International Development Association

IDA's Undisbursed Balances

IDAlO Technical Note No. 10 April 1992

1. At the meeting in Paris on January 27 and 28, some IDA10 Deputies expressed concern about slow rates of disbursement on IDA credits in certain countries and the consequent build-up of undisbursed balances. They asked whether it might be possible to provide more commitment authority by more expeditious cancellation of such balances where the prospects for effective project implementation were poor. This note discusses the trends in aggregate IDA disbursements and the approach which the Association has taken in cases of slow disbursement.

The Level of IDA's Undisbursed Balances

2. As of end-December 1991, undisbursed balances on IDA credits stood at $22 billion, compared to a level of $13 billion in FY85. This was in line with the nominal · growth in IDA commitments over the period. Chart 1 shows that the most common measure of overall disbursement performance, disbursements as a percent of undisbursed balances, has been stable at about 22% over the past 6 years. This compares quite

well to an average of 23.5% for mRD over the same period, given the relatively weak implementation capacity of many IDA borrowers.

3. The aggregate data· does not provide a complete picture, however. The period since FY85 has seen an increase in quick disbUQing adjustment lending. This masks some slowing down in the rate of disbursement on investment projects. Even in the investment portfolio however,· there are sharp differences in the rate of disbursement between different sectors and different types of projects. For example, the average industry project disburses ov~r six years while population projects disburse over eight. As the composition of IDA's investment lending shifts away from major capital intensive and "wholesaling" projects-such as industry, ports and DFC lending-towards the social sectors and institution building projects, longer disbursement schedules for investment lending can be expected. Table 1 provides a comparison of the number of years it takes for a project in a given sector to disburse fully.

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Chart 1: IDA Disbursements As a o/o of Undisbursed Balances

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Ollft 1Q85 1Q86 1987 1988 1989 1QQO 1991

Fiscal Years

4. For this reason also, it is difficult to compare disbursement rates by country. It is evident, for example, that the oft-cited slow disbursement rates in India are at least in part a reflectiOn of the composition of the portfolio-no quiet-disbursing loans until recently, and heavy IDA involvement in slower disbursing areas such as irrigation and the social sectors.

IDA'S Response to Slow Disbursement

S. One indication of whether disbursement rates are lagging is to measure the actual achievement against the rate which was projected at the time of appraisal. About two-thirds of IDA credits are completed on or before the original

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closing date. Of the remaining one-third, the vast majority are completed within two years of the original closing date. However, a small portion continues to experience difficulties well beyond that time. There is currently about $700 million in undisbursed balances (3% of the total balance) for credits where the closing date has been extended by more than two years.

6. Table 2 below provides a breakdown of these slow credits by sector and region. About 75% are in the Agriculture and Transport sectors in Africa and South Asia. There are two sub-areas where slow disbursements have been particularly concentrated: (i) irrigation projects in South Asia and Africa and (ii) highway projects in Africa. In both sectors, IDA has been shifting its emphasis towards maintenance of existing structures and improving institutional capacity, accountability and management. Experience has shown that the complexity of _ these projects has been underestimated and that greater allowance needs to be made for the difficulties of implementation. A second important reason for disbursement delays in Africa has been security factors (slow disbursing projects in Africa have been

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concentrated in Zaire, Uganda, Ethiopia and Sudan). Other problems, which have cropped up in specific projects, include cumbersome procurement procedures on the part of borrowers, cross-conditionality with other donors who were slow to disburse, and lack of local counterpart funds due to budgetary constraints.

7. IDA's primary response to implementation difficulties is to work towards improving project implementation through more intensive supervision to try to get action on the key constraints. In the normal course of project supervision and field missions, issues are analyzed and discussed with the concerned agencies, solutions are sought and action plans are agreed upon. Where government action is required to deal with an important bottleneck, high-level representations are made to secure action. Most projects are now subject to mid-term reviews which provide the opportunity to measure progress and to redesign parts of the project, if necessary. In addition, for most countries, at about two-yearly intervals, the Country Director undertakes a Country Implementation Review with senior government officials at which the health of the entire IDA

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portfolio is examined, concentrating on projects with major implementation problems. Mid-course corrections are a normal part of the project process in any country and many projects need a redesign of certain elements or changes in their scope. Suspension of disbursements (formal or informal) and/or cancellations are not carried out unilaterally by IDA unless the conditions for satisfactory project implementation no longer exist. The process of arriving at negotiated solutions to implementation constraints is preferred to cancel­lation; and often this process accounts for the extension of implementation periods. However,

there is an issue as to whether the quality and intensity of IDA's supervision efforts are sufficient to ensure that corrections are made and constraints dealt with in a timely fashion. The effectiveness of IDA's supervision policies and procedures is currently being assessed by a Bank-wide Task Force on the Bank's Portfolio Management System. The Task Force will conclude its work by July 1992.

