Enabling poor rural people
to overcome poverty
Following a request of the Evaluation Committee of IFAD's Executive Board for a Thematic Study (TS) on the relationship between IFAD and its Cooperating Institutions (CIs), the following report is a response to that request. The TS is based on the use of data from IFAD's various information systems and databases, and in particular, a comprehensive review of 322 Project Files, including approximately 2 200 Supervision Mission Reports and about 900 IFAD staff Back-to-Office Reports, which provided sufficient quantitative data for carrying out the analysis of several issues. In addition, significant information was gathered from over 30 interviews with experienced IFAD staff as well as a consultation with IFAD staff on their perceptions concerning the performance of CIs. Complementary information was also collected from the CIs.
IFAD entrusts the administration of its loans and the supervision of its projects to CIs. So far, the Fund has established agreements with 15 CIs, of which, 10 have effectively been involved in more than 320 IFAD operations. IFAD has pioneered a working arrangement whereby it relies on a number of cooperating agencies to carry out, on its behalf, designated duties which the CIs are expected to perform according to their own technical standards, while at the same time conforming to IFAD's mandate and policies. In addition to supervising projects and administering loans, the CIs, according to the provisions of the cooperation agreements, can also perform preinvestment activities (e.g. project identification, preparation and appraisal) on behalf of the Fund.
As these functions have grown over time, a number of questions have arisen which the TS seeks to address: firstly, the quality of services provided by CIs in supervision tasks and their effectiveness in project implementation; secondly, whether, in performing their various functions, CIs respond to IFAD's specific concerns; and thirdly, a growing concern regarding the costs of these services.
Two 'guiding questions' have oriented the TS:
(a) How have IFAD's relationships with CIs evolved since 1978?
(b) What are the costs and benefits of these relationships?
The answers to the above questions, and the findings of the TS and its specific conclusions on the various themes analyzed have led to the following Main Conclusions:
IFAD's relationships with CIs shows a pattern with two different phases. From 1978 to 1984, IFAD's relationships with larger International Financial Institutions (IFIs) CIs (i.e. the World Bank and the Regional IFIs), were strong and growing steadily while relationships with non-IFIs CIs (i.e. United Nations Development Programme/Office for Project Services (UNDP/OPS)) and smaller subregional IFIs were rather marginal. From 1985 to 1991, there has been a new trend: a progressive divergence between IFAD and the larger IFIs-CIs is recorded, along with the growing role of UNDP/OPS and, to some extent, small subregional IFIs-CIs.
The costs and benefits of IFAD's relationships with CIs are associated with the two different phases above mentioned.
The First Phase (1978-1984) has had the following main benefits:
(i) IFAD's initial technical and financial inexperience was compensated for by the support received from the larger CIs-IFIs.
(ii) IFAD's capacity to provide financial assistance was made possible through the cofinancing of numerous projects with funds from the CIs-IFIs.
(iii) IFAD's costs at preinvestment stages of the project cycle (i.e. Identification, Preparation and Appraisal) were highly "subsidized" by the CIs-IFIs which financed most of these expenditures.
(iv) Project Supervision Costs were mainly financed by the CIs-IFIs because of the comparatively high percentage of CI-initiated projects.
The main costs of the First Phase have been the following:
(i) As a consequence of IFAD's limited participation in CI-initiated projects, in many cases, IFAD's main concerns with respect to the target-group and other aspects associated with the terms of the Fund's Lending Policies and Criteria were not fully taken into account.
(ii) IFAD-initiated projects carried out by CIs-IFIs faced similar problems at the Appraisal stage.
(iii) IFAD's participation in Project Supervision and Loan Administration tasks was marginal. Over time, different perceptions between IFAD and the CIs provoked growing divergencies on the priorities and issues to be addressed during project implementation.
