BOX 3.8. IMPACT OF PROJECT EXECUTION MODALITIES ON PROJECT PERFORMANCE The execution modality of a GEF project can seriously impact its performance and ultimate cost-effectiveness. If the financial conditions imposed on an Executing Agency are too stringent, the success of the project can be undermined from the outset, no matter how good the design or the country ownership. The GEF Executing Agencies typically are operating under very low returns, giving them little or no facility for project adjustment or revision. The risk for poor project performance borne by the Implementing Agency (IA) is greater if the project is executed by a U.N. agency/office (UNOPS, UNON, IMO, or UNIDO) than if through a commercial organization, and this is reflected in the execution or management fees levied. Management fees for U.N. Executing Agencies are typically between 6 and 8 percent for large International Waters projects. This is applied to the total project value, rather than to the project staff inputs, as usually occurs in commercial organizations. The management fee covers the usual head office costs. Typically, the cost of project staff inputs and subcontractors represents 30-40 percent of the total cost, excluding the management fee, and therefore an 8 percent fee would be equivalent to a staff cost multiplier, which is how commercial organizations measure the viability of a project, of 1.26, while commercial organizations would be seeking a minimum multiplier of 2.0. The U.N. agencies are therefore executing the GEF projects well below what would be seen in the commercial arena as viable, and GEF is getting a very low-cost service. There are a number of differences that might explain how the U.N. agencies are able to deliver on such a low management fee: l No requirement for U.N. agencies to make a profit l Little or no business development/tendering costs l No indemnity insurance l Subsidy of fixed costs through central agency budget l Transfer of risk to independent consultants l Loose contractual arrangements, enabling project risk to be off-loaded to the IA. The last difference is probably the most important. The U.N. Executing Agencies work to a specification, but they also work to a budget; once the budget is exhausted, the work stops, irrespective of the status project deliverables. Good project managers are encouraged to manage their budgets to maximize the priority project outputs and outcomes while still holding a contingency, because the agreement does allow the Executing Agency to go over budget. Contingencies have to be set aside to pay for the project staff costs to cover the delays in execution that are common and often due to factors outside the control of the Executing Agency. The project document is therefore rarely fully realized, and 80-90 percent delivery is seen as a good target, irrespective of product quality. There are surpluses in this very simple delivery system to allow for revising or redoing activities that are judged as substandard. This is one of the reasons why GEF project documents are typically written in a loose, flexible form to give the project manager maneuverability. Alternately, highly prescriptive, output-focused project documents under these execution constraints can get into trouble quickly. If a project goes seriously wrong because of the initial project design or poor management, there is no real means of correcting it, because redesign or recasting of the project is rarely considered. Poor performing projects are often written off, and no attempts are made to resuscitate them. There is also a temptation to spend out the projects as quickly as possible to claim the execution fee. Project evaluations are often tardy and lack any real teeth or impact; also, it is not in the interests of either the Implementing or Executing Agencies to publicize a bad project, which they do not have the resources to remedy. A lack of contingency funds means that technical resources are either overstretched or cannot afford to be deployed, if they exist in an Agency (Implementing and Executing). Training for project staff is almost nonexistent, and staff turnover often high. The World Bank sometimes employs commercial organizations to execute projects in other contexts. These are bound by their contract to deliver the full terms of reference to the satisfaction of the IA, meaning that a good level of quality assurance can be provided. The commercial organization, rather than the IA, bears the risk of poor project management and, to an extent, poor project design. However, for this very reason, a poorly written project document will attract higher bids because of the hidden risks. The onus is therefore on the IA to prepare clear, comprehensive, unambiguous output-orientated documents against which
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Program Study on International Waters