.6: Figure 4.1 : Figure 4.2: Figure 4.3: Figure 4.4: Figure 4.5: Figure 5.1: Figure 5.2: Figure 5.3:

TABLES Table 2.1 : Table 2.2: Table 2.3: Table 3.1: Table 3.2: Table 3.3: Table 3.4: Table 3.5: Table 4.1 : Table 4.2: Table 4.3: Table 4.4: Table 4.5: Table 5.1 : Table 6.1 : Table 6.2:

ANNEXES Annex 1 Annex 2

Project Outcomes by Region ............................................................................................... 19 Major Improvers by Sector Board ....................................................................................... 20 Major Decliners by Sector Board ......................................................................................... 21 Proportion o f Operations with Satisfactory Outcomes (IBRD vs . IDA) ............................. 24 QEA8 Results by Quality Dimension .................................................................................. 31 Share o f Country Services Expenditures (FY02 vs . FY07) ................................................. 35 Unit Cost in Real Terms of Dropped AAA Tasks (FY03-07) ............................................. 37 Preparation T ime o f AAA Deliveries (FY03-07) ................................................................ 38 Quality o f E S W Product Types ............................................................................................ 43 Total Cost in Real Terms o f Dropped AAA Tasks (FY03-07) ............................................ 44 Performance o f Country Programs and Related Projects ..................................................... 48 Factors Contributing to Unsatisfactory CAEs ..................................................................... 50 Sector and Aggregate Project Ratings (FYO1-07 CAEs) ..................................................... 53

Gross and Net Disbursements (FY05-07) .............................................................................. 6 Approvals by Theme (FY00-07) .......................................................................................... 10 Approvals by Sector (FYOO-07) ........................................................................................... 15 IEG Evaluations for Afr ica and Other Regions (FY04-07) ................................................. 19 Results o f QAG Assessments for HNP ................................................................................ 22 FY04-07 IBRD and IDA Performance Gap by Sector Board .............................................. 25 FY07 Risk Ratings . QAG Review vs . ISR ........................................................................ 27 Reported Problem Projects vs . Actual Unsatisfactory Projects ........................................... 28 AAA Programs by Number and Cost (FY03-07) ................................................................ 36 Core Diagnostic Reports Coverage (FY04 vs . FY07) ......................................................... 38 Number and Unit Cost o f E S W Deliveries by Output Type ................................................ 39 Quality o f Country Programs ..................................................................................... 42 Status o f Recommendations f rom AAA Assessments ........................................................ 45 Country Program vs . Project Portfolio Performance ........................................................... 49 Status o f FY02-06 ARPP Recommendations ...................................................................... 56 Consolidated ARPP Recommendations ............................................................................... 57

The Portfolio . An Overview Table .................................................................................... 59 Basic Portfolio Definitions and Data Sources ...................................................................... 60

STATISTICAL APPENDIX

ACKNOWLEDGMENTS Th is report was prepared by Albert Martinez with inputs from Amnon Golan. Marc Blanc. Inder

Sud. Jose Sokol. Vinay Bhargava. Roger Grawe. h a Hartmann. Fred Swartzendruber. Eugene McCarthy. Peter Ludwig. Brad Herbert. Irfan Aleem. Rema Balasundaram. and Melvin Vaz . Helpful advice was received from the Advisory Panel composed o f Alain Barbu. Gisu Mohadjer. Sally Zeijlon. Richard Scobey. Raja Iyer. Hoveida Nobakht. Joel Maweni. Brigitte Duces and Tawhid Nawaz . Administrative support was provided by Conchita Castillo. Josephine Onwuemene. and Amelia Laya .

Prem Garg. Director. and Xavier Legrain. Acting Director. Quality Assurance Group. guided the overall effort .

Annual ReDort on Portfolio Performance FY07 i

EXECUTIVE SUMMARY

1. The Annual Report on Portfolio Performance (ARPP) provides the Board and Management with a strategic overview o f the size, composition, and quality o f the Bank’s lending portfolio and Analytic and Advisory Activities (AAA) program. I t also provides Senior Management with real t ime information to assess what i s working well, or less well, together with recommendations on measures to sustain and improve quality and effectiveness o f the portfolio and o f the AAA program - two key vehicles for delivering results to clients.

TRENDS IN APPROVALS AND PORTFOLIO

2. The Bank’s portfolio at end-FY07 consisted of 1,485 operations with net commitments of $100.4 billion representing a decline in real terms compared to five years ago. Investment operations accounted for 95 percent o f the portfolio since most Development Policy Operations (DPOs) close within one year o f approval. There was a decrease in portfolio concentration; the ten largest borrowers accounted for ha l f the portfolio in terms o f commitments in FY07 compared to about 60 percent five years ago.

3. There are five trends and characteristics of Bank lending operations and portfolio worth noting. First, Bank efforts have maintained IBRD lending levels in real terms during the past five years despite a contraction in demand for sovereign external financing. Within the IBRD client group, Blend countries experienced increases in approvals. However, lending in real terms to core IBRD countries, which accounted for ha l f o f IBRD lending, has been stagnant with underutilized lending envelopes. It i s recommended that Management explore opportunities to increase financial and non-financial assistance and services to the core IBRD countries.

4. Second, resource transfers to Fragile States increased significantly in FY07, the highest level since FY02. Fragile States accounted for about a fifth o f IDA FY07 approvals, with post conflict countries receiving about a third o f resource transfers to Fragile States. In addition, about 40 percent o f Recipient Executed Trust Fund project approvals in FY07 went to Fragile States. However, only 61 percent o f Fragile States projects exiting the portfolio during FY04-07’ were rated by IEG as satisfactory. In addition, QSA7 found weaknesses in project design and readiness for implementation in Fragile States projects included in the sample.

5. Third, the infrastructure sectors have been the main source of growth in lending during the past five years. This reflects the large financing needs in infrastructure and the importance o f infrastructure in improving access to services especially by the poor. The growth in lending is a successful response to the 2003 Infastructure Action Plan which sought to reverse the decline at that time in the Bank’s infrastructure lending. Almost ha l f o f the Bank’s current portfolio i s composed o f infrastructure projects, with Transport accounting for ha l f o f the infrastructure portfolio. The challenges facing infkastructure lending include managing the interface with other sectors and responding to cross-border issues. The recent merger o f the

’ About half o f FY07 exits have been evaluated by IEG.

Annual Renort on Portfolio Performance FY07 11

Infrastructure and Environmentally and Socially Sustainable (ESSD) networks is part o f the response to these challenges.

6. Fourth, though simple and repeater operations have increased, Bank operations include many new approaches and innovations. The Bank’s work in Middle Income Countries has been responsive to demand f i o m sophisticated clients for new products and services as wel l as increased efficiency o f delivery. Multi-country and regional programs and projects are increasing in recognition o f the need for collective action to address cross-border issues and improve synergies o f individual country programs. The Sub-National Development Program was created in 2006 to address the lack o f Bank instruments to support an important and growing client segment. There has been rapid growth o f Additional Financing operations in investment lending and a major shift to programmatic approaches in Development Policy Operations. Carbon Finance operations have been growing, with Operations Policy and Country Services (OPCS) issuing guidelines in October 2007 to improve design and risk assessment and mitigation. The quality assurance processes wil l have to keep pace with the introduction o f new products and approaches.

7. Fifth, aggregate trends in lending during the past five years reflect how the Regions implemented the Bank strategy’ introduced in F Y O 1 . Thematically, about a quarter o f lending went to private sector development, a quarter went to human and social development, a fifth to public sector governance, and the remainder roughly equally divided among urban and rural development and environment. There has been a stronger emphasis in IDA countries on human and social development to support poverty reduction and Mil lennium Development Goals (MDG) implementation, while IBRD operations focused more on economic growth. I t is recommended that Management review whether there should be a shift in focus o f IBRD and IDA lending towards more emphasis on addressing inequality and environment in IBRD countries and more lending in sectors such as infrastructure in IDA countries as argued by some Bank papers.

8. As the Bank moves towards new strategic directions, there will be a shift in emphasis of existing programs and introduction of new approaches. Perhaps the major challenge will be operationalizing the global public goods initiative, though much can be learned fi-om the current work on multi-country approaches. Global Programs and Partnerships (GPPs) are important instruments for supporting global initiatives - an FY07 QAG review found improvement in quality-at-entry and oversight o f Window Two programs compared to the FY06 assessment results, though Regions indicated room for greater integration o f GPPs in Regional Strategies. Future ARPPs could review progress in lending, AAA, and other Bank programs towards the new strategic directions.

