34790 FRAGILESTATES-GOOD PRACTICE IN COUNTRYASSISTANCESTRATEGIES OPERATIONSPOLICYAND COUNTRYSERVICES December 19,2005 ABBREVIATIONS AND ACRONYMS AMLICFT Anti-Money LaunderingXombatingo f MAP Multi-Country HIVIAIDS Programfor Financingof Terrorism Africa ARFT AfghanistanReconstructionTnist Fund MDTF Multi-donor Trust Fund AU African Union NGO Non-GovernmentalOrganization BP BankProcedure NSP EmergencyNational Solidarity Project CAR Central African Republic NTGL National Transitional Government of Liberia CAS Country Assistance Strategy OCP Onchocerciasis Control Programme CDC Community DevelopmentCouncil OECD Organizationfor Economic Co- operationand Development CDD Community DrivenDevelopment OECD-DAC DevelopmentAssistance Committeeof the Organizationfor Economic Co- operationandDevelopment CMC CashManagement Committee OED Operations EvaluationDepartment CPIA CountryPolicy and Institutional Assessment OP OperationalPolicy CPR Conflict Preventionand ReconstructionUnit OPCS Operations Policy and Country Services CPS CountryPartnershipStrategy PFM Public Financial Management CRN Country Re-engagementNote PNG PapuaNew Guinea DEC DevelopmentEconomics PREM PovertyReductionandEconomic Management DFID UKDepartmentFor International PRS PovertyReductionStrategy Development DPL DevelopmentPolicy Loan PRSP Poverty ReductionStrategy Paper DPO DevelopmentPolicy Operation RFTF Results-FocusedTransitional Framework DRC Democratic Republic o f Congo SMC SchoolManagement Committees ECOWAS Economic Community of West Afncan SME Small andMediumEnterprise States EEMP EmergencyEconomic Management Plan SPLM SudanPeople's Liberation Movement EITI ExtractiveIndustriesTransparency Initiative TA TechnicalAssistance ESW Economicand Sector Work TF Trust Fund EU EuropeanUnion TFWBG Trust Fund for West Bank andGaza FAS SocialAction Fund TRM TransitionalResultsMatrix FY FiscalYear TSPKSP Transition Support ProgradConsolidated Support Program GEMAP Governance and EconomicManagement UN UnitedNations Program GOA Government ofAfghanistan UNDP UnitedNations Development Programme IBRD InternationalBankofReconstructionand Development ICF InterimCooperationFramework IDA InternationalDevelopmentAssociation IDB Inter-AmericanDevelopmentBank IFC InternationalFinance Corporation IMF InternationalMonetaryFund I S N InterimStrategyNote LEG Legal Department LICUS Low-Income Countries Under Stress LICUSTF Low-Income Countries Under Stress Trust Fund FRAGILE STATES-GOOD PRACTICEIN COUNTRYASSISTANCESTRATEGIES CONTENTS Executive Summary ......................................................................................................................... v I. Introduction............................................................................................................................. 1 I1. Common Principles and Themes ............................................................................................ 2 B. BuildingState Capacity and Accountability..................................................................... A. CommonPrinciples and Themes...................................................................................... 2 3 7 D. Donor Coordination for Results........................................................................................ C. Peace, Security and Development Linkages..................................................................... 9 E. InstitutionalFlexibility and Responsiveness.................................................................. 11 I11. DifferentiatingApproaches................................................................................................... 13 A. Differentiating Approaches............................................................................................. 13 B. ProlongedCrisis or Impasse .......................................................................................... 14 D. Gradual Reform.............................................................................................................. 20 C. Post-conflict andPolitical Transition.............................................................................. 16 E. DeterioratingGovernance............................................................................................... 24 F. "Neighborhood" Spillovers and Regional Programs...................................................... 27 IV. CONCLUSION..................................................................................................................... 29 Annex Annex A. OECD. Learningand Advisory Process on Difficult Partnerships. Draft Principles for Good International Engagement inFragile States ......................................................................... 31 Boxes Box 1. Paris Principles for International Engagement inFragile States ...................................... 3 Box 2. BalancingCapacity andAccountability - Guinea Bissau................................................ 5 Box 3. Support to State-building and Peace-building Goals inTimor-Leste ............................... 6 Box 4. The Economic Dimensiono fthe Search for Peace-West 9 Box 5. Non-traditionalPartnerships: the GEMAP inLiberia .................................................... Bank andGaza..................... 10 Box 6. Long-termEngagement-the Tajikistan CAS ................................................................. 12 Box 7. EnsuringOperational Readinessduring Prolonged Crisis.............................................. 16 Box 8. Transitional Results Frameworks-Liberia .................................................................... 17 Box 9. Development Policy Operations inFragile States-Timor-Leste .................................. 18 Box 10. Development Programs inInsecure areas- Afghanistan ................................................. 19 Box 11. Multi-donor Trust Funds for Post-conflict Recovery ..................................................... 19 Box 12. Results Selectivity and Long-term Partnership -Tajikistan ............................................ 21 Box 13. Leadership Support ......................................................................................................... 22 Box 14. BuildingState Institutions and Civil Society: the Nigeria CPS...................................... 22 Box 15. Anti-corruption Efforts in Cambodia.............................................................................. 23 iv Box 16. Differentiating Strategies within Large States.- Nigeria and India................................ 24 Box 17. Reorienting Strategies to Adapt to Deteriorating Govemance-PNG ........................... 25 Box 18. Community-driven Development Programs in Volatile Country Contexts.................... 26 Box 19. The Onchocerciasis Control Programme (OCP)............................................................. 28 Tables Table 1. Differentiated Approaches across the Fragile States pectrum ....................................... vii Table 2. Differentiating LICUS Contexts ..................................................................................... 13 Table 3. Differentiating Approaches to Context........................................................................... 14 FRAGILESTATES-GOOD PRACTICE IN COUNTRY ASSISTA~VCE STRATEGIES EXECUTIVE SUMMARY 1. Three years after the 2002 Report of the Low Income Countries Under Stress (LICUS) Task Force, this paper draws together lessons from country strategy development and implementation in fragile states. The principles and approaches presented here are not intended to be prescriptive, but rather to provide a basic framework and menu o f tools to facilitate the sharing o f lessons between countries and regions. 2. The Bank identifies fragile states by weak performance on the Country Policy and Institutional Assessment (CPIA). They share a common fragility, intwo particular respects: 0 State policies and institutions are weak in these countries: making them vulnerable in their capacity to deliver services to their citizens, to control corruption, or to provide for sufficient voice and accountability. 0 They face risks of conflict and political instability. Of 26 countries with intermediate or worse civil conflicts between 1992 and 2002, 21 were also LICUS during this period. 3. These challenges are interlinked. Erosion o f state capacity or accountability eventually results infailure to mediate competing interests, generate economic growth or provide services in an inclusive and accountable way, creating the space for political instability or conflict. Conflict in turn erodes state institutional strength and draws resources away from the productive sector and human development. The impact o f this vicious cikle i s clearly seen in development outcomes in fragile states. LICUS have twice the income poverty and child mortality rates o f other low income countries: they also pose a risk o f negative spillovers for their neighbors and the wider global community, through spread o f conflict and organized crime, refugee flows, epidemic diseases, and barriers to trade and investment. Improvingthe international response in these countries is a critical development challenge. 4. Common themes. Since 2002, the Bank has sponsored a differentiated approach to country strategy development in fragile states, and has participated actively in international debates on new research and its implications for development policy. Both practical country experience within the Bank and international policy discussions have highlighted an emerging consensus on a number o f core themes which are important across the fragile state spectrum: 0 the centrality o f efforts to build state capacity and accountability,including strong attention to the most basic state administrative and delivery systems, complementing capacity investments with robust efforts to improve accountability, and balancing state capacity-building efforts with support for civil society and the private sector; vi 0 interlinkages between peace-building and development challenges, including the need to design interventions which are sensitive to political and conflict dynamics, and the importance o f efforts to reduce crime, instability or conflict as development goals in their own right in fragile situations; 0 international partnerships, including aspects o f ownership, alignment and harmonization particular to fragile states such as the need to aim at simplified overarching planning and monitoring tools, align with a broad group of stakeholders and work with differing compositions o f international actors; 0 the need for a strong and flexible institutional response, including the critical importance o f field presence, specialized staff skills and knowledge, speed, adaptability, and long-term partnerships. 5. The first two common themes-state-building and peace-building-relate to the goals and activities undertaken in country assistance strategies. The report elaborates on ways in which the Bank can strengthen its approach in these areas, drawing on the lessons of practical country experiences. The last two areas-international partnerships and institutional response- relate to the supporting infrastructure which is necessary for the Bank to engage more systematically in support o f state-building and peace-building in fragile states. Both aspects are important: there is scope to strengthen the strategic focus o f the Bank's work, but a strong focus on an integrated approach to state-building and peace-building will only work if the Bank is willing to engage inthe international partnerships and reinforcement o f organizational capacities necessary to deliver results. Section I1 of this paper elaborates on the implications of these common themes for country assistance strategies. 6. Differentiated approaches. A strengthened consensus on common themes is useful, but it is also critical to recognize that fragile states cannot be assisted through a uniform approach- they face very different challenges inthe political environment, state capacity and accountability, and reform orientation. While state capacity and accountability, peace-building, new international partnerships and the need for institutional flexibility are common themes across the fragile state spectrum, the way in which these themes are applied will and should differ in different fragile state contexts. Insituations o f deteriorating governance or prolonged crisis, for example, efforts to build state accountability and transparency may be an important pre-requisite to efforts to build state capacity. Equally, states at the more stable end of the spectrum o f fragility may no longer need to explicitly prioritize peace-building efforts-but strong analysis o f conflict risks and efforts to ensure that resurgent crime and social disorder or renewed conflict do not undermine development progress are still important. 7. Experience in country strategy development and implementation have drawn out these differences: country teams have developed approaches which can be clustered into four emerging business models for engagement. Section I11 draws together good practice from across the regions in these different country situations, providing guidance on good practice as well as a series o f country examples. The menu o f tools and approaches identified are summarized in Table 1 overleaf. vii Table 1. Differentiated Approache across the Fragile States Spectrum Deterioration Prolonged crisis or impasse interim strategy note. focusing on stemmingdecline in Interim strategy note, focusing on maintaining operational governance and social services, and contributing in readinessfor re-engagementand providing economic economic and development areas to multi-donor conflict- inputsto early peace or reconciliation dialogue. prevention efforts. Limited new financing; focus on Small grant-based finance, aiming at local economic portfolio restructuring. development and protectionof human capital, generally Increaseduse of CDD, privatesector, NGO and ring- through non-government recipients(including service fenced mechanisms(including service delivery and local delivery and local economic development in areas o f economic development in areas of insecurity). insecurity). State capacityand accountability:focus on transparency, Capacityand accountability:focus on institutional analysis, dialogue and maintaininginstitutional capital to facilitate dialogueand counterparttraining. eventual turnaround. Use of socio-economicissues for restoration of Contributing to community level conflict prevention, and to dialogueiidentificationof entry points for change. multi-donor efforts for peace-buildingor governance reform at anational level. Post-conflict or political transition Gradual improvement Interim strategy note, focusingon rebuilding state capacity CountryAssistance Strategy, focusing on building state and accountability, and delivering rapid visible capacityand accountability,achieving selective development resultsin support o fpeace-building. development results, and boostingsupport for reform ExceptionalIDA allocation. currents, supportedby moderate IDA allocation. Joint needs assessmenthecoveryplanning, linking political, Activities to boost domestic reform currents, including security, economic, and social recovery. leadership support, communicationsinitiatives, training State capacityand accountability:support for abroad state- and capacity-building. building agenda, through institution-building and, where State capacityand accountability: developmentpolicy appropriate, development policy operationswith robust operations (whereappropriateand restrictedinvolume), oversightmechanismsand sector programs(including supportedby sector and capacity-building projectsand with transitionalprojectsworking through CDD or NGO strongoversightmechanisms. Asymmetric reforms. 'mechanisms). Leadershipand civil society support. Public administration, service delivery and economic Public administration, service delivery and economic development to address areas with crime, insecurity or development to address areas with crime, insecurity or conflict. conflict. 