SupplementaryNote to the StrategyUpdate Paper for FY04-06: Implementingthe World Bank's Strategic Framework March 28, 2003 Table of Contents INTRODUCTION .................................................................................................................................... 1 A The SUP in the Strategy and Budget Cycle ......................................................................................... . 1 B. Medium-term relationship between the Bank's administrative budget and the projected mix of lending and knowledge services..................................................................................................... 2 C. Growth & Infrastructure....................................................................................................................... 3 D. Harmonization and Simplification....................................................................................................... 4 QUESTIONS AND ANSWERS .............................................................................................................. 7 Client Services .......................................................................................................................................... 7 Q1. How are traditional client services changing and becoming more effective? ......................... 7 4 2. What exactly are "other development services", and how do they contribute to development effectiveness and results?................................................................................. 10 4 3. What are the factors leading to a flat outlook in lending at current levels? .......................... 11 Q4. Why has the Realism Index declined during the past year and how realistic is the end-year target in light of the recent trend?........................................................................... 11 Q.5, What is the Bank doing to increase its focus on trade? ......................................................... 12 Organizational Effectiveness.................................................................................................................. 13 46. How are the global monitoring and results agendas coordinated? What accounts for the $7-8 million additional cost?................................................. 13 4 7. What is the significance of the seven areas identified for corporate attention? ........15 QS. global programs and partnerships? ............................................................................ How is the Bank working to improve the effectiveness and management of 16 Resource Framework & Staffing............................................................................................................ 17 Q9. What is the relationship between the original budget, revised budget, spending framework? What has been the history since FY97? ................................................ authority, actual expenses, under-run, carryover and the expenditure 17 Q10. What is the likely budget outtum for FY03?............................................................. 18 Q11. What is the proposed $35-45m increase in FY04 budget for? .................................. 20 412. What is the Bank doing to increase the cost-effectiveness of its non-operational activities? ................................................................................................................... 21 413. Why are the Bank's contributionsto the staff retirement plan growing?..................22 414. What are the recent trends in staffing? What are the staffing projections for end-FY03, and what do they imply for FY04?.......................................................... 23 Q15. What is the experience with flexibility, balancing fixed and variable costs, and fixed-cost ratios? Specifically, what has been the experience with STCs?...............23 INTRODUCTION 1. This note supplements the Strategy Update Paper by addressing four issues that were of particular concern to the Budget Committee: the role of the SUP within the strategy and budget cycle; the medium-term relationship between the administrative budget, the Bank's financial context, and its instrument mix; the critical role of growth and infrastructure within the Bank's strategy; and progress on the harmonization and simplification agendas. This note also includes a series of "questions and answers" that are intended to provide more detailed responses to topics raised by Executive Directors. A. TheSUPin the Strategy and Budget Cycle 2. Over the past few years, the Board has encouraged management to improve the timeliness and relevance of its interaction with Board on strategy and budget by (i) ensuring that annual decisions take place within a rigorous medium-term fiamework and (ii) engaging with the Board at an earlier point in the cycle to enable discussion before planning becomes more detailed -and therefore difficult to change. The current process reflects both of these improvements. 3. While the SUP is a key step in the Bank's strategy and budget cycle, it is only one part of a broader process that is both medium-term and annual, and which reflects the Bank's decentralized structure: a) The annual strategy and budget cycle begins with guidelines issued by corporate management that are intended to ground unit planning in the Bank's medium- term strategic framework and a rolling three-year budget framework. 'Initialunit planning takes place within these guidelines, and in the case of our Regions, is built on the medium-term country strategies laid out in the CAS. b) Units submit initial plans to corporate management, and these form the basis for initial discussions between Vice-presidents and Managing Directors about each unit's strategic priorities, work program framework, and associated budgetary needs -as well as to enable some early cross-unit trade-offs in the planning process. Based on these unit plans and discussions, the SUP provides the Board with an overview of the Bank's progress in implementing its strategy, shifts in strategic focus, and a high-level work program and budget framework for the following three years. c) Corporate management uses the Board's feedback on the SUP, particularly on the resource framework, to guide the next steps of more detailed business planning by the units. Board feedback on the SUP is therefore critical to realistic unit-level planning going forward. d) Final unit submissions, including detailed work programs and budgets, are considered by corporate management, and then consolidated into a formal proposal to the Board in the form of the Work Program and Budget Paper. To ensure that the Board has full information when considering the Budget Paper, the Board 'The Bank's current strategic framework was laid out in the Strategic Framework Paper in early 2001, and the current budgetary framework was approved by the Board in the form of last year's budget paper. 1 receives briefings or papers on, inter alia, the Bank's financial context, strategic staffing, and the Development Grant Facility before the Budget Paper is discussed. e) This cycle is complemented by the quarterly business review process, followed by the Quarterly Management Report, which is intended to keep the Board regularly updated on recent performance on key management indicators, 4. Significant changes have been made in recent years to strengthen the planning and budgeting tools available to units, as well as to enable a more common approach across units. For example, the recently introduced Business Planning and Reporting Tool is used at the country level to plan and cost work programs, which can be then consolidated at he regional and corporate levels for more accurate planning. The current work on making planning more results focused - at the country level via the results based CAS and at the corporate level through more results focused unit compacts will enable further strengthening of the process - in future. B. Medium-termrelationship between the Bank's administrative budget and the projected mix oflendingandknowledge services. 5. It is essential that the Bank's proposed administrative budget framework be consistent with the Bank's financial context not only in the short-term but also in the medium-term - based on a range of reasonable expectations of important parameters such as the level of lending. This section looks at the current picture and then discusses possible trends in lending levels and their impact on the Bank's future ability to assist clients. It shows that the Bank's current level of administrative budget is consistent both with the current financial position of the Bank and with the projected financial position of the Bank based on current projections of lending and non-lending services. 6. First, it is important to reiterate that the proposed budget framework for FY04-06 is consistent with the Bank's current financial position and the outlook for net income. As noted in Chapter 3, Part D, of the SUP, management has assessed the Bank's capital needs and alternative uses of income and has concluded that the overall FY04-06 resource envelopes, as indicated in the paper, represent a prudent use of the Bank's resources. The integrated ' resource planning framework, which presents all resource allocations in the context of available gross income and competing uses, indicates that the Bank is projected to have sufficient income potential for increasing reserves while meeting budgeted expenses and core commitments. 