Investment Lending Reform: M ODERNIZING AND C ONSOLIDATING O PERATIONAL P OLICIES AND P ROCEDURES

Context: Part of Broader Reform Efforts 2 Overall modernization effort Important element of Investment Lending (IL) Reform IDA Internal Controls Review found the complexity, inconsistency, and magnitude of the IL policy architecture had an adverse affect on the efficiency and effectiveness of Bank staff and clients in IL delivery Response to demands from clients and staff as current structure is hard to understand and comply Complemented by other efforts especially Procurement reform Safeguards Review Both of these areas are not included in the current exercise.

IL Reform: Five key pillars 3 Risk-based approach for processing IL Enhance supervision and implementation support Rationalize menu of financing options and redesign of the IL instrument Reform of IL policy framework Provide the enabling environment Risks & Results

Proposed Structure of New IL Policy Incorporating recent IL reform initiatives and recommendations (e.g. risk- based approach). Consistent with approach taken for other financing instruments (Program- for-Results & Development Policy Lending). 4 One IL Operational Policy (OP) and Bank Procedure (BP) consolidating 20 OPs and 18 BPs (and cleaning up OpMemos). The OP will be a short, focused statement providing direction for decisions and action. The BP will summarize procedures staff must follow to fulfill policy requirements. Excludes procurement and safeguards. Coverage

While mostly a consolidation effort, a few policy changes were identified and proposed: Clarifying that situations of fragility and weak capacity (including small states) can utilize the flexibility previously provided for post-conflict and emergencies situations Fragility Maintain the requirement of rigorous economic analysis in each operation. Solidifying the principle but better tailoring to country and sector conditions Modernized approach to economic analysis Consider performance and consistency of development objectives as the basis of moving from one stage to the next (instead of using triggers, usually defined five years in advance as the basis for such decision) Phased series of operations …continued on next slide. Limited Number of Proposed Policy Changes (1)

Limited Number of Proposed Policy Changes (2) While mostly a consolidation effort, a few policy changes were identified and proposed: that is curren Allow for more flexibility in the implementation period for additional financing that is currently limited to three years. Additional financing Limited additional flexibility under audit requirements in terms of the timing of the annual reports to be better aligned with country conditions and hence improve compliance Audits Increasing the current limits of Project Preparation Advances from $ 3 million for regular operations to $ 6 million and in cases of fragility to $6 and $ 10 million Project Preparation Advances

Complementary Activities In addition to the consolidated OP and BP, these will be complemented by: 7 Systems and tools / Updated processes Application of new Accountability and Decision making framework Guidance materials Training for staff. Parallel exercises for Procurement and safeguard policy review and operational manual updates

How will it add up? Modern IL: differentiated processes to Achieve development resultsManage Risks to the results Towards better management for results New Accountability and decision making process Quality assurances and monitoring tools Tools/Support systems: Risk framework; guidance; Operational portal, training and skills development, resources etc. Updates/reforms of policy IL consolidation effortsProcurement reformSafeguards reviewRelated OM reforms 8

Consultation Process 9 Internal and external consultations would take place from early June through end of August Consultations would be: – Mainly web-based and with a targeted number of face-to-face meetings – Additional focus on clients, through Country Directors – Touch base with MDBs and Bilateral Donors – Touch base with CSOs on modernization agenda, including IL Policy Reform Feedback summarized and included in the final Board paper.

Feedback Requested 10 We would appreciate your feedback to the following questions: – Do you agree with the overall direction and approach of IL policy consolidation? If not, why not? Please provide any additional comments on the overall approach. – Do you agree with the proposed policy changes? If not, why not? – Do you have other suggestions or comments regarding IL policy reform?

11 Thank You! For more information, please see