CONFIDENTIAL
                                                                                       EDS2004-0136
                                                                                         March 10, 2004
                                                                                          11:11:28 AM


Statement by Otaviano Canuto and Guangyao Zhu
Date of Meeting: March 11, 2004

              Enhancing World Bank Support to Middle Income Countries


       Our Chairs strongly support the paper entitled Enhancing World Bank Support to Middle
Income Countries as a first step towards an increased involvement of the World Bank Group
with middle income countries.

        We fully concur with the management about the importance of the Bank’s increased
involvement with middle income countries. To enhance the cooperation between the Bank and
MICs would not only help fulfill the Bank’s mandate for poverty reduction, given the fact that a
large proportion of poor population lives in these countries, but would also help strengthen the
Bank’s financial position with increased net income from lending operation, which in turn would
reinforce the Bank’s support to poorer countries through internal transfer to HIPC and IDA. In
addition, we believe that many of the Bank’s “knowledge products” are originated from the
Bank’s engagement with MICs. Experiences and lessons learned from cooperation with MICs
have enriched and will continue to enrich the Bank’s development theory.


       I. On the Bank’s General Strategy for MICs

        We took note with concern that “the Working Group found that both staff and clients are
unclear about the Bank’s role in MICs, and uncertain about the importance of quality lending as
part of the Bank’s package of support”, as stated in the Executive Summary of the document. We
are convinced that a clear definition on the Bank’s strategy for MICs is long needed and that such
a definition should be conveyed to both countries and staff in the field. In this regard, we believe
the upcoming corporate statement should give specific guidance for staff to remove obstacles
which constrain the Bank’s support for MICs. Such a statement should be succinct, strong and
easy to be implemented.

         Given the wide diversity of MICs in poverty level, institutional capacity, development
priority and so on, we support the Management proposal to adopt a flexible approach which
tailors the Bank’s assistance programs to the needs of each client.

        We broadly support the Management proposal as outlined in the paper, including among
others, introducing more flexibility into CAS implementation and the CAS process, promoting
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the use of existing IBRD financial products and developing new financial products, improving
Bank services in knowledge/AAA, enhancing the effectiveness of the Bank’s response to
emergencies, and strengthening Bank Group synergies.

          Having said this, we would like to comment on specific issues as follows:


          II. Bank / Fund Relationship on MICs Strategy

       We believe that, in formulating the MICs strategy, one fundamental issue of the Bank /
Fund relationship in assisting their middle income clients should be addressed upfront. Because
of some conditionalities of the Fund, the Bank is unable to scale up its activities in some of the
MIC borrowers, which needs to be handled rationally in order for the Bank to fulfill its
development mandates.

        We underline, for example, the conflict between the fiscal constraints embedded in
agreements signed by countries with the Fund on one hand, and on the other hand, the need of
those countries for increased World Bank lending, especially in infrastructure. We urge the
World Bank to either review its relationship with the Fund or adopt a more flexible stance within
the Bank in lending to those countries. In this sense, the relaxation of requirement for counterpart
funding would give the Bank greater leverage in fulfilling its mandates, and the provision of new
financial products and the sector wide approach (SWAPs) would also constitute a move in the
right direction.


          III. On the Infrastructure Development and Public-Private Sector Partnership

        We regret that the need for investments in infrastructure was not sufficiently emphasized
in the document and thus we encourage Management to address this issue in the strongest
manner. In drawing on the lessons of the disappointing contribution of the private sector in
financing investments in infrastructure, we stress the critical role that can be played by the public
sector in filling this gap. In this regard, we hope to see that the World Bank will increase its
lending operations in the infrastructure sector and enhance its efforts to facilitate the
public-private partnerships (PPP). We ask Management to further elaborate on the tools and
policies, with increased synergy amongst World Bank Group, to achieve the above objective.

        We would like to emphasize that the Bank’s increased engagement with MICs will
provide a unique opportunity to carry out the “high-risk / high-return” projects, given the
relatively stronger institutional capacities of these countries. The past experience proves that
many projects with high economic and social returns have made tremendous contribution to
poverty reduction. The Bank has missed opportunities in the past few years, and therefore we
strongly believe that it is time for the Bank to take prompt action in this regard. The successful
implementation of the high-risk / high-return projects in some countries could be widely
replicated in other countries, including the low income ones. We urge Management to recognize
the huge opportunity cost in case the Bank fails to seize this opportunity.


This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents
may not otherwise be disclosed without the consent of the Executive Director concerned.
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          IV. Country Exposure Limit

        Another important constraint that has been brought to our attention is that a number of
performing middle income countries have reached, or are about to reach, their exposure limits
within the current Bank’s operational rules. We suggest that creative mechanisms be examined to
maximize the use of available limits, such as the allocation of idle limits between IBRD and IFC.

          V. Cost of Doing Business with the Bank

       The increasing cost of doing business with the Bank has long been a matter of concern to
many member countries. While appreciating the findings of the MICs Working Group regarding
the increasing implicit costs to clients of complying with the Bank’s fiduciary guidelines and
safeguard policies, we regret that the issue of increased explicit cost has not been addressed in
the paper. We believe that a review of the current financial cost and the loan pricing policy is
needed in the context of the new developments.

         We must point out that in recent years, the volume of the Bank lending has declined
sharply and the loan-loss provisioning has also dropped down. In this connection, we are
convinced that both the favorable change of the international scenario and the strengthened
financial position of the Bank recommend the review of the Bank’s loan pricing policy. We
would like to remind Management that some regional MDBs have already reduced upfront fees.

       Coming back to the implicit cost of doing business with the Bank, there are three aspects
regarding this issue:

         !       We support the Management’s proposal to rely more on the national fiduciary and
safeguard systems, certified by the Bank. Beside reducing the cost of doing business with Bank,
this is also an important step to enhance the borrowers’ institutional capacity, strengthen their
ownership on the projects, and improve the effectiveness of the Bank’s assistance. We encourage
Management to make continued efforts along the line and to consider widening and diversifying
the sample of pilot participants.

        !       We welcome the realistic and pragmatic approach to reduce the burden of sector
policy conditions on individual projects. We also support the proposal of limiting policy lending
conditionalities to two aspects, namely, the existence of an adequate macroeconomic framework,
and the implementation of a development strategy aiming at poverty reduction. We agree that the
previous assessment of those two aspects is needed before adjustment lending operations can be
examined by the Board.

       !      We strongly encourage the Bank to make continued efforts to simplify its
procedures and harmonize its policies with other MDBs and bilateral donors.

       Finally, we strongly recommend that the Bank’s strategy for MICs be firmly rooted in
operational rules and procedures.


This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents
may not otherwise be disclosed without the consent of the Executive Director concerned.