HARNESSING PRIVATE INITIATIVE FOR DEVELOPMENT

The World Bank Group’s private sector development strategy, approved in fiscal 2002, articulates the key role that private initiative can play in promoting growth and poverty reduction. During fiscal 2003, 22 diagnostic firm surveys on the investment climate were launched. They identified the constraints to firm productivity and income growth. Seven country investment climate assessments were prepared, building on the firm surveys and providing a detailed picture of the business environment. The Doing Business Project was also launched. It surveyed experts and derived five sets of indicators—contract enforcement, credit markets, entry regulation, labor regulation, and bankruptcy—to provide a snapshot of the investment climate for 130 countries, including 55 IDA countries. The World Bank Group continued to provide advisory services to its member countries in building the investment climate, particularly through the work of the Foreign Investment Advisory Service.

The private sector development strategy also proposed the pilot testing of output-based aid approaches to support the delivery of basic services, including infrastructure, health, and education, by private providers. In fiscal 2003 work was done on a portfolio of 25 operations across various sectors and regions. The Global Partnership on Output-Based Aid was established in 2003 to support such pilot initiatives with initial support from the Bank and the United Kingdom’s Department for International Development. (See also figure 4.1.)

Increased efforts are being made to exploit the synergies between the financing instruments of the World Bank, IFC, and MIGA. The Pamir Private Power Project in Tajikistan, approved in June 2002, exemplifies synergies between the commercial discipline and private sector orientation of IFC financing and the potential of IDA funds to address affordability concerns by subsidizing poor consumers. An example of IDA and MIGA cooperation is a guarantee facility being jointly prepared by them to catalyze private investments in small and medium-sized infrastructure and privatization projects in eligible Union Economique et Monetaire Ouest Africaine member countries.

Major efforts are being made across the Bank Group and in particular by IFC to enhance support to small and medium enterprises (SMEs) and to direct it away from firm-level financial assistance to support for intermediaries, and from firm-level advice to creation of a market for business development services for SMEs.

INFRASTRUCTURE

The Bank made a substantial investment in infrastructure this year, recognizing that inadequate and inefficient infrastructure constitutes a major barrier to growth and poverty reduction. In the water and sanitation sector, effective poverty reduction will require dramatically increased investments from both the public and private sectors. The Bank continues to help its client countries in promoting strong legal and regulatory environments for the delivery of water and sanitation services, for example, in Armenia, Jordan, Nigeria, Sri Lanka, and St. Lucia.

In all infrastructure work, the Bank emphasizes the establishment of appropriate regulatory frameworks. There are strong links among the legal and regulatory issues facing the private delivery of water, sanitation, electricity, gas, information and communication technologies (ICTs), and transportation services, whether or not a single multisector regulatory regime itself makes sense. And, as is true of regimes for banking and corporate activity, a clear legal and regulatory framework needs to be in place to ensure an appropriate, transparent, and predictable operating context. (See "Promoting Appropriate Legal and Judicial Systems" in this chapter.)

Water Supply and Sanitation

The emergence of the Millennium Development Goals (MDGs) has moved water supply and sanitation to the heart of the global poverty reduction agenda. In fiscal 2003 the World Bank continued to help shape the international water agenda through active participation in a number of international meetings. These included the International Conference on Financing for Development held in Monterrey, Mexico; the World Summit on Sustainable Development in Johannesburg; the 3rd World Water Forum in Japan; and the G8 Summit in Evian les Bains, France. In addition, the Report of the World Panel on Financing Water Infrastructure, chaired by Michel Camdessus, underscores the need to operate in all aspects of the water sector—water resources, service delivery, and broad poverty-targeted interventions—and calls on the international community to accelerate its efforts. The quality of new Bank projects and the performance of existing projects have improved significantly, whereas total annual IBRD/IDA financing commitments for water supply and sanitation declined in recent years from a high of $1.7 billion in fiscal 1994–97 to $493 million in fiscal 2002. This year commitments rose to $1.3 billion, and sector assistance is projected to increase over the next three years.

