Improving Investment Climates An Evaluation of World Bank Group Assistance THE WORLD BANK THE WORLD BANK GROUP WORKING FOR A WORLD FREE OF POVERTY The World Bank Group consists of five institutions--the International Bank for Reconstruction and Development (IBRD), the International Finance Corporation (IFC), the International Development Association (IDA), the Multilateral Investment Guarantee Agency (MIGA), and the International Centre for the Settlement of Investment Disputes (ICSID). Its mission is to fight poverty for lasting results and to help people help themselves and their envi- ronment by providing resources, sharing knowledge, building capacity, and forging partnerships in the public and private sectors. THE INDEPENDENT EVALUATION GROUP ENHANCING DEVELOPMENT EFFECTIVENESS THROUGH EXCELLENCE AND INDEPENDENCE IN EVALUATION The Independent Evaluation Group (IEG) is an independent, three-part unit within the World Bank Group. IEG-World Bank is charged with evaluating the activities of the IBRD (The World Bank) and IDA, IEG-IFC focuses on assessment of IFC's work toward private sector development, and IEG-MIGA evaluates the contributions of MIGA guarantee projects and services. IEG reports directly to the Bank's Board of Directors through the Director-General, Evaluation. The goals of evaluation are to learn from experience, to provide an objective basis for assessing the results of the Bank Group's work, and to provide accountability in the achievement of its objectives. It also improves Bank Group work by identifying and disseminating the lessons learned from experience and by framing recommendations drawn from evaluation findings. W O R L D B A N K I N D E P E N D E N T E V A L U A T I O N G R O U P Improving Investment Climates An Evaluation of World Bank Group Assistance http://www.worldbank.org/ieg 2006 http://www.ifc.org/ieg The World Bank http://www.miga.org/ieg Washington, D.C. © 2006 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: feedback@worldbank.org All rights reserved 1 2 3 4 5 09 08 07 06 This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: pubrights@worldbank.org. Cover photo: Ray Witlin. ISBN-10: 0-8213-6282-8 ISBN-13: 978-0-8213-6282-2 e-ISBN: 0-8213-6283-6 DOI: 10.1596/978-0-8213-6282-2 Library of Congress Cataloging-in-Publication Data Hallberg, Kristin, 1952­ Improving investment climates : an evaluation of World Bank Group assistance / Kristin Hallberg. p. cm. -- (World Bank Operations Evaluation Department OED series) Includes bibliographical references. ISBN 0-8213-6282-8 1. Economic assistance. 2. Economic assistance--Evaluation. 3. World Bank Group. I. World Bank. Operations Evaluation Dept. II. Title. III. Series: OED series (Washington, D.C.) HC60.H2645 2005 332.15'32--dc22 2005050783 World Bank InfoShop Independent Evaluation Group E-mail: pic@worldbank.org Knowledge Programs and Evaluation Capacity Telephone: 202-458-5454 Development (IEGKE) Facsimile: 202-522-1500 E-mail: eline@worldbank.org Telephone: 202-458-4497 Facsimile: 202-522-3125 Printed on Recycled Paper Contents xi Acknowledgments xiii Foreword xv Avant-propos xvii Prefacio xix Executive Summary xxiii Résumé analytique xxvii Resumen xxxi Acronyms and Abbreviations PART I OVERVIEW 3 1 Introduction 3 Evaluation Scope and Design 4 The Investment Climate, Investment, and Growth 7 2 World Bank Group Strategy, Activities, and Outcomes 7 The Investment Climate in the World Bank Group 9 World Bank 13 International Finance Corporation 16 Multilateral Investment Guarantee Agency 18 From Strategy to Outcomes: Illustrations from Country Case Studies 19 3 Coordination in the World Bank Group 19 Advice on Policies and Institutions 20 Assistance to Investment Promotion Intermediaries 20 Integrating Microeconomic and Macroeconomic Agendas 23 4 Recommendations Annexes 25 I.A: World Bank Group Investment Climate Activities in Peru, Mozambique, and Romania i i i I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E 29 I.B: Management Response 33 I.B.1: Recommendations for the World Bank Group (from the Joint Overview Report) 37 I.B.2: Recommendations for the World Bank (from the IEG Evaluation) 45 I.B.3: Recommendations for the International Finance Corporation (from the IEG-IFC Evaluation) 49 I.B.4: Recommendations for the Multilateral Investment Guarantee Agency (from the IEG-MIGA Evaluation) 53 I.C: Chairman's Summary, Committee on Development Effectiveness (CODE) 57 Endnotes for Part I PART II WORLD BANK EXPERIENCE 61 5 Summary 61 Trends in the Investment Climate 61 The Bank's Strategic Focus 62 Nonlending Services 62 Lending Operations 63 Organizational Issues 63 Recommendations 65 6 Introduction 65 Evaluation Scope and Design 66 A Review of Global Trends in the Investment Climate 69 The Big Picture: Determinants of Investment and Growth 71 The Determinants of Investment Behavior: Microempirical Evidence 71 Conclusions 73 7 The Bank's Strategic Focus 73 From First-Generation to Second-Generation Reforms 74 The Investment Climate Takes Center Stage 74 IC Strategies at the Country Level 78 Translating the Strategy into Operations 79 Conclusions 81 8 Nonlending Services 81 Economic and Sector Work 82 Survey-Based Diagnostics 87 Conclusions 89 9 The IC Loan Portfolio 89 Definition 89 Composition 90 Performance 97 Conclusions 99 10 Implementation and Outcomes at the Country Level 99 Typology of Countries 101 Lessons Learned 107 Conclusions 109 11 Organizational Issues i v C O N T E N T S 111 12 Recommendations Annexes 113 II.A: Evaluation Methodology 121 II.B: IC Theme Definitions 125 II.C: The Investment Climate in Sector Strategy Papers 127 II.D: Findings from IEG-World Bank Country Assistance Evaluations 139 II.E: Country Case Study Summaries PART III IFC EXPERIENCE 155 13 Summary 156 Definitions 158 Recommendations 161 14 Introduction and Context: Why Is the Investment Climate Important to IFC? 161 Objectives 161 What Is the Investment Climate, and How Is It Operationalized in IFC? 163 Good and Improving Investment Climates Boost IFC's Investment Project Outcomes 168 Do IFC's Investment and Non-Investment Activities Improve Investment Climates? A Conceptual Model 171 15 IFC's Investment Operations Show Wide Impacts on Investment Climate 171 Methodology and Limitations 172 How IFC's Investment Operations Address Investment Climates 176 High-Impact Strategic Sector Investments Have the Strongest Direct Impacts on Investment Climate 178 Projects with Demonstration Effects Have Indirect Impacts 185 16 IFC's Non-Investment Operations Have a Direct Impact on Investment Climates 185 Methodology and Limitations 186 Improving the Investment Climate Receives Increased Emphasis, but Not as a Strategic Priority 209 Issues Related to Planning and Coordinating IC TAAS 211 Overlap between FIAS and MIGA 212 Managing Conflict-of-Interest Concerns in IC TAAS 215 17 Summary and Recommendations 215 Summary 217 Recommendations Annexes 221 III.A: Heritage Foundation/Wall Street Journal Index of Economic Freedom and Comparison with Selected Indices 225 III.B: Expanded Project Supervision Reports: Performance Ratings for Development Outcome and Investment Outcome 227 III.C: PSD Indicators and Rating Benchmarks 229 III.D: Non-Investment Evaluation Rating Template (for IC TAAS Operations) 231 III.E: Rating Benchmark for Non-Investment Operations 233 III.F: IC TAAS Descriptive Overview 243 III.G: FIAS's Project Impact Monitoring System and Major Findings v I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E 247 III.H: Overview of the Results-Based Management Framework 249 III.I: Overlap between FIAS and MIGA 251 III.J: Managing Conflict-of-Interest Concerns PART IV MIGA EXPERIENCE 257 18 Introduction 257 Background 258 Objectives and Evaluation Questions 258 Components of the Evaluation 261 19 MIGA's IC Activities 261 In Which Types of Investment Climate Was MIGA Active? 262 Review of MIGA Guarantee Activities 267 20 An Evaluation of MIGA's TA Activities 267 Overview of MIGA's TA Activities 269 Relevance of MIGA's TA Activities 273 Effectiveness of MIGA's TA Activities 279 Resources for MIGA's TA Activities 282 MIGA's Role within the WBG and Collaboration with Other Agencies 285 Monitoring and Evaluation of MIGA's TA Activities 287 21 Findings and Recommendations 287 Mandate 287 Strategy 288 Effectiveness 288 Resources and Efficiency 289 Operational Issues 289 Monitoring Annexes 291 IV.A: Methodology for Case Studies 293 IV.B: Excerpt from MIGA's Convention 295 IV.C: Portfolio of MIGA's TA Activities 297 IV.D: El Salvador Case Study 299 IV.E: Romania Case Study 301 IV.F: MIGA's TA Activities by Country (1999­2003) 309 Endnotes for Parts II­IV 319 Bibliography Boxes 70 6.1 Institutions and Organizations 72 6.2 Diverse Factors Influence Foreign Investment Decisions Because Firms Are Diverse 78 7.1 The Increasing Focus on the Investment Climate in CASs: Evidence from Country Case Studies 83 8.1 Relevance of the Bank's Analytical Work: Evidence from Country Case Studies 85 8.2 Investment Climate Surveys and Assessments 86 8.3 The Doing Business Project 87 8.4 The Costs and Benefits of Reforming Labor Legislation in India v i C O N T E N T S 103 10.1 Romania: Secured Transactions Reform 162 14.1 IFC's 2004 Strategic Directions Address IC to Achieve Strategic Priorities 164 14.2 Recent IEG-IFC Analysis Shows That IC Is Important to IFC Outcomes 167 14.3 Importance of the Quality of the Investment Climate for IFC Client Investors 178 15.1 Strategic Sector Investments Have Yielded Significantly Better Outcomes 188 16.1 New PSD Vice Presidency Oversees Implementation of PSD Strategy and Coordinates IC Work Across the WBG 194 16.2 IFC IC TAAS at a Glance 195 16.3 Overview of IC TAAS Evaluation Ratings Criteria 200 16.4 Overview of FIAS Advisory Services 200 16.5 Strengths and Weaknesses of FIAS Assistance 203 16.6 Strategies to Boost Prospects of Achieving Better Results in TA Activities 206 16.7 Working Together: Donor Coordination Efforts to Streamline Business Registration in Bosnia 206 16.8 PEP's Approach to Improving Investment Climate 209 16.9 Vietnam Business Forum: Helping Improve Investment Climate Through Consultative Dialogue 268 20.1 Early Phase of MIGA TA Activities, 1988­97 268 20.2 MIGIM Mission Statement 271 20.3 Effectiveness of Promotion Agencies at Attracting FDI 284 20.4 MIGA and FIAS: How Does Cooperation Work on the Ground? Figures 8 2.1 WBG Investment Climate Activities 9 2.2 Annual Volume of WBG IC Activity 11 2.3 The IC Share of World Bank Lending 14 2.4 IFC IC­Related Technical Assistance and Advisory Services 67 6.1 IC Indicators in Developing and Transition Economies 67 6.2 CPIA by Region, 1999 and 2003 68 6.3 CPIA Components, 1999 and 2003 91 9.1 Number of IC and Non-IC Projects, Fiscal 1993­2003 92 9.2 IC Lending, Fiscal 1993­2003 92 9.3 IC Lending as a Share of the Bank's Portfolio, Fiscal 1993­2003 93 9.4 Core IC Themes in the IC Portfolio 94 9.5 Non-Core Themes in the IC Portfolio 94 9.6 Share of Core IC Projects by Region 95 9.7 Share of Core IC Projects by Income Group 165 14.1 Projects Done in Good IC Countries Have Significantly Better Outcomes 166 14.2 Better Investment Outcomes When Certain IC Factors Are Favorable 168 14.3 Logic Model for IFC's IC Activities 169 14.4 Investment Operations Dominate IFC IC Activities in Terms of US Dollars 172 15.1 Increasing IFC's Investment Approvals in High-Impact Strategic Sectors v i i I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E 173 15.2 Distribution of IFC's US$ Investment Commitments: Strategic Sectors vs. Other Sectors (%) 173 15.3 Distribution of IFC's US$ Investment Commitments: Strategic Sectors vs. Other Sectors (US$) 174 15.4 IFC's Investment Approvals in Poor IC Countries Have Grown 174 15.5 Distribution of IFC's Investment Commitments: Good vs. Poor Investment Climate Unrated Countries (%) 175 15.6 Distribution of IFC's Investment Commitments: Good vs. Poor Investment Climate Unrated Countries (US$) 175 15.7 IFC Approvals Concentration in High-Risk Countries Has Declined Less than FDI and GDP Concentrations 176 15.8 IFC Approvals Are Significantly More Concentrated in High-Risk Countries than FDI and GDP Are, and the Gap Has Widened 177 15.9 The Inadequacies of Finance and Infrastructure Are Severe for Many Developing Countries 177 15.10 In Many Countries Firms Rate Skill Shortages as Major or Severe Constraints 180 15.11 Demonstration Effects Are the Most Common Indirect Impacts on Investment Climate 183 15.12 Projects with Positive PSD Impacts Have More Influence on Investment Climate When Country Conditions Are Difficult 191 16.1 The Number of IC Operations Is Increasing within Total Non-Investment Operations 191 16.2 FIAS Projects Represent the Bulk of IC TAAS Operations by Number 192 16.3 Volume Varied over Time with PEP's Large Project Size Dominating 192 16.4 Excluding PEP Volume Shows Upward Trend 196 16.5 Survey Responses Show Satisfactory or Better Overall Quality of Assistance, but Outcomes and Impacts Received Lower Ratings or Were Not Rated 197 16.6 Responses from Government Officials Resemble Responses from Others, but with More Optimistic Views of Results on the Ground 197 16.7 Ratings at the Project Level Indicate High Work Quality on All Counts 201 16.8 How Did FIAS Perform? 216 17.1 Range of Impacts on the Investment Climate of IFC's Investment Operations 258 18.1 Logic Model for Assessing the Effectiveness of MIGA's TA 262 19.1 Concentration of MIGA Guarantee and TA Activities, 1998­2003 263 19.2 MIGA Guarantees Issued Increasingly in Countries with Low Investment Climates 264 19.3 Sectoral Distribution of MIGA Guarantee Portfolio (gross), June 2004 264 19.4 Regional Distribution of MIGA Guarantee Portfolio (net), June 2004 265 19.5 Concentration of MIGA Guarantees in Top 10 Developing Countries in Attracting FDI v i i i C O N T E N T S 275 20.1 Distribution of MIGA TA Activities in 2002­3 275 20.2 Number of MIGA TA Activities per Country (1998­2003) 277 20.3 Client Satisfaction Ratings of TA 280 20.4 MIGIM Funding Sources, Fiscal 1998­2003 282 20.5 Role of MIGA TA in Promoting FDI within WBG Tables 76 7.1 IC Issues in Country Assistance Strategies, Fiscal 1993­2002 82 8.1 Bank Reports on IC Issues, Fiscal 1993­2003 90 9.1 Thematic Definition of Investment Climate 91 9.2 IC Lending, Fiscal 1993­2003 95 9.3 IEG-World Bank Ratings for Core IC Projects, Fiscal 1993­2003 110 11.1 Network Assignment of Core IC Projects 165 14.1 Better Outcomes with Improving Investment Climate, Worse with Deteriorating Investment Climate 166 14.2 Investment Outcomes in Countries with Good ICs Were Higher than Those with Poor ICs 179 15.1 Breakdown of PSD Impact (XPSR) into Various IC Components 190 16.1 IC Non-Investment TAAS: Defining Characteristics 204 16.2 Evaluation of IFC's IC Technical Assistance 204 16.3 Quality of IC Advisory Work Rated Very Good, but Outcomes and Impacts Not as Good 270 20.1 Categorization of Country Needs and MIGA TA Services 277 20.2 Survey Results on Performance of MIGA TA Activities 281 20.3 Tied Trust Funds, Fiscal 1998­2003 281 20.4 MIGA in-Depth TA by Region 283 20.5 Possible Activities under Investment Promotion Products i x Acknowledgments T his report benefited immensely from the insights of an external advisory panel consisting of Beatriz Boza, Roger Leeds, John McMillan, and Her- bert Oberhänsli. The panel provided useful comments on the draft re- ports and met in Washington, D.C., to discuss their views with Independent Evaluation Group (IEG) staff and management. The authors also are grateful to the staff members from the Bank, International Finance Corporation (IFC), and Multilateral Investment Guarantee Agency (MIGA) who shared their ex- perience in discussion groups in headquarters. The IEG-World Bank part of this report was Dominguez. The report benefited from the written by Kristin Hallberg and Ramachandra valuable support and insight of Pelin Aldatmaz Jammi, with assistance from Danuta Danilova. (Operations Analyst), Saliha Amroune (Program Valuable input was received from international Assistant), Nicholas Burke and Denis T. Carpio investors who participated in discussion groups (Peer Reviewers), Yvette Jarencio (Program in Washington, Tokyo, Brussels, and London. Assistant), Nisachol Mekharat (Operations Helpful guidance was provided by the internal Analyst), Linda Morra-Imas (Head of Special peer reviewers for the report, Harry Broadman Studies), Mariusz Sumlinski (Evaluation and John Nellis. Background papers were Officer), Vicky Viray-Mendoza (Operations prepared by Tyler Biggs (literature review and Analyst), and Anna Zabelina (Peer Reviewer). Mozambique case study), Eric Oldsman (India The IEG-MIGA part of the report was written case study), Paul Holden (Romania and Peru by Stephan Wegner. Photis Bourloyannis- case studies), Ashok Khanna (Indonesia case Tsangaridis and Timothy Neville contributed to study), Benjamin Rowland (international the analysis, and Alima Ngoutano-Njoya and investor discussion groups), and Ramachandra Esther Peckham formatted the report. Jammi (staff discussion groups). William Hurlbut Background papers were prepared by Eric provided editorial assistance, and Helen Phillip Oldsman (Methodological Note and El Salvador provided administrative assistance. case study), Kishore Rao, and Sheri Pitigala The IEG-IFC part of this report was written (Stocktaking of MIGA Technical Assistance and by Kelly Andrews Johnson and Rafael Romanian case study). x i I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Director-General, Evaluation, World Bank Group Vinod Thomas Director, IEG-World Bank Ajay Chhibber Acting Director, IEG-IFC Denis T. Carpio Director, IEG-MIGA Aysegul Akin-Karasapan Manager, Sector, Thematic and Global Evaluation, World Bank Alain Barbu Head of Special Studies, IFC Linda Morra-Imas Task Manager, IEG-World Bank Kristin Hallberg Task Managers, IEG-IFC Kelly Andrews Johnson Rafael Dominguez Task Manager, IEG-MIGA Stephan R. Wegner x i i Foreword T he Investment Climate Study is a joint evaluation of the Independent Evaluation Group (IEG), covering the activities of the International Bank for Reconstruction and Development/International Development Association (IBRD/IDA), the International Finance Corporation (IFC), and the Multilateral Investment Guarantee Agency (MIGA).1 The purpose of the evaluation is to assess the stakeholders, and WBG staff. The overview effectiveness of the World Bank Group (WBG) in (Chapters 1­4) highlights the main conclusions helping its member countries improve their and recommendations of the joint evaluation, investment climates within the context of the drawing on the separate accompanying reports WBG's overall mission of poverty reduction and of IEG-World Bank, IEG-IFC, and IEG-MIGA. sustainable development. The findings and Special thanks are due to the members of recommendations provide guidance for the the external advisory panel for the Investment WBG's future strategy and activities in this area. Climate Study, who provided unique perspec- The evaluation was conducted in parallel with tives and advice: preparation of World Development Report 2005: A Better Investment Climate for Everyone · Roger Leeds, professor at the School of Ad- (World Bank 2005). vanced International Studies of the Johns Hop- The methodology for this evaluation is kins University and director of the school's outlined in the Approach Paper (IEG 2002). Center for International Business and Public The evaluation spans the past 10 years and Policy covers IBRD/IDA lending and nonlending · Beatriz Boza, former head of the regulatory body services designed to improve the investment for competition policy in Peru (INDECOPI), as climate; IFC investment operations and invest- well as its investment promotion agency ment climate­related technical assistance and (PromPeru), and founding director of Ciu- advisory services; and MIGA guarantees and dadanos al Dia, a nonprofit organization that technical assistance (fiscal 1998­2003). The promotes transparency and good governance findings are based on a literature review, · Herbert Oberhänsli, chief economist and head portfolio reviews, field missions to evaluate of economic and international relations, Nes- selected projects and prepare country case tle Corporation studies, and surveys of foreign investors, other · John McMillan, professor of economics at the x i i i I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Stanford University Graduate School of Busi- ness, senior fellow at the Stanford University Graduate School of Business, and senior fellow at the Stanford Institute of Policy Research. x i v Avant-propos L 'Étude du climat de l'investissement est une évaluation conjointe du Groupe indépendant d'évaluation (IEG), qui couvre les activités de la Banque internationale pour la reconstruction et le développement/l'As- sociation internationale de développement (BIRD/IDA), de la Société finan- cière internationale (SFI) et de l'Agence multilatérale de garantie des investissements (MIGA)1. L'évaluation vise à mesurer l'efficacité du Groupe constatations s'appuient sur une analyse de pu- de la Banque mondiale dans le domaine de l'aide blications, l'examen de portefeuilles, des mis- qu'il fournit à ses pays membres pour améliorer sions sur le terrain pour évaluer certains projets leur climat d'investissement, dans le contexte de et préparer les monographies nationales, et des la mission globale du Groupe qui est de réduire enquêtes auprès des investisseurs étrangers, des la pauvreté et d'assurer un développement du- autres parties prenantes et des services du rable. Les constatations et les recommandations Groupe de la Banque. La présente vue d'en- de l'étude guideront la stratégie et les activités semble met en exergue les principales conclu- futures du Groupe dans ce domaine. L'évaluation sions et recommandations de l'évaluation a été réalisée parallèlement à l'élaboration du conjointe, en s'inspirant des rapports distincts y Rapport sur le développement dans le monde afférents et tels qu'élaborés par l'IEG de la Banque 2005 : un meilleur climat de l'investissement mondiale, l'IEG de la SFI et l'IEG de la MIGA. Nous pour tous (Banque mondiale 2005). tenons tout particulièrement à exprimer notre La méthodologie de la présente évaluation gratitude aux membres ci-après du groupe consul- est décrite dans le document de synthèse sec- tatif externe pour l'étude du climat de l'investis- torielle (IEG 2002). L'évaluation s'étend sur les sement, qui nous ont fourni des perspectives et dix dernières années, et couvre les activités de des conseils de qualité exceptionnelle : prêt et les services hors prêt de la BIRD/IDA vi- sant à améliorer le climat de l'investissement ; · Roger Leeds, professeur à la School of Ad- les opérations d'investissement de la SFI ainsi vanced International Studies de l'Université que son assistance technique et ses services- Johns Hopkins et directeur du Center for In- conseils ; les garanties de la MIGA et son assis- ternational Business and Public Policy de cet tance technique (exercice 1998­2003). Les établissement x v I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E · Beatriz Boza, ancienne responsable de l'orga- · Herbert Oberhänsli, économiste en chef et nisme de réglementation de la politique de la responsable des relations économiques in- concurrence au Pérou (INDECOPI), ainsi que ternationales de la société Nestlé de l'agence de promotion de l'investissement · John McMillan, professeur d'économie à la du même organisme (PromPeru), et direc- Graduate School of Business de l'Université trice fondatrice de Ciudadanos al Dia, or- Stanford, et attaché supérieur de recherche ganisation à but non lucratif qui oeuvre dans au Stanford Institute of Policy Research. la promotion de la transparence et de la bonne gouvernance x v i Prefacio E l Estudio sobre el clima para la inversión es una evaluación conjunta re- alizada por el Grupo de Evaluación Independiente (GEI) que abarca las actividades del Banco Internacional de Reconstrucción y Fomento/la Aso- ciación Internacional de Fomento (BIRF/AIF), la Corporación Financiera In- ternacional (CFI) y el Organismo Multilateral de Garantía de Inversiones (OMGI)1. El objetivo de la evaluación es determinar la efi- (entre los ejercicios de 1998 y 2003). Las conclu- cacia del Grupo del Banco Mundial en la tarea de siones se basan en la revisión de las obras dispo- ayudar a los países miembros a mejorar el clima nibles, exámenes de la cartera; misiones sobre el para la inversión, en el contexto de la misión ge- terreno de evaluación ex post de proyectos se- neral del Grupo que consiste en la reducción de leccionados, y de preparación de estudios de casos la pobreza y el desarrollo sostenible. Sus conclu- de países, y encuestas de inversionistas extranje- siones y recomendaciones sirven de orientación ros, otras partes interesadas y personal del Grupo para las actividades y estrategias futuras del Grupo del Banco Mundial. En la presente reseña se des- del Banco Mundial en esta esfera. La evaluación tacan las principales conclusiones y recomenda- se llevó a cabo en forma paralela con la prepara- ciones de la evaluación conjunta, basadas en los ción del Informe sobre el desarrollo mundial informes adjuntos realizados por separado por 2005: Un mejor clima para la inversión en be- los GEI del Banco Mundial, la CFI y el OMGI. neficio de todos (Banco Mundial 2005). Expresamos nuestro especial agradecimiento La metodología empleada en esta evaluación se a los miembros del grupo de asesores externos describe en la Síntesis sectorial (GEI 2002). El pe- para el estudio sobre el clima para la inversión, que ríodo estudiado comprende los últimos 10 años aportaron perspectivas únicas y valiosos consejos: y abarca los siguientes aspectos: los servicios de financiamiento y de otro tipo prestados por el · Roger Leeds, profesor de la School of Advan- BIRF/AIF con el fin de mejorar el clima para la in- ced International Studies, y director de su versión; las operaciones de inversión de la CFI y Center for International Business and Public la asistencia técnica y los servicios de consultoría Policy, de la Universidad Johns Hopkins brindados por la Corporación al mismo fin, y las · Beatriz Boza, ex presidenta del Directorio del garantías y asistencia técnica ofrecidas por el OMGI Instituto Nacional de Defensa de la Compe- x v i i I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E tencia y de la Protección de la Propiedad In- · Herbert Oberhänsli, economista principal y telectual del Perú (INDECOPI); ex presidenta director de relaciones económicas e interna- del Directorio de la Comisión de Promoción del cionales de Nestlé Corporation Perú (PromPerú), y directora fundadora de · John McMillan, profesor de Economía en la Ciudadanos al Día, una organización sin fines Graduate School of Business de la Universidad de lucro que fomenta la transparencia y el de Stanford, y miembro superior del Stanford buen gobierno Institute of Policy Research. x v i i i Executive Summary T he quality of a country's investment climate (IC) is determined by the risks and transaction costs of investing in and operating a business. These costs, in turn, are determined by the legal and regulatory framework, barriers to entry and exit, and conditions in markets for labor, finance, infor- mation, infrastructure services, and other productive inputs. The World Bank Group (WBG) supports improvements in investment climates by working with both the public and private sectors. Through its lending and nonlending services, sustainable growth and poverty reduction. Yet the Bank (IBRD/IDA) supports the broad policy improving the environment for private environment (macroeconomic stability and sector­led growth has always been a big part of openness) as well as microeconomic policies what the WBG does. A large proportion of the and institutions. The International Finance Bank's lending program is directed toward Corporation (IFC) influences the investment microeconomic policy and institutional reforms climate through its technical assistance and to promote the development of efficient advisory services (TAAS) to both the public and markets. IFC's founding Articles of Agreement private sectors and through its investment state that in carrying out its purpose of encour- operations--directly, by increasing the quantity aging the growth of productive private and quality of infrastructure and financial and enterprise, the IFC is to help create conditions social sector services, and indirectly, through the conducive to the flow of private capital into demonstration effects of investment projects in productive investments. And MIGA was created all sectors. The Multilateral Investment Guaran- with the objective of facilitating foreign direct tee Agency (MIGA) influences the investment investment flows to developing countries. climate through political risk guarantees, techni- Many of the WBG's member countries are cal assistance to investment promotion interme- moving beyond first-generation reforms diaries for capacity building, information (achieving macroeconomic stability and trade dissemination tools, and mediation services. integration) to second-generation reforms The objective of improving investment (improvements in the administrative, legal, and climates in client countries has recently moved regulatory functions of the State). These to center stage in the WBG's approach to second-generation reforms correspond to the x i x I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E public sector's role in establishing an invest- countries), regions, and industries. This ment climate conducive to private sector activity. diversity results from varying macroeconomic Cross-country indicators of broad policy and circumstances, the progress made in earlier institutional performance show that, although reform efforts, and the diversity among the broad indicators of the policy and institutional firms themselves. Thus there is no single set of environment have improved in recent years for priorities within the broad set of characteristics most developing and transition economies, that determine the investment climate--the second-generation (or institutional) reforms still priority issues are country specific. lag behind macroeconomic reforms. This When establishing strategies for improving suggests that these areas are now the appropri- the investment climate, the WBG needs to ate focus of WBG assistance. understand country-specific constraints and The joint IEG-World Bank, IEG-IFC, IEG- opportunities as well as country-specific MIGA evaluation finds four main challenges for institutional designs. It is critical for the WBG the WBG as the organization attempts to to build this understanding using local achieve better outcomes of its investment knowledge and expertise. climate activities. Political Economy and the Sequencing Focus on Reforms at the Institutional of Reforms Level More than at the Policy Level The feasibility of reform depends on the politi- Institutions--the "rules of the game"--are key cal economy of the reform process, and the to the quality of the investment climate. Yet sustainability of reform hinges on broad more is known--and more has been stakeholder support. The WBG needs to assess accomplished to date--in macroeconomic, the capacity and incentives facing public sector financial sector, and trade reform than in institu- organizations to implement reforms and be tional areas. The institutional agenda is on the aware of the likely winners and losers and the frontier of the WBG's knowledge of the develop- political strength of key groups. ment process. While the basic principles of good institutions are well recognized (such as market Organizational Challenges access and competition, protection of property within the WBG rights, and contract enforcement), the institu- The broad nature of the investment climate as tional arrangements for carrying out reform a topic and the need to work with both the seem to be country specific to some degree. public and private sectors creates internal In other words, appropriate institutional organizational challenges for the WBG. Better designs are not completely exportable from one use of the comparative advantages of the Bank, country to another. Moreover, unorthodox IFC, and MIGA would help the WBG deliver on arrangements sometimes work. Strategies for its investment climate agenda more effectively. improving the investment climate have suffered Corporate strategies need to be consistent with from a lack of knowledge about what kinds of each other, and strategies and practice should institutional arrangements will work in different be harmonized. environments and about the dynamic process of At the country level, IC strategies need to be change that is needed. To date, the WBG's integrated across the WBG, as well as across sector research and economic and sector work have units within the Bank. In the IFC, the rapidly provided insufficient guidance to client govern- expanding TAAS activity needs to be provided on ments and WBG staff. a strategic rather than an ad hoc basis. Similarly, MIGA's delivery of technical assistance needs to Customize Interventions follow a clear and coherent strategy for client to Country Needs selection to ensure high effectiveness and The quality of the investment climate varies development impact. And all three parts of the significantly across countries (and even within organization need to do a better job of monitoring x x E X E C U T I V E S U M M A R Y the impact of their activities on measurable · The Bank should do a better job of setting pri- improvements in the investment climate. orities and packaging IC reforms in lending To increase the effectiveness of WBG operations and pay more attention to institu- assistance to improve investment climates, the tions and the political economy of reform. evaluation concludes with the following · IFC should raise the profile of IC work and recommendations: develop operating guidelines for technical as- sistance and advisory work related to the in- · The WBG should clarify the roles of the Bank, vestment climate. IFC, and MIGA in IC activities, bringing corpo- · MIGA should improve the focus and effec- rate strategy and practice into alignment. At tiveness of technical assistance by imple- the country level, coordination and consistency menting a clear strategy for selecting clients, across the WBG on IC diagnosis, priorities, re- exercising greater selectivity, and aligning its sults focus, strategy, and assistance need to be work program more closely with WBG priori- improved. ties and lending. x x i Résumé analytique L a qualité du climat de l'investissement d'un pays est fonction des risques et des coûts de transaction liés à l'investissement dans une entreprise et à l'exploitation de celle-ci. Ces coûts sont à leur tour déterminés par le cadre juridique et réglementaire, les obstacles à l'entrée et à la sortie, et les conditions prévalant sur les marchés du travail, des finances, de l'information, des services d'infrastructures et d'autres facteurs de production. Le Groupe de la Banque mondiale appuie l'amélioration du climat de l'investissement en travaillant à la fois avec les secteurs public et privé. La Banque (BIRD/IDA) appuie l'environnement L'objectif d'amélioration du climat de l'inves- des politiques publiques au sens large (stabilité tissement dans les pays clients s'est récemment macroéconomique et ouverture) ainsi que les po- imposé comme le centre de l'attention de l'ap- litiques et les institutions microéconomiques, proche de la croissance durable et de la réduction par le biais de ses activités de prêt et de ses ser- de la pauvreté du Groupe de la Banque. Pourtant, vices hors prêt. La SFI influe sur le climat de l'amélioration de l'environnement en vue d'une l'investissement au moyen de l'assistance tech- croissance impulsée par le secteur privé a toujours nique et des services-conseils qu'elle fournit aux fait partie des activités du Groupe de la Banque. secteurs public et privé, et grâce à ses opérations Une grande partie des prêts accordés par la d'investissement -- de façon directe, en ac- Banque est orientée vers les réformes institu- croissant le volume et la qualité des services fi- tionnelles et de la politique microéconomique, afin nanciers, sociaux et d'infrastructure, et de de promouvoir le développement de marchés manière indirecte par les effets de démonstration efficaces. Les articles de convention portant créa- des projets d'investissement dans tous les sec- tion de la SFI stipulent que dans la poursuite de teurs. La MIGA influe sur le climat de l'investis- son objectif d'encourager la croissance d'une en- sement en offrant des garanties contre le risque treprise privée productive, la SFI doit aider à politique, de l'assistance technique aux inter- créer des conditions propices à la circulation des médiaires qui assurent la promotion de l'inves- capitaux privés vers les investissements produc- tissement -- afin de renforcer leurs capacités -- tifs. Par ailleurs, la MIGA a été créée dans le but des outils de diffusion de l'information, et des de faciliter l'acheminement des investissements services de médiation. étrangers directs vers les pays en développement. x x i i i I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Nombre de pays membres du Groupe de la semblent, dans une certaine mesure, être Banque passent de la première génération des propres à chaque pays. réformes (assurer la stabilité macroéconomique Autrement dit, les conceptions institution- et l'intégration commerciale) à la deuxième gé- nelles appropriées ne sont pas complètement nération des réformes (améliorer les fonctions transférables d'un pays à l'autre. Qui plus est, les administratives, juridiques et réglementaires de modalités non conventionnelles sont parfois ef- l'État). Ces réformes de la deuxième génération ficaces. Les stratégies d'amélioration du climat sont cohérentes avec le rôle du secteur public de l'investissement ont pâti du manque de qui consiste à établir un climat d'investissement connaissance sur les types de modalités institu- propice aux activités du secteur privé. Les indi- tionnelles qui seront efficaces dans différents cateurs de performance globale de divers pays environnements, et au sujet du processus dy- en matière de politiques publiques et au niveau namique de changement qui est nécessaire. À ce institutionnel montrent que même si les indi- jour, la recherche et les travaux économiques et cateurs généraux de l'environnement institu- sectoriels du Groupe de la Banque n'ont pas tionnel et des politiques se sont améliorés au suffisamment éclairé les gouvernements clients cours des dernières années dans la plupart des et les services du Groupe de la Banque. économies en développement et en transition, les réformes de seconde génération (ou insti- Adapter les interventions aux besoins tutionnelles) n'en continuent pas moins d'ac- du pays cuser du retard par rapport aux réformes La qualité du climat de l'investissement varie macroéconomiques. Cette situation donne à considérablement d'un pays (et même au sein penser que l'aide du Groupe de la Banque doit du même pays), d'une région et d'une industrie désormais cibler ces secteurs. à l'autre. Cette diversité est attribuable aux condi- Il ressort de l'évaluation réalisée conjointe- tions macroéconomiques qui sont variées, aux ment par l'IEG de la Banque mondiale, l'IEG de progrès accomplis dans le cadre des efforts an- la SFI et l'IEG de la MIGA qu'il existe quatre térieurs de réforme, et au caractère diversifié principaux défis à relever par le Groupe de la des entreprises elles-mêmes. Il s'ensuit que dans Banque dans le cadre de ses efforts visant à ob- l'ensemble global des caractéristiques, aucun tenir de meilleurs résultats dans ses activités re- sous-ensemble unique de priorités ne déter- latives au climat de l'investissement. mine le climat de l'investissement -- chaque pays a ses propres problèmes prioritaires. S'attacher davantage à réaliser des Lors de la formulation des stratégies d'amé- réformes au niveau des institutions qu'à lioration du climat de l'investissement, le Groupe celui des politiques de la Banque doit comprendre les contraintes, Les institutions -- les « règles du jeu » -- sont les opportunités et les structures institution- d'une importance capitale pour assurer la qua- nelles propres à chaque pays. Il est crucial que lité du climat de l'investissement. Pourtant, par le Groupe de la Banque exploite les connais- rapport aux secteurs institutionnels, on en sait sances et les compétences locales pour acqué- plus -- et à ce jour on a fait davantage -- en ce rir une telle compréhension. qui concerne la réforme du secteur macroéco- nomique, financier et commercial. Le programme Économie politique et jalonnement des d'action institutionnel se trouve aux confins des réformes connaissances du Groupe de la Banque sur le La faisabilité de la réforme est fonction de l'éco- processus de développement. Si les principes nomie politique et du processus de réforme, et fondamentaux des bonnes institutions (tels que la durabilité de la réforme est liée à un large l'accès au marché et la concurrence, la protec- appui de la part des parties prenantes. Il convient tion des droits de propriété et l'exécution des que le Groupe de la Banque évalue la capacité contrats) sont bien connus, les modalités insti- des organisations publiques de mettre en oeuvre tutionnelles de la mise en oeuvre de la réforme les réformes ainsi que les mesures prises pour x x i v R É S U M É A N A LY T I Q U E les y encourager, et qu'il soit conscient des ga- L'évaluation s'achève sur les recommandations gnants et des perdants ainsi que de la force po- ci-après, formulées en vue de rendre plus efficace litique des principaux groupes. l'aide du Groupe de la Banque en faveur de l'amé- lioration du climat de l'investissement : Problèmes organisationnels au sein du Groupe de la Banque · Le Groupe de la Banque doit préciser les rôles Le Groupe de la Banque est confronté à des de la Banque, de la SFI et de la MIGA dans les problèmes organisationnels liés au fait que le cli- activités relatives au climat de l'investisse- mat de l'investissement est un sujet large, et à ment, en alignant la stratégie de l'institution la nécessité de travailler avec les secteurs public sur ses pratiques. Au niveau des pays, il est né- et privé. Une meilleure utilisation des avantages cessaire d'améliorer la coordination et la co- comparatifs de la Banque, de la SFI et de la MIGA hérence à l'échelle du Groupe de la Banque aiderait le Groupe de la Banque à mettre plus ef- dans le domaine du diagnostic du climat de ficacement en oeuvre son programme d'action l'investissement, des priorités, du ciblage des sur le climat de l'investissement. Les stratégies résultats, de la stratégie et des besoins en de l'institution doivent être cohérentes les unes matière d'aide. avec les autres, et il convient d'harmoniser les · La Banque doit améliorer l'établissement des stratégies et les pratiques. priorités et la mise au point des réformes du Au niveau de chaque pays, les stratégies rela- climat de l'investissement dans ses opéra- tives au climat de l'investissement doivent être in- tions de prêt, et accorder plus d'attention tégrées à l'échelle du Groupe de la Banque et de aux institutions et à l'économie politique de toutes les unités sectorielles au sein de la Banque. la réforme. À la SFI, les activités d'assistance technique et de · La SFI doit mieux faire connaître les travaux services-conseils, qui sont en expansion rapide, portant sur le climat de l'investissement, et éla- doivent être entreprises sur une base stratégique borer des directives opérationnelles sur l'as- et non en fonction des circonstances. De même, sistance technique et les activités de conseil dans la fourniture de son assistance technique, la ayant trait au climat de l'investissement. MIGA doit suivre une stratégie claire et cohé- · La MIGA doit améliorer l'approche et l'effi- rente de sélection des clients, en vue d'une grande cacité de l'assistance technique, en mettant en efficacité et d'un impact sensible sur le dévelop- oeuvre une stratégie claire de sélection des pement. En outre, la Banque, la SFI et la MIGA doi- clients, en étant plus sélective et en alignant vent toutes les trois mieux suivre l'impact de son programme de travail plus étroitement sur leurs activités sur des améliorations mesurables les priorités et les prêts du Groupe de la du climat de l'investissement. Banque. x x v Resumen L a calidad del clima para la inversión imperante en un país está determi- nada por los riesgos y costos de transacción que conlleva operar en una industria e invertir en ella. Dichos costos, a su vez, están dados por el marco jurídico y normativo, los obstáculos a la entrada y salida del mercado y las condiciones reinantes en éste en materia de trabajo, finanzas, informa- ción, servicios de infraestructura y otros insumos productivos. El Grupo del Banco Mundial respalda la mejora del clima para la inversión en colaboración con los sectores público y privado. El Banco (BIRF/AIF), a través de sus servicios de En los últimos tiempos, el objetivo de mejo- financiamiento y de otro tipo, apoya tanto el rar el clima para la inversión en los países clien- marco general de políticas (apertura y estabilidad tes se ha convertido en una prioridad dentro del macroeconómicas) como las instituciones y po- enfoque del Grupo del Banco Mundial sobre el líticas microeconómicas. La CFI influye en el crecimiento sostenible y la reducción de la po- clima para la inversión a través de la asistencia téc- breza. No obstante, el Grupo del Banco siempre nica y los servicios de asesoramiento que brinda ha dedicado gran parte de su labor a la mejora a los sectores público y privado, y mediante sus de las condiciones para el crecimiento impul- operaciones de inversión, ya sea en forma di- sado por el sector privado. Una elevada propor- recta, al mejorar la calidad y aumentar la cantidad ción del programa de financiamiento del Banco de la infraestructura y los servicios de los secto- se destina a las reformas institucionales y de po- res social y financiero, como en forma indirecta, lítica microeconómica con el fin de fomentar el a través de los efectos de demostración de los pro- desarrollo de mercados eficientes. El Convenio yectos de inversión en todos los sectores. El Constitutivo de la CFI determina que, en cum- OMGI influye en el clima para la inversión me- plimiento de su objetivo de alentar el crecimiento diante el otorgamiento de garantías contra ries- de la empresa privada productiva, la CFI debe ayu- gos políticos, asistencia técnica para el dar a crear las condiciones que propicien el flujo fortalecimiento de la capacidad de los interme- de capital privado hacia inversiones productivas. diarios dedicados a la promoción de inversio- Y el OMGI se creó con el objetivo de facilitar los nes, herramientas de divulgación de información flujos de inversión extranjera directa hacia los pa- y servicios de mediación. íses en desarrollo. x x v i i I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Muchos de los países miembros del Grupo del para otro país. Asimismo, a veces resultan efi- Banco Mundial están superando la etapa de las re- caces los mecanismos poco ortodoxos. Las es- formas de primera generación (logro de la esta- trategias para mejorar el clima para la inversión bilidad macroeconómica e integración comercial) se han caracterizado por la falta de conoci- y se encaminan hacia las de segunda generación miento acerca de qué tipos de organización ins- (mejora de las funciones administrativa, jurídica y titucional darán buenos resultados en diferentes reguladora del Estado). Estas reformas de segunda entornos y acerca del proceso dinámico de cam- generación se refieren al papel del sector público bio que hace falta. Hasta ahora, las investiga- en la creación de un clima para la inversión que ciones y los estudios económicos y sectoriales fomente la actividad del sector privado. Los indi- del Grupo del Banco Mundial no han brindado cadores multinacionales de desempeño general de orientación suficiente a su personal ni a los go- las políticas e instituciones revelan que, si bien los biernos clientes. indicadores generales del entorno institucional y de políticas han mejorado en los últimos años en Adaptación de las medidas a las el caso de la mayoría de las economías en transi- necesidades de cada país ción y en desarrollo, las reformas de segunda ge- La calidad del clima para la inversión varía con- neración (o institucionales) aún van a la zaga de siderablemente de un país a otro (e incluso den- las macroeconómicas. Esto indica que, en este tro de cada país) y de una región o industria a momento, la asistencia del Grupo del Banco Mun- otra. Esta diferencia se debe a las distintas cir- dial debería centrarse en estas áreas. cunstancias macroeconómicas, a los avances lo- En la evaluación conjunta llevada a cabo por los grados gracias a programas anteriores de reforma GEI del Banco Mundial, la CFI y el OMGI se iden- y a la disparidad entre las empresas. Por consi- tificaron cuatro desafíos principales que encara el guiente, no hay un conjunto único de priorida- Grupo del Banco Mundial en sus esfuerzos por lo- des dentro del grupo más amplio de grar mejores resultados en las actividades rela- características que determinan el clima para la in- cionadas con el clima para la inversión. versión; las prioridades son específicas de cada país. Meta primordial: las reformas A la hora de elaborar estrategias de mejora del institucionales más que las reformas clima para la inversión, el Grupo del Banco Mun- de políticas dial debe entender las limitaciones y oportuni- Las instituciones (las "reglas del juego") son cru- dades propias de cada país, así como sus ciales para la calidad del clima para la inversión. No estructuras institucionales específicas. Es crucial obstante, se sabe más sobre la reforma macroe- que el Grupo del Banco Mundial amplíe su com- conómica, del comercio y del sector financiero (y prensión del tema valiéndose de los conoci- hasta ahora se han alcanzado más logros en esas mientos y pericia locales. esferas) que acerca del área institucional. El pro- grama de reformas institucionales se encuentra en Economía política y la secuencia de las el límite del conocimiento del Grupo del Banco reformas Mundial sobre el proceso de desarrollo. Si bien se La viabilidad de la reforma depende de la eco- reconocen claramente los principios básicos de nomía política del proceso que entraña, y su sos- toda buena institución (como el acceso al mercado tenibilidad estriba en el logro de un amplio apoyo y la competencia, protección de los derechos de de las partes interesadas. El Grupo del Banco propiedad y cumplimiento de contratos), los me- Mundial debe evaluar la capacidad y los incenti- canismos institucionales necesarios para llevar a vos con que cuentan las organizaciones del sec- cabo la reforma parecen ser en cierta medida es- tor público para llevar a cabo las reformas. Debe pecíficos de cada país. asimismo saber quiénes probablemente habrán de En otras palabras, no se puede aplicar en un ganar o perder con el proceso y conocer la fuerza país la misma estructura institucional adecuada política de los grupos clave. x x v i i i R E S U M E N Desafíos para la estructura orgánica asistencia que brinda el Grupo del Banco Mundial interna del Grupo del Banco Mundial para mejorar el clima para la inversión. Dichas re- La amplitud del tema del clima para la inversión comendaciones son las siguientes: y la necesidad de trabajar tanto con el sector pú- blico como con el privado genera desafíos para la · El Grupo del Banco Mundial debería aclarar la estructura orgánica interna del Grupo del Banco función del Banco, la CFI y el OMGI en las ac- Mundial. Un mejor aprovechamiento de las ven- tividades relativas al clima para la inversión, y tajas comparativas del Banco, la CFI y el OMGI le lograr la armonización de la estrategia del Grupo ayudarían a obtener mejores resultados en su con la práctica. A nivel de los países, es preciso programa de mejora del clima para la inversión. aumentar la coordinación y la coherencia en Las estrategias del Grupo del Banco Mundial todo el Grupo del Banco Mundial en lo que res- deben ser coherentes entre sí, y se deben armo- pecta al diagnóstico del clima para la inversión, nizar con la práctica. las prioridades, el enfoque en los resultados, la Por otro lado, las estrategias relativas al clima estrategia y la asistencia prestada a tal fin. para la inversión a nivel de los países deben in- · El Banco debería fijar mejor las prioridades e tegrarse a nivel de todo el Grupo del Banco Mun- incorporar las reformas relativas al clima para dial, así como a nivel de todas las unidades la inversión en sus operaciones de financia- sectoriales dentro del Banco. En la CFI, las acti- miento. Asimismo, debería prestar más aten- vidades relacionadas con asistencia técnica y los ción a las instituciones y a la economía política servicios de asesoramiento, en rápida expansión, de las reformas. deben brindarse en función de una estrategia y no · La CFI debería conceder mayor relevancia a la en forma ad hoc. Análogamente, la asistencia téc- labor relativa al clima para la inversión y debería nica prestada por el OMGI debe seguir una es- elaborar directrices operacionales para la asis- trategia clara y coherente para la selección de tencia técnica y el asesoramiento relaciona- clientes, a fin de asegurar un nivel alto de efica- dos con esta esfera. cia e impacto en términos de desarrollo. Y las tres · El OMGI debería mejorar el enfoque y la eficacia instituciones que integran la organización deben de la asistencia técnica mediante la aplicación realizar un mejor seguimiento del impacto de de una estrategia clara de selección de clien- sus actividades sobre mejoras medibles en el tes, una mayor selectividad y una mayor ar- clima para la inversión. monización de su programa de trabajo con las La evaluación concluye con varias recomen- prioridades y el financiamiento del Grupo del daciones destinadas a aumentar la eficacia de la Banco Mundial. x x i x ACRONYMS AND ABBREVIATIONS AAA Analytical and advisory activities ADR Alternative dispute/disorder resolution ADRE Annual Review of Development Effectiveness ARIS Romanian Agency for Foreign Investment AsDB Asian Development Bank BEE Business-enabling environment BiH Bosnia and Herzegovina CAE Country Assistance Evaluation CAS Country Assistance Strategy CIC Investment Climate Department CODE Committee on Development Effectiveness COI Conflict of interest CPIA Country Policy and Institutional Assessment DO Development outcome EBRD European Bank for Reconstruction and Development EFW Economic Freedom of the World ESW Economic and sector work EU European Union FDI Foreign direct investment FIAS Foreign Investment Advisory Service FRR Financial rate of return FSAC Financial sector adjustment credit GDP Gross domestic product HFO/WSJ Heritage Foundation/Wall Street Journal IBLF International Business Leaders' Forum IBRD International Bank for Reconstruction and Development (World Bank) IC Investment climate ICA Investment Climate Assessment ICR Implementation Completion Report ICRG International Country Risk Guide IDA International Development Association IEG Independent Evaluation Group IFC International Finance Corporation IICCR Institutional Investor Country Credit Risk Rating IO Investment outcome IPA Investment Promotion Agency IPI Investment Promotion Intermediary IPP Independent power producer M&E Monitoring and evaluation MFI Multilateral financial institutions x x x i I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E MIGA Multilateral Investment Guarantee Agency MIGIM MIGA's Investment Marketing Services Department NATO North American Treaty Organization OECD Organisation for Economic Co-operation and Development OPCS Operations Policy and Country Services (World Bank) PAS Policy and advisory services PDF Project Development Facility PDS Project data sheet PEP Private Enterprise Partnership PIBL Private Sector Institution Building Loan PIM Project impact monitoring PREM Poverty Reduction and Economic Management (World Bank Network) PSA Private Sector Assessment PSAL Private Sector Adjustment Loan PSAS Private sector advisory services PSD Private sector development PSRP Poverty Reduction Strategy Paper RBM Results-based management RDA Romanian Development Agency RPED Regional Program for Enterprise Development SEED Southeast Europe Enterprise Development SME Small and medium-size enterprise SOE State-owned enterprise TA Technical assistance TAAS Technical assistance and advisory services TATF Technical Assistance Trust Funds UNDP United Nations Development Programme UNICE Union of Industrial and Employers' Confederations USCIB U.S. Council for International Business VBF Vietnam Business Forum WBES World Business Environment Study WBG World Bank Group XPSR Expanded Project Supervision Report OED has changed its official name to Independent Evaluation Group (IEG)-World Bank. The new designation "IEG" has been inserted in all of IEG's publications, review forms, databases, and Web sites. x x x i i Part I Overview 1 Introduction A country's investment climate (IC) is its environment for private sec- tor activity. The risks and transaction costs of investing in and operat- ing a business determine the quality of the investment climate. These costs, in turn, are determined by the legal and regulatory framework; barri- ers to entry and exit; and conditions in markets for labor, finance, informa- tion, infrastructure services, and other productive inputs. Governments influence the quality of their designed to improve the investment climate, country's investment climate through policies, IFC investment operations and IC-related institutions, and their relationships with the technical assistance and advisory services private sector. The impact of better investment (TAAS), and MIGA guarantees and technical climates on private sector activity--and thus on assistance (fiscal 1998­2003).2 The evaluation economic growth and employment--links the addresses the following questions: quality of the investment climate to poverty reduction. · Strategic approach. What was the World The Investment Climate Study is a joint Bank Group's (WBG's) strategic approach to evaluation by the Independent Evalu- improving investment climates? How has this ation Group (IEG, covering the activities of the strategy been implemented? International Bank for Reconstruction and · Relevance of WBG assistance. Has the WBG Development [IBRD]/International Develop- emphasized the right things in its IC work? ment Association [IDA], the International How did the WBG's approach to the invest- Finance Corporation [IFC], and the Multilateral ment climate compare with current thinking Investment Guarantee Agency [MIGA]). This on the determinants of investment and growth overview summarizes their combined findings and with the obstacles to investment as per- and recommendations. ceived by private investors? · Effectiveness of WBG assistance. What Evaluation Scope and Design have been the outcomes of WBG IC activities? The evaluation spans the 10-year period of Has the WBG been effective in motivating gov- fiscal 1993 through 2002­3 and covers ernments to undertake IC reforms beyond IBRD/IDA lending and nonlending services what they would have done in the absence of 3 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E intervention? What has been the impact of specific. An institutional arrangement that is WBG interventions on the quality of invest- successful in one country does not necessarily ment climates in client countries and on their transfer well to another without modification, investment and growth? and unorthodox arrangements sometimes work. · Sustainability. What is required for IC im- In addition, different aspects of the invest- provements to be sustained? ment climate matter for different firms, · Organizational issues. Does the WBG's or- because firms are diverse. Interviews with ganizational structure support good IC work? international investors conducted for this evaluation confirmed that IC conditions in host The Investment Climate, Investment, countries matter, but there are firm-specific and Growth global strategic factors that influence invest- The investment climates of developing and ment decisions, such as the size of the transition economies have improved modestly in domestic market, low labor costs, and the recent years. The greatest improvements were in actions of competing firms. Enterprise surveys transition economies (which started from a low show that firms that are private, newer, and base), including those that aspired to accession smaller; that are not recipients of foreign direct to the European Union. Ratings of the quality of investment (FDI); and that cater to the policies and institutions are higher for macroeco- domestic market report more acute business nomic conditions (macroeconomic manage- constraints than do firms that are older and ment, financial stability, and revenue stability) larger, that export, that have FDI, or that are than for many institutional areas (property State owned. rights, public administration, transparency, and The importance of the investment climate rules-based governance), suggesting that these for enterprise performance is also evident in latter areas deserve attention. IFC investment operations. Based on the IEG's 2003 Annual Review of Development measure of investment climate it used Effectiveness (IEG-World Bank 2004) shows regularly, IFC achieved higher development that policies and institutions matter a great deal and investment success rates when the invest- in bringing about improved social indicators ment climate improved from being high risk to and the growth of per capita income. In turn, being middle risk between project approval empirical research shows that growth is the key and evaluation. When the investment climate driver for poverty reduction, suggesting that deteriorated, success rates dropped below policies and institutions that promote broadly average.4 based growth are central to the pro-poor IFC also achieved better investment out- growth agenda (see, for example, Kraay 2004). comes in countries with good investment The literature review conducted for this study climates at the time of either approval or delves deeper into the relative importance of evaluation; that is, both IC quality and its policies and institutions.3 Recent studies have direction of change are associated with IFC found that institutions generally prevail over investment outcomes, suggesting a robust, geography and policies in explaining cross- positive relationship between the investment country differences in income. Macroeconomic climate and investment success. Moreover, and structural reforms are necessary certain aspects of the investment climate were conditions for growth, but modern institutions highly correlated with investment success: are necessary to sustain it. trade openness, a dynamic banking and Certain "good practice" principles--such as finance sector, effective government regula- transparency, accountability, competition, rule of tion, and the absence of black markets. These law, and protection of property rights--apply to results are consistent with other recent IEG- all institutional arrangements. The institutional IFC evaluations. arrangements needed to implement these IEG-IFC interviews with IFC clients in five principles, however, are somewhat country case study countries indicated that their invest- 4 I N T R O D U C T I O N ment decisions responded to opportunities bureaucratic processes, weak institutions, such as access to domestic and foreign markets, inefficient judicial system, and underdeveloped strategic location, and favorably priced inputs financial markets. Although IFC clients appreci- such as raw materials and labor. On the negative ated investment incentives, they did not think side, many respondents expressed frustration that those incentives influenced their decisions with the host country's regulatory framework, to invest. 5 2 World Bank Group Strategy, Activities, and Outcomes The Investment Climate in the World Bank Group U nder different names, the investment climate was a part of Bank pri- vate sector development (PSD) strategies throughout the 1990s. Recently, however, the subject has risen to become one of the two pillars of the WBG's corporate strategy for reducing poverty and occupies center stage in the 2002 WBG Private Sector Development Strategy. The increased prominence of the investment governance, and financial sector issues. In Latin climate at the corporate level is mirrored in the America and the Caribbean, CASs emphasize shift in Country Assistance Strategies (CASs) in regulatory and judicial reform and enterprise the past decade from first-generation macro- competitiveness far more than in other Regions. level reforms (macroeconomic stability and trade In Europe and Central Asia, property rights, liberalization) to second-generation microlevel judicial reform, bankruptcy law, and access to reforms (including improvements in the finance are top priorities. The differences across administrative, legal, and regulatory functions of Regions reflect the diversity of constraints that the State). This "macro first, micro second" firms face, varying progress in broader policy sequencing was not so much a planned strategy areas (privatization and financial sector reform) as it was the result of the disappointing supply and dissimilar macroeconomic contexts. response to first-generation reforms. The Bank The importance the IFC gives to improving has become increasingly aware of the investment climates has grown in the past importance of institutional reform to sustained decade--particularly from 2000 to 2004--in growth. This shift in focus was appropriate and parallel with its frontier strategy and focus on well supported by the literature. high-impact strategic sectors. Its 2004 internal Although CASs in all Regions show a trend strategic directions document points out that, toward second-generation reforms, the relative although IFC has been focusing on frontier emphasis given to different institutional themes countries and markets: varies by Region. In East Asia, for example, follow- ing the economic crisis of the late 1990s, CASs It is becoming increasingly clear that to give priority to corporate restructuring, corporate meet the challenges in these markets, IFC 7 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E will have to . . . scale up its provision of and the private firms themselves (figure 2.1). technical assistance and advisory services Through its lending and nonlending services, the and . . . take a more proactive approach to Bank addresses the broad policy environment project development. IFC's technical assis- (macroeconomic stability and openness), as well tance and advisory services will continue as microeconomic policies and institutions. IFC to focus on both governments and private influences the investment climate through its industry to improve the framework for in- TAAS to both the public and private sectors and vestment and increase the capacity of busi- through its investment operations directly, by nesses (mostly small- and medium-scale increasing the quantity and quality of infrastruc- enterprises) to thrive and grow. ture, financial, and social sector services; indirectly, through the demonstration effects of At the country level, an increasing number of investment projects in all sectors. MIGA influences joint CASs contain combined Bank and IFC investment climate through political risk guaran- strategies to improve the investment climate tees, technical assistance for capacity building of (the Annex illustrates joint Bank/IFC CASs investment promotion intermediaries, online with three examples: Mozambique, Peru, and information dissemination tools, and legal and Romania). mediation services. The Bank, IFC, and MIGA bring to bear a variety Figure 2.2 gives an idea of the Bank, IFC, and of instruments that influence the investment MIGA shares of WBG IC activities. The Bank's climate through policies, institutions (understood lending for IC objectives, broadly defined, to mean the "rules of the game," including the accounted for an average of 68 percent of WBG legal and regulatory framework), organizations, IC activities for fiscal 1998­2002;5 IFC invest- Figure 2.1: WBG Investment Climate Activities IBRD/IDA IFC Lending and AAA for Policies Investment financing policy reform (macro, for demonstration trade) Institutions/ effects (mainly) Organizations Lending for institutional reform Firms TA to public sector (legal and regulatory on legal and framework, corporate regulatory issues, governance, financial capacity building sector development, and so on) TA to private sector for capacity building ESW on IC topics, survey-based diagnostics Guarantee operations TA to investment- MIGA and information promotion agencies dissemination tools for capacity building Note: AAA = analytical and advisory activities; TA = technical assistance; ESW = economic and sector work. 8 W O R L D B A N K G R O U P S T R AT E G Y, A C T I V I T I E S , A N D O U T C O M E S Figure 2.2: Annual Volume of WBG IC Activity (annual average, fiscal 1998­2002, US$ millions) All-IC activities IC-related technical assistance and advisory activities IFC investments $3,640m MIGA guarantees $1,393m Combined TA World Bank AAA $186.2m $163m IFC TAAS $17m MIGA TA $6.2m World Bank lending $10,855m Note: IC = investment climate; TA = technical assisstance; AAA = analytical and advisory activities; TAAS = technical assistance and advisory services. ments (in all sectors) accounted for another 23 provides advice informally to governments and percent and MIGA guarantees for 9 percent. A the private sector through discussions, sharing small share--an estimated $186 million yearly, of information, and in-country seminars. or 1 percent of the total--was devoted to all The Bank's economic and sector work has types of technical assistance, advisory services, helped motivate IC reform in many countries. and economic and sector work (ESW) of the Nevertheless, more work needs to be done in three organizations.6 A breakdown of this some areas to provide guidance to clients as combined technical assistance again shows the well as to Bank staff in designing reforms. Bank accounting for the largest share (88 Knowledge about good practices in institu- percent), followed by the IFC (9 percent)7 and tional design or the dynamic process of MIGA (3 percent). The sections below describe changing institutions is insufficient. It would be these activities in more detail and evaluate their useful to have a typology of country situations effectiveness in improving investment climates. and institutional designs that would provide guidance on (a) which types of arrangements World Bank work where--in other words, an understand- ing of what types of institutional arrangements Nonlending services can be "exported" from one country to Analysis of IC topics is frequently part of both another, (b) how the change process happens, economic and sector reports. During fiscal and (c) how the change process can be 1993­2003, more than 300 reports were supported and sustained. The Bank's directed toward one or more core IC themes. economic and sector work and research have The Bank also has developed diagnostic tools not yet provided enough of this knowledge. to assess the quality of a country's investment Diagnostic work on the investment climate climate and the constraints facing private has evolved toward greater use of enterprise enterprises. In addition to these formal vehicles surveys to provide information on the of nonlending assistance, the Bank also constraints to PSD as perceived by firms. The 9 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E most recent versions of standardized diagnos- picture for countries with heavier reliance on tic tools--the IC assessment and the survey the informal sector.8 instrument on which it is based, the IC survey--do a good job of benchmarking indica- Lending operations tors of the quality of a country's investment The Bank's IC lending operations were identi- climate in a way that allows cross-country fied for this evaluation using a set of "core" and comparisons as well as the monitoring of "non-core" IC themes to describe the changes in individual countries over time. objectives of each project.9 According to these Some clients, however, have complained that definitions, a large share of the Bank's lending these assessments duplicate earlier work and relates to IC reform. Projects that have core or that the surveys are similar to existing surveys non-core IC themes as primary or secondary conducted by governments, think tanks, and objectives of the project (labeled "All-IC" in other donors. This duplication is perhaps an figure 2.3) accounted for 45 percent of all Bank inevitable consequence of the Bank's objective projects and 52 percent of project value during of using IC surveys to build a global IC fiscal 1993­2003. Core IC projects (those with database, but the Bank may need to clarify that one or more of the five core IC themes as a objective to clients to manage expectations. primary objective of the project) accounted for Other problems with IC diagnostics carried 14 percent of all Bank projects. Many projects, out during the review period have been (a) lack however, have both IC and non-IC objectives; of prioritization of problems and their IC components are often only a part of larger proposed solutions and (b) excessive focus on projects (for example, regulatory reforms in the manufacturing sector, urban areas, and macroeconomic adjustment loans). This means formal sector firms as opposed to rural areas that the size of IC lending is smaller than overall and the informal sector. The most recent IC project volumes suggest. assessments have begun to address these Figure 2.3 underscores that IC lending has problems. Although enterprise surveys provide always been a large part of what the Bank does. valuable information on the perspectives of the At the same time, the WBG's increased strategic private sector, the views of business on public focus on the investment climate, contained in policies should balance other economic and corporate and sector strategies as well as in social perspectives when formulating policy CASs, has not been accompanied by an increase recommendations. in the share of lending devoted to this objective. The PSD Vice Presidency's Doing Business Although both core investment climate and all Project has, more recently, begun gathering IC lending have varied (notably during the East data on the costs of doing business in a large Asian crisis of 1997­98), neither share of lending number of countries (145 according to Doing that supports IC objectives shows an observable Business 2005). Surveys of experts, rather than trend in the past 10 years. Nor has the composi- firms, gather information; most indicators are tion of IC lending shown much change. Of the structured around a hypothetical firm to allow five core IC themes, regulation and competition comparisons across countries. The Doing policy has been--and remains--by far the Business Project has received high marks from dominant theme. Other areas--judicial reform, external audiences as well as WBG staff for property rights, and corporate governance-- providing, for the first time, objective indica- received less emphasis, both in the early and tors of the costs of regulation and administra- later years of the fiscal 1993­2003 period. Across tive procedures. At the same time, it is non-core IC themes, infrastructure for PSD and important to recognize some of the limitations other financial and PSD accounted for two- of the methodology. Because countries differ in thirds of the projects in fiscal 1993­2003. The optimal firm size and structure, estimating the importance of the latter theme declined in the time required to set up a "straw firm" provides period, and infrastructure for PSD is now the comparability but may provide an incomplete dominant theme in non-core IC lending. 1 0 W O R L D B A N K G R O U P S T R AT E G Y, A C T I V I T I E S , A N D O U T C O M E S Figure 2.3: The IC Share of World Bank Lending (percent) 80 70 60 50 40 Percent 30 20 10 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Fiscal year Value: Core IC Value: All-IC Number of projects: Core IC Number of projects: All-IC Performance sample of projects showed that, when the The performance of IC projects and IC outcomes of IC components differed from project components was mixed during fiscal overall project outcomes (found in 20 percent 1993­2003. Completed core IC projects of the sample analyzed), the IC components performed better than the Bank average: usually performed worse. A number of factors Outcome ratings for 81 percent of core IC contributed to disappointing outcomes: an projects were moderately satisfactory or apparent lack of attention and supervision when better, compared with 77 percent for all Bank IC objectives were a minor part of a larger projects. Outcomes were worse in low- project, lack of government ownership and income countries than in middle-income commitment, complex or overly ambitious countries (79 percent moderately satisfactory project design, lack of overall institutional or better in low-income countries, compared capacity, and political or social factors that had with 83 percent in middle-income countries). been underestimated at project appraisal. Outcomes of IC operations are positively Outcome ratings for core IC projects correlated with indicators of macroeconomic improved slightly during the decade: 81 and financial sector performance, although no percent of core IC projects were moderately evidence indicates causality from operations to satisfactory or better during fiscal 1994­98, a economic performance. number that rose to 82 percent during fiscal IEG-World Bank outcome ratings are assigned 1999­2003. The performance of the overall to the project as a whole, so the outcomes of Bank portfolio, however, improved signifi- individual project components may differ from cantly in the same period, from 78 percent in the overall rating. A more detailed analysis of a fiscal 1994­98 to 83 percent in fiscal 1999­2003. 1 1 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Thus, the performance of IC lending has deteri- of senior political leaders, other stakehold- orated relative to the average for Bank lending. ers--professional civil servants, business An analysis of IEG-World Bank's Implementa- groups, and the public--were critical to sus- tion Completion Report reviews suggests that taining reforms. more recent IC projects were more heavily · The implementation of reforms would focused on long-term institutional reforms that get bogged down at lower levels of bu- were more vulnerable to the political economy reaucracy if incentives were not changed. of reform, implementation and enforcement Professional civil servants have been essential shortcomings, and gaps in the capacity of to the success of reform efforts. The respon- public sector agencies. A greater share of the sibility for the implementation of regulatory and earlier projects involved reforms for which administrative reforms often ran across a large good practice was better understood (for number of government agencies and depart- example, privatization transactions and ments. Senior civil servants needed to under- financial sector reforms). stand, support, and assume ownership of The country case studies prepared by IEG- reforms. World Bank provide lessons on what worked · Modest, piecemeal efforts have been less and what did not, the factors that led to success successful than a comprehensive set of re- and failure, and lessons that can be generalized forms. Reform programs that were meaning- to the Bank's IC activities.10 ful, coordinated, and sustained were more likely to be successful. Evidence from the coun- · Often, crisis or opportunity has politi- try case studies shows that, in some countries, cally enabled IC reform. Urgency frequently the reforms undertaken were not sufficient to motivated decisions by policy makers to take reduce administrative and regulatory con- the measures necessary to improve the in- straints to investment. The Bank's support was vestment climate: on the negative side, by cri- too modest, too piecemeal, and too inconsis- sis (macroeconomic, financial, political, and tent to get the job done. so on) or on the positive side, by opportunity (the prospect of joining regional agreements, From different angles, the components of taking advantage of new technologies, and so IEG-World Bank's evaluation come to the same on). The Bank has been successful in sup- conclusion: Institutions are key to the quality porting reforms in both these situations. of the investment climate, and supporting · Loan conditionality was sometimes helped institutional reform is a critical challenge for by strengthening the hand of reformers. the Bank. The literature review provides No country's government is monolithic. At any evidence that cross-country differences in the time, individuals within the government--top quality of institutions explain a large share of political leaders, senior government bureau- the differences in growth and may even prevail crats, party officials, and various formal and in- over other growth determinants. The case formal advisors--will support certain reforms, studies confirm this view by providing and others will oppose them. The Bank's loan examples of countries where the Bank paid conditionality has played an important role in insufficient attention to institutional the political economy of reform in several case weaknesses, and as a result had little impact on study countries by strengthening the position the investment climate. In addition, slower- of reform-minded policy makers and other than-average improvement in the IC loan stakeholders against those opposed to reform. portfolio resulted from the increased concen- · Local champions often initiated reforms, tration of IC projects on complex, politically but broad support was necessary to sus- sensitive institutional reforms that take time to tain them. It was important to have the back- achieve results. ing of key politicians to spur reform. However, At the same time, institutional reform is on the although much attention was paid to the role frontier of the Bank's knowledge of the develop- 1 2 W O R L D B A N K G R O U P S T R AT E G Y, A C T I V I T I E S , A N D O U T C O M E S ment process. Although the basic principles of used the PSD impact rating, one of four indica- good investment climates are well recognized tors included in the Expanded Project Supervi- (for example, market access and competition, sion Report framework, in determining an protection of property rights, and contract investment project's development outcome. enforcement), the institutional arrangements for For projects approved during 1993­97, 73 carrying out these principles seem to be country percent had satisfactory or better PSD impact specific to some degree. Strategies for improving ratings. the investment climate in individual countries The PSD impact indicator has several have suffered from a lack of knowledge about potential components for any given project. The what types of institutional arrangements will "demonstration effect" is often high for projects succeed in different environments and the that serve as role models or lead to related necessary dynamic process of change. investments. Pioneering or "first of its kind" projects have, by definition, strong demonstra- International Finance Corporation tion effects. Another important component is "business linkages"--for example, project- Investment operations related upstream or downstream supply chain Although all successful investment projects may linkages that help create or support a network have positive impacts on the investment of business infrastructure. The PSD impact climate, IFC investments in strategic sectors rating also includes skills and knowledge (infrastructure, financial, and social sectors) transfer and provision of infrastructure services contribute to improving investment climates by and direct impacts on the enabling environment directly addressing some of the major factors such as changes in the legal and regulatory conducive to promoting private investments. regime. Several studies, business surveys, and literature reviews show that the quality and quantity of Noninvestment operations infrastructure services are important determi- IFC's IC-related TAAS focused on identifying nants of investment decisions and operating and removing specific constraints to invest- success. IFC's strategic sector projects deliver ment (usually by sector) and other bottlenecks services that private participants alone are (institutional, administrative, and so on) that unable to provide. In addition, IFC's invest- impede investment.11 The main clients for IC ments in all sectors can have an indirect effect TAAS were governments; some activities were on the investment climate through demonstra- directed at private sector clients--for example, tion effects, transfer of technology and expert- to build their capacity to engage in policy ise, improvements in management skills and dialogue with the government. company governance, and linkages with the IFC conducted 655 IC TAAS operations for a domestic economy. total cost of $167 million during fiscal IFC approved $36.2 billion in investments 1993­2002 (38 percent of all IFC TAAS activities during fiscal 1993­2003. Half of the volume in volume). The Private Enterprise Partnership, ($18.6 billion) was in IFC's high-impact "strate- IFC's donor-supported technical assistance gic" sectors: infrastructure (utilities, transport, program in the former Soviet Union, accounted and information), financial markets, and the for about half of IC TAAS in volume. The social sectors. As IFC has pursued its frontier amount of IC TAAS grew significantly in strategy, the volume of investments in countries volume, number of projects, and diversity of with poor investment climates has risen. In instruments and activities in the past decade. fiscal 1993, 52 percent of investment approvals Excluding this partnership, increased IFC (by volume) were in poor IC countries; by fiscal investment department activity--financed 2003, this share had risen to 57 percent. mainly by the Technical Assistance Trust Fund To evaluate the impact of investment and by growth in Foreign Investment Advisory operations on the investment climate, IEG-IFC Service (FIAS) activity--has dominated the 1 3 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E growth of IC TAAS since 1996 (figure 2.4). Since sector-specific IC improvements to develop a fiscal 2000, modest increases were attributable pipeline of projects they can potentially to the joint Bank/IFC Small- and Medium-Scale finance. TAAS has grown in response to specific Enterprise Department and to IFC Project needs and opportunities but, unlike invest- Development Facility activities. ment operations, has not fallen under Most of the growth in IFC's IC TAAS was for corporate-level priority setting, performance advice on specific sector legislation and capacity measurement, or related incentives. In transi- building. More recent IC TAAS projects have tion and frontier countries with small private incorporated capacity-building components, sectors and limited prospects for IFC-financed either as part of a policy advisory project or projects, IFC tended to provide more IC TAAS alone (for example, through the Small- and to create opportunities for private participation Medium-Scale Enterprise Department's policy in general, with less emphasis on paving the advocacy and corporate governance assistance). way for specific future IFC projects. Recent growth in general IC advice has been Noninvestment departments (the joint brought about by an increase in FIAS adminis- Bank/IFC FIAS, Private Sector Advisory Services, trative barriers studies as well as small- and Project Development Facilities [PDFs], and medium-scale enterprise mapping exercises. Small- and Medium-Scale Enterprise Depart- Consistent with IFC's frontier strategy, most of ment) have developed projects and programs IFC's IC TAAS operations were in countries with that are relatively independent from one poor investment climates. another, from the IFC's investment depart- In general, IEG-IFC finds that IC TAAS work ments, and from the Bank's country depart- has not been strategically planned, and the ments. Country-level program managers rarely work done by investment departments has have accountability for planning, prioritizing, often been driven by their desire to make coordinating, and overseeing implementation Figure 2.4: IFC IC­Related Technical Assistance and Advisory Services (US$ millions) IC TAAS by volume, excluding PEP 14 12 10 8 investment departments millions Non 6 US$ 4 2 Investment departments 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Investment Department through TATF PDFs FIAS SME Department PSAS Note: TATF = Technical Assistance Trust Fund; SME = small- and medium-scale enterprise; PSAS = private sector advisory services; PEP = Private Enterprise Partnership. 1 4 W O R L D B A N K G R O U P S T R AT E G Y, A C T I V I T I E S , A N D O U T C O M E S of IFC's IC work during the review period. Ratings for the implementation of Project-level monitoring and evaluation of IC recommendations (outcomes) and the final TAAS operations is relatively recent or being impacts of assistance were lower than for the introduced; similarly, it has not been well quality of assistance. Forty-six percent of respon- coordinated at the corporate level across TAAS dents indicated that IFC's advice was largely providers. implemented, 29 percent said it was im- It is difficult to attribute follow-up invest- plemented in part, and 19 percent indicated ments to IC TAAS, in part because little almost no implementation of the major monitoring has taken place on which to base recommendations. Barriers to implementation evaluation. More generally, establishing causal- included poor dissemination, weak institutional ity links from the quality of TAAS delivery to capacity of government counterparts, opposi- outcomes in terms of implementation of tion from influential interest groups, and politi- recommendations to impacts on the ground is cal infighting. Implementation was more likely problematic without good monitoring data. when the TAAS was teamed with follow-up Changes in policies, laws, and practices--or programs--including lending conditionality by their failure to materialize--often result from the Bank or other donors--supported by private numerous actions or from the inaction of sector associations, public-private working various stakeholders and other internal and groups, and/or an influential local champion. external forces. The most important themes that emerged from IEG-IFC evaluated IFC's noninvestment IC discussions with stakeholders on projects TAAS activities through field visits to five evaluated by IEG-IFC include the following: countries. The evaluation covered the (a) quality of the TAAS ("input"), (b) implementation of · Strong client commitment to reform and a po- recommendations ("outcome"), and (c) changes litical "champion" with staying power were on the ground associated with implementation necessary for inducing change. of recommendations ("impact"). Interviews were · Major stakeholders (across the public sector, conducted with interviewed and/or surveyed private sector, and donor community) should people familiar with specific assignments, such be involved early. Proactive outreach and en- as clients, task managers, investment officers, gagement of stakeholders throughout execu- partners, consultants, business associations, and tion (for example, dissemination in the local other donors. language, participatory workshops, and so on) Nearly all interviewees expressed full and shared commitment to an action plan satisfaction with the overall quality of were critical to moving the reform process for- execution: 76 percent of responses rated the ward sustainably. quality of IFC investment climate TAAS as · Implementation was enhanced through fol- satisfactory, and 16 percent rated it as excellent. low-up projects and capacity-building compo- They viewed the speed and timeliness of IFC's nents. A strong local presence and/or network assistance as more in line with commercial were necessary to keep issues alive and the re- standards, compared with other donor- form process moving forward. Partnerships providers. Although IEG-IFC found only with donors and other stakeholders, based on minimal execution quality issues in the small a shared vision of desired outcomes and sample, it observed that in many instances the impacts, were very important for leveraging re- investment officer or task manager was the only form efforts. representative of the IFC responsible for finaliz- ing consultants' inputs and presenting the Similar conclusions emerged from the 1998 report under the IFC logo. Without any well- IEG-IFC evaluation of FIAS and an analysis of data structured quality-control mechanism in place, from FIAS's Project Implementation Monitoring IFC runs a reputational risk that the advice System. Implementation rates were lower for might be inappropriate or of low quality. technical assistance that was broad in scope, 1 5 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E compared with more narrowly defined or sector- 2004, MIGA supported more than 400 projects specific advice. Project follow-up was also in 85 countries for a total exposure of $12.8 important and identified as one of FIAS's weakest billion. These projects were associated with characteristics, although recent client surveys investment flows of $51 billion. In the past few have shown improvement. The Private Enterprise years, MIGA has become increasingly active in Partnership model incorporates many elements countries with poor investment climates. of good practice, including substantial program follow-up, local stakeholder involvement, and Technical assistance capacity-building components. The IFC-managed MIGA offers capacity building to investment PDFs have undertaken only limited IC TAAS. promotion intermediaries (IPIs). Working with Preliminary evaluative assessments of the facili- government agencies, MIGA assists IPI strategy ties were not able to conclude how effective these development (such as needs assessments, activities were or whether their benefits justified strategic plans, and marketing plans) and their costs. provides promotion support tools (investor In the past year, IFC management has begun information systems, information technology to implement two important initiatives to (a) system tools, contact relationship manage- develop a more strategic approach to developing ment, and promotional materials) and staff and delivering technical assistance and (b) within training. a results-based management framework, set up a MIGA's strategy for selecting technical monitoring and evaluation system for IFC's assistance clients and focusing its activities has rapidly growing TAAS business line. Senior frequently changed. In 2002 MIGA identified management has endorsed these initiatives and several criteria for prioritizing technical implementation was expected to take place in assistance among countries and organizations, fiscal 2005. including countries with (a) low income; (b) a reasonably attractive investment environment; Multilateral Investment Guarantee (c) strong government commitment to the goal Agency of attracting FDI, demonstrated by providing MIGA's mandate is to facilitate FDI flows to adequate funding; and (d) ability to absorb developing countries through guarantee and support. Based on these criteria, MIGA technical assistance activities but does not explic- developed a tiered assistance approach with a itly encompass IC issues. different menu of services targeted to each country category, but it was never formally Political risk guarantees adopted as the basis for client selection. In MIGA offers insurance against certain political 2003 MIGA introduced additional criteria risks that are a subset of IC issues. Although its relating to investor interest to provide an active guarantees do not directly address IC issues market for MIGA guarantees and complemen- (because MIGA does not normally work with tarity with WBG strategies for PSD. Despite governments in its guarantee operations), these stated priorities, MIGA has never limited MIGA projects can affect the investment itself to working within the framework of the climate through demonstration effects and tiered approach. Client selection has been linkages to the local economy. demand driven for diagnostic needs assess- MIGA has made some progress toward ments. In-depth technical assistance activities meeting the objectives of its most recent were driven by the results of needs assess- strategy (IEG-MIGA 2000), focusing its guaran- ments and availability of external funds. tees on IDA-eligible countries (particularly in During fiscal 1998­2003, MIGA provided Africa), complex infrastructure projects, South- technical assistance interventions to 63 South investments, and small- and medium- countries. Of these countries, 41 received one scale enterprises. Between fiscal 1990 and fiscal or two technical assistance interventions 1 6 W O R L D B A N K G R O U P S T R AT E G Y, A C T I V I T I E S , A N D O U T C O M E S (mostly needs assessments) and 22 received crises or regulatory problems. In addition, more in-depth technical assistance. The MIGA projects are mostly small, compared average IC levels for countries receiving in- with their host economies, and therefore have depth technical assistance were similar to those limited PSD impacts. of recipients of MIGA guarantees; the average MIGA's technical assistance activities were IC levels for countries receiving diagnostic found to be effective in strengthening IPIs and technical assistance was worse than for guaran- improving their effectiveness. Surveys of MIGA tee recipients. clients have demonstrated a generally high In 2002 and 2003, after identifying new degree of satisfaction with the quality of MIGA's selectivity criteria, MIGA was active in 41 technical assistance--above that of other countries. Of the 41 with any MIGA technical technical assistance providers. MIGA technical assistance activity, 36 had reasonably attractive assistance, however, does not normally address investment environments and 26 were low the legal and regulatory framework in host income (of which 21 also had reasonable countries, which is under the purview of the investment environments). In 2002­3 MIGA World Bank and, to some extent, FIAS. delivered in-depth technical assistance activi- Empirical research is limited on the link ties to 19 of the 41 countries, and of these, 16 between investment promotion and actual met both the low-income and reasonable IC- investment flows. Although a recent FIAS study level criteria. MIGA's more recent in-depth concluded that a positive relationship exists technical assistance activities are, therefore, between promotion activities and FDI flows, it meeting these two major criteria well. is difficult to measure the ultimate impact of MIGA has used its own budget to fund MIGA technical assistance activities on the diagnostic work and has mainly used donor investment climate and actual FDI flows. trust funds to finance in-depth technical Findings from two case studies conducted by assistance work. Virtually all of MIGA's techni- IEG-MIGA suggest that MIGA's technical cal assistance trust fund and grant resources assistance has had a positive impact on the (which account for 40 percent of MIGA's total quality of services of the IPIs. Although MIGA's technical assistance resources) were tied to recommendations to IPIs were mostly relevant, providing technical assistance in specific the degree of implementation varied. In the countries. Although external funding has two cases, the impact of IPIs on actual FDI enabled MIGA to provide in-depth and flows has thus far been limited. Most investors sustained assistance to a number of countries surveyed by IEG-MIGA for the two case studies requiring its assistance, the lack of untied stated that they would have invested in the funding sources has limited MIGA's ability to country regardless of the IPI. They also stated maximize its development impact. that IPIs have contributed to a reduction in transaction costs (for example, cost of informa- Impacts tion and time) and improved the likelihood of Findings from a small sample of evaluated their investment's success. MIGA guarantee projects showed mixed Evidence from the two case studies suggests results regarding their impacts on PSD (which that MIGA's technical assistance has been more includes demonstration effects). In some effective when MIGA was engaged with commit- cases, MIGA clearly played a positive role in ted governments and where a stable organiza- supporting early investments in a sector or tional framework for the investment promotion country, and some of its projects have had function existed within the government. follow-on investments and thus a positive Examples are IPIs with direct support from and demonstration effect. A majority of evaluated reporting to the president or prime minister, for projects had low PSD impacts because of low which increases in FDI flows were a government financial returns due to economic or sector priority and funding for the IPI was adequate. 1 7 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E From Strategy to Outcomes: Enterprise Development. Support for IC reforms Illustrations from Country Case Studies came through a series of Economic Recovery The Annex shows how WBG strategies and Credits as well as financial sector and enterprise activities translated into outcomes in three development projects. IFC supported the countries that were the subject of case studies establishment of a foreign bank and investment by both IEG-World Bank and IEG-IFC: Peru, banking affiliate and provided TAAS on financial Mozambique, and Romania. The findings sector issues and corporate governance. Despite include the following: progress in improving some aspects of the investment climate, the investment response has Peru been less robust than expected. Investment has In the early 1990s, IC reforms in Peru supported increased, but this was mainly due to several by significant Bank involvement led to an foreign "mega" projects (including an IFC invest- increase in private investment. After 1997, ment in the MOZAL aluminum smelter). Institu- however, the increasing unpredictability of the tional weaknesses and inadequate infrastructure judiciary as well as tax instability dampened continue to impede private sector activity. private investment. Overall, the long time needed to accomplish institutional change and Romania political issues hindered progress in institutional Prospects for Romania's accession into the development. IFC's TAAS on the regulatory European Union motivated the government's framework for mutual funds helped this industry push for improvements in the investment grow significantly; however, recommendations climate. A FIAS administrative barriers study on mortgage finance were largely not initiated WBG support, which led to an action implemented. plan to improve the business environment. The Bank supported policy and institutional Mozambique reforms through two sets of adjustment and WBG strategy increasingly focused on institu- technical assistance loans; IFC did so through tional issues, including administrative and TAAS related to housing, capital markets, regulatory reforms, simplification of licensing mortgage finance, and private participation in procedures and labor regulations, and revisions health care. The investment climate has to the commercial code. Enterprise surveys were improved, but policy uncertainty and lack of prepared under the Regional Program for transparency continue to concern investors. 1 8 3 Coordination in the World Bank Group T he 2002 PSD Strategy defines the broad division of labor among the World Bank, the IFC, and MIGA in implementing the IC agenda: IBRD/IDA focus on investment climate and between the Bank and IFC on providing policy related institution building, improvements advice to governments. IFC's original Articles of governance, legal and regulatory systems, of Agreement state that one of its purposes is financial sector policies, and public financ- to "seek to stimulate and to help create ing. IFC pursues demonstration projects conditions conducive to the flow of private that promote the credibility of government capital . . . into productive investments." IFC policies, provides additional financial first proposed "strengthening its investment services in local markets, and provides and advisory work in support of IC improve- political risk protection to cofinanciers. Its ments in member countries" in 2001 and again strategy is to deploy its instruments such in 2002­4. According to an IFC 2001 strategy, that they support relevant institution IFC is to promote and support technical building particularly in the financial sector assistance and advisory activities to improve and for small and medium enterprises. the investment climate, including appropriate MIGA provides focused political risk guaran- institutional and policy reforms. tees, institution-building, and investment IEG-World Bank and IEG-IFC investigated promotion assistance (World Bank 2003). two issues related to the division of labor between the Bank and IFC on policy advice: (a) In practice, the division of labor on IC work the degree of coordination between the Bank among the Bank, IFC, and MIGA is less clear cut. and IFC and possible duplication of effort and Both the Bank and IFC provide policy advice to (b) concerns about conflicts of interest associ- governments, and both FIAS and MIGA assist ated with WBG policy advice related to investment promotion intermediaries. potential IFC investments. Coordination between the Bank and IFC has Advice on Policies and Institutions been uneven. Although current practice is to There is a lack of consistency between the 2002 prepare joint Bank/IFC CASs, discussions with PSD Strategy and IFC's own strategic staff indicate a perception within IFC that its documents regarding the division of labor participation has little impact on the Bank's 1 9 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E lending and nonlending services. An exception offer a well-defined framework for dealing with is FIAS analytical work, which has often been potential conflicts of interest, it is difficult to taken up in Bank lending operations. At the determine the degree to which IC TAAS project level, cooperation between the Bank conducted by departments outside of those and IFC often depends on personal relations as routinely screened (Global Product Groups well as attention given by Bank and IFC and Private Sector Advisory Services) have management to encouraging collaboration in actually followed conflict-of-interest rules. country teams. Regarding duplication of effort, client and staff feedback suggests that duplica- Assistance to Investment Promotion tion of effort is not a real problem, because so Intermediaries much needs to be done on so many IC topics. Both MIGA and FIAS provide technical Moreover, the Bank tends to focus on broader, assistance to promote FDI. FIAS's mandate is to economywide and sectorwide policy advice provide technical assistance to improve the (for example, regulation or competition overall investment climate and assistance in policy), whereas the IFC focuses more on developing the legal and institutional framework industry-specific advice (such as advising on for the establishment of Investment Promotion corporate bond markets), much of which is Intermediaries (IPIs). MIGA generally works directed to the financial sector. with established IPIs on their organizational Since 2002 the joint Bank-IFC PSD Vice development and investment promotion efforts. Presidency has attempted to enhance coordi- Some overlap in this division of labor exists, due nation and realize synergies across the WBG. to the similarity of MIGA and FIAS objectives. Examples include organization of 12 WBG-wide The extent of overlapping activities--in terms of country IC review meetings and development the number of projects and of project costs--is of a WBG-wide training program on IC reform. not significant and has been declining; however, MIGA now participates in the PSD Sector the similarity of the two mandates is likely to Board, and both PSD and FIAS are members of create confusion among WBG clients about who MIGA's Benchmarking Steering Committee. is providing which services. The vice president responsible for PSD in the MIGA and FIAS have attempted to establish Bank is also the chief economist of IFC. As their respective functional roles and responsi- noted earlier, this report does not evaluate bilities in providing technical assistance to these recent activities. support investment promotion and have Although no specific examples or allegations agreed to "hand off " clients to one another. of conflict of interest were identified in the Because of efforts to improve coordination field, there is concern that IFC's dual role as an between FIAS and MIGA, nearly half the FIAS advisor to governments on legal and regulatory projects in overlapping areas involve joint matters and as a direct (prospective and missions with MIGA staff and/or some form of existing portfolio) investor could result in MIGA involvement. Although IEG-IFC and IEG- potential or perceived conflicts of interest that MIGA found no major conflicts in the countries require careful management. Most of the TAAS they studied, codification of coordination and reviewed for this evaluation appear not to cooperation between FIAS and MIGA, includ- involve conflicts of interest. Current conflict-of- ing protocols for the hand-off of clients, should interest rules require that a team that is occur.12 separate and independent from any IFC invest- ment team for a potential project undertake Integrating Microeconomic and the advisory work and that disclosure of the Macroeconomic Agendas potential conflict of interest and proposed Responsibility for the Bank's IC operations is mitigation measures be disclosed to the spread across the institution. The sector units government client. Although the current for Finance and Private Sector Development, conflict-of-interest guidelines and procedures Poverty Reduction and Economic Management 2 0 C O O R D I N AT I O N I N T H E W O R L D B A N K G R O U P (PREM), and Infrastructure primarily manage units within the Bank. Competition between IC lending operations in the Regions. The wide- PSD and PREM units for the IC agenda has ranging "ownership" of the Bank's IC portfolio become pervasive and led in some cases to a is apparent in the assignment of projects to lack of coordination and information sharing. individual networks and sector boards. In fact, The broad nature of the IC topic and the need more IC projects are assigned to non-PSD to balance private sector interests with broader networks than to PSD. During fiscal 1999­2003, economic and social goals requires the Bank to the Bank assigned 31 percent of the core IC have an organizational structure that facilitates portfolio to the PREM Network, 23 percent to integration across sectors and collaboration the Infrastructure Sector Unit, and 19 percent among staff. The burden of integrating differ- to the Financial Sector Network, compared ent sector perspectives and setting priorities with only 17 percent to the PSD Network. now lies with the country departments, but At the country level, coordination across the some country departments have been more WBG on IC issues has been weak, both actively involved in managing this integration between the Bank and IFC and across sector than others. 2 1 4 Recommendations W orld Bank Group: Clarify the roles of the Bank, the IFC, and MIGA on IC activities, bringing consistency to corporate strategy and practice. Improve coordination and consistency across the WBG on IC diagnosis, priorities, results focus, strategy, and assistance at the country level. a. Define the respective roles of the Bank and IFC arrangements and the political economy of re- in providing advice on policy and institutional form, involving local organizations in this work reform, according to the comparative advan- (IEG-World Bank part recommendation 1a). tages of each institution on specific IC issues. b. Be less timid in dealing with vested interests b. Formulate a joint Bank, IFC, and MIGA results- and in building a balanced constituency for based IC strategy for each client country that reform. Make better use of the Bank's con- is reflected in the Country Assistance Strategy vening power to bring the government to- and that uses the resources of each more ef- gether with other stakeholders. Be more fectively, and track the results. proactive in disseminating information and c. Codify the respective roles of FIAS and MIGA pushing for transparency (IEG-World Bank and hand over protocols to ensure consistent part recommendations 1b, c, and d). application and smooth transfer of clients from c. Make better use of survey-based diagnostics, fo- one to another. In view of the partial overlap cusing them on specific country needs. Use sur- between services offered by FIAS and MIGA, veys only as an input for making policy Management should monitor coordination im- recommendations to balance business per- provements closely to ensure they continue on spectives with broader economic and social track. concerns (IEG-World Bank part recommen- dations 2a, b, and c). World Bank: Do a better job of setting priorities d. Consider packaging a critical mass of micro- and packaging IC reforms in lending economic reforms into IC adjustment loans, operations, paying more attention to institu- rather than piggybacking small IC components tions and the political economy of reform. onto macroeconomic adjustment operations (IEG-World Bank part recommendations 3a, a. Do more analytical work on institutional b, and c). 2 3 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E IFC: Raise the profile of IFC IC work and climates and setting CAS priorities (IEG-IFC develop operating guidelines for technical part recommendation 4). assistance and advisory work related to the investment climate. MIGA: Improve the focus and effectiveness of technical assistance. a. For its technical assistance and advisory ser- vices (TAAS) work, make investment climate a. Implement a clear strategy for client selection a central theme and strategic priority. The re- that ensures MIGA's effectiveness and devel- gional investment departments should de- opment impact, and exercise greater selectivity fine the IC agenda and product mix relevant to improve the effectiveness of resource use to each country's IC needs. Each country and impact. Focus on areas in which MIGA has technical assistance program should have a a comparative advantage and can provide ad- strategic plan and clear accountability for ditionality and complementarity to the WBG, technical assistance coordination, execution, other donors, or the private sector. Continue to monitoring, and evaluation (IEG-IFC part rec- complement its own resources with external ommendation 1). funding, and align MIGA's work program closer b. As part of the corporate-wide initiative to de- with World Bank/IDA priorities and lending to velop operating guidelines and procedures for support capacity building (IEG-MIGA part rec- TAAS operations, management should (a) de- ommendation 1). velop a quality control mechanism for advi- b. Improve MIGA's cost-measurement tools and sory work provided to government clients; (b) tracking systems to be able to assess its cost ef- incorporate good practice measures into TAAS ficiency and aid decision making in the future. operations within a results-based management Implement a monitoring system to track planning, monitoring, and evaluation system; progress and impact of interventions. Facilitate and (c) implement IFC-wide training in conflict- research on impact of investment promotion of-interest policies to ensure that current pro- on investment flows (IEG-MIGA part recom- cedures are known and followed (IEG-IFC part mendations 2, 3, and 5). recommendation 3). c. Formalize MIGA's relationship with client c. Develop a mechanism to (a) track and follow countries through formal contracts that clearly up on IC issues to support IFC's portfolio and state the objectives, scope of work, costs, and potential client companies, (b) update IFC's indicators of success and include arrange- IC work program, and (c) inform relevant ments for sharing costs (IEG-MIGA part rec- WBG staff charged with improving investment ommendation 4). 