CONFIDENTIAL
                                                                                     EDS2005-0124
                                                                                    February 23, 2005
                                                                                         06:52:07 PM


Statement by Messrs. Canuto, Alyahya, Vasudev, Zou,
Dib, Aljazzaf, Gomes.Sinamenye, Herwidayatmo, Kvasov
Date of Meeting: February 24, 2005

           Expanding the Use of Country Systems in Bank-Supported Operations

We welcome the Bank’s intention to expand the use of country systems to Bank-supported
operations in the areas of environmental and social safeguards and urge the Bank to move
forward with the expeditious implementation of the two year pilot project.

The positive experiences gained and the lessons learnt from the use of country systems in
financial management and national competitive bidding has placed the Bank in a position to
better embrace the expanded use of Country Systems. It is another step in the direction of
enhancing country ownership and promoting greater client involvement as a basis for improved
development effectiveness. In addition, the pilot projects will augment these experiences by
refining the Bank’s understanding of policy and implementation issues relevant to the use of
country environmental and social systems.

We strongly believe that the considerations which propel the agenda for the expanded use of
Country Systems far outweigh the operational and policy issues that are certain to be resolved as
the implementation process is clarified in practice. Even so, we wish to emphasize the following
points:

We would like to caution against the use of value judgments and subjective language in the text
of both Table 1 and Table 2, especially in the objectives to be achieved, we note the following
examples:

Table 1:

Environmental Safeguards:

Operational Principle #7 should be amended to ensure that only those NGOs that genuinely
represent the project affected are involved, and are held accountable for their actions. The same
comment applies to Operational Principles # B (5) and D (4).

Natural Habitats:

Operational Principle #2(c) needs to clarify the meaning of “authoritatively known to be of
high conservation value” (whose verdict will prevail, and on what basis, where opinions differ?).
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Involuntary Resettlement:

Implementation of the Operational Principle #3 would be costly and onerous. If a country’s
social safeguards system is judged to be acceptable overall, why should the Bank look beyond
the project?

Indigenous Peoples:

The term “culturally appropriate” in Objective 2(b) is ambiguous. This ambiguity needs to be
removed.

Operational Principle (5) needs to be amended, to the effect that consideration is given to the
options preferred by indigenous peoples (IP) only where feasible.

Table 2:

Procurement:

Fairness of bidding systems is automatically ensured by transparency. Operational Principles
proposed in Table 2 should exclude words such as “fair” and “fairly”. Such words would
unnecessarily increase the nuisance value of unsuccessful bidders and encourage them to raise
unwarranted objections.

Methodology and Tools for Assessing Country Systems

We again think that there should be no room for value judgment by staff in the methodology; it
should be strictly based on objective criteria. We, therefore, ask for deletion of the second last
sentence in paragraph 24.

Currently, the Bank uses multiple diagnostic tools in the area of environmental and social
safeguards. To save cost and administrative burden on countries, we would suggest that CEA
and SEA should be combined in the environment area and CSA and PSIA in the social area.

Role of Inspection Panel

We believe that the jurisdiction of the Inspection Panel in examining or re-opening the
equivalence ceases once the Pilot Projects are individually approved by the Board, and the
assessment of the equivalence of country systems with that of Bank’s safeguard policies based
on the Bank’s assessment of the borrower’s law, regulations, rules and procedures is undertaken.
The only role the Inspection Panel can play is to review whether the Bank carries out due
diligence and is in compliance with the Bank’s relevant policies during the implementation
stage. The provision of empowering the Inspection Panel to determine the correctness of
equivalence is against the logic and spirit of employing country systems in the first place, as well
as violates the principles of corporate governance which empower the Board to take all such
policy decisions.

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may not otherwise be disclosed without the consent of the Executive Director concerned.
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Considering the very stringent requirements in the proposed operational principles, we do not
envisage a weakening of the Bank’s safeguards and fiduciary policies. We, therefore, do not
accept that dilution of the Bank’s policies will occur as a result of the Bank’s acceptance of
country systems in the social and environmental areas.

