Fiduciary oversight of funds channeled through the World Bank

Group

17 November 2014

Stefan Emblad European Parliament World Bank, External & Corporate Relations Committee on Budgetary Control (CONT) Special Representative & Director for Europe

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I. The World Bank Group

II. EU-WBG Partnership

III. Framework Agreement - Evolution

IV. Pillar Assessment

V. WBG Assurance Framework

VI. Results of EU-initiated oversight

VII. Conclusions

Fiduciary oversight of funds channeled through the World Bank

Group

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I. The World Bank Group

The International Bank for Reconstruction and Development

Focus: Middle Income Countries

188 Members | Established 1944

Cumulative lending: $571 billion

The International Development Association Focus: Low Income Countries (‘WB Fund for the Poorest’)

173 Members | Established 1960

17th replenishment round (concluded Dec 2013): record commitment of $52bn,

for the first time including low-interest loans from donors (ca. $4bn), not just grants.

The International Finance Corporation Focus: the role of the private sector in development

184 Members | Established 1956

Current portfolio: ca. $45bn expected to be doubled over the next 10 years

The Multilateral Investment Guarantee Agency Focus: Offer investment insurance to promote FDI into developing countries

180 Members | Established 1988 issued more than $28bn in political risk insurance until

present

The International Centre for Settlement of Investment Disputes Focus: conciliation and arbitration of international investment disputes

150 Members | Established 1966

WBG in FY2014: $65.6 billion in loans, grants, equity investments, and guarantees to partner countries and private businesses 3

WBG Strategy

Twin goals for 2030 (adopted in Oct 2013 )

√ Ending extreme poverty: reducing the percentage of people living on less than $1.25 a day to no more than 3% globally; with a 9% interim target set for 2020 to maintain momentum. (cf.: ca. 50% in 1980, 40% in 1990; 15% today)

√ Boosting shared prosperity in a sustainable way: fostering income growth for the bottom 40%.

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Who Leads the World Bank?

Our shareholders

Member Countries (188)

Board of Governors (188)

Board of Directors (25)

President

World Bank management and staff

EU MS (28.5%computed shares)

United States (15%)

Japan (8%)

China (5.2%)

India (3%)

Canada (2.8%)

Rest of the world (50%)

IBRD Voting power

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EU & WBG are key strategic partners in development cooperation and in

pursuing reforms in the EU and beyond. The partnership is multi-dimensional: √ Financial: EU-28 are our largest shareholder group (28.5% IBRD, 29.9% IFC, 40% IDA17) EC third largest investor in WBG-administered trust funds ($3.2bn in FY09-14)

√ Policy and structural reforms: Joint focus on climate, fragility, private sector development, energy, etc. OUTSIDE the EU, and more recently, also INSIDE the EU

√ Strategic: Global thought leadership and advocacy … underpinned by the broader alignment of the strategies of both the EU and the WBG.

II. EU-WBG Partnership

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Close working relationship

– Across the EC, on top of the traditional partner DG DEVCO

• Policy work now also inside the EU (new MS and Southern Eurozone); effectiveness of structural funds

– European Court of Auditors

– OLAF – recently signed MOU

– European Parliament

– European Council

• e.g. EU-Turkey Customs Union evaluation presentation

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Flagship projects

Climate: √ Joint push for carbon pricing: EC largest contributor to our Partnership for Market Readiness ($19.7M)

Energy: √ Joint focus on energy access in FCS as catalyst for broader-ranging socio-economic transformations.

√ CASA1000: establishment of energy corridor between Afghanistan/Pakistan and Kyrgyzstan/Tajikistan.

Fragility: √ Afghanistan Reconstruction TF : EC key contributor ($452M to date) √ EC early supporter of WBG/UN-led Global Facility on Employment Creation in Fragile Situations.

Private Sector Development: Expanding cooperation with IFC on √ competitive industries

√ investment climate

Inside the EU and its Neighbours: √ absorption of EU funds in new Member States

√ Southern Eurozone: competitiveness, social protection governance

√ poverty mapping

√ Roma integration

√ EU-Turkey Customs Union evaluation

√ Western Balkans: expanding cooperating through WBIF

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DISBURSEMENT 92% [US$ 1.66 bn] through recipient-executed trust funds (of which 50% co-financed Bank projects)

REGIONAL BREAKDOWN SECTORAL BREAKDOWN

(FY09-13, in US$ Millions) (FY09-13, in US$ Millions)

EC contributions to WBG trust funds (FY09-13)

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III. Framework Agreement - Evolution

2001

Initial Framework Agreement signed; funding from EU to WBG grows rapidly.

