ANNUAL REPORT ON PORTFOLIO PERFORMANCE Fiscal 1995 Annual Report on Portfolio Performance Fiscal 1995 The World Bank Washington, D.C. © 1996 The International Bank for Reconstruction and Development/ THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing April 1996 This report is a study by the World Bank's staff, and the judgments made herein do not necessarily reflect the views of the Board of Executive Directors or of the government they represent. ISBN 0-8213-3592-8 Annual Report on Portfolio Performance Fiscal 1995 The World Bank Annual Report on Portfolio Performance (ARPP) for fiscal 1995 is the fourth in a series of annual reports prepared in accordance with the recommendations of the Portfolio Man- agement Task Force report "Effective Implementation: Key to Development Impact," issued No- vember 3, 1992.' The ARPP informs the World Bank's management and Board of Directors con- cerning the overall status of the Bank's portfolio. It thus serves as a key instrument of account- ability. As in past years, the main objective of the ARPP for fiscal 1995 is to assess the develop- ment effectiveness of the Bank's portfolio of ongoing operations. Specifically, that report exam- ines the status of ongoing operations in active country portfolios, analyzes patterns and trends in portfolio composition and performance, and describes and assesses portfolio management ac- tions. In addition, this year, for the first time, it discusses the prospects for the portfolio, taking into account global and major country developments, structural shifts in the portfolio, and the impact of portfolio management actions. Portfolio Size and Composition Portfolio Size The Bank's portfolio of operations under implementation in fiscal 1995 comprised 1,742 opera- tions in 138 countries (table 1). The number of operations in the portfolio was slightly smaller than last year because an unusually large number of operations exited from the portfolio during fiscal 1994. The level of commitments (in nominal terms) increased slightly, to $143.1 billion, but in real terms it declined by 1.9 percent, to $135.5 billion. Roughly half of the commitments had been disbursed by the end of fiscal 1995. Commitments represented about 40 percent of the total cost of all operations in the portfolio ($363.4 billion). 1. The World Bank consists of the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). The term operations portfolio refers to Bank operations under implementation and is used interchangeably with portfolio in this report. The term Regional refers to the Bank's Regional Offices. Dollar amounts are cu.rent U.S. dollars. A billion is a thousand million. 1 2 TABLE 1 THE WORLD BANK PORTFOLIO IN NOMINAL AND REAL TERMS, FISCAL 1993-95 Numerber ofpMjects Commitments (USSM) Average loan size Terms FY93 FY94 FY95 FY93 FY94 FY95 FY93 FY94 :Y95 Nominal Adjustment 132 128 130 22,951.3 18,316.1 18,352.8 173.9 143.1 141.2 Investment 1,639 1,636 1,612 118,553.4 123,521.0 124,728.1 72.3 75.5 77.4 Total 1,771 1,764 1,742 141,504.7 141,837.0 143,080.9 79.9 80.4 82.1 Real, Adjustment 22,951.3 17,834.6 17,379.5 173.9 139.3 133.7 Investment 118,553.4 120,273.6 118,113.7 72.3 73.5 73.3 Total 141,504.7 138,108.1 135,493.3 79.9 78.3 77.8 Note: FY, fiscal year; US$M, millions of dollars. a. Deflated to FY92 prices using the following commitment deflators: FY92, 100; FY93, 101.70; FY94, 103.82. Portfolio Composition REGIONAL DISTRIBUTION. As is shown in table 2, Africa continues to have the most projects (32 percent), but East Asia and Latin America have the largest value of commitments (25 and 23 percent, respectively). The shares of Africa, South Asia, and the Middle East and North Africa declined in terms of both number of projects and value of commitments. Europe and Central Asia continued its rapid expansion (although from a low base), and Latin America increased its share of total projects and commitments between fiscal 1994 and fiscal 1995. Over the fiscal 1993-95 period, Europe and Central Asia clearly had the largest net growth (project approvals minus exits), while Africa and South Asia showed the largest decline. The Bank's portfolio remains highly concentrated in a few countries. The six largest country portfolios (China, India, Mexico, Indonesia, Brazil, and Pakistan), each with more than $5 billion in commitments, accounted for 25 percent of all projects and 47 percent of total