ASIAN DEVELOPMENT BANK Operations Evaluation Department

SPECIAL EVALUATION REPORT

ON

ASIAN DEVELOPMENT FUND VIII AND IX OPERATIONS

In this electronic file, the report is followed by Managements response, and the Board of Directors Development Effectiveness Committee (DEC) Chairs summary of a discussion of the report by DEC.

Evaluation Study

Reference Number: SST: REG 2008-01 Special Evaluation Study December 2007

Asian Development Fund VIII and IX Operations

Operations Evaluation Department

ABBREVIATIONS ADB ADF ADTA AIDS CAPE CPA CSP DEC DFID DMC DSA EA EPRS GDP HIV IDA IMF JFPR JSF Lao PDR LTSF MDG MfDR MOPAN MTS II NGO OCR ODA OED PBA PCR PIU PPER PRC PRS RRP SDR SES TA TASF Asian Development Bank Asian Development Fund advisory technical assistance acquired immune deficiency syndrome country assistance program evaluation country performance assessment country strategy and program Development Effectiveness Committee Department for International Development, United Kingdom developing member country debt sustainability analysis executing agency Enhanced Poverty Reduction Strategy gross domestic product human immunodeficiency virus International Development Association International Monetary Fund Japan Fund for Poverty Reduction Japan Special Fund Lao People's Democratic Republic Long-Term Strategic Framework Millennium Development Goal Managing for Development Results Multilateral Organizations Performance Assessment Network Medium-Term Strategy II nongovernment organization ordinary capital resources official development assistance Operations Evaluation Department performance-based allocation project completion report project implementation unit project performance evaluation report Peoples Republic of China Poverty Reduction Strategy report and recommendation of the President special drawing rights special evaluation study technical assistance Technical Assistance Special Fund

ii

Key Words adb, adf, aid harmonization, asian development bank, asian development fund, asian development fund evaluation, asian poverty reduction, concessional lending, country performance assessment, evaluation, governance indicators, performance-based allocation, poverty targeting

Officer-in-Charge Director Team leader Team members

R. K. Leonard, Operations Evaluation Division 1, Operations Evaluation Department (OED) W. Kolkma, Senior Evaluation Specialist, Operations Evaluation Division 1, OED G. Rauniyar, Evaluation Specialist, Operations Evaluation Division 1, OED J. Tubadeza, Senior Evaluation Officer, Office of the Director General, OED A. Anabo, Senior Evaluation Officer, Operations Evaluation Division 1, OED V. Melo, Administrative Assistant, Operations Evaluation Division 1, OED Operations Evaluation Department, SS-88

CONTENTS Page EXECUTIVE SUMMARY I. INTRODUCTION A. The Asian Development Fund B. Previous Evaluations of the ADF C. Purpose and Focus of the Evaluation of ADF VIII and IX D. Approach to the Evaluation OVERVIEW OF ADF FINANCING A. Introduction B. Lending Conditions of the ADF C. Distribution of the ADF Across Countries and Populations D. Importance of the ADF to Countries E. Sector Distribution of the ADF F. Use of the ADF by Financing Modality G. Use of the ADF for Economic Growth, Social Development, and Governance H. Use of the ADF for Poverty Interventions I. Integration of the ADF and OCR in ADB J. Allocation of the ADF to the TASF and Allocation of TA to ADF Countries K. Net Resource Transfers of the ADF DEVELOPMENT EFFECTIVENESS OF ADF OPERATIONS A. Poverty Reduction and the Millennium Development Goals in the Region B. Success Ratings of ADF-Funded Operations in the Past C. ADF Country-Level Results D. ADF Sector/Subsector Results E. Results by Strategic Development Objectives (19922000) F. Thematic Result Areas Emphasized in ADF Donor Reports G. Performance of Technical Assistance H. Client Satisfaction Surveys of Executing Agencies CASE STUDIES OF ONGOING ADF VIII OPERATIONS A. Success of Ongoing ADF VIII Operations B. Success of Special Components Targeting the Poor C. Success of Special Components Targeting Governance PERFORMANCE-BASED ALLOCATIONS AND GRANTS A. Loans versus Grants B. Country Performance Assessments and Performance-Based Allocations AID HARMONIZATION, COORDINATION, AND COFINANCING A. The Approach to Aid Coordination and Harmonization B. Cofinancing and Other Financial Support C. Harmonization of ADB Procedures and Processes D. Findings from Five Country Case Studies E. Aid Harmonization of Country Programming during ADF VIII and IX v 1 1 2 2 4 4 4 7 8 10 11 12 13 14 15 16 17 18 18 18 20 23 25 25 27 27 29 30 30 32 33 33 35 40 40 41 42 43 44

II.

III.

IV.

V.

