PROJECT PREPARATION FACILITY: POLICY UPDATE

OPERATIONS POLICY AND COUNTRY SERVICES WORLD BANK

June 16,2008

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Abbreviations and Acronyms

ACTCF AFR EAP ECA FY IBRD IDA IDA 14 L O A LCR LEG MNA OPCS PPA PPF SAR

~~

Loan Client and Financial Services Division Africa Region East Asia and Pacific Region Europe and Central Asia Region Fiscal year International Bank for Reconstruction and Development International Development Association IDA Replenishment for the period July 1,2005 - June 30,2008 Loan Department Latin America and the Caribbean Region Legal Vice Presidency Middle East and North Africa Region Operations Policy and Country Services Project Preparation Advance Project Preparation Facility South Asia Region

PROJECT PREPARATION FACILITY: POLICY UPDATE

Contents

I . INTRODUCTION .................................................................................................................... 1 I1 . EXPERIENCE AND PERFORMANCE ...................................................................................... 1 I11 . NEW REQUIREMENTS .......................................................................................................... 4 Iv . PROPOSED FLEXIBILITY ...................................................................................................... 5 V . RECOMMENDATIONS ........................................................................................................... 6

Tables: Table 1 . FY07 Regional Allocations ............................................................................................ 1 Table 2 . Active PPF Portfolio (US Dollars) ................................................................................ 4 Table 3 . Number of PPF Advances by Size and Regions. as of June 30. 2007 ........................ 4

Figures: Figure 1 . PPF Advances Approved. FY96-07 ............................................................................ 3 Figure 2 . PPF Commitments That Did not Materialize into Loans. FY96-07 ........................ 3

Annexes: Annex A . PPF Timeline ................................................................................................................ 8 Annex B . PPF Commitments FY96 - FY07: U S Dollars ........................................................ 12 Annex C . PPF Commitments FY96 - FY07: Regional Distribution ..................................... 13 Annex D . PPF Allocation Control (as o f June 30. 2007) ......................................................... 14 Annex E . PPF Active Portfolio. June 30. 2007 ......................................................................... 15 Annex F . Two IDA PPF Refinancing Cases ............................................................................. 21

Annex H . Project Preparation Facility Policy Update: Summary of Proposed Changes and Draft OP/BP 8.10 Revised ........................................................................................ 25

Annex I . Proposed Amendments to the IDA and IBRD General Conditions ....................... 32

Annex G . Changes in “Traffic Light” Assignments Over Time ............................................. 22

FROM: The President

June 16,2008

PROJECT PREPARATION FACILITY: POLICY UPDATE

I. INTRODUCTION

1. This paper reviews the use and performance o f the Project Preparation Facility (PPF) over the twelve-year FY96-07 period, and recommends a more flexible approach to Project Preparation Advance (PPA) refinancing and repayment. The PPF has been an important and cost-effective instrument supporting the preparation o f individual projects through providing technical assistance for successful project design and implementation start-up, and funding institutional strengthening and incremental operating support. These changes would bring the PPF fully in l ine with: the IDA grant eligibility and allocation framework introduced during the I D A 1 4 Replenishment and agreed to be maintained in IDA15; the revised policy on the rapid response to crises and emergencies'; and with the demonstrated need for flexibility.

11. EXPERIENCE AND PERFORMANCE

2. Project Preparation FaciZity. The PPF was approved by the Board in November 1975 with an initial authorization o f $5 million. In 1996 the Board approved the increase in the size o f the Facility to the current level o f $290 mi l l ion (see Annex A). Operationally, the Managing Directors make indicative allocations to the Regions within the limits o f the commitment authority and adjust these allocations periodically, as necessary. Regional allocations, as shown in Table 1, have remained constant since 2001. In conjunction with the Loan Client and Financial Services Division (ACTCF) and Operations Policy and Country Services (OPCS), the Regions monitor their commitments against the indicative allocations to ensure that the limits are observed. Since PPAs are normally refinanced out o f loans, the funds advanced have been carried on the books o f the Bank as receivables on account o f project preparation, rather than as loans, until they are refinanced or repaid.

Table 1. FY07 Regional Allocations Region ($ millions) Percent AFR 127.0 43.8 EAP 7.5 2.6 ECA 43.0 14.8 LCR 47.5 16.4 MNA 12.0 4.2 SAR 43 .O 14.8

Reserve 10.0 3.4 Total 290.0 100.0

' On February 27, 2007, the Executive Directors approved a new policy on Rapid Response to Crises and Emergencies which i s reflected in the new OPBP 8.00, Rapid Response to Crises and Emergencies, and OPBP 8.10, Project Preparation Facility.

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3. Eligibility. No changes are proposed in the eligibility for PPAs or in the uses o f PPA resources. As i s currently the case, PPAs are made only to a Bank member country.2 PPAs finance:

(a) Preparatory activities for investment operations, including preliminary and detailed designs and limited initial implementation activities,

(b) Preparation o f programs to be supported by development policy lending operations, and

(c) Start-up emergency response activities in cases o f crises and emergencies.

4. Revolving Nature ofthe PPF. The PPF was set up as a revolving fund: and therefore repayment and refinancing terms were established to maintain the integrity o f this revolving fund. Currently, PPA recipients are required either to refinance the PPA from the proceeds o f the loan4 for the preparation o f which the PPA was being used or, if no loan materializes, to repay the advance from their own resources’. Any undisbursed amount i s cancelled. The changes proposed would provide more flexibility in the refinancing and repayment o f the PPA.

5. Demand and Resource Use. Over the twelve-year period FY96-07, PPAs have provided steady support to the Bank’s lending pipeline, particularly in IDA countries (see Fig. 1). In the period through June 30, 2007, 998 PPAs were approved for total commitments o f $81 1.8 million. Of these commitments, $623 mi l l ion (77 percent) were made on IDA terms and $189 mi l l ion (23 percent) on IBRD terms (see Annex B).

