INVESTMENT LENDING REFORM: MODERNIZING AND CONSOLIDATING OPERATIONAL POLICIES AND PROCEDURES DRAFT Operations Policy and Country Services June 11, 2012 ABBREVIATIONS AND ACRONYMS AOB Absence of objection basis APL Adaptable program loan BP Bank Procedure CAS Country Assistance Strategy CODE Committee on Development Effectiveness DL Disbursement letter DO Development objective DPL Development policy loan ERL Economic recovery loan ERR Economic rate of return ESSAF Environmental and Social Screening and Assessment Framework FIL Financial intermediary loan FM Financial management GEF Global Environment Facility IDA International Development Association IEG Independent Evaluation Group IFC International Finance Corporation IL Investment lending ISDS Integrated Safeguards Data Sheet ISP Implementation Support Plan ISR Implementation Status and Results Report IT Information technology LIL Learning and innovation loan MOP Memorandum of the President MP Montreal Protocol (on Substances that Deplete the Ozone Layer) NPV Net present value OM Operational Manual OMS Operational Manual Statement OP Operational Policy OpMemo Operational Memorandum ORAF Operational Risk Assessment Framework PAD Project Appraisal Document PCN Project Concept Note PID Project Information Document PPA Project Preparation Advance PPF Project Preparation Facility SECPO Corporate Secretary, Policy Operations Unit SIL Specific investment loan SIM Sector investment and maintenance loan TAL Technical assistance loan TTL Task team leader INVESTMENT LENDING REFORM: MODERNIZING AND CONSOLIDATING OPERATIONAL POLICIES AND PROCEDURES DRAFT CONTENTS Executive Summary ..................................................................................................................... iii I. Introduction ............................................................................................................................... 1 II. Responding to the Need for Policy Modernization, Consolidation, and Clarification ...... 3 III. Structure of the New IL Policy.............................................................................................. 5 A. Architecture of the New OP and BP ............................................................................. 6 B. Coverage of the New OP and BP ................................................................................... 8 IV. Policy Changes for Board Approval ................................................................................... 13 A. Fragility ....................................................................................................................... 13 B. Economic Analysis of Investment Operations............................................................ 13 C. Series of Operations .................................................................................................... 14 D. Additional Financing .................................................................................................. 15 E. Additional Flexibility in Audit Requirements ............................................................ 15 F. Increasing the Project Preparation Advance Limits ................................................... 16 G. General Policy Consolidation ..................................................................................... 16 V. Challenges And Risks ............................................................................................................ 16 VI. Next Steps ............................................................................................................................. 17 Annexes Annex 1. Draft Operational Policy Statement (OP) 10.00— Investment Project Financing ....... 19 Annex 2. Draft Bank Procedures (BP) Statement 10.00—Investment Project Financing............ 25 Annex 3. Draft Consolidated Operational Policy (OP) for Investment Project Financing: Disposition of Existing Investment Lending Policy Statements .................................. 35 Annex 4. Draft New Consolidated Bank Procedure (BP) for Investment Lending ...................... 39 Annex 5. Draft New Consolidated Operational Policy (OP) and Bank Procedure (BP) for Investment Lending: ..................................................................................................... 43 Annex 6. Disposition of Existing Investment Lending (IL) OPs, BPs: Summary ..................... 45 Annex 7. Economic Analysis for Investment Project Financing: Analytical Underpinning for the Revised Operational Policy .......................................................................................... 47 INVESTMENT LENDING REFORM: MODERNIZING AND CONSOLIDATING OPERATIONAL POLICIES AND PROCEDURES DRAFT EXECUTIVE SUMMARY 1. The work to modernize and consolidate the Bank‟s investment lending (IL) policy, though conceived under the IL reform initiative, should be seen as part of the Bank‟s broader modernization agenda—an agenda that involves modernizing the institution to simplify its services and processes and to strengthen the focus on institutional performance, results, openness, and accountability. 2. IL Reform Process. In planning for IL reform, Management proposed an initial phase focused on five key elements: a risk-based approach, enhanced implementation support, a rationalized menu of financing options, a better enabling environment, and policy reform.1 With the first four elements substantially in place, Management is now working on the “policy reform” element—that is, rationalizing the statements of policy and procedure governing IL. This paper explains the approach Management has taken in this work and proposes a small number of important and urgent policy changes for Board consideration. The draft consolidated Operational Policy (OP) and Bank Procedure (BP) statements for IL are attached as annexes. 3. Responding to an Identified Need. In recent years, reviews by the Independent Evaluation Group (IEG) and the IDA14 Internal Controls review2 formally noted what most Bank staff already knew: the maze of 35 policies that apply to IL, with their gaps, overlaps, inconsistencies, and sheer volume, affects the efficiency and effectiveness of clients and Bank staff in the delivery of IL. The IDA Internal Controls review, in particular, identified this maze as a source of significant operational risk. This was consistent with feedback from staff, who asked for the simplification of the overall framework governing the instrument. 4. Purpose of the Exercise. This exercise is intended to pull together in one policy and one procedure statement (OP/BP 10.00) the material now covered under 20 separate OPs, 18 BPs, an old Operational Manual Statement (to be retired), and 9 Operational Memoranda (OpMemos). The consolidation of these statements also eliminates overlaps, more precisely delineates between policy and non-policy (but still binding) content, rationalizes inconsistencies, addresses gaps, and establishes a clearer decision-making and accountability framework. It is also the final action item to complete Management‟s response to the IDA Internal Controls review by providing users with a much more coherent, understandable, and easy-to-use articulation of the Bank‟s policies on and procedures for IL. 5. One of the original goals of IL reform as discussed with Executive Directors in 2009 was to clarify and consolidate the IL menu with a single IL instrument that builds in the flexibility to respond to clients‟ diverse development and financing needs. The draft OP and BP are designed to achieve that goal. 1 Investment Lending Reform—Concept Note (SecM2009-0026), January 29, 2009. 2 Review of IDA Internal Controls: An Evaluation of Management’s Assessment and the IAD Review, Independent Evaluation Group, World Bank, April 2009. iv 6. Parameters of the Exercise. This exercise does not include the Bank‟s policies on procurement or safeguards—although they are integral to IL operations—because they are being considered separately. The exercise is consistent with—and indeed, it is considered the first step in—the overall process of revamping the Bank‟s Operational Manual to make it an accessible and well-organized compilation of policies and procedures that is user-friendly and facilitates the focus on substance.3 7. Policy Changes. It is important to note that for the most part this work entails revising the policy and procedures statements, not the policy content. That said, during the review and consolidation exercise, Management identified several areas where it believes adjustments to policy would make sense (see Section IV for more details). Specifically, the following policy changes are proposed for the Executive Directors‟ consideration: Extending the existing options available for countries faced with natural or man-made disasters to countries affected by fragility or other specific vulnerabilities, including for small states; Updating the policy on the economic analysis of IL operations; Revising the procedures for a series of IL projects that represent part of a programmatic engagement over time with client(s); Dropping the three-year limit for additional financing; Adding flexibility to the timing of audit requirements to better take into account country conditions and to allow for the use of country systems when appropriate; and Increasing the current Project Preparation Advance limits of $3 million normally and $5 million in situations of fragility to $6 million and $10 million, respectively. 8. Reclassification. In addition to the specific policy changes described above, the consolidation process has identified a number of OP statements that, taking into account the OP/BP definition and distinction, should be classified as BP statements. In some cases, current BP statements are more appropriate for processing instructions or guidance. The Annexes detail these reclassification changes, and Management would ask the Board to approve them. 9. Next Steps. After a review of the draft at a meeting of the World Bank Board‟s Committee on Development Effectiveness (CODE), Management is moving forward with external consultations. A dedicated website has been launched where individuals and organizations can provide inputs and comments on the draft paper. Management will schedule a targeted number of face-to-face meetings on the draft. After the consultations end, Management will update the paper, taking into account the outcome of the consultations, and present it for discussion and consideration at the Board. The final paper is expected to be ready by September/October 2012. 3 The Bank’s Operational Policy Manual: Issues and Prospects for Reform - Approach Paper (CODE2011- 0024), April 1, 2011. INVESTMENT LENDING REFORM: MODERNIZING AND CONSOLIDATING OPERATIONAL POLICIES AND PROCEDURES DRAFT I. INTRODUCTION 1. The last decades have seen dramatic changes in the world. The World Bank has had to change also, to be able to more effectively help clients solve their development challenges. As these challenges diversify and grow, the Bank must continue to modernize and simplify its services, processes, and organization to strengthen the focus on institutional performance, results, openness, and accountability.1 2. Reform Context. The work to modernize and consolidate the Bank‟s investment lending (IL) policy should be seen as part of that broader reform agenda—an agenda that involves modernizing the institution through new, streamlined, and consolidated policies and clearer accountability and decision-making processes. The efforts on various modernization initiatives are also complementary. For instance, business modernization is taking forward new work on accountability and decision-making, which will specify protocols for the assignment of responsibility, accountability, and authority and will clearly define staff roles in decision- making—a key component in risk management. Other elements of reform, not covered in this phase, are also designed to enhance the performance of IL operations: work on operational quality and reviews of procurement and social and environmental safeguard policies and procedures. 3. IL Reform. In January 2009, responding to staff and client demand and the changing development environment, Management outlined a program of IL reforms that was based on five pillars: (a) implementing a risk-based approach for IL; (b) enhancing implementation support; (c) consolidating and rationalizing the menu of financing options; (d) providing a better enabling environment, including an enhanced information technology (IT) system for IL; and (e) modernizing the IL policy framework. See Box 1 below for an overview of the components of that program and an update on progress. 4. Consolidating Progress into Policy. This paper reports on the progress toward the last element of that proposal. An approach paper2 was prepared; it and a companion paper on the Bank‟s Operational Manual3 were discussed by CODE on April 25, 2011. CODE supported the efforts aimed at the Bank‟s business modernization and this element of the IL reform proposal and agreed that Management should begin preparing a draft of the new IL policy for review by CODE prior to external consultations. That CODE review took place on June 6, 2012, with support for moving forward to consultations. 1 See Update on the Bank’s Business Modernization: Results, Openness, and Accountability Spring 2012 (DC2012-0005), April 10, 2012. 2 Investment Lending (IL) Policy Reform: Fixing the Policy Maze, Approach Paper (CODE2011-0025), April 1, 2011. 3 The Bank’s Operational Policy Manual: Issues and Prospects for Reform – Approach Paper (CODE2011- 0024) 2 Box 1: Update of Activities Carried Out as Part of the Initial Phase of IL Reform As part of a comprehensive effort to respond better to borrowers‟ needs and a changing global environment, the Bank has been working to transform its IL instrument. The initial phase of IL Reform focused on five key pillars: (a) risk-based approach; (b) enhancing implementation support; (c) consolidating and rationalizing the menu of financing options; (d) providing a better enabling environment; and (e) modernizing the IL Policy Framework. The following is a brief update of the various activities carried out to date as part of this effort. Implementing a risk-based approach for IL. In July 2010 the Bank introduced a risk-based approach (RBA) designed to help achieve better development results and risk management through a more consistent and rigorous assessments of risk across all operations. The central element of the RBA was the Operational Risk Assessment Framework (ORAF), which helps task teams and managers look systematically at project risks and focus on measures to mitigate or manage those risks during both the preparation and implementation of the project. Risk is now part of monitoring reports and will eventually be incorporated into the Corporate Scorecard. Enhancing implementation support. This pillar supports the need to synchronize the Bank‟s role during project implementation to the current development paradigm, focusing its attention on results, accountability, partnership, and capacity building. This entails a shift from supervision toward strengthened implementation support (IS) with a greater emphasis on managing for results. Implementation support planning has been mainstreamed into project preparation. A number of other tools have also been developed or strengthened to help task teams: (a) better reporting of risks and results in the redesigned Implementation Status Reports (which are now publicly available); (b) platforms for Senior Management to engage in implementation support have also been developed; (c) the simplified restructuring policy (approved by the Board in November 2009) to support more proactive approaches to expedite implementation progress; and (d) ongoing review of quality assurance reporting is placing particular emphasis on strengthening implementation support. Consolidating and rationalizing the menu of financing options. The proposed draft policy rationalizes and simplifies the IL menu into one single instrument and builds flexibility to respond to client needs. A major by-product of this work was the development of a new lending instrument—the Program-for-Results (PforR) Financing Instrument approved by the Board on January 24, 2012. Providing a better enabling environment, including an enhanced information technology (IT) system for IL. IL policy modernization is being implemented in parallel with key changes in the enabling environment—giving staff the knowledge and tools they need to make their work easier. The Operations Portal, designed to be compatible with the new policy and procedure statements, embeds the accountability and delegation of authority framework wth control points built into the systems. A new Operational Core Curriculum (OCC) has been developed and designed to prepare and support staff early and throughout their careers to improve their performance―especially in critical operational roles. The OCC is primarily targeted to new and existing TTLs with less than three years of operational experience. Modernizing the IL policy framework. Policy consolidation and simplification is the focus of this paper. 5. Poverty and Gender. Supporting poverty alleviation is central to all of the Bank‟s work. Addressing gender disparities and inequalities that are barriers to development and poverty reduction and assisting member countries in formulating and implementing their gender and development goals are part of Bank policy. These two high-priority areas for the Bank are cross- cutting issues, and the poverty and gender policies and the related supporting analysis are applicable across all aspects of country support programs. OP 1.00 is the Bank‟s operational policy statement on poverty. OP/BP 4.20 are the Bank‟s gender policy and Bank procedure statements. These two policies are not changed or affected by this exercise. In addition, there is extensive guidance on poverty and gender analysis and on the operational use of the information from that analysis. Hence, those policies are not instrument-specific and are applicable across all instruments. 6. Organization of the Paper. Section II of this paper reviews the case for modernizing the IL policy framework. Section III provides an overview of the structure of the new OP and BP; 3 Section IV sets out the policy changes for which Management seeks the Executive Directors‟ approval; Section V summarizes some of the risks and challenges associated with the introduction of the new policy and procedure framework; and Section VI sets out next steps—a consultation process before coming back to Executive Directors with the final paper and requesting approval of the policy changes. The draft OP and BP 10.00 are attached as Annexes 1 and 2, respectively. Annexes 3, 4, and 5 summarize the disposition of existing OPs, BPs, and Operational Memoranda, respectively, relative to the new OP/BP 10.00. II. RESPONDING TO THE NEED FOR POLICY MODERNIZATION, CONSOLIDATION, AND CLARIFICATION 7. In response to findings from both self-evaluation and independent evaluation—that the Bank‟s operational policies on IL are overly complex, do not provide clear guidance to clients or staff, and create risks for the institution in terms of accountability for policy implementation— Management is consolidating and simplifying the IL policy and procedure framework. The goal is to have a policy framework that can be more easily understood by client countries, staff, Management, and the Board; implemented by staff; and monitored by Management and the Board. 8. Need for Change. The Bank‟s Operational Manual currently contains 35 separate OPs, 30 BPs, and 11 OpMemos that cover IL. The number of these statements grew in a piecemeal fashion, as they were often prepared for policies in papers approved by the Board to address systemic issues as they arose.4 They reflect the fact that many of the policies were framed around an IL model designed for large stand-alone infrastructure projects, not for the wide range of client activities across the many sectors that IL now supports. Independent review and evaluation have come to the same conclusions that internal processes have reached: there is a need for change. 