1.  Lessons Learned: Eighth Replenishment Mandate

1.1 The past year marked the fourth year of the existence of the IDB's Evaluation Office (). is mandated to provide systematic assessments of strategies, policies, programs, projects and support functions of the IDB's operations.

1.2 This 1997 Annual Report of focuses on "lessons learned" from 1994-1997 evaluations for use in the design of new operations and the improvement of ongoing activities. This report presents preliminary evaluation lessons derived from lending operations under the 8^th Replenishment Mandate (IDB-8). The lessons do not imply an evaluation of the mandate itself.

1.3 In defining the term "lessons learned," it was instructive to examine the experience of international lending institutions over the past few years. A growing body of knowledge of best practices, approaches and methods has developed through the ongoing process of review of project development and execution. This body of knowledge did not bring about a consensual understanding of the concept of "lessons learned". In this Annual Report it reflects therefore the uses within the Bank.

1.4 Year 1994 saw the largest increase in resources in IDB history as member countries agreed on a $40 billion replenishment. The IDB-8 had multiple goals, such as reducing poverty and promoting social equity in the region. The IDB continues to support economic modernization and integration and the protection of the environment. It supports the region's governments efforts to redefine the role of the state and promotes the growth of the private sector. This report covers lessons drawn in the following three priority areas:

• Poverty Reduction and Social Equity
• Modernization and Integration
• The Environment

A. Poverty Reduction and Social Equity

1.5 The Bank has always been a "social Bank". It started its operation with a socially oriented pilot project involving water supply systems for the Peruvian city Arequipa. In the sixties, the Bank expanded social lending to cover the rural and urban poor. In the seventies and eighties, the Bank devoted a substantive part of its lending program for the benefit of low-income populations.

1. Bank Mandates and Lending

1.6 With IDB/8, the Bank is committed to providing assistance to the borrowing member countries to support economic reforms; to develop and implement, on the basis of a solid political consensus, a renewed social agenda; and to simultaneously ensure an adequate safety net for the poor. The Bank's support is guided by the principle of assisting borrowing member countries to bring the full benefits of economic growth to the vast majority of their populations, by creating jobs and broadening the business base. Social policy reform is a complex task that needs to emanate from the political will of each member country.

1.7 Social projects require unusual dedication and patience by the member countries and Bank staff: "In the context of full dialogue with borrowing members and mutual agreement on the priority to be accorded social projects, the Bank will increase the number of social projects and the proportion of lending devoted to social sector operations during the Eighth Replenishment. It was recognized that for most operations in these sectors, this means project preparation and execution require greater staff inputs and longer gestation periods. This also means that added emphasis must be placed on institution-building operations which, by the very nature of these operations, translates into a greater number of smaller size operations than the average in other sectors. Ex-post evaluation of social projects will be included in the annual program of the Evaluation Office."

1.8 Under the Eighth Replenishment guidelines, the Bank's support for social and poverty reduction programs should increase to 40 percent of total lending and to 50 percent of the total number of operations. To accomplish this goal, the Bank has broadened its approach to lending in the social sectors.

1.9 The IDB/8 mandates were translated by the Bank into a series of actions which strive to bolster the region's social infrastructure and public institutions, placing particular emphasis on developing projects within the social areas.

1.10 Between 1993 and 1997, the Bank funded 136 social sector projects, in the areas of education, health, social investment, sanitation, science and technology, urban development and housing, totaling over US$11.3 billion. Funds were also made available for technical cooperation in these sectors.

2. Lessons Learned

1.11 Since 1993, has conducted numerous evaluations in this priority areas of Bank lending. Evaluations and lessons were generated on themes such as:

• Social Projects after Disbursement.
• Social Investment Funds
• IDB Health Programs
• Reaching Disadvantaged Children
• Women in Development, and,
• Listening to Stakeholders of Primary Schools

a) Social Projects After Disbursement

1.12 One of the traditional concern of social loan oriented projects is their life after disbursement. Ex-post evaluations from previous years show that the necessary financial support to maintain infrastructure was not always forthcoming after project completion. The concern arose as to the sustainability of projects. found, that long term sustainability rests on several pillars.