The Second Phase (1985-1991) has shown the following benefits:
(i) The development of IFAD's so-called 'specificity' is the main benefit of this phase in which IFAD has become increasingly involved in project preinvestment stages, in turn generating a process of formulation of new objectives and new and more adequate instrumentalities for IFAD's projects.
(ii) IFAD's progressive self-reliance and experience in project formulation has, in turn, had a positive effect on the development of new capabilities for Project Supervision and Loan Administration in UNDP/OPS and various subregional IFIs-CIs.
(iii) IFAD's capacity for mobilizing cofinancing, other than through traditional IFIs-CIs, has developed significantly in the last years.
The main costs of this Second Phase are the following:
(i) IFAD's financial assistance decreased in real terms due both to a reduction in IFAD's resources and the growing absence of cofinancing from CIs, given the emphasis on structural and sector adjustment by the major IFs, especially the World Bank.
(ii) IFAD's costs associated with preinvestment activities grew significantly in absolute and relative terms. IFAD's total Project Supervision costs also increased significantly as CI-initiated projects became more and more marginal. As a consequence, IFAD might face a critical situation in the medium term if no corrective actions are taken.
(iii) In the last seven years, the growth of IFAD's operational expenditures is almost double the growth of IFAD's loan portfolio.
(iv) A growing gap in technical, personnel and institutional terms has developed between IFAD and various of the larger IFIs-CIs.
Specific findings and conclusions
The two Main Conclusions presented are based upon a set of findings and specific conclusions of the TS. These are organized according to the following elements analyzed by the TS.
(a) IFAD's mandate regarding the establishment of relationships with other international organizations.
(b) Legal links established between IFAD and the different international institutions, particularly CIs.
(c) Evolution of the actual involvement of CIs in IFAD operations.
(d) The role of CIs in the preinvestment stages of IFAD's project cycle.
(e) The role of CIs in Project Supervision and Loan Administration.
(f) Costs of CI functions.
(g) IFAD's specificity and the relationships with CIs over time.
IFAD has fully met the requirement of establishing relationships with other international organizations. However, in spite of having concluded 33 Cooperation Agreements (CAs), the actual work is restricted to no more than one-third of these institutions. It could even be argued that IFAD could work with still fewer than the ten with which it is actively engaged.
At an opportuned point in the future, IFAD might consider reviewing its criteria for pursuing collaborative arrangements with CIs with a view to eventually limiting their number. Elements of such criteria may include, inter alia: past experience with pre-investment and/or supervision/loan administration activities in terms of response to IFAD's concerns, costs of services, and the cofinancing record of IFAD-initiated projects. It is not recommended that this exercise take place now in order to allow time for some recently approved smaller CIs to fully express their very encouraging propensity to work with IFAD. A hasty decision to focus, for example on a few major CI-IFIs may lead to lost opportunities to develop and preserve IFAD's specificity.
IFAD's requirements in working with CIs were, in a first stage, adequately articulated within the legal framework designed for the establishment of relationships with CIs. However, these legal tools were not used to their full potential, e.g., the Letters of Appointment were not modified to take into account changes in IFAD's policies and procedures. The response of CIs has been mixed: while the large CIs have introduced formal procedures to deal with IFAD, without major adaptation to IFAD policy changes, the smallest CIs have been able to develop a few formal instruments and were much more responsive to IFAD's demands.
IFAD should introduce amendments to some of the legal instruments which link the Fund to the CIs. In particular, the following measures should be considered:
(i) Introducing as an annex to the CAs a standard formal document which would summarize the most important requirements for the satisfactory supervision of IFAD-financed projects, in conformity with policies derived from the development of the Fund's areas of specificity in recent years. Such document, the content of which may slightly vary according to the CI concerned, should contain specific directives judged necessary as a result of lessons learnt in past collaboration with each CI. The content of the document would be updated as policy changes occur.
(ii) A new format and content of the Letters of Appointment to CIs must be formulated. This new format should introduce special sections to provide clear instructions to the corresponding CI on the main aspects of each project which constitute IFAD's main concerns and require special attention during supervision.