9. IDA Internal Controls Review. The recent IDA Internal Controls Review, a first-of-a- kind undertaking for an international financial institution, took a comprehensive look at IDA‟s entire internal control system.5 The review consisted of a Management self-assessment followed by IAD review and IEG validation. The exercise concluded that, overall, the control framework for IDA operates at a high standard, but it did set out recommendations, notably on IL policy. Management‟s self-assessment found that the Operational Manual guiding IDA‟s operations included obsolete, duplicative, and unclear policy and guidance that could create confusion among staff, affect the efficiency of delivery, and increase the risks of claims and complaints regarding policy noncompliance. IEG concurred on the need to address these dated OPs and BPs. Management committed to address the outdated and overly complex IL policy framework by creating a principles-based umbrella policy for IL operations that would: 4 For a concise summary of the evolution of operational policy, see World Bank Operational Policies: Lessons of Experience and Future Directions (CODE97-0073), November 20, 1997. 5 Review of IDA Internal Controls: An Evaluation of Management’s Assessment and the IAD Review, Independent Evaluation Group, World Bank, April 2009. 4 replace the rigid “ring-fenced” IL project model with a flexible menu of design, funds flow, and financing options to better meet the development and funding needs of IDA‟s varied clients; replace the current “one-size-fits-all” requirements with a risk-based approach to the selection of IL design options and associated due diligence, processing, and monitoring requirements; and reflect main principles governing the redesigned IL instrument in a new principles- based umbrella policy governing IL from “identification to exit.” The exercise described in this paper is a specific Management response to the IDA Internal Controls Review. 10. IL Internal Review Findings. During the process of Bank internal review and consultation leading up to IL reform, staff also identified the maze of policy statements as a major issue that should be dealt with. After consulting with Bank Management, staff, and members of the Board, the IL reform concept note concluded: IL is the most overregulated Bank lending instrument: it is subject to about 30 of the Bank‟s operational policies and procedures, some of which date back to the 1980s (e.g., the 1984 statement governing project appraisal). Many of these policies are inconsistent with today‟s approaches, and they do not adequately reflect such areas as the emphasis on aid effectiveness and outcomes and the need for proactive risk management. Many policy statements also commingle policy with procedure and even guidelines, focusing on detailed and narrow rules rather than true policy principles that could better withstand the test of time. The sheer number of applicable policies inevitably leads to inconsistent treatment of issues and leads to concerns about appropriate levels of due diligence and real accountability, as management and staff find it increasingly difficult to know, apply, and comply with them. Even worse is the possibility that staff and managers will feel artificially reassured about quality, just because they have complied with these extensive regulatory demands.6 11. Incorporating Recent IL Reform Progress. The new OP and BP incorporate the IL reforms that have already been made—for example, IL reform introduced a risk-based approach to the instrument, which is part of a larger effort to better assess and mitigate risk across the institution.7 Hence, the risk dimension has been introduced into the language of the OP and BP. 12. Implementation Support. The new OP and BP also incorporate the rebalancing of efforts from preparation to implementation support. This rebalancing reflects the fact that the Bank has moved from the old paradigm under which its main function was to “supervise” (basically check on) the operation against prescribed rules to a more collaborative process in which it works with the client as a genuine partner in finding solutions to problems during implementation. Underpinning the Bank‟s implementation support is the link to risks and results. Risk 6 Investment Lending Reform Concept Note, op. cit., page 5. 7 See Moving Ahead on Investment Lending Reform: Risk Framework and Implementation Support (SecM2009- 0442, IDASecM2009-0499), September 9, 2009. 5 assessment and management is a dynamic process that begins with preparation and continues during implementation. The new risk-based approach refocuses the attention of teams and Management on addressing risks that arise during implementation and may impact the achievement of the development objectives. Initiatives on quality assurance and monitoring are also under way to focus Management‟s attention on implementation issues and strengthen the tools available for task teams as they provide support to client countries. 13. A Well-Defined Lending Menu. Finally, an important component of IL reform was to rationalize and consolidate the lending menu—to provide a single flexible project support option to replace the menu of IL subproducts, including specific investment loans (SILs), sector investment and maintenance loans or programs (SIMs, SIPs), adaptable program loans (APLs), learning and innovation loans (LILs), technical assistance loans (TALs), and financial intermediary loans (FILs). The new OP and BP provide that single project support option, with the necessary flexibility to help countries choose the appropriate design and implement projects on the basis of project objectives and risk considerations. III. STRUCTURE OF THE NEW IL POLICY 14. A detailed review of IL-related policy and procedures statements confirmed the findings of the IDA Internal Controls Review. As the approach paper noted, the Operational Manual still contains one Operational Manual Statement from 1984, which basically provides guidance and good practice advice; and many of the topics it discusses are covered in subsequently issued OPs, BPs, and staff guidance. The approach paper also highlighted other examples of duplication, overlap, inconsistency, and elements that go beyond IL. Some examples: Several OPs—for example, OP 8.10, Project Preparation Facility, and OP 12.00, Disbursement—contain instructions to staff on how to implement policies that are actually BP material. Some OPs contain elements that go beyond IL. An example is OP 8.00, Rapid Response to Crises and Emergencies, which includes provisions that apply to country programs and overall portfolio management—important elements that need to be retained, but outside the IL OP. As currently written, the OP makes it difficult for staff to know what is required of them specifically in supporting a client country in preparing an IL operation in times of crisis or emergency. Several OPs—for example, OP12.00, Disbursement, OP13.05, Project Supervision, and OP 13.40, Suspension of Disbursements—unnecessarily repeat language from the General Conditions in Loan Agreements. Several BPs, notably BP 10.00, Identification to Board Presentation, go beyond what is required for policy implementation and include supplemental templates and processing information (for example, the name of the person to whom to send a document for circulation to Executive Directors), appropriate for internal instructions to staff (which can be updated easily as needed) but not for a policy manual. 6 Several OPs, including OP 6.00, Bank Financing, OP 10.02, Financial Management, and OP 13.05, Project Supervision, contain material that is advisory in nature and does not reflecting policy content. OP 4.76, Tobacco, sets out mainly Bank practice and internal processing arrangements—how to go about getting approval for an exception (required to be reported to the Executive Directors) to the normal tenet that the Bank does not lend for tobacco, production, processing, or marketing. On the other hand, BP 8.10, Project Preparation Facility, contains material belonging in operational policy—the special authority granted by the Executive Directors for Management approval of Project Preparation Advances. Some OPs and BPs contain footnotes that contain important policy or process guidance that may be too easily missed; for example, the instructions for implementing the policy on retroactive financing are contained in a footnote to OP 6.00, Bank Financing. The review also looked at Operational Memoranda (OpMemos), which are policy implementation statements issued by the Vice President, Operations Policy and Country Services (OPCS). These OpMemos are intended as interim tools, pending policy statement updates, but some have remained on the books for years. The process of modernizing the framework provides the opportunity for cleaning up by incorporating relevant OpMemo content into the new OP and BP. A. Architecture of the New OP and BP 15. The IDA Internal Controls review recommended—and Management, IEG, and Executive Directors supported—a shift from a narrowly prescriptive to a principles-based policy framework. This is the approach that is governing the proposed new IL OP as well as Management‟s goal to reform the entire Operational Manual (see Box 2). It builds on the approach used in developing OP/BP 8.60, Development Policy Lending, and OP/BP 9.00, Program-for-Results Financing. The approach paper for Operational Manual reform (which has also been welcomed by CODE) sets out the following operational architecture:8 OPs are to be relatively short, focused statements of overall goals, results, and core driving principles, providing high-level direction for decisions and actions to achieve the Bank‟s development mandate. BPs are to summarize the procedures Bank staff must follow to achieve specific institutional goals and fulfill policy requirements. Footnotes to OPs and BPs will generally be limited to references and not used for critical policy instructions. 8 The Bank’s Operational Policy Manual: Issues and Prospects for Reform, Approach Paper (CODE2011- 0024), April 1, 2011. 7 In addition to the OPs and BPs, which make up the Operational Manual, internal processing steps describe the various internal roles and accountabilities at the decision points set out in the BPs. These include, for instance, instructions to staff on internal clearance requirements, or on how and where to submit an operation to the Board for approval. In the past some of these internal steps, which have no operational content, have been embedded in OPs and, more often, in BPs. Grouping them into a separate classification allows the OPs and BPs to be clearer and more to the point, and provides a clearer framework of accountability and decision-making. The processing steps are progressively being linked through automation to the project processing portal, hence contributing to a user-friendly “seamless” platform for project processing. Box 2 highlights work that has begun very recently on a wider reform of the Bank Group policy framework and policy-making process. The initial effort is expected to be presented to Board Committees (Audit/CODE) in the fall. At that stage, Management will take stock of the implications of this exercise regarding next steps. However, the overall policy content is unlikely to be affected. Box 2: IL Policy Consolidation, Operational Manual Reform, Accountability and Decision-making, and Bankwide Policy and Procedure Framework Initiative The effort to modernize and consolidate the operational policy framework for IL is related to a number of other efforts under way as part of the World Bank modernization. These include: Modernizing the Overall Framework for Policies and Procedures (see IAD Report No. WBG FY12-04, Audit of WBG Framework for Policies and Procedures, AC2012-0011, February 10, 2012). Under this initiative, the Bank will develop a clear protocol for the preparation and design, processing, adoption and changes of policies and procedures. The changes will affect administrative, human resource, and operational policies. The initial effort is expected to go to Board committees (Audit/CODE) in Fall 2012. As the work on IL policy is a two-stage process, the final stage will benefit from this Bankwide initiative. In general, this work is not likely to affect IL policy content, but it could lead to changes in its form and presentation. Accountability and Decision-making. As part of the Bank‟s ongoing institutional reforms, a new accountability and decision-making framework has been developed. The consolidation of the IL statements is proceeding in parallel with the development of the new framework. Thus the draft BP incorporates the language of that framework and is aligned with its decision points, its simplified and straightforward processing steps, and the roles of the actors at each point in the IL process. Once the OP/BP is finalized and the new processing steps are in place, IL will have a clear accountability framework that will allow for clear decision-making and the ability to take measured risks. Reforming the Operational Manual (OM). The World Bank is updating its OM to make its OP/BPs easier to access and interpret by staff, clients, and the public; to eliminate duplicative or obsolete sections; and to distinguish clearly mandatory rules from advisory guidance. The update does not aim to change the substance of the Bank‟s operational policies, but to make it easier to implement them effectively. The proposal to consolidate the multiple OPs and BPs that govern IL into a single policy and procedure statement is one of the keystones of the OM reform, and is fully in line with the guiding principles endorsed by the Board‟s CODE (The Bank’s Operational Policy Manual: Issues and Prospects for Reform – Approach Paper, CODE2011- 0024, April 1, 2011): Streamlining the OM‟s overall architecture and organizing it around the Bank‟s main instruments and services. Clarifying and rationalizing the hierarchy of rules to focus OPs more sharply on core operational goals 8 Box 2: IL Policy Consolidation, Operational Manual Reform, Accountability and Decision-making, and Bankwide Policy and Procedure Framework Initiative (cont‟d) and principles; establishing more clearly that the BPs are mandatory Bankwide; imposing a better order on the nonmandatory guidelines and good practice materials. Placing the OM on a more flexible and accessible web-based platform. Consolidating the IL OPs and BPs not only offers a good testing ground for the principles of the overall OM reform, but also provides the impetus to accelerate the work on some of its components. For instance, the new IL OP and BP incorporate portions of some policy and procedure statements that apply across the entire set of Bank financing instruments. It would make good sense to take the opportunity to incorporate the relevant portions of these statements into the other financing instrument OPs/BPs, and subsequently retire the original self-standing statements. For instance, relevant aspects of OP 12.00, Disbursement, OP/BP 13.00, Signing/Effectiveness, OP/BP 13.30, Closing Dates, OP/BP 13.40, Suspension of Disbursements, and OP/BP 13.50, Cancellations, would be embedded in the integrated IL OP/BP; if the Board endorses this proposal, the same could be proposed for the OPs and BPs for other financing instruments to which these statements apply—OP/BP 8.60, Development Policy Lending, and OP/BP 9.00, Program for Results. B. Coverage of the New OP and BP 16. On the basis of the analysis described above and taking into account the architecture of OPs and BPs, the draft OP and BP 10.00 consolidate 20 current IL OPs and 18 IL BPs (plus OMS 2.20). Specifically, the following are proposed to be a part of the new OP/BP 10.00: Identification/Preparation/Appraisal/Board Presentation OP 4.76, Tobacco OP / BP 6.00, Bank Financing OP / BP 8.10, Project Preparation Facility OP / BP 10.00, Investment Lending: Identification to Board Presentation OP / BP 10.04, Economic Evaluation of Investment Lending OP / BP 13.00, Signing of Legal Documents and Effectiveness of Loans and Credits Supervision (Implementation Support) OP / BP 13.05, Project Supervision OP / BP 13.20, Additional Financing for Investment Lending OP / BP 13.25, Use of Project Cost Savings OP / BP 13.40, Suspension of Disbursements Completion and Evaluation OP / BP 13.30, Closing Dates OP /BP 13.50, Cancellations OP / BP 13.55, Implementation Completion Reporting OP 13.60 Monitoring and Evaluation* Fiduciary OP / BP 10.02, Financial Management OP / BP 12.00, Disbursement Specific IL Subinstruments OP / BP 8.00, Rapid Response to Crises and Emergencies* OP / BP 8.30, Financial Intermediary Lending OP / BP 8.40, Technical Assistance* OP / BP 8.45, Grants* *Contains non-IL components that would be separated and maintained in the Operational Manual 9 17. Exclusions. The new OP/BP 10.00 does not incorporate the 10 IL safeguard OPs/BPs, the procurement OP/BP, or a few other OPs/BPs because further analysis of these complex policies is needed. (In particular, the BP covers the project documents that the Bank makes publicly available. It does not cover documents that the borrower discloses in order to comply with social and environmental safeguard policies.) The following OPs/BPs are therefore excluded from the consolidation exercise: Identification/Preparation/Appraisal/Board Presentation OP / BP 3.10, Financial Terms and Conditions of IBRD Loans, IBRD Hedging Products, and IDA Credits OP 7.00, Lending Operations: Choice of Borrower and Contractual Agreements OP 7.20, Security Arrangements OP 7.30, Dealing with De Facto Governments OP / BP 14.40, Trust Funds Fiduciary OP / BP 7.40 Disputes over Defaults on External Debt, Expropriation, and Breach of Contract OP / BP 11.00, Procurement Safeguards OP / BP 4.00, Piloting the Use of Borrower Systems to Address Environmental & Social Safeguard Issues in Bank-Supported Projects OP / BP 4.01, Environmental Assessment OP / BP 4.04, Natural Habitats OP 4.09, Pest Management OP / BP 4.10, Indigenous Peoples OP / BP 4.11, Physical Cultural Resources OP / BP 4.12, Involuntary Resettlement OP / BP 4.36, Forests OP / BP 4.37, Safety of Dams OP / BP 7.50, Projects on International Waterways OP / BP 7.60, Projects in Disputed Areas Many of these OPs/BPs are currently under review. Procurement policy. Revised Procurement Guidelines were recently issued to reflect updates to the procurement policy framework. Management has since shared with Executive Directors an approach paper for a more fundamental review of the policy architecture for procurement in operations.9 After further analysis and discussions with Executive Directors and consultations on a draft statement of procurement policies, the revised policy paper would be presented to Executive Directors for approval by December 2013. Safeguard policies. The Bank has initiated a process for updating and consolidating the Bank‟s safeguard policies. Since the safeguard policies were put in place, many client countries have developed regulatory frameworks to address environmental and social issues in development. Significant investments made since the 1990s have led to success in developing such frameworks and in building client capacity, which in many countries provides the foundation for country ownership. The updating and 9 The Bank’s Procurement Policies and Procedures: Proposed Policy Review Approach Paper (AC2012-0010), February 9, 2012. 10 consolidation process will capture Management‟s lessons learned from past experience with safeguard policy application, including a stronger focus on the use of safeguard polices to support environmentally and socially sustainable development; greater emphasis on assessing potential social impacts and risks; improvements in implementation support; and more effective approaches to monitoring, evaluation, and completion reporting, including the enhanced use of indicators. It will also allow the Bank to mainstream and expand the use of country systems for environmental and social safeguard policies at the national and subnational levels in eligible client countries and will encourage continued institutional strengthening and capacity building in support of this approach. Once these policy reviews have been completed, consideration will be given to integrating them into the single IL OP and BP in line with the recommendations of the IDA Internal Controls Review and the approach adopted for other lending instruments. 