The World Bank’s Business Plan and Administrative Budget

Recognizing that its corporate planning needs to be more closely aligned with efforts to achieve the Millennium Development Goals, the Bank has moved to a three-year budgetary and corporate-planning cycle. In June 2003, Executive Directors approved a net FY 2004 administrative budget of US$1,438.3 million, representing a nominal increase of some 6 per cent over the approved budget for FY 2003. Given growing resource pressures and the need for the Bank to prioritize its operations, Executive Directors recently have increased their focus on the Bank’s strategic planning and budgetary processes. Executive Directors’ offices are now involved much earlier in the budget formulation process than they have been in the past.

FY 2003 IBRD Financial Results

As a development institution, the IBRD does not maximize profit. Instead, it aims to earn a return on its assets that is sufficient to ensure its financial strength and sustain its development activities on an ongoing basis. The IBRD usually earns a net return on its assets of about 1 per cent per annum. In FY 2003 the IBRD managed to achieve a net return on assets of 2.1 per cent. The IBRD’s main financial risk rests with the credit quality of its disbursed loan portfolio. At the end of FY 2003 the IBRD’s equity-to-loans ratio, which is a summary measure of the institution’s risk-bearing capacity, was 26.6, compared to 22.9 in FY 2002. These levels are considered sustainable.

Principal and charges totalling US$629 million from four IBRD borrowers^[9] were recorded in "non-accrual" status at the end of FY 2003. No IBRD borrower entered into non-accrual status during the fiscal year. During FY 2003 the IBRD held provisions equivalent to about 3.5 per cent of its outstanding loan portfolio against anticipated losses. The Bank follows very conservative investment and hedging policies. In FY 2003 the IBRD raised US$18.8 billion, before swaps, in medium- and long-term debt on international capital markets to fund its operations. This was US$3.25 billion lower than in FY 2002. All proceeds from new funding are initially invested in the IBRD’s liquid asset portfolio until they are required for IBRD operations. The IBRD strategically repurchases, calls or prepays its debt to reduce the cost of borrowing and to reduce the exposure to refunding requirements in a particular year or to meet other operational requirements. In FY 2003 the IBRD repurchased or called US$6.3 billion of its outstanding borrowings (net of unamortized discounts, premia and issuance costs). The IBRD enters into currency and interest rate swaps to convert US dollar and non-US dollar fixed-rate borrowings into US dollar variable rate funding for its loans. The IBRD does not enter into derivatives for speculative purposes.

The process and procedures under which the IBRD manages its financial risk profile continue to evolve as its activities change in response to market, credit, product and other developments. The Executive Board and its Audit Committee periodically review trends in the IBRD’s risk profiles and performance as well as any significant developments in its risk management policies and controls.

Allocation of FY 2003 Net Income

IBRD net income supports its development objectives. In July of each year Executive Directors recommend to Governors specific allocations from the previous year’s net income. IBRD "allocable" net income, after reserves and interest waivers, was US$640 million in FY 2003. In addition to providing funding for IDA operations and heavily indebted poor country (HIPC) debt reduction, net income allows the IBRD to respond to unforeseen humanitarian crises and to provide grants, from time to time, for other development causes. Governors approved allocations from FY 2003 net income of US$300 million to IDA, US$240 million to the HIPC Trust Fund and US$100 million to the Bank’s Surplus Account.

Managing Canada’s Interests at the World Bank

Finance Minister Ralph Goodale, as Canada’s Governor at the World Bank, is responsible for the management of Canada’s interests at the Bank. Minister Goodale exercises his influence through exchanges of views at the Development Committee and annual meetings of the Board of Governors of the Bank, and through discussions with the President of the Bank. Within the Development Committee, Minister Goodale represents the interests of Canada and all other members of the Canada/Ireland/Commonwealth Caribbean constituency.

The Department of Finance consults closely with CIDA and the Department of Foreign Affairs and International Trade (DFAIT) in formulating Canadian policies related to Bank issues. Paul Thibault, the President of CIDA, is Canada’s Alternate Governor for the World Bank.

