FY15 World Bank Budget

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized FY15 World Bank Budget October 8, 2014 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION BUDGET, PERFORMANCE REVIEW AND STRATEGIC PLANNING This document contains forward-looking statements that are based on management's expectations, estimates, projections, and assumptions. Words such as "proposes," "plans," "estimates," "anticipates," "intends," and variations of these words and similar expressions are intended to identify forward-looking statements. Such statements are not guarantees of future performance. As with any projection or forecast, they are inherently susceptible to uncertainty and changes in circumstances, and the Bank is under no obligation to update or alter its forward looking statements, whether as a result of such changes, new information, subsequent events or otherwise.

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3 CONTENTS 1. OVERVIEW AND RECOMMENDATIONS CONTEXT FY15 BUDGET RECOMMENDATIONS WORLD BANK FINANCIAL AND BUDGETARY CONTEXT WORLD BANK FINANCIAL SUSTAINABILITY FRAMEWORK EXPENDITURE REVIEW SIZING THE BUDGET ENVELOPE FY15-17 BUDGET FRAMEWORK AND PROPOSAL NEW STRATEGIC PLANNING AND BUDGETING PROCESS INSTITUTIONAL PRIORITIES CORPORATE BUDGET FLEXIBILITY ADMINISTRATIVE BUDGET PROPOSAL BUDGET ALLOCATIONS BY WORK PROGRAM AND UNIT TYPE BUDGET ALLOCATIONS BY OPERATIONAL UNIT EXTERNAL FUNDS EXPENSE LINE VIEW NON-UNIT SPECIFIC ACCOUNTS AND BUDGETS CAPITAL BUDGET SUMMARY WORK PROGRAM AND DELIVERABLES REGIONAL WORK PROGRAM GLOBAL PRACTICES AND CROSS-CUTTING SOLUTION AREA WORK PROGRAM CHALLENGES AND NEXT STEPS ANNEXES ANNEX A: PROGRAM COST SUMMARY TABLE ANNEX B: CAPITAL BUDGET ANNEX C: ANALYZING EXPENDITURE PATTERNS BY EXPENSE TYPE i

4 BOXES Box 3.1: Implementing the New Budgeting Approach Box 3.2: Increased focus on Fragility, Conflict and Violence Box 3.3: Meeting the IDA17 Commitments Box 3.4: Global Practice Budgeting Box 3.5: Capital Budgeting - Overview TABLES Table 2.1: Administrative Bank Budget Summary Table 3.1: Corporate Budget Flexibility Table 3.2: FY15-17 Total Administrative Budget Table 3.3: FY15-17 Budget by Work Program and Funding Source Table 3.4: FY15-17 Budget Share by Work Program and Funding Source Table 3.5: FY15-17 Regional Budget Envelopes Table 3.6: Indicative FY15-17 Global Practice/CCSA Budget Envelopes Table 3.7: Projected FY15 Administrative Budget by Expense Line Table 3.8: Centrally-Managed Accounts Table 3.9: Projected Contributions to Staff Retirement and Related Plans Table 3.10: FY14 and FY15 Board-related Budgets (Bank Budget) Table 3.11: FY15-17 Grant-Making Facility Envelopes Table 3.12: Capital Program Summary FIGURES Figure 2.1: WB Bank Budget Envelope Figure 2.2: WB All Funds Envelope Figure 3.1: FY08-14 Administrative Expenditures and FY15-17 Budget Figure 3.2: Projected Composition of the FY15 Country Engagement Envelope Figure 3.3: Full-time Bank Staff on Payroll ii

5 ACRONYMS AAA AFR BETF BPS CCSAs CE CGIAR CSC CPF DGF EAP ECR ECA EFO FCS GBR GE GMF GPSA GSD HQ HRD IBRD IDA IDF IEG IFC IG&A Analytical and Advisory Activities Africa Region Bank-Executed Trust Fund Budget, Performance Review, and Strategic Planning VPU Cross-Cutting Solution Areas Country Engagement Consultative Group for International Agricultural Research Corporate Scorecard Country Partnership Framework Development Grant Facility East Asia and Pacific Region External and Corporate Relations VPU Europe and Central Asia Region Externally Financed Output Fragile and Conflict-Affected Situations Group Business Review Global Engagement Grant-Making Facility Global Partnership for Social Accountability General Services Department Headquarters Human Resources Department International Bank for Reconstruction and Development International Development Association Institutional Development Fund Independent Evaluation Group International Finance Corporation Institutional, Governance, and Administrative iii

6 IMF IT LCR LEG LLI MD MIGA MNA MTBF OPCS PCRF PCS PPM QBRR RAS RM RETF RMS SAR SCD SMT SPF TRE VP VPU WBG WPA International Monetary Fund Information Technology Latin America and Caribbean Region Legal VPU Leadership, Learning and Innovation VPU Managing Director Multilateral Investment Guarantee Agency Middle East and North Africa Region Medium-Term Business and Finance Paper Operations Policy and Country Services VPU Post-Retirement Contribution Reserve Fund Program Cost Summary Program and Practice Management Quarterly Business and Risk Review Reimbursable Advisory Services Resource Management Recipient-Executed Trust Fund Results Measurement System South Asia Region Systematic Country Diagnostic Senior Management Team State and Peace-Building Fund Treasury Vice President Vice Presidential Unit World Bank Group Work Program Agreement iv

