Normalizing Relations with the Government of Ecuador

The World Bank was generally effective in partnership rebuilding after a structural break, but the process was slowed by the lack of a clear and consistent strategy. The World Bank was effective in rebuilding its partnership with the government by creating opportunities for dialogue and building goodwill. The World Bank increased finance to support NLTA as a way to develop dialogue and demonstrate value. Operationally, the World Bank supported priorities that were relevant to evolving responsibilities at the subnational level, and lending directly to municipal governments allowed the World Bank to overcome the impasse in dialogue at the national level. However, the normalization process was slowed by the lack of a World Bank strategy for six years, during which there was an internal disagreement about the reengagement.

The World Bank’s strategy prioritized reengagement over development outcomes. Neither of the World Bank’s approved strategies over the period included a results framework articulating higher-level development outcomes, reducing the line of sight between the Bank Group’s support and higher-level goals. The World Bank’s rapid project preparation at times came at the expense of project readiness, with several projects requiring revisions in engineering designs and resulting in implementation delays (and delayed benefits).

The World Bank’s support over the reengagement was developmentally relevant and generally effective. The World Bank gradually defined an agenda that supported the national development plan in politically nonsensitive sectors and that fit within established priorities for public service delivery and improved access to resources. Most projects approved over the reengagement achieved or are expected to achieve the majority of their objectives.

However, World Bank operations did not adequately account for low institutional capacity, resulting in project implementation delays averaging 50 percent. Municipal infrastructure projects experienced implementation delays, on average 50 percent over the original time frame. Most delays were linked to both inadequate engineering designs (requiring revisions) and capacity issues stemming from lack of experience among subnational governments in implementing World Bank operations. Projects were also affected by a high degree of subnational government turnover, having an impact on project priorities.

The World Bank missed opportunities to mitigate known capacity risks in infrastructure projects. The World Bank failed to include specific mitigation measures within its partnership strategies to address known implementation challenges. The World Bank failed to use additional financing requests to deal with emerging implementation issues (for example, by including conditionality measures). The Bank Group did not adequately leverage IFC expertise to guide the Quito Metro authority, which might have accelerated the unit’s ability to contract out a private operator.

Supporting Ecuador’s Transition to a Private Sector–Led Growth Model

The Bank Group’s support was relevant to Ecuador’s development needs and to the partnership with the government of Ecuador. The World Bank’s early focus on ASA helped fill important information gaps that could inform the World Bank’s future engagement. A ramp-up in analytic work starting in 2017 informed a comprehensive reform agenda, including fiscal reforms, trade and regulatory reforms, and financial sector reforms, supported by World Bank policy-based lending programs. IFC’s support to financial institutions provided finance to underserved SMEs, whereas its support to agribusiness firms addressed a deficit in loan tenors unavailable on the domestic market.

The World Bank’s support contributed to important achievements. The World Bank–supported government actions contributed to an expansion of credit to the private sector, expanding business registration, and increased tax revenues; improved international competitiveness of domestic exporters; improved budget processes; and reduced fiscal risks.

However, in a few areas, the World Bank failed to build internal consensus and communicate effectively across those tasked with adopting or implementing reforms. The World Bank supported reforms to energy subsidies and minimum wage increases, but these reforms were partially reversed or interrupted. In the case of energy subsidy reforms, the World Bank failed to communicate and convince the government of Ecuador to undertake incremental reforms, and in a desire to use its narrow political window, the government implemented a more ambitious program that resulted in widespread social protest (and ultimately reform reversal).1 In the case of minimum wages, the World Bank did not build internal consensus and provide adequate technical assistance to those involved in the use of the new minimum wage setting formula (to ensure understanding of its rationale) and failed to ensure an effective communication strategy to those affected by its use. The government of Ecuador raised the minimum wage in 2022 (as part of a campaign promise) and discontinued use of the productivity-based formula until late 2023.

