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The Project Cycle

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
June 1970
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Warren C. Baum

IF THE QUESTION: “What does the World Bank do?” had to be answered in a few words, these words might be: “It lends for development projects.” The financing of specific projects, carefully selected and prepared, thoroughly appraised, and closely supervised, is the Bank’s central business. The Bank, and beginning in 1961 its soft-loan affiliate, the International Development Association (IDA), have since their inception made some 950 loans and credits 1 for a total amount of about US$17 billion. Of these the overwhelming majority have been for specific projects such as schools, irrigation dams, power plants, and roads. In the fiscal year 1969, for example, 111 loans and credits (a record number) were signed, all but one of which were for individual projects. This emphasis on project lending derives from the Articles of Agreement of the Bank, which provide that loans made by the Bank shall, except in special circumstances, be for the purpose of specific projects of reconstruction or development.

Project lending is intended to ensure that Bank funds are invested in sound, productive projects with the purposes of contributing both to the borrowing country’s capacity to repay and to the development of its economy. It is in the coincidence of these two purposes that the Bank’s functions as an international financial institution merge with those that it has increasingly assumed as a development institution.

Even with the record amount of lending recently achieved, and the even larger amounts expected in the future, the Bank and IDA are and will be dealing with a relatively small number of project operations. These projects, characteristically, are large, usually costing in the millions of dollars. They are diverse, ranging from oil palm plantations in Papua/New Guinea to the construction of Japan’s high-speed Tokaido railway line.

An all-weather transportation link between the country’s agricultural region and the coast has been established as a high priority objective for its economic development. How to fulfill it? Should the existing earth road be improved? Or a new road built on a different itinerary? Is a railroad feasible? Among these possibilities there is a development project demanding IDENTIFICATION.

No two projects are alike; each has its own particular history, and project lending has to be tailor-made to fit each one of them. Techniques and procedures of project lending are continually being re-examined and revised in a quest for excellence which is the challenge and reward of project work.

This work, as it is carried out in the Bank, is a continuous and self-sustaining cycle of activity, which runs through four principal stages. The first is identification of the project; the second its preparation, once identified, to the stage where it is ready for appraisal; the third is appraisal of the project and, assuming the appraisal is affirmative, the negotiation and signature of a loan for it; and the fourth is the supervision of the project in its construction and operating stages to make sure it achieves its objectives.

The reason that we consider this a cycle is that each stage not only grows out of the preceding ones, but leads into the subsequent ones, and we try to make it a self-renewing cycle so that new projects grow out of old ones in a continuous process.

IDENTIFICATION

The logical place to start is with identification. This is the process of identifying, in a preliminary way, projects which are of high priority, which might be suitable for Bank financing, and which the borrower, the Bank, and the government are interested in considering. There are essentially three tests involved in the identification of a project. The first is whether the sector of the economy into which the project falls, and the project itself, are of high priority for development and are so recognized in the government’s development plans. The second is whether, on prima facie grounds, the project seems to be feasible; that is, whether a technical solution to the problem to which the project is addressed can be found at a cost commensurate with the benefits to be expected. And the third test is whether the government is willing to support the project by financial and other means. This is because loans are made either to governments or government entities, or to private entities with the support and guarantee of the government.

How do we go about identifying projects? The answer is not a simple one. Just as there is a wide diversity of projects for which we lend, there is also a wide variety of ways in which projects come to the attention of the Bank, are identified, and are brought forward.

The most straightforward way of getting a new project is by a repeater loan to the same borrower, for subsequent stages of development of the same or a similar project. The Bank is now more than 20 years old and, as might be expected, we are repeating operations with a number of our borrowers. This is particularly so in the older fields of lending such as power and transportation. To give some outstanding examples, we have made ten loans and credits to the Indian Railways, to finance successive annual or biannual segments of their investment program. We have made seven loans to the Comisión Federal de Electricidad for various stages of expansion of the Mexican power system. So, a principal source of new projects is our continuing relations with borrowers, with new projects being identified and growing out of the supervision of existing projects.