7 1. OVERVIEW AND RECOMMENDATIONS 1.1 CONTEXT 1. FY14 was a significant year for the World Bank Group, with an extensive change agenda and important corporate initiatives affecting all parts of the institution the strategy was launched, the IDA17 replenishment concluded with a record funding amount, a new country engagement model is being introduced, the matrix is being reorganized with creation of the new Global Practices, and key support functions have been centralized. 2. It has also been an important year for finance in the Bank, with significant reforms centered on supporting the successful implementation of the WBG strategy. This fiscal year, Management has adopted a new financial sustainability framework to improve the institution s margins for manoeuvre over the medium-term and strengthen our long-term financial capacity. A new Group Chief Risk Officer was appointed in February. At the same time, a new strategic planning process and approach to budgeting was launched to more closely align resources with corporate priorities, enhance selectivity in work program funding, and capture all revenues and expenses. The proposed FY15 budget is the result of this transformation. 3. Important budget processes and structural changes have been introduced so that resources can be managed more effectively and efficiently. Improvements include the new structured business planning process that promotes holistic decision-making through interplay of top-down management guidance on strategic directions and detailed, bottom-up work program planning at the unit level. Initial steps have also been taken to establish a Group-wide approach to business management and budget allocation: Bank, IFC and MIGA planning processes were coordinated and Management teams exchanged ideas on respective funding considerations to ensure strategic alignment across the WBG. The financial sustainability framework includes a new, more dynamic budget anchor to guide judicious management of resources. The new approach to budgeting moves away from unit-based incremental budgets to a work program approach for operational units. Three core work programs that are non-fungible in their funding are distinguished: Country Engagement (CE), Global Engagement (GE), and Program and Practice Management (PPM). Furthermore, a WBG-wide Expenditure Review was conducted and a plan was approved to secure significant cost savings over the planning period. Lastly, resources and budget structures have been re-mapped to support implementation of the new delivery model of Global Practices and Cross-Cutting Solution Areas (CCSAs). 4. New principles and tools for managing the institution and its performance are in line with the thrust of the ongoing organizational change agenda. An overhaul of business monitoring practices has been initiated to move toward a more strategic and Group-oriented way of managing the institution, anchored in a biweekly Group Business Review (GBR) between the Senior Management Team (SMT) and all WBG Vice Presidents (VPs) to promote stronger collective leadership as well as accountability across the Management team. The Review meetings foster continuous dialogue on work program priorities with a focus on synergies and joint solutions, results and evidence-based approaches. The new WBG Corporate Scorecard (CSC) was launched in the spring to monitor 5

8 implementation of the WBG strategy and sustainable progress toward achieving the two goals. It aggregates the contributions of the Bank, IFC and MIGA, and is the apex from which indicators cascade into the individual monitoring frameworks of the three institutions. Correspondingly, the World Bank Scorecard has been revised to ensure its alignment with the new Group Goals, Strategy and CSC. 5. Key decisions have been taken on budget priorities. The new budgeting and planning process has established a framework that supports strategic selectivity and alignment of resource allocations, points to critical trade-offs and, hence, supports Management in making appropriate choices. FY15 allocation priorities include the following: increasing CE funding as much as possible within the currently constrained resource envelope, giving a particular boost to Regions with highest poverty rates and taking into account shared prosperity in line with the strategy; decreasing funds for Institutional, Governance and Administrative (IG&A) support units and reducing sustaining costs across the Bank; kick-starting the implementation of Expenditure Review savings through a one-time reinvestment; and using remaining corporate flexibility to fund corporate priority areas such as country office security, country office connectivity, safeguard and procurement reform and implementation, and leadership training and culture change. 6. The paper discusses the main concerns raised during Medium-Term Business and Finance (MTBF) discussions, notably plans for Grant-Making Facilities (GMF) arrangements (discussed in Section 3.9); budget anchor, sustainability and efficiency (discussed in Section 2.1); and proposed shifts in operational resource allocations (discussed in Section 3.2). Additional topics discussed during the MTBF and other interactions between Management and the Board, include Capital Budget requirements, Expenditure Review related investments, External Fund integration, focus on Fragile and Conflict-affected Situations (FCS), and strategy for CCSAs. This document, together with the other financial year-end papers, continues the dialogue on these issues and Management will continue to address them in next year s planning process. 7. A lot has been accomplished in the past year but much remains to be done. The new financial and budgetary framework represents a significant change in how the institution manages its resources, putting in place a solid foundation to strengthen WBG financial sustainability and to undertake business planning in a more strategic and comprehensive fashion. However, many elements have only been launched this year and more work is needed to, for example, refine the budget, solidify new structures and systems, sustain the efficiency agenda, and align the planning and performance review cycles across the WBG institutions. The main lessons learned from this year s exercise, set out in Section 5, will be addressed in the FY16-18 planning cycle, which will commence in the fall as a fully joint WBG exercise. 6

