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INVESTMENT LENDING REFORM MODERNIZING AND Powered By Docstoc
					      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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