Reform of the Reform of the Policy Framework Policy Framework

for Investment for Investment LendingLending

Fiduciary ForumFiduciary Forum

March 27, 2008March 27, 2008

22

What is IL Used For?What is IL Used For?

Infrastructure and HD dominantInfrastructure and HD dominant Still 77% of all operations by volumeStill 77% of all operations by volume 67% by value67% by value SILs are the dominant instrumentSILs are the dominant instrument

33

IL by Sector (FY05-07)IL by Sector (FY05-07)

1 includes information & communication, transportation, water, sanitation, & flood proctection2 includes Education, health, and social services

FY05 FY06 FY07 Total Total (Percentage)Agriculture $1.7 $1.4 $1.2 $4.3 10.9%Infrastructure $5.5 $4.8 $4.8 $15.1 38.7%Human Dev't $2.8 $3.1 $2.4 $8.2 21.1%Finance/PSD $0.5 $0.5 $0.3 $1.3 3.3%Law & public admin $2.5 $2.7 $0.6 $5.9 15.0%Energy & Mining $1.2 $2.8 $0.3 $4.3 11.0%Total $14.2 $15.2 $9.7 $39.1 100.0%

Finance/PSD3%

Law & public admin15%

Energy & Mining

11%Agriculture

11%

Human Dev't2

21%

Infrastructure1

39%

Agriculture Infrastructure Human Dev't

Finance/PSD Law & public admin Energy & Mining

44

IBRD/IDA Approved Operations (FY05-07)IBRD/IDA Approved Operations (FY05-07)Number of OperationsNumber of Operations (incl Suppl)(incl Suppl)

Source: Business Warehouseas of 4/22/2007

DPL IL ERL TotalFY05 55 226 16 297FY06 53 231 18 302FY07 30 159 10 199

Total 138 616 44 798Total (Percentage) 17% 77% 6% 100%NOTE: Number of projects inlcudes supplements.

616

44138

DPL IL ERL

55

IBRD/IDA Approved Operations (FY05-07)IBRD/IDA Approved Operations (FY05-07)Commitment Amount (US$B)Commitment Amount (US$B)

Source: Business Warehouseas of 4/22/2007

DPL IL ERL TotalFY05 $6.6 $14.2 $1.1 $21.9FY06 $7.3 $15.2 $1.0 $23.6FY07 $3.0 $9.7 $0.5 $13.1

Total $16.9 $39.1 $2.6 $58.6Total (Percentage) 29% 67% 4% 100%NOTE: Commitment amoount includes supplements.

$39.1

$16.9

$2.6

DPL IL ERL

66

IL by Instrument (FY05-07)IL by Instrument (FY05-07)

Source: Business Warehouse as of 4/22/2007

APL FIL LIL SIL SIM TAL Total$6.0 $0.9 $0.0 $29.7 $1.9 $0.6 $39.1

LIL, $0.0

FIL, $0.9

APL, $6.0

SIL, $29.7

SIM, $1.9

TAL, $0.6

APL FIL LIL SIL SIM TAL

77

Is It Time to Reform Is It Time to Reform Investment Lending (IL)Investment Lending (IL)

Project Cycle essentially unchanged in Project Cycle essentially unchanged in 50 years50 years

Essentially a blueprint investment Essentially a blueprint investment model requiring a link between funds model requiring a link between funds provided and expenditures on goods, provided and expenditures on goods, works and servicesworks and services

Designed before the concept of risk was Designed before the concept of risk was recognizedrecognized

Slow and bureaucratic, encumbered by Slow and bureaucratic, encumbered by outdated and extensive set of OP/BPsoutdated and extensive set of OP/BPs

88

Do We Need 6 IL Instruments + 8.00?

Specific Investment Loan (SIL)

Sector Investment and Maintenance Loan/Program (SIM/SIP)

Adaptable Program Loan(APL)

Learning and Innovation Loan (LIL)

Technical Assistance Loan (TAL)

Financial Intermediary Loan (FIL)

99

Main Policies and Procedures Main Policies and Procedures Governing ILGoverning IL

OP/BPOP/BP 10.00 10.00: : Investment Lending: Identification to Board Presentation (1994)Investment Lending: Identification to Board Presentation (1994) OMS OMS 2.202.20: : Project Appraisal (1984)Project Appraisal (1984) OP/BP OP/BP 10.0410.04: : Economic Evaluation of Investment Lending (1994)Economic Evaluation of Investment Lending (1994) OP/BPOP/BP 6.00 6.00: : Bank Financing (2004)Bank Financing (2004) OP/BP OP/BP 8.308.30: : Financial Intermediary Lending (FILs) (1998)Financial Intermediary Lending (FILs) (1998) OP/BP OP/BP 8.408.40: : Technical Assistance (TALs) (1994)Technical Assistance (TALs) (1994) OP/BP OP/BP 13.0513.05: : Project Supervision (2001)Project Supervision (2001) OP/BP OP/BP 13.2013.20: : Additional Financing For Investment Lending (2005)Additional Financing For Investment Lending (2005) OP/BP OP/BP 13.2513.25: : Use of Project Cost Savings (1994)Use of Project Cost Savings (1994) OP/BP OP/BP 13.5513.55: : Implementation Completion Reporting (1999)Implementation Completion Reporting (1999)

