IDA14 Strengthening the Private Sector in IDA Countries: Status of World Bank Group Collaboration International Development Association November 2004 Table of Contents I. Introduction............................................................................................................................. 1 I1. Context.................................................................................................................................... 1 I11. WBG CollaborationinIDA Countries .................................................................................. 3 I11A.The ExperienceSo Far.................................................................................................. 3 I11B.ProblemsBeingSolvedUnder Current CollaborationMechanisms ............................ 9 IV.SummingUp andPossibleNew Directions............................................................................. 11 Figures: Figure 1: FinancialFlows to Developing Countriesby Type ...................................................... 1 Figure 2: Financial Flows to Developing Countriesby Recipient................................................ 2 Figure 3: Compositionof Flows to Low-Income vs.Middle-Income Countries.......................... 2 Figure 4: OBA LifelineTariff inthe Pamir Project...................................................................... 7 Box: Box 1: CGAP Approach to Awarding SubsidiesBasedon Performance....................................... 8 Annexes: Annex 1: Additional Examplesof Collaboration Among WBG Members on Investment Climate ReforminIDA Countries................................................................................ 13 Annex 2: Additional Examplesof CollaborationAmong WBG Members on Public-Private PartnershipsinIDA Countries...................................................................................... 15 Annex 3: Additional Examplesof Output-BasedAid .................................................................. 16 Annex 4: Additional Examplesof IDA-IFC M S M E Programsin Africa .................................... 23 Acronyms ADB Asian Development Bank APL Adaptable Program Loan BAPA Bangladesh Agro-Processor' s Association BDS Business Development Services BE1 Bangladesh Enterprise Institute B M O Business Membership Organization BOAD Banque Ouest Africaine de DCveloppement CAS Country Assistance Strategy CGAP Consultative Group to Assist the Poorest CPIA Country Policy and Institutional Assessment EBRD European Bank for Reconstruction and Development EIB European Investment Bank FDI ForeignDirect Investment FIAS ForeignInvestmentAdvisory Service FMO Netherlands DevelopmentFinance Company GEF Global Environment Facility GOC Government of Cameroon ICA Investment Climate Assessment IDA International DevelopmentAssociation IDB Inter-American Development Bank IFC International Finance Corporation IFU Industrialization Fundfor Developing Countries I M S Investment MarketingServices IPA Investment Promotion Agency IPP Independent Power Producer/Project L A C Latin America and the Caribbean MFI MicrofinanceInstitution MIGA Multilateral Investment Guarantee Agency MPDF MekongProject Development Facility M S M E Micro, Small and Medium Enterprise NGO Non-Governmental Organization OBA Output-Based Aid OECD Organization for Economic Cooperation and Development PDF Project Development Facility PEP . Private Enterprise Partnership PPIAF Public-Private InfrastructureAdvisory Facility PRG Partial Risk Guarantee PSD Private Sector Development SEDF South Asian Enterprise Development Facility SEED Southern Europe Enterprises Development SME Small and MediumEnterprise TA Technical Assistance WB World Bank WBG World Bank Group Strengtheningthe PrivateSector inIDA Countries: Statusof World BankGroup Collaboration I. Introduction 1. At the IDA14 Replenishment meetingin Washington D.C. in October 2004, Deputies welcomed the increased attention beingpaid to the private sector development in IDA countries. They requested an update on the World Bank Group's (WBG) efforts to strengthen collaboration among its organizational units.' This paper responds to that request. 11. Context 2. A trend towards private sector solutions and new forms of risk sharingis clearly visible inthe world and shapes the context inwhich IDA operates. First, following the debt crisis of the 1980s across developing countries, there has been a gradual shift away from debt finance to other types of finance that share risks in more appropriate ways, such as equity instruments. The trend i s epitomized by the fact that FDIhas become the prominent form of cross-border finance to developing countries (Figure 1). Figure 1: Financial Flows to Developing Countries by Type 200 n 175 -Net Equity Flows a 150 e3 -$3 125 100 75 E 25 0 50 -25 ' 1970 1974 1978 1982 1986 1990 1994 1998 2002 Source: Global Development Finance 3. Second, finance to emerging markets has shifted from government borrowing to borrowing by the private sector. Not only i s the private sector by far the greatest provider of finance, it i s now also the greatest recipient - with roughly double the amount of finance going to private firms compared to public ones (Figure 2). 1 A companion paper "Strengthening the Private Sector in IDA Countries: World Bank Group's Collaboration with External Partners (November 2004)," discusses the ongoing efforts to strengthen and improve collaboration with external partners. - 2 - Figure 2: Financial Flows to Developing Countries by Recipient 400 - I -Flows to private I sector 300 Public and publicly x-.- v) 0 guaranteed debt 200 v tft v) 3 100 0 1970 1974 1978 1982 1986 1990 1994 1998 2002 Note: Privatesector flows include nonguaranteeddebt, grants by non-governmental organisations,and worker's remittances,plus portfolio equity and direct investment, which are reportednet. 