7. Second, the Bank's objective is not to maximize its income but rather to meet client needs within a sustainable financial context. Private sector financial institutions often set risk-adjusted return on capital or earnings growth targets. In contrast, as a cooperative development finance institution, the Bank targets desired developmental outcomes in collaboration with its members and then manages its financial resources and risks to best achieve those outcomes. Concomitantly, the administrative budget of the Bank is not designed as the primary shock absorber for potential credit losses or short-term changes in Discussed more fully in the IBRD Medium-Term Financial Outlook and Risks paper (SecM2003-0110, dated March 17,2003) 2 available income. Indeed, the need for the Bank's services may rise at times when the Bank's portfolio credit risks are also rising 8. Third, from a development effectivenessperspective, the Bank's financial and knowledge-related client services should not be thought of as exclusive alternatives but as complementary services aimed at common objectives. Many of the Bank's knowledge related services underpin the future development of high quality lending activities, and much of what the Bank does in the development and supervision of lending projects involves the generation and transmission of knowledge services (see also Question 1 below). 9. Fourth, the recent drop in the size of the IBRD lending portfolio is not due to a policy of de-emphasizing lending within the Bank. The major reasons for the recent decrease in the size of the portfolio, as discussed recently in the Audit Committee, are the prepayments on IBRD legacy products (currency pool and single currency pool loans in dollars), the increase in scheduled amortization payments resulting from crisis-related lending in the late 1990s, and the effect of a decline in the level of investment lending which began in the mid-1990s. Looking at trends in new IBRD lending commitments, there has been a slight long-term decline (excluding the surge during the recent financial crisis), primarily as a result of country specific factors (explained more fully in Question 3 below). Looking to the future, we expect year to year fluctuations in the level of lending based on our assessment of our clients' financial needs, levels of performance, and our own efforts to reduce their cost of doing business with the Bank. However, the Bank stands ready to increase its IBRD lending where it meets the standards of client demand, development effectiveness, and financial capacity. 10. Our projected mix of financial and knowledge services is consistent with the need for financial sustainability, and we should continue to make lending decisions primarily on the basis of client demand and developmental impact. C.Growth&Infrastructure 11, Growth is essential for achieving sustainable poverty reduction and the MDGs. In the context of the growth agenda, increased investment in infrastructure is essential for promoting economic productivity and poverty reduction. The rationale for Bank Group's infrastructure commitments, therefore, is guided by both pillars of our strategic framework -building the climate for investment,jobs and sustainable growth, and investing in and empowering poor people to participate in development which are complementary rather than competing. - While the need for improved infrastructure remains large, the share of many countries' investment budgets within GDP is shrinking, coupled with heightened private investor risk aversion and static or declining aid flows. In addition, IBRD/IDA infrastructure lending commitments have trended down for the last seven years -declining from 34% in FY96 to Board on these key trends and issue^.^ about 25% in FY02 of IBRD/IDA total lending. Bank Group management recently briefed the 12. The Bank Group is responding to these challenges and is beginning to build-up its infrastructure business, focusing in particular on a number of the following key issues. The Bank Group will send clear corporate messages on the important contribution infrastructure can make to achieving sustainable poverty reduction -through enhancing growth, as well as 3Technical briefing held on February 13th,2003 SecM2003-0037 3 improved basic service delivery. Management will ensure that there will be the appropriate signals and incentives to integrate infrastructure work into country programs thorough CASs and PRSPs. In terms of overall approach, the Bank Group will continue to emphasize sound infrastructure sectorpolicies to make investments sustainable in the long run, regardless of whether they are financed from private or public sources and communicate this message clearly both internally to staff and externally to clients. The Bank Group will also ensure the effective use of World Bank Group instruments in an integrative manner and explore new instruments, especially at the sub-sovereign level to effectively leverage total financial - resources for infrastructure. Finally, Bank Group management will ensure the requisite financial and human resources, build up of staff skills and talent, and simplification of Bank processes (described further in Section D below). Specific choices and decisions on the exact nature on Bank Group interventions will be made on a country case-by-case basis, depending on country needs and demand, and be underpinned by improved Bank country level diagnostic sector work. 13. Bank Group management is currently ensuring that in the ongoing business planning and work-programming process, infrastructure is appropriately represented and integrated in the regional country programs. As Annex 2 to the SUP shows, initial business planning by the units indicatively shows a projected uptake in the water, sanitation and flood protection sector, and a more modest increase in the transport sector for FY04-06 period. More definite and detailed information on the Bank's future portfolio will be included in the Budget Paper, once the annual budgeting and work-programming cycle is completed. In addition, Bank Group management is working on an Action Plan which will provide greater specificity on the focal areas for World Bank Group work in infrastructure and will present it to the Board early in FY04. This Action Plan will spell out the specific steps management is planning to take over the medium term -together with clear accountabilities and timelines -to re- establish infrastructure as key to the World Bank Group mandate. D.Hannonization and Simplification 14. The desire for greater development effectiveness and impact has prompted attempts by the Bank and our partners to harmonize and simplify the delivery of aid. Recently, the Bank, along with heads of bilateral development agencies and multilateral financial institutions, and senior officials of 28 partner countries committed to push ahead on implementing harmonized approaches around improved recipient country systems. This commitment, known as the Rome Declaration, covers areas such as the alignment of donor assistance with poverty reduction strategies and harmonized approaches to analytical work, procurement, financial management, environmental assessment and monitoring and reporting. Harmonization in all of these areas strengthens country capacity to manage better the development resources available to them, thus supporting the Monterrey Consensus on the need to use existing resources more efficiently (as well as the need for more development resources). The goal is to achieve greater development impact by supporting strong country leadership/ownershipof poverty reduction strategies and scaling up the impact of development assistance. 15. Together with our partners, the Bank has been engaged in harmonization activities at the global, corporate, and country levels. These activities have ranged from broad consensus building and coordination of MDB harmonization work with that of the bilateral donors under the aegis of the OECD-DAC, to technical support for the development of good practices and 4 their early application in specific countries. Work is also underway to modernize and simplify the Bank's investment lending through the provision of a more flexible range of lending products, a simplified policy framework and streamlined processes (requiring less documentation) and tighter management at all levels. 16. Harmonization and simplification are expected to deliver concrete benefits to our clients. This facilitates donor coordination, a principle underlying the CDF and PRSP approaches that guide the Bank's work. For example: . In Ethiopia, the Government has decided to support the implementation of the . PRSP through a medium-term harmonization program covering diverse instruments such as budget support, sectoral programs and project investments, In Vietnam, the process of developing a Comprehensive Poverty Reduction and Growth Strategy (CPRGS) has provided a valuable opportunity for government and both bilateral and multilateral donor agencies to work together in a more coherent way. Donors have established a cofinanced harmonization project aimed at promoting new aid instruments and building government capacity for better ODA management, while the Bank has focused on technical procedures related to financial management reporting, procurement, environmental assessment and portfolio management. 