commitments in fiscal 1995. The 35 large country portfolios, defined as portfolios over $1 billion or with 20 or more projects, accounted for 61 percent of the number of projects and 83 percent of total comrmitments in fiscal 1995. SECTORAL COMPOSITION. The weight of the social sectors again increased, reflecting recent lend- ing trends (table 3). Although the number of projects in agriculture continued to decline, the sector still accounts for 23 percent of projects. It remains the largest sector, followed by education; transport; population, health, and nutrition; and power. The number of transport and power TABLE 2 REGIONAL DISTRIBUTION OF THE PORTFOLIO, FISCAL 1993-95 FY93 FY94 FY95 Number of % of Commitments % of Number of % of Commitments % of Number of % of Commitments % of Region projects total (US$M) total projects total (US$M) total projects total (US$M) total Africa 604 34.1 21,970.7 15.5 591 33.5 22,240.6 15.7 554 31.8 20,246.6 14.2 East Asia 298 16.8 30,624.2 21.6 300 17.0 33,538.1 23.6 297 17.0 35,C22.2 24.5 South Asia 255 14.4 28,517.9 20.2 242 13.7 26,570.1 18.7 218 12.5 25,116.6 17.8 Europe and Central Asia 122 6.9 15,550.2 11.0 150 8.5 16,919.8 11.9 189 10.8 19,'93.0 13.5 Middle East and North Africa 168 9.5 11,298.2 8.0 154 8.7 10,722.6 7.6 143 8.2 10,100.1 7.0 Latin America and the Caribbean 324 18.3 33,543.4 23.7 327 18.5 31,845.8 22.5 341 19.6 33,002.4 23.1 Bankwide total 1,771 100.0 141,504.7 100.0 1,764 100.0 141,837.0 100.0 1,742 100.0 143,080.9 100.0 3 TABLE 3 SECTORAL DISTRIBUTION OF THE PORTFOLIO, FISCAL 1993-95 Projects Commitments (US$M) FY93 FY94 FY95 FY93 FY94 F"95 Sector No. % No. % No. % Amount % Amount % Amount % Agriculture 442 25.0 431 24.4 402 23.1 27,452.7 19.4 27,855.0 19.6 25,824.6 18.0 Education 184 10.4 188 10.7 197 11.3 10,655.5 7.5 11,954.6 8.4 13,146.1 9.2 Energy 51 2.9 58 3.3 58 3.3 5,554.7 3.9 6,209.5 4.4 6,236.5 4.4 Environment 4 0.2 11 0.6 21 1.2 84.3 0.1 742.1 0.5 1,226.7 0.9 Financial 103 5.8 95 5.4 90 5.2 12,164.9 8.6 10,178.8 7.2 10,470C 7.3 Industrial 66 3.7 56 3.2 48 2.8 6,355.4 4.5 5,748.1 4.1 5,091.3 3.6 Mining and other extractive 15 0.8 14 0.8 14 0.8 1,205.8 0.9 1,012.5 0.7 957.7 0.7 Multisector 108 6.1 107 6.1 110 6.3 11,301.6 8.0 8,843.7 6.2 9,933.6 6.9 Population, health, and nutrition 126 7.1 135 7.7 152 8.7 6,441.6 4.6 7,110.9 5.0 8,031.C 5.6 Power 148 8.4 132 7.5 114 6.5 19,926.6 14.1 18,766.1 13.2 17,226.2 12.0 Public sector management 72 4.1 80 4.5 90 5.2 3,420.4 2.4 3,276.0 2.3 4,239.6 3.0 Social 1 0.1 6 0.3 11 0.6 28.0 0.0 178.6 0.1 798.1 0.6 Telecommunications 33 1.9 35 2.0 30 1.7 2,508.5 1.8 2,814.9 2.0 2,520.F 1.8 Transport 209 11.8 205 11.6 193 11.1 18,431.2 13.0 20,194.8 14.2 19,548.6 13.7 Urban 113 6.4 114 6.5 112 6.4 8,263.8 5.8 8,633.2 6.1 9,172.4 6.4 Water supply and sewerage 96 5.4 97 5.5 100 5.7 7,709.7 5.4 8,318.4 5.9 8,656.7 6.1 Bankwide total 1,771 100.0 1,764 100.0 1,742 100.0 141,504.7 100.0 141,837.0 100.0 143,080.C 100.0 a. Social comprises social safety net and social investment fund operations. b. Environment includes only free-standing environmental operations. A much larger number of operations have substantial environmental objectives, components, and dimensions. projects also declined, while projects in education, in population, health, and nutrition, and in public sector management continued to increase. In terms of commitment value, agriculture is the largest single sector, followed by transport and power. As a group, the human capital devel- opment sectors-education and population, health, and nutrition-are second only to agricul- ture. Portfolio Performance Rating Methodology The Bank's rating methodology was substantially modified for the fiscal 1994 ARPP to shift the focus of the rating process to a more realistic and transparent assessment of the development effectiveness of Bank operations. The revised methodology was again applied to the fiscal 1995 re- view. The traditional methodology had been strongly oriented toward physical and financial inputs; a rating on the likelihood of achieving development objectives (DO) existed but was subsumed under the rating for overall implementation status (OS). The revision included the following features: * A dual rating system with separate summary ratings for development objectives (DO) and implementation progress (IP) * Replacement of the OS rating by the new IP rating based exclusively on progress in input delivery and component implementation relative to the original staff appraisal report imple- mentation plan (or a formally revised plan) * An explanation for the DO ratings giving the specific reasons for judgments regarding ex- pected development results. 