18. Design of the New OP and BP. The draft OP and BP 10.00 are attached as Annexes 1 and 2, respectively. They reflect the design features highlighted in paragraph 10 and Box 1 above. They are designed to be readily accessed and easily understood by clients and staff, and to assist them in better balancing risk and results in IL. The draft OP statement also incorporates the emphasis on enhanced Bank support during operational implementation, taking into account the risks involved in an operation. The draft OP translates the content of policy into one clear statement, providing client countries and staff with the requirements for IL support (referencing the areas that are not part of the consolidation). It describes the kinds of activities that IL supports. It sets out the elements of the assessment process that the Bank undertakes in deciding whether or not to support the client‟s proposal and present it to the Board for approval. It incorporates Bank policy on exceptional arrangements for the use of IL in situations of fragility, crisis, and emergency. Moreover, it sets out roles and responsibilities during implementation, emphasizing implementation support and institution building, and incorporates recent modifications to the Bank‟s policy on restructuring IL operations. Lastly, it covers monitoring during implementation and ex-post evaluation, both vital elements of the results architecture for IL. The BP statement provides a roadmap for meeting the requirements set out in the OP. For ease of use by clients and task teams, it is organized around the operational cycle. 19. Mapping the Changes. The paper also provides a mapping of the changes and how the earlier versions of various OPs/BPs and OpMemos are reflected under the new architecture. Annex 3 provides a mapping from the existing OPs to the draft OP 10.00, Annex 4 shows a mapping from existing BPs to the draft BP 10.00, and Annex 5 describes the handling of OpMemos. With respect to the existing OPs, aside from those that predate the modern concept of binding OPs, all have been retained, but with some paragraphs on process moved to BPs; and with respect to existing BPs, some have been retained and others have been moved to staff instructions/guidance. In addition, content already covered in the IBRD General Conditions for Loans and IDA General Conditions for Credits and Grants or in Standard Conditions for Project Preparation Advances (PPAs) is no longer repeated in OPs and BPs, allowing for a more concise OP/BP formulation. 20. Clarity around a Single IL Instrument. One of the original goals of IL reform as discussed with Executive Directors in 2009 was to consolidate and clarify the IL menu to 11 respond to clients‟ diverse development and financing needs. First, IL operations will use risk as a key element in determining which projects will get fuller preparation and due diligence efforts and which projects can be prepared in a more streamlined way. As part of the single policy, exceptional provisions will be set out for rapid response to crises and emergencies. Support in fragile and conflict-affected situations, for which risk tolerance has to be higher, will also be incorporated under exceptional provisions. Second, other submenu options have in practice provided no additional value. Clarifying that there is only a single IL instrument will allow the Bank to do everything it can do today in support of clients, but without the potential for misunderstandings that have led to some of the policy implementation issues that were raised in the internal and independent reviews. The current subforms of IL have been incorporated into the draft OP and BP as follows (Table 1 shows the current levels of use of each of these forms): Specific investment loans (SILs), the most common title used for IL, have traditionally provided ample flexibility: they can cover a mix of investment expenditures and recurrent expenditures and can support capacity building. Operations that would have been classified as SILs will fit naturally under the new single IL product. Sector investment and maintenance loan or program (SIM/SIP) has been used as a title (there is no specific SIM/SIP policy) for operations that focused on public expenditure programs in particular sectors. SIMs/SIPs aimed to bring sector expenditures, policies, and performance in line with a country‟s development priorities by helping to create an appropriate balance among new capital investments, rehabilitation, reconstruction, and maintenance. They also often supported the development of institutional capacity to plan, implement, and monitor an expenditure or investment program—features that are now standard in IL in general. Adaptable program loans (APLs) are brought under the overall single policy framework umbrella. The draft OP recognizes that programs may need support from a series of operations (although funding could come through the use of additional financing or through a low-risk IL operation if the program is going well). If a formal series is identified in the first operation, follow-on operations in a series would follow a new approval process proposed below. In a rapidly changing world the use of triggers for later operations has proven unwieldy and is dropped in favor of policy and procedure similar to the well-functioning practice for additional financing. Cross-country (including regional) programs (formally horizontal APLs) are covered in the draft OP and BP. Learning and innovation loans (LILs) are eliminated. LILs were designed to focus on experimental learning. However, experience has shown that, with a $5 million financing cap and little or no savings in preparation costs, they were not appropriate to achieve their intended purpose, and client demand for LILs ended several years ago. In their place, countries now often build impact evaluation into IL-supported operations when they seek Bank assistance in testing a new approach before mainstreaming it. 12 Emergency recovery loans (ERLs) respond to a special set of conditions that need to be addressed through rapid action. Those quick-action features are retained and built into the proposed new single policy under special considerations for responding to crises and emergencies. Technical assistance loans (TALs) are no longer needed as a separate category, as support for institutional capacity can be the central or even the only feature of support in an operation processed under the single OP and BP. Financial intermediary loans (FILs) are brought fully under the single IL policy framework. In recent years, most World Bank Group support for stand-alone operations to financial intermediaries has been provided by the International Finance Corporation (IFC), because client countries prefer not to provide a sovereign guarantee in such situations. Still, this is an important option for some countries and clients will continue to be able to seek Bank support for their financial intermediaries through the single instrument. Lending through IL to FILs will continue to be tagged. The proposed single OP references the procurement and safeguard policies and is specific that the features of those policies that apply when the borrower is a financial intermediary remain applicable. Because these loans will be tagged, monitoring the implementation of these special procurement and safeguard features will be straightforward. The current OP and BP are overly prescriptive, setting out in detail material that is more suited for guidance to staff. Global Environment Facility (GEF) and Montreal Protocol (MP) operations are brought under the single IL policy framework umbrella, since the operations they support are in practice the same as other investment operations. Of course, these operations continue to be subject to the special requirements set out by the GEF and MP international agreements, and the single policy notes the need to meet these additional requirements beyond the Bank‟s single IL policy framework. Additional financing remains as an element under the single IL policy framework. Table 1. Use of the Investment Lending Instrument in Recent Years (number of operations) Type FY06 FY07 FY08 FY09 FY10 FY11 Adaptable program operation 36 33 31 36 28 33 Emergency recovery operation 33 39 36 48 27 26 Financial intermediary operation 3 5 3 5 11 5 Learning and innovation operation 0 1 0 0 0 0 Specific investment operation 206 207 210 192 237 205 Sector investment and maintenance op. 10 8 8 0 6 4 Technical assistance operation 15 23 17 17 20 20 Total* 303 318 305 299 329 293 * Two operations in FY07 and one in FY09 did not designate a specific instrument. 13 IV. POLICY CHANGES FOR BOARD APPROVAL 21. In drafting the single OP and BP and consolidating the various OP/BP statements, Management identified several areas in which it would recommend specific policy changes for the Executive Directors‟ consideration. These changes are provisionally included in the attached draft OP and BP statements; if approved, they would all be incorporated in the final OP and BP. A. Fragility 22. As noted in the Approach Paper discussed at CODE last April, the incorporation of OP/BP 8.00, Rapid Response to Crises and Emergencies, into the consolidated OP/BP 10.00 would clarify that the scope of the policy also applied to situations of fragility. Lack of political stability and security, linked with often weak institutions, poses fundamental challenges for development efforts. Fragile situations exhibit a twofold risk dynamic: the risk of failure (e.g., in markets, government, results) is high, and the impact of such failure can be more catastrophic, implying a high risk from inaction or delayed action. That clarification—that when a borrower does not have sufficient institutional capacity because of prolonged fragility or conflict special considerations apply—is a step in delivering on the Board-endorsed operationalization of the WDR 2011.10 Such considerations would allow for better implementation support, simplified operational procedures, and alternative implementation arrangements to reflect the specific challenges in situations of fragility. In addition, some countries due to specific vulnerabilities, including for small states, may also need this added flexibility. 23. Beyond changes in IL policy, as a business modernization priority, 11 work is under way on an additional package of measures to scale up our support in fragile and conflict-affected situations. The Bank will seek to better tailor Country Assistance Strategies to fragile situations. For instance, an integrated emergency and/or post-conflict recovery program might include activities outside the Bank‟s traditional areas, such as relief, security, and activities to foster state- and peace-building as a prerequisite for longer-term recovery. In such activities, the Bank would form appropriate partnership arrangements with other donors for the preparation, appraisal, and supervision of activities outside its core competencies in line with the comparative advantage and core competencies of each such donor. These changes will be taken into account as part of the reform of the Operational Manual. B. Economic Analysis of Investment Operations 24. In reviewing cost-benefit analysis in IL, IEG concluded, “The Bank needs to define the scope for cost-benefit analysis in a way that recognizes the legitimate difficulties in quantifying benefits while it preserves a high degree of rigor in justifying projects.” 12 Management drew on some of the same experts who worked in the early 1990s to develop the existing policy. Their conclusion, set out in Annex 7, is that project economic analysis remains a key element in project 10 See World Development Report, 2011: Conflict, Security and Development, World Bank, 2011, and Operationalizing the 2011 World Development Report: Conflict, Security and Development (DC2011-0003), April 4, 2011. 11 See Update on the Bank’s Business Modernization: Results, Openness, and Accountability Spring 2012 (DC2012-0005), April 10, 2012. 12 See Cost-Benefit Analysis in World Bank Projects, Independent Evaluation Group, World Bank, 2010. 14 consideration, but with almost 20 years of experience, the emphasis should not be on just one number, a projected economic rate of return (projected ERR) or projected net present value (projected NPV), which even when data are readily available inevitably results in a highly uncertain estimate over 10, 20, or even 30 years. They noted that, in practice, (a) projects are not isolated activities but are embedded in a government development strategy supported through an agreed country partnership with the Bank, (b) quantitative information and its costs and availability differ dramatically across countries and types of projects, (c) country conditions, from fragility to well-functioning institutions, have implications for the analysis, and (d) timing is often crucial in the provision of project support. The new policy requires rigorous economic analysis and sets out an approach that helps Management answer three key questions: What is the project‟s likely development impact? Is public provision the appropriate vehicle? What is the Bank‟s value added? The objective is to shift away from a focus only on calculating an ERR to a more conceptual understanding of what the project is attempting to achieve and how it plans to do so. This in no way discounts the value of quantitative information in answering those questions. Indeed, quantitative evidence, including a projection of the possible ERR, should be provided when that is doable, at reasonable cost. This current approach also allows for taking into account the diversity of the portfolio and the sectoral implications for the type of analysis that is best suited for them. An important change is that the policy strengthens the focus on economic analysis by its better integration through the project preparation cycle, from the concept and initial preparation stages through appraisal. Staff guidance will provide teams with direction on the choosing the appropriate framework for economic analysis for their projects and guidance and tools for doing the analysis. C. Series of Operations 25. For a multiphase or multicountry series of projects, currently the Executive Directors approve the first project under regular procedures and succeeding ones on the absence-of- objections basis unless there are significant modifications. Currently, multiphase series over time use triggers as a signal of readiness for the next phase. As noted earlier, triggers have proven to be an unwieldy tool for measuring readiness for subsequent support and would be dropped as a requirement. Instead, approval of financing for follow-on projects should be based on the performance of the initial phase as well as consistency with the development objectives established for the series. This change does not affect projects traditionally referred to as horizontal adaptable program loans: loans to multiple borrowers following a standard template (such as the Avian Influenza Control and Human Pandemic Preparedness and Response series). 15 D. Additional Financing 26. The progress report on additional financing13 noted that “quick” and “simple” are two words not normally associated with Bank IL support, but that they are well suited to the experience with additional financing. These loans have proven themselves as a way to provide low-cost, high-return support in an environment that presents relatively low risk, since they build on the underlying operation‟s solid experience in meeting development objectives. Additional financing is provided to address one or a combination of three situations: (a) completion of the original project activities in the event of an unanticipated cost overrun or financing gap; (b) implementation of additional or expanded activities that scale up a project‟s impact and development effectiveness; and/or (c) implementation of modified or additional project activities included as part of project restructuring when the original loan amount is insufficient to cover such activities Clients uniformly appreciate these loans. These criteria have not changed as a result of the current policy consolidation exercise. 27. To reduce the risk that this type of financing would be used when a new operation would be more appropriate, the original policy required that the additional loan be expected to close within three years after closing of the original loan. Experience has shown that other policy elements are adequate to ensure the appropriate use of additional financing without this stipulation. Additional financing may only be provided if implementation of the project, including substantial compliance with loan covenants, is satisfactory and the additional loan is economically justified. Teams are also expected to consider alternative financing options first. In addition, each operation is expected to have an updated appraisal and risk and results framework. These measures, as well as managerial oversight, are in place to provide needed assurance that additional financing is used in accordance with the criteria noted in the paragraph 26 above. Therefore, Management proposes that the three-year provision be deleted from the policy. E. Additional Flexibility in Audit Requirements 28. At present, operations are required to submit audits within six months after the end of the project year. While that would remain the norm, experience shows that, in some cases, there are good reasons for having more flexibility in terms of timing. The revised policy would continue to require annual audited project financial statements and would call for those statements to be submitted six months after the close of the borrower‟s financial year as the standard. However, it would permit agreeing to an alternative time limit for submitting the required annual audit, without the need for a policy waiver. The greater flexibility would let the Bank better take into account country considerations and, where appropriate, use country systems in cases in which the six-month rule might unnecessarily preclude their use. Guidance would explain when this might be an option, and Management monitoring would guard against its unwarranted application. 13 See Additional Financing: Responding to New Needs—Progress Report (SecM2009-0025), January 29, 2009. 16 F. Increasing the Project Preparation Advance Limits 29. As countries face growing challenges in allocating resources to assist in preparation activities, Management is proposing to increase the current PPA limits of $3 million normally and $5 million in situations of fragility to $6 million and $10 million respectively. G. General Policy Consolidation 30. In addition to the specific policy changes described above, the consolidation process has identified a number of OP statements that, taking into account the OP/BP definition and distinction, should be classified as BP statements. In some cases, current BP statements are more appropriate for processing instructions or guidance. The Annexes detail these reclassification changes, and Management would ask the Board to approve them. V. CHALLENGES AND RISKS 31. Modernizing the policy framework is the last stage of the overall process of IL reform envisaged when the process began in early 2009. It builds on the significant progress that has been made in the four areas of reform (namely implementing a risk-based approach for IL, enhancing implementation support, rationalizing the menu of financing options, and providing an enabling environment, including updating information technology systems), responds to the recommendations of the IDA Internal Controls Review, and is a key component of the Bank‟s overall business modernization process. The need for and importance of such a modernization of the framework has been recognized both internally and externally and including by CODE when it discussed the Approach Paper in April 2011. Nonetheless drafting a new IL OP/BP is not without its challenges and risks. These are outlined below, together with Management‟s proposals on how they should be managed. 