L IDA14 Strengthening the Private Sector inIDA Countries International Development Association September 2004 Table of Contents I. Introduction............................................................................................................................ 1 I1. Private Sector DevelopmentStrategy..................................................................................... 2 1I.A MainComponents..................................................................................................... 2 1I.BStrategic ShiftsinFocus............................................................................................ 3 I11. Implementingthe PSDStrategy inIDA CountriesDuringFY02-04..................................... 3 1II.ADiagnostic Work. Government-Business Dialogue. andResults-Based Monitoring............................................................................................................... 4 1II.BFromMeasurementto Action: PSDin Country Strategy.Operations and Lending.................................................................................................................... 8 1II.C Collaboration. PartnershipsandSharingKnowledgefor Results.......................... 17 IV. ScalingUp: Progress andChallenges for the PSDAgenda ................................................ 19 Tables: Table 1: FY04Lendingto ProjectsAddressing PSDthemes by Region............................ 10 Table 2: IFCinIDA Countries............................................................................................ 11 Table 3: FIAS Advisory ProjectsinIDA CountriesCompletedin2004............................ 17 Table 4: MIGA inIDA Countries.................................................................. 17 Figures: Figure 1: ICA ImplementationinMozambique.................................................................... 8 Figure2: IndicativeIDA Lendingto Address PSDObjectives .......................................... 10 Boxes: Box 1: Startinga BusinessinEthiopia. PublishandPerish................................................ 4 Box 2: Cambodia. for Success?............................................................................. Trading 5 Box 3: Nigeria. to Action................................................................................... FromICA 5 Box 4: BangladeshPartnershipon the SME Agenda.......................................................... 12 Box 5: Macro-Access to MicrocreditinMadagascar......................................................... 13 Box 6: Output-Based Aid inMumbai. FlushWith Success? .......................................... 15 Box 7: IDA-IFC Collaborationin Senegal, GhanaandTajikistan. A PowerfulAlliance 16 Box 8: Examplesof EffectiveChannelsfor WBG Collaboration....................................... 18 Annexes: Annex 1: Role of IFCinIDA Countries........................................................... 23 Annex 2: Role of MIGA in IDA Countries....................................................... 25 Annex 3: OBA Operations in IDA Countries..................................................... 26 Acronyms ADB Asian Development Bank APDF Africa Project Development Facility BDS Business Development Services BE1 Bangladesh Enterprise Institute CAS Country Assistance Strategy DB DoingBusiness EBRD The European Bank for Reconstruction and Development FIAS Foreign InvestmentAdvisory Service FSAP Financial Sector Assessment Program FSD Financial Sector Development FUNDES Foundation for Sustainable Development of SMEs International I C Investment Climate ICA Investment Climate Assessment IDA International Development Association IFC International Finance Corporation IMF InternationalMonetary Fund IPP Independent Power Project JDR Joint Donor Review MDG Millennium Development Goals MIGA Multilateral Investment Guarantee Agency MSME Micro, Small and MediumEnterprise NGO Non-Governmental Organization OBA Output-Based Aid OECD Organization for Economic Cooperation andDevelopment PDF ProjectDevelopment Facility PEP Private Enterprise Partnership PPI Private Participation inInfrastructure PPP Public-Private Partnership PREM Poverty Reduction and Economic Management PRSC Poverty Reduction Support Credit PRSP PovertyReduction Strategy Paper PSD Private Sector Development QAG Quality Assurance Group ROSC Report on the Observance of Standards and Codes SEDF South Asian Enterprise Development Facility S M E Small and MediumEnterprise WBG World Bank Group WDR World Development Report Strengthening the Private Sector in IDA Countries I.INTRODUCTION 1. Private sector development (PSD) hasfeatured prominently in previous IDA Reptenishntentdiscussions. Duringthe IDA13 discussions,' Deputies supported the thrust of the World Bank Group's PSD strategy.2 They urgedIDA to move forward with the implementationof a strong program of activities focused on improving the investment climate, buildingentrepreneurial capacity, improvingmarket access for small producers, and strengthening appropriate regulatory and supervisory capacity inclient countries. The Deputies noted that Output-Based Aid (OBA) approaches heldpromise to improve the delivery of basic infrastructure and social services inIDA countries. Furthermore, they encouraged IDA to exploit synergies with other members of the World Bank Group (WBG), especially with IFC, to adopt innovative approaches to support the private sector. 2. At the IDA14 meeting in Paris in February 2004, Deputies requested that PSD be one of the "special themes" that would be given in-depth treatment during the IDA14 Replenishmentpro~ess.~ This paper responds to that request. It summarizes the WBGPSD strategy, provides an update on the implementation of the strategy in IDA countries, and suggests ways of moving the PSD agenda forward. Inparticular, it addresses issues related to IDA'S support for better investment climate andregulatory environment, increased attention to Small and MediumEnterprise (SME) development, development of public-private partnerships especially with respect to provision of infrastructure, and enrichment of relationships between IDA, IFC andMIGA.4 3. Thispaper is structured asfollows. Sections 1I.A and1I.Bsummarize the 2002 PSD strategy and the main shifts infocus inthe PSD agenda respectively. Section 111provides an update on the implementation of the PSD strategy in IDA countries by the WBG during FY02-04. Within this, Section 1II.A describes the diagnostic instruments usedby the Bank to assess the investment climate inclient countries. It also describes how this diagnostic work i s informing better government-business dialogue and how it forms the basis for results-based monitoringin IDA countries. Section 1II.B describes how the PSD agenda i s pursued at the country strategy level as well as inlending operations. It summarizes progress in implementationon key proposals of the PSD strategy and also outlines areas of collaboration with the IFC, most notably on private provision of infrastructure and S M E development. Section 1II.C describes the Bank's efforts towards collaborating, buildingpartnerships and sharing 1 SeeAdditions to IDA Resources: ThirteenthReplenishment Supporting Poverty Reduction Strategies, July 2002, page 16. 2 Articulated inthe document, Private Sector Development Strategy: Directionsfor the World Bank Group, April 2002. This was followed by an Implementation Progress Report June 2003. To put the PSDstrategy into action, the six World Bank regions completed their individual regional PSD Strategy ImplementationPlans in FY04, following a standard template endorsed by the PSD Sector Board. The PSD strategy is complemented by other operational strategies, notably those related to the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA), and Small and Medium Enterprises (SMEs). See IDA14, Replenishment Priorities: Proposed Special Themes, February 2004. 4 For a description of IFC and MIGA activities inIDA countries, see Annexes I and 2 respectively. - 2 - knowledge with other development partners and client countries. Section IV suggests ways of moving the PSD agenda forward. 11. PRIVATESECTOR DEVELOPMENT STRATEGY 1I.A Main Components 4. The WBG's PSD strategy,formulated in 2002, is based on the central precept that a vibrant and competitiveprivate sector is key to growth andpoverty reduction. The private sector plays a critical role in IDA countries where resource scarcity makes investment mobilization, efficient resource allocation, and technologicalprogress paramount. Private activity helps reduce poverty in two ways. First, private markets are the engine of productivity gr~wth,~ which provides a central avenue for higher incomes, economic growth and employment generation. Second, private initiative can complement government efforts to empower the poor by providingbasic infrastructureand social (health andeducation) services. 