File with   OP/BP 6.00 and  OP/BP 12.00

 DATE:    

March 23, 2007

 TO:    

Staff Recipients of the Operational Manual

 FROM:    
 

Jeffrey S. Gutman, Vice President and Head of Network,
Operations Policy and Country Services

 EXTENSION:     

80454

 SUBJECT:    

Specific Expenditure Eligibility and Cost Sharing Requirements for Investment Projects in Countries Without Approved Country Financing Parameters

1.    On April 13, 2004, the Executive Directors approved Eligibility of Expenditures in World Bank Lending: A New Policy Framework (R2004-0026/1), which revised the eligibility framework for Bank ¹ financing.  This new policy framework is reflected in  OP/BP 6.00, Bank Financing, which applies only to investment projects in countries with approved country financing parameters (CFP).  This Operational Memorandum sets out the eligibility framework, including cost-sharing arrangements, for investment projects in countries without approved CFP (the “non-CFP borrowing countries”) to which  OP/BP 6.00, Bank Financing, does not apply.  Specifically this Operational Memorandum addresses the treatment of  Cost Sharing; Local Cost Financing; Expenditure Eligibility (Recurrent costs,  Customs duties and taxes,  Land,  Resettlement,  Late payment penalties,  Food expenditures,  Severance pay,  Local transportation and insurance,  Interest during construction,  Special accounts,  Secondhand goods); Retroactive Financing; and Project Preparation Facility (PPF) in such projects.  This Operational Memorandum does not apply to emergency operations governed by the new  OP/BP 8.00, Rapid Response to Crises and Emergencies. 

I.    Cost Sharing

2.         The Bank sets cost-sharing ceilings for all non-CFP borrowing countries.  A country’s upper limit on Bank cost sharing is a function of its ability to mobilize domestic and foreign financial resources and thus is based on its per capita income.

3.                   The uniform cost-sharing limits applicable to non-CFP borrowing countries within each of the income groups set forth in OP 3.10, Annex D, IBRD/IDA Countries: Per Capita Incomes, Lending Eligibility, and Repayment Terms, are as follows:

4.         Bank cost sharing limits in such countries are applicable not to individual projects but to the Bank’s overall lending program for a country (excluding financial intermediary, additional financing, emergency recovery, development policy, and technical assistance loans).  The limits are ceilings, and actual cost sharing is expected to be below the limits.  To ensure flexibility, the country limit is applied to a rolling three-year investment lending program, encompassing two prior years and the current year.

5.         For individual projects, the Bank usually expects a non-CFP borrowing country to demonstrate commitment to the project by making a 10 percent minimum contribution to project cost (net of taxes and duties).   However, if government finances are seriously strained, and if a reassessment of the Bank’s lending priorities warrants, a lower borrower contribution may be justified.   In general, to ensure that there is no disincentive to seeking cofinancing and to reduce the potential for conflicts with other donors, the Bank does not limit external cost sharing (Bank plus cofinanciers).   In exceptional cases, the Bank allows a government to demonstrate commitment by allocating to the project general donor resources for cofinancing, thereby permitting up to 100 percent external financing.

6.         Procedures for establishing cost-sharing limits.  The cost-sharing limits for a given non-CFP borrowing country are established by the Regional vice president (RVP) based on the cost-sharing limits set out in paragraph 3 above, and are documented in the Country Assistance Strategy (CAS) for such country. Within such country limits, the country director (CD) determines cost sharing for individual projects. When there is sufficient evidence that a borrower is committed to a project or investment program, ² the CD may make exceptions to the borrower's minimum 10 percent cost sharing for individual projects and may permit cofinancing to substitute for the borrower's contribution. The RVP may approve a temporary increase in the cost-sharing limit for a non-CFP borrowing country whose resource situation has become fundamentally more constrained in recent years or whose external situation has deteriorated sharply. (OP/BP12.00, Disbursement, describes procedures for reallocations and making changes in disbursement percentages to individual projects.) Changes on country grounds that are not temporary may be made only with the approval of the Managing Director.

7.         The Bank may provide local cost financing for projects in non-CFP borrowing countries under the following circumstances:

(a) When indirect foreign costs can be clearly identified, financing of local expenditures up to the equivalent of such costs may be provided;

(b) If, on the basis of a careful appraisal of a country’s overall development program, the Bank judges that the financial requirements of the program will exceed the limits of available local savings and expected foreign exchange resources, financing of local costs in certain high-priority projects may also be provided;

(c) If a specific project has too little foreign exchange cost to permit the Bank to achieve its project objectives by foreign exchange financing alone; and,

(d) Local costs of goods and services procured locally in the case of technical assistance (TA) projects and in TA components of investment projects.

8.         To protect local suppliers against discrimination in competitive bidding or selection, when a contract is awarded to local suppliers as a result of international competitive bidding (ICB) procedures, the Bank disburses up to the full ex-factory cost of the items provided. Similarly, when local consultants are selected through competitive process from a shortlist of local and foreign firms, the Bank permits financing of the same proportion of costs for such local consultants as for foreign consultants. In such cases, the financing of the local cost component of locally procured items is a consequence of the Bank’s procurement policy; and such financing does not need to be further justified on country resource transfer or project grounds.

9.         Local cost financing justification. In a non-CFP borrowing country the Bank’s resource transfer objective for the country, including the analysis by which the objective was reached and a statement on whether local cost financing is justified, is included in the CAS.

