World Bank: Main findings and recommendations

Inhoud - HTML PDF - 1.6 MB Cofinancing between the Netherlands and the World Bank, 1975–1996 Main findings and recommendations 1 Overview of cofinancing Cofinancing between the Netherlands and the World Bank (IBRD and IDA) totalled approx. Dfl. 5 billion (almost US$ 2.5 billion) in committed aid funds between 1975 and 1996, of which about Dfl. 4.2 billion (US$ 2.1 billion) had been disbursed by the end of 1996. Programme aid accounted for slightly more than half of all cofinancing, and project assistance for a little less than half. Virtually all official cofinancing (i.e. with public funds) was provided as a grant. Trends in the volume of cofinancing show that annual commitments increased steadily during the period under review(see Figure 1), more than quadrupling from Dfl. 66 million in 1975–84 to Dfl. 279 million in 1984–90. They increased further to Dfl. 379 million in the 1990s, representing on average 14 percent of bilateral ODA in that period. ( Reference is made to budget category I, ‘Special Programmes’, and category II, ‘Country Programmes’ (replaced in 1997).) Cofinancing in the 1990s in particular showed an important rise in so-called Free-Standing Trust Funds. ( These trust funds refer to joint cofinancing not related to World Bank loans or credits.) Commitments for this type of cofinancing rose from Dfl. 65 million in the 1980s to over Dfl. 1 billion in the 1990s, most of which was actually disbursed. In the period 1994–96 average annual expenditures increased to about Dfl. 450 million, mainly due to Relief, Resettlement and Reconstruction activities, notably in Bosnia, and to Debt Relief. Another trend concerns the shift from parallel cofinancing (1980s) to joint cofinancing (1990s). The Government of the Netherlands preferred the former during the 1980s in view of domestic economic interests. The practical outcome, i.e. a relatively high proportion of joint cofinancing during that decade (see Figure 1), was the result of important ‘end-of- the-year’ transactions, notably in 1984 and 1986. In the period 1975–96, the ratio of joint vs. parallel cofinancing was 60:40. At the end of the period under review, the Netherlands was the World Bank’s second largest bilateral donor of Trust Funds and one of the largest contributors to the World Bank’s Credit and Loan Related Cofinancing Programme. 2 Programme aid Main findings The World Bank proved to be an appropriate channel for the support of structural adjustment programmes in recipient countries and the only suitable partner through which bilateral funds for programme aid in support of economic reforms could be channelled. Since the late 1980s the social dimensions of economic reform programmes have received increasing attention. Lack of data on the poverty situation, however, has had a negative influence on the design of such programmes. Social funds in Bolivia, Egypt and Ghana were relatively effective but suffered targeting and monitoring problems. In individual cases, the human rights situation in recipient countries, notably with respect to political and civil liberties, has been given insufficient attention. In countries where government’s ownership of the adjustment programme was highest, economic reform programmes have been more effective than in those where government was less committed to reform measures. In some cases donor support to economic reform and the political liberalisation process collided with one another. In this respect a major dilemma arose, particularly because it appeared that economic reform programmes under an authoritarian government were generally more effective than those in countries that had a properly functioning democratic system. The former were more free to commit themselves, without having to take (possible) dissent into consideration, than democratic governments. Consequently, economic reform in countries that also introduce political reform needs more time. Debt relief has not always been effective and efficient. Assessments of the debt situation focused on traditional indicators, such as debt service/exports and overall debt/GDP ratios, without addressing more fundamental issues such as the impact of new loans. In particular, the ability to pay the debt service on new loans (sustainable level of borrowing) by recipient countries was not taken into consideration. Hence, overall debt continued to growin the majority of cases despite changes in its composition: bilateral and commercial debt decreased but multilateral debt increased. In all cases the sustainability of results proved to be problematic, even when recipient governments acquired a high level of ownership of the reform programmes. Such programmes failed to pay off in terms of foreign private investments, while private and public national savings remained too low to finance the needed investments. Consequently, virtually all recipient countries showed an increased aid dependency. Recommendations The granting of programme aid should be conditional upon the recipient country’s good macroeconomic policies, preferably linked to World Bank-supported adjustment programmes that are usually formulated in a Policy Framework Paper (PFP). In practice, this means that a World Bank-supported structural adjustment programme constitutes a condition for the granting of programme aid. Joint cofinancing of programme aid should become the preferred form of cofinancing economic reforms since it best serves the purpose of donor coordination. Adjustment programmes, however, will have to give far more attention to poverty alleviation, gender and the environment. Social funds should be better targeted towards the poor and more efficiently monitored. The design of the reform programme should also bear in mind the consequences of