CHAPTER II
THE BANK'S LENDING PROGRAM FOR THE PERIOD OF THE EIGHTH GENERAL INCREASE
IN RESOURCES
1. GENERAL CONSIDERATIONS
2.1 Traditionally, the Bank's contribution to the region's development has
been in the area of project investment financing. Using this modality, the
Bank showed leadership and innovation from the beginning. Early in its operations,
the Bank started financing projects in the social sectors such as potable
water, an activity subsequently adopted by other institutions. With the
Seventh Replenishment, the Bank extended its assistance to the region by
participating in the ongoing restructuring process through policy- based
sector loans. This new channel allowed the Bank to become a more active
player in the region's efforts to overcome the crisis of the 1980s. Bank
operations helped countries overcome the transitional problems associated
with opening up their economies to external competition, reforming the financial
systems, restruc- turing the public sector, removing market distortions,
and strengthening fiscal and customs systems, among others. The Bank also
supported countries in their debt reduction efforts.
2.2 As we enter the Eighth Replenishment, the Bank must expand its operations
in the social areas. As the region comes out of the acute financial crisis
of the 1980s, it is placing greater emphasis on resolving the problems of
the "social debt" in order to ensure more equitable development.
Operational work in the social sectors, including dialogue, lending, and
project execution will be a major focus of the Bank's overall activity to
support efforts of borrowers to deal with this challenge in the 1990s.
2.3 Increased lending in the social sectors will not, however, be sufficient.
To maximize its impact during the Eighth Replenish- ment, the Bank will
seek to ensure that its activities overall contribute directly or indirectly
to borrowing member countries' efforts to reduce poverty and to introduce
social and economic reforms. In order to meet this challenge, the Bank will
review and adjust its own processing capacities and capabilities, both in
terms of staffing skills mix and internal procedures, and the organizational
structure required to support these adjustments. Concurrently, the Bank
will need to strengthen its strategic planning framework, linking country
programs with the guiding principles agreed for the Eighth Replenishment,
and undertaking ongoing evaluation and adjustment of Bank-supported activities
as experience is gained. Strategic planning provides a framework for policy
and operational decisions by Management and the Board.
2.4 Within such an overall framework, Bank programs must be fashioned with
the recognition that countries are at different stages of development and
at different levels of social and political modernization. In many cases,
structural economic and social changes, while admittedly difficult to implement,
alone can lead to internationally integrated economies and democratic societies.
In other countries, these reforms, while necessary, will not be sufficient
to lead to sustainable growth until institutions are further developed and
social conditions are established that can support the new economic structures
being created. For a few countries, the task is even more basic: to create
viable structures and institutions that can effectively carry out the legitimate
core functions of the State.
2.5 Therefore, the Bank cannot have a single, uniform approach applicable
to all countries in the region. The specifics of the Bank's role and lending
emphasis will vary depending on the conditions in each borrowing member
country and its stage of development. These specifics emerge from a process
that begins with country-level analytic work on socioeconomic issues and
includes structural analysis of the countries' economic and social policies
and problems. This provides the basis for country strategies, which, along
with the analysis of the Bank's portfolio in the respective countries, orients
the country programming exercise. This work will continue being coordinated
with work of other bilateral and multilateral institutions.
2.6 In summary, the Bank is in a unique position to assist its borrowing
member countries in making efforts that will lead to sustainable development
in the 1990s. As stated in Chapter I, the Bank is now the official lending
institution best placed to provide net financial flows to the region, and
particularly to the poorer countries. Moreover, as a regional institution
with heavy emphasis on a close and continuing dialogue with member countries
that are both important shareholders and borrowers, and with an extensive
network of Country Offices, the Bank has a strong comparative advantage
in assisting its borrowing member countries in the task of restructuring
their economies to face the competitive world of the next century.
2. KEY AREAS OF BANK ACTIVITY
2.7 From the analysis in Chapter I of the challenges facing the region,
three general areas emerge as crucial for IDB involvement: (i) poverty reduction
and social equity, (ii) modernization and integration, and (iii) the environment.
These are not new areas for Bank involvement but they are areas where the
Bank can bring its experience and expertise to bear in a more focused and
refined way to help borrowing member countries meet the challenges they
face. Governors, in the Seventh Replenishment, identified four areas of
particular importance for Bank action: (i) low-income beneficiaries, (ii)
women in development, (iii) environmental management, and (iv) support for
microentrepreneurs. These areas have become an integral part of Bank operations
and will continue to be pursued during the Eighth Replenishment in all areas
of Bank activity.
A. Poverty reduction and social equity
2.8 The region continues to face difficult problems in the social sphere.
The significant gains made in social indices during the 1950s, 1960s, and
1970s were eroded during the 1980s. Deter- ioration in the social infrastructure,
in the sector's public institutions, and in service delivery systems could
worsen in the future if the present trend continues. Action needs to be
taken now to reverse this trend. Sound macroeconomic policies must be adopted
to avoid further erosion of the buying power of wages and to eliminate the
distortions that affect development of labor markets and the productive
sectors, especially agriculture. Macro- economic reforms are necessary but
not sufficient to ensure more and better opportunities for the poor to enter
into productive activities. Implementation of sound macroeconomic policies
must be coupled with a renewed national dialogue that will lead to the development
of an agenda for social reform based on a solid political consensus. Reforms
must aim to broaden social programs and guarantee full participation of
all segments of the population, especially the poor, in productive activities,
thereby promoting social and political stability. Lastly, programs targeted
at poverty alleviation need to be implemented.
2.9 The Bank will thus need to provide support to the borrowing member countries
to entrench 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 must be guided
by the principle of assisting borrowing member countries to bring to the
vast majority of their populations the full benefits of economic growth,
by creating jobs and broadening the business base.
2.10 Social policy reform is a complex task that needs to emanate from the
political will of each member country. Bank country strategy, operations
and dialogue should be supportive of and complement national efforts. In
the context of a full dialogue with borrowing members and mutual agreement
on the priority to be accorded social projects, the Bank will, during the
Eighth Replenishment, increase the number of social projects and the proportion
of lending devoted to social sector operations. However, the capacity of
most borrowers to manage effectively operations in the social sectors is
still limited. 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.
The role of the Bank
2.11 The Bank will act on a variety of fronts to attain the objectives set
for social reform and poverty reduction.
(a) First, by analyzing, in concert with borrowing member coun- tries, the
causes of poverty and the constraints to social progress in member countries.
The Bank will produce more in-depth country-level analyses of poverty and
the social sectors, so as to enable the full integration of poverty reduction
and social equity issues within the country program- ming process. The goal
is to complete such analyses for a substantially larger number of member
countries in the coming years, with a view to achieving full coverage of
our borrowing member countries in the near future. Such studies will include
an analysis of the financial gap for social sector development in each country.
As part of its analytic work the Bank will support improvements in the data
on poverty and living standards and social indicators in the region's countries,
and will periodically conduct studies to assess the progress being achieved
in the social sectors in the region. The Bank will also produce a review
once every two years summarizing the contribution of Bank operations to
the region's progress in addressing social needs and reducing poverty.
(b) Second, the Bank will utilize its programming process to reach agreement
with each country on the design of a strategy which has as one of its central
aims the reduction of poverty and social sector reform. Available mechanisms
for undertaking studies and formulating programs and projects will be placed
at the service of the Bank's member countries, including pre- investment
loans, the Bank's Project Preparation Facility and other technical-assistance
operations. These efforts will lead to a dialogue with each country, with
a view to identifying and agreeing on priority areas for Bank action at
the country level. In the development of this pipeline, special attention
will be paid to the actions of bilateral and other multilateral institutions,
as increased coordination of efforts is necessary to avoid undesirable duplication.
(c) Third, the Bank will further strengthen the capacity of its Country
Offices in the social areas, so that the Offices can play a strong role
both in the early identification and preparation of prospective operations
and in monitoring and supervising their execution, maintaining throughout
an ongoing dialogue with government authorities.
(d) Fourth, the Bank will begin to work more systematically with borrowing
member countries to evaluate the financial sustain- ability of social sector
projects after conclusion of their execution. Ex post evaluation of social
projects will be included in the annual program of the Evaluation Office.
2.12 Bringing about a significant reduction in poverty levels is an objective
that must be approached simultaneously on a number of fronts.