2 4 ANNEX I.A: WORLD BANK GROUP INVESTMENT CLIMATE ACTIVITIES IN PERU, MOZAMBIQUE, AND ROMANIA Annex I.A: World Bank Group Investment Climate Activities in Peru, Mozambique, and Romania Strategy Actions Outcomes PERU World Bank World Bank World Bank · Use a selective approach to PSD issues, · Private sector assessment (1994) · The reforms of the early 1990s, with considering the roles of partner institu- · Economic and sector work on secured significant Bank involvement, improved tions (CAS 1994). transactions (1997) investment climate and private invest- · Pay greater attention to PSD as source · Investment climate assessment (2003) ment. of future growth, but not yet as an area · Judicial Reform Project (1997) · These were followed by increasing un- of primary concentration; improve prop- · Financial Sector Adjustment Loan (1999) predictability of judiciary and tax insta- erty rights through land titling and · Urban Property Rights Project (1998) bility and of the political situation in registration; strengthen regulatory en- general, which dampened private in- vironment; continue privatization and IFC/World Bank vestment after 1997. decentralization; and build capacity · Study on private participation in infra- · Bank's involvement in institutional de- at the municipal level (CAS 1997). structure velopment efforts overall were relatively · Generate employment and increase com- · FIAS report on promoting foreign in- less successful, due to the long gesta- petitiveness by addressing barriers to vestment tion needed and political issues. private sector growth and increasing ex- ports, and increase focus on governance IFC IFC and institutions, property rights, and ju- · Thirty-nine investments in infrastructure · Four of five investment operations had dicial reform (CAS 2002). (water, telecom, and power), mining, high development outcome ratings and agribusiness, financial sector, and social resulted in high PSD impact. IFC sector (private university) · Implementation of IFC's technical as- · Reduce poverty through private sec- · Technical assistance for financial mar- sistance recommendations helped mu- tor­led growth (CAS 1994). ket reforms, including the regulatory tual funds grow from $100­200 million · Strengthen role for PSD, especially fi- framework for the mutual funds indus- to $1.6 billion with 62,000 individual in- nancial sector development (CAS 1997). try, and development of the primary and vestors. · Develop financial infrastructure, private secondary mortgage market. · Recommendations on mortgage finance participation in infrastructure, and post- were largely not implemented, due in privatization programs (CAS 2001). part to a change in government. IFC in- · Reactivate private sector growth; en- vested in a commercial bank to provide hance competitiveness; foster financial housing credit and support development sector development; and support reform of the primary market. program (CAS 2002). (Continued on the following page.) 2 5 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Annex I.A: World Bank Group Investment Climate Activities in Peru, Mozambique, and Romania (continued) Strategy Actions Outcomes MOZAMBIQUE World Bank World Bank World Bank · Develop comprehensive strategy for re- · RPED manufacturing survey (1997) · Significant progress was achieved in fi- habilitation and reform of the postwar · Investment Climate Assessments (1997 nancial sector reform and privatization, economy. Create a more favorable in- and 2002) but the reforms of the early 1990s failed vestment climate was identified as a · Sponsorship of private sector confer- to pay enough attention to weak corpo- priority area (CAS 1991). ences rate governance and technical capabil- · Accelerate privatization, and create a · Economic Recovery Credits (1992, 1994, ity in State-owned banks and enterprises microeconomic environment for growth and 1997) (IEG Country Assistance Review 1998). and diversification of private sector ac- · Financial Sector Capacity Building Pro- · The government's preoccupation with the tivity. Improve the business environment ject (1994) peace process and elections, as well as by removing bureaucratic red tape and · Economic Management Reform Credit differences in perceptions between gov- restrictions embodied in the regulatory (1998) ernment and the Bank regarding imple- system, institutional development (CAS · Enterprise Development Project (2000) mentation capacity and effect of reform 1995). retarded many areas of policy reform. · Intensify efforts to improve the invest- World Bank/IFC · Investment and growth have increased, ment climate through continued macro- · FIAS administrative barriers to invest- but primarily due to foreign "mega" in- economic reform, added efforts to ment studies (1996 and 2001) vestments; labor-intensive growth has enhance the microeconomic business not yet materialized. environment, private sector capacity- IFC building programs, and infrastructure · Twenty-nine investment projects, in- World Bank/IFC development in high-potential sectors cluding in MOZAL (aluminum smelter), · Interministerial working group was set (CAS 1997). the financial sector (e.g., a foreign bank up to reduce red tape. Many of the FIAS and an investment banking affiliate), recommendations are under implemen- IFC and agribusiness tation. · Continue to help reduce the impedi- · Several studies on policy, regulatory, ments to PSD. and administrative constraints to PSD IFC · Provide financial and advisory services · Advisory services through FIAS, APDF, · Of four investment operations evalu- for financial development. AMSCO, and Private Sector Advisory ated, three had low development out- · Promote innovation, competitiveness, Services. Lead advisory in the privatiza- come, but high PSD impact and one had and employment. tion of Mozambique's oil and gas distri- low development outcome and low PSD · Intensify efforts for legal and regulatory bution company (Petromac) impact. reform including revision of the com- · Investment department provided advi- · In the banking sector, service levels and mercial code (CAS 1995, 1997, and sory assistance on regulatory frame- competition were improved. 2000). work for the insurance industry · MOZAL created local supply linkages. · In the insurance sector, nearly all tech- nical assistance recommendations were incorporated into the law passed in Sep- tember 2003. · Petromac privatization is still under way. 2 6 ANNEX I.A: WORLD BANK GROUP INVESTMENT CLIMATE ACTIVITIES IN PERU, MOZAMBIQUE, AND ROMANIA Annex I.A: World Bank Group Investment Climate Activities in Peru, Mozambique, and Romania (continued) Strategy Actions Outcomes MOZAMBIQUE (cont.) MIGA MIGA MIGA · Support projects with high development · MIGA issued 25 guarantees for 10 proj- · Outcomes of individual MIGA guarantees impact and investment intermediaries ects, for a total exposure of US$411 mil- and technical assistance have not been charged with attracting FDI. lion (gross) during fiscal 1998­2004, evaluated; however, MIGA appears to · Continue support of Investment Promo- especially in agribusiness, infrastruc- have offered relevant products in its tion Center (CPI) and World Bank-funded ture, and oil and gas. support for a post-conflict IDA country, technical program. · Pilot country for the MIGA-Swiss Part- making Mozambique MIGA's fourth nership: long-term, multicomponent largest host country (in terms of out- technical assistance program initiated in standing guarantee exposure). fiscal 2002, providing advice to CPI to ad- vance free zone work program ROMANIA World Bank World Bank World Bank · Improve business environment by low- · Legal Framework for PSD (2002) · Projects had significant impact on the in- ering barriers to entry for firms and joint · Financial Markets, Credit Constraints, vestment climate; however, political fric- ventures (CAS 1995). and Investment in Romania (1999) tions and reduced transparency still · Promote PSD through macroeconomic · Financial and Enterprise Sector Adjust- impede increasing investments for the stabilization, privatization, price liber- ment Loan (1996) following reasons: (a) the legal system alization, and restoration of financial · General Cadastre and Land Registration remains complicated with weak insti- discipline. Establish a well-functioning Project (1997) tutional capacity, (b) frequent changes in legal code and rationalize bureaucratic · Private Sector Adjustment Loans I and II legislation create uncertainty for busi- involvement in business. Establish a (1999 and 2001) ness, and (c) the legal status of fixed sound and competitive financial sector · Public Institution Building Loans I and II property is still unsatisfactory, espe- through bank competition and regula- (1999 and 2001) cially in rural areas. tion. Improve infrastructure to reduce · Rural Finance Loan (2001) · Customs reform has facilitated trade. the unreliability and high cost of infra- · Secured transactions reform has led to structure services (CAS 1997). World Bank/IFC increased access to finance. · Strengthen institutions for a market · FIAS helped draft an investment pro- economy (CAS 2001). motion law, conducted an administrative World Bank/IFC barriers study (1999), and proposed an · FIAS's administrative barriers study led IFC investment incentives policy. to an action plan. Fiscal reform is under · Strengthen business environment by way, new tax code implementation is lowering barriers to entry for firms and IFC expected by 2004, land registration has joint ventures and developing an ade- · Investment operations in telecom, finan- improved, and lead time for business quate incentive framework for PSD (CAS cial sector, manufacturing, agribusiness, permits is lower. 1997, 2001). and small- and medium-scale enterprises · Increase private sector role in agriculture, · Technical assistance for housing regula- IFC energy, transport, water supply, local tions, capital market legislation, mortgage · Of six investment projects evaluated, government, and telecommunications finance, private participation in health three had high development outcomes (CAS 1997). care, and the national pension system and four had high PSD impact. (Continued on the following page.) 2 7 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Annex I.A: World Bank Group Investment Climate Activities in Peru, Mozambique, and Romania (continued) Strategy Actions Outcomes ROMANIA (cont.) · Strengthen financial and capital mar- · Joint study with European Bank for Re- · The health care sector was opened to pri- kets and privatize State-owned banks construction and Development and other vate sector participation, and efficiency (CAS 2001). international financial institutions to gains were achieved. identify investment impediments · Following privatization of Bucharest MIGA · Advised on privatization of Bucharest Water Supply, access and service were · Support government's efforts to attract Water Supply, the State Ownership Fund improved and new investments in the FDI by offering technical assistance for (ball bearings), and tractor manufacturer sector followed. development of investment promotion (Tractorul) · Implementation of pension reform rec- capabilities (CAS 2001). ommendations was limited, and private · Issue guarantees in banking (notably for MIGA participation remains low. small- and medium-scale enterprises · Limited technical assistance for invest- and rural finance) and infrastructure; ment promotion capacity building, fo- MIGA support privatization program (CAS cusing on diagnostics. · MIGA technical assistance had some 2001). · Guaranteed projects overwhelmingly in positive outcomes in enhancing capa- the financial sector (and in services) bilities of the investment promotion in- termediary to some degree, but the IPI lacks credibility, links with other gov- ernment entities, and has a weak gov- ernance structure. 2 8 ANNEX I.B: MANAGEMENT RESPONSE This note sets out the joint management Commission on the Private Sector and response of IDA/IBRD, IFC, and MIGA to the Development, Unleashing Entrepreneurship: four-volume evaluation of WBG fiscal Making Business Work for the Poor, to which 1993­2002 activities in support of improving the Bank Group contributed.14 investment climates that was conducted by the The evaluation reports and our recent respective independent evaluation units.13 strides in meeting challenges identified in the Management welcomes the analysis, which reports provide a valuable reference and comes at an opportune time and helps shape a benchmark for ourselves as well as for the joint Bank Group approach to dealing with broader investment climate community of investment climate issues. While components clients and donors. Moving forward, the main of investment climate activities of IDA/IBRD challenge for the WBG and its partners is to use and IFC have previously been evaluated this momentum to build constituencies for separately, this is the first comprehensive change on this broad but central agenda in evaluation of the WBG on this topic. This is also client countries. the first IEG evaluation of MIGA's investment climate activities. The joint reporting is helpful Joint Findings in bringing together the wide range of The joint evaluation found that investment IDA/IBRD, IFC, and MIGA activities, illustrating climates in developing and transition countries the benefits of a Group-wide approach and the have been modestly improving. Many countries potential for enhancing synergies across and in are moving beyond first-generation reforms the institutions. (including macrostability and in some cases Management agrees with the framing of the privatizations and trade reforms) to second- key challenges and notes that it has benefited generation reforms focusing on institutional from discussions with the evaluation units on "rules of the game" for establishing an invest- the draft reports. Annexes I.B.1­I.B.4 contain ment climate conducive to private sector the response matrices, which provide detailed activity. Given this overall context, the reports responses to each recommendation of the lay out specific areas of attention and perspec- evaluation reports, including the overview tives on key issues for the WBG as a whole and report for the WBG as a whole. Of particular for each institution with regard to assistance note is the marked progress that has been for the improving investment climate. made in meeting these challenges since the The evaluation reports indicate that, on evaluation period ended in fiscal 2002. This balance, WBG IC activities are on track and progress on the investment climate agenda is have reasonably good results, noting that: acknowledged in the overwhelmingly positive reception of two recent WBG flagship publica- · Improving investment climate has always been tions: World Development Report 2005: A a large part of WBG interventions and is in- Better Investment Climate for Everyone and creasingly moving to the center stage in the Doing Business 2005: Removing Obstacles to WBG approach to sustainable growth and Growth, as well as to the report of the UN poverty reduction. 2 9 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E · WBG IC assistance is moving toward second- initiatives are under way to make progress on generation reforms, in line with shifts in the IC the diagnostic front, on solution design, and reform agendas of its member countries. on implementation. · WBG non-investment activities through the Bank's economic and sector work and IFC's Diagnostic Work TAAS activities have contributed to improving The Bank is providing strong global leadership investment climates; MIGA's TA activities were in the area of diagnostics and results measure- found to be effective in strengthening IPIs and ment for key features of IC institutions. As the in improving their effectiveness. evaluation points out, the key challenge is to · The Bank's IC lending activities and IFC's in- interpret the data sensibly, taking into account vestment climate-enhancing operations (for their limitations and adapting them to country- example, investments in support of infra- specific features. Based on the diagnostic work, structure and financial markets) have yielded the Bank Group has clearly made major outcomes above the average of those of all progress in disseminating analyses and in the operations of the respective institutions. setting the agenda for reform--not least through the Doing Business reports and the In the context of the WBG PSD strategy, WDR 2005, but also country by country (where, Management takes from the joint evaluation for example, the Investment Climate Assess- four main challenges present over the evalua- ments (ICAs) have been part of high-profile tion period, fiscal 1993­2002: outreach activities). Notwithstanding the achievements and · Undertake a fundamental approach to IC im- expanded efforts in the area of diagnostics and provements that focuses on institution-build- measurement, Management is pushing further ing customized to country conditions and that within the framework of the PSD strategy to recognizes political opportunities and con- help develop policy-relevant measures for IC straints. issues, with identification of good practice, · In working with clients, support mechanisms, studies of the political economy of reform such as stakeholder consultation processes, processes, and support for results-based that enable country specifics to drive strategy. management of reform processes under way. · Clarify the division of labor and enhance col- laboration within the WBG that leverages or- Solution Design ganizational comparative advantages and that When it comes to solution design, more remains takes into consideration potential conflicts of to be done, as noted in the evaluation. The Bank interest between IFC and the World Bank. Group training program that is currently being · Enhance donor coordination. designed is underpinned by an effort systemati- cally to provide guidance on solution design for Management also agrees with the evalua- some 25 subtopics of the IC agenda that cover a tion's emphasis on the importance of results wide array of issues, including: measurement and monitoring of IC assistance activities. · Governance topics (for instance, legal and in- stitutional foundations for reforms, stakeholder Management Comments management, and change management in im- plementing institutions) Fundamental Approach to IC Improvements · Factor markets topics (for instance, secured Management agrees that the key to improve- lending, labor regulations, education and vo- ment in the IC work of the Group is progress in cational training, property rights, land policies) dealing with institution-building customized to · Judiciary systems (including contract en- country conditions and duly cognizant of politi- forcement and arbitration) cal opportunities and constraints. Bank Group · Tax policies and administration 3 0 A N N E X I . B : M A N A G E M E N T R E S P O N S E · Product market issues (for instance, competi- gic priorities.15 And for MIGA, investment tion, investment promotion agencies, inspec- climate is an integral part of its mandate. tions and project service regulations, corporate When it comes to setting strategy at the social responsibility). country level, management agrees that country specifics will need to be key drivers, with joint Solution design materials cover technical as CASs the main vehicle for WBG efforts at well as political economy aspects of reform. setting country strategy on IC support. In Among other things, this work draws on country dialogue, special efforts are under way existing materials developed for the WDR 2005, to learn from experience in order to better the Doing Business Project, and lessons from assist governments to enhance stakeholder FIAS activities and ICAs. engagement. In the case of Poverty Reduction Knowledge of and experience with effective Strategies, the dialogue between the private investment climate reform processes in sector and government has been less strong developing countries remains incomplete. than that with other stakeholders. Hence, Experience indicates that, for some countries, current efforts are focused on this area, with a comprehensive approach to reform is the Group supporting dialogue processes in appropriate and effective, while for other about 10 countries. A review of successes and countries, notably China and India, incremen- failures of such dialogue processes in develop- tal improvements "at the margin" appear to ing countries is currently under way, and the help a healthy reform dynamic unfold in a WBG will provide the lessons of experience to politically sustainable fashion. As the interested client countries as they prepare knowledge gap shrinks, it will become clearer poverty reduction strategies and undertake whether a typology of country characteristics is other stakeholder processes. useful or whether solution design ultimately is highly country specific and experimental. Management Systems and Processes for Effective Division of Labor and Implementation Capacity Collaboration within the Group On the implementation front, a decentralized The evaluation suggested a better deployment concerted effort is under way to strengthen of resources to increase the impact of IC work. country-specific capability. In turn, implementa- The WBG has in process a coordinated set of tion experience, including the transaction activities to address this issue. As noted in the experience of IFC and MIGA, feeds country evaluation reports, the most significant organi- knowledge into solution design while maintain- zational change aimed at clarifying roles and ing a critical mass of expertise in headquarters. facilitating coordination has been the creation Already, decentralized Bank offices and IFC of the joint PSD Vice-Presidential Unit (VPU) in offices and project development facilities (PDFs) fiscal 2004. Under the joint VPU, diagnostic have been staffed up. At the same time, transac- work, development of good practices, and tion work on both the IFC and MIGA side is work on the political economy is carried out in being aligned better with advisory work in both joint Bank/IFC units in collaboration with both organizations--at the level of the operations Bank and IFC Regions. This will continue. group in MIGA and the Regions in IFC. Implementation of the joint training program will also help strengthen working relationships Strategy Processes within the Group. Investment climate is critical for all WBG Beyond this, current efforts are particularly institutions. For the Bank, it is part of country focused on developing a Group capability to driven processes. For IFC, management carry out freestanding advisory services from recognizes the importance of investment diagnostics through solution design to climate and addresses investment climate as a implementation support. As the evaluation cross-cutting theme in four of IFC's five strate- points out, the recent emphasis on investment 3 1 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E climate work up to fiscal 2003 had not led to an of the Organizational Effectiveness Task Force, increase in Bank lending operations dedicated which is under way. For both IFC and MIGA, to the investment climate. However, there is better systems to manage and monitor techni- now evidence that ICAs and Doing Business cal assistance activities are being put in place, Reports have translated into operations. Going consistent with recommendations of the forward, while efforts focused on diagnostics evaluation. and solution design will yield new lending opportunities, lending priorities will have to be Donor Coordination decided at a country level. And although invest- There is a significant degree of donor collabo- ment climate is suited for policy-based lending, ration in the field of the investment climate, the actual or anticipated development financ- including the following: ing requirements rationale for such lending may not exist. Thus, management expects that · In implementing IC surveys, staff are collabo- stand-alone advisory services will be an rating at the regional level with the European important part of Bank Group work. The basic Bank for Reconstruction and Development building blocks are now in place and the first (EBRD), the Asian Development Bank (AsDB), examples exist. Bank diagnostics have helped and the Inter-American Development Bank set the agenda for investment climate reforms (IADB), and at the country level with bilateral in many countries. Selected items have become donors. the subject of ongoing advisory services at the · FIAS is supported by a multidonor trust fund. national level, for example, through FIAS. IFC · MIGA receives cofinancing from donors for facility staff have provided on-the-ground some of its technical assistance activities. support to reform processes, notably at the · The WDR on investment climate built on case municipal level. And all of this has been coordi- studies prepared by the Department for In- nated at the regional level between the Bank ternational Development and it benefited from and IFC. financing from other donors. The evaluation has raised a number of · PDFs receive multidonor financing. potential concerns about cooperation between MIGA and FIAS. It also discussed the potential Donor coordination is enhanced by donor conflicts of interest between advisory and working groups for PSD in general and for the transaction staff within the WBG. Management small and medium-sized enterprise (SME) feels that the issues raised by the evaluation are topic in particular. Looking forward, ongoing adequately managed. Further codification of discussions with donors suggest interest in collaboration between MIGA and FIAS is being participating in the new investment climate pursued as recommended, notably through a training course, in exchanging good practice collaboration protocol. Processes have been work, and in further enhancing the measure- put in place to review issues of conflict of ment agenda. interest. The evaluation did not turn up evidence of material issues in either area. Conclusion In addition to these interagency issues, the In conclusion, management welcomes the evaluation also emphasized the need to find evaluation and recognizes the contributions it ways to improve coordination within each has already made in helping to shape a joint agency, with particular attention paid to Bank Group approach to deal with investment improving coordination among relevant climate issues. Detailed responses to the IEG networks within the Bank. On this topic, recommendations for all three units (World management notes that the next step for the Bank, IFC, and MIGA) are provided in the Bank would be changes pursuant to the work attached annexes. 3 2 ANNEX I.B.1: RECOMMENDATIONS FOR THE WORLD BANK GROUP (FROM THE JOINT OVERVIEW REPORT) Recommendation Management Response 1a Roles of the Bank, IFC, and MIGA Clarify the roles of the Bank, IFC, and MIGA on investment With marked progress made in developing coordination climate activities, bringing corporate strategy and practice processes since the fiscal 1993­2002 evaluation period, into consistency. Improve coordination and consistency Management believes the roles of the Bank, IFC, and MIGA across the WBG on investment climate diagnosis, priorities, are now reasonably clear. While it agrees with the impor- results focus, strategy, and assistance at the country level. tance of coordination, it notes that appropriate structures and processes to facilitate coordination have been set up, Define the respective roles of the Bank and IFC in providing both at the organizational and country levels, reflecting in- advice on policy and institutional reform, according to the com- sights gained from the joint evaluation reports and related parative advantages of each institution on specific IC issues. discussions. Similar recommendation from the IEG Report (Rec. 2a) In this context, Management appreciates the report's ac- The WBG should clarify the roles of the Bank, IFC, and knowledgment of recent initiatives undertaken after the MIGA on IC activities, bringing corporate strategy and prac- evaluation period by which coordination takes place at the tice into consistency according to the country- and situation- global, regional, and country levels, including: (a) a new joint specific comparative advantages of each institution. Bank-IFC PSD Vice Presidency; (b) a joint Operating Proto- col to enhance coordination of the FIAS and MIGA work pro- grams; (c) joint IFC/WB CAS preparation with active input by MIGA as well; and (d) regular Investment Climate Coun- try Review meetings cochaired by WBG Senior Management. Consistent with the PSD Strategy, the goal of the work on diagnostics, solution design, and implementation is to cre- ate a reasonably seamless working relationship between all parts of the WBG that deal with reform of the investment climate. This involves principally the Bank and IFC Regions (including Regional SME facilities) as well as central pro- grams (including FIAS and MIGA). For lending activities, coordination between the Bank and IFC has generally worked well, with IFC complementing Bank lending by providing financing as a strategic priority 3 3 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Recommendation Management Response in IC-enhancing sectors such as infrastructure and financial mar- kets. In addition, many IFC projects in other sectors are also contributing to improving investment climate through demon- stration effects, sustainability, and other impacts on PSD. Management will monitor and report on coordination in the context of the PSD section of the annual Sector Strategy Im- plementation Update. Related recommendation from the IEG Report (Rec. 2a) Management agrees with the recommendation. Effective coordination at the individual country level should encompass the following: (i) Regarding diagnostics, coordination is country-driven. (i) diagnostic IC needs assessment (e.g., ICA) The initial emphasis was on scaling up with central sup- (ii) WBG IC operational priorities port the use of tools such as the IC surveys to provide (iii) broad division of labor within WBG a better knowledge source for the Bank policy dialogue. (iv) a results-based management framework for alignment Now there is some consolidation (e.g., SME Maps of project planning, results measures, reporting and asso- folded into other diagnostic tools, joint trade/IC reports), ciated unit and individual incentives. and while there continues to be central support for the rollout of diagnostics, the deployment of these tools The process for accomplishing the above and ensuring ef- continues to be country driven. fective coordination should be systematic and formalized for (ii) When it comes to setting operational priorities, coun- every country, building on the PSD-led IC country review ex- try specifics will need to be key drivers, with joint perience. Ensure that these efforts provide a basis for IFC's CASs the main vehicle for WBG efforts at setting inputs to the CAS. country strategy on investment climate. (iii) Division of labor among the different units in the WBG is determined in general by who is best equipped and positioned to undertake a task. For example, central groups like Doing Business and FIAS are focusing on diagnostic tools. On solution design, these central groups as well as MIGA bring to bear global knowl- edge, including collections of best practice. These ef- forts are combined with local knowledge of field staff to develop effective solution designs. IFC staff are particularly helpful in informing the diagnostic and policy work from the transaction perspective, while staff closest to the government on specific issues typ- ically lead or play a major role in discussions with the government on the merits of the advice. With regard to implementation, capacity rests mainly in Bank Group field offices as well as PDFs. For potential investments supported by IFC or by both the Bank and IFC (including private-public partnerships), simi- 3 4 ANNEX I.B.1: RECOMMENDATIONS FOR THE WORLD BANK GROUP (FROM THE JOINT OVERVIEW REPORT) Recommendation Management Response lar working arrangements apply. Teams comprising staff from the Bank and IFC are established as appropriate and can include, for example, central or regional groups from the WBG, IFC-arranged TA teams, and WBG staff on the ground. (iv) See Section 1b below with regard to results. 1b Investment Climate Strategies Formulate a joint Bank, IFC, and MIGA results-based IC Management agrees with this recommendation for countries strategy for each client country, reflected in the CAS, that covered by joint CASs, and it will monitor implementation uses the resources of each more effectively and track results. as part of the regular CAS review process. (Over the last three years, slightly more than half of CASs were joint, and that is the planned share going forward.) As the evaluation notes, increasingly the practice for countries covered by joint CASs is to spell out combined Bank and IFC strategies to improve the investment climate as part of the private sec- tor development agenda. Management believes that the cur- rent level of joint CASs is appropriate. For countries without joint CASs, IFC normally provides in- puts with regard to PSD issues based on its level of activity. Regarding results, work is in progress in the context of bet- ter results frameworks in CASs. It is anticipated that results- based CASs will be mainstreamed after the upcoming discussion with Executive Directors on experience to date with the pilots. More broadly, the WBG is providing strong global leadership in the area of IC diagnostics and results measurement. Im- proved diagnostics such as the ICAs and Doing Business Re- ports with the strong focus on quantitative indicators, benchmarking across countries and regions within countries, and monitoring progress over time are powerful instruments to spur on and manage reform processes. And FIAS is ex- perimenting with OECD-style regulatory impact assess- ments, which have been a powerful tool for promoting regulatory scrutiny in industrial countries. Together these ef- forts are helping to underpin the Bank-wide results meas- urement framework in the PSD area. 1c 3 5 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Recommendation Management Response 1c Roles of FIAS and MIGA From the Overview Report (Rec. 1c) Management agrees with this recommendation and is un- The respective roles of FIAS and MIGA and hand-over pro- dertaking steps along these lines. tocols should be codified to ensure consistent application and smooth transfer of clients from one to another. In view Management notes that no cases have emerged where of the partial overlap between services offered by FIAS and there is a material problem in collaboration between MIGA MIGA, management should monitor coordination improve- and FIAS and that coordination and cooperation between ment closely to ensure they continue on track. FIAS and MIGA is codified in the brochure "The World Bank Group Guide to FDI Advisory and Information Services," Related recommendation from the IEG Report (Rec. 2b) which sets out the roles of the various units. A protocol set- In view of the partial overlap between services offered by ting out the detailed interface between FIAS and MIGA is FIAS and MIGA, management should monitor coordination being finalized. improvements closely to ensure that they continue on track. Management intends to continue to monitor coordination be- Related recommendation from the IEG Report (Rec. 3c) tween FIAS and MIGA, with the aim of better service for MIGA should continue its coordination and cooperation clients. with FIAS and other partners, to ensure that resources are targeted to provide additionality and complementarity. The respective roles of FIAS and MIGA, and hand-over protocols should be codified to ensure consistent application. 3 6 ANNEX I.B.2: RECOMMENDATIONS FOR THE WORLD BANK (FROM THE IEG EVALUATION) Recommendation Management Response 1 Institutions and the Political Economy of Reform 1a Analytical Work on Institutional Arrangements and the Management agrees with the main thrust of this recom- Political Economy of Reform mendation, cognizant of the importance of analytical work on Do more analytical work on institutional arrangements and institutional arrangements and the political economy of reform. the political economy of reform, involving local organizations. We have accomplished much, particularly on assessments of This could include (i) a guidance note with a typology show- constraints/incentives and are working on other aspects. ing what types of institutional arrangements work in different country circumstances; (ii) assessments of a country's in- (i) Guidance note: The lessons from ongoing work ad- stitutional capacity constraints, incentives, barriers to chang- dressing institutional arrangements and political econ- ing behaviors, and training needs, to help design IC assistance omy of reform are being synthesized for dissemination. and monitor progress; (iii) country case studies of IC reform A training course for WBG staff is being developed successes and failures to gain a better understanding of how based on the work on good practice, institutional reform processes are motivated and sustained, and the role arrangements, and political economy; it will be rolled of different stakeholder groups. out in four regional sessions. The training program is underpinned by an effort systematically to provide From the Joint Report (Rec. 2a) guidance materials on solution design for some 25 Do a better job of setting priorities and packaging IC reforms subtopics of the IC agenda that cover a wide array of in lending operations, paying more attention to institutions issues, including governance, factor markets topics, ju- and the political economy of reform. diciary systems, tax policies and administration, and product market issues, such as competition. Solution Do more analytical work on institutional arrangements and design materials cover technical as well as political the political economy of reform, involving local organizations economy aspects of reform. in this work. (ii) Assessments of constraints/incentives: The Doing Busi- ness Project produces probably the most comprehen- sive assessments of the institutional framework of the investment climate, with seven sets of quantitative, ob- jective indicators for 145 countries in 2005. The Doing Business Project also provides a natural window on re- form episodes and reforming countries and this will be an important element of the next annual reports. In ad- dition, ICAs and FIAS diagnostic work also contribute to the assessment of country IC conditions. 3 7 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Recommendation Management Response (iii) Country case studies: Already, 15 country case stud- ies on reform episodes in particular areas (regulation, labor, land, infrastructure) have been prepared as a background for the WDR 2005. In addition, nine coun- try case studies (six developing and three OECD) on broad-front regulatory reform episodes are being pre- pared, looking at reform triggers, institutional arrange- ments, solution design, and stakeholder management. 1b Building a Balanced Constituency for Reform Be less timid in dealing with vested interests and in build- Management recognizes the importance of building a bal- ing a balanced constituency for reform. Make better use of anced constituency for reform; however, it disagrees with the Bank's convening power to bring the government together IEG-World Bank's finding that the Bank has been timid in deal- with the business community, as well as with consumer and ing with vested interest groups. labor groups, and local think tanks. Building a balanced constituency. The WBG and the IMF have From the Joint Report (Rec. 2b) been instrumental in supporting government efforts to es- Be less timid in dealing with vested interests and in build- tablish government-business consultation mechanisms on ing a balanced constituency for reform. Make better use of PSD issues to promote reforms. Pilot investor councils were the Bank's convening power to bring the government together launched in Ghana, Senegal, and Tanzania initially, and in Mali with other stakeholders, and be more proactive in dissem- and Uganda more recently. FIAS provided assistance to the inating information and pushing for transparency. government of Turkey as it launched a similar consultative mechanism this year. IFC has long been involved in business forums in Vietnam and Cambodia, and soon in Laos. In the case of poverty-reduction strategies, the dialogue be- tween the private sector and government, including on top- ics such as women entrepreneurs and micro-enterprises, has been less strong than that with other stakeholders. Hence, current efforts are focused on this area, with the WBG sup- porting dialogue processes in about 10 countries (mainly in Africa and East Asia). A review of successes and failures of such dialogue processes in developing countries is cur- rently under way and the WBG will provide the lessons of experience to interested client countries as they prepare poverty reduction strategies and undertake other stake- holder processes. Work is also under way to create a world- wide database of business associations that can be helpful to this process. Dealing with vested interest groups. The issue is the com- plexity of the reform agenda on investment climate, not timidity in dealing with vested interests. As is common 3 8 A N N E X I . B . 2 : R E C O M M E N D AT I O N S F O R T H E W O R L D B A N K ( F R O M T H E I E G E VA L U AT I O N ) Recommendation Management Response with large and complex issues, there are different views on investment climate that feed into the reform agenda. Stronger implementation support through WBG operations-- policy-based lending, advisory assistance, capacity build- ing--should help push the investment climate reform agenda as suggested by the evaluation. 1c Disseminating Information Be more proactive in disseminating information--on IC Management agrees with the importance of dissemination constraints, the country's reform agenda, the implementa- and is implementing this recommendation with success tion of laws and the achievement of specific targets, and les- through several vehicles. First, there are three flagship re- sons from the reform experience of other countries. The Bank ports released this year with extensive outreach efforts could facilitate research by academics by ensuring better ac- that have led to much momentum and focus on the topic: cess to IC data and research results. (a) WDR 2005: A Better Investment Climate for Everyone (b) Doing Business 2005: Removing Obstacles to Growth (c) Unleashing Entrepreneurship: Making Business Work for the Poor (UN Commission on the Private Sector and De- velopment) to which the Bank contributed. Doing Business 2005 alone was quoted in more than 750 media articles worldwide shortly after it was released. At the country level, IC surveys and assessments have been followed by significant, high-profile outreach efforts in 24 countries, stimulating discussion and efforts to set invest- ment climate reform priorities, and contributing to the de- sign or improvement of 19 active projects and supporting pipeline development of 13 new projects. In addition: · The Rapid Response Web site is recognized as the au- thoritative information source for investment climate matters--it currently receives more than 100,000 unique visitors per month. · The full Doing Business data sets plus methodology pa- pers are publicly available on the Web site. Some 60 ar- ticles were written last year by academics making use of the data. · The ICAs are public documents, available on the Bank external Web site. The detailed IC survey data are pub- licly available for researchers, subject to a signed data access protocol, in the hope of generating relevant re- search. And a Web-based data tool for broad public use is also under development. 3 9 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Recommendation Management Response 1d Transparency and Openness Make a stronger push for transparency and openness--to Management agrees with the main thrust of this recom- help create political will where it is weak, to enlist local over- mendation and is supporting transparency and openness sight of potential government inefficiencies and abuses, through two pillars: (a) supporting government efforts to en- and to improve the investment climate itself. gage in dialogue with key stakeholder groups, and (b) sup- porting efforts to benchmark investment climates across countries and over time and monitor reforms. The substan- tial progress and efforts on the first front are discussed in Section 1b. In the area of diagnostics and results meas- urement for key features of the investment climate institu- tions, the WBG is providing strong global leadership. Improved diagnostics such as the ICAs and Doing Business Reports with a strong focus on quantitative indicators, benchmarking across countries and regions within countries, and monitoring progress over time are powerful instruments for dialogue, transparency, and openness. FIAS is experi- menting with OECD-style regulatory impact assessments, which have been a powerful tool for promoting regulatory scrutiny in industrial countries. 1e Country-Specific Political and Business Cultures Ensure that Bank staff develop a deep understanding of Management agrees in principle with this recommenda- and sensitivity to country-specific political and business tion, recognizing that the key to improvement in the IC work cultures, as well as key features that define the relationships of the Bank is progress in dealing with institution-building between business and government. customized to country conditions and duly cognizant of po- litical opportunities and constraints. Efforts across the WBG will continue to build up field-based staff with local knowl- edge and to feed transaction experience of IFC-MIGA into reform design. However, the key comparative advantage of the WBG re- mains bringing to bear global knowledge to country situa- tions. In this context, the main role of the headquarters staff lies in bringing to local levels global knowledge and best practice in diagnostics, solution design, and capacity- building efforts on implementation. 2 Improve the Focus and Use of Survey-Based Diagnostics 2a Specific Country Needs Management agrees that ICAs need to focus on specific Focus ICAs on specific country needs. Make greater use of country needs, make full use of existing material, and col- existing material and collaborate with other donors doing laborate/coordinate with others to avoid duplication and en- similar things to avoid duplication of effort. sure synergies. To this end, the ICA Guidelines for task 4 0 A N N E X I . B . 2 : R E C O M M E N D AT I O N S F O R T H E W O R L D B A N K ( F R O M T H E I E G E VA L U AT I O N ) Recommendation Management Response From the Joint Overview Report (Rec. 2c) team leaders that were endorsed by the PSD Sector Board Make better use of survey-based diagnostics, focusing them recommend that ICAs be tailored to specific country needs on specific country needs. Use surveys only as an input to through augmenting the core survey instrument and making making policy recommendations in order to balance business full use of existing material both from inside and outside the perspectives with broader economic and social concerns. Bank. Management is monitoring this as part of its quality review function. Regarding donor collaboration, regionally, staff are collab- orating with the EBRD, the AsDB, and the IADB and at a coun- try level draw on bilateral donor funding in implementing investment climate surveys. Discussions with AfDB are under way. Careful explanation of business models and management of expectations minimizes the possibility of dis- appointing clients. 2b Targeting Diagnostic Assessments Take into account the heterogeneity of IC conditions by tar- Management agrees that targeting diagnostic assessments geting diagnostic assessments on subnational geographic on subnational geographic areas or individual industries areas or individual industries. may be appropriate at times, but that determination must be done on a country-by-country basis. There is no "one-size- fits-all" template. This is particularly true for solution designs that may emerge from ICAs. As knowledge and experiences with effective IC reform processes in developing countries remain incomplete, it is not yet clear if a typology of coun- try characteristics is useful or whether solution design ul- timately is highly country specific and experimental. That said, the WBG is pursing diagnostic assessments on subnational geographic areas or individual industries, where appropriate. For example, Doing Business 2005 first re- ported regional variations by city in Brazil, and this regional approach now has been extended to Bangladesh, India, and Pakistan. The ICAs generally have made use of subnational variability of investment climate conditions, including in large countries such as Brazil, China, and India. The ICA for Cambodia focuses on dimensions of the investment climate impacting formal and informal firms. The samples of firms for enterprise surveys are regularly stratified by location and industry (and other attributes such as size and ownership). More recent surveys have increased industry coverage be- yond the manufacturing sector, for example, to service and rural firms. Background work for the WDR 2005 extended surveying of informal firms. 4 1 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Recommendation Management Response 2c Survey-Based Diagnostics Recognize that enterprise surveys represent only the views Management agrees that it is important to recognize that of the business community. Use survey-based diagnostics enterprise surveys provide views of the business commu- only as an input to making policy recommendations in order nity. For example, ICAs complement firm survey findings with to balance business perspectives with broader economic and other analysis and sources of information. Our surveys also social concerns. are quantitative oriented and allow for benchmarking across important indicators of the investment climate. The sur- veys support efforts to engage stakeholders using measured and cross-county comparable indicators of the investment climate. Management also notes that our support in bringing voice to the private sector concerns and priorities is only through expressed demand for these efforts by our client governments as they undertake stakeholder processes that help balance business perspectives with broader economic and social con- cerns. As noted above in 1b, in the case of poverty-reduc- tion strategies, the dialogue between the private sector and government has been less strong than that with other stakeholders. Hence, current efforts at supporting govern- ment-led consultative mechanisms are focused on this area, and the surveys support these efforts. 3 Do a Better Job of Prioritizing and Packaging IC reforms in Lending Operations 3a Priority to Reforms Give high priority to reforms that will build political and civil Management agrees that it is important to pay close attention society commitment to continue the reform process--by fo- to political economy issues in countries. Reform processes cusing on problems that, if fixed, would have immediate pos- need to be designed case by case at the country level, often itive impacts. in an iterative and experimental fashion. Experience indicates that, for some countries, a comprehensive approach to re- form is more effective, while for other countries, notably China and India, incremental improvements with positive but limited impact appear to allow a healthy reform dynamic to unfold in a politically sustainable fashion. 3b IC-Focusing Adjustment Loans Consider packaging a critical mass of microeconomic reforms The choice of Bank instruments to support IC reform (or, for and components (including civil service reform and training that matter, other development agendas) is determined of public officials) into IC-focused adjustment loans, rather within the context of country-based processes, taking into than piggy-backing small IC components to macroeconomic consideration various factors, including balance of pay- adjustment operations. ment/fiscal considerations. 4 2 A N N E X I . B . 2 : R E C O M M E N D AT I O N S F O R T H E W O R L D B A N K ( F R O M T H E I E G E VA L U AT I O N ) Recommendation Management Response 3c Lending Instruments Choose lending instruments appropriate to support the process of institutional change over a long period (e.g. pro- grammatic adjustment loans). This will help ensure that changes in laws and regulations are actually implemented and are sustained. 4 Find Organizational Solutions that Help Integrate Microeconomic and Macroeconomic Reform Agendas 4a Responsibility for Integration Maintain the responsibility for integration with the country Management agrees that responsibility for integration of the departments, but provide better support from the sector IC agenda in country strategies and programs should remain and anchor units, IFC, and MIGA. Clearly define the roles of with country departments. Concerning the WBG at large, sup- the sector units in the regions (principally PSD and PREM) port has improved since the creation of the joint PSD VPU to improve coordination and reduce potential conflicts. and implementation of country review meetings on the in- vestment climate. Under this new structure, diagnostics work, development of good practices, and work on the po- litical economy are, and will continue to be, carried out in joint Bank-IFC units in collaboration with both Bank and IFC regions. Looking forward, implementation of the joint train- ing program focused on developing a Group capability to carry out free-standing advisory services from diagnostics via so- lution design to implementation support will also help strengthen working relationships within the Group. On the topic of defining the roles of the sector units in the Bank Regions, Management notes that the next step for the Bank would be changes pursuant to the work of the Orga- nizational Effectiveness Task Force, which is under way. 4b Integration of Sectoral Issues Improve the integration of sectoral issues in proposed re- Management agrees with this recommendation. The sectoral form strategies. Possible options to accomplish this would dimensions of the investment climate have been getting more be to continue to expand the recent practice of holding attention recently. Sector-specific diagnostics such as value country-level PSD reviews (for individual countries, country chain analysis can complement economy-wide views of in- departments, or regions), bringing together staff across sec- vestment climate constraints. Management agrees that the tor units (particularly PSD and PREM) as well as the IFC and country-level PSD reviews can help in agreeing on sector pri- MIGA; and/or to nominate investment climate "coordinators." orities. The "new" generation of "competitiveness" loans in LCR--for example, the Brazil growth project and Peru de- centralization project--are good examples of where sector pri- orities in the investment climate (logistics, infrastructure) have been addressed along with policy and regulatory constraints. 4 3 ANNEX I.B.3: RECOMMENDATIONS FOR THE INTERNATIONAL FINANCE CORPORATION (FROM THE IEG-IFC EVALUATION) Recommendation Management Response 1 Investment Climate as Strategic Priority Management should consider elevating investment climate Management agrees with the importance of investment cli- to an explicit strategic priority for IFC and a central theme mate in IFC's operations. In fact, investment climate is al- of its TAAS work. The regional investment departments ready an explicit cross-cutting theme in four of IFC's five should define the IC agenda and appropriate product mix of strategic priorities. For this reason, we do not see the need broad IC assessments, sector-specific advice, and capacity to add investment climate as a sixth strategic priority for IFC building mix relevant to each country's IC needs. in the Strategic Directions Paper. From the Joint Overview Report (Rec. 3a) IFC is undertaking IC work in areas that are critical to its Raise the profile of IFC IC work and develop operating guide- strategic priorities and where it has a comparative advan- lines for TA and advisory work related to the investment cli- tage. The four IFC strategic priorities that address key IC is- mate. sues are as follows: (i) Address constraints to private sector growth in infra- For its TAAS work, make investment climate a central theme structure. and strategic priority. The regional investment departments (ii) Emphasize local financial markets development. should define the IC agenda and product mix relevant to each (iii) Focus on frontier markets, e.g., advice on IC issues. country's IC needs. Each country TA program should have a (iv) Differentiate through sustainability, e.g., linkages, cor- strategic plan and clear accountability for TA coordination, porate governance, etc. execution, monitoring, and evaluation. With respect to defining the IC agenda in the regions, man- agement expects investment climate to be addressed as ap- propriate in regional TAAS strategies. The overall approach to investment climate activities is driven by each country's and sector's needs, on one hand, and by IFC's resources and comparative advantage, on the other. 3a Operating Guidelines and Procedures for TAAS As part of a corporate-wide initiative to develop operating Management agrees with this recommendation. guidelines and procedures for TAAS, management should consider addressing the following issues: IFC has recognized similar issues following an internal re- view of its TA operations and is undertaking steps to improve · Develop a quality control mechanism for advisory work current systems. IFC has recently established quality con- that is provided to government clients. A peer-review trol mechanism for TAAS through the upcoming PDS-TA a. Recommendations 2a and 2b in the IEG report are for the WBG. These recommendations and management's response to them are in Annex I.B.1: Recom- mendations for the WBG. 4 5 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Recommendation Management Response process should be put in place to ensure that advice pro- forms and approval process. Each TAAS project will be re- vided is of high quality and reflects internationally rec- viewed and vetted by the relevant regional and relevant in- ognized good practices and standards. Such a process dustry departments. IFC's regional directors will have the ul- may also enhance coordination efforts across the WBG. timate approval authority on every TAAS operation. There is also a formal process to seek input from others within IFC, · Incorporate "good practice" measures into IC TAAS op- i.e., peer review, at the design stage of the project, and those erations, within a results-based management (RBM) comments will be visible to all of the reviewers and approvers system, to improve outcomes and impacts on the ground. later in the process. Inputs from outside IFC, including those To support this objective, a program for disseminating from the WBG and beyond, will be sought as appropriate IC TAAS "good practices" and lessons learned should be through other means. developed. RBM training of staff who provide IC TAAS should help shape the structure and follow-up of oper- Quality control mechanisms at completion of TAAS vary, re- ations toward results-driven outcomes. flecting the wide range of size, scope, design, and form of final deliverable (report, training, capacity building, con- · Implement IFC-COI training to enable the investment sulting to improve process/performance, white papers, leg- departments, as well as staff and managers who deal islation, etc.). The new quality assurance process at approval with IC TAAS, to deal with potential and perceived COI should help improve TAAS design and facilitate increased early on and more proactively, and ensure that current use of best practices. This formal review process could also procedures are known and followed. As part of a sys- lead to some consolidation of products and services with tematic TAAS approvals process, all IC TAAS opera- more focus and increased size and scope. These steps tions with potential risk of COI should be screened and should lead to a more informed position regarding best where actual, potential or perceived COI exists, referred practice quality assurance measures before delivery to the to the COI office. Where COI-related issues are identi- client /TAAS recipient. fied, they should be disclosed and managed according to COI rules and procedures. IFC's internal review of its TA operations also led to a sim- ilar recommendation of incorporating good practice into From the Joint Overview Report (Rec 3b) IFC's TA activities. IFC has recently completed the design of As part of the corporate-wide initiative to develop operat- an RBM-based TAAS evaluation framework. The SME Dept. ing guidelines and procedures for TAAS operations, Man- is currently testing this new framework and expects to agement should: (i) develop a quality control mechanism for launch this within fiscal 2005. Among other items, this advisory work provided to government clients; (ii) incorporate framework captured outcomes, impacts, lessons learned, and good practice measures into TAAS operations within an good practice examples. A formal training was rolled out to RBM planning, monitoring, and evaluation system; and (iii) help implementers better understand RBM theories and implement IFC-wide training in conflict of interest policies tools. IFC has also recently established a new monitoring and to ensure that current procedures are known and followed. evaluation (M&E) team comprising a Principal and a Senior Evaluation Officer in the SME department to manage the M&E of TAAS. Integral to the mandate of the M&E team is the development of a knowledge management and best practice dissemination framework for its TAAS. The aim is for good practices from the TAAS business (starting PDFs and private enterprise partnerships) to feed into IFC's front-end work and eventually into the WBG repository for good prac- tice examples, as appropriate. 4 6 A N N E X I . B . 3 : R E C O M M E N D AT I O N S F O R T H E I N T E R N AT I O N A L F I N A N C E C O R P O R AT I O N Recommendation Management Response Management is pleased that the IEG evaluation did not en- counter any specific case of conflict of interest in IFC's IC activities. There are systems in place in IFC, such as sepa- ration of the advisory group and the transaction group, to responsibly manage potential or perception of conflict of in- terest issues. A Conflict of Interest (COI) Office in the WBG is in place where managers and directors can go for advice as appropriate. In addition, the approval process for in- vestment operations prompts transaction staff through the project data sheet (PDS) to identify potential conflict of in- terest within the WBG. Similarly, the new approval process for TAAS requires staff through the PDS-TA to identify po- tential conflict of interest. With respect to training, the CIO plans to introduce in the current fiscal year a comprehensive e-learning program for the WBG. Training should help staff spot areas of potential conflict of interest and reflect them accordingly in the rel- evant PDS for department management's attention and ac- tion. The CIO has already conducted training for IFC staff in a number of hubs (e.g., Moscow, Johannesburg, and Hong Kong) using the proposed e-learning training modules. The e-learning program will give priority to staff in joint Bank- IFC global products group departments and other staff in- volve in TAAS. 4 Tracking IC Issues IFC should consider establishing a mechanism to track and Management agrees that tracking IC issues is important and follow up on IC issues encountered with a view to sup- will consider adding a section in the Project Status Report porting its portfolio and potential pipeline companies in ad- to track significant IC issues as and when they are en- dressing these issues, informing IFC's IC work program, and countered during the life of a project. These data could feeding this information into the work programs of relevant then be aggregated at the country level with a view to in- WBG PSD staff charged with improving investment climate forming IFC's TAAS strategy and the WBG's IC work. and setting CAS priorities. From the Joint Overview Report (Rec. 3c) Develop a mechanism to track and follow up on IC issues to support IFC's portfolio and potential client companies, to update IFC's IC work program, and to inform relevant WBG staff charged with improving investment climate and set- ting CAS priorities. 4 7 ANNEX I.B.4: RECOMMENDATIONS FOR THE MULTILATERAL INVESTMENT GUARANTEE AGENCY (FROM THE IEG-MIGA EVALUATION) Recommendation Management Response 1 Comparative Advantage and Strategy 1a MIGA should define clearly its comparative advantage in pro- Management agrees that it is important to clearly define ad- viding technical assistance, and focus on areas where it ditionality and complementarity between all parts of the can provide additionality and complementarity to the WBG, WBG working in investment climate. Since the evaluation, other donors, or the private sector. MIGA has taken steps to clarify the role of the agency's TA relative to the other parts of the WBG. A key step is the development of a protocol setting out the interface between MIGA and FIAS. This protocol is being fi- nalized and will be shared with the Board (please see Man- agement Response to Joint Overview Report Recommendation 1c, Roles of FIAS and MIGA). The proto- col will then be integrated into MIGA's Operational Regula- tions. This protocol complements the previous brochure developed with the WBG: "The World Bank Group Guide to FDI Advisory and Information Services." Strengthening coordination with the private sector, other donors, and the rest of the WBG has been an ongoing trend within the TA program. Since the evaluation, MIGA has de- veloped a new knowledge portal for investment promotion (www.fdipromotion.com) as a mechanism for enhancing col- laboration and knowledge sharing. MIGA is also concluding collaboration agreements with other multilateral donors pro- viding TA in related areas in order to further integrate MIGA's TA into a broader framework of IC activities outside the WBG. Management will continue to look for opportunities for in- tegration into joint CAS and other joint strategy development and program design activities across the WBG. In addition, MIGA's comparative advantage in the provision of technical assistance will be discussed as part of the Agency's 2005 Strategic Review (see below). 4 9 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Recommendation Management Response 1b MIGA should endorse and implement a clear and coherent Management agrees that it is important to be selective and strategy for selecting its clients that ensures high effec- strategic when developing programs for its clients. Since the tiveness and development impact. Within this strategy, it evaluation, MIGA has sought to sharpen its policies for TA should exercise better selectivity of clients to improve the deployment. This effort will be part of the ongoing Strate- effectiveness of resource use and impact. gic Review, a comprehensive assessment of the strategic direction of the Agency that takes place every five years, as specified in the MIGA Convention, and was to be presented to the Board in calendar 2005. MIGA selects its clients based on their needs and readiness. Beginning in 2000, MIGA instituted a diagnostic needs as- sessment, which is a tool to assess the readiness of the client IPI to absorb capacity building. MIGA makes a decision on further intervention based on the outcome of the assessment. MIGA requires the needs assessment as a prerequisite to any sustained MIGA intervention. The Strategic Review will further elaborate on the use of the Needs Assessment as a diagnostic tool. MIGA has been coordinating with FIAS to conduct a joint as- sessment within a broader framework of investment climate assessment and continues to do so. 1c This new strategy should integrate TA and guarantee prod- Management accepts this recommendation. ucts to reap synergies within the Agency. In May 2004, MIGA reorganized, with guarantees and TA grouped together as part of one Operations Group. The re- organization was to allow for an integration of delivery of the two main products. 2 Research on Effectiveness of Investment Promotion 2a MIGA should facilitate or commission research to establish Management agrees with the direction of this recommen- whether investment promotion activities have an impact on dation. But management believes that the research agenda overall investment flows and the extent to which government should seek to build on and expand the initial study of these commitment is a key determinant of success, in order to as- issues conducted by FIAS in collaboration with MIGA in sess the likely impact of its TA program. 2002. There is now increasing evidence from new research work to complement the 2000 FIAS study that well-functioning IPIs are effective in attracting increased levels of FDI to a coun- try. MIGA's research efforts financed by the administrative budget are intended to augment the Agency's capacity build- ing and information dissemination programs, and the fiscal 5 0 A N N E X I . B . 4 : R E C O M M E N D AT I O N S F O R T H E M U LT I L AT E R A L I N V E S T M E N T G U A R A N T E E A G E N C Y Recommendation Management Response 2004 program includes the development of several case studies examining the elements of successful investment pro- motion programs in four very different developing country environments. In addition, MIGA is currently studying the im- pact of subnational IPIs on investment promotion. The find- ings of these analyses will be disseminated through MIGA's new series "Investing in Development." 3 Funding Sources, Cost Effectiveness, and Coordination 3a MIGA should continue to seek additional funding to com- Management accepts this recommendation. plement its own resources, and align its work program closer with World Bank/IDA priorities and lending to sup- MIGA's Invest in Development Fund (IIDF) was created in fis- port capacity building. cal 2004, with MIGA contributing $400,000, along with con- tributions from a variety of other partners and donors. In addition, MIGA is currently developing a trust fund strategy to cover the activities of the whole Agency. As noted, the Agency has redoubled its efforts to coordinate closely all technical assistance with the WBG and other donors. 3b MIGA needs to improve its cost-measurement tools and Management accepts this recommendation and notes that tracking systems for its TA activities to be able to assess its important steps have been taken since the evaluation to this cost efficiency in the future. end. Effective tracking of costs requires that the right manage- ment information systems be put in place to be able to cap- ture costs by tasks and activities. MIGA did not have such a system in place until fiscal 2004. Since then, progress has been made. The biggest component of TA, for example, is staff and consultant time. Recognizing this, MIGA has now introduced the use of a time recording system throughout the newly created Operations Group (which combines tech- nical assistance and guarantees). With this platform in place, MIGA is now in a position for the first time to track progress on tasks against the scope and the budget allocated. 3c MIGA should continue its coordination and cooperation Management accepts this recommendation. with FIAS and other partners to ensure that resources are targeted to provide additionality and complementarity. The A protocol setting out the interface between MIGA and respective roles of FIAS and MIGA and hand-over protocols FIAS is being finalized. The protocol will be integrated into should be codified to ensure consistent application. MIGA's Operational Regulations. (Please see also manage- ment response to IEG-MIGA Recommendation 1a.) 5 1 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Recommendation Management Response 4 Formalize Relationship with Clients 4a MIGA should formalize its relationship with client coun- Management accepts this recommendation. tries for in-depth TA through formal contracts, including arrangements for sharing costs. It should clearly define the Every new project has a scope of work, a budget, objectives, scope of work, costs, objectives, and indicators of success. and milestones, as well as a client agreement. In addition, project codes have been introduced across the Agency for TRS, allowing better tracking of costs. (See Recommenda- tion 3.) 5 Implement Monitoring System 5a MIGA should put in place a monitoring system to track the Management accepts this recommendation and is moving progress and impacts of its TA interventions. toward implementation. However, it should be recognized that the full implementa- tion would involve MIGA budgetary issues and improvements in theory and practical indicators for the intermediate out- comes of MIGA's impact on increased FDI. In the interim, al- though MIGA's Operations Department does not have a budget specifically for monitoring, the team is tracking in- dividual projects against project milestones and objectives and is working with MIGA's Environment and Policy group to implement a monitoring program. MIGA is implementing a monitoring program to benchmark IPA performance. 5 2 ANNEX I.C: CHAIRMAN'S SUMMARY, COMMITTEE ON DEVELOPMENT EFFECTIVENESS (CODE) On January 12, 2005, the Committee on emerged from the joint IEG evaluation: (i) the Development Effectiveness (CODE) met to WBG needs to formulate IC strategies tailored discuss the joint IEG-World Bank, IEG-IFC, IEG- to specific country needs in both joint and non- MIGA evaluation Improving Investment joint CAS countries; (ii) the Bank Group needs Climates: An Evaluation of World Bank Group to promote reforms of institutions that are Assistance, and this report. integral to the investment climate and consider how to more proactively support the political Background. A joint IEG Briefing on Investment economy process; and (iii) the division of labor Climate Evaluation from all three units was in the WBG is not always clear, coordination has presented at an informal CODE meeting on been uneven in implementing the IC agenda, June 7, 2004. Some of the main issues raised and results from recent attempts to improve during the meeting were: diversity of institu- coordination should be tracked by Manage- tional themes in the regions and within ment. He also clarified that the research countries; the applicability of OPCS' thematic recommendation was to analyze the relation- definition of Core and Non-Core investment ship between investment promotion and invest- climate (IC) themes; differences in the results ment flows rather than to do more research on of first- and second-generation reforms; the link of IC with growth or employment. adequacy of coordination among the World Bank Group (WBG) units and the overlap of Management Comments. Management highlighted some investment climate activities; and the that the WBG is a small player in promoting effectiveness of MIGA's technical assistance investment climate. Efforts are ongoing in activities. The Board discussed the report preparing the Doing Business report, IC surveys, entitled World Development Report 2005: A and data collection. Management considered Better Investment Climate for Everyone on that it has the tools available to provide free- June 17, 2004. The report followed on from the standing advice on IC matters, whether or not Private Sector Development (PSD) Strategy, there is a specific IC-related lending operation endorsed by the Board in 2002. The Board also in the country concerned. Management also discussed Strengthening the Foundations for mentioned that there are many synergies among Growth and Private Sector Development the advisory systems across the WBG, including Investment Climate and Infrastructure between IFC and MIGA. Development, which was further considered by the Development Committee on October 2, Overall Conclusions and Next Steps. Members 2004. The Bank-IFC Doing Business editions in welcomed the reports, which they found 2004 and 2005 were useful in identifying comprehensive, and also appreciated the constraints of the investment climate and in opportunity to discuss them and the manage- setting agendas for reforms. ment's response. They also found the statement of the External Advisory Panel to be very useful. DGO Presentation. The DGO noted that three The issues that elicited most interest or concern overarching findings and recommendations from members and other speakers were: (1) the 5 3 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E need for a solid results framework to track coordination within the Group. In the spirit of progress in investment climate and to monitor improving WBG coordination, some members the effectiveness of WBG activities; (2) coordi- supported the idea for integrated IEG evalua- nation across the WBG and within each WBG tions of joint WBG activities. The DGO noted institution; (3) consideration of IC issues as part that the form of joint evaluations by IEG of joint CASs; (4) strengthening technical depended on the evaluation topic. For assistance and advisory services (TAAS); and (5) example, the integrated evaluation of private- harmonization and coordination with other sector participation in electricity worked well organizations. Some members asked for a because the topic was narrow relative to the follow-up mechanism to continue the Board's wide scope of IC activities. Some members involvement in the IC work following the proposed an integral reform of WBG activities recommendations of the joint evaluation. to improve investment climate based on the The following main issues were raised evaluation findings, to revise Core and Non- during the meeting: Core IC activities, and to better communicate and disseminate information on different Results Framework. Members stressed the need instruments and services for promoting invest- to make IC strategies more results oriented and ment climate offered by each WBG institution. to improve monitoring results. One proposed the design of a results framework for IC activi- Joint CASs and Investment Climate. Several ties. Management indicated that the measure- speakers encouraged the consideration of IC ment agenda deserves top priority. In this issues as part of the joint CASs as opposed to regard, several speakers urged caution in separate IC strategies. They also requested that interpreting and designing measurement indica- the proportion of joint CASs be increased. tors, as well as some humility in attributing Management clarified that IFC or MIGA success to WBG efforts. A member contrasted engagement in joint CASs is complex and there the modest improvement in investment climate are capacity constraints. Some speakers also with the significant amount of Bank lending and stressed that the WBG support for investment TA activities in this area. climate should be country specific and based on good understanding of the local business WBG Coordination. Several speakers noted the culture, institutions, and the anatomy of corrup- burden on clients, especially resulting from tion. Several speakers emphasized the need to contradictory or even duplicative advice given consider the International Development Associ- by different teams of the Bank Group. Many ation mandate, region specific issues such as speakers emphasized the importance of SMEs in Africa, challenges of small states, and improving coordination across the WBG and continuous support to countries with poor within each WBG institution (e.g., between investment climate. A member stressed the different sector units). They felt that the MR did importance of private sector involvement in not fully address these coordination issues. To preparing PRSPs. Management agreed on the improve coordination across the WBG and merits of bringing the private sector into the within each WBG institution, there was some dialogue of a PRSP or CAS preparation. sentiment in favor of more decisive measures including the possible consolidation of IC work TAAS. The TAAS activities, particularly those of under one Vice Presidency, and more integra- IFC (including FIAS) and MIGA, drew many tion of sectors, regions, and networks within comments as participants sought greater direct the Bank. Some speakers acknowledged the and indirect impact, improved division of labor, good progress achieved following the creation and rationalization of TAAS funding mechanisms of the Office of the Vice President of DVP. A few (including IFC advisory services, MIGA Trust speakers also suggested that the Organizational Funds, etc.). A few speakers felt that the manage- Effectiveness Task Force address the issue of ment response should have elaborated further 5 4 A N N E X I . C : C H A I R M A N ' S S U M M A R Y, C O M M I T T E E O N D E V E L O P M E N T E F F E C T I V E N E S S on TAAS issues. Incorporation of a result across IFC units. One of them recommended framework in future TAAS was suggested. A IC work as one of IFC's strategic priorities. A member queried whether there was an adequate member thought that IFC should not take on incentive mechanism to improve TAAS. an advisory role where it intends to be an investor subsequently because of the potential Harmonization and Related Coordination with Other for a conflict of interest. Management noted Organizations. Some speakers supported better that the conflict of interest is now being coordination of IC efforts between WBG and effectively managed in the WBG. other organizations, including bilateral donors, and suggested that the forthcoming Paris MIGA. While welcoming MIGA's merging of meeting on harmonization flag the benefits of guarantee and TA activities under one group, synergy. Members encouraged the involvement some members advocated further consolidation of investment partners in the design of such as incorporating MIGA's IC activities into solutions and increased participation and FIAS. Management reported that MIGA and consultation to motivate them. Management FIAS now have an integrated system in place indicated that there are formal ways of with signed protocols. A member suggested that working on diagnostics with multilateral due to MIGA's relative size and limited development banks and other donors. resources, it should provide advisory services to assist mostly IPIs. Management noted that the Limitations in Improving Investment Climate. Partici- review of MIGA services is part of the current pants noted the relevance of institutional strategic review. One member noted that reforms to improve investment climate, as well MIGA's presence in a country was an indicator of as the need for continued attention to the bad investment climate. IEG-MIGA responded policy environment, while cautioning against that MIGA's guarantees are, on average, in application of standard models and solutions. countries with better investment climate than Some acknowledged that the political economy TAAS clients have, and that the average invest- of a country--such as limited country ment climate for countries with MIGA guaran- ownership, vested interests, incentive systems, tees is similar to the overall investment climate and lack of broad support for reforms--may for all developing countries. constrain improvements in investment climate. However, management indicated that in such External Advisory Panel. Some members agreed an environment the Bank can still contribute with the observations made by the Panel, to the debate. One member noted the inconsis- especially the need to identify incentives for IC tency between the poor macro progress of reforms, and the small volume of TAAS investment climate and the good and satisfac- designed to support IC relative to the volume tory ratings at the micro (i.e., project) level, of lending. They also noted the Panel's and queried why the ratings of IC components comment that joint WBG evaluations could be are worse than the Bank averages. better coordinated. A member felt that outside researchers should have greater access to the IFC. A few members were concerned about the WBG's knowledge and data. Management lack of corporate level TAAS priorities and reported that many researchers do use the diffused responsibilities for IFC advisory work Doing Business data extensively. Chander Mohan Vasudev Chairman 5 5 ENDNOTES FOR PART I Foreword 6. World Bank analytical and advisory activities 1. This evaluation does not cover the activities of comprised an estimated 1.5 percent of the value of IC the International Center for Settlement of Investment lending. Disputes. 7. IFC's IC-related technical assistance includes 1. L'expression « Groupe de la Banque mondiale » both IFC- and donor-funded technical assistance. See désigne la BIRD, l'IDA, la SFI, la MIGA et le CIRDI ; les IEG-IFC report for details. termes « Banque mondiale » ou « Banque » désignent 8. Management notes that Doing Business is a uniquement la BIRD et l'IDA. "time and motion" study that measures the obstacles 1. Por Grupo del Banco Mundial se entiende el faced by an entrepreneur performing standardized BIRF/AIF, la CFI, el OMGI y el CIADI; "Banco Mundial" tasks-- for example, starting a business, getting credit, o "Banco" hacen referencia al BIRF/AIF solamente. and enforcing contracts. Some of these tasks are measured for a hypothetical firm. The methodology Chapter 1 chapter in the annual Doing Business Reports and the 2. An approach paper sets out the evaluation's methodology papers for each indicator on the Web site scope and design. The IBRD/IDA portfolio analysis cov- exhaustively document the methodology and its lim- ers fiscal 1993­2003; the remaining components of the itations. Regarding the informal sector, Doing Business IBRD/IDA evaluation, which were prepared earlier, sheds light on how institutional frameworks influ- cover fiscal 1993­2002. The IFC evaluation covers fis- ence the entrepreneur's choice of formality/infor- cal 1993­2003 for investment operations and fiscal mality. Entrepreneurs choose to remain informal when 1993­2002 for noninvestment activities. The World they perceive that the costs of formality (registration, Bank Group is currently attempting to improve the getting credit, and so on) outweigh the benefits of focus and effectiveness of its IC activities as part of the being formal (property right protection, contract en- re-emphasis on the growth agenda. Where relevant, forcement, and so on). Informality has been an im- this report notes, but does not evaluate, these recent portant theme in the first two annual Doing Business activities. Reports. 3. Following the institutional economics literature, 9. This set of themes is consistent with the method- "institutions" here refer to "the rules of the game" that ology used by Operations Policy and Country Ser- affect investment decisions by influencing transac- vices and the PSD Sector Board. "Core" IC themes tion costs and risk. include regulation and competition policy, corporate 4. This was true for investments approved in the governance, legal institutions for a market economy, early to mid-1990s and evaluated at operating matu- judicial and other dispute resolution mechanisms, rity five to six years later. Improvements in the in- and personal and property rights. "Non-core" IC vestment climate were also associated with better themes include tax policy and administration, infra- development outcomes of IFC investments. structure services for PSD, export development and competitiveness, trade facilitation and market access, Chapter 2 and other financial and PSD. 5. Projects containing core or non-core IC themes as 10. An annex to the main report outlines the coun- primary or secondary objectives. try case study methodology. 5 7 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E 11. In this evaluation, IEG-IFC focused on IFC's Investment Climates: An Evaluation of World Bank TAAS that contained an explicit component to advise Group Assistance, IEG, November 1, 2004. the government on the legal and regulatory framework 14. See, respectively, World Development Report 2005: or to build the capacity of a regulator or government A Better Investment Climate for Everyone (New York: Ox- agency. IEG-IFC excluded TAAS that advised on how ford University Press for the World Bank, 2004); Doing to conduct transactions (for example, sales or priva- Business 2005: Removing Obstacles to Growth (New tization transactions). York: Oxford University Press for the World Bank and In- ternational Finance Corporation, 2004); and Unleash- Chapter 3 ing Entrepreneurship: Making Business Work for the Poor 12. Management has noted that coordination and (United Nations Development Programme, 2004). cooperation between the FIAS and MIGA is codified. 15. IFC's five strategic priorities are to (a) The President of the WBG specifically requested prepa- strengthen the focus on frontier markets; (b) differ- ration of a brochure entitled "The World Bank Group entiate through sustainability competencies; (c) ad- Guide to FDI Advisory and Information Services," which dress constraints to private sector growth in sets out the roles of the various units. A memorandum infrastructure, health, and education; (d) continue to of understanding setting out the detailed interface be- focus on local financial markets development through tween FIAS and MIGA is being completed. IEG-MIGA institution building and use of innovative financial welcomes the preparation of this memorandum of un- products; and (e) build long-term partnerships with derstanding. emerging global businesses to encourage adoption of sustainable business practices and promote south- Annex I.B south transactions. The first four priorities have strong 13. The four volumes are combined as: Improving ties to the investment climate. 5 8 Part II World Bank Experience 5 Summary A country's "investment climate" (IC) is its environment for private sec- tor activity. The quality of the investment climate is determined by the risks and transaction costs of investing in and operating a business, which in turn are primarily determined by the legal and regulatory framework, bar- riers to entry and exit, and conditions in markets for labor, finance, informa- tion, infrastructure services, and other productive inputs. Governments influence the quality of their management, financial stability, and revenue countries' investment climates through policies, stability) are higher than for some institutional institutions, and their relationship with the areas (property rights, public administration, private sector. The quality of the investment transparency, and rules-based governance). This climate is linked to poverty reduction by the suggests that institutional issues need attention. impact of better investment climates on private sector activity, and thus on economic growth The Bank's Strategic Focus and employment. Under different names, the investment climate was a part of Bank private sector development Trends in the Investment Climate (PSD) strategies throughout the 1990s. Recently, As shown in Independent Evaluation Group's however, the subject has risen to become one of (IEG's) Annual Review of Development the two pillars of the World Bank Group's Effectiveness 2003, the investment climates of (WBG's) corporate strategy for reducing poverty developing and transition economies have and occupies center stage in the 2002 Private improved modestly in recent years. Broad indica- Sector Development Strategy of the WBG. The tors of the policy and institutional environ- increased prominence of the investment climate ment--such as the Country Policy and at the corporate level is mirrored in the shift in Institutional Assessment (CPIA) rating compiled Country Assistance Strategies (CASs) over the by the Bank--improved over the past five years past decade from first-generation to second- in all regions, but particularly in the transition generation reforms. This "macro first, micro economies. However, looking at the components second" sequencing was not so much a planned of the CPIA, it is noticeable that indicators of strategy as the result of the disappointing supply macroeconomic conditions (macroeconomic response to first-generation reforms. Increas- 6 1 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E ingly, the Bank has become aware of the objective of building a global IC database, but the importance of institutional reform to sustain Bank may need to clarify that objective to clients growth. This shift in focus was appropriate and is to manage expectations. well supported by the literature. Other problems with IC diagnostics carried CASs in all regions show a trend toward out during the review period have been (i) a lack greater emphasis on the investment climate. of prioritization of problems and their proposed However, the priorities given to different IC solutions and (ii) an excessive focus on the topics vary by region. For example, in East Asia, manufacturing sector, urban areas, and formal the emphasis has been on corporate sector firms as opposed to rural areas and the governance, corporate restructuring, and informal sector. These problems are beginning financial sector reform. In Latin America and the to be addressed in the most recent Investment Caribbean, there has been more attention to Climate Assessments (ICAs). Finally, it should be regulatory issues and competitiveness. To some kept in mind that enterprise surveys provide extent, these differences reflect the macroeco- valuable information on the perspectives of the nomic environment, such as in East Asia follow- private sector but are an insufficient basis for ing the financial crisis. They also reflect the fact policy recommendations. The views of business that different IC constraints matter to different on public policies need to be balanced with firms, because firms are diverse. other economic and social perspectives. Nonlending Services Lending Operations The Bank's economic and sector work (ESW) A review of lending operations over the past 10 has helped motivate many governments to years shows that IC lending, broadly defined, adopt IC reforms. Nevertheless, there are areas accounts for a large share of the Bank's portfo- where more work needs to be done to provide lio. In other words, supporting improvements in guidance to clients as well as to Bank staff the investment climate is a large part of what the designing IC interventions. Not enough is Bank has always done. At the same time, the known about good practice in institutional share of the Bank's total lending in investment design or about the dynamic process of climate shows no observable trend over the past changing institutions. It would be useful to have 10 years, although it has varied. Thus, the Bank's a typology of country situations and institutional increased strategic focus on improving invest- designs that would provide guidance on which ment climates has not yet translated into a types of arrangements work where, how the greater share of the loan portfolio being devoted change process happens, and how it can be to this objective. supported and sustained. The Bank's ESW and The composition of IC lending also has research have not yet provided enough of this remained relatively stable over fiscal 1993­2003. Of knowledge of institutional design and the the five Core IC themes, regulation and competi- process of reform. tion policy has been and remains by far the Diagnostic work on the investment climate has dominant theme. Other areas--judicial reform, evolved toward greater use of enterprise surveys property rights, and corporate governance-- to provide information on the constraints to PSD received less emphasis, both in the early and later as perceived by firms. The most recent survey years of the period. Across Non-Core investment instruments do a good job of benchmarking climate themes, infrastructure and financial indicators of the quality of a country's investment sector operations are dominant. climate in a way that allows cross-country Over the entire fiscal 1993­2003 period, Core comparisons as well as monitoring of changes in IC projects performed better than the Bank individual countries over time. However, some average. Outcome ratings improved only slightly clients have complained that surveys and assess- over the period, in contrast to a more significant ments duplicate earlier work. This duplication is improvement in the Bank-wide portfolio. Thus, perhaps an inevitable consequence of the Bank's the performance of Core IC projects is falling 6 2 S U M M A R Y relative to the Bank average. An analysis of IEG- Coordination across the WBG on IC issues World Bank's reviews of Implementation was weak during the period of the evaluation, Completion Reports suggests that more recent both between the Bank and IFC and across IC projects were more heavily focused on sector units within the Bank. Competition for longer-term institutional reforms that were the IC agenda between PSD and the Poverty more vulnerable to the political economy of Reduction and Economic Management (PREM) reform, implementation and enforcement, and units was common and in some cases led to a the capacity of public sector agencies. lack of coordination and information sharing. From different angles, the various components The burden of integrating different sector of IEG-World Bank's evaluation come to the same perspectives and setting priorities lay with the conclusion: Institutions are key to the quality of country departments--but some country the investment climate, and supporting institu- departments were more actively involved in tional reform is a critical challenge for the Bank. managing this integration than others. The literature review provides evidence that cross- The Bank needs to have an organizational country differences in the quality of institutions structure that facilitates integration across sectors explain a large share of the differences in growth and collaboration among staff. Recently, the joint and may even "trump" other growth determi- World Bank-IFC Private Sector Development Vice nants. The case studies confirm this view by Presidency has undertaken to improve coordina- providing examples of countries where the Bank tion and reap synergies in IC work across the paid insufficient attention to institutional WBG, for example by holding WBG-wide country weaknesses, and as a result had little impact on review meetings and conducting WBG-wide the investment climate. And the slower than training in the field. The Vice President of the average improvement in the IC loan portfolio is Bank-IFC PSD vice presidential unit is also Chief explained by the increased concentration of IC Economist of the IFC. projects on complex, politically sensitive institu- tional reforms that take time to achieve results. Recommendations The IEG-World Bank evaluation concludes with Organizational Issues the following recommendations to improve The investment climate is a broad topic, and this Bank support for IC reforms: is reflected in the wide-ranging "ownership" of the Bank's IC portfolio across networks and · Pay more attention to institutions and the po- sector boards. In fact, more IC projects are litical economy of reform. assigned to non-PSD networks than to PSD. In a · Improve the focus and use of survey-based di- sense, this is a good thing: It shows that IC issues agnostics. have been mainstreamed in the Bank. But it also · Do a better job of prioritizing and packaging means that coordination and teamwork across IC reforms in lending operations. sector units is needed to design integrated · Find organizational solutions that help integrate strategies and to balance private sector perspec- microeconomic and macroeconomic reform tives with broader economic and social goals. agendas. 6 3 6 Introduction A country's investment climate is its environment for private sector ac- tivity. The quality of the investment climate is determined by the risks and transaction costs of investing in and operating a business, which in turn are primarily determined by the legal and regulatory framework, bar- riers to entry and exit, and conditions in markets for labor, finance, informa- tion, infrastructure services, and other productive inputs. Governments influence the quality of their economies PSD issues in specific sectors (e.g., countries' investment climates through policies, extractive industries (2003), water supply and institutions, and their relationship with the sanitation (2003)). In 1998, IEG-World Bank and private sector. The quality of the investment IEG-IFC conducted an evaluation of the Foreign climate is linked to poverty reduction by the Investment Advisory Service (FIAS). This broader impact of better investment climates on private and more comprehensive evaluation of the Bank sector activity, and thus on economic growth Group's IC work builds on the findings of and employment. previous selective evaluations. Improving the investment climate of client The Investment Climate Study is a joint evalua- countries is one of the two pillars of the World tion of the IEG (covering the activities of the Bank Group's1 approach to development IBRD/IDA), IEG covering the IFC, and IEG effectiveness and is central to the 2002 Private covering MIGA. The combined findings are Sector Development Strategy. Despite the summarized in Chapters 1­4 of this report. centrality of the topic, the PSD Strategy notes that "no rigorous effort has yet been made to analyze Evaluation Scope and Design the relationship between the Bank's PSD work in The intended chain of causality from World Bank different countries and improvements in the IC activities to economic performance countries' investment climate..." (World Bank outcomes has three parts: 2002a, p. 37). The IEG-World Bank has touched on some IC issues in earlier sector and corporate · The link between Bank activities and the adop- evaluations--of Bank support for policy reform tion of policy and institutional reforms (2003 Annual Review of Development Effective- · The link between reforms and actual changes ness), Bank assistance to the transition in the investment climate 6 5 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E · The link between changes in the investment cli- which appear in complete form as background mate and performance outcomes (firm-level papers (Annex III.A describes the tools and productivity and profitability and economy- methods used): wide productivity, investment, income, and employment). · A review of the literature on the drivers of in- vestment and growth and of the microeco- The IEG-World Bank evaluation focuses on nomic factors that determine investment the first two links of the chain--from Bank behavior3 activities to policy and institutional reforms, and · A review of IC issues in Bank strategy docu- for the country case studies, on the relationship ments--institution-wide PSD strategies, Coun- between reforms and actual changes in the try Assistance Strategies (CASs), and Poverty investment climate. The evaluation relies on a Reduction Strategy Papers (PRSPs)4 literature review to provide evidence on the · A description and analysis of the portfolio of relationship between improved investment IBRD/IDA lending operations that support im- climates and final economic outcomes.2 provements in the investment climate The evaluation addresses the following · A description and analysis of IBRD/IDA non- questions: lending services including economic and sec- tor work and survey-based diagnostic · Relevance of Bank assistance: What relative assessments priority did the Bank attach to addressing IC · Results of structured discussions with Bank issues among its total interventions? Were the staff and international investors5 policy and institutional areas emphasized in · Client consultations and country case studies Bank operations consistent with current em- for Indonesia, Romania, India, Mozambique, pirical research linking IC indicators with per- and Peru.6 formance outcomes and with the obstacles to investment as perceived by potential investors? A Review of Global Trends in the Do the survey-based diagnostics used by the Investment Climate Bank provide good information about the qual- IEG-World Bank's Annual Review of Develop- ity of the investment climate, and do they lead ment Effectiveness (ARDE) 2003 evaluates the to sound policy advice? effectiveness of Bank support for policy and · Effectiveness of Bank assistance: Are Bank institutional reform in borrower countries. The activities helping to get IC reforms implemented? indicators of policy and institutional perform- Was the Bank effective in motivating client gov- ance presented in the ARDE can be interpreted ernments to undertake reforms beyond what as very broad indicators of the quality of the they would have done in the absence of Bank investment climate. The indicators compiled by intervention? Was conditionality in lending op- four organizations--the World Bank's CPIA, the erations helpful in supporting reform? What Heritage Foundation Index of Economic were the outcomes of Bank interventions, in Freedom, the International Country Risk Guide terms of the quality of the investment climate (ICRG), and the Economist Intelligence Unit and in terms of investment and growth? Country Risk Service--agree that developing · Sustainability: What is required for IC im- countries' policies have, on average, improved provements to be sustained? How should re- modestly.7 Improvement is seen at both low- and forms be sequenced? middle-income levels (shown as IDA and IBRD · Organizational issues: Does the Bank's or- country groups in figure 6.1). Although there are ganizational structure support good invest- some distinctive regional patterns, average ment climate work? ratings for the CPIA have also improved for every one of the Bank's regions (figure 6.2). This report summarizes the findings of the Improvements in the investment climate, following evaluation components, some of measured very broadly by the CPIA, were 6 6 I N T R O D U C T I O N Figure 6.1: IC Indicators in Developing and Transition Economies (all rated IBRD/IDA countries) 100 90 80 70 indicator 60 50 rescaled 40 30 Value 20 10 0 CPIA CPIA Heritage Heritage ICRG ICRG EIU EIU IDA IBRD IDA IBRD IDA IBRD IDA IBRD 1999 2003 Source: IEG (2004a). Note: CPIA = Country Policy and Institutional Assessment; ICRG = Implementation Completion Report; EIU = Economist Intelligence Unit. Figure 6.2: CPIA by Region, 1999 and 2003 100 90 80 70 60 CPIA 50 Scaled 40 30 20 10 0 Africa East Asia Europe and Latin America Middle East South Asia and Pacific Central Asia and the and Caribbean North Africa 1999 2003 Source: World Bank data. Note: CPIA = Country Policy and Institutional Assessment. 6 7 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E greatest in transition economies--which started that were the target of first-generation policy the reform effort from a lower base than the reforms supported by the Bank: macroeco- average--including some that joined the nomic management, trade and foreign exchange European Union (EU) on May 1, 2004, and those regimes, and public debt management. Ratings that aspire to EU accession. Countries whose are lowest in some institutional areas--property investment climates deteriorated were more rights and governance, transparency, and the diverse. Five of the 10 countries showing deteri- quality of public administration--that are oration between 1999 and 2003 were in Latin commonly termed second-generation reforms. America and the Caribbean, which suffered This suggests that the Bank needs to focus its macroeconomic crises during the period. Signif- assistance on these institutional issues, which icant reform occurred in environments that are among the core IC themes that are the were conducive to change, driven either by crisis subject of this evaluation. (macroeconomic crisis or transition from Country risk indicators provide a broad planned to market economies) or opportunity measure of policy and institutional perform- (e.g., EU accession, the chance to join regional ance. They provide a useful reminder that much agreements, a new regime). remains to be done to improve the investment Looking at the components of the CPIA climate in many developing countries. Until (figure 6.3), it is evident that current ratings are recently there has been a lack of microeconomic highest in some of the macroeconomic areas data that could be used to compare the quality Figure 6.3: CPIA Components, 1999 and 2003 Trade & foreign exchange regime FIRST Macroeconomic management GENERATION Management of public debt Gender Goods & factor markets level Competition 2003 Poverty monitoring & analysis by Human resource development Revenue efficiency ranked Sustainability of reform Equity of public resource use Fiscal policy Budget & financial management components Social protection & labor CPIA Financial stability Environment Financial sector depth Quality of public administration Transparency SECOND Property rights & governance GENERATION 2.8 3.0 3.2 3.4 3.6 3.8 4.0 CPIA rating 1999 2003 Source: World Bank data, 2004. Note: CPIA = Country Policy and Institutional Assessment. 6 8 I N T R O D U C T I O N of the investment climate, at a detailed level, efficiency of enforcing property rights through across countries. To fill this gap, the Bank's the courts. Countries that protect such rights Doing Business Project (discussed in Chapter 8) achieve better social and economic outcomes has just started collecting data on the cost of (World Bank 2004a, pp. xv­xvi). doing business in more than 130 countries (was The real issue is not "more" or "less" regula- to be increased to 145 countries in 2005).8 The tion, but the effectiveness of regulation indicators will be updated annually to provide (although some argue that, in some areas, "less" time series data on progress with reform. The is a good proxy for "effective"). Over-regulation project's first publication on regulation allows in developing countries comes from two cross-country comparisons of the cost of sources: (a) a hangover of the past when the starting a business, hiring and firing workers, prevailing ethos was that the private sector was enforcing contracts, getting credit, and closing a exploitative and had to be controlled, and (b) business (World Bank 2004a). the wholesale adoption of regulatory systems Doing Business 2004: Understanding from developed country models without any Regulation shows that regulation varies widely assessment of whether it was the right institu- around the world, but that rich countries tional model or whether the country had the regulate business in a more consistent manner institutional capacity to implement them. For than do poor countries. For example, it takes example, Jamaica imported the British regula- two days to start a business in Australia, but 203 tory system in the 1980s with disastrous results days in Haiti and 215 days in the Democratic and has now shifted to much simpler rules- Republic of Congo. It costs more than five times based regulation with arbitration provided by per capita income in Cambodia to start a new external courts (World Bank 1997). business, more than 13 times in Sierra Leone. Across all sets of indicators included in the 2004 The Big Picture: surveys, Bolivia, Burkina Faso, Chad, Costa Rica, Determinants of Investment and Growth Guatemala, Mali, Mozambique, Paraguay, the IEG-World Bank's 2003 ARDE shows that policies Philippines, and Venezuela regulate the most. and institutions matter a great deal in determin- Australia, Canada, Denmark, Hong Kong ing outcomes of the growth of per capita income (China), Jamaica, the Netherlands, New Zealand, and of social indicators. Countries with good Singapore, Sweden, and the United Kingdom policies and institutions, as measured by the regulate the least. CPIA, have the highest per capita income growth Doing Business 2004 also shows that heavier rates. To dig deeper into the relative importance regulation is associated with more inefficiency of policies and institutions, this evaluation tried in public institutions and poor enforcement, as to unbundle the determinants of growth. A well as with worse economic outcomes. The review of the literature shows that, at the highest costs of starting a business, going through level of aggregation, investment and growth are bankruptcy proceedings, hiring and firing driven by accumulation and innovation, which in workers, and enforcing commercial contracts turn are determined by three broad variables-- are associated with lower enterprise productiv- geography, policies, and institutions: ity and investment as well as with greater Geography includes exogenous factors such informality. Rigid employment laws are associ- as natural resources, distance from important ated with fewer job opportunities for women, markets, and climate, which help determine and regulatory restrictions on sharing credit relative prices, transportation costs, and market information restrict access to credit, particularly structure. for small enterprises. The report recognizes the Policies (sometimes called "integration") legitimate need for regulation to deal with include macroeconomic, trade, and sectoral market failures. Two examples are credit rights-- policies that determine the integration of the legal rights of lenders to recover their invest- markets across regional and national boundaries ment if the borrower defaults--and the and, hence, also help determine relative prices. 6 9 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Institutions influence investment decisions by seem to work in different countries, so it structuring the environment within which transac- appears that there is no "one size fits all" tions occur, thus determining transactions costs institutional design. For example, the system of and risk of production and exchange. Institutions private property rights and Anglo-American include the legal and regulatory framework, corporate governance is not the only institu- administrative procedures, property rights, tional arrangement that enforces the principle contract enforcement, corporate governance, etc. of protecting property rights. China, with its (box 6.1). hybrid system of property rights and a legal Recent studies have tried to sort out the regime that is far from the Anglo-American importance of these three broad IC variables in system, has supported a tremendous amount explaining economic performance at the of investment and entrepreneurial activity (IEG country level. Most find that institutions "trump" 2004a, p. 13, from Rodrick 2003). The literature geography and policies in explaining cross- on the country-specificity of institutions comes country differences in income. Macroeconomic to two conclusions. First, certain best practice and structural reforms are necessary conditions principles are applicable to all institutional for growth and can stimulate an initial growth arrangements, such as transparency, accounta- spurt even in the absence of a sound institu- bility, competition, the rule of law, and the tional framework, but modern institutions are protection of property rights. Second, the needed to sustain growth. Principal among mechanisms to implement these principles vary these institutional factors are the security of from country to country but are not completely property rights, the rule of law, and absence of unique to each. Between the two extremes of expropriation risk; political factors (political "one size fits all" and "uniqueness" in institu- stability, civil liberty, and democracy); and the tional design, macroeconomic management absence of corruption and graft.9 seems to be closer to a single, well-established It is clear that institutions matter a great deal model; education, health services, and social for growth, but less is known about what protection the most unique; and legal, regula- constitutes "best practice" in institutional tory, and financial sector models lie somewhere design. Different institutional arrangements in the middle (IEG 2004a, p. 30). Box 6.1: Institutions and Organizations Institutions--often referred to as "the rules of the game" in in- Institutions affect the performance of the economy by their ef- stitutional economics literature--are the human-devised con- fect on the costs of exchange and production. Together with the straints that shape human interaction. They may be formal (statute technology employed, they determine the transaction and trans- law, common law, and contracts between individuals) or informal formation (production) costs that make up total costs. Economies (conventions, codes of conduct, and norms of behavior). They may with underdeveloped institutional frameworks tend to favor ac- be created (a nation's constitution) or simply evolve over time (com- tivities that promote redistributive rather than productive activity, mon law). Taken together, formal and informal rules, as well as the create monopolies rather than competitive conditions, and re- type and effectiveness of their enforcement, determine "how the strict opportunities rather than expanding them. game is played"--including how markets function. In practice, however, the distinction between "institutions" Organizations are groups of individuals that implement and and "policies" is not always clear. The Bank's operational notion enforce the rules of the game. They are influenced by institutions of policy reforms--for example, Central Bank independence-- and in turn influence how institutions evolve. Organizations include sometimes overlaps with this broad definition of institutions. political bodies (such as regulatory agencies) as well as social and educational bodies. Source: North (1990), pp. 3­5. 