9 1.2 FY15 BUDGET RECOMMENDATIONS 8. Management seeks Board approval of the following FY15 Budget recommendations: That the total administrative budget (Bank Budget) be set at $2,577 million, be managed within a range of +/- 2 percent (net of Board budget), of which: Board-related FY15 funding to comprise: 1 o o o An indicative budget of $73.8 million for Executive Directors, using a preliminary price factor based on standard rate for HQ units, of which $22.8 million are reimbursables. The price factor will be adjusted subsequently to reflect the decisions of the Joint Committee on Remuneration and approval by the Board of Governors. The total administrative budget will be adjusted accordingly; $13.0 million for Board of Governors, Development Committee, and Inspection Panel, of which $3.4 million are reimbursables; and $14.1 million for the Corporate Secretariat of which $5.0 million are reimbursables. The Grant-Making Facilities (GMFs) to be funded as follows: o o o o o $47.0 million for the Consultative Group on International Agricultural Research (CGIAR); $32.8 million for the Development Grant Facility (DGF); $25.0 million for the State and Peace Building Fund (SPF); $0.3 million for the Institutional Development Fund (IDF); and $5.0 million for the Global Partnership for Social Accountability (GPSA). $370.1 million to be contributed to the Staff Retirement and related Plans, and $15.5 million to be put into the Post-Retirement Contribution Reserve. That the capital budget be set at $178.9 million. 1 The Independent Evaluation Group s (IEG) budget is subject to a separate Board approval process, in which IEG is proposing a budget of $34.1 million, including $7.6 million of reimbursables. 7

10 2. WORLD BANK FINANCIAL AND BUDGETARY CONTEXT This section discusses the two main determinants of the size of the overall expenditure envelope: the World Bank financial outlook in the context of the new financial sustainability framework; and the Expenditure Review. 2.1 WORLD BANK FINANCIAL SUSTAINABILITY FRAMEWORK 9. The World Bank s new strategy-driven budgeting model anchors the expenditure envelope in the new WBG financial sustainability framework. The goals of this framework are to: Increase the WBG s business revenues at an underlying trend rate of above 5 percent p.a., including lifting the IBRD s growth rate from a 2-3 percent p.a. baseline and nurturing IFC and MIGA growth rates; Increase the WBG s annual commitment capacity by $5-10 billion per year and mobilize more external resources in alignment with the WBG strategy and corporate priorities; and Reduce costs by improving efficiency, including reducing the Group s overall annual expenditures by at least $400 million (all else equal) over three years, improving cost recovery on fee-based business and trust funds, and rationalizing budget-funded grants. 10. The framework and its goals bear on the three main funding sources for World Bank administrative expenditures (IBRD, IDA, external funds) to a varying degree. 11. The IBRD revenue/capacity measures will, over time, increase IBRD loan spread revenues, reserve accumulation and lending capacity. The Expenditure Review (discussed in Section 2.2) will generate cost savings across the Bank s work program, whether funded by IBRD, IDA or external resources. The external funds agenda seeks to increase inflow, while at the same time, enhanced cost recovery will contribute to IBRD s increased financial capacity. 12. The Medium-Term Business and Finance (MTBF) paper introduced and discussed a policy objective of budget sustainability, as a replacement for the flat real budget paradigm that had governed the sizing of the Bank s net administrative budget since FY06. 2 The mechanism behind the flat real sizing exercise was straightforward. The starting point was the previous year s budget multiplied by a price factor which reflected price changes the Bank was facing globally. The calculation of the price factor was stable, well documented and approved by Executive Directors along with the budget. 13. Management proposes moving from the flat real budget paradigm, a static anchor, to a dynamic anchor consisting of the financial sustainability framework encompassing budget sustainability rules. This anchor will guide Management s annual presentation of the budget envelope for Board approval. 14. Management proposes that budget sustainability have two dimensions in regards to the World Bank s own resources, and the revenues generated by its lending operations: 2 The total administrative budget consisted of the net administrative budget ( above-the-line ) and the Board-related budgets, the GMF, and staff retirement accounts contributions ( below-the-line ). 8

11 For IBRD, budget sustainability means, in the medium term, IBRD expenses do not exceed business revenue (IBRD loan spreads after waivers); 3 and For IDA, budget sustainability means that IDA expenses do not exceed IDA revenue from credit charges, while minimizing recourse to the commitment charge. 15. The sustainability rules set the trajectory for the World Bank expenditure envelope (Bank Budget or own resources ) through to FY18, when IBRD business revenues are expected to cover IBRD administrative expenses. 16. Consistent with the budget sustainability rules, Expenditure and Revenue (E&R) Statements have been introduced to inform corporate planning discussions, improve transparency and increase awareness of budgetary sustainability and expense-to-revenue ratios. Management has adopted a soft launch for E&R statements at the VPU level, initially using them to bring transparency to sources and uses of funds. Over time, their use will be strengthened after paying careful consideration to any negative incentives that may arise. 17. Regarding sustaining budget discipline, the first priority, and the path to FY18 when IBRD business revenue is projected to exceed IBRD administrative expenditure, lies through successful implementation of the Expenditure Review and increasing IBRD loan margins. Management agrees, however, that it is important to begin work on appropriate indicators and benchmarks to strengthen the framework so that efficiency gains are not lost once the Expenditure Review is fully implemented and business revenues exceed administrative expenses. Over the coming year, as we gain experience in implementing the Expenditure Review, Management will turn its attention to sustaining and institutionalizing efficiencies, and developing thinking on a corporate benchmarking framework to help right-size programs and incentivize budget discipline on an ongoing basis. 18. Regarding external funds, reported revenue is equal to reported expenses. To the extent that there is under-recovery of revenue, the uncovered expenses are embedded in the IBRD/IDA expenses and the shortfall is covered through IBRD/IDA resources (or Bank Budget). 19. In this context, the Bank revised its approach to costing in FY14, moving from a marginal to a full absorption costing methodology. The way in which the cost of facilities, IT and communication is attributed to staff and consultants was also revised as part of this exercise, lowering the Indirect Rate applicable to staff and Extended Term Consultants and attributing some of these costs to Short Term Consultants. The revised costing methodology is aligned with the new planning and budgeting framework, providing information about external funds split across the new budget envelope structure (see Section 3.1). 20. External funds now account for over one-third of the Bank s expenditures on Client Engagement. The Bank is currently reviewing its cost recovery policy for all types of external funds and will provide an update to Executive Directors during the first half of FY15. 3 This is a change from the MTBF. This definition now excludes Loan Loss Provision (LLP). Management s view is that this is appropriate given the potential volatility and changes to LLP. 9