(a) The central objective of reforms of social expenditures in borrowing
countries should be to rapidly improve the efficiency and equity of government
action. Social policy adjustments and reforms should include a review and
reallocation of public spending towards and/or within the social sectors,
since durable reduction of poverty and improvement of human capital formation
can be achieved only through sustained budgetary effort with the aim of
developing and implementing poverty reduction programs. The Bank will use
its dialogue with governments and its financial and technical-cooperation
resources to provide assistance in policy design and to improve the efficiency
and equity of social expenditures, while acting as a catalyst to increase
external resource flows into the social sectors through its interagency
coordination and cofinancing activities.
(b) The most pressing problems of critical poverty must sometimes be addressed
through emergency programs. In the short run, the harshest aspects of poverty
can be mitigated through social investment funds and targeted assistance
programs that offer protection for the most vulnerable segments of the population,
working with governments in initiatives that can have an immediate impact,
especially during adjustment programs. Emergency employment programs can
also significantly increase the demand for labor.
(c) New investments are needed in human resources, mainly in the areas of
education, health care, and vocational training, both to improve equity
and to raise the productivity of human resources. The creation of a workforce
that is healthier, better trained, and more productive is essential to increasing
employment, modernizing production processes, and achieving social policy
reforms that enhance the efficiency and equity of the economic system. The
Bank will continue its support for such human resource programs. In these
programs, consideration will be given to expenditure on nutrition, health,
and edu- cation as an investment in human capital, thereby making, on a
case-by-case basis and where fully justified, a portion of the recurrent
costs of social projects eligible for financing. The aim is that, within
a limited time horizon, the recurrent costs of these programs should be
financed fully with the countries' own resources.
(d) Government efforts to decentralize social programs should be encouraged.
The decentralization of decision-making to local levels that are closer
to the beneficiaries, coupled with the necessary institutional and financial
strengthening of the respective agencies, will enhance the efficiency of
allocations overall. The Bank's role in this process will be to provide
support to interested governments in implementing coherent strategies of
decentralization, including through lending operations to support local
programs.
(e) The Bank's standard terms and conditions may not be appropriate for
all social projects. Accordingly, the Bank should explore the possibility
of adjusting terms and grace periods of social sector loans to take account
of the distinct features of these projects. The financial implications for
the Bank of such adjustments should also be considered.
2.13 The nature of poverty and social equity calls for a wide range of activities
closely linked to social reform and poverty reduction. They include initiatives
in education, health, sanitation, nutrition and housing solutions as well
as activities reaching beyond the traditionally defined social sectors,
in the fields of urban and rural development, job creation, particularly
through the microenterprise and small business sectors, environment and
the modernization of the State, to the extent that these address issues
of social equity and poverty reduction.
2.14 Special attention will be paid to the needs of low-income groups through
programs and projects in the following areas: preschool and basic (primary
and secondary) education; primary health care, mother and child health,
and nutrition; slum upgrading; and actions to boost the production capacity
of small farmers and microenterprises.
2.15 In monitoring implementation of the high priority given to poverty
reduction in its lending program, the Bank will through its programming
process identify as poverty-targeted investments, those operations which
meet either one of the two following criteria: first, the project or program
is geographically targeted to poor beneficiaries or, second, it is determined
that a significant majority of the beneficiaries of a project or program,
according to conditions prevailing in each country, are poor. All investment
loans presented to the Board will state whether the project or program meets
at least one of these two criteria, and how this is achieved. Management
will monitor and report annually to the Board of Executive Directors on
the proportion of lending which meets one or both of these criteria, and
will propose to the Board any adjustments necessary to ensure that the Bank
is adequately addressing its objective of poverty reduction. Finally, the
Bank will develop programs with agencies in borrowing countries to improve
the database on poverty, and will use improved data to enhance, through
country programming as well as project design, the poverty focus of its
operations.
2.16 The Bank will support the region in three closely linked areas: (i)
the needs of families, women, and young people; (ii) health and nutrition;
and (iii) human capital formation.
The family, women, and youth
2.17 Poverty is a multifaceted phenomenon, which manifests itself at the
family and individual level as a broad range of deficiencies in income and
access to basic services (health, education, housing, social security, justice)
and meager opportunities for employment and for personal and social development.
These deficiencies have a dramatic negative effect on the living conditions
of families and their overall quality of life.
2.18 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. These efforts will make a positive contribution
to achieving other Bank objectives, e.g. the objectives of modernization
of production and conservation of the environment.
2.19 Continuing with the work it began during the Seventh Replenishment,
the Bank will assist borrowing member countries to strengthen the contribution
of women to the development process and enhance the benefits accruing to
women under Bank-financed programs and projects.
2.20 Actions targeted towards women yield substantial social returns, in
addition to the economic benefits accruing to individual partici- pants.
Hence, the need to actively support women in overall family development,
in their contributions to local community organiza- tions, in generating
income for the family group, and in taking into account women's specific
health needs. Access to basic services and greater involvement in training
programs will not only help women realize their potential but will also
improve their productivity and access to the job market.
2.21 The Bank will monitor this area closely to ensure that the particular
needs of women are taken into account in program and project design. Particularly
important is the need to provide stronger support services and to make such
services available at convenient times to fit women's work schedules, now
that women are shouldering more and more responsibilities outside the home.
2.22 For a population to rise out of poverty, there must be opportu- nities
for its young people. A vast number of children and adolescents in the region
are not part of the education system or the job market. This is at once
a serious social problem and a waste of a nation's greatest asset its young
people. If poverty is to be conquered for future generations, action must
be taken now to satisfy the nutritional, health care, and educational needs
of young people, so that they may share fully in the economic develop- ment
and social and cultural advancement of their societies. Efforts deployed
to this end will at the same time bolster the human capital base of the
region's countries, which is a sine qua non of sustained economic growth.
2.23 Specific components of the Bank's assistance to the family, women and
youth, while they will vary by country, span a wide range of activities:
(i) Prenatal and mother and child care facilities offering comprehensive
health, nutrition and family planning and support services.
(ii) Programs which improve access to capital and production inputs for
low-income families.
(iii) Income- and employment-generating activities and adult education for
women, since a positive correlation exists with the quality of life of children.
(iv) Programs that offer housing solutions.
Health and nutrition
2.24 Deficiencies in health and nutrition continue to be a serious obstacle
to efforts to build more modern economies and societies in Latin America
and the Caribbean. Only a healthy, well-fed populace will be able to rise
to the new challenges posed by economic and social development. Good health
requires good nutrition, and a proper diet has direct and positive effects
on intellectual capacity as well. The Bank's agenda for the coming years
will afford due priority to working with countries to set up more efficient
health-care delivery and nutrition services.
2.25 In the health sector, emphasis will be placed on preventive measures
and on primary health care. Priority will 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 will be to assist in bringing about full coverage in inoculation,
to provide assistance for mass vaccination campaigns for infants and school-age
children, and to support implementation of environ- mental 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, and the reform and modernization of the
sector, including hospitals.
Formation of human capital
2.26 Improving education is particularly important for the consolidation
of economic and social development. Investment in education has a direct
impact on labor productivity, and therefore on employment opportunities,
and is a necessary complement to investment in physical capital. The transmission
and assimilation of scientific knowledge and new technologies requires a
well-educated populace. From a political viewpoint, democracy demands an
educated and informed electorate. Education will also help reduce inequalities
in income distribution and facilitate social mobility, and is especially
important for women, given its benefits in improving family welfare and
the status of women. The Bank will assist programs in the following areas
for support:
(i) Preschool, primary, and secondary education, with associated health
and nutrition services where practicable.
(ii) Skills training, technical, vocational, higher education and its reform
and modernization, to produce a workforce that can adapt to the needs of
a new century.
Indigenous groups
2.27 Indigenous groups, who comprise a distinctive and significant segment
of the population of the region, are endowed with a rich cultural and linguistic
heritage and have developed social and economic practices that are well
suited to the fragile ecosystems they inhabit. Indigenous groups typically
belong to the poorest economic strata. Accordingly, project design and execution
mechanisms should seek to strengthen the capacity of indigenous groups to
undertake and implement development projects. In recognition of the important
role of indigenous groups as both contributors to and beneficiaries of future
development efforts in the region, the Bank has played a catalytic role
in the recent creation of the Fund for the Development of the Indigenous
Peoples of Latin America and the Caribbean. This initiative will be instrumental
in defining Bank poverty alleviation strategies and action in support of
indigenous development. The Bank will step up its efforts to obtain additional
financing for programs benefiting indigenous groups in order to adequately
address their needs.