See OPBP 8.10, Project Preparation Facility. Paragraph 12 of the 1975 Board paper states as follows: “Bank advances would be at the Bank interest rate deferred until the advance was refinanced or other terms of repayment determined; IDA advances would bear the IDA service charge similarly deferred. They would normally be repaid through reimbursement under the loan (credit) for the project in question as soon as it becomes effective. However, the borrowing government would be required in i ts request to undertake to repay the advance and accrued interest or service charge to date in equal installments over the next five years at the Bank’s rate of interest in the case o f Bank advances or IDA service charge if a project loan (credit) was not made within a reasonable time period to be agreed upon at the time the advance was granted.” Loans include IBRD loans, IDA credits and IDA grants. These requirements are set out in OP 8.10, Project Preparation Facility as follows: “If the loan i s not made within the period specified in the Letter Agreement, including any extensions, the recipient i s required to repay the PPF advance (together with the accrued interest or service charge) in 10 semiannual installments over the next five years. If the disbursed amount o f the PPF advance i s US$50,000 or less, the recipient i s required to repay it within 60 days.”

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F ure 1. PPF Advances Approved, FY96-07

0 IBRD 0 IDA I Total 8 Millions

100 , 90 80 70 60 50 40 30 20 10

-96 -97 W 9 8 W 9 9 W O O W O l -02 N O 3 W04 -05 -06 N O 7

6. In any given year, the number o f PPAs represented approximately 20-30 percent o f the number o f approved projects. Almost all the committed advances made in the reviewed period materialized into loans (see Fig. 2). In total, 166 advances in the amount o f $138.3 mi l l ion (less than 17 percent) did not result in loans financed by the Bank for the twelve-year period (see Annexes B and C) and were repaid. In addition, 44 PPAs (27 on IDA terms) in the total amount o f $44 million, (equally divided between IDA and IBRD) were terminated (approved but never signed).

Figure 2. PPF Commitments That Did not Materialize into Loans, FY96-07

1 -c- IBRD -IC- IDA I

FY96 FY97 FY98 FY99 W O O F Y O I FY02 FY03 FY04 FY05 FY06 FY07

7. Open Advances. At the beginning o f FY07, more than $1 17 mi l l ion was available for new commitments. Of the total commitments o f $172.8 mi l l ion for 210 advances, more than hal f were concentrated in AFR (see Table 2 and Annex D).

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Table 2. Active PPF Portfolio (US Dollars)

Total AFR EAP ECA LCR MNA SAR

June $122,817,909 $69,298,408 $3,058,156 $14,004,000 $12,592,719 $3,000,000 $20,864,626 30, 2006 Share (YO) 56 2 11 10 2 17

June $172,794,949 $101,869,268 $5,796,156 $9,077,650 $17,315,819 $3,000,000 $35,736,056 30, 2007 Share (YO) 59 3 5 10 2 21

Note: EAP includes a PPA o f $150,000 to Myanmar (07/14/1980), which i s in non-accrual status.

8. 50 percent o f the commit ted amounts.

O f the active PPAs, more than 70 percent are smaller than $1 million (Table 3) representing

Table 3. Number of PPF Advances by Size and Region, as o f June 30,2007

Size Range AFR EAP ECA LCR MNA SAR Total TotalAmount

Up to $500,000 34 1 3 4 0 5 47 14,430,994

$500,000 - $1,000,000 78 1 5 9 0 10 103 70,265,990

$1,000,000 - $1,500,000 21 2 2 3 1 7 36 40,778,191

$1,500,000 - $2,000,000 3 0 1 4 0 2 10 25,819,774

$2,000,000 - $2,500,000 5 0 0 0 1 3 9 8,000,000

$2,500,000 - $3,000,000 0 1 0 0 0 4 5 13,500,000

Total by Region 141 5 11 20 2 31 210 172,794,949

111. NEW REQUIREMENTS

9. Recent developments make it necessary to consider changing PPF refinancing and repayment requirements: the IDA system for allocating grants on the basis o f a country’s r i sk o f debt distressY6 the approval o f the revised po l i cy on rapid response to crises and emergency7, and the demonstrated need fo r increased f lexibi l i ty .

10. on a country’s risk o f debt distress, with three “traffic light” categories:

IDA Framework. The IDA framework bases the terms o f f inancial assistance IDA provides

0

0

0

Green light (low r i sk o f debt distress): 100 percent credits Ye l l ow light (medium r i sk o f debt distress): 50 percent grants, 50 percent credits Red light (high r i sk o f debt distress, or in distress): 100 percent grants.

See IDA 14 Deputies Report, Additions to IDA Resources: Fourteenth Replenishment- Working Together to Achieve the Millennium Development Goals. See Toward a New Frameworkfor Rapid Bank Response to Crises and Emergencies (R2007-0010/4), April 2007. ’

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11. Under the existing policy, a PPA i s available to IDA countries only on credit terms’. If no follow-on loan materializes, a “red light” country could be required to repay the full amount o f the advance, with accrued service charges, within five years (or 60 days if the amount o f the advance does not exceed $50,000). By the Bank’s own measures, this requirement would contribute to the country’s financial difficulties.

12. Rapid Response Policy. This IDA framework has already been reflected in the revised policy on rapid response to crises and emergencies. Under the revised rapid response policy, a PPA o f up to US$5 mi l l ion i s available to cover start-up emergency response activities, instead o f the current $2 mi l l ion limit for operations expected to cost less than $200 mill ion and $3 mi l l ion for larger operations. In ‘‘red light” countries, if the IDA grant for the emergency operation does not materialize within two years following the effectiveness o f the PPF grant, the disbursed PPF amounts may be refinanced out o f the proceeds o f any other IDA grant made to the country. If no subsequent financing or loan materializes during this period, the PPA will not be repaid.

13. for flexibility in repayment and refinancing (see Annex F).

Demonstrated Need for Flexibility. The Bank has already approved two country requests

Mali. In Ma l i a telecommunications and postal reform project had two PPAs, o f US$250,000 and $475,000. In March 2004, a PPA in the amount o f $1,500,000 was made for another project, the Ma l i Growth Support Project. This new project incorporated a telecommunications and postal reform component. At the request o f the borrower, all three PPAs were included in the financing agreement for the Ma l i Growth Support Project.

