56814 FAST TRACKBRIEF November 4, 2009 The IEG report "Poverty Reduction Support Credits," was discussed by CODE on November 4, 2009 Poverty Reduction Support Credits: An Evaluation of World Bank Support Poverty Reduction Support Credits were intended to help countries implement comprehensive, country-owned development strategies to promote growth, improve social conditions, and reduce poverty. PRSCs were intended to ease conditionality, make annual flows to recipient countries predictable and integrated with their budgets, strengthen domestic budget processes, provide a framework for donor harmonization, and focus on achieving results. In terms of process, PRSCs have worked well. Findings show that they incorporated many envisaged changes in design and implementation. These include stronger country ownership, eased conditionality, and a shift of focus towards public sector management and pro-poor service delivery. PRSCs balanced tensions between predictability and program credibility. The outcomes of PRSCs are less clear. While PRSC countries have been somewhat superior performers in growth and poverty reduction, PRSCs were generally offered to better performers. It is difficult to attribute better outcomes to the PRSC. And other better IDA performers made comparable improvements in performance. PRSCs addressed some bottlenecks to growth but usually without a comprehensive growth strategy. In pro-poor service delivery, there was at best modest translation of objectives to outcomes. Measurable improvement was made in some areas of financial management, but more difficult public financial management issues remain to be tackled. The PRSC has limitations as an instrument of sector lending, in terms of technical dialogue, engagement of line ministries, integration in aid coordination, and outcomes achieved. However they have usefully raised crosscutting issues and brought attention to sector budgets. Although PRSCs differed from preceding adjustment loans, development policy lending today has converged towards a similar design. PRSCs today are subject to the same guidelines as other DPLs. Differences remain in practice in terms of the association with PRSPs, broad scope, programmatic nature, and country performance. The evaluation recommends either that PRSCs be phased out as a separate brand name or that these differences be clearly spelled out. PRSCs Today are Regionally Concentrated Other lenders also increased budget support aid. Alignment with country systems and harmonization among donors From FY01 to the first quarter of FY10 the Bank approved were central tenets of the Paris Declaration of Aid 99 PRSC operations amounting to US$ 7.9 billion, and Effectiveness, which also focused on capacity building, another 20 are in the pipeline. Within four years of their transparency, and a results focus based on better introduction, PRSCs came to account for almost 60 percent monitoring systems. of IDA policy-based lending and a quarter of total Bank policy-based lending. The share of PRSCs in IDA These changes render it more difficult to isolate the effects disbursements to some individual countries (such as Benin, of the PRSC and its achievements, as the character of all Burkina Faso, Ghana, Rwanda, and Uganda) exceeded half Bank development policy lending changed over the period of total Bank disbursements. Even in those countries where of the PRSC. And for recipient countries, the PRSC the role of the PRSC was not prominent, for example in paralleled increased budget support flows in a multi-donor Albania, Armenia, and Senegal, it accounted for 20-25 framework. Despite these issues, the analysis shows how percent of IDA flows. Ten countries have embarked upon lessons learned from the PRSC remain relevant for policy- their second or third PRSC series. Another nine have had a based lending today. single series so far. In eight countries, PRSC operations did not mature into a programmatic series. PRSCs and Other Policy-Based Lending Have Africa has the largest portfolio of PRSCs among the Converged in Many Respects Regions, with about half of all ongoing series, typically in Convergence is evident in design--for example, eased the context of multi-donor budget support. In the five conditionality and enhanced pro-poor focus--as well as in Europe and Central Asia (ECA) countries where the PRSC overall outcomes. PRSCs effectively served in many regards has been used (Albania, Armenia, Azerbaijan, Georgia, and (for example, eased conditionality, sectoral focus, Moldova), it has generally provided a relatively small share programmatic nature) as a prototype for Development of country budget needs. Three ECA PRSC countries have Policy Loans introduced from September 2004, and the graduated from IDA or chosen other instruments. There PRSC Interim Guidelines were subsumed under their are currently no ongoing PRSCs in South Asia or Latin framework. The PRSC label still carries connotations of America. Changes in political conditions rendered it criteria used since the time of their introduction, but today impossible to continue with PRSCs in Nepal, Nicaragua, there is no distinct set of guidelines for the PRSC, despite and Sri Lanka, and PRSCs in Guyana, Honduras, and the use of the brand name. Pakistan have also ceased. The PRSC has never been a part of the Middle East and North Africa lending portfolio. PRSC Design and Process Have Become More PRSC Design Reflects Parallel Changes in Aid Flexible--as Has All Policy Lending Architecture Stronger Country Ownership Parallel trend changes in aid architecture recognized the PRSC program ownership was usually strong, especially importance of country ownership and government compared to previous adjustment lending. In Armenia, for commitment to reform. An