7 0 I N T R O D U C T I O N The Determinants of Investment in one state over another. Local companies tend Behavior: Microempirical Evidence to remain where they first began operations, At a microeconomic level, many different factors typically in the home town of the owner, and few determine the investment behavior of firms. A firms have the capability to operate in multiple more nuanced picture emerges, with consider- states. able difficulty in pinning down a common set of The WBES finds that, for most categories of factors influencing the investment climate. obstacles, SMEs identify themselves as more Econometric evidence suggests that business constrained than larger firms. Firms that are fixed investment is influenced by tax policy and private, smaller, newer, and devoid of FDI and fiscal incentives,10 product market regulations that cater to the domestic market generally tend (Alesina and others 2003), and high barriers to to report more acute business constraints than entry (Alesina and others 2002). Results from do firms that are older or larger, that export, that the World Business Environment Survey (WBES) have FDI, or that are State owned. In facing show that taxes and regulations, financing, some obstacles to doing business, medium-size policy instability and uncertainty, and inflation firms identify themselves as equally or even matter most for company growth and invest- more constrained than do small firms (Batra and ment (Batra and others 2003). There are others 2003). important differences across regions: In South As part of this evaluation, interviews were Asia, street crime imposes the leading conducted with a small number of multinational constraint, but in Africa infrastructure is identi- corporations headquartered in the United States, fied as the second-leading problem after financ- Europe, and Japan.12 Participants were asked to ing. In Central and Eastern Europe, inflation ties discuss the importance of IC considerations in with taxes and regulations as the leading their investment location decisions worldwide. constraint. The interviews confirmed the diversity in the Some overarching issues (e.g., regulatory relative importance assigned to these considera- uncertainty) matter to most firms, but more tions stemming from the diverse needs of the specific constraints may be ranked differently by firms (box 6.2). For some, IC conditions take different firms. The relative priority of various second place to factors such as cheap labor and constraints seems to depend on the size, age, large markets. Other investors cited physical input mix, and mobility of the firm and the security, rule of law, and currency convertibility industry in which it operates. Foreign investors as critical factors determining their investment care about different constraints than domestic locations. The cost and time required to register investors do because of their greater mobility. a business were viewed as relatively unimportant Foreign direct investment (FDI) decisions are by most of these international investors. more heavily influenced by macroeconomic and political risk than are domestic investment Conclusions decisions. Compared with domestic investment, Indicators of country-level policy and institu- FDI is more positively associated with privatiza- tional performance show that the investment tion, a competitive environment, the level of climates of developing and transition economies technological development, and lower regula- have improved modestly in recent years. tion; it is less influenced by the availability of Improvement is seen in both low- and middle- domestic credit.11 Even within countries, firms income countries and across all Bank regions. may be relatively immobile. In India, for The largest improvements were in transition example, private sector representatives economies--which started from a lower base-- interviewed for this evaluation indicated that, including countries that aspire to EU accession. while streamlining regulations and procedures Performance ratings are higher for macroeco- may facilitate investment in a particular state, nomic conditions (macroeconomic manage- differences in regulatory regimes among states ment, financial stability, and revenue stability) would not induce domestic companies to invest than for some institutional areas (property 7 1 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Box 6.2: Diverse Factors Influence Foreign Investment Decisions Because Firms Are Diverse Interviews with multinational corporations conducted for this "Strictly speaking, I can't tell you the principles we use for evaluation illustrate the diversity of factors that determined each choosing an investment location because we've been shrinking our company's decision to locate or expand an overseas investment. operations for the past few years, but maybe something is said by For some firms, the exigencies of doing business--including ac- how we have consolidated. Our remaining operations tend to be cess to large markets, cheap labor, natural resources, quotas, and located where labor is cheap and where there is a large internal sometimes incentives--dominated institutional factors, whether market. Regrettably, we had to close our production facility in Ire- the latter were viewed positively or negatively. For other com- land, even though it had a superior investment climate." (Japan- panies, institutional factors were decisive. Firm needs differed ese information technology company) across manufacturing and service specialties, and between "Wearetheepitomeofa`reputation-sensitive'company.Wemar- manufacturing and services. Some quotations from participants: ket our products to final customers and we need to be responsive "Other things being equal, we are drawn first in our investment totheirmountingconcerns,particularlyintheareasofenvironmental decisionstolargemarketsthatareunder-servedandhavegrowthpo- andlaborconditions.Aboveall,wehavetoprotectourbrand.These tential. But we can operate in smaller markets as well. For example, arethe`investmentclimate'issuesthataffectusmostdirectly."(U.S. the Dominican Republic, though a small market, has been a suc- footwear and apparel designer and distributor) cessful investment for us. The critical factors are that we can set a "Investment climate conditions do not dictate where we work, fairtariffandtakemoneyoutwhenwewant."(U.S.telecomcompany) but are an important factor when we get there and can affect the "Weareconstantlyweighingriskagainstrewardinasearchfor time and costs and profitability of individual projects--for exam- newbusinessopportunities,andthefactorsthatenterintothesecal- ple, the time and costs of obtaining licenses and permits; local cor- culations,aswellastheweightweassigntothem,canvaryalotfrom ruption; quality, availability, and employment conditions of the one setting to the next. There is no formula. For example, we don't local labor force." (U.S. construction and engineering company) likelaborconditionsorthetreatmentofintellectualpropertyinChina, "Investment climate issues are of course important in select- butthereisnoquestionwehavetoproducethere.Wealsoproduce ing overseas locations. One of our largest overseas investments in some smaller countries--for example, Singapore and Ireland-- is in Singapore, started as a joint venture with the Singapore gov- either because we have confidence in their political and macro- ernment as partner. Singapore doesn't have the cheapest labor or economicstabilityorbecausetheadvantagesoffactorssuchaslower a very large internal market, but labor is competent and reliable, labor costs and investment incentives outweigh our perception of and the government and its policies are stable." (Japanese chem- risks." (U.S. computer and information technology company) ical company) rights, public administration, transparency, and institutions are needed for sustained growth. rules-based governance), suggesting that these Certain best practice principles are applicable to all areas deserve attention. institutional arrangements, such as transparency, The literature review conducted for this study accountability, competition, the rule of law, and the provides evidence on the factors most important protection of property rights. However, the institu- for investment and growth. At a broad level, tional arrangements needed to implement these policies and institutions determine growth principles are somewhat country specific. An outcomes. Macroeconomic and structural reforms institutional arrangement that is successful in one are necessary conditions for growth and can country doesn't necessarily transfer well to stimulate an initial growth spurt even in the another country without modifications, and absence of institutional reforms, but modern unorthodox arrangements often work. 7 2 7 The Bank's Strategic Focus From First-Generation to Second-Generation Reforms A lthough the term investment climate came into use fairly recently, the topic--under such names as "business environment" or "enabling envi- ronment"--hasbeenapartofPSDstrategydocumentsthroughoutthe1990s. The 1989 Private Sector Development Action Plan activities open to private agents. Country identified four priority areas for Bank support to economic and sector work increasingly gave promote PSD: (i) improving the business priority to identifying constraints to PSD and to environment; (ii) public sector restructuring and developing programs to overcome them (World privatization of enterprises, infrastructure, and Bank 1991, p. 9). services; (iii) financial sector development and In the early 1990s, at least as much attention transfer of resources; and (iv) research and policy was paid to other PSD topics as was paid to the work to establish a basis for future Bank investment climate.13 State-owned enterprise operations. Bank assistance to improve the (SOE) restructuring and privatization was at the business environment was to take the form of core of Bank assistance to the transition adjustment operations to support policies, economies. The PSD strategy for IDA countries regulations, and legal reforms. The strategy also issued in 1995 emphasized the drain of dysfunc- called for an expansion of the Bank Group's FIAS. tional SOEs on poor economies and advocated Two years after the PSD Action Plan was privatization in IDA countries (World Bank adopted, the Bank took stock (World Bank 1995). The expansion of private investment in 1991). Efforts to improve the business environ- infrastructure during the mid- and late 1990s ment through adjustment operations was the was supported in many countries by Bank area in which the Bank responded most operations. Financial sector reform predomi- promptly in terms of its PSD emphasis: Three- nated following Mexico's devaluation in 1994 quarters of the Bank's adjustment operations in and the Thai devaluation in 1997. Although 1989­90 supported this objective. Components directed credit lines were largely abandoned by for dismantling barriers to market entry and exit the 1990s, other forms of direct assistance to were included in 60 percent of adjustment firms--particularly in nonfinancial services-- operations. There was also a large increase in continued throughout the decade. the proportion of investment operations In the second half of the 1990s, the Bank designed to enlarge the range of economic began to shift its focus from first-generation 7 3 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E reforms--macroeconomic stability and trade appropriate role of the State, financial sector integration--to second-generation reforms reforms; institutional, legal, and regulatory involving improvements in the administrative, bottlenecks; and the policy environment" legal, and regulatory functions of the State. (World Bank 2001b). The strategy suggested Greater emphasis was placed on institutional that the relative neglect of IC reforms was due development as well as on addressing the social partly to opposition by vested interests in the costs of PSD interventions, such as privatization- countries concerned and partly to the Bank's related labor retrenchment. Issues of continued lending for direct support to firms. transparency and corporate governance also The 2002 PSD Strategy placed special were highlighted, especially after the East Asia emphasis on improving the investment climate crisis (World Bank, 2001a, p. 3). to extend the effective reach of markets (World The shift from first-generation to second- Bank 2002a). The strategy called for country- generation reforms--or the "macro first, micro level assessments of the quality of the invest- second" sequencing--was not so much a ment climate, undertaken in consultation with planned strategy as a result of the disappointing the private sector. Enterprise surveys were to be supply response to first-generation reforms. used to identify constraints from the perspec- Macroeconomic stability, financial sector reform, tive of firms, and to link the policy and institu- privatization, and trade liberalization were tional environment to the performance of firms. recognized as necessary but not sufficient Regular, standardized surveys would allow inter- conditions for sustained growth. Increasingly, country comparisons as well as the ability to the Bank became aware of the importance of track the implementation and results of reform institutional reforms, sometimes referred to as over time. ICAs were to be integrated into other the "microeconomic foundations of growth." economic and sector work (ESW) products such as Country Economic Memoranda and Develop- The Investment Climate Takes ment Policy Reviews, and would underpin CASs, Center Stage Comprehensive Development Framework The past several years have witnessed a shift in exercises, and PRSPs. Building on these assess- emphasis in the Bank's PSD strategy toward a ments, the strategy expected that policy-based clearer and more central role for the investment lending would be a major vehicle for advancing climate. In part this is due to the declining IC reform efforts, complemented by technical activity in both privatization and private invest- assistance operations and free-standing advisory ment in infrastructure. It also reflects the Bank's services. broader corporate agenda: Improving the More recently, the Rural Development investment climate is one of two pillars of the Strategy devoted considerable attention to WBG's approach to development effectiveness investment climate issues in the rural sector, and one of the "focal points" in the WBG's outlining necessary policy and institutional corporate agenda. reforms such as more secure property rights, The emphasis on the investment climate is market access and free entry, market informa- especially noticeable in the 2002 Private Sector tion, financial services, and rural transport, Development Strategy for the World Bank communication, and power infrastructure Group (World Bank 2002a, 2003a). The strategy (World Bank 2003b). The Agriculture Invest- cited several studies that suggest that the ment Sourcebook (2004), which provided development impact of PSD activities in the practical guidance for the implementation of the Bank depends on the overall quality of the strategy, also dealt with rural IC issues. investment climate. Also cited is a recent IEG- World Bank review of PSD in IDA countries, IC Strategies at the Country Level which concluded that Bank operations "focused IC issues have received increasing attention in too narrowly on projects and did not tackle CASs over the fiscal 1993­2002 period. The most such fundamental constraints to PSD as the critical IC issues, and the Bank's strategic 7 4 T H E B A N K ' S S T R AT E G I C F O C U S response, vary significantly by region. Table 7.1 and 2003, which evaluated progress against the highlights the investment climate issues that latest corresponding CASs, shows that one or received the most attention in CASs as well as more investment climate issues were of high the issues that were addressed, de facto, in IC- country priority in 28 countries; the Bank related lending in the region. The table shows assigned high priority to the same issues for 23 the following regional patterns: of these countries. The most frequent obstacles to achieving better IC outcomes were a lack of · Africa: The CASs emphasized the need to im- government ownership and capacity (e.g., prove the enabling environment for business Lithuania) and the hesitancy in completing and make progress on privatization. Projects reforms because of political sensitivities (e.g., focus on achieving macroeconomic stability Mongolia). Reform efforts were sometimes and building investor confidence (changing hindered by a lack of role models to support business perceptions regarding the risk of in- entrepreneurship (e.g., Mongolia) and partici- vesting in the region), addressing institutional pation and partnership of more domestic and constraints, and improving the adaptation of donor stakeholders (e.g., Uganda). The Bank private firms to competitiveness challenges. was criticized in some CAEs for not giving · East Asia and the Pacific: Beginning with the enough weight to governance issues, weak Asian financial crisis, both the CASs and IC institutions, and civil service reform (e.g., lending focused on corporate restructuring Ghana, Bolivia). In many cases, the CAEs argue and corporate governance issues. IC lending that the Bank's ideas and policy advice have also supported financial sector reform. often been more useful than lending. The · Middle East and North Africa: CASs fo- Bank's ESW, policy dialogue, and aid coordina- cused on the need to improve competition tion were assessed in several cases to be timely, policy. The lending program targeted macro- of good quality, and appreciated by govern- economic stability as a means of reducing un- ments (Guatemala, Sri Lanka, Ukraine). certainty and addressed the problem of public IEG-World Bank's recent evaluation of Bank monopolies. assistance to transition economies (IEG 2004b) · South Asia: CASs emphasize constraints in the shows that Bank assistance programs initially business environment and the need for further reflected the view that privatization must take privatization. IC lending operations target the place quickly, taking advantage of limited reform problem of pervasive government involvement "windows" to prevent the possibility of reversals. in the economy. The hope was that new private owners would · Latin America and the Caribbean: Major is- lobby for further liberalizing reforms and sues identified in the CASs include the lack of supporting institutions. Few Bank PSD projects global competitiveness and the need for reg- in these countries contained specific institu- ulatory and judicial reform. IC projects also tional components, and the majority of regula- focus on corporate governance and agricul- tory reform and competition policy projects tural sector reform. were initiated after privatization in most transi- · Europe and Central Asia: CASs focus on tion economies, especially in the Common- the legal and regulatory framework, labor leg- wealth of Independent States. In hindsight, it is islation, and privatization; IC lending covers ju- apparent that the Bank, along with other dicial reform, property rights and land markets, donors, should have tried harder to promote corporate governance, access to finance, and the improvement of the institutional framework bankruptcy law. for business and investment, as well as and in parallel with privatization (IEG 2004b, pp. IEG-World Bank's Country Assistance Evalua- 18­19). tions (CAEs) assess the fit between country The country case studies conducted for this priorities and the Bank's assistance strategy. A evaluation provide examples of CASs that have review of the 42 CAEs completed between 1997 been moving from first-generation to second- 7 5 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Table 7.1: IC Issues in Country Assistance Strategies, Fiscal 1993­2002 Africa Region East Asia and Pacific Region 24 countries/33 CASs 10 countries/14 CASs Issues addressed in CASs and core IC projects Investor confidence Corporate governance Macro stability Corporate restructuring Slow firm adaptation Financial sector reform Other issues emphasized in CASsa Enabling business environment SMEs Investment climate Legal and regulatory reform Privatization vs. credit to PS Transparency Other issues mentioned in CASs Legal and regulatory reform Public/private partnerships Competitiveness Urban/rural development Admin barriers/market access Infrastructure Role of government/bureaucracy/ Competition policy arrears Need for private investment Access to credit Dialogue w/private sector Macro environment High interest rates Competitiveness Institutional constraints Private corporate debt Infrastructure Enabling environment Dominance of conglomerates Conglomerates Unemployment/land constraints Uneven playing field w/SOEs Note: CAS = Country Assistance Strategy; SOEs = state-owned enterprises; SME = small and medium-size enterprises; FDI = foreign direct investment. a. Issues that were included in the development priorities matrix at the end of the CAS. generation reforms (box 7.1). Exceptions were The country case studies and focus group found for those countries that experienced discussions conducted for this evaluation macroeconomic crises, where the CASs necessar- suggested that the Bank is (or is perceived to be) ily focused on restoring macroeconomic stability more focused on promoting foreign investment (for example, Indonesia in the late 1990s). than domestic investment. In Mozambique, for 7 6 T H E B A N K ' S S T R AT E G I C F O C U S Middle East and Latin America and Europe and Central North Africa Region South Asia Region Caribbean Region Asia Region 5 countries/6 CASs 6 countries/9 CASs 18 countries/22 CASs 24 countries/36 CASs Public monopolies Pervasive government involvement Corporate governance Judicial system reform Lack of stability/uncertainty Uncertain environment Agricultural sector reform Access to finance Property rights Corporate governance Access to and security of land title Bankruptcy law Land and labor markets Competition policy Privatization Regulatory/judicial reform Enabling business environ- ment (incl. legal) Business environment Deregulation/demonopolization Privatization Global competitiveness Labor law/labor markets Legal and regulatory frame- work SME competitiveness Difficulty attracting investment Deregulate investment regime High barriers to SME entry and growth Incentives Regulatory environment Diversification Administrative/ other barriers for private investors Low FDI Competition law Transparency Slow pace of privatization Improve incentives for SMEs Low FDI Regulatory system Attract foreign investment Administrative corruption Enforceability of contracts Completing privatization Poorly functioning markets; ease of entry and exit Land tenure Strengthening investment climate Communication infrastructure High cost of capital Liquidity problems/ bankrupt- cies Weaknesses in manufacturing Government interference and export over-regulation of private sec- tor activities Fostering potential industries example, Bank activities were reasonably "mega-projects" that came in under special successful in developing Mozambique's invest- negotiated conditions and circumvented many ment promotion capacity, and this has helped of the administrative barriers faced by local bring foreign investment into the country. investors. While this strategy did some good by However, most of these investments were helping Mozambique establish itself as open to 7 7 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Box 7.1: The Increasing Focus on the Investment Climate in CASs: Evidence from Country Case Studies The Bank's Mozambique strategy stressed the investment cli- nessed much stronger government dedication to promoting the mate from the beginning. However, the particular aspect of the private sector, as well as stronger commitment to reform. The investment climate emphasized changed as the country's polit- 2001 CAS emphasized strengthening institutions for a market ical conditions improved and the transition progressed from economy-- governance, anticorruption, and the business en- plan to market. Bank activities focused on securing first-gen- vironment. Recent projects have focused on institutional re- eration and second-generation reforms have been timed and se- forms critical for PSD, including the reform of the legal quenced well--based on strategic necessity, sound economic environment for business, the reduction of regulatory burdens, principles, and prevailing social and political conditions. In the and secured transactions reform to facilitate collateralization of war years, when conditions were difficult, adjustment lending assets for loans. supported incremental steps toward price and trade reforms, pri- vatization, and improved public expenditure management, which The 1997 CAS for Indonesia was presented to the Board in June were critical in laying the foundation for recovery and growth of that year, a few weeks before the crisis erupted in Thailand. once peace was established. In the recovery and growth years It acknowledged the progress made during the 1980s and early after 1995, macro reforms continued; at the same time, micro- 1990s on the trade regime, investment licensing, financial in- economic reforms of administrative and regulatory barriers and termediation, privatization, and private participation in infra- legal institutions featured more prominently in the Bank's pro- structure. It identified a number of remaining weaknesses, gram. This sequencing of IC reforms was necessary in Mozam- including the undeveloped legal and regulatory framework (land bique because of the urgency of problems as seen by investors, use and bankruptcy), the lack of transparency in the enforcement and the feasibility of changes. Removing administrative and of regulations, a shortage of technical and managerial skills, ex- regulatory barriers to investment was bound to be a complex and cessive regulation, tariff and nontariff barriers in agricultural mar- long-term process, particularly given Mozambique's economic kets, outdated laws and regulations covering financial and political history. Moreover, microeconomic reforms such as intermediaries, and weak bank supervision. After the crisis, the these would not have had much impact on investment in the face 2001 CAS shifted focus to macroeconomic stabilization and to of poor macroeconomic incentives. helping the financial and corporate sectors resolve the overhang of corporate debt and enable the resumption of financial flows The Bank's strategy for Romania during 1992­98, contained in a for investment and working capital. Economic reports focused 1991 County Economic Memorandum, focused on macroeco- on assessing the impact of the crisis on banks and corporations nomic stabilization, price liberalization, and transformation of the and on designing an approach to restructuring them to expedite command economy to a market-oriented system. The report recovery and resume growth. This focus on macroeconomic said little about the institutional foundation of markets and lacked stabilization and bank and corporate restructuring was appro- an extensive treatment of financial markets. The late 1990s wit- priate under the circumstances. business, small domestic investors still face land and property rights (particularly in AFR and administrative barriers to doing business, and ECA), though it was acknowledged that these the degree of linkages between foreign investors are politically difficult. In general, staff felt that and local firms is a matter of debate. IC issues that involve genuine market failure Discussions with Bank staff suggested that should receive more attention.14 some topics have received little attention. IC issues in rural areas, in particular the constraints Translating the Strategy into Operations to nonfarm income-earning activities, have Comparing the Bank's increased strategic focus received little coverage because of the mainly on second-generation issues in CASs with the urban, manufacturing-sector focus of survey- trend in the share of IC projects in the portfolio, based diagnostic assessments. Other issues that it appears that the strategic shift toward IC issues have received limited coverage are labor laws; has not been implemented in the Bank-wide competition policy; the informal sector; and lending program. Using either a broad or narrow 7 8 T H E B A N K ' S S T R AT E G I C F O C U S definition of the IC portfolio (described in Conclusions Chapter 9), the share of investment climate Under different names, the investment climate projects in the Bank's portfolio shows no observ- has been a theme in Bank PSD strategies and able trend over the fiscal 1993­2003 period, CASs throughout the 1990s. More recently, the although it has varied (see Chapter 9, figure 9.3). subject has become prominent in the Bank's Interviews and case studies conducted for this corporate strategy and in the 2002 WBG PSD evaluation indicate that several issues may explain Strategy. Greater emphasis has been placed on why the share of IC lending has not increased. collecting and monitoring comparable data on One problem has been the lack of data on the the quality of the investment climate at the quality of different aspects of the investment country level and measuring country perform- climate, which has made it difficult to identify ance against these indicators. priority problems, draw comparisons across The increased prominence of the investment countries, and monitor progress. This issue is climate in sector strategy papers and CASs now being addressed primarily through the mirrors the Bank's shift in emphasis from first- preparation of IC diagnostics based on standard- generation to second-generation reforms. This ized enterprise surveys (discussed in Chapter 8). "macro first, micro second" sequencing was not Second, while it is clear that the Bank needs so much a planned strategy as the result of the to increase its focus on building and reforming disappointing supply response to first-genera- institutions, less is known about "best practice" tion reforms. Increasingly, the Bank has become in institutional design (an issue raised in the aware of the importance of institutional reform preceding chapter). The basic principles of good to sustain growth, and this recognition is notice- investment climates are well recognized (for able in the CASs during the period. This shift in example, a high degree of competition, protec- focus was appropriate and is well supported by tion of property rights, contract enforcement), the literature. but the institutional arrangements for applying The Bank's increased strategic focus on these principles seem to be highly country improving investment climates has not yet specific. Strategies for improving the investment translated into a greater share of the loan portfo- climate in individual countries have suffered lio being devoted to this objective. Except for an from a lack of knowledge about what types of increase in fiscal 2002, the IC share of the loan institutional arrangements will succeed in differ- portfolio, using either a broad or narrow defini- ent environments and about the dynamic tion of the investment climate, shows no observ- process of change that is needed. able trend over the past 10 years. 7 9 8 Nonlending Services T he Bank is involved in a wide range of analytical and advisory activities on IC issues. Principal among these are ESW on various IC topics and survey-based diagnostics of the constraints of doing business. This chapter briefly describes relevant ESW and then looks in more detail at recent diagnostic work. Economic and Sector Work were those in the legal area (judicial and other Over the past decade the Bank has produced a dispute resolution mechanisms, legal institutions large number of reports on IC issues. Analysis of for a market economy), followed by regulation investment climate topics is frequently part of and competition policy. Of the regionally focused economic reports (Country Evaluation reports, almost 40 percent were in the Europe Memoranda, Development Policy Reviews) and and Central Asia Region; the lowest numbers sector reports (for example, on industrial were in the Middle East and North Africa and development, competitiveness, export develop- South Asia Regions. In Europe and Central Asia, ment, governance, and small and medium corporate governance was the most important enterprise development). In addition to these topic; in Latin America and the Caribbean, regula- formal vehicles of nonlending assistance, advice tion and competition policy received the most is also provided informally to governments and attention. In Europe and Central Asia and East the private sector through discussions, sharing Asia, property rights were also important. of information, and in-country seminars. A recent IEG-World Bank review of the A keyword search identified more than 2,800 treatment of PSD in 15 CAEs found that, in reports and working papers produced since general, the Bank's ESW and related advisory fiscal 1990 that at least touch on IC issues. A services in PSD had generally been effective.15 much smaller number were primarily directed The CAEs remarked that the Bank has a compar- toward Core IC themes: 307 reports were ative advantage in ESW and that good ESW is directed toward one or more Core IC themes important to both the clients and donors and during fiscal 1993­2003, with a larger number in has a bearing on the quality of the Bank's the second half of the decade (table 8.1). About lending. However, the IEG-World Bank review 45 percent of these reports were policy research also identified several cases of insufficient ESW, working papers rather than formal ESW. The which lowered the quality of the Bank's strategy topics that have received the most attention and lending work. It also identified cases of 8 1 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Table 8.1: Bank Reports on IC Issues, Fiscal 1993­2003 Core IC theme Fiscal 1990­96 Fiscal 1997­2003 Total Percent Investment climate/business environment 44 49 93 30 Regulation and competition policy 31 44 75 24 Property rights 25 30 55 18 Corporate governance 27 18 45 15 Legal institutions for a market economy 8 13 21 7 Judicial and other dispute resolution mechanisms 7 11 18 6 Total 142 165 307 100 (Unique documents) 262 inadequate participation by clients and poor in- types of arrangements work where, how the country dissemination of the findings, which change process happens, how it can be reduced the effectiveness of many good ESW supported and sustained, etc.--in other words, pieces. an understanding of what types of institutional Evidence from the country case studies arrangements are transferable in different conducted for this evaluation indicates that the country contexts. The Bank's research and ESW Bank's ESW on IC issues has helped define the have not yet provided enough of this knowledge reform agenda and has been appreciated by of institutional design and the process of reform. clients--in fact, they encouraged the Bank to do more (box 8.1). However, some of the officials Survey-Based Diagnostics interviewed suggested that recent reports have Over the past decade, the Bank has employed presented the same policy recommendations as several diagnostic tools to assess the quality of a earlier reports. While recommendations that country's investment climate and the were not adopted may bear repeating, this constraints facing private enterprises: feedback suggests that the Bank may need to be more selective and focused in its choice of ESW. · Private Sector Assessments (PSAs), many of What is striking is that, despite the quantity which were based on enterprise surveys to and quality of investment climate ESW that has determine perceived constraints in the business been produced by the Bank over the past 10 environment years, many have observed that "we really don't · The WBES and the Firm Analysis and Com- know very much" about good practice in institu- petitiveness Survey (FACS)17 tional design, nor about the dynamics of reforms · The Regional Program for Enterprise Devel- to improve the investment climate.16 While basic opment (RPED) in the Africa Region, which economic principles are well accepted (for combined enterprise survey data with pro- example, the benefits of competition), there is ductivity analysis and sector studies less knowledge about the institutional arrange- · FIAS studies of the administrative barriers to ments to apply these principles (for example, doing business.18 laws governing competition and the organiza- tions that implement them). These institutional PSAs were developed in 1991 to strengthen arrangements are neither "one size fits all" nor the private sector perspective in the Bank, to completely country specific. It would be useful provide the basis for Bank Group assistance for the Bank to develop (perhaps building on strategies for PSD, and to encourage stronger the taxonomy used in Part II of this report) a WBG collaboration on these issues. The Board typology of country situations and institutional mandated the involvement of the IFC, as it was designs that would provide guidance on which considered to be in closer touch with the private 8 2 N O N L E N D I N G S E R V I C E S Box 8.1: Relevance of the Bank's Analytical Work: Evidence from Country Case Studies Evidence from the country case studies confirms the important not explored. It was well known that insider lending, stemming from contribution that high-quality, well-focused, and strategically joint ownership of banks and corporations, caused some of these timed ESW can make to the quality of the Bank's lending oper- bad loans. Borrowing was collateralized by inflated asset values ations and their impact on the investment climate. There were and facilitated by weak accounting practices, which were not in- cases where this has worked well (Romania), others where im- vestigated. Thus, a comprehensive framework for Bank Group portant topics were missed (Indonesia), and other cases of rep- assistance to the financial and corporate sector was missing. etition and redundancy (Peru), detailed below. In Romania, the successful IC activities of the past few years The Bank's analytical work in Mozambique beginning in 1996 appear to have been based on more intensive ESW. Among the re- made relevant contributions to the process of removing micro- ports produced were a 1999 FIAS report that identified the most economic constraints to investment. Among these were the FIAS important obstacles to business growth, which were incorpo- Administrative Barriers to Investment Studies (1996, 2001) and rated in the conditionality of the First and Second Private Sector ICAs (1997, 2002) that helped identify the reform agenda. To facil- Adjustment Loans (PSALs I and II); Romania's evolving legal frame- itate a continuing dialogue between government and business work for PSD (2002), which addressed property rights, rules for entry concerning IC reforms, the Bank supported an annual private sec- and exit of productive activity, and rules for market exchange; tor conference. Studies that focused on government red tape, and financial markets, credit constraints, and investment in rural such as the FIAS studies, detailed long lists of problems. Business Romania (2001) that provided the basis for the financial market com- leaders interviewed for this evaluation asserted that the recom- ponents of PSAL I and PSAL II. Several of those interviewed for mendations were not sufficiently prioritized. They felt that there was this evaluation indicated that the priority given to the investment not enough focus on selected priority issues, action plans for or- climate by the government has been a result of the Bank's enter- ganizing to implement the reforms, monitoring arrangements, and prise surveys and analysis. mechanisms for accountability for success or failure. In Peru, the Bank has engaged in a substantial amount of ESW In precrisis Indonesia, Bank reports consistently pointed out on IC issues during the past 10 years, including a 1993 report on several structural weaknesses that could impede future private sec- measures needed to establish a competitive market economy; a tor-led growth. Although these analyses were appropriate for In- 1994 PSA; a secured transactions analysis in 1997; and a 2003 donesia at the time, they lacked depth in one crucial respect. ICA. While the reports were of high quality, many of the recom- While weaknesses in the financial sector were well analyzed, the mendations contained in the later reports were similar to those in obvious connection to weaknesses in the corporate sector was earlier sector work. sector, and private sector consultations and strategy and led to follow-up through project or surveys were recommended to capture the policy conditionality. However, PSAs varied views of a broad cross-section of the private widely in scope, methodology, and quality. Some sector. PSAs were to be country specific and staff argued that some PSAs failed to provide flexible in coverage, but each was to include a substantially new insights into the problems of description and analysis of the private sector and the private sector or to identify strategic priori- its role in the economy as well as constraints to ties and actionable recommendations for private sector development. About 30 PSAs were promoting PSD. As market-oriented perspec- prepared, most in the early 1990s. tives on economic development became more A 2001 IEG-World Bank review of PSD in IDA mainstream, the cost-effectiveness of PSAs as countries contained a brief evaluation of PSAs separate exercises was increasingly questioned. (IEG 2001b). The evaluation found that, at their Task managers increasingly preferred more best, PSAs deepened Bank staff and government focused analysis on specific issues. policy maker understanding of PSD issues and A number of PSA elements became incorpo- enhanced the dialogue between business and rated in subsequent work including the WBES government. They also contributed to country surveys, which used a uniform core question- 8 3 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E naire to measure and compare business environ- (described in box 8.2) and the Doing Business ment conditions and constraints in 80 countries Project (box 8.3). These two instruments are at and in the West Bank and Gaza.19 The WBES was the core of the Bank's current analytical work on launched through the WBG's Innovation Market- the investment climate and in particular are place in 1998 and reflected collaboration across providing the means of tracking the perform- units of the Bank Group (Development Econom- ance of IDA countries on achieving PSD targets. ics, FIAS, IFC, Poverty Reduction and Economic The ICAs and Doing Business have tried to Management [PREM], PSD, and World Bank address these issues by providing standardized Institute) as well as with external organizations instruments with better quality control by the (the European Bank for Reconstruction and PSD Sector Board. Measuring the same variables Development, the InterAmerican Development in a consistent way allows benchmarking-- Bank, and Harvard University). The WBES comparisons across countries at a particular attempted to standardize the types of analysis point in time, as well as tracking changes over carried out by the earlier PSAs to assess time in a particular country. Objective and conditions for private investment in developing quantitative measures of the policy environment and transition countries, as shaped by local demonstrate to policy makers that change is economic policy; governance; regulatory, infra- possible and give credibility to reform efforts. structure, and financial impediments; and The design and methodology of ICAs and the services to businesses. At least 100 firms were underlying ICSs are better than those of the surveyed in each country. The WBESs were seen earlier surveys and assessments. However, there as potentially more cost effective than PSAs, and are some issues of relevance and of the use of thus more attractive to operational staff. the information gathered in the ICSs. Interviews Although the WBES has not been evaluated and discussions conducted for this evaluation-- independently by IEG-World Bank, a number of in the country case studies, international observations in the Bank's own summary of WBES investor interviews, and focus groups of Bank results are consistent with IEG-World Bank findings staff--identified the following issues: on PSAs and more recent survey-based diagnostic instruments. The summary cited, first, the need for · Duplication of existing work: In some better coordination, comparability, and uniformity countries, the nature of IC constraints, and of the core survey and implementation between the actions required to solve them, are already partner institutions. Second, it is important to known. Often, similar surveys have been con- account for inherent biases and measurement ducted by the government, local universities errors in any survey of this type. This necessitates or think tanks, the Bank, or other donors. The care in interpretation and the use of control benefit of an additional survey may be limited variables and suggests that survey results should be to that of providing comparable data for cross- complemented with other data to assess the invest- country comparisons. ment climate. Even though perceptions matter significantly for firm behavior and decision making, In the Indian states of Andhra Pradesh and they are only imperfectly related to underlying Karnataka, the nature of IC problems, and physical and cost conditions. This underscores the the actions required to solve them, were desirability of complementing questions of percep- already known. Both state governments had tion with more quantitative evaluations of a firm's a significant appreciation of the challenges experience of costs associated with various faced by their states in restoring fiscal constraints. Finally, larger and more representative discipline, improving governance, and samples, particularly for economy-wide surveys addressing constraints to private invest- and for core questions, would be desirable (Batra ment, particularly in the regulatory area. and others 2003, pp. 90­1). Many potential remedies had been identi- More recently, the PSD Vice Presidency has fied, for example, the concept of a single developed two new diagnostic tools: ICAs window for license clearances. 8 4 N O N L E N D I N G S E R V I C E S Box 8.2: Investment Climate Surveys and Assessments Investment Climate Assessments (ICAs) are designed to sys- · Business-government relations: quality of public services, tematically analyze conditions for private investment and en- consistency of policy and administration, customs process- terprise growth. Underpinning all ICAs is a standard core IC ing, regulatory compliance costs (management time, delays, survey instrument (ICS), which allows the comparison of exist- bribes), informality, and capture ing conditions and the benchmarking of conditions to monitor · Conflict resolution/legal environment: confidence in legal changes over time. The survey is administered to managers of system, resolution of credit disputes firms and consists of a core set of questions as well as several · Crime: security costs, cost of crimes, use and performance modules that can be used to explore in greater depth specific of police services aspects of the country's investment climate and links to firm- · Capacity, innovation, and learning: utilization, new products, level productivity. The core survey has 11 sections: planning horizon, sources of technology, worker and man- agement education, experience · General information about the firm: ownership, activities, · Productivity information: employment level, balance sheet in- location formation (including income, main costs, and assets). · Sales and supplies: imports and exports, supply and demand conditions, competition To date, eight ICAs have been posted on the ICA Web site. Most · Investment climate constraints: evaluation of general are conducted at the national level, although the India ICA fo- obstacles cused on the state level. The number of firms in the sample has · Infrastructure and services: power, water, transport, com- varied widely, in part due to the different size of the countries: from puters, and business services 1,032 in India to 659 in Bolivia, 576 in Peru, 223 in Nepal, 193 in · Finance: sources of finance, terms of finance, financial ser- Mozambique, and 98 in Bhutan. vices, auditing, land ownership More recently (since 2003), rural ICSs have been piloted in Sri · Labor relations: worker skills, status and training, skill avail- Lanka, Tanzania, and Nicaragua. ability, overemployment, and unionization and strikes One of the Peruvian reviewers of the ICA who graphic regions, there may be a need to focus was interviewed for this evaluation said, "We ICAs at the subnational level, particularly in have known these things for 10 years--why do large countries.20 we need another report to say the same thing? · Sector or industry focus: Similarly, invest- The World Bank has ignored earlier reports ment climate conditions may vary significantly on what needs to be done for the private sector. by industry (for example, telecommunications Why were the issues that had been identified versus agro-industry), and these differences not incorporated into policies?" may not be captured in ICAs. In some countries the main constraints to private sector devel- · Survey fatigue: Related to the issue above, opment may lay outside the scope of ICAs-- firms sometimes complain that they are re- for example, labor skills. peatedly asked to participate in similar sur- · Unprioritized recommendations: Earlier veys by different organizations. This is surveys and assessments often produced long particularly a problem in smaller countries lists of problems and proposed solutions, with- with a relatively small private sector. out a clear set of priorities. This problem is be- · Geographic focus: IC conditions can vary ginning to be addressed in ICAs, which use significantly by geographic area--across states, firms' rankings or impacts on productivity to across municipalities, and even within munic- set priorities. Nevertheless, feedback from ipalities. While ICSs routinely show variations clients suggests that more effort is needed to in investment climate indicators across geo- identify priorities and sequencing: 8 5 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Box 8.3: The Doing Business Project The Doing Business Project investigates regulations that enhance efits; has up to 50 employees, all nationals; has turnover of at least business activity and those that constrain it. Quantitative indi- 100timesincomepercapita;andhasacompanydeed10pageslong. cators on business regulations and their enforcement are being The Doing Business Project is publishing a series of annual re- gathered that will allow comparisons across more than 145 ports, each covering several topics. The first report, Doing Busi- countries and over time. The indicators are based on assess- ness in 2004: Understanding Regulation, focuses on starting a ments of laws and regulations, with input from and verification business, hiring and firing workers, enforcing contracts, getting by local experts. credit, and closing a business. Doing Business in 2005 discussed In contrast to the ICSs, information is gathered from surveys three topics: registering property, dealing with government li- of experts rather than firms. The questionnaire is administered to censes and inspections, and protecting investors. Doing Busi- local professionals experienced in their fields, such as incorporation ness in 2006 will cover paying taxes, trading across borders, and lawyers and consultants for business entry or litigation lawyers and improving law and order. The Doing Business Project has received judges for contract enforcement. high marks from external audiences as well as Bank staff for pro- TheDoingBusinessmethodologyaimsforcomparabilityacross viding, for the first time, objective indicators of the costs of regu- countries, so that most indicators are structured around a hypo- lation and administrative procedures. At the same time, when thetical firm: a limited-liability company that operates in the coun- using the survey results, some of the limitations of this approach try's most populous city; is domestically owned; has start-up capital must be recognized. As countries and industries differ in optimal of 10 times income per capita, paid in cash; performs general in- firm size and structure, estimating the time required to set up a straw dustrial or commercial activities; leases the commercial plant and firm provides comparability, but at the expense of some bias offices;doesnotqualifyforinvestmentincentivesoranyspecialben- against countries with heavier reliance on the informal sector. Business leaders in Mozambique who were in- needs to be done to determine the optimal terviewed for this evaluation said, "The list was policy stance (see the example in box 8.4). presented to government as the things that Survey-based instruments are not able to needed to be fixed. But the list was far too capture both sides of the analysis. In addition, long--government can't fix everything. There they do not provide an understanding of the was no credible effort made to prioritize what root cause of problems such as market failures. needed to be fixed first and what needed to be A further implication of the difficulty of worked on in the longer run." drawing policy recommendations from enter- prise survey information may be that the The more fundamental problem with ICAs reforms that are proposed are relatively straight- lies in how survey information is used to derive forward ones, such as reducing administrative policy recommendations. IC indicators tell the barriers (licenses, inspections, etc.). For these analyst, from the perspective of firms, "what types of regulations it is often true that less is hurts," or even "what hurts the most, relatively better, as the beneficiaries of the barriers--for speaking," but not what to do about it. In other example, corrupt bureaucrats or incumbent words, they provide description rather than firms--are not perceived to be worthy of contin- prescription. Examples of constraints typically uing to receive benefits. In other words, the identified by firms include high taxes, high solution to the cost-benefit question is relatively interest rates, and the high cost of regulatory straightforward. Again using India as an compliance. This does not necessarily suggest example, the Bank's work on PSD issues in that taxes, interest rates, or regulations should Karnataka and Andhra Pradesh has focused be reduced. Economic and social objectives-- primarily on reducing transaction costs associ- fiscal stability, monetary management, environ- ated with regulations and administrative mental protection, labor protection--are the procedures. None of the Bank's adjustment "benefit" side of the cost-benefit analysis that loans have directly addressed rigidities in labor 8 6 N O N L E N D I N G S E R V I C E S Box 8.4: The Costs and Benefits of Reforming Labor Legislation in India The India case study provides an example of an issue that is of While Bank analytical work has identified labor regulations as concern to firms but that also has broader economic and social an important constraint to PSD and asserts that changing labor leg- implications: labor regulations. Existing labor laws emanate islation will have significant economic benefits, it does not pres- from various acts, including the India Trade Union Act of 1926, ent an assessment of the likely impact of reforms on labor or the Industrial Disputes Act of 1947, Minimum Wages Act of 1948, Com- broader social costs that may arise as a result of worker dis- panies Act of 1956, and Sick Industries Companies Act of 1985. placement. Industry favors the use of contract labor to avoid reg- The 1976 amendment to the Industrial Disputes Act makes lay- ulations and lower costs, but such workers are generally not offs, retrenchment, and closure illegal for industrial concerns with afforded the same level of job security, benefits, worker safety, and 100 or more employees except with the prior permission of the other protections as those covered by labor laws. As such, greater state government, which is rarely provided. The typical Indian reliance on contract labor entails social costs. The point of this ex- firm reported having 17 percent more workers than it desired and ample is not to question the need for labor reform, but to suggest that labor laws and regulations were the main reason why it could that further analysis is needed to assess the costs and benefits-- not adjust to the preferred level. both economic and social--of policy reform. markets, despite the widespread view--shared types of institutional arrangements can be by the Bank--that labor regulations impose "exported" from one country to another. The greater costs on companies. Bank's ESW has not yet provided enough of this knowledge of institutional design and the Conclusions process of reform. The Bank's diagnostic work on the investment Feedback from clients collected for country climate has evolved toward greater use of case studies suggest that the Bank has not been enterprise surveys to provide information on focused enough or selective enough in its ESW the constraints to PSD as perceived by firms. The and diagnostic work on the investment climate. most recent version of a standardized diagnostic Reports sometimes duplicate earlier work, and tool, the ICA, does a good job of benchmarking firm surveys are sometimes very similar to indicators of the quality of a country's invest- existing surveys conducted by governments, ment climate in a way that allows cross-country think tanks, or other donors. IC diagnostics comparisons as well as monitoring changes in sometimes do not take into account the hetero- individual countries over time. geneity of IC conditions across geographic areas The Bank's ESW has helped motivate many (states and municipalities) and industries. In governments to adopt integrated reform strate- some cases, the Bank has not focused ESW gies. Nevertheless, there are areas where more sufficiently on the highest priority types of work needs to be done to provide guidance to investment (for example, domestic versus clients as well as to Bank staff designing IC foreign) or highest priority constraints (for interventions. Not enough is known about good example, labor issues). IC diagnostics often practice in institutional design, or about the produce long lists of problems and proposed dynamic process of changing institutions. It solutions, without a clear set of priorities. would be useful to have a typology of country Enterprise surveys provide valuable informa- situations and institutional designs that would tion on the perspectives of the private sector but provide guidance on which types of arrange- are an insufficient basis for policy recommenda- ments work where, how the change process tions. The views of business on public policies happens, how it can be supported and sustained, need to be balanced with other economic and etc.--in other words, an understanding of what social objectives. 8 7 9 The IC Loan Portfolio Definition T he definition of the investment climate used in this report to compile the Bank's loan portfolio is driven by the Bank's sector and thematic coding system. The Bank's Operations Policy and Country Services de- partment (OPCS) assigns five themes to each project in the Bank's Business Warehouse database. Each of these themes is coded as a primary or second- ary objective of the project. The system allows one to five primary themes and up to four secondary themes to be assigned to each project. OPCS and the PSD Board have defined a set of of the Bank's portfolio is IC lending, broadly five core and five non-core IC themes, as shown defined. Of the 2,891 closed and active Bank in table 9.1. The numbers in the table are the projects approved during fiscal 1993­2003, theme codes used in the OPCS sector/theme 1,291 (45 percent) had IC objectives related to coding system. Detailed descriptions of the core or non-core themes.21 The value of IC themes are contained in Annex II.B. projects was nearly $123 billion, representing 52 To identify the IC portfolio, this report percent of the Bank portfolio. Core IC projects defines three types of projects: (those having one or more core themes as a primary objective of the project) amount to 14 · Core IC projects contain at least one core IC percent of the Bank's portfolio (in terms of the theme that is a primary objective. number of projects), and non-core IC projects · Non-core IC projects are not core IC, but con- another 19 percent. tain at least one non-core IC theme that is a pri- IC components are often included in larger mary objective of the project. projects (e.g., regulatory reforms in macroeco- · Secondary IC projects are defined similarly: nomic adjustment loans), so the significance of At least one core IC theme or non-core IC IC lending is smaller than overall lending theme is a secondary objective of the project. volumes suggest. The value of IC components (weighted by the importance of objectives using Composition OPCS methodology) was about $55 billion, or 45 Table 9.2 and figure 9.1 show that a large share percent of the total value of the IC portfolio, and 8 9 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E 23 percent of the overall Bank portfolio, over non-core themes, the most important are the fiscal 1993­2003 period. "other financial and private sector develop- The total value of all IC lending (core IC, non- ment" and "infrastructure for private sector core IC, and secondary IC) in the Bank's portfo- development" (figure 9.4). The former covers lio experienced a significant increase in 1998­99 measures to strengthen institutions that along with the Asian financial crisis (figure 9.1). support the private sector (investment and Since then, IC lending has fallen below the levels export promotion agencies, public-private of the early- and mid-1990s except for a spike in consultative mechanisms); support restructur- fiscal 2002. As a proportion of overall Bank ing or private enterprises, including corporate lending, the value of IC lending has been fairly restructuring; and promote financial sector stable except for fiscal 1998­99 and fiscal 2002 development. The latter are infrastructure (figure 9.2). These trends are similar for all IC as projects that include components to improve well as Core IC projects. Within IC lending, the sector regulation. share of Non-Core IC projects declined signifi- Increasingly, IC objectives are included as cantly (from 25 percent of the Bank's lending in components in adjustment loans. Adjustment fiscal 1994­98 to 14 percent in fiscal 1999­2003) loans increased from 32 percent of core IC as the shares of core IC and secondary IC projects in fiscal 1994­98 to 38 percent in fiscal projects increased. 1999­2003, compared to an average of 17 The dominant core theme in the IC portfolio percent for all Bank projects over the entire is regulation and competition policy, which period. includes activities aimed at the elimination of Regionally, core IC projects are concentrated monopolies, simplification of business licensing in Europe and Central Asia, Africa, and Latin and registration requirements, reduction of America and the Caribbean, with the smallest barriers to FDI, development of regulatory numbers in Middle East and North Africa and frameworks, and enactment of competition South Asia Regions. Compared to the regional policy (figure 9.3). However, the relative distribution of all Bank lending, core IC projects importance of this theme has declined slightly are more heavily concentrated in Europe and with an increase in projects aimed at other core Central Asia than in other regions, mainly reflect- IC themes (judicial and other dispute resolu- ing post-transition assistance in legal and regula- tion mechanisms, legal institutions for a market tory reform (figure 9.5). By income group, core economy, and corporate governance). Among IC projects are increasingly concentrated in low- income countries, more so than for all Bank projects (figure 9.6). Although core IC projects Table 9.1: Thematic Definition of Investment Climate are somewhat more concentrated in countries with poor investment climates as measured by Code Theme the CPIA, it is to a degree similar to all Bank Core IC themes projects. 32 Judicial and other dispute resolution mechanisms 34 Legal institutions for a market economy Performance 36 Personal and property rights IEG-World Bank rates project performance 38 Corporate governance against stated objectives and assigns ratings to the project's outcome, institutional develop- 40 Regulation and competition policy ment impact, and sustainability.22 Table 9.3 shows Non-core IC themes ratings for core IC projects, averaged over fiscal 28 Tax policy and administration 1993­2003, compared to Bank-wide averages. 39 Infrastructure services for PSD Over the entire fiscal 1993­2003 period, 44 Other financial and private sector development outcome ratings for core IC projects were better 45 Export development and competitiveness than the Bank average: 81 percent of core IC 49 Trade facilitation and market access projects were moderately satisfactory or better, 9 0 T H E I C L O A N P O R T F O L I O Table 9.2: IC Lending, Fiscal 1993­2003 IC loan value IC component Number of Percent of Total loan as percent of IC component value as percent Category projects total projects value ($m) Bank portfolio value value ($m) of IC loan value IC 1,291 45 122,868 52 55,441 45 Core IC 418 14 49,767 21 25,002 50 Non-core ICa 563 19 48,641 21 25,227 52 Secondary ICb 310 11 24,460 10 5,212 21 Non-IC 1,600 55 112,834 48 5,355 5 Other PSDc 231 8 16,613 7 5,355 32 Other 1,369 47 96,221 41 0 0 Totald 2,891 100 235,702 100 60,796 26 a. Excludes core projects that contain non-core themes. b. Consists of projects not included in the first three categories, but containing core, non-core, or other PSD themes of secondary priority. c. Excludes core and non-core projects that contain "other PSD" themes: SME support, standards and financial reporting, state enterprise and bank restructuring and privatization, tech- nology diffusion, and rural nonfarm income generation. d. Includes amounts committed to all IC themes in the project, whether core, non-core, or other PSD. Figure 9.1: Number of IC and Non-IC Projects, Fiscal 1993­2003 Non-IC projects 55 percent Projects with a core or non-core theme as a secondary objective 14 percent Projects with a core theme Projects with as a primary objective a non-core theme 14 percent as a primary objective 19 percent compared to 77 percent for all Bank projects, were moderately satisfactory or better during and the difference is statistically significant at the fiscal 1994­98, and 82 percent during fiscal 5 percent level. There was a marginal improve- 1999­2003. In contrast, the performance of the ment in the outcome ratings over the 10-year overall Bank portfolio improved significantly period: 81 percent of Core IC project outcomes from 78 percent in fiscal 1994­98 to 83 percent 9 1 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Figure 9.2: IC Lending, Fiscal 1993­2003 (number and value of loans) 18,000 140 16,000 120 14,000 100 12,000 80 10,000 projects of million 8,000 60 US$ 6,000 Number 40 4,000 20 2,000 0 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Fiscal year Value: Core IC Value: All IC Number of projects: Core IC Number of projects: All IC Figure 9.3: IC Lending as a Share of the Bank's Portfolio, Fiscal 1993­2003 80 70 60 50 40 Percentage 30 20 10 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Fiscal year Value: Core IC Value: All IC Number of projects: Core IC Number of projects: All IC 9 2 T H E I C L O A N P O R T F O L I O Figure 9.4: Core IC Themes in the IC Portfolio 300 268 250 216 200 150 occurrences of 88 100 63 27 Number 50 24 19 19 6 21 0 Regulation and Legal institutions Judicial and other Personal and Corporate competition policy for a market dispute resolution property rights governance economy mechanisms Fiscal 1994­98 Fiscal 1999­2003 Note: Data represent the number of occurrences of core IC themes in core IC, non-core IC, and secondary IC projects. in fiscal 1999­2003. Thus, the performance of the successful in countries that have better IC portfolio is declining relative to that of the macroeconomic and financial sector perform- Bank portfolio. The institutional development ance--although there is no evidence to suggest impact and sustainability of core IC projects were the direction of causality. Projects performed slightly better than the Bank average, but these better in countries with good investment differences are not statistically significant. Institu- climates, as defined by a 2002 CPIA over 3.5: 85 tional development impact and sustainability percent had outcome ratings of Moderately remained nearly constant over the period. Satisfactory or higher compared to 69 percent Projects targeting personal/property rights and for poor investment climate countries, and the corporate governance had somewhat higher difference is statistically significant at the 5 outcome ratings than projects covering other percent level. themes, but sample sizes are small. Sustainability IEG-World Bank outcome ratings are assigned is rated higher in projects directed at legal to the project as a whole, so the outcomes of institutions for a market economy and corporate individual project components may differ from governance than in the other core IC themes. the overall rating. To check this, IEG-World Bank Outcome ratings were lower in low-income evaluations were analyzed for 86 completed countries than in middle-income countries (79 Core IC projects with significant and correctly percent moderately satisfactory or better in low- coded IC components. The outcomes of the IC income countries, compared to 83 percent in components of these projects were examined to middle-income countries). determine whether their performance was There were also differences in project relatively the same, better, or worse than the outcomes according the quality of the country's overall project. For 80 percent of the projects, macroeconomic environment (measured by the the performance of the IC component was the economic policy performance rating in the latest same as the overall project. For the 20 percent CAS) and the performance of the financial sector that differed, most (15 out of 17) performed (measured by the financial sector performance worse than the overall project. rating in the latest CAS). This suggests that the Various factors are associated with the worse outcomes of IC operations are more likely to be performance of IC components: 9 3 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Figure 9.5: Non-Core Themes in the IC Portfolio 300 251 250 200 161 164 152 occurrences 150 of 100 90 79 79 Number 58 52 43 50 0 Other PSD and FSD Infrastructure Export development Tax policy and Trade facilitation and services for PSD and competitiveness administration market access Fiscal 1994­98 Fiscal 1999­2003 Note: Data represent the number of occurrences of non-core IC themes in core IC, non-core IC, and secondary IC projects. Figure 9.6: Share of Core IC Projects by Region 30 25 20 15 Percent 10 5 0 Africa East Asia Europe and Latin America Middle East South Asia and Pacific Central Asia and the and Caribbean North Africa Core fiscal 1994­98 Core fiscal 1999­2003 All projects fiscal 1994­2003 9 4 T H E I C L O A N P O R T F O L I O Figure 9.7: Share of Core IC Projects by Income Group 60 50 40 30 Percent 20 10 0 Core IC: Fiscal 1994­98 Core IC: Fiscal 1999­2003 All projects: Fiscal 1994­2003 Low income Lower-middle income Upper-middle income · IC components form a small part of the justment objectives and conditionality; similarly, project: IC components seem to perform in investment operations, IC components are worse than the overall project primarily when often a minor part of the project. Outcomes these components do not constitute the main were more likely to be poor when IC compo- objective of the project and/or account for a rel- nents were not linked with the rest of the proj- atively small percentage of project costs. In ect. In Indonesia's Land Administration Project, adjustment operations, IC components are there was little interaction between the com- often overwhelmed by macroeconomic ad- ponent involving land management policies Table 9.3: IEG-World Bank Ratings for Core IC Projects, Fiscal 1993­2003 Outcome Institutional (moderately development impact Sustainability satisfactory (substantial (likely or or better) or better) better) Number of Number of Number of Percent rated projects Percent rated projects Percent rated projects Core IC 81 210 54 209 70 210 Judicial/other dispute resolution 79 14 50 14 54 13 Legal inst. for market economy 88 58 62 58 76 58 Personal/property rights 91 11 55 11 64 11 Corporate governance 80 10 50 10 70 10 Regulation & competition policy 81 185 54 184 71 185 Overall Bank portfolio 77 1,366 49 1,355 65 1,369 Note: The number of rated projects is not the sum of projects listed by theme, because a project can have more than one theme. For this reason the average ratings for Core IC projects is not a weighted sum of ratings for individual themes. 9 5 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E and the rest of the project, limiting the com- nomic and Financial Adjustment Loan (EFAL II, ponent's success. P058536), the cabinet of ministers had not ap- · Insufficient supervision: Related to the proved the framework for accounting and au- above, in some cases the IC components re- diting standards and the draft legislation to ceived less attention during supervision than improve competitiveness in the economy. The other larger components of the project. In government considered the reform program Hungary's Product Market Development Pro- extremely complex, detracting from clarity and ject (P008482), Bank supervision inputs were overburdening its capacity. much less than planned, and the skills mix of · Underestimating political and social missions was inadequate to oversee the ob- readiness: A lack of broad political and social jectives of reducing distribution costs and in- support has inhibited the performance of IC creasing competitiveness, which may have components. In Malawi's Second Fiscal Re- contributed to their partial attainment and structuring and Development Program (FRDP marginal impact. II, P045030), the privatization of agricultural · Lack of government ownership and com- marketing was on hold and little progress was mitment: In Madagascar's First Sector Ad- seen in developing land markets due to com- justment Credit (SAC I, P001582), lack of plex underlying social and political factors. A government ownership contributed to the slow turbulent social and political situation made implementation of reforms for promoting com- consensus difficult in Indonesia's Land Ad- petition in the petroleum and telecommuni- ministration Project (P003984). In Indonesia's cations sectors. Progress in the land Second Public Sector Reform Loan (PSRL II, management policies component of Indonesia's P060258), political interference and allega- Land Administration Project (P003984) was lim- tions of corruption contributed to slow im- ited by the failure of the government to re- plementation of commercial court and main substantially engaged. In Romania's PSAL bankruptcy law intended to improve gover- (P064853), the government amended the law nance and transparency. Moldova's Rural Fi- for bankruptcy reform, but follow-up action nance Project (P035781) did not succeed in remained pending at the end of the project. In establishing an efficient and sustainable fi- Russia's Privatization Project (P008810), signif- nancial system, and in the absence of any sig- icant outcomes included institutional strength- nificant savings mobilization--which is due ening of the Anti-Monopoly Committee and to low beneficiary participation--the system Bankruptcy Agency and adoption of a new has evolved into a group lending operation bankruptcy law, but weak enforcement, poor in- rather than a savings and credit system. Under centives, and remaining legal loopholes con- Uganda's FSAC (P002962), institutional re- tinue to undermine their impacts. In the China forms following the passage of a new law re- Telecom Project (P003633), the government lating to capital markets proved difficult due did not sufficiently address the legal and insti- to resistance to reform. tutional environment that impeded private sec- · Overestimating institutional capacity: IC tor involvement in the sector. components were adversely affected by a lack · Complex or ambitious project design of broad institutional capacity. In Romania's seems to make it more likely that IC compo- Program Adjustment Loan (PAL, P064853), nents will underperform, even if the com- weak institutional capacity in the audit field un- plexity does not pertain to the IC components dermined efforts to bring accounting stan- themselves. Under Uganda's Financial Sector dards in line with international accounting Adjustment Credit (FSAC, P002962), a new law standards. Computerization of the customs related to capital markets was passed, but in- department and installation of public sector in- stitutional reforms proved more difficult dur- formation systems failed in Georgia's Institu- ing appraisal, partly due to an ambitious project tion-Building Project (P008413), mainly because design. At the close of Thailand's Second Eco- the broader institutional and cultural envi- 9 6 T H E I C L O A N P O R T F O L I O ronment was not conducive. In Guyana's Fi- infrastructure for PSD and other PSD and nancial Sector and Business Environment Pro- finance sector projects are most common. ject (P034605), the new private sector Regionally, the Core IC portfolio is concen- investment promotion agency was not effective trated in Europe and Central Asia, Latin America in simplifying the numerous government rules and the Caribbean, and Africa; 87 percent are in and regulations that severely limited invest- low- or lower-middle income countries. Increas- ment and was remiss in providing critical in- ingly, adjustment loans are the instrument of formation on its services to investors. choice, rising from 23 percent of core IC projects in fiscal 1993 to 31 percent in fiscal Conclusions 2002. Although core IC projects are somewhat Projects with IC objectives account for a large more concentrated in countries with poor share of the Bank's lending portfolio. Projects investment climates as measured by the CPIA, it that have core and non-core IC themes as is to a degree similar to all Bank projects. primary or secondary objectives account for 45 Over the entire fiscal 1993­2003 period, core percent of all Bank projects over fiscal IC projects performed better than the Bank 1993­2003, and 52 percent of project value. average: 81 percent of core IC project outcomes Core IC projects (those that have one or more of were moderately satisfactory or better, the five Core IC themes as a primary objective of compared to 77 percent for all Bank projects. the project) account for 14 percent of all Bank Although this performance improved slightly projects. However, the value of IC components over the period, the improvement was less than is usually less than the total loan amount, averag- for the Bank-wide portfolio. Thus, the perform- ing 50 percent of value for the core IC portfolio. ance of the IC portfolio is declining relative to With the exception of the expansion in the Bank-wide average. Moreover, when the lending during the fiscal 1998­99 Asian financial outcomes of IC components differ from overall crisis, the Bank's lending for IC reforms declined project outcomes, they are often worse. A slightly until fiscal 2000 and has increased since number of factors contribute to disappointing then, with a significant spike in fiscal 2002. As a outcomes: apparent lack of attention and proportion of total Bank lending, however, IC supervision when IC objectives are a minor part lending has remained fairly stable. Within the IC of larger projects; lack of government portfolio, core IC topics have increased relative ownership and commitment; complex or overly to non-core topics; within core topics, various ambitious project design; lack of overall institu- regulations and competition policy are the most tional capacity; and political or social factors that common objectives. Of non-core themes, were underestimated at project appraisal. 9 7 10 Implementation and Outcomes at the Country Level F ive country case studies were conducted for this evaluation--for In- donesia, Romania, India, Mozambique, and Peru--covering Bank lend- ing and nonlending activities over the fiscal 1993­2002 period. Annex II.E contains brief summaries of the case tion, and political instability amplified the studies and Annex II.A describes the evaluation financial crisis because no credible arrangement protocol. This chapter presents the main to deal with the crisis decisively and fairly was findings and lessons derived from these case offered to restore investors' confidence. An studies with respect to the implementation, enterprise survey conducted in 2000 suggested outcomes, and sustainability of investment that macroeconomic and policy instability and climate reforms. It summarizes what worked uncertainty were the leading concerns of and what didn't, the factors that led to success Indonesian firms. and failure, and lessons that can be generalized Before the crisis, Bank assistance for the to the Bank's IC activities. The chapter begins investment climate dealt with protecting with a brief characterization of each of the property rights, facilitating an efficient land countries and the IC strategy the Bank pursued. market, and developing the accountancy profes- sion. Analytical work emphasized trade and Typology of Countries domestic regulations, improving governance, reforming the legal system, privatization, and Indonesia: Crisis Drives the IC Agenda land administration. After the crisis, the focus of The 1990s were divided into two periods by the the Bank's lending operations shifted to East Asia financial crisis, which began in July macroeconomic stabilization and bank and 1997 with the devaluation of the Thai bhat. In corporate restructuring. less than two months, Indonesia's currency depreciated 75 percent against the dollar; the Mozambique: A Poor Country with gross domestic product (GDP) fell by 13 percent Little Local Capacity in 1998. The proximate causes of the crisis were Despite fast growth during the 1990s, the rapid increase of unhedged short-term Mozambique remains one of the poorest private external debt before 1997 and shortcom- countries in the world. Per capita income was ings in the banking system. The country's only $200 in 2001, about 40 percent of the chronically weak institutions, endemic corrup- average for Sub-Saharan Africa. Adult literacy is 9 9 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E only 56 percent, and there is an acute shortage transactions reform to facilitate collateralization of highly educated workers. of assets for loans. Beginning in the late 1980s and accelerating after the 1992 peace agreement, extensive policy India: IC Constraints at the State Level reforms improved macroeconomic manage- India's economic reforms in the 1990s raised ment; liberalized prices, exchange rates, and GDP growth to almost 6 percent annually trade; privatized public enterprises; promoted between 1993 and 2003, fueled in part by external financial deepening; and improved public debt. Living standards improved markedly, and investment. Even with the progress on first- the number of people living below the national generation reforms, Mozambique began the poverty line declined from 45 percent in the 1990s with an extremely poor investment 1980s to 25 percent in 2002. Foreign direct invest- climate. Incentives, institutional arrangements, ments and portfolio investments responded governance stability, and physical infrastructure strongly to the first wave of reforms, and have had to be either fashioned from whole cloth or fluctuated around $6 billion per year. While rehabilitated. Added to this, a transition from progress was substantial, economic performance plan to market had to be engineered in the has fallen below the target set by the central context of the postconflict recovery. government in the years after liberalization-- The Bank's strategy during the 1990s moved partly due to persistent and growing fiscal from a first-generation set of macroeconomic deficits, inadequate infrastructure (particularly reforms to second-generation reforms aimed at power), and institutional constraints on private removing microeconomic barriers to invest- investment. The most important IC constraints ment stemming from antiquated laws and are bureaucratic red tape and administrative regulations, inefficient administrative capacity, procedures, inflexible labor markets, persistent and corruption. trade protection, and lack of access to financing. IC conditions vary significantly across differ- Romania: IC Reforms Motivated by Opportunity ent states and even within states. The Bank's In the early years of transition, a flurry of reform recent ICA for India shows that Maharashtra and activity was undertaken to promote a more open Gujarat are perceived by firms to be the "best market economy. But most of the 1990s was climate" states; Tamil Nadu, Karnataka, and characterized by economic and political instabil- Andhra Pradesh are "good climate states," Delhi ity; half-hearted reforms undertaken by succes- and Punjab are "medium," and Kerala, West sive governments resulted in a weak supply Bengal, and Uttar Pradesh are "poor climate response from the economy. Both domestic and states." That entrepreneurs actually act on these foreign investment were weak, there was little perceptions can be seen in the investment rates growth, and poverty continued to rise. for these states. The end of the 1990s was a watershed for Beginning in the mid-1990s, the Bank began Romania. Low growth and macroeconomic to focus greater attention on working with states instability brought governments to office that that were strongly committed to reform. The were committed to reform. Government Bank's activities have supported broad packages commitment was "pulled" by opportunity: the of state-level reform efforts as well as sector- prospects of North Atlantic Treaty Organiza- specific programs in power, water, transport, tion (NATO) membership and integration with health, and education. the EU. The Bank's assistance during 1999­2002 Peru: Progress in Some Areas, showed a stronger focus on the investment Reversals in Others climate. Recent projects focused on institutional When President Fujimori was elected in 1990, reforms critical for PSD, including the reform of Peru was verging on total disintegration. the legal environment for business, the Hyperinflation, multiple exchange rates, the reduction of regulatory burdens, and secured nationalization of the banking system, and a 1 0 0 I M P L E M E N TAT I O N A N D O U T C O M E S AT T H E C O U N T R Y L E V E L vicious terrorist movement had resulted in pointed out several structural weaknesses that economic collapse. The government embarked could impede future private sector-led growth. on a comprehensive economic reform program To overcome these weaknesses, the Bank that introduced market mechanisms into every recommended good macroeconomic manage- sector of the economy. The response to these ment, strengthening the financial sector, reforms was a surge in growth over 1993­7, a reducing international and domestic trade decline in inflation, buoyant foreign investment, barriers, facilitating private investment, improv- and a fall in poverty. ing governance, reforming the legal system, During Fujimori's second term, however, improving land administration, and reducing conditions deteriorated. External shocks, the El excessive state ownership of productive assets. Niño effect, and reversals in the reform program However, when Indonesia was perceived to be all served to weaken the economy, increase performing well and not in need of Bank uncertainty, and damage the investment climate. resources, the Bank lacked leverage with the A new government was elected in 2001, promis- government to move it toward implementing ing to improve the economy and eradicate structural reforms. The Bank's usually strong government corruption. However, confidence influence with government "technocrats," who in the new government began to erode almost had a voice in policy formulation and implemen- immediately, and the government has changed tation, was muted during this period, perhaps its stance on several important issues in because the reforms were politically difficult and response to public opinion. Attitude surveys did not seem critical for Indonesia's growth. indicate that the business community does not During the crisis, the Bank had substantial have confidence in the government, which it leverage and influence despite frequent changes views as unstable and anxious to appease in governments. The Bank supported populist sentiment at the expense of continuing macroeconomic stabilization, bank and reform. The result has been a sharp decline in corporate debt resolution, and structural investment. reforms including competition policy and The Bank has undertaken a series of PSAs governance and justice system reforms. Many of since the mid-1990s, but CASs during the 1990s the structural reforms recommended by the did not focus on IC issues. This changed with Bank before the crisis became required policy the 2002 CAS, which increased the stress on actions in adjustment loans immediately follow- institutional projects, particularly to continue ing the crisis. property rights efforts and to modernize the Political stability began to recover after the judicial system. election of President Sukarnoputri. In the new political arrangement, the Soeharto-era Lessons Learned "technocrats," with direct access to the president for decisions, have been replaced by inexperi- IC reform is often driven by crisis or opportunity. enced politicians with diverse interests and Decisions by policymakers to take measures without clear decision rules or hierarchy. necessary to improve the investment climate are Decentralization has further complicated the often motivated by urgency: on the negative decision process and created complications for side by crisis (macroeconomic, financial, politi- the investment climate. With so many new cal) or on the positive side by opportunity (the players and diverse interests vying for decision prospect of joining regional trade agreements, authority, the Bank's ability to influence policy taking advantage of new technologies). The has been reduced. While the investment climate Bank has been successful in supporting reforms has not improved very much, the Bank's activi- in both of these situations. ties have probably prevented it from deteriorat- In Indonesia, the motivation was a negative ing. Eventually, these reforms are likely to one: the Asian financial crisis that began in 1997. improve Indonesia's investment climate, Before the crisis, Bank reports consistently especially for foreign investment but also for 1 0 1 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E domestic investment. For the future, because the alization of assets for loans. Successive PSALs Bank has less leverage and influence with the and public and private institution-building loans government than during the crisis, it will have to (PIBLs) supported these reforms. adopt a strategy that is appropriate to the new The first PSAL was an ambitious attempt to political landscape and will need to persevere for support enterprise and financial sector reforms a longer period to achieve its objectives. that could substantially reduce the pressure on The Indonesia case study offers lessons for the government's finances. There were two Bank strategy and activities in countries where it major factors that motivated the government to has less leverage--in large countries where the undertake these reforms. First, in 1997­8 GDP economy is stable and growing, in democratic contracted by more than 11 percent and the countries governed by a coalition of parties in budget deficit increased for the fifth consecutive which the decision process is diffuse and year to 5.5 percent of GDP. These factors, along complicated, and/or when decisions formerly with an unstable current account balance and made by central government are devolved to mounting external repayment obligations, regional and local authorities. In these increased pressure on the government, which countries, stakeholders determined to improve moved in late 1998 to initiate an ambitious the country's investment climate play a critical reform program. A second major factor was (and role. The Bank should be prepared to pursue IC is) the prospect of accession to the EU in 2007. reforms directly with several layers of govern- PSAL conditions were well coordinated with the ment and indirectly through stakeholders. The milestones set out by the EU, and the govern- Bank should be prepared to exercise patience ment--along with a broad segment of society-- and persist for long periods to achieve its policy supported the effort to "join Europe." This was reform objectives. reinforced by NATO's decision in November The Bank's IC strategy in Romania during 2002 to invite Romania to join the alliance. Once the 1990s can be divided into two periods. The the government understood the severity of the early years (1992­98) focused on the move- macroeconomic situation and wished to ment away from a planned economy to one in proceed with reforms, the Bank moved quickly which markets determined resource allocation to prepare the project. and investment. Macroeconomic imbalances Preparation of the PSAL provided an example were a major concern. The second period, of how high-quality analytical work and good which had its genesis in a major economic crisis collaboration among Bank Group units along with in 1999, was characterized by a much stronger other donors can lead to high-quality lending dedication by the government to promoting operations. FIAS prepared an Administrative the private sector as well as a rededication to Barriers to Investment report with recommenda- the reform effort in general. The new govern- tions encompassing regulatory reform, corrup- ment that came into power in mid-2000 tion, company and tax registration, foreign adopted an economic program for 2001­4 with exchange, property rights, standardization, the goals of stimulating economic growth, employment, land and site development, and reducing poverty and unemployment, combat- customs and international trade. Based on these ing corruption, and speeding up EU integration recommendations, the government approved an and NATO membership. action plan in September 2001 that is now being The Bank's 2001 CAS evidenced the evolution used to improve the investment climate. The of the Bank's approach to investment climate government established an implementation reform from one that was based on macroeco- group with broad representation from the nomic conditions to one that was institutionally Chamber of Deputies, the Chamber of oriented. Recent projects have focused on the Commerce, nongovernmental organizations, the reform of the legal environment for business, business community, importers and exporters, the reduction of regulatory burdens, and and other members of civil society. The Bank secured transactions reform to facilitate collater- worked closely with other donors (International 1 0 2 I M P L E M E N TAT I O N A N D O U T C O M E S AT T H E C O U N T R Y L E V E L Monetary Fund, EU, European Bank for operations. The Bank's analytical work has often Reconstruction and Development, and bilateral helped to accelerate the process of reform. donors), which resulted in the transmission of a In Romania, a comprehensive set of policy consistent message to the government. recommendations emerged from the FIAS The combination of the "push" of macroeco- administrative barriers study and other ESW. nomic crisis, the "pull" of EU accession, the Based on these recommendations, the govern- coordinated support of donors, and efforts to ment approved an action plan that is now being build broad support seem to be having a used as a roadmap for measures to improve the positive, though gradual, effect on the invest- investment climate. Several of those interviewed ment climate in Romania. One area of achieve- indicated that the priority given to the invest- ment has been increased access to credit as a ment climate by the government has been a result of secured transactions reform (box 10.1). result of the Bank's enterprise surveys and analysis. Businesspeople and representatives of The Bank's analytical and advisory work has been business groups report that the investment key to motivating reform. climate is considerably better than it was a few Successful Bank interventions usually have years ago--for example, in the effort required to started with high-quality analytical work that register a business--and that the involvement of provided the policy framework for lending the Bank contributed to this outcome. Box 10.1: Romania: Secured Transactions Reform In 1999 the Bank approved two private sector development loans · No notaries are involved in the process. for Romania: the first PSAL and an accompanying technical as- · Repossession takes place outside the court system. If re- sistance loan, the PIBL. One of the most important components possession is not disputed, the creditor can simply collect the of the PIBL was secured transactions reform. The first phase of pledged property. In the event of a dispute, upon evidence the project supported the implementation of a Law of Secured of the validity of the debt, an officer of the court can seize the Transactions, which was drafted with the support of the Bank. pledged property without the necessity of a court hearing. The law incorporated provisions that permitted movable property, Harsh penalties for wrongful repossession discourage cred- both tangible and intangible, to serve as collateral for loans. The itors from abusing the system. second phase of the project involved setting up the filing archive to permit the law to operate by recording pledges of property and The impact of the law on lending has been dramatic. In the 18 establishing priority regarding which creditors have the first months since the reform was implemented, there have been more rights to repossess and sell the collateral in the event of default. than 400,000 loans against which security interests have been The secured transactions framework had several innovations: registered. More than 100 banks have registered security interests in the filing archive. As there are only 38 licensed banks in Roma- · The law abrogated all existing legislation affecting debt, so nia, the implication is that scores of non-Romanian banks have that there was no danger of ambiguity regarding the validity been lending in the country against collateral and registering their of pledges. security interests. · The filing archive in which pledges are recorded is run by an Of the security interests that have been registered and are cur- association of lenders, so that the public sector is not in- rent, nearly 20 percent represent non-bank-secured loans. This is volved. It is electronic, and priority is determined by the time especially beneficial in rural areas that do not have bank offices. when pledges are recorded. In addition, the geographic coverage has been extensive: There · No documents are necessary to file a security interest. This al- have been filings of security interests in 42 of Romania's 43 coun- lows Internet-based filing; this system is currently the only filing ties. In rural areas, credit has been granted against diverse assets archiveintheworldtohavethisfeature.Theresultisbroadened including cows and tractors. coverage, especially in the rural areas, and reduced costs. 1 0 3 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E In India, the Bank made an important their programs adopted, particularly during the contribution by focusing attention on specific latter part of the 1990s and early 2000s. issues, while placing them within a broader Conditionality and the need for Bank financing context. According to government officials helped prevent backsliding on reforms. involved in the reform process, the Bank In India, the Bank supported investment helped sensitize the government to the gravity climate reforms in the states of Karnataka and of the problem. The Bank drew attention to the Andhra Pradesh with state-level adjustment significant cost of not reforming in terms of the loans. All of these loans contained up-front ability of the government to address social triggers requiring the state government to take needs within the states. Those interviewed specific actions before loan approval and highlighted the ability of the Bank to present effectiveness. The adoption of triggers helped recommendations in terms of an integrated ensure the achievement of agreed actions. In strategy that reflected the significant interac- Karnataka, the adoption of triggers related to tions among different issues faced by the states. deregulation contributed to the reform effort. Government officials in Karnataka acknowl- The triggers were developed after extensive edge that, while the need for regulatory and discussions between Bank staff and government administrative reforms was broadly recognized officials. Once in place, they helped ensure that within the government, efforts to implement actions were taken by the government even if them were sporadic and uncoordinated before some groups were opposed to particular the Bank's analytical work and adjustment reforms, recognizing that the loan might be operations. jeopardized by failure to make adequate Interviews conducted for several of the progress. country case studies suggest that clients would appreciate even greater emphasis on analytical Local champions often initiate reforms, and advisory work. In Peru, government officials but broad support is needed to sustain them. indicated that they would like more sector work It is important to have the backing of key politi- and technical assistance on IC and financial cians to spur reform. However, while much market issues: "The international financial attention is paid to the role of senior political institutions are becoming more like commercial leaders, other stakeholders--professional civil banks. We ask for advice and they give us money," servants, business groups, and the general one senior government official complained. public--are critical to sustaining reforms. In Karnataka and Andhra Pradesh (India), IC conditionality has been important in political leaders were elected on a reform strengthening the hand of reformers. agenda and took steps on assuming office to It is important to recognize that a country's institute policy and institutional reforms. The government is not monolithic. At any time, there Bank elected to work with these states precisely are individuals within the government--top because officials demonstrated that they were political leaders, senior government bureau- willing to tackle pressing fiscal, governance, and crats, party officials, and various formal and administrative problems. Government officials informal advisors--who will support certain and business leaders interviewed spoke of their reforms and others who will oppose them. The concern over whether reform efforts could be Bank's loan conditionality played an important sustained in the event of changes in political role in the political economy of reform in several leadership. Lacking a strong institutional basis case study countries by strengthening the hand and grass-roots support, the reform agenda is in of reform-minded policy makers and other danger of facing difficulties in the event of stakeholders against those opposed to reform. electoral shifts. Many people pointed to the In Romania, many of those interviewed for need to build support for reforms outside of this evaluation felt that the Bank's conditionality government. It was suggested that there is a has been important in helping reformers get need for strong business associates at the state 1 0 4 I M P L E M E N TAT I O N A N D O U T C O M E S AT T H E C O U N T R Y L E V E L level with the capability for careful, objective efforts to strengthen the country's nascent analysis and the ability to voice concerns in the institutions to improve the investment climate. corridors of government and the court of public Many of these efforts have been successful (for opinion. example, secured transactions reform), but The Mozambique case study indicates that others have been less successful because of the Bank did not work vigorously enough to institutional factors. In contrast to moveable build commitment in the government to property, the legal status of fixed property manage and implement the reform process. The (land and buildings) remains unsatisfactory, 1997 Action Plan for reform of administrative and the problems are especially difficult in barriers was not thoroughly discussed by all the rural areas. The focus of the General Cadastre relevant ministries and agencies, nor did the and Land Registration Project was on technical government formally endorse it. The lack of mapping--rather than ensuring that property ownership, support, and participation by the owners receive a registered title--and has respective stakeholders resulted in poor resulted in little change in the land market. implementation. Both domestic and foreign investors continue to complain that uncertainty over land Institutional issues are key. ownership has caused delays and cost The literature review for this evaluation provides increases in investment projects. In some evidence that cross-country differences in the cases, planned investments have been quality of institutions explain a large share of the cancelled. The Bank supported changes in the differences in growth, and may even "trump" legal framework for business under the PSAL other growth determinants. The case studies and PIBL, but there was insufficient focus on provide examples of countries where the Bank the institutions necessary to enforce the laws. paid insufficient attention to institutional As a result, the legal system remains weak, and weaknesses and as a result had little impact on governance is poor. the investment climate. In Peru, contract enforcement remains Although the Bank has done much to improve lengthy and costly. Businesses still view the legal the financial sector in Mozambique, little has system as almost irrelevant--they usually been done to address institutional weaknesses confine transactions to those they know well. In that continue to hamper lending to the private surveys of Peruvian businesses, the overwhelm- sector and investment in equities. Interviews ing majority claimed that the court system did called attention to three important areas where not adjudicate disputes impartially, delays were business leaders say the Bank should have been long, and judges were untrained in commercial more involved in financial sector reform during law and open to influence. the decade: improving financial information, IEG-World Bank's recent Project Performance improving contract enforcement mechanisms, Assessment Report on three PSD projects in and improving the land law and movable assets Guyana provides an illustration of Bank efforts law to increase the private sector's collateraliz- to improve the investment climate in a low- able asset base. It was argued that the Bank's lack income country. The assessment concluded that of attention to the underpinnings of financial the Bank did not have a realistic understanding markets--for example, accounting standards of the structure of institutional dynamics and and skills--is one of the reasons for continued incentives, the governance context (including a high interest rates and lack of access to credit. recognition of the implications of the ethnic Bank activities have supported programs in the divide between citizens of African and Indian legal area, but enforcement problems continue descent), and management capabilities. As a to cause banks to require more than 100 percent result, all three projects failed to anticipate the collateral for most loans. risks of weak ownership, rent seeking, and poor During the second half of the 1990s, Bank management, which severely constrained the activities in Romania strongly supported effectiveness of the projects. 1 0 5 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E The implementation of reforms can get bogged down was not manifested into a shared vision or at lower levels of bureaucracy if incentives haven't commitment adopted by all political parties, changed. responsible ministries, and executing agencies. Professional civil servants are key to the success Reform implementation problems partly of reform efforts. The responsibility for the stemmed from the overlapping structure of implementation of regulatory and administra- government institutions and lack of clarity on tive reforms often runs across a large number of responsibilities and accountability. But there government agencies and departments. Senior also existed a widespread "passive resistance" civil servants must understand, support, and from unmotivated executing agencies and assume ownership of reforms. officials, and corruption at all operational levels. Bank investment climate activities in These problems could not have been solved by Mozambique beginning in 1996 made relevant reforming investment procedures alone--they contributions to the process of removing required complementary civil service reform. microeconomic impediments to investment. Indonesia's legal and judicial system has FIAS Administrative Barriers to Investment been viewed for decades as unreliable about studies (1996, 2001) and ICAs (1997, 2002) enforcing rights or resolving disputes. The helped to identify the reform agenda. To government initiated a series of reforms since improve private sector capacity to analyze and the Asian financial crisis, but follow-through has lobby for reforms, the Bank supported the been disappointing and pessimism has grown formation and early operation of the Confedera- about the pace of reforms. A recent assessment tion of Mozambique Business Associations. To by the United Nations Special Rapporteur improve government capacity to analyze and suggested that progress was poor. Political will implement reforms, the Bank provided to push through the reforms is lacking, and assistance to establish a private sector develop- corruption in the institutions that enforce the ment unit in the Ministry of Industry and laws has not been tackled. Indonesia's political Commerce, and provided technical assistance to and economic elite benefit from the existing the unit to work with the private sector on corrupt system and are not eager to change it. administrative and regulatory changes. To facili- Without a powerful constituency, legal and tate a continuing dialogue between government judicial reforms have had limited impact. and business concerning investment climate The India case study concluded that legal reforms, the Banks supported an annual private and regulatory reforms should have been sector conference. supported by efforts to build the capacity of These efforts, though modest in financial relevant institutions. Most of those interviewed terms, helped the government make some voiced concern about the extent to which improvements in administrative procedures and reforms had been institutionalized. The concern laws and regulations governing investment. But related less to the particulars of laws and regula- business leaders interviewed for this evaluation tions but more to the mindset and capabilities of stated that the reforms undertaken to date are government agencies and departments. In far from sufficient to ease the prevailing adminis- particular, people cited both problems with trative and regulatory constraints to investment. lower-level officials and the need for training. Reforms require more than rewriting legal and Finally, in Romania, the General Cadastre regulatory frameworks. They must be coupled and Land Registration Project was designed to with capacity building to address weaknesses of address the lack of an effective land market that executing agencies, and efforts to build political has been identified as an issue throughout the consensus and commitment by government 1990s. The project was intended to support a leaders to adopt and implement required unified system of land registration in the country, reforms. And even when there was a desire at establish a cadastre system to provide up-to-date the highest levels of government to reform and unambiguous definitions of existing real administrative barriers to investment, this desire estate parcels for land registration, institute a 1 0 6 I M P L E M E N TAT I O N A N D O U T C O M E S AT T H E C O U N T R Y L E V E L low-cost and reliable method for land transac- some IC issues but little or no progress in others. tions, and facilitate collateralization of this more fundamental and widespread asset. However, Conclusions the outcome of the loan has been disappointing, The country case studies conducted for this in part because judges handling land issues were evaluation show that investment climate underpaid, many were unmotivated, and there reforms are usually motivated by factors external was evidence of corruption in the system.23 to the Bank--either by economic or political crisis, or by the prospect of joining regional Modest, piecemeal efforts are less successful agreements--but that the Bank has helped than a "big push" of reforms. governments push reform primarily through its Bank activities in Mozambique have made intellectual contributions. Lending conditional- relevant contributions to the process of ity has also helped the process of reform by removing microeconomic impediments to strengthening the hand of reformers and investment. But business leaders interviewed for preventing backsliding. Even in poor, low- this evaluation state that reforms undertaken to capacity countries, the Bank can make progress date are far from sufficient to ease prevailing if the government is committed to reform. administrative and regulatory constraints to Where results have been disappointing, they investment. They felt that the Bank's support have mainly resulted from a lack of implementa- has been too modest, too piecemeal, and too tion of the laws and regulations adopted under inconsistent to get the job done. They stressed Bank-supported reform efforts. Often the Bank that, if the Bank were really serious about has not understood or paid sufficient attention increasing the pace and scope of these types of to institutional issues, for example, the skills and reforms, it should have developed a program incentives that determine the behavior of with the government to make a "big push" to get authorities charged with implementing the the necessary changes, as in its adjustment reforms. The process of changing institutions lending for macroeconomic reforms, rather than takes time, and getting institutions right is highly the "partial program" it put together. country specific. The Bank's early focus on investment climate Local champions often drive reforms, but issues in Peru was apparent in a series of high- broad support is needed to sustain them. The quality analytical reports throughout the 1990s. Bank has been more effective when it used its In fact, many of the later reports identified issues convening and coordinating role to build that had been raised in earlier reports: regula- support among various segments of society, and tion, policy uncertainty, infrastructure, a weak engaged in a continuing dialogue with both the judiciary, underdeveloped financial markets, and public and the private sectors. poorly protected property rights. Despite In some countries, the Bank's support has successive CASs that established PSD as a been too modest and piecemeal to make a priority, a comprehensive strategy for doing this significant difference in the quality of the invest- was not prepared. Although critical constraints ment climate. When the critical constraints to to PSD had been identified in ESW, they were not private sector development are pulled together pulled together into a cohesive IC action plan. into a cohesive action plan, IC outcomes have Partly as a result, there has been progress on been better. 1 0 7 11 Organizational Issues R esponsibility for the Bank's IC operations is spread across the institu- tion. IC lending operations in the regions are primarily managed by Fi- nance and Private Sector Development, PREM, and Infrastructure units. The sector units in the Regions are organized projects to individual networks and sector somewhat differently: in some, Infrastructure is boards. In fact, more core IC projects are assigned combined with Finance and Private Sector to non-PSD networks (particularly Infrastructure, Development, and in others Infrastructure is PREM, and Financial Sector) than to PSD. Only 17 separate; in the East Asia Region, financial sector percent of core IC projects were managed by the and private sector development is part of PREM, PSD Sector Board over fiscal 1998-2003 (table but in the other regions it is outside of PREM. 11.1). The PREM share of core IC projects has The central "anchor" for the investment increased over the past 10 years. The PSD Board climate is the Investment Climate Department of manages even fewer of the non-core IC projects, the joint World Bank-IFC Private Sector Develop- since most of the "infrastructure services for PSD" ment Vice Presidency. In this department are projects are handled by the Infrastructure three joint Bank-IFC units: FIAS; the Monitoring, network, "tax policy and administration" by Analysis, and Policy Unit in charge of the Doing PREM, and "other financial and private sector Business Projects; and the Investment Climate development" by the Financial Sector network. Unit (CICIC), in charge of network responsibili- ESW on investment climate issues is similarly ties and the ICA initiative. The PSD Vice spread across a wide range of networks. Presidency is led by a Bank-IFC Vice President Discussions with clients and staff conducted who is also the Chief Economist of the IFC. as part of this evaluation identified a number of Since its creation in 2002, CICIC has focused specific organizational issues that have affected on the development of standardized IC diagnos- the quality of the Bank Group's work on the tic instruments--ICAs and the Doing Business investment climate. They concern the division Project. The ICAs have been implemented by of labor across sector units within Regions; the the Regions with budget and technical support respective roles of the Regions versus central from CICIC. Planning and quality control of the units; and the roles of the Bank and IFC. ICA program is under the management of the Within Regions, linkages among sector units PSD Sector Board. on IC issues have been weak. With the exception The wide-ranging "ownership" of the Bank's of the East Asia Region, PSD and PREM are IC portfolio is apparent in the assignment of separate departments that compete to some 1 0 9 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Table 11.1: Network Assignment of Core IC Projects Fiscal 1993­97 Fiscal 1998­2003 Number of Percent Number of Percent projects of total projects of total Infrastructure 65 34 45 23 Poverty Reduction and Economic Management 51 26 60 31 Financial Sector 40 21 37 19 Private Sector Development 23 12 33 17 Environmentally and Socially Sustainable Development 13 7 19 10 Human Development 2 1 2 1 Total 194 100 196 100 degree for the PSD agenda. In many regions (for broader economic and social goals--requires example, Europe and Central Asia and increas- the Bank to have an organizational structure that ingly Latin America and the Caribbean), first- facilitates integration across sectors and collabo- generation reforms are no longer the focus of ration among staff. Recently, the joint World country assistance strategies, either because Bank-IFC Private Sector Development Vice macroeconomic stability has been restored or Presidency has undertaken to improve coordi- because the solutions to macroeconomic nation and reap synergies in IC work across the problems are well known. Along with the shift WBG, for example by holding WBG-wide toward second-generation reforms in CASs, country review meetings and conducting WBG- PREM has taken more responsibility for covering wide training in the field. microeconomic and institutional topics and A second issue has been the role of central including them in adjustment loans, which are units compared to the Regional units. Currently, often managed by PREM staff. It is not surprising CICIC is mainly involved in designing and that the competition between PSD and PREM supporting the implementation of IC diagnos- units has become pervasive and has led in some tics--the task of collecting descriptive informa- cases to a lack of coordination and information tion on the investment climate. As mentioned in sharing. previous chapters, the Bank's knowledge in The lack of coordination between PSD and some areas--"best practice" institutions, the PREM on IC operations has been a problem political economy of reform, and how to facili- because of the need to integrate macroeco- tate indigenous reform processes--seems to nomic and microeconomic concerns. The have been lacking. This suggests that the anchor burden of integrating different sector perspec- could take a larger role in building and dissemi- tive and setting priorities now lies with the nating knowledge in these areas.24 Country Departments--but some country The third issue deals with the respective roles departments have been more actively involved and comparative advantages of the Bank and IFC in managing this integration than others. (and to a lesser degree MIGA) on IC activities. The broad nature of the IC topic--and the This issue is discussed in Chapters 1­4 of this need to balance private sector interests with report. 