Financial Management - World Bank Group
FinancialManagement1818 H Street, NWWashington, DC 20433U.S.AFinancial Management DepartmentConcessional Finance and Global PartnershipsVice Presidencyof Donor Fundswww.worldbank.org/cfpConcessional Finance and Global Partnerships (CFP)The World BankMay 2010CFP FinanMgmtBroc COV CRA.indd 15/6/10 2:05:05 PM
ContentsThe World Bank’s Role in Financial Management of Donor Funds / 1Financial Management in Practice / 3Extensive experience in managing donor assets / 3Financial management of donor funds / 4Investment management of donor funds / 6Intermediation services in the capital markets / 8Risk monitoring and control frameworks / 9Regular financial reporting and independent audits / 11Provision of financial and information systems / 11Quality assurance and compliance monitoring / 12Independent evaluation of projects and programs / 12Oversight through the World Bank Board and committees / 12Governance and Anti Corruption (GAC) agenda / 12Disclosure and access to information / 13CFP FinanMgmtBroc COV CRA.indd 25/6/10 2:05:06 PM
IntroductionMany donor governments and organizations ask the International Bank for Reconstruction andDevelopment (IBRD) and the International Development Association (IDA), more commonlyreferred to as the World Bank, to manage funds originating from budgetary appropriations andother sources for economic and social development. This booklet describes how the WorldBank manages these assets.Since the creation of IDA in 1960, the World Bank’s funding arm for the poorest, the numberof contributors to IDA and trust funds has increased to about 245 different donors, includingsovereign governments, foundations, non-governmental organizations and private donors. Infiscal year 2010 alone, these donors will provide an estimated 20 billion of cash contributionsto foster economic development and poverty reduction in low and middle-income countries. Atend-March 2010, the World Bank managed a total of 43.1 billion of liquid assets held by IDAand Trust Funds that will be disbursed across a wide range of sectors.The World Bank uses financial management techniques to ensure that the funds provided by itsdonor partners are prudently managed. The growth of donor-funded development initiativesover the past decade is a testament to the confidence that donors place in the World Bank’sadherence to high fiduciary standards of financial management.Donor funds are managed through a number of financial services, ranging from standard banking services to investment management, currency risk management, and financial reporting. Inmanaging these funds, the World Bank maintains secure information technology systems andadheres to a comprehensive internal control framework as well as internal and external auditreviews to provide assurance to donors that disbursements follow relevant World Bank policiesand procedures for the funds it is entrusted with.Sound financial management of donor contributions is a necessary and integral part of the valueprocess to ensure the appropriate use of taxpayers’ and other resources provided for the purposes of economic and social development. We look forward to working with donor partners toachieve sustainable outcomes in developing countries and economies in transition.Axel van TrotsenburgVice PresidentConcessional Finance and Global Partnerships (CFP)The World Bank
2Concessional Finance and Global Partnerships (CFP)The World Bank
The World Bank’s Rolein Financial Managementof Donor FundsWhen donors provide funding to the World Bankto finance development projects and programs,they expect these funds to be well manageduntil they are disbursed. In short, financial management by the World Bank covers the processof sourcing funding from donors, investing thefinancial assets received, and disbursing fundsto recipients. Within this value chain, the WorldBank performs a variety of financial and riskmanagement activities and services, includingfinancial reporting, performing business processes and maintaining the requisite systems andcontrol framework.Other units in the World Bank are also involvedin the financial management of donor funds.These include the Legal Department, Controllers, Treasury, Corporate Finance, InformationTechnology, among others. Appraising andsupervising World Bank-financed developmentprojects is the responsibility of regional, sectorand other vice presidencies.World Bank Financial Managementat a GlancenWithin the World Bank, the ConcessionalFinance and Global Partnerships Vice Presidency(CFPVP) is responsible for resource mobilizationand donor relations, policy development andadvisory services, as well as financial and riskmanagement for the International DevelopmentAssociation (IDA), Financial Intermediary Funds(FIFs), and Bank-executed and Recipient-executed trust funds.nnnnnnnnnnnFinancial Management of Donor FundsExtensive experience in managing donor assetsFinancial management of donor fundsInvestment management of donor fundsIntermediation services in the capital marketsRisk monitoring and control frameworksRegular financial reporting and independent auditsProvision of financial and information systemsQuality assurance and compliance monitoringIndependent evaluation of projects and programsOversight through the World Bank Boardand committeesGovernance and Anti Corruption (GAC) agendaDisclosure and access to information1
