The World Bank’s policy on DPF states: “a DPF is aimed at helping a Member Country address actual or anticipated development financing requirements that have domestic or external origins. The [World] Bank may provide a Bank Loan to a Member Country or to one of its Political Subdivisions; and it may provide a Bank Guarantee of debt incurred by a Member Country or by one of its Political Subdivisions.”2
DPF aims to help the borrower achieve sustainable poverty reduction through a program of policy and institutional actions, for example, strengthening public financial management, improving the investment climate, addressing bottlenecks to improve service delivery, and diversifying the economy. DPF provides general budget support, meaning that the funds are disbursed into the general budget of the client government and are not tied to specific budget items. 

DPF is provided after implementation of a set of policy and institutional actions (prior actions) that support the achievement of development policy objectives, consistent with the recipient’s national goals and strategies and the World Bank’s strategy in the country. Implementation of all prior actions is a condition for approval by the Board of Executive Directors. The purpose of the prior actions is to advance, catalyze, or signal broader reforms and demonstrate credibility and ownership necessary for their success. Well-defined results indicators, with clear baselines and time-bound targets, monitor progress toward objectives. A credible results chain (or theory of change) links objectives, prior actions, other activities, and results indicators. The policy framework is developed through a policy dialogue between the World Bank and the recipient government. 

At the World Bank, over the past decade and a half, DPF operations have typically accounted for between one-quarter and one-third of World Bank financing commitments, rising during times of major crises to as high as 40% (Figure 6.1). The use of DPF escalated during the global financial crisis in 2007–2009 because it was used to provide countercyclical financing to many developing country recipients. This has also been the case during regional crises.  

The World Bank has historically made relatively greater use of development policy financing (as part of overall development financing) in middle-income than to low-income countries. To some extent, this reflects the more advanced institutional and absorptive capacities and better developed systems of public expenditure management and budget planning in these countries. The global financial crisis had a disproportionate impact on middle-income countries, and, in response, the World Bank scaled-up DPF operations to middle-income country recipients during and immediately after the crisis (Figure 6.2). 

Investment project financing from the World Bank is relatively more important in low-income countries. However, a growing number of low-income countries, especially in Sub-Saharan Africa, and particularly since the onset of the COVID pandemic, are now receiving budget support through DPF (Figure 6.3). The largest low-income country recipients of DPF between 2005 and 2019 were Bangladesh, Ghana, Pakistan, Viet Nam, and Tanzania. 

Programmatic development policy operations—a series of consecutive budget support operations in support of a common set of objectives and reforms—have become more common at the World Bank, reflecting their ability to more consistently support longer-term reforms, particularly in the context of a stable policy environment. They enable policy dialogue to continue, reforms to be monitored, and midcourse corrections to be made, as needed. By contrast, stand-alone loans may be more appropriate in the context of either short-term needs or situations of uncertainty (for example, re-engagements, crises, political uncertainty), when the World Bank needs to balance the need to support clients while maintaining flexibility regarding subsequent commitments.

• 2
  
  World Bank. 2017. The World Bank Operational Manual: Operations Policy OP/BP 8.60. Washington, DC: World Bank. Section III.

Given the seriousness of the coronavirus (COVID-19) pandemic and the threat it poses to development gains and future progress, the World Bank has brought its full range of instruments, including DPF, to bear in support of its clients. DPF supports clients in several ways, even when operations are not tagged explicitly as part of a COVID-19 response. DPF provides countercyclical financial support to help countries to maintain critical public services, address rising health care needs, and replace revenues lost from declining economic activity. The prior actions in DPF operations support reforms that will improve the efficiency of public sector spending, thereby making better use of increasingly scarce public resources. This can include improving budget processes to ensure that resources are allocated to the most critical needs, supporting private sector development to help sustain firms during the crisis, and strengthening their eventual recovery (including by encouraging reforms that lower the costs of doing business). 