17. Harmonization and simplification also benefit clients by making partnerships more effective. Harmonized processes and policies allow partners to divide labor so that individual partners can concentrate on areas where they have the most expertise. It is also much easier to build client capacity around a common donor process, rather than the multiplicity of systems that clients would have to learn in the absence of harmonization. For example, in Bangladesh, the Government recently established joint Government-donor working groups on aid governance covering procurement, financial reporting and auditing, and training. The mandate of the groups is to identify modifications of government and donor policies, procedures, and practices that would improve the efficiency, accountability, and transparency of development assistance, including assistance for capacity building. 18. In addition, simplification of procedures and documentation requirements benefits clients by making interactions with the Bank less time consuming and costly. For example, the Board recently approved major changes to the Bank's audit policies. These changes should reduce by 50 percent the number of separate audit opinions that the Bank requires of borrowers, facilitate harmonization with other donors, and implement Bank policies in ways that more actively support borrower capacity. By freeing up task team time to engage in dialogue with our clients that can leverage change in policies, simplification also contributes to scaling up. 19. Staff benefit from harmonization and simplification as well. Staff time previously spent on complex and cumbersome processes will be freed up to engage in dialogue with borrowers. Bank staff will have more time to devote to the quality of client services. For example, the Ideas Fundfor Simplijkation, established in December 2002 to elicit staff proposals to simplify processes and procedures, recently made its first award to a LAC task team. The award winning proposal simplified the safeguard process so that staff could upgrade and improve guidelines on safeguards-relatedprocedures. Such simplification may 5 also encourage staff to add higher risk - higher reward operations to their work programs, thus mitigating one factor that could be contributing to the decline in investment lending. 20. The end result of these efforts will be greater development effectiveness rather than across the board declines in unit expenditures. In the short term, shifting to more harmonized practices first requires investment of resources in developing harmonized products and tools, to disseminate good practices and to assist and support country teams and governments in implementation. Over the medium term, however, such harmonization could be key to achieve greater development impact without a commensurate increase in development resources. Simplification is also unlikely to lead to marked declines in unit costs for similar reasons. In order to ensure that units face the right incentives for harmonization and simplification, potential cost savings asiociated with these processes will be left with the units for reinvesting in spending more time on enhancing quality, spending more time working with clients rather than on internal requirements, and on reducing currently high levels of staff workload and stress. 6 QUESTIONSANDA N S I S ClientServices 91. Howare traditionalclientservices changingandbecomingmore effective? A: The way in which that the Bank prepares and implements many of its client services is being transformed by the need to increase the impact of these activities. Integrating the CDF principles into our activities means that partnership, capacity enhancement and country ownership are embedded now in most project preparation, supervision, and ESW activities. While this has increased the impact of our work, it has also led to increased costs of delivering these traditional products and services. Lending SWAps and other projects undertaken in strategic partnership are time-consuming to prepare and supervise, but they make more effective use of donor and client resources. The policy dialogue during the preparation of a SWAP requires the Bank to engage in a much broader range of issues than it would normally do under a more traditional project. Furthermore, the project team needs to stay engaged in the same range of issues during the supervision of the project so that it can contribute to a common policy dialogue within the donor community. On the procedural side, reaching consensus on legal and procurement issues requires more up-front effort during project preparation, and constant consultation amongst all donors during supervision. These up-front investments, however, lay the foundation for a more effective flow of funds to the country for the entire donor community. The costs of these joint initiatives are often carried primarily by the Bank as we take the lead in reaching out to and coordinating with our partners. The focus on harmonization and capacity enhancement has also temporarily increased the burden on staff. Harmonization and simplification of auditing and changes in procurement and financial management procedures have responded to client demand, but have also increased pressures on staff time and resources to enhance client capacity in these areas. Increased country ownership has led to increased demand for operational learning opportunities not only from the Government, but from civil society and other partner institutions as well, requiring more intensive coordination efforts for external training and outreach activities. Adopting a multi-country approach to more effectively address regional issues (e.g., fighting HIV-AIDS in Africa) also demands a higher effort in coordination, translating into higher up- front costs. Under the aegis of the Cameroon AIDS project, for examples, the project team, together with EXT, prepared a multi-country teleconference linking 9 countries and involving broad participation by NGOs and people living with AIDS. The costs of this activity were borne by the supervision budget of the project, but resulted in mobilizing support for the project by critical stakeholders in-country and within the region, particularly for future AIDS programs in other countries. Another by-product was a substantial improvement of the Bank's image. The development of a general operations manual appropriate for HIV-AIDS programs in different countries for use by the Bank and the client is yet another example of a coordinated approach to a regional issue. 7 Economic &Sector Work The new way of working with clients and donors is being applied to ESW as well, resulting in greater influence on the client'sthinking- and enhanced client capacity. Progress on this front - was demonstrated by the significant improvement in FY02 of the "likely impact" quality indicator of ESW. This What types of activities are considered ESW? increased impact, however, was attended To qualify as ESW, an activity should a) involve analytical effort; b) by a significantly higher cost of delivery. be undertaken with the intent of influencing an external client`s policies and programs; and c) be owned by a specific Bank unit. In FY02, ESW produced with strong The Bank produces standardized country core diagnostic reports participation on the country level was on and other country diagnostic reports that support our country average 70 percent more costly than ESW dialogue and provide upstream analysis for lending operations. produced without it. Core diagnostic reports include: Country Economic Memorandum (CEM)lDevelopment Policy Review (DPR), Public Expenditure This more effective approach to preparing Review (PER), Country Financial Assessment (CFA), Country ESW is exemplified by recent Public Procurement Assessment Review (CPAR) and Poverty Expenditure Reviews (PERs) undertaken Assessment (PA). The Bank also produces other ESW products collaboratively with the client - a such as: other diagnostic reports, country advisory reports; regional reports; and other products, such as policy notes, significant change from the past when the informal country dialogue products, and workshopslconferencesl client's role was limited to providing data consultations on analytical issues. Economic and sector work and discussing the final product with the process tasks encompass country analytical work that does not Bank's team. In this departure from generate separate, identifiable products (e.g., country monitoring tradition, careful attention is also being briefings, unified surveyleconomic modeling, and risk assessmentleconomic monitoring). given to consensus building and public dissemination. The Government of Turkey, for example, requested a process-oriented PER in order to have the Bank play the role of an honest broker in facilitating dialogue among central ministries. This required a longer consultative process and a number of workshops for senior policy makers with participation by international experts, adding significantly to the cost, but resulting in the implementation of a new public expenditure reform strategy that was subsequently supported by an adjustment operation. In Tanzania, a similarly highly collaborative PER exercise takes place annually in partnership with a number of other donors. The higher cost associated with country participation is being rewarded in greater pay-off to the task; benefits arise from widespread and intensive consultation at inception, sharpening task selection and design, and benefits accrue during execution as client capacity is enhanced, consensus built among participants, and constituencies forged for change. The cumulative result of sustained engagement with a range of interested parties on the country