8. None o f these elements are intended to create a boilerplate for Bank assistance strategies. Assistance strategies must remain firmly rooted in country-specific analysis and dialogue- indeed, many o f the recommendations focus on how to strengthen analysis and dialogue. The note does however aim to bring together examples o f good practice from across regions and country teams after three years o f implementation o f the LICUS initiative, allowing for more systematic sharing o f experiences to inform country strategies in future. The Bank, like other international partners, i s still learning what approaches work in fragile state contexts. Going forward, it will be critical that the Bank continues to evaluate operational experiences carefully and adjust and improve approaches based on lessons learned. FRAGILESTATES-GOOD PRACTICE IN COUNTRYASSISTANCESTRATEGIES I.INTRODUCTION 1. Purpose. Three years after the 2002 report of the LICUS task force, this report draws together lessons on country strategy development and implementation. The principles and approaches presented here are not intended to be prescriptive, but rather to provide a basic framework and menu o f tools to facilitate the sharing of lessons betweencountries and Regions.' 2. Background. In 2002, the Bank's Board endorsed the need to intensify engagement in Low Income Countries Under Stress (LICUS). The 2002 report highlighted some general principles for engagement but did not lay out operational guidance for staff, recognizing that more work was needed to identify effective approaches. During the last three years, Bank country teams have developed a number o f promising approaches in country assistance strategies, and the Bank and other donors have conducted further research and policy discussions on aid effectiveness in fragile states. This report takes the opportunity to draw together some o f these lessons on good practice to inform future country assistance strategies: it is intended as a working tool for operational guidance, and will continue to be updated and amended as further operational lessons emerge. 3. Definitions. Since the LICUS task force reported in 2002, there has been considerable international attention to countries under stress, with different terms adopted to describe these situations: difficult partnerships, countries at risk, difficult environments, failing states. The 2005 Senior Level Forum inLondon and March 2005 Paris High Level Forum on harmonization coalesced around the term "fragile states": in the interests o f harmonization, the Bank proposes adopting the same term inits own work. 4. The Bank identifies fragile states by weak performance on the CPIA.2 They share a common fragility, intwo particular respects: 0 State policies and institutions are weak inthese countries: making them vulnerable in their capacity to deliver services to their citizens, to control corruption, or to provide for sufficient voice and accountability. 0 They face risks o f conflict andpolitical instability. Of 26 countries with intermediate or worse civil conflicts between 1992 and 2002, 21 were also LICUS during this p e r i ~ d . ~ I The good practice note examines strategies, approaches and tools which may be usefbl within the Bank's existing policy framework: relevant policies include OP/BP 2.1 1,Country Assistance Strategies; OP/BP 2.30 Conflict and Cooperation and, in some cases, OPBP 8.50 Emergency Recovery Assistance and O P B P 7.30 De facto governments. 2 Core LICUS are considered to be those countries at 3.0 or below inthe CPIA overall and governance ratings; recognizing that the institutional and governance context changes gradually, the Bank also monitors marginal LICUS with ratings of 3.2 or below. The remainder were sub national conflicts. 2 5. These challenges are interlinked. Erosion o f state capacity or accountability eventually results in failure to generate economic growth or provide services in an inclusive and accountable way, creating the space for political instability or conflict. Conflict in turn further erodes state institutional strength and draws resources away from productive sectors and human development. The Bank's LICUS initiative has thus worked closely with the Conflict Prevention and Reconstruction and PREM governance units, building on the substantial track record o f research and operational engagement inthese areas. 6. While the Bank's fragile states work focuses on a tightly defined group o f countries at the bottom o f the CPIA, operational experience has shown that fragility is less clear cut. First, fragility does not disappear when a country achieves a small increase in the CPIA: for this reason, the Bank has maintained close attention to `marginal' LICUS who have made small performance improvements but remain fragile. Second, other countries outside the core fragile states group have found elements o f the donor debate on fragile states to be useful. This has included higher income countries facing the aftermath o f conflict, genocide or social instability (e.g. Balkans); more strongly performing countries facing rising conflict risks (e.g. Nepal), and strongly-performing states facing fragility in particular sub-national regions (e.g. India, Philippines). The Bank proposes a pragmatic approach to this spectrum o f fragility: maintain a focus on a core group o f countries where fragility is most pronounced, but encourage other clients or country teams to make use o f tools and approaches developed for fragile states whenever this fits their needs and circumstances. 7. Commonalities and differences. Experience in country strategy implementation also indicates the need to take advantage o f the opportunities for shared learning which arise from common challenges across the fragile state spectrum, while recognizing that fragile states face very different constraints. Section I1o f this report identifies a number of common themes which apply across the fragile state spectrum and elaborates key lessons learned on how to apply these themes within country assistance strategies. Section I1goes on to describe four types o f different fragile country contexts which have emerged across regions and looks at more specific tools and approaches which maybe useful inthese differing circumstances. 11. COMMONPRINCIPLESANDTHEMES A. Common PrinciplesandThemes 8. Some principles are common to the fragile states group as a whole. The Bank's Board has endorsed the need to stay closely engaged in all fiagile states, despite their volatility. The LICUS task force report o f 2002 also laid out the need to anchor strategies in careful political analysis, promoting domestic demand and capacity for positive change, supporting simple entry level reforms, andworking closely with other donors. 9. Over the last two years, the Bank has worked with other donors at the OECD DAC to develop and endorse a set o f more detailed working principles for international engagement in fragile states, discussed with fragile state partner countries in March 2005. There are twelve principles, which can be clustered into four main themes which are used to structure this report. 3 First, a long-term focus on state capacity and accountability i s critical in all fragile state contexts if these countries are ever to find a durable exit from crisis. Second, political, security and development linkages are particularly important in fragile state contexts. Third, particularly close partnerships between international actors are needed, since low counterpart capacity and difficult political environments mean that fragmented international dialogue or donor programs are unlikely to deliver results. Fourth, donor organizational responses must be calibrated to the specific needs of fragile states, acting faster and more flexjbly, staying engaged for the long- term, and coordinating to address problems of aid orphans and donor-driven aid volatility. Box 1. Paris Principles for InternationalEngagement in Fragile States (Summary, full text attachedat annex A) Take context as the starting point: soundpolitical analysisis needed, above and beyondquantitativeindicatorsof governance, institutionalstrength or conflict. Move from reactionto prevention, sharing andrespondingto risk analysis, addressingtheroot causes of state fraglity and strengtheningcapacityof regionalorganizations. Focuson state-buildingas the long-termvision, strengtheningthe capacity of state structuresto performcore hnctions; their legitimacyandaccountability;and ability to providean enablingenvironment for strongeconomic performance. Align with localpriorities where governmentsdemonstratepolitical will to foster their countries' development; where donorigovernment consensus is lacking,seek wider consultations and partial or shadow alignment. Recognizethe political-security-developmentnexus, movingto support nationalreformersindevelopingunifiedplanning frameworksfor political, security, humanitarian, economicanddevelopmentactivitiesat the countrylevel. Promotecoherence betweendonor agencies, involving those responsible for security, political andeconomic affairs as well as those responsible for development aid andhumanitarianassistance. Agree on practicalcoordinationmechanismsbetweeninternationalactors, includingupstreamanalysis;joint assessments;shared strategies;coordinationofpolitical engagement;joint offices, multi-donortrust funds andcommonreportingfiameworks. Dono harm, avoidingactivitieswhich underminenationalinstitution-building,such as by-passingbudgetprocessesor setting high salariesfor local staff. Mix and sequenceinstruments,includinguse ofboth staterecurrent financingandnon-governmentdelivery to fit different contexts. Act fast and with flexibility at shortnoticewhen opportunitiesoccur. ...but stay engagedlongenoughto give success achance: capacitydevelopmentin core institutionswill take at least 10years. Avoid pocketsof exclusion, addressing"aid orphans" andcoordinatingto preventexcessivedonor-drivenaid volatility. B. BuildingState Capacity andAccountability 10. Fragile states, as the name implies, are fragile because state institutions have limited capacity to deliver services to their citizens, to control corruption, or to provide for sufficient voice and accountability. In the long-term, therefore, a successful exit from fragility will only come about through stronger and more accountable state institutions which are resilient to political and economic shocks. Building state institutions means not only focusing on state capacity, but also on the responsiveness and accountability o f state institutions to the population at large, civil society and the private sector. 11. Work on governance, public institutions and public finance management is a central part o f Bank assistance to all client countries. In fragile states, however, this assistance needs to be calibrated to weaknesses in existing capacity and accountability and to the risk o f conflict or instability. Efforts to build state capacity and accountability in all fragile states will tend to put particular emphasis on the prioritization needed to continue improvement in state performance or prevent failure o f key functions; on the most basic administrative systems; the balance o f visible 4 and invisible results; the balance o f capacity and accountability; the politics o f institutional reform; and calibrating assistance to the state with assistance to the private sector and civil society. 12. Consensus on strategy and expected results. It is important to work with national counterparts and other donors to identify institutional strengths and weaknesses and develop consensus on priorities and expected results, recognizing that institution-building needs to be embedded in a strong understanding o f the political dynamics o f reform and existing capacity constraints, and combined with on-going service deli~ery.~ Insome contexts, (see differentiated approaches, below) priorities may focus primarily on increasing transparency and accountability in state functions, while in others strong capacity-building efforts are needed to support reform transitions and demonstrate that the state can improve the delivery o f positive services to the population. Priorities may occur across the spectrum o f core state functions: while the Bank focuses on economic management, public finances and service delivery, it i s important to recognize the efforts o f government and other donors to strengthen functions and results outside the Bank's core competences. 13. Balance of visible and invisible results. Where basic laws and administrative systems are very weak, there i s often a temptation to focus efforts on establishing the basic legal, organizational and procedural frameworks necessary to regain administrative control. Many o f these reforms, however are invisible to the population at large; and without popular understanding o f the benefits o f reform, domestic reformers may lose influence and ability to sustain reform efforts. It i s therefore important in designing institution-building initiatives to ensure that these will generate some tangible, visible results within a reasonable time period, even if these are modest (for example, paying salaries more reliably; ensuring that procurement reform will deliver drugs to clinics or textbooks to schools). Transitional Results Matrices, established as part o f a PRSP action plan or prior to development o f a PRSP, are a useful tool to plan the achievement o f short-term visible results alongside longer-term institution-building actions. 14. Transition strategies. Effective transitions within fragile states will often require exceptional institutional arrangements to fill temporary gaps in capacity or accountability, drawing on the potential for supplementary oversight, delivery capacity or technical assistance within the private sector and civil society or international partners. These institutional arrangements may form a critical part of a long-term strategy to build strong state institutions, but they are likely to be acceptable to national counterparts and realize sustainable results only when they are part o f a systematic transition strategy to build capacity and enable the transfer o f responsibilities to permanent state institutions over time. Clearly communicating the purpose and expected benefits o f transitional institutional arrangements to stakeholders is also critical to buildmomentum for reformtransitions. Building on the zero generation reform approach laid out by the LICUS task force, parameters used to determine priorities in different fragile states have included: (i)actions necessary to lock in promising reforms or lay the basis for future improvements in state delivery; (ii)actions necessary to prevent potential instability; (iii)actions necessary to build popular momentum for reform by generating visible results. See also forthcoming working papers on core state functions available from OPCS. 5 15. Capacity and accountability. Initiatives to build capacity also need to move in tandem with efforts to build accountability. It is therefore particularly important in fragile states that efforts to strengthen state service provision are calibrated with robust economic governance initiatives to maintain adequate fiduciary controls and accountability over the targeting and use o f funds. Reform-minded governments in fragile states will generally wish to deploy some measures o f external oversight to demonstrate the effective use o f public funds: these may include civil society oversight mechanisms for major revenue and expenditure actions, transparent budget and public expenditure tracking; the use o f external procurement, financial management or audit services; or social accountability measures at the community level. Box 2. Balancing Capacity and Accountability Guinea Bissau - Following the establishment of the 2003 transitionalgovernment in Guinea Bissau, authorities preparedan Emergency Economic Management Plan (EEMP), which was supportedby the internationalcommunitythrough a UNDP-administered trust fund. The Cash Management Committee(CMC) was establishedas an oversight body for the donor-financedfund, to promotetransparency, fiscal responsibility and accountabilityandreinforcethe government'scapacityto managethe budget. The fund coveredcivil service salaries for health and education sectors, as well as services in key areas, such as public utilities; and supportedtechnical assistancefor public financial management, civil service reform and human resource management. As aresult of the experience under the EEMP, the Treasury Committeeauthorities under the CMC have invited donor and civil societyrepresentativesto sit on this committeealongwith governmentofficials. The CMC assists in drafting annualtreasury plansand monthly cash flow plans in accordancewith the budget law and provides bothweekly andmonthly reportsto the Ministry of Finance, andto government as a whole, on receiptsanddisbursements. The successful implementationof the cash managementplan over the last two years helpedthe governmentestablish transparent country systems, which servedto establish atrack recordofthe government'sseriousnessin addressingfiscal restructuringto returnpublic finances to a sustainablelevel. As a result, donors' confidenceand willingness to provide budget support to Guinea Bissauon a regularbasiswas renewed.The CMC example illustrateshow donor support and fiduciary oversight in extremely fragile states can be establishedthroughcountry systems ratherthan parallel extra-budgetarystructures, desuite initially low institutional capacity. 