32. Dilution of Bank Policies. The effort to revisit the hierarchy of policies, procedures, instructions, and guidelines and move to a shorter and principles-based OP could be regarded by some as an attempt on the part of the Bank to dilute its current package of IL policies. It is Management‟s firm conviction that the process of modernizing the IL policy framework will not lead to any dilution of Bank policies but rather to an increase in their development effectiveness. Management plans a consultation process that focuses on the overall need for the modernization of the current framework and is specific on how all existing OPs and BPs have been treated. The Bank has prepared a very detailed analysis on how information previously included in OPs, BPs, and OpMemos have been mapped under the draft OP and BP. In this context it will be important to emphasize that ensuring that the IL OP and indeed all OPs are short, focused statements of principles will help provide much clearer direction and instructions to staff on the actions needed to achieve the Bank‟s development mandate. It will also be important to stress that the more detailed procedures for implementing those instructions that are contained in the BPs are mandatory rather than just guidance and will be embedded into the Operations Portal. 33. Timing of new IL OP and BP. The process of modernizing the framework and moving to a single IL OP and BP is taking place at the same time as important reviews of the Bank‟s procurement and safeguard policies are under way. A legitimate question is why Management 17 has chosen to proceed in this way rather than wait for the procurement and safeguard reviews to be completed and then factor in the implications of these reviews for a single IL OP and BP. 34. Management believes that in the context of the serious concerns raised by the IDA Internal Controls Review and the significant changes in IL policy that have recently been approved as part of IL policy reform, it is now urgent to proceed with the modernization of the framework. The appropriate amount of time can then be allowed for the procurement and safeguard reviews to be completed, at which point careful consideration can be given to the desirability and practicality of integrating the results of these reviews into the new IL OP and BP, which would then cover all the various dimensions of IL policy. 35. Policy Changes. The modernized framework reflects the IL policy reforms to date and the need to provide staff and clients with a much more coherent, understandable, and easy-to-use statement of the Bank‟s policy on and procedures for IL. But in the process of drafting the single OP and BP, Management has also identified the need for specific policy changes in a number of areas and is proposing that these changes be approved as part of the process of approving the new OP and BP and not as part of a separate exercise. 36. Management believes that the rationale for and the specifics of the proposed policy changes are clearly stated in the paper. The process of external consultation will include specific reference to these proposed changes, and the feedback from the external consultations will be reported to the Board and taken into account in Management‟s final proposals to the Board. 37. Staff Perspectives. While modernizing the IL policy framework is designed to provide more clarity and coherence to the package of policies and procedures, there is a concern that the process could be seen by staff as another bureaucratic exercise, and staff will be on the lookout for any elements that appear to be new requirements that add work without a commensurate contribution to real results. There is also a risk that the sequential nature of policy modernization will be perceived as adding to the burden of staff in continually adapting to a new policy structure. To minimize that risk, the current draft OP and BP are designed to be compatible with and easily folded into the new framework as it is developed, approved, and implemented. 38. Prior to submitting this paper to CODE for its review, Management undertook an internal consultation process with Regions, Networks, and central units on both the rationale for modernization and the specifics of the draft OP and BP. Management believes that staff now understand and support the desirability of the proposed changes. Staff will also have a chance to provide further inputs on the draft OP/BP as part of the consultation process. Once the final drafts of the new OP and BP are approved, a training program will be put in place to ensure that staff become fully familiar with the structure and the specifics of the new OP and BP. Guidance and best practice notes will also be prepared and shared with staff. VI. NEXT STEPS 39. As part of the modernization and corporate governance agenda aimed at strengthening the focus on results, openness and accountability, this paper presents in draft a new single operational policy, consolidating in a consistent manner 20 current OPs, 18 BPs, and 9 OpMemos. The consolidation incorporates the risk management approach to achieving results 18 and links IL to the new access to information policy. Its clarity allows for an enhanced focus on accountability. Following the review at CODE on June 6, Management is moving forward on external consultations. A dedicated website has been launched where individuals and organizations can provide inputs and comments on the draft paper. Management will schedule a targeted number of face-to-face meetings on the draft. The Bank‟s country offices will also support the consultation process. After the consultations end, Management will update the paper, taking into account the outcome of the consultations, and present it for discussion and consideration at the Board. The final paper is expected to be ready by September/October 2012. ANNEX 1. DRAFT OPERATIONAL POLICY STATEMENT (OP) 10.00— INVESTMENT PROJECT FINANCING OP 10.00 – Investment Project Financing This operational policy statement (OP) was prepared for use by World OP 10.00 Bank staff and is not necessarily a complete treatment of the subject. ______, 2012 Bank-financed investment projects are governed by this OP, the related BP, and the following OPs and BPs, as appropriate (including any relevant Operational Memoranda): OP 1.00, Poverty Reduction BP 2.11, Country Assistance Strategies OP/BP 2.30, Development Cooperation and Conflict OP/BP 3.10, Financial Terms and Conditions of IBRD Loans, IBRD Hedging Products, and IDA Credits OP/BP 4.00, Piloting the Use of Borrower Systems to Address Environmental & Social Safeguard Issues in Bank-Supported Projects OP/BP 4.01, Environmental Assessment OP/BP 4.02, Environmental Action Plans OP/BP 4.04, Natural Habitats OP 4.07, Water Resource Management OP 4.09, Pest Management OP/BP 4.10, Indigenous Peoples OP/BP 4.11, Physical Cultural Resources OP/BP 4.12, Involuntary Resettlement OP/BP 4.20, Gender and Development OP/BP 4.36, Forests OP/BP 4.37, Safety of Dams OP/BP 7.00, Lending Operations: Choice of Borrower and Contractual Arrangements OP 7.20, Security Arrangements OP/BP 7.30, Dealing with De Facto Governments OP/BP 7.40, Disputes Over Defaults on External Debt, Expropriation, and Breach of Contract OP/BP 7.50, Projects on International Waterways OP/BP 7.60, Projects in Disputed Areas OP/BP 8.45, Grants OP/BP 10.20, Global Environmental Facility Operations OP/BP 10.21, Montreal Protocol OP/BP 11.00, Procurement OP/BP 13.16, Country Portfolio Performance Reviews OP/BP 14.10, External Debt Reporting and Financial Statements OP/BP 14.20, Cofinancing OP/BP 14.40, Trust Funds BP 17.30, Communications with Executive Directors BP 17.55, Inspection Panel 1. Bank financing of investment projects (hereinafter “Investment Project Financing”) 1 aims to promote poverty reduction and sustainable development of member countries by providing financial and related operational support to specific projects that promote broad-based economic growth, contribute to social and environmental sustainability, enhance the effectiveness of the public or private sectors, or otherwise contribute to the overall development of member states. Investment Project Financing supports projects (hereinafter “Projects”) with defined developments objectives, activities, and results, and disburses the proceeds of Bank financing against specific eligible expenditures. 1 Bank financing of investment projects refers to the provisions of loans, credits, or grants financed by the Bank (including IBRD and IDA) from its resources or from trust funds financed by other donors and administered by the Bank, or a combination of these. 20 2. Subject to the other applicable requirements of this operational policy statement (OP), Investment Project Financing may be extended to any type of activities and expenditures, provided they are productive and necessary to meet the development objectives of the Project, the impact of Projects on the borrowing country‟s fiscal sustainability are acceptable, and acceptable oversight arrangements, including fiduciary arrangements, are in place to ensure that Investment Project Financing proceeds are used only for the purposes for which the financing is granted, with due attention to considerations of economy and efficiency. Under appropriate circumstances, such as to provide the borrower with resources to allow the Project to start or to facilitate implementation of the Project, the Bank may agree to disburse a portion of the proceeds as an advance. Considerations in Investment Project Financing 3. The Bank‟s assessment of the proposed Project is based on various country and Project- specific considerations, including consistency with the Bank‟s strategy in support of the country, Project development objectives, taking into account technical, economic, fiduciary, environmental, and social considerations, and related risks. 4. Technical Analysis. The Bank assesses technical aspects of the Project, including design issues, appropriateness of design considerations to the borrower‟s needs and capacity, institutional arrangements, and organizational issues for the implementation of the Project in the context of the long term development objectives of the borrower.2 5. Economic Analysis. Taking into account the Project expected development objectives, the Bank undertakes an analysis of the Project‟s economic rationale, using approaches and methodologies appropriate for the Project, sector, and country conditions, and assesses the appropriateness of public sector financing and the value added of Bank support. 6. Financial Management. The entity or entities responsible for Project implementation maintain financial management arrangements that are acceptable to the Bank and that, as part of the overall arrangements in place for implementing the Project, provide reasonable assurance that the proceeds of the Investment Project Financing are used for the purposes for which they are granted. Financial management arrangements are the planning, budgeting, accounting, internal control, funds flow, financial reporting, and auditing arrangements of the entity or entities responsible for Project implementation. The financial management arrangements rely on the borrower‟s existing institutions and systems, with due consideration of the capacity of those institutions. 7. Procurement. Procurement policies applicable to Investment Project Financing are set out in OP 11.00, except for procurement referred to in paragraph 11 below, in which case the Bank‟s Administrative Manual Statement requirements apply. 2 In this OP, unless the context requires otherwise, references to “borrower” include the borrower or recipient of record, and any other entities involved in Project implementation. 21 8. Environmental and Social. Environmental and social policies applicable to Investment Project Financing are set out in the following OPs: 4.00, 4.01, 4.02, 4.04, 4.07, 4.09, 4.10, 4.11, 4.12, 4.36, and 4.37. 9. Risks. The Bank assesses the risks to the achievement of the Project development objectives with due consideration for the risks of inaction, taking in to account the assessments noted above and other relevant information. Special Considerations 10. The following types of Projects may have specific policy requirements and special considerations. 11. Projects in Situations of Urgent Need of Assistance and Capacity Constraints. In cases where the borrower/beneficiary: is in urgent need of assistance because of a natural or man- made disaster; or affected by conflict; fragility; or specific vulnerabilities, including for small states, the Bank may provide support through Investment Project Financing. In these situations, Projects are subject to normal Investment Project Financing policy requirements with the following exceptions: (a) Such Projects are subject to special ex-ante fiduciary and environmental and social requirements as set out in OP/BP 4.01, BP10.00, and OP/BP 11.00; and are subject to special limits to the use of Project Preparation Advances (PPAs) and retroactive financing. (b) When the beneficiary‟s capacity to implement the needed activities is insufficient, the Bank may, at the request of the beneficiary, agree to the following alternative legal and operational Project implementation arrangements: (i) the Bank may enter into arrangements with relevant international agencies, including the United Nations, national agencies, private entities, or other third parties; and (ii) where no viable implementation alternatives exist, the Bank may execute start-up activities financed as a grant from the Project Preparation Facility (PPF) or a trust fund, following applicable internal Bank procurement rules. (c) Alternative implementation arrangements referred to under subparagraph (b) above are limited to the time necessary to establish or restore borrower capacity and, in all cases, are adopted in Projects that include capacity-building measures to enable a timely transfer of implementation responsibilities to the borrower. Proposals for Bank-executed start-up activities are limited to activities which involve the procurement of small contracts for goods and works, and the provisions of technical assistance necessary to enable the borrower to undertake the execution of subsequent Project activities. 12. Disaster prevention and preparedness and capacity-building activities may be supported by a stand-alone Project with a contingent financing feature or be embedded in a regular Project through a contingent emergency response component that, once triggered, is subject to the exceptional policy requirements in situations of emergencies, crises, and fragility set out in paragraph 11 above. 22 13. For existing Projects being restructured to add contingent emergency response components that meet the requirements of the Immediate Response Mechanism (IRM), the Executive Directors have delegated to Management the authority to approve Level One restructurings (see paragraph 22 of this OP) that require changes in the Project development objectives. 14. Series of Projects. Investment Project Financing may support a series of Projects: (a) to a single borrower, when agreed objectives require support designed as part of a program consisting of a series of two or more Projects; and (b) to multiple borrowers facing a set of common development issues; when two or more borrowers share common development goals, individual Projects prepared for each county may be designed as part of a series of Projects with standard well-defined eligibility criteria and design features. 15. Projects Involving Financial Intermediaries. Investment Project Financing may be used to provide funds to eligible financial intermediaries to be used by them for sub-loans to or as equity in final borrowers/beneficiaries. Procurement policies applicable to Projects involving financial intermediaries are set out in OP 11.00, and environmental and social policies applicable to such Projects are set out in the following OPs: 4.00, 4.01, 4.02, 4.04, 4.07, 4.09, 4.10, 4.11, 4.12, 4.36, and 4.37. Project Preparation Facility (PPF) 16. The Bank may make a Project Preparation Advance (PPA) from the PPF to a prospective borrower to finance (a) preparatory and limited initial implementation activities for the Project or (b) preparatory activities for operations to be financed by Development Policy Lending or Program-for-Results Financing. PPAs are approved by Management under special authority granted by the Executive Directors, who determine, from time to time, the ceiling on the commitment authority of the PPF and the maximum amount of individual PPAs. 17. The following can be borrowers of PPAs: (a) in the case of PPAs made by IDA, a member country or regional organization; and (b) in the case of PPAs made by IBRD, any IBRD-eligible borrower. If the IBRD borrower is not a member country, the member country‟s or countries‟ guarantee(s) of the repayment of the PPA is required. A PPA is made only when there is a strong probability that the Bank financing for which the PPA is granted will be made, but granting a PPA does not obligate the Bank to finance the operation for which it is granted. Once approved, a PPA is implemented as an Investment Project Financing. The PPA may be refinanced from the proceeds of any Bank financing. If such financing does not materialize, the PPA is repaid by borrower, unless at the time of PPA approval by the Bank, the PPA was financed by an IDA grant, in which case the PPA is not required to be repaid, but the amount is deducted from the IDA allocation of the country in question. Borrower and Bank Roles and Responsibilities in Investment Project Financing 18. The borrower prepares the Project for which it seeks Investment Project Financing. The Project‟s scope, objectives, and contractual rights and obligations are set out in the legal agreement(s) with the Bank. The obligations include the requirement to maintain appropriate implementation monitoring and evaluation arrangements, comply with procurement, financial 23 management, disbursement, social and environmental obligations, and to deal in a timely and effective manner with actual or alleged problems or violations (individual or systemic) in these areas. The borrower measures and reports against the achievement of the Project development objectives and agreed results and provides agreed financial and audit reports. 19. The Bank appraises the proposed Project in accordance with this OP and other applicable policies. During Project implementation, the Bank monitors borrower compliance with the Project obligations as set out in the legal agreement and provides implementation support to the borrower, by reviewing the borrower‟s information on implementation progress, progress toward achievement of Project development objectives and related results, and updates the risks and related management measures. Implementation support and monitoring carried out by the Bank during the implementation period ends at the completion of the Project. Managing Investment Project Financing 20. Approval. The Executive Directors consider for approval Investment Project Financing proposals submitted by Management. Except for IDA grants and trust-fund-financed grants explicitly requiring approval by the Executive Directors, all other grants are approved by Management. In the case of a multi-phase or multi-country series of Projects, the Executive Directors consider the Investment Project Financing proposal for the first Project in the series under regular or streamlined procedures. Subsequent Investment Project Financings are submitted for consideration by the Executive Directors under the absence-of-objection procedures,3 provided that the overall program in the series as described in the documentation for the first approved Investment Project Financing in the series has not been significantly modified. 21. Signing. Signing of legal agreements for Investment Project Financing take place after all required authorizations have been issued and there are no overdue payments to the Bank with respect to other Bank financings to the borrower or financings to or guaranteed by the borrower beyond the number of days that would give the Bank the right to suspend disbursements, unless, in exceptional circumstances, Management approves the signing and reports such information to Executive Directors. 