5. The PSD strategy has two broad objectives: opportunity and empowerment. It aims to create opportunity for poor people by extending the reach of markets through investment climate reform6and support of SMEs basedon market-based delivery systems. It aims for empowerment, in part, by improving poor people's access to basic infrastructure and social services through private participation. To achieve these objectives, IDA countries must implement a set of reforms focused on alleviating the microeconomic constraints to private sector investment, competition, and growth. Work on investment climate reforms i s seen as crucial both for their promotion of business development and as a precondition to the success of other types of PSD interventionsby the WBG group.7 Therefore, the PSD strategy calls for a special emphasis on improving the investment climate in support of poverty reduction in IDA countries.' This includes strengthening competition policy, improvingproperty rights and their enforcement, and promoting regulatory reform. It emphasizes the needto assess the key factors driving growth and hence povertyreductionand, combined with consultation processes, inform policy-based and other lending. Hall and Jones (1999)find that nearly 70 percent of the difference between high output and low output economies can be accounted for by productivity differences, rather than factor accumulation. Dollar and Kraay (2001) show that as economies grow, the poor benefit roughly proportionally. Investment climate refers to factors influencing firms' opportunities and incentives for efficient operation. Kaufmann and Kraay (2002) showed that country investment climate factors are strongly associated with per capita income growth. A wealth of studiespoint to the importance of favorable policies to the success of WBG operations. See, for example, C. Bumsideand D.Dollar, (1997). Aid, Policies, and Growth, World Bank Policy ResearchWorking Paper, no. 1777, P. Collier and D.Dollar, (2000). Can the World Cut Poverty in Half? How Policy Reform and Efective Aid Can Meet International Development Goals World Bank Policy ResearchWorking Paper No: 2403. Inaddition, a recent review of IFC projects found that improving the investment climate markedly improves project outcomes. IFC, (2004). An Evaluation of IFC's Investment ClimateActivities (2004). The pathsout of poverty offered to poor people by PSD include opportunities for employment and entrepreneurship, enhanceddelivery of services, and better prices and product availability. The companion IDA14 paper on Growth in IDA Countries notes the positive correlation between economic growth and such investment climate factors as openness to trade, good governance, stability, and conditions supporting PSD, including low transaction costs. - 3 - 1I.B StrategicShifts inFocus 6. The PSD strategy callsfor a shift infocus from privatization and restructuring of state- owned enterprisesto improvingthe investmentclimate. While the privatization agenda remains substantial, there has been recognition that private enterprises work best in a sound business environment open to competition. The first stage of this shift was devoted to designing and implementing rigorous and standardized diagnostic tools to identify priority investment climate constraints as a basis for dialogue with governments, strategy development and operations financedby IDA and IFC.9 With these diagnostic tools now developed, the emphasis i s shifting towards developingbest practice guidelines on solution designs and implementation processes. This will enable translation of the findings from diagnostic tools into lendingoperations and improved policy reform processes.l o 7. Within the SME agenda, too, the investmentclimate has come to theforefront. SMEs, the heart of the private sector inIDA countries, often merit special attention, in large part because they suffer disproportionately from policy and institutionalimpediments in the investment climate. SMEs are the most constrained by poor economic policy, excessive regulation, weak property rights and legal systems, and weak financial services, and therefore benefit the most from effective reforms inthese areas." Thus the S M E activities of the Bank and the IFC are increasingly focusing on this reform agenda, as well as efforts to build institutions and adopt integrated approaches to direct S M E support. 8. Within theprivatization agenda, there has been an evolutionfrom an exclusivefocus onproductive sectors to the inclusion of infrastructure and, subsequently,social sectors (health and education), with a growing emphasis on OBA approach." Ininfrastructure as well as in social services, while the continuingimportance of public participation i s well acknowledged, the WBG i s worlung with clients to provide a broadmenu of public and private options, includingpublic-private partnerships. There i s growing collaboration between IDA and IFCinthis regard (Section 1II.B). III.IMPLEMENTINGTHEPSDSTRATEGYINIDACOUNTRIESDURING FY02-04 9. IDA is makingprogressusingfour approaches:first, good diagnosis of the investment climate which leads to effective reforms; second, policy dialogue and advice aimed at triggering reform; third, lending and grants to support the private sector response; andfourth, monitoring To an extent, this has been achieved. FromFY99-00, it was estimated that over 60 percent o f IDA'SPSD lending commitments addressed issues related to investment climate. This i s expected to edge up to over 70 percent during FY03-05. lo As part of this effort, the PSDAnchor and the Foreign Investment Advisory Service (FIAS) have launched a program to identify the transferable elements of successful cases of legal, regulatory and institutional reform in areas such as business inspections and land registration. l1 World Development Report, (2005). A Better Investment Climatefor Everyone. l2 The WBG's evolving business model for infrastructure and social service delivery calls for a pragmatic approach to balance public versus private provision o f infrastructure, the need for cost recovery with affordability, and the payment o f targeted subsidies with fiscal sustainability. - 4 - and evaluation of the implementation and impact of reforms. With the extensive diagnostic work on the investment climate and other PSD related diagnostic and advisory work well underway, lendingshouldcontinue as an important means of supporting PSD inIDA countries. Inthe implementation of the PSD strategy, a number of trends can be observed in the refocusing of PSD work. 1II.A DiagnosticWork, Government-BusinessDialogue,andResults-BasedMonitoring DiagnosticInstrumentsfor Assessment 10. The measurementagendahas brought with it advances in several toolsfor assessing conditionsfor PSD. Ongoing efforts focused at the IDA country level include the Doing Business Project, the Investment Climate Assessments, and the Country Corporate Governance Assessments, as well as a concerted effort to integrate non-WBG diagnostics. 11. TheDoinn Business (OB)projectproduces rich data about specific regulations, which are comparableacross countriesand updated annually. The project applies a new survey tool that compiles objective indicators of business regulations covering 145countries, including 62 IDA c~untries.'~These indicators can bringlong-hiddenproblems into sharprelief.14 Early experience suggests how a detailed, factual assessment can offer very specific ideas for reform (Box 1). It also contributes to a more systematic understanding of the regulatory burden and reform patterns inIDA countries, where businesses suffer both from heavy costs and slow reform progress. Research based on these indicators leads to a more systematic understanding of how barriers to entry, exit and operation can contribute to unemployment, informal business practices and stagnation. A remainingchallenge lies in scaling up the utilization of a growing numberof available DB indicators, bothby topic and country, to achieve reforms. Box 1: Startinga BusinessinEthiopia Publishand Perish - Many legal constraints to PSD persist due to neglect, not intention. In Ethiopia, the WBG's "Doing Business in 2004" report revealed that a requirement to publish an enterprise's articles of association in local papers added inordinately to costs while serving little public value. Confronted with the evidence, the Ethiopian government scrapped the regulation. The total cost of registration declined in one year from 422 percent of per capita national income to 78 percent, while 12 days were pared from total registration time. 12. Investment ClimateAssessments (ICAs), which are broader and more detailed assessments of a single country's investmentclimate, combine surveys of hundreds offirms withpublicly available indicatorsand special ~tudies.'~ Underpinning all assessmentsi s a l3 In 12IDAcountries, Doing Business in 2004 helped spur governments to cut either the time or cost of starting a business or both. 14 For instance, in Angola, it costs more than eight times per capita income to set up a business. The law, which makes it so expensive, i s 103 years old. So the problem here i s more a lack of attention than a lack of resources or willpower. 15 ICAs got a significant boost through the IDA13 Replenishment process, which stipulated that ICAs should be initiated in a majority of IDA countries by the end of the IDA13 period. - 5 - common survey instrumentthat i s administered to a representative sample of private sector firms. The standard approach allows global comparisons, but also permits flexible adaptation to individual country priorities through additional modules. The result i s a detailed report in the public domain, aimed at promoting dialogue, policy reform and, therefore, growth and poverty alleviation. Well over half of the assessmentslaunched have been inIDA countries. 