4 Portfolio Performance Measures The basic measure of performance used in this report is the percentage of problem project-the proportion of projects in the portfolio rated unsatisfactory or highly unsatisfactory. In accordance with the dual rating scale described above, the percentage of problem projects was calculated with respect to development objectives and implementation progress. Because the emphasis of this report is on the development effectiveness of the Bank's portfolio, the percentage of problem projects with respect to development objectives is used as the key measure of portfolio perfor- mance. The percentage of problem projects with respect to implementation progress is used as a secondary measure. Bankwide and Regional Portfolios PERFORMANCE WITH RESPECT TO DEVELOPMENT OBJECTIVES. The DO-based percentage of problem projects in the total portfolio decreased from 13.4 percent in fiscal 1994 to 11.5 percent in fiscal 1995 (table 4). The improvement was especially pronounced in Europe and Central Asia, the Middle East and North Africa, and Latin America and the Caribbean. Performance remained roughly the same in Africa and East Asia and Pacific, but in South Asia ratings were down- graded. (The South Asia Region has indicated that this change reflects the greater realism of ratings this year rather than a qualitative deterioration.) East Asia and Pacific continued to have by far the best performance, followed by Latin America and the Caribbean. Performance in Af- rica, the Middle East and North Africa, and South Asia was lower than average. If countries in nonaccrual status or suffering from civil strife are excluded from the portfolio, the Bankwide percentage of problem projects remained at slightly less than 10 percent of the portfo- lio. The effect on regional performance of countries in these categories was especially important in Africa, where they accounted for 30 percent of problem projects, and, to a lesser extent, in the Middle East and North Africa. TABLE 4 PORTFOLIO PERFORMANCE, BY REGION, FISCAL 1994 AND 1995 Proiects Projects u7eighted by loan size FY94 FY95 FY94 FY95 % problem .prblem Commitments % _grobll Commitments Y.problem Region No. IP DO No. IP DO (US$M) IP DO (US$M) IP DO Africa 591 20.1 16.9 554 18.4 16.4 22,240.6 18.8 16.0 20,246.6 15.3 13.7 East Asia 300 8.0 4.0 297 10.4 4.4 33,538.1 8.3 1.5 35,022.2 6.4 2.0 South Asia 242 13.6 9.9 218 15.1 13.3 26,570.1 10.3 7.2 25,516.6 12.3 10.4 Europe and Central Asia 150 26.0 16.7 189 19.6 11.6 16,919.8 29.1 15.5 19,293.0 23.1 10.8 Middle East and North Africa 154 27.9 24.0 143 27.3 14.7 10,722.6 25.7 16.6 10,000.1 23.1 10.8 Latin America and the Caribbean 327 20.2 11.6 341 19.9 7.3 31,845.8 21.8 9.8 33,002.4 23.3 8.2 Bankwide total 1,764 18.4 13.4 1,742 17.8 11.5 141,837.0 17.1 9.5 143,080.9 16.0 8.4 Excluded portfolios 138 57.2 54.3 84 47.6 47.6 4,910.4 49.4 35.4 3,874.2 33.3 27.0 Bankwide total (net) 1,626 15.1 9.9 1,658 16.3 9.7 136,926.6 16.0 8.6 139,206.7 15.6 7.9 a. Countries that were in nonaccrual status or were suffering from civil conflict in fiscal 1994 (Angola, Burundi, Djibouti, Rwanda, Somalia, Sudan, and Zaire; Algeria and Yemen; Yugoslavia, Former Yugoslav Republic of Macedonia, Rep. of Bosnia and Herzegovina; Haiti), and in fiscal 1995 (Algeria, Angola, Burundi, Djibouti, Rwanda, Sierra Leone, Somalia, Sudan, and Zaire). 5 When project performance is weighted by loan size (that is, analyzed in terms of commitment at risk), the performance of the portfolio is considerably better: 8.4 percent of commitments in fiscal 1995 presented problems, compared with 9.5 percent in fiscal 1994. The improvement is again broadly spread across most regions. The exclusion of countries in nonaccrual status or suffering from civil strife reduces the percentage of commitments in problem projects to 7.9 percent in fiscal 1995, compared with 8.6 percent in fiscal 1994. PERFORMANCE WITH RESPECT TO IMPLEMENTATION PROGRESS. The IP-based performance of the total portfolio improved slightly between fiscal 1994 and fiscal 1995 in terms of both numbers and commitments (see table 4). The ratings for implementation