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May 11, 2005
JS-2437 Randal K. Quarles
Acting Under Secretary for International Affairs
Testimony before the House Appropriations Subcommittee on
Foreign Operations, Export Financing, and Related Programs
FY2006 Budget Request for Treasury International Programs Chairman Kolbe, Ranking Member Lowey, Members of the Subcommittee, thank you for the opportunity to testify this morning on President Bush's FY2006 budget request for Treasury's International Programs.
Treasury's International Programs – which include the multilateral development banks (MDBs), debt reduction, and technical assistance – are critical instruments in promoting the Administration's international economic agenda. The MDBs promote global economic growth and poverty reduction, thereby helping to create stronger markets for U.S. goods and services. They also support specific U.S. foreign policy priorities, such as combating money laundering and terrorist financing, rebuilding conflict-torn economies such as Iraq and Afghanistan, and assisting recovery from natural disasters. Similarly, debt reduction can help poor countries remove debt overhang, which inhibits a country's economic growth. A sustainable level of debt, if properly structured, can end the cycle of lend and forgive. Our technical assistance helps countries institute the sound budget and financial systems needed for economic growth.
The FY2006 request for Treasury's International Programs totals $1.46 billion. It includes $1.33 billion to fully fund our annual commitments to the MDBs, $6.6 million towards clearing a portion of U.S. arrears to these institutions, $99.75 million towards Treasury debt reduction programs, and $20.0 million for technical assistance.
Measurable Results, Debt Sustainability and Accountability at the MDBs
When former Under Secretary John Taylor testified before this Committee last year, he highlighted an IDA education project in Kenya as an example of how more development projects should be done. This particular project – which provided a $50 million grant to buy textbooks – had a detailed timeline outlining how to: (1) provide the funding to 18,000 schools across the country; (2) to give parents and teachers the authority to buy the books; and (3) to keep track of the funds. In fact, one of the schools visited during the former Under Secretary's trip included its financing and expenditures to the last shilling on one of the school's blackboards. Thus, the financing was provided on terms appropriate to the country's debt situation, was tied to explicit performance targets and timelines, and was executed in a completely transparent manner. The Bush Administration has strivend to ensure that more MDB projects have these critical components, which will maximize effectiveness and results on the ground.
Our work has produced considerable progress, particularly as a result of the recent replenishment agreements, the International Development Association (IDA), the African Development Fund (AfDF), and the Asian Development Fund (AsDF), all of which include enhanced results measurement provisions to this effect. As a result of strong U.S. leadership – and drawing upon broad congressional support – these institutions will now use significantly expanded results measurement systems, increase grant assistance to poor countries, use improved performance allocation systems, focus more on private-sector development, fight corruption, and improve transparency and accountability.
Measuring Results: The U.S. has led a high-priority campaign for the establishment of results-based systems that set quantifiable performance targets and measure results at the project, sector, country and institutional levels of operations. It is not enough to say that a medical clinic has been built to provide vaccinations for children. What matters is whether the vaccines actually get given to the children who need them and their health improves. This requires establishing a pervasive results culture in the MDBs by incorporating a measurable results agenda into all operations, including staff evaluations and incentives; strongly encouraging and building capacity in developing countries to collect the data necessary to measure results; and emphasizing the need to establish outcome indicators and monitoring systems early in the design of country assistance strategies and individual projects.
As a result of U.S. leadership, the MDBs are changing their operating style to focus on results and are continuing to strengthen their systems of measurement and accountability. All of the MDBs have begun to mainstream mechanisms to measure and report the results of their projects. The new reforms emphasize development outcomes in addition to process indicators. For example, the recent IDA Replenishment (IDA-14) significantly expands the existing results measurement system. The IDA-14 Agreement instructs World Bank Management to use a two-tiered system to monitor: (1) progress on aggregate country outcomes, and (2) IDA's contribution to country outcomes. In addition, it commits World Bank Management to working to ensure that 100 percent of IDA loans and grants include indicators connected to a timeline with baseline data and periodic assessments of projects and programs. At the Asian Development Fund, results measurement was a centerpiece of the AsDF-9 replenishment negotiations, which concluded in May 2004. As part of the African Development Fund Replenishment (AfDF-10), every project and strategy coming to the Board of Directors will have a fully operational results-based management system by mid-2006. These replenishment agreements illustrate that U.S. efforts to improve the efficiency and effectiveness of MDB operations are working.
