FOR OFFICIAL USE ONLY Report No. 103723-BD INTERNATIONAL DEVELOPMENT ASSOCIATION INTERNATIONAL FINANCE CORPORATION MULTILATERAL INVESTMENT GUARANTEE AGENCY COUNTRY PARTNERSHIP FRAMEWORK FOR BANGLADESH FOR THE PERIOD FY16-FY20 MARCH 8, 2016 Bangladesh Country Management Unit South Asia Region The International Finance Corporation The Multilateral Investment Guarantee Agency 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 World Bank Group authorization. The last Country Assistance Strategy Progress Report was discussed by the Board on January 14, 2014 CURRENCY EQUIVALENTS (Exchange Rate Effective March 8, 2016) Currency Unit = Bangladeshi Taka (Tk) US$ 1 = Tk 78.48 FISCAL YEAR July 1 – June 30 IDA IFC MIGA Vice President: Annette Dixon Dimitris Tsitsiragos Karin Finkelston Director: Qimiao Fan Mengistu Alemayehu Dan Biller (acting) Task Team Leader: Sereen Juma Wendy Werner/Rafael Dominguez Paul Barbour ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank NGO Non-governmental Organization ADM Adaptive Delta Management MDG Millennium Development Goals AF Additional Financing MDRI Multilateral Debt Relief Initiative AL Awami League MDTF Multi-Donor Trust Fund ASA Advisory Services and Analytics MIC Middle Income Country AUSAID Australian Aid MIGA Multilateral Investment Guarantee Agency BB Bangladesh Bank MOU Memorandum of Understanding BBS Bangladesh Bureau of Statistics MW Megawatt BCCRF Bangladesh Climate Change Resilience Fund O&M Operations and Maintenance BNP Bangladesh Nationalist Party PEFA Public Expenditure and Financial Accountability BWDB Bangladesh Water Development Board PFM Public Financial Management CAS Country Assistance Strategy PGCB Power Grid Company of Bangladesh CEM Country Economic Memorandum PLR Performance and Learning Review CIDA Canadian International Development Agency PPP Purchasing Power Parity CPF Country Partnership Framework PPPs Public-Private Partnerships DB Doing Business REER Real Effective Exchange Rate DFID Department for International Development RMG Ready Made Garments DPC Development Policy Credit SAWI South Asia Water Initiative DPO Development Policy Operation SCB State-owned Bank EU European Union SCD Systematic Country Diagnostic FDI Foreign Direct Investments SDR Special Drawing Rights FLFPR Female Labor Force Participation Rate SEZ Special Economic Zone FY Fiscal Year SIDA Swedish International Development Cooperation Agency GAAP Governance and Accountability Action Plan SNSP Safety Net Systems for the Poorest Project GAFSP Global Agriculture and Food Security Program SOCB State-owned Commercial Bank GDSP Global Database of Shared Prosperity Index SPEMP Strengthening Public Expenditure Management Program GDP Gross Domestic Product SREP Scaling up Renewable Energy Program in Low Income Countries GNI Gross National Income TA Technical Assistance GoB Government of Bangladesh UHC Universal Health Coverage HIES Household Income and Expenditure Survey UK United Kingdom ICT Information and Communication Technology ULB Urban Local Body IDA International Development Association UN United Nations IEG Independent Evaluation Group UNFPA United Nations Population Fund IFC International Finance Corporation UNICEF United Nations International Children’s Emergency Fund ILO International Labour Organization US United States IFR Integrated Fiduciary Review USD United States Dollar IWT Inland Water Transport USAID USAID JICA Japan International Cooperation Agency VAT VAT KM Kilometer WaMIP Water Management Improvement Project LMIC Lower Middle Income Country WBG World Bank Group LNG Liquefied Natural Gas WTO World Trade Organization COUNTRY PARTNERSHIP FRAMEWORK FOR BANGLADESH TABLE OF CONTENTS I. Executive Summary .............................................................................................................. i II. Country Context and Development Agenda .................................................................. 1 2.1 Social and Political Context ...........................................................................................1 2.2 Recent Economic Developments and Outlook ................................................................... 3 2.3 Poverty Profile ........................................................................................................................ 6 2.4 Challenges to Poverty Reduction and Shared Prosperity.................................................. 9 III. World Bank Group Engagement Strategy ................................................................... 11 3.1 The Government’s 7th Five Year Plan .............................................................................. 11 3.2 World Bank Group Partnership Framework ..................................................................... 12 3.2.1 Lessons from the FY11-14 Country Assistance Strategy ............................................... 12 3.2.2 Overview of Strategy ........................................................................................................... 14 3.2.3 Objectives and Planned Support ....................................................................................... 16 3.3 Implementing the Country Partnership Framework ........................................................ 30 3.3.1 Financial Envelope and IDA allocation ............................................................................ 30 3.3.2 Governance: Financial Management and Procurement .................................................. 33 3.3.3 Partnership and Donor Coordination ................................................................................. 35 3.3.4 Monitoring and Evaluation ................................................................................................. 