Review of World Bank Conditionality – LCR Region

Review of World Bank Conditionality – LCR Region Operation Policies and Country Services Country Economics November 15, 2005

Contents • Objectives of the Review • Issues • Modalities and Legal Requirements • Trends • Main Messages • Good Practice Principles

Objectives of the Review • Document the evolution of the Bank's approach to conditionality • Take stock of how lessons of experience have been reflected in recent trends • Take a fresh look at the Bank’s own practice of conditionality • Lead to a set of good practice principles for the Bank’s support for policy-based programs • No operational policy change envisaged

Issues How to reconcile tensions between: • country ownership vs. donors’ need for fiduciary accountability/development effectiveness? • predictability of resource flows vs. performance orientation? • flexibility vs. results-focused, transparent implementation framework?

Modalities The Bank applies Conditionality in a variety of settings: • Prior actions and tranche-release conditions – policy actions that a country agrees to 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 – describe the contents and results of the government’s program in areas monitored by the Bank.

Legal Requirements There are three legal requirements for DPL operations (Paragraph 13 of OP 8.60): • Maintenance of an adequate macroeconomic policy framework; • Implementation of an overall program in a manner satisfactory to the Bank; • Compliance with critical policy and institutional actions (prior actions / tranche release conditions).

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

Complexity of WB Operations Implementing Bank Programs Note: 8.6% of the respondents in the ECA region marked “Refuse / Do not know” on this question.

Trends: Number of Conditions • The number of conditions has been steadily declining… • … but indicative benchmarks have been rising…except in LCR FY05… • … mainly because of multi-sector programmatic approaches

Trends: Number of Benchmarks in LCR

Five Main Messages • Conditionality is neither coercion to undertake reform, nor prescriptive of policy content; • The 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 multi-sectoral operations; • The flexibility of programmatic approaches needs to be exercised cautiously to balance predictability with performance; • The goal is to harmonize financial support with other development partners while retaining the Bank’s distinct accountability.

Good Practice Principles • Ownership • Harmonization • Customization • Criticality • Transparency and predictability

Ownership Ownership of policy programs is strong. LCR clients did not rate Bank programs as highly for taking political considerations and capacity constraints into account There is a strong sense of ownership of World Bank-supported policy programs in my country. The WB takes into account my country's capacity constraints and helps build the capacity necessary for monitoring and evaluation. World Bank-supported policy programs take into consideration political constraints faced by my Government. The WB helps develop my country's medium and long-term development strategy through policy dialogue and joint analytical work. World Bank-supported policy programs are well aligned with my country's medium and long-term development strategy. 1 – Strongly Disagree 6 – Strongly Agree

Ownership Principle #1 – Reinforce Country Ownership • Support only policies and programs for which the Bank has some clear evidence of ownership within the country (i.e., through the adoption of a PRSP in a participatory process) • Potential for country ownership should be assessed through political economy analysis • For Bank policy dialogue, rely on tailored policy analysis by government, Bank, or third parties rather than policy prescriptions • Help strengthen recipient country’s capacity for exercising leadership

Harmonization LCR clients see more value in terms of internal coherence and results orientation of DPLs. They have seen a concurrent reduction in costs or reporting. WB multi-sector operations bring additional value because the feedback between the sectors improves the overall qual. of the program. Harmonization and alignment have reduced the reporting requirements for receiving World Bank disbursements. The World Bank helps develop systems to monitor the results of my country's policy programs. Harmonization and alignment have significantly increased the number of policy actions my Gov't must deliver to obtain WB support. Harmonization and alignment have reduced the transaction costs of negotiating with donors. 1 – Strongly Disagree 6 – Strongly Agree

Harmonization Principle #2 - Agree up-front on a coordinated framework to evaluate performance under the program. • Reach mutual understanding with the government and other donors on a single and internally coherent performance assessment framework for the government’s overall program, comprising policy and institutional actions, outputs, and outcome indicators • Agree on a division of labor with other donors and seek to reduce transaction costs • Where appropriate, follow the lead of other donors in specific areas

Customization LCR clients see the Bank as helping them to build on past experiences, but see less benefits from additional policy reforms. Additional program elements introduced by the World Bank improved overall program outcome. The World Bank helps incorporate lessons learned from my country's past policies. My government's original policy program was significantly modified in negotiations with the World Bank. World Bank multi-sector operations bring about better outcomes than single sector operations. 1 – Strongly Disagree 6 – Strongly Agree

Customization Principle #3 - Customize the accountability framework to country circumstances. • Ensure that the accountability framework builds on and is fully consistent with the country’s expressed policy intentions (i.e., government program, PRSP priority action plan, sector programs, budget) • Do not use the accountability framework as instrument to add policy actions beyond the country’s own intentions • Customize the detail, size, and frequency of review of the framework to specific country circumstances (capacity, aid dependency, vulnerability, reform readiness) • Align modalities and timing of support to country- and program-specific needs

Criticality Across the board, clients do not perceive a real distinction between conditions and benchmarks. The World Bank policy matrix includes only those policy actions that are critical to the program's outcomes. To receive World Bank's financial support, my government needs to meet all policy actions described in the policy matrix. WB multi-sector operations significantly increase the number of policy actions my country must deliver to obtain financial support.. Some key policy actions necessary to achieve the program's outcomes are not included in the policy matrix negotiated with the WB. The WB policy matrix also includes actions that are complementary to those necessary for achieving the program's outcomes. 1 – Strongly Disagree 6 – Strongly Agree

Criticality Principle #4 - Choose only actions critical for achieving results as conditions for disbursements. • Choose policy actions from the performance assessment framework that are critical for the achievement of key program objectives as condition for disbursement or expected prior action (“trigger”) for future financial support • Align conditions with CAS results framework • Base conditions preferably on actions already taken rather than promised future actions • Monitor output and outcome indicators closely, but be cautious in using them as annual disbursement conditions or triggers

Transparency and Predictability There is a lack of understanding of the flexibility embedded in programmatic approaches—triggers are not being interpreted consistently. The World Bank helps assess the results of my country's past policies. The World Bank helps develop monitorable results for my country's policy programs. The policy actions described in the policy matrix can affect the amount and timing of World Bank's financial support. WB is flex. in granting waivers on its condit. for multi-tranche pol.-based ops so my gov't can plan sched. & amount of disburse. WB is flex. in using triggers in the programmatic operations, which allows my government to move to the next program. 1 – Strongly Disagree 6 – Strongly Agree

Transparency and Predictability Principle #5 - Agree on a transparent review cycle conducive to predictable and performance-based financial support. • Review performance under the program in line with the country’s own M&E cycles (budget, PRSP review) • Harmonize performance reviews with other donors and minimize transaction costs for the government • Rely on and strengthen the country’s own accountability frameworks (parliaments), reporting systems, and arrangements for monitoring results • Based on the Bank’s evaluation of performance, modulate the volume of financial support with a gradual response • Announce financial support volumes early enough to be taken into account in making budget allocation choices for the next fiscal year

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.

Review of World Bank Conditionality – LCR Region