managing for transition impact at the ebrd world bank donor meeting paris, may 21, 2008

Managing for transition Managing for transition impact at the EBRDimpact at the EBRD

World Bank Donor MeetingWorld Bank Donor Meeting

Paris, May 21, 2008Paris, May 21, 2008

22

IntroductionIntroduction

EBRD mandate: foster transition to open EBRD mandate: foster transition to open market economies and private and market economies and private and entrepreneurial activityentrepreneurial activity

““Systemic change”, not “development Systemic change”, not “development outcomes”outcomes”

No existing template for project appraisalNo existing template for project appraisal Approach evolved in steps over ten yearsApproach evolved in steps over ten years Further refinements under consideration Further refinements under consideration

(environmental impact)(environmental impact)

33

Aspects of transition impact Aspects of transition impact managementmanagement

1.1. Translate institutional mandate into Translate institutional mandate into project-level frameworkproject-level framework

2.2. Link operational objectives to Link operational objectives to economic prioritieseconomic priorities

3.3. Appraise, monitor and evaluate projAppraise, monitor and evaluate project impactect impact

4.4. Governance and decision-makingGovernance and decision-making

44

Overview: Managing for transition Overview: Managing for transition impact in EBRD operationsimpact in EBRD operations

Country / sector performance

Project performance

Team / banker performance

Institutional objectives / targets

Country and sector strategies

Budget scorecard / transition targets

Team targets for project rating

Ex ante appraisal Transition gap analysis

Transition impact ratings

n.a.

Monitoring implementation

Transition Report Transition impact monitoring system

n.a.

Post-evaluation TI Retrospective, Randomized Impact

Assessments

Project evaluation reports

n.a.

Performance incentives /

compensation n.a. n.a.

Performance bonus / salary

55


1.1. Translate institutional mandate Translate institutional mandate into project-level frameworkinto project-level framework

2.2. Link operational objectives to economic Link operational objectives to economic prioritiespriorities

3.3. Appraise, monitor and evaluate project impactAppraise, monitor and evaluate project impact


66

Operationalising the transition Operationalising the transition mandatemandate

Define market economy and project Define market economy and project contributionscontributions

Three dimensions of a market economyThree dimensions of a market economy• Extent and structure of marketsExtent and structure of markets• Institutions and policies that support marketsInstitutions and policies that support markets• Skills and behaviours of a modern market Skills and behaviours of a modern market

economyeconomy Project transition impact checklistProject transition impact checklist Not quantifiable: ordinal approach, Not quantifiable: ordinal approach,

typologiestypologies

77

Transition impact checklist Transition impact checklist Market dimension Checklist items:

What can we achieve through projects?

Illustrations

Enhancing competition New entry, consolidation Extent and structure of

markets Expanding markets Backward and forward linkages, international

integration

Increased private sector role Privatization, public-private

partnerships Institutions and policies Strengthened institutional

framework Improved regulation, cost-

reflective tariffs Transfer and dispersion of

skills Managerial skills, lending

technologies

Demonstration effects from innovation

New processes, successful restructuring, financial

innovation Skills and behaviours (beyond

the project entity) Setting standards for

governance and business conduct

Governance bodies, IFRS accounting, integrity,

environmental standards

88


1.1. Translate institutional mandate into project-Translate institutional mandate into project-level frameworklevel framework

2.2. Link operational objectives to Link operational objectives to economic prioritieseconomic priorities



99

Linking project choice and design Linking project choice and design to economic priorities to economic priorities

Transition checklist does not Transition checklist does not per seper se express prioritiesexpress priorities

Four main instruments to inform project Four main instruments to inform project choicechoice• Analysis: Assess country and sector status, Analysis: Assess country and sector status,

gaps in economic development (triennial)gaps in economic development (triennial)• Strategy: Prepare country (triennial) and sector Strategy: Prepare country (triennial) and sector

strategies (periodically)strategies (periodically)• Monitoring: Annual monitoring of transition Monitoring: Annual monitoring of transition

progress across countriesprogress across countries• Evaluating broader impact: Transition Impact Evaluating broader impact: Transition Impact

Retrospective (every 5 years), experimenting Retrospective (every 5 years), experimenting with Randomized Impact Assessmentswith Randomized Impact Assessments

1010

Assessing gaps in transition Assessing gaps in transition

Attempt to rate challenges systematicallyAttempt to rate challenges systematically• 13 sectors x 27 countries x 3 dimensions = 13 sectors x 27 countries x 3 dimensions =

1053 ratings1053 ratings Define benchmarks of good practiceDefine benchmarks of good practice Compare actual achievements against Compare actual achievements against

benchmarksbenchmarks• Value judgments, supported by dataValue judgments, supported by data

