i

News &Notices

#141996

for World Bank Watchers

TABLE OF CONTENTS

Quotes p. 1 I. Tidal Wave of Restructuring Hits the World Bank p. 3

A. Social Development task Force: Revolt of the Social Scientists p. 3 B. Institutional Overhaul p. 7 C. Snapshots of Quality Control: Before and After Restructuring p. 8

II. The Status of the Bank's Loan Portfolio p. 11 A. Two Overarching Quality Questions p. 11 B. Defining "Quality" p. 11 C. The Importance of Fostering Good Economic Governance p. 13 D. Quality of the Current Portfolio p. 15

III. Bank-NGO Meeting in Nicaragua p. 17 IV. New Bank Policy Permits Financing of Food p. 21 V. U.S. Aid Levels Continue to Drop p. 22 VI. Multilateral Debt p. 24 Attachment: A Summary of the World Bank Country Assistance Strategy (CAS) for Uganda p. 25 Figure: Bad Model/Good Model p. 6

Contact: Globalization Challenge Initiative 7000-B Carroll Avenue Suite 101 Takoma Park, MD 20912 (301) 270-1000 FAX (301) 270-3600 E-mail: ncalexander@igc.org Bread for the World Institute 50 F Street, NW Suite 500 Washington, DC 20001 Phone: (202) 639-9400 FAX: (202) 639-9401

Note: This publication is prepared collaboratively by Nancy Alexander of the Globalization Challenge Initiative and the Bank Watchers’ Project at Bread for the World Institute with assistance from Ford Foundation and John D. & Catherine T. MacArthur Foundation.

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QUOTES

Quotes of Latin American NGOs at the May meeting of the World Bank-NGO Committee in Nicaragua:

The Bank is as far away [from our people] as a stone from a star. — NGO from Panama

The Country Assistance Strategy document is secret, but if you read it, give us your comments. —Mexican government message to Mexican NGOs

In Lima, NGOs conjugate the verb "to participate" this way: I participate, you participate, he/she/it participates, we participate, you participate; they decide." — NGO from Peru

We have not eliminated our (Bank and NGO) differences, but we are on a positive path.

Europe and the US took 50 years to evolve their free markets and they want Nicaragua to make the market "king" overnight. For Nicaraguan producers, this is an opportunity to open the "door" or the "window" of the World Bank to say what we think. Let me tell you about my grandfather — a Nicaraguan peasant. He used to go to the mountains to buy cheese. He would arrive at his destination loaded with cheese and the rats would not let him sleep. So, he took a piece of cheese and put it in the corner and distributed it among mice & rats. They were quiet and let him sleep. He took the rest to the city the next day. The Bank's Social Investment Funds are the morsels of cheese you are giving us so that we remain quiet and calm the conflicts. You ease our hunger while the load of "cheese" is taken to the city. Every day our people live for the day...to survive. They cannot live for the future. —Representative of a Nicaraguan Peasants' Organization

The problem is really misdefined [by the Bank] in the sense that the real issue is not the "have" economies which are integrated in the global economy vs. the "have nots" which are not integrated, but rather the case of countries like Nicaragua who are fully integrated into the world economy, but which are not benefiting from the integration. A false dichotomy (integrated vs poor countries) is being posed by the Bank.

Summary: This issue describes what we know about the tremendous restructuring process begun by the World Bank this month. The restructuring is intended to improve the quality of the Bank's loan portfolio. About a third of the Bank's projects (500) are actual or potential problems and, according to the Bank's Operations Evaluation Department, 44% of completed projects can be rated as of "likely sustainability" — that is, likely to maintain their achievements for many years after their completion. We ask whether the restructuring is likely to strengthen the Bank's capacity to foster sustainable development. We also ask whether the Bank should put more effort into strengthening the ability of institutions in borrowing countries to foster sustainable development. Partnership or participation is "in" the Bank. We criticize the "wheel" model of participation in which the Bank is the hub relating to each constituency, or spoke, within a country separately. Instead, we suggest that the Bank do more to support good economic governance in borrowing

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countries which means, among other things, shaping economic policies in pluralistic ways. We conclude with updates on: a recent Bank-NGO exchange in Nicaragua; moves by the U.S. Congress to continue axing foreign aid; and G-7 inaction on the debt problem.

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I. Tidal Wave of Restructuring Hits the World Bank The tidal wave of restructuring which begins this month (July 1996) is intended to sweep away the institutional culture geared to moving money. This "old" culture has focused the vast majority of Bank resources on preparing and promoting projects for Board approval; hence, it has been dubbed the "culture of approval." This approval culture is held responsible for the low quality of World Bank loans. (See II., "The Status of Bank's Loan Portfolio.") The purpose of the restructuring is to build a new culture of "effectiveness" or "results" of Bank investments. The two magic words of the restructuring are: “culture” and “client.” We suggest that the restructuring is very Bankcentric — that is, focused on changing its internal culture and insufficiently focused on what it means to be client-focused. Overhauling the Bank as planned may be a good idea, but we do not see enough evidence that the Bank is meaningfully redefining its roles and functions relative to client governments, the private sector, and organizations of civil society (CSOs). World Bank public relations with these constituencies has dramatically intensified; indeed, there is a proliferation of “partnership” initiatives. This issue asks the question: To what end is the Bank intensifying these relationships? What kinds of relationships can be expected to achieve sustainable development (the reduction of poverty in environmentally-sound ways) ? How can “loan quality” be redefined in a way that will foster (1) sustainable development and (2) good economic governance by, for instance, shaping competent, representative and accountable development institutions and initiatives?

A. Social Development Task Force: Revolt of the Social Scientists 1) A New "Mission” for the World Bank From now on, results won't just be measured in economic terms; they will also be measured in social terms. During this summer, the Social Development Task Force (SDTF) of the Bank, led by S.J. Burki (Vice President for Latin America and the Caribbean) is expected to announce what this shift in mission means. According to press reports of a recent Inter-American Dialogue meeting, Bank Vice President S.J. Burki acknowledged that the policies of the World Bank have failed to assist the poorest 20% of the world's population. Most initiatives (including NGO initiatives) that help poor people reach between the 20th and 40th percentiles of the income distribution.

