LINKING IDA SUPPORT TO COUNTRY PERFORMANCE Third Annual Report on IDA's Country Assessment and Allocation Process International Development Association April 2002 -i- Acronyms and Abbreviations ARPP Annual Review on Portfolio Performance CAS Country Assistance Strategy CPIA Country Policy and Institutional Assessment DRC Democratic Republic of the Congo ESW Economic and Sector Work GNI Gross National Income IDA International Development Association PBA Performance-Based Allocation system PCPA Per Capita Per Annum PR IDA Country Performance Rating PRSP Poverty Reduction Strategy Paper SDR Special Drawing Right TSS Transitional Support Strategy TABLE OF CONTENTS 1. The Role of Resource Allocation in Increasing Aid Effectiveness .....................................1 2. Enhancing and Implementing IDA's Performance-Based Lending Framework ............2 2.1 Highlights of the PBA System in 2001 ..............................................................................2 2.2 Country Policy and Institutional Assessment.....................................................................3 2.3Annual Report on Portfolio Performance.. ..........................................................................4 2.4 From Governance Discount to Governance Factor.. ........................................................... 2.5 IDA Country Performance Assessment .............................................................................5 2.6 Allocating IDA Resources According to Performance ......................................................6 2.7 IDA Allocation FY03-05.. ..................................................................................................8 2.8 Future Work ...................................................................................................................... .9 3. Work in Progress: Assuring Stronger Linkage between Performance-based Lending and Results on the Ground ..........................._......................................................................10 Annexes Annex 1 - CPIA Criteria.. ......................................................................................................... .l 1 Annex 2 - CPIA 2001 Clusters and Portfolio: Quintile-Based Cluster Results.. .......................12 Annex 3 - Rating Portfolio Implementation .............................................................................. 15 1. The Role of Resource Allocation in Increasing Aid Effectiveness 1. IDA has seen a marked improvement in the quality of its portfolio since the mid-90's'. Despite the growing complexity and more demanding nature of the development agenda, IDA's portfolio showed a sharp reduction in the projects at risk of not achieving their objectives. In the five years from FY96 to FYOl, these fell from 28% to 13%2. This improvement can be attributed to a number of factors, including: l enhanced modalities qf IDA `s lending operations by sharpening country focus, centered on CASs developed with broad participation; tightening social and environmental project standards; improving fiduciary performance through country assessmentsof financial management and project procurement and fiduciary safeguards; and increasing efforts to link country efforts to key global challenges; and, especially l a better targeting qfresources on countries with goodpolicies. IDA's funding has become increasingly well-targeted by using its Performance-based Allocation (PBA) system. Recent research on aid effectiveness shows that a typical dollar of IDA flows leads to an increase in gross investment of nearly two dollars, including in good policy environments about 60 cents of foreign direct investment. As a result, the overall return-in terms of the income growth spurred by IDA-may be as high as 40 percent3. 2. IDA's PBA system allocates its funds guided by its assessmentof the quality of client countries' policies and institutions. This system has in fact become a standard setter for many multilateral and bilateral development agencies, even as the PBA system continues to incorporate new findings concerning its methodology and application. The partner agencies consult regularly with IDA on the latest methodological enhancements in its assessmentsystem, as well as on the way this assessmentis used in determining the country allocation. 3. IDA now reports annually on its PBA system's evolution and results. This is the third such report4. Section II presentsthe enhancements made in 2001 in the PBA system and the experience with implementing that system. Section III discussesthe important role that IDA's PBA system will have to play as the development community focuses on aid effectiveness and measured outputs and outcomes in recipient countries. 2. Enhancing and Implementinp IDA's Performance-Based Lending; Framework 4. At the time of each triennial replenishment negotiation, IDA Deputies take stock of how well the system has performed and what enhancements ought be put in place. Thus the evolution of IDA's PBA system tends to advance in particular during the replenishment years. This was ' As measured by the Bank's independent Operations Evaluation Department ' Annual Report on Por