12 2.2 EXPENDITURE REVIEW 21. Status of the Expenditure Review and link to the Medium-Term Budget Framework. The objective of the Expenditure Review exercise is to reduce the World Bank s cost base without curtailing client services through efficiency measures, thereby: (i) contributing to IBRD net income, reserve accumulation, and lending capacity; (ii) supplementing IDA commitment authority; (iii) increasing the efficiency of external fund use; and (iv) reducing WBG cost structures. The Expenditure Review is also expected to contribute to longer term budget discipline by informing the broader strategy and performance review process, including planning, benchmarking and support for the Group Business Reviews to improve organizational effectiveness. 22. Phase one of the Expenditure Review started with the determination of a cost baseline and an internal and external benchmarking exercise. Using external benchmarking metric distributions (median and fourth quartile performance), an analysis was undertaken of IBRD/IDA and IFC general services and administration, advisory and convening services, and financial services. Based on this analysis the WBG leadership team committed to achieving $400 million in WBG savings over FY Phase two identified a plan for achieving the savings, including price/cost saving measures (e.g., travel related) and business process changes (e.g., centralization of functions). Phase three, starting FY15, supports, implements and monitors the realization of savings. 23. Since the MTBF, the implementation of the Expenditure Review has advanced in four areas: (i) the SMT endorsed further plans for Group-wide savings initiatives in April; (ii) where plans were sufficiently detailed, the savings estimates were integrated into the FY15-17 budget framework; (iii) the cost of delivering the Expenditure Review savings has been estimated; and (iv) the SMT has endorsed a governance framework for implementing the Expenditure Review. 24. Integration of savings into the FY15-17 budget framework. Further work on fine-tuning estimates and detailed implementation planning has led to a revision of the FY15-17 budget framework. The expected savings for FY15 have been adjusted to $90 million, of which $80 million in Bank Budget. The targeted savings for FY17 remain at $336 million (which, combined with savings in IFC and MIGA, would meet the $400 million or more WBG target). These adjustments have three drivers: 1) The phasing of savings in operations has been further reviewed and back-loaded to FY17 to allow time for the Global Practice restructuring. 2) Some revisions were made to individual savings measures and phases were changed. 3) Finally, since savings estimates are being firmed up as detailed implementation plans are being developed, as anticipated the original buffer for loss of savings has been utilized. There is now little flexibility. 10

13 25. These revised savings estimates have been embedded in the overall budget framework. Where planning is sufficiently advanced, measures have also been reflected in VPU budgets; and the impact of Expenditure Review savings on unit level budgets has been communicated as part of the budget process. Half of assumed Bank Budget savings is still to be clawed back from units, mostly to be allocated for FY16 and FY Investment cost to deliver Expenditure Review savings. The investment costs (one-time costs needed to realize the savings) have been reviewed and Management s planning assumption still remains 75 cents of one-time investment for every dollar of annual saving. To date, investment costs of $218 million have been identified for the WBG, but these estimates will be further revised as detailed investment plans are finalized. 27. For FY15, it is estimated that $30 million would be set aside to finance up front investments associated with Expenditure Review savings initiatives. These investment costs include provision for business process redesign and support for staff transitions. Management will monitor Expenditure Review developments and implementation costs and report regularly in the Quarterly Business and Risk Review (QBRR). For investments related to future Expenditure Review initiatives, estimates will be validated once detailed implementation plans are presented for SMT approval. 28. Governance Framework for Expenditure Review Implementation. The governance framework for implementing the Expenditure Review includes the following elements: (i) A lead Managing Director (MD) or VP is in charge of developing the detailed implementation plans for each initiative and delivering the associated Expenditure Review savings targets. (ii) The process will be coordinated by a dedicated team, working in close collaboration with other units. This unit would manage the overall portfolio of initiatives and track progress, ensuring consistent support for implementation. The unit will track all savings initiatives and provide customized support to the respective lead VPs. Qualitative indicators will also be monitored and reported to the SMT to monitor the sustainability of the measures. (iii) The unit would also help integrate work streams, provide direct support to the lead VPs/individual business units as needed, and bring a consistent rigor and discipline to the process until savings are realized, and capacities required by the business have been built in the accountable units, including business modeling and planning. (iv) Once the Expenditure Review implementation support is complete, the unit would scale back to a steady state, to maintain functions related to strategy and organizational performance, including future benchmarking, promoting additional efficiency initiatives, and supporting the strategic planning processes and regular Group Business Review meetings. (v) Finally, HRDVP is also scaling up its capacity to manage the organizational design and strategic staff planning elements of the process, including helping to ensure that staffing decisions are handled in a fair and transparent manner. 11