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Decision-Makers Discuss Purpose of Development

At the recent Inter-American Dialogue meeting in Mexico City, World Bank VP Burki said, "Are we admitting failure? Of course, we are admitting failure." ("The World Bank Admits Failure in Poverty Programs," La Journada, Mexico City, 6/26) V.P. Burki pointed out that since 1973 when the then-Bank President McNamara identified some 750 million living in absolute poverty, the number of people in this condition has doubled. He emphasized that "Latin America is notable as a region in which poverty — especially absolute poverty seems to register no improvement." In fact, he added that the proportion of people in absolute poverty has increased between 1987 and 1993. In response to Mr. Burki's presentation, the Vice President of the Inter-American Development Bank (IDB), Nancy Birdsall, asked Mr. Burki if he was implicitly questioning the wisdom of a development model which is friendly to business. Mr. Burki responded that the Bank is not questioning the benefits of free market policies, only observing that these policies are failing to benefit the poorest 20% of the world. He said, "We are not abandoning the model, we are trying to understand how this model functions and how, in a negative way, it impacts social change." Two other rejoinders are noteworthy: Colin Bradford of U.S. A.I.D. responded to Burki by saying that in urban areas, the absolute poor are not the ones who will generate unrest and upheaval and that development should benefit people at the upper end of the poorest quintile of the population. Jonathan Fox of the Bank Information Center (a Washington-based NGO) indicated that the Bank should not fund projects that impede social development. Fox also questioned the World Bank's assumption that state governments are closer to the needs of poor people. He asserted that reinforcing of the political apparatus of particular state governments (Chiapas being a case in point) could impede development of these states. The release of the Social Development Task Force report has been delayed to allow for a substantial rewrite in response to a revolt against the draft by Bank social scientists. A genuine change in the Bank's mission means a change in the internal norms and systems of power-brokering within the institution. Thus, there is considerable turmoil as vested interests and fiefdoms within the Bank are challenged. Are you a "NESS"? The non-economic social scientists (or "NESSies") in the Bank have difficulty gaining ground since they are outnumbered by economists, 28 to 1. Interestingly, the draft report declined to make a recommendation about how to rectify this gross disparity. So far, the draft Social Development Task Force report is distinguished by the narrowness of its analysis and the timidity of recommendations. The Bank's proposed new mission statement attempts to weave the goals of social development and poverty reduction. Many of us outside the Bank never saw social analysis and poverty analysis as totally different realms. For us, the degree of disciplinary

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relating to the environment or demonstrate the way in which poverty and social goals relate to the free market policies promoted by the Bank. 2) Partnerships: Which Ones Matter? For the last few years, participation efforts have relied heavily upon one puny funding resource (the Fund for Innovative Approaches to Social and Human Development). The Social Development Task Force draft suggests that the Bank continue to operate this Fund. We support the Fund. However, the Task Force should include powerful incentives to Task Managers to shift their core budgetary resources into participatory work. One recommendation of the Task Force may establish a Civil Society Partnership Fund which would provide resources directly to non-governmental organizations (NGOs). It is not clear from the draft whether the dominant goal of the Bank is to create direct partnerships with NGOs or to facilitate and support partnerships between borrowing governments and NGOs. At the African World Bank-NGO Committee (see "News & Notices" #13, April 1996), NGOs expressed concern that direct Bank-NGO partnerships could, in some countries and circumstances, undermine their relationships with their governments. NGOs also protest being excluded from exercising their rights as citizens in formulating national policy priorities. In many countries, these priorities are heavily influenced by Bank investment decisions which are usually made with a handful of government officials. (The Bank's analysis and investment priorities are contained in its Country Assistance Strategy (CAS), which provides the framework for all Bank-supported operations in a country. See attachment “A” for a summary of a recent CAS for Uganda.) There are two models of Bank engagement in a country. In one, the Bank is the "hub" of a wheel and actors in the borrowing country represent the "spokes." This model, which is increasingly being employed by the Bank in a variety of countries (e.g. Cambodia) and initiatives (e.g. the Civil Society Partnership Fund) puts the Bank in a supra-government role with inordinate political power. In the other model, the domestic players (government, private sector, civil society) engage in the continuous interactions and rivalries that shape policy and the Bank, as outsider, provides general support for this interaction. The draft report makes passing reference to this “Consultative Mechanism” (CM) model: "...it would also be highly useful if...governments would work with local NGOs and other domestic stakeholders to elaborate programs of joint work that the Bank could enthusiastically support." Building the integrity of connections between governments and organizations of civil society (CSOs) is particularly essential when formulating policy priorities for an entire country (e.g. national development plans or Country Assistance Strategies). Now the Consultative Mechanism (CM) model is being employed primarily by the private sector vice presidency of the Bank, which is engaged in a review of its historical experiences with CMs and a comparative analysis of CMs in Malaysia, Mexico and Ghana.

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BETTER MODEL BAD MODEL

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As a result of President Wolfensohn's spring meeting with the presidents of several private foundations, there is now a joint Bank-foundation strategy to establish country-level philanthropic foundations (or support existing foundations) which are intended to foster home-grown development activities. Wolfensohn and Vice President Ismail Serageldin are personally involved in developing this relationship.

B. Institutional Overhaul

The restructuring will result in a major turn-over (some say, as much as a third) in Bank staff. In the Africa Region (the first region to take the restructuring plunge) only half of the 56 regional managers were rehired in management positions.* The regional vice presidencies will become even more powerful than they are today since they will take over many of the technical functions heretofore provided by the three huge central vice presidencies. The functions of the three (human capital, environmentally sustainable development and private sector) central vice presidencies will shrink. To the extent that they exist at all, the central vice presidencies will probably be home to super specialists and “techies” who can keep the conveyor belts of information and knowledge running among the regions and between the Bank and its various constituencies. The country teams will be smaller, but powerful; they will generate the DEMAND for technical services and command the RESOURCES contract with the technical staff. The primary technical "families" being established in the Africa Department relate to:

• Economic Management and Social Policy (including public sector management, poverty and gender emphasis)

• Human Resources • Agriculture / Environment • Infrastructure

Staff won a wonderful coup by convincing management that social policy and economic work should be integrated rather than subsuming social policy into work on human resources.