The actual involvement of the larger CIs (e.g. the World Bank and the regional IFIs) in IFAD's operations has been drastically reduced in the last seven years. The main reasons for this reduction in cooperation between IFAD and the oldest CIs (i.e. the World Bank and the regional IFIs) were the changes in CI policies and priorities regarding rural development and rural poverty alleviation in the mid-1980s, while IFAD has persisted in pursuing its mandate. The development of IFAD specificity and the corresponding formulation of specific objectives and instrumentalities added new demands which larger CIs could not always meet, given their emphasis in the case of the World Bank, thus reducing the opportunities for cofinancing with IFAD. A policy of CI diversification was also decided upon in that period.
Changes in the world economic context are leading to a revival of the major CIs' concerns regarding poverty alleviation. This process, together with IFAD's need to increase the participation of CIs in cofinancing activities, could serve as the basis for a reinforced link between these CIs and the Fund. However, past experience must be taken into account in order to ensure better services on a sustainable basis.
The steps being taken by IFAD to re-establish a proper balance in its collaboration with CIs, with a view to enhancing opportunities for cofinancing CI-initiated projects, should be pursued but efforts must be made to ensure that those projects always meet a minimum set of IFAD basic requirements especially with respect to project beneficiaries. To this effect, inter-agency meetings on policy and operational matters should be encouraged.
With the exception of FAO, no major involvement of CIs in Project Identification and Preparation has ever been recorded for IFAD-initiated projects. Since 1985 a strong trend has developed towards reducing the number of Appraisals undertaken by CIs. Consequently, IFAD's direct participation in all preinvestment stages of the project cycle has been consistently increasing. Currently, most preinvestment activities are carried out by IFAD.
IFAD's direct involvement in standard formal Identification Missions should be reduced, bearing in mind that proper identification can now count on in-house country and project knowledge to the fullest extent possible. Likewise, the number of IFAD-initiated by CI-appraised projects could be increased to reduce the workload and direct responsibility of IFAD staff in that complex exercise.
Although there is no "Golden Rule" for Project Supervision, as presently undertaken for the average IFAD project, supervision can not be considered fully satisfactory. One supervision Mission (SM) every eight months, composed primarily of two staff members of the corresponding CI with an average stay of five working days, does not provide enough supervision inputs for the types of projects that characterize IFAD's operations. Moreover, less than one-quarter of IFAD projects have included start-up or inception missions. There are wide disparaties among CIs regarding this indicator: in general, UNDP/OPS and small CIs-IFIs have carried out more of these missions. Concerning timeliness of SMs, the records show that one-fifth of all projects did not receive any SM in the first two years of implementation.
IFAD should review its SM requirements and related average manpower coefficients to ensure that:
(i) no project receives less than one SM per year, while problem projects receive adequate assistance in terms of amount and quality of required supervision.
(ii) all CIs undertake start-up missions (inception missions) in order to facilitate the compliance of effectiveness conditions and/or to help in designing the programme of work for project implementation.
There are differences in the supervision inputs provided to different project-types and regions. Nevertheless, these differences do not show significant disparity. But, there are significant variations in supervision outputs produced by different CIs. IFAD has to deal with heterogeneous Supervision Reports (SRs), different formats and rating systems in order to measure project implementation performance. IFAD, for its part has, in the course of carrying out the TS, compiled a large database on supervision costs and impact.
IFAD should pursue its current efforts to design a general format for SRs or, at least, negotiate with the different CIs so that they include a minimum and homogeneous critical mass of project data in all SRs. More particularly, in carrying out this work, it would be useful to take into account the identified information flaws as well as remarking on the quality of SRs.
IFAD should, moreover, systematically adopt and apply a standard set of ratings to measure project implementation performance. This should also be negotiated with the CIs. In addition, much more attention should be paid during SMs to the contextual changes, especially policy changes in the borrowing country, and their effects on project implementation outcomes.