VI.

iv VII. ASSESSMENT AND RECOMMENDATIONS A. Relevance of the ADF to Poverty Reduction B. Likely Effectiveness of ADF Outcomes C. Efficiency of ADBs Administration of the ADF D. Likely Sustainability of the ADFs Approach E. Recommendations 45 45 46 47 48 49

APPENDIXES 1. Asian Development Fund VIII and IX Commitments 2. Excerpts from the 1999 Poverty Reduction Strategy 3. ADF Allocation Data 4. HIV and AIDS-Related ADF Loans and Grants 5. ADF Sector Allocations and Changes over the Years 6. ADF Results Tables and Figures 7. Thematic Result Areas Emphasized in ADF VIII and ADF IX Donor Reports 8. Case Studies of Ongoing ADF Operations in Five Countries 9. Targeting the Poor in ADF VIII and IX 10. Targeting Governance in ADF VIII and IX 11. Issues Regarding Grants Versus Loans in the Literature 12. Observations on Debt Sustainability in ADF Countries and Some Recommendations 13. Performance-Based Allocations 14. Aid Coordination and Harmonization 15. Findings from Interviews with Staff of ADBs Development Partners in Five Countries 16. Hirschmann-Herfindahl Index

52 55 57 72 73 75 83 89 96 102 108 111 116 127 129 132

SUPPLEMENTARY APPENDIXES (ON OED WEBSITE AND AVAILABLE UPON REQUEST) A. Review of Project Completion Reports for ADF VIII Projects B. Findings of 11 Country Assistance Program Evaluations for ADF Countries C. Results in Afghanistan, Kyrgyz Republic, and Viet Nam D. Analysis of Eight OED Sector Policy Studies E. Client Surveys with Relevance to ADF F. Summaries of 25 Case Studies of Ongoing ADF VIII Operations in Five Countries G. Analysis of ADF Project and Program Design Changes Before and After 2001 Attachment: Management Response DEC Chair Summary

The guidelines adopted by the Operations Evaluation Department (OED) for avoiding conflict of interest in its independent evaluations were observed in the preparation of this report. Malcolm Bale was the consultant on governance, performance-based allocation, grants, and debt sustainability. Mary Grace Alindogan, Mylene Buerano, Marga Domingo Morales, Jindra Samson, and Cherry Ann Santos did background research. Summer intern Laura Ralston contributed to the analysis on performance-based allocation and grants. The team leader of the study and his director had no prior involvement in ADF operations. To the knowledge of the management of OED, there were no conflicts of interest among the persons preparing this report.

EXECUTIVE SUMMARY This study was requested by the Development Effectiveness Committee (DEC) of the Asian Development Banks (ADB) Board of Directors. It evaluates the Asian Development Fund (ADF) VIII and IX operations initiated over 20012008. Special assessments were made of ADF VIIIs particular efforts to target the poor, and ADF VIIIs and ADF IXs focus on adding a governance dimension to operations. Further attention was paid to ADFs Performance-Based Allocation (PBA) Policy, introduced under ADF VIII; the introduction of a grant mechanism in ADF IX; and progress with aid coordination, cofinancing, and harmonization. ADF VIII (2001 2004) was to make available about $5.6 billion for 193 project and program loans in 26 developing member countries (DMCs). ADF IX (20052008) is making available $7 billion in loans and grants to 27 countries, and technical assistance (TA) to all DMCs. This evaluation covers 327 approved ADF loans and grants437 when the pipeline is included. No more than 7% of these have been closed. This means that much of the study covers operations that were not yet completed or were at the preparation stage at the time of the evaluation. Allocation Patterns. The study noted that (i) ADF resources are modest, given the huge remaining challenges in reaching the Millennium Development Goals (MDGs), and have not expanded significantly in real terms since the early 1990s; (ii) if disbursements do not grow in the near future, rapidly increasing loan service payments by ADF countries to ADB may reduce net ADF transfers; (iii) the ADF covers countries with only about 113 million of the 620 million poor in Asia; (iv) the ADF, beyond being a source of finance, can provide policy leverage in at least 13 countries; (v) ADF VIII, and to a smaller extent ADF IX, funded a large number of poverty interventions over the period; (vi) ADF VIII and IX achieved the focus on governance operations desired by ADB and ADF donors; (vii) the total number of thematic priorities addressed by the ADF increased; and (viii) the desired increased attention for rural development and social (human) development was not entirely realized. Development Effectiveness. ADF operations have become more successful over the decades since its start in 1973. Of the operations approved in the 1990s, 67% were rated successful. The success rates of individual ADF and ordinary capital resources operations are converging. On the other hand, 11 country assistance program evaluations were sometimes less positive, as some of the larger clients of the ADF had programs that the Operations Evaluation Department rated as only partly successful. Some main reasons for this were related to the positioning of ADB in the countries (did ADB do the right things?); and inefficiencies and lack of sustainability, especially of governance-oriented activities (such as increasing water tariffs). The upward trend of success rates may have stalled, hopefully temporarily, according to 25 case studies of ongoing ADF VIII operations conducted for this study. This trend, if confirmed, could be caused in part by increased goal congestion in ADF operations. Management and the Board put much pressure on staff to prepare inclusive project designs in the early years of the Poverty Reduction Strategy (PRS), given the drive for operations that benefit the poor disproportionately. Other reasons for the dip in success rates might have been frequent staff transfers as a result of reorganizations and reforms. Detailed country strategies have asked increasing attention from staff, as well as safeguards and other added agendas. About half of the special components targeting the poor and governance in the sampled operations were unlikely to be successful. Nevertheless, some good results were observed, and these were partly the result of satisfactory staff intensity and continuity. The efforts to target the poor through special components in regular operations were deemphasized in ADF IX and therefore declined, but not governance targeting.