13. The ZCAprogram has greatly accelerated in FY04, with 20 surveys launched inFY04, making a total of 54 surveys launched by end-FY04. Around 15 surveys are planned for launch inFY05. Almost all assessmentsundertaken so far have been followed by dissemination events and private-public dialogue. So far, ICAs have shaped 15 new lending operations in 13 IDA countries such as: Cambodia (Box 2), Honduras, India, Mozambique, Nicaragua, Nigeria (Box 3) and Uganda. A remainingchallenge i s to monitor progress inthe countries ineconomical ways that engage key stakeholders. Box 2: Cambodia Tradingfor Success? - Much o f Cambodia's recent growth relied on rapid expansion of exports. Supported by diverse analyses including a value chain study, an enterprise survey, and a detailed trade logistics study, the Cambodia ICA highlighted the need for reform o f trade facilitation and made specific recommendations for streamlining trade regulation and improving service. Discussion o f preliminary findings with government led to a Prime Ministerial Decree creating an Inter-Ministerial Working Group for Improving the Investment Climate and Trade Facilitation, composed of top officials, which adopted four broad initiatives encompassing 20 specific reforms from the key recommendations of the ICA. A planned PSD project will assist the government in implementation. The Working Group plans to tackle the broader investment climate agenda set out inthe ICA once the trade agenda has been addressed. 14. Among the lessons being learnedfiom ZCAs is the clear link between investment climate constraintsand enterpriseperformance. For example, recent cross-country studies show the role of corruption, regulatory compliance costs, and power outages inconstraining labor productivity (and hence wages) in a cross-section of IDA countries. Other cross-country work has reinforcedthe central importance of competition in stimulating productivity. Globally, f i r m s have emphasized macroeconomic instability, regulatory policy uncertainty, taxes, regulatory burden, corruption and infrastructure as their top priorities. Perhaps the most powerful lesson of the early ICAs i s the persuasive power of specific evidence from local enterprises and industries revealed incomparative perspective. The rigorous approach of ICAs motivates government and business leaders to discuss the content and nature of priority reforms identified, rather than debate the evidence itself. Box 3: Nigeria From ICA to Action - The Nigerian ICA laid the empirical basis for focused consultations between business and government through a competitiveness forum (now called the Better Business Initiative), organized by a local think- tank. Based on broad local private sector participation, it identifiedand forwarded a policy reform agenda to senior federal government officials. Based on this agenda, follow-up surveys and innovative pilot projects sponsored by the WB-IFC SME Department, the design of a Micro, Small and Medium Enterprise (MSME) Credit was identified. The MSME project represents a collaboration of the World Bank and the IFC, which would finance $32 millionand $5 millionresuectivelv. - 6 - 15. As ICAs better capture thepriorities of theformal urban economy, special attention has been devoted to extending this approach to the rural non-farm economy and urban- informal sectors. Rural non-farm enterprise surveys, developed with the Bank's Agriculture and Rural Developmentnetwork, pay particular attention to issues such as rural-urban linkages and (agriculturally-driven) seasonality factors affecting demand and labor supply. For example, in the South Asia region, IDA countries have seen: (i) investment climate analysis for rural an entrepreneurs in Bangladesh, contained inthe 2004 report Promoting the Rural Non-Farm Sector in Bangladesh; (ii) a pilot rural I C A in Sri Lanka, launched in 2003 and now nearingcompletion; and (iii) pilot investment climate surveys, inpreparation of the 2005 WDR, of informal enterprises conducted in major cities in 10IDA countries and rural nonfarm surveys in seven countries. 16. Rural results tend to highlight the difficultiesnon-farm enterpriseshave in accessing financing, infrastructural services, and markets. Both rural and urban informal firms show strong seasonaltrends in demand andreveal weak linkages of small, informal firms to larger- scale formal enterprises. Information on the full range of enterprises, from small and informal to large and multinational, i s contributing to a deeper understanding of informality as a rational reactionto the limited benefits and excessive costs of formal economic participation imposedby hostile investment climates. These results have also revealed informality to be more a continuum than a sharp demarcation, with even large firms showing some types of informal behavior given a sufficiently difficult or costly burdenof formality. 17. An important challenge in sustaining the ICA approach is the cost and difficulty of carrying out repeated large-scale surveys. Ifthe initial informationgenerated by ICAs i s to be used to monitor reforms, there must be longitudinal data. This requires repeating surveys at regular intervals on comparable samples over time. Several past evaluation initiatives, such as "private sector assessments," lost momentum after a few years. The challenge for the ICA approach will be to maintain momentum so that investment reformpriorities can be identified and pursuedon a continuing rather than a one-time basis. One part of the challenge i s to "mainstream" the approach inthe regional work of the WBG. Another i s to institutionalize capacity to generate and utilize ICAs within client countries. 18. Country Corporate GovernanceAssessmentsI6have been completed infive IDA countries (most recently inIndia, Indonesia and Moldova). These assessments analyze how well national securities and corporate laws comply with the OECD principles for corporate governance. They serve as a basis for policy discussions and lending decisions, and provide the l6 The Bank conducts country corporate governance assessmentsunder the Reports of the Observanceof Standardsand Codes (ROSC) initiative at the invitation of country authorities. This i s ajoint exercise with the IMF,inwhich the two institutions are undertaking a large number of summary assessmentsof the observance of selected standards relevant to private and financial sector development and stability. These assessments are being collected as "modules." Under this modular approach, the IMFtakes the lead inpreparing modules inthe area o f data dissemination and fiscal transparency. Modules for the financial sector (monetary and financial policy transparency, banking supervision, securities market regulation, payment systems, and deposit insurance) are mostly derived as by-products from a parallel Bank-Fund Financial Sector Assessment Program (FSAP). The World Bank has been asked to take the lead in three areas covered by ROSCs: (i) corporate governance; (ii) accounting and auditing; and (iii)insolvency regimes and creditor rights. - 7 - foundation for future capacity building and technical assistance initiatives. ROSCs appear to be best attuned to a few lower-incomecountries with reasonably developed equity markets. Business-GovernmentDialogue 19. Business-governmentdialogue has been an important element of successful investment climate reforms. The remaining challenge i s to capture the lessons of successful consultations and apply them more systematically to PSD reforms. The dissemination of DB, ICA, and FIAS reports regularly includes business-government dialogue that often leads to successful reform outcomes. Examples include: The NigeriaICA findings helped launchthe Competitiveness ForumWorkmg Group, which has spurred a private sector-led process of further research and policy dialogue with government on key investment climate issues (Box 3). Investors Councils composed of leading government and business officials have begun operating in Ghana, Senegal, Tanzania and Uganda. The IFC and its Mekong Project DevelopmentFacility has also organized consultative business forums between top government leaders and business representatives to discuss and monitor reforms. Specialized working groups carry forward the agenda between meetings inpriority areas (like trade and taxes). The Global Corporate Governance Forum,jointly foundedby the OECD and the Bank, now funded by donors, holds regional private-public roundtables that discuss policies and identify areas for improvement. Results-BasedMonitoring 20. The PSD strategy emphasizesresults measurement. This i s in line with the increased results orientation of the WBG and global monitoring of the progress in achieving the Millennium Development Goals (MDGs). PSD-related dimensions figured prominently inthe IDA13 Replenishment discussions and progress against PSD input and output indicators are beingmeasured over the IDA13 period.17 During2003-04, the average cost of startinga business in the 39 IDA countries beingmonitoredfell by 8 percent and the time requiredto start a businessfell by 11percent, on a population-weightedbasis. Along the dimension of business start up,Doing Business 2005 finds that the two fastest reforming groups of countries inthe world were the EU(where the EUdirectorate had established specific benchmarks) and IDA countries (where benchmarking allowed a concerted campaign to reduce entry delays and costs). " The IDA13 targets for private sector development were, on the input side, to complete seven Investment Climate Assessments each fiscal year, and to launch surveys in the majority of IDA countries by the spring of 2005. On the outcome side, the target was to reduce both the average time and the average cost (relative to per capita income) o f formal entry by 7 percent - as measured by the DB project -by spring 2004. Meeting these targets required improvements in the business environment of IDA countries. - 8 - 1II.B From Measurement to Action: PSDin Country Strategy, Operations and Lending PSDinCountry Strategy 21. Findingsfrom the growing body of diagnosticsare now being incorporated in Country AssistanceStrategies (CASs)and Poverty Reduction Strategy Papers (PRSPs). For example, ICA findings have been incorporated inCASs in 11countries, where the timing allowed. In addition, PRSPs