2Concessional Finance and Global Partnerships (CFP)The World Bank
Financial Managementin PracticeExtensive experiencein managing donor assetsThe World Bank has mobilized and manageddonor funding since 1960 when IDA was createdto support the poorest countries through interestfree and long-maturity loans. Donor contributionsare the main source of funding for IDA, complemented by credit reflows and contributions fromWorld Bank net income and more recently grantsfrom the International Finance Corporation (IFC).There are 45 donor governments contributing tothe current IDA15 replenishment, including manymiddle-income countries and former IDA recipients. At the end of fiscal year 2009, the WorldBank’s Treasury managed some 21.3 billion ofcash and investments for IDA.funds where the World Bank has spending authority and Recipient-executed trust funds where theWorld Bank passes funds on to a third party recipent while performing an operational (appraisaland supervision) role. Over the last decade donorshave also engaged the World Bank for the management of another line of donor-funded development operations through Financial IntermediaryFunds (FIFs), where the World Bank takes on awide range of financial management and advisory roles while project implementation is carriedout by other agencies or entities. A total of 245donors from 77 countries are now supporting trustfunds (including FIFs) financially, through 1,045trust fund accounts, for which the World Bankheld some 19.9 billion of invested liquidity at theend of fiscal year 2009.Since the 1980s, donors have also provided bilateral aid resources and other contributions throughtrust funds held by the World Bank, many of whichare intended to co-finance World Bank-financeddevelopment projects. A trust fund is typically afinancing arrangement set up with contributionsfrom one or more donors. World Bank administered trust funds consist of Bank-executed trustTo manage these substantial donor financialresources, the World Bank follows prudentfinancial policies and procedures. It employsappropriate operational policies and compliance with established business procedures forappraising and supervising projects and anoperational fiduciary framework including safeguards, project procurement and financial man-Financial Management of Donor Funds3
agement for the recipients of the funds. Backedby its AAA credit rating, IBRD, the World Bank’sarm that supports middle-income and creditworthy low-income countries, acts as a trustedfinancial intermediary for IDA and Trust Fundsin the international capital markets. Trust fundsand IDA assets are kept separately and are notco-mingled with those of IBRD.invoices to donors for their installment payments, followed by the processing of cash andpromissory note payments received.Financial management of donor fundsFinancial management of donor funds starts byguiding donors through the process of making acontribution to IDA or a trust fund. This includespreparing the required legal documents anddonor contribution agreements. Thereafter, theWorld Bank collects and manages the funds fromdonors, beginning with the process of sendingFinancial management also extends to the recipient side of donor funded operations. The WorldBank prepares and enters into grant and projectagreements with developing countries and otherrecipients benefiting from the donor-providedresources. For financial intermediary funds projectimplementation is carried out by other agenciesor entities. The fund balance is tracked to ensurethat grant commitments for projects do not exceedavailable and expected funding. Forecasts areprepared to project the ability of a fund to commitgrant amounts for future project disbursements.Cash flows and liquidity are managed in order toensure that funds are available when required forWorld Bank Disbursements, Fiscal Years 2005-2009In US bn 20 15 10 50FY0518%FY0617%Trust FundsFY0723%IDAFY0825%FY0920%IBRDWBG TF disbursements as percentage of total IBRD, IDA and TF disbursements4
Financial Management of Donor Funds5