vi Other ADF Commitments. The following achievements were noted: (i) increased use of program loans to target macro- and sector governance issues; (ii) higher success rates of program loans than achieved in previous decades; (iii) more attention for capacity development in ADF projects and programs, although ADB has had mixed results in this area in the past; (iv) greater involvement of civil society organizations in ADF operations; and (v) progress with private sector development. The study also noted progress in terms of gender and development, anticorruption activities, and the managing for development results agenda in ADB. ADB has gained more experience with the enforcement of social safeguards over the period. ADBs coordination with other aid agencies has increased, and so have cofinancing and aid harmonization, although there might be limits to what these can achieve. The study is critical of ADBs PBA policy and raises questions regarding the grant mechanism. Assessment of ADF VIII and ADF IX. ADF VIII and IX operations were relevant to many of the ADF countries and their poor populations, but less so to the poor in Asia and the Pacific overall, as an increasing proportion (currently 82%) of them live in countries that are not eligible for ADF support. The redesign of ADF VIII operations to include pro-poor components and governance ambitions in regular investment projects did not always work out well in the context of limited operational staff. They were not always appropriate, and even when they were, more human resources than ADB has been able to muster would sometimes be needed to realize such aspirations. The study regards ADF VIII outcomes as likely to be less effective, due to the influence of more complex project designs and other reasons mentioned earlier. ADF IX outcomes are yet to materialize and are not rated in terms of their effectiveness, but there are some positive signs. The Enhanced Poverty Reduction Strategy of December 2004 has appropriately done away with ADB-wide targets for operations targeting the poor. Demands on the inclusiveness of project designs should have reduced somewhat. Country assistance programming seems to have become less burdensome over the period of ADF IX. This should free up time for project processing and administration. The study regards the PBA policy as inefficient, although the effects of some recent changes will appropriately benefit weakly performing countries. Transparency of the complex PBA mechanism to DMC governments remains a concern, as well as the staff time needed to maintain it. A large number of internal ADB reforms and business process changes approved in the years 20042006 are, however, viewed as likely to improve efficiency and thereby enhance the effectiveness and sustainability of the ADF as an instrument of development aid. The study makes the 10 recommendations, summarized as follows: No. (i) Recommendation For whom The ADFs size should increase if it is to accelerate the achievement ADF donors of the MDGs. Despite its modest size relative to the massive challenge of development, the ADF can be an effective instrument. The size of the ADF is important, not only for the acceleration of poverty reduction and attention for non-income MDG concerns, but also to ensure the leverage needed to achieve policy change and governance objectives in weakly performing countries and other DMCs. ADF donors should consider the role and credibility of ADF as ADF donors ADB's main special purpose vehicle for addressing poverty and achieving the MDGs in the Asia Pacific region. The ADF currently addresses a subset of countries with only 18% of the poor. With expanding reflows from earlier ADF loans and new contributions from ADF donors, ADF X may provide an opportunity to help a greater number

(ii)

vii No. Recommendation in more countries. Alternative options are a revisiting of the ADF graduation policy, or the consideration of a third window to provide concessional resources (or transfers of net income from ordinary capital resources) with financing on terms harder than ADF but softer than ordinary capital resources to countries currently not in the ADF. (iii) ADF X should avoid goal congestion in operations and in ADB as a whole. The unintended effect of the PRS and the ADF donor meetings may have been a very broad agenda of priorities. New activities have implications for ADB staffing and human resources that are difficult to provide when ADB shareholders have placed strict limits on the increase in ADBs budget. The new Long-Term Strategic Framework for ADB, currently under preparation, should provide guidance on ADF focus. ADF donors, Board, and Management For whom

(iv)