8. Box 1 provides an example of a project where efforts were successful in putting a problem project back on track. It is always a matter of

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judgement how long and hard it is worth trying to salvage a project. There are numerous cases of projects with long early delays, which were subsequently implemented satisfactorily. The up-front investment for both IDA and the recipient country is extremely high and a decision to abandon ship is not taken lightly. For example, IDA kept a number of credits in Ethiopia on the books during the years of civil war and economic mismanagement. The expectation is now that several of these long delayed credits will be completed according to newly agreed schedules. Others may need to be revised further in scope in order to facilitate implementation. In the case of significant restructuring of projects, Management seeks the approval of IDA's Executive Directors for the proposed changes.

Cancellations

9. IDA cancellations from FY85 through FY91 averaged $230 million per year on 79

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projects, about 1% of. the total undisbursed portfolio. The year to year levels are shown in Chart 2 below. Many of these cancellations are for small amounts--more than half of - the cancellations over the past five years were for amounts less than 10% of the original loan value. The geographic and sectoral make-up of cancellations parallels that of slow disbursing · credits, i.e. over 50% is in South Asia and over 50% is in the Agriculture sector. The absolute amount of cancellations will rise significantly in FY92, but this is due to the special cancellation program for India described in Box 2.

10. During the period FY77 through FY84, IDA cancellations averaged only $55 million a year. Borrowers were understandably keen to use every penny of these highly concessional resources and pushed for project extensions in order to use up small remaining amounts. Bank staff tended to go along with these requests so that the country concerned would not "lose" the remaining IDA resources. In view of this IDA's Management

Chart 2: IDA Cancellations

1985 1986 1987 1988 1989 1990 1991

Fiscal Year

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:: :. . : J.Iie.!Jlrg¢ volume of.lri(fi.a' s undisln1r@ II:> A lnll.llll~. ·· $5 billion as of elld.-N e>ve.01ber 1991; arid. :.{: i#~#~:~· ·~st#.:tiJ~~ av~n~s~ 4i~Utje~t: $Cl:l~(~ ii&'Ve :b#~ :close.ly. scrutini~ over· tb~ :past·.few yea!j·. by :::·.

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·.. . : }ril.99 r:Ma~g~~(~eri~'kll; ~tr¥&l.¢l#iv~ feyiew of hldia' s undisburse4 Jj(j#f6Iio,taki~8' U.tc{{ :: ~liil,(l:IO~ .·project~i~~ @<)ri:rian# ~d. Jii4iifs: ~~tly.·.· initiated reform prog~:<wbich inv()lvt!d. · .

:: :::~i()iiS m>the bu.diet4~ficlt; ShiftS m: iliC<lillDI;;~i:iri pti()rltiesi ·:and a ·further ·devahi.atiOiiof .the:J:tu:pee:::::· : •::• F6.it(:;~g@s·••rev~~:· ili:Pecerl!bei19?l ~ ~:•.liPPJ1>V.ed the:amcellation· or ··$650 :JDillion nt •JBdia~~:::::

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took a number of steps. Detailed portfolio reviews were undertaken to identify and close completed projects which still had undisbursed amounts; limits were placed on the number of extensions which might be given, with escalating approval requirements for each extension. These steps have recently been strengthened by a decision that no budget will be provided to Regions to supervise projects after eight years of implementation.

11. Cancellations occur for several reasons: (i) project difficulties, aggravated by either lack of action on key policies or weakness of institutions, become overly prolonged and there is little realistic prospect of improvement; (ii) changes in the international or domestic economy render the

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project non-viable and redesign is not an option; (iii) projects are completed and unutilized funds remain due to lower than expected project costs. Lower than expected project costs arise when the purchasing power of the original credit in terms of goods and services to be procured locally increases due to a gradual depreciation or devaluation of the national currency during project implementation. Project cost savings also occur, although not frequent! y, due to better than expected procurement terms from contractors.

12. Prior to FY83, cancellations were used to increase IDA's commitment authority. However, after this date the savings against cancelled credit amounts were needed to meet the shortfalls on

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IDA5 arising from exchange rate movements. At the present time, the undisbursed amount of cancelled credits becomes part of IDA's free funds which constitute a buffer against further adverse exchange rate movements, and also form part of the basis for determining advance commitments against future reflows. The effect therefore is similar to the pre-FY83 situation, in that cancellations are enabling IDA to sustain a higher rate of new commitments against reflows than would otherwise be the case.

Conclusions

13. Decisions to cancel undisbursed amounts are project specific. Short of a project-by-project

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analysis it is difficult to comment with any certainty on whether the rates of disbursement and cancellations are adequate. This note indicates that projects with extended delays are a small part of the portfolio and cancellations appear reasonable given that it is usually more efficient to redesign or revive a lagging project than to start developing a new one from scratch . Nevertheless , this is an area which management is keeping under review. It is inefficient for both the government concerned and the Association to continue providing staff resources and managerial focus for activities which are likely to yield minimal returns. This is a much more significant cost of the failure to cancel in a timely fashion than the likely small impact on available commitment authority.