World Bank

INTRODUCTION TO WORLD BANKToward the end of the Second World War, in July 1944, representatives of the United States, Great Britain, France, Russia, and 40 other countries met at Bretton Woods, a resort in New Hampshire, to lay the foundation for the post-war international financial order. Such a new system, they hoped, would prevent another worldwide economic cataclysm like the Great Depression that had destabilized Europe and the United States in the 1930s and had contributed to the rise of Fascism and the war. Therefore, the United Nations Monetary and Financial Conference, as the Bretton Woods conference was officially called, created the International Monetary Fund (the IMF) and the World Bank to prevent economic crises and to rebuild economies shattered by the war. The Bretton Woods strategy addressed what were considered to be the two main causes of the pre-war economic downturn and obstacles to future global prosperity—the lack of stable financial markets around the world that had led to the war and the destruction caused by the war itself. The IMF would be aimed at stabilizing global financial markets and national currencies by providing the resources to establish secure monetary policy and exchange rate regimes, while the World Bank would rebuild Europe by facilitating investment in reconstruction and development. Although intended to benefit the global economy and contribute to world peace, the World Bank and the IMF, collectively referred to as international financial institutions (IFIs), have become primary targets of the anti-globalization movement. In many countries, they are resented and are viewed as imposing Western-style capitalism on developing countries without regard to the social effects. The following Issue in Depth is designed to help you understand the history, purpose, structure, and activities of the IFIs and to describe both benefits and concerns that surround the World Bank and the IMF. DEFINITION The International Bank for Reconstruction and Development, commonly referred to as the World Bank, is an international financial institution whose purposes include assisting the development of its member nations' territories, promoting and supplementing private foreign investment, and promoting long-range balanced growth in international trade. The World Bank was established in July 1944 at the United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire. It opened for business in June 1946 and helped in the reconstruction of nations devastated by World War II. Since the 1960s the World Bank has shifted its focus from the advanced industrialized nations to developing third-world countries. The World Bank consists of a number of separate institutions. The three major institutions are the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), and the International Finance Corporation (IFC). The IBRD, the bank's most important component, lends funds directly, guarantees loans made by others, or participates in these loans. The IDA, which was established in 1960, lends to low-income countries on more favorable terms, charging a small service fee but no interest. It gets its funds from more affluent member countries. The IFC, established in 1956, provides loans to private business in developing countries. Twenty-nine nations joined the World Bank in 1945. By 1996 the bank had 180 members. The bank is governed by an executive board and a managing director. Voting in the bank is weighted according to the initial contributions to the bank's capital, which historically has given the U.S. government a dominant voice in the bank's affairs. In 1996 almost one-third of the bank's loans went to the world's poorest countries. However, the bank has moved away from financing large-scale infrastructure projects, such as roads, railways, and power facilities. Since the 1970s, the bank has provided an increasing number of loans to developing countries for agricultural, educational, and population programs. The goals of these loan programs have been to raise the standard of living and to increase self-sufficiency. The World Bank also offers advisory services to countries seeking to reform their banking and finance systems. It has also launched InfoDev, an initiative to secure resources from corporations, foundations, and governments to promote reform and investment in the developing world through improved access to information technology. In the late 1990s several coalitions of organizations and individuals formed Jubilee 2000 to campaign for debt-forgiveness for poor countries that found themselves unable to pay back the bank's loans. The World Bank and the International Monetary Fund responded by establishing the Heavily Indebted Poor Countries Initiative (HIPC) that sought to provide relief for the world's most heavily indebted countries. In April 2000 World Bank President James D. Wolfensohn stated that he welcomed Jubilee 2000 and continuing public involvement for their contributions toward getting creditor countries to support the HIPC. MEMBERSHIP There are 184 member countries that are shareholders in the IBRD, which is the primary arm of the WBG. To become a member, however, a country must first join the International Monetary Fund (IMF). The size of the World Bank's shareholders, like that of the IMF's shareholders, depends on the size of a country's economy. Thus, the cost of a subscription to the World Bank is a factor of the quota paid to the IMF. There is an obligatory subscription fee, which is equivalent to 