I do not want to leave the impression that these repeater loans, because they are easy to identify, are necessarily easy to prepare and negotiate. Sometimes this is so, and if the first project is going well, the second can be relatively straightforward. But sometimes the reverse is true. The first loan must be made somewhat on faith, with limited knowledge of the borrowing entity which may be a new institution established as part of the project, or with which we are just beginning to get acquainted. Various objectives are agreed upon and commitments entered into, but the project may not develop as hoped or expected. When this happens it may take three, four, or even five years to make the second loan because the problems which arose under the first have to be straightened out and we must be reasonably satisfied with performance under it before we are prepared to make another one. So, while some of the repeater loans are easy, some are very difficult.

“Piggyback” Operations

There is a variant of the repeater loan, bearing the inelegant but descriptive title, which it acquired from the railway transportation field, of the “piggyback” operation. An important way of securing a self-sustaining project cycle is to include in a loan for a given project the funds for feasibility studies or for detailed engineering of subsequent projects. If, for instance, the Bank is financing the construction of a dam as the first stage of expansion of a power system, the loan may well include the studies necessary to identify and prepare the succeeding stages of the power program.

Missions

There are other ways in which projects are identified. The Bank sometimes sends a special mission to a country, to look into sectors in which we have not done business before. A team of specialists is sent on a preliminary reconnaissance of the sector to determine whether worthwhile projects can be identified. In agriculture and education we have formal relationships with other specialized agencies of the United Nations, which cover the identification and preparation of projects. In agriculture, the agreement is with the Food and Agriculture Organization (FAO), under which it staffs missions that perform identification work for the Bank and that also help to prepare those projects that have been identified. There is a large separate staff in the FAO working full time for the Bank on the identification and preparation of projects, with costs shared between the two institutions. The United Nations Educational, Scientific and Cultural Organization (UNESCO) performs similar services for the Bank in the field of education.

An indication of the importance that the Bank attaches to project identification may be seen in Africa, which is the newest area of the world in terms of Bank lending. Missions have been established in East and West Africa, with headquarters in Nairobi and Abidjan, respectively; between them all of Africa south of the Sahara is covered. The terms of reference of these missions are to help identify and prepare projects for Bank and IDA lending. They have succeeded in filling the pipelines with projects that are now reaching the lending stage in significant numbers.

Another important way of identifying projects is through the work of economic missions. The Bank periodically sends economic missions to its developing member countries for a variety of purposes, one of which is to review the major sectors of the economy in order to establish development priorities and to identify projects which might be suitable for lending.

An improved road is decided on. What should be the precise alignment? Should it have an asphalt or gravel surface? How many lanes, how wide the shoulders, and to what standards of bridge design? What is the trade-off between construction and maintenance costs? A multitude of decisions—technical, economic, financial—make up project PREPARATION.

Other Means

Finally, there are some projects which are identified without our help. These are usually brought forward by new borrowers interested in having Bank assistance, or by private business organizations. When, for example, an international steel or aluminum company is considering an investment to develop mineral resources in Africa, it may seek the Bank’s involvement to obtain both additional capital and the security which the Bank’s presence provides, and it will take the initiative in bringing such projects to our attention.

Usually, however, the work of the identification has to be done by the Bank itself. With the higher lending goals which Mr. McNamara has set forth, identification is becoming increasingly important as a means of filling the pipeline with projects for which loans may be made in succeeding years.

PREPARATION

Once a project has been identified, it enters what we call the project pipeline, and an extensive period of close collaboration between the Bank and the eventual borrower begins. This phase of the project cycle, because it depends so much on the nature of the project, the past experience of the borrower, the relationship of the Bank with the country and the borrower, and many other factors, is the most difficult to characterize. Again I should like to stress the diversity of projects and the fact that each has its own particular history.

Preparation covers all the steps necessary to bring a project to the point where its technical, economic, and financial feasibilities have been established and it is ready for appraisal. For a repeater loan where the first project has gone well, the time can be as brief as a few months. At the other extreme, where we have had great difficulties with the borrower in identifying and helping to prepare a satisfactory project, or where we cannot lend to the country for other reasons (for example, until it has improved the management of its economy), preparation may take five years or more. Some projects fall out during the process, and a loan or credit is never made.