BANK PERFORMANCE

9. Development outcomes of operations exiting the Bank portfolio continued to improve through FY06, though IEG evaluation of half of FY07 exits shows lower outcomes

Strategic Framework Paper, January 2001.

... Annual ReDort on Portfolio Performance FY07 111

in terms of number of operations. On the basis o f a three year moving average, about 80 percent by number o f projects, and 87 percent by disbursement, o f FY06 exits were rated by IEG as satisfactory. T h i s represents sustained improvement in performance since FY90 when one o f three projects was unsatisfactory. The aggregate project performance meets the 80 percent goal set by Management a decade ago. However, Management wil l have to continue to monitor recent performance.

10. There was deterioration in aggregate outcomes o f AFR projects from 83 percent in FY04 to 65 percent in FY06. The FY07 performance thus far i s slightly lower than that o f FY06 based on evaluation o f about ha l f the FY07 exits. Within IDA, AFR performance i s lower than the rest o f the Bank. The performance o f Fragile States projects in AFR is significantly worse than that in other Regions. However, QEA8 rated FY06-07 AFR approvals as satisfactory. The next QSA should include an assessment o f the quality o f older projects in the AFR portfolio to determine the trajectory o f outcomes during the next few years.

11. Among Sector Boards, there were declines in project performance in Health, Nutrition and Population, Private Sector Development, and Public Sector Governance during FYO4-07 compared to FY01-03. A review o f the IEG evaluations revealed that project design flaws were the main factors contributing to unsatisfactory outcomes in these Sector Boards. In a significant number o f cases, the projects were approved with lack o f government commitment. In many cases, the design flaws were rooted in unrealistic assumptions o f absorptive capacity o f the Borrower, and project supervision was not able to successfully address weaknesses in quality-at-entry. The Regions and relevant Sector Boards should review the current portfolio to correct design flaws in existing projects and ensure more rigorous quality assurance o f new projects, focusing on government commitment and capacity. The next QSA should also assess the portfolio o f the above Sector Boards and recommend appropriate courses o f action.

12. The results o f QEA8 indicate a greater than 90 percent satisfactory quality-at-entry of projects approved in FYO6-07. There i s also a convergence o f performance by Regions compared to previous years. Historically, QEA ratings are about 10 percentage points higher than actual project outcomes. Based o n QEA results since FYOO, as wel l as satisfactory QSA outcomes, Bank performance should continue to be at above 80 percent satisfactory.

13. With respect to supervision, QAG reviews had some findings of significance. First, the Proactivity Index indicates that teams have been addressing in a satisfactory manner the underlying issues o f problem projects. A Q A G review found that the Index understates actual proactivity, but recommended no changes at this time to the measurement after assessing the cost-benefit o f such a move. Second, the number o f projects with delayed effectiveness has been increasing mainly due to lengthy client approval processes and the number o f effectiveness conditions. Several Regions are now addressing the factors contributing to delayed effectiveness. Third, QSA7 found no significant difference in quality o f supervision o f HQ vs. field based TTLs - both showed satisfactory efforts overall. However, more could be done to complement local presence with appropriate use o f HQ staff with global experience.

Annual Report on Portfolio Performance FY07 iv

14. Notwithstanding the satisfactory overall results from QAG assessments, there are several areas with scope for improvement. Moving to a higher level o f performance in quality-at-entry requires the strengthening o f three aspects: (a) more realistic results framework and objectives; (b) better risk assessment and mitigation; and (c) improved implementation readiness. Further improvements in the quality o f supervision would require: (a) more effective management attention; (b) timely identification and action on threats to development objectives; and (c) stronger skills mix. Various QAG assessments have identified effectiveness o f managerial oversight as a critical factor that differentiated fully or highly satisfactory from moderately satisfactory project performance. Some Regions have begun to address the issue o f overextended sector managers.

15. Measuring and tracking portfolio performance have been ineffective due to the lack of candor in project reporting. The Realism Index continues to show significant under- reporting o f project risks, a problem that has been recognized for some time but has not been effectively addressed. A recent QAG review o f quality o f reporting covering the FY07 portfolio estimated the share o f problem projects in the portfolio to be twice that reported in ISRs. The finding i s the same as that o f QSA7, which covered the FY06 portfolio. The realism problem i s acute in IDA countries, in particular in Fragile States. The usefulness o f the current system o f portfolio reporting as a management tool is dependent on improving candor in reporting project performance and risks. OPCS will monitor the impact o f the new Realism Index to see whether any further action on portfolio reporting was necessary.

16. One way forward towards improving portfolio performance measurement and reporting i s to establish a stronger link between risks identified at entry and the reporting of project performance. The current system rates projects entering the portfolio at zero risk, and flags project risk only when problems begin to surface. The revision o f the measurement and monitoring o f project risk during implementation should build on the reforms initiated in July 2007 to ensure a more systematic and comprehensive assessment o f risks at appraisal. It i s recommended that OPCS and Q A G work towards reviewing and recommending appropriate changes to the current system o f portfolio risk measurement and reporting.

ANALYTIC AND ADVISORY ACTIVITIES

17. The importance of M A as an instrument of Bank support has been growing. T h i s i s reflected in the increasing share o f AAA expenditures in the country services envelope - AAA expenditures in FY07 were higher than that o f lending preparation and almost as high as that o f supervision. The use o f AAA - as measured by i t s share in country services expenditures - has grown in Investment Grade IBRD countries, Blend countries, and Fragile States. This growth i s consistent with the various strategies on improving Bank relevance in IBRD countries and the recommendations from the 2002 LICUS Task Force Report. The increased use o f Trust Funds was a major factor contributing to AAA growth.

18. Several trends in the size and composition of AAA are worth noting. First, there has been a major shift in AAA towards Non-Lending Technical Assistance (NLTA) both in terms o f number as well as value o f tasks. In part, this i s due to an increasing number o f large NLTA

Annual Reuort on Portfolio Performance FY07 V

activities costing more than $0.5 mi l l ion each in the Afr ica Region and the Social Development Sector Board with a large part o f the financing coming from Trust Funds. Second, within ESW, there is a shift from core diagnostic reports to other types o f reports. These developments reflect decisions at the country level on the appropriate mix o f AAA instruments as envisioned in the AAA reforms in 2003. Third, multi-country AAA is a fast growing segment, mainly in AFR where there have also been an increasing number o f multi-country lending operations. Fourth, while post delivery expenditures have been increasing, the Country AAA (C-AAA) assessment found that Dialogue and Dissemination continues to be a weak aspect o f AAA. Finally, unit cost o f ESW tasks increased by 45 percent in real terms during the past f ive years, mainly in Country Economic Memorandums and Country Advisory Reports.

19. QAG also conducted two assessments of AAA programs during lWO3-07 covering a total of 53 countries. The combined findings from the assessments show a mixed picture. O n the positive side, the overall quality o f AAA programs was rated as satisfactory with strong aspects in Internal Quality as wel l as Scope and Strategic Relevance. But several weaknesses were identified; the l o w rating for L ikely Impact i s a major concern-the Bank may be producing good quality tasks which, when viewed in the overall strategic country context, may not be addressing the most critical developmental constraints. Coherence and Integration o f country AAA programs was the weakest aspect and with Dialogue and Dissemination contributed to lower ratings for L ike ly Impact. These are in turn explained by inadequate management attention to quality.

20. In response to the increase in the costs of dropped AAA tasks highlighted in last year’s ARPP, QAG carried out a review of dropped AAA tasks as a basis for identifying systemic recommendations. Two key findings emerged from the review. First, Value for Money - effective use of resources in relation to benefits - was found to be good overall. Indeed, a large majority o f the tasks in the sample were judged to have produced satisfactory results. Second, Quality of Process was found to be poor, often reflecting inadequate institutional processes that hamper monitoring and tracking of AAA. About a third o f the tasks assessed by Q A G were misclassified. The process problems were particularly acute for AAA tasks that are programmatic, multi-sectoral or global/regional in nature.