level (parliamentarians, private sector, and civil society) throughout task implementation would be increased prospects for the substantive impact of ESW. Wh_yare expected deliveries ofcore diagnosticreportsin FY03projected tofall short ofthe low end ofthe range projected in lastyear'sBudget Document? A: Total ESW deliveries for FY03 are expected to be at the high end of the range projected in the FY03 Budget Document; however, deliveries of core diagnostic ESW may fall 10-15 percent short of the low end of their predicted range. While most Regions expect core ESW deliveries to be in line with their projections, it is likely that the Africa Region will deliver fewer core ESW products than projected due to an increased effort by the Region to respond to clients' specialized needs through the higher-than-projected delivery of country advisory 8 reports and policy notedother products. Work in core diagnostic areas covering poverty analysis and structural and institutional issues is expected to increase in the next fiscal year. As African countries finalize their PRSPs, poverty work in AFR is being reviewed in the context of OP 4.15 to identify priority needs to address specific gaps on poverty analysis. Work on several integrative reports such as CEMsDPRs is also expected to resume, or be launched in post-conflict countries. Whatprogresshas there been on cost shanngfor ESW ? A: Recent changes in the way we do business have led to greater client participation in and contribution to, Bank ESW and non-lending TA. More generally, there has been a growing recognition that other, non-cash transactions are reducing the implicit cost to the Bank in its delivery of analytical and knowledge services to clients, including ESW. A pilot exercise to identify ways to record cost sharing in Bank AAA was carried out during early FY03, and new fields were created in the Bank's SAP system to record ex-ante estimates of contributions by third party donors and clients to Bank ESW. An ex-post assessment of cost-sharing in a sample of Bank ESW delivered during FY02 is also currently underway, and preliminary results indicate that clients typically make significant in-kind contributions in the form of background studies, analytical input, the provision of conference facilities, transIation and interpretation services, local transport, etc., in over half of the ESW produced by the Bank.4 Third-party donors also contribute substantial amounts toward the completion costs of ESW, and in many instances, the combined contributions from clients and third-party donors surpass the level of Bank administrative budget allocated to a task. While prospects for a significant increase by the Bank in its provision of fee-based services remain limited, continued cost sharing among the Bank, other donors and the client is expected to continue lowering the cost to the Bank in delivering ESW products. In addition to cost-sharing, in some cases the Bank (as well as the IFC and MIGA) offer fee- based advisory services. The provision of these services is covered by OP 8.40, Technical Assistance, and by the 1998 Operational Memorandum on the Provision of Fee-Based Services issued by OPCS.' Under this framework, there are a number of ongoing fee-based advisory programs offered jointly by the Bank and IFC through the Foreign Investment Advisory Service (FIAS) and the Private Sector Advisory Service (PSAS), as well as arrangements between the Bank and selected client countries (e.g., Saudi Arabia, Bahrain, and Kuwait) which result in fees recently averaging $5-6 million per year. A number of smaller, one-off advisory agreements have been effected between the Regions and clients such as Chile, Mexico and Peru. Cash reimbursement from clients for services provided under these programs typically totals about $20 million per year, with most of these monies generated through FIAS and PSAS. Detailed results of the ex-post assessment will be shared with the Board in June 2003. The Bank provides most analytic and advisory services to member countries without direct cash charges, so long as services are within the overall constraints of the Bank's administrative budget. The Bank can seek to recover both the direct cost and the institutional overhead cost of services that are requested beyond those that can be funded through the administrative budget. The IFC and MIGA follow broadly similar approaches. 9 02. Whatexactlyare "otherdevelopmentsem'ces';and howdo theycontribute to development effectivenessandresults? A: To improve aid effectiveness and leverage Bank resources, our country programs increasingly go beyond traditional lending and ESW products. A multi-year program now typically includes an integrated package of development services that includes technical assistance, aid coordination, partnership facilitation, informal policy dialogue and advice, and rapid-response research and analytical support. Whether these activities are shaped into products (such as policy notes), counted as events (such as donor round tables and Consultative Group meetings), or managed as processes (such as technical assistance),they are a vital part of the Bank's country service package as they provide the flexibility to respond to the clients' individual needs and enhance the Bank's role as a provider of knowledge and advisory services. The increased demand for these other services has led to increased resources going to them. Allocations for technical assistance, aid coordination, client training, quality assurance, external partnerships, other operational support, and resource mobilization activities have increased from $51.4 million in FYOO to a projected $63.7 million in FY03. The costs associated with providing these services have increased across the board, for non-lending TA by over 15 percent, for donor coordinationby 18percent, and for client training by 10percent. The better coordination of our response within the donor community and the adoption of a more holistic and participatory approach results in higher costs of delivering these services. Some examples include the education for all initiative in the Latin America and Caribbean region, a highly-coordinated effort amongst donors to provide technical assistance and capacity building in multiple countries; the creation of Guatemala's Anti-corruption Commission, resulting from close collaboration of the Bank, the Government of Guatemala, and civil society groups; and the Bank's support to civil society's initiative to promote consensus on governance and economic reform in Paraguay. These efforts, besides contributing to development results, help forge alliances with critical stakeholders and partners in development. The way that we build institutional capacity in countries has also improved development results. We are not only delivering learning opportunities, we are also working together with our clients to exchange and adapt knowledge, so we can learn in turn. In the Middle East and North Africa region, knowledge gained from our dialogue with the municipality of Beirut in developing an Ombudsman Office for Children will be applied to expand the initiative to the entire region, as will learning from developing an e-government model developed with the municipality of Muscat. Another example of the exchange in knowledge for more effective development is the work under the African Imperatives in the New World Trade Order initiative, in which the Bank brought together in Kampala fifty African researchers from different countries to discuss how their economies can integrate more successfully into the world economy. Given the critical and growing role of these other development services, OPCS, WBI, and the Regions are currently working on systems modifications to better capture and measure them. This work is expected to be completed in the first half of FY04. 10 Q3. Whatare the factorsleading to a ffatourlookin lending at currentlevels? A: Lending dollar volumes in FY03 are expected to be slightly below FY02 levels with about the same number of operations. The volume of new lending commitments, however, does not capture the full impact of the Bank's lending services. For example, an operation with low lending amount may help the borrowing country to mobilize much larger resources from other sources, and the preparation of a small loan may include as much or more knowledge transfer and capacity enhancement as the preparation of a large loan. The decline in lending volume in FY03 is due to a combination of external factors (more details will be provided in a Technical Briefing to be held in the near future): . Demand for IBRD lending tends to be affected by the price and quantity of alternative sources of finance. On the issue of price, emerging market bond spreads are down by about 400 bp, from 800 bp at the beginning of FY03. In terms of quantity, increasing portfolio equity flows during the last two fiscal years may have had a negative impact on the demand for IBRD adjustment loans. Conversely, the modest turn-around of IBRD investment lending in FY03 may be partly due to the sustained decline in foreign direct investment (FDI). Country-specific factors have also affected IBRD lending volumes. The decline in adjustment lending is partly due to the slow pace of reforms in some IBRD clients and greater access to reform-targeted concessional financing in other countries. However, IBRD continues to provide financial support to countries experiencing difficult market access circumstances. The volume of IDA credits in FY03 was