* New Country Directors for Africa: Jim Adams: Uganda and Tanzania;

Andrew Rogerson: Cameroon, Chad, Gabon, Zaire; Serge Michailof: Burkina Faso, Cote d'Ivoire, Ghana; Kevin Cleaver, Director, Technical Staff; Phyllis Pomerantz: Mozambique and Zambia; Barbara Kafka: Angola, Malawi and Zimbabwe; Michael Sarris: Comoros, Madagascar, Seycelles, Mauritius; Neil Tcheyan: Burundi, CAR, Congo, Equatorial Guinea, Rwanda; Mamadou Dia: Guinea, Liberia, Sierra Leone.

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A new management incentive system is currently being implemented which uses a mechanism (borrowed from the corporate world) called a "balanced scorecard" to name the performance objectives upon which promotion and salary levels are based. Whether the restructuring changes the culture of the Bank depends heavily upon the content of these scorecards, which will apply to whole teams as well as individuals. The technical staff are organized in "clusters" fulfilling contracts with countries; "families" serving individual regions; and "networks" across regions. The technical staff are networked in ways intended to build more professional leadership, establish a critical mass of expertise within each discipline and facilitate disciplinary networking within and outside the institution. Technical staff of the regions will provide the primary quality control. In sum, there are two dimensions to the new Bank matrix management system — the country dimension and the technical dimension. The country departments will demand services; the technical departments will supply them. Bread for the World Institute is analyzing the new management system and raising key questions, such as: How do the country departments translate demand from the poor communities of borrowing countries into demand for World Bank services? In other words, will the Bank become internally demand-driven or externally demand-driven? We also recommend changing the definition of loan quality and ways to pursue loan quality. One key to improving loan quality is to focus on developing accountable institutions in borrowing countries which are committed to fostering equitable, participatory and environmentally sustainable development. Another key to loan quality is investing selectively in countries which demonstrate this commitment. (These issues are discussed extensively in Section II. C.) The Bank needs a much stronger commitment to sustainable development, itself, before it could exercise such selectivity. A June 1996 report (OED Précis, “World Bank Performance: How Are We Doing”) shows that over half of African borrowers surveyed do not believe that the Bank adequately considers the impact of lending on social equity and poverty. Some borrowers did not know that poverty alleviation is a Bank objective. “Only 16% of borrowers rated the Bank as very or extremely effective in reducing poverty. Even fewer staff (7%) gave the Bank high marks.”

C. Snapshots of Quality Control: Before and After Restructuring Snapshot 1: Before restructuring, staff of the central vice presidencies and technical departments have done multiple paper reviews of every operation. After restructuring, the number of review processes to which each proposed project is subjected will drop from five or six to two. The view within the leadership of the Bank is that two good reviews are better than five or six sloppy reviews. In other words, if potential problems are not caught after two reviews, they probably wouldn't be caught after six reviews.

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However, this is not entirely true. There are many instances where the multiple review process gave technical staff enough time to commission studies and marshal analyses regarding problematic environmental or social dimensions to a proposed project. By the sixth review, technical staff had developed excellent reasons for killing the Arun Dam project in Nepal. Second, the central vice presidencies have provided consulting services to the more powerful regional vice presidencies in exchange for 40 to 65% of their budgets. However, since these staff often have insufficient knowledge of the realities on the ground, their credibility is weak. The credibility of technical staff might be improved if they could at least obtain clearances and resources to travel to key projects under review. As it is, those in charge of projects (task managers) often don't want technical staff with a reputation for whistle-blowing to review their projects. The incentives for central vice presidencies to question or slow down projects are significantly absent, largely due to their budgetary dependence on the regional vice presidencies. Thus, we see a greater emphasis on "moving money" than on maintaining the quality of lending operations. Third, whistle-blowing is deterred by not only the absence of monitoring and evaluation criteria relating to social and environmental realities, but also by what the Bank's Operations Evaluation Department calls a "dismal" rate at which monitoring and evaluation criteria are established at inception, much less complied with during implementation. Snapshot 2: After Restructuring technical staff will still be financially dependent on the country departments. The Country Manager will choose a Task Team Leader (formerly called a Task Manager) to manage a project. The Task Team Leader (TTL) will then contract with a cluster of technical staff with the appropriate skills for the project. (Technical staff who are not chosen for contracts with the country departments will be retrained or let go.) Members of the technical cluster will have dual loyalties — to their project TTL and country team, on the one hand, and to their technical "family," on the other. Here are two interrelated key questions:

��Will the values of the Bank institutional culture value dissent and whistle-blowing? We are assured that technical staff will shoulder as much responsibility for project quality as does the country department staff. The theory is that "demand" of the country department for technical staff services will be balanced by technical staffs' loyalty to the quality imperatives of the technical network. We ask: "Doesn't this system still pit principles of quality against paychecks — since whistle-blowers may not be popular when teams are chosen for contract jobs?

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��Will the restructured Bank have a decision-making or a

consensus culture? Now the Bank's multiple project reviews operate on the basis of consensus which enables tenacious whistle-blowers (with protection from their bosses) to fight bad projects over a long period of time. A streamlined process with fewer quality reviews will only work if decision-makers give the benefit of the doubt to dissent.

A sensible innovation of the restructuring is the creation of a Quality Assurance Group, headed by Prem Garg, to audit samples of lending and non-lending operations. The QAG, which advises the two operational managing directors (Caio Koch-Weser and Gautam Kaji), has just been launched and is now performing "dry-runs" to test its review systems. In contrast to the Operations Committees (which approve or halt operations), the QAG does not theoretically have the authority to stop projects, but rather to help remedy them. It will deploy small teams to review 10% to 20% of lending operations before implementation and 10% after implementation. These audits will be fast (about ten days) and in-depth. Some Bank staff feel that the QAG is too far removed from the regions to be effective and that its incursions will be minimized. Importantly, the QAG plans to systematically involve NGOs in the auditing of operations. It is soliciting input about how best to work with NGOs. Four components are tentatively proposed for QAG's initial work program: Supervision Reviews, Quality at Entry Reviews, Troubleshooting for Portfolio Cleanup (especially in "problem" countries and sectors, and Reviews of Country Assistance Strategies (CASs) and Country Portfolio Performance Reviews (CPPRs). It will be important to learn how the QAG plans to measure its success (e.g. Will it get stuck spending most of its time with projects that are behind in disbursements? Or will it decide whether whistle-blowers are being ignored?). The extent to which QAG is transparent will also be significant. Will it issue reports of its findings? Remedial actions taken? The results of remedial action? Ultimately, quality assurance depends on meaningful definitions of "quality" and tenacious adherence to strategies which can achieve it. We discuss these potential quagmires in the next section.

