Section Three
Major World Bank Programs
Fiscal Year 1996 (continued)
Return to 1st part Section Three
Countries throughout the world are working to enhance the role of the private sector in their national development because it is central to reducing poverty. Private sector development stimulates economic growth and creates jobs, and privati-zations create the fiscal space that allows governments to allocate greater resources to the social sector. Many country initiatives--economic policy reform, regulatory innovation, ownership changes, and capacity building--have all been used to buttress this powerful trend. The Bank Group encourages and supports the expanded role of the private sector through its various financial instruments, advisory services, training, and the nurturing of business partnerships.
In fiscal 1996, the Bank Group--the Bank, the IFC, and MIGA--mounted a diverse program of assistance to continue and enhance its support of member countries' private sector development. World Bank assistance to sectors in which private sector development is making the most rapid inroads totaled more than $5.6 billion through fifty-one projects--in the financial, power, telecommunications/information technology, oil and gas, and industry and mining sectors. These operations supported the structural changes needed to attract private funding to productive enterprises. Operations were designed in many cases to leverage substantial private capital flows. The Bank also provided nonlending services, including technical assistance, research, and knowledge brokering--often in cooperation with bilateral donors, private companies, and NGOs.
In fiscal 1996, the IFC reached a record level in financing approvals of $3.2 billion for 264 projects, compared with $2.9 billion for 231 projects in fiscal 1995. It was a banner year, as well, for the IFC's resource-mobilization activities: $4.9 billion in financing was approved through loan syndications and the underwriting of securities issues and investment funds. Syndications with banks and institutional investors exceeded the IFC's combined loan and equity investments for the sixth year in a row, underscoring the growing catalytic role of this program. Projects approved by the IFC had total investment costs of $19.6 billion; other investors and lenders provided a total of $5.13 for every dollar approved by the IFC. Projects were approved in sixty-eight countries in fiscal 1996. In addition, eight projects were regional or international in scope.
Fiscal 1996 was another successful year for MIGA's guarantee program. Business increased by all measures compared with the results of fiscal 1995. Sixty-eight guarantee contracts were issued for $862 million in coverage, and income earned from premiums and commitment fees amounted to $21.9 million. The contracts issued in fiscal 1996 facilitated an estimated $6.6 billion in foreign direct investment in twenty-seven developing countries, the highest amount facilitated by MIGA in a single year so far. These projects will generate an estimated 9,200 jobs and will involve substantial training programs for their employees. Overall, forty developing countries have benefited from investments guaranteed by MIGA, and more than $15 billion of foreign direct investment has been facilitated.
Reflecting the importance the Bank Group attaches to private sector development and in an effort to be more responsive to clients, a managing director was given the specific mandate to coordinate the Bank Group's private sector activities and strengthen its outreach to business audiences. This office has been facilitating policy coordination across the Bank Group institutions on a range of environmental, social, and other issues, fostering closer working relations among the institutions in developing joint country-assistance strategies, and coordinating financial sector strategies, multi-institutional projects, and a more effective IBRD guarantee instrument. The office has also been promoting Bank Group representation at conferences and trade fairs and helping strengthen partnerships with business associations, NGOs, and other groups. It will soon launch a Business Partnership Center, which will provide a focal point for communications with the private sector.
World Bank assistance for private sector development is grounded in the institution's long experience with its clients, familiarity with the global financial community, and the strong technical skills of its staff. In fiscal 1996, work was under way in every region of the Bank to improve the business environment through encouraging countries to identify and overcome constraints to competitiveness, supporting privatization and enterprise reform, facilitating greater investment in infrastructure, and promoting microfinance.
Improving the Business Environment
The Bank assists countries in privatization and enterprise reform by providing direct advice and analysis, making loans for technical assistance to facilitate transactions, designing adjustment projects to help governments face the one-time costs that may be associated with privatization, making investment loans to help privatized companies restructure, and providing guarantees to cover risks to private investors. During the past year, the Bank stepped up the pace of technical assistance to help governments implement step-by-step, practical measures leading to greater privatization of ownership; to prepare sales strategies for large enterprises, to design worker-participation and related schemes, and to recruit and supervise investment advisers for large transactions. An example of results-oriented technical assistance in Pakistan is detailed in Box 3-2.
