IDA15 fragile states paper - World Bank

1 IDA15 OPERATIONAL APPROACHES AND FINANCING IN fragile states International development Association Operational Policy and Country Services (OPCS) and Resource Mobilization Department (FRM) June 2007 ABBREVIATIONS AND ACRONYMS ADB African development bank AfDF African development Fund ARTF Afghanistan Reconstruction Trust Fund AsDB asian development bank AU African Union CDD Community Driven development CFAA Country Financial Accountability Assessment CPAR Country Procurement Assessment Report CPIA Country Policy and Institutional Assessment CRS Creditor Reporting System DPO development Policy Operations EC European Commission ECOSOC Economic and Social Council ECOWAS Economic Community of West African states GEMAP Governance and Economic Management Assistance Program GNI Gross National Income HIPC Heavily Indebted Poor Country IBRD International bank for

2 Reconstruction and development IDA International development Association IEG Independent Evaluation Group ( World bank ) IMF International Monetary Fund I-PRSP Interim Poverty Reduction Strategy paper LICUS Low Income Country Under Stress MDB Multilateral development bank MDG Millennium development Goal MDRI Multilateral Debt Relief Initiative MDRP Multi-Country Demobilization and Reintegration Program MDTF Multi-Donor Trust Fund NGO Non-Governmental Organization ODA Official development Assistance OCHA UN Office for the Co-ordination of Humanitarian Affairs OECD-DAC Organization for Economic Co-operation and development development Assistance Committee OP

3 Operational Policy OPCS Operational Policy and Country Services QAG Quality Assurance Group PA Poverty Assessment PBA Performance-Based Allocation PCF Post-Conflict Fund PCNA Post-Conflict Needs Assessment PCPI Post-Conflict Performance Indicators PER Public Expenditure Review PRSP Poverty Reduction Strategy paper RETF Recipient Executed Trust Fund RRC Rapid-Response Committee SDR Special Drawing Right TRM Transitional Results Matrix UNDP United Nations development Program UN-DPKO United Nations Department of Peace Keeping Operations IDA15 OPERATIONAL APPROACHES AND FINANCING IN fragile states CONTENTS Executive Summary.

4 I I. Introduction ..1 II. fragile states and the International Aid A. What is a fragile state? ..2 B. fragile states development C. Rationale for engagement and issues in development D. Trends in the international aid III. World bank Strategy and Organizational Support for fragile states ..9 A. Background ..9 B. IDA s role and assistance strategies in fragile states and situations ..10 C. Results ..15 D. Organizational support and institutional reform ..18 IV. fragile states and IDA s Financing Arrangements ..23 A. Overall IDA Resource Flows to fragile states ..23 B. Diverse fragile states and IDA s Financing Arrangements ..26 C. Implications of the Proposed Changes on Overall Shares of IDA Resources ..36 V. The Role of Trust Funds in fragile states ..36 VI. Conclusion ..40 Annex: Annex 1. Post Conflict Performance Indicators ..42 Boxes: Box 1: Definitions of fragile Box 2: World bank s Role in Contributing to Peace-Building Goals.

5 12 Box 3: Differentiated Approaches Across the Spectrum of Box 4: World bank UN Partnership Note for Crises and Emergencies and Post-Crisis Recovery Planning ..14 Box 5: IDA s Assistance to fragile states ..16 Box 6: Knowledge Work ..19 Box 7: Examples of Multi-Donor Trust Funds for fragile states ..38 Box 8: LICUS Trust Fund Tables: Table 1: fragile states Face the Largest Deficit in Most Table 2: Progress in Country-Level development Results in Uganda and Mozambique ..6 Table 3: IDA Allocations Per Capita and Number of People Living Below a Dollar a Day ..24 Table 4: FY07 List of fragile states , Financing Status, Debt Relief and Grant Eligibility ..25 Table 5: PCPI and Allocations per Capita ..30 Table 6: Trust Fund Contributions to fragile states ($ millions) ..37 Figures: Figure 1: ODA to fragile states (Commitments in $ billion at 2004 prices) ..7 Figure 2: Patterns of Aid to fragile states in Crisis.

