John H. Adler
Any understanding of the role of programing in the World Bank Group requires an appreciation of the fact that the Group consists of three rather different organizations. The World Bank itself, or more formally the International Bank for Reconstruction and Development (IBRD), is both the oldest and the largest of the three. Founded in the mid-1940s to assist both in the rebuilding of European economies devastated by war and in the development of less developed countries, it now lends almost exclusively to the latter. Its membership includes 115 countries from all parts of the world outside the Sino-Soviet bloc. Together, these members have subscribed loanable resources of approximately $1.9 billion and with earnings, this equity endowment has now grown to $3.4 billion. The Bank’s own capital must be supplemented by borrowings on the international capital markets. At March 31, 1971 the IBRD had lent a total of $14,530 million1 and held a portfolio of loans outstanding amounting to $9,577 million.
The International Development Association, or IDA, is a close affiliate of the World Bank with the same personnel and Board of Executive Directors. It was founded in 1960 and now has a membership of 107 countries. It derives its loanable resources primarily from funds contributed by the governments of 18 rich (Part I) countries. These funds are lent on an interest-free, 50-year repayment basis to developing countries that meet certain criteria—of poverty and lack of creditworthiness for conventional borrowing on the one hand, and reasonable economic performance on the other. As of March 31, 1971 IDA had extended credits excluding cancellations totaling $2,975 million.
The smallest of the three main organizations in the Group is the International Finance Corporation, or IFC. Founded in 1956, IFC is unique in being the only international organization sponsored by governments which has as its primary objective the stimulation of the private sector in developing countries, not only by lending but also by taking equity positions. Like the IBRD and IDA, IFC is fundamentally concerned with the development impact of its operations, but it must also be concerned with the profitability of its operations to private foreign and domestic investors. Therefore the selection of projects for financial support by IFC is somewhat different from what it is in the IBRD or IDA, and the programing of IFC projects is not dealt with here.
Evolution of Programing
The Bank Group has had a programing system of sorts for a number of years. Until about three years ago, it consisted essentially of a list of projects which the Group proposed to finance over the ensuing twelve months. This was almost certainly adequate for the Group at that stage: total lending by the IBRD and IDA was fairly stable at about $1 billion annually, and by far the greater part of this total was to sectors in which the Group had had very long experience (power and transportation). Group staff was expanding, but at a relatively modest rate. It was only in 1968, when it became clear that the Group was to embark on a very major expansion of its activities, that the need for a much more systematic approach to the planning of the Group’s operations became evident.
Since the Group is essentially (though by no means exclusively) a source of finance, there are two possible starting points for a programing system: the volume of lending expected over a plan period and the availability of resources. Because of the difference in the financial basis of the Bank and IDA, both approaches have to be used and combined into an effective work program, which in turn becomes the basis for the IBRD/IDA administrative budget.
Management was confident from the outset that the capacity of the IBRD—as distinct from IDA—to raise funds in world capital markets would not be a constraint on its lending operations so that, for the IBRD, the relevant starting point was clearly the lending program.
The first step, therefore, was to extend the existing lending program into the future. Such an extension was not difficult up to about 30 months, which is the average time between the date on which a project first comes to the attention of the Bank and the date on which a loan for that project is signed. This “pipeline” formed a firm basis for developing a lending program for the two to three years immediately ahead.
We also knew from experience that “one loan leads to another”—that contacts built up during the appraisal and negotiation of one loan frequently lead to the extension of others. Thus, in the last five years, 25 per cent of all loans were made to entities which had previously received at least one loan from the Bank Group, and a further 35 per cent of the total were made to sectors—irrigation, highways, power, etc.—which had previously received at least one Bank Group loan in that country.
Thus the kind of ongoing working relationship which the Bank has with many of its potential borrowers substantially simplifies the task of developing a lending program for some years into the future. Five years is in fact the period covered by the Bank’s lending program at present. Of course, beyond the second or third year, the lending program is of necessity highly flexible, but the very need to make an estimate of its content exerts a constructive pressure on project identification and preparation activities.