COUNTRY PROGRAM PERFORMANCE

21. There i s a disconnect between aggregate performance of lending and AAA projects and the performance of country programs, which are rated below 60 percent satisfactory based on completed Country Assistance Evaluations (CAEs) during the past ten years. A QAG review o f CAEs with unsatisfactory ratings found that two factors stand out as primary contributors to l ow outcomes: (a) weak design o f country programs; and (b) ineffective country dialogue. Country program design issues included significant omissions, lack o f coherence, and failure to take into account borrower commitment and capacity. Individual project outcomes could be satisfactory but poor program design and ineffective country dialogue would cause the country program to be rated unsatisfactory.

Annual ReDort on Portfolio Performance FY07 vi

22. The 2006 Annual Report on Development Effectiveness (ARDE) found major deviations between sector and project outcomes mainly in Private Sector Development, Public Sector Development, and Rura l Development - the deviations are important because CAS objectives are articulated in terms of sector or thematic outcomes. The QAG review identified three main reasons for the divergence between sector and project outcomes. First, many projects were undertaken which did not address the key development constraints in the sector or had questionable priorities. Second, poor coordination led to l o w outcomes in sectors where cross sector inputs from other Bank projects and donors were critical. Finally, the results frameworks o f both projects and CASs did not have strong linkages among project, sector, and CAS outcomes.

23. The above findings point towards a two track approach to improving program outcomes. First, the CAS design, i.e., quality-at-entry, should be improved by ensuring that the country program addresses key development constraints, i s focused and coherent, and takes into account Borrower commitment and capacity. The introduction o f the results based CASs beginning 2005 should help address the weaknesses in CAS design through the introduction o f a more rigorous results framework. A planned retrospective on the experience with results based CASs would assess progress to date towards improving CAS design. Second, quality assurance should focus on quality o f implementation o f CASs not only at the task level but also at the program level to ensure that the timing and choice o f design o f interventions as wel l as their implementation maximize impact o n CAS outcomes. It i s recommended that OPCS review as part o f the CAS Retrospective the adequacy and effectiveness o f current instruments in ensuring quality o f CAS implementation.

RECOMMENDATIONS

24. A review of recommendations in FYO2-06 ARPPs found that a majority of the recommendations have been completed, but there was less than satisfactory progress in three areas: (a) actions to address structural and incentive issues that constrain Sector Managers from effectively performing their quality assurance responsibilities; (b) actions to address staff and managerial incentives to improve realism in portfolio reporting; and (c) actions to improve management o f AAA. The status o f these recommendations is summarized in Table 1 below. The recommendations which consolidate the findings from the FY07 ARPP and the uncompleted actions from previous ARPPs are shown in Table 2.

Annual ReDort on Portfolio Performance FY07 vii

Recommendations Status

Strengthening Lend

There were 10 recommendations on improving AAA management. These include improving reporting, addressing delays in delivery, improving dialogue and dissemination and improving management oversight. Ha l f o f the recommendations have been implemented.

Business Processes and Portfolio Reporting: There were 12 recommendations on improving processes and portfolio measurement and reporting. These included introducing several guidelines, reforming the PSR system, revising the Realism Index, and strengthening the review and quality assurance processes.

Several recommendations dealing with management oversight and dialogue and dissemination have not yet resulted in satisfactory outcomes based on the latest C- AAA Assessment. Rating: Moderately Unsatisfactory

Staff and Management Incentives and Capacities: There were 4 recommendations: address impediments to Sector Management in ensuring quality; address issues in staf f and management incentives to improve candor in portfolio reporting; upgrading training; and improving support to management.

There were 8 recommendations on the results framework.

Other Quality Issues: There were 10 recommendations relating to other quality issues including those targeting certain groups such as Sector Boards and certain aspects such as adequacy o f resources.

The follow-up to these recommendations will be reported in the upcoming OPCS Results Paper. Rating: Not Rated

P and Portfolio Management

Most o f the recommendations have been implemented. One recommendation - integrating RETF in portfolio - is currently under implementation. Rating: Satisfactory

Some Regions have begun to address the issue o f impediments to sector management in ensuring quality. However, there i s lack o f systemic response to the issue o f candor in project performance reporting, with the Realism Index continuing to be below target. Rating: Moderately Unsatisfactory

Most o f the recommendations have been implemented with satisfactory results. There are lagging areas, such as outcomes o f HNF' and Fragile States projects. Rating: Moderately Satisfactory

Overall Rating for Follow-up to Previous ARPP Recommendations: Moderately Satisfactory

... Annual ReDort on Portfolio Performance FY07 V l l l

Recommendation

Table 2: Consolidated ARPP Recommendations

Intermediate Actions Results

Regions to work wi th HNP, PSD, and PSG Sector Boards to address relatively low project outcomes focusing on improving project design at entry and restructuring problem projects in current portfolio.

AFR to sustain efforts to improve project outcomes, focusing on older projects and projects in Fragile States, HDN, PREM, and ESSD.

0 Sector Boards and Regions to agree on role o f Sector Boards in the quality assurance process at entry and to review current portfolio and address threats to satisfactory outcomes. Next QSA and QEA to report on performance o f HNF', PSD and PSG Sector Board projects.

Lending and Portfolio Quality AFR with relevant Sector Boards to review current portfolio and address threats to satisfactory outcomes. Next QSA to report on progress in AFR with respect to targeted portfolio segments.

0

measurement and reporting o f project r i sks by linking risk assessments at entry to risk management during implementation. OPCS to review Regional efforts to address impediments to managerial effectiveness in quality enhancement and lack o f candor in reporting project performance.

changes to the current system o f project risk measurement and monitoring.

OPCS w i l l monitor the impact o f the new Realism Index to see whether any further action on portfolio monitoring was necessary.

Portfolio Measurement and Monitoring I OPCS and QAG to review and recommend OPCS and QAG to reform

OPCS to restructure AAA definitions, guidelines and systems to improve results orientation, results measurement, and governance arrangements. These initiatives would help address recurring issues o f lack o f adequate management oversight and weak dialogue and dissemination.

AAA OPCS to review AAA definitions, guidelines and systems to improve monitoring, measurement, results orientation and governance arrangements to address recurring issues o f lack o f management oversight.

Narrowing o f performance gaps between AFR and rest o f the Bank with respect to outcomes o f projects in Fragile States, HDN, PREM, and ESSD. Specific targets and timetable to be determined by Management based on outcomes o f reviews and QSA. Improved outcomes for projects in the HNF', PSD, and PSG Sector Boards towards convergence with Bank-wide performance. Targets to be determined by Management based on outcomes o f reviews.

More accurate reporting o f portfolio risk starting FY09 to be tracked by QAG.

Attainment o f 80 percent Realism Index by FY09.

Next QAG AAA Assessment to determine whether progress has been made in addressing areas for improvement.

Annual Reuort on Portfolio Performance FY07 ix

Recommendation Intermediate Actions Results

Regions to improve country program design and ensure that results fkameworks o f projects and AAA are strongly linked to sector and CAS outcomes.

Country Programs OPCS to complete the CAS Retrospective. OPCS to review as part o f the CAS Retrospective the adequacy o f current instruments that track implementation o f CAS programs. OPCS to define, as part o f the CAS Retrospective, the criteria for quality o f M I C programs.

Results w i l l be measured by improved IEG ratings o f country programs. OPCS to define indicators and instruments for tracking effectiveness o f implementation o f CAS programs.

Annual Revort on Portfolio Performance FY07 1

I. INTRODUCTION

OBJECTIVES AND APPROACH

1.1 The Annual Report on Portfolio Performance provides the Board and Senior Management with a strategic overview o f the size, composition and quality o f the Bank’s portfolio and the Analytic and Advisory Activities (AAA) pr~gram.~ It also provides Senior Management with real time information to assess what i s working well, or less well, together with recommendations on measures to sustain or improve the quality and effectiveness o f the lending portfolio and o f the AAA program--two key vehicles for delivering results to our clients.

1.2 The FY07 ARPP draws on materials that are prepared as part o f regular portfolio monitoring fimctions carried out by the Regions and Networks, supplemented by projectlportfolio data in the Bank’s management information systems. I t also draws on various Q A G assessments. In preparing the ARPP, extensive consultations were held with managers and staff from around the Bank.