There were gaps in IFC’s support to the shift to a private sector–led growth model and its monitoring of development outcomes. IFC took a strategic approach to supporting enterprise access to finance through the banking sector. However, in other sectors, with a broad scope of possible activities set out in the ISN and CEN, IFC did not ground its support in an understanding of needs or a theory of change related to the shift to a private sector–led growth model. This was partially because of the substantial political and economic risk perceived by IFC, which led IFC to take a cautious approach; however, the level of risk did not supplant the potential usefulness of diagnostics and strategy. On outcomes, in the financial sector, there were some gaps in IFC’s monitoring of lending to SMEs, and there were few data on its climate lending. In agribusiness, it did not gather data that would identify development outcomes of IFC support (for example, use of IFC-supported production capacity, export volumes, and others). Such data may be gathered in ex post XPSRs but were not monitored systematically during project implementation. There is also scope to improve data management practices so that the data collected can be more easily used.

Supporting Social Protection

Despite underestimation of low institutional capacity, net impact of the World Bank’s work in social protection has been substantial. Across the entire evaluation period, the World Bank deployed an evidence-based approach to address the considerable challenges posed by Ecuador’s fractured social protection system. Although consistently sensitive to political priorities, this approach deliberatively set the stage for action in anticipation of the moment when lending would once again become possible. Initially predicated on improving the design and implementation of nutrition services, the program of work expanded in line with the political “thaw” to eventually include a strong focus on ECD, capacity building for data collection, harmonization, and analysis and work on employability and an exit strategy for BDH. Although the latter had faltered by the end of the evaluation period, other workstreams had not. In addition to achievements in nutrition policy and programming, outcomes from the evaluation period include upstream progress in transforming the URS from a functionary of the National Secretariat for Planning and Development to an autonomous agency, with corresponding headway in improving downstream targeting. Overall, by 2023, World Bank support had helped more poor and extremely poor Ecuadorans qualify for and access social assistance, both with respect to cash transfers and in terms of health and care services delivered by MIES.

Lessons

The findings draw forth the following lessons that may be of relevance to future Bank Group engagements in Ecuador and future Bank Group engagements after a hiatus in dialogue:

• First, rebuilding a constructive partnership after a break in dialogue may require the World Bank to take a significant step back in terms of its own visibility. The World Bank can continue to provide effective support tailored to the needs of the government without lending and without traditional dissemination activities of analytic work. In cases where the dialogue is severely circumscribed, providing low-profile technical assistance may deliver a means to build goodwill and demonstrate value.
• Second, even over periods where dialogue is limited, the World Bank can use the space it is given to build analytic work that can help the Bank Group respond faster and more effectively when conditions for a fuller engagement materialize. That also means that the World Bank should be proactive in planning financing for such activities, including devoting sufficient World Bank finance for analytic work.
• Although reengagement incentivizes the World Bank to be especially responsive to government requests for support, the World Bank needs to balance responsiveness with due diligence in project preparation. Projects that are prepared quickly but that are not underpinned by quality design studies may need to be redesigned or restructured, ultimately delaying social benefits.
• After a significant lapse in World Bank operations, in situations where government authorities have limited project implementation experience or in cases where turnover in implementing authorities results in lost institutional capital, the World Bank needs to ensure that sufficient institutional capacity building is planned to mitigate risks. The World Bank should also use milestones in the project process (such as additional financing requests) to ensure that key processes in implementation take place and that projects can adapt accordingly.
• The prolonged use of Bank Group strategies without results frameworks limits accountability. Even in circumstances where the World Bank cannot adequately predict a five-year agenda of support, the World Bank should stipulate higher-level outcomes achievable over the course of the short-term strategy to ensure an adequate line of sight between Bank Group support and higher-level achievements.
• Particularly in the context of lack of social cohesion about economic reforms, the World Bank needs to make explicit preparations that can ensure broad-based ownership and understanding of the reform agenda—not only for those tasked with adopting the reforms and those involved in the reform implementation but also for those most affected by the reforms. Better and continuous communication across government, implementing agencies, and stakeholders around the rationale for and processes of significant reforms can provide strengthened guardrails against reversal.