BIC Policy Update
September 5, 2006

A Tune-up for the World Bank’s Business Model?
Bank seeks more flexibility in working with middle-income countries

By Bruce Jenkins (bjenkins@bicusa.org)

At its annual meeting in Singapore in mid-September, the World Bank will seek approval for a set of proposals that, in the Bank’s view, will make it a more attractive lender and advisor for middle-income countries (MICs). Faced with increasing competition from commercial lenders, the Bank is seeking to lower the costs of its business model as well as to expand its product line to boost lending and other services to middle-income countries that borrow from the Bank's main lending arm, the IBRD.

In Singapore, the Bank will present a paper to its oversight body, the Development Committee, on Strengthening the World Bank’s Engagement with IBRD Partner Countries (1). The paper elaborates (one might say rehashes) ideas presented in earlier iterations of the Bank’s evolving MIC strategy (2), and includes a number of recommendations, several of which are highlighted below.

From prix-fixe to a la carte: Traditionally the Bank provides its services through a ‘prix fixe’ package that bundles loans with other services such as analytical work and policy advice. While many MICs indicate that they will continue to order from the integrated menu of Bank services, others are calling for a more flexible ‘a la carte’ approach in which they can choose stand-alone advisory services. The Bank will seek to provide stand-alone, "fee-based expert services more systematically and on a larger scale." It will also develop a "quick response window" for delivering policy advice (p. 24).

Lower costs, lower standards?: For several years MIC borrowers (and senior Bank managers) have been beating the drum that the Bank’s non-financial transaction costs were too high. The Bank has been pushing a range of initiatives to lower costs, from decreasing average loan processing times to simplifying internal procedures. The new MIC paper calls for more reliance on "country systems" as a way to reduce Bank costs (though the evidence that this approach would reduce transaction costs is lacking). In early 2005 the Bank approved a pilot program of utilizing a borrower’s social and environmental "systems" instead of World Bank safeguards in Bank-financed operations. Many civil society groups criticized the Bank for potentially lowering critical standards that protect people’s rights and help avoid socially and environmentally destructive projects. The paper laments that this pilot program has been applied only to four MICs so far and is bogged down in the cumbersome "equivalency assessment" phase. The paper also indicates that little consensus exists on the Bank’s board to proceed with country systems for procurement (it is widely known that the US government opposes a country systems procurement approach). Nevertheless, the paper calls for a ramping up of the use of country systems in Bank operations.

Going sub-sovereign: The Bank is looking to expand its business line into sub-sovereign lending. By mandate, the IBRD lends to sovereign governments that in turn guarantee that the terms of the loan will be honored. IBRD is now looking to team up with the Bank’s private-sector lending arms, IFC and MIGA, to "mainstream participation of IBRD regions and country offices in originating and administering public-sector financing as the sub-national level, with the understanding that, when such financing is done without a sovereign guarantee, it would be booked on the IFC balance sheet" (p. vi). A Bank-wide three-year Subnational Development Program is being proposed that would fully integrate Bank staff in the development and implementation of subsovereign loans. On the basis evaluating this program, the Bank would consider a "larger scale-up, including options under which the IBRD will share the risk" (p. 22).

More harmony please: To provide more coordinated services across the World Bank Group, the Bank is proposing to pilot "single country directorships" that would represent IBRD/IDA, IFC and MIGA under one roof. In addition, IBRD managers would participate more directly in major IFC investment and strategy meetings.

The Bank notes that the continued lack of coordination among MDBs and bilateral donors is creating inefficiencies for MIC borrowers. The Bank takes some swipes at the bilaterals—noting a need to avoid cases "when bilateral or regional agencies provide financing at inappropriately soft terms and in ways that crowd out potentially higher-quality policy and project support from the MDBs" (p. 27). The Bank proposes to develop a menu of options for blending bilateral grants with MDB loans to improve coordination and to steer donor funds toward targeted sectors. The Bank calls on bilateral donor agencies to recognize a "need for commitment" to improve donor cooperation. "Common guidance to all agencies from governments represented on the Development Committee will be a key to achieving this" (p. 28). The Bank calls for greater progress among all donors, including the MDBs, in implementing the Paris Declaration on donor harmonization.

Milder shocks: The Bank states that MIC borrowers are calling for greater risk mitigation products from the Bank that could help provide reliable access to finance in the event of external shocks such as natural disasters, commodity price fluctuations, and financial contagion. Pre-approved loans (with deferred draw down options) could be more widely utilized. MICs have indicated interest in a Bank-supported global facility to catastrophe insurance for member countries.

With the new MIC paper, the Bank elaborates on earlier proposals to boost Bank lending and other services to middle-income countries, borrowers that provide a steady stream of funds back to the Bank through loan repayments. The proposals seek to tweak the Bank’s business model without changing the private sector development orientation on which the Bank operates. If anyone suspected otherwise, the new paper clarifies that "In developing these measures, a key objective will be to ensure that they facilitate the development of markets, and strengthen the role for the private sector as a key agent of income growth and job creation and as a deliverer of services" (pp. v-vi).

Notes
(1) World Bank, Strengthening the World Bank’s Engagement with IBRD Partner Countries, August 3, 2006.
(2) See "Enhancing World Bank Support for Middle Income Countries," February 1, 2005 and "Enhancing World Bank Support for Middle Income Countries Management Action Plan: Progress Memorandum," December, 2005.

James Taylor
Information Services
Bank Information Center
1100 H Street, NW suite 650
Washington, D.C. 20005
phone: 202-624-0636
email: jtaylor@bicusa.org