progress ("overall status" before fiscal 1994) appear to have stabilized since fiscal 1992, with 17-18 percent of projects rated unsat- isfactory in each of the past four years. The IP-based performance continues to be weaker than the DO-based performance, perhaps because implementation problems are more immediately apparent than is failure to achieve more distant development objectives, or because they are considered transitory and therefore unlikely to impede ultimate achievement of those objectives. The pattern for regional performance on IP was similar to that for DO, with most Regions show- ing some improvement, except for South Asia and East Asia, which experienced a slight deterio- ration. The gap between IP and DO ratings-about 6 percent-reflects inherent optimism and offers a measure of the risk that projects will not achieve their objectives. To assess the possible effects of IP problem projects on portfolio performance, a sensitivity analysis was undertaken witl two scenarios. The first assumed that all projects experiencing implementation problems will ulti- mately end up with unsatisfactory DO ratings. The second assumed that only projects with un- satisfactory IP ratings for two or more years will end up with unsatisfactory DO ratings. I-i the first scenario the percentage of problem projects in both fiscal 1994 and fiscal 1995 rises to slightly over 20 percent; in the second scenario the percentage of problem projects increases to 15 percent. FACTORS UNDERLYING PORTFOLIO PERFORMANCE. Economic conditions continued to provide a favorable context for portfolio performance during fiscal 1995. The sustained recovery in ir dus- trial countries stimulated exports from developing countries. Non-oil commodity prices remained strong for most of fiscal 1995. Terms of trade gains in 1994-95 were significant (they were ex- pected to average 4 percent of gross domestic product (GDP) for the 20 largest beneficia-ies), although the long-run trend remains one of gradually declining real commodity prices. Interest rates rose more than had been expected a year ago (increasing the debt service burdens of some countries), but the terms of trade gains may have helped ease budgetary pressures in some coun- tries, increasing the availability of funds for project implementation. The observed improvement in portfolio performance is consistent with this generally favorable external environment, al- though it is not entirely clear to what extent the external conditions influenced fiscal 1995 perfor- mance. Country- or borrower-related factors remained important for portfolio performance. These fac- tors fell into three broad categories: political stability; macroeconomic framework, policies, and performance; and institutional strength and implementation capacity 6 * Political instability or civil strife has severely damaged portfolio performance in several coun- tries, especially in Africa and the Middle East and North Africa. In many other countries the effects of electoral cycles (for example, diversion of attention, personnel turnover after elec- tions) have negatively affected project performance. * Macroeconomic conditions, which determine the enabling environment for the implementa- tion of projects, were relatively favorable in fiscal 1995. Some developing economies boomed; a number of countries in Africa showed evidence of a turnaround; and some countries in tran- sition managed to achieve positive GDP growth last year, after sharp declines, creating a more auspicious context for implementation of Bank-supported projects. Some countries, however, remained mired in macroeconomic crises, and a few (most recently, Mexico) experienced sud- den and severe macroeconomic difficulties during fiscal 1995. Budgetary constraints continue to cause serious local funding problems in many countries. * Finally, deep-seated institutional weaknesses hamper the performance of many country port- folios. A review of the 201 projects with DO problems reveals the main factors associated with unsatis- factory DO and IP ratings: delays in implementation due to procurement, land acquisition, and other bottlenecks; deficient project management; ineffective use of technical assistance; inad- equate provision of counterpart funds; lack of government commitment; inappropriate macroeconomic and sector policies; and civil strife. Inadequate project management may result from