36 IV. Managing Risks to the CPF Program .......................................................................... 36 Tables Table 1: Social Indicators for Bangladesh and Comparator Countries ........................................ 2 Table 2: Sources of Growth FY10-15 .............................................................................................. 4 Table 3: Medium Term Macroeconomic Framework .................................................................... 4 Table 4: Long-Term Poverty Trends: 1990-2015 ........................................................................... 6 Table 5: Income Levels: Bangladesh and Comparator Asian Countries: 1980-2013 ................ 8 Table 6: Infrastructure Quality in Bangladesh .............................................................................. 10 Table 7: Summary of Key Priorities for Action Identified by the SCD..................................... 11 Table 8: CPF Focus Area 1 .............................................................................................................. 19 Table 9: CPF Focus Area 2 .............................................................................................................. 23 Table 10: CPF Focus Area 3 ............................................................................................................ 28 Table 11: Indicative FY16-18 IDA Lending Program ................................................................. 31 Table 12: Risk to Achieving CPF Objectives ................................................................................ 37 Boxes and Figures Box 1: The Seventh Five Year Plan (FY2016-2020) ................................................................... 12 Box 2: Gender in Bangladesh .......................................................................................................... 27 Box 3: Governance in Bangladesh: Tailored Response to Tackling Risks ............................... 34 Figure 1: Poverty Projections until 2030.......................................................................................... 8 Figure 2: CPF Selectivity Criteria and Focus Areas ..................................................................... 18 Annexes Annex 1: CPF Results Monitoring Framework ............................................................................. 39 Annex 2: Completion and Learning Review FY11-FY15 ........................................................... 51 Annex 3: CPF Country Financing Parameters .............................................................................. 88 Annex 4: CPF Stakeholder Consultations ...................................................................................... 89 Annex 5: Government Goals, Sustainable Development Goals and CPF Objectives ............. 91 Annex 6: Aid Effectiveness and Development Partners .............................................................. 92 Annex 7: Selected Indicators of Bank Portfolio Performance and Management ..................... 97 Annex 8: Operations Portfolio (IDA and Grants) ......................................................................... 98 Annex 9: Statement of IFC’s Held and Disbursed Portfolio ....................................................... 99 Annex 10: MIGA’s Portfolio ......................................................................................................... 100 I. EXECUTIVE SUMMARY i. Bangladesh lies along the Ganges-Brahmaputra Delta—Asia’s largest and the world’s most densely populated delta. The country’s 160 million inhabitants live on a land mass of nearly 150,000 km2, resulting in a population density of about 1,600 per km2. The delta not only marks the country’s physiology, but also the culture and livelihoods of its people. Like all delta environments, Bangladesh is a hotspot for natural disasters and climate change. Today, most Bangladeshis live in rural areas, but new employment opportunities in the industrial and service sectors have fueled urban population growth in recent years. ii. Despite its challenging circumstances, Bangladesh has proven to be remarkably resilient and achieved significant human development gains. Impressive progress was made in health outcomes, especially in maternal and child health. Population growth slowed considerably during the past thirty years, falling from 2.7 percent per year in the 1980s to around 1.4 percent in the 2000s. In addition, Bangladesh attained near universal access to primary education and gender equity at the primary and secondary education levels. Not only did educational attainment of women improve, but women’s labor force participation increased significantly between 2003 and 2013, while gender wage differentials narrowed. Progress in these areas was supported by policy interventions, macroeconomic stability, a vibrant private sector and the many grass root movements which pioneered innovative mechanisms to respond to the needs of the poor. iii. Bangladesh also achieved significant progress towards achieving the twin goals of eradicating poverty and promoting shared prosperity. Bangladesh is projected to have achieved the Millennium Development Goals (MDG) of halving the incidence of extreme poverty. Projections indicate that the national poverty rate fell from 58.8 percent in 1991-92 to 24.8 percent in 2015. Increase in labor income, agricultural productivity, female labor force participation and remittance transfers have been important drivers of poverty reduction. Moreover, Bangladesh is among a select group of countries worldwide that experienced a decline in inequality. Between 2000 