Guyana. In Guyana a PPA o f $850,000 was approved for the Secondary Towns Infrastructure Project, The Government asked the Inter-American Development Bank to finance the project. In July 2006, the disbursed amounts from the PPA were refinanced from the Guyana Poverty Reduction and Public Management Operation, which was not related to the infrastructure project.

IV. PROPOSED FLEXIBILITY

14. refinancinghepayment o f PPAs.

This paper proposes to address each o f these three issues by providing more flexibility in

15. Proposed Policy Changes. Although the debt distress risk classification i s external to the PPF instrument and the contractual relation under a PPA agreement, it needs to be taken into account to ensure that the refinancing terms are suitable. To facilitate equitable treatment o f borrowers and to ensure a consistent approach across all PPAs, it i s proposed to revise the existing PPA policy as follows:

a) Country Directors will approve PPAs up to a maximum amount o f $3 mi l l ion (or $5 mil l ion in the case o f emergency response operations). There i s no longer a requirement that the PPF advances only be made when other resources are not available. If, on the date

* An exception i s IDA countries treatment under OP 8.00 Rapid Response to Crises and Emergencies.

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the Country Director approves the PPA9, (i) the recipient i s classified as a “red light” country, the PPA will not be subject to any service charges; (ii) the recipient i s classified as a “yellow light”, “green light”, or IBRD country, interest (or services charges) will accrue.

b) The PPA Recipient will be given the opportunity to refinance the aggregate balance of the PPA (defined as the disbursed amounts plus any accrued interest and charges, less cancellations at the closing date o f the PPA) out o f the proceeds o f one or more subsequent Bank loans made to the recipient. Normally the PPA will be refinanced out o f the proceeds o f the loan for the preparation o f which the PPA was used, but if this loan i s unlikely to materialize by the refinancing deadline, the PPA may be refinanced out o f the proceeds o f any other loan or loans to the country which materializes by such date. The refinancing o f the PPA will normally be within two years from the approval date, and can be extended by the Country Director for two more years. Any extension beyond four years requires approval by the Regional Vice President. The effectiveness date o f the subsequent Bank loan serves as the closing date o f the PPA.

c) If, by the refinancing deadline, no loan to a country in “red light” status (determined at the time o f approval o f the PPA), has materialized, the PPA will not be repaid. Instead the amount o f the PPA will be counted towards the country’s IDA allocation (for that fiscal year if it has not already been spent, or the next fiscal year if no funds are available) and the amount thus deducted from the IDA allocation will be used to reimburse the PPF pool. In all other cases, the PPA will be repaid in accordance with current OP8.10 provisions for which changes are not being proposed at this time.

16. A complementary approach i s also being explored for the management o f the PPF. This would be in l ine with the principles outlined in this paper, but it would take the approach a stage further by providing a “Project Preparation Line o f Credit” to any interested country, and would create ceilings for each country. Country Directors would be authorized to make PPF advances to the country for specific projects up to this ceiling. This greater flexibility could be o f benefit in the light o f the proposed phase-out o f PHRD grants for project preparation. As this potential approach has only arisen in recent discussions o f the impact o f the end o f PHRD project preparation grants, the details have not yet been worked out or clients consulted, A proposal on an alternative way o f administering the PPF within Regions i s expected to be worked out in detail for later adoption to supplement the core approach proposed by this paper. If this approach were to involve any further changes to the PPF policy, they would be submitted to the Executive Directors for approval.

V. RECOMMENDATIONS

17. To align Bank policy with IDA provisions for allocating grant resources to countries on the basis o f their risk o f debt distress, and to improve country programs’ effectiveness in using resources for institutional development and project preparation, i t i s recommended that the Executive Directors approve:

Approval i s determined as the date on which the Country Director signs the PPA Agreement.

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(a) the proposed changes to the policy governing the Project Preparation Facility as set out in paragraphs 15; and

(b) the changes to the General Conditions, substantially in the form set out in Annex I to this paper.

18. If the Executive Directors approve this recommendation, the policy will take effect immediately for all PPA Agreements that have not been signed, and OP/BP 8.10, Project Preparation Facility will be modified to reflect the changes.

Robert B. Zoellick President

by Juan Jose Daboub Managing Director

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Annex A.

Year

November-75

December-75

July-76

December-76

March-77

August-77

March-78

October-78

January-79

December-79

July-80

PPF Timeline Event

The PPF i s established.

Executive Directors authorize $5 million for the newly created PPF

Board Report: (Letter from the President) “When the Executive Directors approved the establishment o f the Project Preparation Facility, proposed in R75-224, dated November 17, 1975, it was agreed that reports on i ts use would be made semiannually. This i s the first such report.” The first 10 PPF advances ranged from $100,000 to $366,750, with a maximum of $500,000 but no explicit minimum amount being set.

Board Report: 2nd semiannual Report. At this point, a total o f 18 advances had been made, ranging from $25,000 to $500,000. President requests increase in PPF. Board approves raise in January o f 1977. PPF is raised f rom $5 million to $12.5 million.

Board Report on the “Use and Nationality o f Consultants” provided a review o f consultant procurement during the first 1 1/2 years o f PPF.

Board Report: 3rd semiannual Report. The Facility was viewed as performing satisfactorily and the President recommended that henceforth the

the Board should receive “annual” reports on the PPF instead of ‘(semiannual. ”

Board Report: B y Feb 1978, 36 o f the 44 approved PPF advances were IDA credits and the rest were loans. President requests increase in PPF. PPF is raisedfrom 12.5 million to $22.5 million.

Board approves increasing maximum amount o f PPFs from $500,000 to $1 million “to permit financing o f detailed engineering and other preparation activities necessary to bring projects to desirable degree o f readiness before loan approval. Advances over $500,000 to be made only after project are pre-appraised and appears to be justified. ”

Board approves increase in PPF. PPF is raised by another $15 mill ionfrom $22.5 million to $3 7.5 million.