STRUCTURE AND COVERAGE

1.3 The report i s organized into six Chapters. Chapter 2 reviews the recent trends in size and composition o f the lending portfolio. I t analyzes trends by Regions, Networks, Client Segments, Instrument, Sectors, and Themes. Chapter 3 assesses overall portfolio performance results as wel l as issues associated with measuring and reporting the r isks o f the portfolio o f lending operations not achieving their development objectives. Chapter 4 takes stock o f the Analytic and Advisory Activities. It focuses particularly on trends in the program size, deliveries, and quality o f AAA, drawing on selected recent QAG assessments. Chapter 5 reviews the outcomes o f country programs based on IEG Country Assistance Evaluations. I t focuses on the factors contributing to the relatively l o w program outcomes compared to project results. Chapter 6 examines progress in implementing recommendations o f the FY02-05 ARPPs, and presents a consolidated set o f recommendations covering the findings from this year’s ARPP as wel l as uncompleted recommendations from previous ARPPs. The Statistical Appendix contains a detailed set o f supporting statistical material. As agreed with CODE, and in order to avoid duplication, this ARPP does not address directly the Results agenda, which i s to be the subject o f a separate report by OPCS.

AAA product l ines discussed in this report are ESW and TA. ESW and TA include fee-based and reimbursable tasks. Other AAA product lines not covered here include Donor and Aid Coordination, Research Services, World Development Report and Impact Evaluation.

Annual Reuort on Portfolio Performance FY07 2

11. APPROVALS AND PORTFOLIO SIZE AND COMPOSITION

2.1 T h i s chapter focuses o n trends in lending and changes in the portfolio. In analyzing longer term trends, this chapter uses FYOO as the starting point due to the relatively high lending levels in the late 1990s in response to the crises during that period. Due to significant year to year volatility, lending i s analyzed by aggregating approvals during FY05-07 and FY02-04 and where appropriate, FY00-01. Section A describes aggregate trends and issues, while the succeeding Sections discuss specific topics. The last Section summarizes the recommendations from this Chapter.

2.2 There are five main messages from this Chapter:

0 Aggregate trends in Bank operations during the past f ive years reflect implementation o f the 2001 Strategic Framework Paper. There has been a stronger emphasis in IDA countries on human and social development to support poverty reduction and MDG implementation, while IBRD operations focused more on economic growth. Some Bank papers4 argue for a shift in sectoral emphasis in IDA lending and a strengthening o f IBRD engagement in the areas o f inequality, governance, and environment.

0 Concerted Bank efforts resulted in a slight increase in IBRD lending in real terms during FY05-07 compared to FY02-04 despite a contraction in demand for sovereign external financing. Within the IBRD client group, Investment Grade and Blend countries experienced increases in approvals. However, lending to core IBRD countr ie~,~ which accounted for ha l f o f IBRD lending during FY02-07, declined in real terms with underutilized lending envelopes.

0 Approvals o f projects for Fragile States increased significantly in FY07, the highest level since FY02. In addition, about 40 percent o f Recipient Executed Trust Funds (RETF) in FY07 went to Fragile States. However, only 65 percent o f Fragile States projects exiting the portfolio during FY04-07 were rated by IEG as satisfactory. In addition, QSA7 found weaknesses in project design and readiness for implementation in Fragile States projects included in the sample.

0 Though simple and repeater operations have increased, Bank operations include many new approaches and innovations. The Bank’s work in Middle Income Countries has been responsive to demand from sophisticated clients for new products and services as well as increased efficiency o f delivery. The number o f multi-country and regional programs and projects i s increasing in recognition o f the need for collective action to address cross-border issues and improve synergies o f individual country programs.

The Demand for IDAIS Resources and the Strategy for Their Effective Use, FRM (2007) and Development Results in Middle-Income Countries: An Evaluation of World Bank’s Support, IEG (2007). Defined as IBRD clients that are neither Investment Grade nor Blend countries.

Annual ReDort on Portfolio Performance FY07 3

The Sub-National Development Program was created in 2006 to address the lack o f Bank instruments to support an important and growing client segment.

0 The infrastructure sectors have been the main source o f growth in lending during the past five years. The growth in lending i s a successful response to the 2003 Infrastructure Action Plan which sought to reverse the decline at that time in the Bank’s infrastructure lending. Almost half o f the Bank’s portfolio at end-FY07 is composed o f infrastructure projects, with Transport accounting for ha l f o f the infrastructure portfolio.

A. AGGREGATE TRENDS

Approvals

2.3 Bank lending increased by four percent in FY07 driven by strong IDA performance, notably in A F R and SAR. IBRD approvals declined by ten percent in FY07, though this was mainly due to the moving forward o f many operations in L C R to FY06 in anticipation o f elections in large borrower countries such as Mexico and Brazil. From a longer-term perspective, Bank lending approvals in real terms have been increasing over the past f ive years (see Figure 2.1) despite a constrained lending environment in the Middle Income Countries (MICs). The Bank-wide lending trend since FYOO also compares favorably with those o f other Multilateral Development Banks (see Figure 2.2). The medium-term prospects for lending indicate that Bank lending wil l continue to be at about the same level as during FY05-07, with annual project approvals projected at the $22 to 26 bi l l ion range during FY08-10.

Figure 2.1: Trends in Approvals, Disbursements, and Portfolio (WOO-07) (In Real Terms)

8

- 60 I [ +Approvals in FY

FYOO FYOI FY02 FY03 FY04 FY05 FY06 FY07 -@-Net Commitments at End FY I +Disbursements in FY


Figure 2.2: Approval Trends in Multilateral Development Banks (2000-07) (In Real Dollar Terms)

h 180

11 140

0 0 7

0 0 0

3 100 % ’EI C - 60

2000 2001 2002 2003 2004 2005 2006 2007 [ +AfDB +ADB +IDB +WB 1

Sources: Annual Reports of AfDB, ADB, and IDB; Bank BW. WB approvals are by fiscal year while others are by calendar year.

Box 2.1: THE PORTFOLIO DYNAMICS

The portfolio as defined in the ARPP is a “stock” concept. Lending b y contrast i s a “flow.” The Bank portfolio consists o f the IBRD loans, IDA credits and grants, GEF grants, Montreal Protocol, and Special Financing operations (financed in part out o f the Bank’s net income). I t only includes operations that are active at the end o f the fiscal year. I t excludes operations which are closed or fully disbursed during the year. I t is recorded as the sum o f individual operations’ commitments, net o f cancellations, if any. The chart below illustrates those relationships for FY07 based on the Business Warehouse (BW) data.

Opening Balance $95.2B Closing

Balance* (1,468 $100.4B

Operations) o f which $15.4B (1,485 Exits during Operations)

FY07

$0.3B (266 -$18.8B Operations) >6 etroactive Extension

* Closing balance o f FY07 includes approximately $0.3 billion in projects closed in previous years, which were reopened in FY07.


Portfolio

2.4 The Bank portfolio mainly captures investment lending. As o f end-FY07, the Bank portfolio consisted o f 1,485 operations with net commitments o f $100.4 bi l l ionY6 about 80 percent o f end-FY02 portfolio in real terms. Investment lending in terms o f commitments accounted for about 95 percent o f the portfolio and 75 percent o f approvals in FY07. Development Policy Operations (DPOs) are not commensurately represented in the portfolio because these are mainly quick disbursing loans/credits with an average project l i fe o f less than one year. The growth in quick disbursing DPOs i s the major factor explaining the decline in the portfolio.

2.5 Theportfolio is less concentrated compared tofive years ago (see Figure 2.3). The end- FY07 portfolio included operations in 133 countries, with the ten borrowers accounting for about ha l f the portfolio, compared to about 60 percent five years ago. Nigeria and Pakistan replaced the Russian Federation and Bangladesh in the top ten countries in the Bank’s portfolio in FY07. About 80 percent o f the smallest borrowers accounted for 10 percent o f the portfolio in FY07, roughly the same proportion as in FY02.

Figure 2.3: Portfolio Concentration (FY02 vs. FY07) 100 ,

5 10 15 20 25 No. of Largest Borrowers

FY02 E FY07

Disbursements

2.6 Gross disbursements fell slightly in FY07 mainly due to a decline in approvals of quick disbursing DPOs. However, FY07 disbursements f fom investment loans were at the same level as in FY06 and higher than in FY04-05. Disbursement ratios for investment loans have been improving over the past five years.