The time consumed in the preparation process is a common source of complaint by governments in the developing countries which have an understandable desire to short-circuit project preparation and move directly from the stage of identification to the making of a loan. But the projects characteristically involve long-lived investments, and the time spent in ensuring that correct technical solutions have been found, in setting up the proper organization, in anticipating and dealing in advance with marketing and other problems, usually pays for itself many times over.

Preparation of a project involves decisions, based on technical judgments, about the site and location of the facility, and more broadly, on the appropriate technical features of the project itself. This is the stage in which soil, hydrographic, and hydrological investigations have to be undertaken, and the suitability and adequacy of the natural and other resources required for the project determined. It is also the stage where alternatives are systematically explored. If, for example, a borrower approaches us with a proposal to build a large dam for hydroelectric power, one of the first questions to be asked is whether a thermal plant could provide equivalent power at a lower cost. Or the proposed project may be for the construction of a four-lane, asphalt highway, while a two-lane gravel road, improved in stages with the subsequent build-up of traffic, might in fact provide much higher returns. A new irrigation project has to be considered against the alternatives of improving existing irrigation facilities or of developing agriculture through less capital-intensive measures in rain-fed areas of the country. If the school buildings in an education project appear excessively ambitious, less elaborate structures might save funds that could be used for investments elsewhere in the education system. At the preparatory stage it is therefore essential that all the alternative ways of accomplishing the objectives be considered. This is done typically through feasibility studies, which provide the preliminary design and engineering of alternative technical solutions and make a preliminary assessment of the economic benefits of each.

For a revenue-earning enterprise, the preparatory stage also includes a preliminary analysis to make sure that its financial position will be satisfactory. And for new enterprises or old ones whose past performance has been inadequate, project preparation may entail a great deal of work with the prospective borrower to bring about improvements in organization and management.

The Bank’s Role

The formal responsibility for preparing projects is that of the borrower and not that of the Bank. This formal position was rigidly adhered to in the past for good reasons, one of which is the potential conflict of interest between the roles of the Bank in preparing projects and in lending for them. It was felt that if we had prepared a project, we could not be objective later in the appraisal of our own work. While the position is logical, it has not been able to withstand the pressure of events. Experience has demonstrated that we do not get enough good projects to appraise unless we are involved intimately in their identification and preparation. The result is that, instead of having an invisible dividing line, with identification and preparation of projects on one side and appraisal and supervision on the other, there is a continuing cycle in which the Bank is closely engaged at all stages. One of the benefits of this change of attitude is that, through better preparation, fewer projects are rejected at the appraisal stage, although the final version of the project may be quite different from its original conception.

In practice, the Bank does not usually do the preparatory work itself because we do not have the staff for it; what we do now undertake is the responsibility of ensuring that projects are adequately prepared. This again entails a variety of means. Some of our larger or more sophisticated borrowers are quite capable of preparing their own projects, particularly after the first or second loans when they have become accustomed to the Bank’s requirements, and they are encouraged to do so. If they do not have adequate staff for the purpose, they may have a regular relationship with a consulting firm which prepares projects for them. If such a relationship does not exist we may urge the entity to get consultants to help prepare the feasibility studies, and guide it in how to go about the selection. The feasibility studies may be financed in various ways: by the borrower itself; out of the proceeds of an existing loan or credit (“piggyback”); occasionally by a Bank technical assistance grant or credit; or more frequently by a grant from the United Nations Development Program, for which the Bank may act as Executing Agent. In the case of FAO and UNESCO, and of the Bank’s African missions, the staff which identifies the project also helps to prepare it, unless specialized studies are required.

The road project has been prepared. Has the correct technical solution been found for the expected traffic and is the construction cost estimate reasonable? Would different design standards yield a higher economic return? Does the Government’s Highway Department have a suitable organization to maintain the road after it is built, as well as sufficient staff, equipment and funds? Will road users contribute a reasonable share of the project’s costs through gasoline and other taxes? Comprehensive, systematic, many-sided, often skeptical examination is the essence of a project’s field APPRAISAL.

There is a common misconception that the amount of work it takes to prepare a project varies directly with its size. Small projects tend to be located in small countries, perhaps newly independent, and the work involved in preparing these projects is entirely out of proportion to their size. So, if anything, there is an inverse relationship between the amount of money we lend for a project, and the effort expended in identifying and preparing it.