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II. The Status of the Bank's Loan Portfolio

A. Two Overarching Quality Questions

1. Will senior management and the Board permit egregious weakening of Operational Policies? The process of rewriting approximately 150 Bank policies is nearly complete. The most difficult policies were saved for last. These were watered down unacceptably. Many policies were simply turned into "guidance" — that is "good practice" — which, at the discretion of the manager, should be taken into account. The impact that this could have on project quality in terms of the environmental and social impacts could undo gains we might see from a restructured Bank. 2. Will senior management and the Board permit double standards to exist between Bank-supported public sector and Bank-supported private sector activities? NGOs have been advocating a single standard be applied throughout the World Bank group, including the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA). Despite President Wolfensohn's commitment to a single standard, the Board is leaning toward double standards!

B. Defining "Quality"

That an average of over US$5 billion a year for each of the past five years can have been spent in the name of achieving development for people in poverty without a mechanism for assessing whether it does them harm or good is an indictment of the political management of, and accountability for, aid. It underlines the need for a strong new policy commitment to poverty eradication, proper objective setting and the rigorous evaluation of performance against such poverty objectives. The Reality of Aid 1996: An Independent Review of International Aid, p. 10.

In this section, we discuss the prevailing definitions of “quality” as related to country portfolios and to individual loan operations. We suggest that the quality of country portfolios will improve if the Bank invests more selectively — predominantly in countries committed to equitable, participatory and sustainable development. Another way to achieve “quality” is through fostering good economic governance by, for instance, supporting the development of competent and accountable borrower institutions. How the Bank defines “quality.” As it is, the primary indicators which define "quality" with respect to a country portfolio include: macroeconomic performance, Bank performance, borrower performance and impact (outcomes, sustainability of outcomes, and institutional development).

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The Bank's definition of the "quality" of an individual loan operation has two dimensions. First, "progress toward implementation." Indicators of progress in this area relate to a country's ability to adhere to schedules for procurement and disbursements, the level of compliance with legal covenants, ability to raise (counterpart) funds, etc. Second, prospects for fulfillment of "development objectives." Assignment of development objectives has, in the case of a significant portion of the Bank's portfolio, fallen by the wayside. One reason that loan operations are over-rated, is that progress towards objectives cannot be gauged without clear development objectives and indicators. Now the loan portfolio of some 1500 operations is being retrofitted with clearer objectives and indicators. The question of whether the Bank should be assigning objectives and indicators rather than facilitating such processes by the client governments and intended beneficiaries is raised below. Toward a new definition of "quality." It is our sense that there are three dimensions to "quality:" (1) the traditional cost/benefit analysis essential to investors; (2) the extent to which sustainable development is advanced — especially the reduction of poverty and inequity in environmentally sustainable ways and (3) the extent to which representative and accountable development institutions are strengthened (the "economic governance" dimension). A key to improving country portfolio quality. We suggest that a country's eligibility for loans should be commensurate to its commitment to the three dimensions of “quality” listed above. Now there is a formula for rationing aid to IDA countries. When we last checked, the formula assigned a 20% weight to portfolio performance and an 80% combined weight to three factors (each with equal weights): short-term economic performance, long-term economic performance, and commitment to poverty reduction. The formula should assign much more weight to a government's commitment to poverty reduction and equity and the quality of economic governance, particularly the extent of popular participation in Bank-supported activities. How would the use of this three-part definition play out? Here is an example: The Bank cited that 42% of the agriculture portfolio had major problems. However, not all of the 58% of presumably acceptable agriculture projects would benefit the poor and protect the environment. Conversely, some of the 42% may benefit poor rural communities in sustainable ways, but fall short of acceptable economic efficiency benchmarks. A subset of all agriculture projects (so-called successful and unsuccessful) resulted in important learning and strengthening of indigenous institutions. Use of the proposed three-part definition would help address trade-offs that usually exist between (1) economic efficiency, (2) sustainable development (poverty reduction and environmental protection), and (3) the strengthening of representative and accountable indigenous institutions. A second key to improving quality involves fostering good economic governance, as described below.

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C. The Importance of Fostering Good Economic Governance

The restructuring may create a more results-oriented Bank. However, it is more important that the Bank's client governments develop results-oriented private and public sector institutions! To this end, the Bank can support good economic governance which means, among other things, competent and accountable institutions capable of representing and serving the economic and social needs and aspirations of society. (A new study of aid effectiveness by the Overseas Development Council shows that good governance, or the capacity to integrate internal and external resources into effective development strategies, is a key ingredient of success.) The Bank's Director-General of the Operations Evaluation Department has suggested that effective development of borrower institutions should be the goal of Bank projects. We agree. Like him, we believe that to serve this goal requires a fundamentally different orientation. Thus, we propose that the Bank institute a process whereby it "graduates" governments which exhibit good economic governance by, for instance shaping competent, representative and accountable development institutions and initiatives. Governments exhibiting good economic governance would no longer require certain adjustment conditionality. Release from conditionality wouldn’t make sense unless the Bank invested much more selectively in countries committed to sustainable development (as described on page 5, above.) As it is, donors can support or undercut economic governance systems in an attempt to get the "right" policies. Building and supporting accountable economic governance systems and institutions creates the foundation for sustainability; undercutting systems — even for the "right" policies — has high developmental costs. Surveys of Bank borrowers show low regard for the Bank’s ability to listen and respond to their policy preferences. The June 1996 OED Précis entitled “World Bank Performance: How are we Doing” says that more than half of African borrowers surveyed “felt that the Bank was not helping them develop the capacity and ability to sustain projects that have been implemented.” Many borrowers would agree with the analysis of economist Jeffrey Sachs (“Growth in Africa,” The Economist, June 29, 1996, p. 19) who says that the fact that the World Bank has “hundreds of good ideas but no priorities” contributes to an “overflow of conditionality” which is onerous for borrowers. "Graduation" is now defined as the achievement by poor countries of creditworthiness. Graduation has involved a borrowing country changing its status from that of an IDA borrower to an IBRD borrower and then again to an income level at which it no longer qualifies for IBRD loans. "Graduation" in terms of economic governance could, in some instances, be achieved prior to achieving creditworthiness. [Some reports lead us to believe that in some respects Eritrea might qualify for graduation.] On the other hand, many creditworthy governments have loan portfolios of weak quality.