14 2.3 SIZING THE BUDGET ENVELOPE 29. As discussed above, sizing of the World Bank expenditure envelope is anchored in the financial sustainability framework and its associated budget sustainability rules. Over the planning period, the size of the expenditure envelope is largely determined by the constrained revenue outlook. 30. In order to protect reserve accumulation and strengthen sustainability, growth in the World Bank expenditure envelope (all funds) after incorporating Expenditure Review savings and re-investments will be constrained to around 0.5 percent 4 a year for the next three years, compared to around 5 percent a year over the past three years. 31. IDA s budget envelope is expected to be at a sustainable level over the planning horizon. It is expected that the IDA commitment charge will be zero in FY IBRD s budget envelope is expected to reach sustainable levels by FY18, when IBRD net loan spreads are expected to surpass IBRD expenditures. IBRD expenditures decline over the planning period due to savings from the Expenditure Review and the proposed phase-out of the GMFs. 33. Taking the constrained short-term revenue picture into account, adjustments have to be mainly made on the Bank Budget expenditure side during the FY15-17 planning period. Table 2.1 provides an overview of the available FY15-17 Bank Budget envelope and demonstrates the effect of the Expenditure Review and GMF phase-out plans against the baseline of the FY14 Budget framework. Table 2.1: Administrative Bank Budget Summary Projection Baseline Baseline Baseline Baseline in $ million FY14 FY15 FY16 FY17 FY18 FY14 Budget Framework (FY$14) 2,566 2,553 2,559 2,559 2,559 Budget Envelope before ER, GMF adjustments (nominal $)* 2,566 2,619 2,672 2,732 2,793 Less, Gross ER Savings Target (80) (150) (285) (292) Add, 75% one time cost of ER Add, 25% of net savings for corporate priorities Less, Net ER savings = Reduction in WB Expenditure Envelope (37) (60) (128) (219) Budget Envelope after ER adjustments 2,566 2,582 2,612 2,604 2,575 Less, Savings from Proposed GMF Phase-out (5) (47) (91) (115) Budget Envelope after ER, GMF Adjustments 2,566 2,577 2,566 2,512 2,460 * Budget Envelope after applying price factor to FY14 Budget and updating pension projections. 34. Figure 2.1 shows the adjustment to the Bank Budget trajectory following the implementation of the Expenditure Review and GMF measures. After Expenditure Review adjustments, the Bank Budget 4 Shifts in the implementation plan of Expenditure Review savings led to the adjustment from the 0.7 percent growth presented in the MTBF. 12

15 begins to decline in nominal terms from FY16. Excluding the 75 percent one-time investment costs, the nominal decline begins in FY15. For context, Figure 2.2 shows an all-funds view. Figure 2.1: WB Bank Budget Envelope FY14-18 Trajectory Figure 2.2: WB All Funds Envelope FY14-18 Trajectory 2,900 4,500 2,800 2,700 4,000 $ million 2,600 2,500 2,400 2,300 $ million 3,500 3,000 2,200 2,500 2,100 2,000 FY14 FY15 FY16 FY17 FY18 2,000 FY14 FY15 FY16 FY17 FY18 FY14 Budget Framework after ER adjustments after ER, GMF adjustments FY14 Budget Framework after ER adjustments after ER, GMF adjustments 13

16 3. FY15-17 BUDGET FRAMEWORK AND PROPOSAL This section highlights key changes to the budgeting framework and institutional priorities agreed in the business planning process. It presents the specifics of the FY15 administrative budget proposal, including use of corporate budget flexibility, allocations by work program, unit type, and operational unit, an expense line view, non-unit specific accounts and budgets, and the capital budget. 3.1 NEW STRATEGIC PLANNING AND BUDGETING PROCESS 35. The FY15 budget framework is the result of a more holistic, strategy-driven business planning approach. The new budget, performance review, and strategic planning process was introduced to better align resources with the strategy and corporate goals. It emphasizes the interplay between topdown priority setting and funding decisions by Senior Management and bottom-up work program planning by VPUs. Spanning five main events, the cycle consists of two phases strategic planning followed by detailed budget formulation. 36. Implementation of the new budget and business planning process was challenging in light of the extensive agenda of change initiatives affecting the institution a new strategy, a new financial sustainability framework, reorganization of the matrix with creation of and re-mapping staff to the new Global Practices, centralization of key support functions, the Expenditure Review, and compressed timeframe for FY15-17 planning. See Box 3.1 on how the new budgeting approach has been implemented. 37. To better link with the financial sustainability framework, budget discussions have shifted to being in nominal rather than real terms. Real comparators, based on the World Bank price factor, will still be available for analytical purposes, but the Board will be asked to approve a nominal budget in the context of a Board-endorsed multi-year plan. 38. New budget structure: One of the key features of the new approach to corporate planning and budget is a new budget structure - both at the aggregate level as well as the unit level. Hitherto, the aggregate budget was divided into two parts. The "above-the-line" part consisted of the net administrative budget for the work program that Management is considered most directly responsible for. The "below-the-line" part consisted of the Board-related budgets, the contribution to the Staff Retirement Accounts, and the GMF - areas for which direct Management responsibility varies in degree. The problem with this approach is that it diluted focus on the full administrative budget. Consequently, the new budget structure dispenses with this line. While pension contributions are moved to the centrally-managed accounts, Board-related budgets (which continue to be ring-fenced and determined by the Board) are placed within the All Unit Total, and the GMFs (which will also be ring-fenced, subject to the proposed phase out) continue to be listed separately. 39. This change has consequences for the 2 percent flexibility band, which until now has been applied to the net administrative budget. Management believes that the scope should be expanded to cover the total administrative budget (funded from IBRD/IDA resources) net of the Board-related budgets. The recommendations set out in Section 1.2 reflect this view. While the flexibility band is applied at the 14