The ADF needs to be more selective in its support for sectors Management (and within these, sub sectors) in many countries. ADB should continue reviewing sector focus at the corporate level but especially at the country level. Poverty reduction is an appropriate goal for ADF operations, and Board requires more than direct targeting of the poor in each country. ADB and and ADF IX have already internalized this lesson of ADF VIII. It should Management not be lost. An ADF geared to poverty reduction and governance is staff Board intensive and needs specialized skills. ADB staff expansion is needed. and ADB should continue to expand its staff in resident missions. More Management reliance on long-term ADB staff consultants, or on TA consultants posted to resident missions, to assist directly with project administration could be an improvement over the present situation. Aid harmonization and coordination remain necessary elements of Management the ADF approach. Coordination of country programs among major aid agencies to increase sector specializations should be the priority, and should complement ADBs move towards less goal congestion and more sector selectivity at the country level. Major governance issues should be primarily addressed through Board and program lending, with agreed reforms being supported by advisory Management and capacity building TA. Governance components in some investment projects can help build on earlier reforms or demonstrate good practice, but should be realistic with respect to prevailing institutional capacity and not clutter the project agenda. ADB needs to be more willing to suspend disbursements if progress on essential governance reforms and capacity building is not being made. ADB should undertake a rigorous analysis to test the validity of the Management various CPA indicators. OED recommended such an analysis earlier. The study should preferably be done in partnership with the World Bank.

(v)

(vi)

(vii)

(viii)

(ix)

viii No. (x) Recommendation For whom

ADB needs to pursue a varied approach to debt distress of ADF Management countries and not rely mainly on the institution of an ADF grant mechanism. For instance, ADB should help DMCs to create a legal framework regarding public debt and build capacity for them to be able to monitor and manage their debt.

R. Keith Leonard Officer-in-Charge Operations Evaluation Department

1 I. A. The Asian Development Fund INTRODUCTION

1. Reconstituting an earlier Special Fund, the Asian Development Bank (ADB) established the Asian Development Fund (ADF) on 28 April 1973, serving as the primary source of finance for ADBs concessionary lending operations. The purpose of the Fund shall be to enable the Bank more effectively to carry out its purpose and functions by providing resources on concessional terms for the economic and social development of the developing member countries (DMCs) of the Bank, having due regard to the economic situation of such countries and to the needs of the less developed members. 2. The ADF has the following major features: 1 (i) ADF resources are based principally on contributions from members of ADB, which are mobilized on an organized multilateral basis, pooled, and periodically replenished under the authority of resolutions of the Board of Governors. ADF resources are governed by the ADF Regulations, and can be used for financing procurement in all contributor countries and DMCs of ADB. ADF can finance projects, programs, as well as technical assistance (TA), either through concessional loans or through grants. Grants have been traditionally reserved for TA operations; starting with ADF IX (20052008), they were also reserved for operations of certain kinds and/or for countries in certain conditions. The ADFs main financial instrument is concessional loans for projects and programs (also called operations in this study). Since ADF VI (19921996), ADF operations have been guided by an ADF donor report containing agreements, suggestions, and recommendations.

(ii) (iii)

(iv)

3. The ADF has tended to be replenished by donors every 35 years, and the current eighth replenishment, called ADF IX, is financing projects, programs and TA approved in 2005 2008. ADF has historically funded around a fourth by amount of ADBs overall lending, and half by number of all ADBs loans. ADF loans are usually smaller than loans funded from ordinary capital resources (OCR), but their preparation and administration generally take as much time and resources as OCR loans. This means that relatively more staff time per dollar loaned is devoted to ADF operations and, from another perspective, that some of the income derived from other operations is channeled into the administration of the ADF. From ADF I thru ADF IX, donors authorized funds to a total value of $33.449 billion. ADF VIII (20012004) planned for investment up to $5.4 billion, ADF IX up to $7.0 billion. 2 Since 1973, ADBs member countries contributing to ADF have channeled far more capital to ADB through the ADF replenishment rounds than through general increases of OCR. 4. Thirty-one of ADBs 44 DMCs currently have access to ADF for projects and programs. 3 Twenty-three had availed of ADF VIII or IX loans by end-2006, and 13 of ADF VIII or IX grants. Four more are expected to receive funds under ADF IX. 4 For almost 30 years, access of DMCs
1 2 3

Asian Development Fund Regulations. SDR2.284 billion from new contributions by donors, and SDR2.517 billion from reflows of earlier ADF loans. There are 34 eligible countries (groups A, B1, and B2), but the Peoples Republic of China, India, and Myanmar currently have no access to the ADF. Georgia, Nauru, Palau, and Vanuatu are currently not expected to receive funds for operations under ADF IX.