22. Restructuring. During implementation, the Project may, with the agreement of the Bank and the borrower, be restructured to strengthen its development effectiveness, modify its development objectives, improve Project performance, modify indicators, address risks and problems that have arisen during implementation, make appropriate use of undisbursed financing, extend the financing closing date, or otherwise respond to changed circumstances. A restructuring involving a modification of the original Project development objectives or a change in safeguard category—from a lesser category to a Category A (as defined in OP 4.01) or the trigger of a safeguard policy not triggered originally by the Project—is referred to as a Level One restructuring and is submitted for consideration by the Executive Directors under the absence-of- objection procedures or Management, in cases where the original Investment Project Financing was approved by Management. A restructuring involving any other modification of the Project is referred to as a Level Two restructuring. Management has the delegated authority to approve 3 For more details, see the OPCS Processing Steps Guidelines and SECPO guidance detailing eSubmission of Board documents. 24 Level Two restructuring. Management periodically informs the Executive Directors of the Level Two restructurings. 23. Closing Date. The “closing date” is the date after which the Bank may stop accepting withdrawal applications under the Investment Project Financing and cancel any undisbursed balance in the financing account. In appropriate circumstances, the Bank may extend the closing date. The closing date is not extended (a) for Project subject to suspension of disbursements, except for items exempted from suspension, or (b) for any financing to a borrower with any outstanding audit reports or with reports which are not satisfactory to the Bank, unless the borrower and the Bank have agreed on actions to address the deficiencies. In exceptional circumstances, retroactive extensions of closing dates are permitted and may be approved by Management. 24. Investment Project Financing Completion Report. After the Project is completed, the Bank evaluates and reports on the performance of the Project. The report seeks to include the borrower‟s evaluation of the Project. For Projects that do not become effective or are canceled before significant implementation is initiated, Management provides the Executive Directors with a summary note explaining the circumstances. For Projects for which the legal agreements are not signed, Management informs the Executive Directors of that as part of periodic reporting. Recourse, Remedies, and Sanctions 25. If the borrower does not comply with its contractual obligations, the Bank consults with the borrower, and requires the borrower to take timely and appropriate corrective measures. The Bank‟s legal remedies are specified in the relevant legal agreements and include the right to suspend disbursement and to cancel the Investment Project Financing. The Bank exercises such remedies when warranted and as it deems appropriate, taking into account, among other things, country-, sector-, and investment-specific circumstances, the extent of possible harm caused by circumstances giving rise to the remedy, and borrower‟s commitment and actions to address the identified problems. Additional Financing 26. The Bank may provide additional financing to an ongoing, well-performing Project for completion of Project activities when there is a financing gap or cost overrun, for scaling up the development effectiveness of the Project, and/or in cases of Project restructuring, when the original financing is insufficient for the modified or additional activities. The Bank considers the proposed additional Investment Project Financing on the basis of, as necessary, updated or additional assessments of areas specified in Para 3-9 of this OP. Additional financing financed by IBRD loans, IDA credits or grants and trust-fund-financed grants are submitted for approval by the Executive Directors unless authority of approval of the specific financing source is normally approved by Management. Disclosure of Information 27. During Investment Project Financing preparation and implementation support and in evaluating after closing, the Bank discloses Investment Project Financing-related information in accordance with the Bank‟s Access to Information Policy. 25 ANNEX 2. DRAFT BANK PROCEDURES (BP) STATEMENT 10.00—INVESTMENT PROJECT FINANCING 1. The Bank assesses a project proposed by the borrower1 for Investment Project Financing (hereinafter the “Project”) and, upon Investment Project Financing approval, provides implementation support to the borrower in accordance with the requirements set forth in OP 10.00 and this BP.2 2. The structure of this BP follows the Project cycle: identification, preparation, appraisal, approval, implementation, and completion. The documentation requirements and decision points differ for Investment Project Financing depending on Project risk and special considerations, including exceptional arrangements in situations of urgent need of assistance and capacity shortfalls, Projects that are part of a series, financial intermediary financing, and small grants. Additional Financing and restructurings of Investment Project Financing during implementation also have differing documentation requirements and decision points as set out below. A. Preparation Phase 3. The preparation phase includes identification, assessment, and appraisal of the Project, various interim processing and decision steps, approval, signing, and Investment Project Financing effectiveness. From Identification through Concept 4. By the end of this stage, the Bank decides whether to proceed with further preparation of an Investment Project Financing Instrument. 5. Identification Stage. At the identification stage, the Bank consults with the borrower on the proposed Project, and seeks to identify the Project‟s overall parameters, objectives, financing requirements, possible level of Investment Project Financing, and other general information. After the Bank and borrower have reached preliminary understanding on the Project concept and parameters, a decision is made to form a task team and allocate resources for further Project preparation leading to the concept decision point. 6. The Bank preliminarily, and in consultation with the borrower: (a) identifies the Project and its components and assesses its development objectives (DOs), and assesses its rationale and relation to the relevant country assistance strategy; (b) identifies the key results expected to be achieved under the Project, overall expected Project expenditures, type of activities and overall implementation arrangements; (c) estimates the possible scope of Investment Project Financing; 1 In this BP, unless the context requires otherwise, references to “borrower” include the borrower or borrower of record and any other entities involved in Project implementation. 2 BP 10.00 is derived from and accompanies OP 10.00, and may be further supplemented by internal processing arrangement instructions and guidance issued from time to time by Management. 26 (d) proposes, in accordance with OP/BP 4.01, an environmental assessment category for the Project and indicates any other potentially applicable requirements under the Bank‟s social, environmental, and other policies;3 (e) briefly identifies the type of economic rationale and/or analysis appropriate for the Project; and (f) assesses the main risks to achieving the Project‟s development objectives and results, taking into account the attendant risks of inaction. After the Project concept is developed, the Bank prepares documentation to be considered at the concept decision point. 7. Concept Decision. A decision is made at the concept decision point as to whether the Bank should proceed with the preparation of the Investment Project Financing along with appropriate guidance to teams on the future preparatory work. Decisions are also made on the safeguards classification and scope of safeguards work, the environmental assessment category, and subsequent processing and documentation requirements. 8. Upon the decision to continue with the preparation of the Project, the Bank discloses the Project Information Document (PID) and Integrated Safeguards Data Sheet (ISDS). Project Preparation Advances 9. Management decides on the provision of a Project Preparation Advance (PPA) from the Project Preparation Facility and on its refinancing on the following basis: 10. Upon a request from the borrower, the Bank prepares documentation to be considered at the decision point for a PPA. Management decides whether to provide the PPA and the amount, subject to the limits set out below. When that decision is taken, the PPA is made in US dollars and carries interest on IBRD fixed spread term, charges on IDA credit, or IDA grant terms, depending on the country‟s borrowing status. Payment of interest or service charges, where applicable, is deferred until the PPA is refinanced out of the proceeds of the Investment Project Financing or other repayment terms take effect. 11. One or more PPAs may be made for the Project at any stage before the Bank approves the Investment Project Financing, up to an aggregate maximum amount of US$6 million for the Project (or for each Investment Project Financing in a regional Project), with the exception of Projects responding to situations in which the borrower is in urgent need of assistance because of a natural or man-made disaster; or affected by conflict; fragility; or specific vulnerabilities, including for small states, as described in OP 10.00 and in Section C of this BP, in which case the maximum amount of the PPA is US$10 million for each Project. Management informs the Executive Directors of approved PPAs. 12. When a PPA is not yet refinanced by an Investment Project Financing, the Bank may prepare documentation for consideration of an extension to the refinancing date. Management decides whether to provide the extension. 3 OP/BP 4.04, OP 4.07, OP 4.09, OP/BP 4.11, OP/BP 4.36, OP/BP 4.37, OP/BP 7.40, OP/BP 7.50, OP/BP 7.60. 27 13. If a PPA is not refinanced or the refinancing date is extended and the PPA is required to be repaid, then, upon notice by the Bank, the PPA is repaid by the borrower in ten approximately equal semiannual installments over a five-year period after the refinancing date, unless the borrower elects to repay the full amount up front. If the disbursed amount of the PPA is US$50,000 or less; in which case the PPA borrower is required to repay it within 60 days after receiving the Bank‟s notice to repay. From Concept through Appraisal 14. By the end of this stage, the Bank decides whether to proceed to negotiation with the borrower on the provision of an Investment Project Financing. If decided at the concept stage, the appraisal stage may incorporate a decision point. The Bank (a) works with the borrower as the borrower prepares the proposed Project, and (b) conducts various analyses. The level and nature of expected results and risks, as well as the specific nature of the Project, determine the content, methodology, scope, and depth of the analysis. 15. Technical Assessment. The Bank assesses the Project technical design or approach, and its appropriateness to the borrower‟s needs. This work includes consideration of the borrower‟s organizational and managerial structures and capacity, including for monitoring and evaluation. 16. Economic Analysis. The Bank undertakes an economic analysis of the Project. The three key questions that the economic analysis tries to answer relate to the project‟s expected contribution to the country's socioeconomic development, the rationale for the public sector provision, and the value added of the Bank‟s support. While these key questions are kept in mind for all analysis, the specifics will need to take into account context and background of the operations, information availability and time constraints. Hence, the exact methodology and type of quantitative and/or qualitative analysis will be guided by the nature of the Project and its risks, availability of data, and country circumstances. 17. Financial Management. The financial management assessment considers the degree to which (a) the budgeted expenditures are realistic, prepared with due regard to relevant policies, and executed in an orderly and predictable manner, (b) reasonable records are maintained and financial reports produced and disseminated for decision-making, management, and reporting, (c) adequate funds are available to finance the Project, (d) there are reasonable controls over Project funds, and (e) independent and competent audit arrangements are in place. 18. Procurement, Environmental and Social and Other Safeguard Considerations. The Bank considers the procurement, environmental and social and other safeguard aspects of the proposed Project in accordance with OP/BP 11.00 (on procurement), and applicable environmental, social and other safeguard policies. 19. Fraud and Corruption. Investment Project Financing is subject to the Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants. 20. Risk Assessment. The Bank analyses the risks to the achievement of the Project DO. 28 21. Retroactive Financing. If requested by the borrower, the Bank may agree to provide retroactive financing under Investment Project Financing. Retroactive financing may be provided when: (a) the activities financed by retroactive financing are related to the DOs and are included in the Project description; (b) the payments are for items procured in accordance with the applicable Bank procurement procedures; (c) the total amount of retroactive financing is 20 percent or less of the Investment Project Financing amount (40 percent for Projects in situations in which the borrower is in urgent need of assistance because of a natural or man-made disaster or conflict or does not have sufficient institutional capacity because of prolonged fragility or conflict; and (d) the payments are made by the borrower not more than 12 months before the expected date of Investment Project Financing legal agreement signing. 22. Decision. For Investment Project Financing for which a decision on authorizing appraisal is required, once most Project design issues have been addressed, a decision is made— taking into account the above analysis and information on any known breaches by the borrower of its obligations to the Bank under existing Bank financed operations—whether to proceed to appraisal. 23. Prior to Appraisal. The PID and the draft ISDS are disclosed by the Bank prior to appraisal. For Category A Projects (as defined in OP/BP 4.01), the summary of the Environmental and Social Impact Assessment report is provided to Executive Directors before appraisal. 24. Appraisal. The Bank appraises the Project to confirm any relevant Project and Investment Project Financing information and resolve any outstanding legal, design, and implementation issues. After appraisal, the Bank finalizes the draft Project documentation, including draft legal documentation. 25. Generally, the following information is finalized by the Bank following Project appraisal: (a) the Project‟s definition, rationale, DOs, and scope, planned expenditures, financing requirements, and implementation and funds flow arrangements; (b) the results framework and the monitoring and evaluation arrangements; (c) the economic, financial, financial management, technical, procurement, social and environmental, and risk assessments, and, as necessary, the relevant risk management actions undertaken or to be undertaken; (d) information regarding proposed Bank financed expenditures that are deemed to raise particular risks (including expenditures for land acquisition, compensation for involuntary resettlement, severance payments, demining, and tobacco production or processing) to be described in the project document along with any related mitigation measures; (e) the main legal terms and conditions, and disbursement arrangements as set out in a draft Disbursement Letter, including the provisions of the Disbursement Guidelines for Projects; 29 (f) cofinancing or other collaboration arrangements with other development partners and stakeholders; and (g) any proposed exceptions to or waivers from Bank policies or procedures. From Appraisal through Approval 26. At the end of this stage, the Bank makes the decision whether to approve the provision of Investment Project Financing to the borrower. 27. Negotiation. Management decides to authorize negotiation of the Investment Project Financing, based on the relevant documentation and taking into account information on any known breaches by the borrower of its obligations to the Bank under existing Bank financed operations. After the decision to authorize negotiations (which may be taken at the appraisal decision point), the Bank and borrower conduct the negotiations and seek to finalize agreement on the relevant issues and documentations. If new substantive issues or significant changes in the design of the Investment Project Financing are raised during the negotiations, based on a consideration of these issues, Management decides whether to proceed. 28. Approval. For Investment Project Financing requiring approval by the Executive Directors, Management informs the Executive Directors when the negotiations have been scheduled and then when they have been completed. After the negotiations, the Bank finalizes the draft Project documents and Management decides on their submission to the Executive Directors. If any information in the Project documents raises issues of confidentiality or sensitivity for the borrower, or may adversely affect relations between the Bank and the borrower, and this information is deemed to be relevant to the Executive Directors in their decision-making process, such information is not included in the project document and is described in the Memorandum of the President. When there are overdue payments to the Bank with respect to other Bank financings to the borrower or financings to or guaranteed by the borrower beyond the number of days that would give the Bank the right to suspend disbursements, Project documents are not submitted to the Executive Directors unless an exception is granted by Management. After all requirements for Board presentation have been met, the Executive Directors decide on the approval of the proposed Investment Project Financing, following regular or streamlined procedures. 29. Management decides on the approval of Investment Project Financings that do not require approval by the Executive Directors. From Approval through Effectiveness 30. By the end of this stage, Management decides whether to proceed to Investment Project Financing implementation. 31. Signing. After approval of the Investment Project Financing, the Bank arranges for signing of the relevant legal documents as soon as the relevant signing requirements are met. For Investment Project Financings approved by the Executive Directors, Management informs the Executive Directors when the signing has taken place, or when signing has been delayed for more than six months following the approval. If the legal documents are not signed 18 months 30 following approval, the Bank normally withdraws the offer of the Investment Project Financing; however in certain circumstances Management may decide to provide the borrower with additional time to sign. If the offer of the Investment Project Financing is withdrawn, the Executive Directors are informed through regular operational reporting. 32. Effectiveness. The legal agreements terminate if the conditions for their effectiveness, if any, are not met by the date specified in the agreements, normally 90 days after signing. When warranted, Management may decide to extend the effectiveness deadline; normally the deadline is not extended beyond 18 months after the Investment Project Financing approval. When the effectiveness deadline is extended, dated covenants whose dates fall before the new effectiveness deadline become additional conditions of effectiveness. Any decision by Management to declare the legal agreement(s) effective or to extend the effectiveness deadline is taken before the expiration of the effectiveness deadline. However, in exceptional circumstances, if the legal agreement(s) have terminated for failure to become effective by the effectiveness deadline, Management may decide to retroactively reinstate such agreement(s). 33. Informing the Executive Directors. For Investment Project Financing approved by the Executive Directors, Management informs the Executive Directors as part of regular operational reporting of the following: (a) the effectiveness deadlines; (b) effectiveness delays of more than nine months after approval by the Executive Directors; (c) legal agreements that terminate for failure to become effective; and (d) terminated legal agreements that are reinstated by Management. 