1 1 0 12 Recommendations 1. Pay more attention to institutions and by academics by ensuring better access to the political economy of reform. IC data and research results. a. Do more analytical work on institutional d. Make a stronger push for transparency and arrangements and the political economy of openness--to help create political will where reform, involving local organizations. This it is weak, to enlist local oversight of poten- could include (i) a guidance note with a ty- tial government inefficiencies and abuses, pology showing what types of institutional and to improve the investment climate itself. arrangements work in different country cir- e. Ensure that Bank staff develop a deep un- cumstances; (ii) assessments of a country's derstanding of and sensitivity to country-spe- institutional capaciy constraints, incentives, cific political and business cultures, as well barriers to changing behaviors, and training as key features that define the relationships needs, to help design IC assistance and between business and government. monitor progress; (iii) country case studies 2. Improve the focus and use of survey- of IC reform successes and failures to gain based diagnostics. a better understanding of how reform a. Focus ICAs on specific country needs. Make processes are motivated and sustained, and greater use of existing material and collab- the role of different stakeholder groups. orate with other donors doing similar things b. Be less timid in dealing with vested interests to avoid duplication of effort. and in building a balanced constituency for b. Take into account the heterogeneity of in- reform. Make better use of the Bank's con- vestment climate conditions by targeting vening power to bring the government to- diagnostic assessments on subnational ge- gether with the business community, as well ographic areas or individual industries. as with consumer and labor groups and c. Recognize that enterprise surveys repre- local think tanks. sent only the views of the business com- c. Be more proactive in disseminating infor- munity. Use survey-based diagnostics only mation--on IC constraints, the country's as an input to making policy recommenda- reform agenda, the implementation of laws, tions to balance business perspectives with the achievement of specific targets, and les- broader economic and social concerns. sons from the reform experience of other 3. Do a better job of prioritizing and pack- countries. The Bank could facilitate research aging IC reforms in lending operations. 1 1 1 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E a. Give high priority to reforms that will build tegrate microeconomic and macroeco- political and civil society commitment to nomic reform agendas. continue the reform process--by focusing a. Maintain the responsibility for integration on problems that, if fixed, would have im- with the country departments, but provide mediate positive impacts. better support from the sector and anchor b. Consider packaging a critical mass of mi- units, IFC, and MIGA. Clearly define the croeconomic reforms and components (in- roles of the sector units in the Regions (prin- cluding civil service reform and training of cipally PSD and PREM) to improve coordi- public officials) into IC-focused adjustment nation and reduce potential conflicts. loans, rather than piggy-backing small IC b. Improve the integration of sectoral issues in components to macroeconomic adjustment proposed reform strategies. Possible op- operations. tions to accomplish this would be to con- c. Choose lending instruments appropriate tinue and expand the recent practice of to support the process of institutional holding country-level PSD reviews (for in- change over a long period (e.g., program- dividual countries, country departments, matic adjustment loans). This will help en- or regions), bringing together staff across sure that changes in laws and regulations are sector units (particularly PSD and PREM) as actually implemented and are sustained. well as the IFC and MIGA; and/or to nomi- 4. Find organizational solutions that help in- nate IC "coordinators." 1 1 2 ANNEX II.A: EVALUATION METHODOLOGY Evaluation Framework formance outcomes, and with the obstacles to The chain of causality from Bank IC activities to investment as perceived by potential investors? economic performance outcomes, illustrated Do the survey-based diagnostics used by the below, has three main parts: Bank provide good information about the qual- ity of the investment climate, and do they lead (1) Between Bank activities and the adoption of to sound policy advice? policy and institutional reforms · Effectiveness of Bank assistance: Are Bank (2) Between reforms and actual changes in the activities helping get IC reforms implemented? investment climate Was the Bank effective in motivating client (3) Between changes in the investment climate governments to undertake reforms, beyond and performance outcomes (firm-level pro- what they would have done in the absence of ductivity and profitability, and economy-wide Bank intervention? Was conditionality in lend- productivity, investment, income, and em- ing operations helpful in supporting reform? ployment). What were the outcomes of Bank interven- tions, in terms of the quality of the investment The ICS focuses on the first parts of the climate and in terms of investment and growth? chain--from Bank activities to IC outcomes-- · Sustainability: What is required for IC im- relying on a literature review to provide provements to be sustained? How should re- evidence on the relationship (3) between forms be sequenced? improved investment climates and final · Organizational issues: Does the Bank's or- economic outcomes. ganizational structure support good invest- The evaluation addresses the following ment climate work? questions: The evaluation comprises the following · Relevance of Bank assistance: What relative components: priority did the Bank attach to addressing IC issues among its total interventions? Were the · A review of the literature on the drivers of in- policy and institutional areas emphasized in vestment and growth and of the microeco- Bank operations consistent with current em- nomic factors that determine investment pirical research linking IC indicators with per- behavior Figure II.A.1: Logic Model for World Bank IC Activities World Bank (1) Policy and (2) Quality of the (3) Firm-level and IC activities institutional IC changes economy-wide reforms performance outcomes 1 1 3 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E · A review of IC issues in Bank strategy docu- Benjamin Rowland (consultant). The participants ments--institution-wide PSD strategies, CASs, were chosen by the consultant and several others, and PRSPs including Thomas Niles and Steven Canner of the · A description and analysis of the portfolio of U.S. Council for International Business (USCIB); IBRD/IDA lending operations that support im- Gilles Garcia, private sector outreach officer in the provements in the investment climate World Bank's Paris office; Jonas Moberg and Gina · A description and analysis of IBRD/IDA non- May of the Prince of Wales International Business lending services including economic and sec- Leaders' Forum (IBLF) in London; Carlos tor work and survey-based diagnostic Gonzales-Finat of the Union of Industrial and assessments Employers' Confederations (UNICE) in Brussels; · Results of discussions with Bank staff and in- and Y. Yoshimura and K. Omori of the World ternational investors Bank's Tokyo office, with additional help from the · Client consultations and country case studies staff of the leading Japanese industry association, for India, Indonesia, Mozambique, Peru, and Nippon Keidanren. USCIB, IBLF, and UNICE Romania. kindly provided the use of their facilities for the meetings. Literature Review The main criteria for the selection of partici- A literature review provided a conceptual pants were: headquarters-based executives with a framework for the ICS. Theoretical and empiri- good knowledge of the overseas investment cal literature on the investment climate, strategies and procedures in their respective produced both inside and outside the Bank, was companies; a willingness to be open and candid; reviewed. Specifically, the literature review and the ability to participate fully in meetings focused on the following topics: conducted in English. Although detailed prior knowledge of the World Bank and its programs · The relationship between economic growth was not intended to be a requirement for partici- and poverty reduction pation, familiarity with the Bank and its goals · The relationship between the quality of the in- proved to be fairly strong. For example, two of the vestment climate and investment flows, both corporate respondents, one in Washington and domestic and foreign one in Tokyo, were former WBG staff members, · Aspects of the investment climate that make the and at least four others, one in Washington, two in most difference to investors, both domestic and Tokyo and one in Europe, had negotiated or done foreign business with the Bank in areas such as finance, · The importance of the investment climate as procurement, and partnering. a determinant of investment, relative to other To establish a common threshold level of factors (e.g., macroeconomic and political risk, knowledge about the Bank's IC programs and the labor costs, global investment strategies) design and aims of the IEG-World Bank evalua- · Policy and institutional reform strategies that tion, all participants received briefing materials have had the most success in improving the in- about 10 days before the meetings. These materi- vestment climate. als included (1) a discussion of the scope and definition of the IEG-World Bank evaluation, The review was prepared in November 2003 together with an attempt to place the evaluation by Tyler Biggs (consultant) and is available as a subject matter in the context of the broader range background paper for this report. of activities undertaken by the Bank Group in the name of private sector development; (2) a International Investor Interviews summary statistical analysis of the Bank's IC loan Interviews with large multinational investors were portfolio; (3) examples of the two new diagnostic held in Washington, D.C., Tokyo, London, and instruments (the ICAs and the annual Doing Brussels between early November 2003 and mid- Business Survey) developed to carry out the January 2004. The interviews were conducted by Bank's recently initiated Private Sector Develop- 1 1 4 A N N E X I I . A : E VA L U AT I O N M E T H O D O L O G Y ment Strategy; and (4) several questions to help Participants were asked the following discus- guide the discussions. sion questions: A summary description of the corporate and industry-association participants is provided in · Which country-level factors do you consider table II.A.1. Aggregate revenues for the corporate whenmakinginternationalinvestmentdecisions? participants are approximately $735 billion. Total · How important are "investment climate" con- employment is approximately 1.4 million. Nine of siderations in your investment decisions? the 17 participating companies are included in the · Which IC considerations (if any) do you in- 2003 World Investment Report (produced by the clude in screening for investment locations? United Nations Conference on Trade and Develop- How much weight do you give to them? ment [UNCTAD](World Bank 2003c) list of the 100 · Are the IC activities that are the focus of WBG largest non-financial transnational corporations. lending and advisory services the most im- Table II.A.1: Participants in International Investor Interviews Sector and company Home country Revenues (US$bil) Employees (000s) Computer and information technology Leading computer company U.S. 90 315 Leading computer company Japan 38 118 Infrastructure Gas U.K. 5.3 4.6 Water and sewer France 13.3 77 Water and sewer U.K. 2.3 14 Telecom U.S. 68 230 Telecom U.K. 50 53 Investment Fund U.S. na na Extractive Integrated oil company Europe 202 116 Mining U.K. 20.5 177 Mining U.K. 10.8 36 Construction/Engineering Industrial construction U.S. 4.5 15 Shipbuilding Netherlands 10 30 Pharmaceutical U.K. 34 104 Apparel/Footwear U.S. 10 22 Chemical Japan 10 2.2 Trading Co. Japan 168 35 Industry Associations Nippon Keidanren Japan Prince of Wales International Business Leaders' Forum U.K. UNICE Belgium European Services Forum Belgium European International Contractors Germany USCIB U.S. 1 1 5 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E portant ones, from the vantage point of your · When considering or undertaking an invest- company's location decisions? ment in a developing country, have you used · Can you provide examples of how IC im- the services of investment promotion agen- provements have affected the costs and risks cies? If so, have you found these agencies' as- in the developing countries where you invest? sistance to be effective and useful? Do the improvements affect your company's · Other topics? bottom line? · Is the quality of existing firm-level and coun- Bank Group Staff Discussion Groups try IC data (from private or other multilateral IEG-World Bank, IEG-IFC, and IEG-MIGA held institution sources) a deterrent to making joint discussion groups with Bank staff to get good investment decisions in developing coun- their feedback on WBG IC activities. Invited staff tries for your company? Do the new World were task managers of PSD projects, PSD special- Bank instruments, i.e., the ICAs and the annual ists, country economists, and IFC investment Doing Business survey, fill a gap? officers. Two discussion groups were held: one · Were you aware of WBG activities in the area on February 3, 2004, for the Africa, East Asia and of IC reform? Would more information about Pacific, and Latin America and the Caribbean these activities (e.g., activity details, partici- Regions; and one on February 10, 2004, for the pating countries) affect your investment loca- Europe and Central Asia, Middle East and North tion decisions? Africa, and South Asia Regions. The results of the · Is the PSD IC strategy, with its emphasis on gen- discussions are summarized in a background erating internationally comparable survey data, paper by Ramachandra Jammi (IEG). and a common assessment methodology for Participants were provided with background the Bank's operating regions, the best use of materials in advance of the meeting, which Bank Group resources to "lower the transac- included (a) the objective and components of the tion costs and risks of investing in and oper- evaluation, (b) the working definition of the invest- ating a company"? (Alternatives might include ment climate, (c) a description of the IC portfolio, a stronger emphasis on implementing the Bank (d) project descriptions from IEG-World Bank Group's policy advice, measures to improve [in- evaluation summaries, and (e) findings from IEG- crease] direct lending to and risk taking on be- World Bank CAEs. Participants are listed below: half of the private sector, etc.) · Has the presence of IFC as a direct investor tak- Magdi Amin EASFP ing private sector risk in specific companies and Bernard Drum EASFP sectors served as a demonstration effect or in- Charles Feinstein LCSFP fluenced your company's perception of in- Arvind Gupta EASPS vesting in a particular country? Gaiv Tata DECWB · Are you familiar with MIGA's instruments that Albert Zeufack EASPR target improving the investment climate? Ahmad Ahsan SASPR · Have you ever used, or considered using, MIGA Irina Astrakhan ECSPF products or services (e.g., political risk insur- Harry Broadman ECSPE ance or information services for potential for- Kutlay Ebiri CEUST eign investors such as IPAnet and FDI Jim Emery CASFC Xchange)? If so, have you found these prod- Neil Gregory CSASC ucts or services effective and useful? Peggy Henderson CMEDR · How would you rate these MIGA products and Gregory Jedrzejczak ECSPF services compared with similar products from Arthur Karlin COSDR other providers (e.g., political risk insurance Mihaly Kopany TUDRU from national or private investment insurers, in- Melanie Mbuyi AFTPS formation services from commercial providers, Mohua Mukherjee AFTOS or other international organizations)? Vijaya Ramachandran AFTPS 1 1 6 A N N E X I I . A : E VA L U AT I O N M E T H O D O L O G Y The discussion questions were as follows: · Have there been areas of conflicting objec- tives between the Bank and IFC in policy or reg- Relevance: ulatory issues? · Have IC issues been given enough priority-- Human resources: relative to macroeconomic, rural, social, and human development issues--in the countries · What kinds of expertise are needed in the you are familiar with? Bank to design and implement high-quality · Have the IC issues chosen for emphasis in assistance on IC issues? Bank country strategies reflected the most im- · Are these resources available? portant constraints to investment and enter- prise performance? Country Case Study Protocol Instruments: Activities to Be Included The set of World Bank activities included in the · Have the instruments of Bank assistance (ad- evaluation, covering the fiscal 1993­2002 period, justment loans, technical assistance, diagnos- were taken from the previously constructed tic studies, etc.) been appropriate to country databases of lending operations and nonlending needs? services. The set of activities included individual · Should IC constraints be tackled in stand-alone lending operations (closed as well as ongoing projects, as opposed to being components of projects), surveys/assessments, ESW, advisory larger structural adjustment loans? services, training and knowledge dissemination, and partnerships. The review also included Diagnostics: activities undertaken by the Bank/IFC SME Department. Other IFC and MIGA activities were · Did the Bank's diagnostic work (PSAs, ICAs, and not specifically evaluated in the case study, but other economic and sector work) provide a issues of coordination between the Bank and sound basis for policy dialogue and opera- IFC/MIGA were covered. tions? · How might these instruments be improved? Unit of Analysis The unit of analysis was the country. However, it Outcomes: proved useful to focus on particular organiza- tions (e.g., a foreign investment promotion · What factors seem to have led to good out- institution) or policy (e.g., commercial transac- comes, or poor outcomes, in Bank IC projects? tions law) as an embedded unit of analysis. This · Can we expect good IC outcomes in countries was appropriate when the institution or policy with poor macroeconomic conditions? received sustained attention from the Bank over a period of time. Organizational structure: External Sources of Information · Are the mandates of the various Bank Group Prior to the mission, the following information units dealing with the investment climate will be collected: clearly defined in theory and in practice? · Are there overlaps or gaps in responsibility? · Strategic documents: the CASs covering the · Do the Bank, IFC, and MIGA operate in areas period, as well as any relevant policy notes of their comparative advantage, and are syn- (e.g., dealing with private sector development) ergies being utilized? · Project documentation: For each lending op- · Has Bank-IFC coordination on PSD strategies eration, the Memorandum of the President in CASs worked well? and the Appraisal Report 1 1 7 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E · Existing evaluation material: Quality As- Persons to Be Interviewed surance Group reviews and Project Supervision In headquarters, relevant staff and managers Reports; for completed projects, the Imple- were interviewed to gain their perspectives on mentation Completion Report (ICR) and Eval- the objectives and targets of activities, how uation Summary and, where applicable, the activities were implemented, and the results of Project Performance Assessment Report; CAEs the interventions. · ESW and surveys/assessments: surveys/ In the field, persons interviewed included assessments produced during the period (PSAs, relevant government officials (policymakers and FACSs, WBES, ICSs, ICAs); relevant economic management in institutions receiving assistance) and sector work (e.g., reports on private sec- as well as representatives of the private sector to tor development, or PSD chapters in Country gain their perspectives on constraints to PSD Economic Memoranda) during the past 10 years, the relevance of policy · Investment climate indicators: Existing and institutional reforms undertaken by the data on the constraints to PSD, the cost of government, the effects of those reforms, and doing business, and country risk indicators the remaining reform agenda. · Economic outcome indicators: annual data on domestic and foreign investment, the share Evaluation Questions and Methodology of private sector activity in GDP, private sector The questions addressed in the case study and employment, productivity growth (if avail- sources of information used to form conclusions able), exports, GDP growth, and poverty in- are shown in table II.A.2. Note that "outcome" dicators, from 1990 through the most recent refers to the efficacy of Bank strategy and activi- year available. ties and includes Institutional Development Table II.A.2: Evaluation Questions and Methods Questions Sources of information Relevance Did the IC themes chosen for emphasis in Bank strategy reflect the most important constraints to · Literature review investment, employment, and growth of the private sector? · CASs, sector strategies Did Bank diagnostic work lead to the choice of relevant objectives for lending operations? · IC indicators Were the instruments chosen appropriate to country needs at the time? · Surveys/assessments, ESW · Project documentation · Evaluation material · Headquarters and field interviews Outcome (including institutional development impact) Were changes in the quality of the investment climate associated with changes in economic · Literature review outcomes (foreign and domestic investment, productivity growth, sectoral and GDP growth)? · CASs, sector strategies Were the policy and institutional reforms adopted associated with changes in transactions · IC indicators costs and risks? Were private sector perceptions of risk improved? · Surveys/assessments, ESW Were the adopted reforms actually implemented and sustained? Were necessary complementary · Project documentation actions taken? · Evaluation material Did the Bank have an influence on the government's decisions to adopt policy and · Headquarters and field interviews institutional reforms? Were there other plausible explanations for outcomes, apart from Bank activities? 1 1 8 A N N E X I I . A : E VA L U AT I O N M E T H O D O L O G Y Table II.A.2: Evaluation Questions and Methods (continued) Questions Sources of information Sustainability What was the degree of government commitment to reform, and did the Bank correctly · Headquarters and field interviews assess this commitment? Was there sufficient government ownership of reforms? Were the concerns of civil society (particularly the private sector) recognized and taken into account? Have the policy and institutional reforms been sustained? Do the relevant institutions have enough capacity to continue their work? Were temporary subsidies reduced or eliminated? Were implicit budget subsidies (e.g., to newly privatized firms) reduced or eliminated? Bank Group performance Was relevant information about constraints to private sector development shared among the · Headquarters and field interviews various WBG units involved in improving the investment climate? Were activities undertaken by various units well coordinated? Did the various units undertake activities that were in their comparative advantage? Borrower performance Did the government own the process of reform and take a leadership role in the preparation, · Headquarters and field interviews implementation, and evaluation of the project? Were counterpart funds provided as required? Did the government sustain the necessary policy and institutional framework required to sustain the impact of the project? Note: ESW = Economic and sector work. Impact. Bank Group performance should cover II. Bank Activities to Improve the Investment the effectiveness of the institution's organiza- Climate tion, knowledge sharing, etc. in contributing to A. Strategic focus intended outcomes. B. Lending operations C. Nonlending services Outline of the Case Study III. Relevance of Bank Activities I. Country Context IV. Outcome of Bank Activities A. Trends in Investment, Employment, V. Sustainability and Growth VI. WBG Performance B. Trends in the Quality of the Invest- VII. Borrower Performance ment Climate VIII. Lessons for the Future 1 1 9 ANNEX II.B: IC THEME DEFINITIONS Core IC Themes · Identifying vulnerabilities in existing frameworks having a negative impact on economic growth 32. Judicial and Other Dispute Resolution · Assessment of prevailing legal and regulatory Mechanisms frameworks · Establishing and strengthening the legal and Includes activities aimed at: regulatory frameworks and legislative process related to economic and commercial activities · Improving the efficiency of the courts, simpli- to promote PSD and economic growth in a fying court procedures, improving capacity of fair and competitive economy court personnel, and modernizing case man- · Assistance with formulation of appropriate agement and court administration policies · Supporting the rehabilitation of courts and · Assistance with study, formulation, and re- the provision of information technology vision of laws related to such matters as · Strengthening institutions responsible for banking, insolvency, contracts, property, com- budget, planning, human resources, and court mercial transactions, competition, trade and facilities; and those involved in rendering, pub- the private provision of public infrastruc- lishing, and enforcing judgments ture services, including telecommunications, · Improving the independence and accounta- water supply, electrical power, and trans- bility of the judiciary portation · Improving compensation, appointment, pro- · Assistance with the application and imple- motion, discipline, and removal procedures mentation of relevant legislation · Strengthening judicial and court personnel · Improving capacity of institutions responsible training programs/institutes for the regulation of private sector activities, in- · Publication of court decisions and statistics cluding commercial banks, secured transac- · Support for watchdog civil society organizations tions, capital markets, and the private provision · Building legal framework for complementary of infrastructure services resolution of disputes · Assistance with regulatory frameworks for the · Supporting alternative dispute resolution above and related matters (ADR) · Research and dissemination of results thereof · Supporting arbitration, mediation, concilia- regarding policy directions tion, mini-trials, small claims courts, and other · Training of staff, externally and internally dispute resolution mechanisms · Clarifying and strengthening personal and · Supporting indigenous customary and tradi- property rights, including gender-based, chil- tional methods of dispute resolution. dren's, indigenous peoples, and other human rights, social protection, labor, health, civil 34. Legal Institutions for a Market Economy rights, and criminal law · Supporting with land titling, family and suc- Includes activities aimed at: cession laws, other property laws 1 2 1 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E · Creating and maintaining land, personal prop- · Regulating the provision of electronic financial erty security, and intellectual property registers services (e-finance) · Supporting institutions responsible for clari- · Regulation of microfinance institutions. fying and strengthening such rights · Landlord-tenant courts and ADR. Non-Core IC Themes Excludes business-related laws that would be 28. Tax Policy and Administration coded under Legal Institutions for a Market Economy. Includes activities aimed at improving the effectiveness, efficiency, and fairness of public 38. Corporate Governance revenue systems, including tax policies and tax and customs administration at national and Includes activities that focus on: subnational levels of government. This category includes activities related both to the economic · Rights of shareholders analysis of tax policies and to the design and · Equitable treatment of shareholders functioning of institutions related to tax and · Treatment of stakeholders customs administration (as well as the links · Disclosure and transparency between policies and institutions, and between · Duties of the board tax and customs). · Assessment of corporate governance institu- tional frameworks and practices through the Excludes activities related to the economic preparation of country assessments. analysis of individual tariff policies (which falls under Trade and Integration) or activities that Excludes activities related to corporate social involve minor changes in tax rates or coverage responsibility issues. or changes in revenue administration that are not intended to affect or address systemic issues 40. Regulation and Competition Policy of revenue policy or administration. Activities that promote deregulation and 39. Infrastructure Services for Private Sector enhancement of competition and improve the Development legal and regulatory framework for financial and private sector development Includes activities aimed at: Includes activities aimed at: · Development of infrastructural services such as transport, information technology and com- · Elimination or weakening of state monopo- munications, energy and water, where the ob- lies in various sectors jective is to improve the conditions in which · Simplification of business licensing and regis- private businesses operate (e.g., a rural elec- tration requirements trification program that aims to facilitate the · Removal or reduction of barriers to FDI growth of rural enterprises) · Enactment or refinement of competition pol- · Improving logistics and distribution systems icy, including its legal basis · Supply chain infrastructure · Development of regulatory framework, in- · Customs facilities and procedures. cluding legislation and regulatory capabilities, for private provision of infrastructure Excludes infrastructure projects that have · Strengthening the supervision and regulation objectives other than PSD, such as a rural electri- of financial institutions and markets fication program whose main goal is to improve 1 2 2 A N N E X I I . B : I C T H E M E D E F I N I T I O N S living conditions for the rural population, not tection, and impact on foreign direct invest- facilitate growth of rural enterprises. ment) · Promoting nontraditional exports 44. Other Financial and Private Sector · Countering anti-export bias Development · Export promotion and marketing activities · Market liberalization and access in services Includes activities that: · Diagnostic country trade studies · Aspects of "new" trade agenda at the national · Help establish or strengthen institutions that level, such as competition policy, product stan- provide support to the private sector (e.g., es- dards, and the linkage between exports and tablishing or strengthening investment pro- labor or environmental issues motion agencies, export promotion agencies, · Implementation challenges (e.g., timetable for or technology development institutions, ca- phasing in tariff reductions, handling of sensi- pacity building of private sector collective bod- tive industries, dealing with fiscal impact of ies and development of public-private tariff reduction) consultative mechanisms). · Business facilitation. · Support development of nongovernmental service delivery mechanisms, such as output- Excludes regional trade agreements/integration, based aid schemes involving private provision. and global liberalization. · Small-scale contracting to private providers and nongovernmental organizations (e.g., 49. Trade Facilitation under social funds) may be included if the de- velopment of private sector or nongovern- Activities that focus on increasing the volume mental organization provision is an explicit of international trade by reducing the costs objective. If there is a strong SME develop- and increasing the efficiency of transporting ment objective, it may be classified under SME traded goods to consumers Support. · Support restructuring of private enterprises, Includes activities with the following as either such as corporate restructuring. primary or secondary objectives: · Address multiple subthemes in promoting fi- nancial sector development (e.g., for work in · Modernizing and/or reforming customs oper- diversifying financial systems, developing do- ations and administration mestic debt markets, advising governments · Streamlining and modernizing border-crossing with small financial systems, designing new fi- procedures and documentation requirements nancial instruments for managing risk, and · Regional (cross-border) programs that systemic restructuring policy advice). strengthen mechanisms of interaction and co- operation among border agencies (and between 45. Export Development and Competitiveness border agencies and the trading community) in order to increase the efficiency of border op- Activities that focus on the determinants of erations export growth and external competitiveness in · Reducing corruption and smuggling and en- developing economies hancing security at border crossings · Enhanced transport and supply chain security Includes activities aimed at: · Improving trade and transit logistics (i.e., port, maritime, air, and multimodal transportation) · Trade liberalization (e.g., benefits of unilateral · Expanding access to transportation modes (air, tariff reform, pattern of Effective Rates of Pro- land, and sea) for firms and other business 1 2 3 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E entities whose primary goal is to engage in ex- lowering the costs of transporting goods ternal trade to/from borders · Expanding access in landlocked countries to · Support for information technology infra- ports and other border posts structure to enhance e-commerce usage within · Increasing the quality and efficiency of trans- the trading community portation infrastructure--roads, railroads, · Regulatory and administrative reform and har- ports, and airports--with a direct impact on monization to expand trade. 1 2 4 ANNEX II.C: THE INVESTMENT CLIMATE IN SECTOR STRATEGY PAPERS Report title and date Investment climate messages PSD strategy papers "Private Sector Development Action Improving the business environment is one of four priority areas identified for promoting PSD. Bank Plan" (1989) and "Progress Report assistance will take the form of adjustment operations to support policies, regulations, and legal on the Private Sector Development reforms; FIAS to be expanded. Financial sector development, a related area, is also given priority. Action Plan" (1990) "Private Sector Development The current sector strategy highlights the fundamental importance of the investment climate. The Strategy: Directions for the World strategy suggests that IC issues be part of systematic and regular analysis in preparation of country Bank Group" (April 2002) and strategies and that policy-based lending operations and capacity-building efforts, particularly to "World Bank Group Private Sector reduce unjustified obstacles to private business and to establish secure property rights for poor Development Strategy: Implemen- people, be continued. tation Progress Report" (May 2003) Sector strategy papers Energy: 1993 Policy Paper Regulatory processes must be established that are transparent and clearly independent, and that avoid government interference in the day-to-day operations of power firms. Energy: "Renewing Our Energy Promoting PSD in the energy sector requires the creation of objective, transparent, nondiscriminatory Business: Draft Strategy for regulatory mechanisms, expanding competition and cross-border trade, and catalyzing private invest- Discussion" (January 2001) ment. Bank assistance will be in the form of loans and nonlending services in support of ongoing reform programs. Social Sectors: "Sector Strategy: To promote private participation in health services, the paper recognizes that weak institutional Health, Nutrition, and Population" capacity to deal with regulatory problems often causes governments to become excessively involved (1997) in the direct production of health services. ICT: "Information and Communication To encourage private investment flows, sector reforms policies should emphasize privatization, Technology Sector Strategy Paper" competition, and regulation. (January 2000) Rural Development: "From Vision Facilitating PSD in rural areas is key to improving well-being in rural areas and considers the to Action" (1997) and "From Vision creation of a regulatory framework that allows for the development of a competitive private sector to Action: Update" (July 2000) and efficient markets as a mandatory first step in private sector development. Emphasizes the business environment in rural areas, public infrastructure, and public services. SMEs: SME Department "Strategy, Establishing the business environment conducive to SME development is listed as one of the four Business Plan, and Budget" pillars of the WBG strategy. It is crucial to tackle those factors that discriminate against small firms (May 2000) as well as the broader issues that affect all firms. (Continued on the following page.) 1 2 5 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Report title and date Investment climate messages Urban Development: "Cities in To foster competitive firms of all sizes, the paper emphasizes the importance of the enabling and Transition: A Strategic View of institutional framework, including a legal and regulatory framework that establishes business Urban and Local Government incentives and imposes minimal transactions costs; land, real estate, and transport planning; and the Issues" (March 2000) rule of law and property rights protection. Other PSD papers "Private Sector Development in Identifies four key areas for improving the business environment: strengthening the legal and judicial Low-Income Countries" (1995) system, reducing the barriers to competition and improving regulation; supporting entrepreneurial development; and promoting global integration through foreign direct investment and regional integration to complement trade reform. "Private Sector Development The paper is the outcome of a discussion process within the WBG dating back to mid-2000 and Strategy: Issues and Options" culminating in a discussion with the Executive Directors of the WBG on May 23, 2001. The paper is (May 2001) focused on six major themes, including the creation of an investment climate that promotes growth and provides opportunity for the poor. 1 2 6 ANNEX II.D: FINDINGS FROM IEG-WORLD BANK COUNTRY ASSISTANCE EVALUATIONS Region/Country (CAE year) CAE findings Africa Burkina Faso Adjustment lending addressed public sector reform and the environment for growth and private sector development. (2000) Slow but significant progress has been made in privatizing public enterprises, but the program has not been ade- quately supported by the promotion of new private sector activities or by the removal of economic, institutional, legal, and regulatory bottlenecks to domestic and foreign investment. Trade reform was undermined by the proliferation of tax and tariff exemptions, but is now proceeding swiftly with the introduction of the subregional WAEMU free trade and the common external tariff. Cameroon The Bank and IFC contributed to improve the environment of the private sector. They played an important role in pro- (2001) moting privatization and insuring that the process was conducted in a reasonably transparent manner. The government recognizes that this is probably the major impediment to increased private investment, and is preparing to deal effec- tively with the problem. The Bank played a role in bringing corruption to the forefront and contributed to reducing one of the main sources of corruption, by promoting privatization and ensuring that the privatization process is conducted with sufficient transparency. Côte d'Ivoire Improving the competitive position of the Ivorian economy and improving the private sector environment was the focus (1999) of Bank lending during the fiscal 1994-96 period, with almost half of Bank commitments going to macroeconomic ad- justment credits. Lending has been particularly successful in the series of recent adjustments loans and credits aimed at restoring Côte d'Ivoire's competitive position: financial sector adjustment loan for restoring the health of the financial sector, Poverty Alleviation Strategy Coordinating Office for simplifying and rationalizing the regulatory frame- work, economic recovery credit for supporting the recovery of the private sector, and PSD for creating a more friendly private sector environment. The success of these operations was predicated on a consistent strategy that was sup- ported by sequences of credits and nonlending activities. The Bank has to assist the government in creating an attrac- tive environment for domestic and foreign private investors by simplifying and rationalizing the system of taxes and regulations, by reducing corruption, improving the functioning of the judiciary system, and pursuing the privatization drive. Eritrea A major restructuring of Eritrea's external regime is required, in an atmosphere in which both foreign and domestic (2002) investor confidence has been severely shaken. The government's privatization and PSD efforts have slowed, investors have shied away, and many local entrepreneurs who had invested before the conflict suffered substantial losses and faced difficulties in resuming production and export activities. Enabling legislation in a number of important areas has also been delayed by the government's preoccupation with the war. The Bank should assist the authorities develop a time-bound concrete program of critical investments and policy adjustments to be pursued over the coming three years that recognize the constraints to development associated with war devastation, geographical factors, social fragmentation, governance challenges, and policy weakness. (Continued on the following page.) 1 2 7 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Region/Country (CAE year) CAE findings Ethiopia As defined in the policy matrix of the last CAS in 1997, PSD should be conceived broadly to include regulatory reforms, relaxation (if not the abolition) of the investment code, development of private markets for land leases of both short and long duration, trade liberalization, elimination of controls on foreign exchange transactions, and financial sector liberalization. The progress benchmarks listed in that CAS for these items have not been fully met in many cases. The frustrations of the private sector color its perception of the usefulness of the Bank. The client survey of 1997 indicated that 88 percent of the private sector group did not think the Bank was adequately supporting PSD, and no one in that group responded favorably when asked if he/she was satisfied with the Bank (56 percent reacted unfavorably, and the rest were noncommittal). There remains much to be done in bringing about a competitive economy, and the critical success indicators of private investments--whether domestic or foreign--are not showing improvements. There has been insufficient progress in removing fundamental institutional and policy constraints. The Bank should now focus on a strategy for removing the remaining impediments to private sector development, including faster liberalization of the financial sector. Ghana While private sector investment increased from extremely low levels, it is still inadequate, constrained by incomplete (2000) implementation of reforms to improve governance and redefine the role of the state and by continuing episodes of macroeconomic instability. Emphasizing private sector-led growth was appropriate, given the failures of public sector- led growth in the first two decades after independence. Improvements in public sector capability and better gover- nance were expected to facilitate private sector growth and poverty alleviation, but governance issues were not treated with enough weight to make an important difference. Improved private sector investment will depend sub- stantially on the government's ability to improve fiscal discipline through the 2000 election period and on its even- handed application of laws and regulations. Kenya The government undertook reforms for improving economic governance. The private sector sees improvements in the (2001) climate for private investment. Lack of ownership and poor dialogue are now viewed as less important in moving the reform agenda forward than lack of human and financial resources. Lesotho An improved environment for growth and PSD depends on enhanced political stability, better governance, and deeper (2001) parastatal reform of the state sector. Prospects for all of these improvements are uncertain. The Bank would probably have contributed more to the emergence of an efficient private sector had its assistance been preceded or accompa- nied by the array of interlocking legislative, regulatory, institutional, and financial measures critical to the creation of more congenial environment for private sector investment as well as improved water supply and electricity services. In the years following the CAE, a well-functioning government has displayed commitment to improving governance (e.g., the successful prosecution of powerful international firms on bribery charges related to the Lesotho Highlands Water Project). Also in the last 4 years, Lesotho has been able to take advantage of the U.S. Africa Growth and Oppor- tunity Act initiative, as a result of which there have been significant investments in the garment industry. Lesotho has created more employment than any other African country in this area. Much of this investment was possible because of previous PSD projects that were supported by the Bank and a continuing dialogue on issues affecting investment, particularly utilities. The Bank has also completed an Integrated Framework study (with other donors; technical assis- tance is forthcoming) and more recently, a PSD strategy was prepared to address some of the legislative, regulatory, and institutional issues affecting the investment climate. Malawi With Bank support, price and regulatory obstacles to agricultural production were removed, and further improvements (2000) were made in the environment for production and exports. However, due to external shocks and periodic fiscal indisci- pline, macroeconomic stability was not sustained, resulting in crowding out of credit to the private sector and infla- tion. Bank assistance for infrastructure development had limited results, efficiency in the financial sector was not increased, the poor competitive environment was not improved, and most capacity-building measures had limited long-term impact. 1 2 8 A N N E X I I . D : F I N D I N G S F R O M I E G - W O R L D B A N K C O U N T R Y A S S I S TA N C E E VA L U AT I O N S Region/Country (CAE year) CAE findings Mozambique The Bank should remain the lead agency in assisting the government as it continues to develop the policies and (1997) capacities for economic governance, trade policies, and financial sector reform and development. The Bank has demonstrated comparative advantage in economic governance assistance and in policy-based adjustment lending. However, the Bank's development effectiveness has been limited by weaknesses in aid coordination as well as exces- sive focus on investment projects and traditional technical assistance at the expense of capacity building and results- based sector-wide programs. Tanzania Among the more obvious constraints in PSD was a complex and burdensome administrative and regulatory structure. (2000) Of the four countries where "roadmap" exercises were carried out--Ghana, Namibia, Tanzania, and Uganda-- Tanzania had the most extensive and time-consuming and least transparent regulatory framework. In 1996, the Warioba Commission documented incidences of corrupt practices in the judiciary, civil service, customs service, and issuance of licenses and permits for all types of business operations. It concluded that the spread of corruption was not due to the absence of appropriate policies, institutions, rules, regulations and procedures, but rather to the non- observance of established rules and the ineffectiveness of the established institutions. Rationalizing taxes and regula- tions and infrastructure development are key for private sector development. Support for the indigenous private sector will create a broader constituency for reform. Bank efforts in these areas should be closely coordinated with IFC and MIGA, and PSD should be made an integral part of the CAS. Togo Restructuring and privatizing the banking system without further delay would remove an obstacle to the expansion of (2000) the private sector. Financial restructuring should be supported by a radical reform of the judiciary system, which is in a crisis stage. Uganda By fiscal 1995, when the government's ability to maintain macroeconomic stability was no longer seriously ques- (2001) tioned, policy makers turned to issues that they had addressed in a primarily macroeconomic context in the past-- institutional development in all areas of public sector management and the creation of a favorable environment for PSD. The agenda in each of these areas is still largely unfinished. To promote PSD, the government is attempting to complete its privatization program, promote transparency, free public resources for services, enforce financial sector reforms, reduce intermediation costs, improve access to financial and infrastructure services, and promote corporate governance. Reforms in these areas are more sectoral, microeconomic, and complex; they require time, tailoring to specific contexts, a holistic approach, and careful sequencing. Moreover, unlike past macroeconomic reform, which created relatively few losers (given the post-war Ugandan context), they require the participation and partnership of many more domestic and donor stakeholders, who do not necessarily have uniform views on reform. Zambia The country made substantial progress in creating an enabling environment for private investment through legal and (2002) regulatory reform and reduction of state intervention in various factor and product markets. The Bank played a critical role in this progress. By the end of 1999, nearly all nonmining commercial and manufacturing entities had been priva- tized--unquestionably a fundamental change in the institutional structure of the economy. However, the economic impact of this has been small, and less than it could have been had the country moved swiftly to privatize the copper mines, which was the most critical reform to restore short-term, export-led growth in the 1990s. Simultaneously, to benefit all privatized and new private entities, and provide an environment more conducive to diversification, the Bank would have needed to take a more intensive approach to improving the investment climate. In June 2004, an ICA for Zambia was completed and has already started to inform PSD operations in the country. The IC questionnaire was modified to explore key sectors like tourism and mining, so that it would be more relevant to country operational support. (Continued on the following page.) 1 2 9 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Rehion/Country (CAE year) CAE findings Zimbabwe Relative to the CAS and other relevant objectives, the outcomes of Bank assistance are rated unsatisfactory and insti- (2003) tutional development as negligible. While the Bank's program helped to liberalize trade, reform agricultural marketing arrangements, deregulate domestic investment, and establish a fund to mitigate the social impact of adjustment, the assistance did not support macroeconomic stability. Given the current political situation, a resumption of normal Bank lending should be conditional on credible and upfront measures to achieve macro stability, fundamental governance reforms, etc. East Asia and the Pacific Cambodia A Technical Assistance Credit (TAC) for US$17 million approved in November 1994 aimed to enhance the government's (2000) economic management capacity, re-establish legal institutions, and promote private sector development. The govern- ment viewed TAC as a complex project with too many components. Implementation of the legal reform and private sector development component was delayed for two years by coalition government politics. IDA could also provide assistance for small-scale enterprise development, particularly for exports. Finally, IDA could assist the government in creating a business environment hospitable for investment, especially by expatriate Khmers and other foreign in- vestors. Because of the prolonged trauma experienced by Cambodia's population, the level of insecurity is high. Although many measures are needed for several years to quell insecurity, IDA can assist by rehabilitating legal institutions and promoting legal reforms. Mongolia The Bank made a positive contribution to progress in the 1990s, including an easier transition, improved macro- (2002) economic management, and an improved legal and regulatory framework. At the same time, efforts to help remove some key policy and institutional impediments to sustain growth met with less success; key elements of the enabling environment for private sector investment are still lacking. Factors inhibiting a greater Bank contribution include (in general) limited linkage between the lending program and recommendations from ESW and political sensitivity and anticipated adverse short-term consequences, which caused hesitancy to complete some reforms. Papua New Guinea The outcome of Bank assistance to Papua New Guinea over the past decade is assessed as unsatisfactory, institu- (2000) tional development impact modest, and sustainability uncertain. To assist Papua New Guinea in the future, the Bank should (i) sustain its nonlending services and establish a field presence, even though minimal lending is expected; (ii) collaborate with the government and other donors to help develop a long-term strategy to support capacity-building and the consistent implementation of key reforms; and (iii) assist in public dissemination of country assistance objec- tives to broaden consensus and build ownership of reforms. Subsequent to the CAE, the Bank's field presence has been strengthened through the appointment of a country manager in Port Moresby. The Bank has also sustained non- lending services, and collaboration with donors has strengthened across a number of fronts. Philippines As economic recovery and structural adjustment unfolded in the 1990s, Bank strategy became more balanced. The (1998) Bank lifted its sights to long-term growth issues such as capital market development. It sought to improve the enabling environment for the private sector with similar instruments through advice on and lending for reforms in the incentive framework for foreign investment, the regulatory framework for private sector activity, export development and diversi- fication, ongoing deregulation (especially in transport and industry), basic infrastructure investment, and ongoing financial sector reform, particularly to develop the market for long-term finance. In 1994, under the Private Sector Infrastructure Initiative, the Bank began assistance to address comprehensively a series of issues (including legal, regulatory, promotion, competition, risk unbundling, and mitigation) emerging from increasing private sector participa- tion in infrastructure. The EIL extended and deepened the sequence of economic reforms, as in the process of tariff reform and import liberalization that had been included in earlier Bank operations--Structural Adjustment Loans I and II, the Agriculture Sector/Inputs Loan, and the Economic Recovery Loan (ERL, which supported a major tax reform as well). 1 3 0 A N N E X I I . D : F I N D I N G S F R O M I E G - W O R L D B A N K C O U N T R Y A S S I S TA N C E E VA L U AT I O N S Region/Country (CAE year) CAE findings Thailand The East Asian financial crisis opened a window of opportunity for reforms, which would not have been politically (2000) feasible during the boom years. The Bank could take advantage of this opening to assist the authorities in improving governance and legal provisions. The Bank should be selective and focus its interventions in areas where there is a strong support for reforms. Reducing red tape and corruption in customs services would improve Thailand's competi- tiveness. Barriers that have now disappeared may, however, reappear when the crisis is over. Vietnam Until recently, the climate has not been conducive for PSD--administrative bottlenecks, delays, and overlapping (2001) responsibilities, poor regulatory environment, unclear legal framework and absence of enforcement, high transaction costs, for example, in telecommunications and shipping, unequal playing field with State-owned enterprises, a weak financial sector, and perceptions of corruption have discouraged potential investors. The passage of a new Enterprise Law in 2000 has improved the climate, but official attitudes toward PSD have been ambivalent. Establishing a sound legal and regulatory framework is underway, but still not in place. Many obstacles to improving labor productivity in rural areas relate to policy issues. Areas for future focus might be policies that promote land markets, greater freedom of crop selection, and a level playing field for private rural enterprises. Most Bank reports emphasized policies to address existing constraints: land use rights and title registration; mortgage rights; accelerating reforms of State- owned enterprises; banking sector reforms; import tariff and other trade reforms; private provision of infrastructure. The Bank has also helped to provide substantial technical assistance, often financed through grants (UNDP, PHRD, IDF, ASEM), for improving the legal environment, such as the new Enterprise Law. Initiated by the Bank and IFC in 1998, the Business Forum has become an important vehicle for ongoing dialogue between the Government and the private sector; it is now managed by the IFC. Initially comprised of foreign investors, the Forum gradually drew in domestic entrepreneurs. In the years following this CAE, the situation has been changing very fast in Vietnam. Over the last few years, FDI as a share of GDP in Vietnam has been on par with China, and total investment in the economy is a blister- ing 36 percent. Official attitudes towards PSD have been changing. High-level policy-maker support for PSD has im- proved the momentum of pro-PSD reforms. The Constitution was changed in 2002 to formally recognize the private sector as an important pillar of the economy. Also in 2002, the Party declared openly that the private sector is an im- portant contributor to economic growth, and party members were at the same time allowed to own private busi- nesses. World Trade Organization accession is now the major energizing force for reform in Vietnam. Also, from the perspective of Vietnam, investment climate is about business development including State-owned enterprises, not just PSD or privatization. Vietnam, like China, has chosen to retain a large number of enterprises in the State sector. Devel- oping effective approaches to improve corporate governance, harden the budget constraint, and monitor the perform- ance of State-owned enterprises has to be an important aspect of IC analysis. Another focus important for Vietnam is nonfarm activities in rural areas. Latin America and the Caribbean Ecuador Faster growth will require improvements in the investment climate through privatization, deregulation, and transparent (2001) rules for competition. Corruption has also hampered the climate for growth, distorting incentives, depriving the gov- ernment of badly needed revenues, and undermining public security. A modern legal framework for the development of capital markets and new kinds of financial institutions was passed but remains largely on paper. Formal labor markets remain highly regulated, and private investors remain uninterested in increasing their commitment, so long as the macroeconomic and political climates remain uncertain. El Salvador Over the last decade, the Bank supported the government's efforts in competitiveness to promote PSD, agricultural (2002) reform, and land titling. ESW was relevant to the country assistance strategy. It provided a coherent framework to establish priorities and to guide lending and economic policy advice. One discussed short-term measures for dealing with the liberalization of markets. Bank assistance promoted stability and growth, a more effective public sector, (Continued on the following page.) 1 3 1 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Region/Country (CAE year) CAE findings El Salvador competition, and PSD. While the risks associated with exchange rate policy have fallen sharply after the Legislative (2002) Assembly passed the law of monetary integration, insecurity and high crime rates persist, thereby discouraging (continued) domestic and foreign investment. Bank assistance helped reshape economic institutions and organizations and sup- ported good policy management and better use of private and public resources. Freer markets and fewer regulations have increased transparency, have reduced opportunities for graft, and increased competition. Low import tariffs and the absence of non-tariff barriers reduced graft and eased the reforms in customs administration. A good legal and regulatory framework for the electricity and telecommunications sector contributed to the successful privatization of the electricity distribution system and to competitive markets in telecommunications. Guatemala The environment for PSD has deteriorated. Political divisions within the party in government, weak financial institu- (2002) tions, fiscal deficits, and changing business rules have dented business and investor confidence. Political tensions and weak economic fundamentals reduce investment and constitute the major constraints to private sector activities. Several publicized governance issues have exacerbated the perception of high regulatory risks and instability of private contracts. Guatemala needs to strengthen its institutions for the country to achieve and sustain high growth rates. Property rights continue to be weak, and excessive regulation of domestic commerce and foreign trade burdens private enterprises, which then seek to avoid the burden by paying bribes to civil servants. Crime rates (kidnappings, rob- beries) are high compared with other countries in Central America (except El Salvador). Bank ideas and policy advice have sometimes contributed more to the country's development than the money lent. The Economic Modernization Loan helped shape the liberalization of trade, the sale of state-owned companies, and the management of taxes, budget, and treasury. The liberalization of trade reduced the discrimination against agriculture, forced the industrial sector to be more efficient, and reduced the incentives in customs to engage in corrupt activities. Argentina The Bank's ESW on Argentina has been of very high quality. It could be argued that much of this work is somewhat (2000) superfluous, as local research institutions can and do produce reports of the same quality. In view of the sophistication of Argentina's policy makers and research establishment, ESW should increasingly be in the form of short policy notes to assist in deliberations with the authorities and engage the broader society in dialogue and in a process of "learning together." Specific technical assistance and specialized advice also are likely to be of high value. Bolivia The key to PSD in Bolivia is to formulate and implement a comprehensive strategy to improve the transparency and (2000) legitimacy of the legal and regulatory environment, overhaul the judicial system, radically restructure the civil service, and improve tax compliance. The Bank's diagnosis correctly emphasized the excessive role of the state and its lack of effectiveness and the poor environment for private investment as the main structural explanation for low domestic savings, investment, and growth. Although the Bank's ESW had correctly diagnosed that weak institutions and exces- sive productive capacity in the hands of the public sector were the main constraints to growth and poverty alleviation, the Bank's assistance did not immediately address these constraints. This reduced the relevance and efficacy of the Bank's early lending and nonlending strategy. The Bank's own diagnosis had suggested that privatization was essen- tial, but obtaining government commitment to this was not achieved at this time. The Bank must help Bolivia remove its remaining governance and institutional constraints against PSD and continue to develop its capital market. High- quality ESW lost efficacy because sound policy analyses did not translate into policies adopted by the government or into project design and conditionality agreed with the Bank. The clear need for macroeconomic stability and to restore balance of payments viability led to efforts being initially directed at highly inefficient state enterprises. This meant that creating a suitable environment for PSD did not proceed as expeditiously as possible. The CAE recommends that the Bank should (a) give higher priority to promoting PSD by developing the financial sector and helping the govern- ment accelerate reforms of the judicial system and of the civil service; (b) in partnership with the government, place a high priority on improving the quality of governance and necessary public regulation. 1 3 2 A N N E X I I . D : F I N D I N G S F R O M I E G - W O R L D B A N K C O U N T R Y A S S I S TA N C E E VA L U AT I O N S Region/Country (CAE year) CAE findings Brazil The Bank can still play a relevant role in a middle-income country such as Brazil. The Bank is most relevant as a source (2003) of knowledge and technical assistance. There is also scope for improving Bank support to PSD. The Bank might con- sider assistance to judicial reform, as the judiciary has been identified as a bottleneck in PSD strategies produced by the Bank and domestically. The Bank is already providing some initial assistance through ESW. More assistance to regulatory agencies is also needed, especially at the level of states, to reduce the lingering uncertainties and encour- age public sector investment. Chile The Bank played a key supportive role, with money and advice, in helping Chile out of the mid-1980s crisis and in the (2002) economic transformation that followed. The institutional change that the assistance supported promoted PSD and better governance, financial accountability, and financial management. While Chile now has good access to international capital markets, systemic shocks could reduce that access, encum- bering Chile's ability to achieve its development objectives. Consequently, it may be beneficial to maintain an active Bank program in Chile. Some lessons stand out from the Bank's experience in Chile: The Bank can be more effective in promoting development if it supports programs and projects in countries committed to stable macroeconomic policies; when the Bank lacks sufficient information about the consequences of legislative and regulatory reforms, it should promote and support pilot tests and small demonstrations of the proposed reforms; good results from pilot tests become a powerful tool to convince stakeholders of the benefits of reforms. In a country with sophisticated economic management, the Bank should abstain from insisting on reforming policies if ownership for reforms is weak. Costa Rica The government of Costa Rica has continued to implement its reform program at its own pace, without much financial (2000) assistance from the Bank. It has continued to make progress in opening up trade and diversifying exports while main- taining political stability. Foreign investors complain of excessive bureaucracy, expensive labor costs, and too much government involvement in the economy. In spite of this, foreign private investment continues to expand due to Costa Rica's relative political stability, commitment to economic openness, excellent educational system, market access, and high-quality labor force. The government, however, has dealt decisively with the problem of corruption and Trans- parency International has ranked Costa Rica second (i.e., low perception of corruption) among all Latin American countries and 27th in the world. Dominican Republic During the past 10 years the Bank has had little contact with the Central Bank, the country's central policy-making (2003) body. More recently, it has tried to step up that contact, but it has yet to establish a continuous dialogue with the authorities in areas where the Bank can offer expertise. As a result of this, the Bank has missed the chance to provide advice at times when the country embarked on important reforms, such as the privatization of public enterprises. The Bank should help the country broaden its structural reform agenda to encompass agriculture, including trade, land, water, and price reform, and to remove barriers to entry and competition in domestic activities. Mexico Overall, the policies and programs with which the Bank has been associated in Mexico over the decade are likely to be (2001) sustainable. The open, market-oriented economic policies pursued since fiscal 1989 have helped to generate rapid recovery from the disastrous 1994­5 crisis. The banking system is regaining strength, in part due to the participation of foreign management and equity, a better legal framework, and more effective supervision. Mexican government officials indicated that engagements with Bank staff during the design and implementation of a project sometimes have had value added in these ways: providing direct technical assistance and useful policy advice; providing an objective, outsider's perspective on problems; communicating the lessons from international experience; using the Bank's "convening power" to bring about more productive dialogues among Mexican stakeholders; inducing greater coordination among units of government that normally do not communicate well with each other; insisting on techni- cal norms for resource allocations that might otherwise be subject to excessive discretion; and injecting a greater (Continued on the following page.) 1 3 3 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Region/Country (CAE year) CAE findings Mexico measure of discipline in project execution. Nevertheless, on balance, interviews with Mexican government officials (2001) suggest that the value of the Bank's lending operations during the past decade has been highly variable and, as a (continued) trend, diminishing over time. As a result, it has been increasingly difficult to identify implementing agencies that regard the embedded technical assistance from working with the Bank as worth the "hassle factors." Paraguay The ongoing political uncertainty is exacerbating Paraguay's underlying governance problems. Policy making is not (2001) always transparent. The country's legal and institutional framework is weak, leading to evasion and selective enforce- ment of laws and regulations. The Bank is only the fourth largest official lender in Paraguay. Over the past few years, the Bank has consistently urged reform of the state, especially privatization of state enterprises and improved gover- nance. These recommendations have been generally ignored by government but are frequently referred to in the press. Peru The reforms of the early 1990s, in which the Bank played a significant role, totally altered the environment for PSD and (2002) set off rapid private investment growth. As the decade progressed, two primary obstacles to private investment, the unpredictability of the judiciary and tax instability, became more pronounced and, together with growing political tension, put a damper on private investment after 1997. Uruguay The authorities have moved toward increasing private sector participation in activities traditionally provided by the (2000) public sector. They have opened markets to competition by the private sector and eliminated monopolistic privileges enjoyed by public enterprises in those cases where this can be done within the existing legal framework. They are also preparing legislation to open the markets to competition in cases where changing the existing legislation is needed. Europe and Central Asia Albania IDA saw rapid privatization of small and medium-scale firms and the creation of a "private sector-friendly" legal and (2000) regulatory environment as simultaneous processes. Entrepreneurial dynamism is very strong in Albania, but the need for a regulatory environment that is transparent and uniformly applied has now become acute. Vibrant private sector initiative is a powerful development ingredient, but in the absence of some basic ground rules, transaction costs esca- late rapidly and anarchy ensues. The balance in the lending program has been good, and the adjustment operation supported a complete liberalization of the agricultural price and incentive framework. Adjustment credit also supported revised land legislation that authorized the leasing and sale of agricultural land. Full development of a land transfer system is still pending, however, as the land titling and registration system is only about 10 percent completed. Land fragmentation and the division of family farms into many parcels will present a future obstacle in trying to raise farm incomes and operational efficiency. Land holdings are small and fragmented. This will be a constraint to the transition from the current, largely subsistence farming to a market oriented, commercial agriculture. An active land market needs to develop to facilitate consolidation. Azerbaijan Complex regulations, corruption, and lack of access to finance have hampered private business development. In ESW, (2000) greater emphasis on PSD through an analysis of the business environment would have been a useful addition. Progress in governance reform and PSD was slow. Nonetheless, a policy dialogue with the government was estab- lished and the groundwork prepared for future reforms. IDA could also do more to improve the environment for PSD and to strengthen the social safety net for those expected to be made redundant as the public sector is restructured and privatized. Bulgaria A number of reports point out in some detail the administrative obstacles to doing business and the weak enforcement (2002) of laws and regulations. Bulgaria lagged behind most other EU candidate countries in a number of areas related to the business climate. The Ministry of Finance would like the Bank's help to improve the investment climate for the private sector rather than support for public investment by line ministries. Between 1991 and 1997, with Bank assistance, a basis for privatization was laid, a new commercial banking law was promulgated, and the Central Bank made efforts to improve supervision. Between 1998 and 2000, laws and regulations for private sector activity, legal and institutional 1 3 4 A N N E X I I . D : F I N D I N G S F R O M I E G - W O R L D B A N K C O U N T R Y A S S I S TA N C E E VA L U AT I O N S Region/Country (CAE year) CAE findings Bulgaria basis for health insurance and social protection reform, and foundations for more efficient labor markets have been (2002) established. The newly privatized banks operating in the absence of an adequate judicial and legal framework are not (continued) yet engaging in lending to the private sector. The development of private capital markets is lagging, complicating pol- icy for pension fund investment. In December 1998, FIAS initiated a major study on administrative barriers to invest- ment in Bulgaria, at the request of the Bulgarian Foreign Investment Agency. Though the FIAS study made a number of important recommendations, the follow-up and implementation have been hampered by changes in the Bulgarian counterparts behind the study. Croatia The main objectives of the CAS were to redefine the role of the state, reform public finance, encourage private sector- (2001) led growth (including privatization and bank reform), and upgrade infrastructure. The proposed program was largely relevant and well designed. With hindsight, a notable weakness was the absence of focus on governance. This was understandable, given that at that time governance was not the priority it is now in the Bank. A PSA would have been useful to formulate reforms of the enabling environment for private enterprises, as has been done in other transform- ing economies. The main strategic objectives of the new CAS are appropriate: reduce the size of the public sector and increase efficiency, improve governance, create the conditions for competitive sector real development, and contain poverty. Kazakhstan The Bank's early private sector strategy consisted of macroeconomic stabilization and structural reforms (price and (2001) trade liberalization, privatization, enterprise restructuring, passage of laws and regulations for private sector activity, financial sector reform) to develop competitive markets. The IBRD strategy was relevant, but in hindsight, the rele- vance would have been greater if more attention had been devoted to privatization procedures and to strengthening of the judicial framework early in the transition. Following the second CAS (fiscal 1998), the legal and judicial framework were priorities in the Legal Reform Project (fiscal 1999). A new and unique feature of the CAS was the formation of a joint IBRD-IFC-MIGA Rapid Response Team to provide quick turnaround advice on urgent policy issues for the promo- tion of an enabling climate for the private sector. The CAS should link WBG support to progress on improving the envi- ronment for the development of the private sector, in particular with regard to the clarity in the legal and regulatory framework, judicial reform, transparency in privatization, and a reduction in the arbitrary enforcement of tax laws. Kyrgyz Republic IDA appropriately focused its assistance from the outset on stabilization, liberalization, privatization, and institutional (2001) reform geared to moving the country from a command to market economy. The Privatization and Enterprise Adjustment Credit (whose main objectives were to increase the speed and improve the quality of privatization of small, medium, and large-scale enterprises and to support substantial trade and price liberalization measures to improve PSD) was considered only marginally satisfactory because the objective of attracting strategic investors was not realized, serious corporate governance issues were not addressed, negligible enterprise restructuring followed privatiza- tion, and many of the large loss-making enterprises intended to be liquidated or restructured continue to be a drag on the economy. The Kyrgyz Republic came to be regarded by IDA as a star performer in policy reform relative to other former Soviet Union countries. IEG-World Bank has found, however, that satisfactory covenant compliance in Kyrgyz has not always meant satisfactory development outcomes. Some progress was made in tax reform and in establishing a new legal framework for private enterprise, including foreign investment. A new legal framework and system of rural finance for private agriculture was put in place and private ownership of land is now permitted. All of these reforms were supported by IDA operations. Lithuania Apart from supporting the macroeconomic framework, the Bank's adjustment lending (especially SAL II) supported (2003) voluntary compliance in tax administration, implementing new auditing and accounting laws to improve corporate governance, a revised bankruptcy law, removing bottlenecks in land markets and sale of goods, and removing barriers (Continued on the following page.) 1 3 5 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Region/Country (CAE year) CAE findings Lithuania to the functioning of land markets. While most key conditions in this regard were met, their implementation was chal- (2003) lenging, and the record suggests that broad-based government ownership and capacity to implement parts of the pack- (continued) age were lacking. After Lithuania's accession to the EU in May 2004, improving the business environment was an area of comparative advantage for the Bank, should the country seek the Bank's assistance. Russia In the key reform areas of PSD, the 1990 joint study recommended clarification and legal protection of property rights (2002) as a necessary first step. De-monopolization and the enforcement of hard budget constraints were noted as crucial measures for restructuring existing enterprises, transferring underutilized assets to new enterprises, and increasing competition. An effective legislative and judicial basis, institutional capacity, and political commitment for the rule of law, corporate governance, and competition policy were also viewed as urgent. The study's priorities reflected the broad consensus on these fundamental issues among government reformers, the academic community, and interna- tional financial institution officials. The study, however, gave insufficient emphasis to public governance and bureau- cratic harassment issues, which proved central to the investment climate and the entry and growth of new enterprises. Bank assistance for improving the enabling environment had limited results through 1998, with little progress in estab- lishing a conducive policy and institutional framework for enterprise restructuring, corporate governance, competition, new entry, and private investment. On the other hand, the Bank helped prepare legislation and establish institutions conducive to PSD (e.g., the Anti-Monopoly Commission, the Federal Energy Commission). Ukraine From a development outcome perspective, the efficacy of the Bank's country assistance efforts has been unsatisfac- (2000) tory. Recognizing the difficult political environment, the Bank's strategy was a graduated assistance program, increas- ing with the intensity of the perceived reform effort. The "graduated response" approach was probably the best option, given the lack of full government commitment to reform across all sectors. But despite Bank efforts to create a shared vision, the principles of a market economy are not yet accepted enough by policymakers and civil servants. All country strategies continually refer to the need to strengthen public administration institutions and reform laws and legal pro- cedures. Nevertheless, no comprehensive legal reform agenda was mapped out by the Bank although certain laws were identified as necessary to support the development of a market economy (progress in this was sought under a variety of sector adjustment operations). A new civil code, a bankruptcy law, banking regulations, secured transac- tions, contract, and company law were all identified as crucial. Yet it was becoming increasingly apparent that exces- sive regulation, bureaucratic intervention, and corruption were perverting the desired outcomes from the liberalization agenda. In conjunction with the authorities, the Bank did attempt to create a more comprehensive legal reform agenda in the context of a legal reform project. Progress was thwarted by waning support from the Ministry of Justice, and elements have now been subsumed into a proposed larger technical assistance project. The Bank recognized that while privatization was a necessary condition for vigorous PSD, it was not a sufficient condition. Substantial changes in the environment for PSD would be necessary, including regulatory reform, tax reform, legal reform, and capital mar- ket development. But once macroeconomic stabilization was in progress, the Bank pressed forward with privatization and decontrol of domestic and international trade; the Bank would deal with other liberalization issues later. Part of the reasoning for this strategic approach was that while the reforms were important, they would not be forthcoming until a constituency largely consisting of the new owners of privatized enterprises was developed. Progress has been made in putting in place the laws necessary for a market-based economy. But many anomalies and omissions remain. Progress has been most extensive in banking and securities law. Basic facilitation laws such as bankruptcy and collat- eral laws and a uniform civil code have not fully emerged as yet. Many donors have been involved in this process that has created problems of consistency between laws enacted. Even with good laws, application and enforcement in Ukraine are highly deficient. However, the key part of the Bank's intervention is not the resource transfers, but the pol- icy dialogue, underpinned by ESW, and the Bank coordination of donor efforts to effect change and policy reform. If the Bank had not been engaged, policy reform in certain key areas would have been much slower. Privatization in particu- 1 3 6 A N N E X I I . D : F I N D I N G S F R O M I E G - W O R L D B A N K C O U N T R Y A S S I S TA N C E E VA L U AT I O N S Region/Country (CAE year) CAE findings lar would not have proceeded as swiftly, and the progress achieved in trade and price liberalization might not have occurred. While much remains to be done in agriculture, what has been achieved has created a foundation for further reforms. Middle East and North Africa Egypt According to the 1992 Country Strategy Paper, the Bank hoped to make a number of policy-based loans in support (2000) of privatization and removing barriers to the private sector. The 1994 country strategy recognized Egypt's reticence to borrow from IBRD but still hoped to provide support to the now-slowed reform program. The focus was similar to the previous strategy, but with more modest goals for lending and greater emphasis on nonlending support and Institutional Development Fund grants. For example, in two focus areas, export-led growth and private sector develop- ment, operations did not materialize. More recently, as the momentum for reform has increased, the Bank has not been involved in areas where it might have had some impact: private sector development, financial sector reform, targeted poverty alleviation. Although some government officials expressed the view that no support from IBRD is necessary in this area, other officials suggested that they would welcome such support. Morocco In the area of PSD, a PSA Update (1999) noted that after a decade of efforts at stabilization, liberalization, and dereg- (2001) ulation and the launching of the privatization program, the response of the private sector has fallen short of the high expectations generated by the achievements of the 1980s. It concluded that further reforms are needed, of both poli- cies and institutions. One of the suggested reforms, to improve the judicial system, is included in a Legal and Judicial Development Loan (fiscal 2000). FIAS has been discussing with the government three possible advisory projects designed to improve the FDI investment environment in the country: the development of a strategy and possible estab- lishment of an investment promotion agency; a feasibility study for the establishment of an export processing zone; and a review of the investment incentives system. The slow rate of privatization more broadly calls for particular efforts, whether through analytical and advisory activites/assistance (AAA) or lending, to improve the environment for PSD. Any future adjustment loans should be smaller in size and conditioned on substantive and irreversible progress on a focused set of key reforms. West Bank and Gaza As private investments failed to materialize, the Bank placed greater emphasis on creating an enabling environment. (2002) A wide range of projects was approved to provide financing and remove regulatory obstacles to the private sector, in- cluding: housing finance, microenterprise finance, an industrial estate in Gaza, and finance for the Palestinian Authority's contribution to the MIGA guarantee fund. The Bank provided support to institutional development, broadly defined, including improvements to the legal framework, financing qualified Palestinian expatriates to improve public sector management, and strengthening the nongovernmental organization sector in service delivery. A third major theme of the Bank's strategy was support for private sector development. In this regard, the Bank (as well as IFC and FIAS) and other donors have provided assistance on a wide variety of measures, including legal and regulatory changes, risk insurance funds, guarantees, development of an industrial zone, improvements in housing finance, support for microfinance, as well as support for basic infrastructure and laying the groundwork for future participation by the private sector in the provision of water and energy. Much remains to be done even to harmonize the legal and regulatory environment. Yemen Apart from the petroleum sector, private FDI has been negligible. A 1997 report by the FIAS noted that impediments to (2001) private investors related to governance issues. Following unpleasant experiences, IFC and other international banks were reluctant to do business in Yemen; between 1987 and 1997, IFC had no new investments or lending commit- ments there. Private businessmen also report problems doing business common in other countries. IDA has given too little attention to identifying and assisting the government to remove constraints to private investment and growth; sector work and lending assistance have shown inconsistencies. (Continued on the following page.) 1 3 7 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Region/Country (CAE year) CAE findings South Asia Bangladesh Despite more than 15 years of policy dialogue, the enabling environment for PSD is still deficient. The pace of reform (1998) of the policy environment has been slow, and the successes that have occurred (ready-made garments) cannot be attributed to government or IDA. The quality and depth of the ESW undertaken by the Bank certainly diagnosed the problems and constraints. However, there was a chronic overestimation of government ownership of the reform process, given strong and highly politicized labor movements, a central bureaucracy seeking to maintain centralized control and a complex array of policy distortions and regulations. Throughout much of the 1980s, genuine government commitment to and a vision of an industrial sector driven by market forces was absent. By and large the relevance, timing, and quality of sector work has been good. Undoubtedly the situation improved in the 1990s, with more aggres- sive trade policy reform following good IDA ESW and more intense policy dialogue on trade liberalization issues. IDA's move to SECALs with broad sector reform agendas has been appropriate, and while not fully successful has generated a momentum for more economy-wide liberalization and created a growing constituency for wider reform. As has been manifested in the 1990s, a stronger focus on key sector and subsector policy reforms and actions is a more effective way of using IDA resources in the sector. Maldives None of the two Country Economic Memoranda of the 1980s identified PSD as a priority. None of the Bank's projects (2000) contained components aimed at improving the competitive environment or liberalizing markets. In particular, as dis- cussed above, despite a significant involvement in fisheries, the Bank did not press for greater competition or for phas- ing out the direct public sector role. In retrospect, a more appropriate strategy is likely to have been to enable competi- tion and market forces as far as possible, while strengthening government's regulatory and oversight capacity and targeting direct safety net transfers to the most vulnerable. Nepal In retrospect, in the 1990s, the Bank focused too much on implementing its investment projects in infrastructure, agri- (1999) culture, and power in a very difficult environment and not enough on helping ensure the presence of a conducive policy environment to support both sustainable public investment as well as much greater private sector activity. The critical obstacle to agricultural growth and diversification represented by lack of rural roads was also not fully integrated into the Bank's agriculture strategy. Until road access improves, access to markets and inputs, linkages with agro-industry, and the inflow of food will remain limited. Strong commitment by the government between 1991 and 1994 resulted in significant progress in liberalizing the trade and price regime and removing regulatory barriers to investment. An em- phasis should be placed on defining and realizing a conducive policy environment for increased private sector activity and improved access to social services. ESW should support reform in the financial sector, an improved competitive environment through privatization of key enterprises, and intrasectoral reorientation of public expenditures toward basic social services. Sri Lanka The Bank rightly operated on the belief that, even with the lingering conflict, there was nonetheless room for reforms (2001) to strengthen macroeconomic management, openness, financial institutions, private sector development, safety nets, and the civil service. It constantly reminded the government of the reform agenda in its ESW, policy dialogue, and aid coordination activities, which have been timely, of good quality, and appreciated by successive governments. Note: In many cases, the assessments made by the CAEs have been overtaken by subsequent developments, especially since the Bank's IC-related activity has been more intense in recent years. Significant developments have been highlighted (in italics) wherever applicable. 1 3 8 ANNEX II.E: COUNTRY CASE STUDY SUMMARIES Mozambique inroads have been made in developing technical capacity in government and in private business. Background Despite this progress, however, Mozambique After gaining independence from Portugal in still has much to do to create the IC conditions 1975, Mozambique entered a period of post- necessary for broad-based economic growth and independence conflict. By the time the peace poverty reduction. Significant political risk agreement was signed in 1992, real per capita remains, and geographic dualism is a potential GDP had declined by half compared with pre- threat to political stability. Despite progress in independence levels, much of the country's reforming administrative barriers to investment, human and physical infrastructure had been the country is sill one of the most difficult places destroyed, and 5 million people had been to do business in the world. The leading displaced. The country began a period of transi- constraints are entry procedures for new firms, tion to democracy and a market-based economy, constraints to hiring and firing workers, high supported by substantial aid from the Bank and real interest rates and limited access to credit, other donors. Extensive policy reforms, and impediments to labor-intensive FDI. beginning in the late 1980s, improved economic management; liberalized prices, exchange rates, Bank Strategy and Activities and trade; privatized public enterprises; The Bank's strategy for Mozambique stressed promoted financial deepening; improved public the investment climate from the beginning. The investment; and increased FDI. Growth and emphasis on particular aspects of the invest- investment increased significantly, though much ment climate changed, however, as the of this growth was due to several foreign "mega- country's political conditions changed and the investments" in the capital city and southern transition progressed from plan to market. The provinces that are expected to provide relatively Bank's strategy during the past decade has been few jobs. to move from a first-generation set of macroeco- The government has made considerable nomic reforms to second-generation reforms progress in improving various aspects of the aimed at removing microeconomic barriers to investment climate in the past decade, particu- investment, stemming from antiquated laws and larly considering where the country started. The regulations, inefficient administrative capacity, advent of peace and two successful elections and corruption. have significantly reduced political uncertainty. The Bank's IC lending program since 1992 Economic reforms have increased macroeco- has included a series of Economic Recovery nomic stability and improved the business Credits (fiscal 1992, 1994, 1997) that supported environment. Institution-building efforts have financial sector reform, foreign exchange liberal- helped to strengthen public administration and ization, privatization, the removal of remaining promote FDI. Infrastructure investments in price controls, bank privatization, and trade roads, ports, and telecommunications have reform. The Economic Management Reform begun to lower business costs. And some Credit (fiscal 1998) supported improved tax and 1 3 9 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E trade policies and administration. A fiscal 1994 economy where economic management was Financial Sector Capacity Building Project different. Gradualism contributed to a stronger concentrated on privatizing State-owned banks sense of Mozambican ownership of the reform as well as training central and commercial bank process, despite the government's need to rely staff. The fiscal 2000 Enterprise Development on external advice and technical assistance. Project provided direct support to firms in the Greater ownership has enabled government to form of cost-sharing grants for training as well as be persistent in the transition over the decade. SME financing. In addition, there were several infrastructure projects (Roads and Coastal Outcomes Shipping I and II, Maputo Corridor Revitaliza- Bank lending and nonlending activities have tion Technical Assistance, and Railway and Port been quite important in improving many aspects Restructuring Project). of the investment climate in Mozambique. Bank Nonlending services included private sector support has been at the center of all of conferences and competitiveness advice; ESW Mozambique's first-generation reforms, which, on land policy, legal and judicial reform, financial among other things, have improved macroeco- sector development, regional trade and energy nomic stability, increased economic integration issues, and constraints to PSD; an enterprise with world markets, improved operation of survey by the RPED; and assistance in building financial markets, reduced State involvement in statistics capacity. FIAS studies on administrative production, strengthened FDI promotion and barriers to investment (1996, 2001) were facilitation, and improved infrastructure. Just followed by two ICAs (1997, 2002). about all observers would agree that these Broadly, Bank activities focused on securing reforms are permanent: Mozambique has first-generation and second-generation reforms successfully transitioned to a point where have been timed and sequenced well--based on reforms will be sustained in the long run. strategic necessity, sound economic principles, Despite successful progress in improving and prevailing social and political conditions. important aspects of the investment climate, an This prioritization of IC reforms was necessary objective assessment of the outcome of these in Mozambique, as it is in most countries, activities by most of the people interviewed for because of the urgency of problems as seen by this evaluation is that it has been less robust than investors and because of the feasibility of expected. A large part of the growth and poverty changes. Macro price, trade, and financial sector reduction that did take place during the decade reforms and privatization were crucial to can be attributed to post-war bounce-back and economic stability and efficiency of aggregate large aid inflows. Bank activities to reform the resource allocation, and thus had to be the first investment climate surely have spurred growth, priority. Second-generation reforms, such as but, thus far, it looks like they have had their removing administrative and regulatory barriers primary effect on foreign "mega" investors, to investment, were bound to be a complex and which have provided the majority of investment long-term process, particularly in light of capital, outpacing local investors by four to one. Mozambique's economic and political history. Mozambique still has inadequate infrastruc- Moreover, microeconomic reforms such as ture and capability problems in public adminis- these would not have much impact on invest- tration and private business. Institutional ment in the face of poor macroeconomic weaknesses have received some attention, but incentives. the Bank's efforts have been too modest, too It is likely that economic recovery and growth piecemeal in the legal area, and insufficient in might have been stronger had the pace of the area of reforming administrative barriers to reform been faster. However, the pace was secure much change. Business leaders mostly set by the government, reflecting its interviewed for this evaluation stressed that, if judgment about political feasibility and its the Bank were really serious about increasing caution as it made the transition to a market the pace and scope of these types of reforms, it 1 4 0 A N N E X I I . E : C O U N T R Y C A S E S T U D Y S U M M A R I E S should have developed a program with the enforcement mechanisms, and improving the government to make a "big push" to get the land law and movable assets law to increase the necessary changes, as in its adjustment lending private sector's collateralizable asset base. for macroeconomic reforms, rather than the "partial program" it put together. Lessons Studies that focused on government red tape--such as FIAS's Administrative Barriers to · Even under difficult conditions--such as in Investment in 1996, the manufacturing survey in Mozambique, where poor economic, social, 1997, and others--detailed a long list of and political conditions influenced what the problems. Business leaders say, "This list was Bank was able to do--Bank activities can make presented to government as the things that important intellectual and financial contribu- needed to be fixed. But the list was far too tions to improving the investment climate, if long--government can't fix everything. There the government is committed to reform and was no credible effort made to prioritize what economic development. The Bank's non- needed to be fixed first and what needed to be lending intellectual and coordinating contri- worked on in the longer run." Similar comments butions can be as important as its financial were received about the Bank's annual private contributions. sector conference, begun in 1996: Local · Successful first-generation macro reforms are observers noted that there was not enough necessary but not sufficient for sustained pri- focus at the time on selected priority reform vate sector-led growth. Institutional weak- issues, action plans for organizing to implement- nesses in the form of administrative and ing these reforms, monitoring arrangements, regulatory barriers and poor property rights, and mechanisms of accountability for success or as well as inadequate infrastructure and capa- failure. bility problems in public administration and pri- In all procedural areas examined by the vate business, can continue to constrain review, the investment process was hindered by growth. fundamental weaknesses of the current civil · Removing administrative and regulatory bar- service system. Reform implementation riers is a complex and long-term undertaking. problems partly stemmed from the overlapping Administrative procedures and regulations are structure of government institutions and lack of tied up with a country's social, political, and clarity around responsibilities and accountabil- economic systems. Hence, reform requires ity. But there also existed a widespread "passive more than rewriting legal and regulatory frame- resistance" from unmotivated executing works. Reform efforts must be coupled with a agencies and officials and corruption at all convincing analysis of the costs and benefits of operational levels. These problems cannot reform, together with an exercise to set re- simply be resolved by reforming investment form priorities, capacity building to address procedures alone. They require a complemen- weaknesses of executing agencies, and efforts tary civil service reform. on the ground to achieve political consensus Although Bank activities have done much to and commitment by government leaders to improve the financial sector, including adopt and implement required reforms. assistance to set up a stock market, little has · Second-generation reform programs may need been done to address institutional weaknesses a big push to get the necessary changes, just that continue to hamper lending to the private as was the case for first-generation macroeco- sector and investment in equities. Interviews in nomic reforms. Partial programs may fall well Mozambique called attention to three important short of achieving their objectives. areas where business leaders say the Bank · In cases where comprehensive reform pro- should have been more involved in financial grams are politically impossible, greater effort sector reform during the decade: improving may be needed to prioritize what needs to be financial information, improving contract fixed first and what needs to be worked on in 1 4 1 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E the longer run. There may need to be more political instability amplified the financial crisis focus on a few problems that, if fixed, could because no credible arrangement to deal with have immediate positive effects, in order to the crisis decisively and fairly was offered to build political support for further reforms. restore investors' confidence. · Reform efforts need people on the ground to Economic growth rebounded earlier than help build required political commitment. expected and inflation came down rapidly. GDP There may be "passive resistance" from un- growth increased to between 3 and 5 percent motivated executing agencies and officials and per year between 2000 and 2002. Indonesia is, corruption at all operational levels. These prob- however, the only crisis country that has not yet lems cannot simply be resolved by reforming reached pre-crisis levels of GDP, which remain investment procedures alone. They may re- about 10 percent below the 1997 level. quire a complementary civil service reform, Poor governance in the public sector has had which must be part of the whole institutional serious consequences for Indonesia's private reform effort. sector. Extensive corruption has raised the cost · Free markets work best, but they often need a of doing business, from approvals and invest- little tweaking. This is especially true in the ment clearances to customs, taxation, and areas of technology transfer and training, where purchase of public services. Many smaller unfettered markets fail to provide socially opti- businesses, unable to pay the cost of corruption, mum levels of investment. There may be a need have remained in the informal sector. for interventions to assist firms in these areas by The crisis had a profound effect on the way of vocational and in-firm training and cost- banking system. Many insolvent banks were sharing subsidies for technology transfer to in- closed or nationalized, and as a result, State- crease the possibilities for a growth response to owned banks control about 70 percent of bank investment climate reforms. To be a successful deposits. Banks have hesitantly begun to lend public investment effort, cost-sharing grants again, although mainly for consumer finance. must go to projects that generate broad eco- The widespread international impression is nomic benefits, not simply private benefits. that Indonesia's investment climate is deterio- rating and now ranks among the worst in the Indonesia world. The country continues to face fundamen- tal problems such as inefficiency, corruption, Background bureaucratic delays, uncertain labor relations, The 1990s were divided by the East Asia financial violence and crime, a weak legal and judicial crisis that began with the devaluation of the Thai system, and excessive taxation by some local bhat in July 1997. In less than two months governments. An enterprise survey conducted between the end of November 1997 and the end in 2000 suggested that macroeconomic and of January 1998, the Indonesian rupiah depreci- policy instability and uncertainty are the leading ated by 75 percent against the dollar, far exceed- concerns of Indonesian firms. ing the exchange rate depreciations in Thailand and Korea. Indonesia's GDP fell by 13 percent in Bank Strategy and Activities 1998, and inflation peaked at 80 percent in 1998- Before the crisis, Bank reports consistently 99. The proximate causes of the crisis were the pointed out several structural weaknesses that rapid increase of unhedged short-term private could impede future private sector-led growth. external debt before 1997 and existing To overcome these weaknesses, the Bank recognized shortcomings in Indonesia's recommended maintaining good macroeco- banking system. The country was also hit by the nomic management, strengthening the financial worst drought of the century, a collapse in sector, reducing international and domestic trade regional demand, and the lowest international barriers, facilitating private investment, improv- oil prices in decades. The country's critically ing governance and reforming the legal system, weak institutions, endemic corruption, and improving land administration, and reducing 1 4 2 A N N E X I I . E : C O U N T R Y C A S E S T U D Y S U M M A R I E S excessive state ownership of productive assets. perceived as excellent, despite many problems Two projects dealt with protecting property with its investment climate. After the crisis, rights, facilitating an efficient land market, and macroeconomic stability has been restored, developing the accountancy profession. although risks of deterioration remain. This Although these analyses were appropriate for achievement has assisted the evolution of Indonesia at the time, they lacked depth in one democracy and devolution of authority to crucial respect. Weaknesses in the financial regional governments, which are moving toward sector were well analyzed, but the obvious a stable polity. The banking crisis has been connection to weaknesses in the corporate stabilized, but not yet resolved. Resolution of sector was not explored. It was well known that corporate debt has seen more progress, but insider lending, stemming from joint ownership important issues remain. Important trade and of banks and corporations, caused some of these regulatory reforms were implemented during bad loans. Borrowing was collateralized by the crisis period, although some have recently inflated asset values and facilitated by weak been reversed. Insubstantial progress has been accounting practices, which were not investi- made in governance and legal and justice sector gated. Thus, a comprehensive framework for reforms. Also, there is little progress in privatiza- Bank Group assistance to the financial and tion or private participation in infrastructure. corporate sectors was missing. In addition, the Assessing the impact of these changes on Bank's analyses did not establish reform priori- Indonesia's investment climate is difficult. ties and were not backed by project lending for Domestic and foreign and investment have core investment climate issues, except for remained low since the crisis, and several invest- property rights. Although important, land ment climate surveys show a deterioration. registration and accounting profession reforms However, this outcome can be explained by were not as critical as financial and corporate Indonesia's macroeconomic and political instabil- sector, trade, and competition policy reforms, ity from 1997 through 2001, which affected both for example. In addition, since Indonesia's sources of investment. Moreover, foreign invest- growth relied more on domestic investment ment has also been affected by poor economic than foreign investment, the Bank's assistance performance in source countries. With better strategy should have focused more on issues macroeconomic management and political stabil- relevant to reviving domestic investment. ity for the past two years, some observers This situation changed dramatically during believed that 2003 will prove to be a turning point the crisis period, 1998­99, when the Bank in business confidence in Indonesia. They see enjoyed substantial leverage. The Bank's signs of increasing domestic and foreign invest- assistance strategy focused on macroeconomic ment. Thus, the timing of surveys to gauge invest- stabilization and bank and corporate restructur- ment climate is important. Moreover, surveys ing, as was appropriate under the circumstances. measure corruption and regulatory impedi- The strategy was put into operation with balance ments, which may not be the most important of payments support and technical assistance determinants of investment climate, especially for loans. The Bank's pre-crisis analysis of the domestic investment. financial sector was used to design laws, regula- Have the Bank's analytical and advisory activi- tions, and institutions to resolve the banking and ties and lending services had any impact on corporate debt crisis. Many of the structural Indonesia's investment climate? Before the crisis, reforms recommended by the Bank before the when Indonesia was perceived to be performing crisis became required policy actions in adjust- well and not in need of Bank resources, the Bank ment loans immediately following the crisis. lacked leverage with the government to move it toward implementing structural reforms. The Outcomes Bank's usually strong influence with government Before the crisis, Indonesia's macroeconomic "technocrats," who had a voice in policy formula- management and growth performance were tion and implementation, was muted during this 1 4 3 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E period, perhaps because the reforms were politi- less leverage and influence with the government cally difficult and did not seem critical for than during the crisis, it will have to adopt a Indonesia's growth. Nevertheless, the Bank's strategy that is more effective in the new politi- method of influencing policy through dialogue cal landscape and persevere for a longer period with government technocrats was well to achieve its objectives. established. In turn, these technocrats were subject directly to presidential decisions. Lessons During the crisis, the Bank had substantial The Bank's leverage tends to decrease in large leverage and influence despite frequent changes countries where the economy is stable and in governments. In the new political arrange- growing. Moreover, the Bank's influence also ment, the Soeharto-era technocrats, with direct decreases when democratic countries are access to the President for decisions, have been governed by a coalition of several parties, replaced by inexperienced politicians with because the decision process becomes diffuse diverse interests and without clear decision and complicated. These complications multiply rules or hierarchy. Decentralization has further if some former central government decisions are complicated the decision process and created devolved to regional and local authorities. In complications for the investment climate. With these circumstances, stakeholders in improving so many new players and diverse interests vying the country's investment climate play a critical for decision authority, the Bank's ability to role. The Bank's strategy and services should influence policy has been reduced. focus on one or two of the most critical According to the President of the Interna- constraints to investment. In addition, the Bank tional Chamber of Commerce, nothing the Bank should be prepared to pursue those structural has done has affected their interests. At best, the reforms directly with several layers of govern- Bank's activities have prevented deterioration in ment and indirectly through stakeholders. The the investment climate. This judgment is harsh Bank should be prepared to exercise patience for two reasons. First, the Bank has contributed and persist for long periods to achieve its policy to macroeconomic stabilization, which has facili- reform objectives. tated political stabilization, perhaps the two There are many components of investment most important determinants of investment climate. Some are more important than others climate. Second, it may be too early to assess the in facilitating private investment, and some can impact of the Bank's activities. The reforms it is be reformed more quickly than others. In supporting will be implemented over a long addition, these components can affect domestic period, especially as its leverage and influence and foreign investment differently. The Bank's has declined. Eventually, these reforms are likely assistance strategy should focus on the IC to improve Indonesia's investment climate, components that influence the kind of invest- especially for foreign investment but also for ment that is most critical to attain sustained domestic investment. growth. For example, if domestic investment is The sustainability of Indonesia's IC reforms critical for the next five years, then the Bank depends on the government's commitment, should emphasize IC components that influence other stakeholders' lobbying efforts, and donor that kind of investment the most. The Bank community influence. While many reforms were should not get distracted and expend resources implemented during the crisis period, the on components that have long-term ethical reformist zeal has cooled after achieving value but do not affect investment. macroeconomic and political stability. In fact, the government has back tracked on some Romania earlier reforms. With elections due in the near future, it is not possible to judge whether the Background new government will support investment Romania's transition to a market economy climate reforms. Because the Bank Group has began in 1989 with the overthrow of the 1 4 4 A N N E X I I . E : C O U N T R Y C A S E S T U D Y S U M M A R I E S Ceausescu dictatorship. As a result of the The initial focus of Bank strategy--achieving policies that Ceausescu had followed during the macroeconomic stability, freeing up prices, and 1980s, the country was largely autarkic, with encouraging privatization--was appropriate. In imports comprising less than 10 percent of GDP. hindsight, the Bank's strategy overestimated In addition, extensive centrally planned invest- the commitment of successive governments to ment in heavy industry, the output of which reform and underestimated the difficulties of amounted to nearly 50 percent of GDP, provided attaining some degree of macroeconomic a legacy of large plants with outdated and ineffi- stability. cient capital stock. Agriculture had been collec- The period around the end of the 1990s was tivized into vast state farms and was similarly a watershed for Romania. Economic crisis result- inefficient. ing from low growth and macroeconomic In the early years of transition, a flurry of instability brought governments that were finally reform activity sought to promote a more open committed to reform. The new government that market economy. But most of the 1990s were came to power in mid-2000 adopted an characterized by economic and political instabil- economic program for the 2001­4 period whose ity. The half-hearted reform activities of succes- major goals were stimulating economic growth, sive governments resulted in a weak response reducing poverty and unemployment, combat- from the economy. GDP growth over the 1990s ing corruption, and speeding up EU integration was mostly low or negative, and highly variable. and NATO membership. Encouraging the The investment climate at the outset of transi- private sector became a focus of policy, and the tion was therefore difficult and relatively hostile Bank was asked for help to implement reform. to business. Macroeconomic and political The Bank responded strongly with a high instability created substantial uncertainty, the lending strategy scenario that was embodied in State remained heavily involved in the economy, the 2001 CAS. The strategy evidenced further and the financial system was not able to finance evolution of the approach toward investment new investment. Prices were decontrolled climate reform from one that was based on slowly, and there were severe restrictions on macroeconomic conditions to one that was foreign investment. Combined with high rates institutionally oriented. The Bank's investment of inflation, the private sector faced especially climate strategy focused on governance, anticor- distorted price signals. As a result, both ruption, and the business environment. Succes- domestic investment and FDI were weak. For sive PSALs and PIBLs supported the government most of the decade, there was very little growth, in its efforts to reorient policies toward promot- and the incidence of poverty continued to rise. ing the private sector. An important component of the first PSAL was Bank Strategy and Activities the secured transactions reform that attempted The Bank's IC strategy and activities can be to improve access to credit by the poor by divided into two periods: 1992­98, and 1999 lowering interest rates, increasing the size of onward. The early years were characterized by loans, and lengthening the terms of repayment. projects that focused on support for the The first phase of the project was the implemen- movement away from a centrally planned tation of a Law of Secured Transactions. The law economy, where most decisions related to was drafted with the support of the Bank and economic issues were the purview of the state, incorporated provisions that permitted movable to one in which markets determined resource property, both tangible and intangible, to serve allocation and investment. IC lending focused as collateral for loans. The second step involved on structural adjustment and financial market setting up the filing archive to permit the law to development. The Bank also undertook a operate by recording pledges of property and number of transportation projects during the establishing priority regarding which creditors fiscal 1992­98 period that amounted to more have the first rights to repossess and sell the than $700 million. collateral in the event of default. 