16. Basic economic, administrative and delivery systems. Most fragile states face weaknesses in basic economic, administrative and delivery systems: setting and implementing priorities at a cabinet level; budgeting; expenditure management; customs and revenue collection; payroll and personnel attendance; and core service delivery systems. Bank teams working in these situations need to have direct experience in the establishment o f basic administrative and delivery systems, both at a technical design level and in understanding the processes necessary for implementation. 17. Thepolitics of institutional reform. Inmost fragile state contexts, developing technical suggestions for institutional reform is easy; managing the political process o f reform i s much more difficult. It is therefore important that institution-building initiatives avoid purely technocratic approaches, devoting considerable attention to the process o f decision-making and implementation, and to well-designed participation and widespread communication o f reform initiatives. The "fit" o f institutional structures with local realities has also frequently been problematic in fragile states, due to ill-adapted colonial legacies or the imposition o f inappropriate external models: remaining open to new ideas for locally-driven institutional reforms and supporting local debate and discussion on options is critical. 18. Balancing assistancefor state institution-building with assistance to civil society and theprivatesector. A vibrant civil society andprivate sector are critical for effective governance: indeed, without a strong private sector to generate jobs, incomes and tax revenues, or without popular and civil society demand for accountable services, public sector reforms are unlikely to 6 be sustained. Assistance for "state-building" therefore includes support for private sector and civil society development, in all fragile state contexts.' In some contexts there may also be a need for civil society (including faith-based institutions) to take on an unusually strong transitional role in providing social services, where the state lacks the capacity or accountability mechanisms to deliver the desired short-term development results to the population. This can be a perfectly valid part o f a long-term state-building strategy: but where services are provided through these mechanisms, it is important to explicitly consider a transition strategy for the eventual transfer o f those services which are most efficiently provided through the state to public sector responsibility. 19. Approaches to decentralization. Along with efforts to strengthen capacity and accountability at the central level, strengthening local or community capacity for service delivery i s often a critical element o f a state-building-and peace-building-strategy in fragile states. Well-designed community-based development approaches or efforts to strengthen local government capacity and accountability can often deliver positive visible results in service delivery, which in turn can help strengthen the credibility of a national reform transition.6 However, there is a complex interplay o f political dynamics and incentives between national and local institutions: community-based approaches need to take account o f evolving capacities and responsibilities o f government; and state institution-building initiatives require the identification of the right balance between national and local responsibilities and capacities, taking into account political and conflict dynamics and the history o f institutional development. Box 3. Support to State-building and Peace-building Goals in Timor-Leste The 1999 crisis in Timor-Leste resultedin the destructionof over 70 percent ofpublicbuildings,the collapseofthepublic administration,depletionof humancapitalinkey sectors includingeducationandhealth,and the displacement of over one quarter of the population. Timorese society faced a numberofpotentialinternaldivisions, includingbetweenthosewho hadsupported independenceandthose who hadsupported autonomy; betweenreturningexiles andthose who hadstayedwithin the country; and from historical tensions within the pro-independencemovement. The Bank's strategy in the immediateaftermathofthe crisis hadtwo simplepillars: to support basic needs andto preparefor independence.To ensurea focus on state-building,the Bankhelpedthe Timoreseleadershipdraw upbenchmarks for administrative handoverfrom the UnitedNationsTransitionalAdministrationto new Timoresestatestructures. Transitionalprogramswere developed inthekey sectors to balancethe needfor immediateservice deliverywith state capacity-building: inhealth, for example, initial service provisionthroughNGOs was broughtunder the coordinationandfunding of the new ministryofhealth, with Timorese managementunitsprogressivelyreplacingNGOmanagementas statesystems andcapacityincreased. This allowedtime for the establishment of state institutions, the development of policy,managementandadministrativesystems, andstaff training-whilst also providingfor an acceptablelevelof service deliveryduringthe transition. The focus onpreparingfor administrativehandoverwas balancedby aprogramwhichrecognizedthe importanceo f thepolitical and securityaspects of the Timorese transition. Inclose cooperationwith theUNandbilateralpartners,the Bank supportedthe inclusiono f a programof policecapacity-buildingin themulti-donorbudgetsupportoperation; the demobilizationof ex-combatants; commissions to consider theroleandreintegrationsupport neededfor veterans of the armedandclandestinestruggle; anda series of leadership seminars bringingtogetherleadersfrom differentbackgroundsto work on the challenges ofmaintainingnational unity ina fragile transition, building a capable and accountable state andsupportingeconomic recovery. As the world's newest state, Timor-Lestestill faces many challenges, butwith strongleadershiphas already succeededinovercoming periodsof social tension; establishinga transparent framework for themanagementofoil revenues; andmakingprogressinthe uphill struggleof establishingeffective state systems andservices against a legacyofinstitutionalfailure andunder-development. The recent Report of the World Bank Task Force on Capacity Development in Africa, for example, sees the creation of space and strengtheningof capabilities of social actors to demandpositive change andpush for the effective execution o f state hnctions as a key feature ofthe emergingparadigm for capacity development. This requires the political space for involving civil society and the private sector in decision making and holding the state accountable for its functions, and the enhancedcapacityof civil society andtheprivate sectorto organize for these purposes. "Aid That Works: Effective Project Approaches in Fragile States" (working title); World BanWInstitute o f Development Studies, forthcoming. 7 C. Peace, Security and Development Linkages 20. As the linkages between poverty reduction and peace and security have become clearer in recent years, there have been increasing demands from both client governments and donors to develop a coherent analysis o f progress on these aspects, and to consolidate plans and requests for external finance such as to recognize the links between the different spheres. This pressure coincided with strong donor commitments to the harmonization and coherence agenda after the Rome declaration of 2003. It is also commensurate with renewed international attention to the need for an integrated approach to peace-building and assistance to fragile states, embodied in the Principles for Good International Engagement inFragile States (which include a focus on the political-security-development nexus) and the creation o f the United Nations Peace-Building Commission. 21. Issues related to peace, security and development linkages are present in country-level development debates across the fragile state spectrum, from the need for an integrated approach to prevent the escalation o f conflict, or support the implementation of peace agreements after civil war; to the need to enhance the capacity and accountability o f security sector institutions in order to combat crime and violence, improve human security and create an enabling environment for development interventions. The Bank has already supported a number o f operational approaches which recognize these linkages, including the development and use in many countries o f an integrated conflict analysis framework; Bank co-coordination o f integrated recovery planning processes which span the political, security, economic and social spectra (Haiti, Liberia, Timor-Leste, Sudan, Central African Republic); country assistance strategies which promote peace-building goals (Afghanistan and DRC); and incorporation o f security related activities within integrated multi-donor operations administered by the Bank, through fiscal agent or other donor partnership arrangements (Afghanistan and Timor-Leste). 22. Three points are worth underlining with regard to these approaches. First, the Bank has continued to focus on its core economic and development competences, but has increasingly recognized that these areas cannot be addressed in isolation from developments in the wider peace and security sphere. Second, assistance has been provided at the request o f client governments, recognizing that commitment to peace-building measures needs, like commitment to economic reform, to be nationally driven. Third, harmonization and coherence, rather than expansion o f the Bank's core competences, have been the driving force for a more unified approach.' 23. Moving forwards, there i s justification to extend successful country experiences in linking development and peace-building to a deeper and more systematic consideration o f these linkages in the Bank's operational engagement. Recognizing the need for peace-building to be nationally-driven and the constraints posed by the Bank's mandate and expertise, an emphasis on responsiveness to requests from national counterparts for support; maintaininga focus on the Bank's The Bank has agreed inthe past, for example, to include financing o f police expenditures inmulti-sector/multi- donor trust funds which it administers o n a fiscal agent basis, when excluding these expenditures would undermine the coherence o f the multi-donor program (for example, the Afghanistan Reconstruction Trust Fund).We have not, however, agreed to set up specialized trust funds which would finance only police or other security expenditures, considering that other international agencies would be better placed to lead o n these specialized endeavors. 8 core economic and development competences; and partnershipswith other institutions should be the underlying principles o f assistance in this area. In particular, experience from country programs indicates that: Political economy and conflict analysis are important to inform the selection and sequencing o f priorities for country assistance strategies, as well as project design issues. The Bank should continue to encourage country teams to incorporate analysis o f the political economy and conflict dynamics in both CAS/ISN processes and upstream project preparation. 0 The Bank plays an important role in supporting various cross-cutting development processes where peace-building may emerge as a priority such as post-conyict needs assessments, recovery plans and results frameworks, PRSPs, public expenditure and governance assessments, multi-donor budget support operations, multi-sector/multi- donor trust funds and donor coordination processes. These processes are by their nature integrative: precluding peace and security issue? and institutions from consideration, or placing them on a separate track, creates the real risk o f diminishing their importance, missing opportunities for synergy, or ignoring factors which may undermine longer-term development outcomes. The Bank's role in engaging with political and security sector institutions should focus on its core economic and development competences (such as generic development planning or public finance capacity-building), developing as appropriate partnerships with other donors or institutions that have expertise in specialized technical reform or capacity buildingin the peace and security areas.9 While retaining an emphasis on the Bank's core economic and development activities, there i s scope to increase emphasis on peace-building goals. Peace- building is a valid goal to use in country assistance strategies, where sustaining a fragile peace, preventing escalation o f conflict or addressing crime and violence which constrain the welfare and development opportunities o f the poor have emerged as national priorities. Activities which contribute to peace-building goals are not only those which directly touch on the security sector, such as demobilization and reintegration o f ex-combatants. All economic and development activities- infrastructure, human and social sector development, economic management, private sector and agricultural recovery, etc.-can potentially be selected or designed to contribute to peace-building goals. 24. Bank assistance strategies and programs can also include the development o f partnerships with other donors and national counterparts which combine respective technical capacities to 8 Examples o fpeace and security issues which frequently arise include coverage o f commitments arising from peace processes or security sector reform in post-conflict needs assessments, PRSPs, multi-donor trust funds and government-donor dialogue; or coverage o f security sector institutions in analysis and capacity-building for programs to strengthen public financial management systems. These issues tend to be most important to the fragile states, althoughthey may arise from time to time instronger performers. Bank engagement in the security sector will continue to be performed inaccordance with current guidance on the treatment o f military expenditures. Staff are encouraged to contact LEG and OPC on issues regarding military expenditures. 9 support peace-building priorities. For example, the Bank may work with the UN (or other institutions taking the lead on political governance and peace-building, including civil society organizations) to provide economic inputs or training to the parties to peace and national reconciliation talks; constitutional reform processes; or economic and development training to political parties and parliamentarians, provided that in all cases this dialogue is non-partisan and part o f a multi-donor effort. 