Results-based lending is gaining widespread use in the development field as a means to improve results on the ground with the funds made available by each donor. While all World Bank lending operations focus on results, some in particular link disbursements to the achievement of specified results; and to facilitate implementation, the fiduciary and safeguard policies that apply to these operations have evolved in recent years.
This paper reviews the legal framework and policy requirements for investment lending in general and, in particular, for: (a) investment projects financed through various types of results-based approaches such as output based aid and disbursements and sector wide approach support operations; and (b) programs financed under the new program for results financing policy.
This paper addresses especially the disbursement, procurement, fraud and corruption and other fiduciary-specific features of such lending operations, as well as the environmental and social safeguard policy requirements, illustrating with specific projects in various regions of the world and sectors, similarities and differences between the different approaches. It focuses on the obligations undertaken by member countries or other agencies implementing the investment projects or programs under the required legal agreements and supplementary documents.
Traditionally the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA), (jointly referred to as "the Bank") finance specific expenditures (goods, works and services) required for implementation of projects, against contracts evidencing such expenditures, and results of the project are monitored during its execution following project performance indicators agreed for the purpose. In the last ten years, selected operations were designed to link disbursements of specific project or program expenditures to the results achieved, and were prepared following guidelines aimed to facilitate implementation through systems closely related to those of the borrower country, and to concentrate on achieving results. Starting in 2012, a new program for results-financing policy was approved delinking the expenditure requirement and further modifying the fiduciary and safeguard requirements. Policy-based lending granted by the Bank to assist the borrower in "addressing] actual or anticipated development financing requirements" in a short timeframe, is not included in the scope of this paper. (1)
This paper attempts to provide an overview of the legal and policy requirements of results-based lending for investment projects and programs. Included in Part II, as a framework for the analysis in Parts III and IV, is the general legal and policy requirements of all Bank lending operations based on the IBRD and IDA Articles of Agreement (2) and relevant policies, as well as the main provisions of the legal agreements entered into with borrowers and the General Conditions (3) which are a part thereof. Part III includes a definition of results-based lending approaches, an overview of the design, fiduciary and safeguard features of the different mechanisms particularly for output-based aid, output-based disbursement operations, and sectorwide approaches, and illustrates how these features are applied, based mostly on provisions of legal agreements and other documents related to a rural communications project in Papua New Guinea, a health project in Argentina, a water supply project in Brazil, and an education project in Bangladesh. Part IV provides an overview of the design, fiduciary and safeguard requirements of results-based lending under the program for results financing policy; and illustrates how those requirements were applied in a road infrastructure program in Uruguay and a water supply program in Vietnam. (4) Concluding remarks are provided in Part V.
GENERAL LEGAL AND POLICY REQUIREMENTS OF LENDING OPERATIONS
Articles of Agreement
The IBRD and IDA Articles of Agreement (Articles) contain provisions that regulate lending operations. The IBRD Articles of Agreement are written in more specific terms than those of the IDA but in practice the same policies, as applicable to projects, are applied for IBRD loans and IDA credits and grants.
Related to lending operations, the Articles require among other features that the Bank be satisfied that it is the "lender of last resort," (5) that the borrower be able to repay the loan, (6) and that "the member or the central bank or some comparable agency fully guarantee the repayment of principal and the payment of interest and other charges on the loan" when the borrower is not the member. (7) The Articles further require that financing be provided "for the purpose, except in special circumstances, of specific projects of reconstruction and development, (8) and that funds be made available to meet expenses as they are incurred. (9) Loan proceeds are to be used "for the purposes for which the loan was granted, with due attention to considerations of economy and efficiency and without regard to political or other noneconomic influences or considerations," (10) and a limited number of local expenditures are to be financed. (11) The limitation on local expenditures is very relevant in the discussion of results-based lending, and was further regulated by a policy indicating what expenditures are eligible for financing and under which circumstances local expenditures can be financed. (12)
The requirements above are the basis for the major disbursement, procurement and anti-corruption policy requirements that apply to Bank lending operations and are further described in the sections below.
The Bank's operational policies (OPs), bank procedures (BPs), and interim instructions set forth in the Operational Manual, (13) are based on general requirements set forth in the Articles, the General Conditions and other policies approved by IBRD's and IDA's Board of Executive Directors and designed to ensure that Bank-financed projects are economically, financially, socially and environmentally sound. Bank staff is required to follow such OPs and BPs in the design and supervision of projects unless specific exceptions are granted in the form of operational policy waivers, (14) and the obligations of the borrowers or implementing entities arising from the requirements of these policies are reflected in the legal agreements entered into for each project. As further explained below, third parties may file a complaint if the OPs/BPs are not complied with by the Bank.
The policies most relevant for the analysis in this paper comprise, in the fiduciary realm, those dealing with financial management, procurement, and disbursement. (15) In the area of safeguards, the relevant policies are those addressing environmental assessment, natural habitats, pest management, indigenous peoples, physical cultural resources, involuntary resettlement, safety of dams, international waterways, and disputed areas. (16)
The major procurement requirements for contracting of goods, works and services are set forth in two sets of guidelines governing procurement of goods, works and non-consultant services (the Procurement Guidelines) (17) and employment of consultant services (the Consultant Guidelines). (18) These guidelines are incorporated by reference in the legal agreements and are binding on the borrowers and executing entities as provided in such agreements. (19)
Both sets of guidelines include a preliminary section addressing eligibility of bidders, conflict of interest, misprocurement, fraud and corruption provisions, and procurement plans which apply to all investment projects regardless of the method of procurement applicable. (20) They set forth the eligible methods of procurement and contracting, (21) and the methods applicable to each operation are set forth in Procurement Plans referred to in the legal agreements. For "major" contracts for goods, works, and non-consultants services, the preferred method is international competitive bidding, with the specific provisions set forth in the Procurement Guidelines, (22) and other acceptable methods such as national competitive bidding, (23) contracting of concessionaires, shopping, and contracting of NGOs (amongst the most relevant for this analysis) are also contemplated. The Procurement Guidelines also allow for the use of country systems--the public procurement system of the borrower--provided they are consistent with the Procurement Guidelines and acceptable to the Bank. (24) "Minor" purchases are deemed "non-procurable" items (small office supplies such as pencils, utility bills, etc.), with thresholds changing as applicable for the operation, and usually with no procedural requirements other than those required by the borrower. (25)
The Consultant Guidelines also contain eligible contracting methods, with quality and cost-based selection for major assignments, and other methods of contracting based on price, quality or other criteria. The Consultant Guidelines also include provisions allowing the use of country systems in contracting Bank-financed consultant services. (26) However, they do not include a competitive bidding method for the employment of consultants --a system employed by many countries--to allow for such a method to apply, as is common practice in national competitive bidding for goods and works.
In addition to relevant sections contained in the Procurement and Consultant Guidelines, (27) fraud and corruption are addressed by two sets of guidelines: one governing projects implemented under results-based financing policies, and the other covering those that are not. (28) These guidelines are incorporated into the legal documents of each lending operation and obligate the borrower and other recipients of loan proceeds to adopt measures preventing corrupt, fraudulent, collusive, coercive and...