APPRAISAL

Let us move on in the project cycle to the next stage, that of appraisal. We will assume that the project has been identified, that it has been well prepared, the studies and reports are complete, and the preliminary indications are favorable—in short, that the project is ready to go forward. The next step is what we call appraisal. Appraisal is perhaps the best known, but not necessarily the best understood, part of project work. In the early days of the Bank the appraisal mission might be our first contact with the project and the borrower, but now it usually comes at the end of a period—perhaps as long as several years—of close association. Nevertheless, it is an important stage in the cycle because it is a comprehensive and systematic review of all aspects of the project.

While consultants or specialized institutions are relied on to help prepare projects, the appraisal work is conducted almost exclusively by Bank staff. The appraisals are always made in the field; desk studies alone are not enough. How difficult the appraisal will be depends very much on how the project has been prepared. If the preparation has been well done, the appraisal can be relatively straightforward; if not, what was thought to be an appraisal mission then becomes in fact a project preparation mission, and a subsequent mission or missions may be necessary to complete the job. The appraisal can cover up to six aspects of a project: the technical, economic, commercial, financial, managerial, and organizational.

Technical

On the technical side, we have to be sure that the alternatives have been adequately considered and the correct technical solutions found. This means the right combination of seeds, pesticides, and fertilizer for a particular crop-growing project, or the correct system of drainage for an irrigation project; if it is a road project, that the width of the road, the shoulders, and the thickness of the pavement are appropriate to the traffic; if a railroad construction project, that the best alignment has been found; if a port project, that the design of the berths and the depth of dredging are correct for the kinds of vessels serving the port; if an education project that the number and layout of classrooms and laboratories are suitable for the proposed input of students and the curriculum envisaged. The list could be extended indefinitely. All features of the project design, the cost estimates, and the construction schedule are re-examined and confirmed or revised as necessary.

Economic

Ensuring that the right technical solutions have been found is a major focus of the work of the appraisal team. It ties in very closely with the economic dimension of the appraisal. While the Bank has financed a nuclear power plant, exotic transport vehicles such as hydrofoils, and the most modern container port facilities, we are not looking for the most advanced technological solution but for the one which best fits the circumstances of the developing country. This sometimes involves scaling down ambitious schemes that would be white elephants into more realistic and modest projects that would better serve the development of the country. Sometimes the reverse is true, and ways have to be found of enlarging the technical dimensions of a project, as, for example, by developing additional markets for its products, before the technical solution yields an adequate economic return. The cost-benefit analysis of different technical solutions to arrive at the one which gives the highest economic return is the responsibility of the economist on the appraisal mission. The analysis will often have been done in successive stages during project preparation, but the appraisal is the point where the final review and assessment are made.

While referring to the economic dimension, it might be worth taking a moment to describe how we view a project, since it helps to understand the role of the economist. The Bank takes a broad view of what a project is intended to be. We try to get the best relationship, at a particular moment of time, between the project, the sector of the economy into which it fits, and the development program of the country. First, we want to know that the sectors in which we are lending are of high priority to the economic development of the country; this is done primarily through the work of the economic missions which review the over-all development strategy. Then we try to determine that, within each of the sectors of lending, the projects we are financing are of high priority; this determination is made by the sector studies or project identification missions or in the other ways that I have mentioned.

When it comes to the appraisal of the project, the appraisal report generally discusses the relationship between the project, the sector, and the economy. In transportation, for example, each appraisal report describes the transportation system as a whole and its importance to the country’s economic development. If it is a highway project, the report will examine its relationship to the railway system, and vice versa. At the same time, we review transportation policies throughout the sector. If there appear to be public policies which are inimical to the growth of transportation, whether in highways or elsewhere, these will be explored at length in the appraisal and we will attempt in the negotiation of the loan to get improvements in these policies. In education, power, and telecommunication, the “project” as defined by the Bank may embrace the investment program of the whole sector, and in any case is closely related to the sector; in agriculture, which is more diversified and accounts for a much larger share of the country’s economic activity, it is more difficult to fit individual projects into a strategy for the sector as a whole, but we are attempting to do so to an increasing extent.