simultaneously introducing economic reform measures and political liberalisation, in particular their sequence and timing. If a more effective input of Dutch views and expertise is to be realised, greater Dutch involvement in the formulation, implementation and monitoring of PFPs, as well as more timely involvement in the preparation of the Bank’s Country Assistance Strategy papers, is necessary. Recipient countries should be required to provide insight into the creation and use of countervalue funds during Public Expenditure Reviews (PERs), which should also give more attention to the problem of fungibility of programme aid. To realise a stronger involvement, Dutch participation in PERs will have to be intensified. Debt relief can be positive when debt stock is reduced, public resources are freed for spending in priority areas, and the balance-of-payments deficit is reduced. More attention should be given to the specific situation in respective countries and to determining their sustainable level of borrowing, while experiences with various types of debt relief should be taken into account. To realise this, macroeconomic and financial-technical expertise both in The Hague (the Ministry) and abroad (the embassies) should be increased. Simultaneously, capacities in the respective areas in recipient countries should be enhanced in order to support their ownership of the reform process. 3 Project aid Main findings Most evaluated cofinanced project aid addressed genuine problems and was in line with the declared policies of recipient countries and the Netherlands. Macroeconomic, social and political conditions beyond the projects’ scope were given insufficient consideration, however, which had a negative influence on the projects’ effectiveness. Moreover, most cofinanced projects did not give adequate attention to gender as an issue. This also applied to the dimension of environmental sustainability. In many projects the poor were not reached because they were insufficiently targeted, particularly poor women. Most evaluated project aid proved not to have yielded sustainable results, especially in institutional and financial terms. Cofinanced projects that were linked to economic reform programmes such as civil service reform, and infrastructural projects, performed better than so-called Stand-Alone Projects. The latter were less embedded in recipient countries’ budgetary priorities and institutional frameworks and were less subject to World Bank conditionalities. The quality of project aid in the areas of Consultant Trust Funds and Trust Funds in the energy sector was fairly adequate. Recommendations Cofinanced project aid can be more successful when linked with macroeconomic and sectoral reforms, particularly in the field of human and institutional development and physical infrastructure. Apart from its linkage to World Bank-supported Structural or Sectoral Adjustment Programmes, when applicable, cofinanced project aid should also be in conformity with Sectoral Investment Programmes, thus avoiding the financing of so-called Stand Alone Projects. Moreover, the poor should be better targeted in the design of the project since the present evaluation has clearly shown the difficulties encountered in reaching the poor, particularly poor women. When committing funds for the cofinancing of new activities, the Netherlands will need to be assured that an adequate and independent assessment of proposed activities and strategies intended to reach the poor, particularly women, has been carried out. In the case of ongoing projects this should be made a condition for cofinancing. The question of whether joint or parallel cofinancing is more appropriate for project aid requires consultation with recipient countries on a case-to-case basis. 4 Cofinancing and the Dutch private sector Main findings Tripartite transactions involving the World Bank (IBRD and/or IDA), the Ministry of Foreign Affairs and the Dutch private sector have never reached any important level. They focused solely on the promotion of Dutch exports for development objectives. The number and size of commercially-cofinanced projects also remained moderate throughout the period under review. The most important factors explaining the modest level of export credit cofinancing and commercial cofinancing were: (i) an unfavourable macroeconomic context characterised by economic recession and a precarious debt situation in many developing countries; (ii) the resulting low creditworthiness of potential recipients; (iii) the limited geographical coverage of instruments at the disposal of the Ministry of Foreign Affairs, the frequent changes in those instruments, and time-consuming procedures; (iv) the limited number of countries covered by the Netherlands Credit Insurance Company (NCM), and (v) internal factors within the World Bank (IBRD). Recommendations More attention should be given to promoting investment, e.g. by financial support to the mitigation of risks related to political instability. The change in focus from export to investment promotion may lead to an increase in the number of partners within the World Bank Group (IFC, MIGA) as well as to a changed composition of the representation of the Dutch Committee on Developing Countries (COL) in annual consultations between the Netherlands and the World Bank. 5 The added value of cofinancing Main findings Cofinancing has responded to some Dutch expectations and motivations, but could never respond to all, since some conflicted with one another. The objective of reducing the workload for the Ministry of Foreign Affairs was certainly realised, particularly in joint cofinancing. The price paid for this, however, was that, with few exceptions, the Ministry failed to achieve two other objectives, i.e. to influence World Bank policy