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Reform of the Policy Framework for Investment Lending Fiduciary Forum March 27, 2008. What is IL Used For?. Infrastructure and HD dominant Still 77% of all operations by volume 67% by value SILs are the dominant instrument. IL by Sector (FY05-07).
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Reform of the Policy Framework for Investment LendingFiduciary Forum March 27, 2008
What is IL Used For? • Infrastructure and HD dominant • Still 77% of all operations by volume • 67% by value • SILs are the dominant instrument
IL by Sector (FY05-07) 1 includes information & communication, transportation, water, sanitation, & flood proctection 2 includes Education, health, and social services
IBRD/IDA Approved Operations (FY05-07)Number of Operations(incl Suppl) Source: Business Warehouse as of 4/22/2007
IBRD/IDA Approved Operations (FY05-07)Commitment Amount (US$B) Source: Business Warehouse as of 4/22/2007
IL by Instrument (FY05-07) Source: Business Warehouse as of 4/22/2007
Is It Time to Reform Investment Lending (IL) • Project Cycle essentially unchanged in 50 years • Essentially a blueprint investment model requiring a link between funds provided and expenditures on goods, works and services • Designed before the concept of risk was recognized • Slow and bureaucratic, encumbered by outdated and extensive set of OP/BPs
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)
Main Policies and Procedures Governing IL • OP/BP 10.00: Investment Lending: Identification to Board Presentation (1994) • OMS 2.20: Project Appraisal (1984) • OP/BP 10.04: Economic Evaluation of Investment Lending (1994) • OP/BP 6.00: Bank Financing (2004) • OP/BP 8.30: Financial Intermediary Lending (FILs) (1998) • OP/BP 8.40: Technical Assistance (TALs) (1994) • OP/BP 13.05: Project Supervision (2001) • OP/BP 13.20: Additional Financing For Investment Lending (2005) • OP/BP 13.25: Use of Project Cost Savings (1994) • OP/BP 13.55: Implementation Completion Reporting (1999) PLUS • Safeguards Policies (9 OPs/BPs in the 4 series, 2 (international water and disputed in the 7 series) • Fiduciary and M&E Policies (10.02 (FM), 11.00 (PR) and 12.00 (Disbursement), OP 13.60, Monitoring and Evaluation) • Contractual OP/BPs (7.00, 13.30 (closing), 13.40(suspension), 13.50 (cancellation) • Financial OP/BPs (OP/BP 3.10, Financial Terms and Conditions, OP/BP 8.10, PPF, OP/BP 14.10, External Debt Reporting)
Processes Put in Place Under Current Policies and Procedures (from IDA Internal Controls Review) • IDA Internal Controls review identified 30 processes for preparation, internal review, “approval”, and monitoring/supervision of CAS, ILs and DPLs from concept to completion • Examples of such processes include: SIL project cycle, addressing Legal, FM, PR, safeguards aspects of SILs, disbursement processes etc. • 21 processes apply to IL (12 to IL only and 9 to IL and DPL)
Key Controls Associated with IL Processes (from IDA Internal Controls Review) • IDA Internal Controls review identified about 120 key controls embedded in the 30 processes • Examples of such key controls include: Concept and Decision Review Meetings, Negotiations, Effectiveness, ISR etc. • 73 key controls apply to IL (61 to IL only and 12 to IL and DPL)
Time and Costs Associate with Preparation and Supervision of IL(FY05-07) • Average processing time from concept to Board approval: 16.6 months • Average preparation cost: $383,000 per project (or $276,867 per year) • Average implementation period: 4.6 years • Average supervision cost: $248,000 per project (or $54,000 per year)
Some Lessons from IL Reform Experience • Mere process change can affect speed somewhat, but not cost • Some reforms – APLs, LILs – had little impact while others – Additional Financing, Expenditure Eligibility – were significant. Latter changed the model • Clients are screaming for major changes, not adjustments at the margin • One size does not fit all SO WE NEED A QUANTUM NOT A MARGINAL CHANGE. CAN IT BE DONE?
A Policy Reform that Appears to Work: Additional Financing (AF) • The 2005 Reform of Additional Financing policy was designed to: • scale-up successful projects with greater efficiency and effectiveness • permit quick Bank response to changing borrower circumstances • facilitate timely completion of successful projects that face cost overrun or financing gap • Preliminary results show the revised policy is meeting the reform objectives
Average Preparation Time & CostIL vs AF FY05-07(w supp) Average preparation time (months) IL = 16.6 and AF = 7.7 Average preparation cost (US$T) IL = $383 and AF = $28 NOTE: IL excludes additional financing & ERL
Average Preparation Time & CostIL, AF, Repeater, Simple FY05-07(w supp)
Proposed Approach to IL Policy Reform • Create a single principles-based IL umbrella policy • Embed a risk-based model of internal controls in IL policy and procedures: 70% of operations are low-risk, repeaters. Can’t we prepare in 6-9 months in AF style? • But must do 20-30% higher-risk, innovative operations, requiring more time and resources • Rebalance attention and resources between preparation and supervision and reflect different project needs/risks • Align IL policy with the current development and business model, borrower needs, and strategic objectives
CONCEPT Single Umbrella Principles-Based IL Policy from Concept to Completion APPRAISAL BOARD Single IL Instrument (with appropriate design options/features to meet the DOs) SUPERVISION COMPLETION A Consolidated Umbrella Policy for IL from 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)
Risk-Based Approach to IL Procedures and Associated Processes and Key Controls • Embed a risk-based model of internal controls in IL policy and procedures to: • Rationalize and prioritize key controls • Facilitate appropriate differentiation of requirements and controlsbased on risk (permit streamlined AF-type procedures when building on experience and track record, and use additional controls for high risk situations) • Automate work-flow arrangements to maximize effectiveness and control functions
The Big Questions • Can use of Country Systems address fiduciary issues in low risk operations? • If we are results-focused, is the link between finance and expenditures unchangeable? • What is the right balance between projects and programmatic approaches? • Are Safeguards untouchable? • How long will all this take?