and 2010, inequality in rural areas, where about 70 percent of the population continues to reside, remained more or less unchanged, while inequality in urban areas trended downwards. With a Gini index of about 0.30 at the national level, inequality in Bangladesh is lower than in Nepal, India, Sri Lanka, Indonesia, and most East Asian countries. iv. In 2014, Bangladesh crossed the threshold to become a low middle income country (LMIC) and per capita income continued to increase in FY15 to US$1,220. GDP grew well above the average for developing countries in recent years, averaging 6.2 percent since 2010, and GDP growth is expected to further rise to 6.7 percent in FY17 and 6.8 percent in FY18. Robust macroeconomic fundamentals, strong growth of exports and remittances, and relatively under- developed and insulated financial markets have played an important role in sustaining these high growth levels. Bangladeshi exports doubled their world market share between 1995 and 2012, mainly driven by exports of Ready Made Garments (RMG). Today, the country is the world’s second largest RMG exporter. v. Despite Bangladesh’s remarkable development achievements, significant challenges remain in its quest to eliminate poverty and further climb up the middle income ladder. Bangladesh remains one of the poorest countries in South Asia, with constrained public services i and comparatively weak institutions. Even though it has done fairly well in recent years, many others, e.g. China, Sri Lanka, and Vietnam, have done much better. Moreover, even if Bangladesh’s economy were to continue to grow as rapidly as it has since 2000, simulations indicate that the poverty rate would fall to 15-20 percent by 2030. While this is good progress, it still remains well short of what is required to eliminate extreme poverty by 2030. vi. The fundamental challenge facing Bangladesh today as a nascent MIC is to create more and better jobs that contribute significantly to growth and poverty reduction. Bangladesh’s labor force is growing by 3.1 percent per annum and 21 million people are expected to enter the working age population over the next decade. The World Bank Group’s Systematic Country Diagnostic (SCD) identified three foundational and five transformational priorities where concerted efforts would yield the highest payoffs for promoting sustainable growth and creating jobs in Bangladesh. The foundational priorities include (1) maintaining macroeconomic stability, (2) promoting human development and (3) strengthening institutions and the business environment. Bangladesh has performed well in these areas and they continue to be important pre- requisites for faster job creation and require sustained attention. The transformational priorities represent areas where performance has lagged, such as (1) energy, (2) inland connectivity, (3) regional and global integration, (4) urbanization, and (5) adaptive delta management. Concerted actions in these areas over the next three to five years could have a profound impact on the pace of poverty reduction and growth. vii. In light of this, the CPF will refocus the WBG’s strategic direction on removing stubborn impediments to job creation and growth. The CPF’s primary objective, therefore, is to increase engagement in the five transformational priorities to make a dent in poverty reduction. The Bank will shift more financing towards energy and transportation infrastructure—areas where progress has been limited, where the Bank has a comparative advantage and where it must play an active role to remain relevant. This strategic shift was initiated at mid-term of the previous country strategy and is consistent with the Bank’s analytical work and stakeholder consultations reflecting that underinvestment in key infrastructure is the binding constraint to growth. In addition, the CPF will build on a well-performing portfolio, particularly in human development, identified by the SCD as foundational priorities which are important prerequisites to sustained growth. Engagements from the previous strategy that promote inclusive growth—notably in health, education and social protection, as well as in revenue mobilization, financial sector support and the business environment—will continue. viii. The CPF will also give greater prominence to policy reforms and make policy dialogue an integral building block in the country program. This will be pursued through multiple channels that expand on the ongoing investment operations and technical assistance. These channels include engaging in high level policy dialogue, underpinned by development policy lending to promote economic competitiveness, increase the reliability of power supply, and modernize the country’s infrastructure. The Bank will continue to use results-based financing to bring about systemic policy reforms in areas beyond human development such as strengthening the national statistical and procurement systems. Where possible traditional operational engagements will support operational designs that help enhance the functions and service delivery of local governments by supporting, for example, fiscal decentralization and performance-based ii resource allocation. In addition, supporting government efforts to strengthen governance systems will be critical to building a strong policy dialogue to enhance Bangladesh’s competitiveness. ix. In defining the program, the CPF considers three selectivity criteria: i) consistency with the Government’s 7th Five Year Plan to ensure strong country ownership; ii) alignment with policy priorities identified in the SCD, in particular the five transformational priorities to achieve the greatest impact on poverty reduction