1992 Report of the Auditor General of Canada
Chapter 12—Department of Finance—Participation in the Bretton Woods Institutions and in the European Bank for Reconstruction and Development
Why Canada participates in the Bretton Woods and related institutions needs to be clearly and completely stated
It is time to review the objectives, extent and results of Canada's participation in the Bretton Woods and related institutions
The level of loan loss provisioning for the World Bank needs to continue to be reviewed, particularly from the perspective of the shareholder
Assistant Auditor General: Bonnie Miller
Responsible Auditor: Michael Adibe
12.2 The roles of the International Monetary Fund and the World Bank Group have evolved over time. Both are now concerned with broader socio-economic goals as well as the traditional objectives of stable balance-of-payments conditions and sustainable economic development, respectively. The international debt crisis, and the creation of the European Bank for Reconstruction and Development to help former communist bloc countries of eastern Europe, may increase the pressure on Canada and other creditor members for more financial support.
12.3 Several factors point to the need for the government to review the objectives, extent and results of Canada's participation in the Bretton Woods institutions, and weigh them against its financial commitments to these institutions and other demands on the public purse. These include the reported decline in the success rate of projects supported by the World Bank, the evolution in the roles and operations of the institutions, and domestic fiscal restraint.
12.4 Canada and some other creditor members have suggested that the World Bank continue to review its rate of loan loss provisioning, in view of the proportion of the loan portfolio that the Bank considered to be high risk and the uncertain global economic outlook.
12.5 The Department of Finance has improved the information it provides to Parliament and the public on Canada's participation. However, it needs to further improve the information on the objectives and results of participation and on the associated financial commitments and risks to which Canada is exposed.
12.6 We are concerned that, because of the vote wording in the Appropriation Act, Parliament is not made fully aware that it is approving a significant financial commitment of callable capital subscriptions when it approves payments to the World Bank.
Participation—A Means to Further our Economic and Foreign Policy Interests12.7 The Great Depression of the thirties and the Second World War inflicted massive economic dislocation on many countries. Reconstructing these economies and establishing mechanisms for international trade and flow of capital were high priorities in many multilateral accords drawn up toward the end of the war and shortly after. Under the umbrella of the Economic and Social Council of the United Nations, two international financial institutions were established at the Bretton Woods Conference of 1944: The International Monetary Fund and the International Bank for Reconstruction and Development (or World Bank).
12.8 Throughout Canada's history, the economic well-being of its citizens has been closely linked to foreign trade and international flow of capital. Thus, Canada has a vested interest in promoting an efficient international monetary system, stable exchange rates, an open trading environment and global development. These goals are the raisons d'être of the Bretton Woods institutions. Accordingly, Canada's participation in these institutions is used to pursue, in part, our economic and foreign policy interests.
12.9 The International Monetary Fund. The International Monetary Fund (IMF) was designed to promote the smooth functioning of the international monetary system to facilitate international trade and movement of capital. It provides financial assistance to member countries to help them overcome short-term difficulties with balance of payments. It monitors and analyzes the exchange rate policies and economic performance of all its member countries and discusses its assessments with them.
12.10 The IMF obtains its funds from quotas - subscriptions - paid by all members, partly in their own currency and partly in "hard" currencies. A member country's quota reflects its relative economic importance. Quotas determine each member's relative voting power and determine the maximum amount of balance-of-payments assistance it can obtain from the Fund.
12.11 World Bank Group. Initially established to help with the reconstruction of the war-torn economies of Europe and Japan, the World Bank with its headquarters in Washington D.C. is now the world's largest and most important source of development financing. It and its subsequently established affiliate institutions - the International Development Association, International Finance Corporation and Multilateral Investment Guarantee Agency - make up the World Bank Group. The common objective of the institutions in the World Bank Group is to help raise the standard of living in the developing countries by channelling long-term financial resources to them. ( see photograph )
12.12 Subscriptions to the World Bank by member countries are made up of paid-in capital - a small portion (about 7 percent) of the total - and callable capital (a promise to pay, if necessary). Using these subscriptions and the income from its operations, the World Bank borrows in capital markets to make development loans to developing members, who thereby benefit from easier access to capital and favourable interest rates that are well below what they could obtain on their own.
New Economic Challenges Prompt New Strategies12.13 After the Second World War, the International Monetary Fund administered a code of conduct to promote stable exchange rates based on a fixed exchange rate linked to the U.S dollar and to gold. Membership at the time was largely limited to industrialized countries. However, between 1971 and 1973, most countries adopted floating exchange rates, requiring the Fund to operate in a very different way.
