FINAL DRAFT

International

Reconstruction Fund Facility

For Iraq

FINAL DRAFT

December 4, 2003

1

11/276/03R2

International Reconstruction Fund Facility

For Iraq

I. Introduction

  1. One of the recommendations that came out of the June 24, 2003 meeting on the reconstruction of Iraq was that the United Nations (UN) and the World Bank (the Bank) should work with the Iraq Core Group, taking into account the views of donor countries, to develop a proposal for the establishment of a multi-donor funding framework for Iraq.
  1. These terms of reference build on discussions held with Iraqi national authorities and donor representatives between August and December 2003 in Washington, D.C., Brussels, New York, Dubai, Madrid and Amman.
  1. Given the unique circumstances of Iraq, it is critical to mobilize the donor community behind innovative solutions to help clear the way for the rapid reconstruction of Iraq. It is in this spirit that this proposal was drafted.

II. Purpose and Principles

  1. A Needs Assessment was carried out by the World Bank and the United Nations Development Group (UNDG), in consultation with the International Monetary Fund, during the period June thru August 2003, in order to define the reconstruction requirements of Iraq. The Needs Assessment covers 14 priority sectors and cross-cutting themes, and identifies investment needs and priorities for the short and the medium term. [1] The document was finalized following consultations in Dubai and Madrid with the Iraq Core Group, representatives of Iraq’s Governing Council, Iraqi sector ministries and the Coalition Provisional Authority (CPA). At the Madrid Conference of October 23-24, 2003, the donors present, representatives of the Iraqi Governing Council and Iraqi Ministers of Planning and Finance endorsed the findings and recommendations of the Needs Assessment.

5.In parallel with the Needs Assessment, the World Bank and UNDG designed the International Reconstruction Fund Facility for Iraq (the Facility), which aims to help donors channel their resources and coordinate their support forreconstruction and development activities in Iraq, in line with the priority areas emerging from the Needs Assessment and validated by the Iraqi authorities.

6.Theobjective of theFacility is to ensure coordinated, flexible and swift donor response for financing priority expenditures, including reconstruction activities, sector-wide programs, investment projects, technical assistance and other development activities. The Facility will complement existing options available to donors wishing to contribute to the reconstruction of Iraq—such options include direct funding to executing agencies.

7.While recognizing that the current situation in Iraq presents unique challenges and constraints, the proposed Facility will operate, to the extent possible, based on those principles which normally apply to multi-donor trust funds in a post-conflict situation. The arrangements aim to ensure, in particular, that:

Each project approved for funding is part of a priority program of reconstruction and development activities validated by the Iraqi authorities, based on the Needs Assessment and formulated in consultation with donors and other partners.

The activities financed by the donor community are implemented as much as possible by the Iraqis themselves, under the ownership and leadership of the Iraqi authorities, with the aim to help develop sustainable local capacities.

  • Implementation and funding modalities: (i) provide for transparency and accountability; (ii) facilitate efficient and prompt delivery; and (iii) support the progressive development of a unified budget and coherent public expenditures process.
  • A unified donor coordination and funding structure avoids the emergence of gaps and duplication in funding, inconsistency in policy advice and ensures sustained budget expenditure planning.

III. The Proposed Facility

  1. Consistent with the above principles, the Facility is a structure that establishes a coordinated arrangement whereby donors can fund activities administered by the Participating UN Organizations and/or activities administered by the World Bank, with an agreed structure for joint coordination and monitoring mechanisms. Close coordination is achieved through a joint Donor Committee and a unified UN/World Bank Facility Coordination Committee. The Donor Committee will oversee the activities of the Facility as a whole and endorse its overall priorities. The Facility Coordination Committee will serve as the administrative body for the World Bank and UNDG to work together to ensure coherence, coordinated planning, monitoring and reporting between UNDG and Bank activities.

9.The Facility will have two trust funds for donor participation. Donors will have the option of channelling resources through either or both the World Bank Iraq Trust Fund, to be administered by the Bank, or the UNDG Iraq Trust Fund, to be administered by the United Nations Development Program (UNDP) on behalf of itself and Participating UN Organizations. Each trust fund has its particular characteristics as described in Annexes 1 and 2. In summary:

The World Bank and the UNDG Organizations will utilize their complementary strengths to address the requirements identified in the Needs Assessment, each in accordance with its operational policies.

  • Whenever possible and to the extent that it does not jeopardize the privileges and immunities accorded to themand the safety and security of their staff, the Participating UN Organizations and the World Bank, in consultation with the appropriate Iraqi authorities, will promote donor visibility on information, project materials and at project sites.

A donor will enter into an Administration Agreement with the respective Trust Fund Administrator, as the case may be. Donors contributing to both trust funds will enter into an Administration Agreement with the World Bank and another Administration Agreement with UNDP.

  • The UNDG Iraq Trust Fund and the World Bank Iraq Trust Fund will each be established upon signing of the first Administration Agreement between a donor and the respective Fund Administrator.

