1. 1 World Bank Trust Funds: Experience with Cost Recovery on MDTFs New York April 4, 2008

2. 2 Trust Funds World Bank Trust Fund Portfolio Trends

3. 3 Trust Funds at the World Bank  TFs are now a key component of development finance at the global, regional, country levels -- 350+ sovereign and non-sovereign Donors - First funds held in trust by the Bank - CGIAR - Consultant TFs …. - PHRD, GEF, HIPC, Carbon Funds … - Global Fund, IFFIm, Major Post-Crisis TFs … 1960s 1970s 1980s 1990s 2000s

4. 4 IBRD, IDA and Trust Fund Disbursements FY2002-07 (US$m)  Overall TF spending grew from 11% to 30% of IDA+IBRD disbursements.  Funds held in trust at 6/30/07 were $13.8b cash held in trust + $7.6b promissory notes (PNs).  FY06: 80% to IDA & 20% to IBRD countries

5. 5 Not all Trust Funds are the same: They vary by type……  3 main categories:  Bank-Executed  Recipient-Executed  Financial Intermediary Fiscal Agency and Special Vehicles But also many hybrids  Largest recent growth has been in Financial Intermediary Funds (e.g., GFATM and GEF)

6. 6 …… and by Complexity  Some funds have only one grant; others have hundreds  In some funds the World Bank has full decision-making power as regards disbursements; in others the donors have varying degrees of say  Some donors give the World Bank broad spending mandate; others have highly specific requirements  Some funds are simple “ bank accounts ” ; others involve complex financial engineering  Some are purely project finance; others support donor coordination and policy advice

7. The World Bank MDTF Portfolio

8. 8 Multi-Donor Arrangements account for largest share of Disbursements (except for Bank-executed TFs) Cumulative Disbursements FY02-07 (US$m)

9. 9 Federated Approach to MDTF Management World Bank Managing Units (Regions & Networks; HQ and Country Offices) Recipients Other Central Units (Legal, HR, ISG, … ) Program Secretariats Operations Quality, incl. Procurement & Financial Mgmt Oversight (TQC, IEG, IAD) Finance Units (CFP, CSR) Donors Governing Bodies

10. 10 MDTF Examples (some that start with A !)  Afghanistan Reconstruction Trust Fund  27 donors  $ 2.22 billion mobilized  $ 428 million disbursed in FY07  Aceh and NIAS MDTF  15 donors  $ 663 million mobilized  $104 million disbursed in FY07  Africa Capacity Building Foundation  35 donors  Over $360 million mobilized  $45 million disbursed in FY07  Avian and Human Influenza Facility  9 donors  Over $100m mobilized  $3 million disbursed in FY07

11. Fee Policy, Costs and MDTFs

12. 12 2006 Review of Costs & Fees: Main Findings  Fee Structure has not kept pace with the growing size and diversity of the Trust Fund portfolio since 2001  Increasing complexity of TFs is not reflected in current fees  Mobilization, establishment, oversight and maintenance costs have increased with complexity + inflation  Small TFs are disproportionately costly to administer  Co-financing TFs are as costly to administer as TA  Total annual under-recovery (cost-sharing by the Bank) is estimated at $50m/year (direct + indirect + overhead costs)

13. 13 How the Bank classifies costs The WB breaks costs into two categories:  Direct costs:  Sustaining costs – all activities that sustain internal management and administration of a unit (not costs in other units)  The Vice President & his/her office, Chief accounting Officer and team, Human resource officer, Country Directors, Sector Managers – These average around 18% of other direct costs  Other direct costs that can be easily allocated specific tasks - Staff costs (salaries, benefits, etc) – measured through the Bank’s Time Recording System (TRS), plus consultant costs, travel, etc – specific project related  Indirect costs* – the costs of doing business that are not readily identified with a particular project or activity:  Communications and Information Technology, office occupancy, equipment and furniture – These average around 32% of other direct costs Thus one approach to Full Costs at Unit level (FY07)= (Other direct costs x 1.5) * For TFs the Bank recovers indirect costs by including an hourly mark-up on staff time. The mark-up varies by staff type and location.

14. 14 Streamlining the Fee Structure: New Policy from 1 st January 2008  Minimum threshold for establishing a new TF raised to $1m (from $200,000).  Donors can still contribute < $1m for Bank work under a new, streamlined facility (Externally Financed Outputs, EFOs).  The Bank will continue to share the costs of administering and supervising TFs that directly support its own work or the preparation of Bank-financed operations  A set-up charge of $35,000 will be applied to each new TF that carries a standard fee (to meet average establishment costs)  For all other TFs, the Bank will aim to recover full costs through customized fee arrangements

15. 15 Implications for MDTFs – cost centers Usually four or five cost “centers”:  Central units administration (Accounting, Legal, Treasury, TF Policy (CFP), IT, HR, Audit etc.)  Program Management (often a PM Unit, usually in the Managing unit – e.g. Africa or Human Development Vice- Presidency)  The Managing unit’s administrative costs (Accounting, Donor relations, Overall supervision etc. – note some MUs have billion dollar TF portfolios)  Managing unit costs of supervising Recipient Grants  AND/OR Managing unit operational costs (“economic and sector work” etc.)

16. 16 Implications for MDTFs – two approaches Full cost recovery at the Portfolio level is the objective through Standard fees OR Customized fees  Standard fees  will not apply often to MDTFs. However they will apply for Cofinancing MDTFs below $30m, when the fee will be 5% of contributions + $35,000 for start-up costs, of which 2% (+ $23,000) goes to Central Units and 3% (+ $12,000) to the Managing Unit. Thus the total fee would be 8.5% for a $1m TF, 5.1% for a $30m TF  Customized fees will require  Applying an agreed percentage fee for Central Unit costs, probably in the order of 0.5% of contributions (currently under review – a graduated approach will probably be adopted, perhaps 3% for small TFs, falling to 0.5% for very large TFs ). For very large TFs (> $100m ?) a more customized approach may be adopted.  Analyzing the Managing unit’s expected costs in detail – and usually agreeing them with the donors, up-front or on an annual basis.

