1. Reform of the Policy Framework for Investment Lending Fiduciary Forum March 27, 2008

2. 2 What is IL Used For? Infrastructure and HD dominant Infrastructure and HD dominant Still 77% of all operations by volume Still 77% of all operations by volume 67% by value 67% by value SILs are the dominant instrument SILs are the dominant instrument

3. 3 IL by Sector (FY05-07) 1 includes information & communication, transportation, water, sanitation, & flood proctection 2 includes Education, health, and social services

4. 4 IBRD/IDA Approved Operations (FY05-07) Number of Operations (incl Suppl) Source: Business Warehouse as of 4/22/2007

5. 5 IBRD/IDA Approved Operations (FY05-07) Commitment Amount (US$B) Source: Business Warehouse as of 4/22/2007

6. 6 IL by Instrument (FY05-07) Source: Business Warehouse as of 4/22/2007

7. 7 Is It Time to Reform Investment Lending (IL)  Project Cycle essentially unchanged in 50 years  Essentially a blueprint investment model requiring a link between funds provided and expenditures on goods, works and services  Designed before the concept of risk was recognized  Slow and bureaucratic, encumbered by outdated and extensive set of OP/BPs

8. 8 Do We Need 6 IL Instruments + 8.00? Specific Investment Loan (SIL) Sector Investment and Maintenance Loan/Program (SIM/SIP) Adaptable Program Loan(APL) Learning and Innovation Loan (LIL) Technical Assistance Loan (TAL) Financial Intermediary Loan (FIL)

9. 9 Main Policies and Procedures Governing IL  OP/BP 10.00: Investment Lending: Identification to Board Presentation (1994)  OMS 2.20: Project Appraisal (1984)  OP/BP 10.04: Economic Evaluation of Investment Lending (1994)  OP/BP 6.00: Bank Financing (2004)  OP/BP 8.30: Financial Intermediary Lending (FILs) (1998)  OP/BP 8.40: Technical Assistance (TALs) (1994)  OP/BP 13.05: Project Supervision (2001)  OP/BP 13.20: Additional Financing For Investment Lending (2005)  OP/BP 13.25: Use of Project Cost Savings (1994)  OP/BP 13.55: Implementation Completion Reporting (1999) PLUS  Safeguards Policies (9 OPs/BPs in the 4 series, 2 (international water and disputed in the 7 series)  Fiduciary and M&E Policies (10.02 (FM), 11.00 (PR) and 12.00 (Disbursement), OP 13.60, Monitoring and Evaluation)  Contractual OP/BPs (7.00, 13.30 (closing), 13.40(suspension), 13.50 (cancellation)  Financial OP/BPs (OP/BP 3.10, Financial Terms and Conditions, OP/BP 8.10, PPF, OP/BP 14.10, External Debt Reporting)

10. 10 Processes Put in Place Under Current Policies and Procedures (from IDA Internal Controls Review)  IDA Internal Controls review identified 30 processes for preparation, internal review, “approval”, and monitoring/supervision of CAS, ILs and DPLs from concept to completion  Examples of such processes include: SIL project cycle, addressing Legal, FM, PR, safeguards aspects of SILs, disbursement processes etc.  21 processes apply to IL (12 to IL only and 9 to IL and DPL)

11. 11 Key Controls Associated with IL Processes (from IDA Internal Controls Review)  IDA Internal Controls review identified about 120 key controls embedded in the 30 processes  Examples of such key controls include: Concept and Decision Review Meetings, Negotiations, Effectiveness, ISR etc.  73 key controls apply to IL (61 to IL only and 12 to IL and DPL)

12. 12 Time and Costs Associate with Preparation and Supervision of IL (FY05-07)  Average processing time from concept to Board approval: 16.6 months  Average preparation cost: $383,000 per project (or $276,867 per year)  Average implementation period: 4.6 years  Average supervision cost: $248,000 per project (or $54,000 per year)

13. 13 Some Lessons from IL Reform Experience  Mere process change can affect speed somewhat, but not cost  Some reforms – APLs, LILs – had little impact while others – Additional Financing, Expenditure Eligibility – were significant. Latter changed the model  Clients are screaming for major changes, not adjustments at the margin  One size does not fit all SO WE NEED A QUANTUM NOT A MARGINAL CHANGE. CAN IT BE DONE?

14. 14 A Policy Reform that Appears to Work: Additional Financing (AF)  The 2005 Reform of Additional Financing policy was designed to:  scale-up successful projects with greater efficiency and effectiveness  permit quick Bank response to changing borrower circumstances  facilitate timely completion of successful projects that face cost overrun or financing gap  Preliminary results show the revised policy is meeting the reform objectives

15. 15 Average Preparation Time & Cost IL vs AF FY05-07 (w supp) NOTE: IL excludes additional financing & ERL Average preparation time (months) IL = 16.6 and AF = 7.7Average preparation cost (US$T) IL = $383 and AF = $28

16. 16 Average Preparation Time & Cost IL, AF, Repeater, Simple FY05-07 (w supp)

17. 17 Proposed Approach to IL Policy Reform  Create a single principles-based IL umbrella policy  Embed a risk-based model of internal controls in IL policy and procedures: 70% of operations are low-risk, repeaters. Can’t we prepare in 6- 9 months in AF style?  But must do 20-30% higher-risk, innovative operations, requiring more time and resources  Rebalance attention and resources between preparation and supervision and reflect different project needs/risks  Align IL policy with the current development and business model, borrower needs, and strategic objectives

18. 18 A Consolidated Umbrella Policy for IL from Concept to Completion Appraisal-Approval Policies (OP/BP 10.00, OMS 2.20, OP/BP 10.04) Instrument Consolidation (OP/BP 8.30 (FIL), 8.40 (TAL)) (SIL, SIM, APL) Consolidate supervision and completion policies (OP/BP 13.05, 13.20, 13.25, 13.55) Single Umbrella Principles-Based IL Policy from Concept to Completion Single IL Instrument (with appropriate design options/features to meet the DOs) CONCEPT BOARD SUPERVI SION COMPLET ION APPRAIS AL

19. 19 Risk-Based Approach to IL Procedures and Associated Processes and Key Controls  Embed a risk-based model of internal controls in IL policy and procedures to:  Rationalize and prioritize key controls  Facilitate appropriate differentiation of requirements and controls based on risk (permit streamlined AF-type procedures when building on experience and track record, and use additional controls for high risk situations)  Automate work-flow arrangements to maximize effectiveness and control functions

20. 20 The Big Questions Can use of Country Systems address fiduciary issues in low risk operations? Can use of Country Systems address fiduciary issues in low risk operations? If we are results-focused, is the link between finance and expenditures unchangeable? If we are results-focused, is the link between finance and expenditures unchangeable? What is the right balance between projects and programmatic approaches? What is the right balance between projects and programmatic approaches? Are Safeguards untouchable? Are Safeguards untouchable? How long will all this take? How long will all this take?