2 to ADF resources was determined by country assessments that differed in format and rigor, but since 2001 access has been regulated largely by ADBs Performance-Based Allocation (PBA) policy. 5 B. Previous Evaluations of the ADF

5. In December 2001, the Operations Evaluation Department (OED) completed a review of ADF IV operations 6 based on a desk review of OED studies, coupled with analysis of statistical data. The review analyzed poverty reduction trends and assessed the success of the 488 ADF projects and programs approved between 1973 and 1991. It found that 47% of funds had been devoted to agricultural development, particularly irrigation and rural development. Based on 290 evaluation reports issued, the overall success rate of ADF operations was estimated to be 45%. In line with ADBs overall direction at the time, the review recommended defining poor beneficiaries better in ADF operations, and concentrating poverty reduction operations on wellselected beneficiaries. In March 2003, OED issued a special evaluation study (SES) of ADF VI VII operations (19922000). 7 These had funded loans for 318 operations. While 102 of these had project completion reports (PCRs) at the time of the SES, only 21 had been postevaluated. The SES on ADF VIVII operations relied on those PCRs and postevaluation reports, as well as other studies. The SES team visited five countries, and consultants conducted 12 project case studies there. The SES found evidence of good progress in meeting the ADF VIVII sector and thematic commitments, but some areas moved much faster than others. Progress with gender activities was found to be below expectations. Progress with environmental management was assessed as uneven. The two OED reports served a function in the preparation of subsequent ADF replenishment agendas. 6. The inclusion of an SES on ADF VIII and ADF IX in OEDs work plan for 20072009 was a response to requests made by members of the DEC of ADBs Board of Directors. The findings were to feed into the preparation of the ADF X replenishment. C. Purpose and Focus of the Evaluation of ADF VIII and IX

7. This study provides a synthesis of evidence collected by the evaluation team and other parties in ADB. It assesses the relevance, effectiveness, efficiency, and likely sustainability of the ADF as an instrument of development aid in Asia and the Pacific. The intended outcomes of the study are (i) more clarity regarding the use of the ADF, (ii) better goals and allocation of the ADF, and (iii) better operationalization of ADF goals in the preparation and implementation of individual operations. 8. The study was conducted with reference to the donor reports for ADF VIII and IX, which set out the main issues and recommendations for ADB to take into account when administering the fund. The key policy recommendations made in the reports for ADF VIII 8 and ADF IX 9 are summarized in Appendix 1. Much of the donors interest at the time of ADF VIII focused on implementing ADBs Poverty Reduction Strategy (PRS) 10 of 1999, while at the time of ADF IX it focused on the Enhanced Poverty Reduction Strategy (EPRS) 11 of 2004. Important during the
5 6

ADB. 2001. Policy on Performance-Based Allocation for Asian Development Fund Resources. Manila. ADB. 2001. A Review of the Asian Development Fund IV Operations. Manila. 7 ADB. 2003. Special Evaluation Study of the Asian Development Fund VIVII Operations. Manila. 8 ADB. 2000. ADF VIIIs Donors Report: Fighting Poverty in Asia. Manila. 9 ADB. 2004. ADF IX Donors Report: Development Effectiveness for Poverty Reduction. Manila. 10 ADB. 1999. Fighting Poverty in Asia: The Poverty Reduction Strategy. Manila. 11 ADB. 2004. Enhancing the Fight against Poverty in Asia and the Pacific: The Poverty Reduction Strategy. Manila.

3 preparation for both ADF VIII and IX was operationalizing governance dimensions in ADB operations (governance being one of the three pillars of both the PRS and the EPRS). Crosscutting subjects of consistent donor interest over the period were ADBs internal organization, internal processes, and Managing for Development Results (MfDR). This study will have less focus on the large ADB policy reforms that were supported by the ADF donors, and on the desired changes in business processes and organizational structure. 12 9. The study pays special attention to some new elements in ADF: (i) the PBA Policy, which was introduced at the start of ADF VIII; (ii) the grant mechanism presented at the start of ADF IX; and (iii) increased attention to aid coordination and harmonization. 10. Targeting the Poor. Targeting the poor more directly than had been achieved before was the essence of ADBs 1999 PRS, which was subsequently also made one of the central aims of ADF VIII and of ADBs Long-Term Strategic Framework 20012015 (LTSF). 13 The drive to target the poor dominated ADF operations in 20012004. It was significantly altered under ADF IX but poverty reduction remained the main goal. The PRS outlined a fundamental shift that was intended to affect every aspect of ADBs operations. ADB would rededicate itself to the eradication of poverty in the region. All ADBs strategic development objectives at the time (i.e., economic growth, human development, sound environmental management, and improving the status of women) would be pursued in ways that contributed most effectively to poverty reduction. There would be more emphasis on rural development and social development. Infrastructure investments would be located in poor areas or would include special components to increase access to the poor. Poverty interventions would have to disproportionately benefit the poor; the number of poverty interventions would have to rise to 50% of all ADF and OCR lending operations, and the lending volume for poverty interventions would have to be minimally 40% by 2001. Appendix 2 quotes relevant guidance of the PRS that provides a basis for evaluation of the achievements of ADF VIII. 11. Incorporating Governance. ADF VIII was a watershed event in the attention directed toward good governance in both ADB, as an organization, and in its programs in the DMCs. ADBs PRS had already elevated good governance to the level of one of its three pillars, along with pro-poor sustainable economic growth and social development. The PRS proclaimed that denial of basic services to the poor was not just a matter of lack of investment; it was often the result of (i) institutional structures that lacked accountability, (ii) domination by local elites, (iii) widespread corruption, (iv) culturally determined inequality, and (v) lack of participation by the poor. While no specific governance targets were set, specific operations would seek to improve public expenditure management, increase government accountability, and develop effective regulation of financial markets and public utilities. Later, ADF IX called for a sharpened focus on good governance, but perhaps more concretely called for ADB to focus more on anticorruption measures in its operations. 12. Performance-Based Allocation and Grants. Among the major innovations of ADF VIII in 2001 was the allocation of ADF resources according to each countrys performance, while ADF IX for the first time made grants available for project financing in ADF countries that were
12