1.13 First, projects should be integrated into national socioeconomic development programs which are fully supported by the borrowing member country. Social sector expenditures should also be carefully planned and budgeted, in terms of income generation, expenditures, and capital investments.

1.14 Another important factor is involving beneficiaries in project development and execution so that they assume ownership of such projects, use them, and become supporters for their sustainability.

1.15 Employment of non-governmental organizations as intermediaries has proven to be a good way for governments to reach local communities and obtain their cooperation.

1.16 Finally, institutional development at the national, local, and community level is a sine qua non condition of successful social projects. Not only does it ensure better implementation of projects, but also better management and use of projects after final disbursement.

1.17 Although the Bank is moving in the right direction in all of these areas, it needs to make more effort to ensure that social projects are properly planned and managed so that their beneficial effects are felt by the poorest members of society.

b) Social Investment Funds

1.18 The Social Investment Funds (SIF) often serve to reinforce and broaden state institutions in the social field, particularly where SIF programs have been introduced to complement public sector management of poverty alleviation and social development. SIF portfolios include projects in education and health if they can be carried out more rapidly and effectively outside the government's traditional executing agencies.

1.19 During the past 9 years, considerable skill in project analysis and implementation has been developed under the SIF program. Simplified procurement rules and a reliance on the private sector to build projects has produced a steady stream of needed infrastructure along with some temporary employment. The Funds have also developed methodologies with international assistance, which enable them to reach the most poor communities. The Funds have provided relief and economic opportunities in countries torn by civil strife and poverty.

1.20 However, in many SIF programs, there has been an overemphasis on projects geared towards social infrastructural development at the expense of more long-term programs, such as training in maintenance, which would have helped sustain completed projects. Skills training, which has a long term effect on income generation is an area worth sponsoring. The question of whether sufficient attention is being given to the environmental impact of these many small projects is also of importance.

1.21 Lessons learned indicate, that, if Funds are to be a viable long-term instrument for poverty reduction, the Bank needs to be more flexible in the types of projects and activities it will finance. Effectiveness in poverty eradication will depend heavily on local conditions. There is no blue print of activities which can be designed and successfully applied throughout the region.

1.22 In addition, although many of the Funds utilize advanced information technology in project management, SIF programs should maintain comprehensive demographic data banks on beneficiaries, for use by both the Fund and the Bank. There is also a need for baseline information collected ex-ante in order to judge the impact of projects, ex-post.

1.23 As countries in the region emerged from a period of economic difficulties in the 1980's, programs in public sector modernization began to be implemented. These programs often seek to enhance the role of the central government in developing policies and sectoral norms, while leaving service delivery and infrastructural development to regional, local, or private entities. Within this context, SIF adjust their programs to become intermediaries between municipalities and higher levels of government, and to work with communities to enhance their abilities to articulate their needs.

1.24 Lessons reflect that to improve management of financial allocations, it is critical to adopt transparent and objective selection criteria for projects.

1.25 Local officials should be given more freedom to experiment with innovative solutions. It is no accident that some of the most successful and innovative Funds are those which have given local officials a greater degree of autonomy in project execution. 

c) Health Programs

1.26 The Replenishment gave special emphasis to the health sector. The focus is on preventive measures and on primary health care. In addition, it is stated that priority was to be given to combating infectious and contagious diseases, as well as to reducing infant and child mortality. Within this context and working with specialized agencies, major objectives of the Bank are to assist in bringing full coverage in inoculation, to provide assistance for mass vaccination campaigns for infants and school-age children, and support implementation of environmental health projects, particularly in the water supply and sanitation subsectors. Likewise, the Bank will continue to support programs geared to improving the provision of services in the health sector.

1.27 The Bank has as main areas of interest: responding to a heterogeneous group of health needs; institutional strengthening, including decentralization and coordination of national health systems; and improving resource allocations for providing public health needs. The findings indicate a progression from broadening health coverage to poor beneficiaries, to

dealing with the sectoral conditions that result in adequate health care.

1.28 The Evaluation report included lessons which by now are already integrated into the new IDB strategy for social service delivery. The social service delivery strategy of the Bank includes a more heterogeneous group of health needs; it should strengthen institutions; and favor the decentralization, and coordination of national health systems and, improve resource allocations for providing public health services.