17 corporate level, a carry-forward policy for units is being developed for application at the end of FY At the unit level, the new approach to budgeting moves away from unit-based incremental budgets to a work program approach for operational units. Three core work programs that are non-fungible in their funding are distinguished: The Country Engagement (CE) envelope: This includes all preparation and supervision work with respect to financial services (such as lending, grants, and guarantees), knowledge services (advisory, economic and sector work) and convening services (country strategy, and partner coordination/mobilization). The Global Engagement (GE) envelope: This work program encompasses all the GE activities, without a specific client country. The work program scope includes: (i) Global Public Goods, (ii) global knowledge services, (iii) global convening services, and (iv) global programs administrative services. Program and Practice Management (PPM): This envelope funds the cost of running the operational work program, and includes funding for management, support services, space and IT costs, overseas assignment benefits plus knowledge management, innovation and learning. Box 3.1: Implementing the New Budgeting Approach The budget reform has been implemented in parallel with the organization s restructuring, requiring an extensive remapping of unit budgets. Key elements of this process included: a. Regions and Networks are reorganized into the new Global Practice delivery model beginning July 1. All sector management and sector staff, along with associated budgets are remapped to the Global Practice VPU. b. Breaking down operational budget into work program envelopes comprising the CE, GE, and PPM envelopes. The CE envelope is notionally allocated to Regions, which then agree on a work program with Global Practices. At the conclusion of this process, the budget is allocated to the Global Practice VPU, which will execute and is held accountable for delivering the agreed work program. A portion of the CE envelope is retained by the Region for client engagement activities. c. Budget for enabling and support services is also being reorganized. A number of functions are moving to a centralized VPU model, with all relevant functional staff and associate costs mapped to a single VPU, rather than multiple operational and administrative units. 3.2 INSTITUTIONAL PRIORITIES 41. To increase the focus on absolute poverty, taking shared prosperity into account, Management prioritized the regions with the largest number of people in absolute poverty for budget allocation. The Budget envelopes for Africa (AFR) and South Asia (SAR) will be increased by 3 percent p.a. in nominal terms. 42. Given short-term revenue constraints and the need to implement the net Expenditure Review savings, Bank Budget spend is expected to decline in nominal terms over the planning period. Constrained resources require tough choices and selectivity, guided by the strategy. 15

18 During business planning deliberations, Management took a hard look at client engagement needs, challenges and opportunities with the current funding proposal as the result: increasing CE shares of the regions with highest poverty rates. Given the limited funding flexibility, corresponding adjustments had to be made for other regions. The appropriateness of these choices needs to be assessed in the context of total revenues, total costs of providing services to our clients, lending capacity, opportunities and risks, as well as the overall WBG effort in each region. The new budget process provides opportunity for review and feedback to adapt to changing circumstances. Management will revisit VPU trajectories on an annual basis, and is building regional and corporate contingencies to ensure that we can respond rapidly where needed and will not miss opportunities to promote development and corporate goals in any region on account of funding constraints. 43. Institutional emphasis will further be placed on IDA17 commitments, FCS, strong engagement in Middle-Income Countries (MICs), growing the RAS business in the regions, and more transformational engagement work. Lastly, attention will be given to high quality Strategic Country Diagnostics (SCDs) and Country Partnership Frameworks (CPFs) within the Regions budgets. See Boxes 3.2 and 3.3 for more details on FCS and IDA17. Box 3.2: Increased focus on Fragility, Conflict and Violence During this year s planning cycle, Management continued to place particular focus on Fragile and Conflict-Affected situations (FCS). Scaling up the Bank s work in FCS remains an institutional priority, as can be seen from Regional efforts, and an increase of the Bank s spending on these countries. In FY13, 14.8 percent of the Country Engagement (CE) Bank Budget envelope was spent on FCS (16.3 percent of all funds), with projections indicating further growth: by FY15, the FCS share of CE is expected to reach 17.6 percent for Bank Budget and 18.4 percent for all funds. The new CCSA on Fragility, Conflict and Violence (FCV) will place emphasis on addressing the root causes of fragility, conflict and violence and developing FCV-sensitive development programs. Part of IDA17 efforts will be directed at: (i) Addressing drivers of fragility and conflict, responding to opportunities in turn-around countries, and building resilience; (ii) ensuring more agile operational policies and practices; and (iii) enhancing FCS financing by revising the allocation framework to target IDA s exceptional support and financial engagement in FCS. 44. In addition, Management will find and implement additional efficiency gains in the Bank s support functions (i.e., IG&A units) and in the regional and management costs of Operations. Regional and Global Practice management costs, i.e., the PPM envelope will be reviewed, while recognizing their importance for the Bank s client relationship management with savings to take place in FY16. Bank Budget for GE will be held stable in FY15, but reduced thereafter with the exception of climate change, which will be increased. A review of global engagements will be undertaken to ensure alignment with the WBG strategy and to remove overlap and duplication. 16