BOX 3-2. ACCELERATING PRIVATIZATION IN PAKISTANAs a result, twenty manufacturing units were sold in fiscal 1996, raising Rs.9.4 billion ($268 million). These included Wah Cement and Pak Saudi Fertilizer. In addition, the Kot Addu Power Plant was sold for Rs.7.5 billion ($215 million), and the sale of Banker's Equity Limited (BEL)--a development finance institution--raised Rs.314 million ($9 million). The Commission expects the telecom utility (PTC), gas company (SNGPL), two banks, three firms in the power sector, and other medium- and large-scale units to be privatized later in the calendar year. In addition, the government has begun initial work on privatizing the national airline, PIA. |
The Bank continued to be active in preparing private sector assessments (PSAs), which describe the structure of a country's private sector, identify the key constraints to its development, and lay out economically efficient ways to remove those constraints. They represent the beginning of a process of dialogue with a government and form a baseline for joint work on policy and institutional reform.
Originally mandated by the executive board in 1992 to strengthen the Bank's private sector perspective in economic and sector work, PSAs were further emphasized when the board mandated that the Bank and the IFC collaborate on an initial set of twenty PSAs.14 As of June 30, 1996, thirty-one PSAs had been completed, covering countries in every region in which the Bank works--including, for example, Côte d'Ivoire and Ghana in Africa, Indonesia and the Philippines in East Asia, India and Pakistan in South Asia, Hungary and Poland in Eastern and Central Europe, Brazil and Mexico in Latin America, and Egypt and Morocco in the Middle East and North Africa. At least a half dozen additional PSAs are targeted for completion in fiscal 1997. Moreover, the Bank and its client countries have embarked on a variety of follow-up studies to explore issues identified in the PSAs in more depth.
The "competitiveness framework"--the legal and policy framework affecting business decisions--is critical to the success of private sector development Without such frameworks many privatization, infrastructure investment, and financial sector initiatives cannot realize their full potential. The Bank is helping focus the attention of key policymakers in client countries on how to increase the competitiveness of the local business environment through joint competitiveness assessments, conferences to develop a common vision of actions needed, and technical assistance to develop competition law, competition strategy, and firm-led capacity building. The goal is to create a sustained dialogue for change among the Bank's borrowing countries. Earlier, successful application of these approaches in Morocco was replicated in El Salvador during the past fiscal year, and preliminary work has begun in Egypt and Jordan.15
Private Provision of Infrastructure
The Bank's focus on private sector development comes together most vividly in private provision of infrastructure (PPI). While divestiture of assets through privatization is an essential step in facilitating private sector-led economic growth, the provision of new infrastructure with private financing cannot get under way without a credible business climate. Creating a conducive climate is a complex process that requires appropriate market structures and economic regulations for infrastructure development. The Bank is helping countries develop strategies for "unbundling" infrastructure industries where competitive supply is possible, and, where natural monopoly elements remain, to develop economic regulations that protect consumers and provide incentives for efficient supply. The Bank is providing advisory services to deal with this critical set of issues such as the technical assistance loan, approved during the past year, to Mexico in support of PPI.
The Bank has also begun to develop a structured network of developing-country regulatory leaders and institutions to promote capacity building in PPI. It includes expert meetings, hands-on seminars for regulators and stakeholders, and dissemination of best-practice information on planning and sequencing regulatory change. The Bank has also developed a worldwide data base of 3,500 private infrastructure projects (including those situated in industrialized countries) to support its best-practice work.
The Bank facilitates PPI through loans and credits and guarantee operations. Over the past nine years, some 138 such operations were approved. These include adjustment loans for policy reform, technical assistance, wide-ranging and diverse investment operations, and guarantees (see Box 3-3). Among the twenty-three PPI projects approved in fiscal 1996 was an adjustment credit in Yemen, which is paving the way for multisector regulatory changes to allow private participation in infrastructure. A technical assistance loan in Congo is facilitating private participation in the telecommunications, energy, power, and transport sectors, and a railways-rehabilitation loan in Côte d'Ivoire is supporting the transition from state to private management.
