FIDUCIARY ARRANGEMENTS FOR SECTORWIDE APPROACHES (SWAPS)

Transcription

1 FIDUCIARY ARRANGEMENTS FOR SECTORWIDE APPROACHES (SWAPS) OPERATIONS POLICY AND COUNTRY SERVICES APRIL 2, 2002

2 FIDUCIARY ARRANGEMENTS FOR SECTORWIDE APPROACHES (SWAPS) CONTENTS Page I. Introduction..1 II. Sectorwide Approaches... 2 III. Fiduciary Arrangements for SWAps... 6 A. Financial Management... 8 B. Procurement... 9 C. Disbursements D. SWAps and Traditional Investment Loans IV. Implementation V. Issues for Discussion Boxes and Figure Box 1. Lessons Learned from Bank Participation in SWAps... 6 Box 2. Typical Financial Arrangements for a SWAp... 7 Box 3. Comparison of SWAps to Traditional Investment Loans Figure 1. Percent of Bank Disbursements Made on Basis of Statements of Expenditure... 4

3 FIDUCIARY ARRANGEMENTS FOR SECTORWIDE APPROACHES (SWAPS) I. INTRODUCTION 1. Sectorwide approaches (SWAps) are mechanisms by which development agencies collaborate to support sector reform programs that are based on a country s long-term vision for its development. 1 They have evolved from the traditional investment project as a means to enhance development impact by scaling up, building stronger donor partnerships in support of country-led sector reform programs, and improving the performance of borrower institutions in managing all sector resources. SWAps also present particular opportunities and challenges for the harmonization of procedures by participating donors. 2. Growing Interest in SWAps. Interest in SWAps has grown in recent years. The Development Committee has called on the donor community to move rapidly, while maintaining appropriate standards, to harmonize aid management arrangements, in particular to help low-income countries implement their poverty reduction strategies. 2 It has encouraged donors to rely increasingly on borrowers own planning and budgetary processes, helping to strengthen these systems and processes where needed. In response to borrowers and development partners, the World Bank has committed to bring forward proposals to allow for fuller participation in SWAps. The Bank is also active in both bilateral and multilateral donor harmonization initiatives that address, inter alia, the development of common approaches to SWAps Purpose of this Paper. Borrowers, other donors, and the Bank have been searching for ways to adapt their procedures to support sector programs while maintaining acceptable fiduciary standards. This paper proposes the introduction of special procedures for applying the Bank s financial management, procurement, and disbursement policies when it participates in SWAps. These procedures would allow the pooling of Bank funds with those of the government and other donors participating in SWAps. The proposals do not involve changes to Bank policy; rather, they represent a step in an ongoing process of modernizing investment lending. 4 The continuing SWAps are sometimes known as sector programs or sector investment programs. See paragraph 6 of the communiqué of the Development Committee meeting held on April 30, See Harmonization of Operational Policies, Procedures, and Practices: Second Progress Report (SecM ), March 7, More flexibility was introduced into borrower financial reporting requirements in 2001 (see Loan Administration Change Initiative (LACI): Changes in Implementation (AC ), June 29, An issues paper on the Bank s audit policy will be discussed later this fiscal year. Management is also exploring ways to further streamline disbursements.