PLUSPLUS

Safeguards Policies (9 OPs/BPs in the 4 series, 2 (international water and disputed in Safeguards Policies (9 OPs/BPs in the 4 series, 2 (international water and disputed in the 7 series) the 7 series)

Fiduciary and M&E Policies (Fiduciary and M&E Policies (10.0210.02 (FM), (FM), 11.0011.00 (PR) and (PR) and 12.00 12.00 (Disbursement), OP (Disbursement), OP 13.60, Monitoring and Evaluation)13.60, Monitoring and Evaluation)

Contractual OP/BPs (7.00, 13.30 (closing), 13.40(suspension), 13.50 (cancellation)Contractual OP/BPs (7.00, 13.30 (closing), 13.40(suspension), 13.50 (cancellation) Financial OP/BPs (OP/BP 3.10,Financial OP/BPs (OP/BP 3.10, Financial Terms and Conditions, Financial Terms and Conditions, OP/BP 8.10, OP/BP 8.10, PPF, PPF, OP/BP OP/BP

14.10, 14.10, External Debt ReportingExternal Debt Reporting))

1010

Processes Put in Place Under Current Policies Processes Put in Place Under Current Policies and Procedures (from IDA Internal Controls and Procedures (from IDA Internal Controls

Review) Review) IDA Internal Controls review identified 30 IDA Internal Controls review identified 30

processes for preparation, internal review, processes for preparation, internal review, “approval”, and monitoring/supervision of CAS, “approval”, and monitoring/supervision of CAS, ILs and DPLs from concept to completionILs and DPLs from concept to completion

Examples of such processes include: SIL project Examples of such processes include: SIL project cycle, addressing Legal, FM, PR, safeguards cycle, addressing Legal, FM, PR, safeguards aspects of SILs, disbursement processes etc.aspects of SILs, disbursement processes etc.

21 processes21 processes apply to IL (12 to IL only and 9 to IL apply to IL (12 to IL only and 9 to IL and DPL) and DPL)

1111

Key Controls Associated with IL Key Controls Associated with IL Processes (from IDA Internal Controls Processes (from IDA Internal Controls

Review)Review)

IDA Internal Controls review identified about 120 IDA Internal Controls review identified about 120 key controls embedded in the 30 processeskey controls embedded in the 30 processes

Examples of such key controls include: Concept Examples of such key controls include: Concept and Decision Review Meetings, Negotiations, and Decision Review Meetings, Negotiations, Effectiveness, ISR etc.Effectiveness, ISR etc.

73 key controls 73 key controls apply to IL (61 to IL only and 12 apply to IL (61 to IL only and 12 to IL and DPL) to IL and DPL)

1212

Time and Costs Associate with Time and Costs Associate with Preparation and Supervision of ILPreparation and Supervision of IL

(FY05-07)(FY05-07) Average processing time from concept to Average processing time from concept to

Board approval: Board approval: 16.6 months16.6 months

Average preparation cost: Average preparation cost: $383,000$383,000 per per project (or project (or $276,867 per year$276,867 per year))

Average implementation period: 4.6 yearsAverage implementation period: 4.6 years

Average supervision cost: Average supervision cost: $248,000$248,000 per per project (or project (or $54,000 per year$54,000 per year))

1313

Some Lessons from IL Reform ExperienceSome Lessons from IL Reform Experience

Mere process change can affect speed Mere process change can affect speed somewhat, but not costsomewhat, but not cost

Some reforms – APLs, LILs – had little impact Some reforms – APLs, LILs – had little impact while others – Additional Financing, while others – Additional Financing, Expenditure Eligibility – were significant. Expenditure Eligibility – were significant. Latter changed the modelLatter changed the model

Clients are screaming for major changes, not Clients are screaming for major changes, not adjustments at the marginadjustments at the margin

One size does not fit allOne size does not fit all

SO WE NEED A QUANTUM NOT A SO WE NEED A QUANTUM NOT A MARGINAL CHANGE. CAN IT BE DONE?MARGINAL CHANGE. CAN IT BE DONE?