Water supply and sanitation feature prominently in a diverse range of World Bank operations, including social protection, health and education, rural development, city management, and slum upgrading. At the country level the Bank’s new water strategy supports the trend toward holistic development, identifying future approaches for better engagement with client countries and partners across the spectrum of water uses. Conceptual work has focused on sanitation and hygiene, better integration of water supply and sanitation into country programs, sector reform, and innovative financial instruments, such as output-based aid, subsovereign instruments financing, and risk mitigation instruments.

Energy

Progress has been made in early implementation of the energy business renewal strategy, which envisions a transition from traditional to modern energy use for poor households and an energy sector that is efficient, reliable, and better able to support growth and fiscal stability. In Africa about 40 percent of the new lending commitments in fiscal 2003 had access expansion components, as in the Uganda Energy for Rural Transformation Project and the village electrification scheme under the Songo Songo Gas Development Project in Tanzania. Bangladesh and the Philippines, with IBRD assistance, have embarked on aggressive rural electrification programs that also support provision of renewable energy.

Reduction of large quasi-fiscal deficits in the energy sector is a key focus of the Bank’s interventions in eastern Europe and elsewhere, and major energy conditions are included in adjustment lending in Bulgaria and Romania. In China the Bank is supporting a major effort to restructure the power and gas industry and introduce a proper regulatory system underpinned by a reform of the legal framework.

Projects to support renewable energy and reduce greenhouse gas emissions were approved and are being implemented in a host of countries. The Jepirachi Carbon Off-Set in Colombia will promote 19.5 megawatts of wind-based electricity generation. The Liepaja Region Municipal Solid Waste Management project in Latvia will use energy cells for enhanced degradation of easily biodegradable waste and will use the resulting landfill gas to generate electricity.

Financing commitments in fiscal 2003 to support the development of energy infrastructure and services in client countries amounted to $1 billion in 14 projects. In addition to lending for projects, the Bank supports a range of analytical and policy work in the sector, and more than $2.5 million was spent on this in fiscal 2003.

Helping to Bridge the Digital Divide

The joint World Bank–IFC Global Information and Communications Technology (GICT) Department helps countries maximize the development impact of information and communications technology. In fiscal 2003 GICT’s policy division was involved in grant-funded operations covering every Bank region in addition to 2 credit and lending projects.

Three World Bank projects approved this year harness the output-based aid concept to accelerate access to telecommunications services for poor and rural communities in less-developed countries. Providing public telephones to previously unserved communities has been linked to improved delivery of government services, the expansion of SMEs, and growth in incomes.

The Bank uses approaches that can be applied even in complex environments or small economies. In Afghanistan the government has licensed a second mobile operator, catalyzing significant foreign direct investment in the sector and a rapid rollout of telecommunications services both in Kabul and beyond. The Bank is providing support to create the regulatory and legal underpinnings required for that expansion and is managing investment support under the Afghan Reconstruction Trust Fund. A project approved this year for Samoa supports telecommunications and reform to bring access to Samoans currently on the wrong side of the digital divide.

GICT also manages infoDev, a donor-funded grant-making initiative that supports innovative use of ICT to improve livelihoods in developing countries. Its portfolio contains about 40 pilot projects and technical assistance activities in ICT development. This year infoDev launched an initiative that will establish a network of incubators to facilitate the emergence and development of small and medium-sized ICT enterprises in developing countries.

Transportation

Transportation has an essential intermediate contribution to make to each of the MDGs, and lending to the transportation sector increased to $2.7 billion in fiscal 2003. (See also under "Transportation and Trade" in the "Poverty Reduction and Economic Management" section of this chapter.)

The close link between the transportation and health sectors has also been recognized. Transportation and health staff from across the Bank have been working in close collaboration with World Health Organization counterparts on a World Report on Road Traffic Injury Prevention. This report will be launched on April 7, 2004, World Health Day. This is an annual event devoted to a different topic each year. The focus of World Health Day 2004 will be the promotion of “Safe Roads.”