What financing is necessary for the project? How large should the Bank loan be, and for how long? Will consultants be necessary to supervise construction? Will all parts of the project go out for international tender? Agreement between the borrower and the Bank on these and the other issues raised during the appraisal is reached during NEGOTIATIONS.

Commercial

The third dimension of the appraisal is the commercial, which is of particular importance to revenue-earning enterprises. Commercial considerations cover all arrangements for buying and selling under the project. The Bank seeks to ensure that the procedures used to procure the goods and services required for the project will give the borrower the best value for its money; in general, this implies the use of international competitive bidding, which I shall refer to again later. The commercial appraisal also includes an evaluation of the market demand for the output of the project, the adequacy of marketing channels, and the supply of raw materials, labor, and other resources required for the project.

Financial

The financial dimension is, of course, closely related to the commercial. The review of a revenue-earning enterprise is very comprehensive, covering all the significant financial aspects, but for purposes of discussion these can be separated into two issues. One is our concern that there be sufficient funds for the construction of the project. It is not the practice of the Bank or IDA to lend all the money that is required for a project; we may lend as little as 10 per cent or 20 per cent, or as much as 70 per cent or 80 per cent, but never 100 per cent.

The borrower must therefore provide part of the funds. In large projects, the borrower may not put up all of the remainder itself, but may go to other sources of finance such as the national agencies of capital-exporting countries. An important aspect of the appraisal may be to ensure that there is a financing plan which will make sufficient funds available to construct the project on schedule. When the borrower is a government that is known to have difficulty in raising local revenues, special arrangements may be proposed, such as advance appropriations or the earmarking of tax proceeds, to secure the necessary funds on time.

The other financial issue is whether the enterprise will be able to meet all its financial obligations when it is in operation. Since we typically lend directly to the enterprise that is carrying out the project, we are naturally concerned in the first instance that it be able to service its debt to the Bank. But we are also concerned that it be able to meet all its financial obligations, that it have adequate working capital, and that it generate enough funds from its internal resources to finance a reasonable proportion of its future capital requirements. So a detailed review is made of the finances of the enterprise, with projections of the balance sheet, the income statement, and the cash flow. Where the existing financial accounts are inadequate, a new accounting system may have to be established as a condition of Bank lending.

The financial review often highlights the need to adjust the structure, and particularly the level, of prices charged by the enterprise. Whether or not they are publicly owned, the enterprises financed by the Bank generally provide basic services and come under close public scrutiny. Because it may wish to subsidize the cost of such services to the consuming public as a matter of policy, or at times perhaps simply as the line of least resistance, the government may be reluctant to approve the increases in prices necessary to make the enterprise financially viable. But financial viability is a sine qua non of Bank lending to revenue-earning enterprises, and the question of rate adjustments may prove to be critical to the appraisal.

Managerial

The fifth dimension of project appraisal is the managerial one. Here we are concerned both with the adequacy of the top management to direct the construction of the project and manage it thereafter, and also with the adequacy of the staffing at all levels of the enterprise or organization. In some countries this becomes a major concern. At times the issue is one of redundant staff, as when a national railway is forced to cut back its services in the face of road competition, and has to work out a schedule for orderly reductions in staff. At times there is an opposite concern that the local staff is insufficient, either in number or in quality, to fill key positions in the hierarchy, so that external assistance has to be provided until local managers can be trained. The proper balance at any particular time between the use of consultants and foreign advisors on the one hand, and of local staff and management on the other, is a delicate one. Consultation between the borrower and the Bank on key managerial appointments is now a standard loan provision.

Organizational

The last of the six dimensions, the organizational one, is concerned with the administrative structure of the enterprise or agency carrying out the project. A revenue-earning enterprise that is publicly owned should, in our view, have an adequate degree of autonomy to administer its affairs. It should be free from political interference and from the rigidity that is sometimes inherent in agencies administered directly by the government. So while the degree of autonomy is a principal question examined by the staff member concerned with organization, our interest goes beyond this to make sure that the whole internal structure, the chain of command, the way in which departments are organized, the flow of decisions, the allocation of responsibilities within the organization are reasonably efficient.

This broader concern applies not only to revenue-earning enterprises, but to any organization to which we lend. Thus, a reorganization of the highway department has been part of a number of loans or credits for the construction of highways. In our agricultural lending, the reform of existing institutions, or the establishment of new ones, for example to carry out a livestock project, is increasingly the rule.