also negatively affected by a number of country-specific factors, especially in Africa. For example, Ethiopia, AFR's largest IDA borrower, and Rwanda are having debt sustainability problems, while Cote d'Ivoire is undergoing civil war. There are also performance problems in some large IDA client countries. Q4. Whyhas the Redism Index decfinedduring thepastyear and howrealisticis the end-yeartarget infight oftherecent trend? A: The Realism index declined from 80% at end-FYO1to 59% at end-FY02 and has stayed around that level sincethen. To a large extent, the decline reflects the impact of recalibratingthe projects at risk methodology during FY02 to align better the portfolio riskiness estimates with the likely outcomes from the OED evaluations. It also reflects some accentuation of the over- optimism with which the project performance is being assessed by the task team leaders. (As reported in the FY02 ARPP, during FY02 the Realism Index dropped from 80%to 72% using the old definition, with a further drop to 59% due to definitional changes. In light of the definitional changes the target was also revised from 80% to 70%). From the portfolio management perspective, a key aspect on which Management is focusing is the shortfall from the revised target of 70%, which indicatesthe need to improve incentives for greater candor in supervisionreporting, as suggested also by the recently completed QAG assessment of the SupervisionQuality during FY01-02. As this index is within the Bank's own control, management is committed to ensuring the enabling environment to meet the year-end target as well as to address this problem on a sustained basis. 11 05. Whatis the Bank doing to increaseits focus on trade? A: A new Trade Department drawing together the trade activities of DEC, PREM and WBI has been established to improve the Bank'scapacity to respond to growing client demand for our services, and to provide a single venue for accountability for trade-related work throughout the Bank. Around 25 new staff have already been recruited, and more will likely join the Department in the coming year. The Department addresses global trade issues through analysis and advocacy, and supports regional and country work. At the global level, the Bank's trade-related activities promote changes in the world trading system to make it supportive of development -especially of the poorest countries and of the poorest groups across the developing world. This work encompasses: i) the promotion of a pro-development Doha outcome; and ii) work with development agencies and NGOs to promote the trade and development agenda. At the regional level, our objective is to maximize the beneficial impact of regional agreements within the global context. At the country level, the Bank promotes integration through trade as a core aspect of country development strategies. There has been a resurgence of interest in trade activities at the operational level in the Bank since the Doha meeting. Analytical and advisory activities (AAA), lending, and capacity- building activities at the country and regional levels are on the rise after a period of decline. The trade agenda facing Bank client countries today is more diverse, complex and multisectoral than the agenda that prevailed earlier. This "new" trade agenda extends beyond the traditional "border" tariff and non-tariff issues to include those aspects of the "behind-the- border" agenda. The current trade agenda also encompasses unfinished liberalization in goods trade -in particular agriculture and labor-intensive manufacturing -in both developed and developing countries; liberalization of trade in services; preferential (regional or bilateral) liberalization; and key elements of the trade infrastructure agenda such as trade facilitation, logistics and product standards. For the next year, the challenges will be to: Continue our efforts to support a round of negotiations that help developing countries -prior to the Cancun WTO meetings in September 2003. Progress on the Doha Development Agenda, and efforts to expand trade and market access for developing countries are lagging. For example, WTO negotiations to allow the poorest countries without production capacity to license imports of generic drugs . to address public health crises remain stalled. Negotiations on agricultural policies are also behind schedule. Encourage greater country ownership of the broad trade agenda, since such ownership is crucial for ensuring that the country is committed to the reforms. Expand capacity in the Bank to implement the new agenda. The need is for broad and practical trade-related skills in the Regions, with specialized trade skills at the center. Progress has already been made on this front, with Africa, ECA and SAR dedicating staff to work on trade issues. 12 OrgdnixationalEfectiveness Q6. Howare theglobalmonitofingandresultsagendas coordinated? Whataccounts for the $7-8million additionalcost? The global monitoring and results agendas are conceptually connected, part of a new approach to the management of the development business. The new approach builds on three pillars, The first is country focus, recognizing that country outcomes are the ones that matter, and that while the attribution of specific outcomes to specific actions is very difficult, the contribution of a particular actor can be identified and assessed. The second is the results chain from inputs of policies and actions (including provision of knowledge and funding) through intermediate country outcomes (such as growth) to final outcomes (such as the MDGs and related development goals). The third, and closely related pillar, is monitoring and evaluation along the results chain, using quantified indicators wherever possible to allow for mid-course correction as needed. Against this background, the two exercises -the Bank'sresults agenda and global monitoring - develop the implications for different parts of the business: The results agenda is an action plan for the Bank that aims to: (a) strengthen support for countries as they try to define and monitor results; (b) change our incentives, instruments and reporting to strengthen our focus on results; and (c) promote a global . partnership to harmonize results-based approaches and offer coordinated support to countries in managing for results. Global monitoring focuses on other actors -the developing countries and their trading partners and donors -looking to put in place a systematic framework for monitoring their critical actions and policies for achieving results that is measured in terms of the MDGs and related outcomes. The results agenda will contribute to the global monitoring platform in two ways: by strengthening countries' ability to report on progress and by providing information on the Bank's own policies and performance. Similarly, as the results agenda works with the other MDBs as they develop their results approaches, that information too will be picked up by the global monitoring platform. The estimated $7-8 million budget figure represents the combined incremental costs of the results and global monitoring agendas for FY04. The most significant items in this total include: . Around $3 million for data work focused on intensified support for statistical capacity . building (Statcap), support to IDA results measurement, and to establish and better populate the global data platform for the global monitoring agenda; Around $2 million for operational units for improvement of indicators (e.g., CPIAs), the preparation of newly-introduced CAS Completion Reports, and support to task teams on results-based design and monitoring systems; Around $1.5 million for building our internal results capacity, including strengthening the Results Secretariat, increased support for preparation of results-based CASs, the 13 . development and testing of a core learning curriculum on results-based approaches, and monitoring and evaluation systems; Around $1 million for the preparation of twice-a-year global monitoring reports for the Development Committee and for overall coordination of the Bank's global monitoring agenda. The incremental costs for the results agenda are in line with the costs of enhancing our focus on quality in the mid-1990s. Many existing budget lines will contribute to implementation of these agendas. For example, funding for CAS preparation will serve to develop results-based CASs. Funding of the Monitoring and Evaluation Improvement Program will help retool our M&E architecture to focus on results at the country level. Similarly, work on global monitoring will build on efforts in recent years to improve metrics for policies and outcomes, Where do things stand on the results agenda andglobalmonitoring? Results Agenda. There has been good progress on the results agenda since its launch in March 2002. The conceptual framework was developed last spring and summer and endorsed by the Development Committee last September. Subsequently, Management prepared an Implementation Action Plan for the results agenda that was discussed and endorsed by the Board's Committee on Development Effectiveness in late December. This action plan outlines a work program that seeks to: .... Increase country demand and capacity to manage for results; Sharpen the results-focus of Bank strategies and instruments; Revise staff learning programs and incentives to improve results orientation ; Incorporate results into management's operational, strategic and budget reporting; Promote a global partnership to harmonize results