19 IG&A units will see the largest percentage reductions in their Bank Budgets over FY15-17, as a result of the Expenditure Review (see Section 2.2). Box 3.3: Meeting the IDA17 Commitments On March 25, 2014, the Board approved the IDA17 Deputies Report which provided for a total replenishment of SDR34.6 billion (equivalent to $52.1 billion) to support the overarching theme, maximizing development impact and the special themes: inclusive growth, gender, climate change and Fragile and Conflict-Affected Situations (FCS). IDA Deputies agreed on a set of operational, policy and financial recommendations (IDA17 policy measures) towards achieving the World Bank Group goals to sustainably end extreme poverty and promote shared prosperity in IDA countries. The WBG strategy and change process will enhance IDA s impact by: (i) fostering more integrated, evidence-based engagement to meet the WBG goals; and, (ii) promoting selectivity through systematic country diagnostics, country partnership frameworks and learning reviews. Enhanced synergies across IBRD, IDA, IFC and MIGA through the One WBG approach will also position IDA to better leverage both public and private resources for clients. To track IDA s progress in maximizing development impact in IDA17, including on the special themes, Deputies agreed on a strong package of policy measures and performance targets, that are monitored through a set of indicators under IDA s four-tier Results Measurement System (RMS). The IDA17 RMS incorporates new elements: (i) it explicitly aligns IDA s activities and results monitoring with the WBG strategy goals and the WBG change and reform process, including by adopting a more selective and evidence-based country engagement model, using knowledge more effectively, taking more informed risks, and expanding WBG synergies to achieve results; (ii) it enhances the focus on outcome and quality indicators, including to track IDA s operational effectiveness and organizational efficiency; (iii) it strengthens IDA s accountability to clients and shareholders through greater use of beneficiary feedback and public disclosure; and (iv) it places greater attention to managing and reporting the costs of delivering results. The RMS strategic relevance and coverage has been enhanced with closer links between the tiers, as well as with IDA commitments. The status of the RMS indicators will be reported by Management on an annual basis, with a detailed update on implementation progress of the policy measures at the IDA17 Mid-Term Review, which would take place in the second quarter of FY16, and in the IDA17 Retrospective. During FY15-17 business planning deliberations, Senior Management advised that the IDA17 policy measures and their implementation were corporate commitments and as such needed to be implemented as part of ongoing programs. Many of the policy actions are already mainstreamed into work programs as aligned with strategy goals and the WBG change and reform process, and have their funding identified through a mix of Bank Budget and trust fund resources. Regions have started working with country and task teams to ensure that the IDA17 policy measures are being reflected in the design of FY15 IDA operations. For example, gender considerations are being incorporated into the analysis, program content and results frameworks for all CPFs and SCDs for FY15 delivery. Analysis of the drivers of fragility and conflict is to be included in the CPFs and SCDs for IDA FCS. Country-specific examples include genderdisaggregated data collection and results monitoring in two FY15 operations in Djibouti, and rolling out the BOOST public finance analysis tool in Haiti. 3.3 CORPORATE BUDGET FLEXIBILITY 45. Taking into account (i) the constrained revenue picture, (ii) Management decisions to strengthen the Country Engagement envelope share, and (iii) the Expenditure Review, corporate budget flexibility 5 is limited, especially in FY15. Table 3.1 shows corporate budget flexibility of $56 5 Corporate budget flexibility is the amount of the overall expenditure envelope (BB) that remains unallocated to units or the centrally-managed accounts (including contingency). 17

20 million for FY15. With $30 million needed as one-time reinvestment to kick-start Expenditure Review initiatives, only $26 million was available to cover incremental funding requested by units. The flexibility for the outer years is forecast to be significantly higher. 46. In addition to the corporate flexibility discussed in the previous paragraph, the budget framework includes additional flexibility in the form of contingencies. The corporate contingency is $20 million for FY15 and $10 million for the outer years. In addition, the Regional VPUs held back a maximum of three percent of their CE envelope, which amounts to a $15 million CE contingency in FY15. These funds will be used for CE work, with the actual use to be determined during the year. 47. During the budget and business planning process, all units had the opportunity to request additional funding. Senior Management prioritized funding for specific items totaling $25.3 million and there was a separate process for Expenditure Review implementation. 3.4 ADMINISTRATIVE BUDGET PROPOSAL Projection Baseline Baseline Baseline Baseline in $ million (BB only) FY14 FY15 FY16 FY17 FY15-17 Budget Envelope after ER, GMF Adjustments 2,566 2,577 2,566 2,512 Corporate Flexibility of which, "75%" one time reinvestment "25%" deployment for corporate priorities residual flexibility Corporate Contingency Memo item: Table 3.1: Corporate Budget Flexibility (Available May 5 th ) Regional VPU Country Engagement Contingency The proposed FY15-17 budget and work program is in line with the strategic priorities, supports the Bank s core business, and maintains some room for contingencies. It is consistent with directions set out in the MTBF paper. Table 3.2 summarizes the main components of the proposed administrative budget and the rest of this section provides further detail on each budget item. For a more detailed view see the Program Cost Summary (PCS) table in Annex A. 18