political changes that lead to high rates of personnel turnover or from a shortage of skilled managers and staff, often exacerbated by inadequate salaries and related civil service deficien- cies. Insufficiency of counterpart funds has also been a problem for many years. It is caused in part by budgetary constraints, inefficient budgetary processes, and low priority attached to projects. It may thus be closely related to inadequate government commitment, which also often leads to inadequate sector policies, such as power and water tariffs that do not reflect costs, or insufficient autonomy for public utilities. The review of problem projects also pointed to some implementation-related factors that are under Bank control---principally, project design, which may sometimes be excessively complex, or reflect overoptimistic assumptions regarding demand or institutional capacity, and a poor ap- preciation of project risks. The review also pointed up how performance can be affected by con- tinuing differences between the Bank and governments. Difficulties associated with government commitment sometimes reflect the Bank's role in urging governments to undertake new initia- tives, make basic policy and institutional changes, or address neglected priorities, such as opera- tions and maintenance. Some project failures appear to be the result of the clash between the Bank's role as an agent of change and the political and other difficulties governments face in making fundamental changes. Average portfolio performance is also affected by the number of new projects that enter and the number of older projects that leave the portfolio during the year. New projects, which rarely encounter major problems during the first year or two, improve the average performance rating of the portfolio, while projects that are completed or terminated, and therefore leave the portfo- lio, have included a relatively higher proportion of problem projects. A large number of projects with higher-than-average unsatisfactory ratings exited the portfolio in fiscal 1994, reflecting the efforts to clean up problematic country portfolios. The net effect of entries and exits in 1095 was an improvement in the ratings of the overall portfolio compared with those in 1994. 7 Portfolio Management During fiscal 1995, the Bank further intensified its efforts to promote a strong results orientation. All regions now assign high priority to implementation and results on the ground. "Next Steps," a program of actions intended to reorient the Bank's business practices so as to improve the development impact of Bank-financed activities, is in its third year of implementation. Assess- ments of several of these actions are reported below. Rating Methodology As has been noted, improvements in the Bank's rating methodology, by shifting the focu; of attention toward the achievement of development objectives, have reinforced the emerging "cul- ture of implementation" and enabled the Bank to identify, report, and address more effectively the real constraints on development impact. Further steps currently under way include encour- agement of more explicit assessment of project risks and the introduction of an indicator-based rating methodology to provide a more objective basis for assessing project progress in achieving development objectives. Project Restructuring Projects may need to be restructured if the objectives are no longer of high priority or if the project components cannot be implemented as originally designed. The number of projects re- structured increased from 46 in fiscal 1994 to 54 in fiscal 1995. Although the success of restruc- tured projects is not assured, since necessary actions may not be taken or may turn out to be insufficient to correct the situation, restructuring has been an effective instrument for resolving problems. Of the 26 fiscal 1994 problem projects that were restructured, about one-third were rated satisfactory by the end of fiscal 1995; of the problem projects restructured during fiscal 1995, one-third were no longer problem projects by the end of the year. Restructurings in fiscal 1995 were particularly important in certain countries, including Bangladesh, Brazil, Nigeria, Papua New Guinea, Turkey, and Uganda. Other restructurings took place in countries recently facing civil strife: Algeria, Angola, Burundi, Rwanda, and Yemen. Although restructuring is clearly being