approaches and coordinate support. Implementation of this agenda is a Bankwide, evolutionary process that will take time. Many units have begun implementation, and-even at this early stage-progress is encouraging. A revised PRSP Sourcebook has been published, with strengthened chapters on target-setting, monitoring and evaluation, and the role of civil society in tracking progress. A new lending application-Statcaphas been developed to encourage a multidonor, sectonvide approach to building statistical capacity on the basis of a statistical master plan. Ukraine is piloting this application, and additional funding is now available for other countries and country teams interested in the program. A number of country teams, such as Sri Lanka and Cameroon, are piloting the results-based CAS, and their work should help answer remaining questions about format and content. A draft proposal has been prepared to increase the outcome orientation of investment lending, and some Regions, such as Europe and Central Asia, have made significant progress in defining a Regional action plan within the broader agenda. As a follow-up to the ImplementationForum, teams from the seven areas of increased corporate focus are more clearly outlining expected outcomes and measurable indicators, and aligning the Bank's work program accordingly. This effort deepens work under way by all units to prepare more results-oriented unit compacts as an input into this year's strategy and budget process. Finally, a draft proposal is under discussion by IDA Deputies and borrowers to enhance the results measurement system for IDA. The international discussion on IDA has helped build the global partnership on managing for results-in terms of both making people more aware of the difficulties in applying results-based 14 approaches to development, and bringing measurement issues to the forefront of the global agenda. A follow-up to last year's internationalRoundtable on Results will be held in early June to focus on measurement and statistical capacity-building issues - this is one of the key interfaces between the results agenda and the global monitoring work, reflecting the focus of both on measurement. Much work is underway, but much also remains to be done. A strengthened Results Secretariat and intensified communications within the Bank will help to catalyze and coordinate implementationthroughout the institution, and deepen the commitment to managing for results. Global Monitoring. The global monitoring work is at an earlier stage of development. The initial launch was in late November, 2002, with the first technical briefing for Executive Directors; a second technical briefing was in January. The draft global monitoring report was discussed by Executive Directors in the Committee of the Whole on March 11 and was distributed to Ministers on March 26. The report will be discussed by Ministers at the Development Committee (DC) meeting in Washington on April 13 along with the companion paper on Scaling-Up. Depending on the outcome of the discussion, work will begin on implementation, including the strengthening of the underlying data and the monitoring framework - an exercise to be carried out in consultation with the Advisors in EDs' offices. In all dimensions of the global monitoring work, systematic collaboration will be needed with external partners-UN, DAC, WTO, RDBs. Over the past few months, in connection with the preparation of the initial global monitoring report, extensive consultations have been held with these partners and a good framework for collaboration has emerged. With respect to the monitoring framework itself, there are two main elements. First, it involves regular reporting (`jointly with the IMF) to the DC on policies and actions that developing and developed countries are implementing, and support that IFIs are providing, in facilitating the achievement of the MDGs and related development outcomes. It is also proposed to position these regular global monitoring reports-with a report provided at each DC meeting-to anchor and provide continuity to DC discussions. Second, it includes the development of a global monitoring platform that would both underpin future global monitoring reports to the DC and facilitate open monitoring by the international community between DC meetings. An initial prototype of the platform has been designed. Q7. Whatis the significanceofthe seven areasidentifiedfor coqorate attention? A: Following a consultative process with the Regions and the Networks, the Bank initiated a stocktaking of institutional commitments to the MDG agenda, especially commitments and expectations emerging from Monterrey, Doha, and Johannesburg. The outcome of the exercise was, among other things, the identification of seven areas for more corporate attention (Education For All, HIV/AIDS, Maternal and Child Health, Water Supply and Sanitation, Investment Climate and Finance, Trade, Environmental Sustainability). These areas were identified based on the following criteria: (i) are these areas critical to the Bank's 2 pillar poverty strategy and thus to poverty agenda in all Regions?; (ii) are they important to clients in their needs for Bank assistance?; (iii) is there a Bank commitment and a high level of international scrutiny?; (iv) is there a need to better align commitments and expectations with the Bank's capacity to deliver at the country level? This selected number of program areas - about 30 percent of the Bank's work programs - need somewhat greater management focus to ensure alignment of realistic Bank 15 commitments, the expectations of the Bank to contribute in these areas and our capacity, work programs and client demand to assure timely delivery at the country-level. The challenges posed to alignment and effective delivery may differ they range from limited availability of - proper technical skills, absence of proven operational model, a demand for the right intemal/external partnerships, to striking the right balance between analytical assessment and country level follow-up. For example, there is a need to better align the pace of delivery of some diagnostic assessments with follow up country level actions. Such alignment of work programs across the Bank needs corporate level support to ensure the effective delivery at the receive particular management focus to clarify Bank contributions and ensure the delivery of country level. Therefore, these areas are not treated as new priorities. These seven areas will client demanded country programs. The choice of areas for increased corporate attention will evolve over time, as the alignment-delivery challenges are overcome or as new issues arise. QS. How is theBank working toimprove the effectivenessand management ofglobal programs andpartnerships? A. Management has taken a number of steps in recent years to improve management and oversight of global programs and partnerships (GPPs), e.g., by: ... establishing Development Grant Facility in 1997; establishing the Partnership Council and Secretariat in 1999; . requiring that a Managing Director approve all new partnerships at concept stage in 2000; carrying out network review of all GPPs in 2001. In addition, OED commissioned a major review of the Bank's Global Programs, the first phase of which - on strategic and programmatic management of global program - was the major programs - will be available later this year. In response to the first report, a Review presented to CODE in May 2002. The second phase -providing more detailed review of 28 of Group was established last Fall to develop recommendations for management on how the Bank can strengthen the management and oversight of GPPs. Specific recommendations were developed in five areas: ....strategic focus (being more careful about where to say yes); country alignment (coordinating GPPs with clients and country based programs); developing country voice (in design and management of GPPs); . planning and budgeting (reflecting GPPs in business plan and tracking expenditures); risk management and quality assurance (including reducing complexity of governance models and matching risk and accountability with control). A summary of these proposals was provided to the Board as a technical brief on March 5. In related activities, the Bank is working with partners to improve the interface between the Bank and donors on the operation and oversight of Bank-managed trust funds. More broadly, the Bank is also working with donor partners to harmonize procedures so as to reduce the administrative burden on clients and to ensure a coordinated policy dialogue. 16 Resozkrce Framework &Sta$ng 99. Whatis therelationshipbetween the onginalbudget, revised budget, spending authon'y, actual expenses, under-run, carryoverand the expenditureframework?What has been thehistory since F'Y97? A. The Budget Document and the Strategy Update Paper use a number of terms to describe budgets and expenditures. This answer defines some of these terms. Table 1 below indicates how these numbers relate to each other. The approved original budget is the budget approved by the Board (as shown in the Summarized Budget Trends and the Program Cost Summary tables, and detailed in the Budget Recommendations section of the FY03-06 Budget document). The revised budget (also called spending authority) is the original budget adjusted for subsequent changes. These include the carryover or any subsequent increases approved by the Board, for example the New Spending Authority in response to the Asian Financial crisis. In FY03, the revised budget ($1,421.5 million) is $65.2 million (FY02 carryover) above the approved budget of $1,356 million (see table below). 