2009

Second Framework Agreement signed

(still governs extensions of existing trust funds but not additional contributions)

2014

New Framework Agreement signed as a result of new EU financial regulations (it defines principles of engagement, instruments and modalities, accountability and reporting principles)

New EU contributions fall under this Agreement

Two funding modalities used by WBG based on new EU Financial regulation

Direct Management

• Primarily work by Bank staff and consultants (BETF)

• Typically studies, technical assistance and other advisory services

Indirect Management

• Primarily work by recipient countries or other entities (RETF)

• Pillars Assessment

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• Indicative results indicators to be attached to the Administration Agreements.

• Progress/final reports: strict requirements in terms of content and timing.

• Escalation clause for resolving disputes by deferring them to WBG VP for Development Finance and the relevant Director General of the EC.

• Document retention: much greater clarity on time period and scope.

• Visibility: specific, detailed provisions to ensure visibility of EU-funded actions.

Some important features of the new Framework Agreement

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IV. Pillar Assessment Pillar Assessment assures the EU that WBG fulfils the requirements of the EU Financial Regulation.

First WBG Pillar Assessments in 2008.

Under the 2014 Framework Agreement following Pillars assessed:

√ effective, efficient and fully functional internal control systems;

√ existence of independent external audit;

√ accounting system providing accurate, complete and reliable information in a timely manner;

√ appropriate rules and procedures for financing from EU funds through grants; and

√ appropriate rules and procedures for financing from EU funds through procurement.

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V. WBG Assurance Framework Implementation of Trust-Funded Activities

Funds allocated from the trust fund to projects/programs Continuous monitoring and compliance controls prior to, throughout and after implementation by a multitude of dedicated teams across the WBG

Including: – Review of Procurement Plan prepared by recipient – Implementation support by WBG staff (incl. reviews of expenditures) – Disbursement system: numerous automated validations & segregation of duties – Risk assessments by the Task Manager – Financial management evaluations – Review of procurement documentation prior to the award of selected contract – Review of supporting documentation accompanying disbursement requests

GOAL: Ensure that objectives are met AND operations are in accordance with the FA, the

relevant Administration Agreement and the WBG entity's policies and procedures.

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Reporting

The WBG provides the EC with three types of reports:

– Narrative Progress Reports on the use of trust fund money and the progress of funded activities. They cover progress towards achieving the defined goals, expected results and any problems requiring attention.

– Completion Reports provide qualitative information on the results of EU

financed activities at the completion of the project. These reports contain an overall assessment on achieving the objectives and implementation of the EU financed activities. They also include specific details and/or commentary on outcomes, outputs and implementation by components, execution and disbursements.

– Financial Reports are a summary of trust fund financial transactions and

activity over a certain time period.

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Financial Risk Management

Financial risk for trust funds is managed through a comprehensive risk reporting and fiduciary assurance and control framework:

√ Investment Management: conservative approach, following a well-defined investment process.

√ Liquidity Risk: managed through daily cash flow monitoring, regular rebalancing, timely Development Partner contributions and prudent investment policies.

√ Counterparty & Credit Risk: strong credit standards for eligible counterparties, regularly monitored and reported to Senior Management on a quarterly basis.

√ Commitment and Funding Risk: trust fund commitments are normally limited to cash available.

√ Currency Risk: System controls limit commitments beyond 85% of receivables when currency of contribution differs from currency of commitment/disbursement.

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Independent Checks and Balances

• In addition to the EU’s oversight mechanisms, the WBG TFs have own multiple-audit oversight procedures:

√ Trust Fund Single Audit

√ Individual Trust Fund financial statement audits

√ Project Audit

√ Random sample transaction testing

• The Internal Audit Department is an independent oversight unit that evaluates effectiveness of WBG's risk management, control, and governance processes

• The Independent Evaluation Group evaluates partnerships and TF programs for alignment with strategic priorities and accomplishment of development objectives

• The Institutional Integrity VPU investigates allegations of fraud and corruption

• The Office of Ethics and Business Conduct is an independent unit within the WBG that promotes the development and application of high ethical standards by staff in the performance of their WBG duties.

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VI. Results of EU-initiated oversight

• The WBG works with the European Court of Auditors to facilitate access to relevant financial information and data for audit purposes.

Significant number of audit findings revolved around the definition of “indirect costs” which was left undefined in the 2009 Framework Agreement

2014 Framework Agreement -- resolved this lack of clarity

• The EC performs verification audits of the WBG.

Since 2007 -- 39 verification audits carried out. Out of the total of €1.4bn contributions , the WBG had to reimburse just over €300K (i.e. 0.02%).

• In 2012, the EC’s auditors concluded a 100% compliance rate on the Residual Error Rate Study (RER).

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VII. Conclusions

• WBG shares key principles such as value for money, effectiveness and zero tolerance for corruption and fraud

• New Framework Agreement significantly improves the basis for the EU-WBG partnership

• Since 2008, WBG has successfully undergone Pillar Assessment

• WBG has a robust management and control framework (preventive and detective)

• Partnership evolving including within the EU

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