25. This approach allows the Bank to make a more systematic contribution to the evolving international partnership for peace-building. It acknowledges that the Bank is still learning about the linkages between peace-building and development; signals a respect for the mandate and expertise o f other international institutions; and recognizes that close partnerships are needed. Box 4. The Economic Dimension of the Search for Peace-West Bank and Gaza In 1993,the Bank was asked by the internationalcommunity to helpbuildthe economic foundations o fa PalestiniadIsraelipeace process. The past twelve years have featured periods o f close bilateral engagement, open conflict and attempts to recreate a constructive bilateral relationship. The Bank has beenparticularly influential at two points inthis volatile process-the first three years o f the `Oslo' period (1993-6), and the past five years o f intifada (2000-2005). Inthe first era, one o f positive political developments, the Bank analyzed the Palestinian economy, proposed a recovery and development strategy and helped lead it through a number o f strategic instruments, including a multi-donor budget support facility and the first series o f public infrastructure projects. This represented one o f the Bank's first `post-conflict' engagements, and provided a model for many subsequent engagements. The last five years have been less conventional, with the Bank playing a pivotal role inthe course o f the conflict. During the initial `breakdown' phase, featuring open conflict and the fracturing o f all bilateral political relations, Bank annual omnibus reports measured the impact o f conflict on the Palestinian economy and coalesced donors around an evolving emergency assistance strategy. Inthe current `disengagement' phase, the Bank has been key inhelpingrecreate a bilateral politicalrelationship, which Israel has chosen to approach inlarge measure through the lens o fthe Palestinian economy. In2004the Government ofIsrael, which at that point hadno formal contact withthe Palestinian Authority, asked the Bank to work with i t on Palestinian economic stabilization. The Bank interfaced between the parties for several months, culminating inthe publication o f Stagnation or Revival? Israeli Disengagement and Palestinian Economic Prospects, adopted inDecember 2004 by the international community as an economic roadmap for reengagement between the parties. The report offers a detailed `street map' for Palestinian economic revival, arguing that this depends on four interconnected factors-a cessation o fviolence, the gradual removal o f the severe restrictions on Palestinian movement, deep Palestinian institutional reform, and, inresponse to these basic policy changes, a significant quantum o f additional donor finance. As Quartet Special Envoy for Disengagement, Jim Wolfensohn adopted the report's premises as the core o f his mandate. Over the past several months, the Bank has been closely involved inchairingiparticipating inbilateral negotiations on an agenda for economic revival which closely follows the report's prescriptions. The Bank's promotion of peace through economic regeneration has beenpossible becausethe Bank i s seen by all parties as technically rigorous and politically neutral, and thereby to be operating withm its mandate. D. Donor Coordinationfor Results 26. Donor alignment, policy coherence and harmonization are important in all developing country contexts, but gain particular urgency in fragile states where low capacity and (in some contexts) lack of cohesion within government mean that fragmented donor policy dialogue or aid projects are unlikelyto deliver results. The Bank often takes a strong role indonor coordination. There are several areas o f different emphasis indonor coordination efforts in fragile states which are worth underlining: working with different priorities and donor partners; addressing capacity 10 constraints; addressing fragmentation within government; and the need to be flexible over modalities to align with national priorities. 27. Working with different priorities and donor partners. Fragile situations often pose a range o f priorities and international partnerships which are important for government-donor dialogue, including strong linkages between peace-building and development priorities and the presence of relatively unfamiliar partners for many Bank staff. In addition to DAC donors, neighboring countries, non-OECD donors, peace-keeping or peace-building missions frequently play an `important role in fragile states: an inclusive approach to donor coordination processes where the Bank plays a central role i s needed to take account o f this. Buildingon the "results and resources" approach to Consultative Group mechanisms laid out in the Africa Action Plan, donor coordination processes in fragile states will often need to give strong recognition to results in the peace-building and institution-building areas, and to take a broad view of resource availability and gaps, including non-aid resources such as diplomatic attention and, in some cases, peace-keeping missions. Box 5. Non-traditional Partnerships: the GEMAP in Liberia Since the signing o f the 2003 peace agreement, Liberia has made progress inre-establishing security across the country and preparing for democratic elections in2005. Deterioration inthe economic governance environment, however, has constrained economic and social reconstruction efforts and poses risks for the completion o f a successful transition. Recognizing these risks, Liberia's key partners (UN,EU, ECOWAS, AU, UnitedStates, IMF and the Bank) have engaged inan intensive dialogue with the transitional government on the urgent needto improve economic governance. This partnership has brought unusually strong links between: regional initiatives under the auspices o f ECOWAS and the African Union to bring a durable peace to Liberia; discussions at the Security Council on the links between the success o f the UNpeace-keeping missionand the underlying economic and governance situation; and techmcal work carried out by the IMF, the Bank, the EUand ECOWAS. The collaboration has resulted inthe recent initiation o f the Governance and Economic Management Assistance Program (GEMAP). Implementation o f the GEMAP will be guided and monitoredby a committee comprised o f bothnational and international community representatives. The situation inLiberia remains fragile, butthe interaction o f diverse country, regional, and global partners with the transitional government is producing an inclusive, closely coordinated effort to support the transition. 28. Addressing capacity constraints. Many fragile state governments lack capacity to coordinate the complex range o f donor-financed interventions intheir country, inparticular when data on these i s not readily available. Rather than using lack o f government capacity to set coordinated strategies and sector plans as a pretext for why donor activities are not harmonized, donors can assist in these situations by working together to harmonize between their own activities, for example by providing consolidated reports on activities in each sector. Fragile states need overarching plans to guide donor activities just as much if not more as more stable development contexts: transitional results frameworks and PRSPs remain an important tool. It i s critical, however, that donors keep their expectations on the depth and comprehensiveness o f these plans realistic: it i s much better to have a simple, operational PRS action plan which clearly identifies expected results and will be frequently used by government, civil society and donors than to have a complex and lengthyplanning document which will be ignored. 29. Addressing fragmentation within government. Due to their difficult political and security environment, fragile states will often face low cohesion within government and weak 11 collective decision-making processes. It i s important in these environments that donors respect government decision-making processes, avoiding making assistance agreements with individual ministers, for example, which bypass government procedures on cabinet or ministry o f finance authorization o f projects. 30. Flexibility over alignment mechanisms-donor compacts versus broad consultation mechanisms. Some fragile states have strong r e f o m movements in government who, while facing capacity constraints or political bamers to reform, can drive an overarching plan and process o f donor coordination. In these countries, particularly when they are highly aid- dependent, a shared donor-government compact which lays out the key actions on both sides which are necessary to support a fragile transition may be a useful tool. In other fragile state situations, however, government and donors have difficulty in coming together to agree on a shared development framework. In these situations, the Bank and other donors should not ignore the issue o f alignment with national priorities, but should seek flexible mechanisms for alignment: broadening the group o f national stakeholders consulted, for example, or reaching agreement on particular sector frameworks where consensus is achievable. E. InstitutionalFlexibilityand Responsiveness 31. Assistance programs in fragile states require strong institutional flexibility and responsiveness to support national counterparts and Bank staff who are working under difficult conditions on the ground. The following common themes to guide institutional commitments in country assistance strategies have emerged as important across fragile states in the past three years. 32. Field presence. There are substantial limitations in fragile states to the "mission model" traditionally used by the Bank. Providing technical advice inwritten form and leaving follow-up action to government counterparts is rarely sufficient to ensure implementation inthese contexts: hands-on support to policy formulation and implementation processes i s more likely to generate results, and can only be ensured by the presence o f staff inthe field. An accurate understanding o f local political dynamics is difficult to gain from a distance. L o w state capacity means that on- going support to client counterparts i s often necessary throughout the project cycle. In some fragile states, volatile institutional dynamics mean that institutional processes and counterparts may change rapidly, between the interludes o f traditional Bank missions. Field-based donor coordination processes are critical to ensuring a flexible and harmonized international response. For all these reasons, fragile state programs require a strong field presence. 33. Staff knowledge, training and access to specialized "surge capacity. " Because the Bank's standard tools and development approaches are not always relevant in a fragile state context, country teams will often need to explicitly plan to access experiences from other countries and regions. Country teams may also need to tap specialized expertise for intensive periods when faced with new demands, such as post-conflict needs assessments and recovery plans, arrears clearance and international re-engagement, the launch o f major new reform programs in a fragile context, or rising conflict risks which require rapid adjustment in the country program. 12 34. Speed. The timing o f initiatives to support emerging reforms or prevent deterioration in a fragile situation is often critical. Speed is particularly important in post-conflict recovery operations, but delays in Bank responses can also underminetentative reform initiatives in other fragile states. Bank preparation and review processes in fragile states need to recognize that adverse development impact and reputational risk can arise from fiduciary risks or project quality problems-but also from delays in response to requests for assistance which are highly time-dependent. 35. AdaptabiZity. Circumstances may change rapidly in fragile states: Bank programs need to be flexible inresponse. Uncertainties in the development environment mean that the majority o f fragile states will develop Interim Strategy Notes for a one -two year period rather than longer- term assistance strategies. Even in the gradual reformer group where three-four year Country Assistance Strategies are used, flexibility o f program design and allocation o f resources within the CAS envelope to take advantage o f new openings for reform i s often important. Amending Bank-financed projects to adapt to changing circumstances on the ground may be a positive sign o f the Bank's responsiveness in a fragile context, rather than highlightingweaknesses in project preparation. 36. Long-term partnerships. While donors need to be preparedto adapt assistance rapidly to country circumstances, there i s also a need to indicate commitment to long-term partnerships in fragile states. Bank assistance strategies need to recognize that carrying through reform processes to produce improved development outcomes takes time, and often requires sustained engagement in the face o f temporary setbacks. Even in the most severe situations where countries have fallen into non-accrual with the Bank, the Bank will maintain on-going dialogue and an operational readiness to provide assistance as the situation improves. One option to increase the focus on long-term partnerships is to include in CAS documentation a section which is not limited to the standard CAS period, but outlines the long-term vision for recovery and development over a period o f a decade or more: each CAS can then bejudged against this long- term vision rather than focusing solely on short-term results. Box 6. Long-term Engagement-the Tajikistan CAS Building effective institutions, while essentialto sustainabledevelopment, takes time- years, even decades. Capacity buildmg,knowledgecreationandknowledge shanngwillplay acentralrole inTajikistan's development, andthe Bank i s engagedfor the long-term. IntheFY03-05CAS, programspecifics arebuilt arounda conventional 3 year CASperiod, butthe strategy itselftook a medium-termperspective, focusing onthree goals: generating growththroughprivate sector development; addressing social needsthrough communityinvolvement; andbuildmgthe institutions neededfor a functioning market economy. The strategy was aligned withintermediary CASbenchmarks, butthe longer-termapproach allowed for a focus on efforts whch would reabzemany results only after the period o f the CAS. 13 111. DIFFERENTIATING APPROACHES A. Differentiating Approaches 37. The LICUS task force noted the need to differentiate constraints of capacity versus problems o f lack o f consensus betweendonor and governments on development strategy, and the need for a differentiated strategy to support turnaround due to political changes or the end o f civil wars, ushering in a period o f strong policy change. Emerging experience with country strategy implementation has borne out and built upon these distinctions: across different regions, country teams have developed strategies and approaches which tend to be clustered in four main business models for engagement: (a) prolonged political crisis; (b) fast turnaround (post-conflict or political transition); (c) gradual improvers, and (d) deteriorating governance (see Table 2). Deterioration Prolongedpolitical crisis Characterizedbydeterioration inCPIA or rising conflict Characterizedbyprolongedconflict or domestic political risk. Frequentlylack ofclear consensusbetween donors impasse, often with arrears to the international financial and government on development strategy. institutions. Lack o f consensusbetweendonors and government on development strategy. Post-conflictand political transition Gradual improvers Characterizedby h g h fluidity inthe policy environment Characterizedbypresenceof some government reform andopportunities for rapidreform, due to the successful leadership, butfacing entrenched systems where change is conclusion o fapeaceor national reconciliationprocess, or often difficult, slow andliable to periodic setbacks. renewed international engagement. Includes some o fthe "post-post-conflict" countries. 