1.29 suggested that the Bank should support governments in the definition of their strategic role and assist borrowing countries in the decision making process regarding reorganization and integration of the social security system. To this end, Bank should include support of specific studies and surveys of consumer behavior, institutional problems, and supply capacity of each of the health sub-systems. This will facilitate the interrelationships between the public health and social security sub-sectors, private sectors, and NGOs, which will strengthen institutions, decentralization, and coordination of national health systems.

1.30 In addition, borrowing countries should define the role of the private sector as provider of direct and indirect goods and services for health and as mobilizers of financial resources.

d) Reaching Disadvantaged Children

1.31 Children are one of the priority target groups of the Bank. IDB/8 includes specific policy goals and targets: "In pursuance of its poverty-reduction objective, the Bank will promote projects that benefit the most vulnerable segments of the population, particularly women, adolescents, and children" . It was recognized that efforts like these will have benefits which exceed the social realm, they will "make a positive contribution to achieving other Bank objectives.

1.32 The Evaluation Office prepared an evaluation summary of three programs benefitting children in difficult circumstances in Brasil, Peru and Guatemala. These children were mostly "street children. The Bank began with pilot projects to learn how to be more effective in this area.

1.33 The Rio de Janeiro project in Brazil includes 42 sub-projects emphasizing care for street and working children. The program reaches some 8,000 street and working children with various services, and is making a positive impact on a substantial number of beneficiaries. The Bank has a strong monitoring role, which proved essential for good execution.

1.34 A Peruvian program operates in part, two drop-in centers offering refuge to 30 children and 20 adolescents in Lima, and to 30 children in Ayacucho. To date, a total of 220 street children have been helped, -- 170 in Lima and 50 in Ayacucho. Children receive food, clothing, medical care and education, and participate in sports activities.

1.35 A third project in Guatemala is preventive and community based. It is reaching a large number of children (around 40,000) with limited project resources. The key to such coverage is the cascade effect achieved using adolescents (promotores juveniles comunitarios) to work with children. Adolescents are beneficiaries and agents of change at the same time. In the urban sub-project, children are reached by adolescents who engage them in recreational and educational activities. Another sub-project is a school program which is providing primary education to working adolescents on Sundays. In rural areas the project help children overcome armed conflict trauma with recreational activities aimed at strengthening self-esteem and trust.

1.36 The lessons from this pilot project should be studied further, and, if applicable, applied in future Bank operations. The projects are a break-through from traditional methodologies that normally reach a limited number of children for corrective actions. They represent an innovative approach of reaching whole populations at a low cost.

1.37 Since the phenomenon of street children was identified as a social problem to be tackled initially by pilot or experimental programs, significant learning has taken place. It appears that the number of street children turned out to be less than originally perceived. The number of working children, and those engaged in disabling labor is staggering. Bank projects initially targeted urban centers. However, an examination of the situation of children at risk and their family conditions in rural areas is equally relevant.

1.38 It was suggested that future programs should assess the best way to help girls with special needs and find ways of providing them with equal opportunities in education and work training. Equal attention should be given, at the diagnostic level, to the conditions found in rural and urban settings.

1.39 There is a general lack of coordinated strategy (from donors, governments and NGOs) regarding actions in this sector. The problems facing this sector are recognized to be varied and complex and so are the approaches chosen to address them. However, this frequently results in ineffective attempts to deal with these problems. At the level of NGO, for example, vocational training courses seldom prepare the youth adequately for the real needs of the labor market, creating false expectations for an already extremely vulnerable group. At the level of donors, the lack of precise selection criteria leads to the financing of a highly heterogenous mix of institutions and activities and no clear rewards are given to the staff which ensure that the quality programs are effective and efficient. At the level of government, a frequent lack of vocation from employees and poor knowledge of the target group and their needs, lead to the design of policies and programs that have few common points with the perceived needs of communities.

1.40 In this area, there should be an explicit inter-related strategic orientation for poverty reduction, youth development, and support to labor market reforms. An integrated strategy towards Child and Youth Development creates links between the programs in execution in a particular country that benefit this target group.