17. 17 Implications for MDTFs – fee levels Customized fee levels vary very substantially, given the wide variation in Managing unit responsibilities A large (over $100m) MDTF Cofinancing an IDA credit may have total fees below 1% of contributions: Very few transactions or legal agreements so Central Unit costs and Managing unit administrative costs low – perhaps less than 0.6% of contributions The Managing unit is already supervising the credit. There are incremental costs associated with the expanded package and with donor coordination, reporting etc, but 0.4% of contributions would provide $400,000 for this. An exceptionally complex and innovative MDTF such as the Global Program for Output Based Aid (GPOBA) involves: A special PMU, many relatively small and varied RE grants, a Bank research, monitoring and evaluation program, substantial donor coordination costs (governance board meetings), complex accounting… In this case Central Unit costs are above average (probably nearer 2% of contributions) and Bank PMU and MU costs are very substantial – up to 30% of contributions – BUT agreed with donors and regularly reviewed

18. 18 Cost Recovery for MDTFs – issues that emerge Cost estimation  Most Bank staff do not record time spent on TFs  Cost are highly dispersed, between many units and within units  MU operational costs are easier to monitor when charged to a single account  And a new approach to monitoring all staff costs related to TFs is about to be introduced Fair allocation of fee income  Central unit costs are often part of their overall overhead and the TF share is unclear  Start-up costs have not been adequately reflected or distributed when incurred  MU income has been distributed on the basis of disbursements – a problem when one unit provides the PMU and another manages disbursement  And front-line staff in MUs often feel they never see the fees The complex portfolio  There are all sorts of exceptions – for specific donors (including the WB itself) – changing arrangements within single MDTFs – special processes on specific TFs (sometimes donor-driven)

19. 19 Bank Commitment: Three Pillars  Enhancing Strategic Selectivity of the TF portfolio  Putting TFs in broader context of operational programs and business needs for each VPU  More systematic institutional review of strategic issues, particularly for large Trust Fund proposals  Strengthening Risk- and Results-Management  Refined and strengthened standard controls  Specialized controls tailored to type-specific risks  Strengthened results focus  Enhancing Operational Efficiency and Sustainability  Simpler, output-focused EFO instrument in support of Bank work, with no minimum or maximum size and no fees  Streamlined fee structure with higher minimum TF threshold, continued cost-sharing by the Bank, and more use of customized arrangements

20. 20 Improving Efficiency of Administration  Ensuring effective use of Trust Funds entails costs  The Bank has continued to pursue efficiency gains through:  Process simplification & standardization of legal agreements  Off-shoring of trust fund accounting  Training and accreditation of Bank staff  Phase-out of Consultant CTFs  Simplification of programmatic Trust Funds  The Bank remains very competitive with comparator organizations  Other MDBs, IFIs and UN Family members’ fees range from 3.5% to 13%  These usually cover administration costs only, while World Bank fees cover both administration and operational costs  The Bank’s administration costs under customized fee arrangements are generally lower in % terms than for standard-fee TFs

21. 21 Towards a Risk-Based Approach  Greater complexity, diversity, and volume of portfolio poses challenges, many of which did not exist in 2002  Continuing to develop standard controls for portfolio- wide risks  In addition, specialized controls to manage risks by TF type:  BETFs: integrate with Bank budgetary system  RETFs: align with existing operational strategy and planning processes  “Innovative” funds: strategic oversight and review at institutional level

22. 22 Recent Strengthening of Controls  Since FY02, reforms to strengthen the TF control framework:  Standardization/simplification  Segregation of duties  e-Trust Funds project:  Mandatory Learning and Accreditation Program  Phase-out of consultant procurement “tied” to nationality  Partnership Review (PRN) process  Impact of reforms  Fairly robust framework, with all trust funds subject to standard ex ante, implementation, and ex post controls that provide reasonable assurance  Donor confidence evidenced by growth of portfolio

23. 23 The Trust Fund Compact  The Bank’s Trust Fund administration needs to:  Maximize aid effectiveness for Recipients  Retain strong Donor confidence, with reasonable assurance that funds are used for the intended purposes  Ensure cost-effective services to both Donors and Recipients  These objectives are delivered through:  General Bank Infrastructure for Trust Funds, including our Reputation and Core Competences; Capacity for Innovation; Core Banking Services  Choice of Specific Services, including: Contribution Management; Program Administration; Partnership Services; Activity Preparation and Execution; Activity Appraisal and Supervision

24. 24 Trust Funds Management Framework And New Proposals

25. 25 Disbursements by Theme (US$m) FY02FY03FY04FY05FY06 Health15954429501,145 Environment285482489523635 Post-Conflict/Disaster Recovery130343432657679 Debt Service7878011,005878771 Infrastructure & Finance114164150188176 Other Recipient-Executed376453455556587 Other Bank-Executed152139187231213 IFC, MIGA & ICSID607399128160 Grand Total1,9312,5613,2764,1284,374 Biggest growth in Health (GFATM), Environment (GEF), and Post-Crisis Recovery

26. 26 FIFs Dominate Disbursements ……… FY06 Disbursements, US$ million 2,466 1,456 292 Single Donor --------------------------------> Multi-Donor Level of Bank Input/Supervision (Low to High) Recipient Executed Bank Executed Financial Intermediary

27. 27 …... but BETFs Dominate by Numbers