1 4 5 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E More recent investment climate loans, not yet Privatization. Compared to the situation at the closed, include: start of transition, when the State dominated the economy, substantial progress has been made in · The 2001 Rural Finance Loan ($80 million) to privatizing SOEs. However, the most important provide financial services to a previously un- SOEs have remained in State hands for a large derserved section of the economy portion of the decade. Some of the privatization · The 2001 Second Private Sector Adjustment projects financed by the Bank--the 1994 Loan ($300 million) that continues the PSAL I Financial and Enterprise Sector Adjustment efforts to support enterprise, utilities, and fi- Loan and many of the infrastructure projects nancial sector privatization, along with im- with privatization components--did not achieve provements in the business environment by their privatization goals. reducing administration barriers and other regulatory burdens, and ensuring the appro- Trade policy. Romania made initial strides in priate social protection and poverty-reduction liberalizing its trade regime and removing the measures are in place distortionary instruments of the previous · The 2001 Second PIBL ($18.6 million). Like the regime. The 1994 Financial and Enterprise PIBL I, the loan provides technical assistance to Sector Adjustment Loan made an important ensure a competitive financial sector, privatiza- contribution in assisting the government in the tion of State-owned enterprises, a more efficient trade area, although many of its other energysector,creationofabusinessenvironment components were not successful. In the latter conducive to private sector growth, institutional half of the decade, the country focused on and governance reform, and the necessary meas- making the changes necessary to harmonize its ures to ensure social protection. trade system with the EU, and significant progress was achieved. Nonlending services for the investment climate during the fiscal 1998­2002 period Secured transactions. The introduction of included a 1999 FIAS report that identified the secured transactions reform in 2001 had a most important obstacles to business growth dramatic impact on lending. In the 18 months (incorporated in the conditionality of PSAL I and since the reform was implemented, there have PSAL II), a 2002 report on the legal framework been more than 400,000 loans against which for PSD, and a 2001 report on credit constraints security interests have been registered. Of these, that formed the basis for the financial market nearly 20 percent represent non-bank-secured components of PSAL I and PIBL I. loans. This is especially beneficial in rural areas that do not have bank offices. In addition, the Outcomes geographic coverage has been extensive: There have been filings of security interests in 42 of the Infrastructure. Despite the emphasis on infrastruc- country's 43 counties. More than 100 banks have ture in Bank lending, according to private sector registered security interests in the filing archive. representatives interviewed for this evaluation, in Since there are 38 licensed banks in the country, the end these projects did not have a noticeable the implication is that scores of non-Romanian impact on the quality of Romania's infrastructure. banks have been lending against collateral and Representatives complained about the high costs registering their security interests. that poor infrastructure created for their By contrast with moveable property, the legal businesses and said that they had seen little status of fixed property (land and buildings) is improvement over the past eight or nine years. unsatisfactory, and the problems are especially Infrastructure data show little improvement over difficult in rural areas. The focus has been on the decade, although it is possible that improve- technical mapping--rather than ensuring that ments were made at the margin and do not show property owners receive registered titles--and up in the data. has resulted in little change in the land market. 1 4 6 A N N E X I I . E : C O U N T R Y C A S E S T U D Y S U M M A R I E S Both domestic and foreign investors continue to Conditionality. Conditionality has been important complain that uncertainties over land ownership in assisting reformers in implementing their have delayed and increased the costs of projects. programs. The latter part of the period stands in In some cases, planned investments have been marked contrast to the first part in this regard. cancelled. Many of the investment climate loans of the first eight years of the period had weak conditional- Legal and regulatory framework. PSAL I assisted ity or the conditionality was not enforced--for rationalizing taxation and improving the example, macroeconomic stability was a capacity of bankruptcy-related institutions as condition of many of the loans, yet Romania had well as other regulatory impediments to only recently started to attain stability. Whether business. All of these actions were relevant and this would have influenced the ultimate important. There has been follow-up of these outcome is uncertain, but the Bank continued efforts in the new PIBL, which has assisted the to lend for IC activities in spite of little progress government in formulating an action plan in being made in many areas. which major impediments to business have been identified and for which a timetable for Economic and sector work. The successful IC corrective measures has been established. activities in the past few years appear to have Substantial progress has been made in complet- been based on more intensive ESW. The quality ing the action plan. However, businesses of this work has been high, and this has complain that the government is exacerbating contributed to recent operations (the PSAL and uncertainty by continually issuing decrees, many PIBL) and persuaded the government of the of which are contradictory. need to focus on IC reforms. Several of those While many changes were made to the legal interviewed indicated that the priority given to framework for business, there was insufficient the investment climate by the government has focus on the institutions necessary to enforce been a result of the Bank's enterprise surveys the new laws. The legal system remains weak, and analysis. and governance is poor. Corruption continues to be seen as a major obstacle by firms. Information. The Bank is now devoting substantial resources to collecting and publishing informa- Financial sector. Many Bank projects during the tion on the investment climate. In the case of 1990s had components that dealt with the Romania, evidence of inaccuracies was found. banking sector, its privatization, supervision, Given the importance of this data, better coordi- and regulation. These efforts were, however, nation between the teams collecting the data and severely limited by the government's reluctance the Romania country team would be helpful. to privatize the large State banks as well as restructure their debt. Even with secured India transactions reform, the ratio of private sector credit to GDP is still very low. Background In the wake of a severe balance of payment Lessons crisis, India embarked on a process of economic reforms in 1991. Reform efforts were marked by Institutional issues. In the early part of the 1990s, a reduction in the role of government in the Bank IC activities in Romania paid little attention economy and greater emphasis on the private to the institutional issues that are now considered sector, relying on market forces as a means of to be central elements of the business environ- ensuring economic efficiency and growth. The ment. Institutional reform has come into focus in Government of India took steps to dismantle Bank lending, and there have been significant many industrial controls, privatize public sector achievements under PSAL and PIBL, which are enterprises, encourage FDI, liberalize trade likely to be continued under PSAL II and PIBL II. policy, and strengthen the banking system. 1 4 7 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E These and other reforms seem to have met clearances before allowing businesses to start with some success. Between 1992 and 1993 and operations. In addition, companies must deal 2002 and 2003, GDP grew at an average annual with various state officials on an ongoing basis rate of 5.9 percent--slightly higher than the 5.8 with respect to applications, inspections, and percent rate of growth recorded in the 1980s reporting requirements. that was fueled, in part, by significant external · Labor legislation limits the actions of compa- debt.25 Growth was particularly high in the nies and imposes certain rigidities in labor service sector, where the annual average growth markets. According to the Bank's ICS, hiring rate reached 7.6 percent between 1992 and 1993 and firing of workers was named as one of the and 2002 and 2003. Inflation has also fallen from biggest constraints in doing business in India. the double digits in the mid-1990s to an average · Import licensing has been abolished and some of 5.8 percent in the past three years. import tariffs were reduced in the early 1990s, FDIs and portfolio investments responded but on average, tariffs on imports remain high strongly to the first wave of reforms in the early relative to other countries. 1990s. Since then, annual investments have · While capital markets have been the subject of fluctuated around $6 billion, with the exception substantial reforms, small businesses are still of 1998-99 when portfolio investments suffered constrained by the lack of commercial credit. a net reduction. While progress has been substantial, Bank Strategy and Activities economic performance has fallen below the The Bank has been a consistent advocate for government target set in the years after liberal- greater economic liberalization in India. In the ization. Part of the reason may be attributed to late 1980s, the Bank issued a number of reports the slowdown in worldwide economic growth calling for deregulation of industry and substan- and drought conditions in certain parts of the tial trade reform to increase economic efficiency country that limited agricultural output. and boost economic growth. While noting that However, some critics have pointed to trade sound macroeconomic policy was essential, the liberalization as a major culprit, highlighting the Bank also argued that significant improvements impact of imports on domestic industries. in economic performance could not be achieved Others, including the Bank, have pointed to the without substantial changes in policies, laws, slow pace of reforms and difficulties in and regulations that limited the development of implementing certain policy changes. The the private sector. remaining concerns stand out: Beginning in the mid-1990s, the Bank began to focus greater attention on working with states · Government debt continues to accumulate, that were strongly committed to reform. This and servicing that debt puts upward pressure was first made explicit in the 1997 CAS and on interest rates. further reinforced in the 2001 CAS. The strategy · While reforms in telecommunications have centered on supporting fiscal and governance met with success, access to reliable power at reforms, promoting private sector-led growth, reasonable costs remains a prime concern. and addressing the critical need for education, · Institutional constraints on private investment health, and improved infrastructure. The Bank's inhibit small firms from investing beyond the strategy was to work with selected state govern- stipulated limits, expanding their operations, ments on deregulation and improvement of the and taking advantage of efficiencies arising investment climate, while continuing to engage from economies of scale. the central government through policy dialogue · Existing bankruptcy laws make it very hard for and advice on reforms that fall within its companies to restructure their business. purview. · While the central government has reduced li- In keeping with strategic principles of censing requirements, state governments still selectivity, pragmatism, and reliance on partner- require numerous licenses, permits, and other ships, the CAS indicated that the Bank would 1 4 8 A N N E X I I . E : C O U N T R Y C A S E S T U D Y S U M M A R I E S work primarily with those states that had chosen operations. Approximately 70 percent of the to embark on a comprehensive program of workforce in the two states is employed in the reforms, expressed interest in entering into a agricultural sector. People pointed out that partnership with the Bank, and had relatively reforms concerning agricultural markets and land high poverty rates. Uttar Pradesh, Andhra tenure are critical and likely to have much more Pradesh, and Karnataka were the first three of an impact on living standards than those states designated as "focus" states by the Bank. dealing with industry in the near term. While Bank support was provided for broad packages reforms in the agricultural sector have been the of government reforms as well as sector-specific subject of Bank reports, adjustment operations in programs targeted to power, water, transport, the two states have not yet taken on these issues. health, and education. As of November 2003, one adjustment loan had been extended to Outcomes Andhra Pradesh and two had been provided to Implementation of various components has not Karnataka. always proceeded as smoothly or as rapidly as The reforms that the Bank has supported in envisioned. Both state governments have taken the two states are related to improving the significant steps forward on regulatory and climate for private investment to the extent that administrative reforms. However, questions reforms lead to an increase in the level of remain as to whether reforms have led to resources and/or a more efficient use of changes in actual behavior and are sustainable. resources devoted to the development of social Many of those interviewed suggested that and physical infrastructure. Interviews with reforms had not percolated down to lower-level government officials and members of the officers, where changes in behavior are likely be business community highlighted the critical harder to effect. People expressed concern with importance of improving roads, port facilities, the capacity of institutions to undertake needed water systems, and power supplies to the private changes and alter the "mindset" of officials. sector. The Bank's support for efforts of the Government officials and business leaders states to minimize regulations and streamline also spoke of their concern over whether reform procedures is consistent with the expressed efforts could be sustained in the event of interests of government and business. changes in political leadership, particularly in Numerous studies have called attention to the Andhra Pradesh, where the agenda is seen as need to dismantle the complex system of licens- being driven primarily by political leaders. ing, reduce ongoing reporting requirements, Lacking a strong institutional basis and grass- and deal with burdensome inspections from roots support, the reform agenda may face multiple government agencies. difficulties in the event of electoral shifts. The Bank's work on PSD issues in Karnataka Moreover, the impact on private investment is and Andhra Pradesh has focused primarily on uncertain. Discussions with representatives of reducing transaction costs associated with the business community suggested that the type regulations and administrative procedures. of regulatory and administrative reforms that However, there are other regulatory barriers have been adopted so far would do little to affect that impose greater costs on companies, partic- the level and pattern of investment. The decision ularly those that deal with labor. None of the to start or expand a company is driven foremost adjustment loans have directly addressed rigidi- by conditions in end use and factor markets, ties in labor markets, despite the widespread rather than the number of days that it takes to view--shared by the Bank--that labor regula- obtain clearances or the effort required to comply tions pose a significant constraint to private with inspections. Moreover, managers stated that investment. while streamlining regulations and procedures Many of those interviewed in Karnataka and may facilitate investment in a particular state, Andhra Pradesh noted the absence of attention differences in regulatory regimes among states paid to the agricultural sector in adjustment would not induce companies to invest in one 1 4 9 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E state over another. Those interviewed suggested inputs used in the calculus of whether partic- that relatively few firms have the capability to ular policies are merited. The investment cli- operate in multiple states--companies tend to mate is not just what is good for industry from stay put wherever they first began operations, industry's perspective--it needs to reflect which is typically in the home town of the owner. broader concerns. Larger firms that consider investment outside of · The investment climate varies significantly by their home states seek financial incentives offered industry. Those interviewed would like to see by state governments. more in-depth industry studies that lead to a The Bank played an important role in specific and actionable policy agenda. focusing governments' attention on specific · The ICA instrument could be improved. Those issues, while placing them within a broader interviewed would prefer hard data on actual context. Officials in Karnataka acknowledged cost differentials rather than subjective per- that while sought-after changes were broadly ceptions of firms. In addition, they indicated recognized within the government, efforts to that it was difficult to determine which policies implement reforms were "sporadic and uncoor- where most effective in terms of actually in- dinated" before the adjustment operations. The creasing the investment flow. Bank sensitized governments to the gravity of · Changes within government are necessary but the problem, especially with respect to fiscal not sufficient to ensure sustainability. It is im- matters and power sector reform, and drew portant to create public demand for change to attention to the significant cost of not reforming sustain reform process and ensure imple- in terms of the ability of governments to address mentation. Strong business associations can social needs within the states. In addition to the play an important role in advocating for re- "intellectual clout" of the Bank, the adoption of forms and monitor progress. The Bank could triggers related to deregulation in Karnataka do a better job of interacting with industry contributed to the reform effort. representatives. · Conditionality provides a basis for ongoing di- Lessons alogue with senior government officials and can serve to secure the support of individu- · Champions are needed to initiate and drive re- als within agencies and departments that form, but broad support is needed for suc- may be reluctant to implement required cess. Senior civil servants must understand, changes. Triggers should shift over time from support, and assume ownership for reforms. focusing on the institution of reforms to the · The success of reforms is dependent on the achievement of desired performance im- ability of agencies and departments to imple- provements such as the reduction in the ment them. It would be useful to include an length of time required to obtain clearances, analysis of the institutional capacities within the frequency of inspections, and the cost of government to effect change to identify po- regulatory compliance. tential barriers to proposed reforms and plan accordingly (e.g., training). Peru · Some of the regulatory changes advocated by the Bank, particularly those dealing with labor, Background are more politically sensitive because they are When President Fujimori was elected in 1990, not costless. It would be useful to develop a the country was verging on total disintegration. more compelling argument for these types of Hyperinflation, multiple exchange rates, the reforms based on an objective analysis of the nationalization of the banking system, and a social benefits and costs of proposed regula- vicious terrorist movement had resulted in tory changes. economic collapse. The impact on the private · While industry surveys are clearly important, sector was catastrophic: Antibusiness legislation the views of industry should be only one of the and endemic corruption caused a collapse of 1 5 0 A N N E X I I . E : C O U N T R Y C A S E S T U D Y S U M M A R I E S business activity. Sharp increases in poverty driven, environmentally sustainable growth as pushed many into the informal sector, which well as investments in public goods such as employed more than 50 percent of the econom- infrastructure, education, and health. The Bank ically active population in low-productivity and aimed to assist the government in decentraliz- low-wage occupations. ing, increasing its capacity, and reducing its role The new government embarked on the most in the economy. Improving government comprehensive economic reform program in efficiency was central to this effort. The Bank the country's history. Market mechanisms were would cooperate with the International introduced in every sector of the economy. Monetary Fund in assisting Peru in maintaining Macroeconomic policies were directed at macroeconomic stability. stabilizing prices in the face of rampant inflation, The 1997 CAS evaluated earlier Bank large-scale privatizations were announced, interventions and concluded that they had been negotiations with foreign creditors were successful with the exception of activities opened, and the exchange rate was unified. related to building institutions. The CAS pointed Labor market rules were changed, foreign out that these efforts had been less successful investment restrictions were liberalized, intellec- because strengthening institutions requires tual property rights were strengthened, govern- much longer and is intertwined with political ment spending was cut, and attempts were issues. Although the CAS stated that PSD was made to increase tax revenues. The result was a important, it did not have an IC focus. In retreat from hyperinflation as price stability contrast, the 2002 CAS shifted attention to the began to be restored. Foreign capital returned investment climate with an institutional focus, to participate in the privatization program. proposing continued property rights efforts as During Fujimori's second term, however, well as actions to modernize the judicial system. conditions deteriorated. External shocks, the El Bank activities during the fiscal 1993­2002 Niño effect, and reversals in the reform program period included the following: all served to weaken the economy, increase uncertainty and damage the investment climate. · The $22.5 million Judicial Reform Project in The government's privatization program came 1997. The project's overall aim was to improve to a virtual halt as the government increasingly the execution of justice and create an envi- bowed to public pressure. ronment for conflict resolution. But due to po- President Toledo came to power in April 2001 litical maneuvering surrounding the efforts promising to improve the economy and by Fujimori to secure the right to run for a third eradicate government corruption. However, the term in office, the project did not proceed. moribund state of the economy made the task · The 1999 Financial Sector Adjustment Loan especially difficult and confidence in the govern- ($300 million), intended to strengthen the ment began to erode almost immediately. In government's capacity to manage the impact particular, policy reversals have added to of future economic shocks on the financial uncertainty. Attitude surveys indicate that the system, promote the longer-term development business community does not have confidence and resiliency of the system, and enhance its in the government, which it views as unstable contribution to the overall growth and stabil- and anxious to appease populist sentiment at ity of the economy. the expense of continuing reform. The result · The Urban Property Rights Project, a $38 mil- has been a sharp decline in investment. lion loan approved in 1998 and still active, aimed to formalize transfer of land in urban Bank Strategy and Activities areas on which the poor had built dwellings. The 1994 CAS laid the foundation for lending and nonlending services over the 1995­97 The Bank engaged in a substantial amount of period. The CAS focused on the objective of ESW on IC issues during the period under review. poverty reduction through private sector- In 1993, a report on measures needed to establish 1 5 1 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E a competitive market economy was published. In external shocks of El Niño and the Asian and 1994, a PSA was completed, outlining issues Russiancrisesscaredoffinvestors,andprotracted pertaining to the investment climate and contain- political issues have kept foreign investors away. ing policy recommendations designed to deal · Regulation. Labor regulations reduce flexibility with some of the problems the private sector and encourage informality. It is estimated that faced. A secured transactions analysis in 1997 the regulation imposes a tax on employers of made recommendations on ways to improve the 50 percent of wages. Business registration has functioning of Peru's underdeveloped financial improved, but it still takes a long time to reg- markets. In 2003, an ICA was published that ister (83 days, down from 289). Bankruptcy still analyzed problems faced by the private sector takes too long (2­3 years) to resolve. based on a standardized enterprise survey. · Contract enforcement remains length and costly. Businesses still seem to view the legal Outcomes structure as almost irrelevant--they usually con- Many of the "contextual" IC variables improved in fine transactions to those whom they know Peru over the course of the period under review: well. In surveys of Peruvian businesses, the over- macroeconomic stability was restored, progress whelming majority claimed that the court sys- was made in privatization and infrastructure, and tem would not adjudicate disputes impartially, the trade environment was drastically improved. delays were long, and judges were untrained in Among the Core IC variables, there has been commercial law and open to influence. progress in some areas and little or none in others. Lessons · Legal system, governance, and property Unlike in many other countries, the Bank's early rights. The attempt to improve Peru's legal sys- focus on microeconomic IC issues was apparent tem through the Judicial Reform project failed, in a series of high-quality analytical reports at least in part because of the judicial instability throughout the 1990s. In fact, many of the later associated with President Fujimori's attempt to reports identified issues that had been raised in secure a third term in office. The Urban Property earlier reports: regulation, policy uncertainty, Rights project appears to have been successful infrastructure, a weak judiciary, underdeveloped and has made an important contribution to financial markets, and poorly protected property poverty alleviation through the wealth and labor rights. This suggests that either there was some market effects that it engendered. However, fi- repetition in this work or that the priority IC issues nancial market reform to allow mortgages of had not been addressed. the newly titled property has yet to occur. Despite successive Bank CASs that established · The financial sector. Access to credit for PSD as a priority, a comprehensive strategy for many businesses is still limited. The ratio of pri- doing this was not prepared. Although critical vate sector credit to GDP in Peru lags behind constraints to PSD had been identified in ESW, that of many other countries and is lower than they were not pulled together into a cohesive IC that of many poorer countries in other parts action plan that could be reviewed and updated of the world. Experience in Peru contrasts on a regular basis. markedly with Bank efforts in Romania, where Evidence from interviews conducted for this successful secured transactions reform has re- evaluation suggests that the Bank is not sulted in a large increase in access to credit for communicating sufficiently with either the public the private sector. or the private sector. The private sector does not · Foreign investment also remains at chroni- see the Bank as considering its view important in cally low levels. Peru initially saw an encouraging terms of project efforts and complained of rarely increase in FDI levels in the mid-1990s, but the being consulted. 1 5 2 Part III IFC Experience 13 Summary T his report is part of a joint Independent Evaluation Group (IEG) eval- uation of World Bank Group (WBG) investment climate activities based on an Approach Paper issued to the Board Committee on Development Effectiveness (CODE) in November 2002, to help inform pursuit of the WBG's Private Sector Development (PSD) Strategy (April 2002). The objective of the IEG-International Finance climate improved from high risk to middle risk Corporation (IFC) review is to inform IFC's between approval and evaluation; when the strategy for addressing investment climate (IC). investment climate deteriorated, success rates IFC has been increasing its IC activities, mostly dropped below average. IFC also achieved through non-investment operations, yet no better investment outcomes in countries with evaluation has been done to date to take stock good investment climates at either the time of of the overall IFC IC experience from fiscal approval or evaluation. That is, both the quality 1993­2002 and lessons learned. Similarly, the of investment climate and its direction of Bank has been increasingly active in IC change affected IFC investment outcomes, operations both unilaterally and bilaterally with suggesting a robust positive relationship IFC. The study also aims to draw lessons from between the investment climate and investment the Bank, IFC, and Multilateral Investment success. Moreover, certain aspects of invest- Guarantee Agency (MIGA) coordination on IC ment climate were most highly correlated with activities. investment success: trade openness, a dynamic Productive private sector investments create banking and finance sector, effective govern- jobs and contribute to economic growth, ment regulation, and the absence of black helping to reduce poverty and improve people's markets. lives. But the private sector invests and thrives Improving investment climates of client only where it can use resources efficiently, and a countries features as one of IFC's three main favorable investment climate is an important activities described in its articles of association. factor in that determination. The importance of Section (iii) of Article I (Purpose) calls for IFC to investment climate for firm performance is also "help create conditions conducive to the flow of evident in IFC investment operations. IFC private capital," in direct reference to improving achieved higher development and investment investment climates as a distinct activity from outcome success rates when the investment catalyzing and financing investments. In this 1 5 5 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Definitions Investment operations: Company: The entity implementing the project and, generally, IFC's investment counter-party; for financial markets operations, it refers to the financial intermediary (or fund manager), as distinct from its portfolio of International Finance Corporation (IFC)-financed subproject companies Investment: IFC's financing instrument(s) in the evaluated operation: loan, guarantee, equity, underwriting commitment, etc. Operation: IFC's objectives, activities, and results in making and administering its investment Project: The company objectives, capital investments, funding program, and related business activities being partially financed by IFC's investment selected for evaluation Example: "Through this operation IFC provided $55 million for the company's $100 million cement manufacturing expansion project in the form of a $20 million A loan, a $30 million B loan from commercial banks, and a $5 mil- lion equity investment." Financial markets projects: All projects where the company is a financial intermediary or financial services company, including agency lines and private equity investment funds Nonfinancial markets projects: All other projects; sometimes referred to as "real sector" projects Non-investment operations: Outcomes of non-investment operations: Outcomes refer to implementation of recommendations or advice Impacts of non-investment operations: Impacts refer to the changes that occurred following the implementation of recommendation Example: A technical assistance operation recommended that the country amend the leasing law to incorporate best practices in similar markets in the region. Outcome--the country amended the leasing law in accordance with the recommendation. Impact--the leasing industry became attractive to potential sponsors as evidenced by new companies that were established following the amendment of the leasing law. 1 5 6 S U M M A R Y context, IFC has provided Technical Assistance private sector has found ways to adapt to and Advisory Services (TAAS) to governments to existing IC conditions. On the other hand, help them shape the conditions for promoting unsuccessful private sector operations, or those private investment and foreign direct invest- that depend on or help to sustain distortions for ment (FDI). In doing so, as a company financier their success, can have a negative demonstra- IFC is able to bring to bear its detailed tion effect, suppressing private sector optimism knowledge of policies and institutions that or slowing down the momentum of reforms and either facilitate or hinder sustainable growth of stifling competitive dynamism. private enterprises. IFC's IC-related TAAS focus on identifying IFC has long recognized investment climate and removing specific constraints to private as important in achieving its performance investment (usually by sector) and other bottle- objectives but has only recently made improving necks (institutional, administrative) that investment climate a distinct activity for achiev- constrain it. The main clients for IC TAAS are ing strategic objectives. In its current corporate governments, but some activities have been strategic directions paper, IFC includes scaling- directed at private sector clients, for example, to up advice to country governments on general IC build their capacity to engage in policy reform issues and privatization as a means to strengthen dialogue with the government. IFC conducted the focus on frontier markets. Despite the 655 IC TAAS operations for a total cost of $167 increased importance of IC activities in recent million during fiscal 1993­2002, of which more years, IC TAAS work has been encouraged not in than 90 percent was donor funded and the its own right but as an instrument for growing a remainder funded by IFC. This amount pipeline of viable investment opportunities in represents 38 percent of all IFC TAAS activities pursuit of the frontier and small- and medium- in volume terms during that period. Private sized enterprise (SME) strategies. In that Enterprise Partnership (PEP), IFC, and donor- context, IC TAAS work in IFC has been seen as supported TAAS programs in the countries of the servant of work on investment operations, the former Soviet Union accounted for about because until now, only investment operations half of IC TAAS in volume terms. The amount of have been tracked in IFC's performance IC TAAS grew both in terms of volume and the measures and related incentives. number of projects over the past decade. Sharp IFC helps improve investment climates growth in sector-specific advice reflects IFC's through its non-investment TAAS operations corporate-level focus on pursuing strategic and as a consequence of its investment sector investments, particularly in financial operations. Although all successful investment sector advisory operations. projects may have positive impacts on invest- ment climate, IFC investments in high-impact The evaluation of 38 IC TAAS operations in strategic sectors (infrastructure, financial, and the five field-visit countries found the following: social sectors) contribute most significantly and directly to improving investment climates. · Quality of execution was good--92 percent of These projects directly address some of the stakeholder survey responses rated it satisfac- major factors that contribute to making invest- tory or excellent. ment climates conducive to private investments. · Outcomes showed attrition--48 percent Private sector activities in other sectors also have thought that less than half of the recommen- byproduct impacts on investment climate, both dations or substance of the advice was imple- positive and negative. On the positive side, mented. successful private sector operations have · Impacts are less clear--only 29 percent saw demonstration effects both as role models for major improvements in issues addressed by the existing local companies and in stimulating new assignments; 31 percent could not give an investments. Such a response indicates that the opinion, largely because it was too soon to investment climate is improving or that the see the impacts. 1 5 7 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E There are many factors at work that and evaluating IFC's TAAS, the incentives in contribute toward the attrition of outcomes and place, and an organizational structure geared impacts. Establishing causality links between the mainly to better focusing IFC's resources and technical assistance execution quality, outcomes activities on country needs and IFC's strategic in terms of implementation of recommenda- priorities, IFC's effectiveness in influencing tions, and impacts on the ground is problematic. investment climate will likely increase. The Changes in policies, laws, and practices--or results of these changes will need to be carefully changes not happening--often result from monitored with a view to appropriate fine- numerous actions by various stakeholders and tuning. other internal and external forces. IFC has recently introduced a number of Recommendations changes in the incentives framework and organi- IC work is a major component of IFC's TAAS, zational structure in support of taking a more and for this reason, any recommendation strategic approach to achieving its objectives specific to investment climate will bear on IFC's and pursuing IFC's IC mandate. In an effort to other TAAS. Given that this report is limited to move IFC away from an investment volume IFC's experience in investment climate and does culture to one where the quality of development not cover non-IC TAAS, it offers recommenda- impact, profitability, client service, and internal tions for management in addition to existing or corporate responsiveness matter more, depart- forthcoming findings or recommendations from mental scorecards were introduced in 2001 and relevant working groups, studies, and literature refined in 2002 to reflect the new structure with on all non-investment operations. regional investment departments in charge of country programs. In line with the new organi- Raise the profile of investment climate work. First, zation and the IFC-wide strategy for frontier IFC management should elevate investment markets, the SME facilities were placed under climate to an explicit strategic priority and control of the regional departments in 2003. central theme of its TAAS work. In defining how Also in 2003, the WBG created a new joint Vice- IFC will deliver its technical assistance, the Presidency responsible for WBG PSD strategy regional investment departments should and the IFC Chief Economist function. Building determine the appropriate mix of broad IC on the WBG's April 2002 PSD Strategy, creation assessments, sector-specific advice, and capacity of this new Vice Presidency is designed to help building relevant to each country's IC needs and achieve strategic integration between Bank and situation. IFC approaches to PSD and to help improve investment climates. Enhance synergies in IC activities among different Moreover, the past year has witnessed two WBG units. Second, the WBG should clarify the important initiatives: (i) formulation of a more roles of the Bank, IFC, and MIGA on IC activities, strategic approach to developing and delivering bringing corporate strategy and practice into technical assistance, including the creation of the consistency according to the country- and Funding Mechanism for technical assistance to situation-specific comparative advantages of ensure sustainability and predictability of IFC's each institution. Effective coordination at the funding for TAAS; and (ii) establishment of a individual country level should encompass: (i) monitoring and evaluation system within a diagnostic IC needs assessment; (ii) WBG IC results-based management (RBM) framework for operational priorities; (iii) broad division of IFC's rapidly expanding TAAS business line. labor within WBG; and (iv) a common RBM Senior management has endorsed the framework for alignment of project planning, recommendations for these initiatives, and results measures, reporting, and associated unit implementation is expected to take place in fiscal and individual incentives. The process for 2005. With these improved processes, the accomplishing the above and ensuring effective results-based approach to planning, executing coordination should be systemized and formal- 1 5 8 S U M M A R Y ized for every country, building on the PSD-led of successful outcomes and impacts on the IC country review experience. The Foreign ground; and (iii) implement IFC-wide conflict- Investment Advisory Service (FIAS) and MIGA of-interest (COI) training to enable departments coordination efforts should be closely to deal with potential and perceived COI early monitored to ensure they continue on track. and more proactively and ensure that current procedures are known and followed. Develop guidelines and procedures for TAAS operations. Third, as part of the corporate-wide Identify and track IC impacts. Fourth, IFC should initiative to develop operating guidelines and consider developing a mechanism to track and procedures for TAAS projects, management follow up on IC issues encountered in its invest- should also consider addressing the following ment operations with a view to supporting its issues: (i) develop a quality control mechanism portfolio and potential pipeline companies in for advisory work that is provided to govern- addressing them, informing IFC's IC work ment clients; (ii) incorporate "good practice" program, and feeding this information into the measures into IC TAAS operations, within the work programs of relevant WBG PSD staff charged RBM project planning and monitoring and with improving investment climate and setting evaluation (M&E) system, to enhance prospects country assistance strategy (CAS) priorities. 1 5 9 14 Introduction and Context: Why Is the Investment Climate Important to IFC? "Spreading best practices to emerging markets is critical to creating the business-friendly environment that attracts investors and fosters poverty-reducing growth for countries. And firms are one of the major carriers of best practices." --IFC's Chief Economist and WBG Vice President Michael Klein Objectives To what extent did IFC's projects help improve This report is part of a joint IEG evaluation of investment climates? What are the positive and WBG IC activities to help inform pursuit of the negative impacts of IFC's projects on invest- WBG's PSD Strategy (April 2002).26It is based on ment climate? What are the drivers for, and an Approach Paper issued to the Board Commit- obstacles to, improving investment climate tee on Development Effectiveness (CODE) in through IFC's projects? To what extent does in- November 2002. The objective of the IEG-IFC vestment climate affect IFC's investment op- review is to inform the IFC's strategy for erations? What investment climate factors have addressing investment climate. IFC has been strong impacts on the relative success of IFC's increasing its IC activities, mostly through non- investment operations? investment operations, yet no evaluation has c. To what extent have IFC's non-investment op- been done to date to take stock of the overall erations helped improve investment climate? IFC IC experience and lessons learned. Similarly, What are IFC's non-investment IC operations the World Bank has been increasingly active in and how significant are these operations within IC operations both unilaterally and bilaterally IFC's overall non-investment operations? What with IFC. The study also aims to draw lessons has the quality of IFC's assistance been? What from the World Bank, the IFC, and MIGA coordi- have the outcomes and impacts been? nation on IC activities. d. What are the implications for current and To achieve these objectives, the study future IFC IC activities? What has worked, addresses four main evaluative questions, along what has not, and why? with subsidiary questions for each. What Is the Investment Climate, and How a. What has been IFC's strategic approach to im- Is It Operationalized in IFC? proving the investment climate? How did IFC Productive private sector investments create jobs implement its strategy for investment climate? and contribute to economic growth, helping to b. What is the interrelationship between IFC's in- reduce poverty and improve people's lives. But vestment operations and investment climate? the private sector thrives only where it can use 1 6 1 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E resources efficiently, and a favorable investment stressed the importance of good investment climate is an important factor. Investment climate in expanding IFC's investment operations climate comprises country-specific risks and and yielding sustainable profit contributions. transaction costs of investing in and operating a Recognized as one of the two main pillars of private sector enterprise. It is driven by, among the WBG poverty-reduction strategy, improving other factors, the legal, judiciary, and regulatory investment climates is central to the current framework (both sector-specific and broader WBG PSD Strategy and IFC's corporate strategy. policies); barriers to entry and exit; market The current WBG PSD Strategy indicates that "IC conditions for labor, finance, information, and issues are part of a systematic and regular infrastructure services; and other productive analysis in preparation of country strategies and inputs. Governments can influence investment will be considered routinely in the Bank Group's climate through prudent macroeconomic country assistance strategies."30 IFC's corporate management, trade and investment policies that strategy focuses its priorities on frontier promote a level playing field, strong institutions, markets, strategic or high-impact sectors and good relationships with the private sector. (domestic financial markets, infrastructure, A good investment climate is important in information and communications technology, achieving the Millennium Development Goals health and education), and support for SMEs. (MDGs)27 and for the success of IFC's operations. IFC recognizes that improving IC is a key factor Evidence presented in IEG-IFC's 2002 review of in achieving its frontier markets and SME strate- evaluation findings shows that countries that gies. In its current corporate strategy paper (IFC have improved their investment climates over the 2004), IFC includes scaling up its provision of past decade have better chances of achieving the diversified advisory services and business MDGs.28 The fiscal 2003 and 2002 Annual Reviews capacity building to help improve investment also show that outcomes of IFC's investment climate to support strengthening its strategic operations tend to be better in countries with focus on frontier markets (see box 14.1). improving investment climates. IEG-IFC's recent Investment climate has long been a key individual country evaluations29 have also theme for IFC. At its inception nearly 50 years Box 14.1: IFC's 2004 Strategic Directions Address IC to Achieve Strategic Priorities IFC has identified five strategic priorities to increase its devel- progress in this area, it is becoming increasingly clear that to opment impact, grow its portfolio, further strengthen its finan- meet the challenges in these markets, IFC will have to work on two cial position, and improve market responsiveness. They are as fronts. First, it will need to scale up its provision of TAAS, and sec- follows: (1) strengthen the focus on frontier markets with em- ond, it must take a more proactive approach to project develop- phasis on the SME sector; (2) build long-term partnerships with ment. IFC's TAAS will continue to focus on both governments and emerging global players in developing countries; (3) differenti- private industry to improve the framework for investment and in- ate through sustainability; (4) address constraints to private crease the capacity of businesses (mostly SMEs) to thrive and grow. sector investment in infrastructure, health, and education; and The objective of advice to governments is to create an envi- (5) continue to focus on the development of domestic financial ronment for successful private sector projects, including IFC in- markets through institution-building and the use of innovative vestments. It includes the work of FIAS and the SME Project financial products. Development Facilities on IC issues, work of the Advisory Services For many years, one of IFC's main strategic priorities has been Department on privatization transactions, and Financial Markets to focus on frontier countries. While IFC has continued to make Advisory services work on creating viable financial systems. Source: IFC Strategic Directions, April 2004. 1 6 2 I N T R O D U C T I O N A N D C O N T E X T: W H Y I S T H E I N V E S T M E N T C L I M AT E I M P O R TA N T T O I F C ? ago, IFC's Articles of Association identified the measures of investment climate used by IEG-IFC importance of improving the investment climate and offers a comparison of selected indices. in client countries as one of the three main activities by which IFC shall carry out its purpose Dynamic analysis. Success rates for both develop- of promoting economic development:31 ment and investment outcomes were higher when investment climates improved (as The purpose of the Corporation is to measured by Institutional Investor Country further economic development by Credit Risk Rating (IICCR) for the dataset).33 In encouraging the growth of productive countries where the investment climate deterio- private enterprise .... In carrying out this rated, development and investment outcomes purpose, the Corporation shall: were significantly worse than the IFC average. assist in financing the establishment, Table 14.1 shows that where investment climate improvement and expansion of produc- changed from poor to good between approval tive private enterprises and evaluation, development outcome (DO) seek to bring together investment had a 76 percent success rate. When the quality opportunities of investment climate deteriorated, the success seek to stimulate, and to help create rate dropped to 41 percent. Investment conditions conducive to, the flow of outcomes (IO) were positive in 64 percent when private capital...into productive invest- investment climate improved and only in 32 ments. 32 percent when it deteriorated. IFC's mandate as described in Section (iii) Static analysis. Similarly, countries with good above of Article I, that is, "help create conditions investment climate at approval have on average conducive to the flow of private capital" refers yielded significantly better outcomes (see figure directly to improving the investment climate. In 14.1), using a broader measure of investment this context, IFC has provided TAAS to govern- climate (Heritage Foundation/Wall Street ments aimed at helping them shape the Journal Index [HFO/WSJ]).34 Forty-nine percent conditions to facilitate private investment and of investments in countries with good invest- foreign direct investment (FDI). IFC draws from ment climate over the review period achieved its experience in the country as a company win-win outcomes (square 1 on right-hand box). financier, which has enabled it to acquire This compares to only 39 percent of investment detailed knowledge of policies and institutions projects done in countries that had poor invest- that either facilitate or hinder the establishment ment climate at the time of approval (square 1 or growth of private enterprises. on the left-hand box). Only 23 percent of projects done in good IC countries yielded low Good and Improving Investment Climates outcomes in both dimensions, so-called lose- Boost IFC's Investment Project Outcomes lose outcomes (square 4 of right-hand box), IFC achieved better outcomes in countries compared to a higher lose-lose outcome rate of where the quality of investment climate 34 percent among projects done in countries improved, and in countries with generally good with poor investment climate. The differences investment climates, based on the 5-year evalua- of good and poor IC countries at approval are tion data covering 1998­2002 for projects significant at the 0.02 confidence level. approved 1993 to 1997. This is consistent with A closer look at the outcome success rates the findings in IEG-IFC's fiscal 2003 and 2002 shows that IFC's IO success rates drive the reviews of evaluation findings using Expanded higher win-win outcomes in the static analysis. Project Supervision Report (XPSR) data covering IO had higher success rates in countries with 3-year periods, 1999­2001 and 2000­2, and good IC either at approval or at evaluation (table findings in other IEG-IFC reports and analysis 14.2), and these differences are statistically (see box 14.2). Annex III.A discusses the main significant. Projects in countries with good 1 6 3 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Box 14.2: Recent IEG-IFC Analysis Shows That IC Is Important to IFC Outcomes IEF-IFC's annual review in fiscal 2002 found that frontier markets assistance--mainly in privatization and capital markets--before tend to feature high corruption, poor governance, and political expanding investment operations. By moving quickly and effectively instability. Findings suggest that steady improvement in these to address strategic, high-priority technical assistance needs in countries' investment climates is essential for the frontier strat- the initial years, IFC contributed materially to Russia's transition egy's sustainability. process and earned a high level of goodwill. Given the generally In the next year's analysis, IEG-IFC showed that IFC has been poor performance of IFC investment outcomes in Russia up to making ever-greater efforts to find viable projects in a shrinking 2001 (when this study was completed), this cautious investment population of frontier countries, where there has been a significant strategy appears to have paid off well, particularly in comparison reduction both in private capital flows and gross domestic prod- with EBRD results for the same period (1992­2001). uct (GDP) absorptive capacity. In spite of these efforts, the con- Transition Economies: IEG-IFC analysis found that difficult centration of IFC's new commitments in high-risk countries declined business environments served up few bankable investment op- somewhat between 1998 and 2003 as countries graduated. IFC is portunities for IFC not served by EBRD and prompted an empha- therefore complementing its investment operations with TAAS sis on advisory assistance, especially in countries of the former aimed at capacity building and generating a pipeline of viable in- Soviet Union, to pave the way for investment operations. Moreover, vestment opportunities for the future. IFC investment and development outcomes were directly corre- China: IEG-IFC evaluation findings show that thequalityandpace lated with various indicators of investment climate (IICCR and of reforms, particularly in the corporate and financial sectors, is crit- HFO/WSJ) for this country group. ical to the success of IFC operations in China. Regulations constrain Extractive Industries: IEG-IFC's analysis showed that devel- IFC's ability to use quasi-equity instruments, which complicates eq- opment results of EI projects were significantly better in countries uity exits and reduces aggregate returns below sustainable levels. with good government effectiveness, political stability, and regu- Brazil: According to IEG-IFC evaluations, poor IFC equity out- latory quality, and that investing in countries with poor gover- comes were in part attributable to a difficult investment climate and nance has not on average been financially attractive for IFC. In fact, notably weak corporate governance that minority investors face. none of IFC's 10 most successful EI investments were in a coun- Russia: IEG-IFC evaluations found that a very difficult invest- try with high levels of corruption. IFC's equity returns were worst ment climate and few opportunities prompted IFC to place a strate- in countries with the poorest control of corruption and the best in gic focus on improving investment climate through technical countries with the highest control. Better country governance--Better IFC equity returns for extractive industries and for other sectors Governance quartiles: Worst Third Second Best 100 80 equity 60 on percent) 40 20 returns 0 real inception, ­20 ­40 (since ­60 Relative ­80 Number of projects: 2 10 32 431 40 579 3 43 EI equity returns Non-EI equity returns Source: World Bank Institute: Governance Research. Note: 175 countries were sorted based on the average of their respective Governance Research Indicator Country Snapshots (voice and accountability, political stabil- ity, government effectiveness, regulatory quality, rule of law, and control of corruption) and divided into quartiles. EI = extractive industries. 1 6 4 I N T R O D U C T I O N A N D C O N T E X T: W H Y I S T H E I N V E S T M E N T C L I M AT E I M P O R TA N T T O I F C ? Table 14.1: Better Outcomes with Improving Investment Climate, Worse with Deteriorating Investment Climate Development Investment Movement in country risk group outcome outcome (IICCR at approval and evaluation) Number Percent success rate (%) success rate (%) Improved from high risk to medium/low risk 45 14 76 64 Stayed medium/low risk 168 53 60 54 Stayed high risk 83 26 58 46 Deteriorated from medium/low risk to high risk 22 7 41 32 Overall 318 100 60 52 Note: The population of this analysis includes 318 projects evaluated during 1998 and 2002. The significance level of DO for the improved group is 98 percent and 94 percent for IO. The significance level of DO for the deteriorated group is 94 percent, 95 percent for IO. Figure 14.1: Projects Done in Good IC Countries Have Significantly Better Outcomes Good IC countries at approval have yielded significantly better outcomes (318 evaluated projects approved in 1993­1997) HIGH HIGH 1 20% 2 39% 14% 2 1 49% High development High development High development High development outcome outcome outcome outcome outcome Low return High return outcome Low return High return 4 3 4 3 34% 6% 23% 13% Development Low development Low development Development Low development Low development outcome outcome outcome outcome LOW Low return High return LOW Low return High return LOW HIGH LOW HIGH Investment outcome Investment outcome Poor IC countries Good IC countries (201 XPSRs) (112 XPSRs) Note: There were five XPSRs in countries with no HFO/WSJ IC rating. Poor IC is a rating > 3. investment climates at approval had much significant. This is possibly because IC indicators better financial results for IFC than those in do not capture environmental, health, safety, countries with poor investment climates. and social performance, which is one of the four Similarly, projects in countries with good invest- subindicators of DO.35 IEG-IFC's recent impact ment climates at evaluation performed review of China explores the main causes in financially better for IFC than in those with poor more detail (IEG 2004b). investment climates. For DO, though the success rates in countries with good IC are Some aspects of investment climate matter more slightly higher, the difference is not statistically than others. Good investment outcomes are also 1 6 5 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Table 14.2: Investment Outcomes in Countries with Good ICs Were Higher than Those with Poor ICs Investment outcome success rates (318 evaluated projects approved 1993­1997) Investment Investment climate at approval Investment climate at evaluation Climate Number Percent Success rate (%) Number Percent Success rate (%) Good 112 36 63 119 38 60 Poor 201 64 46 194 62 47 Overall 313 100 52 313 100 52 Note: The total number of projects evaluated during 1998 and 2002 is 318. The quality of investment climate is measured by HFO/WSJ, with poor IC assigned a rating greater than 3. This analysis excludes five projects in countries without HFO/WSJ ratings. The differences of outcomes at approval are significant at the 99 percent level, and at evaluation at the 98 percent level. associated with some aspects of investment appropriate to their operations and reward climate more than others. At the level of the 10 relative efficiency. The banking and finance sub-indices of HFO/WSJ, four are strongly subindex is an indicator of the government's correlated with investment outcomes:36 (i) trade involvement in the financial sector. Less openness, (ii) a dynamic banking and finance intervention is a positive IC factor. IFC's projects system, (iii) effective government regulation,37 operating in a good, dynamic banking and and (iv) the absence of black markets (see figure finance environment have access to domestic 14.2). The trade subindex is an indicator of a finance at market cost that is not driven up to country's trade openness as measured by its uncompetitive levels by government deficit weighted average tariff. Lower tariffs are associ- financing. The government regulation subindex ated with good IC ratings. IFC's projects in an is an indicator of the extent to which business open trade regime have access to cost-competi- regulations are clear and uniformly applied. tive inputs and output markets that are Straightforward and consistently applied regula- Figure 14.2: Better Investment Outcomes When Certain IC Factors Are Favorable IO success rates under different HFO/WSJ indicators (at evaluation) HFO/WSJ composite index Trade policy Banking & finance Regulation Black market 0 10 20 30 40 50 60 70 Percent Good IC Poor IC Note: Heritage ratings of greater than 3 are designated "poor" ratings, except banking & finance, where poor > 2. 1 6 6 I N T R O D U C T I O N A N D C O N T E X T: W H Y I S T H E I N V E S T M E N T C L I M AT E I M P O R TA N T T O I F C ? tions that reduce the scope for corruption, rent- issues that have emerged in different studies. seeking, and bureaucratic harassment warrant a A Bank study covering 80 countries and one good IC rating. IFC's projects operating in territory found that taxes and regulations are transparent and predictable regulatory environ- the leading IC constraints worldwide (Batra ments are better able to respond to opportuni- and others 2003). However, among developing ties and risks as they emerge and are less subject countries (excluding China and transition to uncertainty and corruption. The black Europe), corruption was the number one markets subindex is an indicator of the extent of concern. Not many of the IFC clients IEG the informal or underground economy, includ- visited in the five countries for this study ing illegal trading activities such as smuggling. explicitly mentioned corruption as an issue. Countries with low black market activities have When asked about this issue, most foreign good IC ratings. IFC's projects in low black companies indicated that they are bound by market economies are able to compete on a their own codes of conduct, which prohibit level playing field. them from participating in corrupt practices. IFC clients confirm the importance of Some have gone to court rather than yield to investment climate but also point to business what appears to be harassment or extortion. opportunities that influence their decision to However, SMEs are likely to be more affected invest. Box 14.3 summarizes the main finding by corruption. Because they are thinly staffed of IEG-IFC interviews with IFC investor clients and managed, the pressure to yield to corrup- in five country field visits. Findings from IEG- tion is higher, according to some companies IFC's field visits are consistent with the IC involved in providing services to SMEs. Box 14.3: Importance of the Quality of the Investment Climate for IFC Client Investors For this study, IEG-IFC interviewed IFC clients with mature proj- brokerages. However, due to slow progress in the enabling ects in five countries (Egypt, Mozambique, Peru, Romania, and regulation to allow firms to go public, the number of listed com- Vietnam). IEG-IFC asked what positive and negative factors in panies remained small by any standard (21 companies). investment climate they have encountered in their operations. · SMEs complained of what appears to be harassment through Onthepositiveside,theywereunanimousinindicatingthatthein- oversupervision leading to many hours of management time vestment climate was acceptable although they thought it could be spent dealing with government inspectors from different better.Theycametothecountryorundertookaprojectprimarilyinre- ministries, including ministries of finance, economy, health, sponsetothebusinessopportunitiesundertheexistingICconditions. labor, environment, the tax bureau, and local government Theysawopportunitiesintermsofaccesstodomesticandforeignmar- agencies and police. kets, strategic location, and favorably priced production inputs such · A medium-sized company reported the inefficiencies of the asrawmaterialsandlabor.Mostindicatedthattheexistenceofgood institutions managing the value-added tax system. While the and efficient physical infrastructure was necessary for them to take regulation calls for a 45-day processing of value-added tax advantage of the opportunities in the country. While they appreciate refund, actual processing can take up to nine months. This in- investmentincentives,theclientsIEG-IFCintervieweddidnotthinkthat creased the working capital financing cost of the company. those incentives tilted their decision to undertake the projects. · An agribusiness company had to pay up to 28,000 farmers in On the negative side, many respondents expressed frustrations cash for their harvest because of weak banking infrastruc- with the quality of the regulatory framework, bureaucratic ture, leading to unforeseen additional working capital cost processes, weak institutions, inefficient judicial system, and un- and risk to the company. derdeveloped financial markets infrastructure. The experiences in- · A manufacturing company pointed to the lack of enabling clude the following: guidelines on new legislation. This resulted in inconsistent · A securities brokerage company was upbeat when the coun- interpretation of the law even between the concerned local try passed legislation to allow the establishment of securities and national agencies. 1 6 7 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Do IFC's Investment and Non-Investment hand, more targeted sector policy or Activities Improve Investment Climates? legal/regulatory advice can help prepare sectors A Conceptual Model for potential IFC investment project follow-on. IFC's activities can affect investment climate However, the link between sector IC TAAS and through two main channels: non-investment follow-on investments is not always clearly operations including TAAS and investment defined or a direct motivator. For example, IFC's operations. The potential outcomes and impacts technical assistance program in the countries of of these activities on investment climate are the former Soviet Union (pre-2000 PEP) illustrated in figure 14.3. contained little or no direct link to IFC invest- ment: In an environment where IFC saw few Non-investment operations. IFC activities with an immediate bankable investment opportunities, explicit objective to improve investment strategic priority was placed on assisting govern- climates are usually undertaken to help establish ments in moving forward with privatizations and conditions for potential downstream private related transition reforms needed to improve sector investment--including IFC invest- investment climates. IFC can also affect invest- ments--or as part of executing program ment climate by coordinating with the Bank on mandates or agendas (FIAS, SME department, IC diagnosis to inform joint country assistance PSAS, PEPs, IFC's frontier strategy). Most such strategies (CASs) and private sector assessments IC work takes the form of non-investment (PSAs). This activity is briefly addressed in operations, or TAAS, and focuses explicitly on Section C of this chapter and in Chapters 1­4 of improving the investment environment by this report. identifying specific legal and regulatory constraints to investment (usually by sector) and Investment operations. While improving the other bottlenecks (institutional, administrative investment climate is not necessarily a direct and or other) that impede investment; recommend- explicit objective of investment operations, they ing policy and/or legal changes (including affect investment climate in varying degrees. As drafting of legislation); and building govern- highlighted in the 2005 World Development ment and private sector capacity to improve IC Report A Better Investment Climate for conditions. Broad IC advisory services, such as Everyone, specific investment transactions can provided by FIAS, can help improve the invest- "complement investment climate improve- ment climate generally, hence benefiting ments by mobilizing a supply response and existing IFC investments and facilitating testing and demonstrating investment climate increased investment activity. On the other improvements" (World Bank 2005). And transac- Figure 14.3: Logic Model for IFC's IC Activities ACTIVITIES OUTCOMES IMPACTS Non- Improved Policy and investment quality of institutional operations investment reforms climate components Increased Improved firm private sector capacity Better firm activities decisions Investment Demonstration operations effects 1 6 8 I N T R O D U C T I O N A N D C O N T E X T: W H Y I S T H E I N V E S T M E N T C L I M AT E I M P O R TA N T T O I F C ? tions that support infrastructure development, investment TAAS operations. These figures increase the level of skills and knowledge, and reflect IFC's emphasis on investment operations establish new financial intermediaries can as its primary line of business. In line with IFC's contribute to the investment climate more relative emphasis on investment operations, the directly, especially in pioneering and bottleneck- remainder of this report is organized as follows: relief situations. Chapter 15 explores how IFC's investment The relative importance of investment operations improve investment climates, and operations as a channel for improving invest- provides findings and evidence of the related ment climate emerges dramatically when outcomes and impacts; Chapter 16 describes compared in US dollar terms (see figure 14.4). how IFC set out to improve investment climates More than 99 percent--or $32 billion--of IFC's through non-investment and TAAS activities and total IC-impacting activity during the evaluation investigates the outcomes and impacts of IC review period (fiscal 1993­2002) was through TAAS operations; and Chapter 17 presents a investment operations compared to $167 summary of the report's main findings and million that was expended on executing non- recommendations. Figure 14.4: Investment Operations Dominate IFC IC Activities in Terms of US Dollars All IFC investment (approvals) and non-investment (TAAS) IFC TAAS by facility--IC only IC activities (US$167 millions) (US$32.4 billions) Social sectors Transportation $458 m Finance & $1,745 m insurance $8,879 m SME Dept Information $4 m $2,018 m PSAS IFC TAAS $13 m Utilities IC only $2,699 m $167 m PEP FIAS $90 m $33 m PDFs $3 m Investment Dept General Mfg & through Others TATF $16,448 m $24 m Note: Other sectors include oil, gas, and mining; chemicals; food and beverages; and agriculture. 1 6 9 15 IFC's Investment Operations Show Wide Impacts on Investment Climate Methodology and Limitations I EG-IFC's evaluation drew from IFC's investment and non-investment op- erations over the fiscal 1993­2002 period. For investment operations, the study (i) considered IFC investment approvals and commitments data and information through the formal review period and including fiscal 2003 and (ii) drew from the 318 XPSRs prepared from calendar 1998 to 2002 for projects ran- domly selected from the fiscal 1993 to 1997 disbursed approvals population. IEG-IFC focused on the PSD impact (and its IFC posed three key questions to the project components), an indicator in IFC's XPSR companies it visited: (i) What factors in invest- evaluation framework, as a proxy of a project's ment climate have affected the project's contribution to improving investment climate. operations? (ii) What IC obstacles has the Annex III.B has the detailed description of XPSR project encountered? (iii) What have the indicators and methodology, and Annex III.C project's contributions been to improving the contains details regarding the PSD impact investment climate? The study does not attempt indicator. There is significant convergence to show causality between IFC activities and between the XPSR PSD impact indicator and the changes in the overall investment climate, as various components of investment climate, i.e., represented by a broad indicator or measure of positive PSD component impacts contribute to investment climate.39 Many factors contribute overall investment climate improvements. To to overall IC improvement, e.g., rule of law, supplement the XPSR findings, IEG-IFC visited corruption, property rights, trade policies, etc., mature investment projects in five countries: and many of these factors are beyond the scope Egypt, Mozambique, Peru, Romania, and of IFC's IC activities or ability to influence. With Vietnam. IEG-IFC selected these five country more complete data on the relationship field visits based on, among other factors, between IFC investment operation impacts and volume of IFC's operations, IEG-Bank's case investment climate, one might be able to make study selection,38 and regional diversity. IEG- stronger claims. 1 7 1 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E How IFC's Investment Operations Address tion), financial markets, and social sectors (see Investment Climates figure 15.1). These sectors are a strategic priority IFC helps improve investment climates through for IFC because of their potentially high impacts its non-investment operations and as a in promoting sustainable PSD and economic consequence of its investment operations. In growth. Yet the strategy to pursue investments in investment operations, IFC supports commer- these sectors is not explicitly motivated by the cially viable projects with expected developmen- specific objective of improving investment tal impacts and where there is a substantive IFC climate per se. Instead, improving investment role. Impact on PSD is one of the key develop- climate is a byproduct of a broader strategic ment impacts of IFC's projects that is systemati- investment objective of maximizing IFC's contri- cally addressed both at appraisal and evaluation. bution to development by investing in sectors As mentioned above, this study uses the (and countries) where it can achieve greater project's rated impacts on PSD as a proxy indica- economic impacts and high multiplier effects. tor for it impacts on investment climate. While IFC's high-impact strategic sectors, particu- PSD impact is not synonymous with IC impact, larly infrastructure and financial markets, many of the PSD impact indicators tracked by comprise critical elements of investment IFC contribute to improving investment climate, climate. High-quality, widely available, and albeit in varying degrees. reasonably priced infrastructure services are IFC approved US$36.2 billion investments in important parts of a good investment climate. 2,945 projects for its own account over the fiscal Private sector projects in infrastructure such as 1993­2003 period. Half of the volume (US$18.6 those supported by IFC are designed to meet billion) was in IFC's high-impact strategic sectors rising demand or relieve supply shortages. (as defined currently and since the strategic Access to finance at reasonable cost is likewise sector focus began in 1998), comprising crucial to having a favorable investment climate. infrastructure (utilities, transport, and informa- IFC's projects in financial markets are by design Figure 15.1: Increasing IFC's Investment Approvals in High-Impact Strategic Sectors 4.5 4.0 3.5 3.0 billions 2.5 US$ 2.0 1.5 Approvals, 1.0 0.5 0.0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Others Financial markets Utilities Information Transportation Social sectors 1 7 2 I F C ' S I N V E S T M E N T O P E R AT I O N S S H O W W I D E I M PA C T S O N I N V E S T M E N T C L I M AT E aimed at increasing access to finance by committed in strategic sectors in fiscal 1993­98, introducing new financial services or expanding rising to nearly US$1.2 billion in fiscal existing availability to meet rising demand. 1999­2003. Investment commitments in other Reflecting the Beyond 2000 strategic shift that sectors shrank both as a proportion of all IFC took place starting in 1998, the migration of commitments and in absolute terms. In line with investment projects into the high-impact strate- Management's strategic goal of delivering gic sectors is also shown in figures 15.2 and 15.3. enhanced development impact per investment The percentage of commitments in strategic dollar committed, IEG-IFC's synthesis analysis sectors increased from 37 percent between fiscal of XPSR findings, presented in the next section 1993 and 1998, to 54 percent of all investments of this chapter, finds that high-impact strategic committed between fiscal 1999 and 2003. In sector investments have had better than average terms of annual averages, US$622 million was development and investment outcomes. Figure 15.2: Distribution of IFC's US$ Investment Commitments: Strategic Sectors vs. Other Sectors (% of all commitments) 100 90 37 54 80 70 Strategic 60 Strategic 50 40 Percent 30 63 46 20 10 Other Other 0 Fiscal 1993­98 approvals Fiscal 1999­2003 approvals Note: Strategic = Social, financial (excluding CIVs), and infrastructure sectors. Figure 15.3: Distribution of IFC's US$ Investment Commitments: Strategic Sectors vs. Other Sectors (US$m annual average) 2,200 $2,129 2,000 1,800 $1,674 $1,147 1,600 1,400 $622 1,200 Strategic Strategic million 1,000 800 US$ 600 $1,052 $982 400 200 Other Other 0 Fiscal 1993­98 approvals Fiscal 1999­2003 approvals Note: Strategic = Social, financial (excluding CIVs), and infrastructure sectors. 1 7 3 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Similarly, reflecting the frontier market focus over time. In terms of annual average invest- initiated by IFC Management in Beyond 2000 in ment commitments over the two periods 1998, the share of IFC's investment approvals considered in figures 15.5 and 15.6, the annual for projects in poor investment climate average increased in absolute terms from US$1 countries40 increased from about US$ 1.1 billion billion between fiscal 1993 and 1998 to US$1.2 (52 percent of total) in fiscal 1993 to about US$ billion between fiscal 1999 and 2003. Yet the 2.3 billion (57 percent) in fiscal 2003 (figure share of projects committed in poor IC 15.4), even though the number of countries in countries declined somewhat from 61 percent the poor-IC country group has been shrinking to 57 percent between the two periods. Figure 15.4: IFC's Investment Approvals in Poor IC Countries Have Grown Net IFC approvals fiscal 1993­2003 4.5 4.0 3.5 3.0 2.5 billions 2.0 US$ 1.5 1.0 0.5 0.0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Good IC Not rated Poor IC Figure 15.5: Distribution of IFC's Investment Commitments: Good vs. Poor Investment Climatea Unrated Countriesb (% of all commitments) 4 Unrated 100 1 Unrated 90 80 57 61 70 60 50 Percent 40 42 30 35 20 10 0 Fiscal 1993­98 Fiscal 1999­2003 a. Good IC countries are countries with an HFO/WSJ rating of 3 and below; poor IC countries are countries with an HFO/WSJ rating of greater than 3. b. 28 countries were not rated by HFO/WSJ during the fiscal 1993­98 period and 11 countries were not rated during the fiscal 1999­2003 period. 1 7 4 I F C ' S I N V E S T M E N T O P E R AT I O N S S H O W W I D E I M PA C T S O N I N V E S T M E N T C L I M AT E Figure 15.6: Distribution of IFC's Investment Commitments: Good vs. Poor Investment Climatea Unrated Countriesb (US$m annual average) 2,400 2,200 $22 Unrated 2,000 1,800 $76 1,600 $1,222 1,400 $1,018 Poor IC (73) million 1,200 countries Poor IC 1,000 (69) US$ 800 countries $885 600 Good IC 400 $580 Good IC countries (37) 200 countries (29) 0 Fiscal 1993­98 Fiscal 1999­2003 a. Good IC countries are countries with an HFO/WSJ rating of 3 and below; poor IC countries are countries with an HFO/WSJ rating of greater than 3. b. 28 countries were not rated by HFO/WSJ during the fiscal 1993­98 period and 11 countries were not rated during the fiscal 1999­2003 period. The challenge of finding viable business observed using the HFO/WSJ. For example, of opportunities in frontier and poor IC countries the 48 IFC client countries rated by HFO/WSJ as is considerable, given the shrinking population poor investment climate (i.e., score of above 3) of frontier countries with diminishing GDP and in 1995, only 38 remained in the poor IC group FDI absorptive capacities. IEG-IFC's 2003 review by 2003, with 13 having "graduated" to good IC of evaluation findings illustrates the shrinking and three countries falling from good to poor population of high-risk countries as defined in investment climate. IFC's frontier strategy (IICCR score of 30 or less) Relative GDP and FDI concentrations in high- (IEG-IMF 2004). Similarly, while poor IC risk countries are a proxy for such countries' countries as defined in this paper are not fully share of investment project opportunities. synonymous with frontier countries as defined Figures 15.7 and 15.8 show that in high-risk in IFC's strategy, a similar shrinking trend is countries in both periods IFC's approvals have Figure 15.7: IFC Approvals Concentration in High-Risk Countriesa Has Declined Less than FDI and GDP Concentrations 40 35 30.4 30 26.7 25 20.7 20 Percent 14.5 15 12.1 10 7.9 5 0 IFC approvals Gross domestic Net foreign direct (US$) product (US$) investment (US$) 1993/1998 1999/2003 a. Countries with IICCR of 0­30. 1 7 5 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Figure 15.8: IFC Approvals Are Significantly More Concentrated in High-Risk Countriesa than FDI and GDP Are, and the Gap Has Widened 5.00 4.50 4.00 b 3.4 3.50 ratios 3.00 2.5 2.50 1.8 2.00 1.5 1.50 1.00 Concentration 0.50 0.00 Percent of IFC approvals/ Percent of IFC approvals/ percent of GDP percent of Net FDI 1993/1998 1999/2003 a. Countries with IICCR of 0­30. b. Concentration ratios: (1) GDP concentration ratio indicates the relative percentage of IFC approvals in high-risk countries over their GDP, and (2) Net FDI concentration ratio indicates the relative percentage of IFC approvals in high-risk countries over net FDI. been much more concentrated than either GDP firms, driving efficiency both directly and by fa- or net FDI and IFC's concentration ratio in the cilitating new entry into product markets. And most recent period grew to almost twice that of they create opportunities for firms and house- GDP and 3.5 times that of FDI. These data are holds to manage risks. As a result, financial evidence of IFC's frontier strategy pursuit in market development leads to faster growth in channeling support to countries with poor productivity and output. But inadequacies can investment climate, where it can have the create barriers to opportunities and increase greatest impact. costs for firms. These inadequacies are signif- icant in developing countries (figure 15.9). High-Impact Strategic Sector · Good infrastructure connects firms to their Investments Have the Strongest Direct customers and suppliers and helps them take Impacts on Investment Climate advantage of modern production techniques. IFC investments in strategic sectors contribute Firms with access to modern telecommuni- most significantly and directly to improving cations, reliable electricity supply, and effi- investment climates. These projects directly cient transport links stand out from firms address the major drivers of making investment without them. They invest more, and their in- climates conducive to promoting private invest- vestments are more productive. Yet in most de- ments. As discussed in the World Development veloping countries, firms must cope with Report 2005, A Better Investment Climate for infrastructure that fails to meet their needs. Everyone:41 The problems expressed by firms vary by re- gion, with Africa and South Asia having poorer · Well-functioning financial markets link infrastructure than Eastern and Central Eu- firms to lenders and investors willing to fund rope (figure 15.9). their ventures and share some of the risks. · The availability of skilled and healthy They reduce firms' reliance on internally gen- workers shapes the decisions of firms to erated cash flows and allow cash-strapped en- adopt new technologies, expand, or enter new trepreneurs to grow their firms, giving them markets. Many firms in developing countries access to external equity and debt. Well-func- rate skill shortages as a major constraint on tioning financial markets impose discipline on their operations (figure 15.10). 1 7 6 I F C ' S I N V E S T M E N T O P E R AT I O N S S H O W W I D E I M PA C T S O N I N V E S T M E N T C L I M AT E Figure 15.9: The Inadequacies of Finance and Infrastructure Are Severe for Many Developing Countries 70 60 a as 50 rmsfi by constraint 40 rated 30 severe or 20 major Percentage 10 0 Africa East Asia Europe and Latin America Middle East South Asia and Pacific Central Asia and the and Caribbean North Africa Finance Infrastructure Source: WDR 2005 and investment climate surveys. Figure 15.10: In Many Countries Firms Rate Skill Shortages as Major or Severe Constraints Skills and education of available workers 60 a 50 as rmsfi 40 by constraint 30 rated severe 20 or major 10 Percentage 0 Zambia China Estonia Brazil Algeria Bangladesh Source: WDR 2005 and investment climate surveys. Several studies, business surveys, and litera- IFC's projects provided a quick solution to ture reviews42 show that the quality and quantity chronic supply shortages, ending electricity- of infrastructure is an important consideration related business interruptions and restoring a for investment decisions. IFC's projects in healthy supply-demand balance. In telecoms, strategic sectors bridge the infrastructure gap IFC's projects provide businesses with that the public sector and existing private partic- communication infrastructure, allowing them to ipants are unable to fill. In power, a number of access new product and input markets. IFC's 1 7 7 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E road, port and transport projects provide making IFC management's decision to focus on improved logistical infrastructure, lowering the these high-impact sectors justifiable from a cost of shipping goods to end users. In financial development impact perspective. markets, IFC's projects help increase access to finance and introduce new financial instruments Projects with Demonstration Effects in the sector. Investments in health and Have Indirect Impacts education enhance the skills and quality of local Investment climate affects and is affected by workers. business activities. Investors take on risks that In addition to making significant direct have the potential to generate a host of benefits contributions to key aspects of investment to the economy and society, especially pioneer- climates, IFC's investment projects in strategic ing investments. Still, tracking the impacts of a sectors have yielded significantly better develop- private sector project on investment climate is ment and investment outcomes (box 15.1), extremely difficult. Box 15.1: Strategic Sector Investments Have Yielded Significantly Better Outcomes Overall, the evaluated operations approved between 1993 and (square 1 on left hand box). Similarly, only 23 percent of strate- 1997 in today's strategic sectors have yielded significantly bet- gic sector operations yielded low outcomes in both dimensions, ter DOs and IOs than operations in other sectors. As shown in so-called lose-lose outcomes (square 4 of right hand box), com- the figure below, 50 percent of strategic sector operations eval- pared to a higher lose-lose outcome of other operations. These uated over the review period achieved win-win outcomes, i.e., differences are significant at the 0.06 level, or 94 percent. These good development outcomes as well as good investment results results are consistent with findings in IEG-IFC's 2003 review of for IFC (square 1 on right hand box). This compares to only 38 its evaluation findings for evaluated operations approved be- percent of all other operations achieving win-win outcomes tween 1995 and 1997. High-impact strategic sectors have achieved significantly better development and investment outcomes (318 evaluated projects approved in 1993­97) HIGH HIGH 1 17% 2 38% 18% 2 1 50% High development High development High development High development outcome outcome outcome outcome outcome Low return High return outcome Low return High return 4 3 4 3 36% 8% 23% 9% Development Low development Low development Development Low development Low development outcome outcome outcome outcome LOW Low return High return LOW Low return High return LOW HIGH LOW HIGH Investment outcome Investment outcome Non-strategic sectors Strategic sectors (190 other sectors) (3 social, 89 financial [excluding CIVs], and 36 infrastructure sectors) 1 7 8 I F C ' S I N V E S T M E N T O P E R AT I O N S S H O W W I D E I M PA C T S O N I N V E S T M E N T C L I M AT E In IFC, an indirect indicator of its investment linkages, e.g., as represented by a broad indica- projects' impacts on investment climate is the tor or measure of investment climate. In the PSD impact rating included in IEG-IFC's project absence of better data to capture the relation- evaluation (XPSR) system. The PSD rating ship between PSD impact and IC improvements, considers a project's impacts beyond the project only associative assertions can be made. company. Like all DO indicators, PSD is rated on Overall, IFC achieved PSD impact ratings of a with vs. without project basis. IFC applies an satisfactory or better in 73 percent of its additionality test in deciding whether to finance evaluated investment operations. Regionally, a project--e.g., if a project is unlikely to go Latin America and Caribbean Region performed ahead on sound terms without IFC involve- best, with 84 percent of its projects' PSD impacts ment--which enhances the likelihood that rated satisfactory or better. The Sub-Saharan these projects will achieve good PSD ratings. A Africa Region and Southern Europe and Central project earns a rating of satisfactory or better if it Asia Region achieved levels comparable to the has demonstrable positive impacts on PSD, less IFC average (75 percent and 73 percent, respec- than satisfactory if there are inconsequential or tively), and Central and Eastern Europe Region negative impacts on PSD. Please see Annex III.C and East Asia Pacific Region achieved slightly for a complete description of a project's PSD lower satisfactory rates of 68 percent and 70 impacts and the rating benchmark. percent, respectively. The Middle East and North For the purpose of relating it to the invest- Africa and South Asia Regions had lower than ment climate, this study classifies the average rates (both 61 percent). components of the PSD impact indicator into Project size appears not to have influenced two main IC impact categories: public the ability of a project to have positive PSD sector­driven components, and private sector­ impacts. However, the nature and depth of driven components. The subindicators under impacts could differ. A leasing operation may be each component are shown in table 15.1. small in terms of project cost but it provides PSD is the highest rated DO subindicator access to finance, mostly to SMEs, an among the 318 projects from the 1993­97 underserved but important business segment in approvals population.43 Of these projects, 233 many developing countries. On the other hand, (73 percent) had positive PSD impacts, reflect- a large power generation project has a wide ing the many positive externalities associated reach and directly contributes to improving with sustainable private investments. Yet despite infrastructure, likewise an important factor in the high level of PSD impact which may investment climate. contribute to investment climate at the micro level, it is difficult to show causality between IFC Demonstration Effects Dominate PSD Impacts activities and changes in the overall investment Demonstration effect is the most common climate besides demonstration effects or contributor of positive PSD impacts; 72 percent Table 15.1: Breakdown of PSD Impact (XPSR) into Various IC Components Public sector-driven Private sector-driven IC components IC components Physical and non-physical infrastructure Robust private sector Legal and regulatory Quality and quantity of physical infrastructure Demonstration effects/role model leading to follow- changes/policy reforms Domestic capital and financial markets on/similar projects infrastructure (including SME access to financing) Increased private ownership and company governance Labor force infrastructure--local management and quality employee skills through know-how and Competition technology transfer Upstream and downstream linkages 1 7 9 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E of 233 projects with satisfactory or better PSD Pioneering or first-of-a-kind projects by impacts served as a role model or led to related definition have strong demonstration effects. investments (see figure 15.11). This observation Projects can be the first in a newly created is supported by a logistic (logit) regression subsector such as in leasing or housing finance. analysis,44 which showed that a project is five For example, IFC financed the first company to times more likely to achieve an excellent PSD obtain a license after the enactment of a leasing impact rating (1 percent significance level) if it law in an Asian country. Following the early has a positive demonstration effect. success of this company, 10 other companies While demonstration effects can indeed be have established leasing operations in the significant for some projects, less important for country. others, and negative for some, one shortcoming Projects can also be the first private invest- of measuring this impact is linked to its qualita- ment in a newly opened sector such as tive nature. It is difficult to set up parameters a infrastructure. An early entrant mobile phone priori regarding any given project's potential company in a Latin America and the Caribbean demonstration effect, against which it can be Region country prompted other international measured later. For example, a project to invest operators to enter this market, leading to in the first hotel in a new tourism destination expanded coverage, service improvements, may be expected to have a demonstration effect increased reliability, and lower telephone tariffs. downstream as other hotels follow, but it would The successful structuring and implementation be too difficult to measure that expectation at of the first of five road privatizations in another project approval. Any rigorous assessment of Latin America and the Caribbean Region country demonstration effect would have to be played an important role in informing and conducted on an ex post basis. influencing other future road privatizations in Figure 15.11: Demonstration Effects Are the Most Common Indirect Impacts on Investment Climate (all 233 projects evaluated in XPSRs from 1998 to 2002) Demonstration effects Linkages Training Technology transfer/know-how impacts Competition PSD Local enterpreneurship Domestic capital/financial market positive Management skills of Physical infrastructure Legal framework Indicators Private ownership Governance Resource allocation/mobilization SMEs' access to financing 0 10 20 30 40 50 60 70 80 90 100 Frequency of occurrence (percent) 1 8 0 I F C ' S I N V E S T M E N T O P E R AT I O N S S H O W W I D E I M PA C T S O N I N V E S T M E N T C L I M AT E the country and became the model for road policy makers to pursue further reforms in other concession privatizations. The strong perform- parts of the system that the private sector was ance of the first independent power producer counting on when they made the decision to (IPP) in another Latin America and the invest. Because of stalled reforms, the transmis- Caribbean country attracted 13 other IPPs in the sion and distribution subsectors were unable to country. meet the needs of the expanded generation Projects can be pioneering in terms of capacity. As a result, power plants were not bringing new financiers to the country or to a operated at their optimal dispatch levels even as sector, or in terms of debt or equity structure. A other parts of the country continued to suffer financial markets project in a Middle East and from supply shortages. North Africa country played a major catalytic role Failing projects do not serve as positive in attracting long-term foreign funding to this demonstration effects, and this can result (but country. The success of this project stimulated not always) in less-than-satisfactory PSD ratings. eight other local banks to introduce similar For example, IFC financed a business concept-- financial products to provide financing to SMEs. rice milling--that was not sustainable in an A project in Latin America and the Caribbean African country in the wake of subsequent trade demonstrated that limited recourse debt financ- liberalization. The failure of the project, ing could be arranged for a large privately especially within such a short time after sponsored infrastructure project on the basis of implementation, discouraged similar potential strong local off-take arrangements and strong foreign investments. sponsor support. The successful international Other factors driving positive PSD impacts financing of a social sector project in South Asia include the following: has aroused the interest of local commercial banks that previously considered education · Projects with downstream and upstream link- companies as not bankable. ages help create or expand a sustainable net- Demonstration effects are not limited to work of business infrastructure that the private pioneering projects. Investments in non- sector needs in day-to-day operations; 44 per- pioneering sectors can spur interest from cent of the projects with satisfactory or better existing and new players in the market or PSD impacts had strong business linkages. A country. In catalyzing a competitive response, a petrochemical project in Latin America and hotel project in Africa inspired other area hotels the Caribbean Region prompted the creation to refurbish, raising the standards of the tourism of 30 downstream companies and US$150 mil- infrastructure in the area. A financial markets lion in new investments. project in Middle East and North Africa Region · Projects that contribute toward the skills and led other banks to offer similar and more innova- knowledge of the local workforce can enhance tive products in the market. A general manufac- human capital, helping to improve the invest- turing project in Eastern Europe attracted ment climate; 44 percent of projects with sat- companies from the sponsors' home country to isfactory or better PSD impact provided set up operations in this transition country. transferable skills training, while 39 percent Strong demonstration effects can also have had transfer of know-how and 22 percent led unforeseeable negative consequences. In the to enhanced management skills. It is common electricity sector (IEG 2003), early success of for project companies to provide training to the pioneering power generation projects led to an employees who will do the job. However, some influx of private participants to the sector. On companies go beyond the necessary. An ex- the positive side, power shortages were resolved tractive industries project in Africa provided quickly and efficiently, leading to the stability of classroom and on-the-job training to nonem- the power infrastructure in the short to medium ployees to expand the pool of administrative term. However, in some cases, such success employees from whom the company could reduced the pressure on country leadership and draw from in the future. 1 8 1 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E · Projects that help build efficient and reliable Figure 15.12 shows a higher occurrence of the physical infrastructure can enhance invest- different PSD impact subindicators in IFC's ment climate; 21 percent of projects with pos- projects in countries with poor investment itive PSD impacts created physical infra- climate (based on HFO/WSJ rating of 3 or structure that is accessible to the public. While greater), most of which are also countries IFC most of these projects are in the infrastructure formally categorizes as frontier, i.e., high risk sector, there are also industrial projects that and low income. Significant demonstration include infrastructure components. A cement effects are more common in these countries, project in Eastern Europe upgraded the local both because IFC-financed projects tend to be port and modernized the road leading to this of relatively large investment scale and visibility port. As a result, the port provides cost- in these countries and because potential effective services to exporters and importers investors are alert to success stories, which do in that city. not necessarily come as often as they do in · Creating a transparent and predictable legal countries with better investment climates. framework is the job of the public sector. Significant project impacts on the development However, the private sector can play a role of human capital through training, transfer of through general public/private consultations, technology/know-how, and improvement of lobbying, negotiations for specific projects, management skills as well as financial and and demonstration effects of successful in- physical infrastructure impacts also occur to a vestments. The sponsors of a financial mar- greater extent in difficult countries. These kets project in the ECA region successfully suggest that IFC's strategy to tilt its efforts and lobbied the Central Bank to improve banking resources toward frontier countries has a direct regulations and introduce reforms. To pave positive effect in influencing investment climate. the way for the establishment of a financial markets project in Asia, the sponsors and IFC IFC Projects with Poor Business Performance arranged for technical assistance to draft the Are an Obstacle to Improving Investment regulations and supervisory framework for the Climate new subsector (leasing). A food and beverage Slightly more than a quarter of evaluated projects project in Central Asia was the first foreign in- from 1993 to 1997 had less-than-satisfactory PSD vestment in the country outside the extrac- impacts. A project with no sustainable positive or tive industries sector. This project triggered with adverse impacts on PSD is rated less than new legislation, including the reduction of no- satisfactory. Adverse impacts include some or all tary fees to international levels and introduc- of the following elements: negative demonstra- tion of international accounting standards. A tion effects due to poor business performance; pioneering telecom project in Latin America poor company reputation associated with a and the Caribbean was consulted by policy negative effect on private enterprises; project- makers on various telecom issues, which has induced or reintroduced restrictions on contributed to bringing the country's regula- competition (including protection, uneven tions in line with international standards. treatment of competitors, formation of a cartel, etc.), delays of reforms or entry by private Investment Projects with Positive PSD Impacts enterprises, introduction of laws and regulations Appear to Have a Greater Influence on worsening the investment climate, etc. Investment Climates in Countries with Difficult Poor business performance is a major Conditions obstacle to a project's potential for positive and While overall PSD success rates in different sustainable PSD impacts. Of the 84 projects with country conditions are virtually the same, less than satisfactory PSD impacts, 80 (95 projects with positive PSD impact appear to percent) had poor project business perform- have a more significant influence on investment ance. The projects that had negative PSD climate in countries with difficult conditions. impacts despite good operating results suffered 1 8 2 I F C ' S I N V E S T M E N T O P E R AT I O N S S H O W W I D E I M PA C T S O N I N V E S T M E N T C L I M AT E Figure 15.12: Projects with Positive PSD Impacts Have More Influence on Investment Climate When Country Conditions Are Difficult Impacts on investment climate in Impacts on investment climate in poor and good IC countries frontier and non-frontier countries Demo Effects Demo Effects Training Training Technology transfer/ Technology transfer/ know-how know-how Competition Competition Local entrepreneurship Local entrepreneurship Financial markets Financial markets development development Management skills Management skills Infrastructure Infrastructure Legal framework Legal framework Private ownership Private ownership 0 20 40 60 80 100 0 20 40 60 80 100 Frequency of successful PSD occurence Frequency of successful PSD occurence (percent) (percent) Poor Good Frontier Non-frontier from the failure of full privatizations and from prices that encouraged the formation of a cartel. sending the wrong signal that SME financing was A project in South Asia that failed due to sponsor not viable, given that the bank abandoned SME issues resulted in a negative perception of lending in favor of traditional borrowers. emerging joint ventures in the social sector. A Projects with negative impact on investment financial markets project in Eastern Europe climate included a cement company in South engaged in less than good-practice leasing Asia that contributed to excess supply in the operations, undermining the success of the domestic market. This led to unsustainably low project and the leasing sector in general. 1 8 3 16 IFC's Non-Investment Operations Have a Direct Impact on Investment Climates Methodology and Limitations T he study did not comprehensively evaluate non-investment IC activi- ties. Unlike investment operations, there is no existing robust evalua- tion database or comprehensive evaluation system for IFC's non-investment activities. For this reason, the evaluation of non-invest- IC TAAS operations for this study were ment operations is limited to 38 IC-related defined as those operations containing an mature operations45 in the five field-visit explicit component that advises the government countries. A logical framework-based evaluation on the legal and/or regulatory framework (e.g., template was used to rate IFC's IC activities on: privatization/concession law, sector regulations, (i) inputs and outputs--overall quality of TA etc.) or builds capacity of the regulator or assignment and its execution (relevance; clarity government agency above and beyond conduct- of objectives/targets; responsiveness to client ing the specific transaction. Hence, projects that needs; technical/financial competence; and advise on transactions only (sales or transfers to client acceptance of recommendations); (ii) the private sector) are not included. On the outcomes--implementation of recommenda- other hand, TA that aims to build the capacity of tions; and (iii) impacts--changes on the ground private sector groups to engage in dialogue with attributable to or consistent with the outcomes the government for policy advocacy to improve of TA and advisory work (see Annexes III.D and investment climates and/or educate groups of III.E for evaluation rating template and criteria). private investors on new legislation/policies or IEG-IFC sought the perspective of IFC clients, best practices in corporate governance and IFC staff, stakeholders from the private sector, accounting practices is included. IEG-IFC built a government agencies, and multilateral and database of all qualifying IC TAAS operations, bilateral donors (including Bank staff). IEG-IFC but given the inconsistent, poor quality of data made its own rating synthesis judgment based and information available, project costs on all the ratings received. presented in this report are not entirely reliable. 