Up to 2000, ADB organized much of its project processing and administration along sector lines, and sector programs reflected corporate comparative strengths. Since 2002, partly in response to ADF donor interests, country strategies have become a more important organizing principle in ADB programming, and a reorganization of operations departments along more regional lines was implemented to strengthen country orientation. This reorganization was to enable a more country led and country demand-driven approach. 13 ADB. 2001. Moving the Poverty Reduction Agenda Forward in Asia and the Pacific. The Long-Term Strategic Framework of the Asian Development Bank (20012015). Manila.

4 debt distressed. 14 Clearly, PBA was seen as a tool not only to reduce wastage of resources in countries with weak performance, but also to incentivize DMC governments to improve governance. Grants were to help diminish the level of indebtedness of debt-distressed countries. 13. Aid Harmonization. Aid coordination and cooperation were stressed in the ADF VIII donor report, and aid harmonization in the ADF IX donor report. The 2005 Paris Declaration on Aid Effectiveness, supported by ADB, gave additional weight to aid harmonization. D. Approach to the Evaluation

14. Given that ADF VIII started in 2001, and the period to which ADF IX applies is not yet completed, only 22 of the 245 operations approved had been completed at the start of this study (early 2007). Eight had only PCRs; not one project performance evaluation report (PPER) had been undertaken. 15 Any impact assessment held at such a stage must be preliminary in nature, and much attention will of necessity go to assessing likely outcomes of ongoing operations and issues of ADFs relevance and efficiency. 15. Data sources for the study included (i) ADB databases; (ii) interviews with relevant ADB staff in ADB headquarters and resident missions; (iii) analysis of a sample of 80 reports and recommendations of the President (RRPs); (iv) five country visits to gather information and conduct interviews with stakeholders regarding ADF themes and issues; and (v) case studies of 25 ADF-supported operations under implementation in three of the largest ADF recipients Bangladesh, Pakistan, and Viet Namand two smaller onesLao Peoples Democratic Republic (Lao PDR) and Nepal. 16 Secondary data were gathered from prior and current OED evaluations, and from ADB reviews. 16. Chapter II discusses trends in the ADF and compares allocation patterns in ADF VIII and IX with those of ADF VI and VII, as well as OCR. Chapter III synthesizes available findings and assessments with respect to outputs and likely outcomes of earlier ADF operations than those of ADF VIII and IX. Chapter IV synthesizes preliminary findings regarding results of ADF VIII, mainly based on case studies of 25 ongoing operations. Chapter V reviews the PBA and makes some observations regarding grants. Chapter VI reviews progress with aid coordination, cofinancing, and harmonization, with special reference to the ADF. The final chapter assesses the relevance, effectiveness, efficiency, and sustainability of the ADF, and presents recommendations to ADB and ADF donors. II. A. Introduction OVERVIEW OF ADF FINANCING

17. Since ADF began, donors have contributed some $22.935 billion to ita further $10.514 billion for ADF came from repayments of earlier loans and other sources. Up to 1991, ADF was replenished only through new donor contributionsthe repayments of earlier ADF loans up to that time were few, and the grace periods were longer. Since 1992, ADF has been replenished
14

The term ADF countries in this study refers to those DMCs that had access to loans on concessional terms and/or grants from the ADF in 20012008. 15 PPERs are usually undertaken about 2 years after issuance of the PCR, and OED is conducting only 10 per year since 2007, and in that year moved to a system of independent validation of all PCRs. 16 Projects were selected in the order of their approval from 2001 onwards, taken into account that the projects needed to be in different sectors in each country, and have different executing agencies so that a variety of sector experiences and views from agencies was ensured.