Indicative targets
2.28 The Bank made a significant contribution to the funding of social sector
projects and of projects geared to reduction of poverty in the region between
1979 and 1992. The Bank has been particularly important in its support for
the poorest countries of the region. The Bank's strong contribution reflects
its historic emphasis and recognized leadership in social projects. Bank
lending in the social area has increased steadily in the last decade, and
will account for approximately 25 percent of total lending during the Seventh
Replenishment.
2.29 For the Eighth Replenishment, the Bank intends to achieve a further
increase in lending addressing social needs, equity, and poverty reduction.
The Bank's objective during the Eighth Replenishment is to have operations
in the areas of activity referred to in paragraph 2.13 account for 40 percent
of the total volume and 50 percent of the total number of Bank operations;
this increase will be achieved in a gradual manner bearing in mind other
considerations, especially the quality of the projects.
B. Modernization and integration
2.30 In order for the countries of the region to be internationally competitive
and address social needs, it is essential that they modernize their production
structures and their public sectors; they must also have appropriate financial
and legal institutions. Their participation in world markets is an important
ingredient in this modernization process.
2.31 Economic integration in subregional and regional markets is one way
to achieve the ultimate objective of a multilateral opening up vis-Ö-vis
the rest of the world, on a nondiscriminatory basis. Trade and economic
integration agreements provide a foundation for domestic market expansion
and an incentive for domestic firms to produce goods and services of better
quality, in greater quantity, and at a lower cost. Moreover, integration
agreements help to consolidate the important structural reforms already
undertaken.
2.32 Greater integration has been a rather elusive goal of the region. While
the schemes of the last thirty years were inwardly integrationist, they
were outwardly protectionist. Today's efforts are different. They are being
built around economic reform and trade liberalization with the goal of generating
efficient regional trade as a means of improving the region's ability to
compete in international markets. In large measure this results from the
realization that the potential of export-led growth can only be achieved
with access to the markets of countries outside Latin America and the Caribbean.
As experience in other parts of the world demonstrates, the widening of
markets through regional integration can make firms more competitive by
taking advantage of economies of scale, buying inputs from the cheapest
regional source and by having access to a greater range of production factors.
In addition, greater integration at the level of entrepreneurs can also
make an important contribution to the modernization of the private sector's
institutional structures, thereby strengthening these entrepreneurs' ability
to compete.
2.33 However, it is a complex task to create the conditions for development
of the private sector and to foster the opening up of the economy at the
same time. The pressures that a more competitive market exerts on the productive
sectors are transmitted by different economic groups as pressures upon the
public sector. Democratic governments have to reconcile these pressures,
and at the same time address the demands of a society that insists upon
greater efficiency from the public institutions, greater accountability
and transparency in government actions, and attention to the most pressing
needs of the poor. These goals require the institutionalization of more
flexible, competent, and reliable systems of governance based on clear and
equitably enforced rules, and on respect for human and civil rights.
2.34 Modernization of production structures. The ability of countries to
compete internationally not only depends on exploiting the com- parative
advantages associated with lower factor costs and improved market access,
but also on increasing the productivity of investment and having dynamic
and flexible organizations in agriculture, manufacturing, and services.
Competition in national and regional markets helps to create the adaptability
needed to compete internationally and fosters the development of dynamic
and flexible organizations that are able to respond quickly to varying consumer
requirements and changing demand conditions.
2.35 In this regard the Bank can use technical assistance and loan resources
in support of national and regional efforts for:
(a) Promoting domestic and foreign private investment.
As countries move to rely more on the private sector as the engine for growth,
they must create an environment that is conducive to investment, both domestic
and foreign. This means that governments will have to pursue appropriate
macro- economic policies and achieve social and political stability while
addressing issues such as property rights, financial sector reform, pricing,
privatization, taxation, labor legislation, deregulation, treatment of foreign
capital and the development of a more skilled labor force. Foreign direct
investment, from both inside and outside the region, can also carry important
side benefits for modernization in the form of better business practices,
better knowledge of foreign markets, development of a skilled labor force,
and transfer of technology. Bank efforts in this area will be concentrated
on programs aimed at financial and public sector reform, invest- ment sector
loans (supporting deregulation and other steps to encourage private investment),
and provision of technical cooperation. Finally, the Bank should also seek
to facilitate stronger ties between the region's private sector and that
of its nonborrowing member countries, particularly in the investment sphere.
(b) Institutional strengthening and development of the infrastructure necessary
for skills training and for technology generation and dissemination.
An increasingly critical factor in economic progress is technological change.
Meeting the challenge of today's international marketplace requires that
countries incorporate modern technology, which implies building up the necessary
human capital and technological infrastructure. As successful experience
has shown, the foundation for effective generation and diffusion of new
technology is a sound system of primary and secondary educa- tion, ensuring
a capable and flexible workforce. Provision of more and better technical
training, tied to the workplace, is also critical. In addition, modernization,
strengthening, and equitable public funding of higher education systems
can help provide the highly skilled human capital and the research infrastructure
needed to adapt, absorb, and disseminate constantly changing technologies.
Programs aimed at the technological upgrading of small and medium-sized
enterprises can be particularly beneficial, as experience in other regions
demonstrates. Finally, development of links among institutions within the
region, and the linking of the region's institutions to the international
technological network, can contribute to competitiveness in the region.
In all these areas, close cooperation between public and private sectors
in the region is essential. The Bank will support borrowing member initiatives
in the above areas to advance technological development in the region.
(c) Ensuring a friendly environment for small and medium-sized firms.
An important element in the modernization and social integration process
is the creation of an environment in which small and medium-sized business
can flourish. Experience in other parts of the world has demonstrated that
this sector is well suited to channeling entrepreneurial creativity, effective
at putting new technologies to use, and often the most dynamic source of
new employment opportunities. The aim is twofold: to create the conditions
for existing businesses to flourish and grow, fostering a dynamic small
and medium- sized business sector; and to extend these conditions to ensure
that microenterprises also have scope to develop, so that economic activity
in the informal sectors can be gradually assimilated. Key to business-base
expansion will be a modern financial sector that supports entrepreneurial
creativity by providing small and medium-sized businesses access to appropriate
financing.
(d) 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 by all to financial services,
especially micro, small, and medium-sized enterprises; promote maximum efficiency
in order to reduce the spread between deposit and lending rates of interest,
through appropriate macroeconomic policy and the promotion of competition;
and assure the adequacy of supervisory and regulatory systems.
(e) Programs to provide necessary infrastructure in such areas as energy
and transportation.
An internationally competitive productive sector requires a secure supply
of competitively priced energy and other inputs. Equally important is access
to efficient and reliable transportation and communications systems that
facilitate national, regional, and international trade. Since much of this
infrastructure suffered from the fiscal crisis of the last decade, substantial
investments are required to expand, modernize, and maintain facilities and
provide for regionally integrated systems. In many countries today, the
State is transferring to the private sector major responsibility for providing
these services. Where needed, the Bank will continue to seek innovative
means within existing Bank policy to ensure that long-term financing is
available for private investment in infrastructure.
(f) Strengthening and modernizing the agricultural sector.
Agriculture in the region has two distinct segments: one that is linked
to export and another that is oriented to the production of basic foodstuffs,
primarily for the internal market. The latter is now in the midst of an
adjustment process that seeks to reverse the serious setbacks it suffered
in recent years, as reflected in low production levels, low competitiveness
and, overall, declining rural living standards. Thus, the basic foodstuffs
segment, which is closely related to low-income groups, will have to modernize
in order to cut costs and improve competitiveness. Export- oriented agriculture
will have to adjust to the new realities emerging from the GATT's Uruguay
Round. Efforts must be directed at enhancing competitiveness at regional
and international levels and substituting for crops with declining commercial
potential. In this regard, particular attention should be given to programs
that benefit productive capacity and marketing of small producers. It is
therefore of fundamental importance that the efforts of the Bank and its
member countries be geared towards supporting programs that enhance access
to new technologies through applied research and extension programs, expanded
access to credit (particularly for small producers), and increased efficiency
at both the production and marketing stages. As part of this strategy, support
will need to be given for: removal of price distortions; access to and security
of land tenure; training and extension activities; institutional strengthening
and development of the infrastructure necessary for the generation and dissemination
of agricultural technology; product standardization and grading efforts;
and investment in irrigation, rural transportation, communications, and
storage and marketing infrastructure.
2.36 Modernization/reform of the public sector.
While the private sector is becoming the main engine of growth in the region,
the long-term success of this model requires an efficient public sector.