and follow-on operations are picking up investment climate reform priorities and PSD themes. Examples include: Cambodia, where ICA recommendations such as streamlining trade facilitation and business regulations and strengthening governance of Private Participationin Infrastructure(PPI) became part of the CAS, Eritrea, where ICA findings on the need for progress on demobilization became central to the CAS agenda, and Mozambique, where key ICA findings andrecommendations on constraints such as financing, regulatory barriers inlabor and taxation, and infrastructure became essential components of the PRSC and thejoint donor review (JDR, Figure 1). Figure 1: I C A Implementation inMozambique PRSC & JDR Impact - Mozambique 22. As more diagnostic work is completedthis trend of greater integration of PSD issues in CASs is expected to continue. The growing contributions of the IFC and MIGA to CASs further strengthen their PSD orientation (see below). However, a continuing challenge lies in having - 9 - PSD concerns, and especially investment climate reform priorities, systematically incorporated as part of the growth and poverty alleviation agenda into CASs and country-led PRSPs (even where there i s no recent ICA). A similar challenge confronts the agenda of enhancing the role of the private sector inthe delivery of infrastructure and social services. Financingfor PSDOperations 23. As a crosscuttinginitiative,the PSD work spans manyparts of the WBG. It is found in programmatic lending (e.g. PRSC, SAC), investment projects or their components in various sectors (transport, economic reform, financial sector etc.) and intechnical assistance projects. The estimated amount of IDA lendingthat addressesPSD objectives has been increasing (Figure 2)." As of September 2004, IDA'Stotal active portfolio attributable to PSDthemes consists of 342 projects, estimated to be about $7 billion. DuringFY03-04,just under half of all projects with PSDobjectives took place inIDA countries - 134out of a total of 222 projects. InFY04, 72 projects addressedPSD objectives (Table 1). Over two-thirds of the PSD portfolio commitments fall under the investment climate ~mbre1la.l~Examples of how diagnostic work feeds into operations include: InMozambique, the PovertyReduction Support Credit(PRSC) under preparation will support investment climate reform, includingthe establishment of a unique identification number for all enterprises for use intransactions rangingfrom registration of the business and landto paying taxes. InHonduras, an investment loanwill pick upthe agendaof reformestablished bythe ICA. InCambodia, aPSD loan will advance the agendaof streamliningtrade facilitation and the establishment of a single window for importers and exporters to deal with bureaucracy at the border. InUganda, the ICA findings fed directly into a $27 millionoperation supportingsix components, ranging from trade facilitation to financial services. l 8 Giventhe crosscuttingnatureof PSD work as mentionedabove, it is difficult to determine the exact amount of IDA lendingfor PSD. Thus the IDA lendingfigures for PSDcitedinthis paper are amounts of IDA credits that address PSDthematic objectives, as estimatedby Bank staff. They do not, for example, includesupport for *'Within public utilities. this, regulationand competitionpolicy are central because they form an importantpart of most adjustment operations. Infrastructureis also importantmainly because of the relatively highlevel of transportation-relatedcomponentsinPSDoperations. - 10- Figure2: IndicativeIDA Lendingto Address PSD Objectives, FYO3-05 FY03 FY04 FY05 Est. Table 1: FY04 Lendingto ProjectsAddressing PSDthemes by Region (US$ millions) PSDThemes AFR EAP ECA LAC MNA SAR Corporate governance 6 0 0 0 0 4 Personal & property rights 7 38 10 11 0 0 Regulation & competition policy 269 30 27 17 0 62 Judicial & dispute resolution 8 1 0 0 0 0 Legal institutions for a market Investment economy 14 0 6 10 0 3 Climate Other FSD/ PSD 69 5 0 28 6 43 Infrastructure services for PSD 295 93 41 0 0 157 Tax policy and administration 34 0 2 0 0 34 Trade facilitatiodmarket access 149 0 0 7 0 10 Export development & competitiveness 72 13 0 7 0 43 SOEhank restructuring and privatization 134 25 13 5 0 148 Standard & financial reporting 22 0 5 3 0 28 Other PSD Ruralnon-farm income generation 22 3 4 0 0 16 S M E support 15 38 4 6 8 69 Technology diffusion 4 0 0 0 0 0 Total PSD 1120 246 112 94 14 617 Countries with projects with PSD components 29 6 12 9 2 14 Source: World Bank 24. As a directfinancier to theprivate sector, IFC is a key channel of WBGPSD activity in IDA countries,providing over $4 billion in directfinance in FY04 (Annex 1). The IFC is placing more emphasis inits work on strengthening the investment climate, developing domestic financial markets and encouraging small and medium business formation in order to fund the expansion of private enterprises and generate jobs. In IDA countries, the formation and growth o f sustainable businesses continues to be a particular challenge. There remains a great need for - 11- long-term capital, improvements in the investment climate, stronger community and small business linkages with large organizations, and more private enterprise formation. Among the measures IFC has taken to strengthen impact are: (i)greater concentration of commitments in a highimpact sectors and low-income countries; (ii) new project development facilities eight created since 2000 to buildcapacity and develop SMEs; (iii) a broader range of financial services; and (iv) increased use o f partnerships such as those with IDA described below. By region, there i s a heavy emphasis on South Asia and Africa (Table 2). Table2: IFC inIDA Countries (US$ millions) Region 1999 2000 2001 2002 2003 2004 Central and Eastern Europe 36.4 70.2 64.8 86.4 101.8 124.8 East Asia and Pacific 713.7 639.9 661.9 630.6 622.3 588.4 Latin America and Caribbean 139.4 151.2 145.2 126.9 143.2 132.3 Middle East and North Africa 563.6 482.2 488.2 493.1 480.8 373.1 South Asia 816.4 863.7 1034.9 1082.9 1346.2 1489.9 Southern Europe and Central Asia 347.4 371.3 351.0 413.8 418.6 437.6 Sub Saharan Africa 835.2 909.8 1055.4 1029.8 950.2 103.8 Source: IFC 25. Consistentwith the overall PSD strategyfor SMEs, a major change over the lastfew years has been a re-orientation of SME support from providing direct assistance to individual firms (for business development plans, capacity buildingor finance) to supportinginstitutions that service such businesses, including training firms, business associations, local consultants, and financial institutions. IFC provides a broad range of technical assistance support to benefit SMEs, which is in large part delivered through its Project Development Facilities (PDFs) and the Private Enterprise Partnershi (PEP). There are now 12Facilities managed by IFC that support small business development! Inaddition, inthe fall of 2003, PDFs were placed directly under the responsibility of the IFC regional directors to strengthen the facilities' integration with regional strategy, products and services. The IFC-WB S M E Department continues to provide expertise and dissemination of best practices. 26. An importantfocus of PDF work is improving the difficultbusiness environmentfor SMEs in IDA countries,oftenfollowing up on or extending IDA IC diagnostic work. In Bangladesh, this involved substantial partnership on follow-up to reduce business entry costs and taxes on S M E agribusinesses, and to monitor reform progress (Box 4). In Cambodia, there was active partnership throughout ICA implementation and in follow-up activities, including a sharp focus on reducing business entry costs. In L a Paz, Bolivia, the LAC facility teamed with FUNDES to achieve a dramatic streamlining of business licensing and registration procedures. *' Includes those in Latin America, North Africa, the Middle East, Sub-Saharan Africa, Indonesia, Bangladesh, Southeast Asia, China, South Pacific, the former Soviet Union, and the Balkans. - 1 2 - Box 4: Bangladesh Partnershipon the SMEAgenda - To carry out the Bangladesh ICA, the World Bank 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), addressingpervasive corruptionand over-regulation, and improving access to finance, each of which disproportionatelyburdenedSMEs. With its WB and BE1partners, SEDFmonitoredthe follow-up to the ICA agenda with a semi-annual panel survey of SMEs. It partnered with an industry association, BAPA, to study and work for the reductionof the tax burden on agro-processors. At the request of the Ministry of Commerce, it identified measures to streamline business registration and is providing technical assistance to implementthemand to automatethe registry ofjoint stock companies. 27. IDA and IFC also undertook a Micro, Small, and Medium Enterprise (MSME) initiative in Africa. Inthe past, IDA and IFC have undertaken separately a large number of MSMEprograms andprojects inSub-Saharan Africa, with mixedresults. To improve this performance, duringthe IDA13 Replenishment, Deputies asked IDA "to exploit synergies with other members o f the WBG, inparticular IFC, to encourage innovation in support of PSD, and devote significant resources during IDA13 to such innovative programs." Heedingthis call, IDA and IFC are collaborating on a new series o f integrated IFC/IDA MSMEoperations inAfrica that promise to enhance the range o f opportunities for SMEs. 28. Theprogram supports MSMEs throughthreemain pillars: (i) to financial access services; (ii) to business development services, including strengthening inter-firm access linkages (both domestic and foreign) and access to information; and (iii) improvements inthe business environment for MSMEs. The components o f individual country projects depend on country-specific circumstances. The program objectives are to: (i) increase the number of fully financially sustainable micro-finance institutions; (ii) increase the size and profitability o f MSMEportfolios among selected financial institutions; (iii) establish several funds to provide risk capital investments to MSMEs; (iv) develop sustainable private BDS markets through upgrading selected BDS providers and/or through demand-driven subsidies to MSMEs; and (v) reduce the cost to MSMEs of regulatory compliance, with initial emphasis on the cost and time to register a business (one o f the IDA13 targets). 