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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized International Development Association FOR OFFICIAL USE ONLY IDA/SecM FROM: Vice President and Secretary June 12, 1992 IMPROVING THE COORDINATION OF AID IDA10 Technical Note No. 12 The attached technical note was distributed to the IDA Deputies on June 11, Questions on this document may be referred to Ms. Yap (Ext ) or Ms. Elliott (Ext ). Distribution Executive Directors and Alternates Office of the President Executive Vice Presidents, IFC and MIGA Vice Presidents, Bank, IFC and MIGA Directors and Department Heads, Bank, IFC and MIGA This document has a restricted distribution and may be used by recipients only in the performance of their official duties, Its contents may not otherwise be disclosed without World Bank authorization.

2 International Development Association Improving the Coordination of Aid IDAIO Technical Note No.12 June Following a discussion at the meeting of tion mechanisms and pooling of funds to enhance IDA 10 Deputies in April 1992, this note reviews the impact and effectiveness of their assistance. the advantages and limitations of several forms of They expect the World Bank to take a leading role aid coordination, and discusses the Bank's and in such activities because it has a large lending IDA's role in mobilizing and coordinating aid program in most developing countries, does resources to its recipient countries. reliable analytical and policy work on many subjects, and uses competitive procurement 2. Both the donors and recipients of aid procedures. This notes reviews the experience recognize that well coordinated financing can with several forms of aid coordination. increase the development impact and effectiveness of each country's support, while a lack of coordination can distort the recipient's investment Consultative Groups program, generate unaffordable recurrent costs, and visit conflicting advice and conditionality upon 4. Consultative Groups sponsored by the the recipient. The mechanisms for aid coordi- World Bank have long been an important nation range from formal consortia organized by mechanism for coordinating aid flows at the the World Bank or UNDP, to informal working country level. A CG is established when a groups within the recipient country, to multi-donor government and the Bank agree one would be trust funds aimed at particular development useful, and meetings are held at intervals that vary objectives. from annually to once every few years. Since the first aid consortium group was established for 3. In recent years, donors' budgets for India in 1958, more than 30 countries have bilateral aid programs have become increasingly established CGs. In FY91 and 92, meetings of constrained. Donors look to improved coordina- Bank-led CGs were held for 18 IDA recipient

3 Page 2 countries, 1 including new claimants Egypt, implementation issues. Today, as structural Philippines and Zimbabwe. In addition, there is a adjustment and stabilization programs underpin special CG-the Caribbean Group for Cooperation most countries' development efforts, donors in Economic Development-to mobilize and recognize the importance of the policy coordinate donor financing for 22 small Caribbean environment to the success of the projects they countries and territories, including nine IDA finance. Many bilateral donors have only limited borrowers. opportunities to influence governments on macroeconomic issues. Accordingly, CGs have 5. The countries that have active and long- become a forum for donors and recipients to standing Consultative Groups tend to be large aid discuss macroeconomic and development strategy, recipients where many bilateral donors are active as well as to mobilize aid funds for projects. but none is pre-eminent. The CGs for India, When a country is carrying out a reform or Bangladesh and Pakistan are the oldest and the adjustment program, the existence of an active CG most regularly convened. If a country has no CG, allows the donors to send a unified message about there is usually a good reason. For instance, most the desired reforms, and the government to report of the West African countries, where France still on the program's status. This process tends to provides much of the bilateral support, have not heighten both governments' and donors' formed CGs. China has never organized a CG commitments to the reform program, and to because its Government can unilaterally manage its increase the quantity and reliability of aid flows. foreign capital inflows, of which official aid in any Conversely, if a government is unresponsive to case constitutes only a small part. While CGs are donors' views about important policies, the CG rarely formally disbanded, it is not uncommon for may serve to consolidate their resistance to provide a country's CG to be inactive for several years and more financing. But even when the donors and then to be reconvened. Egypt's CG, for example, the government have serious disagreements, the was reactivated in 1991 after several years of CG process can play a constructive role, as shown dormancy when the Government decided to by the recent meeting for Kenya (see Box 1). undertake stabilization and structural adjustment programs. A new approach to organizing CGs 7. The CGs' increasing focus on the policy was recently used in the Central America region; environment has heightened the importance of the the World Bank and the Inter American Bank's economic analysis. The Bank's current Development Bank (IADB) organized back-to-back Country Economic Memorandum serves the CG meetings for five countries including two IDA starting point of the discussions, and borrowers. This gave the discussions a regional representatives of the government and the IMF focus and attracted more senior donor officials also give opening presentations. The meetings than customarily attend these meetings. discuss macroeconomic issues like the size and Moreover, the recipient countries' officials composition of public expenditures, poverty benefitted from learning about each others' alleviation and social safety nets, as well as topics programs in poverty alleviation and other key of particular importance to the country. At areas. Mozambique's recent CG meeting, for instance, the Government described its plans for liberalizing 6. The role of CGs has evolved to reflect the the allocation of foreign exchange, and explained changing needs of both donors and recipients. In that for the new system to work, donors would their early days, their main purpose was to allow have to untie their aid and modify their governments to secure financing for projects and procurement procedures. At the CG for the for donors to exchange views about Philippines in March 1992 the Governor of the 1/ Bagladesh, Bolivia, Egypt, Ghana, Guyana, Honduras, India, Kenya, Malawi, Mozambique, Nepal, Nicaragua, Pakistan, Philippines, Sri Lanka, Tanzania, Uganda, Zambia, Zimbabwe.