Board approves increase in PPF. PPF is raised by another $20 million, from $37.5 million to $57.5 million.

Board approves increase in PPF. PPF is raised by another $30 million, f rom $57.5 million to $87.5 million.

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Year Event

July-8 1 Board approves increase in PPF. PPF i s raised by another $35 million, but it was also proposed that future requests for additional commitment authority refer to commitment authority as of a speciJic date. Presently net commitment authority was $64.5 million; therefore, PPF was raised to $99.5 million.

July- 8 2 President recommends that reporting requirements on the PPF be satisfied through standard tables in semiannual reports on technical assistance, and that proposals for increase in commitment authority under PPF be included in annual administrative budget.

December-84 President proposes creation o f Special Project Preparation Facility (SPPF), a $10 mil l ion grant facility for IDA-eligible countries in Sub-Saharan Africa to prepare sound investment proposals consistent with their development priorities, for subsequent financing by other donors, to extend the assistance we now provide for the preparation o f projects for Bank financing.

March-86

July-87

April-8 8

FY 89

February-9 1

Board approves increasing the ceiling o f PPF advances from $1 mill ion to $1.5 million.

President proposes the “further operation o f the SPPF for a further three years beyond i t s current expiration o f June 30, 1987.” President proposes the sixth increase in PPF (f irst since 1981) by $55.5 million, bringing the total commitment authority to $155 million. Reports over 80 percent o f all PPF advances have been used for IDA countries Reports:

“The substantial r ise in demand for new advances coupled with the lengthening o f the period between commitment and retirement led to a rapid and unanticipated depletion o f the available net funding level under the Facility during the second half o f CY87.” PPF overcommitted by $17.5 million.

IAD conducts a comprehensive review o f the facility. Recommendations (a) distinctions between Case A and Case B PPF activities should be eliminated; (b) Operational Directive should be revised; and (c) the facility should be monitored better.

Board Report: Gave an overview o f the IAD’s findings and the changes that resulted (outlined above). Also, a monitoring mechanism was put in place that defined the roles of “the Region, ” “the Loan Department,” and the “COD-Central Operations Department. ”

September-9 1 President proposes another increase in PPF o f $35 million, bringing the total commitment authority to $190 million.

10

Year Event

October-92 President proposes another increase in PPF o f $30 million, bringing the total commitment authority to $220 million.

September-93 Board Report: “to raise the individual advances under the Project Preparation Facility (PPF) to $2 mill ion per advance, and in special circumstances to $3 mil l ion per advance for loans exceeding $200 million.”

Reasons: (a) inflation has made $1.5 mil l ion advance equivalent to $1.02 in real terms, (b) average size o f Bank-financed projects has increased by 40 percent since ’86. [By end o f June 1993,70.4 percent o f advances by number were for Sub-Saharan Africa, 74.5 percent by volume.]

December-94 President proposes another increase in PPF o f $30 million, bringing the total commitment authority to $250 million.

August-96 President proposes another increase in PPF o f $40 million, bringing the total commitment authority to $290 million.

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PPF: Relevant Board Reporting

Assistance in Project Preparation (R75-224), November 17, 1975

PPF: The First Six Months (SecM76-473), July 1 , 1976

PPF: Request for Additional Commitment Authority (R76-298), December 28, 1976

PPF: Use and Nationality of Consultants (SecM77-175), March 10, 1977

PPF: Third semiannual Report (SecM77-663), August 3 1, 1977

PPF: Annual Report and Request for Additional Commitment Authority (R78-69), March 27 1978

PPF: Review and Request for Additional Commitment Authority, April 6, 1988

PPF: Review and Request for Changes (R9 1-30), February 20, 1991

PPF: Request for Additional Commitment Authority (R9 1-2 19), September 23, 199 1

PPF: Request for Additional Commitment Authority (R92- 1 8 l), October 16, 1992

PPF: Request for Raising Individual Advances (R93-165), September 23, 1993

Project Preparation Facility, O P B P 8.10, Project Preparation Facility, M a y 1994

PPF: Request for Additional Commitment Authority (R94-247), December 5 , 1994

PPF: Request for Additional Commitment Authority (R96-1 88), August 29, 1996

Project Preparation Facility, O P B P 8.10, Feb 2002, replaces the version dated May 1994.

Project Preparation Facility, O P B P 8.10, August 2004, Revision to reflect the term “development policy lending” (formerly adjustment lending), in accordance with OPBP 8.60, issued in August 2004.

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Period Range

< 1 year 1 year -3 year > 3 year*

Annex D. PPF Allocation Control (as o f June 30,2007)

Number of Disbursed & Accrued PPA's Commitment Undisbursed Outstanding Charges

41 2 8,2 82,96 8 9,896,264 16,191,664 327,917 5 5,654,800 3,194,657 2,460,143 266,18 1 1 150,000 13 1,200 22,959

I Region I C e i I i n g I Open PPFs I Available to Commit I

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25

ANNEX H. PROJECT PREPARATION FACILITY POLICY UPDATE: SUMMARY OF PROPOSED CHANGES AND DRAFT OPBP 8.10 REVISED

Source Topic Existing policy Issue Proposed change OP 8.10 para. 8. PPF If the loan i s not made within Under the existing policy, a PPA Align the PPF refinancing

refinancing the period specified in the Letter policy Agreement, including any

extensions, the recipient i s required to repay the PPF advance (together with the accrued interest or service charge) in 10 semiannual installments over the next five years. If the disbursed amount of the PPF advance i s US$50,000 or less, the recipient i s required to repay it within 60 days.

i s available to IDAcountries only on credit terms, with the exception of IDA countries’ treatment under OP 8.00 Rapid Response to Crises and Emergencies. If no follow-on loan materializes, a country receiving a PPA when it has been classified as a “red light” country could be required to repay the full amount o f the advance, with accrued service charges on expedited terms. Result: Inconsistency between the PPA repayment requirements under OP 8.10 Project Preparation Facility, that may impose hardship on already distressed borrowers, and the treatment of “red light” countries under OP 8.00 Rapid Response to

policy with the IDA framework, and maintain the principle o f equitable treatment for all IBRD and IDA (i.e,, grant and credit) recipients by introducing a more flexible refinancing and repayment policy. (Paper para 15).