BOX 3-3. WORLD BANK CONTRIBUTION TO PRIVATE PARTICIPATION IN INFRASTRUCTUREAdjustment and technical assistance loans. Since 1988, the Bank has developed single-sector and multisector adjustment loans to support major policy improvements in, among other countries, Argentina, Bolivia, Mexico, Peru, and Venezuela. In fiscal 1996, the Bank supported multisectoral PPI components as part of adjustment loans in Yemen and Ukraine. These loans depend on and require long-term government commitment to an infrastructure-privatization agenda. Support to multisectoral PPI agendas has also been provided through stand-alone technical assistance loans, such as those provided in fiscal 1996 to Congo and Mexico. These loans support the design of stable, comprehensive, and consistent legal and regulatory frameworks for PPI, striving to ensure the sustainability of reforms undertaken. Investment loans. World Bank investment loans for physical infrastructure play a catalytic role in privatizing infrastructure services. Transport-sector projects in Armenia and Georgia, for example, funded road maintenance and investment in new equipment, thereby facilitating the privatization of trucking and road-repair operations. Since 1988, similar loans with PPI-related policy components have been undertaken in some ninety-nine other countries. Franchises. The Bank is helping to design management contracts, leases, or concessions for infrastructure services in a number of investment loans that involve franchise arrangements. Franchise arrangements are most common in Africa, where sixteen were supported by Bank infrastructure loans from fiscal 1988 to 1996. In some PPI operations, Bank funds are onlent to private sector operators of infrastructure services, including power projects in India and Turkey, water and telecommunications projects in Argentina and the Philippines, and transport-sector operations in Ethiopia and Mexico. Guarantees. The Bank has provided eight guarantees since the inception of the program in 1994. Catalyzing private funding for mostly public sector projects, these operations have also involved guarantees to the private sector in two power projects in Pakistan, formed an important component in facilitating the eventual privatization of Jordan's publicly held telecom entity, and assisted with the financing of a loan involving an independent power project in the Philippines. 
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Selected Instruments for Addressing Private Sector Development
The guarantee program. In fiscal 1996, the Bank expanded its partial risk and partial credit guarantee programs and integrated them into its comprehensive package of development-assistance instruments. Guarantees can lower project risks and induce private capital investments and can be applied flexibly based on the characteristic of each project and on country conditions. In fiscal 1996, the executive board approved three such operations totaling $275 million.
These included a partial risk guarantee for the privately sponsored Uch Power Project in Pakistan ($75 million guarantee), a complex package involving an IFC loan of $115 million, United States Exim Bank guarantees, and direct loans from the Bank of China. This project exemplifies growing cooperation among the Bank, the IFC, and other cofinanciers in financing major infrastructure investments. Other operations included a guarantee to mobilize $150 million of private debt financing on favorable terms for China's Ertan II Hydro Project and the guarantee of a bond issue of $50 million to support the Telecommunications Company of Jordan. This last operation led to unprecedented access--for a Jordanian company--into the Eurobond market.
The Bank also accelerated guarantee processing by streamlining documentation requirements and developing model agreements for legal documents. Action frameworks were created and specific projects were identified in consultation with several borrower governments to build a pipeline of guarantee operations over the medium term. A broader program to market the Bank's guarantees included convening a seminar on guarantees at the Bank's 1995 annual meetings. A solid pipeline of prospective guarantees now includes more than three dozen operations, across all the Bank's regions, covering virtually all major infrastructure sectors.
CGAP. Over the past decade, microcredit and savings services have proved to be an effective means of job creation and income generation among the very poor. Participation of the poor in credit and savings systems improves family welfare, nutritional and educational status among children, and lowers birth rates. To broaden and deepen this success, the Consultative Group for Assistance to the Poorest (CGAP), established late in fiscal 1995, is now implementing microfinance operations that provide assistance to the poorest.
CGAP channels funds through sound microfinance institutions that meet CGAP- approved eligibility criteria; improves donor coordination for systematic financing of such programs; and provides governments, donors, and practitioners with a vehicle for learning and disseminating best practices for delivering these services. By the end of fiscal 1996, the consultative group had twenty-three members. The Bank manages the CGAP secretariat, which administers a pool of pilot project-oriented external funding amounting to $32 million, of which $18.8 million was received in fiscal 1996, including a Bank contribution of $14 million. Some fifty-seven initial project requests from NGO and microenterprise-funding facilities from about thirty countries and several regional programs were reviewed during the past year, and fourteen were approved for implementation.
CGAP also provides training and information services on best practices in microfinance to policymakers and practitioners in the field. A seminar on methodologies for microfinance was held in Ghana, for example, and a study tour for Tunisian policymakers to Guatemala and Honduras was undertaken.
The Foreign Investment Advisory Service (FIAS). FIAS is a joint Bank-IFC program that provides advisory services to governments to help them improve the policy environment for foreign private investment. The program--funded by the IFC, the Bank, other donors, and paying customers among the developing countries receiving advice--carries out projects in twenty-five to thirty countries each year. During the year FIAS launched more-intensive work in Africa, with operations under way or expected soon in seven countries to help increase levels of foreign investment to the region. FIAS also carries out a large advisory program in East Asia and the Pacific--supported by its new regional office in Sydney--as well as in others regions of the developing world.
