Hugh B. Ripman
The origin of the supervision system
The World Bank maintains a continuous relationship with its borrowers, the principal reason being that as a development institution, it has a fundamental interest in seeing that the projects financed with its loans achieve the purposes for which they are intended, and is indeed required by its Articles (its statutes) to do so.
The Bank—all references to the Bank and Bank loans apply equally to the International Development Association and IDA credits—has always supervised the projects it finances. As early as 1947, two possible ways of carrying out the supervision function were considered. One possibility—to station a Bank representative at every project site—was rejected since it would be expensive in staff and such representatives might well be drawn into an active part in management decisions which were properly the borrower’s responsibility.
A second possibility—that the Bank should rely solely on reports submitted periodically by its borrowers—was also rejected. The Bank finally decided on a middle course: borrowers would be required to submit periodic progress reports, but the Bank would send its own staff to visit each project from time to time in order to see on the spot how the project was doing, to check the accuracy and completeness of the information in progress reports, and to discuss face to face with those responsible any actual or impending problems.
The scope of supervision
The Bank’s decision to finance a project is based on the facts, forecasts, and recommendations contained in the appraisal report. This report describes the project, assesses its merits, and includes a number of assumptions on which judgments are based about the project’s costs and benefits and the prospective borrower’s capacity to carry out the project efficiently and promptly. It may include recommendations to strengthen this capacity.
The Bank’s decision to lend is also based on the covenants and agreements contained in the proposed loan documents whereby, for instance, the borrower and/or the guarantor agrees to adopt or follow policies deemed necessary for the success of the project. In many projects, the borrower agrees to strengthen its organization, employ consultants, train its staff, or even establish a new organization to carry out the project. Some of the policies to be adopted, or the actions to be taken, are judged to be so vital to the success of the project that the Bank requires them to be formally adopted or taken before the loan is negotiated; others before presentation to the Board; and others before the loan becomes effective.
The scope of supervision is determined by its general objective—to help ensure that the project is carried out so as to contribute to the economic development of the borrowing country the benefits which were foreseen at the time of the appraisal. Accordingly, the Bank’s supervision activities must cover all the different aspects of a project, in order to see that the project is implemented as originally intended or modified as appropriate in the light of changing circumstances, and that all the different conditions of lending are properly carried out.
All projects face risks and uncertainties. Sometimes these lie in the nature of the project (e.g., the risk of meeting bad rock conditions in driving tunnels). Sometimes they are external to the project (e.g., unfavorable developments in commodity prices). Some problems are within the power of the borrower to solve, but there are some which the borrower cannot control. One function of project supervision is therefore to alert the Bank to actual or impending difficulties in order that agreement may be reached with the borrower and/or the guarantor to take steps to prevent them or to minimize their harmful effect on the project. In some instances unforeseen events occur which make it desirable for the Bank and the borrower to agree on a change in the scope or contents of the project. Both the Bank and the borrower need to be prepared to adapt to changed circumstances.
Support from the Bank
The Bank in carrying out its supervision function is not concerned with finding out what is going wrong with projects in order to criticize or blame those responsible for carrying them out. On the contrary, the Bank shares the borrower’s interest in the success of the project, so that problems and their solution are a matter of joint concern. Bank staff who are engaged in supervision work are encouraged to establish and maintain a frank and close relationship with the staff of the borrower, so that the latter will not hesitate to reveal the existence or threat of difficulties at the earliest opportunity. In such a relationship the Bank staff share with the borrower the fruits of their experience with other projects and in other countries.
Evidence of this aspect of the Bank’s supervision work is provided by the following extract from a paper written by an official who held a high administrative position for many years in one of the Bank’s member countries.
The borrower’s staff know too well what is going wrong with the project or with the project organization, the government hierarchy, the logistics of supplies, the contractor or the consultants—any or all of which could affect progress. They often know the solution too. But in most cases they are unable to solve the problems on their own either because the decision lies with somebody over whom they have no control or because the required decisions and actions, although within their powers, often involve more than “normal risks.” Consequently, the proposed decisions and actions drag on and develop an inertia with them. It is here that the Bank’s supervision mission can be of immense help to project staff by lending their support to enable them to take the required decisions and actions because, first, their support confirms that the proposed decisions and actions are right; and, second, it gives the project staff the confidence and mobilizes their courage to implement the proposed decisions and actions using the support and weight of the Bank to bulldoze opposition, if necessary, from any quarter. More importantly, the thought that the Bank is sharing the responsibility and risks, and the feeling that they could look upon the Bank’s support even if the said decisions and actions do not turn out to be as good as anticipated, bring out the inherent talent in them and activate the decision-making and action process.