Rate magnitude of remaining challengesRate magnitude of remaining challenges• Scale: Scale: large; medium; small; negligiblelarge; medium; small; negligible

1111

Framework for transition gap Framework for transition gap assessments: Illustrationassessments: Illustration

Starting point Intermediate steps

Benchmark

Ownership State ownership, conglomerates

Commercialization, corporatization, small business development

Private ownership, modern corporate governance, dynamic entrepreneurship

Markets Price controls, foreign trade and exchange controls

Decentralization, declining obstacles

Competitive markets, limited intervention

Financial institutions

Directed lending, interest rate controls, few instruments

Liberalized lending, imperfect regulation, limited depth

Deep, diverse and well-regulated markets

Infrastructure Central control, tariffs delinked from costs, lack of transparency

Decentralization, regulation

Public, private and PPP structures, financial viability, public service contracts

Energy efficiency / environment

Energy and environment considered free goods - waste and pollution

Steps towards tariff reform, metering, environmental regulation, health and safety standards

Cost-reflective tariffs, polluter pays principle, company environmental management, carbon markets

1212

Annual monitoring: Annual monitoring: Transition Report Transition Report

Country-by-country review of Country-by-country review of progress on several reform progress on several reform dimensionsdimensions

Progress is rated on a scale of 1-4Progress is rated on a scale of 1-4++ (transition indicators)(transition indicators)

Published in November and Published in November and presented in roadshowspresented in roadshows

Brief update prior to Annual Meetings Brief update prior to Annual Meetings (Spring)(Spring)

1313

Transition indicators 2007 Transition indicators 2007

Reform progress by sector

0

1

2

3

4

5

6

7

Trade andforeign

exchangesystem

Infrastructurereform

Large-scaleprivatisation

Securitiesmarkets and

non-bankfinancial

institutions

Banking reformand interest

rateliberalisation

Competitionpolicy

Nu

mb

er

of

up

gra

des

CEB SEE CIS+M

0

1

2

3

Electricpower

Railways Roads Telecoms Water andwaste water

0

1

2

3

Electricpower

Railways Roads Telecoms Water andwaste water

1414

Transition indicators 2007Transition indicators 2007

1.0

1.3

1.7

2.0

2.3

2.7

3.0

3.3

3.6

4.0

4.3

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

Small privatisation, liberalisation of trade and pricesLarge privatisation, financial developmentGovernance, competition and infrastructure

CEBSEE CIS/M

1515




3.3. Appraise, monitor and evaluate Appraise, monitor and evaluate project impactproject impact


1616

Project appraisal: Ex ante impact Project appraisal: Ex ante impact assessment assessment

At appraisal, draw together gap analysis and At appraisal, draw together gap analysis and project checklistproject checklist• Does project selection reflect transition priorities?Does project selection reflect transition priorities?• Does project design (e.g., covenants, technical Does project design (e.g., covenants, technical

assistance) maximize impact?assistance) maximize impact?• How likely is the project to achieve its transition goals How likely is the project to achieve its transition goals

(e.g., policy risks, commercial strength)?(e.g., policy risks, commercial strength)? Rating for transition potential: Rating for transition potential:

• Excellent, good, satisfactory, marginal, unsatisfactoryExcellent, good, satisfactory, marginal, unsatisfactory• Only projects rated “satisfactory” or better can proceedOnly projects rated “satisfactory” or better can proceed

Rating for risks to transition impact:Rating for risks to transition impact:• Negligible, low, medium, high, excessiveNegligible, low, medium, high, excessive• Projects with “excessive” rating do not proceed Projects with “excessive” rating do not proceed

Project monitoringProject monitoring

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Stylised ratings guideStylised ratings guide• No market distortions; transition impact via demonstration effects or impact on markets to be achieved through project selection

• Sector requires policy changes but these are being implemented by client’s own accord or externally driven (e.g. EU accession;

• Sector requires policy change by government but client is a private company – Bank’s role limited to policy dialogue;

• Company requires substantial restructuring but Bank has no leverage.

• Project addresses a clear transition challenge in company or sector specifically identified in Bank country or sector strategy;

• Sector requires policy changes that client is implementing and project facilitates with covenants, TC component or policy undertakings;

• Repeat project with company, or in sector, where market or demonstration effects or other transition impact sources are far from exhausted.

• Project is a “first” in sector or country with large market or demonstration effects;

• Project addresses a key transition challenge in company or sector with strong and comprehensive conditionality;

• Sector requires policy change and Bank plays a key policy dialogue role;

• Flagship company restructuring/privatisation in sector or country.