1 8 5 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E IEG-IFC has made some adjustments to improve between the public and private sectors and the data quality, but figures should nonetheless be openness to trade of developing economies" interpreted with these caveats in mind. (IFC 1993). The strategy for fiscal 1994 Given sample shortcomings (not randomly recognized that the "business environment for selected and small population), evaluation private investments in developing countries" findings are not representative of the overall was an important factor influencing IFC's ability non-investment IC activities in IFC and can only to deliver its investment program. A low level of offer quantitative and qualitative insights into emphasis continued up to the April 2000 IFC the non-investment operations in the countries Strategic Directions, which pointed out that visited. However, IEG-IFC complemented these "IFC is in a position to complement the Bank's findings by drawing from various evaluations, efforts to improve the enabling environment for surveys and assessments that have been done by the private sector, by bringing to bear--through TA provider units, such as investment depart- the country assistance strategy process--the key ments, FIAS, PEP and the Project Development lessons of its transaction experience" (IFC 2000, Facilities (PDFs). p. i). For joint IFC/Bank department work, IEG- Subsequent IFC strategies focused more on IFC took the lead in evaluating FIAS and SME IC activity. IFC first proposed "strengthening its department IC TAAS activities. FIAS, created by investment and advisory work in support of IFC in 1985, was evaluated by IEG-IFC in 1998, investment climate improvements in member and IEG-IFC has recently completed an evalua- countries" (IFC 2001, p. 1) in 2001, and then tion of the SME facilities. In line with the broad again in 2002, 2003, and 2004. In March 2002, division of labor as defined by the PSD strategy, IFC's Strategic Directions Paper acknowledged IEG-World Bank took the lead in identifying and the "relative scarcity of good investment assessing core IC-related activities undertaken opportunities in many frontier markets" and by the newly established joint Bank/IFC PSD stressed complementing investment work with Vice-Presidency, notably Investment Climate extensive TA to "support government efforts to Assessments (ICAs), investment climate develop SMEs, improve the investment climate, surveys, Doing Business, and various coordina- and undertake privatizations" (IFC 2002, p. 2). tion initiatives across the WBG by the joint Further, improvements in IC featured Investment Climate Department (CIC). prominently in the PSD Strategy Paper (April 2002), linked explicitly with creating an environ- Improving the Investment Climate ment of opportunity that can help provide poor Receives Increased Emphasis, people with a route out of poverty (World Bank but Not as a Strategic Priority 2002a). In a move that formally recognized the Having featured explicitly in IFC's 1956 Articles strategic importance of investment climate, the of Association, improving investment climate WBG announced in 2003 the creation of a new has also been recognized more recently as an joint Vice-Presidency responsible for WBG PSD important factor in IFC's pursuit of its strategic strategy and the IFC Chief Economist function. priorities. But has improving investment climate As part of this decision, the joint WBG CIC was achieved the same level of strategic importance created to standardize IC diagnostic tools, in IFC as the other two purpose activities, financ- including the development of surveys for cross- ing private sector enterprises and bringing country comparisons and monitoring invest- together investment opportunities? ment climate over time by country. This places a The IFC 1993 Business Plan and Budget major emphasis on systematizing and coordinat- Framework alluded to IC issues in assessing the ing investment climate work across the WBG. impacts of the macroeconomic environment on Yet despite the increased importance of IC IFC's investment activities: "A third important activities in recent years, improving investment influence of the economic environment is the climate has not been an explicit IFC strategic impact of structural changes in the balance priority in itself but a consequence of, and a 1 8 6 I F C ' S N O N - I N V E S T M E N T O P E R AT I O N S H AV E A D I R E C T I M PA C T O N I N V E S T M E N T C L I M AT E S means of achieving, IFC's strategic investment Mexico, Poland, Egypt, and Brazil. In fiscal 1998 priorities. IC TAAS has been an instrument used and 1999, 13 joint CASs were done each year, to achieve investment objectives in pursuit of followed by an annual average of 16 in subse- the frontier and SME strategies. quent years until present. Many of the Category A CASs contain jointly formulated private sec- IFC Emphasized Coordination with the World tor strategies (frequently attached as an annex Bank to Help Improve Investment Climates . . . to the CAS), while the less intensely collabo- IFC's overarching approach to investment climate rated Category B CASs focus more on identi- for the most part of the review period was to take fying areas for coordination and outline IFC's specific actions designed to improve coordination investment/TA strategy and work program in with the Bank, which was explicitly charged with broad, general terms. The split between Cat- "the leading role in establishing the enabling egory A and B CASs is roughly half and half. environment in countries with limited opportuni- · Joint World Bank-IFC Departments. A joint ties for IFC financing" (World Bank 1999). As Bank-IFC Director for East Asia was given the articulated in the various strategy documents, mandate for all PSD activities in 2000. Putting IFC's role was to complement the Bank's efforts together the regional staff working on PSD to improve investment climate through the CAS. and investment operations was thought to In this way, IFC was to inform the direction of the lead to better coordination. However, this pilot country dialogue in order to enhance the quality program was overtaken by a reorganization in of economic reforms supported by the Bank IFC in fiscal 2002 that redeployed most in- Group. IFC has first-hand knowledge of current vestment staff to sector specialist departments issues in private sector investments and direct based in headquarters, and the program was experience and expertise in sector-specific issues abandoned largely because the Bank and IFC that can inform the WBG's policy advice. incentives were not consistent. Also, in 2000, Conversely, IFC's ability to finance viable projects a joint WBG PSA Services Group was created, would benefit from the Bank's successful efforts combining the central PSD function from the to help improve the quality of the investment Bank, FIAS, and IFC's former Corporate Fi- climate at the country level. IFC's actions to nancial Services (subsequently called PSAPT)-- improve coordination with the Bank on IC-related which provides advisory services for themes emphasized increased joint work--either privatization transactions and corporate re- through the PSA or CAS level, or through joint structurings. In 2003, a joint WBG PSD Vice departments that would improve coordination Presidency was formed. At the same time, the and exploit synergies. Major attempts to address name of PSAS changed to CIC, and the IFC pri- IC issues as noted in past strategy documents vatization transaction group was taken out of include the following: the department and took over the PSAS name. CIC has developed tools to diagnose, bench- · Joint World Bank-IFC PSAs. In the 1993 mark, and monitor investment climates and has Progress Report on PSD, 19 joint PSAs were ini- become a focal point for coordination between tiated. In IFC's 1994 three-year business plan, the Bank and IFC on IC matters. Box 16.1 pres- more than 25 countries were earmarked for ents a brief overview of these new tools and co- joint PSAs. The 1996 three-year plan pro- ordination efforts, which are discussed in more grammed and approved a further increase in detail in Chapter 5. In addition, a joint the level of joint work with the Bank on PSAs, IFC/World Bank SME Department was estab- CASs, and sector work. Thereafter, emphasis lished in 2000, and its mandate includes ad- on joint PSAs subsided as the preparation of dressing IC issues relating to SMEs. In 2003, the joint CASs became more central to Bank/IFC SME facilities (TA support) were taken out of coordination from 1997 onward. the joint SME department and transferred to · Joint World Bank-IFC CAS. The first series IFC's regional investment departments with a of joint CASs was executed in fiscal 1997 in dotted line to the SME department. Finally, 1 8 7 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Box 16.1: New PSD Vice Presidency Oversees Implementation of PSD Strategy and Coordinates IC Work Across the WBG New IC tools include: Newly introduced coordination mechanisms include, among others: · ICAs designed to systematically analyze conditions for private investment and enterprise growth. Underpinning all ICAs is · Regular Country Review meetings, cochaired by the WBG a standard core investment climate survey instrument (the Pro- PSD Vice President, Bank Country Director, and IFC Regional ductivity and the Investment Climate Survey, or PICS), which Director, in which Bank Group staff, including MIGA, dis- allows the comparison of existing conditions and the bench- cuss strategies to address the investment climate and ways marking of conditions across countries to monitor changes to improve coordination in implementing strategies across the over time. The ICA work program planned for 12 reports to be WBG. completed by end of fiscal 2004, starting with IDA countries. · PSD Regional Training, a new systematic program of knowl- To date, eight have been posted on the ICA Web site. edge development and training for WBG staff aimed at build- · The Doing Business Project, investigating regulations that ing capacity to better design and implement IC operations. enhance business activity and those that constrain it. Quan- The program includes three critical steps for the WBG to help titative indicators on business regulations and their enforce- governments improve investment climate: diagnosis, solution ment are being gathered that will allow comparisons across design, and implementation process. Training is based on pro- more than 130 countries and over time. The indicators are viding operations staff with tools based on best practice, in- based on assessments of laws and regulations, with input cluding policy reform management strategies. from and verification by local experts. The first report, Doing · Vice President Outreach via field visits and monthly confer- Business in 2004: Understanding Regulation, focuses on start- ence calls linking the SME facilities with relevant WBG staff ing a business, hiring and firing workers, enforcing contracts, to discuss country or regional issues. getting credit, and closing a business. Doing Business in 2005 · PSD Forum, a flagship learning event for WBG staff world- discussed three topics: registering property, dealing with gov- wide who are working on PSD issues. ernment licenses and inspections, and protecting investors. Joint Bank/IFC Global Product Groups were IBRD/IDA shall focus on investment climate created in 2001 and remain in place. and related institution building, improve- · Other WBG Coordination. An IFC manager ments of governance, legal and regulatory joined the World Bank's PSD Sector Board in systems, financial sector policies, and public 1996, and participation continues. MIGA/IMS financing. IFC shall pursue demonstration and FIAS developed a new protocol in 2002 that projects that promote the credibility of entails systematic exchange of project infor- government policies, provide additional mation with a view to conducting joint projects financial services in local markets and in appropriate areas. The FIAS/MIGA protocol provide political risk protection to co- is currently being updated. financiers. Its strategy is to deploy its instru- ments such that they support relevant The division of labor between the Bank and institution building, particularly in the IFC with respect to the IC agenda is described financial sector and for small and medium differently in recent documents. Both the Bank enterprises. and IFC indicate that they provide advice for policy reform, but the PSD strategy sees IFC as According to the April 12, 2001, IFC Strategic focusing on demonstration projects and institu- Directions Paper: tion building rather than on policy reform. According to the April 2002 WBG PSD Strategy: IFC is to promote and support TA and 1 8 8 I F C ' S N O N - I N V E S T M E N T O P E R AT I O N S H AV E A D I R E C T I M PA C T O N I N V E S T M E N T C L I M AT E S advisory activities to improve investment · Corporate governance. IFC established a climate, including appropriate institu- corporate governance program in 2001. Cen- tional and policy reforms. tral to IFC's mission to promote sustainable pri- vate sector investment in developing countries, Subsequent Strategic Directions Papers from the objective of this work is to add value to 2002 to 2004 also proposed strengthening IFC's clients (e.g., enhance access to capital) and investment and advisory work in support of help IFC manage risks. investment climate improvements in member countries as part of its focus on frontier markets IFC addresses investment climate through and SMEs. IFC's Strategy for Africa (August 2003) the advisory and TA activities of its investment stresses increasing efforts to improve the invest- departments (both directly and with support ment climate, including TAAS to governments from donor funds via Technical Assistance Trust on IC issues, closer coordination with the Bank Funds (TATF), PEP, and SME facilities) and non- and activities to strengthen private sector investment departments (FIAS, SME depart- dialogue with government regarding policy and ment, and Private sector advisory services regulatory reform. Moreover, new SME facilities [PSAS]). For this study, IEG-IFC compiled a created post-2002 promote business environ- database of TA and advisory operations executed ment enabling activity--including advisory between fiscal 1992 and 2002 that have (or services to governments to improve investment contain at least one component with) an climates--as an important pillar of these facili- objective of improving investment climate. ties' strategies and business plans. Depending on the nature of the operation, IEG- IFC assigned them to one or more of three categories: Category 1--assistance on broad IC . . . And Engaged Directly in Providing issues; Category 2--sector-specific assistance; Investment Climate Policy Advice and Category 3--capacity building. IEG-IFC IFC has been increasingly engaged in the excluded direct assistance to individual firms in provision of technical assistance and advisory the IC database.46 Table 16.1 provides examples services, enabling it to play a "highly focused of IC service products and highlights the major role in key areas, such as privatization and providers of these services from among the promotion of FDI as well as in helping govern- different departments and groups within IFC. ments establish the enabling framework for The predominant counterpart client for IFC's activities such as leasing and stock exchanges" IC TA is government, whose involvement is key (IFC 2000, p. i). Specific actions outlined in to changing the policy and institutional various strategy documents to strengthen the framework. IEG-IFC estimates that 70 percent of provision of these selective services include the all IC TAAS operations involved policy, legal or following: regulatory advice to government (Categories 1 and 2), and an additional 24 percent involved · Donor-funded TA. IFC has increasingly stand-alone capacity building of government tapped Technical Assistance Trust Funds, PEP, agencies.47 Activities that build the private and other donor-funded facilities to finance sector's capacity to engage in constructive advisory services aimed at improving invest- policy dialogue with the government are also ment climate, especially for financial markets included in IEG-IFC's IC database; however, subsectors, including leasing, housing finance, support to private sector groups represents only and stock exchanges. 6 percent of operations. · FIAS. The 1993 and 1994 three-year plans pro- posed expanding FIAS activities. Endorsement IFC's IC TAAS Accounts for Nearly 40 Percent of continuing the FIAS program was also ar- of all TAAS, and Has Been Growing ticulated in business plans for other years in the IC TAAS within total IFC TAAS. Over the period review period. fiscal 1993­2002, IFC conducted some 655 IC TA 1 8 9 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Table 16.1: IC Non-Investment TAAS: Defining Characteristics Category Description TA providera 1. Assistance on broad 1. Assessment of overall investment climate FIAS, SME department, IFC regional departments, IC issues (diagnostics of policy and/or regulatory framework, including PEP administrative barriers, enterprise surveys, etc.) 2. Sector-specific 2. Advice on specific legislation or sector policy/ IFC regional departments, including PEP and SME facili- assistance regulations (sector assessments of constraints, ties; Global Financial Markets (and former Central Capital policy framework, privatization advice, and Markets), industry departments (e.g. Infrastructure), FIAS, assistance on drafting/amending laws) PSAS (formerly CFS and PSAPT), SME Department 3. Capacity building 3. Capacity/institution building aimed at indepen- IFC Global Financial Markets Group (e.g., corporate gover- dent sector-specific regulators (to execute mandates nance); IFC regional departments, including PEP and SME effectively), government agencies (to implement facilities; FIAS; SME department; PSAS reforms or apply new laws), and private sector groups (to educate the business community on the oppor- tunities and constraints arising from policy changes, new legislation, or best practice,b and to develop sustainable policy advocacy mechanisms with policy makers)c a. TA provider refers to departments and units that develop and execute advisory assignments. For the purposes of this study, we consider TATF as a funding vehicle that assists in se- curing project funding through facilitation and approval. b. Examples include workshops and training programs to introduce the broader domestic private sector (not just IFC clients) to concepts contained in new laws that they may not be fa- miliar with, such as leasing (Ukraine/Russia, PEP), secured finance (Albania, SME/SEED), or international best practice standards in business practices, such as corporate governance (e.g., Brazil) and international accounting standards to groups of firms. c. The study recognizes that the same or similar assistance may have been given at the firm level instead of wholesale at the business association level. However, because of data con- straints, the study excludes firm-level assistance. With respect to the type of assistance, the study considers only the programs that contain direct and significant policy advocacy com- ponents. operations for a total cost of $167 million, or 38 for a total of $10 million; this increased to 92 percent of IFC's total TA volume, roughly 40 projects totaling $16 million between 1998 and percent in terms of number of operations (see 2002. figure 16.1).48 PEP, IFC's donor-supported TA TATF-funded IC TAAS activity grew sharply program in the former Soviet Union, accounted from 1997, which reflects IFC's strategy of for about half of the total volume in dollar terms focusing on high-impact strategic sectors and of IFC's IC technical assistance program. frontier markets, where up-front TA is frequently required. From 2000, modest increases were Growth in IC TAAS over the review period. The attributable to SME department and IC TAAS number of IC TAAS operations grew significantly operations by the SME facilities. Some of this (figure 16.2), particularly after 1997, and the growth was countered by an apparent decline in volume varied over the past decade (see figures TATF; however, TATF financing supported 16.3 and 16.4). High IC TAAS volume in the early roughly half of the IC TAAS operations done by 1990s was largely attributable to the PEP the SME department, and the figures presented program, which had several very large IC TA here are adjusted for this overlap.49 The FIAS projects in support of privatization and land program expanded steadily over the period reforms. Excluding two large land reform from roughly $2.5 million per annum to deliver projects done by PEP in 1993 and 1996 (one for 30 IC projects in 1993, to just under $5 million nearly $28 million in Russia and another in p.a. to deliver about 50 projects in 2002. While Ukraine for about $11 million), the annual the FIAS program accounted for roughly the average between 1993 and 1997 was 40 projects same volume spent on IC TAAS as financed 1 9 0 I F C ' S N O N - I N V E S T M E N T O P E R AT I O N S H AV E A D I R E C T I M PA C T O N I N V E S T M E N T C L I M AT E S Figure 16.1: The Number of IC Operations Is Increasing within Total Non-Investment Operations 250 200 150 operations of 100 Number 50 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Total number IC number Figure 16.2: FIAS Projects Represent the Bulk of IC TAAS Operations by Number Number of IC TAAS operations 120 100 80 Non-investment departments 60 40 20 Investment departments 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 PSAS SME department FIAS PDFs Investment department PEP through TATF Note: PSAS = private sector advisory services; SME = small and medium-size enterprises; FIAS = foreign investment advisory services; PDF = project development facility; TATF = Tech- nical Assistance Trust Fund; PEP = private enterprise partnership. 1 9 1 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Figure 16.3: Volume Varied over Time with PEP's Large Project Size Dominating IC TAAS by volume (US$ millions) 50 45 40 35 30 25 20 Non-investment 15 departments 10 Investment 5 departments 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 PSAS SME department FIAS PDFs Investment department PEP through TATF Note: PSAS = private sector advisory services; SME = small and medium-size enterprises; FIAS = foreign investment advisory services; PDF = project development facility; TATF = Tech- nical Assistance Trust Fund; PEP = private enterprise partnership. Figure 16.4: Excluding PEP Volume Shows Upward Trend IC TAAS by volume excluding PEP (US$ millions) 14 12 10 Non-investment departments 8 6 4 2 Investment departments 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 PSAS SME department FIAS PDFs Investment department through TATF Note: PSAS = private sector advisory services; SME = small and medium-size enterprises; FIAS = foreign investment advisory services; PDF = project development facility; TATF = Tech- nical Assistance Trust Fund; PEP = private enterprise partnership. 1 9 2 I F C ' S N O N - I N V E S T M E N T O P E R AT I O N S H AV E A D I R E C T I M PA C T O N I N V E S T M E N T C L I M AT E S through TATF (cumulating $33.5 million for the that only a fraction of this amount supported IC former and $35.6 million for the latter), FIAS TAAS, as not all PSAS projects contained IC completed the greatest number of projects components, and the projects that did would (387) among all providing units over the review have had only a portion explicitly focusing on period. This compares to an estimated 211 IC improving legal and regulatory environment.52 TAAS operations financed through TATF and 23 Donor funding for IFC's TA work involves a financed through PEP over the review period. balance between IFC's objectives and the Annex III.F contains a more complete donors' objectives. Inevitably, this imposes some description of aggregate IC TAAS (number of limitations on the work that IFC can undertake operations and volume in US$) by category, under a given mechanism. Some donors require sector, region, and frontier-country focus. Box that IFC hire consultants who are nationals of the 16.2 summarizes some of the main aspects of IC donor country (e.g., TATF). Other donors TAAS contained in that Annex. Given the size support regional facilities where the funding is differences and varied approaches to structur- untied with regard to the consultants' nationali- ing and executing IC TAAS across programs and ties, but can only be used in a defined geograph- providing units, it is difficult to make compara- ical area (e.g., the PDFs and the PEP program). tive inferences on a global basis, hence each TA The same is the case for thematic trust fund facili- providing unit is discussed separately in that ties (e.g., business enabling environment [BEE] Annex. The Annex provides descriptive and FIAS). IFC's IC work has been affected by highlights of IC TAAS by investment depart- these limitations, just as is the case with other ments (through TATF, PEP, and SME facilities) kinds of TAAS activities. At the same time, and non-investment departments (FIAS, PSAS, although the agreements between the donors and SME department), with examples of types of and IFC impose limitations, donor resources advisory services provided by each unit. have been and will remain critical for maintain- ing and improving IFC's TA work. Funding Came Mostly from Donors, Yet Source Recent steps taken by IFC. As part of the Breakdown for IC TAAS Is Difficult to Assess Donor-Funded Operations Initiative and the It is difficult to determine with accuracy the FY05 Strategic Directions, management is sources of funding of the IC TAAS on a global setting up the Funding Mechanism for TAAS to level. Since the IC TAAS database was compiled which IFC will allocate a portion of its profits, separately for the analytical purposes of this with the objective of ensuring the sustainability study, existing aggregate figures available for and predictability of its funding sources for donor and IFC contributions cannot be TAAS, while donor funding will continue to play projected onto the IC TAAS population. Each a critical and valued role. This is part of a set of project has different sources of funding from TAAS initiatives meant to develop a strategic various donors, and the degree of IFC support approach to developing, executing, monitoring, varies by project and program. Some facilities and evaluating IFC's TAAS operations. account for IFC contribution as part of total project costs (e.g., FIAS, SME facilities), some do IFC's Non-Investment Operations (IC TAAS) not (e.g., TATF-funded, PEP), and others vary Yield Positive IC Results from project to project (SME department, As mentioned above, IEG-IFC evaluated IFC's PSAS). Virtually all of the estimated $167 million non-investment IC activities in five field-visit cited above comes from donor funds, with IFC's countries for this study. For this purpose, IEG- share of this amount estimated at $14 million.50 IFC developed a template for evaluating IC TAAS In addition to the $167 million figure, IFC projects based on (i) outputs--overall quality of provided administrative support of an estimated design and execution of TA assignment, (ii) $11 million to PEP over the review period.51 outcomes--implementation of TA assignment IFC's net contribution to PSAS over the review recommendations, and (iii) impacts--changes period was $6.6 million, and IEG-IFC estimates on the ground associated with the implementa- 1 9 3 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Box 16.2: IFC IC TAAS at a Glance · Consistent with IFC's frontier strategy, most IFC investment · Most IC TAAS operations were in Categories 2 and 3 (sector climate TAAS was done in countries with poor investment cli- specific and capacity building); these segments accounted mates. for most IC TAAS growth, particularly since 1997. · The East Asia and the Pacific and Sub-Saharan Africa Re- · Financial sector (investment departments through TATF) and gions received the highest number of IC TAAS operations; yet investment policy/legal framework (FIAS) were the dominant in terms of US$ volume, the lion's share went to Central and Category 2 advisories in terms of numbers of operations. Eastern Europe ($100 million, compared to regional average · Privatization advisories (mostly PEP) absorbed the most re- of $11 million). sources to finance only 27 projects. A: Frontier Focus: Breakdown by Instrument B: Most of IC TAAS Volume Went to CEE Distribution of IC TAs Distribution of IC TAs by Region (by number of operations) 110 100 PSAS 90 SME Dept. 80 70 FIAS 60 92 PDFs millions 50 40 Direct TA by Inv. Depts. (TATF) US$ 30 20 6 2 PEP 2 1 10 9 3 6 8 9 2 9 14 2 0 4 0 20 40 60 80 100 Percent and and Asia EuropeAsia PacificAmerica andAfrica CaribbeanEast Europe Asia Africa World No investment climate rating Central North South Central Eastern East Latinthe Good investment climate Middle and Southern and Sub-Saharan Poor investment climate Non-investment departments Investment departments C: All Categories Increased after 1997, with D: The Bulk of Category 2 Operations Categories 2 and 3 Showing Sharp Growth in Terms of US Dollar Volume Were in Privatization (mostly PEP) Evolution of IC activities by category Distribution of sectoral specific 60 advisory work by US$ volume Corporate 50 governance 40 8 percent Other operations 30 11 percent of Privatization 20 58 percent Investment incentives & 10 Number tax legislation 0 2 percent 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Sector specific Agriculture & Financial Investment & forestry sector competition Capacity building 3 percent advisory Policy Broad IC 13 percent 5 percent Note: See Annex III.F for details. 1 9 4 I F C ' S N O N - I N V E S T M E N T O P E R AT I O N S H AV E A D I R E C T I M PA C T O N I N V E S T M E N T C L I M AT E S tion of TA recommendations. IEG-IFC received numerical score for each rating as follows: 75 responses from 55 respondents53 on 38 Unsatisfactory--1; Partly Unsatisfactory--2; assignments. IEG-IFC interviewed and/or Satisfactory--3; and Excellent--4. Annex III.E surveyed people familiar with specific assign- contains detailed definitions and criteria for the ments such as government counterpart clients, rating scale. Box 16.3 provides a brief overview of task managers, investment officers, partners, the ratings criteria. consultants, business associations, and donors. The study presents the evaluative ratings for IEG-IFC asked each respondent to rate IFC's IC non-investment operations in two ways work on a four-point scale and assigned a summarized in the following two charts: (i) by Box 16.3: Overview of IC TAAS Evaluation Ratings Criteria 1. Overall quality of assistance is a synthesis of ratings for the full implementation (75 percent to 100 percent); satisfactory rat- following: ings are assigned where more than half to 75 percent of the major recommendations made were implemented; partly unsatisfac- · Relevance--a satisfactory rating signifies that assistance ad- tory is given for partial implementation, or less than half. Un- dresses major priority issues, and an excellent rating means satisfactory is given when almost none of the major that it introduces a major new insight regarding other is- recommendations are implemented. sues. Less than satisfactory suggests that assignment over- looks major priority issues. 3. Impacts attempt to measure results on the ground, which · Clarity of targets, objectives and limitations--satisfactory are typically longer-term outcomes. Excellent ratings are given suggests that project objectives and targets are clear and com- in cases where major improvements are made and outcomes prehensive, and an excellent rating means that a performance achieved are best practice or regional/global role models. A monitoring system is also set up. Less than satisfactory is given satisfactory rating is given where major improvements are where only some or no clear objectives/targets are outlined. made and issues/problems addressed were resolved ade- · Client responsiveness--satisfactory is given where a good quately. A partly unsatisfactory rating suggests that a few im- level of responsiveness and timely delivery of service/re- provements were made but targeted outcomes were not fully port is achieved, and excellent denotes extreme client sat- achieved. Unsatisfactory suggests that almost no impact was isfaction with IFC responsiveness. Less than satisfactory is made, the situation was made worse, or additional problems assigned where one or more shortfalls in responsiveness or were created. time of delivery was experienced. Establishing causality links from the TA execution quality, out- · Technical/financial competence--satisfactory is given for comes in terms of implementation of recommendations, and im- competence with regard to accurate facts, logical analysis, pacts on the ground is not straightforward. More often than not, and recommendations based on findings, and an`excellent rat- changes in policies, laws, and practices are the result of numer- ing is given for very high competence. Less than satisfactory ous influences by various stakeholders and other internal and ex- suggests deficiencies in one or more major areas. ternal forces. Consequently, there are problems of attribution. · Acceptance of recommendations--satisfactory ratings are Moreover, given that improving the investment climate is a long- given where more than half to 75 percent of recommenda- term, multifaceted process and impacts may take a while before tions are accepted by clients as appropriate, relevant and of they emerge, it takes time to not only make legislative changes, but good quality, with excellent ratings in cases where 75 per- also draft corresponding regulations and ensure the appropriate cent to 100 percent of recommendations are fully accepted. implementation of laws including changing the attitudes and in- Less than satisfactory suggests partial (less than half) or no centives of administrative officials charged with enacting new acceptance of major recommendations. procedures. These and other issues, along with related good prac- tice measures that IFC can take to enhance its ability to achieve 2. Outcomes consider the degree to which client countries im- outcomes and impacts, are discussed in more detail in the report's plemented recommendations. An Excellent rating means nearly section on outcomes and impacts. Note: See Annex III. F for details. 1 9 5 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E responses--in percentage shares of assigned Stakeholders Rate Quality of Assistance and ratings--figures 16.5 and 16.6; and (ii) by Execution of IC TAAS as Very Good projects--in rating scores--figure 16.7. Note Overall quality of assistance and execution is a that due to the small sample size and other synthesis rating of five subindicators: (1) technical weaknesses associated with compiling relevance; (2) clarity of objectives/targets; (3) and reporting survey information, the results responsiveness to client needs; (4) presented are not necessarily fully representative technical/financial competence; and (5) client of all IC TAAS. Responses from government acceptance of recommendations. Responses officials represent 44 percent of total responses were nearly unanimous in expressing full (33 of 75), and ratings for this group were similar satisfaction54 with overall quality: 76 percent of to the larger sample's ratings (see figures 16.5 all responses rated the IFC IC technical and 16.6). For quality of assistance, government assistance quality of assistance satisfactory and officials rated IFC's work slightly higher than the 16 percent rated it excellent (figure 16.5). The rest, with more frequent ratings of excellent (27 overall average score for the IC TA quality of percent, compared to 16 percent for the entire assistance at the project level55 is 3.1, or above sample). Government officials tended to agree the satisfactory benchmark (see figure 16.7). In with the rest (nongovernment) of the sample general, ratings responses did not contain signif- regarding the degree to which IFC recommenda- icant variations and there appear to be no tions were implemented, with moderately higher important performance differences among the claims of overall implementation. Yet govern- different types of projects evaluated (e.g., by ment officials were much more positive about Category 1, 2, 3 department or funding vehicle). results on the ground, rating impacts more Concerning the subindicators under Overall frequently as satisfactory or excellent (42 Quality of Assistance, IEG-IFC's field visit­based percent) than the rest of the sample (29 evaluation yielded the following ratings and percent). observations: Figure 16.5: Survey Responses Show Satisfactory or Better Overall Quality of Assistance, but Outcomes and Impacts Received Lower Ratings or Were Not Rated IFC's IC TAAS operation ratings (based on 75 responses) 100 5 5 3 19 31 80 29 19 60 76 Percent 40 21 41 20 28 16 5 1 0 Quality of assistance Outcomes Impacts Excellent Partly unsatisfactory Satisfactory Unsatisfactory No opinion possible Note: All IC advisory projects conducted by IFC are considered here, including those done by IFC regional departments, industry departments (through TATF), FIAS, PSAS, and MPDF. Per- centages are based on the actual number of responses given for each question--where applicable, some respondents answered with "No opinion possible." 1 9 6 I F C ' S N O N - I N V E S T M E N T O P E R AT I O N S H AV E A D I R E C T I M PA C T O N I N V E S T M E N T C L I M AT E S Figure 16.6: Responses from Government Officials Resemble Responses from Others, but with More Optimistic Views of Results on the Ground IFC's IC TAAS operation ratings (based on 33 government official's responses) 3 3 100 3 18 21 80 15 24 60 67 24 Percent 40 42 39 20 27 9 3 0 Quality of assistance Outcomes Impacts Excellent Partly unsatisfactory Satisfactory Unsatisfactory No opinion possible Source: IEG-IFC survey. Figure 16.7: Ratings at the Project Level Indicate High Work Quality on All Counts Average score of 38 IC operations Quality of assistance Relevance Clarity of targets, objectives, and limitations Responsiveness to client needs Technical and financial competence Acceptance of recommendations Outcomes Impacts 1 2 3 4 Unsatisfactory Partly Satisfactory Excellent unsatisfactory Source: IEG-IFC survey. 1 9 7 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E · Relevance. This category received very high rating.56 Although different from formal RBM ratings, with 37 percent of responses claiming frameworks, the FIAS projects rated as excel- that IFC's assistance addressed major priority lent did incorporate specific recommenda- issues and introduced major new insights re- tions that included building monitoring and garding one or more issues, and 60 percent of evaluation systems and specific targets to gauge responses indicating that assistance addressed reform performance over time (see Annex III.I major priority issues to a large extent. The for overview of RBM framework). overall average score based on the project · Responsiveness to Client Needs. On the level for Relevance was 3.3, the highest aver- whole, clients viewed the speed and timeli- age ratings under Quality of Assistance. The ness of IFC's response as more in line with com- most common rationales for the satisfactory mercial standards than those of donor or better rating on relevance were the fact providers of advisory services. A few cases of that the assistance dealt with follow-on as- long waiting periods for delivery of advice were signments, loan conditions of multilateral fi- cited.57Many respondents contrasted IFC with nancial institutions (MFI), issues the private the Bank, expressing frustration with the Bank's sector was lobbying, and/or government pri- limited ability to respond to requests from orities. IEG-IFC found a high level of per- government clients to provide TA in specific ceived relevance among government areas that were not included in the CAS lend- counterparts, yet in a few cases other stake- ing and nonlending program. In many in- holders perceived the TA operation to be less stances, IFC TA assignments filled gaps where relevant to the country situation. For example, the Bank could not be more responsive to the government counterparts of a TATF-funded PSD needs of government clients in the short project to develop the secondary mortgage to medium term. market in a Latin America and the Caribbean · Technical/Financial Competence. While country viewed this work as highly relevant almost all responses rated the technical and fi- given that it was in response to a loan condi- nancial competence of IFC's TAAS teams and tion from an MFI. However, some private sec- advice good or very high (90 percent) with re- tor financial institution respondents opined gard to accuracy, logical analysis and recom- that the assignment was ahead of its time, mendations based on findings, numerous given that the primary mortgage market was clients expressed a desire to make more use of still in an infancy stage. Meanwhile, other regional and other developing country good stakeholders familiar with the project believed practice experiences. Overall, the role of IFC in that the TA was not entirely irrelevant, even if managing the TA was appreciated and seen as market conditions were premature, insofar as valuable, especially in light of the transaction ex- the TA may have served as a long-term strate- perience IFC brings to the table. IFC staff's up- gic map for housing market (primary and sec- to-date, hands-on experience was seen as ondary) development in the country, with IFC complementing the expert advice of external perceived as an early agent of change. consultants who may be very knowledgeable on · Clarity of Objectives/Targets. Overall, re- theories and practices but may not have current spondents reported clear and comprehensive experience. Notwithstanding these high marks, project objectives and targets (satisfactory rat- a frequently heard criticism was that experts ing) in 84 percent of responses. Clients said that were typically brought in from industrialized na- IFC delivered what it said it would, and their tions with models and practices that were not expectations were generally met and occa- entirely appropriate for local conditions and cir- sionally exceeded. While 8 percent of responses cumstances. In a number of cases, clients and gave excellent ratings, IEG-IFC notes that none stakeholders thought that TA teams had a of the projects evaluated for the country case prepackaged solution before they could have studies actually contained explicit RBM frame- a full understanding of the local conditions. works, which was a criterion for an excellent Moreover, clients occasionally drew attention 1 9 8 I F C ' S N O N - I N V E S T M E N T O P E R AT I O N S H AV E A D I R E C T I M PA C T O N I N V E S T M E N T C L I M AT E S to the lack of in-depth local knowledge needed of poor quality. This issue should be addressed to make the most of a TA operation and to as part of a forward-looking strategy to develop IFC's inability to present the report in the local and strengthen IFC's IC technical assistance line language. This is particularly an issue where TA- of business. funded consultants, and to some extent IFC sec- Other sources of information support IEG- tor specialists, have weak country knowledge. IFC's general finding that clients value the The extensive use of well-screened local con- quality of IFC's work. While supplemental sultants was identified by PEP staff as one of the independent evaluations of quality of IFC's TA key factors that contribute to its project suc- are not available for a sample that represents all cesses by allowing the project teams to build different types of IC TA assignments, FIAS's work both effective working relationships and cred- quality has been assessed through IFC and IEG ibility in the local community. client surveys a number of times over the past · Acceptance of Recommendations. Clients several years (see box 16.4 for a brief description generally expressed high levels of acceptance of FIAS advisory services products). When of recommendations made by IFC, with 29 clients were asked to rate the quality of FIAS's percent of responses showing acceptance of advice, the 1998 IEG-IFC evaluation produced nearly all (75 percent to 100 percent) major rec- the following responses:60 100 percent said the ommendations made, 47 percent accepting technical competence was either excellent or more than half, and 17 percent of clients ac- good; 91 percent rated FIAS either excellent or cepting fewer than half of major recommen- good with regard to responsiveness to client dations made. Meanwhile, 5 percent of needs; and 82 percent said they thought FIAS's responses indicate major recommendations timeliness was either excellent or good, while 19 were not accepted. The average score based on percent rated it fair. Moreover, the 1998 IEG-IFC the project level was 3.0, suggesting that over- evaluation found that nearly two-thirds of FIAS's all, the majority of IFC's recommendations clients had had repeat assignments, which were accepted. Many respondents said that implies a relatively high level of satisfaction. Box they placed a high value on IFC's private sec- 16.5 presents key evaluative findings of the tor perspective and experience and saw IFC as strong points and criticisms of FIAS from the a valued partner in creating conditions pro- 1998 IEG-IFC study. With regard to overall client moting private investment. Clients also noted acceptance of recommendations, FIAS's Project that while they largely accepted IFC's recom- Impact Monitoring (PIM) system, which mendations, translating acceptance into im- evaluates all projects conducted between fiscal plementation required a local champion and 1999 and 2002, shows that only 2.2 percent of broad political support, and that IFC's ability FIAS's recommendations were outright rejected to exert influence over the various external by clients, the remainder being accepted either factors was indeed limited.58 in full or in part. (Annex III.G summarizes the PIM system and highlights major findings; IEG- While IEG-IFC found only minimal quality IFC did not validate these self-evaluation issues in the small evaluated sample, it observed findings.) that in many instances the IO/Task Manager was IFC's Advisory Client Surveys done in fiscal the only IFC representative responsible for 2002 and 2003 reported that all clients surveyed finalizing consultants' inputs and for presenting were satisfied with the assistance they received final reports and recommendations to govern- from FIAS.61 All respondents valued FIAS as a ment officials under the IFC logo.59 Without any neutral partner with global reach, strong techni- well-structured quality control mechanism in cal competence and cross-country experience place to review advice or reports for a significant that designs, executes and delivers its advisory amount of advisory work delivered to clients on projects well, based on a strong client focus and its behalf, IFC runs a reputational risk in the good communications skills. Figure 16.8 event that the advice is either inappropriate or is provides more detailed information, ranking the 1 9 9 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Box 16.4: Overview of FIAS Advisory Services FIAS offers a range of services to help governments attract FDI. both investment and subsequent production. These detailed flow- Some common areas of assistance are: charts pinpointing problems help governments identify and elim- Diagnostics--Identify a country's main policy impediments to inate counterproductive procedures, and streamline the necessary productive FDI. The issues typically identified include prohibitions regulations that remain. FIAS has included a "self-assessment" ap- on foreign investment in sectors or locations; restrictions on the proach to reviewing administrative barriers to investment in client share of foreign ownership in the equity of domestic companies; countries. Under this approach, a counterpart team in the gov- difficult administrative approval processes; restrictions on repa- ernment will utilize FIAS-developed templates to collect the basic triation of dividends and capital; taxes; the character and functioning institutional information on administrative procedures for busi- of legal systems; and problems foreign firms have in gaining ac- ness establishment and operation in the country, following the ex- cess to land and bringing in technical and managerial staff. isting norms and regulations. Legal and Regulatory Environment--Review a country's legal Investment Incentives--Analyze incentives to ensure they are and regulatory environment and recommend measures in such cost-effective. areas as screening procedures, restrictions on the percentage of Investment Promotion--Help countries design promotion in- shares owned by foreigners, currency convertibility, access to land, stitutions, adapting models that have proven effective elsewhere. and investment protection under national laws and international Italsohelpstheseagenciesformulatepromotionstrategiesthatiden- conventions. tify competitive advantages and target specific opportunities. Strate- Administrative Barriers--Analyze administrative barriers to gies can be conceived on national, regional, or sectoral levels. Source: FIAS Web site, www.fias.net. Box 16.5: Strengths and Weaknesses of FIAS Assistance As part of the 1998 IEG-IFC study, evaluation panels composed Criticisms of FIAS included: of FIAS clients, IFC staff, and Bank staff were asked to rate FIAS's work in selected countries. · Inflexible approach: A few see FIAS as wedded to a model and reluctant to recommend second-best solutions to ac- The strong points of FIAS's work noted: commodate local constraints. This may reflect the flipside of FIAS's strength in international best practice. · Authoritative, objective advice: FIAS's advice is based on a · Boiler-plate or cookie-cutter reports: Bank and IFC staff crit- broad range of international experience. icized reports as being too general or not tailored to a spe- · Service and client orientation: Clients report that FIAS staff cific country. Only a small number of clients made this are agile and quick to respond to requests in a manner that criticism, most of whom read only one report and acknowl- serves clients well. edge that reports which espouse general, efficacious prin- · Practical, pragmatic advice: FIAS's advice is seen as sensi- ciples can be helpful in building local support for reforms. ble and action-oriented. · Uneven quality: Some respondents noted uneven quality of FIAS's staff or products, yet others have expressed satis- faction with every product type. Note: In 2000, FIAS joined the PSD Vice Presidency, which changed to PSD VP in fiscal 2004. FIAS indicated that it has responded to the criticisms but IEG-IFC has not done a follow-up. 2 0 0 I F C ' S N O N - I N V E S T M E N T O P E R AT I O N S H AV E A D I R E C T I M PA C T O N I N V E S T M E N T C L I M AT E S Figure 16.8: How Did FIAS Perform? Funding IFC Links Innovation Project follow-up Neutral partner Delivery Project planning and execution Communications Long-term impact Cross-country experience 0.0 1.0 2.0 3.0 4.0 5.0 Fiscal 2002 Fiscal 1999­2001 Source: IFC client surveys. different aspects of FIAS's performance in IEG-IFC's overall quality of assistance rating. individual advisory projects, also comparing the While TATF's PCR system may not offer most recent results for fiscal 2002 with those independent assessments of the quality of IFC's from the fiscal 1999­2001 survey.62 Clients rated assistance, it does reflect the views of informed FIAS highest on its international experience, IFC staff who are in a position to provide insights ability to communicate findings and recommen- into how well a TA assignment went. Of the total dations, project design, role as an objective 86 task managers who provided ratings for IC TA partner, and client focus. On the lower end, FIAS under the PCR category overall success of the TA was most criticized for insufficient project operation,64 52 percent gave projects a rating of follow-up,63 perceived lack of innovation, weak excellent and 33 percent good; while 10 percent links with IFC, and aspects related to project of projects were assigned a partly unsatisfactory funding. Details of survey findings can be rating, and 5 percent were rated poor.65 obtained through IFC's Operational Strategy Department. Implementation of Recommendations Was TATF project completion report findings Mostly Satisfactory, Yet Changes on the Ground generally support the positive assessment of Take a Long Time and Depend on Other Factors IFC's IC TA outputs, bearing in mind the upward Establishing causality links between TA bias of self-assessments and imperfect matching execution quality, outcomes in terms of of the rating criteria between this indicator and implementation of recommendations, and 2 0 1 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E impacts on the ground is not straightforward. ratings and observations and experiences from More often than not, changes in policies, laws, programs and evaluations of FIAS, PEP, and the and practices are the result of numerous factors SME facilities. Several of these elements were and influences by various stakeholders and tackled in the 2005 World Development Report, other internal and external forces. Perhaps a particularly the importance of ensuring country given policy change by the government, or new ownership, engaging stakeholders and a managerial practice in some firm, would have broader group of actors to help build consensus been adopted anyway, even in the absence of and better policy approaches, and the IFC's TAAS. As such, attribution cannot be made importance of adapting proposals to local with certainty. However, one can check whether conditions, capacities, and priorities (World the changes made were consistent with the Bank 2005). recommendations or training provided by the Other useful suggestions from stakeholders TAAS and assess the client's perception of the when asked what IFC could do to improve the importance of IFC's role in achieving these outcomes and impacts of its non-investment IC changes. If one finds that nothing has been done work included the following: or the changes made ran counter to what had been recommended by the TAAS activity, one · Do not underestimate the value of local par- would know with certainty that the TAAS was ticipation. Do not go to the country with a so- not utilized in the way intended. lution looking for a problem. Hear the issues Despite the issue of attribution, catalyzing first from the locals before coming up with a positive changes is not entirely out of IFC's solution. Involve the private sector. control. First and foremost, IFC has control over · Be sensitive to local culture. Some advice and the quality of its advice, which is an important recommendations were rejected not because factor in determining the level of acceptance they were bad, but because of the presentation. and implementation of recommendations by · Provide for capacity building following complex clients. Beyond the quality of assistance, there advice. Many local institutions may not have the are other steps that IFC can take to enhance its institutional capacity to implement the rec- ability to influence results and impacts. During ommendations. the course of this study, stakeholders and clients · Get the views of the private sector when mon- provided very useful insights regarding what IFC itoring the outcomes and impacts of advisory could have done differently to be a more projects. effective agent of change, or in other instances, · Improving investment climate is a complex which factors appeared to contribute to its task that takes time. A programmatic long- success in achieving impacts. Many of these term approach incorporating results-based lessons learned are widely applicable, while management is key. others are project specific. The most important themes that emerged from discussions with About Half of the Recommendations and stakeholders on projects evaluated by IEG-IFC Advice Were Largely Implemented. . . include: As might be expected, overall results ratings-- outcomes: implementation of recommendations a. Strong client ownership and impacts: changes in invest percent of b. Stakeholder involvement responses indicate at least some extent of c. Project follow-up with focus on implementa- implementation of IFC's recommendations: 46 tion and capacity building. percent of responses indicate that IFC's advice was implemented to a large extent (rated Box 16.6 presents good practice elements satisfactory or better), and 29 percent said they and strategies in more detail. These elements were implemented in part or less than half are also discussed in the paragraphs below, (partly unsatisfactory), while 19 percent (rated synthesized from IEG-IFC's field visit evaluation unsatisfactory) indicated that almost none of the 2 0 2 I F C ' S N O N - I N V E S T M E N T O P E R AT I O N S H AV E A D I R E C T I M PA C T O N I N V E S T M E N T C L I M AT E S Box 16.6: Strategies to Boost Prospects of Achieving Better Results in TA Activities During the course of IEG's study, interviews with major stake- Project follow-up for implementation. Follow-up programs holders of IFC's IC TA projects yielded useful information and per- are critical for implementation of reforms and achieving results on ceptions on ingredients needed to enhance prospects of the ground. Strong local presence and/or network is needed to keep implementation of recommendations and achieve results on the issues alive and the reform process moving forward. Due to lim- ground. IEG-IFC's findings can be summarized into three major ited resources and mandate, IFC does not always have the capacity groups of good practice: to take on a leading role in implementation, yet it can do more by Appropriate client selection for a TA recipient is very impor- way of coordinating/sharing TA outputs and building partnerships tant. Client commitment to the issue should be high and the client with donors that have a strong local presence (including the Bank should be seen as a likely effective champion with staying power and multi- and/or bilateral donors) and resources needed to im- and the political clout needed to induce change in the appropri- plement recommendations. By doing this IFC could plant the seeds ate areas, i.e., motivated and capable of moving the process to- to keep the issues alive and on the broader agenda for reform/im- ward successful implementation. plementation. Follow-up programs that appear to be particularly Stakeholder involvement is key to building local ownership effective are those that contain a strong local presence, which helps and moving the process of implementation forward. IFC can do a to build credibility at the country level and forges close relation- lot to build stakeholder involvement during a TA or advisory as- ships with local counterparts and stakeholders, e.g., the Vietnam signment. Examples include promoting ownership across rele- Business Forum. As one respondent said, "Major policy initia- vant government agencies (beyond the client counterpart); private tives must be led locally. You can't subcontract out an entire re- sector stakeholder participation and support; and early and active form." Often, donors with substantial resources and strong local involvement of donors (multilateral and bilateral agencies). In ad- presence are in a good position to bring about change. Lending con- dition to bringing in stakeholder views from the beginning of a TA ditionality can also produce the leverage needed to foster changes. operation (diagnostic stage), attempts should be made to reach out However, IFC and World Bank staff and TA recipient clients inter- and include them in subsequent discussions, for example, through viewed stated that lending conditionality has often not been as suc- translation into local language, broad dissemination of report or cessful in terms of achieving meaningful changes and producing findings, invitations to workshops to discuss findings/recommen- changes on the ground as one might have anticipated, because dations, and encouragement to become partners in dialogue with it is not a replacement for true reform ownership/buy-in. Intervie- government through the formation of special committees and fo- wees cited conditionalities that were either too general to be ef- rums charged with designing action plans for follow-up and im- fective agents of change (e.g. produce a draft law or sector study), plementing reforms. or too specific and, hence, easily waived for disbursement. major recommendations had been implemented · A committed local champion and reformer (see figures 16.5, 16.6, and 16.7). with wide influence and support Respondents cited a number of factors that · World Bank and other MFIs' loan conditional- have positively influenced the implementation ities (however, this is not a substitute for local of recommendations/advice, including the buy-in and ownership of reforms). following: On the other hand, barriers to implementing · A powerful and proactive private sector lobby the IFC recommendation/advice despite the working through well-organized business as- perceived good execution quality of TA include: sociations · Strong implementation assistance from locally · Lack of or weak institutional capacity and re- based donor agencies sources · Public/private partnership through regular di- · Political infighting among affected government alogues and joint working groups ministries and agencies · Narrowly focused advice/recommendations · Influential opposing interest groups66 that are relatively easy to implement · Complexity of the advice/recommendations 2 0 3 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Table 16.2: Evaluation of IFC's IC Technical Assistance No opinion Partly possible Unsatisfactory unsatisfactory Satisfactory Excellent Number of responses (%) (%) (%) (%) (%) Quality of assistance 5 0 3 76 16 Outcomes/implementation of recommendations 6 19 29 41 5 Impacts (changes in IC related to the TA) 31 19 21 28 1 Source: IEG-IFC survey. Note: All IC advisory projects conducted by IFC are considered here, including those done by FIAS, PSAS, and MPDF. · Change in government administration projects, the score was slightly lower at 2.61, and · Delayed completion of TAAS a first assessment of fiscal 2003 projects · Negative tone of the advice, putting the af- indicates a score of 2.38. This trend in higher fected ministries on the defensive implementation rates as time passes reflects the · New developments or changes in government notion that policy reforms take time to be priorities, overtaking the IFC recommenda- implemented, and hence success rates may tions/advice increase over time. · Poor dissemination of the positive outcomes More narrow sector or policy specific advice expected from the implementation of advice. (e.g., drafting laws) appears more effective in terms of achieving results judging from the IEG-IFC's 1998 evaluation of FIAS showed evaluation of 38 assignments in the five field-visit slightly higher implementation results, with 87 countries. Category 2 assignments have better percent of respondents saying they than average performance in terms of delivering implemented FIAS's advice (16 percent in full; outcomes and impacts (see table 16.3). However, 58 percent in large part; and 13 percent in part). the study is unable to clearly distinguish the Notwithstanding a slightly less mature crop of difference in outcomes and impacts for each projects and a different rating scale, FIAS PIM category of IC work because of the small sample system outcomes over fiscal 2001 and 2002 size of Category 1 and 3 operations. reinforce the general direction of IEG-IFC's Data from FIAS's PIM system also offer findings.67 The average implementation score evidence that outcome success rates for more for fiscal 2001 projects was 2.73 on a scale of 1 to narrowly defined or sector specific TA (Category 4, where 4 represents fully implemented, 3 2) are higher than broader TAAS (Category 1). partially implemented, 2 accepted but not FIAS fiscal 2001 and 2002 projects that fell into implemented, and 1 is rejected. For fiscal 2002 IEG-IFC's Category 2 had slightly higher average Table 16.3: Quality of IC Advisory Work Rated Very Good, but Outcomes and Impacts Not as Good Category 1: Category 2: Category 3: Overall Broad IC Sector-specific Capacity score assistance IC assistance building Number of projects 38 9 24 5 Quality of assistance 3.11 3.02 3.11 3.23 Outcomes 2.41 2.04 2.51 2.57 Impacts 2.34 1.96 2.47 2.50 Source: IEG-IFC survey. 2 0 4 I F C ' S N O N - I N V E S T M E N T O P E R AT I O N S H AV E A D I R E C T I M PA C T O N I N V E S T M E N T C L I M AT E S scores of 2.8 compared to the Category 1 outcomes in terms of implementation of reform average of 2.6. It makes intuitive sense that more and results on the ground. In fact, IFC may not specific, narrowly defined TA interventions always be in a position to develop appropriate showed higher outcome ratings when follow-up implementation programs due to lack compared in the same time frame with broader of resources, insufficient expertise or other advisory assistance. It takes more time, effort constraints; however, efforts to coordinate and resources to move forward agendas of advisory work with other donors, including the change on a broad, economy-wide level, and to World Bank and other multilateral and bilateral show corresponding results on the ground.68 agencies with active interests in the Project follow-up appears to be an important sector/country, and involve them in the factor for enhancing outcome success implementation process, can potentially prospects. The most common response heard produce handsome pay-offs in terms of success- to IEG-IFC's question regarding what IFC could ful outcomes. Box 16.7 presents an example have done differently to enhance the likelihood where FIAS, the World Bank and SEED worked of implementing recommendations was more together with donors and local stakeholders to proactive follow-up on behalf of IFC to assist in move forward the reform process of streamlin- implementation. Recognizing that effective ing business registration in Bosnia and Herzegov- implementation is ultimately up to the govern- ina (BiH). While concrete results on the ground ment and for the most part out of IFC's direct had not yet been achieved in the case of BiH at control, many government clients nonetheless the time this report was written, the example stated that they simply did not have the capacity demonstrates how moving forward the process to implement recommendations without some of reform requires substantial follow-up, as well form of follow-up assistance. as time, appropriate technical skills, resources, Insufficient project follow-up was also one of and political will. the weakest characteristics of FIAS service The PEP model incorporates many elements delivery, as pointed out in IFC's advisory of "good practice" as identified by stakeholders services client survey. Data from FIAS's PIM also and discussed above, including substantial show that ratings for implementation of program follow-up and local stakeholder recommendations were higher where projects involvement.70 While no comprehensive, were followed up by a second or third advisory independent evaluation has been made of PEP project (post-diagnostic).69 IEG-IFC's 1998 to date, anecdotal evidence and program evaluation of FIAS partially attributed its high progress reports made to donors document levels of implementation to the fact that nearly high levels of implementation and substantial two-thirds of FIAS's clients had had repeat results on the ground for PEP.71 PEP has assignments. In addition, strong client commit- developed a results-based approach to the ment was cited as a major contributor to FIAS's planning, monitoring, and evaluation of all high success ratings--the fact that FIAS advises projects. For each project, PEP defines the goals, only after a government formally requests objectives and activities, with desired results assistance and, in most cases, agrees to finance stated in specific and measurable terms. Next, part of the costs. Hence, in the end, FIAS's role PEP designs the monitoring process to track is more to assist those governments that have a actual results during the life of the project, predisposition to act on its advice rather than try starting with capturing baseline data at to convince governments to undertake unpopu- inception and conducting midpoint evaluations lar reforms. These findings reinforce client and to review and modify, if needed, project priori- stakeholder feedback to IEG-IFC during this ties, and performs a final evaluation to assess the evaluation regarding the importance of strong effectiveness and efficiency of the project, client commitment and project follow-up. capture the lessons learned, and assess the As noted in box 16.7, IFC does not necessarily potential for replicating the project elsewhere. have to follow up on projects to produce desired Below are examples of IFC's IC TAAS program in 2 0 5 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Box 16.7: Working Together: Donor Coordination Efforts to Streamline Business Registration in Bosnia FIAS has been actively involved in efforts to improve the in- ing a working group composed of representatives from government, vestment climate in Bosnia and Herzegovina (BiH) for over five private sector and international donors to consider steps to sim- years. In 1998, it helped draft the foreign investment law; two plify the business registration process. SEED was particularly well years later it provided assistance to develop an institutional placed to take on this role, because of its local presence, close re- framework for the newly created Foreign Investment Promotion lations with the private sector, and being part of the WBG. As part Agency. As a continuation of this work, FIAS issued a report in of the action plan, the working group obtained TA from DFID and March 2001 documenting various administrative barriers to in- the Norwegian government for developing a detailed plan to re- vestment in BiH. The report included an assessment of the busi- vamp and implement a new business registration system. ness registration process, noting the complexity, cost, and time DFID has assumed direct responsibility for working with the gov- involved in starting a new firm, and called on the government to ernment to revise the business registration process, and SEED con- harmonize laws and procedures between the two entities within tinues to provide support. By government request, FIAS launched BiH and simplify the overall business registration process as a a project in late 2002, in partnership with SEED, to build the capacity matter of priority. of the government to implement these and other reforms identi- These and other recommendations regarding constraints to in- fied in FIAS's 2001 report and to monitor the performance of im- vestment were accepted by the government and incorporated pacts on the ground through the use of periodic investor surveys. into the Bank's Business Environment Adjustment Credit. As part Despite the progress in moving the process forward, more than of the process to define the specific elements of the proposed two years after the FIAS report was delivered there has been little Credit, including the precise actions to be taken by the government change in the business registration process in BiH so far. Under BAC as a condition of the loan, Southeast Europe Enterprise Develop- conditionality, specific targets for reducing the steps to register a ment (SEED) assumed responsibility for organizing and support- business will need to be achieved before the end of fiscal 2004. Source: Evaluation of SEED, Nexus Associates. the former Soviet Union countries based on a · In cooperation with local partners, PEP helped 2002 IFC Board report.72 Box 16.8 provides a introduce new legislation and improve existing brief overview of PEP's comprehensive laws affecting leasing in Russia, Ukraine, Geor- approach to delivering TAAS. gia, Armenia, the Kyrgyz Republic, Tajikistan, and Uzbekistan. In Russia, Georgia, Armenia, and the Kyrgyz Republic, the legislatures passed Box 16.8: PEP's Approach to Improving Investment the proposed laws. The improvements in leg- Climate islation have resulted in the launch of leasing activities by the Russian subsidiaries of several PEP's approach to delivering TAAS takes a holistic and programmatic international banks, including an IFC invest- view, with each project containing three main components: ment company in the sector. Leasing in Ukraine has also expanded thanks to the TA, with IFC (i) policy diagnostic to identify the problems and make specific rec- investing in a project, as well as many other pri- ommendations vate investments made in the sector. (ii) publicrelationstoeducatethepublic/stakeholdersandpromotereforms · In Belarus, PEP's advocacy for regulatory reform (iii) training on the implications of new laws and policies (conceptual contributed to a significant simplification of and practical) for potential beneficiaries and users. taxation procedures and a limitation on the gov- ernment's ability to confiscate private property. As a result of the approach to combine policy advice with training and · In Ukraine, joint policy work with IBRD led to capacity building, most PEP investment climate TA projects were clas- a decrease in inspections from an average of 76 sified as both Category 2 and 3, as per IEG's theme classification described per year to 14 and a decrease in required li- in table 16.1. censes from more than 100 to 64. PEP also par- ticipated in drafting six pieces of recently 2 0 6 I F C ' S N O N - I N V E S T M E N T O P E R AT I O N S H AV E A D I R E C T I M PA C T O N I N V E S T M E N T C L I M AT E S adopted legislation regulating the issuance of se- Macedonia and Serbia and Montenegro. In both curities and conduct of shareholders' meetings. instances, SEED marshaled technical expert- · In Armenia, PEP drafted the law on joint stock ise to deal with substantive issues related to pro- companies and the law on limited liability com- posed reforms. However, while legislation has panies, adopted in late 2001. PEP also sup- been passed, the report indicates that the im- ported the establishment of the first pact on SMEs has yet to be felt, suggesting that shareholders' rights organization. The associ- it will take time for leasing companies to be es- ation's members numbered about 500, and in tablished. In addition, despite important ef- 2001 the association responded to requests forts, projects intended to build the capacity of for advice from about 1,500 shareholders. business associations to engage in construc- tive policy advocacy dialogue with the govern- In contrast to PEP, IC TA activities undertaken ment on issues facing investors have not yet by the SME facilities over the review period have yielded much success.76 been limited.73 Recent evaluative assessments of · MPDF. An IEG-IFC­managed independent the facilities were not able to conclude how evaluation conducted in June 2002 (Nexus As- effective these activities were and whether their sociates 2002) examined the outcomes of pri- benefits justified the costs: vate sector discussion reports. The evaluation describes the 12 reports published by MPDF Programs to improve the business on private sector development issues in Viet- enabling environment can potentially nam, Cambodia, and Laos as well written and help even more companies. The facilities generally well received by stakeholders and have devoted a small share of their concludes that the series has contributed to the resources to these programs. Their efforts policy debate within the WBG and govern- have brought about some changes in mental bodies. The report noted that "while a leasing regulations and may have had direct impact on policies is difficult to trace, one some influence on attitudes. No informa- World Bank manager, who considered the re- tion, however, is available on the number ports to be very useful and encouraged MPDF of SMEs reached.74 to continue this program, argued that the re- ports provide `grist for the mill' and `helped to Findings from recent evaluations of SEED and change attitudes.'" The evaluation report also Mekong Project Development Facility are concluded that MPDF should broaden its view summarized below.75 Even where it appears that of SME policy advocacy, in close coordination successful outcomes have been achieved in with the Bank, by assuming "a more active terms of implementation of recommendations, role in influencing the debate through vari- evidence of impact on the ground appears ous forums, including the publication of PSD limited. In the case of SEED, it may be too early series, briefings for key policymakers and reg- to detect impacts on the ground, given that the ular discussions with representatives of the facility had existed for only three years at the WBG and other international donor organiza- time of the evaluation. tions" with regard to the SME business envi- ronment reform agenda. · SEED. A recent IEG-IFC­managed independ- ent evaluation report on SEED (Nexus Associ- . . . But Impacts on the Ground Were Harder to ates 2003)identifies a number of projects aimed Detect at legal and regulatory reform and concludes IEG-IFC country field visits indicate that achiev- that in some cases, the assistance provided by ing longer-term impacts through changes on the SEED and ensuing dialogue have led to changes ground is even more elusive than achieving in specific laws and regulations. The major suc- outcomes in terms of implementation of cess in this regard has been the introduction of recommendations. Thirty-one percent of leasing legislation in the former Republic of respondents had no opinion on this matter. 2 0 7 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Only 1 percent of responses gave an excellent managing the process of change by better rating, indicating that major improvements were explaining the benefits of reform to all made beyond issues targeted by the TA. In one stakeholders; involving private/public sectors in project, the reforms in the regulatory framework dialogue; setting targets and milestones for played a significant role in the successful privati- reform implementation; and monitoring and zation of a utility company, resulting in improved reporting results on the ground. and more efficient physical infrastructure. Only While some degree of insight may be gained 28 percent of responses indicate that major from various anecdotal examples, such as IFC's improvements were made which resulted in experience with Vietnam's Business Forum (see adequate resolution of targeted problems/ box 16.9), the small sample size of IEG-IFC's issues. Moreover, 21 percent of responses evaluation limits our ability to draw conclusions indicate that few improvements were visible and from the data gathered regarding impacts. that the targeted issue/problem was not Further, unlike Outcomes--Implementation of sufficiently addressed or adequately resolved. Recommendations, there are no other evalua- Nineteen percent noted either no change or a tive assessments of IFC's IC technical assistance negative impact since the end of the TA. A available that provide reliable and useful negative impact implies that the situation information regarding Impacts--Changes on related to the TA had been made worse, or the Ground from which to draw in this evalua- additional problems emerged. For example, a tion. Compiling even basic data on impacts is private sector survey respondent for an IFC IC difficult to do, and programs that assess impacts TA to promote the secondary mortgage market are rare. in a Latin American country rated the impact on One good indicator to measure impact of TA the ground unsatisfactory. In his words: "The on the ground is whether interested investors mortgage market has not grown since the TA, were able to undertake an investment project and counter to IFC's advice, the government following an IC TAAS-related project, with or introduced subsidized interest rates and credit without IFC. While this is not systematically guarantees, which have introduced market tracked across IFC, an example of sector-specific distortions that have made the situation more TA (Category 2) that was followed up by an IFC problematic."77 investment and increased activity by third-party Discussions with IFC clients and stakeholders investors is a leasing project in Vietnam. IFC cited many factors at work that appear to started a TA operation on leasing in Vietnam in contribute to poor impacts. The most frequently 1991 when it advised the authorities on develop- heard comment was that considering that ing the appropriate legal framework for licensing, improving the investment climate is a long-term, regulation, and conduct of leasing activities. The multifaceted process, impacts may take a while TA operation included seminars and workshops to emerge. Respondents stressed that it takes in Korea and Vietnam and drafting of regulations. time to not only make legislative changes, but This led to opening the leasing industry to also draft corresponding regulations and to interested investors from the private and public ensure the appropriate implementation of laws sectors. In 1997, IFC helped establish the first including changing the attitudes and incentives leasing company in Vietnam by providing financial of administrative officials charged with enacting support. Since its inception, this leasing company new procedures. One respondent commented has provided approximately US$35 million in that 10 percent of change needed is often in the lease financing to nearly 250 companies. These legal framework, while 90 percent is in the detail financial leases have enabled local enterprises to at the bureaucratic level. acquire a wide variety of capital goods, including Similarly, respondents urged IFC not to stop machinery, office, and plant equipment. Today, the its involvement after the completion of an leasing market in Vietnam comprises 10 financial advisory project--but to play a more active role institutions with total leasing operations valued at overseeing the implementation process or about $100 million. 2 0 8 I F C ' S N O N - I N V E S T M E N T O P E R AT I O N S H AV E A D I R E C T I M PA C T O N I N V E S T M E N T C L I M AT E S Box 16.9: Vietnam Business Forum: Helping Improve Investment Climate Through Consultative Dialogue The Vietnam Business Forum (VBF) is a donor community sup- income tax, and streamlining of licenses and approvals. In the porting private/public policy dialogue. The purpose of VBF is to banking sector, the VBF has been instrumental in removing as improve investment climate with a view to stimulating economic well as in interest and guarantee commission ceilings, enabling development, creating employment, and improving people's lives. banks to lend in foreign currency to exporters, relaxing foreign cur- The first meeting of the VBF took place in June 1998 following an rency forced-surrender rule and changing the reserve requirement. initiative adopted by the Vietnam Consultative Group meeting a Private sector VBF participants interviewed by IEG for this year earlier. The VBF meets formally twice a year around the time study expressed satisfaction with the overall VBF program and its of the CG meeting. Private sector representatives report the out- achievements. They thought VBF had achieved major accom- comes of the forum to the donor-government discussions at the plishments, especially on straightforward issues. However, there CG meetings. More than 350 people from the private sector, are those who expressed concern on losing the momentum of the donor community, bilateral agencies, international development VBF and the excessive optimism of participants, given that some organizations, and the government attended the 13th Vietnam issues are taking quite a long time to resolve. Respondents felt the Business Forum in December 2003 in Hanoi. need to continuously refine the VBF to adapt to the changing con- VBF discussions are ongoing year-round through several work- ditions. For one, some thought that the capacity of the working group ing groups. Issues tackled at the working group level include participants to continue to do pro bono work may not be sustain- banking regulations, property and tourism, infrastructure and ten- able because of the increasing demands on their time. In fact, some ders, intellectual property rights, labor and employment, adminis- of the more active participants have left the VBF, leaving the work trative reform, information technology and telecoms, import-export to less-experienced or more junior professionals. Some would and customs, and macro policy. IFC manages the VBF secretariat, like to see more proactive donor participation in adding pressure organizes the semi-annual meetings, and cochairs the meeting with on the government to take actions swiftly. the World Bank and the Ministry of Planning and Investment. Respondents appreciated IFC's role in running the VBF. They The VBF has led to a number of reforms in the general manu- value IFC's honest-broker role, its understanding of the private sec- facturing and banking sectors. Among the policy changes in gen- tor, and its access to the government as part of the WBG. Many eral manufacturing are a decree that phased out US$ denomination pointed out that IFC's strong local presence is essential for keep- of local salaries and dual pricing, reduction of fees and personal ing VBF running. Recent steps taken by IFC. A systematic approach two focus groups also included 16 Bank staff undertaken by the WBG's PSD Vice Presidency working in the area of PSD from the Regions of to measure investment climate conditions Latin America and the Caribbean, Africa, East through firm-level surveys and Doing Business Asia and the Pacific, Europe and Central Asia, are providing a set of standard, tangible indica- Middle East and North Africa, and South Asia, tors to measure impacts of broad IC initiatives and from Development Economies and TUDUR over time. The availability of this information (Urban Unit). Some of the major themes and should help facilitate the monitoring and evalua- issues that surfaced throughout interviews with tion of operations under IFC's new RBM TAAS IFC staff, as well as in the joint IFC-Bank staff framework. focus groups, are presented below. Bank-IFC coordination is further explored in the joint IEG Issues Related to Planning and overview report. Coordinating IC TAAS In general terms, coordination on the Nearly 60 IFC staff (investment officers, strate- ground between the World Bank and IFC is gists, economists, sector specialists, and invest- said to be largely uneven and ad hoc. At the ment policy officers) were asked in interviews IFC country team level, there is a perception and focus groups about how IC advisory work that IFC's efforts to improve investment was developed, carried out, and coordinated climates through the CAS mechanism are not with the World Bank and within IFC. In addition, effectively translated into the Bank's lending 2 0 9 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E and nonlending programs, and hence have assistance to government clients. Both IFC and little impact on the ground. A possible Bank staff commented on the large and complex exception is FIAS' analytical work, especially IC agenda, and room for both IFC and the Bank its studies of administrative barriers to invest- to provide advice to governments. Discussions ment. While no data are available to assess the in two joint Bank-IFC focus groups of well- degree to which these recommendations have informed IC TAAS staff members confirmed this, become part of Bank lending projects, FIAS as both IFC and Bank staff raised the issues staff pointed to a number of cases where Bank related to the slow pace of WB provision of conditionalities included findings and policy advice on investment climate, and inabil- recommendations from FIAS reports, es- ity of the Bank to allocate resources to invest- pecially in countries that lacked substantive ment climate policy advice work. PSD analytical work. In many of these in- IFC specialists indicated that where the stances, FIAS is said to have provided deeper Bank and IFC have collaborated at the sector analytical work than what was available. level, the Bank typically focused on broader On a project basis, cooperation between the aspects of policies and institution building institutions is also said to be ad hoc and largely (e.g,. assisting the government in developing a dependent on personal relations. Some claim to bond market, which includes broader issues have established good coordination and like fiscal policy management, with a focus on achieved productive joint outcomes, while government issuance) and IFC took a more others cite a lack of responsiveness or interest of targeted slice of the market where it has a one or the other party. By and large, IFC staff comparative advantage by way of skills and/or interviewed for the study indicated that they experience (e.g., advising on the corporate take a proactive role in pushing for IC reforms if bond market segment). Some interviewees their Bank counterparts are unable to provide shared concerns regarding the lack of a real- timely TA in a particular area. Given the 3- to 4- time, private sector-informed perspective in year shelf life of CASs, Bank staff are less able to Bank policy advice, while in the words of one respond quickly to fast changing business person interviewed, "As a market participant, environments and opportunities. Hence Bank IFC has real insight and expertise on the staff have limited flexibility and administrative workings of particular markets." In such cases, budget resources to address changing IC issues. IFC typically takes the lead by hiring and IFC prepares annual work programs and strate- supervising consultants using donor funding to gies for operationalizing the CAS priorities at the provide sector-specific policy advice, usually in country level and therefore can respond to a fast coordination and with the support of IFC changing environment. Reflecting its market- staff's counterpart in the Bank. driven business model, IFC has more flexibility The study found that within IFC, investment and is strongly motivated to push IC reform, climate TAAS work is not strategically planned especially where potential follow-up invest- and is largely driven by the investment depart- ments are a possibility. ments in their quest to make needed sector- IFC investment staff and sector specialists specific improvements to the IC to develop a charged with managing TA noted that before pipeline of projects which they can potentially moving forward with conducting the TA, the finance. In transition and frontier countries standard procedure was to check with their where the private sector is small and IFC's counterparts in the Bank to see if experts were prospects for financing projects are limited, IFC able to provide assistance to government tended to do more IC TAAS to create general clients. While reasons for not taking on many of opportunities for private participation, with less the TA assignments of interest to IFC vary by of an emphasis on paving the way for specific country and product, Bank counterparts are said future IFC projects. Non-investment depart- by IFC staff to have been generally pleased that ments (e.g., FIAS, PSAS, SME department, etc.) IFC was able to provide targeted, timely have developed projects and programs relatively 2 1 0 I F C ' S N O N - I N V E S T M E N T O P E R AT I O N S H AV E A D I R E C T I M PA C T O N I N V E S T M E N T C L I M AT E S independently from each other, from IFC In addition, as discussed above and in the regional departments, and from the World Bank IEG-World Bank report, the newly created joint country departments. Two years past the 2002 PSD Vice Presidency has made significant strides reorganization, there is no country-level in a short time in introducing tools for more program manager with accountability for focused IC work and improving coordination planning, prioritizing, coordinating/overseeing between the IFC and the Bank. implementation of IFC's IC work. Monitoring and Evaluation (M&E) in IC TA is relatively new Overlap between FIAS and MIGA and likewise not well coordinated among the Both FIAS and MIGA are involved in investment different TA providers. promotion advisory work, an integral part of the WBG's IC activities. With regard to the gray area Recent steps taken by IFC. Over the past year, there of potential overlap in services offered, FIAS have been efforts across IFC to improve the tends to be involved more on the macro scale: strategic planning, coordination, and M&E of FIAS helps countries design investment IFC's TAAS work. Within IFC, there are currently promotion agencies (IPAs), adapting models two initiatives under way to develop a more that have proven effective elsewhere. It also systematic approach to developing, executing, helps these agencies formulate promotion monitoring and evaluating IFC's TAAS lines of strategies that identify competitive advantages business: and target specific opportunities. MIGA focuses on capacity building assistance to specific IPAs, · First, as part of the Donor-Funded Operations to equip them with best practice knowledge, initiative, regional investment departments tools, and techniques to strengthen their will now be responsible for formulating TA capacity to attract and retain foreign direct strategies to fit country needs, and Manage- investment. To this end, MIGA provides both ment will set priorities and strategic directions "hands-on" operational assistance to IPAs and a for the development of the TAAS lines of busi- range of investment information services to ness. Regions will be responsible for approv- assist member countries and firms contemplat- ing all operations that come out of any TAAS ing direct investments. But according to a recent unit (including non-investment departments paper commissioned by FIAS, the current like FIAS and PSAS) and defining how IFC will division of labor between FIAS and MIGA deliver all TAAS in an effort to maximize the de- includes some areas in which both play a role -- velopment impact of IFC's combined TA and for example, assistance in designing marketing investment activities. strategies and business plans. Annex III.J · Second, a working group has been set up to es- discusses the areas of overlap in more detail. tablish a results-based management evalua- This may lead to gaps or overlaps in providing tion system for all IFC's TAAS operations (see advice to governments and create confusion Annex III.I for a summary overview of a re- among WBG clients about who is providing sults-based management framework). This which services. While the range of products comprehensive system will provide a consistent offered by both MIGA and FIAS may appear and comparable framework across all types wide, as discussed in Annex III.J, the actual and providers of IFC TAAS. A draft framework volume (in US$ and numbers of projects) of has been developed and is currently being work done by FIAS in investment promotion tested. In addition to improving the way IFC products over the evaluation period has been plans and coordinates TAAS at the project level low (just over 20 percent of total advisory within the Corporation, more strategic planning services), declining sharply to 11 percent since and aggregating performance patterns and les- fiscal 2001 (only four to eight projects per year). sons from project completion reports should The division of labor between FIAS and MIGA's help priority setting and coordination across TA activities was addressed in the 2002 WBG the Bank Group. Private Sector Development Strategy.78 This 2 1 1 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E strategy mentioned that MIGA and FIAS had advisor to governments on legal and regulatory developed a protocol encompassing an exchange matters and as a direct (prospective and existing of client requests for TA, agreements on the portfolio) investor could result in potential or division of labor between both institutions, and perceived conflicts of interest and requires regular (quarterly) meetings among managers careful management. and staff to harmonize work plans and joint activi- Most of IC TAAS appears not to be conflicted, ties. The strategy paper prescribed continuity or may contain at most a potential or perceived rather than new directions for MIGA's and FIAS's COI. For example, broad IC assessments TA programs and their organizational alignment. (Category 1) address general constraints to Management is currently updating the FIAS/MIGA private investment and advocate increased protocol. As a result of efforts to improve coordi- competition economy-wide, such advice is not nation between FIAS and MIGA, nearly half of the linked to the financial interest of any particular number of FIAS projects done in the gray area investment project. Similarly, sector-specific involves joint missions with MIGA staff and/or advice focuses on improving conditions to some form of MIGA involvement. encourage private investment in the sector by Neither IEG-IFC nor IEG-MIGA encountered removing constraints or establishing the needed major issues on the ground regarding the legal/regulatory framework based on interna- division of labor between FIAS and MIGA on tional best practices. This type of advice is investment promotion work in the five countries typically not linked to an existing IFC project and visited for this study. In fact, in one country, they would equally benefit subsequent private invest- found that the coordination between the two ments, including a potential downstream IFC institutions appeared to have worked well. The investment project once appropriate conditions IEG-MIGA IC evaluation also explored the are established in the sector. However, potential overlaps and coordination between MIGA and COI could arise where IFC is pursuing a project FIAS in two country case studies. The two cases in parallel with providing TA on sector indicated that while there were no major policies/regulations. Under these circum- conflicts, cooperation could have been better stances, COI rules require that the advisory work between FIAS and MIGA to provide more be undertaken by a separate and independent effective and strategic client services as "the team from any IFC investment team for a World Bank" (see Part IV). However, neither potential project and that the potential COI and study is able to make a conclusive finding on the proposed mitigation measures be disclosed to FIAS-MIGA coordination or appropriate division the government client. The TA/advisory team of labor in line with expertise. While this study would be expected to provide stand-alone, cannot take a view on the effectiveness of independent advice based on international best coordination, some people interviewed in the practice and experience, and without regard to field and within the WBG who are familiar with the possibility that IFC might eventually become both believe that synergies between FIAS and a lender to or investor in a project beneficiary. MIGA could be improved if the division of labor Annex III.K provides more discussion on the was more clearly delineated, or even if the two COI framework. groups were merged under either FIAS or MIGA. While the current COI guidelines and procedures may offer a robust framework for Managing Conflict-of-Interest Concerns dealing with potential COI, it is difficult to in IC TAAS determine how effective actual implementation This study's scope did not extend to a thorough of this system has been for IC TAAS activities review of the WBG's COI system and falling outside the Global Product Groups and procedures. While the IEG-IFC team did not PSAS. As the COI office deals with other projects encounter any specific complaints or allegations on a voluntary basis, it is not clear how many of COI in the field, there is a concern within projects with potential COI were executed parts of the Bank Group that IFC's dual role as without following the COI rules. The COI Office 2 1 2 I F C ' S N O N - I N V E S T M E N T O P E R AT I O N S H AV E A D I R E C T I M PA C T O N I N V E S T M E N T C L I M AT E S is in the process of initiating an IFC-wide representative, available data from TATF's PCRs training on conflict identification and mitigation. also shed some light on the relationship between Still, some staff interviewed by IEG-IFC were not IC TA and specific IFC projects (current or familiar with specific COI procedures and future). From the sample of IC TA assignments guidelines. Moreover, since March 2003, the COI that contained linkages information, it appears Office has not been fully staffed, which has that most IC TA had no linkages with IFC invest- limited its effectiveness in outreach. ment projects. Out of the 124 TATF-funded The COI office was not in existence over most operations with PCR information available, 54 of the period reviewed by IEG-IFC, and IEG-IFC percent had no linkage with IFC investments, cannot make any inferences about the possible and one operation was in support of an existing instances or the extent to which potential COI investment project,79 while 24 percent (30 cases may have arisen. However, it appears that operations) claimed that IFC investment virtually none of the PEP IC technical assistance operations followed the TA. PCRs are usually (mostly privatizations, land reforms, corporate collected at the closure of the TA activities and governance) contained linkages to IFC invest- therefore the data on investment linkages may ments. The only two PEP IC technical assistance not be 100 percent correct, since the invest- projects that resulted in IFC investment project ments may take place (or may collapse) after the follow-ups were in leasing in Russia and Ukraine, PCRs were collected. The Global Financial and these two activities were sequenced and led Markets database, which tracks and updates TA by separate teams. The leasing sectors in both linkages with IFC investments more closely, these countries also experienced important identified two follow-up IFC investment projects increases in non-IFC-related private investments out of the crop of 44 recently completed following the TA. Of the 16 PSAS advisory (between 2001 and 2004) enabling environment projects included in the IC TAAS database, one TAAS operations. The small number of follow-on was followed up by an IFC investment, which was investments is undoubtedly a reflection of the managed according to COI rules: The investment time required to implement reforms and took place in sequence and was processed by a provides evidence of the sequencing of TA and separate team. While incomplete and not investments that typically occurs. 2 1 3 17 Summary and Recommendations Summary T he quality of investment climate affects IFC's investment project out- comes. IFC achieved better investment outcomes in countries with good investment climate based on the 5-year evaluation data covering 1998­2002. IEG-IFC also found that where IC changed from that private investors will follow. Improving invest- poor to good between approval and evaluation, ment climates may not be an explicit objective of both the development and investment IFC's investments, but it is implicit in IFC's outcomes had higher than average success rates purpose, mission, and frontier strategy. IFC invest- (76 percent and 64 percent, respectively, ments in strategic sectors (infrastructure, compared to IFC averages of 60 percent for DO financial, and social sectors) contribute most and 52 percent for IO). When investment significantly and directly to improving investment climate deteriorated, the development and climates. These projects directly address some of investment outcome success rate dropped to the major factors that contribute to making invest- below average levels (41 percent and 32 percent, ment climates conducive to promoting private respectively). This finding is consistent with the investments. Several studies, business surveys, findings in IEG-IFC's fiscal 2003 and 2002 and literature reviews show that the quality and reviews of evaluation findings using XPSR data quantity of physical infrastructure is an important covering 3-year periods, 1999­2001 and 2000­2, consideration for investment decisions. IFC's and findings in other IEG-IFC reports and projects in strategic sectors bridge the infrastruc- analysis. As part of the analysis done for this ture gap that the public sector and existing private study, IEG-IFC also found that good investment participants are unable to fill. In financial markets, outcomes are more strongly associated with IFC's projects help increase access to finance and certain components of IC indicators: (i) trade introduce new financial instruments in the sector. openness; (ii) a dynamic banking and finance In the social sectors, IFC's projects help enhance sector; (iii) effective government regulation; and the quality of human resources in the local (iv) the absence of black markets. market. IFC's business model is geared toward creating Private sector activities have byproduct sustainable projects with demonstration effects so impacts on investment climate, both positive 2 1 5 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E and negative. On the positive side, successful tor. In transition and frontier countries where private sector operations have demonstration the private sector is small and IFC's prospects effects and stimulate follow-on investments, for financing projects are limited, IFC focuses indicating that the investment climate is improv- more on IC TAAS to create opportunities for ing or that the private sector has found ways to private participation in general. Non-investment adapt to existing investment climate conditions. units undertake IC work as part of their strategy On the other hand, unsuccessful private sector or mandate (e.g., PEP, FIAS, and SME Depart- operations or those that depend on distortions ment), or as project-specific follow-on advisory for their success can have a negative demonstra- transactions (e.g., PSAS privatization transac- tion effect, subduing private sector optimism or tions). IFC's IC TAAS activities in poor IC slowing down the momentum of reforms. countries have been on the rise as IFC pursues IFC activities with an explicit objective to its frontier markets and SME strategy, a trend improve investment climates are usually that pre-dates, but supports the IEG-IFC Annual undertaken to help establish conditions for Review fiscal 2003 recommendation to tilt IC potential downstream private investment, TAAS toward this group of countries. The evalua- including IFC-financed projects, or as part of tion of 38 non-investment operations in the five advisory assignments. Investment departments field-visit countries shows that: tended to undertake TA necessary for ground- laying work to develop and open up sectors, or · Quality was good--92 percent of responses for reform needed to pursue investments in a rated it satisfactory or excellent--but-- sector. However, the link between sector- · Outcomescouldbebetter--46percentthought specific IC TAAS and IFC follow-up investments that more than half of the recommendations is not always clearly defined or a direct motiva- or substance of the advice was implemented. Figure 17.1: Range of Impacts on the Investment Climate of IFC's Investment Operations Demonstration effects/ follow- on investments Physical Financial infrastructure infrastructure Investment Climate Quality of workforce Policy reforms/ technical know-how regulatory changes Competent/efficient institutions Note: See Batra and Mody 2003. The paper attempts to create a "parsimonious but useful index of investment climate." This proposed index includes the following subindicators: (1) Macroeconomic Environment; (2) Country Risk; (3) Policy and Institutions (including access to finance), (4) Policies to Enhance Competition; (5) Infrastructure; and (6) Human Development. Along the lines of this index, IEG considers the PSD impacts of its investment operations under the following subindicators: Demonstration Effects/Follow on Investments--Policies to Enhance Competition; Physical Infrastructure--Infrastructure; Financial Infrastructure--Policy and Institutions (Access to Finance); Quality of Workforce/Technical Know-How--Human Development; Policy Teforms/Regulatory Changes and Competent and Efficient Institutions--Policy and Institutions and Policies to Enhance Competition. 2 1 6 S U M M A R Y A N D R E C O M M E N D AT I O N S · Impacts are less clear--only 29 percent saw ment in addition to existing or forthcoming major improvements in issues addressed by findings or recommendations from relevant the assignments; 31 percent could not give working groups, studies, and literature on non- an opinion, largely because it was too soon investment operations. This study also to see the impacts. recognizes the efforts of the WBG PSD Vice President to raise the profile of investment The most important themes that emerged climate and to improve WBG coordination in the from discussions with stakeholders on projects post-evaluation period. evaluated by IEG-IFC include the following: IEG-IFC makes four clusters of recommenda- tions derived from the findings in the preceding (i) Client ownership is essential. Strong chapters. The recommendations are supported client commitment to reform and a political by suggestions for implementation. champion with staying power are needed for inducing change. Raise the Profile of IC Work (ii) Stakeholder involvement is key Improving investment climate is one of the throughout execution. Major stakehold- WBG's two strategic pillars for poverty ers (across public sector, private sector and reduction. It is also at the core of IFC's mandate, donor community) should be involved early yet it has not taken full center stage in IFC's on. Proactive outreach and engagement of strategy. Article 1 (Purpose) of IFC's Articles of stakeholders throughout execution (e.g., Agreement states that, among others, IFC will dissemination in local language, participa- seek to stimulate and help create the conditions tory workshops, etc) and shared commit- conducive to the flow of private capital. The ment to action plan are critical to moving quality of investment climate is also important the reform process forward in a sustainable for IFC's investment project outcomes and its fashion. ability to pursue the frontier and SME strategies. (iii) Project follow-up is critical for IFC has long recognized investment climate as outcomes success. Implementation is important in achieving its strategic objectives enhanced through follow-up projects and but has only recently made improving invest- capacity building components. Strong local ment climate an instrument to do so. To date, presence and/or network is needed to keep non-investment IC work in IFC has been seen as issues alive and the reform process moving less important than investment operations. forward. Partnerships with donors and However, despite the paucity of self-evaluation other stakeholders based on a shared vision reports and this report's only partial evaluation of desired outcomes and impacts, are very findings on IC TAAS, this study nonetheless important for leveraging reform efforts. shows that IC TAAS can be an effective tool in improving investment climate and in paving the Recommendations way for increased private sector activities. This report comes at a time when IFC manage- As part of the TAAS strategic review, IEG-IFC ment is undertaking a strategic review of IFC's suggests that management consider prioritizing noncommercial TAAS operations, including investment climate as a central TAAS theme and donor-funded operations, and establishing a elevating IC TAAS to equal footing with invest- results-based approach to planning, executing ment operations in terms of relevance and and evaluating IFC's TAAS. IC work is a major importance to pursing its frontier strategy. component of IFC's TAAS and for this reason, Neither one by itself is sufficient, and synergies any recommendation specific to investment between the two lines of work can help improve climate will bear on IFC's other TAAS. Given that prospects for successfully implementing the the report is limited to IFC's experience in frontier strategy, and enhancing IFC's invest- investment climate and does not cover non-IC ment project outcomes. Productive private TAAS, it offers recommendations for manage- sector investments create jobs and contribute to 2 1 7 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E economic growth, helping reduce poverty and Enhance Synergies in IC Activities among improve people's lives. But the private sector Different WBG Units will only go to where it can use resources The April 2002 WBG PSD Strategy defines the efficiently, and a sound investment climate is an broad division of labor but is not a sufficient important consideration and outcome driver. basis for guiding day-to-day interactions as While IFC may have several comparative issues arise, particularly with respect to the advantages in IC work, such as field presence and provision of policy advice to governments. As a its affiliation with the Bank, this report found that result, actual coordination is ad hoc at best and IFC's up-to-date transaction experience is most is driven more by individuals' attitudes, valuable in its IC work. For this reason, it is resources, and individual unit priorities and important that IFC continue to inform its IC incentives, than by a shared vision for improving work with real-time relevant transaction experi- investment climates. A delineation of standard ence. Ideally, IFC staff with appropriate and operating procedures and commitment to current transaction experience should adhere to them should help. Of perhaps greater undertake or oversee IFC's IC work, especially importance is addressing the issue of non- for sector-specific TAAS. However, under the coherent objectives across the units. current incentive structure, investment officers Participation in joint CASs and in WBG PSD and specialists are encouraged to focus on strategy preparation has been the principal investment transactions and not to be fully vehicle for coordinating IFC's IC activities with engaged in TA implementation and follow-up. the Bank. IFC strategists/economists at the investment department and corporate levels are Recommendation 1: the primary participants in preparing the joint Management should consider elevating CASs, while Investment Officers and sector investment climate to an explicit strategic priority specialists who bring to bear their transaction for IFC and a central theme of its TAAS work. The experience are often in charge of executing IFC's regional investment departments should define the IC work. Given the 3- to 4-year cycle of CASs, IC agenda and appropriate product mix of broad Bank staff are limited in their ability to anticipate IC assessments, sector-specific advice, and capacity and respond quickly to fast-changing business building mix relevant to each country's IC needs. environments and opportunities, whereas IFC Elevating investment climate to a corporate can more easily process IC operations. Reflecting strategic priority in IFC should give it the high its business model, IFC is more flexible and is profile and management attention it deserves. strongly motivated to push IC reforms, especially Moreover, IFC should be more proactive and where potential follow-up investments are a persistent in engaging in dialogue with Bank and possibility. Moreover, the study found a general government counterparts, in both formal and perception within IFC that the joint CASs (and informal contexts, with respect to improving the PRSPs) have not been the most effective instru- investment climate in client countries. Once that ments for focusing attention on WBG priorities has emerged as a strategic priority, appropriate for improved investment climate on the ground. measures of improving investment climate Staff interviewed expressed frustration with the should be tracked in the departmental seemingly piecemeal approach and slow scorecards. As part of the strategic review and implementation pace of policy changes aimed at planning of TAAS and building on the Africa improving investment climate (through mostly Department's recent initiative, an IC focus microeconomic reforms) at the country level. person at the country level within the regional Regardless of the extent to which this perception departments should ideally be responsible and accurately reflects reality, it underlines the need accountable for planning (strategy), coordina- for the Bank Group to revisit certain aspects of tion, execution, quality control, follow-up coordination and align short- and medium-term actions, monitoring, and evaluation. management and team objectives of both institu- 2 1 8 S U M M A R Y A N D R E C O M M E N D AT I O N S tions to optimize efforts for achieving the Bank of the WBG's investment climate activities. FIAS Group's strategic IC agenda. is involved more at the macro level while MIGA The recent appointment of a WBG PSD Vice focuses on capacity building assistance to President who is also the IFC Chief Economist has specific IPAs. FIAS provides investment helped improve coordination through facilitating promotion diagnostics and policy advice as part collaboration between TA providing units. The of its broader IC activities. It brings to bear best WBG PSD Vice President has convened country practice models from its global and broad IC review meetings on investment climate that bring experience. The study cited a range of potential together staff across the Bank Group for a discus- overlap in the types of advisory products and sion on the challenges and approaches to improv- services provided to investment promotion ing IC on a county-by-country basis. agencies by FIAS and MIGA. However, despite the apparent wide range of gray overlap areas, Recommendation 2a: the actual volume of FIAS advisory work done in The WBG should clarify the roles of the Bank, IFC, investment promotion products over the period and MIGA on IC activities, bringing corporate has been low, declining sharply to 11 percent strategy and practice into consistency according to since fiscal 2001 (only four to eight projects per the country- and situation-specific comparative year). advantages of each institution. Effective IEG-IFC did not encounter any major issues coordination at the individual country level on the ground regarding the division of labor should encompass the following: (i) diagnostic IC between FIAS and MIGA on investment needs assessment (e.g., ICA); (ii) WBG IC promotion work in the five focus countries for operational priorities; (iii) broad division of labor this study. The study cannot make a conclusive within WBG; and (iv) a results-based management finding on FIAS-MIGA coordination; in one framework for alignment of project planning, country IEG-IFC found that the coordination results measures, reporting, and associated unit between the two institutions appears to have and individual incentives. The process for worked well, whereas the IEG-MIGA study accomplishing the above and ensuring effective found instances where coordination could have coordination should be systematic and formalized been better. Management has taken steps to for every country, building on the PSD-led IC improve coordination between FIAS and MIGA, country review experience. Ensure that these efforts and nearly half of the FIAS projects done in the provide a basis for IFC's inputs to the CAS. gray area involve joint missions with MIGA staff Keeping in mind that what gets measured gets and/or some form of MIGA involvement. done, examples of possible IFC measures to Despite increased coordination, knowledgeable shape incentives structures for promoting IC people on the ground and within the WBG improvement and effective coordination include interviewed for this study believe that synergies tracking evaluated success rates for TAAS project could be improved if coordination efforts were outcomes in IFC departmental scorecards and strengthened. recognizing/rewarding cross-institutional coordi- nation by tracking responsiveness ratings by Recommendation 2b: counterparts across relevant parts of the WBG In view of the partial overlap between services (along the lines of IFC's current tracking of offered by FIAS and MIGA, Management should internal client responsiveness). monitor coordination improvements closely to At the same time, it would not be most effica- ensure that they continue on track. cious to introduce the measures in IFC unless the same measures were also tracked by other Develop Operating Guidelines and Procedures parts of the Bank Group. for TAAS Operations Both FIAS and MIGA are involved in invest- IFC has been increasing its non-investment TAAS ment promotion advisory work, an integral part operations, yet it has no standard operating 2 1 9 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E guidelines or procedures for these operations. potential and perceived COI early and more This study recognizes that there is an ongoing proactively, and ensure that current proce- project in IFC to develop an M&E system for dures are known and followed. As part of a sys- TAAS. While the rationale for an M&E system for tematic TAAS approvals process, all IC TAAS TA and advisory assignments is clear, this study operations with potential risk of COI should be highlights the need to keep track of and evaluate screened and where actual, potential, or per- IC TAAS components of privatization and other ceived COI exists, referred to the COI office. advisory assignments separately from the overall Where COI-related issues are identified, they advisory assignment, which may be larger and should be disclosed and managed according to contain transaction-specific TA as well. The COI rules and procedures. operating guidelines and procedures should be a tool for undertaking all TAAS, including IC TAAS, Identify and Track IC Impacts and assist Management in controlling and IFC's investment operations contribute to maintaining consistent work quality and in improving investment climates, while existing accounting for results. It should also help ensure projects regularly encounter IC issues. To date, that any actual, potential, or perceived COI are there is no database in IFC that tracks the dealt with through the COI Office. impacts of its projects on investment climate to enable IFC IC TAAS staff to use them in advising Recommendation 3: other countries on the benefits of relevant As part of a corporate-wide initiative to develop needed changes. Nor is there a systematic operating guidelines and procedures for TAAS, process in place to feed IFC investment portfo- management should consider addressing the lio IC issues and IFC project pipeline experience following issues: (e.g., projects that did not go ahead because of an unresolved IC issue) into the WBG IC strategy · Develop a quality control mechanism for ad- or CAS agenda. visory work that is provided to government clients. A peer-review process should be put in Recommendation 4: place to ensure that advice provided is of high IFC should consider establishing a mechanism to quality and reflects internationally recognized track and follow up on IC issues encountered with good practices and standards. Such a process a view to supporting its portfolio and potential may also enhance coordination efforts across pipeline companies in addressing these issues, the WBG. informing IFC's IC work program, and feeding this · Incorporate good practice measures into IC information into the work programs of relevant TAAS operations, within an RBM system, to WBG PSD staff charged with improving investment improve outcomes and impacts on the ground. climate and setting CAS priorities. To support this objective, a program for dis- IFC should consider creating an IC subcategory seminating IC TAAS good practices and les- when identifying a project's potential develop- sons learned should be developed. RBM ment impact at entry. IFC should put this training of staff who provide IC TAAS should information in a database and use it as an input help shape the structure and follow-up of op- to the proposed holistic approach to IC activi- erations toward results-driven outcomes. ties at the country level. IFC could start with the · Implement IFC-wide COI training to enable information it tracks under the Sustainability the investment departments, as well as staff and Framework to extract data on a project's managers that deal with IC TAAS, to deal with potential impacts on investment climate. 