Debt Sustainability and Increased Grants: For the last twenty-five years, the international community has attempted to address the unsustainable debt burdens of poor countries through a series of stop-gap measures. During this period, a number of countries have needed and received repeated debt reduction and reschedulings from the "Paris Club" of major bilateral creditors. Numerous poor countries, including Cote d' Ivoire, Democratic Republic of Congo, Madagascar, Mauritania, Mozambique, Niger, Senegal, Sierra Leone, Togo, Uganda, and Zambia have received 8 or more Paris Club agreements each.
All of these responses were understandable in light of countries' debt problems; however, they have not comprehensively addressed the longer term systemic determinants of debt distress, such as perverse incentives for excessive lending and excessive borrowing. The result has been that as debt is cleared through forgiveness and re-schedulings, the IFIs have stepped in and provided new loans, often exceeding the amount of debt relief and with little regard for a country's capacity to pay. For example, between 1989 and 2002, countries eligible for the Heavily Indebted Poor Countries initiative (HIPC) received a total of $40 billion in debt relief but accumulated nearly $93 billion in new debt.
The Bush Administration strongly believes that grant financing is a critical component of any long-term debt sustainability solution. In 2001, President Bush called on the MDBs to provide 50 percent of their assistance to the poorest countries in the form of grants. As a result of strong U.S. leadership, the recently agreed IDA and AfDF replenishments stipulate that approximately 45 percent of IDA and AfDF assistance to the poorest countries will be provided on grant terms. These breakthrough achievements build on the significant progress that the U.S. secured during the previous replenishment negotiations, which stipulated that IDA and the AfDF would provide between 18 and 21 percent of total assistance in the form of grants. Before then, less than one percent of assistance was provided as grants. Clearly, we are making substantial progress toward ending the lend-and-forgive approach to multilateral assistance and toward facilitating long-term debt sustainability in poor countries.
The U.S. is continuing to have constructive discussions with the G-7 and other MDB shareholders about moving this important issue even further. The shift to greater use of grant financing will reduce unsustainable debt burdens over the long-term. However, debt will continue to act as a constraint on economic growth in the interim. To address this problem, the Bush Administration has put forth a concrete and doable proposal that would relieve the debt burdens of poor countries and fundamentally fix the multilateral system. Our proposal calls for immediate action to provide up to 100 percent relief on IDA and AfDB loans to the HIPCs without additional cost. Net assistance levels would, at a minimum, remain unchanged from current levels. In addition, those bilateral creditors not providing 100 percent relief on pre-Cologne Summit (June 20, 1999) debt should take action immediately to do so. Following debt relief, IDA and AfDF assistance to HIPCs would be provided on grant terms. Over time, the HIPCs would gradually be eased into new borrowing based upon their capacity to repay. These actions will serve to conclusively end the lend-and-forgive approach to multilateral assistance; put these poor countries on a sustainable path over the long-term; and eliminate the need for future rounds of debt relief. In other words, the proposal not only drops the debt of yesterday, but prevents debt from burdening countries again well into the future.
For our part, the U.S. committed to provide 100 percent bilateral debt reduction to eligible countries under the HIPC Initiative. While we have completed our funding obligations for the majority of participating HIPC countries, some work remains. This includes fully financing bilateral debt reduction for the Democratic Republic of Congo and providing HIPC relief for Liberia and other countries if they achieve political peace and make progress on their economic programs. The U.S. also provides funding to the HIPC Trust Fund, which helps finance the HIPC debt reduction costs of the regional multilateral institutions. In addition, the U.S. provides debt reduction through the Tropical Forest Conservation Act (TFCA), which relieves certain debts owed the U.S. while generating funds to support local tropical forest conservation activities. To date, eight countries have TFCA agreements: Bangladesh, Belize, Colombia, El Salvador, Jamaica, Panama (two agreements), Peru, and the Philippines. These deals will generate over $95 million for tropical forest conservation in these countries over the life of the agreements. A number of other countries have qualified for or expressed interest in the TFCA.