4 2 discussions with development partners on harmonization are also expected to lead to further proposals later this year Structure of the Paper. The paper briefly describes the features of SWAps and reviews the Bank s experience with them, explains the concept of pooling of donor and government funds, sets out the building blocks of a sound fiduciary approach to SWAps, and discusses key implementation issues. II. SECTORWIDE APPROACHES 5. SWAps have evolved as a means of improving development cooperation in a sectoral context. They aim to strengthen government ownership and coordination of projects, facilitate budgeting of sufficient funds to cover operating costs, integrate capital investment budgets in overall country budgets, and support policies and efforts to build domestic capacity. 6 SWAps also aim to reduce the procedural diversity of multiple donors which developing countries, especially those with limited capacity, find both burdensome and costly. 6. SWAps Features. As the term suggests, a SWAp represents a shared approach by development partners to support country-led programs whose scale is greater than that of traditional projects. It typically encompasses an entire sector, or large portions of one. 7 A SWAp is neither a lending instrument nor a donor product. In general, SWAps are characterized by the following: 8 Country Ownership. Development partners come together to support the government s own program for the development of a particular sector. 5 Areas being explored include collaboration in the conduct of financial management and procurement assessments at the country and project levels; common financial reporting requirements; and common terms of reference for audits and auditor qualification criteria. 6 See Sector Programme Support and Macro-economic Development by Broback and Sjolander, SIDA, February SWAps may also be used to support defined subsectors, such as a particular geographic region, subnational entities (e.g., states or municipalities), or discrete subsectors (e.g., primary education). In smaller countries, they may be used to support more than one sector. 8 More information on SWAps can be found in Education and Health in Sub-Saharan Africa: A Review of Sector-Wide Approaches, Africa Region Human Development Series, World Bank, January 2001; The Status of Sector Wide Approaches by Foster, Brown, Norton and Naschold, Centre for Aid and Public Expenditure, Overseas Development Institute, London, February 2000 on behalf of Ireland Aid; Sector Wide Approaches: From Principles to Practice, by Forss, Birungi and Saasa, November 2000 on behalf of the Department of Foreign Affairs, Ireland; A Guide to Sector-Wide Approaches for Health Development, WHO, DANIDA, DFID and EU, 1997; Sector Investment Programs in Africa: Issues and Experience, World Bank Technical Paper Number 374, 1997; and The Broad Sector Approach to Investment Lending, World Bank Discussion Paper 302, Africa Technical Department Series, 1995.

5 3 Partnership and Consultation. The government directs the program and coordinates the participation of donors and the involvement of other stakeholders. Partners are committed to openness, consultation, and sharing of information. Comprehensive Sector Policy Framework. This framework typically includes a medium-term (five years) strategy articulated in a program of specific interventions for the short term (two to three years). Expenditure Framework and Resource Envelope. Derived from the sector policy framework and integrated into the government s overall medium-term expenditure framework, the expenditure framework and resource envelope identify prioritized activities and plans. Donor resources are channeled increasingly through government systems. Uniform implementation Structures and Procedures. As circumstances permit, partners aim to synchronize their own processes through joint appraisal, programming, review, and monitoring and evaluation. There is an emphasis on using and strengthening government institutions, procedures, and staff, rather than establishing parallel systems. The aim is to have a single reporting and auditing system for all activities in the sector. 7. Consistency with the Bank s Development Efforts. The SWAp is consistent with the principles that underpin the Comprehensive Development Framework and country poverty reduction strategies. It is a vehicle to foster country ownership of the reform agenda, country capacity building, and more efficient resource use through the harmonization of donor efforts and procedures in support of a comprehensive policy framework. The groundwork for the Bank s increased participation in SWAps has been laid through efforts among many international development institutions to harmonize their policies and procedures. Notable advances in this work have been made in the procurement area with the development of standard bidding documents; and wider Bank participation in SWAps would build on this progress. 8. Focus on Social Sectors. SWAps are found mainly in social sectors in countries in which many donors are active. The Bank s resource transfer profile in these sectors is increasingly characterized by large numbers of low-value transactions. The proportion of Bank lending used to finance transactions that are below the threshold is typically higher in social sector projects than the average for the Bank s portfolio, and has grown over the years (see Figure 1). 9 9 Below the threshold transactions are those whose value is below the level needed for procurement prior review by Bank staff, or for which documentation supporting the transaction must be submitted with the request for disbursement in loan withdrawal applications. Disbursements for these transactions are made on the basis of statements of expenditure that are subject to annual audit and review on a sample basis by Bank staff.