4 Page 3 Box 1: Kenya's CG Fosters Candid Disrcion The 1991 CG for Kenya occurred against a backdrop of reemerging macroeconomic imbalances, slow progress on public sector reform, and political uncertainty. All the donors raised serious concerns about the Government's poor implementation of announced reforms in the civil service, the parastatals and public expenditures. Most delegations declined to make any financial pledges, and the meeting agreed to consult again in six months to review progress on the required economic and social reforms. The candid but constructive discussions reaffirmed that the CG process was robust and could deal with difficult issues while continuing the partnership between Kenya and its donors. Central Bank briefed participants on the country and between them and government Government's strategy for reducing its debt service officials. Donor representatives have always met burden, which is an integral component of the informally to discuss shared problems, to macroeconomic stabilization program. The recent harmonize the work of related projects, and to CG on Sri Lanka even reviewed the Government's present common views to government officials. In progress on human rights issues. Issues in some countries, donors have formalized these particular sectors, as well as macroeconomic contacts by creating a Local Consultative Group matters, may also be aired (see Box 2). (LCG). The World Bank, with resident missions in almost all IDA recipient countries, 2 is active in leading both informal and formal donors' groups. Local Aid Coordination Bangladesh has one of the longest established formal LCGs: it meets monthly and discusses a 8. Local aid coordination refers to links wide variety of macroeconomic and sectoral among the donors' representatives in the recipient issues, often on the basis of a paper prepared by Box 2: Nepal's Aid Group Advises on Development Of the Power Sector Nepal has considerable potential to generate hydroelectric power and export it to India. The Government has asked IDA to help support a huge dam, Arun 3, as the first of a series of projects. But IDA found that while the dam would be technically viable, its cost-us$1.3 billion-would probably be unaffordable. The Nepalese Government was disappointed with IDA's unwillingness to support the project. At the 1992 meeting of the Nepal Aid Group, the Govermnent underlined the importance it attaches to hydroelectric development and presented preliminary details of a scaled down version of the Arun dam. The Aid Group discussed this proposal as well as other alternative hydroelectric projects. The Group concluded that the scaled down project appears affordable, and that the Govermnent should therefore proceed with further technical analysis, accompanied by proposals for institutional reform of the Nepal Electricity Authority and improved macro-economic management. The potential donors agreed to preserve their original allocations for the Arun project for eventual support to the scaled-down version or an alternative project that could emerge from the stdies. Z/ IDA recipients without a Bank nmssion are the new and newly reactivated countries, Myanmar, and the small countries of the Caribbean and Central America.