29. Thefirst of thesejoint operationswas approved in December 2003 by the IDA Board for Nigeria. IDA funds will be used to support capacity building and technical assistance to firms and to financial institutions oriented to MSMEs, as well as initiatives to improve the business environment for small enterprises. IFC will target investments in S M E financing institutions and microfinance and use the experience gained via the Africa Project Development Facility (APDF) and other IFC initiatives to expand successful capacity buildingpro rams with IDA funding. Similar programs are being developed for six other African countries.Fl Depending on the number and scope of country projects, total indicative program costs amount '*The implementation o f this initiative has proven more cumbersome than originally expected, as the management of both institutions worked to put inplace procedures and processes to address potential conflicts o f interest by IFC as a lender to SME organizations which may also receive IDA funding under the joint program. Specific measures are being worked out with the IFC-Bank Conflict of Interest Office, which should enhance the chance o f success of this initiative and the opportunities for its replication. - 13- to approximately $175 million over a four-year implementation period. The program i s expected to leverage additional funds by facilitating the mobilization of substantive additional capital into banks and other financial agencies it supports. The program will draw extensively onjoint teams from IDA, IFC, APDF staff and local consultants. 30. Experience reveals that sustainablefinancial services can helppoor people to increase incomes, build assets and reduce vulnerability to shocks through microenterpriseactivity. IDA is pursuinga number of activities to improve access to financial services for poor people in a sustainable manner. First, the Bank's policy and operational work focuses on supporting sound policies and institutions for financial intermediation. This entails work on credit information and payment systems, as well as the regulatory, legal and institutional factors that determine the conditions and availability of financial services for poor people.22 In addition, IDA will further elaborate methods andindicators to measurethe degree to which poor people have access to the financial system, and the effects these access conditions have upon their well-being. The objective of this work i s to help ensure that CASs and PRSPsreflect conditions and needs with respect to the access that low-income people andbusinesses have to financial services. 31. Finally, there are a number of microfinance operations underway in IDA countries. In addition to two stand-alone microfinance operations inFY04 amounting to $39 million, nine other FY04 projects totaling around $430million have microfinance components. 23 Stand-alone projects include the Madagascar Microfinance Project, which i s phase 1of a 15-year Adaptable ProgramLending (Box 5) and the Bangladesh Second Poverty Alleviation Microfinance Project. Inaddition, the Broad-Based Access to FinancialServices Project inNicaragua was recently approved and focuses primarily on technical assistancefor scaling up a range of microfinance providers. IDA assistance has played an important role inproviding countries the means to build and support microfinance providers through capacity-buildinginitiatives. I Box 5: Macro-Access to Microcredit inMadagascar I This project seeks to ensure the long-run viability of savings and loan association (SLA) networks to be established in four provinces of Madagascar, in order to provide access to financial services to lower- income people. Technical assistance i s provided as part of an integrated approach that includes supporting the establishment of an appropriate legal, regulatory and supervisory framework for microfinance, the expansion of microfinance skills through a training program and the development of sustainable local institutions. The project does not provide funds for on lending, but rather focuses on savings mobilization and promoting member-owned organizations. SLA i s expected to reach about 187,000 low-income families and about 935,500 inthe 15-year adjustable programloan (APL). 32. One major innovationproposed in the WBG PSD strategy is scaling up the use of OBA as a mechanism to improve infrastructure delivery to low-income communities. Much of the Private Participationin Infrastructure(PPI) agenda i s encompassed in the project work of the 22 Given the volume of international remittance flows and their substantial benefit to the poor, the Bank will also continue to focus on the development o f competitive and accessible channels for sending and receiving international remittance payments. 23 IFC also takes part in microfinance activities - through investments (totaling $245 million in 2004) and technical assistance. IFC encourages market-priced microfinance projects rather than subsidized lending. - 14- World Bank and IFC.PPIi s also a key component of the World Bank's InfrastructureAction Plan.24 The OBA approach is a powerful tool to harness public-privatepartnerships to reach the poorest segments of the population in the poorest countries, while increasing accountability for results. Inthis approach, service delivery i s contracted to a third party -usually private companies but also NGOs- under arrangements that link payments to the results actually delivered. Payment i s not provideduntilthe teachers are teaching, the public phones work, or the water is flowing (Box 6). The aim i s to make sure that subsidiesare targeted closely at the poor, andto make sure that service provision i s efficient. Currently, over 30 such Bank projects, most of which are in IDA countries, are under preparation or implementation and are aimed at expanding services to low income consumers or to protect the poor from increases in prices requiredto reach financial viability (Annex 3). OBA approaches have proved successful in water, sanitation, power, transport, telecommunications, and health, and in countries where it generally has been difficult to attract private interest.25 Demonstrable benefits thus far have includedreduced subsidy payments, improved operating performance, and better targeting of government and donor funding towards the poor. Examples include: A small-scale rural water project inCambodiafinanced through a $16.9 millionIDA credit has subsidies targeted to 40 percent of the connections with intendedbeneficiaries amounting to over 13,000 households. Similar schemes are being considered for the sanitation sector in Cambodia, which currently has a weak recordon provision of sanitation services for its rural poor. A health project inRajasthan, India, is financed through a $89 million IDA credit andhas intended beneficiaries of 3.4 millionpeople for in- and out-patient care. InBangladesh, OBA approachesare beingpilotedfor the delivery of electricity andwater through small-scale networks to poor households intargeted communities, and for delivery of social services inhealth and education for specific beneficiary groups (e.g., children at risk) within targeted communities. IDA assistedthe government inthe identification and preparation of pilot operations for electricity and water, and in the development of standard approaches and pilot projects for the social sectors. Replicating successful pilot contracts in Chad and inLatin America, a $67 million IDA credit i s being usedto introduce Performance-BasedManagement and Maintenance of Roads contracts in Tanzania, Madagascar, Cape Verde, and elsewhere in Chad. Approximately two million people, many of them very poor and living inrural areas, should benefit from these improvedroad conditions through lower transport costs, better access to markets and services, and reduction intime andeffort needed to perform routine tasks, thereby increasing standards of living. 24 World Bank, (2003). Infrastructure Action Plan. 25 The Bank is also managinga trust fund, the GlobalPartnership for Output-BasedAid (GPOBA), which is helpinginthe design and evaluationof OBA schemes and disseminating knowledgeon OBA. - 15- Box 6: Output-BasedAid inMumbai-FlushWith Success? I Within the larger Bombay Sewage Disposal Project, the pilot Slum Sanitation sub-project targets the provision of one million slum dwellers with sanitation services. Rather than a traditional input-based approach, the sub-project focuses on sanitation service as a package of construction, hygiene education, capacity building, operation and maintenance plan, and utilities to assure that facilities are used and maintained. It establishes contracts with micro-scale service providers to construct and operate sanitation blocks, with provisions rewarding the actual provision of sanitation services, making effective service a profitable small business endeavor. 