................................................................................................................................................................................................................................................................�� OP 8.10 para 2 PPF only when PPF i s used only when other PPAs are carefully Drop this requirement. BP 8.10 para 3 other resources screened at the Regional level

are not project preparation are not within the Regional allocation. available suitable or resources are not However, the requirement to

Bank resources to assist in

available prove that other resources are not suitable or are not available has the unintended consequence o f delaying the Bank’s ability to provide timely assistance to project preparation through the PPF.

for Borrowers, it i s recommended that there be only one maximum size o f non-Emergency operations.

................................................................................................................................................................................ ...................................... ....................................................................................................................... ” .................................................................................................................................................................................... OP8.10 Size o f PPAs The maximum size o f PPAs can To simplify the acility PPAs have a $ 3 million

be US$2 million for operations expected to cost less than $200 million, US$ 3 million for larger operations, and US$ 5 million for Emergency Response Operations ................................... PPA i s approved by the RVP or To simplify the use of the Facility,

authority over individual PPAs be given to the country directors

maximum, except for Emergency Response Operations which have a $ 5 million maximum.

.............................................................................................................. BP8.10 para 6 Approval PPAs are approved by the

authority designate it i s recommended that approval country directors.

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OP 8.10 - PROJECT PREPARATION FACILITY

(February, 2002)

This Operational Policy statement was revised in August 2004 to reflect the te rm "development policy lending" (formerly adjustment lending), in accordance with OP/BP 8.60, issued in August 2004. A previous revision to this statement was made in April 2004 consequent to the issuance o f OP/BP 6.00, which changes may be viewed here.

Note: OP and BP 8.10 replace the versions dated M a y 1994. For guidance on, and answers to specific questions about, the Project Preparation Facility, staff should contact opmanualO,worldbank.org.

1. The Bank' may make an advance from the Project Preparation Facility (PPF) to a borrowing country to finance (a) preparatory activities for investment operations, including preliminary and detailed designs and limited init ial implementation activities, and (b) preparation o f programs to be supported by development policy lending operations.

2. The PPF complements other Bank methods o f assisting project preparation, such as emergency recovery assistance loans, technical assistance loans, grants, and retroactive financing.* I t i s used only when these methods are not suitable and alternative sources o f funds are not available. A PPF advance is made only to a member country.

3. A PPF advance i s made only when there i s a strong probability that a Bank loan w i l l be made for the project under preparation. However, granting the PPF advance does not commit the Bank to finance any portion o f the project. The PPF advance i s designed to be refinanced out o f the proceeds o f the loan or, if the loan does not materialize, to be repaid as provided in paragraph 8. The PPF advance i s made in U S dollars on IBRD3 or IDA terms, depending on whether the project i s l ikely to be financed by IBRD or IDA.4 Payment o f interest or service charges i s deferred until the PPF advance i s refinanced out o f the proceeds o f the loan or other repayment terms take effect.

4. The Bank determines the PPF's total commitment authority and the ceiling on individual advances. One or more PPF advances may be made for the project at any stage before the Bank approves the loan, up to an aggregate maximum amount o f US$2 mi l l ion per proposed project, or US$3 mi l l ion if the project i s expected to cost US$200 mi l l ion or more.

OP 8.10 - PROJECT PREPARATION FACILITY

(June, 2008 - Draft)

Note: OP and B P 8.10 replace the version dated February 2002 (revised in April and August 2004). For guidance on, and answers to, specific questions about, the Project Preparation Facility, staff should contact oDmanual@, - worldbank.org.

1. The Bank' may make a ProjectProgram Preparation Advance (PPA) f rom the Project Preparation Facility (PPF) to a borrowing country to finance: (a) preparatory activities for investment operations, including preliminary and detailed designs and l imited init ial implementation activities; and (b) preparation o f programs to be supported by development pol icy lending operations.

2. A PPA i s made only to a borrowing country. The PPA complements other Bank methods o f assisting project or program preparation, such as trust fund grants for projecVprogram preparation and retroactive financing.*

3. A PPA i s made only when there i s a strong probability that a Bank loan w i l l be made for the operation under preparation. However, granting the PPA does not commit the Bank to finance any portion o f the operation. The PPA i s designed to be refinanced out o f the proceeds o f the loan for whose preparation the PPA i s granted or, if the loan does not materialize, to be refinanced or repaid as provided in paragraph 8. The PPA i s made in US dollars and carries interest on IBRD fixed spread terms or charges on IDA credit or IDA grant terms, depending on the borrowing status o f the ~ o u n t r y . ~ Payment o f interest or service charges, where applicable4, i s deferred until the PPA i s refinanced out o f the proceeds o f the loan or other repayment terms take effect. 4. The Bank determines the PPF's total commitment authority and the ceiling on individual advances. One or more PPAs may be made for the operation at any stage before the Bank approves the loan, up to an aggregate maximum amount o f (a) US$5 mi l l ion for operations made under OP 8.00, Rapid Response to Crises and Emergencies; or (b) US$3 mi l l ion for a l l other operations.

Refinancingrnepayment RefinancingiRepayment

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5. The Letter Agreement between the Bank and the recipient spells out the purposes, terms, and conditions o f the PPF advance and specifies a date by which the advance i s to be refinanced or the repayment process initiated.’ The refinancing date i s the expected date o f effectiveness o f the loan to be made for the project under preparation. After this date, no withdrawals o f the advance are made and any unwithdrawn amount o f the advance i s canceled. If the loan i s not effective by the agreed date but i s expected to become effective within a reasonable time thereafter, the Bank may agree with the recipient on an extension o f the refinancing date.