Financial Sector Development
A well-functioning financial sector is essential for private enterprise to grow and flourish. In turn, a healthy financial sector depends on a favorable policy environment and on strong institutions, banks, capital markets, and specialized institutions in areas such as housing finance, pension systems, and banking-sector supervision. In fiscal 1996, the Bank approved seventeen projects designed to help its clients develop their financial sectors.
The Bank's role in the financial sector is rapidly changing; in the past, Bank operations focused primarily on improving the policy framework and mandating basic prudential supervision. While still important in many countries, the Bank is increasingly becoming involved in assisting countries facing internal and external shocks (such as Argentina and Mexico) that result in pressure on their banking systems from high real interest rates and economic slowdown. Deterioration in asset quality increases the potential for runs on banks' liabilities, and responses must deal with underlying problems in banking systems, accounting standards, and bank management. Operations must be designed quickly since situations can soon become systemic within a country rather than affecting one or a few banks.
Lending in support of the financial sector in fiscal 1996 included support to banking reform in Argentina, Ghana, India, Moldova, Morocco, Tanzania, and Vietnam. In addition, supervision of earlier financial sector loans was intensive in both Argentina and Mexico to deal with the systemic aspects of their banking systems. Loans to Ghana and India are assisting nonbanking financial institutions--primarily leasing and other financial services organizations--to expand their financing of development-related infrastructure activities. These new-style financial sector operations rely heavily on staff with a high degree of expertise in resolving systemic liquidity and solvency problems. They include specialists in bank restructuring and privatization, banking supervision, central banking, liquidity management, and the collection and sale of bad assets. The Bank is building up its technical capability in these areas.
Training client-country staff is an important element of the Bank's assistance to the financial sector. During fiscal 1996, seven courses, attended by about 400 participants, were held, covering issues such as payment systems, banking supervision, and social security and pension reform. A total of 1,100 Bank staff also underwent short-course training in financial sector issues throughout the fiscal year.
Assistance in capital markets development--in close cooperation with the IFC--is a growing area of Bank support. In fiscal 1996, the Bank provided technical assistance in market building, including the regulation and supervision of capital markets, and in developing new financial instruments to address investor concerns about risk. Examples include upgrading regulatory and supervisory capacity and providing a backstop facility in Argentina, creating market infrastructure in Russia, promoting debt-market development in India, and developing regional capital markets in West Africa.
Operations in the Power Sector
The Bank's assistance to the power sector emphasizes restructuring, private sector involvement in financing and management, innovative energy sources, energy for the rural and urban poor, energy efficiency, and environmentally sound energy technologies. The lending program was robust in fiscal 1996, with twenty projects totaling $3.2 billion in all regions of the Bank. The Bank also carried out an expanding program of nonlending services including conferences and roundtables, direct technical assistance, and knowledge dissemination aimed at energy-sector decisionmakers in the Bank's borrowing countries.
The Bank aims to buttress borrower efforts to increase private sector participation in the power sector. The past year's lending program included power-generation loans with reform and institutional strengthening components in Bolivia, Cambodia, China, Colombia, El Salvador, India, Madagascar, Pakistan, and Romania--among others. The loan for Colombia supports power-sector reform by facilitating the operation of a competitive bulk supply market for electricity. In India, the Bank supported a pathbreaking operation in Orissa to unbundle the state's power generation, transmission, and distribution businesses and to achieve full privatization of power transmission by the year 2000.
Supporting Reform in Telecommunications and Information Technology
The Bank is shifting from investment in telephone-company infrastructure to support for sector reform that sets the stage for competition and mobilization of private capital and management. Traditional telecom lending is declining accordingly while technical assistance to prepare regulatory regimes and restructure programs is increasing. In Ghana, for example, the Bank's technical assistance has resulted in a competitive telecommunications-sector strategy. With Bank assistance, increased private participation in financing and management is now a reality in many borrowing countries, including Bolivia, Hungary, India, and Indonesia. IFC's private sector activities in the sector have increased.
The Bank and the IFC have worked together closely on telecommunications financing and reform. During the past year that collaboration became even closer, as the Bank and IFC telecom divisions "co-located" their operations to facilitate joint work--for example in evaluating industry proposals for fiber cable systems in Africa.
In the new information age, economic development is intimately connected to the growth of telecommunications services. In recent years, up to 10 percent of project lending has funded information technology-related procurement. However, before fiscal 1996 the Bank did not have a visible, freestanding program for applying information-technology solutions to the full range of developing country problems and priorities.