33. A sample of 14IDA Bank projects in different sectors (from the universe of over 30 Bank OBAprojects currently under implementation) estimated that they improve service delivery of infrastructure services to a total of 18.6million people. The total value of IDA credit in the sample i s US$387.8 million, plus a grant amount of approximately US$73 million (Bank and GEF sources). If successful, scaling up of OBA operations in the Bank could lead to a significant increase in the allocation of IDA resources to the provision of infrastructure services to the poor. The Bank is also managing a trust fund, the Global Partnershipfor Output-Based Aid (GPOBA), which is helping inthe design and evaluation of OBA schemes and disseminating knowledge on OBA. InFY05, the WBG will undertake a review of OBA to draw lessons learned from these pilot experiences. This will allow learning from experience and a scaling up of the successful practices identified at the pilot stage. 34. To expand the number of viable infrastructure projects developed in Africa and other poor regions, IFC and IDA have entered a set of uniquepartnerships. Africa has received relatively little expansion of private investment in public services, with its associated benefits. To help overcome the many challenges governments and private investors face inthis area, on a pilot basis, IFC and IDA have teamed-up with the governments of several African and other countries to help them create the conditions under which private investment inthe power sector can take place. IDA-IFC infrastructure programs are now in operation or near operation in Ghana, Senegal, Cameroon, Kyrgyzstan, and Tajikistan. Ghana, Senegal and Tajikistan (Box 7) provide three notable examples where a joint IFC-IDA team has been working closely with the government and private industry to address the issues facing the power industry. - 16- Box 7: IDA-IFC Collaboration inSenegal, Ghana and Tajikistan A PowerfulAlliance - InSenegal, IFC organized trust funds and commissioneda study to assessthe investment requirementsof 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 bidders for 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 inthe sector. Two international companies have submitted bids for the project and the winning bidder was selected at end-March 2004. It i s expected that a combination of IFC, IDA and MIGA will provide financing support. InGhana, IDA is coordinating with other donors onaneconomic analysis ofthe sector, while IFChas provided the government a powerful sector model that captures the cash flow impact of all the various parts of the sector. IFC hopes to finance the conversion of a crude oil fired IPP (Takoradi 11)into a combined-cycle operation, thereby increasing electricity supply without additional fuel consumption. This could reduce tariffs inGhana. Thejoint IDA-IFC teami s helping the government to implement a private management contract for the state-owned electricity distribution company and IDA will make financing available for muchneeded capital investments inthe distribution network. This i s expected to reduce losses, raise collections and improve efficiency, helping the sector to become self-sustaining. The IFC's innovativePamir project inTajikistan will generate and supply electricity under a 25-year concession, taking control of the assets of the state utility and expanding generation capacity through rehabilitation of existing plant, transmission and distribution assets. Inaddition, the project will provide tariff subsidy mechanisms to ensure basic provision of electricity to the poorest. Inorder to subsidize tariffs to the poor, IDA i s supporting the project along with a grant from the government of Switzerland. 35. Efforts by the WBG to understandhow best to tapprivate initiative in delivery of social services (health and education)and improveaffordable access are relatively new. The PSD strategy recognizes that, alongside the public sector, the private sector (including nonprofit organizations) has played a central role in providing health and education services in a number of developing countries for many years.26 There have been several assessments of the private education or health sectors in IDA countries, and a few projects that have included the private sector. But the use of the private sector in health and education projects i s still rare and there is no systematic program in either analysis or engaging the private sector inimplementation. Advisory and Non-LendingTechnical Assistance Through FIAS and M I G A 36. The Foreign InvestmentAdvisory Service (FIAS), ajoint program of the IFC and WorldBank, completed42projects in IDA countriesrelated to investmentclimatepolicy reforms and capacity building in 2004 (Table 3). These diverse projects include reviews of investment laws and policy frameworks, diagnostic studies of administrative barriers to investment, specialized work on competition policy, and analysis of corporate social 26 "More than half of all basic health services are provided by private parties inlow-income countries and, in Sub- SaharanAfrica, about a third of primary education is provided privately." World Bank, (2002). Private Sector Development Strategy, page iii. - 17- re~ponsibility.~~average about two-thirds of FIAS policy recommendations in IDA countries On were fully or partially implementedwithin a three-year period after the recommendation was made. FIAS collaborates with IDA in a number of countries, providing its advisory work as inputsto ICAs, CASs andPRSPs andthrough direct collaborations.28 FIAS analytic work is routinely incorporated in ICAs and often IDA and FIAS have collaborated onjoint surveys. Furthercollaborationis expected to focus on solution design andimplementation,including identification of global best practices in reform and technical assistance to reforming govemments. Table 3: FIAS Advisory Projects inI D A Countries Completed In 2004 Region AFR EAP SAR ECA LAC Number 13 9 4 10 6 37. MIGA's technicalassistanceand information services work helps IDA countries attract and retainforeign direct investment (Annex 2). This i s done through advice andtailored assistance to investment promotion intermediaries as well as a suite of online services about investment opportunities, business operating conditions, and business partners. InFY04, the agency undertook 35 new technical assistance activities in IDA-eligible countries, focusing especially on Africa. MIGA's assistance also takes the form of capacity building and investment dispute mediation services. And, of course, MIGA continues to provide guarantees: inFY04,20 guarantee projects (57 percent of new projects) were undertaken inIDA-eligible countries (Table 4). Table 4: MIGA inI D A Countries Number of Total Percent in projectsin number of I D A IDA (US$ IDA countries projects countries million) FY02 14 33 42.4 480.6 FY03 19 37 51.4 431.7 FY04 20 35 57.1 413.6 1II.C Collaboration, Partnershipsand SharingKnowledge for Results Strengthening Collaboration 38. New and improved mechanismsare helping ensuregreater coordinationbetween the relevantpartners of the WBG in investment climate work and MSME support (Box 8). Several of the collaborative activities are described above in the sections on the IFC andMIGA. '' A new tracking system found that on average about two-thirds of FIAS policy recommendations inIDA countries were fully or partially implemented within a three-year period after the recommendation was made. 28 For example, in Nigeria, FIAS collaborated with IDA and the IFC on a project component designed to streamline company registration. - 18- Because PSD is a cross-cutting theme, collaboration and coordination within the WBG to implement the PSD strategy inIDA countries requires unusually broad collaboration involving many groups within the WBG inthe implementation o f the PSD agenda, including: (i) IFC, MIGA and the Bank regional vice-presidencies; (ii) multiple disciplines and networks, including those for rural development, human development, financial sector development, legal, PREM and infrastructure; and (iii) specialized facilities, includingFIAS, and the S M E PDFs. several 39. Although the WBGis taking advantage of several effective channelsfor collaboration and coordination, challengesremain. One challenge is to better tap the resource of over 200 PDFand PSDNetwork staff, many workmg inthe various in-country IFC PDFs, who over the past year have increasingly focused on matters o f the investment climate and policy reform. In FY05, ajoint training program, largely infield offices, will foster this collaboration and coordination. At the same time, work will continue to buildup knowledge resources and sharing o f experience and best practice inIC reform. Box 8: Examples of Effective Channelsfor WBG Collaboration A new joint World B a M F C PSD Vice Presidency, formed in FY03-04, which oversees the implementation of the Bank's PSD strategy and focuses efforts on coordinating PSD work across the WBG. The Vice Presidencyconvenes meetings amongheadquartersandregional staff to coordinate PSD work. For example, in Country Review meetings, co-chaired by the PSD Vice President, the Bank Country Director, and the IFC Regional Director, senior Bank Group staff, including MIGA and PDF staff, discuss PSD strategy in a country and effective ways of improving coordination in implementing this strategy across the WBG. The PSD Sector Board, which i s composed of members from IFC, MIGA and the PSD Anchor and regions of the Bank. It serves as an increasingly important vehicle to share information and lessons learned as well as to improve the coordination of efforts. Joint CAS preparationby Bank and IFC staff for about 15 out of 40 CASs each fiscal year, with active inputby MIGA as well. A new program of