6 4 Figure 1. Percent of Bank Disbursements Made on Basis of Statements of Expenditure (%) Percent Bank-wide Social sectors FY98 FY99 FY00 FY01 Source: Loan Administration System reports. Investment operations only. 9. Experience with SWAps. Since the mid-1990s, an increasing number of Bank operations support sector programs. Among those that reflect most fully the general characteristics of SWAps are Bangladesh Health, Ghana Health, and Pakistan Social Action (specific investment loans); Ethiopia Education and Zambia Agriculture (sector investment and maintenance loans); and Mozambique Agriculture and Tanzania Health (adaptable program loans). 10 These operations have an aggregate committed loan value of US$745 million. Their performance generally compares favorably with that of the rest of the portfolio. As of June 30, 2001, the implementation progress and development objectives ratings were satisfactory or better for six of the seven operations; the procurement rating was satisfactory or better for five of the seven; and there were no overdue audit reports for five of the seven. 11 However, the cost and time taken to prepare these operations, and their supervision costs, are significantly above the average for the rest of the portfolio. 12 Over the period FY97 through end-january 2002, the aggregate value of the international competitive bidding (ICB) contracts subject to prior review on the seven projects was less than 15 percent of aggregate disbursements. In FY01, the proportion of disbursements made on the basis of statements of expenditure for these projects was 73 percent, and it exceeded 90 percent in two of the seven. 10 Bangladesh Health and Population Program Project (Credit 3101-BD), Ethiopia Education Sector Development Program Support Project (Credit 3077-ET), Ghana Health Sector Program Support Project (Credit 2994-GH), Mozambique Agriculture Sector Public Expenditure Program (Credit MZ), Pakistan Second Social Action Program Project II (Credit 3050-PAK), Tanzania Health Sector Development Program Project (Credit 3380-TZ), and Zambia Agriculture Sector Investment Program (Credit 2698-ZM). 11 A new financial management rating was introduced in the Project Status Report in March 2002, and will provide a fuller measure of financial management performance in future. 12 For the seven projects, the average cost of preparation, and of supervision in FY01, was more than double the Bank average. The average time lapse from concept review to Board approval for the same projects was 2.8 years, again more than double the Bankwide average.

7 5 10. Lessons Learned. Lessons learned from experience with SWAps range across program preparation and implementation (see Box 1), with the need for sound fiduciary arrangements a consistent theme. 11. Pooling of Funds. An increasingly common feature of SWAps is the pooling of donor and government funds for disbursement through jointly agreed channels rather than the use of special-purpose accounts for individual donor funds. Using pooling, funds are deposited into and disbursed from a common account, with donors participating in the pool to finance agreed proportions of the overall sector program. 13 This arrangement yields several benefits: Enabling borrowers to institute a single procurement, financial management, and disbursement system, thus reducing the transaction costs of parallel systems; Enhancing the government s own fiduciary system, thus strengthening ownership, internal capacity, and program sustainability; Encouraging harmonization of borrower and donor fiduciary systems; and Extending donor confidence over the proper use of funds to the whole sector program rather than just to the ring-fenced projects each donor has financed. 13 The Brazil Family Health Extension Project (Report No BR), approved by Executive Directors on March 14, 2002, was the first project to provide for such type of pooling. It was prepared using the principles set out in this paper.

8 6 Box 1. Lessons Learned from Bank Participation in SWAps Program Preparation Sector institutional assessments, including financial management and procurement capacity, should be undertaken in a timely manner and shared among participating donors, and should lead to agreement on appropriate capacity-building arrangements. Fiduciary risk mitigation measures should be determined at the outset. Remedial measures are necessary if the financial management and procurement risk assessments reveal serious process and internal control weaknesses. An example may be the establishment of transitional arrangements for accounting for donor funds. These transitional arrangements should be subject to an agreed timeline for moving to unified accounting and procurement arrangements (including a consolidated set of financial statements analyzed by donor, if necessary as well as a joint independent audit of the overall program). Government-donor partnership, under national leadership, and donor coordination are critical. Bank fiduciary specialists should be involved during program preparation (and throughout the program) in carrying out the required fiduciary assessments and monitoring borrower compliance with agreed fiduciary arrangements. Program Implementation Larger than normal budget coefficients for preparation and supervision may be required as SWAps may encompass the equivalent of multiple projects and require higher investment in assessing and building capacity. Flexibility is required in the allocation of funds to disbursement categories, normally through a higher than average unallocated category in the Schedule of Disbursements (Schedule 1 of Loan/Development Credit Agreements), with annual planning meetings between the government and donors determining the activities to be financed by all participating financiers, including the Bank. Effective monitoring and evaluation of SWAp performance requires (a) reliable information systems to capture, analyze, and report data on program implementation; and (b) the establishment of appropriate procedures for joint reviews involving the government, participating donors, and other stakeholders. Earmarking donor funds to finance specific pre-identified expenditure items, such that each donor follows its own rules and procedures, significantly diminishes the benefits of the program, principally by undermining government ownership and institutional development and adding costs. III. FIDUCIARY ARRANGEMENTS FOR SWAPS 12. The Bank s financial management, procurement, and disbursement policies can be applied to allow the Bank to participate in SWAps. 14 This section spells out specific proposals to allow the pooling of Bank funds with those of the government and other donors participating in SWAps and shows the differences between the proposals and the application of the policies in traditional investment loans. No new lending instrument is proposed SWAps use the investment loan instrument and no change is proposed to Bank policy. 14 The applicable policies are OP 10.02, Financial Management; OP 11.00, Procurement; and OP 12.00, Disbursements.