12.14 In the early 1980s, weak commodity prices, recession in industrial countries, high real interest rates, domestic policy failures and other factors made it difficult for many poorer nations to pay their international debts, either to commercial banks or to other countries. Creditor nations and financial institutions were forced to find ways to cope with a crisis that threatened to collapse the international financial system.
12.15 In response, the G-7 (the seven leading industrialized nations, including Canada) initiated several plans for corrective action that the IMF, with its experience in economic restructuring and its capacity to analyze economic conditions, was particularly well placed to help implement.
12.16 Traditional short-term approaches to balance-of-payments difficulties have not been able to reduce the persistent and repetitive problems plaguing a number of countries over the past two decades. The IMF and other experts believe that long-term structural solutions must be found. Consequently, the IMF has adapted some of its facilities and lending policies to meet the specific needs of certain members. And, although the IMF was not designed as a Third World development institution, it has established the Structural Adjustment Facility and Enhanced Structural Adjustment Facility to lend money to debt-distressed, low-income countries at concessional interest rates and for longer terms. However, the role of the IMF still remains that of a monetary organization primarily concerned with macro-economic issues.
12.17 The World Bank Group's approach to development has also evolved. Traditional development financing focussed on projects and programs with very specific and limited objectives. The wider ramifications - economic, social and environmental - were not fully specified in the objectives and, consequently, were not addressed.
12.18 Since the early 1980s, more and more of the World Bank Group loans have become linked to structural and sector adjustment assistance designed to enhance broad sectors of the economy. In 1992, adjustment lending represented 27 percent of total loans approved. Conditions such as protection of the environment are now attached to certain loans, and concerns are being expressed by the World Bank about the policies of recipient countries. As well, development funding is now expected to dovetail with macro-economic objectives and initiatives, thus moving the operations of the World Bank closer to those of the IMF.
12.19 As the basic strategies of these institutions have evolved in the area of macro-economic reform, their co-operation and co-ordination have improved. However, analyzing the effectiveness of longer-term, multi-objective strategies is intrinsically difficult. The challenge is to clearly specify objectives, develop adequate information and undertake analysis to assist in the efficient and effective allocation and use of scarce development funds.
12.20 The European Bank for Reconstruction and Development. The European Bank for Reconstruction and Development was created in 1991 to funnel financial support to the formerly communist states of eastern Europe, including countries of the former Soviet Union. Its mandate is to foster the transition toward democracy and open market economies, and to promote private and entrepreneurial initiative in those countries. This Bank is also concerned with promoting democratic institutions and human rights.
12.21 The European Bank for Reconstruction and Development's funding is similar to that of the World Bank, but paid-in capital represents 30 percent of the total membership dues compared with 7 percent at the World Bank. It also borrows in capital markets to fund its loans and investments.
Canada's Participation12.22 Canada's participation in the International Monetary Fund and the World Bank was authorized under the Bretton Woods Agreements Act of 1945. Since the addition of the World Bank affiliates, participation has been authorized under the 1985 Bretton Woods and Related Agreements Act, as amended. Our participation in the EBRD is authorized under the European Bank for Reconstruction and Development Agreement Act of 1991.
12.23 The Department of Finance is the lead manager of Canada's participation in these institutions. Other departments and agencies that play a role are the Canadian International Development Agency (CIDA), External Affairs and the Bank of Canada. Obviously, appropriate co-ordination is crucial.
12.24 The International Finance and Development Division of the Department of Finance manages Canada's relations with the IMF, the World Bank Group and the European Bank for Reconstruction and Development, working through an Executive Director in each institution. The Division:
- reviews the financial policies and operational directives or guidelines of the institutions;
- analyzes and provides input for policy papers, loan documents and proposals for structural adjustment projects of the institutions;
- disseminates information and consults with other departments and agencies concerned; and
- co-ordinates its activities with those of other centres involved in managing other multilateral development banks and Canada's overall Official Development Assistance program.
12.25 Canada's Executive Directors in these financial institutions represent other countries, mostly borrowing members, as well as Canada. Thus, they virtually "wear two hats", promoting the interests of Canada as a creditor and those of others they represent as borrowers, even though these interests may occasionally conflict.
12.26 Canada's voting share is marginal (3.2 percent for the IMF at 30 April 1991, 3.0 percent for the World Bank at 30 June 1991 and 3.5 percent for EBRD at 31 December 1991). Canada commands no veto in the affairs of the institutions. Its Executive Directors seek to influence the institutions to adopt policies and administrative arrangements that Canada believes are conducive to sustainable development and consistent with other goals and priorities Canada supports. However, Canada's capacity to influence these institutions' decisions extends significantly further. With a Canadian on each Board of Directors and as a member of the G-7, which collectively exerts great influence over the priorities, strategies and even operations of each institution, Canada can exert influence beyond its limited voting power when it obtains the support of its G-7 allies.