2 2 0 ANNEX III.A: HERITAGE FOUNDATION/WALL STREET JOURNAL INDEX OF ECONOMIC FREEDOM AND COMPARISON WITH SELECTED INDICES The study (Beach and Miles 2004) uses the targeted assessment of the impact of different IC HFO/WSJ Index of Economic Freedom as the components/areas on IFC's project outcomes. primary indicator of a country's IC quality. HFO/WSJ defines economic freedom as the Description of the HFO/WSJ Index of absence of government coercion or constraint Economic Freedom on the production, distribution, or consumption In the late 1980s, HFO/WSJ produced the Index of goods and services beyond the extent of Economic Freedom as a tool for policy makers necessary for citizens to protect and maintain and investors. The goal then was, as it is today, liberty itself.80 HFO/WSJ is a composite of 50 to develop a systematic, empirical measurement variables divided into 10 subindices: Freedom of of economic freedom in countries throughout Trade; Fiscal Burden of Government; Govern- the world. The Index, however, is more than just ment Intervention; Monetary Policy; Foreign a dataset based on empirical study; it is a careful Investment; Banking and Finance; Wages/Prices; theoretical analysis of the factors that most Property Rights; Regulations; and Black Markets influence the institutional setting of economic (see below for detailed description). It is based growth. Moreover, although there are many on a five-point rating scale where 1 is the best or theories about the origins and causes of most free and 5 is the worst or most oppressed. economic development, the findings of this IEG-IFC considers countries with a rating of 3 or study are straightforward: Countries with the below as having a good investment climate, most economic freedom also have higher rates while those with rating of 4 or 5 are deemed to of long-term economic growth and are more have a poor investment climate. prosperous than those with less economic IEG-IFC uses HFO/WSJ in the absence of a freedom. uniform WBG indicator of investment climate The 2004 Index of Economic Freedom with wide country (157) and sufficient period measures how well 161 countries score on a list coverage (1995­2003). The IICCR--a measure of of 50 independent variables divided into 10 country sovereign risk and thus only a proxy of broad factors of economic freedom. Low scores investment climate--has been traditionally used are more desirable. The higher the score on a by IEG-IFC as an indicator of investment climate factor, the greater the level of government (in line with IFC's corporate strategy to define interference in the economy and the less high-risk countries). IEG-IFC uses HFO/WSJ in economic freedom a country enjoys. this report because it covers more aspects and To measure economic freedom and rate each types of business and investment issues faced by country, the authors of the Index studied the the private sector. Recent research indicates that independent economic variables falling into the most major IC indices are strongly positively following categories, or factors, of economic correlated81 and IEG-IFC's comparative analysis freedom: supports this (see below). Moreover, HFO/WSJ data are easily accessible and have clear and · Trade policy transparent criteria for deriving each of the · Fiscal burden of government subindices, which allows for more detailed and · Government intervention in the economy 2 2 1 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E · Monetary policy indicate, respectively, whether that factor of · Capital flows and foreign investment economic freedom has improved, worsened, or · Banking and finance stayed the same compared with the country's · Wages and prices score in the previous year. · Property rights Finally, the 10 factors are added and averaged, · Regulation and an overall score is assigned to the country. · Informal market activity. The four broad categories of economic freedom in the Index are: Weighting In the Index of Economic Freedom, all 10 factors · Free--countries with an average overall score are equally important, as the level of economic of 1.99 or less freedom in a country are weighted equally to · Mostly Free--countries with an average over- determine that country's overall score. all score of 2.00­2.99 This is a common-sense approach. It is also · Mostly Unfree--countries with an average over- consistent with the purpose of the Index: to all score of 3.00­3.99 reflect the economic environment in every · Repressed--countries with an average overall country. The Index is not designed to measure score of 4.00 or higher. how much each factor adds to economic growth; that is ably done in the many empirical studies of Factor scoring is straightforward and consis- economic growth. Rather, the authors of the tent across countries. If a country's banking Index identify institutional factors that, taken system received a score of 3, for example, this together, determine the degree of economic means that its banking and financial system freedom in a society. It is this institutional displays most of the characteristics for level 3, environment that allows economies to grow. such as substantial government influence on While the approach appeals to common banks; government ownership or operation of sense, recent research on the determinants of some banks; significant government influence growth indicates that some factors are statisti- on credit allocation; and significant barriers to cally more important than others. However, the formation of domestic banks. Professor Richard Roll illustrates that equally weighting the Index factors reveals as true a Period of Study picture of economic freedom in a country as the For the 2004 Index of Economic Freedom, the best weighting system that statistics can devise. period of study covered the second half of 2002 In any event, it is clear that for a country to through the first half of 2003. To the extent succeed in achieving long-term growth and possible, the information considered for each economic well-being, it must perform well in all factor was current as of June 30, 2003. factors. It is important to understand, however, that some factors are based on historical informa- The Grading Scale tion. For example, the monetary policy factor is Each country receives its overall score based on a 10-year weighted average inflation rate from the simple average of the individual factor January 1, 1993, to December 31, 2002. Other scores. Each factor is graded according to a factors are current for the year in which the unique scale. The scales run from 1 to 5: A score Index is published. For example, the taxation of 1 signifies an economic environment or set of variable for this Index considers tax rates that policies that are most conducive to economic apply to the taxable year 2003. freedom, while a score of 5 signifies a set of Occasionally, major economic events occur policies that are least conducive to economic that cannot be factored into the scores because freedom. the Index is published several months after the In addition, following each factor score is a cutoff date for evaluation. In the past, such description--"better," "worse," or "stable"--to occurrences have been uncommon and 2 2 2 A N N E X I I I . A : H E R I TA G E F O U N D AT I O N / WA L L S T R E E T J O U R N A L I N D E X confined to one region of the world. The Asian Index, Freedom House's Country Ratings, and financial crisis, for example, erupted as the 1998 Transition Report. Index of Economic Freedom was ready to go to Index of Economic Freedom by the HFO/WSJ print. As a result, the effects of policy changes in is used in this study as a measure of investment response to that crisis were not considered in climate for several reasons: that year's scoring; however, they were consid- ered in later editions. In the country write-ups, · HFO/WSJ has wide country coverage (101 the authors and editors also note major events countries in 1995 and 155 countries in 2002). that might have a substantial impact on a · HFO/WSJ has annual data available from 1995. country's score in the future. Many other series are not available for years prior to 1998, rendering them unusable for the Sources analysis of relative performance of IFC projects In evaluating the criteria for each factor, a range and country portfolios over the period of eval- of authoritative sources has been used. For uation for this review. For example, A.T. Kear- example, a statement about the level of corrup- ney's FDI Confidence Index started in 1998 and tion in a country's customs service may be covers 64 countries, and A.T. Kearney's Global- followed by a supporting quote from a source of ization Index started in 2001 and covers 62 demonstrated reliability. There also are countries. There are other indicators such as innumerable lesser sources of information, IICCR, EFW, Euromoney and ICRG that have including conversations with government information available as far back as 1995, but they officials and visits to Internet sites. These were not used as the primary indicator of in- sources are indicated in the narrative where vestment climate in this study for reasons cited appropriate. in the points below. Regarding EFW, country in- For more information on how each factor is formation and time coverage is limited, with graded, please contact the Heritage Foundation information available every five years and the lat- or visit http://www.heritage.org. est information available in 2001, but not 2002. · HFO/WSJ's definition of economic freedom Comparative Analysis of HFO/WSJ and (see above) represents a broader array of in- Selected Indices stitutional factors determining the quality of the There is a wide variety of indicators that describe investment climate compared to other indi- different aspects of a country's IC quality includ- cators with similar country coverage that focus ing: The HFO/WSJ Index of Economic Freedom, on narrow investment climate aspects. For ex- Transparency International's Corruption Percep- ample IICCR, Moody's, and Standard and tion Index, IICCRs, Euromoney's Country Risk Poor's focus on country sovereign risk; Trans- Rankings, IMD's World Competitiveness Yearbook, parency International on corruption; Price Wa- Global Competitiveness Report, Economic terhouseCoopers on unclear rules/procedures; Creativity Index, the PRS Group's International Freedom House on political rights and civil Country Risk Guide (ICRG), A.T. Kearney's FDI liberties; ICRG gives heavier weight to politi- Confidence Index, A.T. Kearney's Globalization cal risk than financial and economic risk. Eu- Index, the WBES, the World Bank Institute's romoney captures a narrower aspect of Worldwide Governance Research Indicators investment climate, with three main compo- Dataset, PriceWaterhouseCoopers' Opacity Index, nents including analytic (economic perform- Standard and Poor's Sovereign Ratings List, ance and political risk), debt, and access to Moody's Sovereign Ratings List, United Nations international financing indicators. IICCR, tra- Development Programme's Human Development ditionally used by IFC as part of its frontier Index, the Fraser Institute's Economic Freedom of country definition, does not fully measure in- the World (EFW) Index, the Environmental vestment climate. Instead, it is an index that Sustainability Index, the Tuck School of Business' measures sovereign risk. Despite this short- (Dartmouth College) Emerging Market Access coming, this report uses IICCR as a proxy of IC 2 2 3 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E change, since it is a more volatile variable than Euromoney scores indicate lower political, HFO/WSJ, which, given its broad base of input financial and economic risk, a high score of variables, is slower to change over time. HFO/WSJ signifies a set of policies that are less · HFO/WSJ has a strongly correlated relation- conducive to economic freedom. For compari- ship with IFC's investment outcomes in the son purposes, HFO/WSJ was converted by evaluated sample (as well as the sample used subtracting (to take the inverse). As a result, a in IEG-IFC's impact review of China). Moreover, high positive converted HFO/WSJ score various components of the HFO/WSJ index indicates an economic environment more have shown close correlation to IFC's Invest- conducive to economic freedom, and HFO/WSJ ment Outcomes and IFC's Project Business becomes positively correlated with EFW, IICCR, Success (a DO indicator). ICRG, and Euromoney. · With some exceptions, there tends to be a HFO/WSJ is highly correlated with high correlation among many of the IC indi- Euromoney, IICCR, ICRG, and EFW. At these cators in terms of country groupings (World levels of correlation (75 percent and above), Bank 2003; IEG-IFC's Annual Reviews for 2002 each indicator could be expected to give similar and 2003; and IEG-World Bank 2003). results when used as an explanatory variable in a regression equation. While they are closely Indexes for which information is available as correlated, the IICCR indicator is much more far back as 1995 are compared in a correlation volatile than HFO/WSJ, which is relatively more matrix (see correlation matrix below). While a stable over time. Hence, IICCR is a better high EFW score indicates a higher level of directional indicator of IC quality change in economic freedom, a high IICCR score indicates relation to past project outcomes and prospec- less chance of default, and high ICRG and tively, as discussed in the main report. Correlation of Indices (percent) 1995 2002 HFO/WSJ EFW IICCR ICRG HFO/WSJ EFW IICCR ICRG EFW 75 EFW n.a. IICCR 79 72 IICCR 81 76 ICRG 78 71 85 ICRG 75 71 89 Euromoney 81 74 98 85 Euromoney 81 78 98 89 Note: HFO/WSJ = Index of Economic Freedom, by the Heritage Foundation and Wall Street Journal; EFW = economic freedom of the world, by the Fraser Institute; IICCR = institutional investor's country credit rating, by Euromoney Institution Investor, plc; ICRG = international country risk guide, by the PRS Group, Inc.; Euromoney = country risk rankings by Euromoney Magazine. 2 2 4 ANNEX III.B: EXPANDED PROJECT SUPERVISION REPORTS: PERFORMANCE RATINGS FOR DEVELOPMENT OUTCOME AND INVESTMENT OUTCOME IFC introduced what became the current This study measures contribution to improving Expanded Project Supervision Reports (XPSR) investment climate through impacts on private evaluation system in 1996. Investment staff sector development (see Impact on PSD below evaluate investment operations and IEG-IFC and separate note on PSD impacts). Previous validates evaluation findings to ensure IEG-IFC studies and reports already found a corporate-wide consistency in judgment and strong positive association between work quality interpretation. Every year, IEG-IFC selects a and outcomes. random stratified sample from among invest- ments approved five years prior to evaluation Development Outcome that have reached early operating maturity. Four indicators measure distinct aspects of each IFC's investments are evaluated under eight operation's fulfillment of IFC's Article 1 purpose or nine performance indicators: four indicators and contribution to its mission. The DO rating, a of development outcome; one or two indicators bottom-line assessment of the operation's of IFC's investment outcome (loan and/or results on the ground relative to what would equity); and three indicators of IFC's work have occurred without the project, considers quality. The outcomes and underlying indicators the performance of four subindicators, (i) are rated on the following scales: business success, (ii) economic sustainability, (iii) environmental effects impacts on PSD, and · The project's development outcome is rated (iv) PSD. The development outcome rating is on a six-point scale from highly unsuccessful not a mechanical weighting of the four subindi- to highly successful. The bottom three ratings cators. Instead it is determined case by case, (mostly unsuccessful and worse) together are considering the relative importance of each described as "less than successful" outcomes; indicator in the specific operation and what the top three (mostly successful or better) as would have been necessary for the operation to "successful" outcomes. merit the next higher or lower DO rating. · The other two performance dimensions (IFC's investment outcome and IFC's work qual- Project business success. This measures the ity), and all indicators, are rated on a four- project's actual and projected financial impact on point scale: unsatisfactory, partly unsatisfactory, the company's financiers, i.e., lenders and equity satisfactory, and excellent. Unsatisfactory and investors. Investors have diverse goals, but partly unsatisfactory ratings together are de- ultimately there is only one bottom line: financial scribed as "low" ratings; satisfactory and ex- returns. Sufficient financial returns are necessary cellent ratings as "high" ratings. to attract and reward private investment. Rating standards are based on the project's real after-tax This study covers the interplay of DO and IO financial rate of return (FRR) relative to the with investment climate. The interplay between company's real after-tax weighted average cost of IFC's work quality on investment operations and capital. Where FRR cannot be calculated, e.g., for investment climate is not covered in this study. financial markets operations, project business 2 2 5 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E success is measured based on achievement of relevant WBG policies and guidelines and local objectives and the extent projects contribute to standards. the company's profitability. Impact on PSD. This is based on the project's Economic sustainability. This is based on the impacts beyond the project company. Impacts project's net quantifiable social benefits and on private sector development include factors costs, as measured in the real economic rate of that influence or form part of the investment return. Not all development aspects can be climate. This study uses this subindicator as a quantified, and therefore this indicator also proxy measure for the project's impacts on considers qualitative aspects, including the investment climate. Please see Annex III.C on extent to which a project has contributed to this subindicator. IFC's mission--helping to reduce poverty and improve people's lives. In addition, the indicator Investment Outcome identifies who benefits (or suffers) from a partic- Where IFC has both a loan and an equity invest- ular project based on the net present value of ment, the rating is a synthesis of the separate benefits to people other than the project's ratings for the two investments. The ratings owners and financiers--typically taxpayers/ address the gross contribution of the invest- government, consumers, workers, suppliers, ments, i.e., without taking into account transac- competitors and the local community. It also tion costs or the cost of capital. Where there is specifies the project's contribution, where only a loan or equity, the synthesis rating follows applicable, to international development goals. the rating of the underlying instrument. Taxes generated by a project would be counted as an economic benefit, but the evaluation would Loans. Rating is based on the extent loans have not address whether additional tax revenue is been and are expected to be paid as scheduled. likely to further the country's development. Equity. Rating is based on the extent the invest- Environmental effects. "Environment" includes ment's realized and/or unrealized return is the physical environment and social, cultural, greater than the (actual or notional) fixed rate health, and safety impacts over the project's equivalent loan interest rate plus an equity risk life. Performance is evaluated relative to premium. 2 2 6 ANNEX III.C: PSD INDICATORS AND RATING BENCHMARKS IFC's Purpose, specified in Article I in IFC's · reforms in legal and regulatory framework and Articles of Agreement, is "encouraging the its administration (e.g., a pioneering transac- growth of productive private enterprise," and to tion stimulated policy makers to enact legisla- that end IFC shall "seek to stimulate and to help tion and implementing guidelines for similar create conditions conducive to the flow of transactions; or executing a mortgage on land private capital, domestic and foreign, into facilitated the debate that led to more trans- productive investment." This indicator addresses parent regulations on property or land-use to what extent the project has contributed to rights). IFC's purpose, i.e., helping create conditions conducive to private investments, beyond the For financial markets projects project company. · deepening of domestic financial markets Indicators through enhanced competition, new prod- Positive project-induced impacts include: ucts, improved services · easier access to financing domestic investors For both nonfinancial and financial markets projects (particularly SMEs), introduction of interna- tional accounting standards and/or enhanced · broad demonstration effects in the local econ- disclosure standards omy; follow-on investments by other investors; · resource allocation efficiency and resource quality, reputation, and business practices as a mobilizations. positive corporate role model and quality in- vestment asset Negative impacts include: · significant upstream and downstream supply linkages to local private businesses · adverse demonstration effects due to poor · introduction of new technology/know-how performance; poor company reputation lead- · development of management skills ing to a negative effect on private enterprises · employee training · project-induced restrictions on competition · enhanced private ownership (including protection, uneven treatment of · stronger local entrepreneurship competitors, forming of a cartel, etc.) · greater competition and competitiveness · delays of reforms or entry by private enter- · domestic capital market development (e.g., prises, introduction of laws and regulations pioneering listing on a stock exchange or sig- worsening the investment climate. nificant increase of listed value; first-of-a-kind financing instrument; introduction of inter- Evaluation Standard national accounting standards or enhanced disclosure standards) · Excellent: Considering its size, the project con- · development of infrastructure available to others siderably improved investment climate or oth- · corporate governance and transparency erwise made a substantial contribution to the 2 2 7 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E growth of private enterprises or efficient fi- pected to be of long duration or broad appli- nancial markets cability (e.g., a failed project without substan- · Satisfactory: The project had some but no tial negative demonstration effects) major positive impacts · Unsatisfactory: Substantial negative impacts · Partly Unsatisfactory: The project had some of broad applicability and/or expected to be of negative impacts, which, however, are not ex- long duration. 2 2 8 ANNEX III.D: NON-INVESTMENT EVALUATION RATING TEMPLATE (FOR IC TAAS OPERATIONS) Country: Project Name: Date Rating Obtained: Source of Rating (Contact Person, Task Manager, Others-Specify): IFC Dept. in Charge: I. Rating Matrix: Unsatisfactory Partly Unsatisfactory Satisfactory Excellent 1. OVERALL QUALITY ASSISTANCE a. Relevance b. Clarity of targets, objectives, and limitations c. Responsiveness to client needs d. Technical and financial competence e. Client's acceptance of recommendations 2. OUTCOME (IMPLEMENTATION OF RECOMMENDATIONS) 3. IMPACT INSTRUCTION: PLEASE CHECK THE APPROPRIATE BOX FOR EACH LINE II. Key Rationale for Ratings 1. Overall Quality Assistance a. Relevance e. Client's acceptance of recommendations · · · · b. Clarity of targets, objectives, and limitations 2. Outcomes · · · · c. Responsiveness to client needs · 3. Impacts · · d. Technical and financial competence · · · III. Lessons · · Prepared by: Date: 2 2 9 ANNEX III.E: RATING BENCHMARK FOR NON-INVESTMENT OPERATIONS Unsatisfactory Partly unsatisfactory Satisfactory Excellent 1. Overall quality Synthesis (not average) of Synthesis (not average) of Synthesis (not average) Synthesis (not average) of of assistance the below rating criteria the below-rating criteria of the below rating criteria the below rating criteria a) Relevance Assistance does not Assistance overlooks one Assistance addresses Assistance addresses priority address priority issues or two priority issues priority issues to a large issues and introduced major extent new insight regarding one or more issues b) Clarity of tar- No clear objectives/ Some project objectives/ Clear and comprehensive Very clear project objectives gets, objectives, targets outlined at targets outlined project objectives and and targets are set out, and & limitations onset of project; no targets are defined a performance monitoring (Use of results- performance monitoring system is set up based framework) criteria established c) Responsiveness Significant delays in client One major shortfall in either Good overall level of High level of client to client needs responsiveness and time of delivery of services responsiveness to client orientation and responsive- delivery of services or responsiveness to requests and timely ness. Client expressed (formal and informal) client requests delivery of services/reports extreme satisfaction. d) Technical/ Low level of technical/ Level of technical/financial Good overall level of Very high level of financial financial competence competence is deficient technical/financial com- technical/financial com- competence with substantial in one major area petence with regard to petence deficiencies in terms accurate facts, logical of accuracy of facts, analysis, and recommen- logical analysis and dations based on findings recommendations e) Acceptance of None of major recommen- Fewer than half of the More than half of major Nearly all major recommen- recommendations dations accepted major recommendations recommendations accepted dations fully accepted (75 accepted (up to 75 percent) percent to 100 percent) 2. Outcomes Almost none of the major Fewer than half of the major More than half of major Nearly all major recommen- (Implementation of recommendations recommendations imple- recommendations imple- dations fully implemented (75 recommendations) implemented mented mented (up to 75 percent) percent to 100 percent) 3. Impacts Almost none or negative Few improvements made, Major improvements made; Major improvements beyond impact (situation made but issues/problems targeted issues/problems targeted issues targeted; outcome worse or additional to be addressed not resolved to be addressed resolved achieves best practice/ problems created) adequately (e.g., reduction in adequately. regional or global role model number of days from 120 to 90 to register business, but target of 40 not met) 2 3 1 ANNEX III.F: IC TAAS DESCRIPTIVE OVERVIEW Breakdown of IC TAAS by Category tion/sectors (Category 2) and capacity-building Overall, 27 percent of IC TAAS operations by activities (Category 3). Growth in the Category 1 number have general IC assessments (broad IC segment over time reflected the expansion of FIAS assistance, or Category 1), and 43 percent of IC diagnostics and administrative barrier studies to TA operations were Category 2 (sector-specific investment projects, as well as more recent SME advisories). The remaining 30 percent were mapping studies. More recent IC TA projects have Category 3. Moreover, 11 percent of the projects had a higher incidence of incorporating capacity categorized as 1 and 2 also contained capacity building components as part of either sector- building Category 3 components. Figures III.F.1, specific assistance or broad IC policy advisory III.F.2, and III.F.3 show trends in numbers of work (and hence of qualifying for inclusion under operations and US dollar volumes over time. Due both Categories 2 and 3, or Categories 1 and 3). to the relatively small size of Category 1 More recent operations also took the form of operations, they accounted for only 12 percent capacity building alone, as was the case for many of total IC TAAS volume. Categories 2 and 3 SME IC technical assistance projects that aimed to claimed the remainder in terms of dollars spent, strengthen the private sector's knowledge of new each accounting for roughly half. legislation or good corporate governance, and its Most of the growth in terms of number of IC capacity to engage with government to conduct TAAS operations was in advice on specific legisla- policy advocacy. Figure III.F.1: All Categories Increased after 1997, with Category 2 and 3 IC TAAS Experiencing Sharp Growth Evolution of IC activities by category 60 50 40 operations 30 of 20 Number 10 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Sector specific Capacity building Broad IC 2 3 3 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Figure III.F.2: Evolution of IC TAAS Activities by Category, Including PEP 50 45 40 35 30 millions 25 US$ 20 15 10 5 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Broad IC Sector specific Capacity building Figure III.F.3: Evolution of IC TAAS Activities by Category, Excluding PEP 5 4 3 millions US$ 2 1 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Broad IC Sector specific Capacity building Breakdown of Category 2 (Sector Specific) was responsible for delivering most of the By number of operations, most IC TAAS in advisory support in investment policies and laws. Category 2 focused on financial sector advice and FIAS also carried out most of the investment investment policies/laws (see figure III.F.4).82 All incentives operations. In terms of volume, IC TAAS done in the financial sector was privatization advice clearly dominated, led by the executed by investment departments and PEP program (see figure III.F.5). Yet a breakdown funded mostly through TATF. The FIAS program of privatization advisory projects by number 2 3 4 A N N E X I I I . F : I C TA A S D E S C R I P T I V E O V E R V I E W Figure III.F.4: Distribution of Sectoral-Specific Figure III.F.5: Distribution of Sectoral-Specific Advisory Work by Number of Operations Advisory Work by Volume (in US$) Investment incentives & Corporate Other tax legislation governance Other Investment 15 percent 8 percent 8 percent incentives & Corporate 11 percent tax legislation governance 2 percent 3 percent Privatization Investment & Investment & 8 percent competition competition policy Agriculture & policy 5 percent forestry 35 percent 2 percent Financial sectory advisory Financial Privatization 13 percent sectory 58 percent Agriculture & advisory forestry 29 percent 3 percent (figures III.F.6 and III.F.7) shows that there were percentage terms. Regarding countries without few in number: PEP executed 9; PSAS carried out an IC rating, a majority of these (nearly 80 13 Category 2 projects and only two were done percent) are countries that would normally fall by investment departments with TATF support. under poor investment climate. The East Asia and Pacific and Sub-Saharan Concentration in Frontier Countries Africa Regions were the top receivers of IC TAAS In line with IFC's frontier strategy, most of IFC's (see figures III.F.11 and III.F.12) in terms of non-investment IC operations was done in number of operations, thanks mostly to the large countries with poor investment climates (see number of FIAS projects done in these regions figures III.F.8 and III.F.9). Figure III.F.10 shows the and more recent SME department activities. breakdown by instrument/provider of TA in However, in terms of volume of US dollars spent, Figure III.F.6: Privatization by Facility by Figure III.F.7: Privatization by Facility by Number of Operations Volume (US$ millions) PEP 32 percent PSAS 16 percent PEP Direct 83 percent PSAS investment 59 percent through Direct investment TATF through TATF 1 percent 9 percent Note: PSAS = private sector advisory services; PEP = private enterprise partnerships; Note: PSAS = private sector advisory services; PEP = private enterprise partnerships; TATF = Technical Assistance Trust Funds. TATF = Technical Assistance Trust Funds. 2 3 5 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Figure III.F.8: Distribution of IC TAAS by Figure III.F.9: Distribution of IC TAAS by Number of Operations Volume (US$ millions) 400 100 350 90 300 80 136 70 250 62 60 200 50 150 50 40 218 41 49 100 30 20 50 98 111 33 6 10 11 0 7 0 Poor IC Good IC No IC rating Poor IC Good IC No IC rating Non-investment departments Non-investment departments Investment departments Investment departments Figure III.F.10: Breakdown by Instrument Distribution of IC TA (by number of operations) PSAS Non-investment departments SME Dept FIAS PDFs Investment Direct TA by Inv Depts (TATF) departments PEP 0 20 40 60 80 100 Percent Poor IC Good IC No IC rating the Central and Eastern Europe Region claimed number of operations and volume, with $3 million $100 million compared to a regional average of spent on 27 operations. Similarly, IC TAAS activity about $11 million for the others. PEP was respon- in the Middle East and North Africa and Latin sible for about a quarter of the number of all America and the Caribbean Regions was below operations that went to that Region, yet for nearly regional averages. 90 percent of the volume. East Asia and the Pacific, Sub-Saharan Africa, and the Southern Europe and The Role of IFC's Investment Departments Central Asia Regions received $17 million, $16 in Providing IC TAAS million, and $15 million, respectively. The South In terms of volume, IFC's investment depart- Asia Region received the least in terms of both ments took the lead in initiating and carrying out 2 3 6 A N N E X I I I . F : I C TA A S D E S C R I P T I V E O V E R V I E W Figure III.F.11: Distribution of IC TAs Figure III.F.12: Distribution of IC TAs by Region (Number of Operations) by Region (US$ millions) 180 110 160 100 90 140 18 57 80 120 70 100 60 operations millions 50 92 of 80 49 48 15 40 60 US$ 100 23 111 30 40 Number 58 20 6 2 52 20 48 41 10 2 10 9 3 17 7 8 9 9 14 2 0 0 6 4 2 CEE EAP LAC MENA SAR SECA SSA World CEE EAP LAC MENA SAR SECA SSA World Non-investment departments Investment departments Non-investment departments Investment departments Note: CEE = Central and Eastern Europe; EAP = East Asia and Pacific; LAC = Latin America Note: CEE = Central and Eastern Europe; EAP = East Asia and Pacific; LAC = Latin America and the Caribbean; MENA = Middle East and North Africa; SAR = South Asia; ECA = Europe and the Caribbean; MENA = Middle East and North Africa; SAR = South Asia; ECA = and Central Asia; SSA = Sub-Saharan Africa. Europe and Central Asia; SSA = Sub-Saharan Africa. IC TAAS activity. These departments (through IC TAAS across programs and provider units, it is PEP, PDFs, and TATF) mobilized about $118 difficult to make comparative inferences on a million, or 70 percent of the total $167 million global basis, hence each TA providing unit is IC TA, to fund approximately 260 IC-related discussed briefly in the paragraphs below. TAAS operations. However, their share drops to only 35% by project number (see figures III.F.13 PEP 82 and III.F.14). Given the size differences and The PEP (and pre-2000 PEP) program provided varied approaches to structuring and executing the lion's share of IFC's IC TA during the review Figure III.F.13: Breakdown by Number of Figure III.F.14: Breakdown by Volume of IC TA Projects Including PEP Including PEP PSAS PSAS SME Dept 2 percent SME Dept 8 percent 3 percent 4 percent FIAS 20 percent Investment Dept through TATF Investment 14 percent Dept through PDFs TATF 2 percent 14 percent FIAS 59 percent PEP PEP 53 percent 53 percent PDFs 2 percent Note: PSAS = Private Sector Advisory Services; SME = Small and medium enterprises; Note: PSAS = Private Sector Advisory Services; SME = Small and medium enterprises; TATF = Technical Assistance Trust Funds; PEP = Private Enterprise Partnership; PDFs = TATF = Technical Assistance Trust Funds; PEP = Private Enterprise Partnership; PDFs = Project Development Facility. Project Development Facility. 2 3 7 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E period, at nearly $90 million ($84 million if program cut the average IC project cost from the adjusted for overlaps with TATF in the pre-2000 pre-2000 average of $2.6 million to $1.5 million. years). About 90 percent of PEP programs Supporting government privatization included a component aimed at improving the programs was the most important type of IC investment climate in the former Soviet Union TAAS undertaken by PEP (see figures III.F.15 and countries. PEP takes a holistic approach to III.F.16), especially in the earlier years of the providing TA to clients (see box III.F.1). Such a program's existence. Two sizeable land privatiza- comprehensive approach places PEP's average tion and reform projects in Russia and the cost at $2.4 million per project above all other IC Ukraine accounted for a combined $42 million. TA providers across IFC.83 After completing Five projects were in support of SMEs, and four large privatization projects, the post-2000 PEP others had objectives of improving corporate governance standards through a combination of improving legislation and regulations, direct company training and capacity building Box III.F.1: PEP's Approach to Improving Investment (Categories 2 and 3). Climates TATF Support of Investment Departments PEP's approach to delivering TA takes a holistic and programmatic IFC provides TA funding using grants from view, with each project containing three main components: bilateral donors under the TATF Program.84 The TA assignments under TATF are developed and (i) policy diagnostic to identify the problems and make specific task managed directly by IFC's operations staff.85 recommendations; TATF funding of IC operations over the evalua- (ii) public relations to educate public/stakeholders and promote re- tion period totaled $35.6 million,86 or roughly 26 forms; and percent of the total TATF program over the same (iii) training on the conceptual and practical implications of new period. The total number of assignments funded laws and policies for potential beneficiaries and users. over the period was 279, yielding an average assignment cost of $128,000. Yet because of the As a result of the approach combining policy advice with training and nature of nationality tied funding and other capacity building, most PEP IC TA projects were classified as both Cate- donor-specific requirements,87 many IC TA gory 2 and 3. operations have had more than one assignment Figure III.F.15: Sectoral Breakdown of PEP Figure III.F.16: Sectoral Breakdown of PEP by Number of Operations by Funding Amount (in US$ millions) Agriculture & forestry SME SME 9 percent 11 percent 22 percent Corporate governance Agriculture & 17 percent forestry Privatization 3 percent 71 percent Dispute Corporate resolution/legal governance 4 percent 10 percent Financial sector Financial advisory sector Privatization 9 percent advisory 39 percent 5 percent 2 3 8 A N N E X I I I . F : I C TA A S D E S C R I P T I V E O V E R V I E W (i.e. multiple project approvals and numbers in projects.89 While improving the IC was not an the TATF system). Taking this into account, IEG- explicit strategic objective of the MPDF, it IFC estimates the average cost per overall nonetheless mobilized the largest amount of all operation to be approximately $169,000. the facilities in support of TA funding for IC activi- TATF-funded IC advisory work focused ties, $2.5 million. This assistance went mostly mostly (40 percent by both volume and toward supporting the Vietnam Private Sector number) on advising policy makers on specific Forum and toward assessing IC issues and laws or sector policies and regulations (Category needed reforms through a series of papers that 2).88 The financial sector dominated as 40 were discussed with government, private sector, percent of all TATF IC, or $13.5 million, went to and the Bank. SEED--the only facility which advise governments on financial sector policies placed an explicit strategic focus on improving and legal/regulatory frameworks. Box III.F.2 investment climate for SMEs--allocated less than provides some examples of typical TATF-funded $350,000 to IC activities over the review period, financial sector projects. Sector-specific advice in part due to its recent establishment in 2000. In was accompanied by capacity building coordination with the SME department, SEED components in 29 percent of assignments, an focused its IC efforts on improving legislation, occurrence that became more common after mostly in leasing, and on advocating various 1998. Stand-alone capacity building projects reform initiatives in support of SMEs, namely accounted for 26 percent of all assignments, through workshops and private/public dialogue. while only 14 percent focused on broader-based The SPPF delivered six small IC TA projects in IC reform agendas, such as diagnostics. tourism and fisheries totaling $85,000, and APDF carried out an SME-focused IC TA in Ghana for SME Facilities $50,000. The role of the facilities in providing IC TAAS was There is evidence that the facilities have limited during the review period: in total, four become more active in the area of improving IC facilities spent about $2.9 million on IC in the period following the review (2003), as BEE Box III.F.2: Examples of TATF-Funded Financial Sector Projects Aimed at Improving the Investment Climate In Turkey, IFC provided TA in 1999 to draft new insurance legis- provided implementation assistance to the government. Total lation and supporting regulations based on the European Union donor funding: $100,000 model of insurance regulation. The primary legislation and sup- In Mexico, IFC examined the existing legal and regulatory porting regulations covered both life and non-life insurance. framework for securities markets and recommended specific im- Total donor funding: $208,550 provements in the National Banking and Securities Commission's In Romania, IFC helped the government in 1998 to develop the supervisory practices. The assignment helped the Mexican gov- structure, responsibilities and operating guidelines for the regu- ernment formulate its policies and develop its securities markets. latory apparatus of the Pension Supervision Agency, and estab- Total donor funding: $15,000 lish best practice guidelines for the operation of new pension In Egypt, IFC provided TA focusing on removing impediments to management companies. Assistance was also provided to de- local bond market development by (a) providing international per- velop investment policies for these new management companies. spective and expertise on removing impediments in a safe and pru- Total donor funding: $471,000 dent way; (b) helping regulators draft documents, procedures, In Nepal, IFC assisted the government in 1998 in developing an regulations, etc. needed for the market; and to a lesser extent help- appropriate regulatory regime for lease finance. The project re- ingensurethatregulatorsandmarketparticipantsarecommunicating viewed the regulation and potential market for lease finance and effectivelytomovetheprocessforward.Totaldonorfunding:$141,000 Source: TATF project descriptions. 2 3 9 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E features more dominantly in the newer facilities' team of consultants, followed by the production (socioeconomic development fund, Caribbean of a written report and then by the presentation Project Development Facility, and Latin America and discussion of that report and its recommen- and the Caribbean) mandates. There is overlap dations in the country with clients and major between BEE and investment climate as defined stakeholders (see box III.F.3 for an overview of in this report since BEE can also include a range FIAS product lines). However, where govern- of activities designed to improve investment ments are receptive, FIAS attempts to build climates, such as more general capacity building assistance programs aimed at identifying and of business associations. It also undertakes a implementing reforms downstream of initial broad range of business development services, diagnostic work. Nearly half (44 percent) of FIAS which are not included in this report's definition projects are categorized as 1, and these types of of investment climate. So far, resource allocation advisory projects focus on diagnostics, legal and to BEE activities for the newer facilities is regulatory environment assessments, and estimated at approximately 15 percent of total administrative barriers to investment. Just over a facility expenditures. quarter were categorized as 2, including advice on formation of investment promotion legisla- The Role of Independent Departments: tion, investment incentives regimes, and other FIAS, PSAS, and SME more narrowly focused or sector-specific assign- The non-investment departments--FIAS, PSAS, ments. The amount of projects qualifying as and the SME department--executed IC TAAS Category 3 has increased significantly over the activities worth just over $50 million during the past decade due to two main factors: (i) review period, representing 31 percent of all IC increased incorporation of capacity building TAAS in dollar terms. In terms of number of elements in Category 1 and 2 advisory projects, operations, however, the non-investment and (ii) introduction of implementation projects departments executed 65 percent. that focus on building government and private sector capacity to move forward the reform FIAS process. The implementation projects are Of all the TA-providing units that operate in designed to follow up on and build on relative independence of the regional depart- recommendations proposed in previous FIAS ments, FIAS was the most active in the area of reports. IC. Having completed 387 IC TA assignments during the review period, FIAS had the lowest PSAS average cost per project of all IC TA providers in PSAS provides assistance to governments in IFC: $87,000. The volume and number of its executing privatization transactions, many of projects grew proportionately from roughly $2.5 which contain some form of advice to govern- million to deliver 30 IC projects in 1993 to just ments on the legal or regulatory framework in under $5 million to deliver about 50 projects in the sectors to be privatized. PSAS projects are 2002. Roughly half of FIAS's budget was paid by paid for by a combination of client fees and donors (14 donors have contributed to FIAS's budget support from IFC and other donors, Trust Fund), and the other half by the IFC and including TATF.90 IFC's net contribution (after World Bank, of which IFC contributed two-thirds reimbursements) over the review period was (approximately $11 million over the review $6.6 million (equaling the cumulative operating period) and the Bank one-third. loss over review period). IEG-IFC estimates that Virtually all of FIAS's projects were in support roughly 25 percent of all PSAS transactions with of improving investment climate, and the small mandates signed over the review period unit generated more than half of IFC's IC TAAS contained IC components, and that these operations on a number-of-projects-basis per projects totaled just over $13 million.91 However, annum. FIAS projects tend to be standardized, due to the emphasis on structuring and execut- discrete interventions involving a field visit with a ing transactions, only a portion of this amount 2 4 0 A N N E X I I I . F : I C TA A S D E S C R I P T I V E O V E R V I E W Box III.F.3: Overview of FIAS Advisory Services FIAS offers a range of services to help governments attract FDI. flowcharts pinpointing problems help governments identify and Topics for assistance include: eliminate counterproductive procedures and streamline the nec- Diagnostics--Identifying a country's main policy impediments essary regulations that remain. FIAS has included a self-assess- to productive FDI. The issues typically identified include prohibitions ment approach to reviewing administrative barriers to investment on foreign investment in sectors or locations; restrictions on the in client countries. Under this approach, a counterpart team in the share of foreign ownership in the equity of domestic companies; government will utilize FIAS-developed templates to collect the difficult administrative approval processes; restrictions on repa- basic institutional information on administrative procedures for triation of dividends and capital; taxes; the character and functioning business establishment and operation in the country following of legal systems; and problems foreign firms have in gaining access the existing norms and regulations. to land and bringing in technical and managerial staff. Investment Incentives--Analyzing incentives to ensure that Legal and Regulatory Environment--Reviewing a country's they are competitive and cost effective. legal and regulatory environment and recommending measures in Investment Promotion--Helping countries design promotion in- such areas as screening procedures, restrictions on the per- stitutions, adapting models that have proven effective elsewhere. centage of shares owned by foreigners, currency convertibility, ac- It also helps these agencies formulate promotion strategies that cess to land, and investment protection under national laws and identify competitive advantages and target specific opportuni- international conventions. ties. Strategies can be conceived on national, regional, or sector Administrative Barriers--Analyzing administrative barriers levels. that slow investment and subsequent production. These detailed Source: FIAS Web site, www.fias.net. would have explicitly contributed to improving operations. Almost half of the operations were the legal and regulatory environment. capacity building (Category 3), reflecting the Given the sector-specific nature of PSAS strategic importance of SME department efforts advisory work, about 80 percent of all IC to upgrade skills levels and standards of practice projects have sector-specific legal/regulatory/ and to strengthen the private sector's ability to policy advice components (Category 2). The organize and conduct constructive dialogue with remaining 20 percent are capacity building the government on policy issues. Thirty-two projects (Category 3). Nearly half of the sector- percent of projects aimed at providing sector specific assistance projects also had a capacity- specific advice (Category 2). The majority of these building aspect. About 70 percent of all IC projects was in the financial sector and contained qualifying PSAS projects were done in the capacity building elements in addition to the infrastructure sector. central policy/legal advice. Twenty-eight percent of the projects were broader assessments of the SME Department investment climate (Category 1) and were often Total IC TA generated by the headquarters SME supported by public/private sector dialogue department amounted to $4.24 million for 25 components on the issues identified (Category 3). 2 4 1 ANNEX III.G: FIAS'S PROJECT IMPACT MONITORING SYSTEM AND MAJOR FINDINGS Introduction FIAS's PIM system was introduced in fiscal 2001. Table III.G.1: Project Example Within the system, FIAS task managers track for each project the implementation of major Importance Implementation recommendations by the client government. Recommendation weight rating This note presents the results of the first FIAS Include arbitration legislation 3 1 self-assessment of the PIM system. Train IPA staff in FDI promotion 1 4 Under the system, task managers review their projects once a year over three years and rate each recommendation on a scale from 1 to 4, with rejects the important one but fully implements the less important one fully. If we now calculate · 4 = recommendation fully implemented the simple average, the project would receive a · 3 = recommendation partially implemented score of 2.5 (i.e., [1+4]/2). However, consider- · 2 = recommendation accepted, but not im- ing the different importance of both recommen- plemented dations, the weighted score would be only 1.75 · 1 = recommendation rejected. (calculated as [3 × 1]/[3+1] + [1 × 4]/[3+1]), providing a more accurate project implementa- In addition, task managers also weigh the tion rating. relative importance of each recommendation Data are now available for the first years of with respect to its expected impact on a projects completed in fiscal 2001 and 2002, country's overall investment climate and ability allowing for the calculation of weighted to attract investment. The weights are on a scale implementation ratings for each project.92 The from 1 to 3: self-assessment therefore limits itself to these two fiscal years, but information for fiscal 2003 is · 3 = very important provided where possible based on a first evalua- · 2 = important tion provided by Task Managers. It provides · 1 = less important. more detailed and systematic information compared to previous attempts. But it should be The combination of the implementation kept in mind that this is, after all, a self-assess- rating with an importance weight allows for the ment of the performance of FIAS and consists of calculation of weighted scores, where the evaluations done by FIAS task managers that will implementation progress on individual remain subjective despite quality control efforts recommendations is adjusted by the relative by FIAS management. importance of each recommendation. Consider the project described in table III.G.1, resulting Overall Impact in two recommendations to the government, In fiscal 2001­3, FIAS completed a total of 146 one judged to be critical for the investment advisory projects worldwide. The current score climate while the other one is deemed less for fiscal 2001 projects is 2.73 on our scale of 1 to important. Now assume that the government 4, and slightly lower at 2.61 for fiscal 2002 2 4 3 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E projects. A first assessment of fiscal 2003 worse, although it was considered the best projects indicates a score of 2.38. This trend of performer, with 71 percent of recommendations improving recommendation implementation as fully or partially accepted in the last self-assess- more time elapses since project inception is ment covering fiscal 1999­2001. Many countries common to policy advisory work, reflecting the in this region face political and economic fact that policy reforms take time to implement. instability combined with general public dissatis- It is important to note that many of these faction regarding privatization and liberalization projects, even fiscal 2001 operations have not policies pursued in the past, leaving govern- yet completed their full three-year review cycle, ments hesitant to initiate private sector policy and further improvements should be expected. reforms. However, the implementation ratio is But the largest gap is clearly after the first year, expected to improve in all regions with the when government clients are typically initiating maturing of advisory work. policy reforms, resulting in limited implementa- tion impact immediately following the comple- Impact by Income Grouping tion of an advisory project. Low- and lower-middle income countries Overall, 30.4 percent of FIAS recommenda- accounted for more than 82 percent of all tions were considered fully implemented by advisory projects done in fiscal 2001­2. The clients, and another 33.6 percent were partially remaining assistance went to a select number of implemented. In 33.8 percent of the cases, upper middle-income countries and to two clients accepted our recommendations but (so high-income countries. far) failed to follow up with any implementation Comparing these different income groupings activity. Only 2.2 percent of FIAS recommenda- by impact score as well as by percentage shares tions were outright rejected by clients. Yet of recommendations implemented, it is interest- breaking down these results between the two ing that FIAS advisory assistance seems to be fiscal years shows a striking difference, again more effective in poorer countries. Low-income reflecting the fact that it takes time for clients to countries showed the best average project act on FIAS recommendations and initiate a impact score of 2.75 (ignoring the results for the policy reform process. For fiscal 2001 projects, two high-income countries), with close to 70 40.8 percent of the recommendations are percent of FIAS recommendations fully or partially implemented and only 27 percent are partially implemented. In lower middle-income accepted but not implemented; for fiscal 2002 countries, the impact score declines slightly to projects, on the other hand, this relationship is 2.63 and an implementation share of 65 percent. reversed, with 26 percent partially implemented But for upper middle income countries the score and 40.9 percent not yet acted on by clients. drops to 2.4, with only slightly more than 40 percent of FIAS recommendations being Impact by Region pursued by clients. The reason behind these In terms of a regional breakdown, Sub-Saharan trends could be that FIAS is better equipped to Africa was the most important geographic assist its lower income clients, as well as that region for FIAS with 28 advisory projects, poorer countries have a stronger sense of followed by East Asia and the Pacific with 27 urgency in implementing reforms to catch up in projects and Europe and Central Asia with 19 their ability to attract private investment. projects. Latin America and the Caribbean as well as the Middle East and North Africa follow Impact by Product with 11 projects each. An interesting question is whether FIAS's impact The three largest regions are also the best might vary across its product spectrum, performers, with average impact scores of above implying that some advisory products might be 2.7 and percentage shares of recommendations more useful to clients than others. fully or partially implemented above 65 percent. The comparison of products (administrative LAC, on the other hand, performed significantly barrier studies, diagnostics, investment pro- 2 4 4 A N N E X I I I . G : F I A S ' S P R O J E C T I M PA C T M O N I T O R I N G S Y S T E M A N D M A J O R F I N D I N G S motion agencies and strategies, investment projects alone, the respective shares of fully and legislation and corporate income tax and tax partially implemented recommendations are 72.2 incentives) with respect to the implementation percent and 77.6 percent. For these products, a actions taken by clients shows that the project marked improvement over the next year should impact rating as well as the implementation share be expected. remains strong across different products. This issue does not seem to be a serious Noteworthy is that the share of fully implemented factor in FIAS work on IPAs, investment legisla- recommendations is particularly high in our law tion or tax, where recommendations tend to be and tax projects, while administrative barriers easier to implement for these products, or tend to be slightly less successful. A closer look at where FIAS assistance supports an ongoing the differences between the fiscal 2001 and 2002 technical initiative, such as drafting of legislation project results is revealing. Administrative barrier or a tax reform program. This also explains the studies and diagnostics tend to deal with a relatively large share of full implementation, as broader range of policy recommendations that detailed technical advice typically is incorpo- take time to implement. Considering fiscal 2001 rated entirely. 2 4 5 ANNEX III.H: OVERVIEW OF THE RESULTS-BASED MANAGEMENT FRAMEWORK Results-based management (RBM) is defined as a · Working with stakeholders to make a com- management strategy focused on performance prehensive situation analysis and achievement of outputs, outcomes and · Jointly defining the results we contribute to and impacts. RBM is a system to improve program and the results we are accountable for management effectiveness and accountability and · Identifying a set of qualitative and quantita- is oriented toward achieving results. It uses results tive indicators with baselines and targets for all as a basis for planning, management and report- planned results ing, and aims to improve performance by compar- · Defining the strategies to achieve these results ing and analyzing actual results against planned · Regular monitoring to track progress toward results through regular monitoring, evaluation, achieving these results reporting, feedback and adjustments. A simple · Evaluation of performance to assess what works RBM process is presented in figure III.H.1. and what does not work, and why Basic principles and practices of an RBM · Reporting on performance to enhance ac- approach include the following: countability and communication with partners · Feeding lessons learned back into improving · Strengthening partnership, participation, and performance and refining results, indicators, teamwork at all levels and stages and strategies. Figure III.H.1: Simple RBM Model Regular monitoring and evaluation Planned results Actual results Regular feedback and adjustment Sources: OECD (see http://www.oecd.org/dataoecd/16/25/1886519.pdf) and United Nations (see http://accsubs.unsystem.org/ccaqfb-intranet/RBB-RBM/ResultsBasedMgt.htm). 2 4 7 ANNEX III.I: OVERLAP BETWEEN FIAS AND MIGA Recently FIAS commissioned a discussion paper to the Sydney office of FIAS carries out some examine overlaps between its services and those activities of (rows) 5 through 7 in a few by MIGA, among other objectives (Wells 2004). small countries in the Pacific. It is clear The table below summarizes the possible activities that (rows) 5 and 6 sometimes attract under Investment Promotion Products (IPP), as FIAS and sometimes MIGA; MIGA claimed defined in that report. FIAS activities usually part of (row) 4 as its territory as well. encompass rows 1 to 4 of the table. However, as shown in the table, interviews with staff from both While the range of potential overlap appears units indicate that the borderline between FIAS wide, the actual proportion of projects done by and MIGA activities is not so clear in practice: FIAS in the so-called gray areas of investment promotion strategy and institution over the For years, the allocation of tasks to FIAS review period was low--roughly 20 percent (21 and MIGA has appeared arbitrary and percent in terms of total number of projects and vague to many. Professionals in FIAS and 23 percent of total project cost). The fiscal MIGA agree that (rows) 7 and 8 are the 2001­4 period shows a decline in this segment territory of MIGA, rather than FIAS. There to about 11 percent of all advisory projects (only are, however, occasional exceptions... an estimated four to eight projects per year). Possible Range of Activities Under FIAS/MIGA Investment Promotion Products FIAS MIGA 1 1 Diagnostic work 2 2 Administrative Barriers Studies 3 3 Development of national investment strategies, including investment law, approaches for reforming other laws, approvals processes, tax structure and administration, etc. Advice on location of investment promotion activity within government Creation of legal framework for effective policy advocacy 4 4 4 Creation of basic design (governance structure, for example) of proposed investment promotion unit to be re- sponsible for marketing function 5 5 5 Assistance in designing marketing strategy of responsible investment promotion unit Diagnostic studies of promotion institutions 6 6 6 Assistance in designing initial business plan of responsible unit 7 7 7 Help in developing budgets and detailed organizational charts of marketing unit Assistance in developing target sectors Provision of training to marketing unit, help in Web site design, tracking systems, benchmarking, etc. 8 8 Working with and providing capacity building assistance to investment promotion organizations in carrying out their activities 2 4 9 ANNEX III.J: MANAGING CONFLICT-OF-INTEREST CONCERNS This study's scope did not extend to a thorough procedures in place since 2000 help staff and review of the WBG's COI system and managers identify and effectively manage procedures. While the IEG-IFC team did not potential conflicts of interest.95 The COI encounter any specific complaints or allegations framework typically involves disclosure to of COI in the field, there is concern within parts concerned parties and sets out measures to of the Bank Group that IFC's dual role as advisor manage any actual, potential or perceived to governments on legal and regulatory matters conflicts of interest arising from the dual roles of and as a direct (prospective and existing portfo- the Bank and IFC: lio) investor could result in potential or perceived conflicts of interest that require · Disclose potential conflict issues fully to all af- careful management. Concerns have also been fected parties before acceptance of the pro- expressed inside and outside the WBG where posed assignment. IFC and Bank departments have merged, so that · Obtain fully informed and freely given con- the same organizational unit could be engaged sents from affected parties, when appropri- in advising governments on privatization and ate, before acceptance of the proposed regulatory strategies/issues while also discussing assignment. private sector investments in the same sector. · Assign staff to teams in such a way as to avoid On the other hand, IFC staff has noted that many members overlapping between assignments Part II clients (especially IDA countries) have for clients with divergent interests, as appro- expressed frustration in that the WBG fails to priate. provide client countries with the package · Implement guidelines for the treatment of solutions they need--and are requesting--in confidential client information. complex areas such as infrastructure, involving · Where possible, sequence assignments to min- at once reform advice, transactional advice, and imize the extent of the conflict. financing. While IEG-IFC's reports did not look into advisory work done by Bank staff in joint Where a COI cannot be resolved, the rules departments, four sector-specific advisories specify that an assignment is to be declined. done by the IFC staff in joint industry groups The rules and procedures currently in place and their predecessor departments qualified for align well with generally prescribed standard inclusion in the IC TAAS database.93 practices for identifying and managing COI in To address COI concerns in the context of the financial institutions.96 In the identification of merged departments, WBG adopted COI COI, an important first step is to determine guidelines and formed an independent COI whether the conflict is actual, potential, or office to deal with actual, potential and perceived. In the words of an expert in COIs in perceived conflicts in a systematic fashion for the financial services industry: "Despite the the Global Product Groups and PSAS.94 The prevalence of potential conflicts of interest in office deals with actual, potential, and perceived the financial services, the occurrence of actual COIs for other departments in the WBG on a conflicts has been minimized by relatively voluntary, case-by-case basis. The COI rules and effective preventative strategies. These strate- 2 5 1 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E gies are embodied in much of the regulation of cannot enter into financing discussions with the financial services industry and in accepted interested third-party investors until after a industry practices. They can be conveniently public authority has made a bidding selection. classified under the headings of competition, Most of IC TAAS appears not to be conflicted disclosure, rules and policies, and structural at all, or may contain at most a potential or changes" (Boatright 2002). Box III.J.1 sets out perceived COI. For example, broad IC assess- these classifications in more detail. ments (Category 1) address general constraints All privatization advisory assignments to private investment and advocate increased undertaken by PSAS and all GPG advisory competition economy-wide--such advice is not mandates must undergo "conflict screening" by linked to the financial interest of any particular the relevant department in consultation with the investment project. Similarly, sector-specific COI Office and are managed according to the advice focuses on improving conditions to established IFC principles and procedures on encourage private investment in the sector by the matter. For PSAS advisories, for instance, a removing constraints or establishing needed "Chinese wall" is placed between advisory teams legal/regulatory framework based on interna- and investment teams, by separating functional tional best practices. This type of advice is units and preventing transmission of informa- typically not linked to an existing IFC project tion across units. The COI Office states that and would equally benefit subsequent private there have been very few incidences of actual investments, including a potential downstream COI in IFC's experience, with most situations IFC investment project once appropriate falling under the category of potential or conditions are established in the sector. perceived (i.e., reputation risk). Potential However, potential COI could arise where IFC conflicts can arise in situations where IFC takes is pursuing a project in parallel with providing on an advisory role in the privatization of a TA on sector policies/regulations. Under these sector and/or gains sensitive market informa- circumstances, COI rules require that the tion, and subsequently IFC would be willing to advisory work be undertaken by a separate and finance an investment project. In these independent team from any IFC investment situations, IFC's policies specify clearly that IFC team for a potential project, and that the Box III.J.1: Strategies for Managing Conflicts of Interest Preventative strategies as embodied in much of the regulation Rules and policies--Specific rules and polices serve to reduce of the financial services industry and in accepted industry prac- COI, whether disclosed or not, by prohibiting conduct that consti- tices include the following: tutes or facilitates conflicts. These rules and policies may ad- Competition--Intense competition for clients among financial dress COI directly by prohibiting the kind of conduct that constitutes service providers creates a powerful incentive to avoid actual con- or facilitates COI. flicts of interest and the appearance of conflicts. Results are criti- Structural changes--Because so many COIs result from com- calincompetition,andanysourcesofinefficiencymustbeeliminated. bining different functions in one institution, these conflicts could Where competition thrives, service provision must be based on be reduced by structural changes that separate these functions "best practice execution" rather than other institutional interests. into distinct units and teams, and limit the flow of information (Chi- Disclosure--Disclosure as a strategy for managing conflicts of nese wall). Addressing the problem of COI by such radical struc- interest is generally understood as the disclosure of adverse inter- tural changes is probably unwarranted, however, because of the ests.Inaddition,conflictsofinterestcanbeavoidedbymakingknown many advantages of such combinations. The trend in the financial an institution's policies and procedures for dealing with conflicts. services industry is toward more rather than less integration. Source: Boatright (2002, pp. 231­5). 2 5 2 A N N E X I I I . J : M A N A G I N G C O N F L I C T- O F - I N T E R E S T C O N C E R N S potential COI and proposed mitigation based on international best practice and experi- measures be disclosed to the government ence and without regard to the possibility that client. The TA/advisory team would be expected IFC might eventually become a lender to or to provide stand-alone, independent advice investor in a project beneficiary. 2 5 3 Part IV MIGA Experience 18 Introduction Background I nvestment climate (IC) refers to a country's environment for private sec- tor activity. It is determined by risks and costs associated with investing in and operating a private business to the extent those risks and costs are af- fected by government policies. Determinants of investment climate are, inter decision-making of potential investors. FDI alia, the legal and regulatory framework, flows are important for their potential contribu- barriers to entry and exit, and conditions of tion to a country's growth and development markets for labor, finance, information, through employment and training opportuni- infrastructure services, and other productive ties, steady incomes, the transfer of know-how inputs. Improvements in investment climate are and technology, stimulation of local enterprises, largely in the realm of governments, which can efficiency gains through increased competition, influence macroeconomic management, trade and demonstration effects that may lead to and investment policies, and strengthen institu- follow-up investments. Thus, they contribute to tions and the rule of law.97 PSD and a reduction of poverty in many ways. Investment climate has been recognized by The Multilateral Investment Guarantee the World Bank Group (WBG) as an important Agency's (MIGA) mandate is to enhance the flow factor for development since the 1990s and has of investments for productive purposes to become a priority objective in recent years. The developing countries "on the basis of fair and Bank's Private Sector Development (PSD) stable standards for the treatment of foreign Strategy (2002) identified investment climate as investment."99 As a facilitator of FDI, MIGA is the primary determinant of the development therefore not only a player within the Bank's impact of PSD operations. Furthermore, recent PSD agenda, but its business is directly affected research suggests that there is a positive by the investment climate of host countries. relationship between a country's welfare and MIGA guarantees can mitigate political risks, a improvements in its investment climate. subset of investment climate. In turn, host While foreign direct investment (FDI) flows countries' investment climates also determine depend on many factors,98 broad IC issues MIGA's operating environment for its guarantees appear to be an important consideration in the and TA activities. 2 5 7 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Poor or deteriorating investment climate can presents findings from its two pilot evaluations diminish the development impact of MIGA and a review of all MIGA TA activities to date, projects and have repercussions on the Agency's within the limitations of available data. For the financial performance and sustainability (partic- TA activities, the report is organized around the ularly through increased project risk or claims following evaluative questions: triggered by host country action or inaction). In addition to offering guarantees to private · Did MIGA focus its TA on the right issues (rel- investors in developing countries, MIGA works evance)? with public sector agencies providing technical · Was MIGA's TA effective (outcome and im- assistance (TA) to build capacity in local invest- pact)? ment promotion agencies and to offer informa- · How were MIGA's TA activities funded (effi- tion dissemination services. ciency and institutional sustainability)? · What has MIGA's role been within the WBG Objectives and Evaluation Questions (additionality and complementarity)? This report is part of a joint evaluation of WBG IC activities conducted by the Independent IEG-MIGA used the logic model presented in Evaluation Group (IEG) of the World Bank, IFC, figure 18.1 to evaluate MIGA's TA activities, and MIGA. The objective of IEG-MIGA's evalua- assessing inputs, activities, outputs, outcomes, tion is to assess the effectiveness of MIGA's and impact. While relatively more information is activities in addressing IC issues and in fulfilling available for assessing outputs and outcomes of its development mandate. MIGA's TA, the link between impacts (changes in IEG-MIGA's evaluation focused mostly on FDI flows) and outcomes (i.e., the last link in MIGA's TA activities, particularly its capacity figure 18.1) becomes weaker, due to the building activities, during the fiscal 1998­2003 interference from other variables; thus, a strong period. For guarantee projects, it did not have a causality is difficult to establish. The impacts of large enough sample of evaluated projects to MIGA's activities were assessed within these assess systematically their impact on investment limitations. climate. However, the report includes an overview of MIGA's guarantee portfolio that Components of the Evaluation discusses trends and MIGA's performance with The findings from the guarantees evaluation are respect to priority areas, and reflects findings based on IEG-MIGA evaluations of guarantee from nine guarantee projects issued in fiscal projects insured in fiscal 1996­98.101 In addition, 1996­98 with respect to these projects' impact IEG-MIGA reviewed documents from MIGA's on PSD. The impacts of MIGA's information underwriting department for a portfolio overview. dissemination services and mediation activities The evaluation of TA activities is based on: have not yet been evaluated.100 Since the evaluation of TA activities began · A review of MIGA's TA activities focusing on the only in fiscal 2004, this evaluation report evolution, relevance, effectiveness, and effi- Figure 18.1: Logic Model for Assessing the Effectiveness of MIGA's TA Inputs Activities Outputs Immediate Intermediate Final effects outcome impact MIGA staff Technical Plans Changes in Improved Increased and assistance Materials practices and service FDI consultants Methods systems delivery Skilled staff 2 5 8 I N T R O D U C T I O N ciency of MIGA capacity building activities. Quarterly Executive Vice President and annual This review took stock of MIGA's TA portfolio reports; MIGIM's self-evaluation reports for a during the fiscal 1998-2003 period, identify- small number of country cases; other MIGA ing trends and issues. publications; and interviews with current and · Two country case studies (for El Salvador and former MIGIM senior management and staff, as Romania) evaluating MIGA capacity building well as other MIGA and WBG departments. The programs for investment promotion interme- two case studies involved staff interviews, a diaries.102 review of files and relevant WBG documents (e.g., CASs), a field mission, and a survey The findings of the TA evaluation are based administered to foreign investors that had used on a literature review and a review of the services of investment promotion interme- documents, including previous external assess- diary. The methodology IEG-MIGA developed ments of MIGA's TA activities; back-to-office for these case studies is consistent with the one reports from MIGA's Investment Marketing used by IEG-World Bank to evaluate Bank TA Services Department (MIGIM), budget informa- activities and is described in more detail in tion, and other internal documentation; MIGA Annex IV.A. 2 5 9 19 MIGA's IC Activities M IGA has a specialized role within the WBG with the specific objective to promote FDI flows to developing countries.103 MIGA's IC-related activities include: (i) political vironment analyses, and FDI-related research on risk guarantees; (ii) technical assistance and developing countries. The evaluation of these advisory services (TAAS) and information information services began in fiscal 2005. dissemination tools; and (iii) legal and Finally, MIGA mediates a small number of mediation services. disputes between investors and member Guarantees against political risks are aimed at countries for investment projects not covered facilitating FDI flows into developing countries by a MIGA guarantee. MIGA's legal department is by reducing specific risks of insured invest- also involved in claims avoidance activities ments. Guarantees can make certain aspects of related to disputes involving MIGA guarantees, investment climate more manageable and may which can affect a country's overall investment indirectly have an impact on investment climate, climate. e.g., by changing investors' perceptions of country risk or having a demonstration effect In Which Types of Investment Climate (and paving the way to other investments). Was MIGA Active? MIGA offers specialized TA, primarily targeted The following section analyzes the categories of to Investment Promotion Intermediaries (IPIs), countries in which MIGA has been active working with host governments. Currently, the through political risk guarantees and TA activi- range of TA activities for IPIs includes needs ties. The Heritage Foundation/Wall Street assessments, strategic planning, preparation of Journal Index of Economic Freedom (HFO/WSJ) marketing plans and promotional materials, Web was used because it captures well the elements site development, development of information of IC as defined for the purposes of this evalua- systems, and staff training, which are mostly tion, and was available with a consistent defini- provided free of charge to the recipients. tion over time for many countries; it is also In addition to TA activities, MIGA provides an highly correlated with other measures.104 Based expanding set of online information dissemina- on this index, MIGA guarantee projects over the tion tools that provide customized information fiscal 1998­2003 period have mainly been about investment opportunities, business en- concentrated in developing countries with 2 6 1 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E scores reflecting relatively restricted ("mostly Over the period 1998­2003, for political risk unfree") investment climates (see figure 19.1). guarantees, MIGA has become increasingly This indicates that on average MIGA guarantees more active in countries with "mostly unfree" were in countries where the types of risks MIGA investment climates: the (unweighted) average covers existed. Investors in better IC countries IC score of countries where MIGA guarantees were hence less likely to seek MIGA insurance; were issued has increased. (See figure 19.2. and low levels of MIGA insurance in countries Higher scores indicate more restricted invest- with "repressed" investment climate may have ment climates.) This reflects a shift in MIGA's been due to low investor interest in those portfolio toward postconflict countries and countries (and possibly deselection of risky projects in Africa. projects by MIGA). On average, MIGA TA activities during fiscal Review of MIGA Guarantee Activities 1998­2003 were in countries with worse ICs To achieve its objective of encouraging the flow than for guarantee activities.105TA activities were of productive foreign investments to developing also more likely than guarantee projects to be countries, MIGA began issuing guarantees to conducted in countries classified as having foreign investors against certain types of politi- "repressed" and "mostly free" economies (see cal risks in 1990.106 Currently, MIGA offers figure 19.1), whereas MIGA's guarantee projects coverage against the following risks: expropria- were overwhelmingly located in "mostly unfree" tion, war and civil disturbance, currency transfer investment climates. Within its TA products, restrictions (including inconvertibility of funds), countries that received limited assistance on and breach of contract. average have had worse investment climates, Within the Berne Union (the association of and countries receiving in-depth assistance had currently 51 investment insurers and export investment climates better than the countries credit agencies, which offer political risk served by MIGA guarantees. This implies that insurance), MIGA is the seventh largest insurer, overall IC conditions in a country have been providing about 8 percent of outstanding relevant for MIGA in its decision to offer more coverage (2003).107 MIGA defines its role as in-depth assistance to countries. complementary to other insurers by providing Figure 19.1: Concentration of MIGA Guarantee and TA Activities, 1998­2003 80 70 68% 59% 60 50 48% istributiond 40 38% 32% 30 28% Percent 20 14% 10% 10 0 0 0 4% 0 Free Mostly free Mostly Repressed unfree Investment climate FDI associated with MIGA guarantees Distribition of limited TA activities Distribution of in-depth TA activities (1­2 activities per country) (3 or more activities) 2 6 2 M I G A' S I C A C T I V I T I E S Figure 19.2: MIGA Guarantees Issued Increasingly in Countries with Low Investment Climates 3.4 3.35 3.3 index 3.25 3.2 Heritage 3.15 3.1 3.05 3 1998 1999 2000 2001 2002 2003 Note: Average Heritage index rating for MIGA guarantee countries, higher scores mean less economic freedom, 1­1.99 free, 2­2.99 mostly free, 3­3.99 mostly unfree, 4­5 repressed. counter-cyclical capacity, forging partnerships There are no measures that accurately track the with private and public insurers (through additionality of MIGA insurance across the coinsurance and reinsurance), and focusing on portfolio.110 certain priority areas. These priority areas were Trends in the portfolio composition indicate identified in the most recent strategic review (in that MIGA has made some progress toward 2000) as: (i) projects in International Develop- priorities in its strategy formulated in 2000. ment Association (IDA)-eligible countries, partic- MIGA's guarantee portfolio is concentrated in ularly in Africa; (ii) investments between infrastructure (38 percent of gross exposure as developing countries; (iii) small and medium size of June 30, 2004)--one of the priority areas enterprises (SMEs); and (iv) complex infrastruc- identified in MIGA's strategy, the financial sector ture projects. As part of the WBG, MIGA has a (35 percent), and in manufacturing and agribusi- development mandate that sets it apart from ness (9 percent). The balance is in mining and oil commercial insurers and requires its projects to and gas (11 percent), and tourism and services have a development impact and to be sound from (7 percent) (see figure 19.3). Geographically, an environmental and social perspective. MIGA has increased its exposure in Africa-- Since 1990, the Agency has supported 453 another strategic priority--to 13 percent of the projects in 85 developing countries. In support net portfolio. Europe and Central Asia has of these projects, MIGA has issued 711 contracts recently overtaken Latin America and the of guarantee for a total gross exposure of $12.8 Caribbean as the largest region in MIGA's portfo- billion.108 Of these contracts, 316 (44 percent of lio, accounting for 37 percent and 30 percent, contracts, equivalent to 41 percent of original respectively. The balance is in East Asia and the exposure) were active on June 30, 2004. MIGA Pacific (15 percent) and Middle East and North estimates that the projects it has supported have Africa (7 percent) (see figure 19.4). resulted in FDI of $51 billion, on average four As of June 2004, one-third of MIGA's times the amount MIGA insured for all guaran- outstanding portfolio was in IDA-eligible tees since 1990.109 This ratio has declined since countries, three of which (Mozambique, Bosnia 2000 and in 2004 stood at 1.3. However, this and Herzegovina, and Serbia and Montenegro) ratio would be lower if only those projects are among the largest 10 countries in terms of where MIGA played a crucial role were consid- exposure in MIGA's active portfolio. ered, since some projects would probably have As shown in figure 19.5, MIGA does play a role gone forward regardless of MIGA coverage. in supporting investments in countries that are 2 6 3 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Figure 19.3: Sectoral Distribution of MIGA Guarantee Portfolio (gross), June 2004 50 40 38 35 30 Percent 20 11 9 10 7 0 Infrastructure Financial Oil, gas and Tourism and Agribusiness and mining services manufacturing Sector Figure 19.4: Regional Distribution of MIGA Guarantee Portfolio (net), June 2004a 50 40 37 30 30 Percent 20 15 13 10 7 0 Latin America and East Asia Europe and Sub-Saharan Middle East and the Caribbean and Pacific Central Asia Africa North Africa Host Region a. Percentages add up to more than 100 percent because of multicountry agreements. 2 6 4 M I G A' S I C A C T I V I T I E S Figure 19.5: Concentration of MIGA Guarantees in Top 10 Developing Countries in Attracting FDI 0.8 71% 0.6 42% 0.4 0.2 0 Top 10 countries Share of average annual FDI flows to top 10 developing recipient countries, 1998­2002 Share of FDI associated with MIGA guarantees in top 10 FDI recipient developing countries, 1998­2003 not major destinations for FDI. The 10 largest of investment climate), and through backward developing country recipients of FDI account and forward linkages, which stimulate local for 71 percent of total FDI to developing enterprise development. However, MIGA's countries, whereas these same countries only guarantees do not address IC policy issues accounted for 42 percent of the FDI associated directly as MIGA usually works with foreign with MIGA guarantees in 1998­2003.111 private investors and not with host governments Although investors from European countries on policy reforms and institutional issues, which and the United States are MIGA's biggest clients, generally fall under the purview of the Bank. MIGA's guarantees can serve investors from both Objective and precise indicators for the developed and developing countries. Promot- impacts of guarantee projects on PSD, includ- ing South-South investments (and investors) ing demonstration effects, and investment has been one of the stated strategic priorities for climate are difficult to define, and measuring MIGA since 2000 (and an area in which MIGA has these impacts is inherently difficult due to a comparative advantage, given the absence of methodological limitations. Evidence regarding national insurance agencies in many developing the PSD impact of a limited number of MIGA countries and the reluctance of private insurers guarantee projects evaluated by IEG-MIGA to serve these clients). As of December 2003, shows mixed results.113 MIGA has clearly played investors from developing countries (originat- a positive role in supporting first or early invest- ing from 13 countries) accounted for 13 percent ments in some sectors and countries, and some of the overall exposure.112 of these projects have led to follow-up invest- While MIGA guarantees are designed to ments. In a majority of evaluated projects, the mitigate political risks, which is a subset of IC impact is considered to be low, because the issues, they do not directly affect the regulatory projects have either had financial problems, and legal framework and practices in the caused by sector or systemic crises, or regula- country. Guarantees have the potential to tory and management problems. Furthermore, improve investment climate indirectly by MIGA's projects are mostly small in comparison helping to increase the role of the private sector to the size of their host economies; thus, their in a country. Successful private investments can impact is generally modest. Additionally, MIGA do so through demonstration effects that does not normally have leverage to influence encourage other investors (foreign or local) to the business environment and the country's IC invest in the country, through infrastructure policies and regulatory framework. On the projects (addressing an important impediment other hand, the ultimate market test for MIGA's 2 6 5 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E guarantee products is the demand for MIGA foreign investors, providing guidance to insurance from foreign investors. This suggests claimants and member countries. MIGA seeks to that the Agency meets those needs and plays a resolve disputes before they require arbitration. role in facilitating private sector projects In Ethiopia, for example, MIGA is offering its (mainly by reducing risks and associated costs services at the request of the government to help or by providing comfort in a difficult business resolve claims dating from expropriations in the environment). mid-1970s, which have proved to be obstacles to new FDI. Apart from its mediation work, MIGA is MIGA Legal and Mediation Services. MIGA offers involved in dispute resolution related to its its good offices to mediate a small number of guarantees, working with host countries and investment disputes between host countries and investors to avoid claims situations. 2 6 6 20 An Evaluation of MIGA's TA Activities Overview of MIGA's TA Activities M IGA's activities are governed by the 1985 Convention that estab- lished it as an agency of the WBG. Articles 2(b) and 23 of the Con- vention (see Annex IV.B) set out the Agency's mandate to provide technical assistance to member countries to encourage FDI flows. This responsibility that was fulfilled, in part, by countries. MIGA's TA mandate is further MIGA's Investment Marketing Services Depart- supported by the Agency's Operational Regula- ment (MIGIM) during 1998­2003, which tions, which authorize MIGA to conduct focused on a narrow subset of a wider range of programs in research, information dissemina- activities encompassed by the Convention. In tion, TAAS, and consultations with and among May 2004, MIGA was reorganized, merging the its members on investment policies and activities of the Underwriting and Investment programs. Marketing Services Departments into one MIGA's interpretation and operationalization department, called the Operations Group.114 of its TA mandate have evolved over time (see Article 2(b) of MIGA's Convention states that box 20.1). In 1998, MIGA commissioned an the Agency, in addition to providing investment external review of its TA activities, which mainly guarantees, has the mandate to "carry out focused on the outcomes of the TA activities at appropriate complementary activities to the level of IPIs but did not explore the next level promote the flow of investments to and among of the impact of IPIs on FDI flows. This external developing member countries." This mandate is review recommended that MIGA (i) expand its elaborated in Article 23(a), which requires MIGA TA services through a tailored country-by- to carry out research and undertake TA activities country, needs-based approach; (ii) coordinate to promote investment flows and disseminate its operations more tightly with those of FIAS information on investment opportunities in and other units of the WBG; (iii) change its developing member countries to improve the funding strategy to include higher contributions environment for FDI flows to these countries from MIGA's administrative budget without (see Annex IV.B). This means that MIGA-- requiring full recovery of program delivery through its TAAS--was designed to play a role in costs, (iv) access donor funding and create trust improving the investment climate in developing funds, and (v) change its staffing to include a 2 6 7 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Box 20.1: Early Phase of MIGA TA Activities, 1988­97 1988 MIGA established. Joint venture agreement between IFC and MIGA, assigning FIAS responsibility for MIGA's technical assistance mandate. 1989 Policy and Advisory Services (PAS) unit established within MIGA to carry out its TA mandate more directly, focusing on investment promotion activities, mainly through investor guides, conferences, and seminars. 1989 to 1993 PAS undertakes 11 promotional activities, including conferences, roundtables, and executive development pro- grams. 1993 MIGA discontinues joint venture support to FIAS to better focus its mandate. FIAS retains responsibility for legal, policy, and institutional development to attract FDI; PAS to focus on operational assistance to member coun- tries in investment promotion. 1994 PAS replaced by MIGIM, with TA more clearly aligned with mandate: direct promotional activities (e.g., mul- ticountry, sector-specific investor conferences); general investment promotion skills training; and information dissemination. 1993 to 1997 MIGIM undertakes approximately 100 TA activities in as many countries (including multicountry activities, such as seminars and investor conferences). larger share of senior staff on a full-time, on- and firms contemplating direct investments in budget basis, with expertise in investment developing countries. promotion. Based on the findings of this review The division of labor between FIAS and MIGA's and ensuing MIGA Board directives, MIGA TA activities was addressed in the 2002 WBG PSD sought to improve the relevance and effective- Strategy (World Bank 2002). The PSD strategy ness of its TA products and services by offering document noted that MIGA should provide more in-depth and longer-term activities, thus "focused political risk guarantees, institution- better serving MIGA's developing member building and investment promotion assistance." countries. MIGA also articulated a mission for Advisory services for PSD are located in the Bank itself--"to strengthen the capacity of investment and the IFC (in the form of joint departments) and, promotion intermediaries to attract and retain separately, in MIGA. The division of labor between foreign direct investment" in its mission FIAS and MIGA was described as follows: "FIAS statement (see box 20.2). Since 1998, MIGA has provides policy advice to governments on how to provided both "hands-on" operational assis- attract foreign investors in ways that benefit the tance to IPIs and a range of evolving investment host country. MIGA/IMS tends to operate information services to assist member countries downstream from FIAS helping countries promote investments based on the policy and institutional framework promoted by FIAS." This strategy also mentioned that MIGA and FIAS had developed a Box 20.2: MIGIM Mission Statement protocol encompassing an exchange of client requests for TA, agreements on the division of labor between both institutions, and regular "MIGA's mission is to stimulate the flow of overseas investment to de- (quarterly) meetings among managers and staff to veloping countries and economies in transition. MIGA's Investment harmonize work plans and joint activities. In Marketing Services (MIGIM) Department works to equip investment pro- addition, to facilitate consistency and cooperation motion intermediaries with leading-edge knowledge, tools, and tech- within the Bank Group, MIGA staff was expected niques to strengthen their capacity to attract and retain foreign direct to continue to participate in PSD sector board investment." meetings. The strategy paper thus prescribed Source: MIGIM Web site (http://www.miga.org/screens/services/ims/ims.htm). continuity rather than new directions for MIGA's TA program and its organizational alignment. 2 6 8 A N E VA L U AT I O N O F M I G A' S TA A C T I V I T I E S During 1998­2003, MIGA's TA services and developing member countries are prospective products can be categorized into three broad recipients of MIGA's TA programs, MIGA's areas: challenge has been to balance the need to maximize the impact of its limited resources · TA to IPIs for institutional strengthening and ca- with the fulfillment of its development man- pacity building--Strategy development (such date. At the same time, MIGA's Convention as needs assessments, strategy and action plans, specifies the areas of technical assistance on investor targeting, marketing plans) and pro- which MIGA should focus (Annex IV.B). motion support tools (investor information system; IT system tools; contact relationship Strategy management; promotional materials; Investor MIGA's TA activities, as well as its strategy, have Toolkit; and associated training) evolved significantly over time. There have been · Information dissemination--Online investor in- important changes in the relative mix of these formation services, including a clearinghouse of activities, their duration, extent of client target- investment environment information (IPAnet), ing, countries of coverage, methods of delivery, an e-mail dissemination service on investment and degree of cooperation with other donors. opportunities and investment environment in- This evolution has in part been in response to formation (FDI Xchange), an information and Board directions following the external review marketing service for privatization opportunities in 1998 but has also been shaped by internal (Privatization Link and Privatization Link Russia), factors, such as the availability of budget and several e-publications resources, senior management priorities, staff · Investment facilitation--Regional investor con- skill mix, and external factors, such as external ferences and seminars, primarily in mining funding sources and demand by client and tourism. countries. MIGA Review 2000 (the most recent strategic Capacity building formed the core of MIGIM's document for MIGA) proposed to focus TA TA program and thus became the primary focus activities on capacity building of IPIs that of this evaluation. The information dissemina- generates actual investment flows, and contin- tion tools, an expanding area for MIGA, have not ued upgrading of knowledge activity through yet been evaluated by IEG-MIGA, but are Internet-based services. Since then MIGA has discussed in reference to their complementary not prepared a comprehensive strategy for the role in supporting other TA activities. MIGA's agency to define the roles of TA and guarantee support for Investment Facilitation has, in activities to fulfill its development mandate and recent years, shifted away from traditional explore any possible synergies.115 investor conferences of earlier years, and increasingly toward online information dissemi- Criteria for Client Selection nation tools and services (FDI Xchange, Privati- The MIGA Review 2000 identified the following zationLink, and PrivatizationLink Russia). criteria for prioritizing client countries: (i) The following sections discuss the evaluation existence of an attractive legal and regulatory findings of the overall relevance, effectiveness, framework for FDI, (ii) commitment and ability and funding of MIGA's TA activities over the of client agency to absorb assistance, (iii) period 1998­2003, in light of MIGA's develop- priority of the country for MIGA, the Country ment mandate and in meeting the needs of its Assistance Strategy (CASs), and Comprehensive developing member countries. Development Framework, and (iv) the ability of the country to copay for services or mobilize Relevance of MIGA's TA Activities funding. The relevance of MIGA's TA activities can be In the fiscal 2003­5 work program, MIGA defined broadly in terms of its ability to meet modified and expanded these criteria for priori- the needs of its target clientele. Since all tizing its TA services among countries and organi- 2 6 9 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E zations to focus on: low-income countries; The tiered approach broadly categorized the countries with a reasonably attractive investment investment promotion intermediary market- environment; strong government commitment place into three groups of countries, with a to the goal of attracting FDI, including the different menu of services targeted toward each demonstration of such commitment by provid- country category (see table 20.1). "Priority ing adequate funding for an IPI; and the ability to countries," or Tier 2 countries, were those absorb support. Countries that do not meet all deemed to have a reasonably attractive invest- criteria could still be considered for TA, but the ment environment, have established but range of services might be more limited. underdeveloped investment intermediaries, but Based on these criteria, MIGA developed a lack the necessary resources to pay the full cost tiered assistance approach, although this was of advisory services. never formally adopted as the basis of client The tiered approach seemed to recognize the selection. However, in 2000 MIGIM began to need to appropriately target MIGA's TA services prioritize countries in which to offer its TA, taking and to incorporate empirical evidence on best into account several indicators ranging from FDI approaches in order to maximize potential performance to macroeconomic data to IC indica- developmental impacts. It also appears to be tors to prioritize needs assessments. The results consistent with some findings of a recent FIAS of needs assessments have been used by MIGA to study (see box 20.3), as some of the criteria decide which further interventions were introduced by MIGA (especially the quality of warranted, if any, in light of the country conditions overall investment climate) are cited among the and needs, and the capacity of the existing invest- most important factors for developing an ment promotion intermediary (IPI).116MIGA does effective institutional framework for investment not have a formal system in place to review promotion. However, this approach was not prospective TA projects at the time of project formally adopted, and MIGA did not limit itself selection similar to the management review for to working within this framework. prospective MIGA guarantee projects. MIGA's objective was to offer in-depth services wherever Other factors affecting MIGA country selection. In warranted by the findings of the needs assess- practice, MIGA's TA program has been partly ment, subject to the availability of funds. driven by factors other than a consistent, Table 20.1: Categorization of Country Needs and MIGA TA Services Country characteristics Typical MIGA TA service offerings Tier 1: Countries structured to · Attractive investment climate and · Capacity building on cost-recovery basis attract FDI flows institutional structure · Good practice in investment promotion · Effective investment intermediary structures · Effective use of private sector advisory services Tier 2: Priority capacity building · Acceptable investment climate · Tailored capacity-building programs countries · Underdeveloped investment intermediaries · Lack of resources Tier 3: Countries developing FDI · Lack of attractive investment environment · Regional workshops and conferences attraction capacity · Lack of investment intermediaries · Selected capacity building 2 7 0 A N E VA L U AT I O N O F M I G A' S TA A C T I V I T I E S Box 20.3: Effectiveness of Promotion Agencies at Attracting FDI Literature assessing the effectiveness of investment promotion velopment get better results by improving these conditions and IPIs in attracting FDI is scarce. Given that many variables than by spending resources on investment promotion. have an impact on a country's FDI performance, studies on the · Policy advocacy appears to be the most effective function, subject have methodological shortcomings, so their findings followed by image building and investor servicing. Investment- should be considered with caution. generation activities are not associated with higher FDI in- Using a combination of statistical analysis and field interviews, flows. Wells and Wint (2000) argue that there is a strong positive relation · Strong reporting mechanisms to the highest political level and between investment promotion and FDI inflows, but that promo- participation of the private sector increase IPAs' credibility tion programs have attracted only certain kinds of investors. The and effectiveness. authors also found that different combinations of promotion tech- niques are useful at different phases of the promotion program. Fi- Based on field interviews and surveys, a paper by Brossard (1998) nally, they argue that the type of promotion organization makes a highlighted the role IPIs can play in facilitating and accelerating the difference in effectiveness. investment process, providing companies with easier access to key A report by Morisset and Andrews-Johnson (2003), based on information, networks, and governmental departments during the an IPI survey and statistical analysis, highlights that existing coun- setting-up stage of the investment decision process. try conditions (investment climate and level of economic devel- An internal working paper for FIAS (2004) argues that, similar opment) are more important variables in determining investment to product marketing, investment promotion activities primarily flows than investment promotion, although it also matters. Their address market failures resulting from imperfect information among main findings are as follows potential investors about countries. This is all the more important for small, resource-poor countries, as foreign investors track the · Greater promotion is associated with more FDI, even when developments in major markets. Smaller countries need to get on accounting for the influence of market size and quality of IC. "the radar screen." · IPA budgets need to exceed a certain level to exploit in- This paper also raises the issue, although it did not provide an creasing returns associated with most promotion activities. answer, whether investment promotion is able to "increase the pie" · IPA effectiveness is strongly correlated with the country's in- of total FDI, or whether it is a zero-sum game, which might put into vestment climate and the level of development. question the economic rationale for investment promotion activ- · Countries with poor investment climate or low level of de- ities, at least from a global perspective. Sources: Brossard (1998, pp. 203­14); Morisset and Andrews-Johnson (2003); Wells and Wint (2000). adopted strategic framework. As a result, some the earlier criteria, introduced "sufficient resources and activities have been directed to investor interest to provide an active market for countries that appear to fall outside the target MIGA guarantees" as a new criterion and strategy described above.117 Among the factors emphasized closer collaboration and comple- that more strongly influenced country/client mentarity with the WBG and its strategies.119 If selection in practice were ad hoc requests for implemented, the latter could help achieve assistance from member governments better selectivity and consistency with the WBG. (especially for needs assessments); and availabil- ity of external donor funding to complement Portfolio of MIGA TA Products MIGA's limited administrative budget for TA to The following four categories broadly define the offer larger scale, in-depth activities.118 functions and roles of IPIs (Wells and Wint Furthermore, MIGA's strategic selection 2000): criteria for TA have been adjusted frequently; these were modified again in MIGA's fiscal · Image-building activities create the per- 2004­6 budget document, which, in addition to ception of a country as an attractive site for FDI 2 7 1 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E based on general promotional techniques, · Promotional Tools. This includes develop- such as advertising and media campaigns and ment of investor information and tracking sys- public relations events. tems, installation and implementation of · Investment generation targets specific sec- information technology tools, development tors, country markets, and companies to cre- of promotional materials, and promotional ate investment leads. skills training (49 percent of TA activities). · Investor facilitation and servicing refers to · Investment Promotion. This includes assis- services provided to assist an investor in ana- tance to IPIs for organizing investor confer- lyzing investment decisions and in establishing ences seminars and promotional events, and and operating a business. development and implementation of systems · Policy advocacy consists of activities through and procedures for investment promotion (6 which the IPI supports initiatives to improve percent of TA activities). the quality of the investment climate and rep- resent the views of the private sector. The main categories and subcategories of MIGA TA activities are described in detail in While IPIs perform a wide array of functions, Annex IV.C. not all have been found equally effective in promoting inward investment flows (see box Development of standardized products. MIGIM 20.3). A recent FIAS study (Morisset and has developed more standardized products, includ- Andrews-Johnson 2003) argues, based on ing (i) a needs assessment framework, a diagnostic empirical analysis, that policy advocacy might tool to evaluate the capabilities and constraints of have the strongest impact on FDI inflows, IPIs; (ii) an Investment Promotion Toolkit, covering followed by image building and investor servic- best practices in investment promotion; (iii) an ing.120 Investment generation activities were Investor Tracking System, a contact management found to be the least effective function, particu- software package; and (iv) IPAWorks, a template for larly in countries with relatively poor investment Web site development. climates and/or low levels of economic develop- More recently, more complex standardized ment. These results suggest that in general, IPIs' products have also been added. For example, in effectiveness varies with the IC conditions. early 2003, MIGA conducted a pilot benchmark- Therefore the role of MIGA TA in improving ing study to determine and compare operating investment climate has depended largely on the costs and conditions in six Asian countries for IPI's characteristics and potential, as well as two industry sectors--electronics and shared country conditions. The following section services. This was expected to become a provides an overview of how well MIGA's TA standardized analytical tool to be used by IPIs to products have matched IPI needs. collect information on local costs and the In the past, MIGA did not clearly define and business environment. In addition, a standard- differentiate its TA products. Since 1998, MIGA ized methodology for sector-specific investor has broadened its portfolio of TA products and targeting strategies and marketing plans is also services aiming at more tailored, hands-on being developed, which would provide the basis assistance for its clients. More recently, MIGA has for IPI investment generation programs. begun using a TA matrix to define the different In practice, needs assessments have been the types of TA it offers to IPIs, which fall in three most broadly used TA product MIGA offers to its categories: clients. As a diagnostic tool, it has constituted the first contact with the client in response to a · Strategic Direction. This includes institu- new request for MIGA services. A needs assess- tional needs assessments, organizational strat- ment is a one-time, short intervention, but it egy development and implementation plans, may serve as the first stage of a more in-depth and promotional and marketing strategies (ac- and continued TA program if the client decides counting for 45 percent of TA activities for IPIs). to pursue further assistance from MIGA. Thus, 2 7 2 A N E VA L U AT I O N O F M I G A' S TA A C T I V I T I E S with a smaller group of clients, MIGA has been positive relation between FDI and growth, engaged in more in-depth assistance activities depending on the nature of the investment consisting of one or more of the activities noted and host country conditions. Insofar as MIGA's above. TA builds capacity and improves the quality of investment promotion intermediaries, the Relevance of MIGA's TA Activities to Agency is responding to a need in particular Investment Promotion Intermediaries considering increased competition between MIGA's range of TA products and services is countries for FDI. largely oriented to building capacity in three of MIGA's TA was relevant to host countries and the four core functional areas of IPIs, image to IPIs in helping leverage their positions building, investment generation, and investor within the institutional framework for FDI facilitation and servicing, but not policy promotion in the country. However, because advocacy. In MIGA's diagnostic work with IPIs, IPIs are not responsible for the development of identifying their institutional capacity gaps, it policies affecting FDI and have thus limited has tended to focus on areas in which MIGA policy impacts on investment climate, MIGA's provided TA. Thus, some key issues (such as the assistance has been only indirectly relevant to IPI's overall importance or relevance in FDI directly improving IC. Furthermore, the size of promotion within the government's structure) MIGA's TA team and the resources available may not have been addressed when they fell relative to the Bank, as well as MIGA's specific outside the focus of MIGA's TA services. role within the WBG, limit MIGA's effectiveness The two TA evaluation case studies, while not in addressing IC policy issues. These sufficient to reach broad generalizations, constraints have led others to suggest that IC provide useful insights. IEG-MIGA found that in issues should be handled by the other these cases MIGA's work was relevant and