and to benefit from new experiences. Cofinancing with the World Bank allowed both the Netherlands and recipient countries to benefit from the opportunity to participate in large projects and programmes. For recipient countries an additional advantage was the grant character of Dutch aid. The quality of programme aid was found to be good. Joint cofinancing in particular had a positive impact on donor coordination both at the level of recipient countries and of the donor community. Cofinancing was not effective in mobilising additional resources beyond ODA and/or increasing access to international capital markets for developing countries. The interests of the Dutch private sector were only served directly under partially untied parallel cofinancing and in some specific projects. The added value of cofinancing could have been higher if the instrument had benefited from a consistent set of Dutch policy objectives, clear criteria for the selection of activities and of the form of cofinancing (joint or parallel cofinancing), and had been better managed. Recommendations In view of its grant character, Dutch bilateral cofinancing should focus primarily on Severely Indebted Low Income Countries and other developing countries that have reached the limits of their sustainable level of borrowing, in order to reduce the growth of their indebtedness resulting from new World Bank loans. 6 Management Main findings The management of cofinanced activities showed serious shortcomings throughout the period under review with regard to the registration of cofinanced activities, monitoring, reporting and evaluation. This applies to both the Netherlands and the World Bank. The 1990s have shown some improvements as compared to the 1980s. Neither the Dutch Ministry of Foreign Affairs nor the World Bank were able to produce a comprehensive list of all activities cofinanced between 1975 and 1996. It should be noted that the World Bank’s lack of a comprehensive overview of cofinanced activities not only relates to Dutch cofinancing. It represents a general problem that also involves other bilateral (and multilateral) cofinanciers. Dutch decisions to cofinance have frequently been taken on an ad hoc basis, often motivated by the desire to spend quickly yet undisbursed amounts of the overall aid budget at the end of a fiscal year through joint cofinancing. This has jeopardised a careful and independent assessment of proposed cofinanced activities. Substantial amounts of Dutch aid funds transferred to the World Bank remained unspent for considerable periods of time due to their premature transfer and to slow project implementation, often caused by overambitious programme objectives or underestimation of the recipient country’s major constraints. This had a negative influence on the efficiency of cofinanced activities. The World Bank’s practice of not monitoring the creation and use of countervalue funds resulted in lack of transparency regarding the impact on recipient countries’ revenues and expenditures, thus constituting a threat to the overall efficiency of cofinanced programme aid, notably import support. On the Dutch side, the efficiency of cofinancing was hampered by (i) the absence of an adequate information system; (ii) an inadequately-defined coordination function resulting in lack of insight into cofinancing, and lack of an overview of the size and results of cofinancing; (iii) frequent changes of staff; and (iv) insufficient expertise in the 1980s and, in the area of macroeconomics, also in the 1990s. On the World Bank side, internal communication problems had a negative effect on the flow of information and contributed to the persistence of inadequate working methods based on estimated rather than realised cofinancing data. The expansion of so-called Free-Standing Trust Funds after the mid-1980s resulted in a large area not being covered by standard World Bank procedures with respect to monitoring and evaluation. This problem has only been addressed since the mid-1990s. Recommendations To improve the management of cofinancing the following recommendations are made. A complete list of all cofinanced activities and regular updating of the database will be required to enable their monitoring and evaluation. Furthermore, it would be useful to examine the consistency and clarity of existing considerations for cofinancing in general and the cofinancing mode (joint/parallel) in particular. The selection of cofinanced activities will need to reflect priorities established in Country and Regional Policy Plans as well as thematic policy documents. There is also a need to improve legal arrangements with respect to mutual information and consultation, particularly in the field of parallel cofinancing. This also applies to monitoring and evaluation. Procedures regarding the assessment of proposed cofinanced activities are also in need of improvement. Disbursements should be based on realistic expenditure expectations in order to prevent untimely disbursements. The financial management of all accounts main-tained under the 1995 General Arrangement on Cofinancing will have to be improved, e.g. with respect to the monitoring of outstanding balances. Sufficient macroeconomic and financial expertise should be available both at the central level (the Ministry) and abroad (the embassies). Finally, taking into account the ongoing process of decentralisation of the Ministry of Foreign Affairs and of the World Bank, it will be necessary to strengthen central coordinating functions on both sides for the purpose of such issues as general policy formulation and consultation, and overall monitoring and evaluation. In the case of the Netherlands this should involve both the Ministry of Foreign Affairs in The Hague and the Royal Netherlands Embassy in Washington.