1.41 The Bank would benefit from a systemic focus or treatment of children targeted programs. There is a need to focus on strengthening the institutional capacity of service providers in this field (governmental and non-governmental), mainly in the areas of management, administration, finances, technical expertise, and evaluation. The quality of the services provided to children is directly related to the quality of the institutions that provide them.

1.42 In addition, the Bank should seek to strengthen institutions and programs that reinforce linkages between the children and their families and/or communities and between the children and the formal school system. Linkages should also be strengthened between youth and the labor market. Programs that incorporate the family as part of the solution to the street children problem seem far more effective and cost efficient.

1.43 In addition, it is supposed that preventive projects rather than corrective projects should be designed. Corrective projects have been found to be more difficult to implement, more complex, and more costly than preventive projects.

e) Women in Development

1.44 evaluated the Bank's policy on Women in Development (WID). The WID Policy issued by the Bank in 1987, states that the IDB "will assist member countries in their efforts to bring about fuller integration of women into all stages of the development process and improvement in their economic situation".

1.45 The strategic intent of the WID policy directed to low income beneficiary groups was well focused. With the Bank's increased emphasis on the social and political dimensions of development as established in 1994, in IDB-8, the WID policy has become much more significant to the Bank's central mandates. Implementation of the WID policy continues to be a valid and effective approach for carrying out the current strategic objectives of the Bank.

1.46 Lessons stress the importance of developing action plans and strategies outlining how objectives are to be achieved, how resources are to be obtained, when progress is to be assessed, and how progress and success are to be measured.

1.47 Given the consistency between WID policy objectives and IDB-8 mandates, clear signals are given to operational staff in the bank about the importance of addressing WID issues throughout Bank programming and project operations. Departments responsible for strengthening the Bank's performance monitoring systems, in coordination with SDS/WID, should develop indicators and benchmarks for assessing progress in the implementation of WID policy objectives.

1.48 On the project level, gender issues should be reviewed in the very early stages of project design. On the country level, the Bank should ensure that its country papers reflect gender-related constraints and opportunities, and address pertinent gender issues in Bank-funded projects.

1.49 The Bank should continue to place WID experts in its regional departments and special efforts should be made to strengthen expertise in country offices.

1.50 To make all this possible, the Bank should ensure that the WID unit strengthens its guidance and oversight capacity for implementation.

f) Listening to Stakeholders of Primary Schools

1.51 This report provides the results of a survey of stakeholders on a variety of issues. They relate to children's intellectual and emotional conditions and behavior, parent's attitude as a major influence in children's motivation to learn, importance of books, the role of politics in educational quality, etc. These survey results would need empirical verification and further qualitative and quantitative research, to draw more definite conclusions.

1.52 Despite the above limitations, it is important to note that stakeholders responses significantly coincide with education experts views that, for learning to take place, two key inputs are necessary: the education system that delivers quality instruction, and the students who bring to the classroom their aptitude and motivation; factors over which the school has little or no control.

1.53 Should primary education projects address all the factors outside the school that affect learning? Not necessarily. The Bank knows from experience that the simpler the project the better tend to be its chances of success.

1.54 Obstacles to learning outside the education system could be identified and addressed both at the country programming stage, and at the education project design stage. In both cases, a beneficiary assessment would be indispensable, as a complement to other technical analysis, to understand the concerns and specific needs of final stakeholders.

1.55 At the country programming stage, particularly in the context of decentralization, children's needs could be defined at the local level, coordinating different actions (by the Bank or others). At the project level, project staff could seek to link-up with other projects, or with actions of the private or public sector meant to address the children's basic needs. One example are the projects for children under especially difficult circumstances (MEDC) that the Bank is supporting at present. One of the major objectives of these operations is to keep children in school, and attend to the factors in their personal lives (need to work, family problems) that distract them from getting a formal education.

B. Modernization and Integration

1.56 Modernizing the region's infrastructure and continuing reform of the public sector is a major Bank priority in order to help help member countries compete internationally. The Bank's work includes the promotion of domestic and foreign private investment; institutional strengthening, skills training, the generation and dissemination of technology; ensuring a hospitable legal and regulatory environment for small and medium-sized firms; financial sector reform and modernization; financing essential infrastructure in energy and transportation; modernizing the agricultural sector; and support for subregional integration initiatives with a view to achieving overall hemispheric trade integration.

