2006 Spring Meetings

Development Policy Lending and Conditionality
Friday, April 21, 2006 / 9:30-10:45 am

MEETING NOTES

This session, sponsored by the World Bank’s Operations Policy and Country Services Department (OPCS), provided an opportunity for CSO representatives to give feedback to Bank staff on the conditionality review and its continued use in development policy lending.

Three speakers made presentations: Mr. Jan Walliser, senior economist in OPCS; Ms. Lucy Hayes, policy and advocacy officer, the European Network on Debt and Development (Eurodad), and Ms. Romilly Greenhill, senior policy officer with Action Aid International in the UK. A fourth panelist, Mr. Jim Adams, vice president and network head of OPCS made no opening remarks but was the principal respondent to questions from the audience. Ms. Francis Seymour, (Program Director) of the World Resources Institute moderated the discussion.

Presentation by Mr. Walliser (World Bank)
 
Mr. Walliser discussed the latest trends in conditionality, updating the Bank’s comprehensive Conditionality Review of 2005. During FY06 the Bank financed 18 development policy lending operations in International Development Association (IDA) countries and 13 policy lending operations in International Bank for Reconstruction and Development (IBRD) countries. The volumes tend to be in the range $1.5 -2.5 billions for IDA countries and $5-6 billion for IBRD countries. The volume of development policy spending tends to be larger in IBRD countries although the share of the Bank’s development policy lending or budget support tends to relatively stable, around 30 per cent.

One of the points Mr. Walliser emphasized was that 90 percent of Bank operations in IDA countries are now single tranche, which means the Bank disperses funds after actions have been taken, and that credit agreements do not specify future actions as conditionalities. One of the lessons of the 1990s, he said, was that most multiple tranche operations have proven to be cumbersome and not operationally effective.

In terms of the numbers of conditions and the content of conditionality there is no significant change from last year. The numbers are stable at around 12-13 conditions per operations for IDA and 11 for IBRD countries and the trend has been downward since the mid-1990s.  In terms the content of loan conditions, beginning in the 1980s there has been a shift away from conditionalities in the economic and trade areas, to a concentration in the area of public sector reform.

The Bank will be going to the board sometime in July with a report on how the new policy for development policy lending is being implemented, which will also include an update on progress in implementing the good practice principles on conditionality.

Presentation by Ms. Hayes (EURODAD)

Conditionality is a key priority for many European Non-Governmental Organizations (NGOs), Ms. Hayes said, and they are closely monitoring conditionality in Bank programs. Currently Eurodad’s conclusions are that conditionality has actually increased. In its most recent research, Eurodad tried to get a clearer picture of how many conditions and what kinds of conditions are contained within World Bank Poverty Reduction Support Credit  (PRSC) loan documents by doing a comprehensive survey of conditions in 20 countries, first looking at the most recent PRSC documents and then at the last PRSC documents. Euordad included both “prior actions” and “benchmarks” in its definition of conditions and  it found that, on average, countries faced 48 conditions in the previous PRSCs and now face an average of 69 conditions per World Bank loan. Prior actions have risen from an average of 13 to 15 per loan document and the benchmarks have risen from an average of 35 to 54. There is also a wide discrepancy on the use of conditionalities among countries and this variation has actually become more pronounced recently.

The Eurodad researchers also broke down the information and looked at the numbers of privatization conditions and found again that there has actually been a rise in the number of privatization conditions between the previous and the current loan.  These findings contradict those of the Bank’s official studies of last year which indicated a decline in privatization-related conditionalities. The privatization of utilities is of particular concern, she said. Twelve of the twenty countries tracked have had conditions related to privatization of utilities, and in some countries as much as 20 percent of conditions are related to privatization.

Presentation by Ms. Greenhill (Action Aid)

Ms. Greenhill opened by saying that she was going to add to what Ms. Hayes had said by summarizing evidence from two other recent studies: one looked at PRSC conditions in 13 loans in countries across Africa, Asia and Latin America with a focus on privatization. The other looked at Heavily Indebted Poor Countries (HIPC) conditionality. The PRSC study examined changes and continuities from previous instruments, comparing PRSCs to earlier forms of lending instruments. The HIPC study examined which conditionalities are preventing progress in accessing debt cancellation for HIPC countries, looking at countries which are at decision points or at pre-decision points in the HIPC initiative. The PRSC study found that there was a decrease in binding conditions, but a sharp increase in benchmarks. There was an increase in public financial management and good government conditions, but there were also conditions which concern many NGOs. All but two of the 13 loans still have privatization conditions in them and generally it was found that the Poverty and Social Impact Assessments (PSIAs) focused on seeking safety nets rather than looking at the appropriate poverty reduction policies.

The HIPC study found that the delays in reaching completion points were largely due to failure to meet fiscal targets, slow implementation of restructuring and privatization of state-owned enterprises, and governance reforms. Other delays were caused by internal conflict which prevented countries from generating a three-year track record. So, she said, the major issue is about countries that are at a decision point in terms of policy conditions but are unable to get to completion point because of fiscal targets.

She stressed that the report is not saying there should be unconditional aid. Some conditions, such as accountability and transparency are very important for both donors and borrowers.  But, the necessity of economic conditionalities should be reconsidered. She also emphasized that locally determined conditions are more effective and stable than externally imposed conditions, and there is a concern among NGOs that World Bank conditions are still not country owned, in any broad sense of the term.  Finally, she stressed that more consultation with Civil Society Organizations (CSOs) and parliaments is vital.

The first participant said that one of his big concerns is the definition or redefinition of what a “condition” is. The Bank now makes a distinction between what are called required conditions or prior actions and other benchmarks. While the latter might not be in the contract, they clearly influence the country.