Governors have delegated decision making for a wide variety of day-to-day operational, policy and administrative matters to the Bank’s Executive Board. The Executive Board formally approves all loans, credits, projects and World Bank policies, discusses Country Assistance Strategies and provides strategic advice to Bank management as appropriate. Of 24 Executive Directors on the Board, 12 are from developing and transition countries and 12 from developed countries. Marcel Massé, who was elected Executive Director in September 2002 by constituency Governors, represents Canada and the 12 other members of the constituency.

Canada’s Office at the World Bank

One of the key roles of the office is to provide advice and assistance to Canadian individuals and businesses on doing business with the Bank. Over the past two decades, the Executive Director’s office has helped introduce roughly 1,000 Canadian businesses to such opportunities through seminars and workshops held across the country and by organizing direct contacts in Washington. Beyond its formal work, the office provides a valuable bridge between the Bank and Canadian constituents—individuals, NGOs, federal and provincial agencies, associations, the academic community and parliamentarians, among others.

In addition to the Canadian Executive Director’s office, the Canadian Embassy in Washington has established an Office for Liaison with International Financial Institutions that can advise Canadians on how to participate in Bank-financed projects. The office can be reached at (202) 682-7719.

Another point of contact for Canadian businesses is the Bank’s Business Web page at www.worldbank.org/opportunities. Canadian firms, organizations and institutions that are interested in pursuing opportunities created by Bank-financed projects should consult the Bank’s Web site on a regular basis. Information on CIDA’s cooperation with and support for World Bank and World Bank-supported programs can be found at www.worldbank.org/canada.

Canadian Procurement at the World Bank

Canadian firms benefit from Canada’s World Bank membership by accessing procurement opportunities under World Bank-financed loans. Canadian expertise in the power, environmental, engineering, public service reform, health, education, financial and transportation sectors has led to procurement opportunities for Canadian firms for developing country projects around the globe. In FY 2003 Canadian companies provided US$139 million in goods and services under Bank-funded projects with, as in past years, consulting services accounting for approximately half this amount. For example, Terasen International Inc. undertook a detailed study of the regional energy market in Kamchatka under a US$450,000 World Bank-funded technical assistance project with the Government of the Russian Federation and the administration of the Kamchatka Region. EDUC-INTER Inc., a Montréal-based consulting firm active in education and training since 1996, recently obtained a US$500,000 contract with the World Bank in the education sector. This contract demonstrates how Canadian expertise in applying information technology can foster a better relationship between education and employment. Dévelopment International Desjardins, Cowater International and the Montréal-based International Civil Aviation Organization also gained World Bank financing to provide technical assistance to developing countries.

Canadian companies such as Tecsult International, CIMA International, Intelcom Research Consulting, R.J. Burnside International Ltd. and Dillon Consulting were successful in gaining financing from the World Bank in 2003 for various consulting services.

Canada Mortgage and Housing Corporation obtained a contract valued at almost US$4 million to provide mortgage finance technical assistance to the Government of Algeria, while other Canadian companies, such as Systeq Instruments of Canada Inc., RPM International Ltd. and Trans Canada Turbines, won contracts to supply various goods for World Bank-financed projects. The Executive Director’s office collaborated with several institutions and government agencies to promote business opportunities with the Bank. Through their participation in Canada in several events and conferences such as International Development Days, the Annual Meeting of the Saskatchewan Trade and Export Partnership and special events organized by the World Trade Centre in Montréal, Toronto and Halifax, World Bank representatives provided information to the Canadian private sector on how to do business with the Bank.

Trust Fund Activities

Consultant trust funds (which, in Canada’s case, are financed by CIDA and administered by the Bank) are a significant source of funds for identifying and preparing Bank projects, programs or analytical work focused on poverty reduction. These trust funds are intended to support the participation of Canadian consultants with limited prior involvement in activities funded by the Bank. In FY 2002 the Board of Directors approved a package of reforms for consultant trust funds which simplify and standardize existing eligibility criteria. These reforms have resulted in new standardized consultant trust fund framework agreements for all donors. The changes strengthen the alignment of the consultant trust funds with the Bank’s overall strategic development priorities and resource-planning processes. They also improve management and strengthen oversight of the consultant trust funds. The Bank introduced a 5-per-cent fee for its administration of these funds.