9 7 13. Proposed Pooling Arrangement. The proposals with respect to pooling Bank funds would apply only to transactions procured by methods other than ICB and to individual consultants or consulting firms engaged using short lists comprising entirely national consultants. 15 These transactions would generally be financed from a pool of funds to which the government and participating donors, including the Bank, would contribute in agreed proportions. For other transactions, existing disbursement practices would continue to apply (see Box 2). The high levels of disbursements made on the basis of statements of expenditure and of non-icb procurement in the social sectors generally, and in SWAps particularly, illustrate the importance of the performance of borrower systems to the Bank s fiduciary assurance. By shifting the focus from individual transactions to the fiduciary arrangements that apply to the entire pool, donors, including the Bank, would receive more meaningful assurance on the overall use of financing for the sector, including resources provided by donors. This shift in focus would also contribute more effectively to sustainable capacity in the management of all public finances and help to achieve greater cost-effectiveness. Excluding ICB contracts from the pool would allow donor oversight to be directed to high-value individual contracts; at the same time, their relatively small number and aggregate value as a proportion of total program expenditure means that pooled funds would normally finance the bulk of program costs. Box 2. Typical Financial Arrangements for a SWAp The financial arrangements would typically work as follows. As part of project preparation, the government and participating donors would agree on an overall program to be undertaken, separately identifying (a) activities to be financed by the government and donors from the pooled account, and (b) contracts to be financed by individual donors. They would also agree the proportions in which each would contribute to the pool. Each year, the government and donors would agree on the specific activities in support of the program together with the associated budget and procurement plan, separately identifying contracts to be financed by individual donors from activities to be financed from the pool. An initial advance of the estimated requirement for six months would be deposited into a pooled account dedicated to the agreed program by the government and donors in the agreed proportions. Each quarter, the government and donors would replenish the pooled funds, again in the agreed proportions. The Bank would replenish directly into the pooled account on the basis of quarterly consolidated Financial Monitoring Reports. In certain circumstances (such as when capacity is weak), these reports may be subject to external audit to certify the physical achievements and the corresponding resources used. Annual audits would be required in all cases. Contractual provisions, including appropriate remedies, would, as needed, be agreed and reflected in the legal agreement between each donor and the borrower to ensure coordination of deposits into the pooled account, timely and adequate reporting on the use of all funds, the receipt of audit reports, and timely recovery of any outstanding amounts. 14. Fiduciary Building Blocks for SWAps. Acceptable fiduciary arrangements are provided by systems that (a) account for the use of all program funds, (b) have acceptable procurement regulations and procedures, (c) put in place an acceptable 15 See Guidelines for Selection and Employment of Consultants by World Bank Borrowers, section 2.7. National consultants are firms with majority ownership and registered and incorporated in the country. The Loan or Credit Agreement with the Borrower provides the circumstances under which such procedures may be used.