2.7 Net disbursements declined from $5.0 billion in FYO6 to $0.5 billion in FY07 due to large prepayments in LCR (see Table 2.1). In FY07, LCR, EAP and E C A had negative net disbursements; however, before prepayments, only EAP had negative net disbursements. The main net resource transfers were occurring in AFR and SAR. For IBRD, gross disbursements

The Bank Portfolio is composed o f IBRD loans, IDA credits and grants, and grant finds fiom the Global Environment Facility (GEF), Montreal Protocol (MP), and Special Financing (SF). A description o f portfolio dynamics i s provided in Box 2.1.


were almost equal to scheduled repayments in FY06 and FY07; about $2.0 bi l l ion in prepayments in FY06 and $6.4 bi l l ion in prepayments in FY07 resulted in negative net disbursements. IDA had positive net disbursements o f $6.8 bi l l ion in FY07, almost unchanged from FY06. Projected Bank-wide net disbursements in FY08 range from $2 bi l l ion to $5 billion, with IBRD at negative $1.2 bi l l ion to negative $3.3 billion.

Table 2.1: Gross and Net Disbursements (FY05-07) (US$ Million)

FY05 FY06 FY07 IBRD IDA Bank IBRD IDA Bank IBRD IDA Bank

Gross Disbursements 9,722 8,950 18,672 11,833 8,910 20,743 11,055 8,579 19,635 Scheduled Repayments 12,107 2,008 14,116 11,507 2,134 13,641 10,852 1,891 12,743 Disbursements less Repayments -2,385 6,942 4,557 326 6,776 7,102 203 6,688 6,892 Prepayments 2,676 0 2,676 2,068 0 2,068 6,354 0 6,354 Net Disbursements -5,062 6,942 1,880 -1,742 6,776 5,033 -6,151 6,688 538

Investment Lending

2.8 Investment loans, accounting for about 75percent of FY07 approvals, remain the main instrument for deliveringJinancia1 and knowledge services to clients. There was a decline in approvals o f Emergency Recovery Loans (ERLs) in FY07 compared to the previous two years. Stand-alone Technical Assistance Loans (TALs) were also utilized less in the face o f declining demand in IBRD countries, increased utilization o f Non-lending Technical Assistance (NLTA) and Recipient Executed Trust Fund (RETF) capacity building projects, and integration o f TA components in other investment loans. However, the share o f simple and repeater projects has increased to about 25 percent o f number o f approvals in FY07, compared to about ten percent in FY04.

2.9 Based on exits during FY05-07, the average investment project had a life of 6.7 years, about the same as during FY02-04. The average age of active investment loans in the FY07 portfolio was 3.5 years, slightly lower than five years ago. However, the number o f project exits has been declining, mainly in AFR. The decline in exits i s partly explained by the increase in Additional Financing operations in FY07, which contributed to some increase in project extensions (see Para 2.32). Management would need to pay close attention to extensions o f closing dates.

2.10 There has been a continuing decline in average preparation cost but a slight increase in the preparation time7 for investment loandcredits in FY07 (see Figure 2.4). Preparation cost per project has declined in real terms by about 25 percent since FY03, consistent with the increase in simple and repeater projects as well as Additional Financing operations. AFR was the only region with a preparation cost per project in excess o f $400k in FY07, due mainly to a growing number o f multi-country projects. The increase in average Bank-wide preparation time for investment lending in FY07 i s partly explained by the increasing number o f multi-country projects.

This i s measured as elapsed time from Project Concept Review to Board Approval.


2.1 1 OPCS is currently reviewing the Policy Framework for Investment Lending. The proposed approach i s to modernize and streamline the pol icy framework towards: (a) creating a single principles based Investment Lending umbrella policy; (b) embedding a risk based model on internal controls governing Investment Lending; (c) rebalancing attention and resources between preparation, approval, and implementation stages; and (d) strengthening alignment with the current development and business model, borrower needs, and strategic directions.

Figure 2.4: Preparation Time and Cost per Investment Lending Operation (In Real Terms)

I

= 450 lft 400 ’ 350 0 0

v)

2003 2004 2005 2006 2007 Approval FY

I 1 +Ave. Preparation Cost +A*. Elapsed Time (Concept to Board) 1

- 20 0

- 19;

- 173;

- ISZ *

w , - I S $

U - 15

Development Policy Operations

2.12 Development Policy Operations accounted for about a quarter of approvals in FY07. As part o f the operational pol icy change in 2004, the 25 percent ceiling o n policy-based lending was removed, although Management committed to report annually to the Board o n the anticipated share o f policy based commitments. The projected level and share o f DPOs for next year will be higher than in FY07 and closer to the average level o f about one-third o f total approvals during the past five years. In addition, as part o f IDA 14 commitments, Management would seek guidance from IDA Executive Directors in the event the projected share o f IDA DPO commitments was to exceed 30 percent. The share o f DPOs in IDA lending in FY08 is projected to be below 30 percent.

2.13 IBRD accounted for two-thirds of DPO approvals in terms of lending commitments during thepastfive years. IBRD used DPOs to deliver 35 percent o f its lending during the past five years, compared to about 25 percent for IDA. L C R processed almost ha l f o f DPOs during the past five years in terms o f commitments, reflecting large demand o f Middle Income Countries in L C R for utilization o f th is instrument to support second generation reform programs in a wide range o f sectors and themes. AFR, ECA, and SAR have roughly the same share o f DPO approvals by amount in their lending activities at about 15 percent each over the past f ive years. In terms o f number, AFR delivered the most DPOs, mainly providing recurring support for the implementation o f poverty reduction strategies. T h e amount o f D P O approvals in SAR doubled since FY03, with increased use o f this instrument in India, Pakistan, and Bangladesh.


- 550 u) s 500 ' f 450 a f 300

1 6 v ~3 400 E -

350

2.14 Since their introduction in 1999, programmatic DPOs have become a widespread approach. They accounted for 90 percent o f DPOs in terms o f number and 85 percent in terms o f commitments in FY07. Under programmatic operations, the Bank supports the implementation by borrowing countries o f a medium-term program through a phased series o f typically single tranche loans, each o f which i s disbursed on the basis o f completed actions. The programmatic design i s wel l suited for supporting complex institutional reforms requiring a flexible step-by-step approach. DPOs are increasingly rapid disbursing instruments--the average project l i fe has declined to less than one year based on exits in FY05-07, compared to almost two years in FY02. IEG evaluates programmatic DPOs after the closing o f the last DPO in a series, and to date there has not been a sufficient number o f evaluations to assess the effectiveness o f the programmatic approach.

10 a,

+ - 9 .E

8 3 2 7 s Q ' 5 a

W E

6 $

2.15 Programmatic lending and the use of less complex designs reduced DPO preparation time and cost in FYU7 (see Figure 2.5). Average preparation cost in real terms has been declining since FY05, though the FY07 level i s s t i l l about 10 percent higher compared to FY03. Average preparation time has declined to about seven months in FY07, compared to 8.8 months in FY06 and 8.1 months in FY03. In FY05, there was a restructuring o f policies and processes guiding DPOs, including fast disbursing and programmatic operations, contributing to improved efficiency.

2003 2004 2005 2006 2007 Approval PI +Am. Elapsed Time (Concept to Board) 1 1 +Ave. Preparation Cost

Guarantees

2.16 Because of their unique characteristics, the Guarantee amounts are not included in the Portfoliofigures. The Bank's Portfolio o f 33 Guarantees i s spread through a l l Regions, with the highest Bank exposure concentrated in E M and ECA. The Energy and Mining Sector accounted for 60 percent o f Guarantee operations, followed by the Financial Sector with 16 percent. There are 15 new operations currently under preparation. Given the growing volume o f Guarantees, and in response to Senior Management request, QAG carried out an assessment o f Quality-at-Entry o f Guarantees approved in FY05/06.


2.17 The QAG assessment of Quality-at-Entry of Guarantees in FY06 found the quality to be less than that of other Bank operations. The weaknesses identified were: (a) an unsatisfactory underlying pol icy and regulatory framework o f the Borrower that had not been adequately addressed through credible actions; (b) generally no assessment o f the risk o f the guarantee being called; and (c) inadequate readiness for implementation. The Anchor Unit (FEU) i s fol lowing up the QAG recommendations and has introduced simplification to the implementation processes. While Regions have full ownership o f the Guarantee operations, FEU has clarified i t s role in the quality assurance process.