and shared prosperity; and iii) the WBG comparative advantage, taking into account the knowledge and financing support provided by other development partners. By design, the CPF follows the same cycle (FY16-20) as the government’s five year plan. x. The activities in the CPF are structured around three focus areas consistent with the South Asia Regional Strategy—growth, social inclusion and climate and environmental management. Under the Growth and Competitiveness pillar, WBG activities will seek to remove barriers to growth by increasing electricity supply, improving transport connectivity, expanding financial intermediation and creating an environment conducive to doing business. To support social inclusion, WBG activities will aim to consolidate the equity and access gains in health and education with continued due regard to gender, and address the next generation of challenges related to quality improvements in health, access to clean drinking water and sanitation, and education and skills development. In addition, the WBG will seek to expand pro-poor coverage of social protection and help the poor secure better formal sector jobs at home and abroad, while bringing the rural poor into the folds of the country’s progress with support to their livelihoods. Under the third pillar, Climate and Environment Management, the WBG will support the government’s efforts in adaptive delta management, which seeks to ensure that sectoral investments take into account the long term uncertainties related to climate change and growth. WBG activities will focus on boosting Bangladesh’s resilience to climate change and natural disasters, improving the management of water infrastructure and promoting agricultural productivity with climate-smart farm practices and technology, diversification and accelerating the move up the value chain. xi. The CPF identifies governance reforms as a long-term agenda that demands sustained effort as well as downstream and upstream interventions. At the national level, the Bank will continue to provide lending and technical assistance to support policies and systems aimed at improving transparency and efficiency in service delivery. These include maintaining ongoing public sector reforms to improve public financial management, promoting electronic government procurement, reinforcing audit and parliamentary oversight functions, and automating VAT administration to boost tax revenues. New IDA operations are planned to strengthen the corporate governance of state-owned financial institutions and to expand the use of personal identification by linking it to delivery of public services. At the portfolio level, the CPF seeks to strengthen institutions through capacity-building activities embedded in operations. It will also enhance fiduciary oversight in the implementation of the World Bank program—particularly for large infrastructure projects, and including extensive use of forensic audits—to ensure resources are used for their intended purposes. iii xii. Bangladesh has a well performing WBG portfolio and is the largest IDA17 recipient, with an indicative total allocation of US$3.8 billion equivalent (SDR 2.7 billion). Under IDA16, the Government utilized its entire allocation for the first time in two decades and is poised to do the same with IDA17 resources. Where possible, the Bank will also tap into regional IDA resources to finance initiatives that tap into Bangladesh’s strategic location for trade, logistics and regional cooperation. Bangladesh’s IDA financing will be supplemented by a robust trust fund portfolio aligned with the country program. IFC investments are expected to range from US$500-600 million per year and, along with advisory services, will address physical, financial and regulatory constraints to competitiveness. MIGA will seek opportunities to expand its engagement in Bangladesh and has currently US$480 million of guarantees in the pipeline in the power generation sector. Beyond financing, the WBG will undertake a range of analytical work during the course of the CPF to fill key knowledge gaps that warrant policy attention. The five key knowledge gaps identified in the SCD relate to labor markets, fiscal challenges, land markets, public service delivery and gender. xiii. The overall risk to achieving the development objectives for Bangladesh, as outlined in the CPF, is high. The main risks emerge from the political and governance environment, weak fiduciary capacity, and an elevated safeguard risk profile due to the planned shift towards infrastructure investments. These risks are not new and have been a defining feature of the previous CAS, but each one has the potential to compromise the achievement of the overall CPF objectives. As a global development institution with the mandate to fight poverty and boost shared prosperity, the World Bank Group must take calculated risks to remain relevant in countries such as Bangladesh where the need for development assistance is enormous. As in the past, risks will be monitored continuously throughout the implementation of the CPF in close collaboration with the Government and development partners, and the mitigation measures currently in place will be further adapted based on lessons of experience. iv II. COUNTRY CONTEXT AND DEVELOPMENT AGENDA 2.1. Social and Political Context 1. Bangladesh lies along the Ganges-Brahmaputra Delta—Asia’s largest and the world’s most densely populated delta. The country’s 160 million inhabitants live on a land mass of nearly 150,000 km2, resulting in a population density of about 1,600 per km2. The delta not only marks the country’s physiology, but also the culture and livelihoods of its people. Like all delta environments, Bangladesh is a hotspot for natural disasters and climate change. Today, most Bangladeshis live in rural areas, but new employment opportunities in the industrial and service sectors have fueled urban population in recent years. 