38. This typology is dynamic rather than static, focusing on the direction andpace o f changes in governance. The dynamic nature of fragile state environments is important: it implies that country assistance strategies must aim to look ahead at the direction o f reform dynamics, avoiding an over-simplistic design o f assistance based on past performance. However, a highly dynamic environment also means that the direction o f performance may itself change rapidly: situations o f prolonged crisis may achieve a rapid turnaround or, conversely, post-conflict or gradual reform situations may shift into renewed risk o f political instability or blocked reform. Hence it may often be desirable for country assistance strategies to identify not only the country's current performance and direction, but also the probability o f a shift in scenario within the basic typology above, requiring adaption to a rapid turnaround or deterioration in the environment. 39. Operational experience and research highlight a number o f good practice approaches which may be usefbl in these different country circumstances (see Table 3). These approaches andtools are describedbelow: they are not intendedto beprescriptive (each country strategy will and should look very different), but rather to provide a menu o f tools and a basic framework to facilitate the sharing o f lessons between countries and regions. They draw on the lessons o f programs financed by other donors as well as the Bank, but focus on the Bank's particular contribution and comparative advantage inthese situations. 14 40. This typology covers some of the key parameters which affect the Bank's strategy and operational planning. It does not preclude the need to base strategy development on strong analysis o f other factors, such as the history o f state institutional development and conflict; lack o f commitment to reform versus capacity constraints; the presence o f centrifugal and centripetal forces; the presence o f natural resources; or the freedom and relevance o f information flows. Table 3. Differentiated Approache across the Fragile States Spectrum Deterioration Prolongedcrisis or impasse Interim strategy note, focusingon stemming decline in Interim strategy note, focusing on maintaining operational governance and social services, and contributing in readiness for re-engagement,and providing economic economic and developmentareas to multi-donor conflict- inputsto early peace or reconciliation dialogue. preventionefforts. Limited new financing; focus on Small grant-basedfinance, aiming at local economic portfolio restructuring. developmentand protectionof human capital, generally Increaseduse of CDD, private sector, NGO and ring- through non-governmentrecipients( including service fenced mechanisms(including service delivery and local delivery and local economic developmentin areas of economic developmentin areas o f insecurity). insecurity). State capacity and accountability: focus on transparency, Capacityand accountability:focus on institutional dialogue andmaintaining institutional capitalto facilitate analysis, dialogue and counterparttraining. eventual turnaround. Use of socio-economicissues for restorationof Contributing to community level conflict prevention,and dialogue/identificationo f entry points for change. to multi-donor efforts for peace-buildingor governance reform at anational level. Post-conflict or political transition Gradual improvement Interimstrategynote, focusingon rebuildingstate capacity Country Assistance Strategy, focusing on building state and accountability;anddeliveringrapidvisible capacity and accountability, achievingselective developmentresultsinsupport ofpeace-building developmentresults, andboosting support for reform ExceptionalIDA allocation. currents, supportedby moderateIDA allocation. Joint needs assessment`recovery planning,linking Activities to boost domestic reform currents, including political, security, economic, and socialrecovery. leadershipsupport, communicationsinitiatives, training State capacityandaccountability:support for abroadstate- and capacity-building. building agenda, throughinstitution-buildingand, where State capacity and accountability: developmentpolicy appropriate, developmentpolicy operationswith robust operations(where appropriateand restrictedinvolume), oversightmechanismsandsector programs(including supportedby sector and capacity-building projects and transitionalprojectsworking throughCDD or NGO with strongoversight mechanisms. Asymmetric reforms. mechanisms). Leadershipandcivil society support. Public administration, service delivery and economic Publicadministration,service deliveryand economic developmentto address areaswith crime, insecurity or developmentto addressareaswith crime, insecurityor conflict. conflict. B. ProlongedCrisis or Impasse 41. Prolonged crisis or impasse includes states in long-duration conflict or those facing domestic political impasse and international sanctions, with arrears to the international financial institutions. Diplomatic interventions tend to be particularly important in these contexts, with development agencies playing a subsidiary role. Because o f the presence o f arrears, severe insecurity, or lack o f consensus on international engagement, the Bank's role tends to focus on maintaining operational readiness in order to be able to re-engage rapidly in the event o f a turnaround. Experience under the LICUS initiative has shown that, in order to maintain operational readiness, the following types o f activities are critical: 15 0 Country analysis. The Bank is now regularly updating country analysis even in countries in non-accrual. Initial country engagement in these contexts has shown that, while formal ESW plays a role, targeted shorter notes on specific issues may often be more useful in dialogue with other donors or national counterparts. Joint analysis and scenario planning with other donors should be given high priority. Analytical work can also help build a domestic constituency for change, as when i t demonstrates that conflict or poor governance have resulted in dramatic increases in poverty. 0 Small grants through local institutions. Even in the most severe conflict, working with local institutions is both possible and critical to maintain a real understanding o f local dynamics, which cannot be gained from data analysis alone. Small grants will generally be targeted at protection o f human capital (health and education services) and local economic development, aiming to create demonstration projects which act as a model for more effective governance. Awareness of potential conflict tensions and political dynamics is important in selecting recipients. 0 Training. Providing international exposure and training can be important both in increasing the prospects for nationally-driven reform and to provide the Bank with a stronger understanding o f local conditions. 0 Restarting dialogue. In some situations o f prolonged conflict or political impasse, relatively non-controversial development issues may provide an entry point for constructive dialogue between the parties to a conflict. Where the Bank contributes to this type o f activity, it should generally be done within the ambit o f a multi-donor effort involving international or regional institutions with a more direct political mandate. 0Providing economic and development inputs to peace talks. At the request o f international mediators and the parties to a conflict, the Bank may provide specialized input on economic and development issues to a recognized peace process. Economic and development issues are often at the heart o f peace discussions; upstream technical input can ensure that the right information is available to parties to the talks and mediators, and that options considered are economically and fiscally sustainable in the longer-term. 16 Box 7. Ensuring Operational Readiness during Prolonged Crisis The Central African Republic has experienced repeated waves of political instability together with periods o f non-accrual to the Bank. The Bank restarted a comprehensive program o f analytical work in 2003-04, including a multi-donor mission to develop a Transitional Results Framework covering key development challenges in the areas of security, governance and natural resource management, economic management and the social sectors. The Bank`s Country Re-engagement Note (CRN) supported this program through small grant-based programs addressing demobilization and reintegration, social services and HIV-AJDS, basic economic management capacity, and leadershipdialogue. These grant-based initiatives were critical in maintaining operational readiness; a dialogue between donors, national authorities and civil society; and a sense of hope through international attention to one of the most marginalized countries of the world. After a difficult period between the 2003 coup d'etat and the 2005 elections, the Bank is now working with Government, civil society and other donors to prepare for a new poverty reduction strategy. Haiti fell into non-accrual status to the Bank in 2001, and cleared arrears in January 2005. Throughout this period, the Bank stayed engaged through dialogue with the government and civil society, donor coordination and tracking disbursements, and analytical work on poverty, public finances, social services and economic governance. In 2003, the Bank approved a Post- Conflict Fund grant to support a two year Emergency Health and Schools Project and the piloting of a Community h v e n Development Project. In collaboration with the IMF, IDB and the Caribbean Technical Assistance Center, the Bank provided technical assistance for the design and launch of an economic governance reform program supportedby IDA upon clearance of arrears. In 2004 as the Haitian transition unfolded, the LlCUS Trust Fund approved $6.4 million for urgent activities which addressed thejoint priorities of initial reforms to strengthen economic governance and the delivery of quick, visible results at the community level. These activities provided critical support for initial capacity-building and visible results while larger IDA programswere under preparation. Financing from the LICUS TF also enabled the Bank to better participate in sector dialogue with donors and the government during and following the preparation of the Interim Cooperation Framework through which aid is coordinated. InSomalia a precarious security situation and significantarrears on past debt-servicing obligationshadresulted inthe Bank's absence for over a decade. InJune 2003, ajoint World BanWUNDP Country Re-engagement Note was drafted for the country, with a focus on four strategic entry points-macroeconomic data collection and analysis; the development o f Somali consensus on a program of support to livestock certification, a coordinated action plan to address HIVIAIDS; and skills development and training. Analytical work was also undertaken, including a conflict analysis framework and a country economic report. The Bank also provided technical inputs on economic issues to the peace talks. As the peace processmoved forward, this mix of operational and analytical work and engagement haspositionedthe Bank to react rapidly now that a transition government is inplace, including co-chairing the overall planning processes for Somalia and engaging in ajoint needs assessment exercise with the UNand Somali counterparts. In Sudan, the 2003 interimstrategynote enabled the Bankto engage the Government and the SPLMon analytical work, training and capacity-building and community-based initiatives. During 2004, the Bank co-coordinated the Joint Assessment mission with the parties and the UN,providing a critical underpinning to the on-going peace talks andpreparing for the implementation period. Early engagement proved crucial ingaining knowledge of institutions and counterparts in Sudan and inhelpingto galvanize acoordinated donor approach. Sudanremains inarrears: a $4.5 millionLICUS Trust Fund grant has enabled the Bank to put inplace urgent, early capacity-building initiatives to support the structuresestablishedby the peace agreement, including the two Bank-administered multi-donor trust funds to support reconstruction. C. Post-conflict and Political Transition 42. Post-conflict countries have experienced a sudden, significant change inthe development environment and the degree o f international engagement, due to the successful conclusion o f a peace or national reconciliation process. The majority o f post-conflict countries also have international peace-keeping missions. The main characteristic of these situations i s high fluidity in the policy and governance environment, offering the opportunity for much faster and more wide-ranging change than i s present in other LICUS situations. Together with the one-off costs associated with the rehabilitation o f physical capital, this change in the governance environment means that there can be unusually high returns to aid investments in post-conflict situations- recognized in IDA'S exceptional post-conflict allocation. Despite the relatively favorable context, post-conflict situations are highrisk: over 50% o f countries fall back into conflict within 5 years, and there are often highrisks o f corruption due to weak state capacity. 17 43. The Bank has a wealth of experience in support o f post-conflict transitions, as well as substantial research and analytical work supported by DEC, the Conflict Prevention and Reconstruction unit and, more recently, the LICUS initiative. While there are still areas which can be strengthened, the business model for post-conflict assistance i s well proven and generally includes: Post-conflict recovery planning. The Bank often plays a central role in developing reconstruction and recovery frameworks. The Bank is usually asked to co-lead with national authorities, UNDP (and other partners) post-conflict needs assessments and recovery planning: the Bank has now introduced a simple new planning tool, the transitional results matrix, to encompass priority results needed across the political, security, economic and social spheres. Recovery frameworks need to be specifically oriented to deal with the differing strengths (in capacity and accountability) o f post- conflict transitional governments. Some post-conflict situations will allow for relatively rapid transition from humanitarian relief and non-government services to the provision o f services through the state: others will require a longer period o f building capacity and accountability mechanisms before the state can resume provision of the full range o f services. Box 8. Transitional Results Frameworks-Liberia ~~ ~ ~~~~ ~~~ ~~~~ ~ ~ Following the peace accord in Liberia in 2003, the Bank worked with Liberian counterparts and other donors to develop a results-focused transitional framework (RFTF), integrating the political, security, economic, and development areas o f reconstruction into one simple planning tool. With specific, time bound results, the RFTF has enabled government and donors to prioritize and sequence key actions in the transition, and to pinpoint problem areas. It has also become an excellent public communication and transparency tool, helping to promote dialogue on development plans, manage expectations and foster accountability. The framework was recently updated based on implementation experience and broad-based stakeholder consultations across Liberia, further simplifyng the format and incorporating UNhumanitarian activities. The RFTF has proven its worth even under adverse conditions, in enabling Liberia's partners to rapidly identify risks caused by lack o f progress in economic governance, and agree on a framework to address these. For information on transitional results frameworks in other countries, see the TRM Guidance Note". Bank's assistance strategy. The Bank's interim strategy note will normally focus on a subset o f activities within this overarching framework and will have a greater specific emphasis on the contributions o f economic and development activities to peace-building than i s the case with regular IDA clients. 