1414

A Policy Reform that Appears to A Policy Reform that Appears to Work: Additional Financing (AF)Work: Additional Financing (AF)

The 2005 Reform of Additional Financing policy The 2005 Reform of Additional Financing policy was designed to:was designed to:

scale-up successful projects with greater efficiency and scale-up successful projects with greater efficiency and effectivenesseffectiveness

permit quick Bank response to changing borrower permit quick Bank response to changing borrower circumstancescircumstances

facilitate timely completion of successful projects that facilitate timely completion of successful projects that face cost overrun or financing gapface cost overrun or financing gap

Preliminary results show the revised policy is Preliminary results show the revised policy is meeting the reform objectivesmeeting the reform objectives

1515

Average Preparation Time & CostAverage Preparation Time & CostIL vs AF FY05-07IL vs AF FY05-07 (w supp)(w supp)

NOTE: IL excludes additional financing & ERL

Average preparation time (months) IL = 16.6 and AF = 7.7 Average preparation cost (US$T) IL = $383 and AF = $28

17.08.4

20.6

14.73.4

13.75.9

20.03.5

18.111.1

0.0 5.0 10.0 15.0 20.0 25.0

Months

AFR

EAP

ECA

LCR

MNA

SAR

IL Add'l Fin

Add'l Fin 8.4 3.4 5.9 3.5 11.1

IL 17.0 20.6 14.7 13.7 20.0 18.1

AFR EAP ECA LCR MNA SAR

413

45

468

351

11

296

22

471

395

21

0

50

100

150

200

250

300

350

400

450

500

(US$

T)IL Add'l Fin

IL 413 468 351 296 471 395

Add'l Fin 45 11 22 0 21

AFR EAP ECA LCR MNA SAR

1616

Average Preparation Time & CostAverage Preparation Time & CostIL, AF, Repeater, Simple FY05-07IL, AF, Repeater, Simple FY05-07(w supp)(w supp)

16.6

17.4

9.8

9.1

7.7

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0 20.0

Months

IL no ERL, AF IL no ERL, AF, Repeat, Simple Repeater Simple Add'l Fin

$383$411

$199 $207

$28

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

(US$

T)

IL no ERL, AF IL no ERL, AF, Repeat, Simple Repeater Simple Add'l Fin

1717

Proposed Approach to IL Policy Proposed Approach to IL Policy Reform Reform

Create a Create a single principles-based IL umbrella single principles-based IL umbrella policy policy

Embed a Embed a risk-based modelrisk-based model of internal controls of internal controls in IL policy and procedures: 70% of operations in IL policy and procedures: 70% of operations are low-risk, repeaters. Can’t we prepare in 6-are low-risk, repeaters. Can’t we prepare in 6-9 months in AF style?9 months in AF style?

But must do 20-30% But must do 20-30% higher-risk, innovative higher-risk, innovative operations,operations, requiring more time and resources requiring more time and resources

Rebalance attention and resourcesRebalance attention and resources between between preparation and supervision and reflect preparation and supervision and reflect different project needs/risks different project needs/risks

AlignAlign IL policy with the current development IL policy with the current development and business model, borrower needs, and and business model, borrower needs, and strategic objectivesstrategic objectives

1818

A Consolidated Umbrella Policy for IL A Consolidated Umbrella Policy for IL from Concept to Completionfrom Concept to Completion

Appraisal-Approval Policies (OP/BP 10.00, OMS 2.20,

OP/BP 10.04)

Instrument Consolidation (OP/BP 8.30 (FIL), 8.40 (TAL)) (SIL, SIM, APL)

Consolidate supervision and completion policies (OP/BP 13.05, 13.20, 13.25, 13.55)

Single Umbrella Principles-Based IL Policy from Concept to Completion

Single IL Instrument (with appropriate design options/features to meet the DOs)

CONCEPT

BOARD

SUPERVISION

COMPLETION

APPRAISAL

1919

Risk-Based Approach to IL Procedures and Risk-Based Approach to IL Procedures and Associated Processes and Key ControlsAssociated Processes and Key Controls

Embed a risk-based model of internal controls in Embed a risk-based model of internal controls in IL policy and procedures to:IL policy and procedures to:

Rationalize and prioritizeRationalize and prioritize key controls key controls

Facilitate appropriate Facilitate appropriate differentiation of differentiation of requirements and controlsrequirements and controls based on riskbased on risk (permit streamlined AF-type procedures when (permit streamlined AF-type procedures when building on experience and track record, and building on experience and track record, and use additional controls for high risk situations)use additional controls for high risk situations)

Automate work-flowAutomate work-flow arrangements to maximize arrangements to maximize effectiveness and control functionseffectiveness and control functions

2020

The Big QuestionsThe Big Questions

Can use of Country Systems address Can use of Country Systems address fiduciary issues in low risk operations?fiduciary issues in low risk operations?

If we are results-focused, is the link If we are results-focused, is the link between finance and expenditures between finance and expenditures unchangeable?unchangeable?

What is the right balance between projects What is the right balance between projects and programmatic approaches?and programmatic approaches?

Are Safeguards untouchable?Are Safeguards untouchable? How long will all this take? How long will all this take?