34. Changes in Conditions Prior to Signing or Effectiveness. If during the extended time for signing or effectiveness, the conditions under which the Investment Project Financing was originally approved change substantially, the legal agreement(s) are not signed or declared effective until the Bank and the borrower agree on the necessary changes to respond to the new conditions. Management or the Executive Directors decide on the approval of such changes in accordance with the restructuring requirements set out below. After such decision, the legal agreement(s) are amended, as necessary, to reflect the new agreement(s) with the borrower, guarantor, and other parties involved. B. Implementation Support and Monitoring 35. After the Bank declares the legal agreement(s) to be effective, the borrower carries out its Project implementation, with Bank implementation support and monitoring that continue up to the completion of the Project. 36. Borrower’s Role. The borrower is responsible for implementing the Project, monitoring its progress, evaluating results on completion, and meeting the relevant contractual obligations set out or referred to in the Investment Project Financing legal agreement(s) with the Bank. The borrower submits annual audited Project financial statements six months after the close of the borrower‟s financial year, unless otherwise agreed by the Bank. Audits need to be carried out by auditors with independence and capacity acceptable to the Bank, under terms of reference acceptable to the Bank. 31 37. Bank’s Role. In providing implementation support, the Bank pays particular attention to reviewing the monitoring of the performance of the Project and the borrower‟s compliance with its contractual undertakings. The Bank periodically assesses the Project, and reviews the monitoring of results and risk, updating Project information as necessary. The Bank monitors the timeliness of the receipt of the annual audited financial statements and audit reports and reviews their content and quality. 38. Disbursements and Suspension of Disbursements. After the legal agreement(s) have been declared effective, the Bank disburses the proceeds of the Investment Project Financing in accordance with the terms and conditions set out in the legal agreement(s) and in the Disbursement Letter. If the Bank decides to suspend disbursements, items whose exemption is, in the Bank‟s judgment, in the interest of the Project, including items whose exemption will minimize delays and cost in the event that the suspension is lifted, or permit an orderly termination of the Project, may be exempted from suspension. Special commitments to third parties that the Bank has entered into at the borrower‟s request are always exempted. 39. Cancellation. The borrower or the Bank may decide to cancel an amount of Investment Project Financing. When the borrower decides to cancel an amount of Investment Project Financing in accordance with the terms of the legal agreement(s), and gives notice to the Bank, the cancellation is effective as of the date of receipt of the request. The Bank does not accept requests for retroactive cancellations. 40. If the Bank cancels an amount of Investment Project Financing in accordance with the terms of the legal agreement(s), it notifies the borrower, and provides a revised withdrawal schedule. The cancellation is effective as of the date of the notice, except in the case of cancellation of the remaining balance of Investment Project Financing after the closing date as set out below. The cancellation of an amount of Investment Project Financing is reflected in the amortization of the financing; the canceled amount is normally prorated to the remaining Investment Financing principal maturities. For Projects cofinanced by other lenders, the Bank follows internal procedures concerning communications with cofinanciers on any proposed cancellation. Except in the case of cancellation of the remaining balance of Investment Project Financing after the closing date, the cancellation of any amount of Investment Project Financing constitutes a restructuring of the Project. 41. Restructuring. If the borrower proposes changes to the Investment Project Financing, the Bank determines if this is a Level One or Level Two restructuring, as defined in OP 10.00 and prepares the documentation accordingly. The documentation describes the rationale for the proposed restructuring, and the analysis of associated benefits and risks. Executive Directors or Management decide on the restructuring approval as appropriate. Restructurings take effect through amendments to the legal agreement(s) or, if so established in the original legal agreement(s), by written notices to the borrower. A list of all approved restructurings is included in regular operational reporting to the Executive Directors. From Implementation to Closing 42. During Project implementation, the Bank monitors the approach of the closing date of the Investment Project Financing and works with the borrower to ensure that closing procedures as 32 set out below are followed. After completion, the Bank prepares a report evaluating the performance of the Project. 43. Withdrawals after the Closing Date. The Bank may decide, without formally extending the closing date, to disburse or approve the use of proceeds of Investment Project Financing for withdrawal applications received within four months after the closing date for payments made or payments due for eligible expenditures prior to the closing date. In exceptional cases and upon the borrower‟s request, the Bank may decide to extend the period for receipt of such withdrawal applications. In addition the Bank may decide to finance out of the proceeds of the Investment Project Financing the cost of a final audit that will be completed after the closing date. 44. Extension of Closing Date. Upon a request from the borrower, the Bank may decide to extend the closing date if the Project DOs remain achievable, and the Bank and the borrower agree on actions that will be undertaken by the borrower to complete the Project. The Bank processes the extension as a restructuring. 45. Closing the Investment Financing Account. The Bank closes the Investment Project Financing account within two months after the deadline set by the Bank for receipt of withdrawal applications or, if no such additional period is granted, within two months after the closing date. Any undisbursed balance of the Investment Project Financing is cancelled. The Bank notifies the borrower of the final disbursement position. 46. Investment Project Financings under Suspension of Disbursements. If a suspension of disbursements is in effect on the closing date, any Investment Project Financing balance is normally canceled and the Investment Project Financing account is closed. In exceptional cases, Management may decide to authorize a delay in canceling the Investment Project Financing balance and closing the Investment Project Financing account if suspension is likely to be lifted imminently and Project and/or country circumstances warrants such a delay. Once the Bank decides to lift the suspension, Management may decide to approve an extension of the closing date in accordance with the procedures set out above. 47. Investment Project Completion Report. After the completion of the Investment Project Financing, the Bank prepares an Implementation Completion and Results report (ICR). The ICR covers, among other things, the degree to which the Project DOs and results have been achieved and the overall Project performance. The ICR incorporates the borrower‟s evaluation of the Project, as well as of its own performance and the performance of the Bank, if available. Management decides on the submission of the ICR to the Executive Directors, normally within six months of Project completion, and can decide to authorize an extension for the completion of the ICR and its submission to Executive Directors. C. Projects with Special Considerations 48. Exceptional Arrangements in Situations of Urgent Need of Assistance and Capacity Constraints. Following OP 10.00, paragraph 11, the borrower may request the use of these exceptional arrangements for an Investment Project Financing. On the basis of that request, Management decides if the application of these arrangements is appropriate. If so, the following provisions apply: 33 (a) procurement procedures applicable to emergency situations as set out in OP/BP 11.00 and Procurement and Consultant Guidelines apply. (b) following OP/BP 4.01, an Environmental and Social Screening and Assessment Framework (ESSAF) is the single instrument required to address the application of environmental and social policies. (c) when exceptional alternative legal and operational implementation arrangements are used, Project documentation sets out the relevant capacity-building measures planned for timely transfer of implementation activities to the borrower. (d) the normally sequential stages of identification, preparation and appraisal may be consolidated; and the decision to authorize negotiation may be taken after a single consolidated review of a complete negotiations package, including the ESSAF. 49. Series of Projects. In cases of single-borrower sequential Projects, in addition to regular requirements, the documentation for the first Project presents the rationale for a phased approach, the potential benefits and risks of such an approach, the overarching DOs for the series, overall expected results, and timeline for expected completion of each phase and the series; it also gives an indicative funding envelop for the entire series. Subsequently, each Project in the series is prepared and appraised individually, taking into account the performance of the preceding Project(s) to date. 50. After the approval by Executive Directors of the first Investment Project Financing in a series to a single borrower, Management decides whether subsequent Investment Project Financing is submitted for approval by the Executive Directors under regular or streamlined procedures4, or is submitted to the Executive Directors for approval under Absence-of-Objection procedures. A subsequent Investment Project Financing is submitted for decision for approval by Executive Directors under regular or streamlined procedures if it involves a modification of the development objectives for the series, a change in safeguard category—from a lesser category to a Category A or the trigger of a safeguard policy not triggered by a previous Project in the series—or if the previous project underwent a Level 1 restructuring. 51. In the case of a multi-borrower series of Projects following a similar Project template, the first Investment Project Financing in the series sets out the rationale for the series, an indicative funding envelop, and the standard design features, with the program documentation for the first Investment Project Financing providing the general template for subsequent Projects. After approval by Executive Directors of the initial Investment Project Financing, all subsequent Investment Project Financings that follow the Project template are submitted to Executive Directors for decision for approval under Absence of Objection procedures. 52. Financial Intermediary Financing. If Investment Project Financing is proposed to be made to a financial intermediary, at the concept review a decision is taken on the appropriateness 4 For more details, see the OPCS Processing Steps Guidelines and SECPO guidance detailing eSubmission of Board documents. 34 of such financing, taking into consideration the availability and appropriateness of alternative sources of financing. 53. Small Projects. For a Project financed by the Bank through a borrower-executed grant of less than $5 million, the Bank follows simplified procedures set out in internal processing arrangements, requiring simplified assessments and risk analysis, streamlined procedures from appraisal through approval, and streamlining ex-post evaluation. D. Additional Financing 54. When additional financing is requested by the borrower during implementation of a Project, the Bank follows normal Investment Project Financing procedures with the following exceptions. Management decides on proceeding with preparation on the basis of documentation justifying the need for additional financing and summarizing the implementation record and results to date. The Bank prepares documentation for additional financing, including an updated appraisal-stage PID and ISDS (covering the original Project and the new activities) for a single decision point on appraisal and negotiation. Additional financing is provided through an amendment to the original legal agreement and/or a new legal agreement. The relevant legal agreement(s) are signed before the closing date of the original Investment Project Financing. The ICR for the original Investment Project Financing covers the original project and additional financings. ANNEX 3. DRAFT CONSOLIDATED OPERATIONAL POLICY (OP) FOR INVESTMENT PROJECT FINANCING: DISPOSITION OF EXISTING INVESTMENT LENDING POLICY STATEMENTS1 Retained (with rewording where necessary for clarity and Moved to Bank Current OP brevity) Procedure Archived Missing—and Added OMS 2.20 Predates the modern concept of Clear, concise statement of Project binding OPs; it is far too long the Bank‟s role and Appraisal and not true policy: a mixture responsibilities in (Note—not an of policy direction, guidance, operational assessment, Operational and good advice; overlaps and now included in the draft Policy) is inconsistent with existing BP OP, paragraphs 3-9; Bank 10.00 on appraisal. It does not practice on appraisal, now provide clear direction to staff; included in the draft BP, archived—see next column. paragraphs 23 and 24. OP 4.76 Key element—that the Remainder archived and Tobacco Bank does not normally moved to internal processing finance tobacco arrangements and staff production, processing, guidance. and marketing—included in draft BP paragraph 25 (d), noting that decisions to the contrary and any mitigation measures are recorded in the PAD. OP 6.00 Bank Guiding principles in Footnote 3 on retroactive The remainder is advisory; Financing paragraph 1 and first sentence financing, clauses (a)-(d) archived and moved to of paragraph 2 incorporated incorporated in draft BP, guidance. in draft OP, paragraph 2. paragraph 21. OP 8.00 Rapid Paragraphs 1, most of 2, 36, Incorporation of fragility Response to and 11 go beyond IL; and specific Crisis and retained outside IL policy. vulnerabilities, including Emergencies small states, along with crises and emergencies Remaining paragraphs under special consolidated and included in considerations. the draft OP, paragraphs 11- 12 under special considerations. 1 IL policy reform does not cover safeguard and procurement policies. 36 Retained (with rewording where necessary for clarity and Moved to Bank Current OP brevity) Procedure Archived Missing—and Added OP 8.10 Paragraphs 1, 2, parts of 3-5 Parts of paragraphs 3, 4, Remainder covered in the Adding preparatory Project and 8 slightly rewritten and 8 moved to draft BP, Standard Conditions for all activities for operations to Preparation incorporated in draft OP, paragraphs 9-13 (including PPAs. be financed by Program- Facility paragraphs 16-17. raising the ceilings on for-Results Financing as a limits for individual PPAs possible use. to $6 million normally and Parts of BP 8.10 more $10 million in cases of appropriate for OP, crises, emergencies, and notably the special fragility). authority for Management approval of PPAs and ED authority over the commitment ceiling for the PPF and the maximum amount of individual PPAs. Included in draft OP, paragraph 15. OP 8.30 The draft OP includes in Appropriateness of such This OP was designed for a Financial paragraph 15, under special financing addressed in the different world, notably Intermediary considerations, those draft single BP. paragraph predating, for example, the Lending considerations covering 52. Financial Services Advisory lending to financial Program and the general intermediaries, notably modernization of financial highlighting that specific intermediation in IBRD and elements of procurement and IDA recipient countries. safeguard policies are Currently, there are very few applicable to these projects. IL operations directly supporting financial intermediaries (an average of six FILs per year since FY06). Appropriately, the IFC now generally provides this type of support without a government guarantee. Archived and moved internal processing arrangements (including those specifically for Project including financial intermediary lending) and staff guidance (particularly concerning to techniques of economic and financial analysis of loans to financial intermediaries). OP 8.40 Paragraphs 5-7 not relevant TA already a routine use of IL Technical for IL and retained outside and, as such, is covered under Assistance the draft OP. draft OP. Except for paragraphs 5-7, remainder archived with relevant parts updated and moved to staff guidance. 37 Retained (with rewording where necessary for clarity and Moved to Bank Current OP brevity) Procedure Archived Missing—and Added OP 8.45 The OP is mainly about the From the point of view of Grants sources of grants and their IL, grants are just one of governance, not relevant to the possible sources of carrying out investment funding for use in lending support and will be Investment Project retained outside the single IL Financing. The draft OP OP, with more clarity that OP makes it clear that 10.00 covers the use of grants Investment Project by recipients of Investment Financing from grants is Project Financing. covered by the OP. OP 10 IL: Key general principles from Remainder archived. Identification paragraph 1 and from to Board paragraph 3 (a) incorporated Presentation in draft OP, paragraph 1. OP 10.02 Key elements of paragraphs The content of paragraph 3 is Financial 1, 2, 4, 5 incorporated in draft guidance—archived and Management OP, paragraphs 6, 18, 23 and, moved to guidance. 