Performance-Based Allocations: Assistance is effective when it is provided to countries that are committed to and successful in implementing sound pro-growth economic policies. A sound policy environment also attracts investment because it increases private sector confidence. On the other hand, providing assistance to countries that are not committed to good policies can actually be counterproductive. As a result, the U.S. has urged the MDBs to focus their efforts on projects that contain measurable results and raise living standards through higher productivity. This means placing a greater emphasis on private sector development - particularly small and medium sized enterprises – as well as on health and education, to help individuals realize their full potential. It also means aggressively promoting pro-growth policies that enable countries to use assistance effectively. Because of U.S. leadership, the concessional windows of all the MDBs – which are devoted to the poorest countries – have established performance-based allocation systems. Such systems provide more resources to countries with sound growth-oriented policies and fewer resources to countries without them, with an extra emphasis on governance to promote transparency and fight corruption. For example, the best policy performers in IDA receive almost seven times more resources per capita than the poorest performers.
Fighting Corruption: Governance, Transparency and Accountability. Good governance is essential for a vibrant private sector and for economic growth. Poor governance, the lack of rule of law or enforceable contracts, and the prevalence of corruption create disincentives to invest, to start new firms, and to expand existing firms with high-productivity jobs. This has a negative impact on capital formation and entrepreneurial activity. In too many cases, potential entrepreneurs and investors in developing countries are deterred by arbitrary rules, corrupt bureaucracies, and weak judiciary systems. For these individuals to succeed, governments must fairly enforce laws and contracts and respect human rights and property. As a result of strong U.S. urging, more diagnostics on governance issues are being undertaken by the MDBs, governance and corruption are routinely discussed in MDB country strategies, and more assistance is being provided to help countries tackle corruption issues. Efforts to fight anti-corruption are focused on three levels: the country level, the project level, and the institutional level.
At the country level, U.S. efforts to strengthen anti-corruption activities are focused on enhancing the transparency and accountability of recipient countries' governance systems and disclosure in MDB operations and analysis, and to channel MDB resources towards countries that have good governance in place. At the project level, U.S. efforts are focused on encouraging the MDBs to conduct analysis and design projects that help reduce opportunities for corruption, strengthen fiduciary and procurement standards, and help ensure that MDB funds will be well spent. At the institutional level, U.S. efforts are focused on improving the MDB internal control processes for internal auditing, investigative mechanisms, whistleblower protections, and corporate procurement, as well as increasing the disclosure of information and the accountability of MDB operations.
Transparency at the MDBs allows the kind of public scrutiny that is essential to ensuring accountability and results. The U.S. continues to press the MDBs to release more documents, especially those relating to Board decisions, country strategies, measurable results, and anti-corruption measures. Section 581 of Division D of the Consolidated Appropriations Act, 2004, directs the Secretary of the Treasury to instruct the United States Executive Director at each multilateral development institution to inform his or her respective institution of certain policy goals pertaining to transparency and accountability and to use the voice and vote of the United States to achieve such goals.
Only one year after the legislation was passed, Ssubstantial progress has been made on these goals since the legislation was passed a little over one year ago. All the MDBs except two now publish the minutes of their Board meetings or are moving forward with proposals to do so. All the institutions except one now either post on their website an annual report containing statistics and case studies of fraud and corruption investigations or are moving forward with proposals to do so. All the institutions have taken measures to increase public involvement in, and awareness of, project and policy proposals that will be the subject of Board decisions. And all the institutions are reviewing their whistleblower protections to see how they can be enhanced. F or example, the World Bank makes publicly available considerable information on all its projects. This includes summary information on all projects for approval by the Board of Directors, information on the progress of individual projects during implementation, and detailed information on output and outcome indicators upon project completion. In addition, the IDA-14 Replenishment Agreement calls on the World Bank Board to take steps to: (i) publish project and program assessment reports; (ii) complete and publish an independent assessment of the World Bank's internal controls; (iii) strengthen documentation of stakeholder feedback from consultations required under the World Bank's safeguard policies; and (iv) enhance public access to information on World Bank Board proceedings, including the disclosure of Board minutes. Similar reforms have been achieved at the other MDBs. We will continue to work tirelessly to see these important reforms to fruition.