4. Third,an effort has been made to helpthe poorest and most indebtedcountries to position themselves better. Debt relief has been provided and grant programs have been introduced including by IDA. Nevertheless, for now the broadtrends towards private finance have largely passedmost IDA countries by. They continue to depend on government finance andFDIi s often driven by natural resource exploitation rather than more broad-based economic development (Figure 3). Figure 3: Composition of Flows to Low-Income vs. Middle-Income Countries Compositionof Grant Flows Composition of Loans 100 100 90 90 80 80 70 70 E 60 $ 60 50 50 $ 40 40 30 30 20 20 10 10 0 0 1970 1975 1980 1985 1990 1995 2000 1970 1975 1980 1985 1990 1995 2000 Source: OECD Development Assistance Committee 5. Given this context, a number of development institutions have moved or are moving to deal better with the financing approach to private sector development. Various institutions are now offering a broader range of instrumentsfor private clients including guarantees, loans without sovereign counter-guarantee and equity instruments. The European Commission has taken this route with funds often administered by the European Investment Bank (EIB). The new crop of development institutions that emerged in the last two decades tends to focus or at least - 3 - have the capability to provide this range of instruments. The European Bank for Reconstruction and Development (EBRD) i s a clear-cut case. Others such as the Netherlands Development Finance Company (FMO) and the Industrialization Fundfor Developing Countries (IFU)also provide such forms of finance. All the major multilaterals are also pursuingthe basic agenda, including Asian Development Bank (ADB) and Inter-American Development Bank (IDB). 111. WBG Collaboration inIDA Countries I11A. The ExperienceSo Far 6. There are three key efforts o f collaboration between IDA, IFC, and MIGA. They include: (i) work on the investment climate; (ii) approaches to new public-private joint joint partnerships in infrastructure; and (iii) joint work on Small andMediumEnterprises (SME) support in Africa. These are discussed below. Investment Climate 7. The goal for the work on the investment climate is to create a reasonably seamless working relationship among all parts of the WBG that deal with reforming the business environment. This involves principally the Bank and IFC regions (including the regional S M E facilities) as well as central programs (including Foreign Investment Advisory Services (FIAS) and MultilateralInvestment Guarantee Agency's (MIGA) investor marketing service, which are now coordinated under a collaboration protocol).2 8. The targeted division of labor i s as follows. Central groups like "Doing Business" as well as other staff from the Private Sector Development (PSD) Vice-presidency work on diagnostic tools, collection of best practice examples, provision o f training and relevant analytical pieces that underpin country-specific policy advicekechnical assistance. When countries need advice but do not want to borrow, WBG can now deliver freestanding advisory services by combining managers or experts from headquarter teams with staff on the ground, mostly in the S M E facilities. Where countries want to borrow either in the form of policy-based lending or technical assistance loans, Bank staff manages those loans drawing on expertise from advisory teams. The precise composition of teams depends country-by-country on availability of relevant staff across the WBG and funding sources that match the particular goals o f the assignment. 9. Examples of such collaboration now exist in all regions drawing on all parts of the WBG. The following examples provide a sense of the various collaboration options that are being pursued: MIGA's Investment Marketing Services (IMS) department provides tailored advice and capacity-building assistance to developing country investment promotion agencies. FIAS and MIGA work closely to provide a comprehensive package o f investment promotion assistance to governments and investment promotion agencies (IPAs). In2004 FIAS and MIGA, incollaboration with the Commonwealth Secretariat, designed a nine month capacity-building program for IPAs from all 14 member countries o f the Pacific Islands Forum Secretariat. In 2002, FIAS and MIGA assisted the Board of Investment in Bangladesh in developing a strategy for investment promotion. - 4 - Bangladesh. To carry out the Bangladesh ICA, the WorldBank partnered with the Bangladesh Enterprise Institute (BEI) and the South Asian Enterprise Development Facility (SEDF), one of IFC's regional facilities serving SMEs. The ICA reform agenda identified an urgent need for infrastructure reform (especially in electricity), for addressing pervasive corruption and over-regulation, and for improving access to finance, each of which disproportionately burdened SMEs. With the Bank and BE1as partners, SEDF monitored the follow-up to the ICA agenda with a semi-annual panel survey o f SMEs. It partneredwith an industry association, Bangladesh Agro-Processor's Association (BAPA), to study and work for the reduction of the tax burden on agro- processors. At the request o f the Ministry o f Commerce, it identified measures to streamline business registration and is providing technical assistance to implement them and to automate the registry o fjoint stock companies. 