Equivalence:

With regard to the interpretation and application of the concept of equivalence against the
background of Bank requirements, we wish to emphasize the need to establish minimum
standards, place focus on outcomes rather than on inputs and, eventually utilize the experience of
the Pilot projects to establish the application of equivalence in practice.

We believe that the analysis of equivalence should focus on whether individual country systems
adhere to the objectives of Bank safeguard policies. In this regard the Board should take a more
active stance in evaluating past World Bank projects. For example, it may be advisable that
some Project Completion Reports be presented for Board discussion along with the newly
proposed lending, and the summary of such discussion be recorded in the minutes. This would
increase transparency and accountability of both the country and the Bank teams, and give the
Board an opportunity to judge both the country performance and the effectiveness of Bank
operations.

Benefits:

We regard four primary benefits from the use of country systems. Firstly, from economies of
scale and scale-up benefits derived from savings in transaction costs not only in the project for
which the equivalence analysis is first carried out, but for all future projects that need to meet the
same safeguard requirements. Significant savings also arise when donor money is harmonized
around country systems.

Secondly, the benefits of this approach are permanent in nature whereas the costs are start-up in
nature. The expectation is that these short term cost increments will be more than offset by the
medium to long-term benefits including reduced transaction costs, and greater developmental
impact.

Thirdly, the use of country systems will enhance accountability, especially to clients. In
particular, we believe that the Bank’s clients will now have a better reference point to challenge
the Bank to use their country systems more systematically. In this context, it is of utmost
importance for the Bank to disseminate the pilot policy widely, through inter alia, regional and
country workshops. Enhanced transparency and disclosure are also an integral part of the
process. The more developing countries learn about the implementation of country systems and
the Bank’s role in practice, the more likely will they challenge the Bank to use country systems
in their case.

Fourthly, and more importantly, the use of country systems will help to improve the three main
weaknesses perceived in the Bank’s interaction with its client countries by increasing

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents
may not otherwise be disclosed without the consent of the Executive Director concerned.
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project/program ownership, improving the sustainability of the development effort, and
contributing to strengthening client’s institutions.

Trust:

We regard trust as an essential ingredient for the effective implementation of country systems in
Bank operations. There is more ownership and effectiveness with trust. Results would be much
more powerful if we reinforced trust between Bank and borrowers and between headquarters and
country offices.

We support the notion of the Bank maintaining adequate safeguard policies in order to preserve
the reputation of the institution and financial integrity. However, we caution that the new policy
framework should not be overloaded to address perceived risks which may not materialize in
practice, and which could contradict the intended objectives. Furthermore, we believe that the
Bank has nothing to hide. Even if changing from business as usual to a more rewarding scheme
may entail some risk, we are in a risky industry no matter what system we use.

Assessment of Risks:

While we appreciate the need to make a realistic assessment of the possible risks associated with
the expanded use of country systems, we consider that the risk analysis given in paragraph 68 to
be overly pessimistic. We believe that the real risk lies in the creation of risk-averse attitudes in
staff and managers.

This will require the establishment of an adequate incentive system for the Bank’s staff to be
willing to make extra efforts in filling gaps and building capacity.

It is our belief that the use of country system is an innovation in the way the Bank does business.
It is a learning-by-doing process and a capacity building process for both the Bank and its
clients. No one should consider this as a one time exercise. A realistic and practical approach is
the key during the pilot phase. Therefore, we should pay attention to the following points: First,
the difference of country circumstances and country systems should be fully recognized. The
selection of the pilot projects should be based on close consultation with the countries, taking
consideration of the country context. Second, it should take a balanced way during the
implementation. Bearing in mind that cost reduction and time saving are among the ultimate
goals. More effort needs to be put on finding cost-effective methods, instead of seeking
excessive assurances. Third, we should not try to put too much burden on one pilot project.
Expecting a few projects to solve the issues of an entire sector or even of the whole country
would do no good, but only harm the initiative.




This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents
may not otherwise be disclosed without the consent of the Executive Director concerned.