knowledge development and training for WBG staff and its clients aimed to build capacity to better design and implement Investment Climate operations. The program covers three training - mostly in the field - provides operational staff with tools based on best practice, including critical steps for assisting clients: PSD diagnostics, solution design and implementation process. The proven and innovative policy reform management strategies. An annual PSD forum, a flagship-leaming event for WBG staff worldwide working on PSD issues. IFC and IDA collaboration on advancing credit reporting in member countries, sharing expertise and research globally and by broad project level collaboration. WB staff focus on policy and legal issues, while IFC emphasizes development of best practice credit bureaus. PDF-ledimplementation of several collaborative programs with the IBRD/IDA,the World Bank Institute (WBI) and MIGA. - 19- Partnerships with Other Stakeholders 40. The PSD Network is partnering with other stakeholders on manyfronts that include: (i)collaboration with EBRD and the ADB on implementation and financing of investment climate surveys; (ii) co-financing FIAS work and PDFs (IFC contributes roughly 20 percent of facilities' operating costs, andmultiple donors contribute the remainder); (iii) the Norwegian Trust Fundwindow for activities related to private sector andinfrastructure, which provides grant resources for WBG activities aimed at mainstreaming investment climate, governance and infrastructure for the poor across the Bank and IFC; and (iv) partnerships with the private sector through Investor Councils and in analytic and policy work on corporate social responsibility. Sharing Knowledge 41. Through the PSD Anchor and WBI, the WBGjointly implementeda learniag program thatpiloted efforts to improve capacity to transform diagnostic studies into operations and policy dialogue on investment climate reforms. Also inFY04, the PSDAnchor launched a new systematic program of knowledge development and training for Bank staff and clients that covers the three critical steps for the World Bank to assist clients inimproving the investment climate: diagnostics, solution design andreform implementation processes. The remaining challenge i s to scale up training to reach all regional staff and an increasing body of local stakeholders engaged in the reform process inIDA countries. 42. The PSD Rapid Response unit upgraded and expanded a new version of its knowledge management Website,which was noted inthe recent QAG review of Sector Boards as a best practice model. The website allows bank staff, policy makers and reformers to hold policy discussions as well as the leadingresearch, databases, and privatization tool kits. The site i s on target to reach one million visits a year globally. 43. Several regional PSDgroups haveput knowledge management at theforefront as well. For example, the SouthAsia region collaborated with the PSD Anchor and WBI on a regional workshop on the investment climate, inviting leaders from government and business from six countries, all of which hadICAs recently completed or well underway. The workshop not only brought together comparative information on investment climate performance inthe region and international best practice information, but also provided an excellent chance for reformers in the region to meet, exchange ideas and create networks with each other. IV: SCALING UP:PROGRESS CHALLENGES AND FORTHEPSDAGENDA Investment Climate: EnhancingProductivityfor Poverty Alleviation 44. Extending the reach of markets through investment climate reform provides the economic opportunitiesnecessaryfor lifting people out of poverty. When the Deputies reviewed the PSD agenda in the IDA13 Replenishment process, they stressed the importance of moving from an emphasis on privatizationto greater focus on the investment climate. This has largely occurred, both in analytic and operational work of the WBG. Within IC agenda, the Bankhas moved to the frontier of developingand applying better measurement, essential to - 20 - better focusing efforts to strengthen the investment climate in particular countries and localities. Loolung forward to IDA14: Given the central importance of the investment climate to the growth agenda, it must come to the forefront in WBG strategy, with consistent attention to priority investment climate issues in every CAS and PRSP. Consistent input from IFC and MIGA through joint CASs can reinforce the PSD orientationof IDA strategy. While the DB project coverage is already extensive and ICAs will be launched in a majority of IDA countries by the end of IDA13 (inaccordance with the IDA13 Agreement), IDA still needs to pushaheadtowards the goal of increasing coverage for IDA countries. Inthose IDA countries where baseline information has already been established, the focus will shift to monitoringkey indicators over time inefficient and replicable ways inpartnership with stakeholders. As countries address individual constraints, new ones will come to the fore and good diagnostics can help to pinpoint the second generation of reforms. Recognizingthe short lifespan of many other assessment initiatives, a key challenge will be to sustain effort over time, ensuring that broad benchmarking i s followed up with progress monitoring and re-evaluatingof reform priorities accordingly. Onthe designof investment climate reforms, there i s substantial learning andpilot experience. This lundof learning, largely from case studies of experience, needs to be conducted with methodologicalrigor, both to assure the appropriateness of solutions proposed to clients and to persuade key stakeholders of their validity. To date, efforts to collect and synthesize the lessons of experience and best practice are still preliminary and must be strengthened duringthe IDA14period. Successful reform experiences in developing countries can be documented and many of their features adapted and replicated. Successful pilot initiatives, such as those inbusiness registrationreform, output-based private provision of social services and S M E support, can be scaled up as their features become clearly defined and widely available to operational staff. There i s also major progress intransforming diagnostics into country operations and programs in the implementation agenda. Operations and TA are increasingly focusing on the PSDagenda. The transformation of ICA, DB and other diagnostic findings into operations, and the growth in volume of IDA PSD activity also signals advancement, while raising potential financing challenges for the future. ThinkingSmall: Supportfor SMEs 45. The SME sector serves as a critical link between the growth and poverty agenda. At the same time, SMEs suffer disproportionately from policy and institutional impedimentsin the investment climate, and have significantly less access to financial and business development services than do larger enterprises. As recommended inthe PSD strategy, IDA has shiftedfrom direct support to SMEs to an emphasis on strengthening the business environment and building capacity in financial systems and business development services. IDA i s also workmg to dramatically leverage capacity by workng through intermediary institutions that have - 21 - substantially lower transaction costs in supplyingfinance and services to individual enterprises. It is recognizedthat some direct support will continue for its demonstration effect. Loolung forward to IDA14: A three prongedSME development strategy will be scaledup: (i) emphasizing the broader elements of investment climate reform strategy that disproportionately affect SMEs; (ii) leveraging SME financial and business development service capacity- buildingefforts; and (iii) creating successful business models which provide demonstration effects for SMEs at large. Inthis area as well, the measurement agendato monitor andevaluate SME support programs i s seen as a critical part of the next phase of PSD strategy implementation. There also needs to be stronger emphasis on knowledge management among the growing number of IFC's PDFs, so that information flows among them and the center, assuring that all staff working on PSD share a common understanding of appropriate methods and best practices and can share their lessons of experience. Iti s recognizedthat the scope andreachof the WBG's SME work, includingthat of the PDFs, i s not comprehensive and can be further extended inIDA countries. This will require support and systematic collaboration among all parts of the WBG, building on the models of IFC-IDA collaboration in Africa and on the increasingly close collaboration of PDFswith IDA on the investment climate agenda. As partof this effort, areview of IFC- IDA collaboration inAfrica will be conducted inFY06 andreported at the mid-term review. Onmicroenterprise finance, there is a continuing challenge to spreadawareness that the PSD agenda concerning propertyrights and enabling conditions for the financial system are fundamental to poor people's access to credit. Second, there remains the challenge of scaling up the current approach to microfinance, with its generally favorable returns, emphasizing enablingconditions and the use and capacity of intermediaries. Mobilizing the Private Sector for Infrastructure and Social Services OBA - 46. OBA isproving itselfto be a valuable means deliveringservices topoor people. Public investment ininfrastructure has been curtailed inmany countries over the last few years, inpart due to fiscal constraints. This coupled with significantly reduced private sector participation in infrastructure since the 1990shas limited many countries' overall growth