0 Kenya. Followingthe completion of a FIAS Administrative Barriers study inJuly 2004, the World Bank incorporatedFIAS analysis and recommendations inits economic and sector work and further in its private sector development policy dialogue with the Government. Subsequently, the BanWIDA and IFCjointly designed the Kenya S M E project, which was approved by the IDA Board in July 2004. This project includes reforms in such areas as speeding upthe legal and institutional changes to ease business entry and licensing, S M E tax simplification; and initiatives to promote increased S M E access to finance. Other Examples. Annex 1contains other examples from Bolivia, Lesotho, Serbia, and Zambia. Private-PublicPartnerships 10. Collaboration between IDA, IFC and MIGA can help private and public sector players to improve access to better physical and social infrastructure. On the one hand, better management discipline can be brought into these sectors via the introduction o f private commercial arrangements. On the other hand, private investors still shy away from some of the risks that surround, for example, infrastructure projects in Africa. Successful schemes tend to involve a blend o f public and private funding combined with private management, preferably with adequate exposure to commercial risks so as to provide incentives to perform. Output-based aid (OBA) schemes holdpromise, as do schemes that involve small or medium-sized domestic service providers (or combinations thereof). 11. Insome cases IDA funds may support the enabling environment or regulatory reform to develop an infrastructure sector and IFC and/or MIGA help finance an infrastructure investment as a private investment. In other cases, IDA supports a private sector infrastructure investment that is also supported b y IFC andor MIGA. Since IDA funds are highly concessional, IDA support i s only usedin special instances where such subsidizedfinancing i s appropriate, for instance: (i) to provide critical technical assistance and advice to help create viable projects, e.g., through supporting regulatory reform; (ii) extend critical infrastructure access to poor or to underserved populations; and (iii)to deal with short term political issues o f infrastructure pricing, e.g., phasingin commercial user fees. - 5 - 12. Examples of WBG collaboration in public-private partnerships include the following: IDA-IFC Tajikistan. IFC's innovative Pamir project will generate and supply electricity under a 25-year concession, takmg control of the assets of the state utility and expanding generation capacity through rehabilitation of existing plant, transmission and distribution assets. In addition, the project will provide tariff subsidy mechanisms to ensure basic provision of electricity to the poorest, supported by IDA investment and a grant from the Government of Switzerland. IFC i s a lenderto and equity investor in . the Pamir project. C8te d'Ivoire. IDA and IFC and other multilateral andbilateral agencies helped finance the US$223 million Azito Power Project, including a 300Mw gas-fired power station and a 225 kV transmission line. An IDA partial risk guarantee covering sovereign and political risks was considered a crucial credit enhancement to secure commercial bank financing. IFC and IDA were able to leverage their respective institutional strengths for the benefit of the client country. Both institutions collaborated closely interms of project appraisal, sector issues as well as . syndication strategy. Ghana. InGhana, IDA andIFC havejoined efforts to provide a package of advice and financing to help the Government reform the power sector and unblock much needed investments. IFC has receivedBoard approval to optimize the capital structure and finance the conversion of a crude oil fired Independent Power Producer (IPP) (Takoradi 11)into a combined-cycle operation, thereby increasing electricity supply without additional fuel consumption. This, together with the IDA-supported reform program, could help to reduce tariffs in Ghana. Thejoint IDA-IFC team i s helpingthe government to implement a privatemanagement contract for the state- owned electricity distribution company and IDA expects to make financing available for much needed capital investments in the distributionnetwork. IDA and MIGA are also contemplatingproviding support to the West African Gas Pipeline, which would bringnatural gas from Nigeriato Ghana and which would enable the Takoradi Power . station to switch fuel sources from crude oil to natural gas. Other Examples. Annex 2 contains additional examples from Senegal and Cameroon. 0 IDADFC- MIGA. Three other projects of notehave involved MIGA and other members of the WBG: . Mozambique. In2004, IDA, MIGA andIFC combined WBG Instruments(i.e. an IBRDenclave guarantee, MIGA guarantees and IFC equity investment) to facilitate the mobilization of critical private capital as well as commercial debt financing requiredfor the implementation of a Sasol oil and gas project, consisting of the - 6 - development of Mozambique's natural gas industry and export facilities to South Africa. In addition, IFC i s helping the Government o f Mozambique broaden the participation o f local investors and raise financing to cover the shortfall in Mozambican participation in the project. Over the past two fiscal years MIGA has provided a total of US$186 million worth of guarantees for the equity investment and debt financing for the project. Since this i s the first large scale privately-financed energy export project inthe gas sub-sector, it provides a framework for other future private sector projects and would facilitate further investments in gas exploration and other gas related industries. West Africa Economicand MonetaryUnion. In2004, thejoint MIGA and IDA Boards approved a MIGA-IDA guarantee facility in support o f small and medium infrastructure projects inthe countries o f the West Africa Economic and Monetary Union. Banque Ouest Africaine de Developpement (BOAD) acts as an intermediary for the new facility. The Agence FranCaise de DCveloppement i s a co-guarantor in the project and has provided funding for the secondement o f a MIGA staff member to BOADto assist the institution with the implementation of this program and the development o f BOAD capacity. Afghanistan. Inits efforts to enhance its support of conflict-affected countries, MIGA also worked to establish a guarantee facility for Afghanistan, with funding providedby IDA and the Asian Development Bank. The facility i s expected to be launched in early FY05. Output-basedaid (OBA). OBA is a core design strategy for supporting private sector projects that aims at