The volume of supervision work is large. The number of projects being supervised has risen from 318 at the end of June 1968 to 627 at the end of June 1972. The number of supervision missions a year rose from 286 to 746 during the same period. The rising trend reflects the facts that the rate of lending operations is increasing and that supervision work is becoming more intensive, as more projects are carried out by relatively inexperienced borrowers and the number of projects with complicated administrative arrangements (e.g., family planning, tourism, and rural development) is increasing.
Stages of supervision
Three stages can be distinguished in the process of supervising a project. The first runs from the date of signature of the loan to that of its effectiveness. The second stage, in which most of the work of supervision is carried out, is the period during which the main investment of human, physical, and financial resources takes place. The third stage is after such resources have been invested—the operating stage. The work of supervision in this third stage may overlap the evaluation of the project’s results or the execution of subsequent projects by the same borrower. Supervision in each of these three stages is discussed below.
From signature to effectiveness
A borrower can draw on the proceeds of a Bank loan to defray expenses in carrying out a project only after the loan becomes effective. It is, therefore, important to make loans effective as soon as possible. Even before the loan becomes effective, there are often things the borrower can do which will help the project get off to a good start. It is for these reasons that in many cases supervision begins at this stage.
Most loan agreements specify an interval of three months after signature during which the agreement should be made effective and after which, if it has not become effective, the Bank has the right to cancel the agreement. An analysis of all loans which became effective in the two-year period ended December 31, 1971 shows that 60 per cent of all loans took more than three months to become effective and that the proportion taking more than six months rose from 10 per cent in 1970 to 20 per cent in 1971.
In its concern to reduce such delays, the Bank has increasingly been sending supervision missions to borrowing countries in the interval between signature and effectiveness. They help the borrower to take promptly those steps—such as establishing an organizational unit to manage the project, acquiring land, or negotiating on-lending agreements—necessary to make the loan effective. Such missions can also ensure that those responsible for the project’s management understand the appraisal report, the contents of the loan documents, the system of procurement, and the necessity for making plans to collect the information needed for progress reporting. Supervision missions at this stage can be particularly useful for new borrowers.
The investment stage
It is at this stage, which usually lasts several years, that the bulk of supervision is carried out. In order that the Bank may have the legal right to supervise projects, various agreements are included in the loan documents, three of which are of prime importance—namely, agreements on the part of the borrower to
keep records of the progress of the project and of the cost of carrying it out;
permit representatives of the Bank to visit the project, and to inspect the works being carried out and the records mentioned above; and
submit to the Bank on request information concerning the progress of the project.
“The Bank has increasingly been sending supervision missions to borrowing countries.”
In addition, there are various clauses recording the agreement between the Bank and the borrower to consult together on matters affecting the project and the loan.
During this stage of supervision, the Bank needs to be informed of the progress made in all aspects of the project, of any significant deviations of actual and prospective developments from the original plans, of steps to get the project back on track or to modify it to changing circumstances. It also needs to ensure that the borrower acts in accordance with the various agreements included in the loan documents, which are themselves designed to promote the successful implementation of the project.
The Bank therefore asks its borrowers to keep it informed, through the submission of progress reports, of the development of design, procurement, construction, costs, recruitment, training, and all other aspects of the project. An experienced and efficient project management does not normally have any difficulty in providing the kind of information which the Bank requests, since such a management understands that it needs the information itself as an essential tool for informed decision taking. It is a part of the informal technical assistance provided by Bank supervision missions to help less experienced managers come to this understanding. Annual financial statements are certified by auditors satisfactory to the Bank.
An important part of supervision is to see that procurement is carried out in accordance with the provisions of the loan documents and the policies agreed with the Bank. These policies are designed to ensure that borrowers use the proceeds of Bank loans economically and efficiently, and that suppliers in all member countries of the Bank (including the borrowing country and Switzerland) have the opportunity of bidding on Bank projects.