10 8 internal control system, and (d) have effective external auditing arrangements. The fiduciary building blocks for SWAps would include the following: Risk Assessment and Mitigation. The process of preparing a SWAp would include an assessment of the financial management and procurement capacity, regulations, practices, and procedures of the sector institutions responsible for program implementation. These assessments would take into account the findings of country-level diagnostic work, such as Country Procurement Assessment Reviews, Country Financial Accountability Assessments, and Public Expenditure Reviews. They would provide a solid diagnostic underpinning on which to provide support to strengthen local capacity, as well as to mitigate risks to the use of donor funds. Agreement Among Financiers. All participating financiers would share the results of the procurement and financial management assessments, and would reach agreement on the procurement, financial management, and disbursement systems that would apply. This agreement on fiduciary arrangements would normally be recorded in a signed Memorandum of Understanding. The procurement, financial management, and disbursement procedures would be agreed and reflected in the legal agreement between the borrower and each donor. Financing Arrangements. Contracts procured under ICB and consulting firms engaged under methods other than those involving short lists comprising exclusively national consultants would be identified and made subject to prior review by the Bank. All other contracts and expenditures would be financed from the pooled account. Monitoring and Auditing. The Bank, other donors, and the borrower would jointly monitor the program s financial management and procurement through review of regular reports, post reviews and audits. Consolidated financial statements would be jointly audited, and remedies would be applied if misprocurement or misuse of funds were identified. A. Financial Management 15. The financial management system in a Bank-supported SWAp would be expected to produce timely, understandable, relevant, and reliable financial information that would allow the government to plan and implement the program, and the Bank and other donors to monitor compliance with agreed procedures, and appraise progress toward its objectives. To ensure that these requirements are met, the financial management system would include the following:

11 9 Financial Management Assessment. The assessment of the financial management capacity of institutions implementing the program would be undertaken jointly by participating donors as part of program preparation. 16 Financial Management Action Plan. On the basis of the assessment, participating donors would jointly prepare a financial management action plan for the sector program to establish a control environment that mitigates any identified fiduciary risk. The financial management arrangements should include an appropriate organizational structure (including internal audit function), staffing, and documented procedures. Financial Reporting. All donors would agree on the format, content, and frequency of the regular financial monitoring reports to be provided by the borrower during implementation. 17 Auditing. All donors would agree on the auditing arrangements to apply. This would include the scope of the audit, criteria for selection of auditors, period for submitting audit reports, and arrangements for reviewing and following up on audit findings. While audit reports would normally be provided annually, where particularly high risks have been identified, they may be required more frequently. Monitoring and Supervision. The government and donors would agree arrangements for monitoring the financial management performance of the program during implementation. B. Procurement 16. The procurement arrangements for a SWAp would include the following elements: Risk Assessment and Mitigation. The assessment of applicable national procurement regulations and procurement practices and procedures in the sector would be carried out jointly by all participating donors. 18 Procurement Plan. The rolling annual procurement plan would identify the contracts to be procured separately following each donor s procedures and financed from outside of the pool, and would identify both the amount of nonpooled and pooled-fund contracting to be undertaken during the period. This 16 See Assessment of Financial Management Arrangements in World Bank-Financed Projects; Guidelines to Staff, June 30, 2001, available at 17 See Financial Monitoring Reports: Guidelines for Staff, November 30, 2001, available at 18 See Office Memorandum Assessment of Agency s Capacity to Implement Procurement, Setting of Prior Review Thresholds, and Procurement Supervision Plan, August 11, 1998, available at

12 10 plan would be updated every year, separately identifying those contracts that would be financed outside of the pool and those that would be financed from the pool. Use of Donor International Procurement Procedures. Bidders competing under international procedures value the assurance of transparency and level playing field provided by ICB. Donors usually require procedures similar to the Bank s ICB for high-value contracts, which are normally financed with donor-provided foreign currency. While the threshold above which ICB is required would be set to take into account the capacity and competitiveness of local contracting or manufacturing industries, it is expected that all high-value contracts in a SWAp would be financed under each donor s international competitive bidding procedures. These contracts would be earmarked for financing by a particular donor using its own rules and procedures. 19 The same would apply to the selection of consultants. National/Sectoral Procurement Procedures. For transactions below the threshold for international procurement, donors participating in the pool would agree on minimum required procurement procedures for items financed from the pooled account rules and procedures aimed at maintaining acceptable standards of economy, competition, transparency, and efficiency and, if possible, on standard bidding documents. These rules and procedures would be agreed with the donors and borrower and reflected in the legal agreement between each donor and the borrower. Manual of Procedures. A Manual of Procedures for the SWAp, covering, among other things, procurement for the pooled funds and the borrower s responsibility to maintain a sound recordkeeping system, would be agreed with the borrower. Compliance with this Manual would be a condition reflected in the legal agreement between each donor and the borrower. Reporting. The reporting system would provide each donor with a quarterly report showing all pooled-fund procurement actions under the agreed program undertaken during the period. Post Review. Participating donors would agree on a post review supervision plan that would cover the frequency, procedures and assigned responsibilities for the post review missions. All donors would receive post review reports, and any donor could decide to send additional missions to the field for further reviews or investigations, the results of which would be shared with all participating donors. 19 In some circumstances, donors agree that Bank rules should be applied to all international competitive bidding, irrespective of the source of funds. Through the harmonization process, the bank is working to agree common ICB rules with other multilateral development banks.