ensuring that subsidies reach intended beneficiaries while enabling efficient private sector participation with commercial risk-taking. An example i s the delivery o f basic services where policy concerns justify public funding to complement or replace user fees, e.g., to enhance affordability for particular groups o f consumers. The heart of the OBA approach i s the contracting out of service delivery to a thirdparty - usually private companies but also NGOs - under arrangements that link payments to the results actually delivered. This approach can provide a sharper focus on objectives, improve efficiency and innovation, enhance accountability for the use o f public resources and create opportunities for mobilizing private finance and know-how. The World Bank i s scaling up the use o f OBA and this i s a key component o f the New Infrastructure Agenda. Currently, over 30 O B A projects, most o f which are in IDA countries, are under preparation or implementation. Some of the Public-Private Partnership initiatives involving IFC and IDA have utilized OBA concepts. For example (additional output- based aid examples are in Annex 3): The Pamir project in Tajilustan, mentioned earlier, uses OBA concepts in provision o f lifeline tariffs for the poor. As shown in Figure 4 below, subsidized IDA finance flows to the government, which on-lends to the power producing company at a higher interest rate. The differential funds an IDA Spread Account, which along with funds from the Swiss Government, i s used to finance a lifeline tariff for residential consumers. In this way, part o f the subsidy embedded in the IDA credit is unbundled - 7 - andused to fundpoor users, if and when the private sector performs. Inthe case of . non-performance, subsides are not paid out. A small-scale watedsanitation project in Cambodia, features IDA credit and grant funds to buildpartnerships with the private sector and user groups infinancing, operating, and maintaining watedsanitation facilities. The projects require designing specific instrumentsthat ensure inclusion of low-income communities. OBA contracts are being awarded to local operators. IFC has supported this operation via the MekongProject Development Facility (MPDF),one o f the S M E project development facilities. This example demonstrates that OBA schemes can be deployed to promote small-scale solutions usingdomestic providers, when this is the appropriate approach. Most o f the Bank's OBA pilots work with small-scale providers. Figure 4: OBA LifelineTariff inthe Pamir Project Republicof Tajikistan Pamir Private Power Project put-based Financing o ........................................... i185centdkWh ................................ National tariff o f 2.lcentslkWh SMEProgramsinAfrica 13. The joint program for S M E support in Africa is meant to help create an enabling environment that allows SMEs to flourish and where the IFC can take credit risk without requiring a sovereign counter-guarantee. This should then demonstrate to other investors the possibilities to operate profitably in Africa and lead to greater private investment. 14. IDA funds are usedprimarily to provide technical assistance on the enabling environment, capacity building for S M E support services, and training o f financial institutions that may lendto SMEs or provide micro-finance services. IDA can also provide credit lines to banks for on-lending to SMEs. The IFC i s to provide investments or guarantees without a sovereign counter guarantee. IDA and IFC are currently developing new combined products that - 8 - would strengthen the ability o f IFC to provide incremental investments. By bringing commercial approaches to financing schemes involving IDA, commercial discipline i s to be strengthened. In future new approaches, the concessional element of IDA financing could also be deployed so as to reward institutionsthat show sound performance e.g., by maintaining a high-quality portfolio. Examples have been developed under the auspices of the Consultative Group to Assist the Poorest (CGAP, Box 1). These are the financial sector incarnation of output-based aid (also found in EBRD). Box 1: CGAP Approach to Awarding Subsidies Based on Performance CGAP i s a consortium of 29 bilateral and multilateral donors who support microfinance. With a team of microfinance specialists housed in the World Bank, CGAP serves the microfinance industry, donors and microfinance institutions (MFIs) through the three categories of services provided: technical tools and services, training and capacity building, and technical advice and exchange. CGAP also has a small grant facility that provides funding for these activities and for strategic investments in MFIs. A large part of CGAP's mission i s to promote "best practice," especially in the way donors support MFIs. Using its grant fund, CGAP has developed an investment-style approach to grant making that ties tranched funding to institutional performance. The key focus i s on the achievement of financial performance measures that will enable the MFIto reach sustainability and thus a significant number of poor clients. The performance contract that accompanies CGAP's equity-like funding leaves the use of funds entirely at the discretion of management; reporting, monitoring, and continuation of disbursements are tied to the MFI's fulfillment of performance thresholds at the institutional level. These thresholds are designed to lead the microfinance institution to "full financial sustainability," the ability to cover all costs includingthe commercial cost of funds. They generally step up over time and include indicators such as profitability, efficiency (cost per dollar lent), portfolio quality, and growth (numbers of clients reached). Because most of a microfinance institution's funding i s usually soft, achievement of full financial sustainability implies that it will generate substantial surpluses that will be retained to fund yet more services to poor clients. 