used more in recent years as a portfolio management instrument, it is not targeted only to problem projects. Many restructurings are apparently being undertaken for "preventive" reasons or in response to changes in government priorities or to natural disasters. Only about one-fifth of problem projects carried over from the fiscal 1995 port- folio to fiscal 1996 had been restructured. There may therefore be significant scope for more ex- tensive use and effective targeting of restructuring to address problem projects. Quality at Entry The Bank's operational units have taken a number of measures to enhance the quality of new projects before they enter the portfolio. These include consulting borrowers very early in project identification; putting more emphasis on a broader sectoral approach in designing investment operations to achieve greater development effectiveness; lending only after public expenditure reviews indicate that local financing will be available; improving economic analysis of projects; avoiding excessive complexity in the design of new operations to keep implementation problems to a minimum; insisting on policy improvements before Board approval; promoting greater bor- rower responsibility for project preparation to increase the sense of ownership and commitment; increasing beneficiary participation in project preparation; using small pilot operations to test 8 new approaches and determine what projects to pursue further on a larger scale; and onsuring readiness for implementation through more effective implementation planning. Portfolio Management The Regions have also continued to strengthen portfolio management practices throt.gh such measures as involving borrowers in portfolio management; tightening the management 3f exten- sions of project or loan effectiveness and of closing dates; using midterm reviews and supervi- sion missions to identify needed midcourse corrections; taking pro-active measures such is project restructuring to increase the chances that projects will achieve their development objecdves; us- ing country portfolio performance reviews to address generic issues affecting performance; us- ing thematic supervision and intensifying the use of Resident Missions and local consultants to increase the cost-effectiveness of supervision; and addressing systemic problems in the borrow- ers' procurement, accounting, and auditing systems. Prospects for the Future Likely Evolution of the Portfolio The prospects for improvement in portfolio performance depend on a variety of factor3, includ- ing economic and political developments. On balance, the modest improvement in portfolio per- formance observed in fiscal 1995 may be sustained in the long run, although not necessarily in fiscal 1996. This judgment is based on a number of factors, some positive and some negative. * The external environment remains broadly favorable for developing countries, and improved macroeconomic management continues to provide a good context for project implen entation. * Increasing the realism of project ratings may actually yield a downgrading in performance ratings, as was the case in South Asia this year. * An unusually large number of problem projects exited from the portfolio in fiscal 1994, im- proving average performance ratings in fiscal 1995. The number of problem projects exiting during fiscal 1995 was considerably lower, and therefore the favorable "exit effect" on perfor- mance in fiscal 1996 is likely to be smaller. * A number of large country portfolios showed a significant deterioration in IP ratin gs during fiscal 1995. The gaps between DO and IP ratings may signal an eventual decline in DO. * The Bank's young portfolios are likely to experience considerable "growing pains" a, they age. Many of the expanding portfolios are for relatively new borrowers such as the countries of the former Soviet Union and Eastern Europe. * The number of countries affected by civil strife declined in fiscal 1995. This develo,ment au- gurs well for the affected portfolios. * Finally, increased restructurings ought to lead to improved performance, and the wviide scope of other portfolio management activities should partially offset any weakening in ihe perfor- mance of certain portfolios and the negative effects of increased realism in ratings. 