Under pressure to keep up with a changing world, the Bank is modernizing. Encompassing the primary operational policy reforms, as well as changes to enhance the enabling environment for policy implementation, the modernization agenda will set the stage for the upcoming review of World Bank safeguard policies.
With a wide array of ongoing internal and external reforms, the World Bank is undertaking the most profound institutional reform since the creation of the matrix structure in 1997. Under pressure to keep up with a changing world, the Bank is modernizing. The three focus areas of modernization include results, openness and accountability. Encompassing the primary operational policy reforms, as well as the internally oriented changes to enhance the enabling environment for policy implementation, the modernization agenda will set the stage for the upcoming review of World Bank safeguard policies. In this article, we outline the issues of central relevance for the safeguard review in Management’s update on the reform process to CODE (April 2012) and contrast that with the findings of a recent evaluation of the Bank’s matrix system.
The changing nature of demand for Bank finance and knowledge services is the primary motivation behind the modernization process. Access among developing countries to development finance from the private sector has increased significantly, leading to a decreasing share of official development aid to developing countries, including Bank financing. In 1987, World Bank lending represented 15 percent of all external financing for developing countries. By 2002 Bank lending had declined to 4 percent of external financing.[3] This trend toward more globally diversified sources of development finance has induced the World Bank to dramatically revise its business model. Bank revenue will now derive not only from traditional investment loans, but increasingly from programmatic and policy loans. By 2010, policy, programmatic and other non-project finance modalities of lending had eclipsed investment loans, and they will continue to dominate Bank business in the future.
In April 2010, the World Bank governors agreed to this modernization agenda as a condition for a 30% capital increase, which some now see as too modest. The most recent progress report on the modernization process was presented to CODE at the 2012 Spring Meetings, and among the highlights, include the following:
– Promote Increased Appetite for Risk – There will be a push for greater risk taking through simplification of the Bank’s policy framework, clarification of decision making accountability, and changes in the risk assessment method. The newly adopted Operational Risk Assessment Framework is designed to better align risk to efforts to manage risks and staff training is underway to “support risk-based decision making.”
– Moving Beyond Projects – The Bank is shifting away from dependence on conventional lending instruments, toward greater use of more flexible ones (Program for Results, Guarantees, Performance Standards for Public Private Partnerships, wider Use of Borrower Systems…).
– Simplification of the Operations Manual – Investment Lending, Social and Environmental Safeguards and Procurement operational policies are all under review, guided by the objective of moving from a prescriptive, compliance based approach to operational design and implementation, to an approach that rests more on a discretionary, flexible, problem solving. Simplification of policy requirements could result in dilution.
– Strengthen Accountability for Results – The first Corporate Scorecard, which outlines progress in four areas of outcome indicators, was disclosed. Along with an overhaul of performance evaluation system, the Bank could tie pay more closely to the achievement of results.
– Fix Knowledge Management – Despite a reputation as a Knowledge Bank, the World Bank has not been able to adequately deliver on that institutional advantage. The matrix system has been highly inefficient and modestly effective in ensuring that innovation in the field is well captured across the institution and that country operations are able to draw efficiently on global knowledge to meet client needs. Management has committed to fixing the matrix system.
– Lead on Transparency – Building on the 2010 implementation of a strengthened access to information policy, the Bank has launched an open data initiative, which has improved certain disclosure practices while distilling other key strategic information sources such as Board deliberation, operation supervision and results reports.
– Overhaul Human Resources – Profound shifts in the human resources of the Bank, through intensified decentralization, closing the revolving door on consultants, more flexible-term appointment labor contracts, benefits harmonization, rooting out informal practices of risk aversion and consensus decision making, and revisions to the performance evaluation system.
– Governance reforms at the Bank that give greater voice to developing members.
The details of the Bank’s different moving internal and external processes of reform since the capital increase are detailed in the undisclosed Annexes A, B & C of the 2012 Modernization Update.