15. Some examples o f the current IDA-SME projects in Africa include: Nigeria. Approved inDecember 2003, IDA funds will be used to: (i) provide technical assistance to financial institutions in order to create new specialized institutions and to help existing ones develop new products tailored to Micro, Small and Medium Enterprises (MSMEs) and increase their internal capacity; (ii) bringthe expertise required to reduce the cost of business registration, improve the legislative framework for leasing and secured transactions, and establish a credit bureau and a movable collateral registry; (iii)increase the competitiveness o f firms in specific industries and provide technical assistance to training/consulting service providers to develop new products and expand; and (iv) build the capacity of key public institutions in charge o f SMEs. IFC will target investments in M S M E financing institutions, leveraging IDA technical assistance funding (ACCION, approved in Sept. 2004, i s the first of such investments). 0 Ghana. The project, earmarked for roughly US$47 million, will: (i)increase M S M E access to medium-term finance and to sustainable microfinance services through SME - 9 - loan portfolio partial guarantees, an S M E risk capital fund, and strengthening and extending the outreach of MFIs; (ii) promote the competitiveness of selected industries, including enhancing linkages and know-how transfer between large businesses and SMEs and worlung within highpotential value chains and focused training in competitive subsectors; (iii)promote a conducive business environment through reducing the time and cost o f business registration and licensing, policy work on leasing and credit bureaus, developing the capacity of Business Membership Organizations (BMOs), and reforming the national system of technical regulations for certification and standardization; and (iv) strengthen the institutional capacity o f Government through worlung with the policy unit o f the Ministry o f Private Sector Development and the SME Directorate o f the Ministry of Trade, and supporting the localization of an S M E information platform. 0 Mali. The Mali Sources of Growth project is scheduled for Board discussion in December 2004. The approximately US$12 million S M E component o f this US$55 million project which also includes telecommunications and postal reform and mining sector reform, will: (i) support to improve the investment climate by (a) provide streamlining the registration process in terms o f cost and time involved in business start- up operations, (b) developing procedures to streamline the corporate taxation process, and (c) improving commercial dispute resolution and arbitration mechanisms; (ii) improve Business Development Services by (a) developing a mechanism to strengthen the capacity of service providers to serve M S M E clients and address market needs more appropriately, using various BDS tools including an establishment of a Consultant Accreditation Program of local consultants, business associations, and financial institutions, and (b) setting up an electronic information system (SME Toollut) that will provide information on BDS services, access to finance, the investment climate, fiscal issues pertaining to MSMEs, tools on best practices inbusiness, as well as other issues that concern small businesses. The access to the finance component will provide technical assistance to support institutional developments intended to increase the availability of term finance and other specialized products suitable for SMEs. This will include the development o f a stand-by liquidity facility, an IFC Trade Enhancement facility and a Partial Guarantee product. 0 Additionalexamples. Additional examples for Kenya, Madagascar, and Uganda are in Annex 4. I11B. ProblemsBeingSolvedUnder Current CollaborationMechanisms 16. The examples presented above o f various WBG interactions indicate that a great deal i s underway to leverage the resources and tools to address development needs o f the private sector inIDA countries. Much has been learnedfrom these undertakings regarding how to effectively leverage the various resources o f the WBG. From this base o f experience, a number of issues have been identified that have, to various extents, hindered the coordination of the institutions. Insome cases, this ledto missed opportunities, delays inproject development, and difficulties bringingprojects to implementation. These are discussed below. - 10- Culture 17. Because PSD i s a crosscutting theme, implementing WBG programs in IDA countries requires unusual levels of collaboration and coordination within the Group, including the IFC, MIGA, Bank regional vice-presidencies, multiple disciplines and networks within the Bank, as well as several specialized facilities, including FIAS and the S M E Project Development Facilities (PDFs). Challenges remain in better tapping all the resources in the WBG. However, collaboration i s improving, and a number o f channels have been developed to further enhance it. Good and regular communication has proven the key to effective collaboration and tends to overcome the "culture" differences between different parts o f the group in almost all cases. A description of some of the enhanced communication channels developed was provided inthe earlier IDA paper "Strengthening the Private Sector in IDA C~untries."