Trust Funds

2.18 The FY06 ARPP recommended that Recipient Executed Trust Funds (RETFs) be recorded in the Bank’s Portfolio. In June 2006, the RETF product l ine was introduced as a f i rs t step towards a better recording o f deliverables and cost relating to recipient executed projects carried out without any IBRDADA financing. Most o f the entries in RETFs were converted from other product lines that had varying oversight; the result was that RETFs inherited some problems o f data quality and consistency, which are now being addressed. All projects o f $5 mil l ion or more, classified as RETF, wil l become part o f the Bank’s Portfolio definition during FY08.

2.19 QAG review of RETF projects found weaker quality-at-entry than other Bank operations. RETF projects that were linked to ongoing or past operations were assessed as generally satisfactory - most o f these RETF initiatives funded capacity building and had focused objectives with wel l targeted interventions. O n the other hand, stand-alone RETF projects, especially in conflict countries, tended to have unrealistic objectives and designs that were not consistent with implementation capacity. The QAG review recommended: (a) greater realism in objectives and results framework; (b) more attention to institutional and implementation arrangements; (c) subjecting RETF projects to regular Bank processes and quality assurance mechanisms; and (d) ensuring adequate preparation and supervision budgets.

B. FOCUS OF LENDING

2.20 A breakdown of lending ap rovals by themes gives an indication of how the Bank implemented the two-pillar strategy during FY02-07 (see Table 2.2). About a quarter o f the lending went to finance and private sector development, mainly in infrastructure, regulation and competition, and enterprise and banking restructuring. Slightly more than a quarter o f lending went to human and social development, mainly in education and health. Slightly less than a fifth o f the lending supported public sector governance, mainly in public expenditure and civ i l service reforms. The remaining 30 percent o f the lending addressed rural development, urban development, and environment with each theme having roughly equal shares.

f

The two-pillar strategy was introduced in 2001. The two pillars are: (a) building the climate for investment, jobs, and sustainable growth; and (b) empowering poor people to participate in development and investing in them.


Table 2.2: Approvals by Theme (FYOO-07)

I FYOO-01 M02-04 FYO5-07 Major Theme % o f % o f % o f Bank- % o f %of %of Bank- % o f %of %of Bank- IBRD IDA wide IBRD IDA wide IBRD IDA wide

Economic Management 7.6 2.3 5.1 5.7 2.8 4.4 1.7 1.2 1.5 Public Sector Governance 14.5 16.3 15.1 20.5 18.2 19.4 14.4 18.2 16.0 Finance and Private Sector Development 30.4 22.4 26.7 27.8 20.3 24.2 30.2 20.9 25.6 Social Development 14.5 23.2 17.9 13.0 18.4 15.4 12.1 15.6 13.6 Human Development 5.0 10.9 7.1 12.7 16.0 14.0 10.0 18.6 13.6 Urban Development 8.0 6.5 7.6 8.5 6.3 7.6 11.4 5.9 9.0 Rural Development 7.9 13.3 9.9 6.3 12.0 8.7 8.9 15.2 11.5 Environment 12.1 5.0 10.4 5.5 6.1 6.3 11.3 4.4 9.1 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 "

*' Finance and Private Sector Development include Trade and Integration. 3' Social Development includes Social Protection and Risk Management.

Public Sector Governance includes Rule o f Law.

2.21 Economic growth has been a prominent theme in IBRD lending. In terms o f themes, the largest share o f IBRD lending approvals--about 30 percent--during the period FY05-07 went to Finance and Private Sector Development mainly to the infrastructure sectors; this share i s more than twice as high as those o f other themes. Nonetheless, IBRD lending has focused on countries where poverty remains prevalent - two-thirds o f IBRD lending went to non-Investment Grade countries. However, a recent IEG Evaluation' found less progress in three important issues included in many IBRD CASs: (a) addressing inequality; (b) fighting corruption; and (c) meeting environment challenges.

2.22 The distribution of IDA lending reflects a stronger emphasis than in IBRD on human and social development. Thematically, about one-third o f IDA lending during FY05-07 went to human and social development," compared to a fifth in IBRD. Lending for human development support empowerment and MDGs. Finance and Private Sector Development" (FPD) accounted for about a fifth o f IDA lending, compared to about one-third in IBRD. A main component o f FPD thematic lending was support for infrastructure investments, which have high financing requirements and are critical to improving access to markets and services. Public sector governance also accounted for a fifth o f lending, slightly higher than IBRD. Rural Development had a share o f 15 percent in IDA, double that o f IBRD. Urban and Environment together represented about 10 percent o f IDA lending, half o f the share in IBRD lending. A recent paper for IDA1512 has raised the issue o f appropriateness o f sectoral allocation o f lending, suggesting that lending patterns should focus more on sectors (i.e., infrastructure) with decreasing shares in ODA than on those (ie., social sectors) where shares in ODA are increasing.

2.23 The planned OPCS Results Paper is an opportunity to systematically review whether the lending patterns are appropriate. While overall lending is the aggregation o f decisions at

Development Results in Middle-Income Countries: An Evaluation of the World Bank's Support, IEG 2007. This i s the aggregation o f the following themes: (a) human development; (b) social development, gender, and inclusion; and (c) social protection and risk management. The trade and integration theme was included in this classification. The Demand for IDAIS Resources and the Strategy for their Effective Use, FFW 2007.

lo

l1 l2

Annual Revort on Portfolio Performance FY07 11

the country level, the relatively l o w effectiveness o f country programs as measured by the CAEs raises the issue o f whether the lending programs are addressing the key development constraints and priorities (see Chapter 5). In addition, with new strategic directions for the Bank, a robust results framework could be developed that would provide benchmarks for evaluating whether future lending and portfolio trends are moving in the right direction. Future ARPPs would utilize this results framework as a basis for evaluating lending trends.

C. IDA AND FRAGILE STATES

2.24 FY07 I D A approvals of $11.7 billion were at an all time high, representing an almost 25 percent increase over the previous year. Average annual commitments in nominal terms increased from $6.4 bi l l ion under IDA12 and $8.3 bi l l ion under IDA13 to $10.6 bi l l ion thus far under IDA14. IDA approvals have grown faster than IBRD since FYOO. The IDA Portfolio o f $43.8 bi l l ion in FY07 was also at a historic high, now accounting for 44 percent o f the Portfolio compared to 36 percent five years ago. Average annual disbursements also showed an upward trend, increasing from $5.6 bi l l ion during IDA12 to $7.8 bi l l ion in IDA13 and $8.9 bi l l ion during the f irst year o f IDA14.

2.25 Lending to Fragile States increased by about 60 percent over FY06 to $2.1 billion in FY07 (see Figure 2.6). The share o f Fragile States in total IDA approvals was 18 percent in FY07. In addition, about 40 percent o f FY07 RETF approvals were in Fragile States. The Bank’s strategy uses a segmentation o f Fragile States into four groups based on client environment: deterioration, prolonged crisis or impasse, post conflict or political transition, and gradual improvement. A large share o f the lending during FY04-07 went to post conflict or political transition states. The risks o f lending to Fragile States are relatively high - about 40 percent o f the projects exiting the portfolio during FY04-07 were unsatisfactory (see discussion in Chapter 3). QSA7 found both design and supervision issues that would have to be addressed to improve project outcomes.

2.26 The IDA Results Management System ( M S ) established in IDA13 has been enhanced considerably in IDA14. The Rh4S has become an integral part o f the Bank’s effort to enhance results orientation. The Rh4S indicates uneven progress across IDA countries, with Fragile States lagging. Several key human development indicators remain a cause o f concern. The Bank i s further refining the IDA15 R M S indicators and related signaling mechanisms to reinforce the focus on results.

Annual ReDort o n Portfolio Performance F Y 0 7 12

Figure 2.6: Approvals for Fragile States (FYO3-07)" (US$ Million in Real Terms)

2 2,500 0 E 2,000 E tft 1,500 to

e

.-

2 1,000 L

a 500

FY03 FY04 FY05 FY06 FY07 1 L T o t a l Lending +Lending to Post-conflict Countries I

* Includes countries in the Fragile States Category during FY05-08

D. IBRD

2.27 The Bank has been systematically adapting to the changing environment in IBRD client countries. Over the past few years, IBRD lending has been facing a constrained environment with a contraction o f real demand for sovereign external financing. There have been general client concerns, especially from MICs, about the attractiveness o f traditional IBRD loans relative to alternatives from other sources, including financial markets. There has been an evolution in the way the Bank supports IBRD clients in meeting their development needs, with the latest paper-Strengthening the World Bank's Engagement with IBRD Countries-defining the focus areas. In September 2007, the Bank simplified and reduced loan charges to IBRD clients.