CIDA’s framework agreement with the Bank, signed in June 1995, governs all of its other trust fund arrangements with the Bank, the World Bank Institute and the Global Environment Facility. These overall trust fund programs include trust funds for persistent organic pollutants (C$20 million), the Prototype Carbon Fund (US$10 million), the Public-Private Infrastructure Advisory Facility (C$800,000) and the Cities Alliance (C$400,000). CIDA has established a separate C$5-million trust fund with the World Bank Institute that enables the organization to engage Canadian expertise in the preparation and delivery of its training programs in countries eligible for Canadian Official Development Assistance. Allocations are made annually to five or six World Bank Institute programs, based on their compatibility with Canadian development assistance priorities.

International Finance Corporation

The International Finance Corporation (IFC), created in 1956, supplements the activities of the IBRD and IDA by providing financing on commercial terms for productive private sector enterprises that lack access to private capital markets. The institution is the largest multilateral source of loan and equity financing for the private sector in the developing world. The institution provides both loans and equity investments; loans represent 75 per cent of the IFC’s disbursed portfolio. Through its co-financing arrangements, it leverages substantial private financing for development purposes. By investing alongside the IFC (as Canadian financial institutions have done since the mid-1990s through their participation in the IFC loan syndication program) investors gain valuable access to potential new customers, attain a high-yielding asset and, given the IFC’s good relations with developing country governments, benefit from a degree of implicit political risk coverage.

In FY 2003 the IFC signed investment commitments totalling US$5.03 billion for 204 projects in the developing world, compared to US$3.6 billion in FY 2002. Of this amount, US$1.2 billion was mobilized through loan syndications, compared to US$518 million in FY 2002. Of the US$3.9 billion of the IFC’s own financing, US$2.6 billion was provided in the form of loans, US$429 million in the form of other types of guarantees and risk management products, US$712 million as equity investments and quasi-equity investments, and US$106 million for risk management products. The IFC earned net income of US$487 million in FY 2003, compared to US$215 million in FY 2002.

While the bulk of the IFC’s financing is provided to middle-income countries, the institution is increasingly targeting frontier markets (countries such as those in Africa, traditionally of little interest to private investors). Canada supports this stronger focus on frontier markets, while recognizing the difficulties posed by higher business costs and financial risks.

Canada supports a number of technical assistance programs through the IFC’s Technical Assistance Programme, which was instituted in 1988 and manages technical assistance programs funded by bilateral and multilateral donors. At the end of FY 2003 the program comprised 40 trust funds that focused on frontier markets, high-impact sectors and small and medium-sized enterprises. In addition to its consultant trust funds with the IFC, CIDA has also provided funding for the South East Europe Enterprise Facility, the Mekong Project Development Facility, the Private Enterprise Partnership and the Foreign Investment Advisory Service.

Canada maintains a 3.45-per-cent share of IFC capital. It has paid-in US$81.3 million to the IFC’s capital stock. Given the risks associated with its financial operations, all of the IFC’s authorized capital is paid-in.

Canada’s Financial Participation in the IFC

Multilateral Investment Guarantee Agency

The Multilateral Investment Guarantee Agency (MIGA) was created in 1988 to encourage foreign investment in developing countries by providing viable investment insurance against non-commercial risks (e.g. expropriation, transfer restrictions, breach of contract, and war and civil disturbance), thereby improving or creating investment opportunities. MIGA’s Canadian clients include Barrick Gold Corporation, Hydro-Québec International and The Bank of Nova Scotia.

In FY 2003 MIGA approved 59 guarantees totalling US$1.4 billion for 37 projects, of which 19 were in IDA-eligible countries. IDA-eligible countries also benefited in 2003 from 35 MIGA technical assistance efforts. MIGA estimates that its guarantees facilitated US$3.9 billion in foreign direct investment. During FY 2003 MIGA also increased its support for investors from developing countries: it supported 12 investments made between developing countries.