potential. Discussions of the PSD strategy emphasized that there i s no one right answer to how public services should be delivered. Rather, the WBG emphasizes findingthe appropriate pragmatic solution on a case- by-case basis. Although governments will continue to play a centralrole, the potential for private delivery in some cases can importantly enhance capacity, efficiency and effectiveness in reaching the poor. Where private delivery i s appropriate, IFC-IDA collaboration i s especially valuable inIDA countries, where policy, institutional or regulatory reform as well as catalytic financing may be requiredto bringprivate provision on line. On OBA, already evidence i s mounting of the potential of well-structuredcontracts to improve service delivery to the poor. Looking forward to IDA14: - 22 - A review of OBA pilot projects will be conducted inFY05 to lay the groundwork for scaling up pilot efforts and mainstreaming this approach. This report will be made available at the mid-term review. CollaborationandPartnerships: PullingTogetherBetter 47. Collaborativeapproachesare leveragingthe resources, toolsand skills of the different parts of the WBGtopromote the PSD agenda in IDA countries. This paper has documented the important areas of collaboration and synergy between IDA, FIAS, IFC, and MIGA in diagnostics, strategy and operations. At the same time, there i s no question that the different operating procedures and project time frames of these organizations have requiredmutual adjustments, with some challenges remaining. As envisioned inthe PSD strategy, IFC-IDA collaboration i s expanding dramatically in IDA countries, especially ininfrastructure and S M E support. Already, some initially contentious issues arising from pilot efforts, like addressing potential conflict of interest and establishing common procurement procedures, have been successfully resolved. Looking forward to IDA14: There should be growing collaboration on joint CASs, on identifying and implementing investment climate operations and reforms, on private delivery of infrastructure and social services and on S M E support. The aim needs to be a seamless product providedto clients along the entire spectrum of public and private sector development finance. To achieve greater impact, the WBG will work to further make collaboration systematic across all parts of the WBG, including the multi-donor project development facilities (PDFs). As part of this effort, the WBG will also buildon andexpandoperational collaboration exemplifiedby the MSME program described above. Moreover, the PSD Knowledge Management (KM)program will extend to all WBG PSD staff to assure uniform understandings and enhanced capability to diagnose, apply international best practice, andimplement successful reform initiatives inoften challenging local environments. - 23 - ANNEX 1: ROLEOF IFC INI D A COUNTRIES By sector, three key areas of IFC investment in IDA countries are the financial sector (including insurance markets), infrastructure, and extractive industries (Table A1.1). But the full portfolio i s broadly diversified across a range of manufacturing and service sectors, with a markedincrease ininvestment in such sectors as agriculture and forestry, plastics and rubber, information technology, health and education. Section 1II.Bprovides details on IFC's role in IDA countries. Table Al.1: IFC Projects inI D A Countries by Sector (Millions of US dollars) Sector 2003 2004 A -Agriculture andForestry 59.8 123.2 B-Oil, Gas andMining 415.7 372.0 C -Utilities 510.1 481.3 D-ConstructionandRealEstate 52. 9 52.9 E-Transportation andWarehousing 147.6 130.7 F-Food& Beverages 179.3 177.2 G-Chemicals 104.8 132.0 H-NonmetallicMineralProductManufacturing 308.3 229.7 I-PrimaryMetals 273.1 234.0 J-Pulp & Paper 56.6 75.8 K-Textiles, Apparel & Leather 175.1 199.5 L-Plastics &Rubber 66.8 65.3 M-Industrial& Consumer Products 187.4 162.4 N-Information 205.5 418.4 0-Finance&Insurance 1071.6 1048.2 P-Collective Investment Vehicles 83.0 73.9 Q -Wholesale andRetailTrade 11.4 13.9 R -Professional, Scientific & Technical Services 12.5 9.9 S - Health Care 30.6 47.5 T -EducationServices 15.5 19.3 U-Accommodation & Tourism Services 95.8 123.6 Total 4063.2 4189.8 Source: IFC - 24 - ANNEX2: ROLEOF MIGA IN COUNTRIES IDA Since the "2000 Review of MIGA's Results and Activities" identified investmentsin IDA- eligible countries as a priority areafor the agency,the levels of MIGA support to projects inthe poorest countries have steadily increased through the full spectrum of services - investment guarantees, technical assistance, and legal advisory services. InFY04,20 guarantee projects (57 percent of new projects) were undertaken in IDA-eligible countries (Table 4). Of these, six guarantees for investments were inconflict-affected countries and eight projects benefited small and medium-sizedenterprises. With the launch of MIGA's Small Investment Program (SIP) - which includes a standardized guarantee product and underwriting approach aimed specifically at SME's - MIGA expects to increase support to such projects. Under MIGA's new managementteam, on board since May 2004, the agency is undertaking a realignment of its business model with the explicit purpose of enhancing MIGA's focus on development impact. MIGA will pay particular attention to facilitating investment inlow- income/high-risk countries and on the infrastructure sector. Conflict-affected countries have also been identified as a top priority going forward, in view of the important role that political risk insurance can play inthese environments tojump-start private investment. MIGA's portfolio already reflects a tendency to support projects inriskier markets with low-incomehigh-risk countries accounting for 43 percent of MIGA's portfolio exposure, even though such countries only account for a small percentage of worldwide Foreign Direct Investment (FDI). MIGA alsoprovides technicalassistancewith the aim of enabling developingcountriesto attract investment. This assistance takes the form of capacity building, web-based information services, and investment dispute mediation services. InFY04, the agency undertook 35 new technical assistance activities inIDA-eligible countries, especially in Africa, which i s a primary area of focus of MIGA technical assistance. Inits technical assistance interventions, MIGA places a premiumon working with countries that both present development challenges and are committed to market-oriented reforms. MIGA investment advisory services have proven to be particularly effective incatalyzing both policy reform and new investment in such Central American countries as Nicaraguaand Honduras, where MIGA has long-termtechnical assistance efforts in place. Likewise, the online services and supportingtechnology guidance provide a much-needed promotional vehicle for IDA countries worldwide, as well as, access to economic and competitive information that they would not otherwise have. MIGA's increasing efforts to integrateits activities with the Country Assistance Strategies (CASs)of the World Bank Group will further enhance the agency's development impact. Duringfiscal 2004, MIGA collaborated closely with the WBG country teams to develop innovative approaches to facilitate FDIincluding inIDA countries such as Kenya, Mozambique and Tanzania. - 25 - ~ Box A2.1: Joint IDA-MIGA Guarantee Products In FY04, the joint MIGA and IDA Boards approved a MIGA-IDA-AfDB guarantee facility (in an aggregate amount o f $227 million) in support of small and medium infrastructure projects in the countries of the West Africa Economic and Monetary Union as part of the WAEMU Capital Markets Development Project. Banque Ouest Africaine de DCveloppement (BOAD) acts as an intermediary for the new facility that will benefit investors in Benin, Burkino Faso, Cote d'lvoire, Mali, Niger, Guinea-Bissau, Senegal, and Togo. The Agence Franqaise de DCveloppement i s a co-guarantor in the project and has provided funding for the secondment of a MIGA staff member to BOAD to assist the institution with the implementation of this program and the development of BOAD capacity to undertake private sector operations. As part of its effort to increase support to conflict-affected countries, MIGA also established a guarantee facility for Afghanistan, with funding provided by IDA and the Asian Development Bank. The availability of political risk insurance through the Afghanistan Investment Guarantee Facility (AIGF) i s expected to significantly encourage foreign investment in the country. The facility i s being financed by an initial IDA credit of $5 million being supplemented by a $5 million soft loan from the Asia Development Bank (ADB) and $10millionininsurance capacity from MIGA. This will be co-insured by the ADB in the equivalent amount of $10 million. Together with support to be raised by MIGA from private and other public insurers, the total size of the facility i s expected to be $60 million, a significant amount for Afghanistan. AIGF will not only insure "traditional" FDI projects, but will extend coverage to loans and credits provided to local businesses by newly established foreign banks in Afghanistan. Additionally, AIGF will provide coverage to foreign loans to be used to finance local equity investment or the importation of critical capital goods for Afghanistan reconstruction. MIGA is also collaborating with the WorldBank to provide technical assistanceto the Afghan Investment Support Agency and advising on the legal and policy environment for industrial estate development, a critical element of the country's infrastructure development plan. I- I W a: n > W w a a 0 u? w crm 3 z i5 0 H m I 00 c\) I I I 0