The UNDG and the Bank will both offer “holding accounts” as part of the Facility for the benefit of donors who may wish to deposit all or part of their contributions to an account pending their allocation decisions.

Unless otherwise agreed by the donors and the Bank or the Donors and the UNDG Organizations, the respective Trust Fund arrangements will terminate on the earlier of: (i) December 31, 2007; or (ii) such date as the contribution funds will have been fully disbursed.

Interface Between Iraqi National Authorities and the Facility

10.To operationalize the principles noted above, the World Bank Iraq Trust Fund and the

UNDG Iraq Trust Fund will work in close partnership with the Iraqi national authorities in order to ensure that gaps are filled and overlaps avoided and that there is consistency and coherence between Facility-financed activities and the overall Iraqi priorities and budget.

11.According to current Iraqi plans, Iraqi-led development assistance coordination will be carried out by two entities in particular.

  • The Iraqi Strategic Review Board will provide overall policy guidance for donor assistance and have the final approval authority on recommendations from the Ministries of Planning and Finance on allocation of international assistance to Iraq.
  • The Iraqi Ministry of Planning, renamed as the Ministry of Planning and Development Cooperation (MoPDC), will be the interlocutor with the donor community and, in that context, serve as the Interim Iraqi Administration’s primarily liaison with the Facility. It will ensure that resources are applied against Iraq’s prioritized needs and equitably distributed. The Ministry will work closely with the Ministry of Finance to ensure conformity with the overall budgetary framework.
  • The Iraq Strategic Review Board and MoPDC, in consultation with the interim ministers and under the guidance of the Governing Council, will define the Priority Program based on the Needs Assessment and revise it as necessary in view of changes in the Iraqi budget, resources and economic circumstances.
  • The Council for International Coordination (CIC) will be chaired by the MoPDC and provide advice and support to the Minister on coordination issues. Its current composition may be enlarged to include donors, civil society representatives and other key partners involved in the reconstruction of Iraq. Local aid groups may also be established to assist in sectoral coordination.

The World Bank Iraq Trust Fund

  1. The World Bank Iraq Trust Fund will be administered by the Bank according to its policies and procedures. Details are provided in Annex 1. During the transition period, the World Bank will operate on three tracks:

(i) capacity building of Iraqi counterparts in areas that will help facilitate sound implementation;

(ii) sectoral programs that will include a menu of specific projects at the subsector level which can be expanded opportunistically as circumstances improve; and

(iii)start-up operations that will establish building blocks for sectoral and structural policy reforms and larger scale development projects.

The Bank will operate in all sectors and cross-cutting themes identified in the Needs Assessment (with the exception of mine action), with particular emphasis on areas where the Bank has comparative advantage. For operations in these sectors, the categories of expenditures that will be eligible for financing from the World Bank Iraq Trust Fund will be:

(i)investment and capital expenditures, including pre-feasibility studies, and incremental recurrent costs directly relating to the supported investment and capital expenditures; and

(ii)technical assistance and training.

13.A donor may state a preference that its contribution be used to support one or more of the 14 sectors and cross-cutting themes defined by the Needs Assessment, except for mine action, for which no funds from the World Bank Iraq Trust Fund may be allocated. In the event that a donor's preference cannot be accommodated, the World Bank Iraq Trust Fund Administrator may allocate the contribution to other sectors with the agreement of the donor.

United Nations Development Group Iraq Trust Fund

14.The role of the United Nations in Iraq currently derives from Security Council Resolution 1483 and 1511.

15.The vehicle for receipt of contributions to support the UNDG-administered Iraq Trust Fund will be known as the “UNDG Iraq Trust Fund” and will help finance the implementation of the activities entrusted to the UN system in Iraq by its executive bodies, particularly during the transition phase. The UNDG Iraq Trust Fund will place emphasis on all of the sectors in which the UN has carried out needs assessments and will focus on funding quick-impact projects and transition activities which need to be implemented in a rapid and flexible way. Its functions

will cover technical assistance and capacity building across the following areas,in particular: (i) capacity and institution building for human development and social justice; (ii) the delivery of essential social services, in the area of health in particular; (iii) the empowerment of civil society and local communities; (iv) water resources and food security; (v) infrastructure rehabilitation, building in particular on expertise gained under the Oil for Food Program; (vi) the protection and reintegration of vulnerable groups; (vii) the promotion of human rights and the rule of law; and (viii) private sector development and employment generation, with due regard to cross-sectoral issues such as gender equality and environmental protection and management.

16.The UNDG Iraq Trust Fund will be administered by UNDP, in its capacity as chair of the UNDG, according to its regulations and rules. Its detailed operational modalities are described in Annex 2.

17.Under the UNDG Iraq Trust Fund, donors will be able to earmark their contributions by sector/cross-cutting theme and/or by UN agency, and reports will be managed accordingly.