17 now limited to 3 percent of the approved/original budget i.e., excluding any amounts carried forward at the beginning of the year. If the under-run exceeds the 3 percent limit, the balance is returned to net income. The expenditure framework is a concept used in the FY03-05 Strategy Update Paper and FY03 budget document to refer to the estimate of the actual expenses required to deliver the work program. The FY03 expenditure framework of $1,376 million was $19.5 million greater than the requested budget of $1,356 million6. This difference was hnded from part of the carryover. The expenditure framework in FY04 will be identical to the original budget. 010. Whatis thelikelybudget ouitumforE;yO3? A: FY03 expenditures are expected to be at a level similar to the original expenditure framework laid out last year. The FY03 revised budget is $1,422 million. As indicated in the second Quarterly Management Report, the Unit under-run is projected at $12 million, with some upward pressure mainly due to external uncertainties. In addition, some $35 million in the Central Accounts are expected to remain unused. As a result, FY03 expenditures are expected to be $47 million below FY03 revised budget, or at $1,375million. This is in line with the FY03 expenditureframework of $1,376 million7. This is $124 million above FY02 actual expenditures ($1,252 million, see Table in previous answer) and includes a price factor of $40 million as approved last year. In real terms, FY03 expenditureframework is $84 million above FY02 actual expenditures (Fig.1. below). As indicated in the Q&A of last year's Budget Document, this framework was validated in variance from FY02 expenditures'. The purpose of this methodology was to ensure that all the savings and efficiencies that led to the FY02 under-run were embedded in the new budget unless specifically identified otherwise. The $1,376 million expenditure framework was therefore built by adding $84 million to the $1,291 million FY02 expenditures (in FY03 dollars). In Chapter 3 section C of the FY03 Budget Document, these numbers ($1,323 million for the expenditure framework and $1,304 million for the requested budget) are outlined in FY02 dollars (the price adjustment is 'InFY03 $42 million) and excludes $10 million for business continuity (which was approved separately). dolIars. This includes $10 million for business continuity. Amounts in this section differ from those in last year's Budget Document which was based on the expected outturn in May; actual expenditures (used here) are higher than expected in the Budget Document. In addition, in this document, all numbers were in FY02 dollars. 18 Fig. 1. Major drivers of the FY03 budget and expenditure framework (FY03 $ million) FY03 $I 1,400 FY03 Expenditure Framework 1,375 $1,376111 $21 cost driven $20171prog. carryover 1,350 $84m planned increase in 1,325 expenditures 1,300 1,275 1,250 FY02 FY03 Exp. FY03 Budget Expenditures Framework This increment was made of three elements. i/ $39 million were pre-committed costs and services. This includes $10 million for business continuity and $29 million for several costs and services that were listed in last year's Budget Document (including $12 million for system depreciation and maintenance, $4 million for higher cost of security and insurance, $8 million for human resources - e.g., diversity initiative, HIV/AIDS testing - and $4 million to strengthen risk and trust fund management). Most of the programs fimded by these increases are on track. ii/ Proposed increase in number of deliverables was expected to drive a $24 million increase in expendituresg. This increase came mainly from a higher number of analytical products and knowledge services (costing $19 million). Most of this increase is expected to be achieved, for example, the number of ESW reports delivered increased from 248 to 280-320. iii/ $21 million resultedfrom increase in costsl0.Most of this increase (about $12 million) was for supervision, in order to protect portfolio quality. Only $5 million of that increase is expected to be realized in FY03. In the FY03 Budget Document, the $1,356 million FY03 budget was based on a $1,376 million expenditure framework. The $20 million gap was funded through pre-programming part of the expected carry-over, while recognizing the implications on the FY04 budget of this one-time approach (see right-hand part of Fig.1.). This amount is lower than indicated in the Budget Document Q&A ($46 million), reflecting a higher than expected volume of deliverables in FY02 (mainly ESW products). l oThis is also lower than indicated in the Budget Document Q&A ($24 million), reflecting higher than anticipated costs in FY02 (in particular a level of stafftraining that was higher than expected). 19 Qll, Whatis theproposed $35-45mincreaseinFY04budget for? A: $20 million of the $35-45 million budget increase between FY03 and FY04 (in real terms) is needed to continue funding of activities financed by programming on a one-time basis part of the carry-over in FY03 (see Fig.2. below and Table 8 in the SUP). In addition, expenditures are expected to increase by $15-25 million. This increase can be grouped into four blocks (see Fig.2.). Fig. 2. Major drivers of the proposed budget increase (FY03 $ million) FY03 $m 1,400 FY03 Expenditure $3545111 -------. Proposed I I \ I Budget Increase 1,350 $0-8m Net imoact of: n 1,325 1,300 1,275 1,250 FY03 Budget FY04 Framework i/ The Bank is expected to deliver new requirements that were not anticipated in last year's framework: their cost is estimated at $15-17 million (see Table 7 in the SUP and para. 66). This includes: . About $7-8 million to develop global monitoring and to implement the results agenda (see Question 6 above). $2 million for an increase in audit fees, increment discussed by the Audit Committee in January. $5-6 million to implement the disclosure policy and associated translation and public information requirements. ii/ In addition, another $5 million is required to fund increase in system depreciation and maintenance costs (this was identified last year). These first two elements add up to more than $20 million for services and costs that are pre-committed or driven by external commitments. 20 iii/ The third block consists of $31-39 million in additional services. The bulk of this increase will deliver higher levels and greater effectiveness of client services. A significant part of this increase was included in last year's framework. Client services will increase by $20-27 million (see Table 7 and para. 65 in the SUP). Part of this increase reflects higher volumes of development services that are not yet appropriately captured in the way we measure deliverables: for instance, the costs of coordinating the EFA initiative are around $800,000 to date. Another part of this increment is classified as a "cost" increase, higher unit costs of our traditional deliverables reflecting, for instance, the cost of working with other donors and with civil society. These evolutions are critical to our approach to scaling-up, but both the benefits and the costs of this work are not readily measured by our current systems. Management is committed to continue to find ways to better integrate this important range of services into our management and measurement framework. . Increase in global services and operational support is $2-3 million, as indicated in last year's framework. Support services will also increase by about $9 million, including higher level of and external outreach''. staff learning, improvement in HR support to Regions and in recruitment process, iv/ These three increments are partly offset by some $36 million savings. This only reflects savings in delivering support services, i.e. it does not capture redeployments within country programs. $11 million of these savings have been identified in Finance, Administrative and Corporate Units as a response to the budget framework laid out last year (see para. 65 in the SUP). As indicated in Table 8 in the SUP, additional $25 million savings result from reducing provisions for central accounts (and expecting slightly higher reimbursables from airline rebate). As shown in the figure above, the last three blocks add $0-8 million to the $15-17 million cost of new requirements. As a result, FY04framework is $15-25 million above FY03 expenditure framework, or $35-45 million above FY03 budget (see Table 8 in the SUP). Ql2. Whatis theBank doing toincrease the cost-effectivenessofitsnon-operational activities? A: Since the end of the Strategic Compact in FYO1, budgets for Finance, Administrative and Corporate (FAC) units have remained constant as a percentage of total Bank budget. In FY03, some growth occurred primarily due to increases in depreciation costs. During the FY04 budgeting cycle, FAC units have been asked to budget for up to a 2.5 percent reduction in Bank resources. This reduction will help offset further increases in depreciation and the development and delivery of new services in response to emerging client demand. In this year's strategic submissions, FAC units have identified that the savings will be realized mostly through the elimination of low priority, low value-added activities and improvements *'As a result, the net increase in support services, including these $9 million new services, and $5 million additional system depreciation and maintenance, offset by $11 