increased, multidimensional example, all counterparts agreed that the PRSC, derived emphasis on poverty reduction was introduced with the from the participatory PRSP, led to strong country Millennium Development Goals, supporting pro-poor ownership and leadership of the PRSC program. Whereas service delivery. the Bank had largely determined programs of adjustment credits, the government determined overall strategy in the These changes were reflected in the World Bank's PRSP, and the PRSCs supported the PRSP program. PRSC Comprehensive Development Framework (CDF; 1999), ownership has been particularly high at the level of central which emphasized a long-term, holistic vision of ministries such as finance and planning, though less so with development. The Poverty Reduction Strategy Initiative sectoral ministries such as health or education. PRSCs (PRS) was launched in tandem to put key principles of the stimulated dialogue between the center and sectors and CDF into practice. Poverty Reduction Support Credits raised their accountability. By contrast, recipient were introduced under Interim Guidelines in 2001 to aid government's engagement with legislative organs and civil the operationalization of the Poverty Reduction Strategy society was low. Papers (PRSPs) and provide structural support for the International Monetary Fund's Poverty Reduction and PRSCs aligned reasonably well with national development Growth Facility. By FY05, new Bank guidelines for strategies, especially where the PRS was merged with the development policy lending reflected the same principles. national development strategy. Alignment improved over 2 time. In Vietnam, the PRSP merged with the National Nicaragua following a change of government. However, Development Strategy. Uganda's national Poverty following termination of PRSCs, the Bank has often Eradication Action Plan now serves as its PRSP. PRSCs remained substantially engaged, sometimes though other occasionally included policies outside the national plan, policy-based loans. This underscores the question of the reflecting evolving country circumstances. brand value of the PRSC label. Shift in Focus toward Public Management and Pro- Somewhat More Predictable Financing Poor Service Delivery PRSCs have led to some increase in the dependability of The sectoral focus of the PRSC showed a marked shift obtaining financing from year to year, as well as increased away from macroeconomic adjustment toward public stability in the volume of financing. And PRSCs have sector management and key social service delivery. In Lao tended to disburse in a more timely manner than previous PDR, the first PRSC series covered virtually all sectors, but lending. In Burkina Faso for example, whereas 60 percent in the second series a more selective focus on health and of budget support disbursements until the end of PRSCs 1- education was adopted. Indeed, all Bank adjustment 3 took place during the last quarter of the budget year, the lending began to reflect a reorientation toward areas approval of PRSC 4 was accelerated to May 2004 to permit emphasized by the PRSC. a vote by the National Assembly before its June recess. Eased Conditionality Limited Donor Harmonization PRSCs responded to concerns about the extensive and While PRSCs made effective contributions to donor overly rigid nature of conditionality with fewer legally harmonization under a variety of arrangements, they rarely binding conditions than earlier adjustment loans and a served as a focal point for donor coordination (Vietnam gradual decline in program benchmarks. Armenia provides being an example of an exception). In many large budget an example of this pattern. Its Structural Adjustment support groups the Bank had limited influence in shaping Credits had a peak of 66 conditions, in multi-tranche the overall agenda. There has been progress in achieving operations, while its first through third PRSCs each had joint Performance Assessment Frameworks, which are the about 10-12 legally binding conditions, in the form of prior overall donor matrices of policy frameworks, but upstream actions. Its fourth PRSC included only 7 such conditions. harmonization of the PRS process and its integration in the Following the introduction of new guidelines for policy matrix has been limited. More also remains to be adjustment lending in late 2004, other policy-based lending achieved in the harmonization of results indicators, capacity showed a similar trend, and today there is little difference in building, and especially in reporting arrangements. numbers or nature of conditions of PRSCs and other policy-based lending. The Bank's effectiveness is also curbed by limited synchronization of its internal processing calendar with the Yet some country clients continue to believe that there are donor cycle. Agreement on the substantive agenda can be too many conditions, reflecting blurred perceptions of the unduly influenced by individual donors. Recipient countries difference between prior actions, triggers, and program sometimes seek to leave major items off the agenda. The benchmarks, especially in large multi-donor programs. Bank has sometimes reverted to means outside the joint matrix to achieve its objectives. Furthermore, PRSCs have been markedly more flexible than earlier harmonization involves intensive transactions costs that adjustment lending, as demonstrated by the high team leaders feel are not adequately recognized and proportions of modifications of triggers, or actions for sometimes crowd out substantive issues. subsequent operations. In Ghana, for example, an agreed measure to complete the rollout of a budget management From a wider perspective, clients value harmonization for system in five ministries was deemed