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The Bank has not been effective in institutional development. Its technical assistance work is usually tacked on to a major infrastructure or resource transfer project and thus, does not receive the continuous attention it requires. Institutional development is not a subject that grabs attention and priority; moreover, many consider the topic passé. Furthermore, it requires more field-seasoned staff than the Bank may have. Nonetheless, institutional development is at the core of effective projects.

The Bank's Operations Evaluation Department (OED) has shown that certain aspects of economic governance, such as strength and accountability of borrower institutions and the quality of project preparation (especially participation by affected communities) are reliable indicators of good economic governance. In fact, OED has said that the "quality of project preparation and of appraisal have significantly more influence on satisfactory project performance than key country macroeconomic variables, external factors, or governance considerations. (Evaluation Results, p. viii) One ingredient of good project preparation (but also an end in and of itself) is popular participation. The U.S. Executive Director remarked upon the distinction between borrower ownership and participation:

I would like to emphasize...the importance of borrower ownership; it seemed to me that the report [Portfolio Management: Next Steps - A Program of Actions] did not make a clear enough distinction between borrower and beneficiary participation, to the detriment of the latter. —Board statement by Jan Piercy, U.S. Executive Director, August 25, 1994

The same issue is raised by the recent Evaluation Results report:

Certain factors like borrower commitment were picked up in the economic analysis (of country portfolio performance). Most others - like interest group dynamics in economic policy reform or involvement by beneficiaries or the civil society at large in program/project design and implementation or the relative strength of a country's institutions — were not fully captured. Rather, they entered the analysis in a somewhat tenuous way through the assessment of appraisal quality and the underlying factors that determine appraisal quality. These are areas that require not only great attention at the early stages of the project cycle, but also in the "ex post" analysis to learn more from actual experience about their importance...to address these issues, risk management based on flexible responses to changing events is crucial. (Emphasis added.) (p. 62)

In sum, we suggest that the Bank concentrate on supporting good economic governance — primarily, the development of effective and accountable institutions in borrowing countries. Among other things, this would entail rethinking the purpose and function of the project cycle (along the lines suggested by Robert Picciotto, Director-General of the Bank's Operations Evaluation Department).

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A participatory project cycle requires considerable resources up-front. As it is, the Bank keeps its task managers on tight budgets and strict timetables that militate against meaningful participation. We see few signals of change in this area. Another area calls for change: managers should pay attention to the work of the Operations Evaluation Department (OED). OED does some good evaluations of completed operations, but its importance and authority are not recognized. Hence, its learning does not generally get injected into new operations (e.g. the Planofloro project recently brought before the Inspection Panel did not benefit from what was learned in the disastrous Polonoreste project).

D. Quality of the Current Portfolio What is the quality of the Bank's current portfolio using the limited, but prevailing, definitions of quality? It is 1,481 operations with commitments of $119 billion and undisbursed balance of $70 billion as of 4/96. This level of undisbursed balances reflects the fact that the average Bank operation has traveled about one-third of the way toward completion. "Completion" in this context means completion of the Bank's role in the approximately seven year time frame it takes the Bank to implement a project. According to the World Bank, 66% of the operations evaluated in 1994 had satisfactory outcomes. This number is based upon an evaluation of projects initiated in the late 1980s and early 1990s; about three fourths of the operations in the cohort reviewed were approved in 1985 or later. Thus, these statistics illumine portfolio quality problems and issues; they do not demonstrate the results of portfolio management reform. The effects of portfolio management reforms will not be evident for a few years. The percentage of problem projects has remained the same for five years. Now 18% of the portfolio (260 projects and $22 billion in commitments) are rated unsatisfactory in terms of "implementation progress" (IP) or "development objectives" (DO) or both. The Bank defines "portfolio quality" as the combined rating for IP and DO. Another 224 projects are potential problems. Together this is 33% of projects and 30% in commitments. The Bank is striving to reduce the unsatisfactory projects to 25% of all projects by July 1997. Forty-four percent of completed projects can be rated as of "likely sustainability," according to OED. "Sustainability," measures "the extent to which an operation is likely to maintain its achievements, or expected achievements, during its operations phase." (p. vi, 1994 OED Evaluation Results) The levels of satisfactory projects by region (from lowest to highest) were as follows: Africa (57%), Latin America and the Caribbean, Europe and Central Asia, South Asia and East Asia/Pacific.