5 from (i) new donor contributions, (iii) reflows, 17 and (iii) other contributions (such as income from OCR operations). Reflows are certain to become the most important source of financing for the next ADF replenishment. 18. Donor contributions were highest in the period of the 1980s to early 1990s and have continued to rise in both nominal and real terms (Figure 1). In real terms, the ADF resources have not grown by very much from the early 1990s onwards, and can be argued not to have kept pace with the growth of the population in the Asia and Pacific region50% between 1980 and 2005. Figure 1, which includes updated data from ADBs Treasury Department, shows that reflows and other resources have grown in particular in ADF VIII, rendering it the largest ADF replenishment in real terms so far ($7,525 million in 2005 prices). Figure 1: ADF Replenishments in Nominal and Real Terms
14,000
Other Resources (Nominal Terms) 8,000 7,000 6,000 5,000 4,000

$m illion (N inal Term om s)

12,000 10,000 8,000 6,000

3,000

4,000 2,000 0

2,000 1,000 -

ADF I ADF II ADF III ADF IV ADF V ADF VI ADF VII ADF VIII ADF IX 1973-75 1976-78 1979-82 1983-86 1987-91 1992-96 1997-00 2001-04 2005-08 Replenishment Period

Resources in Real Terms, 2005 Prices

ADF = Asian Development Fund. Note: In $ equivalent at exchange rates specified in Board of Governors' resolutions. A constant discount factor of 2.09% is applied per year in $ terms using 2005 as the base year. Other resources comprise loan repayments, net income, ordinary capital resources net income transfers, loan savings and cancellations, and setaside resources. ADF V, VI, and IX exclude donor contributions transferred to the Technical Assistance Special Fund. Source: Asian Development Bank Treasury Department.

19. When comparing with allocations of the International Development Association (IDA), especially after 2004, and total official development assistance (ODA) over a longer period, the ADF has been declining in importance in ADF countries. This is borne out by Figure 2. ODA figures for 2006 and 2007 were, however, not yet available at the time of drafting this report.

17

Reflows consist of loan repayments, service charges net of administrative expenses, and investment income.

$m illion (R Term eal s)

Ref low -based Commitment Authority (Nominal Terms) Donor Contributions (Nominal Terms)

Figure 2: Comparison of ADF Approvals with IDA Approvals and Total ODA Disbursed to a Selection of ADF Countries, 20002005

16,000.0 14,000.0 12,000.0 $ million 10,000.0 8,000.0 6,000.0 4,000.0 2,000.0 2000 2001 Total ODA 2002 2003 IDA 2004 ADF 2005

ADF = Asian Development Fund, IDA = International Development Association, ODA = official development assistance. Note: Countries included: Afghanistan, Azerbaijan, Bangladesh, Bhutan, Cambodia, Indonesia, Kyrgyz Republic, Lao PDR, Maldives, Mongolia, Nepal, Pakistan, Samoa, Sri Lanka, Tajikistan, Timor-Leste, Tonga, Uzbekistan, Viet Nam. Sources: (i) ADB Loan, TA, and Private Sector Approvals database; (ii) World Bank annual reports and IDA Statement of Development Grants available at http://www.worldbank.org: (iii) data extracted 2007/12/01 from Organisation for Economic Cooperation and Development statistics:Available: http://stats.oecd.org/WBOS/Default.aspx?Dataset Code=CRSNEW

20. In the interest of harmonization with IDA 13, donors approved that some of the ADF IX resources could be provided as grants to DMCs that were under debt distress. The maximum amount that could be on-granted under ADF IX was $1.28 billion, or 21% of the total replenishment. This comprised 18% for projects and programs, and 3% assigned to the Technical Assistance Special Fund (TASF). Two percent of the funds were to be granted to operations combating human immunodeficiency virus (HIV) risks and acquired immune deficiency syndrome (AIDS). Furthermore, ADF IX set aside funds for regional cooperation operations (up to 5% of total funds) and for Pacific DMCs (4.5% of the PBA). Set asides were also made available to Afghanistan and Timor-Leste, 18 while a set-aside for Indonesia ($100 million a year in recent years) was intended to cap the allocation to that country. 21. An evaluation of ADF VIII and IX requires consideration of resource flows from January 2001 until December 2008. By August 2007, $9.4 billion had been committed to loans and grants, and operations with an estimated value of $4.5 billion were still in the pipeline. Given that ADB is planning to commit all funds by end-2008, this equates to ADB needing to process 64% of ADF IXs value in less than 1.5 years. While many operations have been under preparation for some time, a bunching of loan and grant approvals at the end of 2008 can be anticipated, which will put pressure on the decision-making processes.

18

Set-asides are fixed sums or percentages of ADF, outside the pool of funds to which the PBA formula is applied.