Conditions of lending
All loan documents include various agreements to take action or to follow policies designed to facilitate the successful carrying out of the project. The substance of such agreements will vary according to the circumstances of the project and the borrower, but typically they may cover, among other things:
the employment of consultants and their terms of reference;
the appointment of key staff;
the training of staff;
financial and other protective agreements, such as tariff and rate clauses and debt limitation clauses;
the provision of funds to meet all costs not financed out of the proceeds of the Bank loan or by other lenders;
the maintenance of the project after completion;
the insurance of the assets of the project entity and of goods acquired for the project; and
the employment of auditors.
It is a part of project supervision to keep informed of the execution of these agreements by the borrower.
In projects to be carried out by established operating entities, such as public utilities, industrial enterprises, or development finance companies, it is necessary to obtain information on the results of operations during the investment stage because any substantial deviation from the projected results may affect the financing plan for the project. It is also necessary in many instances because the borrower may have agreed to take steps—such as the reduction of surplus staff—to improve operations.
The operating stage
After the investment has been completed, the supervision workload normally diminishes. Progress reports covering construction or its costs are no longer required. However, supervision needs to continue. First, problems may have arisen which have not yielded to attempts to solve them, so that continuing contact between the Bank and the borrower may be required. Second, initial operation is a crucial stage with certain types of project (for instance, with many agricultural and industrial projects) during which difficulties often arise. Third, there are agreements of the borrower which continue in force during the operating stage (e.g., rate clauses, debt limitation clauses, and the general undertaking to operate the project according to sound principles).
An important function of supervision during this stage of a project’s development is to collect information about the benefits which the project contributes to the economy of the borrowing country, and how these benefits compare with those foreseen at the time of appraisal and with actual costs. Here the Bank is improving its practice which in the past has been uneven and, apart from “repeater” loans (see below), generally inadequate.
In order to carry out this function efficiently, plans for the collection and processing of information about the benefits of a project need to be made well before they begin to accrue. This needs to be foreseen during appraisal, and the capacity of the borrower to provide such information assessed. When the Bank staff discusses its requirements for progress reports with the staff of the borrower, it needs to cover information required during both the investment and operating stages. Operational information may become available from existing sources (e.g., in the annual reports of revenue-earning borrowers) but with, for example, highway, educational, or family planning projects no such regularly published reports may exist and special arrangements for collecting and processing the necessary information will be required.
Where a borrower receives a number of loans from the Bank to finance sequential parts of a continuing investment program, such as that of a public utility, a highway system, a development finance company, or an agricultural financing institution, an evaluation of the performance of the borrower in carrying out previous projects, and of the benefits deriving from those projects, is a necessary part of the appraisal of subsequent “repeater” projects. In such cases some or all of the elements in the project cycle—preparation, appraisal, supervision, and evaluation—may be proceeding at the same time in respect of different parts of the continuing investment program.
Supervision on behalf of other sources of finance
While the great bulk of the Bank’s supervision work serves only its own purposes, sometimes other lenders wish to avoid the duplication of supervisory effort and agree to rely on the progress reports submitted to the Bank. In such instances representatives of other lenders may accompany Bank supervision missions visiting projects.
A notable example of this is the system agreed with the nations providing funds to finance the Indus Basin works in Pakistan. Here the Bank acts as manager of all the funds provided by foreign sources and carries out on their behalf a unified system of supervision. As administrator of the Indus Basin Fund the Bank has made special arrangements, with the help of consultants, for the continuous monitoring on the ground of these projects, and keeps all the contributors to the Fund currently informed of progress.
In one case the Bank has agreed to supervise a project for which it is not providing any finance. At the request of the Secretary-General of the UN, the Bank agreed to act as trustee for the funds provided by a number of governments for the Nam Ngum project in Laos. Procedures for supervision were established on the lines of those used for the Indus Basin projects.
Supervision organization and procedures
The Bank normally uses the same staff for supervision as it does for project preparation and appraisal. This ensures continuity of contact with borrowers, enables the staff responsible for appraisal to live with projects during their execution and thus to learn lessons which can be used to amend and refine appraisal techniques, and avoids the need to recruit two separate staffs, each with similar qualifications and experience.
