1 Development Policy Operations: Supporting PRS Policy and Institutional Reforms 4 th LAC PRS Donor Network Meeting 4 th LAC PRS Donor Network Meeting Manuela Ferro (OPCS)

2 Contents 1.Key Elements of Development Policy Lending (DPL) 2.Designing Development Policy Operations 3.Trends and Good Practice

3 What is Development Policy Lending? All rapidly disbursing policy-based financing to address actual or anticipated development financing requirements of domestic or external origins Typically supports a program of policy and institutional actions consistent with a country’s economic and sectoral policies Can be loans (IBRD terms), concessional credits (IDA terms), or grants (on debt sustainability grounds)

4 DPL rationale No more distinction between different types of lending instruments – PRSC is a form of DPL, aligned with a country’s PRS Broader definition allowing Bank to cover both external and internal financing needs and to provide “budget support” Greater focus on country-owned policies, strong analytic backing, participation, and results Systematic treatment of fiduciary/environmental aspects with upstream analytical work at country/sector levels

5 1.Key Elements of Development Policy Operations

6 Considerations in DPL Appropriateness of DPL determined based on an assessment of the country’s policy and institutional framework Bank considers commitment to and ownership of the program; assesses the country’s institutional ability to implement the program; and describes capacity-building efforts DPL, including tranche releases, is undertaken only when the country’s macroeconomic policy framework is adequate ; IMF program or IMF views are important inputs to Bank’s assessment -- any relevant outstanding issues raised by the IMF are communicated to the Board

7 Broad country ownership Ownership implies the government can build and maintain an adequate political support for the reform program Bank considers commitment to and ownership of the program as demonstrated by track record, as expressed in participatory processes, and at times, political economy analysis Policy dialogue/analytic work can contribute to building ownership – Poverty Assessment, Development Policy Review, Public Expenditure Reviews, etc. Public disclosure lends credibility to country ownership

8 Participation The Bank advises borrowing countries to consult and engage with stakeholders Country determines in the context of its constitutional and legislative framework the form and extent of consultations and participation in preparing, implementing, and monitoring DPL (in the case of PRSP countries, the PRSP process could serve to this end) Bank staff describe in the program document the country’s participatory arrangements for the operation and their impact in formulating the development strategy

9 Collaboration with other donors The Bank collaborates with other donors, including the IMF and other international financial institutions, as appropriate, while retaining responsibility and accountability for its financing decisions The Bank seeks to harmonize conditions with other development partners in consultations with the country DPL is applied only to adequately funded programs, considering both domestic and external financing sources; during preparation, Bank staff needs to ascertain overall financing of program from all sources

10 Poverty and Social Impact Analysis Bank determines possible poverty and social consequences of development policies In case of significant negative poverty and/or social effects of proposed policies, Bank summarizes in the program document analysis of these effects, as well as country systems to reduce negative and enhance positive effects In case of gaps in analysis or country systems, Bank describes in the program document how gaps and shortcoming would be addressed during or before program implementation

11 Environmental and natural resource aspects Bank needs to determine whether specific policies supported by a DPL are likely to have a significant impact on the environment, forests, or natural resources In case of significant impact, the program document must assess the country’s system for reducing adverse effects and enhancing positive effects drawing on sectoral environmental analysis (by country, Bank, or others)

12 Fiduciary arrangements Bank assesses public financial management arrangements through its diagnostic work as well as country and third party reports, including other donors Loan amounts, tranching, conditionality, and risk mitigation are informed by these reviews Borrowers are expected to not use loan proceeds for ineligible expenditure as a code of conduct; financing of local expenditure will be permitted.

13 Results, M&E arrangements Borrower is responsible for implementation and monitoring and evaluation Bank staff reviews implementation progress to verify fulfillment of conditions and compliance with legal covenants Bank staff assesses and monitors appropriateness of country arrangements The program document describes specific results, including measurable indicators for M&E purposes

14 2.Designing Development Policy Operations

15 Choosing the structure of an operation Take into account:  Strategy and results framework set out in the CAS  Magnitude of development benefits – poverty reduction  Alignment with the country’s budget cycle  Quality of the analytic underpinnings (DPR, Poverty Assessment, PER, CFAA/Proc assessment)  Institutional and political capacity for defining a medium-term program and assuring its implementation  Bank’s comparative advantage  Activities of other partners  Opportunities for Bank support through other vehicles

16 Tranching Stand-alone single-tranche operation All conditions are prior actions (policy and institutional reforms) Good practice – allows for flexibility and for support to be adapted to country conditions Multi-tranche operation Tranche conditions (policy and institutional reforms) are specified up-front Appropriate only when the key steps in a medium-term reform process are already well understood and the key outcomes can be achieved by the end of the loan Useful if government wants to use the conditions of DPL operation as a signaling device- but reduces flexibility Tranches can be ‘floating’

17 Programmatic approach A series of single-tranche operations with notional amounts and dates in a medium-term framework (e.g., PRSCs) Sustained Bank support, with clear triggers (key actions signifying progress in program implementation) for moving to the next operation Focus on step-by-step policy and institutional reforms and capacity building Vehicle for integrated Bank-donor support of government program

18 What are the benefits of programmatic approach? Predictability Captures the medium- to long-term nature of most significant reform efforts Allows flexibility to adjust to new information and changing circumstances during implementation Can serve as a vehicle for policy dialogue that typically involves transfer of advice and knowledge

19 3. Trends and Good Practice

20 Bank policy on conditions The Bank makes the funds available to the Borrower upon:  Maintenance of an adequate macroeconomic policy framework  Implementation of the overall program  Compliance with critical policy and institutional actions

21 Modalities of conditionality – What does the jargon mean? Prior actions and tranche-release conditions – policy actions that a country take before the Board approves a loan, and actions which a country agrees to take before a tranche is released; Triggers – expected prior actions of the next operation in a programmatic series; Benchmarks – progress markers of implementation of the program which describe the contents and results of the government’s program; they are not legal conditions for disbursement.

22 Trends: content Content of policy-based lending has shifted from short-term economic management to complex medium-term institutional reforms; strong emphasis on public sector/governance Source: ALCID, World Bank

23 Conditionality Review: Good Practices Importance of balancing the recognition of country ownership with responding to changing policy environments When focusing on critical actions – avoid using large and complex policy matrices – especially in multisector operations Flexibility of programmatic approaches needs to balance predictability with performance The goal is to harmonize financial support with other development partners while retaining the Bank’s distinct accountability

24 Conditionality: Good Practice Principles Ownership - Reinforce country ownership. Harmonization - Agree up-front on a coordinated framework to evaluate performance under the program. Customization - Customize the accountability framework to country circumstances. Criticality - Choose only actions critical for achieving results as conditions for disbursements. Transparency and predictability - Agree on a transparent review cycle conducive to predictable and performance-based financial support.

25 Conclusions More flexibility in financing development programs (i.e., financing of local expenditure) Incorporates policies for participation and disclosure, and emphasizes analytical underpinnings Unified conceptual treatment of potential negative impact and risks (Poverty and Social Impact Analysis (PSIA), environment, fiduciary) through analysis of country systems and, if necessary, program actions and conditionality Focus on results with inclusion of results framework in program documents, clear assignment of M&E responsibilities to borrower, with validation of results by the Bank Room for flexibility (amounts, political economy constraints, debt sustainability, etc)