These are some of the principal types of issues that arise in the appraisal process. We are continually trying to improve our appraisal procedures and techniques. Systems analysis has been introduced into the choice of alternatives. Risk and probability analysis are increasingly employed in the cost-benefit work, to deal with the uncertainty attached to many of the project estimates. Shadow prices are being applied where true economic costs are not accurately reflected in market prices. We also try to keep abreast of new technology and new techniques to see that they are brought into use as rapidly as circumstances warrant. The scope and content of the appraisal process are thus evolving over time, against the background of related developments in technology, economics, and finance.

The Bank loan has been approved and signed. The road works must be put out to tender, and awarded to the lowest evaluated bidder. All the careful planning will be useless if contractors and consultants do not carry through at every stage, if highway maintenance is not reorganized on schedule, and adequate local funds provided. The loan includes funds for feasibility studies of new feeder roads to link the road to an underdeveloped agriculture area, thus preparing the way for another project cycle. Watching over these and other matters to ensure that the development objectives of the road are realized makes up the task of SUPERVISION.

We have described how projects are identified, prepared, and appraised in the field. The appraisal mission returns, it writes it report, and the report is carefully reviewed, and reviewed again within the Bank. When it has finally been approved negotiators are invited.

NEGOTIATIONS

Negotiations are the stage at which the Bank and the borrower endeavor to agree on the various measures that the appraisal report has shown to be necessary to ensure the success of the project; these agreements are then converted into legal obligations, set out in the loan documents. To illustrate: let us suppose that the revenues of a public utility are insufficient because there has been uneconomic pricing of electricity, and we have agreed with the borrower that, in order that the utility may earn an adequate rate of return and to finance a reasonable proportion of its new investments, prices must be increased by, say, 20 per cent immediately and 10 per cent in two years’ time. There will be a financial covenant, decided upon during negotiations, which defines the over-all financial objectives of the utility and specifies the necessary rate of return and the timing of the rate increases. The managerial, organization, commercial aspects—in fact all of the issues that have been raised prior to and during the appraisal—are dealt with in the loan documents. For example, if it is concluded that a road should have only a gravel surface rather than asphalt paving, the project description will stipulate this. If consultants are required in connection with some part of the project, the borrower will agree to recruit and maintain consultants satisfactory to the Bank. Thus, the negotiations and the drafting of the legal documents are an essential part of the process of ensuring that the findings of the appraisal are translated into actions that are agreed with the borrower and will be implemented on an acceptable schedule.

After negotiations, the appraisal report is updated to reflect the agreements reached during negotiations, and the revised report, together with related documents, is given to the Bank’s Executive Directors. If the Executive Directors approve the operation, the loan or credit is then signed in a simple ceremony which marks the end of one stage of the cycle and the beginning of another.

SUPERVISION

The final stage in the life cycle of an individual project is its supervision during the period of construction and subsequent operation. The purpose of such supervision is to ensure that the project is executed as planned, or modified in the light of changing circumstances, so that the development objectives are achieved.

Supervision is the least glamorous part of project work. Once the ceremony attendant upon the signing of a loan or credit has passed, the attention of planners and policymakers shifts to the new projects that are coming along; this attitude is understandable and it is reinforced by the fact that many months may elapse before the “old” project begins to yield tangible results. Nevertheless, supervision is an essential stage in the project process. It is obvious that however well a project has been identified, prepared, appraised, and negotiated, it is only when it is properly executed that the development benefits are realized. Moreover, development is by definition a dynamic process, and the circumstances under which the project is implemented may not coincide in all respects with those envisaged at the time of appraisal. An important part of the supervision process may therefore be to adapt the project to these changing circumstances, and in this sense “supervision” is a misnomer which does not do justice to the work involved. It is for these reasons that we have concluded that adequate supervision should have first priority in the assignment of project personnel.