To download the Annexes to the 2012 World Bank Business Modernization Update, see:
The review of the safeguards is just one of at least 10 World Bank business modernization programs, each with multiple components. The report annexes provide more detail about the results reform process, and a considerable number of sweeping internal and external policy and procedural reforms. In addition to the paragraphs that summarize Investment Lending, Procurement and Safeguards policy reviews, there is discussion of changes to Bank’s matrix system for sharing and using knowledge, ensuring quality, revising the purpose of sector strategies, adjusting internal incentives and budgets and correcting overly conservative risk management practices that mire the Bank in “paralysis through analysis.” Management highlights the significance of internal organizational change to complement the ongoing policy reviews. “The goal is to move the institution away from diffused accountability and consensus-style decision making, which is exacerbated by risk-aversion, to a more defined and disciplined approach.” [4]
Management’s modernization plan is mirrored by a recent IEG evaluation of the effectiveness of the Bank’s matrix, which was introduced by James Wolfenson in 1997 to better leverage the Bank’s comparative advantages as a global development institution.[5] IEG suggests that the matrix is imbalanced and that substantial changes are required to stave off the erosion in confidence of the Bank’s global primacy in development knowledge. The 1997 reforms have led to prioritization of responsiveness to borrowing country’s short-term needs over quality, contributing to knowledge not being shared efficiently and a variety of pressures that continue to place short-term client needs over global or sector strategic priorities. IEG concludes, “Unless the Bank significantly modifies the means and incentives to ensure efficient sharing of Bank and external knowledge through better connectivity with global knowledge, the institution risks losing global relevance on both the knowledge and the lending side.” [6]
IEG shows that Bank operational quality has actually declined since the matrix was introduced. Using a three-year moving average, the share of operations rated moderately satisfactory or better among those approved during Fiscal Year (FY) 01-03 was 79 percent, compared to 70 percent among operations approved during FY04-05. The quality of supervision and quality at entry have also shown a declining trend since the introduction of the matrix.[7]
Strategic alignment of regional operations with global priorities has been weak. Of 11 sector strategies and 2 corporate strategies produced between FY02-10 (produced at an average cost of $9 million), only 2 or 3 have had much influence on the sector portfolio in country programs – indicating a weakness in the World Bank’s ability to apply global knowledge. To take one example, IEG found that only about half of all impact assessments are disseminated – leaving questions about how much learning is achieved.
The Matrix evaluation outlines recommendations to rebalance the matrix, including a strengthening of sector strategy and sector boards, an independent quality assurance function, more closely linking performance evaluations to results that include knowledge products, and to rethink the barriers to more efficient knowledge flows – including decentralization.
Management and IEG generally agree that substantial strengthening to the matrix system is the cornerstone to Bank modernization, and many of the actions outlined in the modernization agenda are consistent with IEG recommendations. However, there are a number of areas where Management’s modernization agenda diverges from IEG’s recommendations:
- Perhaps the primary difference may be IEG recommendation for a holistic strengthening of matrix imbalances (i.e., incentives, operational processes, and structural constraints) and Management’s modernization agenda tends to exclude key elements of this approach.
- Management does not indicate measures to rethink Country Director budget authority relative to Sectors and Networks, which IEG points to as the primary source of imbalance in the current matrix system.
- Management is not fully convinced that staff incentives and performance evaluations can be tightly linked to the quality of achieved operational development results.
- With the elimination of the Quality Assurance Group (QAG) in 2010, Management does not agree with IEG’s recommendation to restore a centralized, independent quality assurance function that now resides in OPCS.
- The measures to address the waning influence of the global strategic inputs to country programs differ from IEG’s recommendations.
- Management disagrees with IEG’s observation that decentralization and the dissimilarity in regional matrix structures to respond to country needs may be weakening the global matrix function by impeding knowledge flows and reinforcing regional silos.
The World Bank’s modernizing actions encompass the revision of the Bank’s safeguards in the overarching push to simplify the Bank’s procedures, encourage greater risk taking, and to promote the use of country systems in the delivery of results. The Modernization Update report provides a summary of the procurements and safeguard policy reviews:
“Procurement and safeguards. Over the coming two years, a review of procurement policies and procedures is being undertaken; this is the first fundamental review of Bank procurement policies since its founding. The review goes beyond specific transactions under Bank-financed operations, toward the larger goals of improving development effectiveness by encouraging the use of country systems and harmonization, building competitive local industries, strengthening public sector management, improving governance and anticorruption, promoting sustainability, accelerating public and private sector investment in infrastructure, and deepening international trade. Because these objectives converge with public procurement in one way or another, the review will identify both potential synergies and trade-offs between policy goals.