It is therefore necessary to continue building a more modern and effective
State which is accountable and conducts its activities in a transparent
manner. Increasingly countries are concentrating the role of the State in
the economy on:
(a) Maintaining macroeconomic stability with social equity;
(b) Providing social services efficiently and creating and maintaining financially
sound social security systems and social safety nets;
(c) Developing the necessary infrastructure and the appropriate legal and
regulatory framework for development of the productive sectors; and
(d) Providing an appropriate environment for development of the financial
sector, including the regulatory apparatus.
It is also recognized that democracy and respect for human rights have helped
create appropriate conditions for development.
2.37 The Bank can help governments that request assistance in carrying out
these tasks by supporting their efforts to:
(a) Achieve and maintain macroeconomic stability.
Given its fundamental importance, macro stability will continue to be a
major part of the country dialogue. While the focus will be on consolidating
and maintaining macroeconomic stability in countries that have already undertaken
adjustment programs, the Bank will support other countries' adjustment processes
with sector lending.
(b) Establish social sector policies and programs.
In order to tackle the social problems they face today, the countries of
the region will have to meet the challenge of improving the mechanisms and
effectiveness of social programs, including the reform of social security
systems, in a context of severe budget constraints.
(c) Reform tax and budgetary systems.
Improving tax systems and increasing tax revenues is critical to the development
of an effective public sector capable of addressing the needs of modern
societies, particularly in the social sectors. The tax system needs to be
strengthened and made more equitable by broadening the tax base and improving
tax administration, including compliance. Expenditure systems need to be
aimed at better income distribution and the rationalization of public expenditures,
including military expenditures.
(d) Modernize the public sector and move forward with the process of privatization.
To make the region's economies more efficient, it is necessary to restructure
the public sector and redefine the State's role and involvement in the various
sectors of the economy. The countries of the region should continue to move
ahead with public sector restructuring and privatization. The Bank will
continue to lend support to these processes through programs designed to
facilitate the transfer of employees to the private sector. Other specific
areas of assistance could include strengthening the capability to enforce
existing laws, regulations and contracts, and modernizing and streamlining
government procurement procedures.
(e) Strengthen public institutions.
Effective and efficient government will require institutional strengthening
of the executive, legislative, and judicial branches, and other public entities.
The success of this effort will hinge on the availability of properly trained
and appropriately motivated managerial and technical staff at all levels
of institutions. The upgrading of budgetary and regulatory controls is likewise
a key element in this process. Although considerable progress towards institutional
reform has already been made by the countries of the region, it is a complex,
long-term process that frequently involves the decentralization of functions.
The Bank should support decentralization efforts, when appropriate, channeling
funding and technical assistance to programs designed to: (i) strengthen
local capability for planning, formulation, implementation, and evaluation
of development projects; and (ii) support central government efforts to
decentralize functions to the local level and to strengthen their policy-setting
role in individual sectors.
(f) Strengthen the capacity to prepare and execute development programs
and projects.
A modern public sector must have the ability to turn plans and proposals
into actual investments. Yet, the public sector's capability to develop
and execute projects has been severely reduced by the region's financial
crisis. The Bank will therefore devote special attention to this important
area, through loans and technical assistance aimed at enhancing the public
sector's capacity to: (i) design, execute, monitor and evaluate public investment
programs; (ii) strengthen the legal framework for the efficient approval
and execution of investment programs; and (iii) develop and implement training
programs for government employees in project design and execution.
(g) Establish appropriate regulatory and supervision functions.
In order to ensure the appropriate functioning of markets, new regulatory
frameworks are needed, especially where monopolies are shifted from the
public sector to the private sector. In some countries, market conditions
require developing appro- priate policies and mechanisms to handle market
imperfections. In other countries, there is a need to develop the regulatory
framework required for international trade. Especially important areas for
the development of appropriate regulations are finance, trade, public services,
labor relations, and the environment.
(h) Promote strengthening and modernization of the judicial system.
Like the social sectors, judicial systems have suffered under the limitations
imposed by the scarce availability of resources in the wake of Latin America's
fiscal crisis. In order to reinforce judicial systems, simultaneous action
is called for on various fronts: court caseloads need to be lightened and
procedures streamlined; more resources need to be provided for judicial
administration; available resources need to be managed more efficiently;
and methods need to be designed for assessment and follow-up. Bank support
should be geared towards ensuring that the judicial system is independent
and effective, that it guarantees the rights of citizens, and that it contributes
to effective and rapid settlement of disputes.
(i) Support to national parliaments.
The proper functioning of parliaments is an essential condition for consolidating
democratic systems and ensuring the quality of laws. The Bank will lend
its support to policies and programs aimed at modernizing and improving
effectiveness of parliaments.
C. The environment
2.38 The past 10 years have seen a substantial rise in awareness of the
scope and gravity of the environmental problems facing the region. Awareness
that poverty contributes to aggravating many of the region's environmental
problems, both in rural and urban areas, has also grown. Throughout the
region, it is clear that reducing poverty levels and improving the environment
will mutually reinforce each other.
2.39 The urban environment has changed dramatically in the last few decades
in Latin America. Nearly 75 percent of the region's inhabitants now live
in cities. Current projections show that in the last decade of the century
the urban population will increase by approximately 100 million, exceeding
400 million by the year 2000. At the same time, urban areas have developed
into industrial centers. This concentration of people and industrial activity
has had serious repercussions in terms of the environment and public health.
The enormous problems involved in accommodating such growth are well known,
and public services in the region's cities have become overwhelmed, as for
instance in potable water, collection and treatment of industrial and domestic
wastewater, air pollution control, the maintenance of parks and other green
spaces, and the collection, recycling and disposal of solid waste, including
toxic waste. Quality of life in Latin American cities is also being impaired
by the shortage of housing, lack of public services, and the overexploitation
of natural resources both within the cities and in the surrounding areas.
2.40 The region's rural areas also face environmental challenges such as
preventing or containing soil erosion caused by water and wind, salinization,
and other forms of land degradation; ensuring that land and water are used
in a sustainable manner; containing urban sprawl towards fertile farmland;
preventing pollution by agricultural, mining, and other industrial activities;
and preventing desertification, deforestation, and the consequent loss of
biological diversity. It is also crucial to improve living standards and
open up sustainable economic opportunities for the rural population, in
order to contain migration to the cities and to the remaining forest areas.
2.41 Ideally, environmental protection in the countries of the region would
reflect a global approach that highlights the universal benefits of proper
environmental management to all those who inhabit our planet. On the one
hand, the Rio Declaration of 1992 recognizes that, "in view of the
different contributions to global environmental degradation, States have
common but differentiated responsibilities. The developed countries acknowledge
the responsibility that they bear in the international pursuit of sustainable
development in view of the pressures their societies place on the global
environment and of the technologies and financial resources they command."
On the other hand, account must be taken of the significant economic costs
developing countries must bear in shifting rapidly towards the goal of sustainable
development. Therefore, solutions to environmental problems, especially
global problems, must take imaginative approaches and must envision the
availability of financing on concessional terms for environmental projects
and components with distinctly global benefits including, for example, projects
related to the implementation of the Biodiversity and Climate Change Conventions.
2.42 In addition to assisting borrowing members in direct environmental
programs, the Bank will continue its firm commitment to work with borrowing
members to ensure that all 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 will be as economically efficient as
possible, while also seeking to minimize negative environmental impacts.
2.43 During the course of the Eighth Replenishment, the Bank will ensure
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 will continue to
update its internal guidelines on an ongoing basis and will strengthen its
programs of staff training to ensure effective application of environmental
standards. The Bank will develop and update environment-related guidelines
in a context of consultation and dialogue with relevant segments of the
public.
2.44 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 a dialogue regarding
overall environmental management issues, needs and solutions. In this context,
the Bank will support borrowing member countries in the following areas:
(a) Strengthening the environmental legal and regulatory framework, including
Environmental Action Plans when requested by the borrowers. The Bank will
continue to work with member countries to strengthen environmental legislation,
establish regulations and concrete systems of incentives and sanctions aimed
at promoting environmental conservation, and improve the management of institutions
responsible for the environment and natural resources, including staff training,
establishment of environmental monitoring systems and databases, and identification
of environmental projects. Efforts to protect the environment should not
focus exclusively on the regulatory framework but must also take into account
long-term economic considerations and the search for cost-effective solutions.
