Publications

	Table of Contents
p. 8 of 10 BACK | NEXT Executive Summary I. The Context II. Present Bank Policies and Practices III. Graduation Policies of Other Multilateral Development Banks IV. Rationalizing the Bank's Classification and Graduation System V. Other Operational Implications VI.Conclusions VII. Recommendation

A Graduation Policy for the Bank's DMC's

---

V. Other Operational Implications

86. The existing classification system has operational implications in regard to the eligibility for Bank assistance and to applicable cost-sharing limits for loans and domestic preference for civil works. While not part of the current policy, cost-sharing in TA operations could also be brought within the ambit of the classification system. The adjustments required in regard to these other operational implications are examined below.

A. Cost-Sharing Limits for Project Cost Financing and TA Cost Financing

1. Project Cost Financing

87. According to existing Bank policy,⁴² the maximum proportion of project costs that the Bank may normally finance is determined by a DMC's country grouping.⁴³ These limits are not to be applied mechanically, but are to be based on a DMC's performance in domestic resource mobilization, the balance-of-payments situation, and any special circumstances that may prevail. These criteria relate to the economic strength of a DMC, the same principle on which assessment of debt repayment capacity is based. It is therefore proposed that, in general, the eligibility for Bank assistance should be used when applying cost-sharing limits. It is proposed that the existing cost-sharing ceilings (80 percent for Group A, 60 percent for Group B, and 40 percent for Group C) be retained with the modification that a ceiling of 70 percent be applied to Group B1, i.e., if a country graduates from Group A to Group B1, it will also graduate from an 80 percent cost-sharing limit to a 70 percent limit. The 60 percent cost-sharing limit will apply to Group B2. The lower ceilings for countries that are proposed to be reclassified will be effected in phased manner, with a 5 percentage points reduction per year. As per current policy, under exceptional circumstances and where justified on country and project grounds, Bank financing may also exceed the country cost-sharing limit.⁴⁴

2. TA Cost Financing

88. Some Board members expressed concern about the lack of "ownership" and commitment on the part of recipients of Bank TA. This perceived lack of ownership has been attributed to the low levels of financial contribution to total costs that recipients are currently required to make. A higher level of contribution by recipients, it is argued, would ensure that they properly assess whether a proposed TA is indeed one of their priorities and one for which they are prepared to take ownership. A change in existing Bank policy on TA cost-sharing has been considered necessary to bring about the desired attitude change. The issues involved in sharing of TA costs are discussed in detail in Appendix 3, while the salient points are outlined below.

89. According to the cost-sharing principle applied by most multilateral and bilateral development agencies, the recipient is expected to meet most of the local currency costs of a project, while the external donor meets the foreign exchange costs. Bank policy on TA financing is broadly based on this principle: it stipulates that the share of local cost financing (excluding the cost of domestic consultants) in the amount financed by the Bank cannot exceed 25 percent.

90. The key question is whether minimum levels should be prescribed for government contribution to total TA costs. Such an approach would mark a significant departure from the existing policy, wherein the composition of TA costs is taken into account in determining the type and extent of government contribution. An analysis of Bank TAs during 1994–1997 shows that foreign exchange costs and local costs of domestic consultants (Appendix 3) account for over four fifths of the total TA costs. Strict adherence to minimum levels of government contribution to total TA costs without regard for the composition of such costs could result in DMCs having to contribute to foreign exchange costs and local costs of domestic consultants to meet the prescribed minimum levels of contribution expected of them. The foreign exchange costs of TAs are largely accounted for by the costs of international consultants. Requiring DMCs to contribute towards such costs would not only go against well-established Bank principles but could also mean that TAs would be delayed in bargaining over issues such as the costs of international consultants. In regard to financing the local costs of domestic consultants, the Bank has found it administratively convenient to bear such costs.

91. It is proposed that the government contribution to TAs should be at least 15 percent of the total TA costs for Group A, 20 percent for Group B1 and B2, and 30 percent for Group C. However, such contribution will be subject to the limit of total TA costs minus foreign exchange costs and costs of domestic consultants.

92. The ADF eligibility matrix (Table 2), the proposed policy for graduation from regular Bank assistance, and the cost-sharing ceilings for projects and TAs are linked to the classification of DMCs as shown in Table 3.

B. Domestic Preference Scheme for Goods and Civil Works

93. Under the existing procurement policy, all DMCs receiving Bank loans are eligible to participate in the domestic preference scheme for procurement of goods. The domestic preference scheme for procurement of civil works is, however, applied only to domestic contractors in Group A DMCs, typically the ADF-only countries. The policy was last revised in August 1991⁴⁵ nd at the time, it was stipulated that the policy be reviewed again after five years. Pending such review, it is proposed that the status quo be maintained in regard to the current eligibility of individual DMCs under the domestic preference scheme.

Back B. Graduation From Bank Assistance	Next VI.Conclusions