6. T o refinance the PPF advance, an amount sufficient to cover the principal amount o f the advance plus estimated accrued interest or service charges i s allocated in a separate category in the disbursement schedule o f the Loan Agreement providing for the Bank loan. Any excess amount remaining in this category after refinancing the PPF advance may be reallocated to other disbursement categories in the disbursement schedule o f the loan agreement.

7. Further disbursements for continuing PPF activities that have been included for financing under the loan are made against the appropriate disbursement categories in the disbursement schedule o f the Loan Agreement.

8. If the loan i s not made within the period specified in the Letter Agreement, including any extensions, the recipient i s required to repay the PPF advance (together with the accrued interest or service charge) in 10 semiannual installments over the next five years. If the disbursed amount o f the PPF advance i s US$50,000 or less, the recipient i s required to repay it within 60 days.

Suspension of Disbursements and Cancellation

9. The Bank may suspend disbursements o f the PPF advance6 if:

(a) any proceeds o f the PPF advance have not been used in accordance with the provisions o f the Letter

5. The PPA agreement between the country and the Bank spells out the purposes, terms, and conditions o f the PPA and specifies a date by which the advance i s to be refinanced or the repayment process initiated. The refinancing date i s the expected date o f effectiveness o f the loan agreement to be made for the operation under preparation. After this date, no withdrawals o f the advance are made, and any unwithdrawn amount o f the advance i s canceled. If the loan agreement has not become effective within two years fol lowing the date o f PPA approval’, a later refinancing date may be agreed between the country and the Bank. Extension o f the refinancing date beyond four years fol lowing PPA approval requires RVP approval. If the loan for which the PPA was made i s unlikely to materialize by the refinancing date, the PPA may be refinanced out o f the proceeds o f any other loan to or guaranteed by the country whose loan agreement becomes effective by the refinancing date.

6. To refinance the PPA, an amount sufficient to cover the principal amount o f the advance plus estimated accrued interest or service charges, where applicable, i s allocated in a separate disbursement category in the loan agreement providing for the Bank loan. Any excess amount remaining in this category after refinancing the PPA may be reallocated to other disbursement categories in the disbursement schedule o f the loan agreement.

7. Further disbursements for continuing PPA activities that have been included as eligible for financing under the loan are made against the appropriate disbursement categories in the loan agreement.

8. If no loan agreement providing for the refinancing o f the PPA has become effective by the refinancing date (including any extensions), the following apply:

(a) If the country was an IBRD-country or an IDA-country eligible to receive IDA credits6 on the PPA approval date, it i s required to repay the PPA (together wi th the accrued interest or service charges, as applicable) upon notice by the Bank in 10 approximately equal semiannual installments over a five year period after the refinancing date. However, if the disbursed amount o f the PPA is US$50,000 or less, the country i s required to repay it within a period o f 60 days after the Bank’s notice to repay.7

(b) If the country was an IDA-country eligible only to receive IDA grants’ on the PPA approval date, the advance becomes a grant and i s not repaid by the country. Suspension of Disbursements and Cancellation

9. The Bank may suspend disbursements’ o f the PPA upon occurrence o f any o f the events o f suspension specified or referred to in the PPA agreement.g The Bank may also request a refund o f any amount o f the advance that has not

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Agreement; (b) the recipient has failed to carry out any of the other

provisions of the Letter Agreement; (c) the right of the recipient, or any other entity to

which the IBRD has made a loan with the guarantee of the recipient, to make withdrawals under any Loan Agreement with the IBRD or any Development Credit Agreement with IDA has been suspended;

(d) the Bank has decided, at any time after consultation with the recipient, to withdraw i t s support for the project; or

(e) the recipient has withdrawn i ts request for the Bank’s financial assistance in support of the project.’

10. At any time after disbursements of the PPF advance have been suspended, the Bank may cancel any amount of the PPF advance remaining unwithdrawn.

“Bank” includes IBRD and IDA, and “loans” includes IDA credits and IDA grants, Project Preparation Facility advances, and cofinanciers’ loans or grants administered by the Bank.

For emergency recovery assistance loans, see ml& 8.00, Rapid Response to Crises and Emergencies; for technical assistance loans, see Op/& 8.40, Technical Assistance; for grants, see @BJ 8.45 , Grants; and for retroactive financing, see BP 6.00, Bank Financing.

At the IBRD’s standard variable interest rate for fixed-spread loans as provided in para. 5 of the Annex to the Letter Agreement, available online at the OPCS Temolates.

When the project i s likely to be financed with a blend of IBRD and IDA funds, the PPF advance is normally granted on IDA terms and refinanced out of the proceeds of the IDA credit, in accordance with the policy that IDA funds are normally disbursed first.

A model form of the Letter Agreement i s available online to staff at the OPCS Temolates.

-- OPDP 13.40, Suspension of Disbursements.

See the Letter Agreement template, available online to staff at the OPCS Temolates.

been used in accordance with the provisions of the PPA agreement.

10. At any time after disbursements of the PPA have been suspended, or an amount of the advance has been refunded, the Bank may cancel any remaining unwithdrawn amount of the PPA.

“Bank” includes IBRD and IDA, and “loans” includes IDA credits and IDA grants, “borrower” includes recipient o f an IDA credit or grant.

For grants, see Q&BJ 8.45 , Grants; and for retroactive financing, see BP 6.00, Bank Financing.

When the operation i s likely to be financed with a blend o f IBRD and IDA funds, the PPA i s normally granted on IDA terms and refinanced out o f the proceeds o f the IDA credit or grant, in accordance with the policy that IDA funds are normally disbursed first. See OP 3.10, Financial Terms and Conditions of IBRD Loans, IBRD Hedging Products, and IDA Credits, Annex D.

If, on the date of approval of the PPA, the country i s eligible only to receive IDA Grants, the PPA does not cany service charges. See OP 3.10, Financial Terms and Conditions of IBRD Loans, IBRD Hedging Products, and IDA Credits, Annex D.

Approval is determined as the date o f signature by the Country Director of the PPA agreement.

The notice of how the PPA will be repaid is sent by ACTCF.

