International Development Association

IDA's Administrative Costs

IDAlO Technical Note No. 7 April 1992

Introduction

1. At their meeting in Paris on January 27 and 28, 1992, the IDA Deputies requested information on IDA's administrative costs. This note responds to that request. IDA's administrative costs are covered by service charges and any commitment fees. Donor resources, reflows and IBRD net income transfers are not used to defray IDA's administrative costs.

IDA's Administrative Costs, Service Charge and Commitment Fee

2. IDA shares staff and other resources with IBRD to support its operations. It is difficult therefore to cost out IDA's operations separately. For example, in the blend countries where substantial amounts of IDA's funds are lent, the underlying country and project level work is linked to both IDA and IBRD lending operations. In the financial reports of the Bank Group, IDA's administrative costs are derived by allocating total IBRD/IDA administrative costs on the basis of a cost-sharing formula between IDA and IBRD. This formula breaks down the costs into three parts: country-specific expenditures; development

services expenditures; and support services expenditures. Attachment 1 explains the cost­sharing formula, which became effective in FY88. Prior to this, cost-sharing reflected a simple prorata allocation of total administrative costs based on the average number of projects approved over a three year period by IDA and IBRD, respective! y.

3. IDA's administrative costs are met by the service charges and any commitment fees paid by borrowers. IDA's service charge is currently set at 0. 75 percent of the disbursed and outstanding balance, to be paid semi-annually by the borrower. This service charge rate has been in effect since 1961. A commitment fee of 0.5 percent on the undisbursed balance was introduced for IDA credits approved from January 1982. In April 1988, the Executive Directors decided that IDA should charge a commitment fee within a range of 0-0.5 percent of undisbursed balances, with the actual rate to be set annually based on a review of IDA's financial position. IDA's actual commitment fee rates have been set at zero percent during FY89-92. Table 1 below summarizes IDA's administrative costs and income from service charges and commitment fees during FY80-91 and its cumulative profit/loss position.

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4. In the past, income from commitment fees and service charges have not always covered IDA's administrative expenses and the shortfalls have been carried as a net operating loss in IDA's books. IDA has had an annual net operating surplus each year since FY86 and the cumulative operating deficits from prior years were eliminated in FY90. For the future, the expectation is that service charges will be adequate to cover administrative costs given the increasing disbursed balance. It is this expectation which has resulted in the commitment fee being set at zero in the last few years.

Assessing IDA's Operational Efficiency

5. IDA's operational efficiency can be assessed in two ways. First, by comparing it to

other similar entities and second, by reviewing the trend in its key performance indicators over time. Given the common set of resources - staff, facilities, technical and country knowledge drawn on by both IDA and IBRD - analysis of IDA's operational efficiency needs to be done for a combined IDAIIBRD operation. This also permits a more meaningful comparison with other agencies such as the Regional Development Banks. In addition, a time series analysis of combined IDAIIBRD administrative costs eliminates the effect of the changes in the cost allocation formula which were introduced in FY88.

(a) Trends in unit costs

6. Table 2 shows IDA and IBRD's combined total administrative costs, including overheads. Unit administrative cost for IDAIIBRD

· ·Total IDAliBRD Administrative .. :_Cfu~t ($ fui1Ji6~) :b! •.

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trended upwards through most of the 1980s and then declined during the later part of the decade.!/ The increasing trend reflects the changing content of both IDA credits and mRD loans in recent years. Most credits and loans are now supported by expanded economic, sector and project work to identify the policy adjustments needed, evaluate public investment programs and place special emphasis on environment, poverty alleviation, women in development, human resources, role of the private sector, and institutional development. To implement this, new non-lending outputs have been introduced in recent years. Examples include: Policy Framework Papers, Environmental Strategy Papers, support for Environmental Action Plans, Country Poverty Assessments, Women in Development Strategies, and Private Sector Assessments.