There are deficiencies in IFAD's SR filing system since more than 10% of SMs do not have the corresponding reports on file. These flaws are aggravated by the omission of important data in the SRs.
The storage of information provided in IFAD's SM reports should be urgently reviewed to ensure that complete up-to-date information is available at all times for loan portfolio management and evaluation purposes. The SR format referred to under Recommendation 6 should address the issue of the critical mass of proper data.
A statistical analysis of data on supervision and project implementation performance has shown that there is not a significant relationship between supervision efforts and project implementation performance. This finding must be considered carefully since it implies that the quality of supervision by CIs may have serious limitations and new approaches should be explored. At the same time, there is evidence that significant experience has been gained in loan administration work within IFAD. The acquired experience could be useful for eventual experimentation with new Project Supervision and Loan Administration approaches.
With a view towards identifying new and efficient approaches to Project Supervision, IFAD should undertake in a few selected projects, pilot-experiences in Project Supervision and Loan Administration, taking into account a past experience with CIs as well as internal know-how developed in the administration of technical assistance grants and in the case of a few loans (under special circumstances of capacity loss by a CI). IFAD management may want to study this proposal further and seek authorization from its governing bodies to proceed. Two complementary approaches, within the framework of such pilot experiences, are recommended:
(i) IFAD should work out new and different supervision agreements, particularly with those CIs which have so far displayed a good understanding of IFAD specificity.
(ii) In some selected cases, IFAD should carry out independently the supervision and loan administration of its projects.
IFAD's direct involvement in supervision shows a growing trend. More than one thousand IFAD visits have been carried out to partially supervise project implementation: the participation of 299 IFAD staff in SMs carried out by CIs, 650 independent IFAD staff visits to projects and 150 IFAD consultant follow-up missions summarize IFAD's efforts in these tasks.
IFAD's direct involvement in supervision derives principally from the need to preserve the Fund's identity by ensuring that projects being implemented are essentially in line with proposals approved by the Executive board. In this respect, IFAD management is accountable to its governing bodies. Therefore to the extent of the availability of the financial and human resources, such direct involvement should be maintained. However, it should be focussed more and more on selected projects with a view to drawing lessons on new and/or enhanced approaches to Project Supervision and Loan Administration as discussed under Conclusion 8 and the corresponding Recommendation.
Payments to CIs and consultants represent 40% of total IFAD operational expenditures. These costs show a growing trend, although average real costs corresponding to the preinvestment stages, as well as to Project Supervision, have not increased in the last 14 years. In fact, they have slightly decreased in real terms. World Bank costs are 50% higher than the average cost of the rest of CIs for Project Supervision, but are in line with IFAD's costs for preinvestment activities.
IFAD's operational expenditures represent 1.6% of the Fund's total portfolio. In the last five years, these expenditures have grown at 17% a year and supervision costs have grown at 20% a year. This trend could affect IFAD's financial viability in the medium term given the slower growth of IFAD's loan portfolio (e.g. 12% per year) and the corresponding slower increase in financial income.
IFAD should make it a policy (and practice) to build up its new project pipeline to the fullest extent possible on the basis of its staff's country and project experience, as suggested under Recommendation 4, thereby reducing project identification costs. With respect to project preparation, sustained efforts must be made to use local expertise through individual consultants, universities and relevant private institutions, with the expectation that if carefully selected, the local experts concerned should be able to perform satisfactorily with limited external inputs after a few project preparation exercises. The result should be an overall cost reduction to IFAD and capacity-building in the countries concerned. As regards Appraisal and Supervision costs, IFAD should maintain its current practice of cost reimbursement negotiations with CIs.
In connection with the proposed supervision experiment (pilot-experiences) under Recommendation 8, a detailed feasibility study should be undertaken in order to properly assess the alternative costs of loan administration work. The results of this proposed study would provide a sound basis for making decisions with respect to the growing direct involvement by IFAD in these tasks.