See OP 3.10, Financial Terms and Conditions of IBRD Loans, IBRD Hedging Products, and IDA Credits, Annex D - IBRD/IDA Countries: Per Capita Incomes, Lending Eligibility, and Repayment Terms.

_ _ OPIBP 13.40, Suspension of Disbursements.

See the Standard Conditions for Project Preparation Facility Advances, incorporated by reference in the PPA agreement.

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BP 8.10 - PROJECT PREPARATION FACILITY

(February, 2002)

This Bank Procedures statement was updated in April 2007 consequent to the issuance o f O P B P 12.00, Disbursement. Previously updated to reflect title change to "finance officer" (formerly disbursement officer) that took effect on July 1, 2002.

Note: OP and BP 8.10 replace the version dated M a y 1994. For guidance on, and answers to specific questions about, the Project Preparation Facility, staff should contact opmanual@worldbak.org.

1. Project Preparation Facility (PPF) advances are made by Bank' management under a special authority granted by the executive directors, who determine, from time to time, the ceiling on the commitment authority of the facility and on the size o f individual advances. The Managing Director, Operations, makes indicative allocations to the Regions within the limits o f the commitment authority and adjusts them periodically, as necessary. The Regions monitor their commitments against the indicative allocations to ensure that the limits are observed. Since PPF advances are normally refinanced out o f loans, the funds advanced are carried on the books o f the Bank as receivables on account o f project preparation, rather than as loans, until they are refinanced or repaid.

2. The processing o f a PPF advance begins when the Bank receives a letter f rom the country requesting the advance and containing the fol lowing information:

(a) brief statement o f the purposes o f the PPF advance, and the expenditures it would finance;

(b) the expected period o f project preparation; and

(c) a table showing local currency and U.S. dollar estimates for the items to be financed under the PPF advance.

3. The country unit and the task team leader (TL) review the country's proposal for a PPF advance to determine:

(a) whether financing can be provided by the requesting country or another source;

(b) whether the proposal i s sound;

(c) whether the proposed activities are appropriate;

(d) what amount o f PPF advance would be needed,

BP 8.10 - PROJECT PREPARATION FACILITY

(June, 2008 - Draft)

Note: OP and B P 8.10 replace the version dated February 2002 (revised in April and August 2004). For guidance on, and answers to, specific questions about, the Project Preparation Facility, staff should contact oDmanual@worldbank.org.

1. ProjectProgram Preparation Advances (PPAs) are made by Bank' management from the Project Preparation Facility (PPF) under a special authority granted by the Executive Directors, who determine, from time to time, the ceiling on the commitment authority o f the PPF and on the size o f individual PPAs. The Managing Directors responsible for Operations, make indicative allocations to the Regions within the limits o f the commitment authority and adjust them periodically, as necessary. The Regions monitor their commitments against the indicative allocations to ensure that the l imits are observed, Since PPAs are normally refinanced out o f loans, they are carried on the books o f the Bank as receivables on account o f project preparation, rather than as loans, until they are refinanced or repaid.

2. The processing o f a PPA begins when the Bank receives a letter from the country requesting the advance and containing the fol lowing information:

(a) br ief statement o f the purposes o f the PPA, and the expenditures it would finance;

(b) the expected period o f project preparation; and

(c) a table showing local currency and U.S. dollar estimates for the items to be financed under the PPA.

3. The country unit and the task team leader (TL) review the country's proposal for a PPA to determine2:

(a) whether the proposal i s sound;

(b) whether the proposed activities are appropriate;

(c) what amount o f advance would be needed, given the estimated cost o f the activities;

(d) how the activities would be carried out (including

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given the estimated cost o f the activities;

(e) how the activities would be carried out (including procedures for procurement o f goods and services);

(0 whether the PPF advance should be made by IBRD or IDA; and

(8) a suitable deadline for refinancinghepaying the PPF advance.

4. If the proposal meets the criteria set out in OP 8.10, paras. 1-3, the TL prepares a br ief memorandum* to the Regional vice president (RVP), requesting approval o f the PPF advance. The memorandum covers the fol lowing points:

(a) a br ief description o f the project, i ts objectives, and i ts economic justification, and whether it i s l ikely to be financed by IBRD or IDA;

(b) the recipient's commitment and readiness to undertake project preparation;

(c) the activities to be financed by the PPF advance, and their appropriateness;

(d) why other sources o f financing are not available;

(e) the refinancing date; and

(0 the procurement methods and disbursement arrangements, including the terms and conditions o f any designated a c ~ o u n t . ~

5 . The draft memorandum, together wi th a copy o f the recipient's letter o f request, i s sent to the finance officer, the procurement specialist, and the lawyer for review. The lawyer prepares a Letter Agreement,4 which i s cleared by the TL, the finance officer and the procurement specialist. The finance officer ensures that the proposed advance falls within the Regional commitment level and assigns the PPF number that i s shown in the Letter Agreement.

6. The TL sends, through the country director, the memorandum and two originals o f the cleared Letter Agreement, together wi th a copy o f the recipient's letter o f request, to the RVP for a p p r ~ v a l . ~ The originals o f the Letter Agreement are signed by the RVP, the country director or any other person designated by the RVP,6 and sends them to the recipient for countersignature by an authorized representative o f the recipient. One original Letter Agreement i s returned to the Bank. Upon receipt by the Bank o f the countersigned original, the Letter Agreement becomes effective in accordance with the terms o f the Letter

procedures for procurement o f goods and services);

(e) whether the PPA should be made by IBRD or IDA (including country debt-risk classification - green; yellow; red); and

(0 a suitable deadline for refinancinghepaying the PPA.