25. OP 10.04 The key element of paragraph Policy as it is currently written The draft OP draws on Economic 1 (the requirement for to be archived, with major recent thinking and Evaluation of economic evaluation) elements moved to staff permits a wider array of Investment retained in paragraph 5 of the guidance. options for economic Operations draft OP. analysis techniques, appropriate for the wide array of activities currently supported through IL. OP 12.00 Key principle from paragraph The remainder of the current Disbursement 1 retained in draft OP, OP is already covered under paragraphs 1, 2 and 6. the General Conditions for Paragraph 3, last sentence Bank support included in reworded in draft OP, operational legal agreements paragraph 23. Paragraph 4 and mandatory Disbursement retained under draft OP Guidelines. paragraph 18 on the recipient‟s contractual obligations, which include disbursement conditions. Paragraph 13 already covered under OP 8.60, Development Policy Lending, paragraph 18. OP 13.00 Paragraph 1, condensed and Paragraph 4 moved to The remainder is already Signing of reworded, incorporated in the draft BP, paragraph 31. covered under the General Legal draft OP, paragraph 21. Paragraph 5 moved to Conditions for Bank support Documents draft BP, paragraph 32. included in operational legal and agreements. Effectiveness of Loans and Credits 38 Retained (with rewording where necessary for clarity and Moved to Bank Current OP brevity) Procedure Archived Missing—and Added OP 13.05 Paragraph 2, condensed and Paragraph 1, which explains Section on restructuring Project reworded, is included in draft the “why” of implementation incorporating OpMemo on Supervision OP, paragraph 19, second support but does not have project restructuring sentence. policy content. following Board approval on October 22, 2009 of new policy on restructuring (see paragraph 21 of the proposed OP). OP 13.20 Paragraph 1, most of Proposed policy change Additional paragraph 2, and paragraph 3 incorporated into draft OP, Financing rewritten and incorporated lifting the three-year into the draft OP, paragraph limitation for additional 26. financing. OP 13.25 Use As envisioned at the time that of Project the new restructuring policy Cost Savings was approved, this policy is to be archived, since cost savings are now covered in the draft OP, paragraph 21 on restructuring. OP 13.30 Much of paragraphs 1, 2, and Paragraph 3, simplified The remainder archived; key Closing Dates 6 (notably defining the and reworded, regarding element already covered by the closing date) incorporated the conditions for an General Conditions. into the draft OP, paragraph extension of closing date 23. moved to draft BP, paragraph 44. OP 13.40 Paragraph 3 wording on Paragraph 5 reworded and Rest of the policy is redundant, Replaced by a broader, Suspension of delays in signing in situations moved to draft BP, as it is covered in the General unified section on Disbursements of suspension included in paragraph 38. Conditions. Details on recourse, remedies, and draft OP, paragraph 21. processing moved to internal sanctions, paragraph 25 in processing arrangements. the draft OP. OP 13.50 Paragraphs 1 and 2 moved Remaining provisions are Replaced by a broader Cancellations to draft BP, paragraph 40. either part of the General section on recourse, Conditions or cover processing remedies, and sanctions, and moved to internal paragraph 24 in the draft processing arrangements. OP. OP 13.55 Except for paragraph 2, the Paragraph 2 condensed Implementatio entire policy statement, and moved to draft BP, n Completion rewritten and condensed, is paragraph 47. Report incorporated into the draft OP, paragraph 24. ANNEX 4. DRAFT NEW CONSOLIDATED BANK PROCEDURE (BP) FOR INVESTMENT LENDING DISPOSITION OF EXISTING INVESTMENT LENDING PROCEDURES1 Current Bank Retained Moved to Internal Procedure (with possible rewording Processing Arrangements/ Statement for clarity and brevity) Guidance Archived Missing and Added BP 6.00 Bank Paragraph 5 and Annex A Paragraph 3 moved to Staff Paragraphs 1, 2, and 4 on Tobacco and demining Financing rewritten, simplified and guidance or covered in country financing added to the list of clarified, removing internal General Conditions (notably parameters. Experience has expenditures deemed to processing arrangements, taxes and duties); parts of shown that the calculation of raise particular risk, draft included in draft BP, paragraph 5 and Annex A these parameters has not BP paragraph 24 (d). paragraph 25 (d). covering internal clearances added value to project moved to internal processing analysis on the Bank arrangements, with decisions financing share. and any related mitigation measures recorded in the PAD. BP 8.00 Rapid Paragraph 4 included in draft Paragraphs 1-3, 5, 7 (e), 8, Response to BP, paragraph 48 (e). and 9 cover internal steps; Crises and Paragraph 7 clarified and moved to internal processing Emergencies rewritten in draft BP, arrangements. paragraph 48. BP 8.10 Project Parts of paragraph 1 moved Paragraphs 2-8 on processing Preparation to draft OP, paragraph 16. steps moved to internal Facility processing arrangements. BP 8.30 Content updated as staff Archived. Draft BP sets out special Financial guidance, notably for considerations for Financial Intermediary economic analysis of Bank Intermediary Financing in Lending support to financial paragraph 51. intermediaries. BP 8.40 Some portions of the sections Archived. Technical on design, supervision, and Assistance documentation moved to staff guidance. BP 8.45 Grants Paragraphs 1-17 and 19 and Paragraph 18 and parts of most of 20 are not relevant to paragraph 20 cover grants to carrying out Investment recipients from IDA and will Project Financing support be archived. Grants are just and will be retained outside one of the sources of funding the new single IL BP. for Investment Project Support, so the new draft BP, which applies to Projects independent of the source of financing, does not mention grants explicitly. 1 IL reform does not cover safeguard and procurement policies and procedures. 40 Current Bank Retained Moved to Internal Procedure (with possible rewording Processing Arrangements/ Statement for clarity and brevity) Guidance Archived Missing and Added BP 10.00 Detailed processing Archived and replaced by Missing: the spelling out of Investment provisions—outdated in draft BP10.00. the basic analytic Lending: current BP—updated and requirements—technical, Identification to moved to internal processing economic, financial Board arrangements. management, procurement, Presentation social, environmental and risk—included in draft BP, paragraphs 15-19. BP 10.02 Preparation elements Processing provisions moved Missing: statement that Financial reworded to remove internal to internal processing Investment Project Management processing arrangements and arrangements. Financing is subject to the included in draft BP, Guidelines on Preventing paragraph 17 and paragraph and combating Fraud and 36. Annex A replaced with Corruption in Projects broader procedures for Financed by IBRD Loans handling breaches in and IDA Credits and compliance with recipient Grants—draft BP, obligations; see draft BP, paragraph 19. paragraphs 22 and 27. BP 10.04 Staff guidance will provide Archived and replaced—see Economic instructions on carrying out draft BP, paragraph 16. Evaluation of economic analysis across Investment types of activities supported Operations and examples of good practice. BP 12.00 The essence of paragraph 3 All of the content on internal The rest of the BP Section in draft BP, Disbursement included in draft BP, steps moved to internal duplicative of the General paragraph 37, cross paragraph 25 (e). processing arrangements. Conditions, the referencing Project legal Disbursement Letter for the agreement and Investment Financing, and Disbursement Letter. binding Disbursement Guidelines and, therefore, archived. BP 13.00 Signing Current BP covers internal Archived. of Legal steps rather than procedures; Documents and updated and moved to Effectiveness of internal processing Loans and arrangements. Credits BP 13.05 Project Current BP covers internal Archived. Procedures for Supervision steps rather than procedures. restructurings, based on Elements consistent with OpMemo, Project emphasis on implementation Restructuring: New support moved to internal Procedures, November 18, processing arrangements and 2009; see paragraph 40 of staff guidance. draft BP. BP 13.20 Retained with slight Components that cover Additional rewording to remove internal internal processes and not Financing for processing arrangements; see procedure moved to internal Investment paragraph 54 of the draft BP. processing arrangements. Lending 41 Current Bank Retained Moved to Internal Procedure (with possible rewording Processing Arrangements/ Statement for clarity and brevity) Guidance Archived Missing and Added BP 13.25 Use of Archived as envisioned at the Project Cost time of the approval of the Savings policy on restructuring. BP 13.30 Closing Paragraphs 2-5 and 8-9, Remainder of the current BP Paragraph linking extension Dates rewritten to remove internal moved to internal processing of the closing date to processing instructions, arrangements and staff practice on restructuring, included in draft BP, guidance. since a closing date paragraphs 43 -46. extension is now covered under restructuring policy (see paragraph 39 of the draft single IL BP). BP 13.40 Content is entirely internal Archived Suspension of process and not procedure; Disbursements moved to internal processing arrangements. BP 13.50 Paragraphs 1-2, 5-6 and 8 Paragraphs 3-4 and 7 moved Statement noting that Cancellations retained in single IL BP, to internal processing cancellation prior to the reworded to remove internal arrangements and staff closing date constitutes a arrangements; see paragraph guidance. restructuring; see paragraph 39 and40 of the draft BP. 39 of the draft BP. BP 13.55 Current content covers Archived. Implementation internal processes and does Completion not contain procedural Reporting content; moved to internal processing arrangements. ANNEX 5. DRAFT NEW CONSOLIDATED OPERATIONAL POLICY (OP) AND BANK PROCEDURE (BP) FOR INVESTMENT LENDING: DISPOSITION OF EXISTING OPERATIONAL MEMORANDA Moved to Internal Processing Arrangements/ Archived/Not Incorporated into Incorporated into Relevant for Investment Current OpMemo Draft OP Draft BP Financing OP or BP Missing—to be Added Supervision of To be reissued, once issuance of Carbon Financing Investment Project Financing Operations OP/BP 10,00 takes place, changing references to indicate that OP/BP 10.00 are applicable but that applicability ends at the end of the monitoring phase (replacing list of policy statements and Bank process statements incorporated into OP 10.00). Placing Bank The content covers internal Loans in Non- processes and will be incorporated Performing Status into internal processing and Restoring arrangements covering Investment Loans to Project Financing. Performing Status Tracking and The content covers internal Recovery of Cash processes and will be incorporated Refunds arising into internal processing from Ineligible arrangements covering Investment Expenditure Project Financing. Cancellation and A country engagement and Recommitment of portfolio issue not relevant for IDA Resources Investment Project Financing OP or BP; retained outside the draft OP and BP. Project Paragraph 2 and section Paragraph 3 Paragraphs 1 (informing staff of Restructuring: of paragraph 4 on cost incorporated into draft Board approval of the change in New Procedures savings incorporated BP (without content policy) and 5 (noting that the (Revised) into draft OP (without dealing with internal OpMemo would be incorporated content dealing with processing into the overall IL policy internal processing arrangements); see framework as part of IL reform) arrangements); see draft BP, paragraph 41. archived. draft OP, paragraph 22. The Provision of Fee-based services are not a Fee-based Services subject treated in the draft Investment Project Financing OP or BP—not relevant. 44 Moved to Internal Processing Arrangements/ Archived/Not Incorporated into Incorporated into Relevant for Investment Current OpMemo Draft OP Draft BP Financing OP or BP Missing—to be Added Specific Archived. (See comments on Expenditure disposition of BP 6.00, Bank Eligibility and Financing.) Cost Sharing Requirements for Investment Projects in Countries Without Approved Country Financing Parameters Retroactive Archived—treats internal Extensions of processes; to be incorporated into Closing Dates: internal processing arrangements Approval for Investment Financing. Authority Learning and Archived—see policy paper. Innovation Loans: Informing Executive Directors Demining-- Covered under Operational paragraph 25 (d) of the Guidelines for draft BP. Financing Land Mine Clearance Clarifications to Falls outside the subjects treated OP/BP 10.21, by draft OP and BP—not relevant. Investment Operations Financed by the Multilateral Trust Fund for the Implementation of the Montreal Protocol Treatment of Archived and replaced by staff Environmental guidance on carrying out the Externalities in the economic analysis required under Evaluation of draft OP. Investment Projects Provision of Legal Falls outside the subjects treated Services by draft OP and BP—not relevant. Tranching in Archived, although the principle of Loans/Credits for strongly discouraging tranching in Investment Investment Project Financing will Projects be included in staff guidance. ANNEX 6. DISPOSITION OF EXISTING INVESTMENT LENDING (IL) OPS, BPS: SUMMARY Content Retained in OP Content Retained in BP Some Content Completely or in Part Completely or in Part Removed/ Already Some Content Some Content Moved to (with rewording for (with rewording for in General that Goes Beyond Processing Steps and Guidance Content Missing and Added to clarity & brevity) clarity & brevity) Conditions IL to OM or Archived Draft Single OP/BP OP 6.00 Bank Financing OP 4.76 Tobacco BP 6.00 Bank Financing OP 8.00 Rapid OMS 2.20 (Note: not an Operational Policy; Bank‟s role in operational assessment; Response to Crises and archived) supporting Bank practice on appraisal and Emergencies analytic requirements OP 8.00, Rapid Response to OP/BP 6.00 Bank Financing OP/BP 12.00 OP 8.40 TA OP 4.76 Tobacco Tobacco & demining added to list of Crises and Emergencies Disbursement expenditures deemed to raise particular risks OP/BP 8.10, PPF BP 8.00 Rapid Response to Crises OP 13.00 Signing and OP/BP 8.45 Grants OP/BP 6.00 Bank Financing Incorporation of fragility and specific and Emergencies Effectiveness vulnerabilities, including small states under special consideration OP 8.30 FILs OP/BP 8.10 PPFs OP 13.30 Closing Dates BP 8.00 Rapid Response to Crises and Adding the possibility of using PPA Advance Emergencies in preparing PforR Financing Current OP 10.00 IL OP 8.30 Financial Intermediary OP 13.40 Suspension of OP/BP 8.10, Project Preparation Facility Statement that IL financed by grants is Lending Disbursements covered by the single IL policy OP 10.02 FM BP 10.02 FM OP 13.50 Cancellations OP/BP 8.30 FILs Special considerations for FILs in draft BP OP 10.04 Economic Evaluation BP 12.00 Disbursement OP/BP 8.40 TA Statement on fraud and corruption OP 12.00 Disbursement OP 13.00 Signing and BP 8.45 Grants Listing of questions for economic analysis; Effectiveness planning of analysis advanced OP 13.00 Signing and BP 13.20 AF Current OP/BP 10.00 IL Cross-referencing of Project legal agreement Effectiveness and Disbursement Letter OP 13.05 Project Supervision OP/BP 13.30 Closing Dates OP/BP 10.02 FM Policy and procedure statements on restructurings OP 13.20 AF OP 13.40 Suspension of OP/BP 10.04 Economic Evaluation Inclusion of treatment of cost savings under Disbursements restructuring; OP 13.30 Closing Dates OP/BP 13.50 Cancellations OP/BP 12.00 Disbursement Statement that cancellation prior to the closing date constitutes a restructuring OP 13.40 Suspension of OP 13.55 ICR OP/BP 13.00 Signing and Effectiveness Treatment of extension of closing date as a Disbursements restructuring OP 13.55 ICR OP/BP 13.05 Project Supervision Lifting of three-year restriction on AF BP 13.20 AF Broad, unified section on recourse, remedies, and sanctions OP/BP 13.25 Use of Project Cost Savings OP/BP 13.30 Closing Dates OP/BP 13.40 Suspension of Disbursements OP/BP 13.50 Cancellation BP 13.55 ICR ANNEX 7. ECONOMIC ANALYSIS FOR INVESTMENT PROJECT FINANCING: ANALYTICAL UNDERPINNING FOR THE REVISED OPERATIONAL POLICY 1. Economic analysis can assist the Bank by providing evidence relevant to the selection, design and implementation of client-country projects to be supported by the Bank. Specifically, it can assist Bank Management in addressing three key questions. 2. The first two consider the project from the standpoint of the client country: What is the project’s expected development impact? Is public sector provision the appropriate vehicle? 3. The first question assesses the project‟s contribution to the client country‟s development while the second explores the rationale for allocating scarce public administrative capacity to its implementation. Both questions need to be addressed before the Bank can be assured that the project warrants support as part of the client‟s public investment program. 4. The third question takes the perspective of the World Bank: What is the Bank’s value added? This question investigates to what extent and how Bank involvement contributes to the project beyond what can be realized by the client or other development agencies. 5. This note, prepared as underpinning for the revision of investment lending operational policy, argues that all three questions listed above should be addressed in the Bank‟s economic analysis for all investment projects. It develops the argument in three steps. Section I lays out the basic concepts underlying each question. While it is important to be clear about the core ideas, application in practice is confounded by an array of difficulties. The main complicating factors are set out in Section II. Section III then closes the circle by suggesting how best to proceed in practice, with a focus on project identification to appraisal. It does so by calling for all three questions to be addressed in every investment project but allowing for a flexible approach to their analysis. I. Basic Concepts 6. A clear statement of the basic analytical objectives provides a valuable signpost. Even if the first-best analysis cannot be realized in most situations, clarity about the aim of the exercise helps to guide the choice of practical short-cuts and the use of approximations. This first section, therefore, sets out the conceptual underpinnings of the three questions posed above. 48 7. Development Impact. The basic principle underlying the estimation of a project‟s development impact is well-known and enshrined in the current OP 10.04.1 In essence, OP 10.04 rests on three ideas: A project contributes to development if expected benefits exceed expected costs. Benefits and costs attributable to a project are measured by comparing the situation with the project to the situation without the project (the counterfactual). Where plausible alternatives exist, the selected project should be the preferred design (least-cost option). 8. Public Rationale. Public investment plays a unique role in a country‟s development by handling a range of issues that can only be dealt with through government action. The main rationales warranting public action include market failures, externalities, spillovers, redistribution, social and political concerns, and so on. Given the scarcity of public funds and implementation capacity, public investment in new or ongoing programs contributes most to development when those programs are clearly directed to addressing one or more of these concerns. 9. Governments‟ role in reducing market failures and promoting other economic, social, or political goals often takes the form of public provision, but in some cases public-private partnerships (PPPs) of a variety of forms may be the preferred solution. The choice will depend on the strengths of governments in terms of their regulatory and administrative capacities and independence from capture by special interests, as well as the relevant private sector‟s level of development and competitiveness. The specific design features of a given program will also help determine its suitability for public, private, or mixed provision, taking into account, for example, whether the program allows for user fees to be charged and whether the quality of service is realistically contractible. 10. Bank Value Added. Bank financing and staff support increase a project‟s development impact when they contribute in ways that go beyond what can be realized by an exclusive reliance on the client‟s own resources or other sources of external financing. Conceptually, the Bank‟s value added is the difference in the project‟s net development impact with and without the Bank. II. Implementation Issues 11. Specifying the key principles that ought to be kept in mind is a useful first step, but actual practice will be complicated by several sets of factors among which the following are the most important. 12. Context and Background. Projects are not isolated activities. They emerge from prior discussions with the client as part of the country dialogue and from management decisions 1 Technically, the expected present value of the project‟s net benefits must not be negative and must be higher than or equal to the expected net present value of mutually exclusive alternatives. 49 already embedded in Country Assistance Strategies (CAS) and related documents where priorities and rationales for project lending can be laid out in the context of an agreed country strategy. Considerable background information and material may also be available from economic and sector work (ESW), from country sources, from other development partners, or from past experience with similar types of projects. Country conditions are also relevant— different input may be required from Bank staff in situations of fragility than in situations with well-developed and functioning civil services. In consequence, the depth and focus of economic analysis required for any individual project will differ depending on prior decisions, existing analysis, and country conditions. 