Mr. Walliser said the core issue is where the conditions are coming from: from the Bank or from the governments own strategies. He said that, for example, countries’ Poverty Reduction Strategies (PRS) often have a large number of unprioritized actions, but the Bank’s policy is to highlight only critical actions as prior actions/conditions for Bank financing.

Underscoring Mr. Walliser’s point, Mr. Adams said he had two points to make: 1) The Bank wants selectivity and clarity. It wants to focus on those conditions that are most likely to contribute to economic growth and poverty reduction at a policy level. 2) These conditions are discussed, developed, and agreed to through discussion with governments.

Some key points made in this discussion by CSO representatives were the following:

• Selectivity is welcome but it is not going far enough. At the moment the Bank is stepping too far over the line and steering countries in a direction that often involves the concepts of privatization and free markets.
• The Bank tends to talk to a very narrow group of people in the government and that is often considered ownership. There is little input from a broader set of stakeholders. Even in countries when parliaments must approve the loans, often the consultation with the legislature is carried out at the last minute, and CSOs are rarely involved in the discussions.
• Someone needs to track how early parliament is consulted, how meaningful the CSO consultation is, and how transparent the draft documents are.

Mr. Adams replied that the Bank does not control how governments consult with parliaments, and said there is a lot of disagreement about what comprises adequate consultation. Responding to the point about the elimination of economic conditionality, he said both the Bank and the International Monetary Fund (IMF) management feel very strongly that sound economic policies can contribute to growth and poverty reduction. Regarding tracking, every operation the Bank has is binding on the government and those arrangements are tracked.

The second participant’s question was about the kind of privatization that takes place in utilities and other sectors.

If one considers the telecom and water sectors, Mr. Adams said all the analysis on telecom shows that privatization has resulted in the improvement of services and, in every case, in significant increases in the numbers of users. In water the experience has been different. There are examples where privatization has resulted in better provision of services, but there are other examples where it has not.  The Bank recognizes that privatization is a complicated process. The replacement of public monopolies with private monopolies is not desirable. The real successes are where the environment is created not just for privatization but for competition.

Other comments or questions from the audience included the following:

• Is the Bank doing enough to take into account the politics that surround policy reform or is the Bank stuck as a technocratic agent trying to force policy reform where it is not warranted?
• Is anyone paying attention to how well the Bank and borrowers are assessing the possible negative consequences of their policies regarding adjustment lending on the environment, and how much they are discussing ways to promote intended  positive consequence from adjustment lending? 
• Will there be an opportunity to discuss the annual conditionality report going to the Board in July?
• What is being done in the Caribbean, for example, where hurricanes continue to devastate the economy?
• Conditionalities, from the Bank’s point of view, are supposed to lead to poverty reduction but, with privatization, large companies tend to benefit not poor people.
• NGOs are concerned about the way the Bank counts and weighs conditions. It is difficult to weigh the impact public sector reforms can have.  A single loan condition such as reform of the cotton sector, for instance, can result in the privatization and liberalization of the entire cotton industry.

In brief remarks Ms. Greenhill commented on the huge difference in numbers of conditionalities across countries. She said government officials from developing countries have made it clear that the large numbers of conditions are intrusive and amount to micromanagement. She also asked what the incentives are to minimalize conditions in loans? She then emphasized the point one participant had raised, that depending on the politics of a country, poor people could be worse off even if there is the “right policy” in place.

Ms. Hayes reiterated the point about numbers of conditions, saying there could be 20 conditions that weren’t particularly onerous and that were country owned or there could be one condition with major policy implications. She also said that more attention needs to be paid to the question of policy space and inclusiveness.

Mr. Walliser addressed the point about numbers of conditions saying that many of the conditions the NGOs are tracking are adopted by governments or generated by Poverty Reduction Strategy Papers (PRSPs).  On policy and politics, he pointed out that single tranche operations take a step-by-step approach including providing the proper regulatory framework and setting up the environment for policy changes. Responding to the question of consultation on conditionality reviews he said the Bank uses this type of session to get feedback from Civil Society on conditionality and the reviews and was going to follow up with NGOs on further opportunities for receiving feedback before the Board discussion,

Mr. Adams provided answers to many of the participants’ questions: Regarding the policy context, the debates with government are often intense and the main challenge comes where government is not prepared to accept sound economic practices which have been proven successful in other countries.  About the environment, country environmental assessments are becoming an important part of the Bank’s work. However, the Bank has not yet created a range of development policy lending actually focusing on environmental issues, which he hopes they will over time.  On the question of hurricanes, he said that one idea the Bank is working on is to develop some form of  hurricane insurance to give governments more assurance about the resources they can expect without diverting funds from other activities. Responding to the comment that large companies are perceived winners in privatization processes, he said that this is a complicated policy issue because the reality is that in many situations the only funders with the resources to finance defunct utilities are foreign companies.  He added that while there was no simple answer to the problem, the Bank is working on deepening local capital markets to provide alternatives.

On policy space, he said he agreed with the idea of creating policy space for considering various growth alternatives but that governments which propose unsound economic policies are not going to mobilize resources from the Bank and the Fund. He echoed Mr. Walliser’s point on consultation and added that the Bank will try to provide opportunities to review and comment on the current report going to the Board in July. He also touched on investment lending, saying that a powerful message had gone out to the staff that reducing conditionality in investment lending is a Bank objective. In addition surveys are going out to governments and a representative sample of projects is being studied to determine the quantity and quality of conditions being applied.  Finally, he commented that the Bank is concerned about how the Bank and CSOs are counting and analyzing conditionalities differently, and that he was prepared

List of participants in the discussion

Photos

More Information:
2006 Spring Meetings Civil Society Dialogues Program - main page
2006 Spring Meetings - general information for CSOs