12.27 Canada's participation in these institutions is linked to its Official Development Assistance program. Canada's contribution to the IMF and the World Bank Group in 1990-91 was $320 million, or about 11 percent of its total Official Development Assistance in that year. Per capita, Canada's subscriptions to the World Bank are the highest of the G-7 countries (see Exhibits 12.1 and 12.2 ).
Cost and Benefit to Canada12.28 As a member, Canada assists these institutions through paid-in capital subscriptions, callable capital subscriptions (a promise to pay, if necessary), loans and other commitments. It is also committed to abide by the terms and conditions contained in the institutions' Articles of Agreement. At 31 March 1991, Canada's subscription (quota) to the IMF was $4.6 billion. Canada's total financial commitments to the World Bank Group and the European Bank for Reconstruction and Development were $5.6 billion (see Exhibits 12.3 and 12.4 ).
12.29 Participation gives Canada measurable commercial benefits, namely procurement of goods and services in Canada by the World Bank and International Development Association. Smooth functioning of the world monetary system, enhanced flow of trade and capital, and the conditions for sustainable international economic development promoted by these institutions also benefit Canada, although such benefits are difficult to assess. Membership also gives the government access to information not obtainable through its bilateral programs. Having a voice in the G-7 and on Boards of Directors, however, also imposes a responsibility to share global management risks and burdens.
Audit Objectives and Scope12.30 The objectives of our audit were, first, to determine how the Department of Finance monitors and reports on the extent to which Canada's participation is effective in achieving its objectives; second, to review how Finance manages the financial risks associated with Canada's financial commitments to these institutions; third, to review how Finance handles the flow of information and how it co-ordinates its activities with other departments and agencies involved; and finally, to determine whether there is adequate disclosure and accountability to Parliament for Canada's participation in these institutions. Our reasons for looking at these areas and what we expected to find are outlined in the various sections of the chapter.
12.31 Our audit focussed on Finance's management of Canada's participation in the Bretton Woods institutions (IMF and the World Bank Group) and included a brief examination of the role of the relatively new European Bank for Reconstruction and Development. Because our audit emphasized the role of these institutions in facilitating sustainable economic growth of developing countries, we devoted the bulk of our attention to Canada's participation in the World Bank Group.
12.32 Although our audit required that we understand the lending operations of these institutions, it was not an audit of the institutions.
Observations and Recommendations
Review of Canada's Participation - Objectives and Results12.33 We examined how Finance monitors and reviews information on the effectiveness of the institutions, particularly in achieving Canada's international development objectives.
12.34 Because of the significant financial commitments involved, it is reasonable to expect:
- a clear statement of the objectives and costs of Canada's participation so that Parliament and the public are aware of the reasons for participating, and are in a position to objectively assess results; and
- periodic review and assessment of the objectives, extent, costs and results of Canada's participation in these institutions by the Department of Finance and the government.
Why Canada participates in the Bretton Woods and related institutions needs to be clearly and completely stated12.35 The objectives of Canada's participation in these institutions must be clearly stated before the cost-effectiveness of participation can be evaluated.
12.36 In its 1991 Report on Operations Under the Bretton Woods and Related Agreements Act , Finance states: "Membership in IMF gives Canada a vehicle for promoting a stable world financial system, and orderly and early policy adjustment by countries experiencing unsustainable external imbalances. These are goals which Canada has always supported and which continue to influence Canadian policies toward the Fund." Also, "there are several benefits from Canadian participation in the World Bank. The World Bank exerts a major influence on the global development agenda, policies, programs, and innovation. It is the world's most important, influential, and largest organization active in the development field. Participation in the World Bank thus gives Canada a voice in relatively large decisions and provides Canada with information not obtainable through bilateral programs."
12.37 Other, different, objectives for Canada's participation in the World Bank Group have been stated in Finance's internal documents: sustainable development, alleviation of poverty, environmental protection and enhancement and "proper" governance through policy-based lending and aid. Canada also expects commercial benefits from its participation: procurement of Canadian goods and services by the World Bank and its affiliates, and employment for Canadians in these institutions.
12.38 These latter objectives and expected results set out in internal documents are not publicly reported in Finance's Part III of the Estimates, or in the annual report on Bretton Woods and other Related Agreements Act. Instead, the objective for international financial organizations is stated in Finance's Part III as: "to provide funds for the payment of Canada's subscriptions to various international organizations". There is no reference to the results expected from those payments. Nor is the related burden-sharing responsibility specified. The objectives of Canada's participation in the Bretton Woods and related institutions are not clearly and completely stated in any one public document to make Parliament and the public fully aware of why taxpayers' dollars are spent - that is, all the reasons for participation and the concomitant responsibilities - and to provide a basis for assessing results.