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The average Bank-wide rate of return was 22%. By sector, rates of return were: agriculture, 17%; power, 17%; transport, 28%, and urban development, 25%. Borrower ownership and institutional development (and management effectiveness) were the two most important determinants of project success. Thus, it is significant that institutional development goals are not generally achieved. (Thirty-nine percent of the 1994 cohort achieved stated goals in this area.) With respect to current stock, it is noteworthy that the projects which are "at risk" are highly concentrated by country, sector, and size. Specifically, 49% of problem projects are concentrated among 17 countries. Problem Countries. Ten countries with about one-sixth of the total Bank portfolio account for over half of the total commitments at risk. These countries are: Venezuela, Nigeria, Russia, Brazil, Colombia, Morocco, Argentina, Turkey, Mexico and Romania. Other risky countries include: Guinea, Kenya, Rwanda, Tanzania, Algeria, Egypt, Yemen, Papua New Guinea, Bangladesh and Nepal. "While 33% of the project portfolio is rated unsatisfactory, this ratio was 56% in the ten countries with the worst macroeconomic performance and 60% in countries in non-accrual status and/or suffering from civil conflict. Thirty-one percent of all population, health, and nutrition projects had unsatisfactory outcomes; by contrast, this ratio was 75% for the worst macroeconomic performers. (Evaluation Results, OED, p 53) In countries with a poor portfolio, adjustment is seen as the safest instrument. Evaluation Results says that: "The findings suggest that the most direct way to improve portfolio performance is to lend more selectively...The current Bank practice of maintaining minimum lending levels in countries with adverse policy environments should be revisited...In countries with a history of poor portfolio performance, the Bank should focus its contributions on macroeconomic stabilization and growth-promoting structural reforms." (p. viii) Countries with performance deemed outstanding include: Chad, Mauritania, China, Thailand, Vietnam, Albania, Chile, Ecuador, Nicaragua, Panama and Lebanon. Problem Sectors. Thirty percent to 35% of problem projects are concentrated in eight sub-sectors. Percentage of projects and commitments at risk ranges from below 10% for social sector to over 40% for water supply, energy and financial sectors. Risky areas include: forestry, irrigation and drainage, research and extension, highways, urban water supply, water and sanitation. Problem Lending Instruments. Financial intermediary loans and technical assistance loans have bad records as do Sector Investment Loans in education, transportation and agriculture. The structural adjustment record is relatively good according to the Bank. Problem of Size. Among the problem projects, 50 large projects (the "nifty fifty") constitute commitments of $13.5 billion.

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III. Bank-NGO Meeting in Nicaragua

The World Bank-NGO Committee, which in its 14-year history has focused largely on questions related to popular participation and structural adjustment, began holding regional meetings last year. This was a good move. NGOs and Bank officials are now able to discuss selected issues as they affect a region in a fairly in-depth manner. In 1996, meetings have been held in Ghana, the Philippines and Nicaragua. The Nicaragua meeting was held in a location of spectacular beauty with incredible hospitality and logistical support provided by FACS and its chief, Edwin Zablah. The principal NGO consortium for the region, Asociacion Latinoamericana de Organizaciones de Promocion (ALOP) managed the event. ALOP and Bank representatives, Manuel Chiriboga and Myrna Alexander, co-chair the Bank-NGO Committee. Chiriboga and Alexander coordinated a useful Bank-NGO dialogue on key themes of relating to: information dissemination and disclosure, gender equity, participation (especially in the Country Assistance Strategies) and Social Investment Funds. Ishrat Husain, Director of the Poverty and Social Policy Department of the Bank reminded us that Central America has the worst record on poverty… greater than 60% of people live below the poverty line — despite Costa Rica's record. (Forty-nine percent of Africa's population is below the poverty line as compared with 60% in Central America.) Information. Bank officials promised to improve access to information in Latin American and Caribbean (LAC) countries. Commitments were made to establishing information centers in Brazil and Mexico and developing a joint strategy for establishing additional centers in the region. There was also a commitment made by the Vice President for Latin America and the Caribbean (LAC), S.J. Burki, to establish translation capability in his Washington office and in Resident Missions. The Bank asked NGOs to consider making a joint proposal to co-financing sources to build regional networks to distribute information among and to civil society. Participation. The Bank reported on three key activities at the regional level: 1) Screening of every lending activity to answer a) who are collaborators? b) what are mechanisms or procedures for involving them? c) how to pay for it? The Bank is now appointing individuals on the country teams who will perform this screening. 2) Flagships Participation Operations. At the end of fiscal year 1997, LAC will do progress reports on 29 key projects and share these with the other regions of the Bank and governments in order to influence future initiatives.

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3) Special actions to support participation. NGO profiles are being done in several places: Southern Cone (Argentina 50% done); Central America (Guatemala and Mexico); Andean Region (Peru and Ecuador). These profiles are not directories, but rather analyses of legal frameworks and a schematic of relationships among NGOs and other elements of civil society and among civil society and international and bilateral players. They will provide ways to understand the types of partnerships that exist. A meeting will be held shortly in El Salvador which will review the profiles of Guatemala and Mexico (NGOs and government representatives will be involved). NGOs repeatedly asked the Bank to conduct participatory Country Assistance Strategy (CAS) processes in selected countries. Bank V.P. Burki suggested that two to three CASs in LAC would be fully participatory. John Clark of the Bank's NGO Unit pointed out that the extent of NGO participation hinges on factors such as: government acceptance of participation, capacity of NGOs, NGO-Government empathy, and the scope of the Bank program. Sometimes the Bank is a minor player with little leverage. He noted that NGOs can be involved in a number of ways — in the analytical building blocks of the CAS, which include: economic and sector work (ESW), Participatory Poverty Assessments (PPA); consultative meetings to scope priorities; and intensive dialogue on action plans. There are already some interesting case studies (Vietnam, Bangladesh, Mozambique, and Burkina Faso). NGOs were heartened by the fact that the NGO Liaison Officer for Bolivia had translated the Bolivian CAS and disseminated it to about 200 NGOs. Urban Poverty. LAC Vice President Burki announced that, in conjunction with another Bank Vice President, Ismail Serageldin, he would be developing an urban poverty strategy during the next year. He invited NGOs to work with the Bank to prepare a joint paper that would address the range of urban issues, including poverty, crime and violence. He stated that if, in the course of the next year, the paper could be jointly prepared and presented to the 1997 Bank-NGO Committee in the Latin America Region, it could be presented to the Bank's Board of Executive Directors as a joint product. Burki noted that the majority of Bank research has focused on rural poverty and while its strategy has not yet succeeded, the solutions are in sight. He contended that the challenges in the urban area must be tackled insofar as 75% of population in Latin America is located in towns and cities. NGO Liaison Officers in Resident Missions. NGOs have experienced that involvement of the NGO Liaison Officers in projects is up to the discretion of Bank Task Managers. Some Task Managers resist such involvement which impedes participation.