The use of market-driven instruments designed to offer effective incentives
to conserve the environment and to apportion costs according to criteria
of equity and economic efficiency provides the greatest assurances that
a high level of compliance with environmental policies will be attained.
(b) Strengthening environmental institutions. Everywhere in the region it
will be necessary to overcome present inadequacies in legislation dealing
with, and weaknesses in institutions responsible for, natural resources
and the environment, if the trend towards environmental degradation is to
be reversed. A significant effort must therefore be made to establish efficient
institutional mechanisms to address environmental matters, which entail
the coordination of the decision-making process and the promotion of participation
processes through local public and private organizations. Environmental
management at the local level can play a fundamental role in allowing the
population to take part in creating a better environment.
(c) Improving the environmental quality of operations financed by the Bank.
The environmental assessment process in place at the IDB identifies the
environmental effects and consequences of all operations proposed for Bank
financing. Bank-financed operations will be supported by high-quality environmental
assessments, sponsored by the national authorities, that reflect, inter
alia, consideration of project alternatives, the results of timely consultations
with the affected populations, in accordance with current practices, and,
in the area of influence, the economic costs and benefits of the projects'
environmental impact and/or of the associated protection measures. In the
case of projects whose effects can easily be identified and monitored, project
design will include measures to alleviate and control environmental damage.
In the case of sector loans or other types of operations such as multisector
credit loans, multiple works programs, and "time slice" operations,
whose repercussions are not easily foreseen, the attention will be focused
on the borrowing country's institutional capacity to respond to and manage
the possible environmental consequences of those operations. The Bank will
encourage its borrowing member countries to take into account the global
environmental effects of Bank-financed operations. Also, it will continue
to emphasize the provision of support and advisory assistance to the borrowing
countries in connection with their efforts to ensure the highest possible
environmental quality of their investments in development. The Bank will
continue to promote this key aspect through its lending and technical-cooperation
operations and training programs.
(d) Promoting the conservation and efficient use of energy in the Bank's
projects. The Bank will continue to assist borrowing member countries in
adopting energy development strategies that are environmentally sustainable,
by:
(i) Elaborating integrated least-cost energy development plans which, taking
into account the economic reality of each country, include practicable and
available demand management as well as supply side measures. The Bank's
lending to a borrower should be based on such plans when they exist. When
a country has no updated plan for the energy sector, the Bank will support
the elaboration or updating of such a plan. These plans should include an
analysis of possible measures to foster efficient energy use by end users
and the use of nonconventional renewable energy options. These plans should,
to the extent practicable, reflect the environmental costs and benefits
in the area of influence of proposals for energy development.
(ii) Promoting the efficient use of energy in the energy, industry and transport
sectors, and, where practicable and appropriate, in the areas of urban renewal,
rural development and microenterprise, through the inclusion in projects
financed by the Bank of appropriate measures, taking into account the economic
reality of each borrowing country.
(iii) Developing and carrying out regional energy integration programs.
(e) Improving the urban environment. The Bank will step up its efforts to
upgrade the urban environment and improve living conditions for city dwellers.
Operations in subsectors such as sanitation, transport, housing, and urban
development will be coordinated with environmental strategies in the urban
and regional spheres. Special attention will be paid to controlling pollution
by industrial activities, vehicle emissions, and solid wastes, and to strengthening
the pertinent regulatory authorities.
(f) Management of natural resources. Despite a number of promising environmental
conservation and management programs upon which countries have embarked
in the region, the quality of water and soil resources continues to deteriorate,
deforestation and desertification remain of concern, and losses in biological
diversity are still being reported. The programs instituted to date are
making promising strides on a number of fronts: soil conservation; watershed
management; reforestation to rehabilitate land; natural forest management;
conservation of ecosystems and biodiversity by establishing protected areas
and ensuring their sound management; conservation and management of coastal
and island resources, including ecotourism; and fisheries conservation and
management. The remedial measures being deployed will be valuable aids in
the short run, but in the longer term, the solution to natural resource
management problems will lie in an integrated approach to planning, conservation,
and management. This will call for a convergence of sound policies, strong
institutions, and planning resources. The central issues and target areas
from the standpoint of Bank support are as follows:
(i) The definition and adoption of sustainable agricultural practices that
are consistent with the realities of the region, and take particularly into
account the needs of low-income farmers, with due regard to land tenure
issues. Special emphasis will be placed on soil conservation in farmlands
and critical watersheds.
(ii) Assistance to borrowing member countries to develop viable fresh water
sources and systems through a variety of initiatives, such as: developing
and implementing guidelines; devising and employing integrated approaches
that will converge over time upon least-cost solutions for investments in
water resources development; identifying and preparing projects and project
components, including water conservation programs; and encouraging better
use of water resources and advances in water technology. The Bank will develop
and implement guidelines on water resources management, which support an
integrated approach to watershed management based on consideration of all
sources and uses of water in a particular river basin.
(iii) Sustainable management of forestry resources. The Bank will continue
to support the conservation, reforestation and rehabilitation of forests,
as well as agroforestry. To assist borrowing countries in performing these
activities, it will also provide assistance for strengthening pertinent
institutions, training personnel and carrying out research. The IDB will
finance activities that ensure the participation of local residents in the
benefits of sustainable forest management. The sustainable and conservation-oriented
management of forestry resources cannot take place without a firm commitment
on the part of borrowing country governments. The Bank will actively seek
that commitment and will support forestry operations, judged on their individual
merits, only when it exists. The Bank will also support operations to foster
such a commitment. In primary tropical moist forests, the Bank may support
operations to enhance the ability of responsible agencies to manage forestry
resources in a sustainable manner. However, the Bank does not finance commercial
logging in these forests, nor the purchase of equipment for such purposes.
(iv) An ongoing search for opportunities to aid in the conservation of biological
diversity, with local community involvement.
(v) Support for the conservation and management of the region's maritime
resources.
(vi) Continued attention to the environmental consequences of extractive
activities, particularly pollution control and the restoration of degraded
areas.
(g) Resettlement. The Bank will continue to apply the strategies and procedures
devised for projects that require communities to be relocated. This will
include consulting with the affected population at an early stage as well
as during project execution, incorporating resettlement issues in environmental
impact assessments, and drawing up detailed resettlement plans as an integral
part of the project and carrying them through. When a project has a resettlement
component, the resettlement plan will be prepared at the earliest stages
of project design and available at the time the project is presented to
the Board. This resettlement plan is provided in environmental summaries,
and environmental impact assessments. The Bank also will keep a list of
ongoing projects that call for resettlement of communities, and will continue
to update its procedures and guidelines in this area.
(h) Information. Greater transparency in the Bank's operations, in the form
of readier access to environmental information, will encourage community
interest and participation in the environmental aspects of the Bank's projects
and programs, with expected benefits in terms of the environmental quality
of such projects and community support. The Bank will continue to work with
its borrowing member countries to this end via the following actions:
(i) It will make available at Headquarters and in all Country Offices factual
and technical information on the environmental impact of all projects throughout
the preparation and implementation period. Such information will consist
of environmental briefs and summaries prepared by Bank staff.
(ii) The Bank expects borrowers to conduct consultation processes, for all
projects which may have a significant negative impact, that are designed
to elicit informed opinions from affected communities and other local parties
having a legitimate direct interest in an operation, as part of the environmental
assessment of environmentally significant operations. The Bank will strengthen
its existing guidelines in this area.
(iii) Before the Bank proceeds to its "Analysis Mission" for an
operation requiring an environmental impact assessment, the environmental
impact assessment would be made available in the borrowing country at some
public place accessible to affected groups and local NGOs. Once the EIA
is released locally and officially submitted to the Bank, the EIA would
be directly available to the public at Headquarters, in the Country Offices,
and in the Special Office in Europe. If the Borrower objects to the broader
release of the EIA outside of the borrowing country, the matter will be
taken to the Board of Executive Directors for a decision on how to proceed.
(i) Environmental education and training. Environmental education and efforts
to build an awareness of environmental issues and impacts will help preserve
the environment and encourage communities to take a more active interest
in environmental concerns. Accordingly, in the projects it finances, the
Bank will foster such environmental awareness in local public and private
groups. The education programs it finances will continue to build in an
environmental studies and education component wherever necessary or advisable.
Among the wide range of initiatives to be tried and promoted are simple,
everyday conservation practices, environmental education for women, and
access to information on the local, regional, and global consequences that
certain activities may be expected to have on the environment. Additionally,
the Bank will continue to stress training for its staff across sectors,
to disseminate information and broaden the responsibility of its staff for
the environmental dimension of its operations.