12.39 Both the public and the internal documents express the goals and objectives of Canada's participation in broad, abstract terms that are not measurable. For example, sustainable development and proper governance are not defined; nor are criteria provided to help assess the extent to which they are achieved. Finance has indicated the need for such criteria, by which, for example, the effectiveness of the International Development Association's performance in reducing poverty can be judged. Generally, targets and indicators of expected results that are of particular interest to Canada are not stated. Independent assessment of their achievement is therefore more difficult. To help in assessing the benefits of participation, the objectives need to be clearly stated and results indicators identified, where practicable, and monitored.
12.40 Where indicators for monitoring the achievement of certain objectives have been specified, they are measured and reported. In the Report on Operations Under the Bretton Woods and Related Agreements Act , required by legislation, Finance has provided information on procurement (identifiable expenditures) in Canada by the World Bank and the International Development Association in four categories: consultant services, civil works, machinery and equipment, and all other goods. It has also given the number and percentage of Canadians working in the World Bank. No employment information was provided for the International Monetary Fund. Certain aspects of commercial benefits to Canada are also monitored and reported by Finance and External Affairs. As well, for the International Development Association replenishment negotiations, Finance reviewed and used specific indicators developed by the United Nations Development Program (incidence of poverty or proportion of population below poverty line, life expectancy, education attainment index, adjusted GDP per capita, human development index - by country and region) to develop Canada's position on the regional allocation of IDA resources.
12.41 These indicators provide concrete readings that can help assess the achievement of objectives that have been clearly specified. Reporting them would help make some of the results of participation more apparent. However, alone they are not enough. Changes in the indicators cannot be attributed solely to the activities of the World Bank Group or to Canada's participation. Therefore, periodic review or evaluation that takes into account analyses of these and other indicators and relevant information would provide a more comprehensive assessment of the extent to which Canada's participation in the World Bank Group is achieving the expected results.
12.42 The government should provide a clear and comprehensive statement of the objectives of Canada's participation in the Bretton Woods and related institutions. The Department of Finance should identify, monitor, analyze and report selected indicators that can serve in assessing how well Canada's objectives for participation in these institutions are being achieved.
Department's response: We agree that the objectives of Canada's participation in these institutions need to be clearly stated. The annual reports to Parliament provide a comprehensive overview of the activities of the institutions and the objectives and benefits of Canada's participation. Additionally, extensive reporting to Parliament occurs more directly through frequent appearances before parliamentary committees, including the recently established House of Commons sub-committee on the international financial institutions (IFIs). We should note that assessing the benefits of participation against Canada's objectives in unequivocal and quantifiable terms is difficult. The IFIs differ considerably from commercial banks; they engage in a range of activities that provide benefits for Canada and the international community that are not readily subject to precise measurement. To make judgments about the value Canada receives from its participation on narrow commercial criteria would be to ignore these important benefits.
It is time to review the objectives, extent and results of Canada's participation in the Bretton Woods and related institutions12.43 Several factors point to the need to review the objectives, extent and results of Canada's participation in the IMF, the World Bank Group and the European Bank for Reconstruction and Development.
12.44 First, as we have noted, the roles, operations and facilities of the institutions have evolved over time. (See paragraphs 12.13 to 12.19.) A full review of the mandates of the institutions against their operations (preferably in collaboration with other interested G-7 members, for purposes of economy and efficiency) could greatly enhance accountability.
12.45 Second, as part of its ongoing evaluation designed to identify areas for improvement, the World Bank has expressed concerns that the success rate of projects it supports has declined. The proportions of projects with problems and of projects reported as unsuccessful by the Operations Evaluation Department of the World Bank have been increasing since 1979. Also, the negative social, cultural and ecological impacts of some projects have become a concern. At the same time, a North-South Institute study has concluded that "multilateral aid has been a splendid deal for Canada in its service of multiple Canadian and global interests". However, the study and subsequent reviews by the Institute have identified multilateral aid issues that need to be addressed. It is difficult to gain a balanced perspective without regular reports on results, or an independent evaluation or public review of the extent to which Canada's objectives are being achieved through the World Bank Group's operations.
12.46 Third, there is international pressure to commit more resources to these institutions. Problems of development, balance of payments and debt in Third World countries persist. Substantial resources are needed to address these problems and to assist in the reconstruction of eastern European economies. All this has generated a demand for additional funding that shows no signs of diminishing. This means increased pressure on Canada and other creditor members for more financial support. Meanwhile, at home, there are budgetary pressures to reduce development assistance along with other expenditures. Faced with domestic fiscal restraint, the federal government needs to assess the results desired and attained through participation in these and other multilateral institutions, and weigh them against the financial commitments to these institutions and against other demands on the public purse.