In July 1995, some 150 donors, industry representatives, and information-technology experts participated in the Bank Group's first conference on information infrastructure. The conference explored the role of information in economic development, and participants discussed how the Bank, together with the private sector, can most effectively help developing countries build, access, and utilize modern information infrastructure. The conference led to the creation of infoDev (the Information for Development Program), designed to bring together industry experts, other donors, the Bank, and its borrowers, to focus on meeting development needs through technology applications (see box on page 21).
TechNet, an information-dissemination and networking program, has also been launched to assess the technology status and requirements in developing countries and link practitioners around the world through seminars, best-practice papers, and electronic communications. TechNet is working with partners, such as foundations, the United States National Research Council, and the European Union, to improve understanding of the role of science and technology in economic development.
Oil and Gas Sector Activities
Privatization of the oil and gas sector is well advanced in many of the Bank's borrowing countries. The Bank's role is catalytic; it provides financing for the infrastructure that must be put into place along with private investments, and develops worldwide methodologies and standards for procurement to facilitate bid preparation. In fiscal 1996, the Bank joined with private sector partners in the oil and gas sector to find ways to overcome bottlenecks to private investment arising from traditional contracting procedures. Bank staff, country experts, and industry representatives held a productive seminar to suggest faster, more innovative contracting procedures to facilitate investment flows, for example through structured, direct negotiations.
The Bank also provides technical assistance loans to speed up the privatization process. In fiscal 1996, for example, a technical assistance credit helped the Bolivian government design and execute a hydrocarbon-sector adjustment program and capitalize YPFB, the state-owned oil company.
Mining Sector: Active Bank Involvement
The mining sector is an important engine of growth for many of the Bank's borrowing countries. During fiscal 1996, the Bank actively facilitated private sector involvement in a number of ways. Bank lending is supporting a series of reforms, including rewriting mining laws, reforming public mining institutions, strengthening environmental protection capabilities, privatizing state companies, and addressing social safety net issues. The Bank also works closely with the IFC, MIGA, other multilateral banks, and private investors to help governments carry out broad, complex programs of mining-sector privatization, restructuring, and new investment--for example the mining industry in Zambia.
Forging Links with External Partnerships
The Bank is forging wider and stronger linkages with private industry, NGOs, trade groups, and investors. For example, the Bank hosts an annual review of progress and problems for private power-sector companies that invest in developing countries. Information-technology companies are involved in infoDev as both donors and colleagues and are helping to carrying out pilot projects. Two private energy groups, Marubeni of Japan and EnergyNet of the Netherlands, have joined the ESMAP consultative group and participate in its deliberations and funding. Links with trade associations and industrial organizations are increasing--with the Japanese Keidanren, the International Business Roundtable, the Milan and Turin Chambers of Commerce, the Global Information Infrastructure Commission, and the International Institute of Finance--to name a few. Contacts with the petroleum industry are close, both in project development and in dialogue on strategic issues. Groups such as the Prince of Wales Business Leaders Forum provide the opportunity to advance the concept of corporate responsibility.
In fiscal 1996, a network that provides technical assistance in developing countries, the Senior Volunteer Advisory Service, was invited to participate in the Bank's work; it is supporting Bank development activities in a number of countries. Linkages with bilateral donors are long-standing (through ESMAP), as well as new (through infoDev and CGAP). Increasingly, the Bank is collaborating with bilateral donors in planning and implementing technical assistance projects.
Best-practice knowledge in private sector development, financial sector development, and industry and energy is disseminated through publications and access to Bank data bases (for example, in the private provision of infrastructure). The Bank is stepping up its secondment of private sector staff into the Bank--and the assignment of its regular staff to enrichment programs in private companies.
Footnotes
14. The Bank and the ifc have also begun a pilot program of a limited number of joint country-assistance strategies (CASs), which provide a vehicle for executive board discussion of the Bank's views of a particular country's developmental constraints and priorities and the proposed Bank-assistance strategy. These cass would be considered jointly by the executive directors of the Bank and the executive directors of the ifc. Eight countries in the pilot program have been agreed upon: Brazil, Côte d'Ivoire, Egypt, India, Indonesia, Kazakstan, Mexico, and Poland. The objective of the joint cas is to ensure that there is a coordinated Bank Group private sector country view and strategy.
15. In Morocco, four public-private "clusters" are workingwith support from the Bankon policy changes and action programs, for example, the Northwest Regional Tourism Development Program.