10.         Subject to the CAS’s recommendations, the Project Appraisal Document (PAD) for a project in a non-CFP borrowing country gives the justification for local cost financing for a specific project: country resource transfer grounds or project grounds. When local cost financing for local procurement and local consultants is projected to account for less than 5 percent of the loan, justification on country resource transfer or project grounds is not required.³

11.         Following are categories of expenditures that are not eligible for financing under a Bank loan to a non-CFP borrowing country except as specified below under each such category:

a) Recurrent costs, except the Bank may finance incremental recurrent costs (that is, costs that are over and above the recurrent costs which the implementing entity would have to meet even without the project), when:

i) the country has serious shortage of budget resources that makes it unable to finance such recurrent expenditures for the project; and

ii) a specific recurrent expenditure is crucial to the success of the project and Bank financing is desirable to ensure timely availability of funds.

Recurrent costs are normally financed on a declining basis with Bank financing not exceeding 25 percent in the final year;⁴

b) Customs duties or taxes ⁵ levied by the non-CFP borrowing country including income tax⁶ levied on payments to consultants under contract and payments to PIU staff. However, social charges that may be levied on salary payments to Project Implementation Unit staff are eligible for financing under Bank loans, provided the Bank is satisfied that these charges constitute a payment for the drawdown of future benefits by these staff. Normally, in a project for a non-CFP borrowing country, no adjustment is made for duties or taxes on imported components that are included in the final cost of locally manufactured products;⁷

c) Cost of land, except that the Bank may finance the cost of land for projects in non-CFP borrowing countries that support community-based land reform, on the basis of review and authorization by the Bank’s Land Acquisition Committee;⁸

d) Costs associated with resettlement, including cash compensation, the cost of land for resettlement activities (including compensation for land acquisition), and other resettlement assistance paid in cash, except the Bank may finance the cost of land improvements undertaken as part of resettlement activities;⁹

e) Late payment penalties imposed by suppliers, except where these penalties are incurred in connection with a disputed payment that has been the subject of arbitration;

f) Expenditures for the purchase of food intended for human consumption, except in the context of projects that support poverty alleviation, health and nutrition, improving the targeting and effectiveness of social safety nets, and temporary compensatory measures during fiscal and economic reform programs.¹⁰ Such costs are normally financed on a declining basis with Bank financing not exceeding 25 percent in the final year;

g) Severance pay, except in the context of operations supporting retrenchment which forms part of a broader program of productivity enhancing public sector reform, and where the retrenchment package is designed to ensure that the severance payments minimize the risk of adverse selection, overpayment and rehiring of staff receiving severance packages.¹¹

h) Local expenditures for transportation and insurance (except as part of foreign shipments to the project destination), unless the project legal agreement provides for the financing of local costs. Costs for local transportation and insurance constitute local expenditures which the Bank may finance when a foreign or local supplier or contractor includes them in its bid for: (i) a contract for supply of goods or equipment under "related services"; or (ii) a contract for works.¹² The Bank may reimburse such local expenditures for transportation and insurance up to the percentage stipulated in the legal agreement for local expenditures for the underlying goods, equipment or works;¹³

i) Interest during construction (IDC) ¹⁴ except from the proceeds of an IBRD loan if the beneficiary is a financially autonomous entity¹⁵ whose cash flow requires such financing. If the proceeds of the IBRD loan are channeled through a financial intermediary, the Bank may finance¹⁶IDC only if the intermediary itself finances IDC on the subloans it makes out of the proceeds of the IBRD loan. The Bank may finance up to the full amount of the estimated IDC on the IBRD loan. If the project entity qualifies for IBRD financing of IDC and the project's construction period is longer than the standard grace period for IBRD loans, the Bank may extend the grace period and adjust final maturities correspondingly (see OP/BP 3.10, Financial Terms and Conditions of IBRD Loans, IBRD Hedging Products, and IDA Credits). The estimated amount of IDC to be financed under an IBRD loan is calculated at the IBRD lending rate¹⁷at the time of appraisal and is based on the projected disbursement schedule of the loan for that part of the project construction period for which IDC will be financed. If IDC is to be financed under an IBRD loan whose amount exceeds the project's foreign exchange cost, the amount of the loan is calculated as follows: the base amount of the loan is determined by applying the percentage of Bank financing to the total project cost, net of taxes and duties ¹⁸ and excluding all IDC; and the total amount of the Bank loan is calculated by adding to the base amount the estimated IDC on the base amount;

j) Operating charges on special accounts, except when included in the definition of incremental operating costs in the project legal agreements; and

k) Secondhand goods except when:

i) there is a surplus (in suitable quantity and quality) of the type of goods required from enough sources to ensure competitive bidding; and

ii) the procurement of new goods would result in excessive costs due to lack of economies of scale.

12.         In exceptional circumstances, to facilitate the prompt execution of Bank-financed operations in a non-CFP borrowing country, the Bank allows retroactive financing under the following conditions: (a) the activities financed are included in the project description; (b) the payments are for items procured in accordance with applicable Bank procurement procedures; (c) such payments do not exceed 10 percent of the investment loan amount (20 percent for development policy loans) ; and (d) the payments were made by the borrower not more than 12 months before the expected date of Loan Agreement signing. The date after which payments may be made is agreed at appraisal, confirmed during negotiations, and recorded in the Loan Agreement. Exceptions to these limits may be approved in exceptional circumstances by the Regional vice president in consultation with the Vice President, Operations Policy and Country Services. Proposals for retroactive financing, including any exceptions to normal limits for such financing, are spelled out in the PAD.

13.         Consistent with expenditure eligibility requirements for non-CFP borrowing countries, the PPF advance finances primarily foreign exchange costs, but it may be used for local currency costs. Normally the PPF advance finances consultants’ services or incremental operating costs, but it may be used to finance goods and minor works as well.

14.         Questions related to this Operational Memorandum should be addressed to Galina Mikhlin-Oliver, ext. 81871.