12.47 Fourth, evaluations would provide useful information to help the government decide how best to allocate the limited dollars available for Official Development Assistance, between multilateral and bilateral aid and between global development banks and regional development banks. One would expect these resources to be allocated, at least in part, to where they are most cost-effective in achieving Canada's objectives. In developing Canada's negotiating position for the tenth increase (replenishment) in subscriptions of the International Development Association, Finance has called for more systematic information on the extent to which the relative efforts by recipient countries to alleviate poverty affect the allocation of Association resources. It has also suggested that the extent to which those efforts are taken into account in allocating Association money needs to be more transparent. Similar principles could apply to the allocation of Canada's Official Development Assistance dollars.
12.48 Fifth, lessons learned from periodic reviews could suggest ways of making Canada's involvement more effective. Reviews could also provide answers to pertinent questions like those in Exhibit 12.5 , and others raised by Finance in preparing for the replenishment negotiations mentioned in the previous paragraph.
12.49 Sixth, we are not aware of any comprehensive review of Canada's participation that has been carried out by the federal government since the country joined the institutions in 1945. Finance has carried out substantive but only partial reviews from time to time, usually when member countries have been asked to approve a replenishment of capital or a quota increase. Canada also participated in a 1985 Group of 10 study on the functioning of the international monetary system. As well, the Department reviews and comments on issues of concern to Canada to promote the pursuit of Canada's objectives by the institutions. However, these reviews have not provided sufficient information to Parliament and the public on how well Canada's objectives are being achieved.
Information about the results and benefits of participation needs to be maintained and reported12.50 The Operations Evaluation Department (OED) of the World Bank produces an annual review of evaluation results by sector and by country. These reports provide a basis for assessing the success of multilateral development efforts in various countries and for identifying strengths and weaknesses of completed projects.
12.51 Finance reviews the World Bank's reports and has based some of its argumentation about the Bank's operational policies on OED results. It has also made recommendations aimed at improving the dissemination of OED results to various departments of the Bank. Finance has noted that, when it comes to specific objectives (poverty reduction, women in development, environment), the Bank tends to focus on quantity (volume of loans) rather than quality (results), and has suggested that a more thorough analysis describing the actual results of the Bank's programs would be more useful. We agree with the Department and encourage it to pursue this and work with other World Bank members to formulate better indicators of results. Meanwhile, the Department could use the reports of the World Bank to distil and provide information to Parliament on how well Canada's objectives and priorities regarding social and economic development of poorer countries are being achieved.
12.52 We recognize that it is a complex process to evaluate the cost-effectiveness of development assistance delivered to developing countries through multilateral aid. Other countries with development objectives similar to Canada's (Australia, the U.S.A., the U.K., and the Nordic countries) have shown interest in evaluating the results of their participation in multilateral institutions. A joint study or evaluation by Canada and other interested members - especially the G-7 members - would carry more weight and be more economical and efficient for all concerned.
12.53 There is no single best approach to assessing the benefits of participation. Occasional evaluation, such as Australia completed this year, might be appropriate in some instances. Assessment of how reliable the audit and evaluation processes in these institutions are at providing adequate accountability and value-for-money information is another possible approach. Ongoing monitoring of selected indicators of results is yet another way to evaluate performance. Another approach could be through occasional parliamentary reviews. While our audit was in progress, a sub-committee of the House of Commons Standing Committee on Finance was established to study the management and policies of the IMF, the World Bank Group and the European Bank for Reconstruction and Development. This can be an effective review mechanism since this type of parliamentary review encourages public debate.
12.54 Because of the importance of periodically evaluating Canada's participation in these institutions, a legislative requirement to do so - say, no less than every ten years - could be considered. This would provide an impetus to assess the value of Canada's membership, and foster a results-oriented attitude toward participation. It would also help focus attention on the relevance of these institutions to Canada.
12.55 The Department of Finance should investigate the feasibility of Canada undertaking a joint evaluation with other interested members to assess the cost-effectiveness of participation in the Bretton Woods and related institutions as a way of promoting national objectives. Lessons learned could be applied to improve the functioning of the institutions, particularly where it concerns the objectives of countries that supply hard currencies and the financial backing for market borrowing.
12.56 Finance should also consider combining its evaluation capacity with that of other departments and agencies involved (such as CIDA) to assess the extent of Canada's overall participation in multilateral financial institutions.