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The key responsibilities of Liaison Officers are: 1) To improve the quality of projects by selecting key organizations which can contribute to outputs/outcomes; 2) To enhance participatory techniques, for instance, through the flagships operations; 3) To foster closer NGO-Bank-government dialogue re policies by, for instance, establishing public information centers (PICs) and taking other steps to improve the flow of information to civil society about the Bank and its projects, policies, analysis, etc. Dialogue is growing into substantive areas — for instance, relative to the CAS formulation. 4) To improve analytical work by, for instance, understanding the perspectives of people in remote locations (not served by the private sector) as the agricultural marketing system is liberalized. 5) To broaden the dialogue on policy issues, especially in light of work of the social development task force which is demonstrating just how highly contextualized development questions are. 6) To help promote a more enabling environment and more open political space for NGOs. NGO Liaison Officers currently have insufficient budgets. Bank management expects the Resident Missions to provide these budgets as an organic component of their operations. This is preferable to getting spending money from Washington...if the Resident Missions come through. Some points of agreement between the Bank and NGOs were articulated: ��Two to three CASs in LAC will be conducted in a fully participatory manner. ��The work plans of the Liaison Officers will be finalized with inputs from the

meeting and progress will be reviewed next year. ��Sub-regional workshops (3) will be held. ��Public Information Centers (PICs) will be established (Mexico, Brazil, etc.). ��Translation capacity will be added at headquarters level and in the resident

missions (Spanish and Portuguese). ��A joint Bank-NGO Urban Poverty Strategy will be developed beginning in July. It

will be presented at the 1997 regional Bank-NGO Committee meeting and thereafter, go to the Bank's Board.

��The gender action plans will be finalized in six months. Contacts will be identified for every country.

When the meeting with the Steering Committee of the Bank-NGO Committee is held in October, they will review progress in participation with attention to participatory CASs, the gender action plan and flagships.

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At the conclusion of the meeting Bank and NGO officials discussed the possibility of setting up an interactive information bulletin board to track progress towards these and other goals and to increase the flows of relevant two-way information.

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IV. New Bank Policy Permits Financing of Food

Average world market wheat prices in 1995 were 85% higher than the year before, which were 26 percent higher than the year before that. And now they are up another 30% since March. Maize prices are nearly double those of a year ago, which were then 50% higher than in 1993. Rice is up 33% in a year. — Bank memorandum, issued by Alan Berg, 4/96

The Operations Policy Committee of the Bank decided, as of April 11, that the Bank can finance "socially relevant expenditures for food," according to a recent Bank memorandum. This policy supplants one stated by Bank General Counsel Ibrahim Shihata who noted "piecemeal departures from the principle that the Bank does not finance consumption under its investment operations." Programs for Argentina and Mexico had been dropped or scaled back due to uncertainty about the policy.

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V. U.S. Aid Levels Continue to Drop

Our foreign assistance program accounts for less than 1% of our national budget, about $34 per taxpaying family. That's not generous. We should feel ashamed. We are failing to fulfill our responsibilities as a world power. More importantly, we are failing our own national interests and we're failing our own national values. — J. Brian Atwood, Administrator, USAID, The Washington Post, 6/18/96

The U.S. has long been a laggard in terms of the percentage of aid per capita. What is new is the fact that if one ranks the volume of economic aid the U.S. provides compared to twenty other industrialized countries, the U.S. has dropped from second to fourth — behind Japan, France and Germany — in the amount of money it spends on aid. Japan provides double the U.S. level of $7.3 billion. France and Germany provide $8.4 billion and $7.5 billion, respectively. The U.S. was last among the 21 nations in the Development Assistance Committee of the Organization of Economic Cooperation and Development in terms of the amount of aid as a percentage of gross national product (GNP). Aid is .1% percent of the U.S. GNP as compared to the highest ranking country, Denmark, which provides aid equivalent to .97% of GNP. U.S. Budget. In early June, the House and Senate agreed to provide $18.236 billion in budget authority ($19.549 billion in outlays) for the U.S. international affairs account. These figures, which are higher than either the House or Senate proposals, represent budgetary ceilings. Congressional Appropriations: The House of Representatives passed the FY 1997 foreign aid appropriations bill (H.R. 3540) by a wide margin of 366-57 on June 11. The bill appropriates $11.95 billion for FY 1997 aid, $458 million less than FY 1996 and $1 billion less than the Administration's request. Overall, development aid — with the important exception of the World Bank's IDA (see below) — was more or less maintained at last year's levels. This is probably the best that could have been expected in the House. The bill maintains bilateral development assistance at the total FY96 level of $1.65 billion. This total includes a $500 million separate "Children and Diseases Programs" account. But there is no separate account for Development Fund for Africa. Instead the bill includes language providing that "funds for sub-Saharan Africa and Latin America and the Caribbean should be provided in at least the same proportion" to overall development assistance spending as was the President's request for this regions. This implies that Africa would receive 41 percent of the total, or $676 million. In fact, the just-released U.S.A.I.D. Congressional Presentation shows a $629 million budget for Africa for fiscal year 1996 (compared with $781 million for fiscal year 1995)! For the poorest countries, debt reduction funding in the amount of $10 million was granted, far short of the President's request of $22 million. The subcommittee allowed the transfer of funds from development assistance to debt reduction, to total $22 million, but this provision was deleted on the floor.

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The deepest cut in the bill was for the International Development Association (IDA) of the World Bank. The bill funds IDA at $525 million, well below the President's request of $935 million to pay what was previously owed to the World Bank. Accounts receiving increases above FY96 levels include narcotics control, military education and training, and Peace Corps. The Senate Appropriations Committee marked up HR 3540, the FY 97 foreign aid appropriations bill on Thursday, June 27. There was not much controversy. The subcommittee had dealt with controversies surrounding funding for the World Bank's International Development Association (IDA) and family planning. IDA, the largest source of finance for Africa and other poor countries, was granted $626 million, $101 million more than the House, but still $309 million less than the amount needed to pay up on past arrears. When the full Senate considers the bill, several outstanding issues may be addressed in the floor debate or quietly worked out in advance, including: increasing funding for IDA to $700 million, up from the $626 million currently in the bill, which could come partly at the expense of other bilateral and multilateral development aid; reinstating the restrictions on population funding that are in the House bill but were stripped from the Senate bill at the subcommittee level; and obtaining $52 million to establish a new Middle East regional development bank, which could come at the expense of IDA; and further increasing aid for narcotics control, even though it already received a substantial increase.