1. Bank Mandates and Lending

1.57 To achieve this, Bank policies stress modernization and integration, financial sector reform and modernization: " While foreign investment and borrowing will play a significant role in private sector growth and development, these flows are neither sufficient nor are they always stable or predictable. Economic growth, therefore, requires the efficient mobilization of domestic financial resources. Bank objectives will be to foster the emergence of new and varied sources of longer term savings in the domestic markets; develop the necessary instruments and infrastructure for mobilizing domestic savings; ensure access to financial services, especially micro, small, and medium-sized enterprises; promote maximum efficiency in order to reduce the spread between deposit and lending interest rates, through appropriate macroeconomic policy and the promotion of competition; and assure the adequacy of supervisory and regulatory systems."

1.58 The Bank focus is on "civil society", the citizenry, the sum total of individuals and organizations that exist apart from governments: groups of microentrepreneurs or environmentalists, civic and trade associations, political parties, philanthropic organizations, churches, indigenous communities, organized labor and women's and youth groups.

1.59 The Bank recognizes that without a strong civil society, even democratic governments become the stewards of a kind of development that comes from the top down, not from the ground up.

1.60 Lending in this area was considerable, Between 1993 and 1997, the Bank funded 81 projects in public sector reform and modernization of the state, totaling $6,070.30 million.

2. Lessons Learned

1.61 Over the years, conducted numerous evaluations in this priority area of IDB lending. Evaluations and lessons were generated on specific topics such as:

1. Reform of Development Banks
2. Reform of the Public Enterprise Sector
3. Technical Cooperation in Support of Public Sector Reform
4. Sector Lending

a) The Reform of Development Banks in IDB Financial Sector Loans

1.62 The Evaluation Office undertook a preliminary overview of Sector Lending Programs. The IDB's participation in support of the policy reform process began under the Seventh Replenishment. In the course of the discussions leading up to IDB-7, the Board of Governors resolved that the IDB should start to cofinance with The World Bank sector loans designed to assist governments in undertaking sector policy reforms. This decision was aimed at fostering macro-economic and sector policies that would encourage market-based allocation of resources and adjust the scale of state intervention. The defining feature of the instrument or modality of sector policy loans is to provide flexible financing in the form of fast-disbursing funds to support changes in policies and institutional frameworks at the sector or subsector level.

1.63 The IDB has been involved in Sector Loan Operations since 1990, when they were incorporated into the Bank's activities as part of the Seventh Replenishment mandate of the Board of Governors (AB-1378, IDB 1989). These operations provide fast disbursing funds for balance of payments support, in exchange for the implementation of an agreed set of policy reforms.

1.64 Significant advances were made in the reform programs supported with theIDB's Financial Sector Loans, especially in the areas of the reform of the Central Bank, the establishment of prudential regulation, the liberalization of interest rates, and the commercial banking system. However, progress has been slower with respect to some aspects of the strengthening of the supervisory institutions and some of the reforms affecting development banks.

1.65 IDB strategies in the area of financial sector reform and credit programs should be reviewed to reflect best practices, in order to reinforce the new IDB's structure and provide continuity and consistency to the operations in this sector.

1.66 Sector reform: Financial sector reform must be designed as part of an overall long term structural adjustment process at the country level, to which the Bank and other multilateral institutions can provide support under a coordinated programming exercise resulting in a coherent pipeline, including policy-based loans, technical cooperation, and credit operations.

1.67 Loan conditionality and legislation: Policy-based loans should include the policy conditions essential to achieving the objectives of the program within its time-frame. Conditionality dependent upon the approval of legislation should be carefully analyzed in this context, especially taking into account the fact that the Executive does not necessarily exert influence on the legislative process.

1.68 Support for financial sector reform and credit programs: IDB programs and projects in areas affecting the financial sector should continue supporting the redefinition of the role of the state in this sector by, as a first option, removing existing distortions, correcting market imperfections, increasing competition, and allowing greater private sector involvement in these markets.