3. BANK MODALITIES AND INSTRUMENTS
2.45 In order to meet the objectives and priorities outlined above, the
Bank will not only continue using its traditional tools and modalities but
will endeavor to find new ways to accelerate the ongoing process of restructuring
and renewal in the region. The Bank will continue to be an institution that
finances projects in infrastructure, the productive area, and social sectors
through project loans, global credits, microenterprise financing, small
projects and technical assistance. At the same time, it will work with those
countries still undergoing policy changes with policy- based sector loans.
In particular, the Bank will use sector loans to assist reforms in the social
sectors, where the problems are not always related to funding but often
have to do with delivery systems.
2.46 To support this overall effort, the Bank has a unique asset in its
Country Offices, which will be strengthened in order to increase their contribution
in all areas of Bank activity, especially program formulation and portfolio
management.
A. Programming as instrument
2.47 The Bank will respond to the need to strengthen its overall programming
process through: (1) the development of its own strategic planning function;
and (2) the enhancement of the country programming exercise itself. The
utmost will be done to streamline analytical efforts with other agencies
to reduce redundancies and duplications.
2.48 During the Eighth Replenishment, the country programming process will
continue to be grounded in an intense and continuous dialogue with borrowing
members, with the objective of identifying a mutually agreed-upon program
of Bank financing and technical cooperation. Each year, for each borrowing
member country, Management will present to the Board of Executive Directors
a new or revised country paper (CP), providing a basis for Board- Management
discussion of the status of the country's portfolio and of planned areas
for Bank Group cooperation.
2.49 Each new CP will provide an assessment of the country's economic policies
and performance in relation to the objectives of the Eighth Replenishment.
In addition to the above, the CP will assess the impact of the external
environment, cover expected broad levels of support for a given scenario,
and review the current status of implementation of approved projects, including
difficulties experienced in implementation, as reported in annual country
portfolio assessments.
2.50 A concise and issue-oriented paper on the medium-term strategic planning
framework, derived from the country programming process, covering a three-
to four-year period will be provided each year to the Board of Executive
Directors for consideration. This document will include a review of the
Bank's proposed plans and activities in keeping with the priorities of the
Eighth Replenishment agreement. Management will also prepare an annual Operational
Plan which would set forth the Bank's lending program along with a notional
allocation of all program resources (lending and technical cooperation)
by sector and by country group. This document will provide the basis for
the Administrative Budget to ensure that resources are available to meet
the stated program goals. These documents will enable the Board and Management
to undertake an annual review of the Bank's objectives its policies, priorities
and programs - and make it possible for the Bank to adjust to relevant changes
in policies and to the results of program and project implementation. This
annual review will be complemented by portfolio management reports provided
to the Board of Executive Directors.
B. Policy-based lending
2.51 Policy-based lending (PBL) has allowed the Bank to become a major player
in the restructuring of the region's economies through PBL directed towards
supporting macroeconomic adjustment programs. The goal has been to achieve
sustainable growth via policy reforms in the productive sectors, in fiscal
and monetary policy and in financial markets. Practically all PBL activities
are comprised of fungible resources for balance of payments support, and
for debt reduction agreements, although multisector credit and investment
programs have been combined in some hybrid loans.
2.52 Policy lending during the Eighth Replenishment will continue to support
economic adjustment programs for those countries still in need of such financing,
but greater emphasis will be on reforms in the public sector (i.e., in tax,
budget and expenditure policies, institutional strengthening and support
for sub-national governments), and promoting reforms in sectors neglected
in the general adjustment process, in particular the rehabilitation and
modernization of social sector infrastructure and delivery systems. The
Bank will continue to use investment sector loans as part of its support
for the development and growth of the private sector.
2.53 The policy-based lending modalities now in use are adequate for dealing
with the special problems of the social sectors. However, some adjustments
will be necessary to reflect the different nature and generally longer time
horizon needed for effective social sector policy reform, compared to that
for economic adjustment programs.
2.54 The financing of social sector reforms requires a full range of policy-based
loans. PBL resources are needed when costs are not directly tied to investments,
e.g., health care finance and delivery reform, institutional strengthening,
and the development and implementation of cost recovery schemes. However,
since PBL resources would be linked to the country's providing domestic
resources for certain programs, loan disbursements would be tranched at
the rate that costs are incurred. The effect would likely be to extend a
PBL operation over a three- or four-year period. Costs tied directly to
outlays associated with physical works would be financed through regular
investment loans. The profile of investment costs and other financial outlays
in the reform program will dictate the structure and design of the Bank's
PBL financing package.
2.55 The type of PBL expected during the Eighth Replenishment suggests that
PBL operations, in relative terms, will be smaller than in the Seventh Replenishment
which had a significant number of large loans to support macroeconomic adjustment
programs and debt reduction. Policy-based lending will therefore not exceed
15 percent of the cumulative lending program under the Eighth Replenishment.
C. Technical cooperation
2.56 Under its Charter, the Bank is charged with providing technical assistance
as a primary function for implementing its purpose. Technical cooperation
has always been important for the success of members' development efforts
and the Bank's lending program overall. Technical cooperation has become
crucial for the effective design and implementation of reform programs and
new development strategies and will play an important role for issues of
a regional nature such as the environment and integration. In addition,
technical cooperation is a vital and growing part of Bank efforts to support
policy reform, institutional strengthening and capacity building, especially
in such sectors as human resources and environment, and regional trade and
integration initiatives. Given the impact these efforts can have on increasing
a country's capacity to absorb Bank lending to achieve long-term development
objectives, technical cooperation and its proper sequencing is an integral
part of the programming process. Technical cooperation is essential to identify,
prepare and implement projects and programs. Especially important for the
Bank's operations is the Project Preparation Facility.
2.57 The regional technical-cooperation program has been an important instrument
for the Bank to take a proactive and supportive role in the development
of new and innovative approaches to the changing priorities of the region.
Through this program, the Bank has made important contributions to the process
of institutional development by supporting training and assistance in areas
such as agricultural research, project evaluation, macroeconomic and sector
policy analysis, energy planning, urban development, income distribution,
technology, management, and environmental impact assessment. During the
Eighth Replenishment, the Bank will review the effectiveness and the analytical
methods used in technical- cooperation operations, and Management will periodically
present for Board consideration a programmatic framework for technical cooperation
outlining clear priorities to meet growing demand.
2.58 Given the strengthening of the integration process in the region and
the increasing number of joint initiatives by the governments of member
countries, the demand for regional technical cooperation is expected to
continue growing in the future. In order to respond to this growing need,
the Bank must diversify the current sources of financing for regional operations,
beyond nonreimbursable technical cooperation, by developing mechanisms which
will allow all borrowing member countries to access reimbursable technical-
cooperation and loan funds for high-priority regional initiatives.
2.59 During the Eighth Replenishment, regional technical-cooperation resources
will be directed towards activities which can best or only be supported
through a regional approach, such as key multicountry initiatives and specialized
training where economies of scale and sharing of national experiences are
vital. Sector priorities will be those of the replenishment.
2.60 While funding reimbursable technical-cooperation operations will not
be a problem, sufficient funding for nonreimbursable technical cooperation
is problematic. Nonreimbursable technical-cooperation operations financed
from FSO income in convertible currencies is essential for institutional-strengthening
efforts, capacity building and project preparation, especially in Group
D countries, with priority given to countries in inverse relation to their
per capita income. In addition, these resources could be used to finance
technical cooperation which can best be carried out at the regional level
in support of the priorities of the Eighth Replenishment. These limited
resources will be allocated through the country and regional programming
processes according to the priorities of the IDB Eighth Replenishment agreement.
2.61 In the past the Bank has financed nonreimbursable technical- cooperation
operations from bilateral funds and from FSO net income. However, bilateral
funds are directed to countries and activities specified by the donor country,
and FSO net income available has not been sufficient to meet the growing
needs for technical-cooperation operations and for financing the Small Projects
programs.
2.62 Resources for technical cooperation. During the 1990-1993 period, the
Bank approved 1,051 nonreimbursable technical-cooperation operations (including
short-term missions; operations under the Project Preparation Facility,
CT/INTRA, and CT/FONDOS; regular operations; and operations in parallel
to small projects), for a total of approximately US$362.8 million. Of that
amount, 48.8 percent (US$176 million) was earmarked to fund 558 operations
(53.1 percent of the number of operations approved during the period) for
project preparation and institutional strengthening in the Group C and D
countries; 16.8 percent (US$60.8 million) in support of similar efforts
in the Group A and B countries; and 34.7 percent (US$126 million) for the
Bank's regional cooperation and integration initiatives. It bears mentioning
that technical- cooperation activities in the social sector accounted for
31 percent of the amount of total approvals.