Future Challenges

That millions of the world’s poorest are unable to share in the benefits of globalization is both an economic and moral issue, and has made development a prominent theme of G-7/G-8 meetings and of policy discussions in other multilateral fora (e.g. in the UN system, regional summits and World Trade Organization negotiations). Effective use of scarce resources is central to international discussions of development issues. At the International Conference on Financing for Development in March 2002, developed and developing country leaders agreed that more must be done to channel resources in support of development and that, for their part, developing countries have a responsibility to ensure that these resources are used effectively. Donors, conscious of the uneven results of decades of Official Development Assistance, want to ensure that scarce assistance resources produce measurable results. This requires stronger efforts by developing countries to create sound policy and institutional environments. The Bank, as the world’s largest provider of development financing, plays a crucial role in providing advisory and financial assistance to countries to help strengthen their economic, social and governance policies. Going forward this will remain one of the Bank’s more pressing challenges.

More effective measurement and monitoring of development results is a critical element of the development effectiveness agenda, and Canada will continue to stress the importance of results-based indicators. While the Bank has embarked on a program to improve its results measurement and monitoring, adapting and refining the Bank’s results measurement work to different developing country poverty reduction strategies will be a substantial challenge over the medium term.

Recognizing the importance of country-owned development strategies, the major challenge for the future will be to orient the Bank’s operations towards those clients which have strong economic and governance frameworks in place and to help convince countries with weak policy frameworks of the need to alter their policies. As the Bank moves increasingly to support nationally owned development strategies, a key challenge will be to work with developing country governments and civil society to ensure that there is sufficient capacity on the ground to develop and implement these strategies. The Bank will also have to work increasingly with other partners, both multilateral and bilateral, on the basis of their comparative institutional strengths, to improve the quality and effectiveness of development assistance within individual countries.

Without careful attention to the unique needs of individual countries, the Bank will be unable to meet its objectives of improving the quality of its operations and strengthening its development impact. Moreover, the effectiveness of the Bank’s own operations must be enhanced through closer partnerships with bilateral donors and international organizations. Cooperation with UN agencies, in terms of measuring global and national progress towards the Millennium Development Goals, will be key, given the high operational priority the Bank attaches to helping countries achieve these goals.

The Bank will continue to provide support to developing countries facing a broad range of institutional, economic and social challenges. The Bank’s strategy for contributing to capacity building and poverty reduction in LICUS will continue to evolve based on its operational experience. However, the Bank’s future challenges are not limited to the world’s poorest countries. A majority of the world’s poor live in middle-income countries, and over the coming year the Bank will be reviewing its strategy for how best to address the problems facing this particular segment of the world’s poorest.

Establishing clear development priorities and being more selective in its operations will be critical to future success. Canada will continue to stress the need for the Bank to be much more selective and transparent in its operations.

Joint Issues

Overview

The IMF and the World Bank are important institutions for Canada, each playing a unique role in the international economic and financial system. Nevertheless, there are key areas where the mandates of the two Bretton Woods Institutions overlap, or where there is a requirement for close cooperation and coordination of activities. Indeed, at the Halifax Summit in 1995, G-7 leaders asked that efforts be made to increase cooperation and coordination between the IMF and the World Bank. The heads of both institutions have put considerable effort into fulfilling that objective. At the special meeting, Financing for Development, that was held in Monterrey, Mexico, in March 2002, leaders from both the developing anddeveloped worlds asked the Bank and Fund to explore innovative waystoenhance the voice and participation of developing countries in theirdecision-making processes. Three particular examples—the joint preparationof a proposed program of assistance for HIPCs, Bank/Fund cooperation in addressing financial sector reform and Bank/Fund measuresto enhance developing country voice—are examined below.

Enhancing the Voice and Participation of Developing Countries in the Bretton Woods Institutions

Responding to the call at the March 2002 Monterrey special international conference on Financing for Development that the Bank and the Fund find "innovative and pragmatic" ways to enhance the participation of developing and transition economies in their decision-making, Ministers discussed the voice issue during the spring and fall 2003 meetings of the Development Committee of the Boards of Governors of the World Bank and IMF.

At present, there is no consensus among members to alter either the voting structure or the composition of the Executive Boards at the World Bank and the IMF. There is agreement, however, that more needs to be done to address capacity constraints in the offices of developing country Executive Directors at both institutions. There is also agreement that greater attention is needed to deal with the problem of weak capacity within developing country capitals to assess important World Bank and IMF policy issues from a developing country perspective. While Development Committee discussions have underlined that there is no single measure that can be taken to address this issue, the Committee is focusing its attention on a range of measures designed to address these capacity problems.