13 11 Technical and Procurement Audits. The government and all donors would receive copies of the ex post technical and procurement audit reports on the program. Misprocurement/Remedies. As a result of the post review and procurement audits, each donor could identify cases of noncompliance with the loan agreement (including the Manual of Procedures) and exercise the remedies provided for in its legal agreement with the borrower. The Bank would declare misprocurement in any misprocured contract funded by the whole pool of funds, and would have the option of canceling from its loan (or requesting reimbursement of) an amount equivalent to the contract amount multiplied by the Bank s percentage participation in the pool of funds. C. Disbursements 17. The following disbursement arrangements would apply to SWAps: Expenditures not Financed from the Pool. There would be no change to current disbursement procedures for expenditures not to be financed from the pool, such as ICB contracts. Expenditure Financed from the Pool. The Bank would disburse into the pool in the proportions agreed with the government and other participating donors. Bank staff would determine ex ante that the proportion of total expenditure from the pool that is eligible for Bank financing is expected to equal or exceed the Bank s agreed financing proportion. Bank staff would then carry out an ex post reconciliation to confirm that the amount of eligible expenditure exceeded the amount of Bank financing. This reconciliation would be based on consolidated Financial Monitoring Reports (or equivalent reports prepared in agreement with other donors). Annual financial reports would be subject to annual audit. D. SWAps and Traditional Investment Loans 18. SWAps are governed by the Bank s fiduciary policies for investment lending. The main differences in how these policies would be applied in SWAps and how they are applied in traditional investment operations are summarized in Box 3. Box 3. Comparison of SWAps to Traditional Investment Loans Activity Traditional investment loan SWAp Assessment of Focus on the entity with Focus on the institutions responsible for financial responsibility for project program implementation. Planned and management and implementation. Normally conducted by participating donors. Results procurement capacity conducted by Bank staff. shared among all donors.

14 12 Box 3. Comparison of SWAps to Traditional Investment Loans Activity Traditional investment loan SWAp Scale Normally a discrete set of activities within one or more sectors. Rules concerning use of funds Use of Bank loan proceeds Reporting and auditing Misprocurement Expenditure eligibility Co-financing donors normally agree bilaterally with borrowers the specific rules that will apply to each source of funds. Loan proceeds are normally used to finance a portion of eligible expenditures, defined separately for each individual type of transaction. Borrowers provide the Bank with supporting documentation for each transaction, or, in the case of lower value transactions, statements of expenditure. Borrowers normally provide customized financial and audit reports to donors on the use of funds provided by each. If misprocurement is declared in respect of a contract financed by the Bank, the Bank s remedies for misprocurement are applied to that contract. Expenditure eligibility is determined as expenditure is financed out of loan proceeds by reference to specific, identified transactions. Typically encompasses an entire sector, or large defined portions of one. The government and all participating donors, including the Bank, agree on a common financial management and procurement regime, with flexibility to agree separate rules for some contracts. All contribute to the pool in agreed proportions. Other than transactions specifically agreed to be financed outside the pool (for which current practice continues to apply), the loan proceeds are used to finance an agreed proportion of total pooled expenditures. Borrowers provide the Bank with financial reports sufficient, inter alia, to allow confirmation that the amount of eligible expenditure in the pool exceeds the amount of Bank financing. Borrowers do not routinely provide the Bank with supporting documentation for individual transactions financed from the pool, but are required to maintain adequate records of such transactions. The government and all participating donors agree on common financial and physical reporting and auditing arrangements that provide the information needed by all, based as far as possible on the government s own systems. All parties agree on the content, format and frequency of reports, as well as the scope of audit, the qualifications of auditors, and the review processes for financial and audit reports. If misprocurement is declared in respect of a contract financed from the pool, the Bank would have the option of canceling from its loan (or requesting reimbursement of) an amount equal to the value of the contract multiplied by the proportion of the pool financed by the Bank. Expenditure eligibility is determined on the basis of agreed program content as well as the procurement plan, with an ex ante determination that the proportion of pooled expenditure eligible for Bank financing exceeds the proportion financed by the Bank. Eligibility is confirmed at regular intervals by reviewing (a) whether the amount of pooled expenditure that is eligible for Bank financing exceeds the Bank s contribution to the pool, and (b) whether all expenditure financed from the pool formed part of the agreed expenditure program.