The FY2006 Request
There are four basic components of our FY2006 request: (1) annual funding for the MDBs, (2) arrears clearance for the MDBs, (3) funding for debt relief programs, and (4) technical assistance.
(1) Annual Funding for the MDBs: $1.33 billion
The Administration's request of $1.33 billion for the MDBs includes the first annual commitment to three new replenishments: IDA ($950.0 million), the AfDF ($135.7 million), and the AsDF ($115.3 million). Negotiations of these three replenishment were very successful in achieving key U.S. reform objectives. Each of these replenishments includes profound advances in improving debt sustainability through increased grants. IDA and the AfDF will increase the share of new funding distributed to the poorest countries through grants, rather than loans, to about 45 percent from approximately 25 percent and 20 percent, respectively. The AsDF established a grant window for the first time and approximately 30 percent of assistance to the poorest countries will be in the form of grants. Success was also achieved in the areas of debt sustainability, measurable results, transparency, and support for the private sector. U.S. contributions leverage significant resources in the MDBs, for the new replenishment of IDA every $1 provided by the U.S. provides more than $9 from other sources.
(2) Arrears Clearance for the MDBs: $6.6 million
The $6.6 million request for arrears clearance is part of an effort to pay down U.S. arrears to the institutions, which now total $687.0 million. It is critical for the U.S. to meet its international commitments, thus helping to ensure U.S. leadership and credibility on policy direction, program priorities, and institutional reform.
(3) Debt Relief: $99.75 million
The Administration's request for debt restructuring is $99.75 million to be available for bilateral HIPC and poorest country debt reduction, contributions to the HIPC Trust Fund, and TFCA debt reduction, with flexibility in determining the amount for each program. Under the enhanced HIPC initiative, the requested funding could be used towards covering a portion of the cost of bilateral debt reduction for HIPCs, including the Democratic Republic of the Congo and possible new countries such as Liberia, and/or completing the U.S. pledge of $150 million in additional contributions to the HIPC Trust Fund.
(4) Technical Assistance: $20.0 million
The request also includes $20.0 million for Treasury's technical assistance programs, which form an important part of our efforts to support countries facing economic development or financial security issues, and whose governments are committed to fundamental reforms. The FY2006 request will allow us to continue current programs in the Middle East, Africa, Asia, and Central and South America, as well to expand into new countries committed to sound economic reform policies. Of the FY2006 request, we expect to use $10.0 million of the funds on programs that focus on anti-terrorist initiatives, to be spent in coordination with other U.S. Government agencies, and we will use $2.8 million on programs in Afghanistan.
Authorization Requests
For FY2006, the Administration is seeking authorization for the replenishments of three concessional windows of the MDBs: the fourteenth replenishment of IDA; the tenth replenishment of the AfDF; and the eighth replenishment of the AsDF. Additionally, the Administration will be seeking authority to reduce lend-lease debt for Liberia under the HIPC initiative in order to be able to meet the Administration's commitment to forgive 100 percent of debt for HIPC countries. Draft authorization legislation has been sent to the Speaker of the House and the President of the Senate. I look forward to working with you as well as the authorizing committees to achieve the authorization of these critical programs.
Conclusion
We will continue to work with the MDBs to make progress on implementing our strong reform agenda. I ask for your support as we strengthen these institutions in ways that increase their effectiveness in utilizing U.S. taxpayers' financing and in serving vital U.S. economic and security interests around the world. Our debt reduction and technical assistance programs also serve key U.S. reform and growth objectives in very important ways.
Thank you very much. I look forward to working with you on funding this request, and I would be happy to respond to your questions.
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