The Administrators

18.The Administrators, i.e. the Bank and UNDP, will each be responsible for establishing and maintaining appropriate records and accounts to identify the contributions to the trust funds, the commitments to be financed out of the contributions, and the receipt and disbursement of said funds, in accordance with the arrangements set forth herein. The Bank and UNDP will use a standardized format in drafting their reports, on the activities financed by their respective trust funds, as further stipulated in the Annexes hereto and these will be consolidated into one report. The Secretariat to the Facility (described below) will disseminate the consolidated reports to the members of the Donor Committee and the Facility Coordination Committeeto ensure transparency, thereby contributing to closer coordination at all levels.

IV. Coordination Arrangements

19.To ensure coordination between the two trust funds, the proposed arrangements consist of a Facility Coordination Committee and a Donor Committee, both supported by a joint Secretariat.

The Donor Committee

20.For purposes of efficiency, the Donor Committee will be kept to a manageable size. The Committee will comprise donors whose paid-in contributions or binding commitments to either or both of the trust funds amount to a minimum of US$10 million per donor. In addition, two seats would be given to representatives of other contributing donors who do not meet this threshold according to a procedure to be decided upon by the Committee. The World Bank, UNDG, IMF, and the Iraqi Strategic Review Board will have observer status. The Donor Committee may be expanded to include other observers.

21.The Donor Committee will be responsible for endorsing overall priorities and for providing strategic guidance to the Facility’s two trust funds. The Committee will review progress of the Facility’s operations and ensure reporting to all its donors. The Donor Committee will also ensure coherence and collaboration between the Facility and Iraq’s Priority Program, maintaining close collaboration with Iraqi authorities to ensure flexible adaptation of the Facility to changes in the Priority Program.

22.The Donor Committee will meet on a semi-annual basis in such location as it may decide.

The UN/World Bank Facility Coordination Committee

  1. The UN/World Bank Facility Coordination Committee (the Facility Coordination Committee) will include representatives from the Bank and UNDG. The IMF will serve in observer status.

24.The primary responsibility of the Facility Coordination Committee will be to review, for purposes of conformity with the Facility’s objectives, make recommendations, and coordinate the overall programs of activities to be financed by both trust funds. It will ensure that such programs are coordinated with those funded from the national budget and bilateral donors. When requested to do so, the Facility Coordination Committee will also advise donors on the most appropriate allocation of their resources, based on needs, priorities and absorptive capacities. The Facility Coordination Committee will liaise closely with Iraqi counterparts, on a continuing basis, to assure both program and implementation coherence with Iraqi priorities. The Bank and the UNDG Trust Funds will each, according to their internal governance structures, have full authority in the allocation of funds within their agreed purpose and the Priority Program. Broadly, the processing of program/project proposals for financing by either of the trust funds will be as follows:

  • For the World Bank Trust Fund: Potential recipients, in consultation with World Bank staff, will submit their program/project proposals to MoPDC which will vet them to determine if appropriate for channelling to the Facility. The Coordination Committee will determine eligibility of proposal for funding from the Facility. The World Bank will appraise the proposed operation, following which a grant agreement will be signed by the recipient and a special account opened in an Iraqi Bank (most likely the Central Bank of Iraq) and disbursements against required documentation made.
  • For the UNDG Iraq Trust Fund: Based on the Needs Assessment and Iraqi priorities and plans, UNDG, in consultation with the Iraqi authorities, will develop a costed program of support. This program will be reviewed in the context of the Facility Coordination Committee. The projects endorsed for funding by the UNDG Trust Fund Steering Committee will normally be part of this program and will be approved by the Iraqi authorities.

25.The Facility Coordination Committee will review all reports prepared or passed by the Secretariat on the activities of both trust funds in connection with their submission to the Facility’s donors. The Facility Coordination Committee will make a formal report and bringrecommendations to the Donor Committee at every meeting of the latter.

26.The Facility Coordination Committee will meet at least on a monthly basis in Baghdad. On an exceptional basis it may also meet by teleconference, or in such location other than Baghdad, as it may decide. Reports and recommendations of the Facility Coordination Committee and minutes of its meetings will be prepared by the Secretariat and shared with the Facility’s donors.

The Secretariat

27.The Secretariat will be staffed by representatives of the Bank and UNDG and will be based in Baghdad. Its responsibilities will be informational, administrative and secretarial. The Donor Committee may assign and fund staff to the Secretariat (to be decided by the Donor Committee).

28. The Secretariat will answer inquiries from donors. It will handle logistical arrangements for meetings of both the Facility Coordination Committee and the Donor Committee as well as take minutes and distribute them. In addition, the Secretariat will disseminate to all donors in the Facility and to the MoPDC the following:

(i)A semi-annual consolidated report of overall activities performed by the Facility, including status of project/program portfolio, programs/projects entering or leaving the portfolio, status of implementation, contracts awarded, disbursements for the previous period and projections, project/program pipeline and financing requirements, administrative fees and cost recovery by the two trust funds, and other pertinent information;