15 13 IV. IMPLEMENTATION 19. Implementation of the measures set out in this paper is expected to be fairly straightforward, since the measures build on those staff are already accustomed to using in the context of investment loans. This section discusses several aspects of implementation: costs to the Bank and borrower, donor participation, and the preparation and issuance of guidance to staff. 20. Administrative Costs. The administrative cost to the Bank of preparing and supervising SWAps is significantly higher than the average for the overall project portfolio. This is due both to the larger scope and complexity of the operations, and to the higher investment needed to assess and build capacity as greater reliance is placed on borrower systems. The proposals in this paper are expected to reduce costs by (a) providing clearer and more consistent guidelines to Bank staff, and (b) affording opportunities for more effective fiduciary oversight of the overall use of resources in the sector concerned. Going forward, proposals arising from the harmonization initiative may provide further opportunities to improve cost-effectiveness. Nevertheless, administrative costs for these operations are likely to remain above average. Borrowers, the Bank, and other donors will therefore opt to use SWAps when the anticipated benefits exceed the costs. 21. Costs to Borrowers. Significant cost savings should accrue to borrowers through participating donors commitment to common assessment, procurement, reporting, and auditing procedures, in particular in sectors in which many donors are active. By directing remedial fiduciary measures to strengthen underlying borrower (rather than parallel) systems, SWAps offer the potential for more sustained improvement in fiduciary performance. 22. Donor Participation. Individual donors in a sector may choose not to participate in a SWAp, or in the pooled financing mechanism. Some may have legal impediments to doing so, while others may have policy constraints or may judge that direct financing of particular transactions is more appropriate in a given set of circumstances. The decision on the form of participation will be taken in each case by the government and the individual donor concerned. As SWAps mature and deliver expected benefits, higher levels of donor participation can be anticipated. 23. Guidelines to Staff. The Procurement and Financial Management Sector Boards are preparing detailed joint guidelines to staff on the application of the principles set out in this paper. The guidelines will be shared with borrowers and development partners. While these proposals are planned to be implemented immediately, the Bank will continue to discuss them with development partners and representatives of borrowers as part of ongoing harmonization discussions. Executive Directors will be briefed on these discussions through the twice yearly progress reports on harmonization and in the proposed annual reports of the Financial Management and Procurement Sector Boards. In the event that further changes to the application of current policies, or to policies

16 14 themselves, become desirable, proposals will be presented to Executive Directors in the normal way. Management proposes to undertake an evaluation of SWAps by the end of FY04. V. ISSUES FOR DISCUSSION 24. The proposals in this paper form part of the Bank s efforts to modernize its lending instruments to support promising new approaches to development cooperation. They respond to the Bank s heightened focus on country ownership, stronger partnership, and results while continuing to ensure that it can meet its fiduciary obligations. 25. Executive Directors might wish to address the following questions: Do Executive Directors agree that the proposed measures, including those concerning pooling, support sustainable improvements in sector performance, stronger borrower capacity, lower transaction costs, and more effective partnerships? Do Executive Directors agree that the proposed fiduciary arrangements for SWAps essentially those that apply to project-based investment lending, adapted to meet the scale of sector programs, the centrality of borrower systems, and close partnerships with other donors are appropriate? Do Executive Directors agree that these measures will support the Bank s ability to harmonize with other donors by facilitating agreement of common procedures, and thus contribute to lower transaction costs for borrowers?