2.28 Bank efforts resulted in maintaining IBRD lending levels in real terms since FY02 (see Figure 2.7). Without the efforts to remain relevant with sophisticated clients that have wider financing options, IBRD lending might have fallen. Nonetheless, IBRD net commitments o f $54.0 bi l l ion accounted for 54 percent o f the FY07 Portfolio, compared to 65 percent five years ago, though part o f the portfolio decline i s attributed to increased use o f quick disbursing DPLs. SAR and EAP were the only regions that posted increases in IBRD approvals in FY07.

2.29 The ability to respond to client demand will be critical to lending to MICs. Many clients with ample foreign resources such as China and Brazi l continue to borrow mainly for the embedded knowledge and learning services where the Bank i s seen to have a comparative advantage. In a recent Client Survey o f M ICs carried out by IEG in the context o f i t s paper on MICs, some 80 percent o f the respondents reported that their country's development goals in the coming five years could be best serviced with Bank lending remaining the same or increasing.

Annual ReDort o n Portfolio Performance F Y 0 7 13

Figure 2.7: IBRD Approvals by Client Segment (3-Year Moving Average in Real Terms)

.25.0 - I m

woo M o l n o 2 FY03 FY04 FY05 FY06 FY07 +Investment Grade +Core IBRD +BLEND (IBRD portion) +Total IBRD

Note: IBRD Investment Grade Countries include China, and Blend Countries include India.

2.30 Lending to coreI3 IBRD clients has been stagnant (see Figure 2.7). These countries do not have the same access to financial markets as the Investment Grade countries. In many cases, the core IBRD countries are those that need both financial and knowledge services from the Bank, hence there i s an expectation that there would be more lending to th i s set o f countries. Based on SFR analysis, about 75 percent o f the CASs in core IBRD countries have programs that on average are 55 percent below the lending envelope, indicating substantial space for lending growth. Four out o f 27 core IBRD countries accounted for about 70 percent o f the lending - the challenge is how to expand engagement. It i s recommended that Management explore opportunities to increase financial and non-financial assistance and services to core IBRD countries.

E. INNOVATIONS IN LENDING

2.31 While scaling up and the use of simple and repeater projects have been increasing, lending has also been characterized by innovations in approaches and instruments. In MICs, new services are being provided in response to demand from sophisticated clients, including the use o f fee based delivery o f services. Programmatic approaches have become widespread in DPOs and are also being utilized in investment lending through APLs and SWAps. Carbon Finance operations are growing,14 and due diligence and processing guidelines were issued in October 2007 to ensure appropriate methodology for assessing design and risks. In addition, the lending growth in the following areas i s noteworthy.

2.32 The main growth area in investment lending has been the use of Additional Financing operations following the introduction of guidelines in June 2005. Approvals for additional financing amounted to $1.8 bi l l ion in FY07, doubling that o f the previous year. LCR and AFR accounted for more than ha l f o f Additional Financing in terms o f amount; among networks, INF accounted for about half. Additional Financing approvals result in an increase in commitments

l3 l4

This is defined as IBRD clients that are neither Investment Grade nor B lend countries. The Bank currently manages 11 Carbon Funds and Facilities worth more than $2 bi l l ion.


in existing projects, which typically involve extending the closing dates o f projects. QEA8 found no differences in quality-at-entry o f Additional Financing projects compared to other investment projects.

2.33 Regional projects and programs are growing as cross border dimensions of environment, health, infrastructure, and trade facilitation take on greater importance. About $1.9 bi l l ion o f regional projects are recorded in the portfolio, though based o n feedback from the Regions; the amount i s understated and is closer to $3 billion.” Regional projects in the portfolio are concentrated in AFR. QEA8 included a sample o f regional projects and found several aspects which could be improved. QEA8 recommends: (a) improving efficiency and reducing the cost o f preparing regional projects by addressing duplication o f work in Bank processes, such as the mult ipl ici ty o f fiduciary arrangements and staff involved with a regional program; and (b) ensuring adequacy o f supervision budgets in light o f the nature o f regional programs. In addition, there should be a review o f lending instruments for multi-country programs.

2.34 To respond to the unique requirements of sub-national borrowing for Infrastructure, the WB and IFC Boards approved the pilot Sub-National Development Program in 2006. The program addresses the lack o f Bank instruments to best support the growing sub-national client segment; the Bank’s Articles o f Agreement prevent the Bank from lending directly to sub- national entities without a sovereign guarantee. A joint IBRD-IFC Sub-National Department (SND) was created in November 2006 to implement the program. In FY07, four transactions under the program were approved for a total exposure o f $156 mil l ion. SND has developed a pipeline o f over 20 projects representing an investment value o f over $500 million. The goals o f the program extend beyond providing finance, to include improving the ability o f sub-national governments to access financial markets more widely. To this end, SND helped create, in July 2007, a multi-donor technical assistance facility (a window within the Public-Private Infrastructure Advisory Facility) that helps sub-national entities improve their institutional capacity and creditworthiness.

F. INFRASTRUCTURE

2.35 Infrastructure lending has increased during FY05-07 in response to the Infrastructure Action Plan (see Table 2.3). The share o f infrastructure in Bank-wide lending increased from 28 percent during FY02-04 to 35 percent during FY05-07, close to the share during FY00-01. Infrastructure accounted for almost 40 percent o f IBRD lending, and about 30 percent o f IDA approvals during FY05-07. Transportation accounted for half o f infrastructure lending in FY07, with Water, Sanitation and Flood Protection having a one-third share.

2.36 Project outcomes have been generally satisfactory. Transport Sector projects have been consistently high performers, with more than 90 percent satisfactory outcomes during FY04-0716 in both IBRD as wel l as IDA countries. Performance o f Water Supply and Sanitation Sector

l 5 l6

Many regional or multi-country projects are classified in the portfolio as country level operations. IEG has completed the evaluation o f about hal f o f FY07 exits.


projects has improved considerably during FY04-07 to 88 percent satisfactory compared to FYO1-03 exits when performance was below 70 percent. In IBRD countries, the performance o f Urban Development Sector projects improved from 55 percent satisfactory during FYO1-03 to 99 percent during FY04-07.

2.37 The challenges facing infrastructure lending include improving the interface with other sectors and responding to cross-border issues. This would introduce greater complexity to designing and supervising infrastructure operations. The integration o f the INF and ESSD networks provides an organizational response to these challenges by enabling better cross sectoral coordination. The quality assurance process should keep pace with changes in focus and introduction o f new approaches in infrastructure lending to ensure continued satisfactory performance o f project outcomes.

Table 2.3: Approvals by Sector (FYOO-07) woo-01 M02-04 FYO5-07 Major Sector % of Bank-wide

Agriculture, Fishing and Forestry 4.9 6.9 7.9 Public Administration, Law and Justice 25.7 24.6 24.1 Infrastructure 32.7 28.3 34.7 Human Development 18.0 24.4 18.5 Finance, and Industry and Trade 18.7 15.9 14.8 Bank-wide 100.0 100.0 100.0

Notes: l' Infrastructure includes Energy and Mining, Transportation and Water, Sanitation and Flood Protection.

3' Finance, Industry, and Trade includes Information and Communications. Human Development includes Education and Health and other social services.

G. RECOMMENDATIONS

0 OPCS Results Paper to develop framework for assessing aggregate lending and portfolio trends in the context o f new strategic directions; and

0 Management to explore opportunities to increase financial and non-financial assistance and services to core IBRD countries.


111. PORTFOLIO PERFORMANCE

3.1 This Chapter reports on portfolio performance by reviewing IEG evaluations o f latest exits and analyzing the existing portfolio based on risk indicators and QAG assessments. The analysis uses aggregate outcomes o f exits covering three year periods except for the period FY04-07, which includes partial IEG evaluations o f FY07 exits. The main messages from the Chapter are:

0 Development outcomes o f operations exiting the Bank portfolio through FY06 continued to improve. On the basis o f three year moving average, about 80 percent in terms o f number o f projects, and 87 percent weighted by disbursement, o f projects exiting the portfolio in FY06 had satisfactory development outcomes. However, Management wil l have to monitor recent performance which indicates a decline in terms o f number o f projects based on IEG evaluations o f about half o f the FY07 exits thus far.