At the outset of the COVID pandemic, the World Bank Group committed itself to providing up to $160 billion, in total financing (IBRD, IDA, IFC, MIGA, and from trust funds), from April 2020 through the end of June 2021 to help countries address the health, social, and economic impacts of COVID-19, while maintaining a line of sight to their long-term development goals. This financing comes from a variety of instruments (including DPF) through new operations and restructuring existing ones to strengthen country capacity to address health, economic, and social shocks. It includes $50 billion in IDA financing for low-income country recipients. The support is organized around four pillars: saving lives, protecting the poor and most vulnerable, ensuring sustainable business growth and job creation, and strengthening policies, institutions, and investments for rebuilding better.3
By June 2021, the Bank provided $157 billion in overall financing support to client countries, of which $98.9 was accounted for by IBRD financing for middle-income countries and IDA financing for low-income countries.4
Of this, about $28 billion was provided in development policy financing for crisis support, $10 billion to middle-income and $8 billion to low-income countries.5
This $28 billion in DPF in support of the COVID19 crisis response during April 2020-June 2021 compares with $12.9 billion provided in the FY2019 as shown in Figure 6.1.

• 3
  
  World Bank. 2020. Supporting Countries in Unprecedented Times: Annual Report 2020. Washington, DC: World Bank.
• 4
  
  The World Bank 2021. Annual Report 2021: From Crisis to Green, Resilient and Inclusive Recovery. World Bank. Washington D.C.
• 5
  
  World Bank. 2021. 2021 Development Policy Financing Retrospective: Preliminary Findings. OPCS. World Bank: Washington D.C. pp. 24-25. https://thedocs.worldbank.org/en/doc/15a18cacdbcf0b366069d95225036969-0290032021/original/Development-Policy-Financing-DPF-2021-Retrospective-Preliminary-Findings.pdf

At the close of every World Bank DPF operation (or programmatic series of operations), the unit which prepared the operation produces a self-evaluation in the form of an implementation completion and results report (ICR). ICRs are intended to provide a candid and systematic account of the performance and results of each operation or programmatic series of operations, drawing on evidence collected during the life of the project and after completion, thereby contributing to World Bank learning and accountability. The ICR assesses the extent to which operations have achieved their relevant objectives, self-assesses World Bank performance and, until recently, rated borrower performance. 

IEG conducts validations of all ICRs. The resulting report, the ICR review (ICRR), is the main operation-level assessment of operational performance. The ICRR validates the ICR’s analysis and findings, providing an independent, desk-based, critical review of the evidence, results, and ratings of World Bank self-evaluation. Based on the evidence provided in the ICR and an interview with the relevant task team leader, IEG arrives at an independent rating for the operation. The ICRR may downgrade the rating of an operation from the staff self-assessment, sometimes because of shortcomings in the evidence in support of achievement. IEG reports aggregated data on the disconnect between staff and IEG ratings to the Board, which provides some degree of discipline on the objectivity of the self-assessment. IEG conducts in-depth evaluations (project performance assessment report) for a subset of operations with a completed ICRR, based on additional evidence (including field visits with extensive interviews of relevant stakeholders) to gain deeper insights into what works and what does not, serving both accountability and learning functions. 

ICRs and ICRRs have traditionally taken an objectives-based approach to evaluating performance by assessing the relevance of the objectives and design and the achievement of each objective with reference to targets for pre-identified results indicators. This methodology is similar to the approach used to evaluate and validate investment projects. Recently, the World Bank and IEG reformed the approach to assessing budget support operations to better reflect the characteristics of DPF operations. This new framework, which began being implemented recently, is discussed below in the penultimate section “The Evolving Framework for the Evaluation of World Bank Development Policy Financing.”

Until 2018, the World Bank used similar approaches for self-evaluation and validation of World Bank investment project financing (IPF) and DPF operations. The main difference was that efficiency (i.e., cost–benefit analysis) was not assessed for DPF operations because of the methodological difficulties in assigning costs, benefits, and weights to economic reforms underpinning DPF operations compared with the outputs supported by traditional investment projects. To assess the efficiency of a DPF operation, an evaluation would have to determine (i) whether more reform or more impactful reform could have been obtained for the same amount of budget support, or (ii) whether the same reforms could have been secured with less budget support. Given the nature of a budget support operation, a credible assessment of either would not have been feasible. 