Department's response: While we agree all efforts should be made to review the results and benefits of participation, we would stress that the Department already evaluates in a comprehensive manner the effectiveness of the institutions at critical stages in the evolution of their activities to ensure the promotion of national objectives. In conducting this evaluation, Canada works closely with other countries, not only at the Executive Board, but in smaller groups of interested member countries. Substantive assessments of the extent of Canada's overall participation in the international financial institutions are conducted with other interested departments and agencies at the time of replenishment and capital increases. Moreover, the Department conducts day-to-day analysis of the policies and operations of the institutions, and seeks to influence such policies and operations in a direction that meets Canadian objectives.
Managing the Financial Risk
Demand continues to mount for financial support to the Bretton Woods and related institutions12.57 We reviewed the systems and practices used by Finance to manage the financial risk associated with Canada's participation in the IMF, the World Bank Group and the European Bank for Reconstruction and Development.
12.58 We expected Canada's financial commitments to these institutions to be identified and monitored, and the fiscal implications for future deficits and financial requirements regularly assessed.
12.59 Demand for substantial increases in capital subscriptions (both paid-in and callable) continues to mount. Under the IMF Ninth General Review, it is proposed that Canada's subscriptions (quota) increase by some 47 percent. Negotiations are currently under way for the tenth increase in the subscriptions for the International Development Association. As well, there is pressure for a significant infusion of capital to help former communist countries of eastern Europe.
12.60 To meet these additional demands, substantial replenishments of resources may be required by these institutions in the future. Canada and other creditor members may have to consider diverting resources from other uses or raise them through taxation or borrowing to make further replenishments. Finance monitors these developments, estimates future resource requirements and assesses the fiscal implications. Thus, for the tenth replenishment of the International Development Association (the concessional lending arm of the World Bank Group) Finance has reviewed requests for replenishments, with input from CIDA and External Affairs, assessed the need for the replenishments in the context of Canada's fiscal plan and will establish the amount to be recommended to the Minister. A similar process is followed for World Bank general capital increases and the IMF quota increases.
Financial risk associated with participation is considered to be low12.61 According to Finance officials, the risk associated with Canada's financial commitments in the International Monetary Fund and the World Bank Group is low.
12.62 A few countries are deeply in debt to the IMF and are paying neither interest nor principal. The IMF itself has never written off such accounts, but creditor nations with net investments in the Fund receive lower rates of return, and other borrowing nations pay higher interest rates, thereby covering the delinquent accounts. This sharing of the burden, together with other financial management and control practices, minimizes the risk that the value of Canada's subscriptions - its "reserve position" - in the IMF will be eroded. Any nation is entitled to draw on demand its reserve position for balance-of-payments purposes.
12.63 The risk that Canada will have to come up with large additional financial resources for the World Bank Group and the European Bank for Reconstruction and Development lies primarily in the prospect that the callable capital or the promissory part of Canada's subscription ($5.0 billion at 31 March 1991) could be called so that these institutions can meet their obligations to those who have invested in their securities through the international financial markets. In effect, Canada and other creditor members act as guarantors of the securities issued to private investors by the institutions.
12.64 Since the establishment of the World Bank 48 years ago, no calls have been made on the callable capital. This has been attributed in large part to the preferred creditor status the Bank enjoys and to the sound financial policies and performance of the institution. Countries in arrears have often been supported through bilateral and multilateral programs to enable them to service their debts with the World Bank and other international financial institutions. Under its Article of Agreement, the total amount outstanding in guarantees, participation in loans, and direct loans made by the World Bank may not exceed 100 percent of the sum of subscribed capital, reserves and surplus. At the end of its 1991 fiscal year, the total amount outstanding represented 60 percent of that sum.
The level of loan loss provisioning for the World Bank needs to continue to be reviewed, particularly from the perspective of the shareholder12.65 To assess the risk associated with Canada's financial commitments in the World Bank, Finance relies on the reports of the Bank's independent accountant (who acts as auditor), monitors its financial viability, and reviews and influences its financial policies through the Executive Director.
12.66 The independent accountants expressed no reservations in their most recent report on the Bank's financial statements for 1990 and 1991. Financial rating agencies have assigned to the World Bank a Triple-A rating - their highest. This high credit rating reflects the support of the hard-currency member countries in the form of callable capital. Finance continually monitors these credit ratings.
12.67 Adequate levels of reserves and loan loss provision are a critical defence against a possible call on the Bank's callable capital to meet its obligations created by borrowing or guarantees. At 30 June 1991, the reserve-to-loan ratio was 11.2 percent and the loan loss provision rate was 2.5 percent.
12.68 The Department also seeks to influence the World Bank's financial policies through Canada's Executive Director who sits on the Bank's Executive Board. In its review of the Bank's 1991 loan loss provision document, Finance could not determine whether 2.5 percent was adequate and called for more details on why this rate was chosen.
12.69 Canada and some other creditor members have suggested that the present rate of loan loss provisioning may not be high enough given the uncertain global economic outlook, the high level of the portfolio risk indicator, and other factors, and have suggested that the rate be reviewed.