1.69 Diagnostic studies and public sector intervention: Any specific role assigned to public sector development financial institutions and government credit, should be based on in-depth diagnostic studies for the conditions affecting the supply and demand of credit in the sectors and areas of concern, and only after careful consideration of alternative instruments that could help address existing market failures and non-financial issues of compe-titiveness..

b) Reform of the Public Enterprise Sector

1.70 An important component of the structural adjustment process carried out by several countries in Latin America and the Caribbean is the reform of the public enterprise sector. During the last decade, there has been an increasing trend throughout the region toward the privatization of public enterprises, especially those in the productive sectors. There have also been some attempts at incorporating new management practices into those enterprises remaining under state ownership. The IDB has been involved in supporting this reform process, mainly through its sector lending and technical cooperation operations.

1.71 The IDB has been successful and should continue to support the efforts of governments to define coherent policies towards public sector enterprises, may it be through technical assistance programs, sector lending operations, or other programs relevant to these activities. The Bank's country programming process represents a valuable instrument for furthering this end in a cohesive manner, contributing to the eventual definition of long-term sectoral goals, the identification of the instruments available for reform, and the design and timely creation of the required institutional framework. This will help define an adequate lending pipeline through a more clear determination of the scope of the different projects in the program, their timing and complementarity.

1.72 Regarding the institutional framework for Public Enterprise Reform, the Bank should continue strengthening the government institution(s) responsible for the design and execution of public enterprise reform. The Bank should take into account that the responsible institutions should not only have sufficient technical and negotiating capacity to interact with the enterprises, but also political leverage for decision making.

1.73 The IDB should consider the utilization of performance contracts as a policy option linked to lending to public enterprises, be it for restructuring purposes or for an investment loan execution. As a restructuring instrument, the performance contract provides for a viable setting to define the reforms to be introduced, describe the actions to be taken to implement the reforms, and establish a monitoring and evaluation system for supervision. An assessment of the institutional framework for implementing the contracts should be made, and adequate support provided if necessary, before initiating such a system.

1.74 The IDB should provide technical support for privatization as part of public enterprise reform programs. The Bank should make sure that the government institutions responsible for the privatization process and the supervision of the commitments of the sales contracts, in the case of divestiture of public enterprises, are capable of doing so effectively. Institutional strengthening should be considered in order to achieve these goals. The success of these programs should be measured in terms of the long-term objectives for the sector and not just on the short term budgetary effects. "Nonsale - privatization" efforts, such as management contracts, leases, and concessions, should also be evaluated and considered as alternative instruments for public enterprise reform.

c) Technical Cooperation in Support of Public Sector Reform

1.75 The Bank has been involved in providing support for public sector activities in Latin America and the Caribbean since the its creation, including the institutional strengthening and reform of the sector through technical cooperation (TCs). This support has increased in recent years as sector loans were initiated in 1990, providing assistance to the process of reforms carried out throughout the region, essentially aimed at reducing the intervention of the state in the economy and increasing the efficiency of the public sector. The reorganization of the Bank's programming and operational procedures initiated in 1988 also led to increased IDB involvement in programming and executing technical cooperation in favor of public sector reform on a country wide basis. The main responsibility for oversight of this process was delegated to the Country and Project Teams.

1.76 The IDB should refine the objectives and scope of the Bank's assistance to member countries involved in public sector reform and development. Strategy papers, based on evaluation and "best practices" studies on clearly defined areas of public sector reform, should be produced by the pertinent units of the Bank, such as e.g. the Fiscal Unit, in accordance with the mandate of the 8th Replenishment and under the coordination of the Strategic Planning and Operational Policies Department. Accordingly, the required expertise and resources should be assigned.

1.77 The country programming process with respect to technical cooperation in support of public sector reform should continue to be emphasized, in the context of the need to set priorities for IDB resource allocation. Country missions should help define the Bank's strategies and pipeline in this area, in close coordination with the Government's goals The process of preparation of the new country programming documents, such as the Country Paper, whose procedures and contents are being defined by a Management Task Force, must be based on an in-depth analytical work, including operations and program evaluations, and sector studies.