In April 2003, Executive Directors approved an increase in the professional staff complement of the two Executive Directors representing African countries at each institution. The two institutions are also making greater efforts to involve staff from developing country Executive Directors’ offices in their internal training programs. The World Bank has expanded its secure access to Executive Board documents to developing country capitals. Following the September 2003 Development Committee meeting, the World Bank has been developing a secondment program that will expose mid-level developing country officials directly to World Bank operations, with the object of improving their understanding of the Bank’s operational and decision-making processes. Separately from the World Bank and IMF, some bilateral donors are working to establish an independent policy advisory unit that developing countries could draw on to seek policy advice on key World Bank and IMF policy issues.

More broadly, the World Bank is moving to enhance developing country influence and participation by increasing its efforts to involve developing countries in the design and formulation of its Country Assistance Strategies and non-lending programs. The Bank is also making greater efforts to focus its Country Assistance Strategies on priorities identified by developing countries themselves in their Poverty Reduction Strategy Papers (PRSPs). Within IDA, donors are making greater efforts to engage borrowers in the regular series of donor meetings convened to discuss operational priorities for the 14th IDA replenishment period (2005–2008).

Strengthening Financial Sectors

Problems in the financial sector, especially the banking system, can disrupt growth and macroeconomic stability and spill over regionally and internationally, as shown by the emerging market financial crises of the late 1990s. In response to concerns about such problems, the IMF and World Bank are devoting increasing attention to financial sector issues. Discussions in both institutions in the past couple of years have focused on how they can assist member countries to establish and maintain sound financial systems.

The special Financial Sector Liaison Committee, composed of senior staff from the IMF and the World Bank, helps ensure effective collaboration between the two institutions on financial sector issues and enhance operational coordination on work in the financial sector in individual countries.

To help identify and evaluate vulnerabilities in financial systems, and assess observance of core principles, standards and good practices by member countries, the IMF and World Bank introduced the joint Financial Sector Assessment Program (FSAP) on a one-year pilot basis in May 1999. All 12 FSAP pilot missions were completed by April 2000. After a review of the experience with the FSAP pilot, the IMF and World Bank agreed to extend the FSAP and expand the coverage to up to 24 countries per year. Over 100 of the IMF’s 184 members have either participated in the FSAP or have volunteered to do so in the near future.

Information on financial system standards assessed under the FSAP is used to support Fund surveillance through the Financial System Stability Assessments (FSSAs), which are provided to the Executive Board as background to the Article IV consultation process. The summary assessments of standards contained in FSSAs become the Reports on the Observance of Standards and Codes modules.

The FSSAs include a form of "peer review" in that they are prepared with the participation of outside experts drawn from national supervisory agencies. This represents the operationalization of Canada’s financial sector peer review proposal made at the IMF meetings in April 1998.

Canada was the first industrialized country to undergo an FSSA. IMF and World Bank staff and outside specialists from Australia, Brazil, Germany, Sweden and the United States conducted a pilot review of Canada’s financial system in October 1999. The results of the peer review were released in the staff report for the 2000 Article IV consultation with Canada. Overall, the assessment found Canada’s financial system to be among the soundest in the world (see www.imf.org/external/pubs/cat/longres.cfm?sk=3420.0).

It is important that the Fund continue to help countries with limited resources and administrative capacities implement key codes and standards through the provision of advice and technical assistance. To help this important work, Canada is a founding contributor to the joint IMF/World Bank Financial Sector Reform and Strengthening Initiative, which was launched in the spring of 2002 and provides technical assistance to help countries address financial sector weaknesses identified in FSAPs and Reports on the Observance of Standards and Codes.

The international financial institutions’ mandate to strengthen financial systems, promote good governance and fight corruption encompasses the enhancement of a country’s capacity to combat money laundering and financial abuse. In 2000, the International Monetary and Financial Committee asked the Fund to explore how to incorporate work on financial abuse, particularly with respect to international efforts to fight money laundering, into its activities. As a result, in April 2001 the Fund’s Executive Board agreed the IMF would take the following steps to enhance the international efforts to counter money laundering:

• intensify its focus on anti-money laundering elements in all relevant supervisory principles, in particular by developing a methodology for enhancing the assessment of financial standards relevant to countering money laundering;

• work more closely with major international anti-money laundering groups;

• increase the provision of technical assistance in this area;

• include anti-money laundering concerns in its surveillance and other operational activities when relevant to macroeconomic issues; and

• undertake additional studies and publicize the importance of countries acting to protect themselves against money laundering.