2.63 Nonreimbursable technical cooperation from the Bank has been financed
primarily from the net income of the FSO. However, as indicated earlier
(paragraph 2.61), the levels of such resources have fallen significantly
in recent years. Following a record US$140 million in 1991, approvals fell
to US$65.4 million in 1992 and recovered somewhat in 1993 to US$100.6 million,
thanks to a greater use of trust funds (CT/FONDOS) and local-currency resources.
2.64 It would, therefore, be desirable to have a mechanism that would (a)
facilitate efforts to attract additional resources and con- solidate the
funding and programming of technical-cooperation operations, and (b) harmonize
the utilization of the various sources of technical cooperation.
2.65 Such a mechanism could be a Technical Cooperation Fund (FONTEC). This
fund would:
(a) Afford a strategic focus to the Bank's technical-cooperation activities
within a multiyear framework.
(b) Provide a convenient and transparent mechanism through which interested
donors might wish to funnel all or part of their technical-assistance resources
to the region.
(c) Improve the Bank's internal procedures to achieve efficiency gains in
the processing and administration of technical- cooperation operations.
2.66 FONTEC would play a valuable role in the context of the country programming
process. Its operations would be programmed on the basis of priority areas
and specific objectives and goals of the Eighth Replenishment lending program.
The Board of Executive Directors would approve policies and procedures under
which FONTEC would operate.
D. The private sector development program
Introduction
2.67 The economic and social development strategies being pursued today
by the countries in the region are according a more prominent role to the
private sector. In the economic reform processes now under way, public sector
involvement in the production of goods and delivery of services is fading,
leaving the State free to concentrate on shaping a stable macroeconomic
and legal framework that will be conducive to private investment.
2.68 The private sector is being called upon to bring about the micro- economic
changes needed to help business function more efficiently. Specifically,
efforts to promote small and medium-sized commercial operations will expand
the business base of the countries, and further their development strategies.
A number of countries have found that such small and mid-sized businesses
are creative outlets for entrepreneurs, and that they generate jobs more
quickly than any other sector.
2.69 All of the efforts being deployed will be insufficient to achieve the
objectives noted above unless medium- and long-term financing facilities
are made available for the private sector.
2.70 The Bank will need to adjust and augment its activities to keep pace
with the trend towards private-sector-led development strategies. Specifically,
it should explore ways in which it may help the region's economies build
closer and ever-stronger ties with each other and with the rest of the world,
notably in the investment sphere and in the transfer and adoption of new
technol- ogies. In so doing, the Bank will assist its member countries as
they seek to foster private sector involvement in the sectors specified
by each, and offer financing to that end.
Existing facilities
2.71 In recent years, the Bank has lent support to its member countries
in the region as they have set about building legal and economic frameworks
that will be attractive to private investors. It will continue to assist
with efforts to create a friendly climate for private investment and, generally,
to contribute both directly and indirectly towards the development of the
private sector, using the following programs and instruments which are already
in place.
2.72 Sector lending. Policy-based sector loans are one means at the Bank's
disposal to help the member countries pursue development approaches which
give center stage to private enterprise. Through this program, the Bank
offers technical and financial support to governments that are bringing
in reforms to bolster the role of the private sector in the development
process. Investment sector loans help identify obstacles to investment in
a number of areas of a country's economic activity, and seek ways to remove
them. With such support, the countries are better equipped to tackle the
economic, legal, and bureaucratic barriers that are limiting business opportunities,
stifling competition, and seriously distorting resource allocation. Loans
in support of finance sector reform and capital market development should
help build up the capabilities of economies to raise the vast amounts of
financing needed to bring the private sector into the development process
and allocate those resources efficiently, and to multiply possibilities
of access to financial services.
2.73 Public sector restructuring programs. If the economic policy reforms
now under way are to be successful, public sector institutions will need
to be capable of administering the reform process and providing a modern,
efficient regulatory framework. The Bank should continue to offer support
to the countries in this area, which is essential for the nourishment of
private economic activity.
2.74 Financing for infrastructure and public services. A country cannot
advance without the proper infrastructure and public services. Economies
in the region require such facilities to be more efficient and more competitive,
and to draw the private sector fully into the development process. It is
therefore essential that the Bank continue to lend support for infrastructure
projects and projects to expand and upgrade public services.
2.75 Financing for training and development programs. Prospects for a heightened
role for the private sector in development will hinge, in the medium to
long term, on the training received by its human resources, the upgrading
of management skills, and its ability to produce and adapt new technologies.
Accordingly, working closely with the MIF, the Bank should support innovative
ventures to improve education and training at every level.
2.76 Global credit programs. The Bank should continue to assist in the development
of small and medium-sized companies through global credit loans, with special
emphasis on the needs of microenter- prises. In so doing, it should draw
on the IIC's capacity and experience in the design and, where appropriate,
the execution of global lines of credit. The IIC has added a new dimension
to financing for private enterprise: equity investments in individual companies.
The MIF, for its part, has increased the number of funding avenues and volume
of financing available for such purposes through its Small Enterprise Development
Facility and Small Enterprise Investment Fund.
2.77 Technical cooperation and advisory services. Technical assistance will
become more and more important as countries seek to consolidate gains achieved
in the early stages of their reform programs. The Bank should assist countries
in the region through ongoing advisory support services in the areas of
investment systems, restructuring of the public sector, privatization, finance
system reform, and development of capital markets.
New facilities
2.78 As the private sector is given greater weight in development strategies
in the region, demands for financing will arrive from new quarters, seeking
support for initiatives such as the privatization of companies producing
goods and delivering services, and activities hitherto reserved to the public
sector, for which capital market financing is not available. To rise to
these new demands, the Bank will need to help foster the development of
capital markets and devise new financing facilities to supplement its existing
support programs. Specifically, and maintaining its present global credit
facility, the Bank should, with the consent of the member country government
in each instance:
(i) Target a small percentage of resources for direct lending to the private
sector, without government guarantees. The proceeds of such loans would
be channeled primarily to finance activities traditionally undertaken by
the public sector, such as infrastructure projects.
(ii) Help mobilize private medium- and long-term capital flows for the financing
of development projects, through cofinancing operations, guarantee arrangements,
and others.
2.79 Direct lending to the private sector. Even with heightened private
sector investment, the region will still need to raise enormous amounts
of funding, particularly to finance large infrastructure and public service
projects with long lead times. The public sector in many of the region's
nations plans to hand over, or has begun to hand over, responsibility for
public utilities to the private sector, but such privatization programs
will be compromised if attention is not given to their long-term financing
needs. The Eighth Replenishment is an ideal opportunity for the Bank to
begin lending directly to the private sector without sovereign guarantees,
in each instance with the concurrence of the government of the member country.
Such financing will be limited to a percentage of the Bank's total lending
portfolio, so as not to jeopardize its credit rating; at the outset, this
support would be targeted exclusively towards the financing of investment
in infrastructure and public utility projects providing services generally
performed by the public sector.
2.80 IDB lending under this program should be part of country program- ming,
and would be subject to the following terms and conditions:
(i) The Bank would enter gradually into lending for these purposes, and
this lending would at no time exceed 5 percent of commitments corresponding
to the Eighth Replenishment lending program. For any individual project,
the Bank's share should not, as a rule, exceed 25 percent of total costs
or US$75 million, whichever is less. Management and the Board of Executive
Directors will ensure that all countries have access to this facility in
line with the general distribution of resources.
(ii) Countries would need to have in place and maintain on the one hand
a body of rules and regulations providing for a permanent, stable private
investment system and, on the other, in the sector in which the project
being proposed for financing would operate, an adequate regulatory system
whose legal and financial provisions would not compromise the feasibility
of the project.
(iii) For statistical purposes, the Bank's own resources would be imputed
to the country or countries where the project is being financed.
(iv) The nongovernmental guarantees required to assure performance of the
financial obligations of the loan would be determined in each case.
(v) The greater risk assumed by the Bank in providing financing not backed
by a sovereign guarantee would be assessed and reflected in the loan charges,
and in the possible impact on loan provisioning policy.
(vi) Additional criteria will be discussed by the Board of Executive Directors.