World Bank Disbursements, Fiscal Years 2005-2009In US bn 20 15disbursement. 10 Disbursements to the recipient aredependent on receipt of funds from the donors.the primary objective of preserving the capital ofthe funds held.Allocations 5of funds for specific grants areThe investment process starts by establishingrecorded and tracked by the task manager ofan asset management strategy. Once this strata trust fund.0 These allocations can encompassegy is reviewed and approved by appropriateFY05FY06FY07departmentsFY08grant or loan commitments,administrativeand financialFY09committees, the World18%17%23%25%20%budgets, fees for project supervision, and otherBank’s Treasury develops a strategic asset allocaIBRDIDA to achieve thecommitments. Commitments willtranslatetioninvestment objectives. SuitTrustFunds intosubsequent disbursements for eligible expendiable portfolio benchmarks are set to achieve theWBG TF disbursements as percentage of total IBRD, IDA and TF disbursementstures and transfers of funds to recipients.investment objectives and performance is closelymonitored. Investment positions are establishedInvestment management ofwith approved market counterparties based oninvestment guidelines for which credit exposuredonor fundslimits are established and monitored continuously.Between the receipt of funds from donors andtheir disbursement to grant recipients, the World Trust funds assets are invested in three tranchesBank’s Treasury invests the liquid assets in thewith different risk and return profiles. All trustcapital markets. This is carried out prudently with funds are reviewed with respect to their alloca-Portfolio Investment Returns, Fiscal Years 2005-200910%8%6%4%2%Credit Crisis Period0%FY05FY06FY07Trust Funds Portfolio ReturnsFY08IDA Investment ReturnsIBRD Investment Returns6FY09
Financial Management of Donor Funds7
Asset Management During the Global Financial CrisisThe World Bank took several steps to further safeguard donor assets and preserve their investment performanceduring the global financial crisis of 2008-2009. These included but were not limited to:nReducing the exposure of the portfolio to assets backed by residential home loans.nReducing the duration of the portfolio to limit sensitivity to widening credit spreads.nReducing exposure to financial institutions most adversely affected by the crisis.nRegularly reviewing the portfolio to ensure adherence to credit rating constraints, as many institutionsexperienced credit rating downgrades.nLimiting trading to the strongest counterparties to minimize risk due to counterparty failure.nStrengthening collateral policies and procedures to reduce counterparty exposure.tion into the different investment tranches, basedon multi-year cash flow projections for eachfund and risk/return considerations. For IDA, theinvestment framework is based on three liquidity tranches with different investment objectives,investment horizons and risk tolerances whichare reviewed annually. Investment returns fortrust funds and IDA are analyzed monthly andthere are regular discussions to assess investment policy and asset allocations.Intermediation servicesin the capital marketsIDA and Trust Funds are exposed to market risksdue to movements in currency and interest rates,affecting the value of assets held in trust. Market risks are identified and hedging and otheralternatives to mitigate these risks are approvedby appropriate departments and finance committees. In the case of trust funds, where relevant,the Bank consults external governing bodies andseeks their approvals. Thereafter, the World BankTreasury arranges the intermediation of market8transactions. One example is the contracting ofcurrency hedges to manage a mismatch betweenthe currency of donor contributions and the commitment currency of loans or grants for IDA.The World Bank also provides customized financialservices. One example is the design and evaluationof a market borrowing strategy, with subsequentexecution services for bond issues of a given fund,such as the International Financing Facility forImmunization. In another example, on behalf ofCarbon Fund participants, the World Bank entersinto Emission Reduction Purchase Agreements(ERPAs). The World Bank also executes the monetization of the Carbon Emission Reductions (CERs)received on behalf of a fund; the monetizationprogram converts CERs into cash to support commitments and disbursements to the funds’ projects.For the poorest countries affected by droughts, theWorld Bank intermediates the purchase of droughtinsurance in the capital markets, with donorsfinancing the resulting insurance premia. Othercustomized financial intermediation services can beprovided as required by donors.Concessional Finance and Global Partnerships (CFP)The World Bank
Risk monitoring and control frameworksThe World Bank monitors and reports on risk atthe institutional and fund level. It uses an integrated risk management framework, providing acontinuous, proactive and systematic process toanalyze, manage and communicate risks from aninstitutional perspective to its Board and management. This includes regular risk scans, riskworkshops and the World Bank-wide Risk Reportthat draws from institutional risk assessments andreviews performed by the World Bank’s InternalAudit, Independent Evaluation and institutionalIntegrity units.At the fund level, risk assessments are performedthroughout the life of the fund by its assignedtask managers, providing important input intothe oversight and monitoring of funds. A separate Risk Report is prepared by CFP as part ofits fiduciary oversight and financial management responsibility for IDA and Trust Funds. Thereport provides an assessment of risks in eachfund and program based on a customized