12.70 The World Bank's current loan loss provision of 2.5 percent seems low in light of the situation on 30 June 1991, when the Bank's management assessed 37 percent of the loan portfolio as high risk, and 3 percent as non-accruing; five countries represented 45.1 percent of the loan portfolio; and loans to countries whose loans have been rescheduled represented 49.4 percent of the loan portfolio.
12.71 Because the financial risk to which Canada is exposed in the World Bank is closely linked to the level of provisioning, Finance should consider calling for an assessment, in collaboration with its G-7 partners, of the loan loss provision rate and the method used to determine it, to ensure the adequacy of accumulated provision for loan losses from the perspective of shareholders, so that the risk of a call on capital remains low.
Department's response: We agree that the financial integrity of the World Bank is critical if our investments in the Bank are to remain sound and if the Bank is to continue to be an effective development institution. In this respect, the levels of reserves and loan loss provisioning are of prime importance. The Executive Board approves these levels at the end of every fiscal year. Moreover, they are discussed at the Board at regular intervals during the year, at which time Executive Directors may decide to increase or decrease the rate of accumulation of loan loss provisions. Executive Directors from the G-10 countries typically meet during the week preceding Board discussions on levels of reserves and loan loss provisioning to assess the adequacy of such levels.
Operating Procedures - Information Handling and Co-ordination with Other Entities12.72 We reviewed Finance's systems and procedures for collecting relevant information on upcoming IMF and World Bank issues, such as policy papers and loan documents, and for giving feedback to Executive Directors.
12.73 We also reviewed the systems and practices used by Finance to co-ordinate activities with the departments and agencies involved in the Official Development Assistance program to ensure consistency in Canada's position on issues.
12.74 It is reasonable to expect Finance, as the lead agency managing Canada's participation in these institutions, to collect all relevant information on IMF and World Bank issues and ensure that the views of all interested parties are expressed to the Executive Directors in time for the Executive Boards' discussions of the issues. It is also reasonable to expect Finance to co-ordinate the work of all departments and agencies involved, in order to promote consistency in the pursuit of Canada's objectives.
12.75 We found that Finance does collect relevant information on World Bank issues, and that it obtains the views of all parties involved and sends Canada's views and positions to the Executive Directors on a timely basis.
12.76 The responsibilities of each department or agency are established and understood by all involved. Recently, officers from Finance, CIDA and External Affairs documented and presented their roles and responsibilities to the House of Commons sub-committee on International Financial Institutions of the Standing Committee on Finance. They explained how the three departments interact with the World Bank and IMF and also with each other. Finance monitors the institutions' activities to see whether they remain well managed and well financed. CIDA's main role is to provide input on development matters, and External Affairs provides input on foreign policy matters. It also seeks to gain benefits for Canadian business from the activities of the institutions.
12.77 The mechanisms used to co-ordinate the activities of Finance, CIDA and External Affairs are largely informal. An interdepartmental committee exists, but Finance advises us that it has no documented terms of reference and that no minutes of meetings are kept. Other ways to co-ordinate activities include forums and meetings, and memos and telephone calls.
12.78 These informal methods place a great deal of reliance on individual, as opposed to corporate, memory and thus cannot ensure a consistent approach and common positions on issues, especially when new officers come on board. Consideration needs to be given to drawing up written memos of understanding covering the roles and responsibilities of the departments and agencies involved. This would also be helpful in avoiding any duplication of work.
Accountability - Information for Parliament
Information for Parliament needs to be improved12.79 We reviewed the information reported to Parliament in public documents on the nature, costs (including financial risk) and benefits of Canada's participation in the IMF, the World Bank Group and the European Bank for Reconstruction and Development. Our purpose was to determine whether it was adequate and understandable for purposes of accountability.
12.80 We expected Parliament to receive relevant, complete, accurate and understandable information on the costs, mechanisms and outcomes of Canada's involvement in the Bretton Woods and related institutions and the European Bank for Reconstruction and Development, so that Members of Parliament can review and approve government proposals concerning Canada's participation in these institutions.
12.81 Parliament is made aware of future increases in IMF quotas and World Bank Group capital subscriptions. IMF quota increases require amendment to the legislation and thus parliamentary approval. The legislation authorizes the Minister of Finance to provide financial assistance to the World Bank institutions, not exceeding the amount specified in an appropriation by Parliament. The Department keeps Parliament informed, in the Annual Report on Operations under the Bretton Woods and Related Agreements Act, about the status of future capital subscriptions for these institutions.
