This document summarizes a workshop on balancing "hard investments" like infrastructure with "soft investments" like capacity development. It discusses the World Bank's approach of focusing on short-term results but also supporting longer-term capacity building. While infrastructure is important, many regions now face constraints on absorption capacity rather than financing. Effective capacity development requires flexible, adaptive management and blending hard and soft investments. More guidance is needed on how different capacity development instruments can best facilitate institutional change and support endogenous growth of knowledge and networks.

1. IFAD Workshop Balancing Hard and Soft Investments Knowledge and Capacity Development G. Alaerts The World Bank April 18, 2011

2. Getting a grip on the issues “Hard investments” – works, equipment, surveys, technical designs, etc. “Soft investments” – any activity in the social and institutional spheres that increases (i) quality of the project prioritization, (ii) net development impact, and (iii) financial sustainability of investments and programs. Policy and strategic frameworks Dialogues Institutional strengthening and reforms Knowledge and capacity development KCD (encompasses all the above …) For financier: Project design, program management, M&E, learning …

3. World Bank and international approaches WB: has strong interest in quality of portfolio, development impact, sustainability  capable institutions  reforms Much work on Impact assessment, M&E Much work on Results in CPS and program design Comparatively little discussion on institutions and KCD ADB, UNDP, EU: More work on KCD and how to assess capacity and its improvement

4. World Bank considerations Better investment prioritization, plus design and ownership, have in past decade led to better results Since mid-90s financing is no longer key impediment to sector development: Much observable need, but constrained internal demand Financiers (World Bank, ADB, IDB, …) often cannot achieve lending targets EU cannot disburse cohesion funds to member countries; absorption is around 10-20% WSS PPP failed partially, partly because it was expected that private partner can bring and help absorb funds  Major leap in efficiency of institutions and absorption capacity required within next decade

5. World Bank and international approaches WB: two-pronged approach Organizations: 70-80s: 5% of loans used for TA and training > 80s: more KCD Institutions: reforms through conditions, budget support and TA Challenge: tension between (i) short-term “results”-driven and budget-driven /accountable approaches, and (ii) longer-term adaptive approaches building C Hard to assess – the latter purported to be more robust; but the former arguably developing economy and providing the “marbles” to learn the “game” But clear that KCD without hardware doesn’t work well

6. World Bank experience WB review of Africa capacity development(2006): TA and training ineffective to build sustainable public sector capacity. While some countries do well, average SSA govt capacity has stagnated …

7. World Bank experience: Africa Region Is capacity included in the development objective? World Bank Institute desk study, 2008 (unpublished).

8. World Bank experience: Africa Region Type of capacity development inputs in WB projects World Bank Institute desk study, 2008 (unpublished) But – no specific data about reforms, institutional strengthening, knowledge development, etc.

9. Principles of KCD Two basic approaches: Capacity can be developed through inputs, leading in turn to better results positivist approach, assuming causal relations between input and output Capacity is emerging from complex interactions that are partly endogenous and partly exogenous  stresses non-plannable nature, prioritizes capacity not results, stresses need for adaptive management “What works” can be either, or a combination … depending on the situation, start position (path dependency) and objectives

10. Principles of KCD Capacity is the “ability of people, organisations, and society as whole to manage their affairs successfully” OECD (2005) “Capacity is the ability of individuals, groups, institutions and organizations to identify and solve development problems over time” Morgan (1993), UNDP (1993)  external partners cannot “do” CD of others. Partners can support and direct CD processes, but they cannot manage the actual CD of others  key criterion for success is that CD must be “owned” by those who develop their capacity

11. KCD Principles “Capacity is the capability of an institution or society to identify and understand its development issues, act to address these, and learn from experience and accumulate knowledge for the future.” Alaerts (2009) This definition is more Operational Linked with knowledge Allows to specify verifiable impacts “Extra” capacity for learning

12. Principles of KCD Adaptive capacity: considers changes in external factors in a proactive manner to develop a systemic process for improving management policies and practices, with a central objective of increasing the adaptive capacity of the management regime in general, and the involved actors in particular. (Morgan, Pahl-Wostl) “Adaptive management is learning to manage by managing to learn.”