A question that is kept under review is whether it is the most efficient use of staff to centralize almost all supervision work in headquarters (as is done now), or whether it would be better to entrust more of the work to staff stationed in borrowing counties. Exceptionally, staff members have been stationed abroad—for instance, in India, Colombia, and Chile—to keep a close eye on certain types of projects and this procedure has worked well. In addition, the missions in Indonesia, eastern Africa, and western Africa, whose main responsibility is to help potential borrowers to prepare projects, perform some supervision tasks at the request of headquarters.
It was recently decided to experiment by stationing a team of four staff members in Nairobi to be responsible for field supervision work for certain types of agricultural projects in Kenya and in other East African countries. If this experiment proves successful, it may be extended.
Supervision missions are planned in advance for six-month periods, and reviews are made periodically to see how the actual frequency and intensity of visits compare with targets set for each project.
Progress reports from borrowers, which are currently being received at the rate of about 2,300 a year, are studied in order to see whether any action is necessary. Also a constant flow of procurement documents—draft invitations to bid, analyses of bids received with recommendations for contract award, and draft contracts—has to be scrutinized without delay each day in order not to hold up the various stages of procurement.
A “completion report” is prepared after the end of the investment period showing how the actual achievement of the borrower compares with what was expected at the time of appraisal, what (if any) were the major problems that arose in carrying out the project, and how the actual cost and time taken compare with previous forecasts. Such reports draw attention to any lessons learned from experience with the project that may help to improve the Bank’s techniques for project work—preparation, appraisal, and supervision. This type of report is not a full-scale evaluation of the project since, although the actual costs should be well established, it is too early at this stage to come to any final conclusion about the benefits.
It is the nature of things that projects—especially large and complex projects such as those the Bank finances—meet with difficulties during their execution and operation. This often happens in developed countries and is to be expected in less developed countries, where there is less experience and a shortage of managerial and administrative talent.
To what extent are Bank-financed projects affected by such difficulties? An analysis shows that about 45 per cent of projects being supervised have experienced no significant difficulties. Another 40 per cent have experienced “normal” difficulties—i.e., difficulties worth recording but not serious enough to cause concern either about the successful completion of the project or the situation and prospects of the borrowing institution. The balance of some 15 per cent has encountered more serious problems and is receiving special attention and intensive supervision.
Experience gives ground for hoping that in many of these cases the borrower and the Bank will find ways to overcome the difficulties. Some projects may have to be restructured. A number of the projects in question have been physically completed and are in operation, but the borrowers are meeting difficulties (mainly financial) in the operating stage.
Supervision and development
What has the Bank achieved by means of its supervision activities? First, it has carried out the duty imposed on it by its Articles, to see that the financial aid it supplies has been used for the intended purposes. This has contributed to its reputation as a sound institution in the markets where it borrows funds.
Second, it has learned a great deal about the planning and carrying out of development projects (which in an increasing number of cases involves a whole sector of the economy) and the part they can play in the process of economic and social development. This has enabled the Bank progressively to improve its techniques of appraisal. Supervision experience has led the staff to undertake research, resulting in improved methodology for appraisal. Through its supervision activities, the Bank has become year by year more alert to the difficulties likely to arise in carrying out projects, and so has been able to focus on these aspects during preparation and appraisal.
Third, and perhaps most significantly, supervision has made an important contribution through technical assistance to the Bank’s borrowers. In the continuous dialogue with borrowers, Bank staff help to anticipate problems likely to arise in carrying out projects and to find ways to avoid or overcome them. The effect of this technical assistance contribution cannot be quantified, but the evidence suggests that it is very substantial, particularly where borrowers are establishing new institutions or adopting new management techniques.
In the coming years, the supervision workload will steadily grow with the continued increase in lending operations, in particular in new and complicated types of project (e.g., in rural development, tourism, urbanization, and population), where supervision requires more staff time than do many traditional projects in sectors such as transportation and public utilities.
As data about the results of projects becomes more regularly available for all projects, it will contribute to the information required for the new and important function of project evaluation. Thus, the Bank will have a continuous and complete system of monitoring the progress of projects through all the stages of their development and of establishing the contributions they make to the economic and social development of its member countries.