12.82 Once an amount is decided, it is included in an appropriation Bill for Parliament's approval. However, we are concerned that the vote wording in the Appropriation Act, with respect to the 1988 World Bank general capital increase, does not clearly disclose that payments to the World Bank are for purchase of shares and represent only the paid-in capital portion, or about 3 percent of the capital subscriptions for those shares. There is no mention of the callable capital portion, which represents about 97 percent of the total subscriptions. As a subscriber to the shares, Canada is committed to the callable portion. Therefore, we are concerned that Parliament is not made fully aware that it is approving a potential financial commitment when it approves the payments to the World Bank. Since 1988, the callable capital portion of shares purchased by Canada has been almost $1.5 billion.
12.83 The vote wording in the Appropriation Act for payments to the World Bank should clearly indicate that the payments are for the purchase of shares, and should also indicate the amount of financial commitment with respect to the callable capital portion.
Department's response: Although Parliament is made aware that payments to the World Bank represent the paid-in portion of share subscriptions through our annual report and our appearances before various committees of the House of Commons, we will provide more details in the vote wording in the Appropriation Act in the future.
12.84 The Department of Finance and Canada's Executive Directors of the institutions have improved the amount and quality of information they provide in the Annual Report on Operations under the Bretton Woods and Related Agreements Act, and the Annual Report on Operations under the European Bank for Reconstruction and Development Agreement Act. These reports provide ample information on the purpose, funding, operations and environment of the institutions. As well, the Department's officials (though not Canada's Executive Directors at the institutions) are often called to testify at hearings of parliamentary committees.
12.85 However, all this information is not sufficient. The reports and Finance's Part III of the Estimates do not give measurable objectives, targets and actual results of Canada's participation. Information on the financial commitments from Canada's participation is diffused and sometimes unclear. For example, in the annual report on the Bretton Woods and Related Agreements Act, information on financial commitments is dispersed throughout the report, thereby making it difficult to determine the total. As well, the report does not clearly indicate how much money has been committed and how much money has been spent for International Development Association subscriptions. As a result, it is difficult for Parliament to comprehend the total financial commitment associated with Canada's participation in these institutions.
12.86 In our opinion, although the information Finance provides to Parliament and the public on Canada's involvement in the Bretton Woods and related institutions has improved over the past few years, further improvement is needed. More complete, understandable and usable information on the objectives and results of Canada's participation, and the associated financial risks, is needed to enable Members of Parliament and the public to assess the costs and benefits of Canada's involvement. Reference could also be made in Finance's Part III of the Estimates to the annual report and other sources of information on participation.
12.87 As Finance continues to improve the information it provides to Parliament on Canada's participation in the IMF, the World Bank Group and the European Bank for Reconstruction and Development, it should also provide more complete and understandable information on the objectives and results of participation and on the resulting financial commitments.
Department's response: Canada's financial participation in the IMF, World Bank Group and the EBRD is already provided to Parliament in our annual reports, along with Canada's objectives in these institutions. We will, however, review the content and format of these documents to ensure that they are as useful as possible to parliamentarians.
Accounting treatment for notes payable to the International Development Association needs to be reviewed12.88 Notes payable to the International Development Association (IDA) - $885 million at 31 March 1991 - are shown on the government's statement of assets and liabilities as a reduction in the government's investment in IDA. The net investment in IDA - the investment, reduced by notes payable - is included in budgetary expenditures and the deficit for the current and prior fiscal years. Since 1 April 1986, note encashments ($152 million in 1990-91) are now made under budgetary authority, whereas notes issued to IDA ($276 million in 1990-91) continue to be made under non-budgetary authority.
12.89 In our view, notes issued are legally binding obligations to make future payments. In essence, they are not substantially different from accounts payable and other debts that the government records and reports as liabilities at the end of the fiscal year. Accordingly, we believe that notes payable to IDA should be shown as liabilities on the government's balance sheet rather than being netted against the investment in IDA. As well, subscriptions made to IDA by the issuance of notes should be included in budgetary expenditures. If subscriptions made to IDA were included in budgetary expenditures at the time of note issuance rather than at the time of encashment, the impact on the deficit would be felt at an earlier date.
12.90 The government should reconsider, and revise as appropriate, its accounting for and reporting of notes payable to the International Development Association.
Department's response: Finance has consulted with the Office of the Comptroller General (OCG) and we are in agreement that the current accounting treatment is appropriate. The most obvious reason is that the notes payable are commitments to IDA, not liabilities, and therefore should not be included with the government's liabilities. There is an agreement to make payments over a scheduled future period, which in turn is used to establish project schedules. Consequently, the costs, as well as the benefits, of our contributions to IDA occur when the notes are encashed and not when they are issued. However, in the interests of enhancing clarity in the presentation of IDA in the Public Accounts, we will review the current balance sheet presentation with the OCG.