13. Knowledge and capacity – levels diagram (Alaerts and Kaspersma 2010)

14. Knowledge and capacity – measuring capacity

15. KCD rationale Very few efforts to quantify ERR Indonesia Irrigation Improvement with Water User Associations (WUAs) empowerment (2003): Conventional rehabilitation ERR of 10 - 18 % Capacity development only  ERR of 20 – 30 % Rehab plus enhanced knowledge and capacity of the WUAs  ERR of 30 – 40 % Education: Long-run effect of 1 additional year of education in OECD area == 3 – 6% increment in GDP/cap.

16. World Bank tools for results: (i) prioritization Country Partnership Strategy (with MoF, stakeholders) Country Poverty Reduction Strategy (with other donors) Sectoral policy and strategy studies (ESW and TA) Operational Risk Assessment Framework (ORAF) Quality-at-Entry and other peer-reviews Implementation Completion Report (ICR) Independent Evaluation Group (IEG) reviews and reports Etc.

17. World Bank tools for results: (ii) Monitoring IDA Results Monitoring: with key indicators: Growth and poverty reduction Public financial management and investment climate Infrastructure and access to services Human development (education, health, equity, …) Quality and effectiveness of IDA program activities Regular sectoral policy and operational policy reviews Experience with Inspection Panel Other

18. World Bank tools for results: (iii) investment tool kit IDA Poverty Reduction Support Credit Global Food Response Crisis Program Climate Change Mitigation and Adaptation programs HPIC and Fragile and Conflict-Affected States Global Floods and Disaster Response and Reduction GEF-supported projects for environmental sustainability Program for Results (P4R) (replaces SWAps, OBA etc) Development Policy Loans (budget support + reforms) Sectoral programs: Irrigation, agriculture, municipal development, WSS, flood management, health, etc. Etcetera

19. World Bank tools for results: (iv) in short … Two approaches are advocated: Focus on short-term tangible results, within set time frames and budgets, and with clear accountability / measurability … Focus on longer-term capacity development recognizing endogenous capacity growth, with lower measurability …

20. World Bank tools for results: (iv) in short … WB takes pragmatic route 1 enhanced with: Priority for sustainable investments, meeting a demand and with demonstrated institutional readiness Design flexibility to allow learning-as-we-go (use of Additional Financing, APL and phased projects) Lower ambitions on Development Objectives Mix in institutional strengthening where opportunity seems to exist Use investment to improve economic outlook first Use investment to engage and prepare institutions No a priori inclusion or exclusion of KCD

21. Diagnosis: multiple paths to a capable state(World Bank Institute 2007)

22. From diagnosis to selection of intervention reforms

23. Other approaches in developing capacity OECD, UNDP, EuropeAid – stress the complexity nature of capacity and the adaptive management approach Manuals with laborious capacity assessment More geared for macro tasks UNDP (2007): Capacity Assessment Methodology: starting from Capacity assessment, then Desired future capacities, Capacity gap assessment, Work plan Mostly for sector-wide or governance areas

24. Other approaches in developing capacity (ADB) ADB – Practical Guide to Capacity Development in Sector Context: Focuses on institutional change / reforms, and change management 10 sections with tools for diagnosis, dialogue and planning Though the diagnosis and dialogue give good guidance, risk exists of over-analysis

25. Other approaches in developing capacity (ADB)

26. Balancing Soft and Hard investments: A way forward Main constraint to development is lack of institutional capacity  need major leap in institutional performance Fundamental decision: Positivist concept of development vs. constructivist concept: Planned mgmt vs. adaptive mgmt. What works best when? Flexible opportunistic approaches based on risk analysis and realistic objectives are probably best Short-term projects to support long-term program Projects prioritizing both capacity development and results are undermining effectiveness on both counts An opportunistic blend of H and S is probably best in short and long run  Need stronger guidance framework & lessons

27. “Soft investments”: A way forward in KCD We make advances on the diagnostics -- need to understand better how KCD instruments work best, e.g. How to maintain engagement and facilitate change processes How to develop effective networks, formal and social ones How to make partnerships effective Tacit knowledge is more important than explicit knowledge  yet we know little about how tacit K works; and especially in developing countries education is geared to explicit K How to build on local K and endogenous capacity and preferences