1.78 The Bank should strengthen its technical capacity to assess the effectiveness of public sector reform assistance projects through improved in-house capability and the use of outside consultants for monitoring, mid-term evaluations, and ex-post evaluations

d) IDB's Experience with Sector Lending

1.79 The Bank's participation in support of the policy reform process began under the Seventh Replenishment. In the course of the discussions leading up to IDB-7, the Board of Governors resolved that the Bank should start to cofinance with the World Bank sector loans designed to assist governments in undertaking sector policy reforms. This decision was aimed at fostering macro-economic and sector policies that would encourage market-based allocation of resources and adjust the scale of state intervention. The defining feature of the instrument or modality of sector policy loans (SPLs) is to provide flexible financing in the form of fast-disbursing funds to support changes in policies and institutional frameworks at the sector or subsector level.

First lessons for sector lending include:

1.80 Prior studies on actual conditions in the respective sector form an important contribution to the process of loan formulation, both for the Bank team and for the national authorities.

1.81 The conditionality matrix should be designed in such a way as to be technically consistent with the formulation of policies for the sector, given the political and institutional context within which it will be applied in country.

1.82 In designing reform programs, the need for legal reform should be carefully analyzed to determine appropriate timing for its introduction and a viable sequence for approval.

1.83 The Bank and national authorities participating in loan negotiations should analyze the process for adopting measures when the national legislature is involved, and adopt a plan of action and timetable.

1.84 The periods for complying with conditions are usually variable and depend both on the complexity of the reforms to be introduced and on the skills of the national officials responsible for fulfilling them.

1.85 Evaluation of each individual condition is complemented by an assessment of the overall progress of the reform process. The reform process is continuous and calls for a measure of flexibility in its application and supervision.

1.86 The introduction of policy reform instruments in the sequence of conditions depends both on their viability and risk, and on the sequencing of the measures needed to facilitate their successful introduction.

1.87 There are cases where public sector institutions which have been subject to restructuring or transfer to the private sector, became the main source of opposition to the introduction of reform. Where possible, it is desirable to involve such authorities in prior discussions in order to incorporate their concerns as the reform is developed.

1.88 The Bank should position itself to react with flexibility to completion of one phase of the reform process by devising additional support measures that enable the reforms to be deepened and consolidated. The support which technical cooperation can provide for diagnostic work and institutional strengthening is crucial to the success of longer-term reforms.

C. The Environmental Sector

1.90 The protection and enhancement of environment in the member countries has been a major goals of the Bank. In recent years, the Bank has strengthened its ability to assist countries in managing the significant environmental problems facing the region and has also financed many environmental and natural resource management program.

1. Bank Mandates and Lending

1.91 The Bank's role in assisting borrowing members in direct environmental programs, continue during IDB/8. In the future, the bank will support strengthening the environmental institutions; promoting the conservation and efficient use of energy in Bank projects; and improving the environment and living conditions for urban residents. The Bank will ensure that the operations it finances are environmentally sustainable. Efforts will continue to include, where warranted, components of direct benefit to the environment in the projects the IDB finances. In all projects, the approach supported as economically efficient as possible, while also seeking to minimize negative environmental impact.

1.92 During the course of the Eighth Replenishment, the Bank will see that its environmental guidelines are extended to cover possible environmental effects in other activities, such as agriculture, transportation, watershed management, extractive activities, and mining. The Bank continues to update its internal guidelines on an ongoing basis and will strengthen its programs of staff training to ensure effective application of environmental standards.

1.93 The Bank has been strengthening its ability to assist countries in managing the more significant environmental problems facing the region. Through the programming process, the Bank will maintain open dialogue regarding overall environmental management issues, needs and solutions.

1.94 The Bank has also made a firm commitment to, among other activities, strengthening environmental, legal, and regulatory frameworks and environmental institutions, and improving urban environments in the region. Between 1993 and 1997, the Bank funded 31 environmental projects totaling $986.80 million.

2. Lessons Learned

1.95 Over the years, conducted some evaluations in this priority area of Bank lending. Evaluations and lessons were generated on specific topics such as:

• Renewable Natural Resource Management Efforts in Watersheds
• The Administration of Water Supply and Sanitation
• Maintenance of Rural Roads

a) Renewable Natural Resource Management Efforts in Watersheds

1.96 The Evaluation Office has carried out this assessment of Bank-supported natural resource management activities in response to mandates from the Board of Directors. The purpose of this evaluation is to provide the Board and Management with an assessment of some Bank experiences in the area of natural resources. It is a fundamental premise that watershed management constitutes an excellent example of the interplay between rural development and environmental conservation.