setof risk metrics and serves as an input into WorldBank-wide risk reports.The World Bank mitigates financial and operational risks through strong internal controlsand processes to safeguard donor assets.Controls are evaluated using the Committeeof Sponsoring Organizations of the TreadwayCommission (COSO), an internationally recognized and widely accepted internal controlframework. The World Bank has in place aprogram to assess all of its business unitsand takes steps to strengthen and streamlineits controls and business processes. Mostrecently, CFP carried out a Financial Management Review to ensure that financial transaction processing adheres to high operationalstandards and is sufficiently segregated, witheffective controls and independent oversight.The World Bank is committed to continuouslystrengthen monitoring, oversight and controlsfor its donor-funded operations.Financial Management of Donor Funds9
Information Systems for DonorsDonor Center/Client Connections. Provides each donorand agency with up-to-date financial information onTrust Funds through a secure website (http://clientconnection.worldbank.org):n Financial information updated dailynDonor contributions for each trust fund and acrossthe portfolionDisbursements for each trust fund by country andexpense categorynAccess to donor administration agreementsnProgress reports, completion reports and auditreportsnUser access is managed by donor agencyAidFlows. Provides information on sources of donor aidcontributions as reported by OECD and the World Bank.Information is available for 58 donor countries (www.worldbank.org/cfp, Financial Management, Donor Aid Contributions):nOfficial Development Aid (ODA) as a percentageof GNInContributions to the World Bank and othermultilateral banksnContributions to IDA and World Bank-administeredtrust fundsA second phase of AidFlows is under development toprovide information on the uses of funds by recipientcountry.10Concessional Finance and Global Partnerships (CFP)The World Bank
Regular financial reportingand independent auditsProvision of financial andinformation systemsFinancial transactions are accounted for andrecorded using appropriate accounting systems.The World Bank ensures proper and securemaintenance of all accounting documents andrecords for IDA and Trust Funds.The World Bank uses integrated information systems that provide end-to-end financialtransaction processing. Transactions include therecording of replenishment and contributionagreements, calls of resources from donors, foreign exchange, allocation of investment income,disbursement of funds, and associated reportingto donors in accordance with underlying agreements. The information technology systemsprovide donors as well as the implementingagencies and secretariats with data and customized reporting, as part of the World Bank’sfiduciary responsibilities.Donors are provided periodic financial reportsthrough the World Bank’s Client Connectionwebsite (http://clientconnection.worldbank.org).At the end of each fiscal year, donors receive aSingle Audit Report for all modified cash-basistrust funds, comprising (i) a management assertion together with an attestation signed by external auditors regarding effectiveness of internalcontrols over financial reporting of the modified cash-basis trust funds and (ii) a combinedfinancial statement along with the external auditor’s report. The World Bank arranges for separate external audits of financial statements forselected large trust funds where requested andseparately funded by donors. For IDA, shareholders receive quarterly financial reports andannual audited financial statements, as well as adetailed Management Discussion and Analysis.The internal audit function at the World Bankreports to the President of the institution. Thereare regular internal audits of IDA and TrustFunds, covering their business processes andthe responsible units. Internal audits serve as anindependent, third-party assessment of existingsystems for risk management, the control framework, and governance processes.Most of the donor funding received for IDA andTrust Funds is processed through the System forTracking and Accounting for Resources (STAR).STAR is a customized, flexible interface that lowers transaction costs, enhances business controls and reduces operational and financial risk.STAR provides a robust information technologyplatform for supporting an increasing numberof complex and often customized donor-fundedinitiatives. It automates most financial functionsand client relationship management. Since it isfully integrated, transactions in STAR are seamlessly transferred to the SAP general ledger.STAR is used for donor contributions to IDA andTrust Funds as well as World Bank m
The World Bank’s Role in Financial Management of Donor Funds / 1 Financial Management in Practice / 3 Extensive experience in managing donor assets / 3 Financial management of donor funds / 4 Investment management of donor funds / 6 Intermediation services in the capit
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