The Bank will also review its environmental and social safeguard policies. This review will capture lessons from experience including, among other things, a focus on the use of safeguard polices to support environmentally and socially sustainable development, greater emphasis on assessment of a wider range of potential social impacts and risks, improvements in supervision, and more efficient and effective approaches to monitoring, evaluation, and completion reporting, including the enhanced use of indicators. Supported by significant investments in capacity building, many client countries have developed their own regulatory frameworks to address environmental and social issues: hence the review will also allow the Bank to mainstream and expand the use of country systems and to encourage continued institutional strengthening and capacity building. This is an ambitious and challenging agenda which will need careful sequencing and broad consultations.[8]”
Little detail is known about World Bank’s plans for reviewing the safeguard policies. However, some clues might be evident in the Bank’s approach to Procurement policy reform. A Procurement Policy Approach Paper was released in early May outlining the rationale and consultation plan. The review will consist of a first phase in order to identify the issues to be addressed and to formulate the overarching framework and guiding principles for the future evolution of the policies and their application. This phase is based on an Initiating Discussion paper which provides an overall diagnosis, additional studies to address specific concerns, the advice and inputs from a group of international experts, and the views solicited via consultations with a wide range of stakeholders. Beginning in early 2013, the second phase of the review will focus on fleshing out the details of specific changes to the policies and procedures, and their implementation. It will culminate with the drafting of the statement of operational policy and accompanying procedures and to the Bank’s Procurement and Consultant Guidelines as well as to the relevant internal operational policy and business procedures to be presented for the consideration of the Bank’s Board of Directors at the end of 2013 or early 2014.
Another signal to how the Bank might approach the Safeguard policy review is evident in the revised policy architecture and consultation plan for revising Investment Lending Policies. On Investment Lending Reform, the Modernization Update states:
“ Consolidation of operational policies and procedures. Following advice from the Committee on Development Effectiveness in the Spring of 2011, we are consolidating the operational policy and procedure statements for investment lending. Part of a broader effort to reform the Bank’s Operational Policy Manual, this effort does not necessarily aim to change the content of the policies, but is primarily aimed at updating, clarifying, and streamlining them, eliminating duplication and making them easier to use and access. For example, Management proposes to bring 19 policy statements and 18 procedures statements covering investment lending into a single policy and procedure statement.
But streamlining policies is only part of the challenge. Equally important is the goal of eliminating the growth of informal practices, procedures, and process that have grown up across the Bank and particularly in the six regions. Contributing to risk-aversion, and impeding internal staff mobility, the complexity and diversity of processes has also led many to question whether we are functioning as one integrated organization or six different regional banks. A key goal of the modernization agenda over the coming year is to simplify and harmonize these processes into a single common set.”
On June 6, the Bank’s Board Development Committee (CODE) discussed the first draft of the proposed revisions to Investment Lending Policy, OP/BP 10.0, along with a consultation plan. The results of this meeting will signal the extent to which the principles-based approach to simplifying investment lending policy could be the likely Bank approach to the safeguards policy review.
The scope of the Bank’s modernization process appears to leave no part of the current World Bank business model untouched, except perhaps for the prospect of graduation by any middle income country. The design of the reform process leaves no doubt that change in policy can not be delinked from change in the enabling environment for effective application of policy. However, such an approach places a high premium on the proper sequencing and articulation of reforms. In the case of safeguard policies, the coordination has yet to be ensured.
[1] The World Bank relationship between regional vice presidencies and network vice presidencies, sometimes referred to as the “big matrix” , was introduced in 1997 to help balance competing objectives, such as client responsiveness and maximizing development effectiveness, and to better manage interdependent activities (see Figure 1 below).
[2] The overall modernization agenda was reflected in two related papers under the collective title New World, New World Bank Group: (i) New World, New World Bank Group: Post Crisis Directions published in February 2010: and New World, New World Bank Group (II): The Internal Reform Agenda published in April 2010. The present paper, Update on the Bank’s Business Modernization: Results, Openness and Accountability, DC 2012-0005 (April 11, 2012) is the second annual update on business modernization; see Modernizing the World Bank Group: An Update, April 16, 2011.
[3] Organizational Effectiveness Task Force: Final Report, 2005.
[4] World Bank, “Update on the Bank’s Business Modernization: Results, Openness and Accountability,” DC 2012-0005 (April 11, 2012) pg. 15
[5] IEG (2012) The Matrix System at Work: An Evaluation of the World Bank’s Organizational Effectiveness,” (April 2012)