88.29% of the quota that a country has to pay to the IMF. In addition, a country is obligated to buy 195 World Bank shares (US$120,635 per share, reflecting a capital increase made in 1988). Of these 195 shares, 0.60% must be paid in cash in U.S. dollars while 5.40% can be paid in a country's local currency, in U.S. dollars, or in nonnegotiable non-interest bearing notes. The balance of the 195 shares is left as "callable capital," meaning the World Bank reserves the right to ask for the monetary value of these shares when and if necessary. A country can subscribe a further 250 shares, which do not require payment at the time of membership but are left as "callable capital." (Learn more about the IMF in An Introduction To The International Monetary Fund.) The president of the World Bank comes from the largest shareholder, which is the United States, and members are represented by a Board of Governors. Throughout the year, however, powers are delegated to a board of 24 executive directors (EDs). The five largest shareholders - the U.S., U.K., France, Germany and Japan - each have an individual ED, and the additional 19 EDs represent the rest of the member states as groups of constituencies. Of these 19, however, China, Russia and Saudi Arabia have opted to be single country constituencies, which means that they each have one representative within the 19 EDs. This decision is based on the fact that these countries have large, influential economies, which requires that their interests be voiced individually rather than diluted within a group. The World Bank gets its funding from rich countries as well as from the issuance of bonds on the world's capital markets. FUNCTIONS (i) Granting reconstruction loans to war devastated countries. (ii) Granting developmental loans to underdeveloped countries. (iii) Providing loans to governments for agriculture, irrigation, power, transport, water supply, educations, health, etc (iv) Providing loans to private concerns for specified projects. (v) Promoting organisations. (vi)Providing technical, economic and monetary advice to member countries for specific projects foreign investment by guaranteeing loans provided by other (vii) Encouraging industrial development of underdeveloped countries by promoting economic reforms ADVANTAGES AND BENEFITS OF GUARANTEES FOR GOVERNMENTS… 1. Catalyzes private financing in infrastructure 2. Provides access to capital markets 3. Facilitates privatizations and public private partnerships (PPPs) 4. Reduces government risk exposure by passing commercial risk to the private sector 5. Improves impact of private sector participation on tariffs 6. Encourage co financing FOR THE PRIVATE SECTOR… 1. Reduces risk of private transactions in emerging countries 2. Mitigates risk that the private sector does not control 3. Opens new markets 4. Lowers the cost of financing 5. Improves project sustainability TWO INSTITUTIONS, ONE MISSION We are not a bank in the ordinary sense but a unique partnership to reduce poverty and support development. We comprise two institutions managed by 188 member countries: the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). The IBRD aims to reduce poverty in middle-income and creditworthy poorer countries, while IDA focuses exclusively on the world’s poorest countries. These institutions are part of a larger body known as theWorld Bank Group. Established in 1944, the World Bank is headquartered in Washington, D.C. We have more than 9,000 employees in more than 100 offices worldwide. STRATEGY Six strategic themes drive the Bank’s work, focusing on the poorest countries, fragile and conflict-affected states, the Arab world, middle-income countries, global public goods issues, and delivery of knowledge and learning services. There are also strategies for the key areas in which we work:  Thematic and sector strategies, which guide our work to reduce poverty in a specific sector or aspect of development. Each derives from a broad consultation with a wide array of stakeholders.  Country assistance strategies, which identify the key areas in which we can best support a country in reducing poverty and achieving sustainable development. ]FINANCIAL PRODUCTS AND SERVICES We provide low-interest loans, interest-free credits, and grants to developing countries. These support a wide array of investments in such areas as education, health, public administration, infrastructure, financial and private sector development, agriculture, and environmental and natural resource management. Some of our projects are cofinanced with governments, other multilateral institutions, commercial banks, export credit agencies, and private sector investors. We also provide or facilitate financing through trust fund partnerships with bilateral and multilateral donors. Many partners have asked the Bank to help manage initiatives that address needs across a wide range of sectors and developing regions. INNOVATIVE KNOWLEDGE SHARING We offer support to developing countries through policy advice, research and analysis, and technical assistance. Our analytical work often underpins World Bank financing and helps inform developing countries’ own investments. In addition, we support capacity development in the countries we serve. We also sponsor, host, or participate in many conferences and forums on issues of development, often in collaboration with partners. To ensure that countries can access the best global expertise and help generate cutting-edge knowledge, the Bank is constantly seeking to improve the way it shares its knowledge and engages with clients and the public at large. Key priorities include:  Results: We continue to sharpen our focus on helping developing countries deliver measurable results.  