In September 2018, the World Bank and IEG adopted IPF-specific evaluation guidelines. Among the changes adopted, the rating for borrower performance was dropped so the assessment could be focused on how World Bank staff adapted and responded to borrower-related challenges. Self-evaluation and validation of DPF operations continued to use the preexisting guidelines. 

The World Bank recognizes that budget support operations have features that require a different approach to evaluation when compared with investment project lending. For example, the specific prior actions required for DPF disbursement alone are rarely sufficient to achieve the program objectives, especially in the context of a multisector operation. Additional actions by governments and complementary support from investment projects and development partners are usually needed. 

The trajectory of reforms supported by DPF are generally part of broader and longer-term policy-making efforts. This makes attribution of the development objectives to DPF operations particularly difficult. It also presents challenges in articulating a complete results chain based solely on the prior actions in the operation. Moreover, while supervision of a multi-year investment project is conceptually clear, it can be of lesser importance for a standalone DPF operation given that prior actions, by definition, are completed before approval (although monitoring of progress toward targets remains important). 

To improve the operational relevance of its work, IEG recently adopted changes to the structure and content of its evaluations and validations of DPF operations. This was in part in response to changes in ICRs (self-evaluation) that the World Bank has adopted. The new IEG framework for evaluating budget support operations better reflects the characteristics of DPF. Figure 6.6 shows the main building blocks of the new DPF evaluation framework.

The main changes from the earlier framework relate to the assessment of relevance, results indicators, and World Bank performance. Instead of rating the relevance of objectives, IEG will rate the relevance of the prior actions supported by the operation (although the relevance of objectives will still be discussed).20

• 20
  
  The discussion of the relevance of the objectives considers the extent to which a particular objective should be a priority for the World Bank, taking into account the overarching World Bank-supported country development strategy.

This chapter has reviewed the evolution of the use of DPF at the World Bank between 2005 and 2019 and its performance as reflected in the recent literature and Independent Evaluation Group (IEG) evaluations. The chapter also described recent changes to IEG’s evaluation framework for PBF operations. The principal conclusions are as follows. 

• Policy-based lending has been an important financing instrument of the World Bank, accounting for about one-quarter of its total financing during 2005-19, but increasing to 40% in times of crises. It plays an important countercyclical role in developing countries. Budget support operations have supported short-term and longer-term policy and institutional reforms geared toward poverty reduction and shared prosperity (the World Bank’s twin corporate goals). There are several varieties of budget support in use, from standard, stand-alone operations, and programmatic series of operations to policy-based guarantees (PBGs) and deferred draw-down options. This makes development policy financing a flexible and versatile financing instrument that can be deployed in a wide variety of country contexts to support short-term goals (e.g., macroeconomic stabilization, natural disaster emergency, post-conflict budget financing support, and arrears clearance) and long-term goals (e.g., poverty reduction and shared prosperity). As a result, governments have frequently chosen this instrument, especially in times of crises, when national budgets are under stress, and quick-disbursing financing, combined with corrective policy actions, is an economic and social imperative. 
• The COVID-19 crisis and its unprecedented global health, economic, and social impact has prompted the World Bank to rapidly scale up its financing to developing country recipients to cushion impact. To that end, the World Bank committed itself at the start of the pandemic to deliver $160 billion in overall financial support by the end of June 2021. In the event, $157 billion was delivered, of which $28 billion in development policy financing. 
• IEG evaluations have generally assessed the World Bank’s DPF positively, with about four-fifths of assessments rated moderately satisfactory or higher. However, the share of operations rated satisfactory has declined, while the share rated moderately satisfactory has risen. There is evidence that elements of design have improved over time, including the quality of macroeconomic frameworks, results frameworks, and the use of knowledge on public expenditures. 
• The World Bank has used DPF as a key instrument in supporting country clients in crisis. During crises such as the global financial crisis, the focus on fiscal management, effectiveness of public expenditures, and targeted social programs has supported countercyclical policies. 
• The framework for evaluating development policy financing was recently revised in order to produce more operationally relevant assessments and findings, including with respect to the assessment of World Bank performance. IEG has similarly revised its validation framework for evaluations of DPF operations to give greater attention to the relevance and quality of prior actions, better results indicators, and more informed ex ante assessment of risks. IEG began using this new framework in late 2020.