1.97 With respect to the design and execution of natural resources management investments, Bank Management should emphasize the inclusion of appropriate measures to take into account the livelihood of campesino families living in upland watersheds. Project designs should include calculations of the carrying capacity of arable land and agricultural production vis-à-vis farm worker requirements for decent rural living, and measures to ensure compatible population distributions throughout the watershed. If natural conditions are deficient and the resource base cannot support occupation on slopes, then alternative arrangements should be proposed and consensus reached regarding settlement in areas conducive to productive activities, economic autonomy, and provision of services.

1.98 Large-scale infrastructure (whether measured by size, cost, or common area) and major natural resource project investments can be cumbersome, increasing the risk of not achieving total project effectiveness. Therefore, the Bank should promote sound watershed management also by means of increased support for individual investments, including pilot projects, whose scale and complexity do not exceed the (actual or potential) institutional capacity of implementation agencies. Where appropriate, institutional strengthening projects should precede or parallel investments in infrastructure. Such projects must not be expected to function as means to build strong institutions.

1.99 Projects within watersheds (including large-scale water projects) should be conceived as catalysts or as fitting into and reinforcing positive, productive activities and sound natural resources management already underway in hillside settlements. In conjunction with Government authorities, Bank Management therefore, should establish policies and actively engage in pipeline co-programming in order to define projects which are consistent with and part of long-term, watershed development plans and processes.

b) Water Supply and Sanitation

1.100 Water and sanitation touches the life of the ordinary person more than almost any other public utility. Potable water and sanitation services are part of the basic social requirements for human existence. They are essential to any measure of the quality of life in contemporary societies. But for millions of persons in Latin America and the Caribbean region, being essential does not equate with being available. Millions of people in the region still do not have access to these basic services.

1.101 What makes companies successful--whether public or private--is their capacity to build on internal strengths, address their internal weaknesses, and seize opportunities arising in their environments. The requirements for success in water supply and sanitation companies are no different. What follows are brief statements of the conclusions reached and matters for consideration posed to the IDB in its continuing efforts to promote effective and efficient operations in this sector. 

1.102 The existence and implementation of a strategic plan is a necessary component for organizational success, including a stable regulatory framework. The strategy should give management a guide and a comprehensive set of corporate objectives, goals, strategies, policies, and action programs.

1.103 Evidence from the companies examined indicates that the adoption of subsidized tariffs or other mechanisms influencing economic performance are not appropriate distributional policy instruments.

1.104 The Bank should support water and sanitation companies in their policies to bring in new users. Community outreach policies associated with the delivery of water and sanitation services should also be encouraged.

1.105 IDB should lend strong support to investment proposals that address the administration of human resources as a core requirement for operating excellence. It should encourage investment proposals that address preventive maintenance.

c) Rural Roads

1.106 The report summarizes key issues and findings distilled from the review and evaluation of the Bank's lending experience in construction, rehabilitation and sometimes maintenance of 98 rural road loans.

1.107 The Evaluation found that maintenance activities must be given higher priority by borrowers. Contractual clauses alone have not and cannot ensure proper maintenance of Bank-financed rural roads. To address this problem, it is recommended that the Bank place more emphasis on strategic thinking to identify incentives that will deter present preference for rehabilitation and construction over maintenance. The strategy developed for this purpose must address institutional, political, economic, and budgetary problems that have prevented the implementation of borrower maintenance plans in the past.

1.108 As some borrowers move towards devolution of maintenance activities to local government units, it is advisable that Bank strategy for activities related to public sector reform identify ways of addressing technical and budgetary restrictions to carry-out new local government responsibilities such as road maintenance and administration.

1.109 Recognizing the importance given to maintenance in Bank loan contracts and the need for continued support to Borrowers in the maintenance of rural roads, it is proposed that Management include in future road related loan proposals a status report on the maintenance of roads previously funded by the Bank.

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