BANK/IDA LENDING OPERATIONS
While it took only the application of experience and some imagination to push the lending program out toward the end of the pipeline and beyond, at least three constraints had to be taken into account in preparing an initial program. One was the economic performance of borrowing countries. Before it will agree to lend for a project, the Bank Group requires that two quite different sets of conditions be fulfilled. One set concerns the project itself—it must be beneficial to the borrowing country’s development, it must be financially viable, there must be adequate management available for it, and so on. But in addition to these project-related conditions the Group must be satisfied that the country as a whole is making a reasonable effort to further its own development. There are obviously many enormously difficult problems involved in making an objective judgment on what constitutes “reasonable effort” but the attempt must be made in order to ensure that the Bank’s loans do not simply permit other resources to be squandered.
Another constraint on lending was the creditworthiness of borrowers. Though creditworthiness is clearly not a sufficient condition for the Bank to lend to a country, it is a necessary condition. The Bank’s Articles of Agreement specifically enjoin the Board, in making a loan, to pay due regard to the prospects that the borrower will be in a position to meet its obligations under the loan.
A third factor which had to be taken into account in formulating the original lending program was the availability of Group staff. At present, the Bank Group employs 2,400 people, half of whom are professionals. It would be possible to expand this number at almost any rate required by the lending program; the problem lies not in the expansion of numbers but in the time needed to acclimatize new staff to the Bank’s policies and procedures. A high rate of growth of staff yields a slower growth in operational capacity than the increase in numbers would suggest. It also reduces in some measure the effective capacity of middle and senior management because of the increased demands on their time for training and supervision.
All these factors then—the pipeline, economic performance, creditworthiness, and staff availability—were systematically considered in arriving at the Bank’s initial long-term lending program.
In formulating the program for IDA, most of the same factors were also relevant, though there were some additional considerations. Only countries which lack creditworthiness for borrowing on conventional terms, or have only limited capacity to service such debt, are eligible for IDA credits. Furthermore, to be eligible countries must be among the poorest developing countries; in practice, with a per capita income of less than about $300.
The problem of course is that the absorptive capacity for IDA credits of developing countries which meet these criteria—satisfactory economic performance, a lack of creditworthiness for borrowing on conventional terms, and poverty—is substantially greater than the funds available to IDA. India alone, for example, could have made good use of all the resources available to IDA in recent years (about $600 million annually), and both Indonesia and Pakistan could effectively absorb a large part of that total. Unlike the programing of Bank loans, therefore, there is a financial resource constraint operating on IDA’s lending program which necessitates an element of rationing. Because of the desirability of having as wide a geographical spread as possible in IDA’s operations, this rationing inevitably takes the form of placing some limits on IDA’s lending to those countries whose absorptive capacity is greatest.
Frequent Review of the Program
The lending programs of both the Bank and IDA could obviously not be fixed once and for all. They have to be reviewed and revised frequently if they are to have any operational significance. Four review cycles have been completed since the new programing system was introduced in 1968. The first and second reviews were concentrated reviews of all borrowing countries simultaneously. But it became apparent that this approach was less than satisfactory: it imposed considerable strains on the operating departments of the Group, and, because of the adverse effects of the concentration of the review process on its thoroughness, substantially reduced the usefulness of the program itself.
As a result it was decided to spread the country reviews throughout the year, and formalize a procedure for introducing changes in the lending program between reviews. The vehicle for such reviews is a meeting of the President of the Group with senior operational staff to consider what we now call Country Program Papers. Normally, a Country Program Paper is prepared for each potential borrower among the Bank’s membership once a year; area departments, in cooperation with the functional projects departments, are responsible for their preparation.
The Papers themselves are expected to cover four main topics, viewed from both macroeconomic and sectoral perspectives: the development objectives of the country, the obstacles impeding the attainment of these objectives, the recommended solutions, and the proposed Bank Group contribution. On the basis of these papers, senior management is able to decide on the most appropriate combination of Group assistance, both financial (amounts of Bank/ID A lending, terms of lending, sectoral composition of loans) and advisory (technical assistance, policy and institutional conditions of loans, sector studies, project-preparation work, etc.).