6 8 Figure 3: CPIA Average Scores and Project Ratings ..17 Figure 4: Project and Commitments at Risk fragile and Non- fragile states (QAG) ..18 Figure 5: Percent Projects with Satisfactory Figure 6: Organizational Support to fragile Figure 7: Flow of IDA Resources by Country Groups over the Past Decade ..24 Figure 8: fragile states : Broad Financing Categories, Estimated Share of IDA14 Resources, and Financing Figure 9: Allocations to Post-Conflict IDA countries ..30 Figure 10: Extending Post-Conflict Figure 11: Impact of the Proposed OPERATIONAL APPROACHES AND FINANCING IN fragile states EXECUTIVE SUMMARY 1. Purpose. At the first meeting of the IDA15 replenishment negotiations, the IDA Deputies requested that IDA s role in fragile states be addressed as one of the three special themes for the replenishment. Specifically, they asked that the following issues be addressed: IDA s strategy, instruments and operational response in supporting fragile states ; IDA financing for fragile states ; and a systematic approach to arrears clearance.

7 1 This paper responds to this request, with the exception of the systematic approach for arrears clearance, which is described in a separate 2. The critical challenge of fragile states . fragile states , characterized by weak institutions and vulnerability to conflict, have increasingly become an area of focus for the development community in recent years. fragile states represent a critical challenge for IDA: while they are home to less than 19 percent of the total population in IDA-eligible countries, they account for over one third of the extreme poor, almost two fifths of all child deaths, and one third of 12 year olds who did not complete primary school in 2005. 3. High risk-high reward. development assistance is inherently risky in these environments, where weak policies and institutions correlate with a lower probability of successful project outcomes. Despite the risks, there is a strong rationale for engagement: the impact of well-designed and supervised aid-financed programs can potentially be very high, because these countries start from a very low level of achievement of the Millennium development Goals (MDGs).

8 A successful exit from fragility also has positive spillover effects on neighboring countries. A strong response from IDA in fragile states is therefore in the interests of all its members, as progress in these environments will also enhance and protect the development gains made in the stronger performers. 4. Differentiated operational strategies. In line with other donors at the OECD-DAC, the World bank is focusing on its comparative advantage in different types of fragile states and situations by differentiating its assistance strategies and its role based on the direction and pace of governance change. Within this framework, the World bank has a significant contribution to make by adapting its traditional economic and service delivery competencies to weak capacity environments and by tailoring its technical expertise to support the lead of the UN and other partners in efforts to consolidate peace and stability.

9 In this regard, the World bank s partnership with the UN in fragile states has strengthened significantly in recent years, and will be further bolstered by the adoption of a common recovery planning process and agreed fiduciary framework for collaboration in post-crisis situations. 5. Operationalizing policy and institutional reforms. The continued implementation of organizational, policy and procedural reforms recently endorsed by the Board of Executive Directors is important for realizing the full potential of the World bank s contribution in fragile states . In particular, strengthening operational support and building on lessons learned, together 1 Chairman s summary from the first IDA15 meeting in Paris, March 5-6th, 2007. 2 IDA (2007): Further Elaboration of a Systematic Approach to Arrears Clearance. - ii - with strengthening field presence and enhancing human resource systems to attract high quality staff and reward strong performance in these tough environments, will be critical.

10 6. IDA s overall financial assistance. Over the past decade, IDA allocated around SDR11 billion or 19 percent of its overall resources to fragile states , countries with Country Policy and Institutional Assessment (CPIA) ratings at or below In addition, a majority of fragile states have benefited significantly from debt relief having received $ billion of relief in NPV terms by mid-June 2007 under the Heavily Indebted Poor Countries (HIPC) and Multilateral Debt Relief Initiatives (MDRI) initiatives. They also benefited from increasingly concessional resources through the provision of IDA grants (receiving 57 percent of IDA funds as grants to date in the IDA14 period as compared to 8 percent for non- fragile states ). 7. fragile states financing classification. From a financing perspective, IDA classifies fragile states into: (i) those receiving IDA resources through the Performance-Based Allocation (PBA) system; (ii) those qualifying for exceptional post-conflict allocations; (iii) those qualifying for exceptional allocations upon re-engaging with IDA after a prolonged period of inactivity; and (iv) those in non-accrual status.