7. Although unit costs have fallen in the most recent period, this may not be indicative of the longer-term trend. The decline seems to derive at least in part from the fact that the major

·.·.·.·.·.·::::::: :::: :

up-front effort needed to support the adoption of adjustment programs in a large number of borrowing countries was substantially achieved by the late 1980s. In the 1990s, the overall cost of servicing IDAtmRD's clients may rise on account of three factors. First, it is likely that more resources will need to be devoted to the areas of special emphasis mentioned above. Second, the reeent accession of a large number of new members and the likely reactivation of some dormant IDA recipient countries will require costly start-up work.2/ Third, there is increasing emphasis on the quality of portfolio management. The effectiveness of IDA's supervision work, including implementation assistance, is currently being assessed by a Bank-wide Task Force on Portfolio Management. The Task Force will conclude its work in July, 1992.

(b) Comparing IDA and ffiRD's unit costs

8. Table 3 compares the unit administrative costs of IDA with those of mRD.

!/ Unit administrative cost is defmed as the total annual administrative cost as a percent of annual commitments. Unless indicated otherwise, the sources of all data are the IDA/IBRD's financial and accounting records and internal budget documents. Where appropriate, three year average data are presented in order to smooth out annual variations.

'1,/ Between July 1, 1987 and January 1, 1992, six new members had joined IBRD. Another 17 new members are expected by the end of 1992. In addition, in FY91 alone, lending programs in four countries were reactivated.

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Because of the change in the cost-sharing formula in FY88, it is not useful to compare the unit administrative costs of IDA and IBRD over time. However, for any given time frame, it is apparent from Table 3 that the cost of doing business in IDA countries is significantly higher than in IBRD countries. Weak domestic institutions, high levels of economic and sector work, and a greater need for supervision and aid coordination, characterize IDA borrowers. Furthermore, the special emphasis areas discussed above have particular

significance in the IDA countries. To address these issues effectively in IDA countries requires considerable time and staff resources.

9. Another factor which contributes to IDA's higher unit costs is the large number of relatively small countries among IDA's borrowers. This has a direct impact since there are certain fixed overhead costs of doing business in any country, but there is also an indirect impact which results from the fact that the average size of IDA

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credits is well below that of IBRD loans. During FY89-91 for example, IDA credits were $54 million on average while IBRD loans were $131 million on average.

(c) The share or operational activities

10. The activities of IDAIIBRD can be divided into "operational" work undertaken mainly by Regional staff that relate more or less directly

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to lending and support. The latter category includes, in addition to the broader development oriented activities, various administrative functions such as loan disbursements, accounting, legal work, personnel, etc. For many of these activities, cost-effectiveness can be defined in relation to "service standards" to be met. To the extent productivity can be increased in these non-operational functions, this releases resources for operational work. Box 1 gives examples of

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recent measures to improve IDA/ffiRD cost effectiveness. Therefore, one measure of IDA/ffiRD's operational efficiency is the share of total administrative budget that is devoted to activities that are directly related to country-level operations. Table 4 indicates that throughout the last decade there has been a consistent proportionate downward trend in the non-

operational costs of IDA/IBRD with an increasing share of the budget being directly allocated to operational activities.

11. While IDA/ffiRD has succeeded in shifting more of its resources to operational work (increasing from about 53% during FYS0-82 to 58% during FY89-91), there have been some

changes among the major cost components within its operational budget. Table 4 also indicates the trend in major cost elements -- direct lending, economic and sector work, supervision and aid coordination/technical assistance. The proportion of resources allocated to economic and sector work has grown significantly; although in absolute terms resources for lending activities continue to represent the largest amounts. This reflects the changing scope and emphasis of IDA/ffiRD's activities in the recent years. Not only in adjustment lending but also in investment lending, new generation projects are much more policy­oriented, thereby increasing the need for economic and sector work to underpin the lending work.

12. Even within lending activities, there is a shift towards less capital intensive sectors (e.g., urban management, human resource development, population and health, etc.) which are more staff intensive in their design and implementation than the traditionally more capital intensive sectors

(e.g., power, industry). As indicated above, the weak implementing agencies and the complexity typical of these sectors increases costs. The unit lending cost (expressed as a percent of commitments) rose marginally from 0.55% in FY80 to 0.59% in FY91, or registering about a 7% increase, and unit supervision cost (expressed as a percent of undisbursed balances) rose from 0.09% in FY80 to 0.11% in FY91, representing about an 18% increase.