The Country Lending Program is thus a direct out-growth of the review of the Country Program Paper and becomes a part of the total lending program of the Group. The Country Lending Program can be changed between annual reviews with the permission of the Chairman of the Bank’s Loan Committee, and this means that at any point management has an accurate, up-to-date view of the proposed total lending program. In addition to this continuous review of individual country programs, there is also an annual review by management of the broad characteristics of the total program.
The Financial Plan
Most of the other elements in the Group’s programing system follow directly from the lending program.
One element that obviously has a particularly close relationship to the lending program is the financial plan. In the early years of the Bank, financial planning was simple: because repayments were relatively unimportant, it was an easy matter to establish a rela-tionship between available resources and those required for disbursement. Indeed, until the mid-1950s it was the practice to keep on hand, in cash and marketable securities, sufficient funds to fully meet the disbursement commitments on all outstanding loans. The relative size of these liquid balances has been gradually reduced since that time. This is a result both of the increased importance of repayments on past Bank loans and of the lengthening of the average disbursement period, and of the shift in the emphasis of Bank lending from Japan, Australia, and the developed countries of Europe to the less developed countries of Asia, Africa, and Latin America.
In recent years, financial planning has been firmly based on detailed cash flow analysis using the best possible estimates of lending, disbursements, repayments, service payments due on the Bank’s own funded debt, earnings, etc. Financial planning has to take into account a variety of considerations: the relation of the maturity profile of the Bank’s loans to that of its debt, the prospects of movements of interest rates, the relation of long-term to medium-term and short-term rates, etc.
The Bank’s borrowing program is an integral part of its financial planning. Because of the highly unsettled conditions in world capital markets, this is also one of the most difficult aspects of the Bank’s operations to program meaningfully. In 1970 and 1971 for example, the Bank was able to borrow $400 million in yen in Japan largely because of Japan’s particularly favorable balance of payments position. These were circumstances which would have been difficult if not impossible to predict with any certainty one or two years in advance.
The lending program yields information not only on the financial resources required, of course, but also on the staff needed to conduct it. Because it gives detailed information on the sectoral, as well as on the geographic allocation of loans, it serves as a basis for assessing manpower needs for the functional projects departments (agriculture, transportation, utilities, education, etc.) and for the area departments, and for determining how many new staff—how many loan officers, engineers, economists and, as a result, how many administrative officers, research assistants, and secretaries—should be hired. Like the lending program and the financial plan, the Bank Group’s overall man-power plan now extends five years into the future, although for obvious reasons detailed staff requirements are only established firmly for one year at a time and become part of the annual budget documentation.
|Central African Republic||Ireland|
|Dahomey||Papua and New Guinea|
|Dominican Republic||Peoples Democratic Republic of Yemen|
Since development of the five-year lending program, it has been possible to see more clearly where the priorities for the Bank’s economic manpower lie, both between countries and between sectors. We have categorized countries into three groups on this basis. The first, which at present includes 32 countries, comprises all major developing countries in which the Group has an active lending program; countries in this group receive a Bank economic mission at least once a year. Countries in the second group, currently numbering 23, are those in which the Bank has a less active lending program; the Bank sends an economic mission to these countries only every second year. The third group includes 42 countries—all of them small or unlikely to receive a substantial volume of Bank or IDA lending in the near future—and these receive an economic mission only once in three years.
Some Consequences of the System
One of the most important consequences of the development of a programing system is the way it has facilitated use of the budget for management purposes. Until a few years ago, the Bank Group had only a fiscal budget, with no attempt to relate inputs to outputs in any operationally significant way. Except for personnel expenditures, no attempt was made to budget the various other expenditure categories by department; this arrangement did not encourage departments to manage and control their expenditures in detail, or to relate them to the level of their activities.
Recently, as a result of our programing of operations, we have been in a position to prepare a budget in which inputs of staff time are related to operations output. At this stage, the manpower coefficients we are using are crude and subject to quite considerable error. But they already enable us to see what kind of operations are most expensive in terms of our scarcest resource and, of course, point to areas where our performance needs improvement.