met when achieved in its reduced transactions costs, but face difficulties with only two, and a significant unmet trigger in the energy initial increases in conditionality as individual positions are sector was waived and made a requirement for the aggregated. In some circumstances clients prefer separate following PRSC. Yet flexibility does not seem to be at the arrangements to spread risks. Donors, especially small expense of program adherence, as PRSC managers often ones, face high transactions costs but value having a voice delayed the loan or adjusted their amounts downward in at the table. Further synchronization will be more difficult cases of program slippage. due to legitimate differences in donor priorities. The Bank has clearly been prepared to exit PRSC series when the reform program went off track, as happened in 3 Outcomes are Less Clear PRSC program components in health and education focused particularly on budgetary aspects, with an emphasis Weak Results Frameworks on increasing resources and improving the efficiency of PRSC results frameworks were initially weak in many resource allocation. In Vietnam and Lao PDR, for example, operations, although there is some evidence of the introduction of a medium-term expenditure framework improvement over time. In Mozambique, for example, the was a priority in the education sector. But countries lag in first PRSC had no explicit results framework. PRSC 2 had a their ability to link budgetary inputs with results and results framework but it omitted key areas, and the outputs. In most countries the PRSC was not able to make subsequent series for the first time contained a results the budget the vehicle for most sectoral policy framework for the series as a whole. Many shortfalls in interventions, even in pro-poor areas. Large proportions of PRSC results frameworks can be attributed to country sectoral resources remain off-budget. shortcomings in underlying country monitoring systems. Upstream shortcomings in results frameworks for PRSPs Limitations in the monitoring framework make it difficult also contribute. Weaknesses remain in terms of clearly to track outcomes, especially poverty outcomes. To the defined and consistent outcome indicators, intermediate extent that indicators are available, targets have been fully milestones, and baseline data. Indicators for poverty met a third to a half of the time across the three sectors of outcomes are also lacking. health, education and water supply and sanitation. Unclear Achievements in Pro-Poor Service Delivery Improved Public Financial Management, Largely in Areas that Are Easier to Tackle The ultimate objective of PRSCs has been to support national development plans for achieving poverty-reducing PRSCs have helped to advance public financial economic growth. Assessing the contribution of PRSC management and procurement (PFMP) reform in most operations to growth and poverty outcomes is difficult due borrowing countries. PFMP reform programs in PRSCs to the fundamental problem of attribution. The PRSC is have been well grounded in recent diagnostics and have only one, typically small, element in a range of contributing generally conformed to Bank guidelines on fiduciary risk factors. analysis. Many PRSCs have integrated two or more diagnostic tools, helping to sequence their PRSC countries performed well on growth and macro recommendations. Countries performed moderately well in indicators, but so did relevant comparators. Differences in developing an appropriately sequenced and donor- creating a growth enabling institutional environment are supported PFMP strategy, although implementation has small. Most PRSCs did not have a comprehensive overall sometimes been slower than expected. growth strategy, focusing in many cases on reforms related to the investment climate (Benin, Ghana, Lao PDR, and Areas of successful reform in PRSCs, such as budget Mozambique) and select other issues. It is difficult to trace classification systems, have arguably been the easier ones to a direct link from PRSC growth-related measures to tackle. Remaining weaknesses reflect tougher challenges, country growth outcomes. In some successful countries, including the inability of most PRSC series to reduce the Vietnam, for example, a growth-oriented reform proportions of extra-budgetary funds or to include all momentum was already under way. donor funds on-budget, also pointing to limits in progress by donors on the use of country systems under the Paris PRSC countries have a good record on income poverty Declaration. A prominent area of weakness has been the reduction as well as on the achievement of the Millennium PFM results framework, which was complete or largely Development Goals, better than comparable high- complete in only about half the countries reviewed. Finally, performing IDA countries despite broadly similar initial the impact of PRSCs--and donor budget support more conditions. Yet establishing a clear link between the PRSC generally--on overall governance and levels of corruption and pro-poor service delivery is difficult. A portfolio review is a debated issue with little meaningful evidence to support shows that most PRSCs had program objectives in these claims either way. areas, though such program components usually ran in parallel to sector projects, and social sector development Partial Support to Sectors objectives were usually ancillary to core objectives. Only In many respects, the PRSC is an imperfect vehicle for around two-fifths of PRSC objectives in education and half sector support. PRSC engagement focuses on central in health had an explicit pro-poor focus. Proportions for ministries. While dialog between central ministries and water supply and sanitation were lower, at less than a fifth. sectoral agencies has been strengthened, surveys suggest the depth of their engagement may have been limited. 