0 There was deterioration in performance o f AFR projects with outcomes o f FY06 exits at 65 percent satisfactory compared to 78 percent in FY05 and 83 percent in FY04. AFR had 61 percent satisfactory performance in FY07 based on about ha l f o f FY07 exits evaluated to date.

0 Among Sector Boards,17 there were declines in project performance in Health, Nutr i t ion and Population, Private Sector Development, and Public Sector Governance during FY04-07 compared to FYO1-03. A review o f the IEG evaluations o f projects in these Sector Boards revealed that project design flaws were the main factors contributing to unsatisfactory outcomes.

The results o f QEA8 indicate a greater than 90 percent satisfactory quality-at-entry o f projects approved in FY06-07. There i s also a convergence o f performance by Regions compared to previous years. Historically, QEA ratings are about 10 percentage points higher than actual project outcomes. QAG i s tightening i t s QEA methodology to reduce the disconnect between QEA ratings and project outcomes.

0 With respect to supervision, there are three developments worth noting. First, the Proactivity Index indicates that teams have been addressing in a satisfactory manner the underlying issues o f problem projects. Second, the number o f projects with delayed effectiveness has been increasing, mainly due to lengthy client approval processes and, for some Regions, the relatively high number o f effectiveness conditions. Third, QSA7 results show no significant difference in supervision quality o f projects based on the location o f TTL; however, panels find that more could be

l7 The FY07 Sector Board classification was used for purposes o f the analysis in this chapter. The Finance and Private Sector Development Boards were merged in FY08.


done to complement local presence with appropriate use o f HQ staff with global experience .

0 Lack o f candor in project reporting has diminished the effectiveness o f the current system o f measuring and reporting portfolio performance. The Realism Index continues to show significant under-reporting o f project risks, a problem that has been recognized for some time but has not been effectively addressed. A recent review o f quality o f reporting covering FY07 projects estimated the share o f problem projects in the portfolio to be twice that reported in ISRs. The usefulness o f the current system o f portfolio reporting as a management tool i s dependent on improving candor in reporting project performance and risks.

One way forward towards improving portfolio performance measurement and reporting i s to establish a stronger link between risks identified at entry and the reporting o f project performance. The current system rates projects entering the portfolio at zero risk, and flags project risk only when problems begin to surface. The revision o f the measurement and monitoring o f project r isk during implementation should build on the reforms initiated on July 1, 2007 to ensure a more systematic and comprehensive assessment o f r isks at appraisal. It is recommended that OPCS and QAG work towards reviewing and recommending appropriate changes to the current system o f portfolio r isk measurement and reporting.

A. DEVELOPMENT OUTCOMES OF PROJECTS

3.2 The Development Outcomes’’ of operations exiting the Bank’s Portfolio continued to improve through FY06 (see Figure 3.1). Satisfactory development outcomes based o n FY06 exitsIg were 82 percent by number o f projects and 89 percent when weighted by disbursement. Because o f significant year-to-year volatility, the development outcome trends are best analyzed using three year moving averages. On this basis, about 80 percent in terms o f number o f projects, and 87 percent weighted by disbursement, o f operations exiting the portfolio in FY06 had satisfactory development outcomes. This performance represents sustained improvement since FY90. I t also meets the 80 percent goal set by management a decade ago. However, this performance wil l have to be tempered by the following developments:

0 IEG project assessments covering about ha l f o f FY07 exits thus far show lower outcomes Bank-wide in terms o f number o f projects compared to the FY06 exits.20

’* IEG uses a six-point scale in rating project outcomes. The f r s t three ratings - Highly Satisfactory, Satisfactory, and Moderately Satisfactory - indicate a satisfactory outcome while the other three ratings - Moderately Unsatisfactory, Unsatisfactory, and Highly Unsatisfactory - indicate an unsatisfactory outcome. Unless specified otherwise, the terms “satisfactory’ and “unsatisfactory” used in this chapter follow the above definitions. About 85 percent o f FY06 exits have been evaluated by IEG. With about half o f the FY07 exits evaluated, the satisfactory performance o f FY07 exits in terms o f number o f projects is 75 percent compared to 82 percent for FY06 exits. There is no significant change thus far in the performance o f FY07 exits compared to FY06 exits in terms o f disbursement.

l 9

2o


Development outcomes for FY07 are projected to be lower than 80 percent by number o f projects, which would reverse the upward trend since FY04. SAR, LCR, EAP, and AFR are projected to show declines.

0 The Bank performance reported above i s measured on the basis o f projects that were evaluated by IEG to be Moderately Satisfactory or better. The number o f projects with Moderately Satisfactory ratings during FY04-07 accounted for about 25 percent o f total, indicating opportunities for further improvements in project quality.

0 IEG evaluations o f CAEs completed in FY97-07 show that aggregate performance o f country programs is less than 60 percent satisfactory. This indicates that while outcomes o f individual projects may be improving, the projects may not be addressing the key development constraints or priorities at the sector or country level (see Chapter 5).

Figure 3.1: Proportion of Operations with Satisfactory Outcomes* (Based on Year of Project Exit)

50 , l / I I I , I I l I I / / i I I I I i I I / / I I I FY80 FY83 FY86 FY89 FY92 FY95 FY98 FYO1 FY04 FY07*

+ 3 Year Moving Avg. (By No. of Projects) +3 Year Moving Avg. (Weighted by Disbursement)

* FY07 Outcomes based on QAG Projections.

Regional Performance

3.3 Aggregate project outcomes improved in all Regions during FY04-07 compared to previous periods, with a growing convergence of performance among four Regions. SAR and AFR performance lagged the other Regions in FY04-07, with SAR showing l i t t le improvement over FY01-03 compared to the rest o f the Bank. However, SAR performance improved significantly in FY06 to 91 percent; the challenge i s to maintain this level. On the other hand, AFR performance has been deteriorating from 83 percent in FY04 to 78 percent in FY05 and 65 percent in FY06, in part due to l ow ratings o f f i rs t generation Multi-Country H IV-A IDS Program (MAP) projects. IEG evaluations o f about half o f AFR FY07 exits indicate a slightly lower performance compared to FY06 exits. Figure 3.2 presents the percentage o f satisfactory project outcomes by Region, weighted by disbursement, for FY04-07 compared to FY01-03 and FY98-00.


Figure 3.2: Project Outcomes by Region

EAP LCR

C MNA ECA P

p! SAR AFR

Ban k-w ide

0 .-

0 20 40 60 80 100 %Satisfactory Outcome by Disbursement (IEG Rating)

1 FY98-00 FYOI-03 UFY04-07 1

3.4 Further improvement in the performance of A F R projects is key to improving overall Bankperformance. There are several areas where the performance gap between AFR and the rest o f the Bank i s significant. Within IDA, aggregate satisfactory AFR project outcomes during FY04-07 were lower than those o f non-AFR projects. This i s mainly due to the lower outcomes o f projects in Fragile States in AFR compared to other Regions. Among networksY2l AFR performance i s lower than non-AFR in HDN, PREM, and SDN. A comparison within the FPD network was not included due to the relatively small number o f IEG evaluations for AFR during FY04-07. Please see Table 3.1 for comparative performance between AFR and other Regions.

Table 3.1: IEG Evaluations for Africa and Other Regions (FYO4-07) (Percent Satisfactory Outcome)

AFR Other Regions Ban k-wide By No. of BY By No. of BY By No. of BY Projects Disbursement Projects Disbursement Projects Disbursement

IDA 68 73 82 86 76 80 Fragile States 52 49 72 89 61 61 HDN 61 65 82 85 77 82 PREM 66 74 76 91 73 86 SDN 77 75 87 92 85 90 ESSD 73 77 85 92 83 90 INF 79 74 90 92 87 89

3.5 QEAS rat

46145 Public Disclosure Authorized - World Bank · 2016. 7. 10. · GRAAA HD HDN HNP HR IBRD ICR...

Documents

Transcript of 46145 Public Disclosure Authorized - World Bank · 2016. 7. 10. · GRAAA HD HDN HNP HR IBRD ICR...