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Investment Lending Reform

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At a Glance

  • Investment Lending (IL) typically accounts for 75 percent to 80 percent of the World Bank’s portfolio.

  • However, the IL instrument has remained largely unchanged in several decades. In response to changing client and staff needs, the Bank has been developing instruments more suited to programmatic approaches in areas such as the social sectors and governance.

  • IL reform serves a critical role in increasing the Bank’s ability to provide client countries with development solutions that efficiently address their needs while adapting to ever-changing global demands.

  • Two key focuses of IL reform are achieving results and managing risks. The Bank is currently developing a risk-based management system for IL operations that will provide the basis for differentiating projects in terms of processing requirements and implementation support intensity.

What Is Investment Lending?
Investment loans, credits and grants provide financing for a wide range of activities aimed at creating the physical and social infrastructure necessary to reduce poverty and create sustainable development. During the past two decades, investment operations have, on average, accounted for 75 percent to 80 percent of the Bank's portfolio.

The nature of investment operations has changed over time. Originally focused on physical infrastructure projects, i.e. dams and roads, investment lending and grants have come to focus more on institution building, social development, and improving the public policy infrastructure needed to strengthen private sector activity.

Why Is Investment Lending Reform Necessary?
The Bank’s IL model has remained largely unchanged since the 1960s. The primary IL policy and process requirements are premised on a project-centric and input-focused instrument that revolves around the 30-year-old concept of the “project cycle” and the Bank’s role as the dominant project financier. Appraisal of such projects was based on assessing the technical and financial viability and sustainability of the detailed engineering plans developed during project preparation, while supervision measured performance relative to the original engineering plan, including performance against the original budget and implementation targets.

Therefore, IL reform is organized around five pillars or components:

  • Improving risk management by developing a risk-based model to assess proposed operations and processing requirements;

  • Consolidating and rationalizing the menu of IL options by providing rapid response projects, IL projects differentiated by risk and results-based IL;
  • Enhancing supervision and implementation support for clients;

  • Simplifying and revising the IL policy framework guiding investment lending; and

  • Cultivating an enabling environment for IL transformation through aligning incentives, addressing accountability issues, and improving the use of information technology.

By redesigning the IL instrument and expanding the menu of financing options, IL reform serves a critical role in increasing the Bank’s ability to provide client countries with development solutions that efficiently address their needs while adapting to ever-changing global demands. It should be noted that since all five pillars are interrelated, developments in one will influence developments in others. For example, the approach taken to risk assessment will affect the way supervision is done, which in turn could influence the development of electronic reporting systems for supervision.

Moving to a risk-based approach or better results through targeted risk management development is an inherently risky environment. The Bank is currently developing a risk-based management system for IL operations that will provide the basis for differentiating projects in terms of processing requirements and implementation support intensity. Clients will benefit from faster processing of operations and less Bank bureaucracy, more staff support for implementation, and the identification of core risks that will better support capacity-building efforts and the achievement of better development outcomes.

IL Reform and other Bank Initiatives
Given the breadth of IL reform’s mandate, it will affect other bank wide initiatives e.g., Governance and Anti-Corruption (GAC), Decentralization, Aid Effectiveness, Internal Governance, and the Results Agenda. IL reform will also address the weaknesses of the IL process identified in the IDA Controls Review.

Current Progress
The paper “Investment Lending Reform—Concept Note” was discussed by the Executive Directors at an informal meeting on February 12, 2009.1 That note set out the rationale for a proposed revision of the IL framework.

Since then, a great deal of headway has been made with focus on two components in particular: (i) the new risk-based approach and (ii) efforts to improve supervision and implementation support.

The Risk Working Group has developed an operational risk assessment framework and a risk governance framework. The rollout of these two items is scheduled to begin in phases in fall 2010.

The Implementation Support Working Group has produced an Implementation Support Plan. This plan will describe how the Bank and other development partners will support the implementation of risk-mitigation measures and provide the technical advice necessary to facilitate the achievement of the development objective(s) of a particular project.

New Project Restructuring and IDA Cancellation Guidelines have also been drafted.
An integral part of IL reform has been consultations with various stakeholders. As the process of internal consultations continues, a series of consultations with client countries will begin in fall 2009.

Media Contact:
Geetanjali Chopra, (202) 473-0243, Gchopra@worldbank.org

Updated September 2009

[1] See Investment Lending Reform-Concept Note (SecM2009-0026), January 26, 2009.




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