~ Procedures 18. Inmany cases of WBGcollaboration inPublic PrivatePartnerships and MSME development, projects involve government entities (e.g., regulatory bodies, ministries) and private sector entities (e.g., for service delivery). The government may initiate various types o f procurement to select the private service provider and WBG members may at some point in the process be involved with bothparties. Thus, two issues become important: (i) the procurement process must meet high standards of transparency and fairness; and (ii) the selection process must avoid any potential or appearance of conflict of interest. At the same time, because these projects involve private sector business, the procedures developed must allow for quick decisions to be made. The WBG has developed processes to manage these issues: 0 Forprocurement, where IDA funds are used, IDA procurement rules are followed. At times, the government procurement processes were traditionally too slow for effective private sector participation, particularly inthe case o f private financial institutions biddingto become part of IDA-IFC MSME on-lending andTA programs. However, progress i s being made in overcoming this problemthrough better use o f flexible IDA procurement features (e.g., sole sourcing, fast track, and pre-qualification options) that are already allowed for but have not been practiced in ways conducive to private sector participation. 0 To prevent any possibility of conflict of interest, rules are employed that have become well established for a number o f different Bank-IFC operations, such as the joint BanWIFC investment departments in telecommunications and oil, gas and mining. Scaling up output-based aid 19. The first wave o f output-based aid projects are now under implementation and initial results are encouraging. A sample of 14IDA projects in different sectors (from the universe o f over 30 OBA projects currently under implementation) estimated that they improve service delivery o f infrastructure services to a total of 18.6 million people. If successful, scaling up o f OBA operations in the Bank could lead to a significant increase inthe allocation of IDA "Strengthening the Private Sector in IDA Countries," IDAISecM2004-0653, September 27,2004, Box 8, p, 18. - 11- resources to the provision of infrastructure services to the poor. There i s also likely to be a continued growth in use ofjoint Bank Group support for OBA projects, as was pioneered in the Pamir project. The Bank i s also managing a trust fund, the Global Partnership for Output-Based Aid (GPOBA), which i s helping inthe design and evaluation of OBA schemes and disseminating knowledge on OBA. The WBG will undertake a review o f OBA to draw lessons learned from these pilot experiences early duringthe IDA14period. This will allow learning from experience and a scaling up of the successful practices identified at the pilot stage. Supporting theprivate sector with IDA Guarantees 20. IDA partial risk guarantees are important for supporting the private sector in client countrie~.~Introduced in 1997, the guarantees enable member countries to attract private investment and international commercial financing particularly for infrastructure projects. The IDA guarantee programis currently limitedto Partial Risk Guarantees (PRGs). Through this instrument, IDA provides a guarantee for lenders to private investment projects against debt service defaults that result from nonperformance o f government obligations. These guarantees are intended as an instrument o f last resort to help fill financing gaps in cases where IBRD exposure could not be increasedand neither MIGA nor IFC could provide sufficient support and lenders would only be prepared to participate with an IDA guarantee o f sovereign risks. 21. However, the policy o f treating IDA guarantees as equivalent to credits in terms of their draw on commitment authority and country allocations has been identified as one o f the factors leading to relatively limited demand for the guarantee product. To lower these disincentives, on March 30, 2004, the Executive Directors approved an amendment to the IDA Guarantee Pilot Program that reduces the "cost" o f the guarantee by lowering the backing o f new guarantees from 100percent to 25 percent. Under the new policy, the assistance envelope for a given country as established in the CAS would be increased by 75 percent o f the face value o f IDA guarantees included inthat country's lending program. IV. Summing Up and Possible New Directions 22. As discussed in Section 111,duringIDA13, several efforts were made to improve collaboration among WBG institutions with a view to creating a more integrated approach to deploy the various instruments o f the Group. As discussed above, key collaborative efforts revolve around the following: (i) improving diagnostic underpinnings through Investment Climate Assessments, DoingBusiness reports, as well as other analytical pieces and policy advice; (ii) forging public-private partnerships to improve access to better physical and social infrastructure, and partnering with the private sector through innovative OBA approaches; and (iii)creatingjoint programs for S M E support in Africa. 23. While much has been learned to date from the WBG undertakings regarding how to effectively leverage the various resources, a number o f challenges have been identified. Some are being resolved under current collaboration mechanisms. For instance, good and regular communication has proven key to effective collaboration and helps overcome the "culture" Also see the backgroundnote to IDA Deputies entitled, "IDAGuarantees Pilot Program, (November 2004)." 5 "IDA GuaranteesAmendmentsto Pilot Program," March 17,2004. IDAR2004-0057. - 12- , difference between different parts of the Group. Progress has been made in efficient implementation of appropriate procurement and conflict of interest procedures. Initial assessmentsindicate that OBA projects show promise and efforts are underway to scale up these activities. Finally, a new method for counting IDA guarantees against country allocations has been implementedand should encourage their use. 24. Going forward, as experience grows, the WBG will take stock of its collaborative efforts to promote private sector development. Of special interest in IDA countries are the projects based on the innovative OBA approach that help extend infrastructure and social services to the poor in an affordable manner. The Group will conduct a comprehensive review of OBA-based projects, and as lessons are distilled, ways of scaling up the projects will be explored. The findings of the review of OBA-basedprojects will be sharedwith the Deputies at the mid-term review. 