4 Efforts to streamline conditionality imply that some areas To clearly delineate legally binding conditions from of importance are not highlighted. Sector staff acknowledge program benchmarks, which are still referred to as binding the PRSC's usefulness for high-level dialogue but express and non-binding conditions by clients and others in the aid reservations about its effectiveness for tackling details. Few community, program benchmarks should be removed from support having PRSCs be the sole vehicle for sector the policy matrix/Performance Assessment Framework engagement, as envisioned by some Bank managers in the and instead combined with the program monitoring early years of PRSCs. When attempted, the Bank usually framework. reverted to parallel sector financing. In Benin, Burkina Faso, and Mozambique, Country Assistance Strategies for 3. Enable greater voice for the Bank in a multi- early PRSC series expressed intent to subsume health donor budget support lending framework lending in the PRSCs, but sector projects were subsequently resumed. And outcomes of sector At present, Bank financial commitments in a multi-donor components of PRSCs in health appear weaker than in framework must sometimes be made before the Bank's health sector investment lending. internal review of the PRSC. This can limit the Bank's substantive contributions and comments on program There are also tensions in sector working groups within the content. Synchronizing the Bank's internal processing harmonization process. In many countries they reflect timetable with country and donor processes would ensure financing arrangements that may be earmarked or even off- Bank input in PRSC/DPL formulation. budget, which run counter to the philosophy of joint budget support. And counterparts sometimes prefer 4. Underpin operations with comprehensive separate arrangements. diagnostics Sector staff point out that the Bank's incentive framework PRSCs (and DPLs) should reflect country-specific growth introduces resource variability and limited recognition for diagnostics, which are undertaken based on analytic sectoral team participation compared to delivery of free- underpinnings that identify an overall growth strategy that standing sectoral projects. Incentives affect sector reflects the linkages between growth, poverty reduction, managers as well. and broader social development. Recommendations 5. Strengthen PRSC/DPL results frameworks, link them with the underlying PRS/national 1. Phase out the PRSC as a separate brand name development strategy, and increase their poverty for development policy lending or clarify when it is focus appropriate to use Results frameworks of PRSCs should be consistently linked Convergence in the design and content of PRSCs and other to those in the PRS or national development strategy and development policy lending in terms of conditionality and its Annual Reviews and should be simplified to a small set sector focus suggests that there is limited rationale for the of core outcomes. Adequate baseline and intermediate separate existence of the PRSC today. However, there are indicators and pro-poor results indicators should be also implicit criteria backing the PRSC brand name. If the required, built on country monitoring systems to the extent PRSC brand name is still important, clear guidelines (which feasible. are currently lacking) and criteria for eligibility should be spelled out and applied. 6. Focus sector content in policy loans to high-level or crosscutting issues 2. Simplify conditionality for PRSCs/DPLs by eliminating the term "triggers" and by transferring PRSC/DPL sector content should focus on areas where it has been consistently effective: cross-sectoral or central program benchmarks to the monitoring framework ministry issues critical to facilitating key sectoral reforms In line with its use of the term "prior actions," the Bank and strengthening sector budget processes. Complementary could further simplify its lending framework by dispensing parallel sector lending, linked to PRSCs/DPLs, remains with the term "triggers" and substituting the term important to address detailed technical issues and facilitate "indicative prior actions for future lending." Lending would program ownership by line ministries. then be based simply on prior actions already achieved and indicative prior actions for future lending. This would exhibit greater flexibility and ease understanding. 5 About Fast Track Briefs Fast Track Briefs help inform the World Bank Group (WBG) managers and staff about new evaluation findings and recommendations. The views expressed here are those of IEG and should not be attributed to the WBG or its affiliated organizations. Management's Response to IEG is included in the published IEG report. The findings here do not support any general inferences beyond the scope of the evaluation, including any inferences about the WBG's past, current or prospective overall performance. The Fast Track Brief, which summarizes major IEG evaluations, will be distributed to selected World Bank Group staff. If you would like to be added to the subscription list, please email us at ieg@worldbank.org, with "FTB subscription" in the subject line and your mail-stop number. If you would like to stop receiving FTBs, please email us at ieg@worldbank.org, with "FTB unsubscribe" in the subject line. Contact IEG: Director-General, Evaluation: Vinod Thomas Director: Cheryl Gray (IEG-WB) Manager: Mark Sundberg (IEGCG) Task Manager: Anjali Kumar (IEGCG) Copies of the report are available at: http://www.worldbank.org/ieg/prsc IEG Help Desk: (202) 458-4497 E-mail: ieg@worldbank.org 6