0 Rebuilding state capacity. Inclose collaboration with the IMF, the Bank plays a key role inrebuildingcapacity on economic policy, public financial management systems and civil service reform or strengthening. It is therefore critical that the Bank i s involved in the immediate post-conflict period (and indeed prior to this), when many critical decisions on the size, scope and parameters o f public administration will be taken. Assistance inthis area may include policy dialogue, analytical work, capacity- building and support to recurrent expenditures: since state institutions are often new or extremely weak, much stronger knowledge o f basic public financial and 10 See: http://siteresources. worldbank.org/INTLICUS/PoliciesandGuidance/2033O632/Operational%2ONote%2Oon%2OTR Ms.pdf 18 administrative systems is needed than in the Bank's regular IDA clients. The Bank is also engaging more closely with leadership capacity building in the early stages of post-conflict transitions, in recognition that leadership that is new to peace-time government may require exceptional support to make this transition successfully. Box 9. Development Policy Operations in Fragile States-Timor-Leste In Timor-Leste, development of an effective, inclusive and accountablepolicy and planning process has been critical to the success of the country's state-buildingagenda. The Transition Support ProgramiConsolidated Support Program (TSPICSP) has focused on an annual, cross-Government results matrix, including coverage o f economic governance, justice and police capacity-building, anti-corruption measures and key service sector outcomes. The TSPiCSP is financed by grants from ten partnersand supported by several other observers and has been the principal instrumentfor policy dialogue between the Government and its development partners. The Government has praised the TSPICSP budget support operation and associated action matrix for respecting ownership, building capacity in identifyingpriorities, exploiting the synergiesamong development partners, and providing a framework for government and donor accountability. Besidesits use for policy-basedaid and policy development, the budget support processbecame an important capacity building exercise, helping Government agencies identify and schedule work programs, while also introducing more durable mechanisms for donor coordination as part of their planning routines. Most importantly the process not only helped to strengthen and legitimize national institutions, but also reinforced the involvement o f civil society groups. (For further information see Good Practice Notefor Development Policy Lending: Development Policy Operations and Program Conditionality in Fragile States, World Bank, Operations Policy and Country Services, June 7, 2005 on the Intranet at oucs.worldbank.or,~.See also the Good Practice Note available at: c\,~vw.worldbank.ore/conditionali~ Developmentpolicy operations. DPOs in post-conflict countries will typically seek to mobilize a multi-donor effort around a fairly broad state-building agenda and pay particular attention to mechanisms o f oversight and fiduciary controls, including robust measures for fiduciary oversight. Action matrices for DPOs- which should be drawn from transitional results matrices where these exist- will generally seek to balance some rapid, visible actions which can help generate a peace dividend and less tangible, medium-term institutional reforms which are critical for longer term governance and successful poverty reduction. The Bank has developed a detailed good practice note on development policy operations infragile states. Sector reconstruction. Bank projects in post-conflict situations may cover a wide range o f areas and sectors, including: economic and community infrastructure, private sector recovery, service delivery in health and education, HIV/AIDS, demobilization and reintegration o f ex-combatants, de-mining, judicial modernization, and safety nets for vulnerable groups. All projects in post-conflict environments are prepared and implemented under emergency procedures, which are currently under revision to increase the Bank's speed o f response. Choice o f sector programs will vary depending on country needs and priorities and the capacity o f the Bank and other donors. A s in other fragile state contexts, sector programs need to reflect a strong understanding o f political economy issues and conflict dynamics, such that they support and do not undermine peace-building goals. They also need to prevent collateral damage to state institutions, by avoiding establishing parallel structures such as PIUs or ensuring that these are integrated over time into permanent state structures. 19 Box 10. Development Programs in Insecure areas- Afghanistan ~~The Emergency Piational Solidarity Project (NSP) - The NSP probidesblock grantsto community councils ~ around Afghanistanto support local economic and social reconstruction,strengthencommunity level governance, supporting capacity-buildingwithin Community DevelopmentCouncils (CDCs) and linking local institutions to government administrationand donor agencies. It has established: rapid and transparent fund disbursement and service delivery mechanismsin remoteconflict-affected areas; a strong operationalpartnership betweenthe government, NGOs and CDCs, with the government facilitating implementationby civil society and the private sector: and strong institutional arrangementsat the village level for participatory decision making, planning and implementationof rehabilitation activities. The Emergency Customs Modernization and Trade Facilitation Project- Afghanistan's customs revenue collection has been severely hampered by insecurity, poor communicationsand infrastructure,and widespread smugglingand corruption, among other problems.The Customs Modernization Project provides emergency assistance-through the financing of improvementsin key transit infrastructureand communicationsand capacity-building within the administration-to establish a more efficient customs and transit regime, particularly in border zones under warlord influence.To ensure effective implementation,the Bank works closely with the InternationalSecurity AssistanceForce, which supports border managementand internaltransit o f goods in its larger security operation. 0 Developmentprograms in insecure areas. Post-conflict countries include a growing number o f "no war no peace" transitions, where governments lack full control o f some territory. This is a relatively new area of engagement for the Bank and other development institutions, which are still learning about effective tools. Several country operations show that it is important-and possible-to find ways to provide services and economic development in insecure areas, but that this must be carried out carefully to ensure development activities prevent rather than exacerbate the risks o f conflict escalation, and to provide for the security o f staff and project workers. Operational tools include the use o f community driven recovery in areas under active conflict, and collaboration with peace-keeping operations over the extension o f public finance systems (for example, payroll, customs and provincial revenue collection) into insecure areas. Box 11. Multi-donor Trust Funds for Post-conflict Recovery InWest Bank andGaza, the Bankadministeredthe multi-donor Holst Fund ($270million) for recurrentandstart up costso fthe PalestinianAdministration as well as emergencyemployment.It also administeredthe donor financedTechnicalAssistance Trust Fund ($23 million) and from its own resources establisheda Trust Fundfor West Bank and Gaza(TFWBG) mobilizingdonor funding in excess of $325 million. OED concludedthat the Bank's performanceinahighly politicized contexthadbeen "timely andrelevant" without which bothPA administrationanddonor coordinationwould havebeenweaker. The Afghanistan ReconstructionTrust Fundwas established inMay2002 to serve as a coordinatedfinancing mechanismfor the Government'srecurrentbudget andpriority reconstructionprogramsandprojects. Total contributionsto date exceed$1 billion. A recent externalevaluationo fthe ARTF ratedits operationhighly satisfactory.The evaluationnoted: "the ARTF RecurrentWindow has been aresponseto the Government's strong, systematic and continuousrequest to the donor communityto put its resources together inARTF. GOA haswanted a single, predictable,accountable source of funding that would ensure mobilization of sufficient funds for the recurrentbudget. Itneededto provide key public services on a continuousbasis inthose areas where the population can see andbenefit fromthem, such as basic health, educationand infrastructure. The ARTF has been able to deliver this.. ."To enhance the strategic use of the ARTF resources, the Governmentis preparinga National DevelopmentStrategywhich will include amediumterm fiscal and expenditureframework to underpin resourceallocations for priority programs. 0Donor coordination and aid management. Many post-conflict situations are highly aid dependent and face, for a transitional period, a substantial proportion of aid flows 20 which flow outside state delivery mechanisms. Specific support from the Bank and other donors is likely to be necessary to enable government to track and coordinate these aid flows. Where government has a strong reform orientation but lacks capacity, it may be useful to develop a specific government-donor compact, centered around a clear results framework such as the Transitional Results Matrix, which lays out the key actions and expectations from both government and donors to support the early stages o f the transition. The Bank i s also frequently asked to administer multi donor trust funds (MDTFs): MDTFs in post-conflict situations have included use of fiscal agent arrangements to address areas outside the Bank's traditional purview, such as police-capacity-building, and have developed specific arrangements to provide for direct financing o fUNagency activities. 44. Political transitions. Operational experience has shown that some states which have experienced renewed international engagement following a peaceful political transition (such as a national political agreement which averts an escalation o f conflict or a return to constitutional government after a coup d'etat) have similarities with post-conflict transitions in the operational strategy required. Like post-conflict transitions, these situations often offer a fluid environment with significant opportunity for rapid and positive reform, together with exceptional one-off financial needs for transitional support to recurrent expenditures or to restart service delivery. They differ from classic post-conflict environments, however, in that the scale o f physical destruction tends to be less extreme and the returns to large scale capital investments are therefore lower: institutional rather than physical rehabilitation tends to be paramount. Provisions under IDA 14 recognize that these country situations, in the presence o f arrears, may require exceptional financial support to restart government services." D.Gradual Reform 45. Gradual reformers may be in a post-post-conflict scenario, or under-going a slower, longer-term reform process. Countries in this situation often have some degree o f reform leadership within government, but face entrenched barriers o f corruption or inefficiency in the state which can make reform difficult, slow and liable to periodic setback. The Bank is increasing its knowledge o f how to provide effective assistance in these situations: strategies focus on selective results and activities to boost support for reform currents insociety: 0 CAS results sekctivity. In country assistance strategies, there is a move to focus more selectively on results in these situations-based on a stronger analysis o f the political economy o f reform. Targeted results should: (i) balance governance and institutional strengthening, which tends to be invisible to the population, with visible outputs which will strengthen support for the reform process; (ii)be politically feasible and capable o f garnering domestic support. One promising approach is to focus several instruments in a CAS on the same, selective results. For example, the objective o f improving teacher attendance and enrollment may be supported by an education sector project dealing with education management and teacher training; a DPO dealing with school budget allocations; and a community-driven program supporting parent-teacher committees. " Inthe case ofpolitical transitionsinvolvingde facto governments, OP 7.30 applies. 21 Box 12. Results Selectikit! and Long-termPartnership-Tajikistan Country Context- Since the signing o f the peace accord in 1997,Tajikistan has moied quickly from c n11war to internal stability and to a functioning government I t has achieved remarkable economic success, averaging 10% growth a year for the past four years However, such factors as unfavorable geography, challenging demography and weak governance, pose significant challenges to its future development The Countrj Partnership Strategy (CPS)-The recently endorsed CPS is selective in terms o f the results it seeks to achieve, but brings multiple instruments to bear on each o f these results I t also links interventions at different levels o f public service 'supply chains' to ensure coordination among instruments and an effective process that delivers on the ground, exemplified below with the education sector Multiple Level Interventions and CrossLinkagesto Deliver the Maximum Impact in a Sector: Example of EducationReform I PRSP Goal: Improve education outcomes Sector reform financing reform - CurricXtum I -reform Teaching local budget management -materials Teacher trainin% I ' 0 Long-term partnerships. C A S results in these circumstances also need to be specified realistically: reform in entrenched l o w capacity environments i s a long haul, and expectations o f results need to be modest, with a commensurate commitment to long-term partnership from the Bank. In some cases key outcomes m a y be specified over a period longer than the term of the CAS, with the CAS itself focusing primarily on intermediate outputs within this long-term vision (see para 2.28). Gradual improvers are the only category of the fragile states group where full Country Assistance Strategies rather thanInterim Strategy Notes will typically b e developed. e Activities to boost supportfor reform currents and strengthen social accountability. Sustainable reform processes, in fragile states as in other countries, will depend on domestic leadership and demand for accountability and effective service provision fi-omgovernment bybroader society. Activities which have proven useful include: 22 r Leadership support. Many fragile states have highly centralized decision- making: without leadership support, reform processes will be blocked. Seminars for political leadership can helpbuild inclusive support for reform; Box 13. Leadership Support Political leadership to mobilize positive change is critical in fragile state settings. Recognizing that reform programs will only succeed with leadership support, the Bank has supported leadership seminars and retreats inTimor Leste, Burundi, the Central African Republic and Tajikistan. These events have brought together a range o f political leaders from different backgrounds, including previous parties to a conflict, government and civil society leaders, to work on national vision, problem solving approaches and technical issues linked to post-conflict or reform transitions. See OPCS note on leadership support infragile states. '' 3 Targeted analytical work. Short notes analyzing problems and presentingpolicy options can often play a useful role in strengthening the quality o f internal dialogue on reform issues; 3 Communications strategiesfor reform. Communicating the need for reform, reform successes and providing a feedback loop on problems is critical to maintain momentum on reform; 3 Training and capacity-building for civil society and private sector actors to increase their capacity to influence policy choices, and hold the state accountable for reforms; Box 14. Building State Institutions and Civil Society: the Nigeria CPS Newreform-oriented leadership inNigeria has demonstrated strong political will to implement governance improvements after decades o f civil conflict, mismanagement o f oil revenues and weak formal accountability. The Bank-DFID Nigeria Country Partnership Strategy (CPS) is supporting the government's reform programthrough three pillars- strengthening o f governance and transparency, advancing growth inthe non-oil economy and improving public service delivery for human development. The CPS also recognizes that sustainingthe current reformmomentum willrequire efforts to increase popular support and demand for reform. A strong communications and civil society capacity-building effort aims to strengthen the capacity o f the media, private sector, academia, trade unions and other groups to demand change, dialogue with the government, and build coalitions for economic reform, transparency and accountability. Bank-DFID support to the Extractive IndustryTransparency Initiative (EITI), for example, seeks to involve civil society and buildconsensus on how to manage anduse oil revenues ina transparent fashon. As a result o f efforts such as these, a vibrant press and civil society are gaining strength inNigeria, building demand for improved service delivery and better governance, and creating an environment conducive for economic growth and social cohesion after decades o fpublic mistrust o f state institutions under military rule. l2 See: http://siteresources. worldbank.org/INTLICUS/64 137337- 1094491940414120362982/Note~on~Leadership~Workshops~Jan~2005 .pdf 23 Strengthening state capacity and accountability. In gradual improver situations where capacity is the binding constraint, assistance strategies need to apply the same selectivity to capacity building as to policy reform: overly ambitious, administration- wide capacity-building efforts are generally not feasible. It is better to link efforts to key sector outcomes and policy efforts where there i s popular demand and political support for improved state capacity. Corruption is still a systemic problem for many LICUS countries in the gradual improver category. CASs should include a frank assessment o f corruption issues and measures to address them. Specific activities should generally balance capacity-building for public financial management and measures to increase social accountability, such as civil society oversight structures, national and local budget transparency, and anti-corruption advocacy activitie~.'