Satisfactory

Good

Excellent

1818

Risks to Transition ImpactRisks to Transition Impact

Likelihood of not achieving transition potential Likelihood of not achieving transition potential • e.g., due to business environment, government policies, e.g., due to business environment, government policies,

legal framework, project or client performancelegal framework, project or client performance Likelihood of “negative” transition impact from Likelihood of “negative” transition impact from

perverse attributes of the projectperverse attributes of the project• e.g., reputation risks, subsidies, trade barriers, other e.g., reputation risks, subsidies, trade barriers, other

market distortionsmarket distortions Many transition risks are correlated with Many transition risks are correlated with

commercial riskcommercial risk• if a project does not perform, transition impact if a project does not perform, transition impact

potential will not be realisedpotential will not be realised

GoodSatisfactory Excellent

Distribution of transition impact Distribution of transition impact potential and risk ratings 2002- 2006 potential and risk ratings 2002- 2006

1

68

20

37

2

17

1 02

13

4

41

32

2

85

01

96

50

28

2

13

1 01

13

5

69

25

0

11

6

03

23

9

64

21

1

19

20

0

10

20

30

40

50

60

70

80

high medium low high medium low high medium low

2002 2003 2004 2005 2006

Satisfactory Good Excellent

2020

Project monitoringProject monitoring TIMS – information system to monitor and assess TIMS – information system to monitor and assess

the transition impact of the Bank’s portfoliothe transition impact of the Bank’s portfolio Project documents set detailed impact targets Project documents set detailed impact targets

(transition benchmarks) and timeline(transition benchmarks) and timeline At least annual review of performance in At least annual review of performance in

conjunction with credit reviewsconjunction with credit reviews Project teams prepare brief update of benchmark Project teams prepare brief update of benchmark

achievementachievement Action taken as necessary to mitigate concernsAction taken as necessary to mitigate concerns Ratings adjusted:Ratings adjusted:

• ““Risk” rating improves as benchmarks are metRisk” rating improves as benchmarks are met• ““Potential” ratings adjusted if major change in Potential” ratings adjusted if major change in

circumstancescircumstances

2121





4.4. Governance and decision-Governance and decision-makingmaking

2222

Governance considerations Governance considerations Institutional ScorecardInstitutional Scorecard

• Board sets annual targets for transition impact in Board sets annual targets for transition impact in context of budgetcontext of budget

• For 2008:For 2008: Transition potential ratings of signed projects >80% good Transition potential ratings of signed projects >80% good

or excellentor excellent Expected transition impact of portfolio 50-60% equivalent Expected transition impact of portfolio 50-60% equivalent

to good/medium or betterto good/medium or better• Quarterly Board review based on Institutional Quarterly Board review based on Institutional

Performance Report + annual Strategic Portfolio Review Performance Report + annual Strategic Portfolio Review Incentive management: Allocation of salary and Incentive management: Allocation of salary and

bonus pool to banking teamsbonus pool to banking teams• transition scores, financial and operational performance transition scores, financial and operational performance

2323

Decision-making processDecision-making process

Project approval cycleProject approval cycle• Operations Committee (OCE key role)Operations Committee (OCE key role)

Concept Review: transition priorities, sound banking Concept Review: transition priorities, sound banking principles, additionality; guidance on designprinciples, additionality; guidance on design

Structure Review: have major issues identified at CR Structure Review: have major issues identified at CR been addressed? (often off-line)been addressed? (often off-line)

Final Review: detailed design, draft loan / shareholder Final Review: detailed design, draft loan / shareholder agreement, document issuesagreement, document issues

• BoardBoard Project document sets out transition rationale / Project document sets out transition rationale /

ratings, credit rationale / ratings, etc. ratings, credit rationale / ratings, etc. Board can request Chief Economist to justify Board can request Chief Economist to justify

transition rating / rationaletransition rating / rationale

2424

Issues to considerIssues to consider

Centrality of assessor (impact)Centrality of assessor (impact) Independence vs. involvementIndependence vs. involvement

• Design, implementation, learningDesign, implementation, learning• Assessment vs. evaluationAssessment vs. evaluation• Internal checks and balances Internal checks and balances

Quality of assessmentQuality of assessment• Quality of informationQuality of information• Experimental design (learning)Experimental design (learning)

Coverage of assessmentCoverage of assessment• Range of products: Frameworks (+ BAS), TC...Range of products: Frameworks (+ BAS), TC...• Range of effecs: Environment, social issues...Range of effecs: Environment, social issues...

2525

Maintain transition focusMaintain transition focus

Selectivity: systemic change, not Selectivity: systemic change, not global public goods per seglobal public goods per se

Process, not specific development Process, not specific development outcomesoutcomes

Institutional change - where Institutional change - where transition and development meet transition and development meet

managing for transition impact at the ebrd world bank donor meeting paris, may 21, 2008

Documents

transition priorities

transition attempt

foster transition

transition goals

transition indicatorspublished

project impactgovernance

project design

project appraisalapproach