Reform: We are working to improve every aspect of our work: how projects are designed, how information is made available (Access to Information), and how to bring our operations closer to client governments and communities.  Open Development: We offer a growing range of free, easy-to-access tools, research and knowledge to help people address the world's development challenges. For example, theOpen Data website offers free access to comprehensive, downloadable indicators about development in countries around the globe. We have also made Open Forum—live discussions open to participants worldwide—a key part of our Spring and Annual Meetings with the International Monetary Fund. FINANCIAL ARRANGEMENTS Private Sector Private sponsor(s) are responsible for the rest of the financing for the project and choosing the arranging banks in a manner suitable to their objectives and circumstances of the project. The arranging bank typically syndicates the Bankguarantee tranche pro rata with other tranches of debt. Public Sector For partial credit guarantees where the borrower is a public sector entity or sovereign government, once the structure of the guarantee is endorsed by the Bank management, the borrowing entity, in consultation with the host government and Bank staff, solicits and evaluates proposals from financial institutions to lead manage the guaranteed borrowing. Based on the evaluation of the proposals received from these institutions, the borrowing entity awards a mandate. DOCUMENTATION Guarantee proposals are initiated in the Bank by a Project Concept Note (PCN) and/or Project Appraisal Document (PAD), which summarizes the main features of the guarantee in the context of the specific project, provides a brief project overview. This document is used by the Operations Committee (OC) for evaluation of the guarantee transaction. Post-appraisal of the project, an updated PAD along with a Memorandum of the President (MOP) are circulated for Board review. The key legal documents include the Guarantee Agreement, the Indemnity Agreement and the Project Agreement. The Guarantee Agreement is usually executed between the Bank and the lenders, and is the agreement under which the terms of the guarantee are specified. The Indemnity Agreement is executed between the Bank and the member country and it specifies the terms of the member country's counter-guarantee to the Bank. The Project Agreement is executed between the borrower and the Bank and specifies additional undertakings by the project company to the Bank. These undertakings include provisions on the use of proceeds of the guaranteed loan and compliance with environmental standards etc. BOARD APPROVAL AND FINANCIAL CLOSURE Guarantees require approval from the Bank's Board of Executive Directors, which is sought once the guarantee structure and coverage are finalized and the relevant legal documents have been substantially negotiated with the relevant parties. Financial closure takes place after the Board Approval. Implementation and Supervision For both public and public sector projects the borrower is responsible for preparing an implementation plan in accordance with Bank procedures. Bank staff review the borrower's plans for implementing the project, including the scope and content of the project agreements and the arrangements for their execution; the corporate structure, management, and administrative features of the project entity; the construction of project facilities; and operation and maintenance arrangements. Guarantees are subject to the same supervision criteria and standards as investment loans. Stand-alone guarantees are monitored based on the information contained in progress reports received from lenders and/or borrowers. In addition, specific areas needing Bank attention such as government performance of its contractual obligations and its compliance with stipulated sectoral and financial covenants are supervised as part of the Bank's regular missions. Wherever guarantees are used along with loans, loan supervision also includes two critical parameters that are monitored to ensure the success of these guarantees: (i) Project performance; to ascertain to what extent projects supported by guarantees meet their expected performance targets (construction completion, efficient operations, and achieving desired financial ratios); and (ii) Monitoring of government performance; vis-à-vis their contractual obligations outlined in the project documentation and covered by the guarantee. CONCLUSION It is not surprising that there is a clash of opinion over how aid is given. Indeed, those that offer assistance are going to want to have a say in how the loans are used and what kind of economic policies are fostered in a country's developmental process. Many developing and poor nations, however, are stuck in a quagmire of debt and impoverishment, no matter how much assistance they receive. Given this, we may need to remember that the process of aid is also a developing state, in which both the giver and the receiver should be helping each other reach a povertyfree world. INDEX 1. Introduction To World Bank 2. Definition 3. Functions 4. Advantages And Benefits Of Guarantees 5. Two Institutions, One Mission 6. Financial Arrangements 7. Documentation 8. Board Approval And Financial CLOSURE