9 Agenda for Improvement The agenda that the World Bank's new president, James D. Wolfensohn, has set for the instituti n entails a renewed commitment to quality. Over the past two years, changes in the Bank's perfor- mance rating methodology, new portfolio instruments, and greater management attention have led to noticeable improvements. Yet there is no reason to be complacent; the Bank's monitoring and assessment of project performance still show significant deficiencies. This year's agenda ,or improvement calls for actions in four main areas. RATING METHODOLOGY. The basic supervision form will be modified to mitigate the effects of observer bias and improve transparency. These changes will require more precise statements of project objectives, more extensive use of indicators, and explicit assessment of risks. The int-o- duction of the revised form will be accompanied by extensive staff training and guidance on definitions, norms, and use of performance indicators. Projects that do not now have measurable objectives and performance indicators will be "retrofitted" in conjunction with the introduction of the revised form. PORTFOLIO MANAGEMENT. The Regions have at their disposal a large number of portfolio man- agement tools. Two instruments in particular-the Country Assistance Strategy and the Coun:ry Portfolio Performance Review-have become the core of regional portfolio management s ys- tems. Regions supplement these instruments by conducting regular management reviews of prob- lem projects and restructuring entire portfolios and specific projects. In fiscal 1996 the Regions will continue to implement these various portfolio management actions, many of which build on the Next Steps program. * More responsibility will be decentralized to field offices. * Even more actions will be targeted to problematic country portfolios. * Supervision resources will be increasingly targeted, partly in response to budget pressures and partly because of more cost-effective uses (for example, focusing on problem projects). QUALITY OF SUPERVISION. Efforts to improve the Bank's performance monitoring system need to be complemented by efforts to enhance the quality of supervision. To facilitate improved su- pervision, the current operational directive on supervision (which predates the Next Steps pro- gram) will be updated. The revised directive will also instruct staff in the use of new portfolio management instruments such as midterm reviews and of instruments that have become more prevalent, such as project restructurings. A Task Manager's Handbook on Supervision will pro- vide guidance for staff in these new approaches. QUALITY AT ENTRY. The performance of projects under implementation cannot be divorced from the quality of projects at entry. A recent review revealed that the quality of project economic analysis was less than satisfactory in a significant proportion of the projects entering the por:fo- lio in calendar year 1993. A separate review of economic and sector work (ESW) concluded that sector and project-related ESW can make a substantial contribution to project success but that many projects are not preceded by relevant ESW It is important that lending be preceded by necessary analytic work, involving clients where possible. The Regions will focus on quality control and enhancement, supplemented by independent cross-checks and review by the central sector departments. Trends will continue to be monitored through a third review of economc analysis, examining all projects entering the portfolio in fiscal 1996. A Handbook on Economic 10 Analysis will be issued in fiscal 1996 and will be integrated with an expanded program of staff training. In addition, loan documentation requirements will be modified to provide more explicit and thorough presentations of project rationales, benefits, and risks. THE WORLD BANK A partner in strengthening economies and expanding markets to improve the quality of life for people everywhere, especially the poorest Headquarters European Office Tokyo Office 1818 H Street, N.W. 66, avenue d'I&na Kokusai Building Washington, D.C. 20433, U.S.A. 75116 Paris, France 1-1, Marunouchi 3-chome Chiyoda-ku, Tokyo 100, Japan Telephone: (202) 477-1234 Telephone: (1) 40.69.30.00 Facsimile: (202) 477-6391 Facsimile: (1) 40.69.30.66 Telephone: (3) 3214-5001 Telex: MCI 64145 WORLDBANK Telex: 640651 Facsimile: (3) 3214-3657 MCI 248423 WORLDBANK Telex: 26838 Cable Address: INTBAFRAD WASHINGTONDC 1359 9 -780821 -335925- ISBN 0-8213-3592-8