2. Since the return to electoral democracy in 1991, two political parties, the Awami League (AL) and the Bangladesh Nationalist Party (BNP), have dominated politics. Bangladeshis regard democracy as an important legacy of their war for independence from Pakistan in 1971, and they vote in large numbers. The AL and BNP alternated power in the 1990s and 2000s, until the AL government returned to power for a second consecutive term in 2014, following a BNP boycott of the elections. Increasingly confrontational politics have also resulted in long stretches of general strikes (hartals) and transport blockades. Unrest during election periods and following recent war crime verdicts have often paralyzed civil and economic activities: political violence around the 2014 elections led to more than 500 deaths; and turmoil in the first quarter of 2015, sparked by the one year anniversary of the 2014 election, resulted in 100 more deaths and is estimated to have cost Bangladesh US$ 2.2 billion or about one percent of its GDP. 3. Despite longstanding political differences, governments across the political spectrum have exhibited strong commitment to the country’s long-term development agenda. Although institutions in Bangladesh remain weak, successive governments have maintained macro- economic stability, and made efforts to liberalize trade, reform the financial sector and limit interference in business. They worked with the private sector to introduce market-friendly reforms and established economic zones that fueled the growth of the export-oriented garment manufacturing industry, raised export earnings, and provided employment to many Bangladeshis, including women. As a result, Bangladesh has maintained a healthy growth rate averaging 5.5 percent in the last two decades. 4. Bangladesh is a Muslim majority democracy with a vibrant civil society. Almost 90 percent of the population is Muslim and about 9 percent is Hindu; the remainder consist of small groups of Christians and other religions and ethnic minorities. Since independence, relations among these groups have been mostly harmonious, and Bangladesh’s society is characterized by a strong cultural bond and national identity. A strong civil society and grass root movement emerged in the wake of the 1971 war to provide assistance to impoverished communities. Institutions like BRAC and Grameen Bank are world-renowned for their development work and have pioneered innovative mechanisms to respond to the needs of the poor. 5. Bangladesh shares a 4,100 km border with India, making regional cooperation between the two countries an imperative. During Indian Prime Minister Modi’s visit to Dhaka in June 2015, more than 20 cooperation agreements were signed, including a historic land 1 boundary agreement under which India and Bangladesh exchanged more than 160 small enclaves which had existed within each other’s territories since the partition of British India in 1947 . The two sides also agreed to establish a Special Economic Zone for Indian firms, initiate new trans- border bus services and enable Indian vessels to use Bangladesh’s ports. India extended a US$2 billion line of credit to Bangladesh and pledged investments of US$5 billion, mostly in the energy sector. In addition, a 2014 UN Tribunal ruling settled a 40 year old dispute over maritime waters between India and Bangladesh, enabling Bangladesh to explore for oil and other natural resources in the Bay of Bengal. Bangladesh shares 57 transboundary rivers with India, and therefore cooperation on water management through a river basin approach is an important agenda for the two countries. This includes cooperation in managing the unique Sundarbans landscape encompassing several shared rivers and home to some of South Asia’s poorest. 6. Despite its challenging circumstances, Bangladesh has proven to be remarkably resilient and achieved significant human development gains over the last four decades. The war of independence in 1971 was followed by a devastating famine in 1974, and then a series of deadly cyclones and severe floods in the 1980s and 1990s, as well as global oil and food price crises in the late 2000s. Even so, Bangladesh exceeded expectations. In 1971, Bangladesh ranked well below India in many social indicators, but today, with less than 60 percent of India’s income per capita, it ranks higher in most such indicators, as well as above many other low- and lower- middle-income countries with similar or better initial conditions in 1971 (Table 1). Table 1: Social Indicators for Bangladesh and Comparator Countries Low-income Lower middle- Bangladesh India Indicator countries income countries 1971 2013 1971 2013 1971 2013 1971 2013 GDP per capita (constant US$ 2005) [1971-2013] 259 621 272 1,165 376 456 410 1,261 Life expectancy (years) at birth [1971-2012] 47 70 50 66 46 62 52 66 Infant mortality rate [1971-2013] 149 33 141 41 145 53 124 44 Total fertility rate [1971-2012] 6.9 2.2 5.4 2.5 6.7 4.1 5.6 2.9 Mean years of schooling of adults [1985-2013] 2.4 5.1 2.4 4.4 2.3 4.0 3.1 5.4 DPT child immunization rates (%) [1985-2103] 2 97 18 72 24 80 27 76 Access to improved sanitation (%) [1991-2012] 35 57 18 36 22 37 30 47 Prevalence of undernourishment (%) [1991-2012] 34 16 26 17 34 26 25 15 Source: WDI. Mean Years of schooling: Barro and Lee (2013) UNESCO (2013b) and HDRO estimates. Low and lower middle income groups comprise countries with per-capita GNI