members of the WBG that have a comparative responsive as it provided its services at the advantage to address them. expressed invitation of the governments. In both cases, MIGA's TA was welcomed by the Effectiveness of MIGA's TA Activities investment promotion agencies (IPAs) and The effectiveness of MIGA TA activities is praised by their staff as pivotal for establish- assessed within the framework presented in ing/developing the IPA. MIGA appeared to have figure 18.1, which includes immediate effects responded to needs of these organizations as (changes in practices and systems of the IPA), they arose. In one case, the IPA was willing to outcomes (improved service delivery by the defray some of the cost of the services provided IPA), and impacts (increased FDI as a result of by MIGA. In the other, MIGA's cautious and improvements in the IPA). As noted earlier, this flexible approach was appropriate and borne last link in the chain of causality is tenuous. This out by frequent changes in the institutional section briefly discusses evidence from the framework for investment promotion in the literature on this link, then it focuses on whether country. In both cases, MIGA helped bring a MIGA targets its TA services at the right broader perspective to investment promotion. countries (i.e., where it can have the greatest By focusing on developing an appropriate developmental impact), and assesses the client strategy, establishing a solid organization, and perceptions of MIGA TA. Finally, the section strengthening operations, MIGA's services assesses the effectiveness of MIGA TA activities, appear to have been relevant to the specific based on findings from two case studies, needs of the organizations. focusing mainly on the first two components of There is extensive literature on the relation the chain of causality. between FDI and growth (and between growth and poverty reduction), one of the Link between investment promotion and FDI pillars of WBG assistance to developing flows. Over the past 10 years, IPIs have prolifer- countries. Most of the research confirms the ated in developing countries,121 partly in recogni- 2 7 3 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E tion of the fact that countries are competing for TA was also offered in five countries with foreign investment, and partly by the apparent "repressed" economies with unattractive invest- success of efforts by some developed countries ment environments that would appear to fall and regions to attract FDI.122Activities to promote outside its targeting strategy.124 This means that a country appear to have a role to play in this about 88 percent of MIGA TA activities were competition, along with fiscal and regulatory offered in countries presumed to have a reason- incentives by the host country. In particular, able investment environment. Figure 20.1 shows promotional activities can address market failures, the distribution of MIGA TA by country group, such as imperfect information among investors differentiating limited interventions such as on investment conditions and opportunities of needs assessments (defined as countries where potential locations, and can help reduce investors' MIGA offered one or two activities) compared transaction costs and risks. Little empirical analysis with those where MIGA offered more in-depth has been done on the effectiveness of investment interventions (three or more activities per promotion for FDI flows, and investment country). decisions are influenced by many intervening Seventy MIGA member countries are IDA- variables, which are difficult to isolate. Neverthe- eligible countries. In 2002­3, MIGA provided less, recent research shows a positive relationship some form of TA to 26 of them. Mapping both between promotion and FDI flows. Research also the investment environment and the low- suggests that the existing investment climate, the income criteria, half (21 of 41) of the countries level of economic development, and the size of a that received TA during this period have met country influence the outcome of promotion both criteria, thus ensuring greater effectiveness activities (see box 20.3). and impact. Among the in-depth interventions, the share of assistance to countries meeting Effectiveness of Strategic Approach both priority areas assessed was 84 percent (16 During fiscal 1998­2003, MIGA provided techni- of 19). This also suggests that, in absence of a cal assistance to 63 countries, while others clearly articulated strategy, MIGA needs assess- benefited from regional capacity building and ments have served as a useful tool for selecting investment promotion events.123 The number of in-depth interventions. recipient countries is smaller when compared to The available data did not permit the calcula- the 1993­7 period, mostly due to phasing out of tion of the actual share of technical assistance multicountry, one-time activities (such as (in terms of outputs or value of inputs) MIGA conferences) in favor of more customized provided to different categories of countries. and/or in-depth interventions. Thus, it was difficult to determine whether a higher or lower share of actual assistance may Recent allocation patterns (fiscal 2002­3). To have been directed to priority countries once assess MIGA's most recent activities in terms of the value of technical inputs (or outputs) is their strategic effectiveness, the list of client taken into consideration. countries was mapped against two of the selection criteria listed in MIGA's fiscal 2003­5 Longer-term allocation patterns (1998­2003). work program, i.e., countries with a reasonably Between 1998 and 2003, the majority of attractive investment environment and low- countries (41 of 63) received limited assistance income countries. IEG-MIGA measured these in one to two different TA subcategories. More criteria by using the Heritage Foundation/Wall than one-third of the countries (22) received Street Journal Index of Economic Freedom, and assistance in a wider range (three or more) of TA the list of IDA-eligible countries, respectively. subcategories (see figure 20.2). Over the The data indicate that the majority (23 of 41) 1998­2003 period, MIGA was more likely to offer of countries receiving MIGA TA in 2002 and 2003 limited assistance, such as needs assessments, to were rated as "mostly unfree" economies, and countries with unfavorable investment environ- another 13 were "mostly free" economies. MIGA ments.125 For instance, within the group of 2 7 4 A N E VA L U AT I O N O F M I G A' S TA A C T I V I T I E S Figure 20.1: Distribution of MIGA TA Activities in 2002­3 14 13 12 10 10 8 7 interventions 6 of 6 4 Number 3 2 2 0 0 0 Free Mostly free Mostly unfree Repressed Heritage Index ratings 1­2 Interventions 3+ Interventions Figure 20.2: Number of MIGA TA Activities per Country (1998­2003) 44% 0.45 0.3 activities TA 21% total 16% of 0.15 Percent 6% 6% 6% 0 1 2 3 4 5 6+ Number of TA services provided "mostly unfree" economies, MIGA offered TA to ents of MIGA guarantees; in-depth TA was 34 countries, of which 10 were in-depth interven- offered in countries with better IC levels than for tions. Among the 21 TA clients with "mostly free" recipients of basic diagnostic TA interventions.126 economies, there were 8 in-depth interventions, While a sizeable proportion of basic TA activi- a somewhat higher share. Analysis using the ties has been directed toward countries that do HFO/WSJ Index shows that over the 1998­2003 not fit well with the stated targeting strategy and period, MIGA in-depth TA was offered in that are unlikely to be able to address fundamen- countries with IC levels similar to those of recipi- tal problems in a country's investment environ- 2 7 5 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E ment, MIGA's recent in-depth operations have and TA projects will be required in the future to been targeted reasonably well. Given that evaluate objectively the impact of MIGA's key TA MIGA's stated country targeting strategy for TA products and assistance strategy, as well as to has changed over time, was not clearly articu- further improve internal measuring of activities. lated until 2002, and underwent modifications a year later, it is not surprising that stated priori- Client Perceptions of the Quality of MIGA TA ties and actual clients served somewhat diverged With regard to client perceptions of MIGA's work, over the 1998­2003 period. The high number of the most recent available information comes from countries served reflects MIGA's objective to a survey of its TA clients undertaken by MIGA in respond to as many client requests as possible, 1999. These surveys showed a generally high at least with some basic diagnostic service. degree of satisfaction with the quality of MIGA's technical assistance (i.e., input, activities, and Trend toward more in-depth interventions. Follow- output categories in figure 18.1).127 The results of ing one of the recommendations of the 1998 the IPI Survey, presented in MIGA Review 2000, external review, MIGA has shifted its TA from indicate that perceptions of MIGA's performance multicountry, one-off events (such as regional were high compared to other TA providers (both workshops and seminars) to more tailored, in- private and donors, see figure 20.3). depth TA programs for individual clients. The Overall, MIGA TA was rated highest in terms number of TA activities gradually increased of client satisfaction among selected public between 1998 and 2003, while the number of (donor) and private technical assistance beneficiary countries declined. This indicates a providers (see table 20.2), although the differ- greater concentration of efforts per country, as ences in ratings vis-à-vis the next best competi- the average number of TA activities per active tors were relatively small. In terms of specific country increased from 0.55 in 1998 to close to areas of competence, MIGA assistance was rated 2.4 in 2003. An indication of the greater depth of highest in terms of investor networking and cost MIGA TA activities is provided in Annex IV.F, of service (its services are highly subsidized and which presents a breakdown of these activities by often provided free of charge to clients). It also country and by type. rated relatively high on knowledge and expertise While there is clearly a trend toward greater in investment promotion, the ability to provide concentration of interventions per country, the practical solutions, and understanding of the role numbers presented in the previous paragraph of technology in investment promotion. need to be treated with caution, due to the lack of any consistent and clear definition of what consti- Outcomes and Impacts of Two Evaluated MIGA TA tuted an "activity." MIGA TA activities have not Projects been differentiated clearly for internal monitor- IEG-MIGA has carried out TA evaluations in two ing purposes. The number of activities was countries in fiscal 2004. While the two case measured by the frequency of staff trips to client studies are not necessarily representative of the countries. Staff Back-to-Office Reports have 63 MIGA TA interventions during 1998­2003, formed the main basis of accounting. In some they provide some useful insights. This section cases, this information has been adjusted by staff presents the findings from the two case studies to take account of activities/ projects not reflected (in El Salvador and Romania) with regard to the in the Back-to-Office Reports. This definition of effectiveness of MIGA assistance to IPIs for "activity" does not allow for easy classification of capacity building. Annexes IV.D and IV.E present trips linked to a single project or capacity-building summaries of the two case studies, and Annex activity and thus makes it difficult to track TA IV.A describes the methodology used for evaluat- activities in a consistent way or monitor results. A ing both activities. work plan to track work flow, milestones, and costs was introduced in fiscal 2004; and more Conditions for MIGA's Engagement and Nature of specific and meaningful definitions of products TA. The two cases differ with respect to depth and 2 7 6 A N E VA L U AT I O N O F M I G A' S TA A C T I V I T I E S Figure 20.3: Client Satisfaction Ratings of TA MIGIM 8.85 Public C 8.8 Public A 8.37 Regional development banks 7.63 Private providers 7.6 Public B 7.5 Bilateral 6.33 0 2 4 6 8 10 Source: Investment Promotion Intermediaries Survey, MIGA Review 2000. Note: Scores range from 1 to 10, with 10 being the most favorable. Table 20.2: Survey Results on Performance of MIGA TA Activitiesa Rank/ Importance IPI perception of provider performance (N = 20) to IPIs Selection criteria MIGA TA Public A Public B Public C Private 1 Understanding of country needs 8.25 8.53 7.44 8.00 8.20 2 Knowledge and expertise 8.86 8.94 7.89 7.83 8.60 3 Practical solutions 8.54 8.19 7.25 7.80 8.60 4 Cost of service 8.10 7.15 8.00 7.80 7.25 5 Investor networking 8.33 7.82 7.86 6.67 8.00 6 Understanding of technology 9.00 8.63 8.00 8.60 8.20 7 Experience/track record 8.31 8.50 7.88 6.83 8.75 8 Responsiveness 8.23 8.29 7.00 8.00 7.60 9 Existing relationship 7.73 7.80 7.44 7.17 7.50 Source: Investment Promotion Intermediaries Survey, MIGA Review 2000. Note: IPIs = Investment Promotion Intermediaries. a. Scores range from 1 to 10, with 10 being the most favorable. Figures in bold represent category leaders; figures in italics represent scores higher than 8.50. duration of MIGA's involvement; the nature of ing the investment environment as important assistance; the country's commitment to government priorities, MIGA has been able to implementation; investment climate; and institu- provide longer-term and more in-depth tional framework, and thus, in outcomes and assistance. In Romania, MIGA's involvement and impacts of MIGA's assistance. input were much more limited, due largely to In El Salvador, a country that has been country conditions. While MIGA provided an pursuing a comprehensive reform program initial needs assessment (a diagnostic tool to (supported by the Bank), with PSD and improv- assess the infrastructure in place for investment 2 7 7 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E promotion and the capacity of the country to for the nascent institution and helped with its attract FDI), thereafter the institutional implementation. structure for investment promotion underwent While there were few benefits from MIGA's frequent changes, and the roles and responsibil- work in Romania in the early phase (2000­1) ities of different agencies dealing with aspects of because its initial recommendations were not investment promotion were never defined implemented, the eventual formation of the clearly. Accordingly, MIGA did not continue its Romanian Agency for Foreign Investment (ARIS) assistance beyond the initial stage. is attributed to MIGA's advocacy for an independ- ent IPI. In the later phase (2002­3), MIGA's re- Outcomes. Based on in-country interviews, in engagement and work with ARIS, which both cases MIGA's recommendations and consisted mainly of a needs assessment and a assistance were considered very useful by IPI draft strategic plan, resulted in several positive staff and induced changes in capabilities and outcomes. At the same time, MIGA did not practices of the IPI. However, MIGA had a more emphasize sufficiently several important issues substantial and longer-term involvement in El ARIS faced: weak relationships with other govern- Salvador, and the outcomes have also been ment entities with similar responsibilities and a more discernable and positive than in the case poor governance structure, which severely of Romania. hampers its effectiveness. The institutional In El Salvador, MIGA has helped since 2000 to framework in Romania for issues relating to strengthen the capacity of the then newly investment promotion has changed frequently, established IPI (PROESA), which implemented and several government entities have been many of MIGA's recommendations and adopted competing with ARIS in implementing aspects of the basic approach to investment promotion its investment promotion mandate. ARIS does propagated by MIGA. PROESA staff also received not have any links with the Business Environment significant training. An IEG-MIGA survey and field Department in the Ministry of Economic interviews show that the government and foreign Development and Prognosis, an entity supported investors view the IPI very positively. PROESA has by FIAS. The case of Romania is illustrative of the established itself as a highly professional agency, difficulties MIGA can encounter in its engage- mounted a major image building campaign ("El ment with a country and the dependence of the Salvador Works"), provided services to about 90 success of its interventions on the capacity and potential investors, and generated a number of willingness of the host country to implement concrete FDI leads. The vast majority (84 recommendations. Given these findings, MIGA's percent) of investors interviewed were satisfied cautious approach, by offering only limited with the IPI's assistance. Furthermore, most services in Romania, was appropriate and borne investors (93 percent) considered PROESA's out by subsequent events. services to be of "good" or "excellent" quality.128 ARIS is perceived by some stakeholders as MIGA played an instrumental role as an struggling to gain credibility, having little visibil- advisor during the early phase of PROESA's ity, and lacking needed resources and structures. operations, addressing concerns of its board and Nevertheless, even within the limitations of the succeeding in sustaining government support. existing institutional framework, MIGA's MIGA staff established strong relationships with assistance seems to have had some positive PROESA staff and board members. PROESA staff outcomes in terms of ARIS's effectiveness in noted the responsiveness of MIGA's team and serving its clientele. A small sample of foreign the high quality of their assistance. This investors rated ARIS's overall effectiveness quite assistance was widely credited with helping high, and about half stated that ARIS's services PROESA establish credibility and legitimacy were of major importance in their decision to within the government and with investors, and locate in Romania (yet a strong majority of allowed the new agency to get a head start. respondents stated that they would have MIGA was credited for providing a "blueprint" invested in Romania without ARIS's services). 2 7 8 A N E VA L U AT I O N O F M I G A' S TA A C T I V I T I E S Impact. A recent FIAS study concluded based on the prospect of EU accession, and related empirical evidence that there is a positive improvements in the business environment and relationship between investment promotion macro economic performance. and FDI (Morisett and Andrews-Johnson 2003). However, when assessing the impact of MIGA's Sustainability. In terms of the sustainability of interventions on increased FDI flows to the host the impacts of MIGA assistance, both IPIs countries (or improvements in the investment depend on visibility, credibility, and support climate), it is important to consider the limited from the highest level of government and the role of IPIs. They can help shape the image of a private sector. In the case of El Salvador, the IPI country, but their mandate does not encompass appears to have political support, but it the responsibility for policies affecting FDI. currently lacks budget autonomy and many of Investment decisions are influenced by many its staff move to take jobs with foreign factors outside the control of IPIs, such as the companies. The Romanian IPI has inadequate macroeconomic situation, the legal and regula- funding and staffing, and it is still struggling to tory framework, and conditions on factor and gain credibility and support from the private final markets. It is therefore difficult to measure sector and to define its role among various any direct improvements in FDI flows as a result government agencies. To date, the sustainability of MIGA's TA. of impacts of MIGA's technical assistance is IEG-MIGA's surveys of IPI clients for the two therefore considered likely in El Salvador, but country cases did not show strong evidence that modest in Romania. the IPIs have had any significant impacts on investment decisions by the time of this evalua- Resources for MIGA's TA Activities tion. Broad majorities of respondents (79 percent This section addresses the resources available and 90 percent, in El Salvador and Romania, and funding mechanisms for MIGA TA activities. respectively)129 indicated that they would have It also considers the degree to which MIGA TA invested in the country even in the absence of an activities complement or leverage other donor IPI. According to responses of surveyed investors, and nondonor-related activities, including those the IPIs' main added value was in helping to of MIGA's guarantees other WBG and donor reduce the time required to start operations-- agencies, as well as private sector providers. thus reducing the cost of doing business--(50 percent of respondents) and increasing the likeli- Resources and Cost Efficiency of MIGA TA hood of the success of the investment in the MIGIM was structured as a relatively small country (50 percent)--which involved closing department, consisting of 23 staff, 17 of whom the information gap. However, investments take are at the professional level and 10­20 of whom time, and it may therefore be too early to are consultants.130 Until MIGA's reorganization determine the impact of these IPIs on FDI flows. in May 2004, this group had been responsible The evaluation found that investment flows for the delivery of both TA and online informa- in El Salvador were mainly driven by reform tion services; within this group, the team policies, trade liberalization initiatives, and responsible for capacity building activities privatization efforts by the government, which consisted of nine staff. reduced costs and minimized risks. The govern- During 1998­2003, MIGA recruited experi- ment took specific steps to create a more enced investment promotion practitioners to favorable investment climate. Foreign investors bring high-caliber experience to its clients, as stated that they were drawn to El Salvador recommended in the 1998 external review.131 because of the political and currency stability, Given the small size of its core staff, the role of and its physical infrastructure. According to the external consultants in delivering MIGA's TA investors surveyed, investment promotion products and services has been growing. Until efforts were not in themselves a determinant. In recently, most external consultants have been Romania, investor interest resulted mainly from recruited on an individual basis. However, as 2 7 9 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E MIGA has moved its TA toward the development MIGA's budget) to $5.1 million132 in fiscal 2004 and implementation of larger-scale, multicoun- (15 percent of MIGA's total budget)--in line with try and field-based initiatives, MIGA has also a recommendation of the 1998 external review. begun to outsource entire initiatives, projects, MIGIM's administrative budget has been funded or large components of projects to private mainly through premium income from MIGA's consulting firms. political risk guarantees. Between fiscal 1998 The cost efficiency of MIGA's TA activities is and 2003, MIGIM's total funding (including trust difficult to evaluate, as there are little internal funds and partner contributions) has gradually data available on the actual costs of delivery of increased from US$4.7 million to more than its various products and services. Although from US$7.1 million per annum. Cumulatively, the client's perspective MIGA offers low-cost between fiscal 1998 and 2003, MIGIM's adminis- access to TA (since cost recovery from clients for trative budget accounted for approximately 58 capacity building activities--fees or reimburse- percent of total resources available for TA activi- ment of expenses--account for less than 0.5 ties, which have been supplemented by external percent of total TA resources), it is not clear funds from donors. The share of external whether MIGA is a cost-efficient provider of TA, funding from trust funds and partner contribu- given the lack of cost information. The delivery tions has been volatile over the last five years, of assistance free of charge also means that averaging 42 percent. MIGA's capacity building programs do not face a MIGIM's modest administrative budget and true market test. Proper project management the limited availability of additional funding and monitoring will require a more effective and sources have been important factors in consistent approach to project accounting. In determining the direction of its TA activities. this regard, MIGA has started in fiscal 2004 to While the administrative budget has covered the track the staff time spent on a project. cost for all the needs assessments, MIGA seeks funding for more intensive TA programs from Funding Sources for MIGA TA donors or support from existing Bank programs, MIGIM's administrative budget has risen from and, in rare cases, MIGA has funded in-depth $2.7 million in fiscal 1998 (or 10 percent of interventions from its own budget. However, in most cases where external funding is not available, it is not able to offer an in-depth Figure 20.4: MIGIM Funding Sources, support program. During 1998­2003, MIGA was Fiscal 1998­2003 (cumulative) able to leverage its own budget by US$14.2 million in external funding, consisting of trust MIGIM funds, grants, and partner133 contributions Products and during 1998­2003. Revenues from MIGA TA services revenues products and services--including both capacity 2 percent building and information products and services--funded less than two percent, equiva- Partner/client contributions lent to US$0.8 million, of MIGIM's total 23 percent resources for the same period. Virtually all of MIGIM's trust fund and grant resources were tied to providing technical assistance in specific countries (see table 20.3). MIGIM Funding from trust funds or partner/client administrative contributions has also had an impact on the budget allocation of MIGA's regular administrative Trust funds and 58 percent grants budget as it has been used to supplement off- 17 percent budget funds, covering MIGA staff and, in some cases, travel expenses of externally funded 2 8 0 A N E VA L U AT I O N O F M I G A' S TA A C T I V I T I E S projects. While external funding has enabled selectivity to maximize its developmental MIGA to leverage its limited resources and to impact. Table 20.4 shows some evidence that provide in-depth and sustained TA to some MIGA's TA activities may have been partly driven countries, trust funds have also limited its by the availability of external funding, as there is Table 20.3: Tied Trust Funds, Fiscal 1998­2003 (cumulative) Funding source Funding amount (Year of disbursement) (US$) List of eligible countries Country-specific funding $6,155,000 MIGA-Swiss Trust Fund (ECA) $213,000 Albania, Armenia, Azerbaijan, Belarus, Bulgaria, Bosnia-Herzegovina, Croatia, (FY98) Cyprus, Czech Republic, Estonia, Georgia, Hungary, Kazakhstan, Kyrgyz Republic, Latvia, Lithuania, Macedonia, Malta, Moldova, Poland, Romania, Russian Federa- tion, Serbia and Montenegro, Slovak Republic, Slovenia, Tajikistan, Turkey, Turkmenistan, Ukraine, Uzbekistan MIGA-Swiss Trust Fund (Africa) $1,730,000 Ghana, Mozambique, Senegal, Tanzania (FY02) Indo-China (PHRD TF) $450,000 Lao PDR, Cambodia, Vietnam (FY98­00) Miyazawa Initiative (PHRD TF) $714,000 Indonesia, Korea, Malaysia, Philippines, Thailand (FY00­02) Promote Africa (PHRD TF) $2,550,000 Angola, Botswana, Burkina Faso, Cameroon, Côte d'Ivoire, Eritrea, Ethiopia, (FY98­02) Ghana, Malawi, Mali, Mozambique, Namibia, Nigeria, Senegal, South Africa, Tanzania, Uganda, Zimbabwe Russia PLink (CIDA TF) $498,000 Russia (FY99­01) Product-specific funding $200,000 FDI Xchange (Japan TF) $200,000 n/a (FY03) TOTAL $6,355,000 Source: Internal MIGIM documents. Table 20.4: MIGA in-Depth TA by Region Region Number of in-depth interventions (1998­2003) Percentage of total in-depth interventions Sub-Saharan Africa 8 38 Asia and Pacific 7 33 Europe and Central Asia 1 5 Middle East and North Africa 2a 10 Latin America and the Caribbean 3 14 Total 21 100 Note: In-depth interventions are defined as comprising three different MIGA TA activities or more (see Annex IV.F). a. One case involved cofinancing by the host government. 2 8 1 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E a relationship between the number of MIGA in- To ensure that all member countries benefit depth interventions in each region and the size from MIGA products and services, MIGA has of trust funds available for that region, as shown provided TA to some countries that have not yet in table 20.3. benefited from MIGA's guarantee operations,135 with the implication that these TA activities MIGA's Role within the WBG and would be less selective and directed outside its Collaboration with Other Agencies strategic priorities. While MIGIM has worked MIGA is one of many organizations providing TA with MIGA's Underwriting Department in some to developing countries in the area of invest- countries and Regions (e.g., in Sub-Saharan ment promotion. MIGA's TA activities were Africa), in practice, there has been little comple- conceived to complement MIGA's guarantees mentarity between the two products, and operations and the activities of the Bank, IFC, guarantees and TA activities were handled by and other development agencies.134 Its compar- two separate departments (until May 2004). ative advantage vis-à-vis other providers of MIGA has not formulated a strategy that would advisory services in the area of investment better integrate or complement the delivery of promotion is not clearly defined. MIGA has TA and guarantees products. There is no collaborated with a wide range of WBG evidence that MIGA TA activities have entities--such as FIAS, the PSD department, and contributed to the generation of guarantees others. Figure 20.5 provides an overview of the business, or vice versa, and current TA activities current broad division of roles of the various have a limited potential to make the IC more institutions. conducive for MIGA guarantees. In fact, there Figure 20.5: Role of MIGA TA in Promoting FDI within WBG Formulating Attracting Steps in Creating a the national investors and enhancing conducive investment anchoring FDI FDI flows environment promotion within domestic for FDI strategy economy Key issues · Business climate for FDIa · Contribution of FDI to · Investor research/surveysb and concerns · Administrative barriers economic developmenta · Use Internet and IT for to FDIa · Role of IPA vs. othersa investor outreachb · Legal environment · IPA structure, function, · Investor servicing and for FDIa core activitiesa aftercareb · Benchmarking sector · IPA strategies and business · Backward linkages into the local competitivenessb plans for IPIsb economyd and policies to · Costs/benefits of investor · Business-government strengthen these linkagesa incentivesa partnerships to facilitate FDIb · Corporate social responsibility · Competition policy to · Targeting IP effortsb among foreign investorsa attract FDIa · Investment disputest through · FDI statistical databasea mediationc or arbitratione Source: MIGIM data. a. World Bank/IFC Foreign Investment Advisory Service. b. MIGA Investment Marketing Services. c. MIGA Investment Dispute Mediation Services. d. IFC SME Department. e. International Center for Settlement of Investment Disputes. 2 8 2 A N E VA L U AT I O N O F M I G A' S TA A C T I V I T I E S are important differences between MIGA's concentrates on national strategies and policies products; both are distinct, have different to encourage FDI; it provides technical clients, and are served by different tools in assistance to improve the overall investment different ways, and at different times. climate and assistance in developing the legal According to management and staff Back to and institutional framework for the establish- Office Reports, MIGIM has actively sought to ment of IPIs. MIGA works on implementation promote MIGA guarantee products and services with established IPIs (e.g., on their organiza- both to client IPIs and prospective investors tional development and investment promotion (although direct investor contacts have efforts). FIAS's client is usually a ministry; MIGA's decreased as MIGIM moved away from support- is the investment promotion intermediary. Staff ing investor conferences). MIGIM has also raised skills of the two institutions also differ; FIAS staff awareness of MIGA guarantees via its online and often have a policy focus, while MIGA TA staff direct outreach to potential investors, including have a stronger background in investment PrivatizationLink, FDIXchange, and IPAnet. promotion/marketing. A possible classification of TA in investment promotion, based on an Relationship between MIGA TA and FIAS. Since internal FIAS paper is presented in table 20.5. their demerger in 1993, FIAS and MIGIM have This paper defines investment promotion operated as two separate entities offering TA in activities as columns 4­8. FIAS activities usually the area of investment promotion. FIAS typically encompass activities in columns 1­4 in table Table 20.5: Possible Activities under Investment Promotion Products 1 2 3 4 5 6 7 8+ Diagnostic Admin. Development of Creation of basic Assistance in Assistance in Help in Working with and work barriers national investment design (gover- designing mar- designing ini- developing providing capacity studies strategies, including nance structure, keting strategy tial business budgets and building assistance perhaps investment for example) of of responsible plan of detailed organi- to investment pro- law, approaches for proposed unit unit. Diagnostic responsible zational charts motion organiza- reforming other laws, to be respon- studies of promo- unit. of marketing tions in carrying approvals processes, sible for tion institutions. unit. Assistance out their activities. tax structure and ad marketing function. in developing ministration, and so on. targets. Advice on location of Provision of promotion activity training to within government. marketing unit, Creation of legal help in Web framework for invest- site design, ment promotion. tracking sys- Creation of framework tems, bench- for effective policy marking, and advocacy. similar. Typical FIAS scope Typical MIGA scope Possible FIAS scope Possible MIGA Scope 2 8 3 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E 20.5 (which include most of the activities achieved name recognition for their products, directly linked to investment climate, e.g., as well as attracted a clientele. In addition, MIGA administrative barriers, legal and regulatory was mandated by its Convention to provide TA framework). Hence, addressing IC issues is to promote investment flows to developing clearly in FIAS's purview, which is also countries, in addition to its guarantee business. underscored by its mission statement: The current division of labor between FIAS and MIGA includes some areas in which both FIAS helps governments in improving may play a role. The internal FIAS report their business environment so that they highlighted the need for better communication can attract and retain more and more and coordination between these two units on beneficial FDI.136 ongoing activities and research. However, in recent years, the coordination and cooperation By contrast, MIGA's main sphere of activity between MIGA and FIAS have become much has been in columns 5­8. Its mission is defined more effective. MIGA and FIAS have, over time, as follows: attempted to establish their respective functional roles and responsibilities in providing [MIGA] provides tailored advice and technical assistance to support investment capacity-building assistance to investment promotion, as outlined in figure 20.5 above. In promotion intermediaries. practice, MIGA and FIAS have agreed to "hand off" clients to one another. The existence of two separate entities dealing Both MIGA and FIAS have increased their with TA for investment promotion is related to roles in coordinating their TA activities with institutional history. Both MIGA and FIAS have other Bank units, particularly the PSD units. evolved and specialized over time and have However, by and large, they continue to plan Box 20.4: MIGA and FIAS: How Does Cooperation Work on the Ground? In the case of El Salvador there was a clear-cut division of labor The case of Romania is illustrative of potential gaps in delivering between FIAS and MIGA. The country had a clear reform agenda, services across the WBG, and of difficulties in operating in a starting in the early 1990s, and sought support from the WBG for country with insufficient institutions for FDI promotion. MIGA has reforms and institutional development. Both FIAS and MIGA were provided technical assistance in specific areas to the IPA, al- active in the country, albeit at different times and with clearly dif- though the most pressing needs for improving FDI were in the area ferent mandates. Each focused on different tasks, working with two of legal and/or institutional development, which fall under the different entities (the one stop shop in the Ministry of Economy in purview of FIAS. Both FIAS and MIGA were involved in Romania the case of FIAS and the IPA in the case of MIGA). Both entities but each through a different ministry. While FIAS was engaged in have distinct mandates that do not overlap, one being a public sec- investment climate work in Romania, it did not assist the national tor institution, and the other a private sector-led promotion agency. IPI to improve the agency's institutional framework for investment The roles of FIAS and MIGA appear to have been separate and in promotion and facilitation. While MIGIM management recognized line with the division of labor between the two organizations. FIAS the weaknesses that the IPI faced institutionally,a it did not actively finished its work in El Salvador in 2000, well before MIGA work involve FIAS to bring in the necessary technical assistance. started in earnest. While there was no conflict or overlaps or gaps These two cases indicate that while there are no major con- in the delivery of services, there also appears to have been very flicts, cooperation can be improved between FIAS and MIGIM to little coordination between the institutions, as both seemed to provide more effective and strategic client services under the have responded to client requests separately. umbrella of the WBG. a. Based on discussions with MIGIM management. 2 8 4 A N E VA L U AT I O N O F M I G A' S TA A C T I V I T I E S and implement their activities independently of nature of much of this collaboration and the lack each other. A concern expressed by both MIGA of effective mechanisms to channel these and FIAS management is MIGA's lack of relationships have not always enabled MIGIM to sufficient resources to follow up with client fully leverage Bank Group resources. Moreover, organizations that FIAS has supported. MIGIM's resource constraints have been a signif- From the perspective of a client country, the icant cause of concern in terms of its ability to existence of two separate units can lead to collaborate and support investment promotion confusion over which services are provided by activities in client countries. whom. It may also lead to overlaps or gaps in the conception and delivery of services to clients, MIGIM Collaboration with Other Development although no such evidence was found in IEG- Agencies. In addition to WBG entities, MIGIM MIGA's evaluation. Finally, there is also a risk that has collaborated with a number of other organi- the WBG may be suboptimizing its resources zations that are involved in investment and provide suboptimal (compartmentalized) promotion, including the United Nations services to its clients. Therefore, the increased Development Programme, United Nations coordination and cooperation between the two Conference on Trade and Development, United departments should be formalized, including Nations Industrial Development Organization, protocols for the handover of clients. United Nations Economic Commission for Africa, and the World Association of Investment Cooperation between MIGA and Other World Promotion Agencies. Bank Units. Given that MIGA is highly special- To some extent, MIGA also competes with ized and its activities are generally small, its specialized consulting firms in offering its TA overall effectiveness and impact needs to be activities. However, as mentioned above, its seen in the context of WBG. In the 1998­2003 services are highly subsidized and provided to period MIGA increased its collaboration with the clients essentially free of charge. It is not other Bank departments, including coordinat- clear how MIGA TA differentiates its services ing activities or directly participating in invest- from those that could be provided at similar ment promotion components of private sector quality (and maybe more cost-effectively) by development projects. MIGA started in fiscal consulting firms and other organizations. There 2003 to participate in the formulation of CAS are no rules that explicitly require MIGA TA and Poverty Reduction Strategy Papers (PRSPs) activities to complement these firms' services, for selected countries. rather than compete with them. At the time of More recently, MIGA has increased its efforts this evaluation, when operating as a consulting to build more effective linkages with WBG and training organization, MIGA did not programs, and it participates in the PSD sector conclude formal contracts or agreements with board. In 2003, MIGIM was involved in work its clients incorporating an explicit scope of with other parts of the Bank Group to explore work, objectives, budget, and cost-sharing an integrated and improved approach to arrangements. encouraging FDI. As a result of these discussions and internal strategic planning, MIGA defined an Monitoring and Evaluation of MIGA's TA approach for its involvement in the CAS. Its fiscal Activities 2004 work plan was developed with an explicit MIGA prepared an internal document outlining effort to coordinate better its future technical a monitoring and evaluation framework to track assistance activities with the CAS to leverage progress of its TA activities in 2001, but at the Bank Group resources and maximize the time of this evaluation, MIGA had not developmental impact of its activities. established a monitoring system for TA activi- While the extent of MIGIM's cooperation ties. MIGA continues to have difficulties in with other departments of the WBG has defining its TA activities, and there is little gradually increased since 1998, the ad hoc information available on the cost of delivering 2 8 5 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E TA. Until 2001, monitoring and evaluation reporting purposes; however, some of the (M&E) occurred primarily through BTORs, with information and indicators are not conducive to significant shortcomings in the accounting of building an effective M&E system. As MIGA activities. The proposed framework envisaged a improves the targeting of regions and countries fully integrated system consisting of project for its TA program and develops clear criteria planning records, activity completion records, for project objectives, milestones, responsibili- follow-up surveys, and selected ex post evalua- ties, and cost assignments, it should adopt a tions. Subsequently, a few project-specific self- fully integrated M&E system as envisaged in evaluations were carried out, mainly focusing 2001. In fiscal 2004, MIGA undertook some on outputs and immediate effects of MIGA TA preliminary work for developing an M&E activities, without making progress in strategy and related indicators for its TA activi- implementing the fully integrated system. In ties, and has implemented a work plan to track addition, data were collected for internal project milestones. 2 8 6 21 Findings and Recommendations Mandate M IGA plays a specialized role within the WBG and its mandate is fo- cused on facilitating FDI flows to developing countries. This mandate does not explicitly incorporate the objective of improving Investment Climates for its guarantee activities. MIGA's guarantees and TA activities are provided in accordance with the WBG's PSD Strategy. MIGA's guarantees can mitigate some aspects of active, on average, in countries with worse IC relating to political risks, a component of investment climates than for guarantees; but investment climate. Although MIGA's involve- more in-depth TA, beyond needs assessments, ment may not improve investment climate has gone to countries with investment climates directly, its guarantee projects have the potential better than those of guarantee recipients. to affect IC indirectly through demonstration effects and linkages that stimulate local Strategy enterprises. These impacts are difficult to MIGA's strategies for selecting clients for its TA quantify. Evidence from a small sample of activities have changed frequently, and a signifi- evaluated guarantee projects suggests that cant share of diagnostic MIGA TA activities has demonstration effects have been modest. been directed to countries outside MIGA's strate- MIGA's TA capacity­building activities can be gic priorities. During 2002­2003, in-depth TA has effective in strengthening PIs and improving been concentrated in countries covered by the their effectiveness. The impact of MIGA's TA on stated strategic priorities--those having reason- investment climate (and FDI flows) is difficult to able investment environments and low incomes. establish. MIGA TA does not normally address Any divergence from MIGA's stated strategy the policy, legal, and regulatory framework, and its current portfolio of TA clients is due to which is under the purview of other members of several factors, including MIGA's objective to the WBG. respond to as many requests for assistance as MIGA guarantees have been concentrated in possible, and its funding structure. External countries with "medium-quality" investment funding is important for leveraging MIGA's own climates. For its TA activities, MIGA has been limited resources for TA, and lack of resources-- 2 8 7 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E combined with tied funding--constrain MIGA's Investors stated that IPIs have contributed to a strategic selectivity. reduction in transaction costs (e.g., time, cost of Within its mandate, between 1998 and 2003, information, and red tape) and improved the MIGA focused and diversified its products and likelihood of their investment's success. services. It concentrated its activities for a subset Evidence from the two case studies and a of clients for which it carried out more intensive, review of past MIGA TA activities also suggests longer-term activities. that MIGA has been more effective when MIGA does not have a strategy that integrates engaged with committed governments (e.g., the delivery of its guarantee and TA activities. where the IPI had direct support from and was There has been little complementarity between reporting to the President/Prime Minister, TA and guarantees in practice under the former increases in FDI flows were government priori- organizational structure, where two separate ties, and the IPI was adequately funded). departments handled these two products. Recommendation 2: Recommendation 1: Research on Effectiveness of Comparative Advantage and Strategy Investment Promotion MIGA should facilitate or commission research · MIGA should define clearly its comparative ad- to establish whether investment promotion vantage in providing TA and focus on areas activities have an impact on overall investment where it can provide additionality and com- flows and the extent to which government plementarity to the WBG, other donors, or the commitment is a key determinant of success, in private sector. order to assess the likely impact of its TA program. · MIGA should endorse and implement a clear and coherent strategy for selecting its clients Resources and Efficiency that ensures high effectiveness and develop- MIGA leverages its modest internal budget with ment impact. Within this strategy, it should ex- external resources (trust funds and partner ercise better selectivity of clients to improve the contributions) primarily to deliver in-depth TA effectiveness of resource use and impact. assistance programs. MIGA's limited TA resources · This new strategy should integrate TA and and its dependence on tied external funding have guarantee products to reap synergies within influenced the range and direction of its TA the Agency. program and have had implications for the implementation of a client targeting strategy. Effectiveness While MIGA offers its assistance essentially Given the many variables influencing FDI, free, little is known on its cost effectiveness, empirical evidence linking investment because cost information at the activity level is promotion to higher FDI flows is limited. not available for past years. According to a recent empirical study by FIAS, MIGA cooperates with many partners inside the investment promotion activities are and outside the WBG in the delivery of its TA positively related to FDI flows. program. Coordination and cooperation Findings from two evaluation case studies of between MIGA and FIAS have improved over the MIGA TA activities suggest that the outcome of past years. While there is potential for overlap MIGA's TA (in terms of improved quality of between the mandates and activities of FIAS and services of the IPI) has been positive. The impact MIGA, this evaluation has found no evidence of IPIs on actual FDI flows in these two cases was that this has had a major impact on the delivery difficult to determine and has so far been of the work to the client. The WBG PSD Strategy limited--and may never be known. The evalua- did not provide new directions for FIAS-MIGA tion found that most of MIGA's recommenda- collaboration, but prescribed continuity. Codify- tions were relevant for the agencies they worked ing the division of labor between FIAS and MIGA with, but that implementation by the IPI varied. and establishing protocols for handing over 2 8 8 F I N D I N G S A N D R E C O M M E N D AT I O N S clients can ensure continued good coordina- ex ante the scope of work and objectives for its tion. This will also help clarify the roles and program in a client country. services of the different institutions for the Bank's clients. Recommendation 4: Formalize Relationship with Clients Recommendation 3: MIGA should formalize its relationship with Funding Sources, Cost Effectiveness, client countries for in-depth TA through formal and Coordination contracts, including arrangements for sharing costs. It should clearly define the scope of work, · MIGA should continue to seek additional costs, objectives, and indicators of success. funding to complement its own resources, and align its work program closer with Monitoring IBRD/IDA priorities and lending to support ca- MIGA has not established a monitoring system pacity building. for its TA activities, and its measurement of · MIGA needs to improve its cost measurement projects is insufficient. While a few ad hoc self- tools and tracking systems for its TA activities to evaluations have been undertaken by MIGA and be able to assess its cost efficiency in the future. some progress was made in fiscal 2004, it has yet · MIGA should continue its coordination and to implement a systematic, integrated monitor- cooperation with FIAS and other partners, to ing system to track project progress, outcomes, ensure that resources are targeted to provide responsibilities, and costs over the TA project additionality and complementarity. The re- cycle. This becomes more important as MIGA spective roles of FIAS and MIGA, and hand- continues to move into more in-depth, longer- over protocols should be codified to ensure term assistance programs. consistent application. Recommendation 5: Operational Issues Implement Monitoring System MIGA does not have an explicit policy on cost MIGA should put in place a monitoring system sharing with clients and does not usually to track the progress and impacts of its TA conclude contracts with them. It does not define interventions. 2 8 9 ANNEX IV.A: METHODOLOGY FOR CASE STUDIES General Framework The evaluation of MIGA's TA includes an The technical assistance provided by MIGA to assessment of the outcome, impact, and IPAs can take any number of forms and includes efficiency of an intervention. Determining the following (see figure 18.1 on page 258): whether the technical assistance provided by MIGA actually yielded intended outcomes · Needs assessments involves making statements concerning causal- · Strategic planning ity. The fundamental tenet of impact assessment · Preparation of marketing plans and promo- is the need to compare the observed situation tional materials with the intervention to what would have been · Web site development had there been no intervention at all, i.e., the · Development of information systems counterfactual. The difference in resulting · Staff training. outcomes between these two states constitutes the impact of the program as illustrated in figure The nature and magnitude of technical IV.A.1. While the counterfactual cannot be assistance delivered to individual IPAs varies. observed or known with complete certainty, the Some interactions are short-lived focusing on concept of comparing observed outcomes to one particular aspect of an IPA's operations; this hypothetical state underlies all valid others extend over a long period and are approaches to assessing impacts. Valid compar- designed to address the organization as a whole. isons imply that the net effect of interventions is Regardless of these differences, TA is isolated from all other extraneous or confound- intended to strengthen the capacity of IPAs and ing factors that influence defined outcomes. increase their effectiveness in terms of attracting For MIGA TA, IEG-MIGA assessed both the greater FDI to relevant countries. impact of technical assistance on the IPA and the Figure IV.A.1: The Impact of an Intervention Outcome Observed outcome with intervention } Impact What would have happened without intervention Time 2 9 1 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E improved effectiveness of the IPA in influencing The other was selected from IEG-MIGA from a investment decisions of particular companies. group of projects where MIGA had done in- For this study, IEG-MIGA evaluated two TA depth and long-term interventions that would be projects. One case was selected because it had suitable to test this TA evaluation approach. Each been identified as a joint country case study by case study had the following two components as IEG-World Bank and IEG-IFC for this evaluation. described in table IV.A.1. Table IV.A.1: Evaluation Components Component Description Data requirements Expert opinion This component would trace the link between TA and subsequent changes · Results of the initial needs in the capacity of the IPA through in-depth interviews and direct obser- assessment vations. The study would examine the extent to which the organization · Description of the technical improved along dimensions included in the MIGA needs assessment assistance provided to the IPA from the TA received. The expert would assess the IPA's existing capacity · Materials provided to the IPA and compare it to the results of the initial needs assessment prepared · Current needs assessment by MIGA. The expert would attribute changes in capacity based on in-depth interviews with MIGA TA and IPA staff as well as a review of materials and other deliverables prepared by MIGA staff as part of the TA. Investors' perceptions This component would involve a survey of companies with which the IPA · Complete list of potential had interactions to obtain information on their satisfaction with IPA services investors with which IPA and the degree to which these services influenced their subsequent interacted investment decisions. · Survey 2 9 2 ANNEX IV.B: EXCERPT FROM MIGA'S CONVENTION Article 2 (b). Objectives and Purposes countries, to the flow of investment to The objectives of the Agency shall be to encour- developing member countries; and age the flow of investments for productive (iii) coordinate with other agencies purposes among member countries, and in concerned with the promotion of particular developing member countries, thus foreign investment, and in particular supplementing the activities of the IBRD [...], the IFC. the IFC, and other international development (b) The Agency also shall: finance institutions. (i) encourage the amicable settlement of To serve this objective, the Agency shall: disputes between investors and host countries; (b) Carry out appropriate complementary activ- (ii) endeavor to conclude agreements with ities to promote the flow of investments to developing member countries, and in and among developing member countries. particular with prospective host countries, which will assure that the Article 23. Investment Promotion Agency, with respect to investment (a) The Agency shall carry out research, undertake guaranteed by it, has treatment at least activities to promote investment flows and as favorable as that agreed by the disseminate information on investment member concerned for the most opportunities in developing member favored investment guarantee agency or countries, with a view to improving the State in an agreement relating to invest- environment for foreign investment flows to ment, such agreements to be approved such countries. The Agency may, upon the by special majority of the Board; and request of a member, provide technical advice (iii) promote and facilitate the conclusion and assistance to improve the investment of agreements, among its members, on conditions in the territories of that member. In the promotion and protection of invest- performing these activities, the Agency shall: ments. (i) be guided by relevant investment (c) The Agency shall give particular attention in agreements among member countries; its promotional efforts to the importance of (ii) seek to remove impediments, in both increasing the flow of investments among developed and developing member developing member countries. 2 9 3 ANNEX IV.C: PORTFOLIO OF MIGA'S TA ACTIVITIES Activity Description Strategic direction Needs assessment Formal institutional assessments using MIGIM's comprehensive Needs Assessment Framework. Informal assessments may also be conducted where an in-depth assessment is either unnecessary or inappropriate. Strategy development Encompasses several different TA interventions depending on needs and capabilities of client, including in-depth strategic planning exercises and the development of a formal strategic plan document; formal and informal strategic planning tools and methodologies to assist in defining institutional and promotional strategies. Implementation plan Operational business/corporate plans that specify objectives, organizational structure, promotional targets, and budgetary requirements and impact expected from promotional activities. Investor targeting Training for conducting investor targeting studies and market intelligence. Marketing plans Studies and/or training in design of generic and sector marketing plans. Promotional tools Investor information Design, development, and implementation of publications, including both paper and electronic based systems and system materials, to provide factual information to investors. Information technology Information technology strategy development, Web site design and implementation (IPA Works); assistance in use of tools implementation other IT tools, including PrivatizationLink and PrivatizationLink Russia, and FDI Xchange. Contact relationship Needs assessment, installation, and implementation of customized contact relationship management software to management enable investor tracking. Promotional materials Assess need for and assist in development of promotional materials, including country brochures, sector brochures, country or sector videos, Web site content, information packets, promotional stand design, press kits, etc. Investor toolkit/training Training to develop promotional capacity using MIGIM's Investor Toolkit framework. Investor services and Assistance to IPA management and staff to design and implement quality investor servicing capability and aftercare aftercare training services. IT skills training Training on use of information technology for promotion and organization support. workshops Investment promotion Investor conferences Assistance in organization and promotion of investor conferences; often region or sector based. Procedures, systems Design, development and implementation of procedures and methodologies, including day-to-day procedures for and methodology reporting, evaluation results, organizing investor site visits, site visit reports, etc. Missions, fairs, and Assistance in organization, participation, and follow-up of promotion outreach activities such as inbound or outbound shows missions, participation in trade fairs or regional investment conferences. Promotion using foreign Assistance in effective use of foreign relations offices (e.g., commercial offices within embassies) to extend outreach relations offices and develop promotion networks. Includes development of effective relationships, delegation of responsibilities, and coordination and communication requirements. Establishing and Assistance in selection of office locations, staffing, organization of office and staff, budget requirements, monitoring managing foreign and evaluation of results, training of promoters. offices Sector-specific Assistance in design, development, implementation and follow-up of missions in specific sectors. marketing/missions Subsector-specific Assistance in specialized subsector promotion activities and missions. marketing Source: MIGIM internal documents. 2 9 5 ANNEX IV.D: EL SALVADOR CASE STUDY After an absence of 10 years due to civil war, the · Advice and counsel: Through frequent MIGA IBRD resumed lending to El Salvador in 1991, staff visits to El Salvador, MIGA has offered including a US$16 million competitiveness guidance on issues ranging from governance enhancement loan in 1995, which provided and organizational management to specific as- assistance in formulating the country's 1999 pects of operations. MIGA helped PROESA de- Investment Law. This law affords equal fine an appropriate investment promotion treatment to domestic and foreign investors, strategy and validate plans developed by its including full protection of property rights. staff. During the 1990s, FIAS provided advice on · Investment promotion training: MIGA con- legislation related to foreign investment, helped ducted several training workshops for Board to design strategies to promote investment, and Directors, PROESA staff, and stakeholders, ad- assisted in the establishment of a one-stop shop dressing topics such as investment promotion in the Ministry of Economy--Oficina Nacional strategies, selection of sectors, company tar- de Inversiones (ONI)--to facilitate the approval geting, lead generation, direct mail, telemar- and registration of investments. keting (cold calling), presentation skills, Web Successive Salvadoran governments have site development, trade fairs, aftercare ser- pursued policies of economic and trade liberal- vices, and contact management software. ization. Important milestones were the Free MIGA's Investment Promotion Toolkit was used Trade Zones Law (1998), the Law of Reactivation in this training. of Exports (1990, amended 1999), and the · Installation of contact management system Monetary Integration Law (2000), all of which including staff training. have helped to make the country a more attrac- tive investment destination. Free trade Outcomes agreements, such as the Caribbean Basin Initia- Assistance provided by MIGA was considered tive, the Central American Free Trade very helpful, and more importantly, PROESA has Agreement, and several bilateral agreements, followed many of the recommendations offered have made the country a more interesting by MIGA. PROESA staff, Board members, and destination for foreign investors. others interviewed during the field mission The government of El Salvador approached appreciated MIGA's responsiveness and quality MIGA in fall 1999 for assistance with launching its work. The value of MIGA's advice and PROESA, the country's investment promotion counsel was noted, particularly in the early agency. The idea of creating such an agency grew stages when PROESA was struggling with out of the Bank's competitiveness enhancement internal management issues. PROESA has project. MIGA staff first visited El Salvador in the adopted the investment promotion strategy spring of 2000 to assess whether and how MIGA recommended by MIGA. Foreign investors could provide assistance. Since late 2001, MIGA interviewed as part of the case study expressed has been involved in a capacity-building favorable opinions about the quality of program with PROESA, which included the PROESA's work and offered examples where following components: PROESA was helpful. 2 9 7 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Impact MIGA's Effectiveness While the assessments of MIGA's work and MIGA seemed to have played an instrumental PROESA have been almost uniformly positive, role in addressing the concerns of the Board and interviews conducted with foreign investors sustaining the government's commitment to indicated that while PROESA had been helpful PROESA, despite some of the problems faced in and, in some cases, improved the chances of the early stages of its operations. The quality of success in the projects and helped reduce the MIGA's work and its being part of the WBG were time required to open operations, it had not considered to be reasons for the positive assess- played a major role in their decision to invest in ment of MIGA's involvement, which "helped El Salvador. Almost 80 percent of surveyed PROESA establish credibility and legitimacy." On company representatives responded that they the other hand, in the absence of MIGA probably or definitely would have invested in El assistance, PROESA would have likely retained Salvador in the absence of PROESA. assistance from private consultants offering The final impacts of MIGA's interventions these services, possibly with similar outcomes, have to be qualified by the variety of variables albeit at a higher cost. that influence FDI flows and the changes in IC. The following paragraphs therefore present MIGA-FIAS Coordination some macro trends for El Salvador, without Both FIAS and MIGA were active in El Salvador. claiming any relationship of those impacts with Both focused on different tasks, working with MIGA's work. two different entities (ONI and PROESA). Both El Salvador attracted FDI of $960 million entities have distinct mandates that do not between 1999 and 2003 (September). A signifi- overlap, one being a public sector institution, cant share of this investment has been associ- and the other a private sector led promotion ated with privatization of State-owned agency. The roles of FIAS and MIGA appear to enterprises (primarily communications and have been separate and in line with the division utilities companies). Over this five-year period, of labor between the two organizations. FIAS annual FDI flows fluctuated between $150 and finished its work in El Salvador in 2000, well $250 million, with investment levels slowing before MIGA work started in earnest. There down in the past two years. appears to have been very little coordination The IC--as expressed by the HFO/WSJ between both institutions, suggesting that their Index--improved from 2.4 (1998) to 1.95 (2001) involvement was basically demand-driven. But before deteriorating somewhat to 2.25 in 2003 given their different tasks and roles this did not (higher ratings correspond to lower IC). These result in overlaps or gaps in the delivery of ratings nevertheless put El Salvador into the services. "mostly free" category of the index, achieving one of the best scores for Latin America. 2 9 8 ANNEX IV.E: ROMANIA CASE STUDY Although Romania has lagged behind other year approach for establishing a "virtual invest- countries in Central and Eastern Europe in FDI ment promotion agency" with an independent flows, foreign investor interest has been increas- Board. After the establishment of ARIS in June ing in recent years due to favorable macroeco- 2002, MIGA made recommendations regarding nomic performance, improved investment capacity needs, a draft investment strategy and credit ratings and risk assessments, and the action plan, and assisted with an application for prospect of European Union (EU) accession. A an EU assistance program to help skills develop- 2002 survey of the business environment ment and capacity building within ARIS. conducted by the World Bank and the EBRD showed Romania's business climate had Outcomes improved slightly. The EU singled out adminis- ARIS senior management unequivocally praised trative barriers, the lack of implementation of MIGA's assistance. MIGA's support of a quasi- newly enacted legislation, and administrative autonomous IPA was regarded as "pivotal" to capacity as major weaknesses. making the case leading to the eventual establishment of ARIS. MIGA was also cited as MIGA Technical Assistance particularly helpful in getting the World Bank to The institutional framework for investment finance ARIS' information technology require- promotion in Romania was subject to frequent ments at a time when such funding was urgently reorganizations. The Romanian Development needed. ARIS regards MIGA's FDIXchange as Agency (RDA), active since 1991, merged with the "extremely useful" in gathering intelligence on SME Agency in 2000 and saw its responsibilities FDI trends and competitor capabilities. Privati- diluted in 2001 only to be redefined again in 2002, zationLink was also cited as a key resource, becoming ARIS. These changes have complicated which contributed to several recent privatization MIGA's work with Romania, which began in early transactions. The institutional needs assessment 2000 with an assessment of RDA's institutional of ARIS was also regarded as "very useful," capacity and development needs. Installing the helping ARIS to understand strengths, appropriate structure for investment promotion weaknesses, and priorities. and capacity building initiative have comprised the key focus of MIGA's work since. Impact In 2001, MIGA recommended that Romania A survey of 15 foreign investors assisted by ARIS should establish a quasi-autonomous IPA showed that the majority of firms rated ARIS accountable to a public/private sector Board. very highly and viewed them as an effective IPA, Later in 2001, the government fundamentally but there is little evidence that ARIS ultimately restructured the investment promotion program, affected their investment decision. but not along the lines proposed by MIGA. MIGA A major determinant of FDI flows to Romania assessed the set-up again and concluded that is the prospect of EU accession and perceived establishing an autonomous IPA was "somewhat progress toward that goal. Hence, the FDI premature" and instead recommended a 2- to 3- numbers for Romania are used for context only 2 9 9 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E and not as a measure of MIGA's success or MIGA Guarantees failure. While Romania's per capita FDI stock MIGA has issued guarantees totaling $344 was relatively small at EUR 418, compared with million in Romania for 11 projects. The first Poland's EUR 1,257 as of December 2003, in guarantee was issued in 1997, and guarantee recent years, Romania has seen substantial FDI issuance has become more intensive since 2001. flows from OECD countries, which are attracted Eight of the 11 projects are in the financial by its well educated, low-cost workforce. Annual sector, covering the establishment of branches average FDI inflows have increased from $770 of, for the most part, Austrian banks, or million during 1991­2002 to over $1 billion shareholder loans to already existing branches. during 2001­3. The other projects are a brewery, an infrastruc- In terms of changes in the investment ture project, and a health services provider. In climate, evidence from indices has been mixed. all, MIGA's insurance has been associated with Romania's rating in the Business Environment FDI of $410 million. MIGA's first banking project and Enterprise Performance Survey improved was underwritten in 1997, just as the govern- over 1999­2003, albeit from a very low level. ment had begun a reform of the banking sector. Major shortcomings identified in the surveys Governance and the government's commitment were in taxation, corruption, and finance. By to private sector development was weak, so the contrast, the Heritage Index for Romania deteri- risks to new entrants were considered high. In orated over the same period. the past years, the banking sector has been strengthened by the expansion of activities by MIGA's Effectiveness major foreign banks and privatization of State- While few of MIGA's recommendations were owned banks. Their loans are almost exclusively implemented prior to the establishment of ARIS, denominated in foreign currency. it is difficult to assess MIGA's effectiveness IEG-MIGA conducted interviews with four during this period due to the frequent institu- banks benefiting from MIGA guarantees in tional changes. Interviews with stakeholders Romania, one from Greece and three from showed that ARIS suffered from weak relation- Austria. These banks have introduced modern ships with other government agencies and a banking facilities (including Internet banking) that poor governance structure, suggesting that are improving the efficiency of the banking sector. MIGA's assessment may not have placed enough While overall bank lending to the private sector is emphasis on these critical factors. Many govern- on the rise, it remains constrained by country ment agencies compete with ARIS in portfolio risk concerns. In this regard, MIGA implementing various aspects of the investment guarantees have reduced the cost of providing promotion mandate. For example, ARIS is not investment funds to the Romanian banking sector linked with the Business Environment Depart- by eliminating concerns of the parent bank about ment of the Ministry of Development, currently the possible need to increase provisioning for supported by FIAS and working to improve the these loans. Discussions with the Austrian parent business environment and simplify administra- banks indicated that they were highly appreciative tive barriers to investment. ARIS's Advisory of MIGA guarantees, as they would have to either Board also lacks a public-private Board of reduce their exposure in Romania, take larger Directors with representatives drawn from key provisions on their own books to cover the ministries (commonly seen in other IPAs) and possible losses, or run the risk of receiving lower has been ineffective, leaving the organization credit ratings--thereby making borrowing more without sufficient credibility and resources. expensive. Some of the banks active in Romania Thus, MIGA's draft strategic plan would appear have used MIGA repeatedly to cover investments to have not addressed these issues adequately. in other countries in Central and Eastern Europe Greater cooperation with FIAS would have been to pursue a regional expansion strategy, which has useful and possibly led to better outcomes. been assisted by MIGA. 3 0 0 ANNEX IV.F: MIGA'S TA ACTIVITIES BY COUNTRY (1999­2003) 3 0 1 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Strategic direction plan plans development targeting assessment Region/Country Needs Strategy Implementation Investor Marketing Other Sub-Saharan Africa Burkina Faso x Cameroon x Cape Verde x x Congo (Democratic Republic of) x Côte d'Ivoire x x Equatorial Guinea x x Ethiopia Ghana x x Kenya x Malawi Mali x Mauritius x Mozambique x x Namibia x Nigeria x x x Rwanda x Senegal x x x x South Africa x Tanzania x x Uganda x Zambia x x Zimbabwe x Regional East Asia & Pacific Bangladesh x x Cambodia x China x x Indonesia x Korea (Democratic People's Republic of) x x Lao (PDR) x x Malaysia x 3 0 2 A N N E X I V. F : M I G A' S TA A C T I V I T I E S B Y C O U N T R Y ( 1 9 9 9 ­ 2 0 0 3 ) Promotional tools Investment promotion offices A (CRM) FDI capacity foreign (IP & methodology system mgmt. aftercare & relations marketing & workshops shows training & managing marketing/missions materials systems & foreign fairs -specific information implementation PrivatizationLink, relationship toolkit workshops services training conferences with specific tools orks, skills Investor IT W Xchange) Contact Promotional Investor building Investor IT Other Investor Procedures, Missions, Prom. Establishing offices Sector Subsector Other x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x (Continued on the following page.) 3 0 3 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Strategic direction plan plans development targeting assessment Region/Country Needs Strategy Implementation Investor Marketing Other Mongolia x x Philippines x Thailand x x Vietnam x Regional x Europe & Central Asia Albania x Armenia x Azerbaijan x Bulgaria x Bosnia and Herzegovina Kyrgyz Republic x Macedonia (FYR) x Romania x Russian Federation x Serbia and Montenegro x x x Regional Middle East & North Africa Egypt x Jordan Lebanon x Saudi Arabia x x x Tunisia x Latin American & the Caribbean Argentina Bolivia x x x x x Brazil Chile Colombia Ecuador El Salvador x x x x Guatemala x 3 0 4 A N N E X I V. F : M I G A' S TA A C T I V I T I E S B Y C O U N T R Y ( 1 9 9 9 ­ 2 0 0 3 ) Promotional tools Investment promotion offices A (CRM) FDI capacity foreign (IP & methodology system mgmt. aftercare & relations marketing & workshops shows training & managing marketing/missions materials systems & foreign fairs -specific information implementation PrivatizationLink, relationship toolkit workshops services training conferences with specific tools orks, skills Investor IT W Xchange) Contact Promotional Investor building Investor IT Other Investor Procedures, Missions, Prom. Establishing offices Sector Subsector Other x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x (Continued on the following page.) 3 0 5 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Strategic direction plan plans development targeting assessment Region/Country Needs Strategy Implementation Investor Marketing Other Honduras x x Nicaragua x x Panama x Peru x St. Lucia x Venezuela Regional Sources: MIGA Quarterly EVP Reports (fiscal 2000, Q1 to fiscal 2003, Q3), MIGA Annual Reports (fiscal 2000­2), and MIGIM Back-to-Office Reports (fiscal 2000­3). 3 0 6 A N N E X I V. F : M I G A' S TA A C T I V I T I E S B Y C O U N T R Y ( 1 9 9 9 ­ 2 0 0 3 ) Promotional tools Investment promotion offices A (CRM) FDI capacity foreign (IP & methodology system mgmt. aftercare & relations marketing & workshops shows training & managing marketing/missions materials systems & foreign fairs -specific information implementation PrivatizationLink, relationship toolkit workshops services training conferences with specific tools orks, skills Investor IT W Xchange) Contact Promotional Investor building Investor IT Other Investor Procedures, Missions, Prom. Establishing offices Sector Subsector Other x x x x x x x 3 0 7 ENDNOTES FOR PARTS II­IV Chapter 6 9. See, for example, Keefer and Knack (1995, 1997), 1. The World Bank Group refers to IBRD/IDA, the Sachs and Warner (1995), Hall and Jones (1999), Ace- IFC, and MIGA; the "World Bank" or "Bank" refers to moglu, Johnson, and Robinson (2001), Mauro (1995), IBRD/IDA only. and Kaufmann, Kraay, and Zoido-Lobaton (1999), and 2. The evaluation does not cover small- and medium- others cited in the literature review for this evaluation. scale enterprises (SME) or financial sector issue in 10. Cummins, Hassett, and Hubbard (1994); Fazzari, depth, as these are being addressed in other ongoing Hubbard, and Petersen (1988); Calomiris and Hub- IEG evaluations. bard (1990); Hubbard and Kashyap (1992); Hubbard, 3. Available as a background paper for this report. Kashyap, and Whited (1995); Sakellaris (1994). 4. Summarized in Annexes II.B and II.C. 11. Batra and Mody (2003). It should be noted, 5. The results of international investor meetings however, that FDI may fluctuate in a country for rea- are available as a background paper for this report. sons that have nothing to do with its investment cli- 6. The country case studies are available as back- mate--for example, economic cycles in source countries ground papers and are summarized in Annex II.E. The (particularly for investments in emerging market case study countries were chosen to achieve a diver- economies) and commodity prices (particularly for in- sity of regions, income levels, and economic systems, vestments in Africa). along with a significant volume of World Bank invest- 12. Summarized in a background paper for this re- ment climate activity. The case study methodology is port. Annex II.A contains information on these inter- described in Annex II.A. views and their participants. 7. IEG (2004a), p. 6. The CPIA assesses borrower countries' policy and institutional frameworks annually Chapter 7 with regard to their capacity to foster poverty reduction, 13. For a review of WBG PSD activities in the 1990s, sustainable growth and the effective use of development see World Bank (2001a). assistance. The CPIA is currently being redesigned to 14. More recently, the PSD Network has been piloting better differentiate sub-themes such as the "business rural Investment Climate Assessments in collaboration environment." The Heritage Foundation Index meas- with the Agriculture and Rural Development Network. ures developed and developing countries' performance Labor and property rights issues are to be covered in with respect to 50 policy dimensions. The International Doing Business 2005, and informal sector studies were Country Risk Guide Risk Rating System is a proprietary commissioned by the 2005 World Development Re- service that rates the risks faced by investors in a coun- port. In addition, it should be noted that land and try based on political instability, economic vulnerability, property rights issues have been dealt with in research and ability to meet financial obligations. The Economist by the Development Economics and Environmental Intelligence Unit Country Risk Service is a proprietary ser- and Socially Sustainable Development departments, vice that rates risks faced by investors in a country, de- and competition policy in the Latin America and the signed for commercial bankers, institutional investors, and Caribbean Region. corporate executives who invest in emerging markets. 8. The Investment Climate Surveys and Assessments Chapter 8 represent another effort to improve on cross-country 15. IEG (2001a). Note that there have been few indicators of the quality of the investment climate. Quality Assurance Group evaluations of IC-related ESW, 3 0 9 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E particularly of survey-based diagnostic instruments agency and a redesign of the capacity building com- such as Private Sector Assessments. ponent of the project. 16. Based on the literature review as well as input from the external advisory panel for this evaluation. Chapter 11 17. The findings of the WBES surveys are summa- 24. Work conducted in fiscal 2004 and planned for rized in Batra et al. (2003). fiscal 2005 included country case studies of investment 18. FIAS was the subject of a 1998 evaluation by IEG climate reforms; using lessons and research from the IFC, and is covered in the IEG part of this evaluation. FIAS program to compile best practice in policies and 19. The findings of the WBES surveys are summa- institutions; and a focus on reform episodes in the rized in Batra et al. (2003). next Doing Business report. 20. The recent state-level ICAs in India are an ex- ample of recent efforts to do this. Annex II.E 25. For fiscal 2003­4, economic growth is estimated Chapter 9 to reach a record high of over 7 percent, largely because 21. However, it should be noted that the assignment of a good monsoon. of themes to projects in the portfolio under the cur- rent Bank coding system is somewhat arbitrary and Chapter 14 may not be 100 percent accurate. Sample checks car- 26. See Private Sector Development Strategy--Di- ried out by IEG showed that the potential for misclas- rections for the World Bank Group, April 9, 2002. sification is greatest for non-core IC projects. 27. The MDGs are eight internationally accepted 22. IEG assigns ratings according to the following broad objectives designed to reduce the proportion of criteria. Outcome measures the extent to which the people in poverty by 2015. See http://www.develop project's major relevant objectives were achieved, or mentgoals.org/About_the_goals.htm. are expected to be achieved, efficiently. Institutional 28. There is a strong correlation between countries' development impact measures the extent to which a progress toward the MDGs and their perceived risk for project improves the ability of a country or region to investors as measured by the IICCR. Under IFC's own cat- make more efficient, equitable, and sustainable use of egorization, ratings of less than 30 constitute a high-risk its human, financial, and natural resources through: (a) environment;IICCRratingsof30tolessthan45,amedium- better definition, stability, transparency, enforceability, risk environment, and rating of 45 or greater, a low-risk and predictability of institutional arrangements and/or environment. The average likelihood of achieving the (b) better alignment of the mission and capacity of an MDGs was calculated for eight different MDGs and organization with its mandate, which derives from weightedbycountries'respectivepopulations.Theaverage these institutional arrangements. Institutional devel- country risk score for countries that are thought possible opment impact includes both intended and unin- or likely to achieve the MDGs is 42 (equivalent to a tended effects of a project. Sustainability measures medium-riskenvironment),whereastheaveragescorefor the resilience to risk of net benefits flows over time. countries considered unlikely or very unlikely to achieve Note that IEG outcome ratings measure the degree of the MDGs is 27 (equivalent to a high-risk environment). achievement of project objectives due to the project 29. See IEG's Annual Review of IFC's Evaluation as well as to factors external to the project--in other Findings for fiscal 2002 and 2003. This and other stud- words, outcomes are not necessarily attributable to the ies with themes relating quality of IC to IFC perform- project alone. ance and outcomes are discussed in box 6.2 of this report. Chapter 10 30. See Private Sector Development Strategy--Di- 23. The Bank and the Government of Romania have rections for the World Bank Group, April 9, 2002. agreed to and begun implementation of the restruc- 31. The formal Articles of Agreement governing the turing the General Cadastre and Land Registration Pro- IFC were drafted by the World Bank in 1955. IFC offi- ject to ensure its meeting the development objectives. cially came into existence in the summer of 1956. The restructuring includes the integration of land reg- 32. This study uses IICCR to track changes in in- istration and cadastre tasks into one function in one new vestment climate, given that IICCR is a more volatile IC 3 1 0 E N D N O T E S F O R PA R T S I I ­ I V indicator than HFO/WSJ. The increased volatility al- and Gi-Taik Oh, "Costs of Infrastructure Deficiencies in lows us to capture changes in investment climate in Manufacturing in Indonesia, Nigeria and Thailand," shorter periods. For a more detailed analysis compar- World Bank Policy Research Working Paper, 1996. ing the volatility of IICCR and HFO/WSJ indicators, 43. These projects were evaluated five years after ap- please see Annex 4 in the IEG-IFC's impact review of proval, i.e., from 1998 to 2002. A stratified random China, March 2004. sample was selected from each year's approval popu- 33. HFO/WSJ index is a broader, more stable meas- lation and was evaluated by IFC's investment depart- ure of investment climate, in contrast to IICCR, which ment under the oversight of IEG. captures a narrower slice of investment climate (coun- 44. Using a step-wise approach where the regression try sovereign risk) and is more volatile from year to year. model started with all variables and sequentially re- See Annex III.A for an explanation of indexes used to moved all variables that are not significant at a 10 per- measure IC. cent significance level. 34. DO is a synthesis rating of four subindicators: proj- ect business success; economic sustainability; impact on Chapter 16 private sector development; and environmental impacts. 45. These are operations undertaken during the 35. IEG-IFC's impact review of China, Annex 4 has review period, approved two years before evaluation, further details. i.e., fiscal 1993­2001 approvals, and where IEG was 36. Four subindices of Heritage Foundation/Wall able to track IFC's counter parties in the client/host Street Journal Index are strongly correlated at 5 percent countries. significance level or better at evaluation. In the impact 46. IEG focused on including TAAS operations review of China, which conducted a similar analysis for that are of a public good nature. A public good is one a different sample of XPSRs, the subindices of Trade and where one cannot exclude others from benefiting if Banking and Finance were also strongly statistically the product is supplied to at least one person/firm, significant, and this supports the robustness of these and use of the item by one person/firm does not two variables. However, while Regulation and Black make it impossible for others also to benefit from it. Market had the correct signs, they were not found to However, some firm-specific TA products may partially be statistically significant. take on the characteristics of a public good, such as 37. The "regulation" subindex is strongly correlated advice to a firm that leads to new best practice that with IO at evaluation but not at approval. others then copy. 47. Note that 30 percent of all operations were Chapter 15 stand-alone Category 3 (containing no overlaps with op- 38. For the investment climate study, IEG World erations in Categories 1 or 2). Of this amount, 79 per- Bank did five country case studies: India, Indonesia, cent involved government and 21 percent involved Mozambique, Romania, and Peru. private investor groups. 39. Examples of broad IC indicators include 48. This figure is adjusted to remove overlaps in fund- HFO/WSJ Index of Economic Freedom, the Frazer In- ing reported by the three main contributing vehicles: stitute's Index of Economic Freedom, Euromoney's TATF, PEP, and PDFs. However, in the section below and Country Risk rating, Institutional Investors Country Annex III.F, which describe each program's IC TA vol- Credit rating, AT Kearny's FDI Confidence Indicator, etc. ume, figures are not adjusted for overlaps. 40. Poor IC countries include those with scores 49. Overlaps in financing with TATF are adjusted in greater than 3 HFO/WSJ. figures 16.1­16.3. 41. The text in the following three bullet point para- 50. IFC's contribution includes $11 million made to graphs was taken from the World Development Re- FIAS over the review period; an estimated $1.6 million port 2005: A Better Investment Climate for Everyone, in administrative support for IC TA work done by the World Bank, pages 6.1, 6.14, and 7.1. SME department in fiscal 2001­2; and an estimated 42. See literature review "The Investment Climate $700,000 in support of SME facilities' IC TA program. and Private Sector Development" prepared by Tyler For South Pacific Project Facility (SPPF), most IC TA was Biggs, 2003. This was prepared as a background paper financed with IFC funding. For SEED and MPDF, about for the joint IC report. See also Lee, Kyu Sik Alex Anas, 18 percent of their IC TA was financed by IFC. 3 1 1 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E 51. IFC's contribution to all PEP (including pre-2000 the success prospects for the implementation process. PEP) over the review period is as follows: fiscal 1993­95 This is discussed in the next section. $500,000; fiscal 1996­8 $900,000; fiscal 1999­2000 $1.2 59. This is not the case for PSAS and FIAS, which both million; fiscal 2001­2 $8.4 million. Total PEP donor fund- have up-front quality control mechanisms in place. ing in fiscal 2001 and 2002 was $27 million from Canada, 60. In August 1997, IEG sent questionnaires to 119 Finland, the Netherlands, Norway, Sweden, Switzer- people in 73 countries and received 33 responses from land, the United Kingdom, and the United States. 29 countries--a response rate of 28 percent of the 52. PSAS projects are paid for by a combination of clients and 40 percent of the countries surveyed. See client fees and budget support from IFC and other "An Evaluation of the Foreign Investment Advisory Ser- donors, including TATF. IFC's contribution of $6.6 mil- vices," CODE98-56, for detailed information. lion reflects PSAS's cumulative operating loss over the 61. IFC Advisory Services Client Survey responses review period. For projects that qualify as investment were too few to provide meaningful information for climate, nearly $2.7 million of TATF funds supported TATF and PSAS projects. For FIAS, a small sample size-- PSAS projects. 21 responses of 56 surveys sent out in 2002, and 12 re- 53. Some respondents represented more than one sponses of 38 sent out in 2003--also suggests that project. interpretations of these results need to be approached 54. That is, gave ratings of satisfactory or better. with caution, since respondents might tend to be more 55. To arrive at this score, IEG first assigned nu- favorably inclined toward FIAS than nonrespondents. merical values to project ratings based on a 4 point scale: Nonetheless, the data provide an interesting perspec- 1 = unsatisfactory; 2 = partly unsatisfactory; 3 = sat- tive and feedback about FIAS by clients. isfactory; and 4 = excellent. Project averages were 62. Respondents were asked to rate FIAS perform- then taken for each project. IEG derived an overall av- ance "poor," "fair," "good," "very good," or "excellent" erage from these figures, as well as group averages for in each category. For this comparison, weighted aver- the three different categories that IC TA operations ages were calculated based on a rating from 1 ("poor") were split into for comparative reasons. to 5 ("excellent"). Note that this scale is different from 56. Criteria for excellent rating include: project ob- the scoring scale of 1­4 used elsewhere in this report. jectives and targets are very clear, and a results- 63. It is worth noting that despite continued low rat- based management (RBM) system is set up. RBM is ings on project follow-up, performance of project follow- a system to improve program and management ef- up improved by 23 percent in the fiscal 2002 survey fectiveness and accountability and is oriented to- over the previous year's survey. ward achieving results. It uses desired results as a 64. As the PCRs are self-assessments of not-yet-ma- basis for planning, management and reporting, and ture projects and are typically completed within one aims to improve performance by comparing and an- month of project completion or delivery to the client, alyzing actual results against planned results through they are not evaluations of outcome or impact. For the regular monitoring, evaluation, reporting, feedback, overall success of TA operation rating, task managers are and adjustments. asked to assign a rating that gives a synthesis, bottom- 57. The overall average score based on project line judgment that takes various factors and components scores for responsiveness was 3.2. Sixty-three percent into consideration, including accomplishment of scope; of respondents said they received good overall levels achievement of objectives; preparation quality; funding; of responsiveness from IFC to their requests, and timely consultant selection and performance; and client sat- delivery of services/reports, and 27 percent described isfaction. See TATF PCR instructions for details. IFC's responsiveness as high, or rated it excellent. In 65. Of the total 278 TATF projects that fall into the contrast, 10 percent of clients said there was major IC category, 165 had PCRs (59 percent) and half pro- shortfall in either time of delivery of services or re- vided ratings for the overall success of TA operation. sponsiveness to client requests that resulted in a partly 66. This bears keeping in mind that "there is noth- unsatisfactory rating. ing more difficult to take in hand, more perilous to con- 58. Having recognized IFC's limited ability to con- duct, or more uncertain in its success, than to take the trol the implementation process, clients and stake- lead in the introduction of a new order of things. Be- holders nonetheless outlined how IFC could enhance cause the innovator has for enemies all those who 3 1 2 E N D N O T E S F O R PA R T S I I ­ I V have done well under the old conditions, and lukewarm 5­8 and Annex 1, for a complete list of projects and out- defenders in those who may do well under the new" comes/results. (Niccolo Machiavelli, The Prince). 73. This reflects in part the fact that until their re- 67. Through FIAS's PIM system, task managers re- cent mainstreaming/integration into the reporting view their projects once a year for three years and structure of the regional investment departments, the rate the implementation of each recommendation on SME facilities concentrated their skills and activities a scale from 1 to 4, where 4 = recommendation fully mainly on helping SMEs raise financing for expansion implemented; 3 = recommendation partially imple- projects. IC-related activities were varied and of sec- mented; 2 = recommendation accepted but not im- ondary importance. plemented; and 1 = recommendation rejected. In 74. See IEG's forthcoming evaluation of SME addition, task managers also weigh the relative im- facilities. portance of each recommendation by its expected 75. Findings set out in these paragraphs are de- impact on a country's overall investment climate and rived from independent evaluations, which have been ability to attract investment. The weights are on a contracted out by IEG and paid for by the facilities, by scale from 1 to 3, with 3 = very important; 2 = im- an independent consulting firm, Nexus Associates. portant; and 1 = less important. Final ratings repre- 76. The evaluation cites a very fluid political process sent a weighted average of the recommendations in in the region, with some associations not wanting to terms of their importance. FIAS's PIM system does assume this role until they establish a stronger mem- not attempt to measure impact of reforms on the bership base. Moreover, the sustainability of some as- ground; however, it has developed a series of imple- sociations is questionable given weak financial mentation projects that are centered around moni- situations. toring performance of reform implementation, with 77. It should be noted that at the time of these in- impacts on the ground measured through investor terviews in October 2003, the Inter-American Devel- and government surveys at the core. opment Bank was preparing a housing sector loan 68. It is interesting to note that despite divergence that, among other things, included plans to change the in implementation rating averages between these two distortionary subsidy scheme of a government sup- groups, ratings provided by clients with regard to ac- ported housing finance company. ceptance of recommendations did not show major dif- 78. See "World Bank Group PSD Strategy," April ferences between broad TA projects (Category 1) and 2002. The PSD strategy document noted that MIGA specific ones (Category 2). should provide "focused political risk guarantees, in- 69. Projects that were followed up with second proj- stitution-building and investment promotion assis- ects or were part of country programs had an average tance." Advisory services for PSD are located in the implementation score of 2.86, while projects with no Bank and the IFC (in the form of joint departments) follow-up scored an average of 2.47. and, separately, in MIGA. The division of labor be- 70. PEP's approach combines advisory work on tween FIAS and MIGA's Investment Marketing Ser- legal and regulatory aspects with significant stake- vices Department was described as follows: "FIAS holder involvement through partnerships with the provides policy advice to governments on how to at- private sector, government and donors; program- tract foreign investors in ways that benefit the host matic follow-up by way of capacity building and train- country. MIGA/IMS tends to operate downstream from ing; and extensive use of local consultants and FIAS helping countries promote investments based expertise. on the policy and institutional framework promoted 71. For more information on assessing PEP's out- by FIAS." comes, see IFC board report IFC/R2002-0191, "Pro- 79. Out of 176 IC TA operations funded by TATF, 52 posed Continued IFC Participation in the Private percent did not have PCRs completed. The one TA op- Enterprise Partnership"; IEG's "Country Impact Re- eration with linkage to an investment project intended view of Russia," CODE 2002-0026; April 29, 2002; and to advise the Slovakian government on legal barriers PEP progress reports made to donors. to SME lending, since an IFC investment to support a 72. See "Proposed Continued IFC Participation in the $30 million agency line for SMEs was never disbursed Private Enterprise Partnership" IFC/R2002-0191, pages and finally cancelled. 3 1 3 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E Annex III.A 87. Such as funding limits by region, country, proj- 80. See http://www.heritage.org/research/features/ ect size, or activity. index2003. 88. Nearly 60 percent of all TAFT IC assignments have 81. See Batra and Moody, "Investment Climate In- sector-specific IC components. dicators," 2003, which analyzes 21 databases of IC in- 89. Four PDFs provided IC TA: MPDF, SEED, SPPF dicators, uses the principal components method of and APDF. information from these indices to construct an index, 90. For projects that qualify as IC, nearly $2.7 mil- and compares the constructed index and other in- lion of TATF funds supported PSAS projects. dices. Also, see IEG's Annual Review of Development 91. Only a portion of this dollar amount actually con- Effectiveness: The Effectiveness of Bank Support for Pol- tributes toward improving IC, with the bulk spent on icy Reform, Report 28296, March 2004 (pp. 6­7 and structuring and executing the transaction. Annex B). Annex III.G Annex III.F 92. These PIMs, along with Project Briefs and Pro- 82. PEP countries formally include Armenia, Azer- ject Completion Reports, are available to donors for all baijan, Belarus, Georgia, Kazakhstan, Kyrgyz Republic, projects on the FIAS Web site (www.fias.net). Russian Federation, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan. For the purposes of this study, all IC TA Annex III.J undertaken before 2000 by IFC in the countries of the 93. These TA operations include the following: Im- former Soviet Union will be referred to as pre-2000 PEP. proving the Investment Climate for Sustainable Mining 83. This average does not include two large land re- in China, Sustainable Development of the Mining Sec- form projects. tor in Lao, Study of the Business Environment for In- 84. These funds must be used for fees and travel of formation and Communication Technology Businesses consultants, not IFC staff. Use of these funds is subject in Kyrgyz Republic, and Investment Opportunities in the to donor and TATF approval and is influenced by donor Information Technology and Internet Sectors (Côte preferences regarding types of activities and countries d'Ivoire, Ghana, Nigeria, and Senegal). or regions. The funds are frequently tied to the use of 94. This office reports to the two general counsels consultants who are nationals of a particular donor of the WBG (Bank and IFC). country. 95. Before the COI Office was established, there 85. TA under this program includes feasibility and was no systematic screening, and IFC's principles and prefeasibility studies, project identification studies, policies provided guidelines for provision of advisory strengthening the environment for PSD, capacity build- services. While these principles and policies were dis- ing for private businesses and government agencies, and cussed to some extent in a 1995 IFC policy paper (see privatization. To be considered an IC operation, a proj- "Collaboration with Private International Financial In- ect must contain an explicit component that advises the stitutions: Practices and Policies," IFC, November 1995), government on the legal and/or regulatory framework the primary focus of that report was to clarify IFC's poli- (e.g., privatization/concession law, sector regulations, cies with respect to privatization and corporate re- etc.) or builds capacity of the regulator or government structuring advisories and address the issue of potential agency above and beyond conducting the specific trans- displacement by IFC of other private financial institu- action. Hence, projects that advise only on transac- tions providing similar services. During this period, tions (sales or transfers to the private sector) are not IFC was under criticism from private financial institu- included. tions for overlap and unfair competition in the provi- 86. This figure is not adjusted to exclude overlaps with sion of advisory services (see, for instance, GAO Report other TA-providing units within IFC that have received to Congressional requesters: World Bank: US Interests cofinancing through TATF. IEG estimates that approxi- Supported, but Oversight Needed to Help Ensure Im- mately $11.4 million in TATF IC funds went to support proved Performance, September 1996, Chapter 2 these other programs. Overlap with PEP accounts for $5.9 [GAO/NSIAD-96-212]). In addition to clearly setting million; with PSAPT for $2.7 million; with the SME de- out the conditions for IFC's acceptance of remunera- partment for $2.6 million; and with FIAS for $173,000. tive government advisory mandates to remove poten- 3 1 4 E N D N O T E S F O R PA R T S I I ­ I V tial for displacement, the report pointed out that a greater levels of government interference in the economy substantial majority of the advisory mandates under- and a worse investment climate. taken by IFC were non-remunerative, and as such gen- 105. The average HFO/WSJ Index score for countries erally involved no competitive bidding with alternative in which MIGA guarantees were issued in fiscal private advisors. 1998­2003 (weighted by the amount of FDI facilitated 96. For more detailed treatment of COI, see Boatright in each country) was 3.18 (equivalent to "mostly un- 2002. Chapter 11 explores different types of COI in fi- free"); for TA activities in the same period the score was nancial services and proposes strategies for managing 3.28. Within the TA activities, the score for countries only them. receiving needs assessments was 3.41, while the score for countries receiving more in-depth assistance (ben- Chapter 18 efiting from three or more activities) was 3.20. Individual 97. For a description of the definition, scope, and scores for in-depth TA ranged from 2.13 (mostly free division of labor of IC activities of the WBG, see Part I, economies) to 4.53 (repressed). (Higher scores indi- Chapter 1 of this report. cate worse investment climate.) 98. See literature review on investment climate con- 106. See MIGA Convention Article 11. MIGA re- ducted by IEG-World Bank, which is summarized in Part quires host country approval before it can issue a I, Chapter 1. guarantee, to inform the country (which is also a MIGA 99. MIGA Convention, Preamble. shareholder) of the potential investment. In addition 100. IEG-MIGA began evaluating MIGA's information to MIGA, the IBRD offers Partial Risk Guarantees services in fiscal 2005 and MIGA's mediation services in (mostly for infrastructure projects) that require a sov- fiscal 2006. ereign counter-guarantee. IFC offers partial credit 101. IEG-MIGA's methodology for evaluating guar- guarantees to enhance the structure for debt instru- antee projects is described in its 2004 Review of De- ments. In terms of the coordination of WBG guaran- velopment Effectiveness in MIGA. tee instruments, the WBG's PSD Strategy has 102. These two country case studies are the first prescribed the following hierarchy of instruments: MIGA TA projects that were independently evaluated. markets first, MIGA/IFC instruments second, and Bank guarantees last. However, applying this hierarchy in Chapter 19 practice has been difficult. Therefore, the paper notes 103. MIGA Convention, Article 2. that discussions among WBG staff to avoid duplication 104. There are several indices measuring aspects of or competition of instruments have taken place with IC quality; one is economic freedom by the Heritage the result that Bank Partial Risk Guarantees should be Foundation/Wall Street Journal (HFO/WSJ) Index of Eco- used when "one or several of its features [...] are crit- nomic Freedom (2004). This evaluation used the Heritage ical from a risk management and/or market point of Index and the World Bank composite index on regulatory view to achieve private financing objectives" (see Pri- quality and also uses other measures. A recent IEG World vate Sector Development Strategy--Directions for the Bank report that reviewed indices for measuring invest- World Bank Group). ment climate found a close correlation, and all have 107. According to records from the Berne Union, shown an improving trend over the past four years. See MIGA's share of outstanding liabilities was 7.9 percent Annual Review of Development Effectiveness 2003: The (2001), 8.4 percent (2002), and 8.2 percent (2003). Effectiveness of Bank Support for Policy Reform, 2004, These numbers do not include political risk insurers that p. 5 ff. The HFO/WSJ Index measures how well 161 coun- are not members of the Berne Union (such as Lloyd's tries score in 50 independent variables divided into 10 of London), whose impact would diminish MIGA's mar- broad factors (trade policy, fiscal burden, government in- ket size and ranking. tervention, monetary policy, capital flows and foreign in- 108. Gross exposure is MIGA's outstanding maximum vestment,bankingandfinance,wagesandprices,property aggregate liability. Net exposure is the gross exposure rights, regulation, and informal market activity). The 10 less reinsurance. factors are weighted evenly, as each is considered by the 109. The leverage ratio is defined as the quotient of Index to be equally important. Each factor is graded estimated FDI facilitated by MIGA guarantees and the from a scale of 1­5, with higher scores representing net guarantee coverage issued. 3 1 5 I M P R O V I N G I N V E S T M E N T C L I M AT E S : A N E VA L U AT I O N O F W O R L D B A N K G R O U P A S S I S TA N C E 110. IEG started measuring whether MIGA support Thus, they may not be well equipped to fulfill this func- was critical or not in its ex post project evaluations be- tion. A stronger policy advocacy role for IPIs could ginning in fiscal 2003. At present, the stock of completed also give rise to conflicts of interest. evaluations is too small to make statistically significant 121. As of October 2004, the World Association of inferences or propose an adjusted indicator. Investment Promotion Agencies (WAIPA) had 164 mem- 111. The top 10 developing countries in terms of re- bers. There are more than 160 national and 250 sub- ceiving FDI during 1998­2002 were China, Brazil, Sin- national IPAs worldwide. gapore, Argentina, Poland, Czech Republic, Korea, 122. Frequently cited examples are Ireland, Scotland, Chile, Thailand, and Venezuela (all eligible MIGA Cat- and Singapore. egory 2 countries) (Source: International financial sta- 123. This figure does not include developing coun- tistics, International Monetary Fund). tries that MIGIM may have visited or interacted with 112. The cumulative total FDI associated with MIGA during the course of its non-TA activities, such as guarantees to investors from developing countries MIGIM participation in World Bank (Group) Country since was approximately 7 percent (1990­2004). Assistance Strategies or pre-assistance government 113. Based on nine guarantee projects evaluated in consultations. fiscal 2003. More than half of the projects were rated 124. Note that three of the countries categorized as less than satisfactory. See IEG-MIGA (2004). "repressed" are postconflict countries. 125. This is consistent with the finding that coun- Chapter 20 tries that received only needs assessments had on av- 114. Information dissemination services, previously erage worse IC scores compared to those that received part of MIGIM, were moved to the External Outreach more in-depth assistance. and Partners Group. 126. See endnote 103 and Figure 19.1. 115. IEG-MIGA 2003 Report on Operations Evalu- 127. As part of the MIGA Review 2000, MIGA com- ation (MIGA/2003-0046) highlighted the need for a missioned an independent research firm to undertake new MIGA strategy. an analysis of MIGA's "public value." 116. According to MIGA TA staff, MIGA aimed at 128. IEG surveyed 62 IPI clients in El Salvador (34 targeting 70 percent of its assistance to countries in the responses) and 15 in Romania (10 responses). second tier, within this framework. Starting in FY04, 129. Surveys administered to current general man- MIGA has offered needs assessments to all client coun- agers/directors of companies, who may not have been tries requesting assistance. the ones making the initial site selection decisions for 117. Nonetheless, there were pressures from MIGA the firms. management and the Board of Directors to ensure 130. MIGA's total staffing is 120, including 77 pro- that the services it provides were effective and pro- fessional staff. ducing results. 131. MIGIM management has identified its experi- 118. Based on interviews with MIGIM management. enced and specialized staff as one of its comparative ad- 119. The more recent criteria include (i) sufficient vantages. investor interest to provide an active market for MIGA 132. In nominal terms, not adjusted for inflation. guarantee products; (ii) presence of an active, com- 133. Partner funding includes both cash and in-kind plementary PSD work program; (iii) a particular focus contributions. Partners include other donor organiza- on low-income countries and Africa; and (iv) involve- tions and development banks (e.g., World Bank, United ment in those countries where MIGA's services can Nations Development Programme, United States Agency have a direct impact, based on WBG strategy as artic- for International Development, United Nations Office ulated in the CAS. for Project Services, Inter-American Development Bank, 120. However, MIGA staff have observed that IPIs are African Development Bank, Organisation for Economic not normally positioned to do policy advocacy, as their Co-operation and Development, United Nations In- mandates are often narrower and focused on promo- dustrial Development Organisation) and exclude client tional activities, and they do not have policy-oriented and client government contributions. staff, nor are they within the government structure. 134. MIGA, Operational Regulations. 3 1 6 E N D N O T E S F O R PA R T S I I ­ I V 135. Of the 63 client countries receiving MIGA TA, of the TA-only clients were in Africa (9), followed by Asia 47 (75 percent) have also hosted MIGA guarantee proj- and Pacific (6). ects since inception of the Agency. While in ECA, LAC, 136. The WBG Guide to FDI Advisory and Infor- and MENA, most TA clients also had guarantees, most mation Services. 3 1 7 BIBLIOGRAPHY Acemoglu, Daron, Simon Johnson, and James 1994. "A Reconsideration of Investment Be- Robinson. 2001. "The Colonial Origins of Com- havior Using Tax Reforms as Natural Experi- parative Development: An Empirical Investi- ments." Brookings Papers on Economic gation." American Economic Review 91 (5): Activity 7. 1369­1401. Fazzari, S., Glen Hubbard, and B.C. Petersen. Alesina, Alberto, Silvia Ardagna, Giuseppe Nico- 1988. "Financing Constraints and Corporate letti, and Fabio Schiantarelli. 2003. "Regula- Finance." Brookings Papers on Economic Ac- tion and Investment." National Bureau of tivity 1. 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Washington, DC: World Bank. 3 2 1 IEG PUBLICATIONS Study Series 2004 Annual Review of Development Effectiveness: The Bank's Contributions to Poverty Reduction Addressing the Challenges of Globalization: An Independent Evaluation of the World Bank's Approach to Global Programs Agricultural Extension: The Kenya Experience Assisting Russia's Transition: An Unprecedented Challenge Bangladesh: Progress Through Partnership Brazil: Forging a Strategic Partnership for Results--An OED Evaluation of World Bank Assistance Bridging Troubled Waters: Assessing the World Bank Water Resources Strategy Capacity Building in Africa: An OED Evaluation of World Bank Support The CIGAR at 31: An Independent Meta-Evaluation of the Consultative Group on International Agricultural Research Country Assistance Evaluation Retrospective: OED Self-Evaluation Debt Relief for the Poorest: An OED Review of the HIPC Initiative Developing Towns and Cities: Lessons from Brazil and the Philippines The Drive to Partnership: Aid Coordination and the World Bank Economies in Transition: An OED Evaluation of World Bank Assistance The Effectiveness of World Bank Support for Community-Based and ­Driven Development: An OED Evaluation Evaluating a Decade of World Bank Gender Policy: 1990­99 Evaluation of World Bank Assistance to Pacific Member Countries, 1992­2002 Financial Sector Reform: A Review of World Bank Assistance Financing the Global Benefits of Forests: The Bank's GEF Portfolio and the 1991 Forest Strategy and Its Implementation Fiscal Management in Adjustment Lending IDA's Partnership for Poverty Reduction Improving the Lives of the Poor Through Investment in Cities India: The Dairy Revolution Information Infrastructure: The World Bank Group's Experience Investing in Health: Development Effectiveness in the Health, Nutrition, and Population Sector Jordan: Supporting Stable Development in a Challenging Region Lesotho: Development in a Challenging Environment Mainstreaming Gender in World Bank Lending: An Update Maintaining Momentum to 2015? 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