5 Page 4 the Bank or another donor. Consultative Groups, IDA's Vice-Presidents for South and East Asia instead of meeting more frequently themselves, consult annually with the Asian Development can use LCGs to monitor and report on the Bank, and the Bank sends observers to the regional Government's implementation of its commitments. Banks' annual meetings. There are semi-annual Donors in some of the larger countries have even consultations with the African Development Bank, formed specialized local CGs for particular which also recently opened a liaison office in sectors, led by a donor with particular knowledge Washington. While there may be scope for of the sector. further deepening contacts at the institutional level, the country level will remain the most productive 9. The strengths of local coordination groups arena for coordination. are their direct and immediate contacts with working level officials, and their first-hand 11. Where IDA has moved beyond knowledge of implementation issues. They also coordination to rely on a regional bank to have good contacts with local and international undertake part of its work program, the results non-governmental organizations. But since the have been disappointing. In 1980, the World participants are not usually authorized to make Bank and the Asian Development Bank (ADB) funding decisions, and still depend on their agreed that in the interest of economy and headquarters organizations to do economic analysis efficiency of lending operations in the small and project design, these groups are best seen as Pacific Island countries (Fiji, Kiribati, Solomon a way of enhancing the effectiveness of aid Islands, Tonga, Vanuatu and Western Samoa), the programs rather than as a substitute for World Bank would participate as a cofinancier programming decisions taken by the participating with the ADB, with ADB having the lead donors. responsibility for identifying, appraising and supervising projects. A recent World Bank review found that this arrangement has resulted in a Coordination with Regional Development considerably smaller portfolio of projects than Banks anticipated, and the projects' development impact has not been fully satisfactory. In addition, the 10. The Asian, African and Inter-American borrowers have indicated that they wish to have Development Banks are important sources of more contact with IDA, including some projects finance in some of IDA's recipient countries. appraised and financed directly by IDA. As a Many IDA projects, including adjustment result, the World Bank is now reassessing whether operations, are cofinanced by the relevant regional the arrangement should be supplemented by such bank. This requires operational staff to work operations. closely together, often on joint missions, to identify and appraise the project. At the country level, the regional banks' representatives tilateral/biteral Programs: The participate in CGs and local aid groups. The Special Program of Assistance for Africa African Development Bank is a major supporter and donor to the Special Program of Assistance for 12. The Special Program of Assistance (SPA) Africa (described in paragraph 12). In addition, for Africa represents a relatively new mechanism IDA's country directors and division chiefs meet for mobilizing and coordinating aid. Under the regularly with their counterparts to discuss lending program, bilateral and multilateral donors provide plans and macroeconomic conditions. This funds under a common framework to more than 25 consultation helps each bank to efficiently allocate African countries to support their adjustment its staff and funds in the country assistance programs. The World Bank created the SPA in program, and to develop consistent policy 1987, a time when donors were becoming recommendations. At the institutional level, discouraged about the prospects for development

6 Page S in Africa, in order to revitalize their commitment to monitor and guide the countries' economic to aid. The donors provide funds to countries of policies. their choice, with IDA being responsible for endorsing and monitoring the recipients' economic 14. At present the SPA arrangement seems reform programs. Donors expect IDA to provide unlikely to be replicated for other groups of them with frank assessments of each recipient's countries. In Asia, countries' sizes and economic progress in order to guide their individual funding structures vary immensely. Their development decisions. At the program's semi-annual strategies are equally diverse, and there is no meetings, donors review both the program as a overarching need for structural adjustment as there whole and the financing needs of individual is in Africa. Moreover, the large recipient recipient countries. Now in its second phase, SPA countries like Bangladesh and Pakistan already use expects to mobilize over US$8 billion from other their CGs as fora to explain and seek donors' donors for adjustment lending, complemented by support for their macroeconomic policies as well US$ 3.2 billion from IDA itself, for its next three as for individual projects. For the small countries years of operation. It has been a successful of the Caribbean, the Caribbean Group for program: the typical SPA country's GNP grew at Cooperation in Economic Development described 3.7 percent per year after starting a reform in paragraph 4 above is already serving as an program, compared to about 1.3 percent before the efficient mechanism for donors to review the program. Moreover, donors have increasingly financing needs of a large number of countries. decided to provide their assistance in untied form And the Central American countries have asked and have harmonized their procedures for the Bank and the IADB to continue organizing procurement and import support. back-to-back CGs because of the logistical advantages and opportunities for cross-fertilization 13. The SPA has been successful not only of ideas. There are two sub-regions-cambodia, because of donors' generosity, but also because of Laos and Vietnam in Indo-China, and the several unusual features of its objectives and Commonwealth of Independent States countries in structure. It involves many donors who are Western Asia-where an SPA or grouped CG assisting many countries with roughly similar arrangement might eventually prove appropriate, economies. The recipients are all heavily reliant but donors' involvement is still too limited to on smallholder agriculture and the export of warrant organizing them yet. primary commodities, and face similar structural problems related to excessive state control of production and distribution. Bilateral donors want Multi-donor Fbancing for Special to support structural adjustment but do not have Programs the resources or expertise to advise each country and monitor its progress on the necessary reforms. 15. The World Bank has organized and IDA, through its economic studies and policy coordinates many multi-donor programs that recommendations for each country, provides the address specific development objectives on a analytical framework within which the other regional or global basis. The objectives are donors allocate their financing. IDA does this diverse: they include control of onchocerciasis, economic analysis not just to support the SPA, but safe motherhood, control of urban pollution, and primarily to underpin its own lending to each of tropical disease research. The programs have the SPA recipients. This lending is considerable: generally been established to tackle problems to IDA's adjustment financing to SPA countries for which donors attach high priority but lack the 1992 is about equivalent to the total provided by expertise or resources to address within their own other SPA donors. Without its own lending aid programs. A multi-donor approach can program, IDA could not undertake the significant mobilize enough funds to have an impact on the expenditure on staff, consultants and travel needed problem. Since many of these programs disburse