~ Box 15. Anti-corruption Efforts in Cambodia Country Context. Progress inpoverty reduction has been moderate, and could be accelerated by tackling weaknesses ingovernance. The Bank's new Country Assistance Strategy provides support to the Government's efforts in selected key areas o f governance and its fight against corruption. More specifically the CAS focuses on: Improving the environment for private sector development because cumbersome, non- transparent and corruption-prone legal and regulatory frameworks impose unnecessary costs on f i r m s and are currently a key obstacle to competitiveness, investment, employment and profit in Cambodia. Continuing to engage innatural resources management because the major constraints upon sustainable pro-poor management o f such resources are rooted inweak transparency o f state processes and lack o f accountability on the part o f state actors. Supporting public financial management reform(PFM) because institutionalization o f rent- seeking (as a consequence o f a system-wide inadequacy inpublic sector salaries) is a hndamental weakness inPFM and constitutes a major bottleneck to improved service delivery for the poor. Because o f its importance to the overall anti-cormption effort and to building confidence inthe public policy environment as a whole, several donors and international NGOs are providing assistance for the drafting o f an anti-corruption law. Supporting decentralization and interventions designed to build civil society capacity and citizens' partnerships for better governance because decentralization could potentially improve governance across a broadrange o f state functions, bybringing decisions about planning and budgeting closer to those affected, and shortening the links inthe chain o f accountability. Strengthening civil society capacity and the demand side aspects o f governance i s also critical. Improving the policy and institutionalenvironment to reduce potential corruption inWorld Bank projects because reducing the potential for corruption is part o f the Bank's overall strategy to strengthen its supervisory and fiduciary responsibilities to its shareholders, the Cambodia program will strengthen public disclosure o f fiduciary processes and develop a systemto incorporate anti- :onuption measures into all project designs and implementation procedures. Combination of financing instruments. Some gradual reformer countries are resource rich; and projects rather than development policy operations will be appropriate assistance instruments. There are however circumstances where development policy operations may play an important role as part o f the CAS: where l3According to international standards, corruption i s a predicate offense for Money Laundering. Therefore an effective Anti-Money Laundering and Combating o f Financing o f Terrorism (AMLEFT) regime could provide additional tools to LICUS authorities to strengthen the legal and financial framework, increasing transparency and accountability, and consequently reduce corruption. 24 a reforming government has low revenue potential for a transitional period and may face instability if it cannot cover its recurrent expenditures; or where a small programmatic DPL has proven crucial in generating policy and institutional changes. Experience indicates that in these circumstances DPOs should not be stand-alone instruments, but should be closely supported b y sector and capacity-building projects and give strong attention to fiduciary oversight (OPCS Good Practice Note on DPOs in fragile states). 0 Asymmetric reforms. In particular in gradual reform environments where some geographic regions o f the country or functions o f the state have stronger governance and institutions than others, an asymmetric approach may create incentives to broaden governance improvements. Asymmetric reforms target aid through public administration systems (either to national government functions or regional or local entities) where there is a will for reform, under a rules-based system which creates incentives for other functions or geographical areas to join the reform process. To avoid marginalization, weaker-performing functions or geographic areas may be supported through more ring-fenced or non-governmental channels, until a successful transition to core standards o f state capacity and accountability in these areas is completed. Box 16. Differentiating Strategies within Large States-Nigeria and I n d i a InNigeria, the Bank andDFIDhave adopted a `lead states' approach to target several well-performing states with a demonstrated commitment to reform. Financial and technical assistance is used to increase the capacity inthese states to deliver services through deepening reforms, sharpening incentives for both public officials and civil society, while strengthening systems. The approach also encourages states to work with local governments indeveloping medium-term plans, and through efforts to strengthen accountability and efficiency o f public expenditures across all levels of government, establishes a basis for the use o f more flexible instruments for assistance, such as budget support. The strategy sees its impact inhelping develop and rewarding a number of `models' for development and growth inlead states, and leveraging improvements inthe effectiveness and efficiency of public expenditure to broaden and sustain impact. Instronger performing countries there mayalso bethe needto adopt a differentiated approach inthe Country Assistance Strategy for weaker sub-national governments. InIndia, the Bank has been workmg to initiate dialogue o n cross-cutting reforms and buildproductive relationships with the four states where poverty is most prevalent and where public institutions may be at their weakest- Bihar, Jharkhand, Orissa, and Uttar Pradesh. This engagement takes several forms, including non-lending technical assistance inkey foundational areas (such as financial and budget management) needed across all activities o f government, knowledge transfers, institutional capacity-building, support for civil society, piloting service delivery innovations, and where appropriate, investment lending. The pace and scope o f engagement varies between these states depending o n the domestic climate and readiness for reform-Orissa, for example, receives development policy loans but the others do not. E. Deteriorating Governance 46. Fragile states with deteriorating governance are characterized by significantly declining CPIA scores and rising conflict risk: while state capacity may differ, these environments commonly share a decline in the credibility o f state institutions and weak accountability o f government to society, together with lack o f consensus between government and donors on development strategy. Within the fragile state grouping, this is the category where the Bank and 25 other donors have had most difficulty in reorienting assistance strategies effectively. There are however some basic lessons emerging from country strategies implementation in these situations. 0 Reorienting the assistance strategy. It is important in situations o f deteriorating governance to avoid "business as usual" and reorient the assistance strategy to meet new circumstances. Objectives will depend on the country context, but may cover some or all o f four basic pillars: (i)stemming the decline in governance; (ii) maintaining institutional capital; (iii)stemming the decline in social indicators; (iv) supporting efforts to prevent conflict escalation and restart dialogue. In general, situations o f significantly deteriorating governance will indicate use o f an interim strategy note rather than full CAS. Box 17. ReorientingStrategies to Adapt to Deteriorating Governance-PNG Chronic political instability, along with problems ingovernance and deteriorating law and order, has contributed to a steady decline inkey social indicators in PNG, and to an increase inpoverty and unemployment. Political instability also made sustained dialogue difficult on the developmentireform agenda or on a common assistance strategy with development partners. Acknowledging these challenges, the Interim Strategy for PNG focuses on: Promoting a developmentdialogue and mitigating the decline in social indicators by deepening the relationship with Government at all levels, reachmg out to stakeholders inbroader society and enhancing coordination with other development partners through leadershp retreatsiworkshops, dissemination o f recent analytical work o n human development, public expenditure review, and targeted capacity building and small grants support for strengthening the government's response to the H I V i A I D S epidemic. Building thefoundation for improvedgovernance and sustained recovery throughanalytical work on alternative modes o f assistance, selective capacity building,and targeted priority investments which, inaddition to generating highsocial and economic returns, would also contribute to localicommunity level engagement, strengthen donor coordination, improve income-generating opportunities and service delivery, and enhance sustainability throughinstitutional reforms. 0 Stemming the decline in governance. One o f the more beneficial external interventions which can be made in situations o f declining governance i s to focus on the transparency o f government decision-making and financial management: this may not be successful in reversing the decline, but does provide potential to check more severe financial abuses and create a space for internal actors to demand more accountability. 0 Maintaining institutional capital. A second key challenge, in particular in states with historically strong public administration capacity, is finding mechanisms to maintain institutional capital to facilitate eventual turnaround without exacerbating unaccountable government: direct support for social service delivery (for example, protection o f health and education expenditures); continued training o f service delivery workers; or use o f mechanisms such as social funds which can provide a positive role for lower level governmental service delivery workers, may provide an appropriate channel. 0 Stemming the decline in social indicators. A significant decline in social indicators can cause long-term damage which spans generations and impacts neighboring 26 countries, hence continued investment in human capital and social protection i s important. Contexts o f deteriorating governance may mean, however, that development programs are operating either under conditions o f significantly increased centralization o f decision-making and lack o f transparency within government, or active conflict and insecurity, or both. In these conditions, new development programs should generally make increasing use o f non-government, private sector and community-driven mechanisms; or should insulate financial flows and decisions on beneficiary targeting from political interference, as in the case o f social funds; or should ensure broad-based ownership o f government-executed programs amongst both government and non-government stakeholders. Contributing to peace-building initiatives in a situation of rising conflict risk. The Bank does not have the mandate or expertise to play a leading role in peace-building initiatives, but there are opportunities for economic and developmental interventions to provide a contribution to peace-building goals. Three particular areas o f intervention deserve attention in Bank strategies and dialogue: (i)combining efforts with diplomatic actors to clearly signal to national counterparts the risks of any actions which may escalate conflict risk, and the economic benefits o f commitment to peace-building; (ii)input on specific economic issues which are important for mediation efforts and may serve as a way to restart dialogue; (iii) use of community driven initiatives to contribute to local conflict prevention. Where the Bank contributes to such peace-building initiatives, it should generally work within the ambit o f a multi-donor effort involving international or regional institutions with a more direct political mandate. Box 18. Community-drivenDevelopmentProgramsinVolatile Country Contexts InAngola, the Social Action Fund(FAS) encourages community based management of assets and the development o f partnerships between communities, local governments and civil society organizations. The fund supports small and medium scale social and economic projects, identified by poor communities and implemented in collaboration with local government and sectoral agencies inthe provinces. From initiation in 1995, the FAS projectshave proved highly successful despite dramatic changes inthe country context. Designed inexpectation ofpeace, the social fund structure remainedflexible enoughto deliver results and implement all project activities satisfactorily, despite renewed insecurity inmany parts o f the country. InComoros, the Social FundProject, begun in 1998, supported demand driven initiatives developed by communities to create employment and improve access to basic services. Despite a suspension o f disbursements within two weeks o fproject initiation as a result o f deteriorating security, the task team remained closely engaged in continuous dialogue with the country on project preparation. When the suspension o f disbursements was lifted, the Bank and project team had already agreed upon a work program, and within four months, 22 projects were under implementation. Despite continued political and institutional strife and severe socio- economic difficulties throughout the implementationperiod, by completion sub-projects had benefited almost 70% o f the population, with 3,700 jobs and 360 SMEs created. InNepal, community-driven development is a critical instrument for social protectionand to address the exclusion which has fuelled conflict. Bank projects have supported the empowerment o f local school management committees (SMCs) and health facilities have been devolved to local communities, working increasingly with the private sector and NGOs. Access to safe water is being improved through the use o f demand-driven user group participation and empowerment approaches. As the level o f conflict risk inNepal has risen, close monitoring o f community- based programs to avoid interference by the security forces or the insurgents is critical, but provided program design is adapted to ensure conflict sensitivity, these instruments have the potential to maintain openings for improvements in governance and service delivery at local level and avoid a shift into full-scale humanitarian crisis. 