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VI. Multilateral Debt

It is outrageous that G7 leaders can summon the political will overnight to agree to a 40 point plan on terrorism, but even after two years cannot agree to sell a tiny portion of the massive $40 billion in gold reserves to help the poorest countries in the world. — Justin Forsyth, Oxfam International

The G-7 meetings were held June 27 - 29 in Lyon, France. Although combating terrorism took center stage, debt relief for Third World countries was discussed. Several issues were covered but, overall, the progress made was disappointing. The sale of IMF gold for debt relief was a contentious issue. The Germans were the most adamant against it, arguing that sales of international gold would be too risky at this time since there are feelings of anxiety among the German public about the costs of creating a single European currency. Germany did, however, agree that measures needed to be taken to make the IMF's loan program to the poorest countries more concessional but blocked any direct reference to gold sales in the summit communiqué. U.S. Treasury Secretary Rubin reportedly believes that eventually there will be agreement to sell and reinvest $2 billion of the IMF's gold. An 85 percent majority is needed in support of gold sales. Support for the IMF's concessional loan program, the Extended Structural Adjustment Facility (ESAF), as the IMF's contribution to debt relief was affirmed by the industrialized countries. There was little progress made on the issue of increasing share of debt relief granted by individual governments to poor countries as part of the proposed debt framework. Instead of declaring an increase to 80 to 90 percent debt reduction, as is outlined in the proposed framework, the G7 leaders only called upon creditor governments (in the forum called the "Paris Club") to go beyond the present terms as needed.

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Attachment A

A Summary of the 1995 World Bank Country Assistance Strategy (CAS) for Uganda Cutting government expenditures. The civil service has been slashed from 320,000 in 1990 to 150,000 in 1994. The army was downsized as well: 33,000 soldiers were demobilized; another 12,500 returned to civilian life. The demobilization represents a 50% reduction in the military. Subsidies to parastatals constitute about half of recurrent public expenditures. Privatization of these state-owned enterprises (SOE) has had a slow start, but is now accelerating. Eighty-five (85%) of SOE should be sold by the end of 1997. Those utilities not privatized should be restructured. Adjustment lending is being phased down. Inflation could destroy any gains made through the adjustment process, so it must be guarded against. There is a limit, however, to the feasibility of reducing fiscal expenditures given the political and electoral realities. It is essential that Uganda's dependence on external budgetary assistance be reduced. Tax revenues are too low and a small sector of the economy is over-burdened. Poverty/Gender. In 1994, the government established a Poverty Reduction Committee and Council with members drawn from the private and public sectors in order to oversee the poverty strategy. The share of public expenditures benefiting poor people has been rising. Projects targeted to benefit poor people include the PAPSCA and the Northern Uganda Reconstruction Project (NURP). Gender inequity is being addressed in projects — notably the Agriculture Extension Project. SIDA has also performed a study of the legal constraints to economic empowerment of women. Participation. There is an attempt to decentralize and devolve public service delivery to the state and local government level. Decentralization will make participation is Sector Investment Programs (SIPs) more difficult. There will be more SIPs in transportation, agriculture and education. Road systems and telecommunications projects will be featured in the future. Participation will entail discussions among organizations of civil society and the government of resettlement plans. It will also entail communities discussing project concept papers (PCPs) with the government. In the Small Towns Water Supply Project, communities will choose their water supply system. Decentralization of education is constrained by serious management capacity problems. Exports. Because the coffee prices collapsed and the drought affected yields, the poverty rate has been constant. At the same time, the decline in domestic terms of trade and the rise in cash crop prices have led to increased productive participation of poor people. Since, 66% of export revenues are from coffee sales, there is a need to diversify — especially into non-traditional exports.

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The trade and payments system was deregulated. Quantitative restrictions on imports were removed as were the surrender requirements on export earnings. The inter-bank foreign exchange market was liberalized. The rate of import growth is high relative to export growth. Portfolio Management. Implementation and supervision is being improved. The Country Portfolio Performance Review (CPPR) resulted in creation of a "club of project managers" which monitors project implementation and procurement committees for IDA projects and resolves any bottlenecks at the Central Tender Board. Environment. Serious environmental problems need to be addressed. In 40 years, the forest cover of Uganda has declined by 40%. The water quality of Lake Victoria is seriously degraded. Uganda has two projects funded by the Global Environment Fund. Debt projections. It is expected that Uganda's debt service ratio will decline from 54% in 1994 to 18% in 2003. In 1994, debts of $3 billion represented 75% of GDP. It is anticipated that in the year 2003, debts of $5 billion will represent 53% of GDP. Lending Scenarios. The Bank's lending scenarios are based solely on Uganda's adjustment performance, especially as articulated by the IMF's Policy Framework Paper (PfP) for 1995-1997. The base lending level is $150 to 200 million; the high case is $200 to 225 million. The types of conditions that will trigger the base case include: failure of parastatal reform, increases in the civil service, increasing expenditures and decreasing revenues exacerbating the fiscal deficit, failure to reallocate public expenditures, borrowing on non-concessional terms, and inflation up to 40%. GDP growth in the base case scenario will be only 2% or less. In contrast, the high lending scenario would produce growth at 6% to 7% per year, a broadened tax base which will increase revenues, a declining deficit, and growth in non-traditional exports. Non-traditional exports (in areas including tourism, fish, flowers, vanilla, and foodstuffs) could grow at 40% per year over three years from the current (very low) base level. IFC and MIGA. IFC investments are in the areas of sugar and tea production and financial services. The African Enterprise Fund supports six small projects (fish, flower, private schools, hotel, apartment and office blocks.) MIGA's commitments and guarantees amount to $57.1 million in insurance against risks of currency transfer, expropriation, war, and civil disturbance for cobalt extraction, fish processing and coffee processing work.