25. Moreover, extension of the concept of regional IDA operations6to include private sector implementingentities might be another important way to improve the efficacy of WBG support to the private sector. Cross regional programs could be important for infrastructure projects. Additionally, the IDA-IFC MSME programs often have features that would enhance their viability if done on a regional basis, particularly because financing intermediaries and related support institutions often operate in several countries, where scale economies make operation in only one country uneconomic. Inthe context of the review of the regional pilot program (expected to be shared with Deputies at the mid-term review), IDA will explore ways to increase private sector involvement inregional projects. 26. Also looking ahead, comprehensive reviews of OBA projects and the IDA-IFC Africa MSMEpilot programinAfrica couldfocus on (among other things) whether lack of Government capacity inclient countries to participate in OBA and other private sector schemes have led to missed opportunities to harness private enterprise. If this i s the case, then an important issue to be explored i s whether IDA should lenddirectly to the private sector without sovereign counter- guarantee when promising operations are constrained by lack of capacity inthe public sector to respond in a timely manner. 27. However, with respect to lending without sovereign guarantees, IDA would be faced with a number of critical financial and risk management challenges. Talung on private sector credit exposures would change the very nature of IDA in a substantial manner. The advantages and disadvantages of lending directly to the private sector would have to be weighed carefully. The WBG intendsto look into this and a detailed analysis will beprovidedto the Board of Executive Directors and the Deputies around the time of the mid-termreview. A pilot programfor regionalprojects was started during IDA13 period. - 13 - Annex 1: Additional Examplesof CollaborationAmong WBG Members on Investment Climate Reform inIDA Countries Latin America Bolivia. Followingthe findings of a World Bank investment climate assessment inBolivia, the IFC L A C facility teamed with FTJNDES, an NGO, to streamline the procedures for registering a business in the city o f L a Paz. The project achieved a dramatic streamlining o f business licensing and registration procedures: Increasednumber o f registeredbusinesses by 20 percent 0 Reduced average required visits to complete registration from 6 to 2 Increased transparency in municipal administration 0 Designed support software for business registration and authorization procedures (www.ci-1apaz.gov. bo) 0 Created new infrastructure for customer service Africa Lesotho. FIAS didan administrative barriers study in 1997,which was not actedupon because o f political instability and elections. In2003, the new reformist government informed the Bank that it was willing to move on reform in general and a private sector strategy in particular. The administrative barriers study findings were adopted as part o f the reform mix, and the government indicated a willingness to act on licensing and business registration issues. The Bank (and government) asked FIAS to provide technical assistance for the design of a licensing and business registration reform, with the intention of having a subsequent Bank private sector development project finance the implementation. FIAS has providedthe technical assistance, and the Bank i s now preparing the project. Zambia. FIAS carried out an administrative barriers study in 2003. A joint ARCS/Investment Climate Assessment survey was designed by FIAS and the Africa World Bank private sector department, and was carried out by the World Bank and local consultants. The recommendations o f the administrative barriersstudy were incorporatedby government into a private sector development reform plan, whose implementation i s being supported by the Bank initially through a component o f an existing Bank project, then a new enterprise development project (approved b y the Boardin mid-2004). EasternEuropeand Central Asia Serbia. FIAS supported an administrative barriers study in 2003/2004 that was carried out primarily by a local institute, using a self-assessment methodology. Work on inspections was carried out jointly b y the institute and SEED (Southem Europe Enterprises Development), a facility o f IFC. SEED published its own report of this work, and the findings and - 14- recommendations were incorporated in the final administrative barriers report preparedby the Institute. The Institute also made use of the findings of a business survey that it conducted on behalf o f the Bank as a component o f the Bank's Investment Climate Assessment study. FIAS and the Bank's private sector department have maintained close contacts as the administrative barriers and Investment Climate Assessment were carried out at the same time, and because the Bank has financed the preparation of a regulatory impact assessment tool that FIAS proposed to be used within the implementation o f the administrative barriers study recommendations. - 1 5 - Annex 2: Additional Examples of CollaborationAmong WBG Members on Public-Private Partnerships inI D A Countries Senegal. InSenegal, the IFC organized trust funds and commissioned a study to assess the investment requirements o f the electricity sector. Based on the results of this study and preliminary market soundings, IFC and IDA advised the government to invite the private sector to develop an Independent Power Project (IPP). IFC contacted a number of potential international biddersfor the IPP, while IDA arranged trust funds for advisors to help the government with the biddingprocess, and supported the