27 F. "Neighborhood" Spillovers and Regional Programs 47. The impact of state fragility does not remain confined within the borders of the most fragile states: debilitating effects are also suffered within neighboring countries, through spillovers o f conflict; organized crime; epidemic diseases; barriers to transit and trade; and decreased investment and growth. Bank research estimates that neighboring states lose on average 1.6% o f GDP per year as a result o f these spillovers. The map below indicates the extent of potential spillover effects in Africa. S 28 48. There are two primary ways in which the Bank can use its instruments to assist in overcoming these spillover effects. The first is within each individual CAS or ISN process. There i s scope for country strategy processes to make a more systematic assessment of spillover risks from neighboring states, and consider the actions which national authorities, the Bank and other partners can take to minimize the impact of such spillovers. This applies both within fragile states (that are often bordered by other fragile states) and within stronger performers. 49. The second instrument with potential to address spillover affects is regional programming. Regional programs can create valuable synergies and a means to bring neighboring states together to address concrete development issues despite a legacy o f conflict or on-going instability, and can act across territory with marked differences in the governance strengths and weaknesses. 50. The health sector has the longest history o f successful regional development initiatives (see Box 19 below), but recent years have demonstrated the potential for regional programs in other sectors. Two areas are o f particular relevance to the Bank's work. The first is support to regional infrastructure programs. By definition, many infrastructure sectors involve economic factors which cannot be addressed on a single-country basis: in addition, control over economic resources and infrastructure i s often at the heart o f historic inter-state conflicts. Initiatives such as the Nile Basin and the Sub-Saharan transport policy program provide an institutional forum for countries to release mutual gains from economic development despite the differing institutional strengths o f participants. The second area is the demobilization and reintegration o f ex- combatants, where the multi-country demobilization and reintegration program in Africa has- despite many start-up difficulties-demonstrated some gains in regional capacity-building and the harmonization o fapproaches between countries. Box 19. The OnchocerciasisControl Programme(OCP) The OCP was initiated in 1974to control river blindness inseven countries inWest Africa: Benin, Burkina Faso, Cote d'Ivoire, Ghana, Mali, Niger, and Togo. Later, the programwas expanded to include Guinea, Guinea-Bissau, Senegal, and Sierra Leone. The majority o f these countries would now be considered to be fragile states. Today, twenty years after the inception o f control, the OCP is widely regarded as one o f the most effective regional programs ever launched. River blindness is no longer a public health threat inthe original control zone, and many o f the river basins are being resettled. 600,000 cases o friver blindness have beenprevented, and 25 million hectares o f formerly evacuated arable lands have been made safe for resettlement and agriculture. These lands have the potential to feed an additional 17 million people per year. Increasedagricultural production from these lands has transformed the region from aid-dependent to food exporting. These programs have added over a million years o f productive labor to the economies o f the participating countries. Buildingonthis success, a newprogram(African Programfor Onchocerciasis Control) is now covering another 19 African countries, and these experiences have informed other multi-country health interventions such as the Multi- Country HIV/AIDS Programfor Africa (MAP) and the campaign to roll-back malaria. 29 IV. CONCLUSION 51. This note identifies a strengthened assistance strategy framework for fragile states. It describes four common themes for the Bank's work in fragile states: peace, security and development linkages; building state capacity and accountability; international partnerships; and institutional flexibility and responsiveness. The note also highlights the need to differentiate approaches and tools in different contexts: prolonged crisis or impasse; post-conflict and political transition; gradual reform processes; and deteriorating governance. Finally, the note highlights the important role o f regional initiatives. 52. None of these elements are intended to create a boilerplate for Bank assistance strategies. Assistance strategies must remain firmly rooted in country-specific analysis and dialogue- indeed, many o f the recommendations focus on how to strengthen analysis and dialogue. The note does however aim to bring together examples o f good practice from across regions and country teams after three years o f implementation o f the LICUS initiative, allowing for more systematic sharing o f experiences to inform country strategies in future. The Bank, like other international partners, i s still learning what approaches work in fragile state contexts. Going forward, it will be critical that the Bank continues to evaluate operational experiences carefully and adjust and improve approaches based on lessons learned. ANYEXA. ORGANlZATlOlV FOR ECONOMIC COOPERATION AYD DEVELOPMENT, LEARNING AND ADVISORY PROCESS Oh DIFFICCILT P4RTYERSHlPS Draft Principlesfor Good International Engagement in Fragile States A durable exit from poverty and insecurity for the world's most fragile states will need to be driven by their own leadership and people. International actors can affect outcomes in fragile states in bothpositive and negative ways. International engagement will not by itself put an end to state fragility, but the adoption o f the following shared principles can help maximize the positive impact o f engagement and minimize unintentional harm. ' The long-term vision for international engagement in fragile states i s to help national reformers to build legitimate, effective and resilient state institutions. Realization o f this objective requires taking account o f and acting according to the following principles: 1. Take context as the starting poirzt. All fragile states require sustained international engagement, but analysis and action must be calibrated to particular country circumstances. It is particularly important to recognize different constraints o f capacity and political will and the different needs of: (i) countries recovering from conflict, political crisis or poor governance; (ii) facingdeclininggovernanceenvironments, and; (iii) wherethestatehaspartially those those or wholly collapsed. Sound political analysis is needed to adapt international responses to country context, above and beyond quantitative indicators o f conflict, governance or institutional strength. 2. Movefrom reaction toprevention. Action today can reduce the risk o f future outbreaks o f conflict and other types o f crises, and contribute to long-term global development and security. A shift from reaction to prevention should include sharing risk analyses; acting rapidly where risk is high; looking beyond quick-fix solutions to address the root causes o f state fragility; strengthening the capacity o f regional organizations to prevent and resolve conflicts; and helping fragile states themselves to establish resilient institutions which can withstand political and economic pressures. 3. Focus on state-building as the central objective. States are fragile when governments and state structures lack capacity-or in some cases, political will-to deliver public safety and security, good governance and poverty reduction to their citizens. The long-term vision for international engagement in these situations must focus on supporting viable sovereign states. State-building rests on three pillars: the capacity o f state structures to perform core functions; their legitimacy and accountability; and ability to provide an enabling environment for strong economic perfonnance to generate incomes, employment and domestic revenues. Demand for good governance from civil society is a vital component o f a healthy state. State-building in the most fragile countries i s about depth, not breadth-international engagement should maintain a ' The piloting of the Principles will draw on the experience of the Good Humanitarian Donorship Principles endorsedin Stockholm(June 2003). 32 ANNEXA tight focus on improving governance and capacity in the most basic security, justice, economic and service delivery functions.2 4. Align with local priorities and/or systems. Where governments demonstrate political will to foster their countries' development but lack capacity, international actors should fully align assistance behind government strategies. Where alignment behind government-led strategies is not possible due to particularly weak governance, international actors should nevertheless consult with a range o f national stakeholders in the partner country, and seek opportunities for partial alignment at the sectoral or regional level. Another approach is to use `shadow alignment'-which helps to build the base for fuller government ownership and alignment in the future - by ensuring that donor programs comply as far as possible with government procedures and systems. This can be done for example by providing information in appropriate budget years and classifications, or by operating within existing administrative boundaries. 5. Recognize the political-security-development nexus. The political, security, economic and social spheres are interdependent: failure in one risks failure in all others. International actors should move to support national reformers in developing unified planning frameworks for political, security, humanitarian, economic and development activities at a country level. The use o f simple integrated planning tools in fragile states, such as the transitional results matrix, can help set and monitor realistic priorities and improve the coherence o f international support across the political, security, economic, development and humanitarian arenas. 6. Promote coherence between donor government agencies. Close links on the ground betweenthe political, security, economic and social spheres also require policy coherence within the administration o f each international actor. What is necessary is a whole o f government approach, involving those responsible for security, political and economic affairs, as well as those responsible for development aid and humanitarian assistance. Recipient governments too need to ensure coherence between different government ministries in the priorities they convey to the international community. 7. Agree on practical coordination mechanisms between international actors. This can happen even in the absence o f strong government leadership. In these fragile contexts, it i s important to work together on upstream analysis; joint assessments; shared strategies; coordination o f political engagement; multi-donor trust funds; and practical initiatives such as the establishment o f joint donor offices and common reporting and financial requirements. Wherever possible, international actors should work jointly with national reformers in government and civil society to develop a shared analysis o f challenges and priorities. For governments where political will exists and capacity i s the main constraint, supporting state-building means direct support for government plans, budgets, decision-making processes and implementing structures. In countries where political will is the main constraint, support for long-term state-building does not necessarily imply short-term support for government - but it does mean moving beyond repeated waves o f humanitarian responses to a focus on how to support and strengthen viable national institutions which will be resilient inthe longer-term. A vibrant civil society is also important for healthy government and may play a critical transitional role inproviding services, particularly when government lacks will and/or capacity. 33 ANNEXA 8. Do no harm. International actors should especially seek to avoid activities which undermine national institution-building, such as bypassing national budget processes3 or setting high salaries for local staff which undermine recruitment and retention in national institutions. Donors should work out cost norms for local staff remuneration in consultation with government and other national stakeholders. 9. Mix and sequence aid instruments tofit ?liecontext. Fragile states require a mix of aid instruments, including, in particular for countries in promising but high risk transitions, support to recurrent financing. Instruments to provide long-term support to health, education and other basic services are needed in countries facing stalled or deteriorating governance-but careful consideration must be given to how service delivery channels are designed to avoid long-term dependence on parallel, unsustainable structures while at the same time providing sufficient scaling up to meet urgent basic and humanitarian needs. A vibrant civil society is important for healthy government and may also play a critical transitional role in providing services, particularly when the government lacks will andor capacity. 10. Act fast ...Assistance to fragile states needs to be capable o f flexibility at short notice to take advantage o f windows o f opportunity and respond to changing conditions on the ground. 11. ...but stay engaged long enough to give success a chance. Given low capacity and the extent o f the challenges facing fragile states, investments in development, diplomatic and security engagement may need to be o f longer-duration than in other low-income countries: capacity development in core institutions will normally require an engagement o f at least ten years. Since volatility o f engagement (not only aid volumes, but also diplomatic engagement and field presence) i s potentially destabilizing for fragile states, international actors commit to improving aid predictability in these countries, by developing a system o f mutual consultation and coordination prior to a significant reduction inprogramming. 12. Avoid pockets of exclusion. International engagement in fragile states needs to address the problems of "aid orphans"-states where there are no significant political barriers to engagement but few donors are now engaged and aid volumes are low. To avoid an unintentional exclusionary effect o f moves by many donors to be more selective in the partner countries for their aid programs, coordination on field presence and aid flows, and mechanisms to finance promising developments inthese countries are essential. The Addis Ababa principle developed in November 2001 as part o f the Strategic Partnership for Africa Initiative states: "All donor assistance should be delivered through government systems unless there are compelling reasons to the contrary; where t h s i s not possible, any alternative mechanisms or safeguards must be time-limited and develop and build, rather than undermine or bypass, governmental systems."