2.81 The Bank also should adjust its arrears policy, delinking this kind
of operations from all other Bank-financed operations in the country so
that governments could not be required to shoulder the obligations of delinquent
private sector borrowers. After two years of operation, this program would
be evaluated to ascertain the progress being achieved and suggest to the
Board of Governors improvements as needed, including the limits established
in the previous paragraph. After four years, the Board of Governors will
review the possible continuation of this program.
2.82 Mobilization of additional funds. As part of its cofinancing activities,
the Bank will step up its efforts to mobilize additional resources, particularly
from private sources, for priority development initiatives, and especially
for infrastructure and public utility projects carried out by the private
sector.
2.83 To attract investment funding and be more effective in mobilizing financing
for high priority development projects from commercial banks, private investors,
and the domestic and foreign capital markets generally, the Bank should
focus more closely on the finan- cial structuring of projects, and make
greater use of various cofinancing and resource mobilization techniques.
Institutional considerations
2.84 The Bank, the IIC, and the MIF should design new mechanisms of coordination,
and procedures, so as to ensure the use of the instruments at the disposal
of each in order to achieve a satisfactory execution of the various programs
and operations carried out in support of the private sector, preventing
the duplication of functions and making the work of the IDB Group more effective.
E. Cofinancing
2.85 The Bank has always given a high priority to arranging cofinancing
for its projects to complement its own resources. Cofinancing operations
have increased considerably since 1990 as a result of cofinancing agreements
with the World Bank for sector lending operations and with the Government
of Japan as part of their Capital Recycling Program announced in June 1987,
which provided "untied" resources through the OECF and Eximbank
of Japan. These combined sources represent about 95 percent of total Bank
cofinancing operations, with the Japanese funding accounting for over 90
percent of bilateral funds.
2.86 During the Eighth Replenishment the Bank will need to find additional
concessional cofinancing funds to complement the Bank's available IFF and
FSO resources, and will continue to seek concessional cofinancing for such
high-priority areas as the environment and social programs. The Bank will
thus mount an effort to diversify the sources of official cofinancing, and
to strengthen the collaboration mechanisms with existing cofinanciers. The
Bank will actively pursue the possibilities of additional concessional resources
from bilateral institutions and nonborrowing governments with whom it does
not already have existing programs. The Bank will also adopt a more systematic
and consistent approach in its relationship with official cofinanciers,
periodically making direct contacts and regularly updating potential projects
for cofinancing.
2.87 In addition to official resources, the Bank will attempt to raise substantial
external financing from market sources to meet the needs of all borrowing
member countries. In the latter case, the Bank's role should be that of
a catalyst helping to develop well conceived projects, carefully customizing
loan requests to the needs of particular markets (timing, pricing, maturity,
choice of currency), and offering specific financing techniques to reduce
direct country risks incurred by commercial lenders. The Bank will also
encourage international competitive bidding procurement procedures whenever
feasible, and will take the necessary steps to encourage full compatibility
of parallel financing with Bank financing in each such project.
2.88 In order to effectively carry out this role the Bank will develop and
present to the Board of Executive Directors for its consideration, in the
context of an overall strategy, a menu of cofinancing instruments which
may include parallel cofinancing with optional cross-default linkages and
longer maturities, and guarantees.
F. Export promotion
2.89 While the Bank has always been concerned with strengthening countries'
export sectors, the current changes in economic policy throughout the region,
together with trade liberalization initiatives, have resulted in the need
for a more focused approach to export promotion activities.
2.90 During the Eighth Replenishment, the Bank will help countries to develop
strategies to strengthen export promotion efforts. This assistance will
include support for policy reforms to develop market opportunities, strengthening
infrastructure and technical- assistance packages for the improvement of
services related to the export sector (e.g.: communication, market information
systems, training, and educational programs). In addition, the Bank will
work with borrowing member countries to develop a market-based export financing
mechanism, tailored to the needs of individual member countries of the region
to finance intra- and extra-regional trade.
2.92 The percentages of foreign exchange financing of total costs indicated
above are those that the Bank would apply regularly and consistently. At
the borrower's request, the financing in foreign exchange could exceed these
percentages if the cost of the goods and services that would have to be
imported for a specific project exceeds the applicable level, provided that
this does not mean a substantial reduction in the local contribution and
provided that it is shown that no alternative source of financing exists
on reasonable terms.
2.93 The levels of financing according to the various country groups will
be supplemented with an additional 10-percentage-point increase for projects
delineated in paragraph 2.15.
2.94 In the case of hybrid loans, with a fast-disbursing component as well
as a long-term investment component, the matrix percentages referred to
above will be applied to the investment component, while the fast-disbursing
component will be financed in its entirety and in foreign exchange.
H. Information disclosure policy
2.95 The IDB is directly accountable to its member governments and indirectly
accountable to their parliaments and citizens; disclosure of information
and transparency of operations is an important element in ensuring this
accountability. Moreover, there is a growing realization that the Bank's
work can be strengthened by disclosure of information to the public which
would ensure interest and participation by affected populations and local
NGOs, whose contributions may help ensure that the Bank's projects are better
designed. Disclosure of information will also help increase overall public
understanding of development issues, which will in turn lead to increased
support for the Bank and its operations.
2.96 The IDB has a number of rules and regulations governing disclosure
of information, but it does not have a single, comprehensive policy statement
on disclosure. Management will propose the adoption of a comprehensive disclosure
policy which is analogous to those adopted by other multilateral development
banks and which assumes that, in the absence of a reason for confidentiality,
information should be released. The policy, which will be submitted to the
Board of Directors for its consideration in early 1994, will incorporate
principles designed to promote accountability and improve project design
and execution through disclosure. It will, at the same time, protect the
needs of the institution, its employees, its borrowing member countries
and cofinancing institutions for confidentiality in certain defined areas.
I. Inspection function
2.97 To increase the transparency, accountability and effectiveness of the
Bank's performance, Management is studying options for the introduction
of an inspection function, to be performed independently from Management,
that would investigate allegations by affected parties that the Bank had
failed to apply correctly its own operational policies. Alternatives being
considered include a panel of independent experts appointed by the Board
of Executive Directors. The panel would be convened only on an as-needed
basis in accordance with clear activation procedures established by the
Board, and the findings of any investigation would be submitted to the Board
for decision.
2.98 A definitive proposal for the inspection function will be submitted
by Management for consideration by the Board of Executive Directors in the
first half of 1994.
J. Internal audit function
2.99 Management and the Board of Executive Directors will ensure that the
Bank continues to maintain an effective and efficient internal audit function
to ensure full accountability on administrative, financial, and operational
matters, including problems that may arise.
K. Operations evaluation
2.100 The Board and Management are in the process of redesigning the evaluation
function of the Bank. The new Bank Evaluation System (BES) will aim at using
evaluation as a tool for institutional learning and as an instrument for
systematic assessment of the effectiveness of Bank development policies,
of the results of Bank- financed activities, and related processes. The
BES will distill lessons from the evaluation experience of borrowers, nonborrowing
countries, and the Bank's own operations for use in the design of new operations,
as well as the improvement of ongoing activities. The Bank will endeavor
to promote and support in-country capacity building and facilitate cooperation
in evaluation activities with other development agencies.
2.101 The new Evaluation Office (EVO) will be endowed with a high degree
of independence as established recently by the Board of Executive Directors.
EVO will contribute towards the Bank's transparency by undertaking independent
and systematic evaluations of the Bank's strategies, policies, programs,
activities, delivery support functions and systems. EVO will also be responsible
for the dissemination of evaluation findings and will provide oversight
and support for the enhancement of the effectiveness of the Bank Evaluation
System.
L. Concessional lending
2.102 Since 1983 the sources of the Bank's concessional resources have been
the Fund for Special Operations (FSO) and the Intermediate Financing Facility
(IFF). The FSO provides funds for direct lending while the IFF provides
resources to pay part of the interest payments on loans from ordinary capital
resources. Over time, these resources have become increasingly concentrated
on the poorest, least-developed borrowing member countries as the amount
of concessional resources available to the Bank has diminished. The allocation
of concessional resources from the Eighth Replenishment is discussed in
Chapter IV.
M. Review by Governors
2.103 By April 1998, Management, through the Board of Executive Directors
will report to Governors on the status of lending and implementation of
the objectives of the Eighth Replenishment. This review will include a report
on the adequacy of resources for future lending and the availability of
concessional resources, as well as recommendations on any new directions,
modalities, or instruments.