government in assessing and monitoring private sector participation in the project. Two international companies submitted bids for the project and contract negotiations with the preferred bidder are at an advanced stage. It i s expected that a combination of IFC, IDA, and other development institutions (potentially including MIGA) will provide financing support to the project. Cameroon. In2001 IFC advised the Government of Cameroon (GOC) on the privatization of Sonel, the integrated national electric utility, which also benefited from strong support from IDA. Over the last two years IFC and IDA have been working in close cooperation in Cameroon to help address the critical needs of the electricity sector. IFC i s leading a syndicate of Development Financial Institutions made up of the European Investment Bank, Proparco, African Development Bank, Deutsche Investitions-und EntwicklungsgesellschaftmbH(DEG) and IFC that i s considering a financing to the private concessionaire, AES Sonel, for its post- privatization capital expenditure program. IDA i s helping the Government of Cameroon to: (i) strengthen power sector institutions; (ii)develop a generation expansion plan in the country; and (iii) andfinancea150-2OOMWgas-firedplant. develop cw 0 h m .3 W Y h s4E E 1 W .. k Cri m 1 ,, 4- 4 '5 .-2 a, 0 n 3 a r L) w0 M 3Q$ I I 2 I E - 8a, a, a , - .-C cw 0 .. cc, w x 2 4 z r 0 : Q v) C 4 (I W z P L b Q4 0 - e > v) m tj e 0 Q E .3 n - c C 0 0 C P E 0 ma 0 - n v) .3 Q) Y h C I E 0 c\1 .-.-eP 0 u v) ti I c : .-8 Y fk0 - 0) z E e n .-0Q2 Y C m m - Y 2 Q 0 v) - b eL 0"a C - 23 - Annex 4: AdditionalExamplesof IDA-IFC MSMEProgramsinAfrica Kenya. The Kenya SME project was approved by the IDA BoardinJuly 2004. The project supports the Government program to increase the competitiveness of MSMEs through mutually reinforcing components: (i) access to finance; (ii)strengthening enterprise slulls and market linkages; and (iii)improving the business environment. The project aims to increase productivity and employment inparticipating MSMEs. This objective will be achieved by strengthening financial and non-financial markets to meet the demand o f MSMEs, strengthening institutional support for employable skills and business management, and reducing critical investment climate constraints on MSMEs (reforms in such areas as speeding up the legal and institutional changes to ease business entry and licensing, SME tax simplification). The project will focus on key value chains and on both formal small and medium enterprises and informal microenterprises that have highpotential for dynamic growth, including "graduation" from informal to formal status. Madagascar. The Integrated Growth Poles Project i s expectedto be discussedat the Boardin March/April2005. This IDA program intends to act as a strong catalyst for very broad economic growth with three very focused geographical areas o f Madagascar: Antananarivo/Antsirabe, Nosy B e and Fort Dauphin. The overall project includes the following components: transportation, roads, and port development; export processing zones; tourisdparks; telecommunications; investment climate; and M S M E development. The M S M E component will consist o f the three following sub-components, which may include . the following activities (yet to be finalized, as pre-appraisals have not yet taken place): Access to Finance: development of a quasi-equity investment fund; Analyze and possibly establish new leasing company(ies); establish a greenfield MSMEbank and/or strengthen the SME banking activities of existing financial institution(s); . analyze the possibility of establishing risk mitigation facilities to promote lendinghnvestments inNosy Be and Fort Dauphin, and/or to M F I s . M S M E Capacity Building: training - largely funded through matching grants, to develop new courses, increase market for existing courses, establish apprenticeship programs, and consider establishing training institutions;firm level consultancies - in key sectors within the poles, offer matching grants for essential consultancy services; developing value chains - hire a specialist in each pole to encourage business-to-business exchanges, to improve access to TA and to . financing, in some cases perhaps establishing service companies (mass purchasing inputs,offering transport/storage facilities, etc.). Business Enabling Environment: computerize and improve access to existing pledge registry/moveable collateral systems; analyze the need to establish specialized repossession regulations, and perhaps a repossession agency, for leasing - and implement if needed; support GUIDE (SME registry & promotion) expansion; possibly support some expansion costs of S M E support centre to Nosy Be and Fort Dauphin. - 24 - Uganda: Uganda Private Sector Competitiveness Project 11,approved on September 2, 2004, aims to increase M S M E creation and growth. The proposed Credit will help finance three mutually reinforcing components: (i) development of serviced industrial land and improvements inthe provision of financial services; (ii) improvement of enterprise capacity, particularly in the MSMEs; and (iii) improvement to the business environment and land registry. Inparticular two components of the project will focus on MSMEgrowth and creation. These will aim to improve enterprise capacity by increasing enterprise investment in skills (including investment in slulls for women), and by raising productivity and improving the quality, standards, and reliability of M S M E producers and export value chains. This objective will be achieved by scaling up the ongoing matching grant scheme implemented successfully under the first Private Sector Competitiveness Project. The scale up will focus on: (i) increasing the regional outreach o f the scheme; (ii) improving technology; (iii)improving skills; (iv) improving financial management o f MSMEs to enable access to finance; and (v) rolling out new financial products by financial institutions.