million savings in these units, is $3 million as indicated in TabIe 7 of the SUP. 21 in the efficiency of existing processes. As part of the reviews done to identify the areas of savings, units also identified areas of activities where performance needs to improve. In these cases, the units' goal is to improve the quality, quantity and/or timeliness of the services they deliver without increasing the resources spent on those activities. For example: . HRS plans to off-shore several types of hiring and benefits transactions to reduce . processing costs, improve accuracy and shorten elapsed times for completion of requests. GSD plans to reduce costs by renegotiating contracts and streamlining maintenance programs for equipment and buildings. In specific units, targeted analyses, such as benchmarking studies, help the units meet stated cost-effectiveness objectives and provide specific feedback on process changes that will reduce costs and/or improve service. Completed benchmarking studies and those currently underway focus on industry best practices. For example: . GSD benchmarks its facilities management services and office services against large international private sector companies. The main focus is on cost comparisons; in some categories it also compares and ranks customer satisfaction scores, service levels and efficiency in service delivery. . . In ISG, a benchmarking project is being implemented to allow IT cost comparisons using the standard industry database. DEC and EXT are preparing a joint study that assesses both the processes and costs related to writing, printing and distributing several of the Bank's flagship publications. Benchmarking these activities will allow the Bank and its partner organizations to determine the most effective ways of distributing this vital information. Q13. Whyare the Bank'scontn'butions to the staffretirementplangrowing? A: Bank contributions to the Staff Retirement Plan (SRP) and Retired Staff Benefits Plan (RSBP) were suspended between FY98 and FY02 and the budget was reduced accordingly. The need for larger Bank contributions to the pension and benefit plans over the next three years stems, in large part, from the substantial decline in equity prices seen over the last three years. The pattern of projected increase in Bank contributions is more than anything else - a - direct consequence of the averaging process that we use for determining the market value of the plan assets in our contribution calculations, and less so on account of a sharp increase in the value of liabilities. Instead, Bank contributions for a given year are determined by first calculating the difference between projected plan liabilities and the market value of assets averaged over a preceding three year period, and then spreading this difference over the actuarial service period which is on the order of 17 years or so. The averaging process employed for valuing the assets smoothens out or dampens the volatility in Bank contributions from year to year. Thus, even though the market value of plan assets is assumed to grow in our base case -by - 7.9 percent annually the three year moving average of market value of plan assets will still - continue to decline through end-2004, given the negative returns we have had over the last three years. This, in turn, is projected to trigger the requirement for larger contributions. Our 22 base case estimates project Bank contributions more or less peaking around FY06/07, and thereafter plateauing or even declining as the effects of the last three years' asset values begin to drop away from the moving average. The estimated contributions included in the Strategy Update Paper are Bank base case estimates, contingent on obtaining annual investment returns of 7.9 percent in line with our Strategic Asset Allocation assumptions. Actual future contributions would depend critically on realized investment returns. Q14. Whatare therecent trendsin staffing?Whatare the staffingprojectionsforend- FY03,and what do theyimplyforW04? A: The Bank began FY03 with a shortfall in staffing, particularly in the Regions. During the last quarter of FY02 and through FY03 vigorous efforts were made to make up staff numbers in Washington and Country offices. This included strategic staff planning in units and introduction of a batch hiring pilot to speed up hiring of staff whose skills aligned with the needs of the business. By the end of February 2003, the Bank added 79 Internationally Recruited Staff and 195Locally Recruited Staff. The June 2002 strategic staffing paper projected staffing in IBRD to be within a range of 8,750-8,950 staff. While the Board endorsed management's strategic staffing plans, it emphasized that care should be taken to avoid cycles of expansion and contraction in staff numbers and provided guidance that the Bank should hire to reach the lower end ofthe projected stuflng range. During FY03 mechanisms were put in place to track the progress of recruitment, review staffing at each Quarterly Business Review by senior management, and mid-course corrections were made when required. As of end February, staffing numbers are at 8,705, and it is expected that we will close the year at a staffing level of around 8800 staff, thereby remaining at the lower end of the staffing range projected in the Strategic Staffing paper last year. While net hiring in the field has been more than double that in Headquarters, the growth of staff in country offices has nevertheless been somewhat less than projected -- at2,600 staff located in Country Offices, still short of the range of 2,700-2,850 projected last May. We expect only part of this gap to be filled over the remaining months of FY03. Units have begun work on their strategic staffing plans for FY04, due to be submitted to senior management by the third week in April. In the absence of such plans it is difficult to provide firm projections of end-FY04 staffing levels. The Strategic Staffing Update Paper, scheduled for Personnel Committee discussion at the end of May, will provide a summary of projections for FY04 planned staff numbers. Q1.5. Whatis the expen'ence withflexibiZiq,balancingfured and van'able costs, and fixed-costratios?Specifically,whathas been the expen'ence with Short Term Consultants? A: Limits on fixed costs, as distinct from headcount controls, are the appropriate management control in a dollar budgeting environment. Headcount controls do not reward cost reduction, and tend to act as a disincentive to decentralization and off-shoring strategies. In contrast, when year-to-year budgetary allocations fluctuate within a narrow band, fixed cost ratios help ensure that the Bank avoids painhl cycles of staff expansion and contraction. Combined with 23 medium term budgetary stability, such controls help units to plan their long term staff commitments. And fixed cost ratios also help units preserve response-flexibility in an uncertain environment. The balance between fixed and variable costs helps units meet longer term core staffing needs (part of fixed costs) while providing for variable costs (travel, consultants); fixed cost ratios help achieve this balance. Based on historical trends in ratios of fixed to variable cost, management has set a limit on fixed costs equivalent to 69 percent of the administrative budget of Regions. While a healthy internal discussion continues on the level at which such limits should be set, there is uniform agreement amongst Regions that fixed cost ratios are the appropriate and usehl control mechanism in the Bank's budgetary environment. Limits have also been worked out for the other operational units, each limit varying depending on the business model of that unit. Going forward it is management's intention to continue to use the fixed cost ratios as the guiding mechanism rather than headcount, though it will continue to track and monitor trends in headcount and staffing composition at the corporate level, intervening as needed. The Bank's business model relies on use of a balanced mix of longer-term staff and a contingent work-force. Use of short term consultants allows the Bank to (i) use specific skills that may not be available amongst existing staff for particular, defined tasks; (ii) to cover for recruitment gaps and (iii) to provide flexibility on the supply side to respond to changes in demand. Employment of a contingent workforce of short term consultants and temporaries is integral to this model. As a consequence of under-staffing, utilization of short-term consultants (STCs) for longer durations during FY02 increased in order to deliver on the work program: numbers of STCs engaged for more than 130 days increased from 750 in FYOl to 950 in FY02. This pattern has been carried forward into FY03 while recruitment was being ramped up; utilization of these longer term STCs is expected to level off and decrease at the margin as staffing numbers stabilize and new staff are fully integrated into work programs. Continued use of some STCs and STTs on an on-going basis carries attendant employment and other business risks. In order to minimize these risks, and yet meet the business need for access to a cadre of skilled, medium term flexible resources, management set up a task force to come up with recommendations to reform the approach to engagement of Short Term Consultants and Temporaries. The work of the task force has been completed. After senior management input and endorsement, these recommendations are scheduled for discussion by the Personnel Committee in mid-May. 24