At the Spring Meetings of the World Bank, a range of shareholders repeated their call for multilateral development banks (MDBs) to do more, particularly with regard to climate finance. At the same time, client countries are demanding these institutions preserve their core mandate to support development. That echoes the results of World Bank client surveys showing that borrowing-member countries want the institution to focus its resources on areas such as education, rural development, governance, jobs, poverty, and the economy. Added to that is a general reluctance amongst middle-income countries to borrow from the World Bank for the infrastructure projects that will be a key part of investments for climate mitigation and adaptation because of the very high nonfinancial transactions costs of such projects. It's clear that a key part of any grand bargain involving more financing and more borrowing for climate has to be reducing the cost of doing business with the World Bank and other MDBs. It's time for shareholders to insist on a thorough and independent review of the cost of doing business with these institutions.
As part of the ongoing reform efforts, shareholders should identify a reputable and independent third party to undertake this review.The indicators could include measures such as:
- The time between concept note and board approval, board approval and 50 percent and 100 percent disbursal for various lending instruments;
- The length of procurements of different scale and using different mechanisms, from process start through bidding to award and completion;
- The percentage of projects rated Category A or B and the impact of ratings on time to prepare and complete projects as well as procurement processes under those projects.
They should also include estimates of the associated financial and labor costs of preparation, procurement, and project management activities for different mechanisms for both the World Bank and client countries. To help understand which constraints have the largest impact, the data should be accompanied by average and median size of projects and procurement packages of different types as well as the percentage of the total each type represents.
It is important that this review covers the regional development banks, including, for example, CAF (the Development Bank of Latin America) and the European Investment Bank, in addition to the World Bank. There is evidence that client countries prefer to borrow from regional development banks over the World Bank, as well as evidence that other MDBs have more client-friendly approaches to project design. There may be things for the World Bank to learn, as well as the potential for cross-fertilization between the regional banks.
Any exercise of the kind we're recommending here would be open to criticism, not least because it would measure only the costs and not the benefits of the measures that drive MDBs' high nonfinancial transactions costs. In addition, it would not capture the impact on initial borrowing choices: projects and activities never considered for MDB funding because of the anticipated high transactions costs. But it would at least provide the basis for a discussion of opportunities to address transactions costs that, upon review, can be seen as gratuitous, and thus interfering with the goal of ensuring the most cost-effective deployment of public capital by these institutions. In turn, that might help spark a renaissance in World Bank lending, particularly for global public goods, which is something that clients and shareholders alike should appreciate. Bottom line: let's not let the perfect be the enemy of the good.
CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.
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