21 Table 3.2: FY15-17 Total Administrative Budget in $ million BB All Funds Budget by Work Program FY14e FY15 FY16 FY17 FY14e FY15 FY16 FY17 Total All Units 2,178 2,155 2,131 2,089 3,233 3,268 3,263 3,247 o/w Budget for Governance (Board, SEC, IEG) Centrally Managed Accounts (CMA) exc. Unallocated Budget o/w Contingency o/w Contributions to Staff Retirement Accounts o/w net other CMA items (121) (128) (123) (108) Grant Making Facilities (GMF) One-time ER Investments Net Unallocated ER Savings 2 - (4) (31) (109) - (4) (31) (109) Unallocated Budget Total Administrative Budget 2,566 2,577 2,566 2,512 3,752 3,819 3,832 3, Over the FY15-17 period, 75% of the Expenditure Review savings will be invested to achieve the savings targets. 2. Expenditure Review savings that have been identified but are pending assignment of reduction at unit level. 49. Management seeks approval of a FY15 budget envelope of $2,577 million. In nominal terms, this is an increase of 0.4 percent over the estimated FY14 total administrative budget. Over the planning period, the Bank Budget will decline by 2.1 percent at an average annual rate of 0.7 percent. The total FY15 envelope is expected to be around $3,819 million, increasing by 1.8 percent over the same period (at an annual rate of 0.5 percent). 50. In order to put the FY15 Bank Budget proposal in perspective, Figure 3.1 compares the proposed budget envelope with corresponding spend data from FY08 to FY13 and FY14 projections. From FY08 to FY14, Bank Budget expenditures grew by 3.3 percent per year, and the total envelope including all funds by 5.2 percent per year, in nominal terms. The corresponding rates for FY14-17 are a decline of 0.7 percent per year for Bank Budget and an increase of 0.5 percent per year for all funds. 19

22 Figure 3.1: FY08-14 Administrative Expenditures and FY15-17 Budget (BB and all funds) 4,000 3,750 3,500 in $ million 3,250 3,000 2,750 2,500 2,250 2,000 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Nominal BB Real $FY13 BB Nominal All Funds Real $FY13 All Funds 3.5 BUDGET ALLOCATIONS BY WORK PROGRAM AND UNIT TYPE 51. Tables 3.3 and 3.4 present work program budgets along the new envelope structure (i.e., Country Engagement, Global Engagement, and Program and Practice Management). While the total all unit spend is stable, the allocation across the structure will continue to evolve as the allocation of costs associated with staff in new organizational units and the final staff transfers are completed. The largest shift, which is likely to be significant, is expected to be between Program and Practice Management (PPM) of the Regions and the Global Practices/CCSAs. 52. In line with the WBG strategic priorities, the strongest growth in the coming three years will be in the Country Engagement envelope. At the same time, the cost of running the business is decreasing over the planning horizon (for Bank Budget, external funds and, consequently, all funds). The sharpest decline will be in the IG&A units. While Management has made some progress in directing more resources to the Country Engagement envelope, more needs to be done and the allocations will be revisited in next year s planning cycle. 20

23 Table 3.3: FY15-17 Budget by Work Program and Funding Source in $ million BB External Funds All Funds Budget by Work Program & Funding Source FY15 FY16 FY17 FY15 FY16 FY17 FY15 FY16 FY17 Client Engagement Country Engagement (CE) ,075 1,099 1,114 Global Engagement (GE) Sub Total ,365 1,377 1,392 Cost of Running the Business Regional Program Management (PPM) Global Practice/CCSA Management (PPM) Institutional, Governance & Administrative (IGA) ,237 1,224 1,195 Sub Total 1,533 1,514 1, ,903 1,887 1,855 Total All Units 2,155 2,131 2,089 1,113 1,133 1,158 3,268 3,263 3,247 Table 3.4: FY15-17 Budget Share by Work Program and Funding Source in $ million BB External Funds All Funds Budget by Work Program & Funding Source FY15 FY16 FY17 FY15 FY16 FY17 FY15 FY16 FY17 Client Engagement Country Engagement (CE) 25% 25% 26% 48% 50% 50% 33% 34% 34% Global Engagement (GE) 4% 4% 4% 18% 17% 17% 9% 9% 9% Sub Total 29% 29% 29% 67% 67% 68% 42% 42% 43% Cost of Running the Business Regional Program Management (PPM) 19% 19% 19% 2% 2% 2% 13% 13% 13% Global Practice/CCSA Management (PPM) 9% 9% 9% 4% 4% 4% 7% 7% 7% Institutional, Governance & Administrative (IGA) 43% 43% 43% 27% 27% 26% 38% 38% 37% Sub Total 71% 71% 71% 33% 33% 32% 58% 58% 57% Total All Units 100% 100% 100% 100% 100% 100% 100% 100% 100% 21

24 3.6 BUDGET ALLOCATIONS BY OPERATIONAL UNIT 53. Under the new structure, each Region will receive two budget envelopes (not fungible) for Country Engagement (CE) and Program and Practice Management (PPM). Table 3.5 presents FY15-17 envelopes by individual Region. These envelopes incorporate projected Expenditure Review savings as discussed in Section 2.2, and adjustments reflecting institutional priorities as highlighted in Section 3.2. Table 3.5: FY15-17 Regional Budget Envelopes in $ million BB External Funds All Funds Region FY15 FY16 FY17 FY15 FY16 FY17 FY15 FY16 FY17 AFR CE PPM Total EAP CE PPM Total ECA CE PPM Total LCR CE PPM Total MNA CE PPM Total SAR CE PPM Total Total ,502 1,529 1,543 All Regions CE ,075 1,099 1,114 PPM Total ,502 1,529 1, The CE envelope will provide funding for regional, sub-regional, and country work programs. Regional VPs identified and sized the work program, and allocated associated budgets to countries reflecting top-down guidance provided through the business planning process. Country Directors are working with their respective teams to determine the work program at the country level. Figure 3.2 demonstrates the composition of the CE envelope, differentiating between resources for Global Practices, resources for Regions, and contingencies to be allocated. On average, 61 percent of CE deliverables are Financial Services. Approximately 94 percent of the total CE envelope will be 22