The World Report on Road Traffic Injury Prevention will be a flagship product for both institutions. Its main message is that road traffic injuries are a major but neglected public health and development problem requiring concerted efforts for effective and sustainable prevention. It is projected that by 2020 road traffic injuries will rise from 9th to 3rd place as the leading contributor to disability-adjusted life years in the developing world. Road crashes increase the burden on already overburdened medical treatment facilities. It is also believed that road crashes have a disproportionate impact on the poorer sections of the community. The costs of hospitalizing a family member who suffers injury or lasting disability can often drive a family into poverty, even if individuals work and earn reasonable incomes by local standards.

URBAN DEVELOPMENT

In fiscal 2003 the 15 urban projects presented to the Board ranged in focus from traditional concerns such as urban upgrading, including a national program for Mexico, to economic development in St. Petersburg, social development in Djibouti, disaster management in Iran, asset management in Morocco, cultural development in Lebanon, and structural adjustment in Uruguay. Lending for urban development totaled $1.6 billion in fiscal 2003. (See also box 4.7.)

In addition, urban poverty analysis and strategies are being developed with the governments of Lima and Lagos, and local economic development strategies are being prepared by 25 pilot towns and cities in the Baltics and the Balkans. These participatory strategies help identify and then prioritize measures that the public and private sectors can undertake to improve the local investment climate and improve the local economy. To further support local infrastructure investment, the Bank is working with the IFC on a newly created pilot program to finance subsovereign credits and guarantees.

The Urban Development Group is launching with the Global HIV/AIDS Unit a joint initiative to support local governments’ response to the disease. This recognizes the fact that HIV/AIDS has significantly undermined income growth and service provision in urban areas.

DISASTER MANAGEMENT FACILITY

Natural disasters are a key source of risk for poor people. The Disaster Management Facility serves as a central resource for technical support, policy guidance, knowledge generation, and capacity building to reduce disaster risk in the operations of the Bank and its partners. The Facility works with partners in the private and public sectors and civil society through the ProVention Consortium to develop practical learning activities aimed at mitigating disasters and contributing to sustainable development.

PROJECT FINANCE AND GUARANTEES

The recent global economic slowdown has increased the risk aversion of the private sector toward investments in frontier markets. Guarantees are important in mobilizing new investments for critical infrastructure projects exposed to sovereign risk. Over the last year the Bank has developed a number of innovative uses of the guarantee instrument. Guarantees are now being offered to cover regulatory risk in projects and to support privatization of state-owned entities in all sectors. They are also offered through facilities that provide guarantees for small and medium-sized infrastructure projects. In addition, guarantee structures that could support output-based arrangements, mobilize local currency loans, and mitigate currency devaluation risk are being developed. The portfolio now includes a number of projects in the water, oil, gas, and transport sectors.

During fiscal 2003 an IDA partial risk guarantee of $75 million in support of the Phu My 2 Phase 2 Power Project in Vietnam addressed fiscal issues of the government by shifting investment cost to the private sector. The IDA guarantee is expected to serve as an important milestone for attracting further private capital flows to the country. During the year the guarantee facility approved by the Board in fiscal 2001 in support of the coal and forestry sectors in Russia became effective.

REDUCING POVERTY THROUGH MICROFINANCE

The Consultative Group to Assist the Poorest (CGAP) is a multilateral organization of 30 donors housed at the World Bank. Its objective is to build financial systems for poor people. As part of its efforts to increase the scale of microfinance, CGAP continues to work in partnership with a broad range of institutions (banks, credit unions, networks, and others) that deliver a variety of financial services, including savings, insurance, fund transfers, and credit.

CGAP's key activities in fiscal 2003 included the launch of donor peer reviews, an initiative aimed at improving aid effectiveness, whereby the microfinance policies and operations of major development agencies were reviewed. Ten international agencies underwent peer reviews in 2003, and several have made significant changes based on the recommendations of the reviews. CGAP also launched an appraisal and monitoring service for promising microfinance institutions on behalf of interested donors.

The Microfinance Gateway, launched in 2001, is now the most comprehensive source of microfinance information on the Internet, attracting over 11,000 individual users and approximately 400,000 hits per month.