It need hardly be said that the Bank is not able to apply these coefficients in the same way as would a private organization to determine whether or not an operation, or a certain type of operation, should take place. Though the Bank seeks to operate profitably, and has been notably successful in doing so throughout its history, it is not primarily a profit-making institution. If it were, it would concentrate its lending in the most developed countries and pay little heed to the least developed. At a minimum, it would concentrate attention on the largest developing countries—such as Argentina, Brazil, and Mexico—where the stage of development and the Bank’s long experience make it possible to extend very substantial loans with a relatively small expenditure of staff time and effort. We do make substantial loans to countries of this kind. For example, in the fiscal year (FY) 1970 ended June 30, some 42 per cent of total lending by the Bank and IDA was provided through 16 loans of $40 million or more. But because the Group’s function is primarily to stimulate economic development, many of its lending operations are undertaken in countries which require not only capital but also considerable assistance in the identification and preparation of suitable projects, in their appraisal, and in their management and operation. They are often to countries whose capacity to absorb large amounts of capital effectively is small, and as a result the majority of the Group’s loans are small too. Again in FY 1970, for example, almost half of the 119 loan and credit operations approved were for amounts of $10 million or less, and eleven of them were for amounts of less than $2 million.
A Gradually Improving System
This, then, is where we are at present—with a gradually improving system for programing lending operations and with derivative systems for planning the financial and personnel aspects of the Group’s activities. It is still too early to get a clear impression of all the benefits which the Group’s programing efforts have brought. But some are already obvious. One is the comparative ease with which the Bank and IDA have raised the volume of their lending to a wholly new level. Throughout most of the 1960s, this remained at approximately $1 billion annually then, in FY 1969, it increased by 87 per cent to $1,784 million and, in FY 1970, by another 23 per cent to $2,186 million. Significantly, what is involved is not simply an expansion in volume. The geographical allocation of the Group’s resources is shifting; much greater emphasis is being placed on Africa and on countries where, in the past, Bank Group activities have been nonexistent or very limited. In the last three years, the Bank Group made loans or credits for the first time to 14 countries, 7 of them in Africa.
There is also a shift in the sectoral allocation, with relatively less weight being given to the Bank’s traditional areas of emphasis (such as power and transportation) and more to newer areas: a fourfold expansion in lending for education and a fivefold increase in that for agriculture are in prospect, for example, together with lending in the completely new fields of tourism and family planning. Both the geographical and the sectoral shifts imply somewhat smaller projects than in the past and projects involving more intensive identification, preparation, and supervision if they are to be successful.
To accomplish these goals has required a large increase in the Group’s inputs of both money and manpower. In FY 1969 borrowing increased by 65 per cent over FY 1968; after a decline in borrowing in FY 1970, we expect to borrow a record volume of $1,300 million in FY 1971. The professional staff increased in FY 1970 by 28 per cent and is expected to increase by a further 21 per cent in FY 1971. The staff of some departments, of course, has increased by substantially more than this: that of the two Africa departments doubled between the end of FY 1968 and the end of FY 1970, for example, and over the same period the professional staff of the Education Projects Department grew by 138 per cent.
This capacity to expand and simultaneously redirect the operations of the Group has had ancillary benefits in addition to its intrinsic importance. For instance, the Bank has been asked by both bilateral and regional lending institutions for advice on its experience of programing, and has gladly shared this. Even more important, the demonstrated ability of the Group to handle a major increase in its operation with undiminished efficiency and concern for the development of its members was a significant consideration in the recent negotiations between the developed members of IDA over the resources to be made available to the Association over the next three fiscal years, 1972-74. Governments have agreed to a Third Replenishment of $800 million a year, compared with $400 million a year for the Second Replenishment. For the future, the Bank Group’s increased capacity should enable it to make an increasing contribution to the flow of aid to developing countries. Of equal importance, the Bank’s systematic gathering of economic intelligence—as a basis for its own lending operations and for those bilateral and regional sources of development finance with which it is associated in consortia and consultative groups—together with its cooperation with international and national agencies providing technical assistance for development, should go a long way toward ensuring that these increased funds make an effective contribution to the development process as a whole.
This article is based on a paper presented to the Conference on “Integrated Systems of Planning and Budgeting” of the German Section of the International Institute of Administrative Sciences, Freiburg i.B., June 1970. The assistance of Donald T. Brash, a staff member of the Department, is gratefully acknowledged.
Excluding a loan to IFC ($200 million) and cancellations ($413 million).