In addition, the Fund and Bank recognized the Financial Action Task Force 40 Recommendations as the appropriate international anti-money laundering standards and agreed to adapt those Recommendations that are relevant to their mandates. As indicated in the "Strengthening Financial Sectors" section on page 61, it was agreed following the events of September 11, 2001, that the Fund would extend its involvement beyond money laundering to efforts aimed at countering terrorist financing. In this respect, the Fund has added the Financial Action Task Force’s 8 Special Recommendations on terrorist financing to the list of standards and codes useful to the operational work of the Fund and has adopted a comprehensive methodology for anti-money laundering and terrorist financing assessments.

Following the recommendation of the Financial Stability Forum, the IMF also agreed to carry out assessments of offshore financial centres (OFCs) to help them identify and reduce vulnerabilities in their financial systems. OFC assessments for 40 jurisdictions have been conducted or are underway. To help provide technical assistance in the Caribbean region, the Fund, in close collaboration with Canada, established the Caribbean Regional Technical Assistance Centre (CARTAC), which became operational in September 2001. Canada is the largest single donor to CARTAC, which is designed to strengthen the region’s technical capability in financial sector regulation and supervision, tax administration and other areas.

Multilateral Debt Relief

In September 1996 the IMF and World Bank launched the Heavily Indebted Poor Countries Initiative (HIPC Initiative) to reduce the unsustainable debt burdens of the world’s poorest countries. After a review of the HIPC Initiative in 1999, a number of modifications were approved to provide faster, deeper and broader debt relief and to strengthen the links between debt relief, poverty reduction and social policies. Currently 42 countries are being considered for assistance under the HIPC Initiative. Guyana, a member of Canada’s constituency at the World Bank, recently reached its HIPC completion point and has completed the process.

Good progress has been made. As of the end of December 2003, 26 countries were benefiting from debt relief under the HIPC Initiative. Ten of them (Benin, Bolivia, Burkina Faso, Guyana, Mali, Mauritania, Mozambique, Nicaragua, Tanzania and Uganda) have completed the HIPC process and received irrevocable debt relief. Fourteen more are expected to reach the completion point in 2004.^[10] These countries will receive over US$40 billion in debt relief under the HIPC Initiative and additional measures, and they will benefit from an average two-thirds reduction in their debt burdens.

With the relatively stronger HIPC cases making good progress, further progress on the overall initiative will require closer examination of how best to bring the remaining six conflict-affected HIPC countries^[11] into the process. Their special circumstances could merit flexible treatment. However, many countries emerging from conflict have serious governance problems that could undermine assistance efforts; these governance issues will need to be addressed before the international community can engage meaningfully with them.

Maintaining long-term debt sustainability in HIPCs will also be a challenge. The economic weakness of many HIPCs leaves them vulnerable to exogenous shocks, such as a fall in primary commodity prices, which could alter their debt sustainability prognosis.

Annex 1
Active IMF Lending Arrangements—As of December 31, 2003 (cont’d)

Annex 2
IBRD Loans and IDA Credits—
Fiscal Year 2003 (July 1, 2002–June 30, 2003)

Annex 4
Disbursements by IBRD and IDA Borrowers:
Goods and Services From Canada—To June 30, 2003 (cont’d)

Annex 5
IBRD Loans and IDA Cumulative Lending by Country—
As of June 30, 2003 (cont’d)

Annex 5
IBRD Loans and IDA Cumulative Lending by Country—
As of June 30, 2003 (cont’d)

Annex 5
IBRD Loans and IDA Cumulative Lending by Country—
As of June 30, 2003 (cont’d)

Annex 6
Projects Approved for IBRD and IDA Assistance in Fiscal Year 2003,
by Country (July 1, 2002–June 30, 2003) (cont’d)

Annex 6
Projects Approved for IBRD and IDA Assistance in Fiscal Year 2003,
by Country (July 1, 2002–June 30, 2003) (cont’d)

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