13. The type of project also bears on the nature and depth of analysis. Thus an innovative project may warrant more rigorous analysis than a „repeater‟ project, or a large project (relative to the country‟s public investment program) than a small one, or a risky project relative to a straightforward one. An investment project responding to an emergency, on the other hand, may require an abbreviated economic analysis relative to operations implemented in more normal circumstances. The shift in the Bank‟s portfolio from mainly conventional bricks-and-mortar projects to more complex capacity-building and institutional strengthening operations also calls for a more flexible approach to economic analysis. 14. Information and Time Constraints. The quantitative information required for a truly comprehensive and complete economic analysis is rarely available, especially at project identification and concept review. Even with abundant information, projecting costs and benefits over ten, twenty, or even thirty years inevitably results in highly uncertain estimates. Moreover, the appropriate measure of development impact, the difference between the situation with and without the project, is difficult to gauge because the without-project situation is not observed, adding another layer of imprecision. And for many projects, especially those with a strong rational for public provision, it may not be possible to express benefits in monetary terms. While generating new information from baseline surveys, control groups, contingent valuations and so on can help to fill some of the gaps, all such efforts place considerable time and resource demands on recipient countries and Bank staff. Where possible, staff should also utilize existing analysis at the country level that may help the specific questions at hand like country or sectoral poverty analysis and/or country gender analysis or other information and analysis form other development partners. III. Closing the Circle: How to Proceed 15. The discussion of implementation issues suggests that a full analysis of the three questions is unlikely to be feasible in most situations or even desirable given differences in prior decisions, project-specific characteristics, country capacity, and information costs and availability. Accordingly, the approach proposed here requires that all three questions be answered in every project but allows for flexibility with respect to their analysis. In other words, while the fundamental questions must be addressed in each project, the method of doing so will, to a considerable extent, be project-specific. 16. Early Consideration. The approach also emphasizes the importance of answering the three questions as early as possible in the project cycle if economic analysis is to be at all useful in guiding decisions. It therefore focuses on what should be included in the key results section of 50 the Project Concept Note (PCN). In doing so, it draws on the strong synergies between the economic analysis of projects and other Bank efforts dealing with results and operational risk management. 17. Identification. Clarity about the questions to be addressed at the PCN meeting can have important implications for the upstream dialogue and identification. As noted in Section II, many decisions influencing the subsequent selection of projects are typically made in the context of regular country dialogue and embedded in CASs. If it is known that all projects will address the three questions proposed in this note, those questions will exert a guiding influence and signal during country discussions and in project identification. 18. What should be in the PCN? The PCN should enable management to: (a) Check that the proposed operation is consistent with any prior decisions made in CASs and through the country dialogue regarding country strategy, sectoral focus, rationale for public provision, and World Bank value added (Introduction and Context and Key Results sections of the PCN). (b) Understand to what extent and how the project is expected to contribute to the country‟s development (Key Results Section of the PCN). (c) Determine what further actions are necessary to substantiate project justification, if required, or to shepherd the project through appraisal and prepare for implementation (Key Risks and Issues section of the PCN). 19. Development Impact. The Bank‟s traditional approach to measuring development impact has been to calculate an Economic Rate of Return (ERR)2. For the reasons mentioned in Section II, especially the shift in the Bank‟s portfolio towards projects that build capacity and strengthen institutions, such a calculation may be infeasible in many cases. The ERR, however, is simply a summary measure of underlying information that describes what the project is expected to achieve relative to a counterfactual that may be no project or some plausible alternative. The underlying information, in whatever form it can be provided, is, by itself, the most useful input for many management decisions. Accordingly, even as early as the PCN, staff should be required to provide a clear description of the project’s expected contribution to development relative to the most reasonable counterfactual. 20. For some projects the description may take the form of a verbal comparison of the “with” and “without” situation. A project designed to strengthen financial accountability in the public works ministry, for example, may not lend itself to a precise specification of costs and benefits. Nevertheless, staff should support their verbal description by bringing evidence wherever possible from similar projects to help establish what the project contributes relative to the counterfactual. In institutional reform and similar projects, the evidence on impact is likely to refer to improvements in intermediate outcomes or measures of the strength of country systems, as the impact on final outcomes is more likely to be predicted theoretically than observed 2 As noted above, net present value is technically the preferred measure but the World Bank has typically reported ERRs. 51 empirically. In other cases, the benefits may be quantifiable but not in monetary terms or in terms of ultimate development impact. Thus, it may be possible to measure benefits with and without the project in terms of intermediate outcomes, such as a reduction in the incidence of malaria, without being able to express them in monetary terms or in terms of their ultimate impact on health and development. 21. In such instances, several techniques are available to the analyst—break-even calculations, contingent evaluation, or least-cost analysis, for example. In still other cases, transport projects for instance, a monetary measure of costs and benefits with and without the project may be feasible. The same is true of revenue-generating projects where the economic costs and benefits can build on the corresponding financial measures. In these situations, staff may be able to calculate a preliminary ERR (or Net Present Value (NPV)) or at least describe how this would be done before appraisal. In all cases staff would describe in the Key Risks and Issues section of the PCN the form of economic analysis that will be used leading up to appraisal, based on the availability and cost of acquiring data, the quantifiability of benefits, and other country and sector considerations. One of the Management decisions at PCN stage would be the adequacy of the proposed economic analysis (including a decision on whether an expected ERR will be calculated). 22. Public Rationale. Many Bank appraisals already justify their projects by reference to the standard arguments for inclusion in a public investment program—market failures, spillover effects, redistribution, or asymmetric information, for example. Quantitative information to establish the extent of these problems—what is the evidence of market failure? how pervasive are spillovers?—is difficult to acquire but, at a minimum, the PCN should provide Management with a clear description of the problem. One way of demonstrating the argument for public provision is to compare it with the best possible private sector alternative wherever such an alternative attractive to the private sector exists. In addition, and most importantly, the PCN should explain how the proposed project either addresses the identified concern or compensates for it by outlining the causal chain from project design to impact on the factor justifying intervention. This parallels precisely the discussion of a „results chain‟ or „logic of an intervention‟ in the Results Framework (see below) and should be documented in that context in the Key Results section of the PCN. 23. Many projects in the public sector do not introduce new programs but strengthen or improve ongoing ones by eliminating binding constraints to performance. Upstream public sector projects are cross-cutting and cannot be related to just one or a few sectoral improvements —but the causal chain from project design to elimination of the bottleneck should still be laid out as fully as possible. 24. Other projects may involve various forms of partnership with the private sector. For PPPs, the PCN should explain and justify the chosen mode of delivery with reference to the government‟s regulatory and administrative capacities, the private sector‟s level of development and competitiveness, and the specific design features that make the project suitable for a PPP. This information of itself should serve to demonstrate the causal chain linking design to outcome. 25. World Bank Value Added. The World Bank‟s value added arises from its technical input—provision of new knowledge based on international experience, introduction of innovative projects, improvement in design, support for capacity development during implementation, training, and so on. The PCN should describe how the Bank‟s technical input contributes to the project beyond the provision of funds. In fact, clients often seek Bank support 52 precisely because local expertise is not available or not sufficiently developed. On the other hand, if Bank technical input is minimal or could be provided effectively by local resources, then the project is simply a vehicle for transferring funds. Since other vehicles are available for this purpose, failure to provide a convincing demonstration of genuine value added arising from Bank technical support undermines the rationale for an investment operation.3 26. Each possible argument for Bank involvement entails a corresponding action. Thus, if a project is highly innovative, the client may want Bank support for an impact evaluation in addition to the basic economic analysis. Or if the goal is to complement local expertise in the short run, training and capacity-building may be required for the long run. Where the Bank's value-added is in operationalizing insights concerning how political economy obstacles can be overcome, the generalizable lessons should be reviewed as part of the capacity-building. Or if the project is unusually large or risky, there may be need for a more thorough economic analysis with Bank support. Or where the process from identification to approval (and possibly into implementation) is one of continuous adjustment and modification of project design as more information becomes available and more context-specific experience is generated, additional staff time may be required both to support project design adaptations and for intensive implementation support (with implications for the use of economic analysis in considering adaptations, as information becomes available). 27. Decisions regarding these tasks can have significant budgetary implications for the Bank. In addition to explaining why Bank input is required (as part of the project description section), the PCN should therefore also specify the tasks tentatively expected to be undertaken by staff throughout appraisal and implementation (in the PCN section on proposed team composition) and indicate the skill and time requirements. 28. Links to other World Bank Efforts. Other ongoing efforts to modernize IL in the World Bank link closely to the economic analysis of projects. Thus, the Results Framework 4 makes a strong case for better measuring results in all projects. Results in the Framework may not always correspond exactly to the outcomes required for an economic evaluation because framework results can refer to intermediate steps as well as final outcomes. Nevertheless, in many cases they will match and in all cases the link between the economic analysis and development objectives should be explicitly set out in the Key Results section of the PCN.5 29. Similarly, the Operational Risk Assessment Framework (ORAF)6 has clear links to the economic evaluation. The economic analysis of projects has to project the future, an exercise 3 Where fungibility is considered a critical issue for a country portfolio, then a public expenditure review or assurances that the client‟s expenditure planning and implementation are well managed can help to ensure that World Bank funds are contributing positively to development. 4 See Results Framework in World Bank Operations: Guidance Note. 5 Beyond a focus on results or outcomes, the Results Framework and Economic Analysis have different purposes. The former compares expected results with the base case (before and after analysis) and does not examine costs, whereas the latter compares expected benefits with a counterfactual (with and without analysis) and of course considers costs. 6 See „Moving Ahead on Investment Lending Reform: Risk Framework and Implementation Report‟ and „Guidance Note On The Operational Risk Assessment Framework (ORAF) Risks To Achieving Results‟ (July 2010). 53 that is inherently uncertain and subject to many risks. Given this, staff should be required to identify the most significant uncertainties in their economic projections and the most serious risks their project is likely to face. These should be fully consistent with (ideally identical) and drawn from the information in the ORAF where risks are defined as “risks to achieving development objectives as reflected in the results to be generated by Bank operations.” 30. The Results Framework, ORAF, and the economic analysis of projects are closely linked substantively. Management guidance to make sure there is a tight interaction among them through proper sequencing and appropriate procedures would ensure consistency and significantly reduce demands on staff. 31. Summary. The approach outlined here requires that all three questions—development impact, public rationale, World Bank value added—be addressed in the PCN for all projects. To accomplish this it shifts the economic analysis away from a focus only on calculating a rate of return and a yes-no decision to a more conceptual understanding of what the project is trying to achieve and how it plans to do so. This in no way discounts the value of quantitative information. Indeed, hard evidence (including an ERR) should be requested and provided wherever possible, at reasonable cost, and without forcing staff to make unreasonable assumptions. Rather, the intention is to ensure that the project‟s conceptual basis is well defined in all projects even when it proves hard to marshal relevant quantitative information. With this in mind, the PCN should: describe the project‟s expected contribution to development in a with and without framework (Key Results section); outline the causal chain running from project design to impact for the factor justifying its inclusion in the public investment program (Key Results Section); tentatively specify the tasks by which the World Bank contributes value added to the project (Project Description section and Proposed Team Composition and Resources Section); set out the potential key risk factors that affect the expected economic contribution of the project, the further economic analysis that will be undertaken, and what form that analysis will take. The analysis may range from fully qualitative to the calculation of an expected NPV or ERR (Key Risks and Issues section of the PCN). The added cost of the economic analysis described above to be undertaken at the PCN stage will not be large in most cases, since it uses the information from and be fully consistent with the key results and the risk analysis. 32. PCN Meeting. The PCN meeting is a critical step in project processing. Given that many decisions determining the focus of World Bank efforts in each country have already been made, the first task of the PCN meeting is to ensure that the proposed project is consistent with country-level discussions. The main tasks, however, are to assess the arguments and information presented in support of the project and to decide on next steps. 54 33. The key decision confronting management at this stage is whether to continue with plans to support the country‟s project and, if so, how to do so. Here it might be useful to consider three possible decisions. One decision is of course to drop the project. The work that has gone into identification, however, may suggest other avenues that are worth exploring. „Rewarding‟ staff for a dropped project by allocating funds for investigation of alternative approaches may partially offset the negative signal towards experimentation and innovation that otherwise might be conveyed. When the decision is to proceed with the project, on the other hand, Management may wish to differentiate between those projects where justification is already well advanced and those where additional gaps need to be filled in or where there are special considerations (a high- return but high-risk project, for instance) calling for more intense scrutiny before submission for approval. This is consistent with the two-track approach already in place. 34. Management also has to assess the arguments justifying Bank support and decide on future staff allocations. Management should be persuaded that the allocation of staff to the project under consideration adds significant value and that the specific activities to be undertaken are well chosen. Three broad sets of activities can be identified. The first focuses on training, capacity building and institutional strengthening. In some cases, these activities may be the central focus of the project but even in other cases World Bank staff often play a critical role in these areas. The second emphasizes the learning dimension of projects. All projects contribute to knowledge about development, but highly innovative ones with potential for replication are worthy of special attention and should therefore be assessed carefully and continuously from identification through completion, including, where appropriate, the use of specially designed impact evaluations. And the third sets out risk- mitigating actions as required by the ORAF. Decisions on the specific actions to be undertaken by staff in all three areas should emerge from the PCN meeting. 35. Quality Assurance. Many of the decisions that have to be made at the PCN meeting will inevitably be based on judgment as much as hard evidence. In these circumstances, efforts to encourage maximum transparency and objectivity play a key role. In the specific case of economic analysis, it is important that (1) Management pays attention to the economic analysis (and confirms its tight link with the results and risk analysis or identifies discrepancies that need to be pursued) and determines the form of economic analysis that will be part of the eventual project document; and (2) the quality assurance function in each Region and Network is equipped with staff with expertise in economic analysis, and that these staff take an active role in PCN discussions. 36. Appraisal. The main task for the appraisal is to revisit the three questions drawing on the additional information and analysis resulting from actions called for at the time of the concept note. The Project Appraisal Document (PAD) should therefore report fully on the economic evaluation for all projects, especially those for which it had been decided at the PCN stage that an in-depth economic analysis was required or where important gaps in the information base needed to be filled. The PAD should also report the key lessons learned from the economic analysis. It should also recall the key actions to be undertaken by World Bank staff as decided at the PCN meeting, confirm they have been completed (or explain why not) and demonstrate to the extent possible that they have resulted in real value added. Staff actions to be undertaken during implementation should also be described.
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