7 Page 6 funds directly to research and training institutes or 17. The World Bank plays several roles in other non-governmental entities, they serve to managing multi-donor programs. Bank staff work complement, rather than displace, any related with the other donors to define the program's support under IDA's own projects. The classic overall strategy, often in collaboration with example of this type of program is the specialized UN agencies like the WorldHealth Consultative Group on International Agricultural Organization, UNDP or UNEP. In doing so they Research (CGIAR) founded in Many of its draw on the Bank's knowledge of the recipient's features have been adopted in other multi-donor economy and sector strategies to ensure that the programs (see Box 3.) special program is well integrated with the national Box 3: Multi-donor Fmancing for the CGIAR The CGLAR is a loose-kit association of 40 public and private secto donors that support a network of international agricultural research centers in developing countries. The individual donors provide direct grants to individual centers. The World Bank chairs the group and provides the secretariat, which monitors the centers' work programs and achievements on behalf of the other donors. The Bank supplements other donor contnbutions to centers needing additional funding. The Bank has provided about 15 percent of CGLAR's total costs-in 1991, US$35.2 million to the centers and US$3.4 million for the secretariat. CGIAR has three key features that have been successfully adopted in other special multi-donor programs: decentralized funding decisions; centralized quality control and reporting under World Bank responsibility, and a governing or advisory body of donors and recipients. 16. The Global Environment Trust Fund development program. The Bank usually helps (GET) is the largest multi-donor fund that the make the necessary finn=cing and disbursement Bank helps to manage. It was created in 1991 arrangements with participating institutions and when donors became concerned about global governments, and in some cases finances an warming, marine pollution and other emerging administrative secretariat within Bank global environmental problems. The multinational headquarters. Finally, the Bank contributes nature of the problems made existing aid directly to the program costs: in fiscal 1992, it mechanisms unsuitable for raising and transferring provided about percent of most programs' the necessary funds. Most of GET's contributions total financing. This opportunity for leverage of -about two-thirds of the total US$1.1 billion-are its own funds reinforces the Bank's interest in pooled in a core fund managed by the Bank, coordinating these programs. Moreover, the United Nations Development Programme (UNDP) Bank's direct financial involvement provides the and United Nations Environment Programme credibility with donors and recipients that it (UNEP) and administered under a single set of requires to effectively design and monitor the procedures. The remaining third of GET's activities. Within the past few years, new resources have been provided by six donors under programs have been launched for building public individual cofinancing agreements. The program sector capacity in Africa, combatting pollution in as a whole is governed by a semi-annual assembly the Danube River Delta, and improving the of donors' and recipients' representatives. environment of five of Asia's biggest cities.

8 Page 7 Because these programs are closely targeted and supplements to conventional aid programs when yet flexibly managed, they will continue to occupy there is wide donor interest in a specific an important niche in the range of development development objective. In order for the World assistance tools. Bank to help donors realize the potential of these activities, though, it must do more than organize meetings and exchange information. The Bank Conclusion Group's analytical work and relationship with the recipient countries are vital. To coordinate aid 18. The coordination activities described in effectively in its client countries, IDA has to this note have improved the effectiveness of aid continue providing a bedrock of substantial programs. Most of them have also generated financing, backed up by credible economic increases in the overall flow of assistance. Multi- analysis upon which other donors can draw. donor programs have proven to be valuable