As with all other stages, project supervision takes place in a variety of ways. During negotiations we will have agreed on a schedule of progress reports which the borrower is to prepare and which cover such questions as the physical execution of the project, its costs, and, if it is a revenue-earning enterprise, the financial status of the borrower. These reports are generally submitted at three-month to six-month intervals, and they may be prepared by the borrower or by its consultants. They are reviewed by the Bank staff in Washington, the same team which has been involved in all the earlier stages of the project cycle, and problems brought to light by the reports are handled in the first instance by correspondence.

A principal feature of project supervision covers the procurement of the goods and services that are financed under the loan or credit. One of the most important roles of the Bank is to see that this procurement is carried out in accordance with guidelines that have been established for this purpose and that are published in a booklet which is widely circulated. These guidelines are designed to ensure that the works are contracted or the equipment purchased in the most economical manner. The principal device that has been developed over a considerable period of time to this end is international competitive bidding among qualified contractors or manufacturers. The guidelines give detailed ground rules about how this international competitive bidding is to take place. Seeing that these rules are observed in practice—and a single loan or credit may involve anywhere from one to several hundred individual contracts, all of which may have to be reviewed by our staff—becomes a time-consuming job and one that we take very seriously. Sometimes it is relatively straightforward and routine; on other occasions it becomes a major issue, as, for example, in the case of a telecommunications or power project where orders are being placed in amounts of $5 million, $10 million, or $15 million; and it may come to a very close choice among several international suppliers as to which is the lowest evaluated bid. I should make it clear that it is the borrower, not the Bank, that is responsible for evaluating the tenders or bidding documents. The Bank’s role is to review the borrower’s work to make sure that it is done properly and that the rules have been observed. Our approval is required before the contract can be placed. And you can be sure that, if there is a controversy, it is called to the Bank’s attention at an early stage.

The tasks that I have been describing so far are the ones that are done primarily in headquarters. We also send supervision missions to the field to see how the project is going forward and what difficulties are being encountered in its execution. The frequency of these visits varies with the nature of the project. On the average, we send a supervision mission every nine months to active projects. This is not as often as we would like, and we are taking measures to increase the frequency of supervision visits. Ideally, if we could get supervision missions into the field two or three times a year, we would be able to work more closely with our borrowers to deal with problems expeditiously and to see that the project is going forward quickly and achieving the best results. In the periodic reviews of our supervision work some projects (currently about 10 per cent of the total) are classified in a special “problem” category, and these are watched with particular care and receive more frequent visits.

Supervision is a process of learning by experience. The lessons drawn are used not only to modify the on-going projects as necessary, but also in the formulation of similar types of projects in the future. In the supervision process the results of the Bank projects are thus being continuously evaluated. This is not, in our view, a substitute for a full-scale review of selected projects, once they have been in operation for a sufficient number of years, to measure their actual results against the original expectations. The Bank has completed or has in process several such reviews, and more are contemplated on a regular schedule. We have also collaborated with various outside groups which have conducted independent studies of Bank projects.

The supervision mission has among its tasks the review of the preparatory studies of future projects included (in “piggyback” fashion) in the loan or credit. It also provides the continuing relation with our borrowers from which new projects are identified and brought forward. In this way, supervision leads to identification and preparation, and the project cycle renews itself.

THE CYCLE REVIEWED

Summed up, here are the main points that I have tried to make:

• the relatively small, but growing number of operations in which the World Bank engages each year;

• the wide variety of projects for which we make loans or credits;

• the wide variety of paths that they follow in entering the pipeline and moving through it;

• the broad scope of our interest from development program to sector to individual project;

• the importance of project supervision;

• and particularly the close association that has grown up between the Bank, the government, and the borrower at all stages of the project cycle.

We have found that to help prepare and execute projects that will make a useful contribution to development we must get into the project cycle at the earliest stage and remain with it continuously.

Despite the differences that inevitably arise on occasion when difficult issues must be decided, the relations that have developed between the Bank and most of our borrowers in this continuing process have become quite good. They have come to appreciate that the Bank has no ax to grind, that we are in business to assist their development by lending for well-conceived and executed projects, and that this is our primary, indeed our only, interest in project work.

Loans are made by the Bank at an annual interest rate which is currently 7 per cent; IDA offers credits on concessionary terms of 50 years with a service charge of ¾ per cent a year. The methods of project work are identical for the two institutions, and in this article all references to the Bank and to loans apply equally to IDA and to credits.

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