4. If the proposal meets the criteria set out in OP 8.10, paras. 1-3, the TL prepares a br ief memorandum to the Country Director requesting approval o f the PPA. The memorandum covers the following points:

(a) a brief description o f the project, i ts objectives, and i t s economic justification, and whether it i s l ikely to be financed by IBRD or IDA (including country debt-risk classification - green; yellow; red);

(b) the recipient's commitment and readiness to undertake project preparation;

(c) the activities to be financed by the PPA, and their appropriateness;

(d) the refinancing date; and

(e) the procurement methods and disbursement arrangements, including the terms and conditions o f any designated a c ~ o u n t . ~

5. The draft memorandum, together w i th a copy o f the country's letter o f request, i s sent to the finance officer, the procurement specialist, and the lawyer for review. The lawyer prepares the PPA agreement, which i s cleared by the TL, the finance officer and the procurement specialist. The finance officer ensures that the proposed advance falls within the Regional commitment level and assigns the PPF number that i s shown in the PPA agreement.

6. The TL sends the memorandum and two originals o f the cleared PPA agreement, together w i th a copy o f the country's letter o f request to the Country Director for approval. The originals o f the PPA agreement are signed by the Country Director or any other designated p e r ~ o n , ~ and are sent to the country for countersignature by an authorized representative o f the country. One original fully signed version o f the PPA agreement i s returned to the Bank. Upon receipt by the Bank o f the countersigned original, the PPA agreement becomes effective in accordance with the terms o f the PPA agreement.5 This original i s sent to the lawyer, and

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Agreement.' This original i s sent to the lawyer, and a copy i s sent to LOA and OPCS.

a copy i s sent to LOA and OPCS.

Extension of Refinancing Date Extension of Refinancing Date

7. Requests for approval of an extension of the refinancing date are made in a memorandum that explains the rationale for the extension. The memorandum i s prepared by the TL, cleared by the country director, the finance officer, and the lawyer, and sent to the RVP.'

Reporting Arrangements

8. After signing, the Region reports the agreement for a PPF advance in the Report to the Executive Directors on Bank and IDA Operations and in the Monthly Operational Summary of Bank and IDA Proposed Projects. Operations Policy and Country Services reports to the Board on the use of the facility, answers policy inquiries from the executive directors and management, and provides to the RVPs a monthly summary of outstanding commitments relative to the approved ceiling.

1 "Bank" includes IBRD and IDA, "loans" includes IDA credits and IDA grants, and "Loan Agreement" includes Development Credit Agreement.

2 A sample form o f the memorandum i s available online to staff in the OPCS Temolates.

3 When relatively few payments are anticipated, the establishment o f a designated account may not be warranted.

4 A sample Letter Agreement with attachments related to the terms and conditions of the grant and procurement procedures i s available online to staff in the OPCS Temolates.

5 The RVP may delegate to the country director the authority to approve a PPF advance. In such cases, the sector manager submits the approval memorandum to the country director, otherwise following the same procedures as provided in paras. 4-6.

6 Staff should see Administrative Manual Statement 1.30. Annex C, Designation of Authorized Signatories for Instruments Relating to Lending, Technical Assistance, and Cofinancing Operations.

7 Usually, the Letter Agreement becomes effective as o f the date of countersignature.

8 The RVP may delegate to the country director the authority to extend the refinancing date.

7. Requests for approval of an extension of the refinancing date are made in a memorandum that explains the rationale for the extension. The memorandum i s prepared by the TL, cleared by the finance officer, and the lawyer, and sent to the Country Director for approval. Extensions of tht refinancing date beyond four years following PPA approval requires RVP approval.

Reporting Arrangements

8. After signing, the Region reports the agreement for a PPA in the Report to the Executive Directors on Bank and IDA Operations and in the Monthly Operational Summary of Bank and IDA Proposed Projects.

1 "Bank" includes JBRD and IDA, "loans" includes IDA credits and IDA grants, "borrower" includes recipient of an IDA credit or grant.

2 For PPAs made under OP 8.00, Rapid Response to Crises and Emergencies, staff should follow BP 8.00

3 When relatively few payments are anticipated, the establishment o f a designated account may not be warranted.

4 Staff should see Administrative Manual Statement 1.30. Annex C, Designation of Authorized Signatories for Instruments Relating to Lending, Technical Assistance, and Cofinancing Operations.

5 Usually, the Letter Agreement becomes effective as of the date of countersignature.

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Annex I. Proposed Amendments to the I D A and IBRD General Conditions

A. and Grants (dated July 1,2005, as amended through October 15,2006) are proposed to be amended as follows:

The International Development Association General Conditions for Credits

1. Section 2.07 would be amended to read as follows:

“Section 2.07. Refmancing Project Preparation Advance

If the Financing Agreement provides for the repayment out of the proceeds of the Financing of an advance made by the Association or the Bank (“Project Preparation Advance”), the Association shall, on behalf o f the Recipient, withdraw from the Financing Account on or after the Effective Date the amount required to repay the withdrawn and outstanding balance o f the advance as at the date o f such withdrawal from the Financing Account and to pay all accrued and unpaid charges, if any, on the advance as at such date. The Association shall pay the amount so withdrawn to i t se l f or the Bank, as the case may be, and shall cancel the remaining unwithdrawn amount o f the advance.”

2. Paragraph 43 of the Appendix Definition would be amended to read as follows:

“43. “Project Preparation Advance” means the advance referred to in the Financing Agreement and repayable in accordance with Section 2.07.”

B. The International Bank for Reconstruction and Development General Conditions for Loans, dated July 1, 2005 (as amended through February 12, 2008) are proposed to be amended as follows:

1. Paragraph (a) o f Section 2.07 would be amended to read as follows:

“(a) If the Loan Agreement provides for the repayment out of the proceeds of the Loan of an advance made by the Bank or the Association (“Project Preparation Advance”), the Bank shall, on behalf o f such Loan Party, withdraw from the Loan Account on or after the Effective Date the amount required to repay the withdrawn and outstanding balance o f the advance as at the date o f such withdrawal from the Loan Account and to pay all accrued and unpaid chargesdf any, on the advance as at such date. The Bank shall pay the amount so withdrawn to i t se l f or the Association, as the case may be, and shall cancel the remaining unwithdrawn amount o f the advance.”

2. Paragraph 77 of the Appendix (Definition) would be amended to read as follows:

“77. “Project Preparation Advance” means the advance referred to in the Financing Agreement and repayable in accordance with Section 2.07 (a).”