(d) Leveraging IDAJIBRD resources

13. Substantial background work undertaken by IDAIIBRD in economic and sector analysis, appraisal and supervision of projects, and aid coordination activities, support not only IDAIIBRD lending but lending by the donor com­munity at large. As an indication of this leverage, the level of official cofinancing is presented in Table 5. Of particular significance is the scale of resources mobilized through the Special Program

::::.:::::::::::.·:: .. ............ ...

of Assistance (SPA) to Africa which draws heavily on IDA's aid coordination role in the region. The inputs which go into aid coordination are more than the direct costs as indicated earlier. The servicing of such coordination mechanisms, in general requires more intensive country analysis and reporting at greater frequency.

(e) Regional variations in IDA/IBRD's costs in comparison with other institutions

14. It is difficult to determine a suitable comparator which closely resembles either IDA or IBRD in scope, scale, geographical coverage and diversity of activities. IDA/IBRD's work program includes elements not typically covered by other economic assistance organizations. The scale of its research program and development policy work (e.g., annual World Development Reports, Poverty Reduction Handbook, etc.) is unique, as is the role in aid coordination. Its global scope and its involvement in conducting country-specific economic and sector work and related policy dialogues and in helping design and monitor adjustment programs give it a broader mandate than that of other multilateral development agencies. The Economic Development Institute, which directly trains more than one thousand officials from the borrowing countries each year, is another unique feature.

15. Other multilateral development banks have a regional focus, and bilateral aid programs typically concentrate on a select group of client countries. Given the considerable disparity in the cost of doing business among various regions, a regional breakdown of IDA's and ffiRD's cost of

operations, as shown in Table 6, provides a more meaningful basis for comparison with the regional development banks.

16. Regional variations of operational costs arise due to such factors as the maturity of the lending program, strength of domestic institutions and the mix of sectors and lending instruments. For example, as the data in Table 6 indicate, the cost of operation in Africa is considerably higher than for other regions and also higher than that of the African Development Bank. The scope and diversity of IDA's program in Africa and its central role in aid coordination exceed that of any other development assistance agency. The associated costs of the Africa program represent a conscious choice in responding to the needs of the borrowers - reflecting a more staff intensive approach in the region. By contrast, the cost of operation in Asia is considerably lower -signifying the ability of IDAIIBRD to rely more heavily on the quality of the domestic institutions. The cost of IDAIIBRD's operations in Asia compares favorably with that of the Asian Development Bank and the Asian Development Fund, taken together.

17. It is evident from the comparative data in Table 6 with other multilateral and bilateral agencies that IDAIIBRD's global presence, while it has certain added costs associated with it, also permits substantial economies of scale. While it is difficult to attach much significance to a comparison of IDAIIBRD's unit costs with other economic agencies because of the differences in the nature and scope, the costs ofiDA's operations would not appear to be out of line with those of the comparators cited.

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::$:':SS.:o ---------~-:ss.:·o:..-------------------------lllllt Conclusions

18. The preceding analysis suggests that the efficiency of IDA's and IBRD's operations, taken together, is within the norms for similar institutions. The trends in unit costs - both in the aggregate and in their components - reflect the continuing evolution of Bank and IDA work. The data also indicate the increased costs associated with the "redefinition of IDAIIBRD's products"

which took place throughout the 1980s as adjustment and the various special emphasis activities, were integrated into the operational work program. While this process has by now been substantially absorbed into the cost structure and total costs per dollar lent have fallen recently, given the additional tasks which the Bank Group is undertaking and the number of new member countries, it is not unlikely that unit costs will rise at least during the first half of the 1990s.

•

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ATTACHMENT 1

IDA/ffiRD COST SHARING

IDAIIBRD cost sharing is determined by a three-part formula:

• Country-Specific Expenditures are pro-rated in the proportion of IDA to IBRD operations presented to the Board over a three-year period (the previous year, the current year and the coming year). Country-specific expenditures are those for lending, supervision, economic and sector work, operations evaluation, technical assistance, aid coordination, and legal services.

• Other Development Services are pro-rated in the proportion of IDA to IBRD commitments in the current year. These services include research, development policy work, and EDI training.

• Support Services are pro-rated based on the weighted average assessments of the benefit to IDA of the various support services. The average, set at 28% for IDA in FY91, is reassessed every three years. These services include external relations, personnel and administration, Secretariat, Executive Offices, Board, and Finance.

In FY91, the IDA charge was 33.9% of the IDA/IBRD budget.