7 22. The rest of this chapter assesses how ADF VIII and IX allocations have been distributed across countries of different types and poverty levels, how they are distributed among sectors, how ADF VIII and IX approvals compare with OCR approvals in the same ADF recipient countries, and how ADF has been utilized through various financing modalities. The themes addressed by ADF, and the amount of ADF used for general versus poverty interventions, are also discussed. This sets the context for the development results that are analyzed in chapters III and IV. Attention is paid first to lending conditions of ADF in order to answer the question: how much benefit does a country derive from access to low-interest ADF loans? B. Lending Conditions of the ADF

23. ADF loans are usually provided for operations implemented over a 5-year period, and are assigned an 8-year grace period and a repayment period of 32 years for projects and 24 years for programs. Service charges are 1% for loans per year during the grace period and 1.5% thereafter. In June 2004, ADB's Board of Directors approved the loan terms for ADFfinanced emergency assistance loans: 40-year maturity, including a 10-year grace period, 1% interest per year, with repayment of principal at 2% a year for the first 10 years after the grace period and 4% a year thereafter. 24. A key feature of the ADF is that it is supplied to country governments that generally do not have access to commercial lending sources, cannot issue bonds easily, and so have difficulties in accessing international credit markets. Even when governments have some access, this invariably comes at much higher cost than ADBs (or the World Banks) lending conditions. 25. The ADF is highly attractive to DMCs from a financial perspective. With a discount rate of 10%, the grant element of ADF loans with 8 years grace period and 32 years maturity is between 60% and 75%, depending on the speed of disbursement of the loan. 19 However, the use of ADF loans invariably comes with a set of conditions that need to be met. ADF lending often comes with additional benefits, such as pro-bono project preparatory technical assistance. During implementation, the operations that the loans support may be further supplemented by pro-bono advisory technical assistance (ADTA) or other grant funds given by donors to ADB to administer. ADF operations can be complemented by projects granted by the Japan Fund for Poverty Reduction (JFPR) since 2000. ADF-funded operations may generate further cofinancing supplied by other donors, which is usually also on highly concessional or grant terms. Tables A3.1 and A3.2 in Appendix 3 provide details on ADB support as well as cofinancing by other aid agencies in the context of ADF operations. A recently approved advantage is that, since 2006, ADF-recipient countries can choose the currency in which to receive the loan, and have more choice regarding the currency in which to repay (euro, Japanese yen, pound sterling, or United States dollar). 26. ADF loans have historically been somewhat less attractive than the concessional loans of the IDA, as the latter usually come with a 10-year grace period, a 40-year repayment period, and 0.75% service charge. Nevertheless, most countries, unless they are in severe debt distress, are eager to receive ADF loans due to the scarcity of IDA and other concessional funds, and to their large investment needs. Many ADF countries are also interested in ADBs OCR loans, which have a smaller but yet significant concessional element, and share the
19

If average project disbursement in ADB is assumed, then the grant element would be around 61%; OCR lending with 25 years maturity and an assumed 5% interest rate (in reality the rate is variable) after a grace period of 5 years, and with an identical disbursement pattern and discount rate, would have a grant element of 44%.

8 advantage of ADB support in project preparation and implementation, as well as support in the form of project preparatory technical assistance, ADTA, and cofinancing by other sources. C. Distribution of the ADF Across Countries and Populations

27. The present 27 DMCs with access to the ADF 20 had an aggregate population of 741 million in 2005, a total gross domestic product (GDP) of $475 billion (i.e., less than that of the Netherlands) and an average GDP per capita of $637. However, GDP per capita ranged in size from over $2,000 in the Maldives and the Marshall Islands down to $234 in Nepal. DMCs with per capita gross national product above $925 in 1997 prices must meet with some special criteria to remain eligible for the ADF. 21 ADF countries are divided into three groups: (i) Group A, with access to ADF only (not OCR); (ii) Group B1, with access mainly to ADF and limited amounts of OCR; and (iii) Group B2, with access mainly to OCR but with access to limited amounts of ADF. During ADF VIII and IX, Group A included 15 countries; Group B1, 9; and Group B2, 3 (Table A3.3, Appendix 3). 28. The distribution of ADF loans to individual countries is determined by a PBA formula that takes into account investment needs as approximated by population and per capita income, and that furthermore contains factors derived from ratings arrived at through annual country performance assessments (CPAs) undertaken for most ADF DMCs. Under ADF VIII (2001 2004), these CPAs were relatively simple and gave weight mainly to portfolio performance. Annual variations in ceilings were cushioned by caps and collars. ADF IX abandoned the collars, and a new type of assessment, more harmonized with that of IDA, gives much weight to issues of governance, economic and social performance, as well as ADB project portfolio performancegood performance and governance is rewarded by relatively higher allocations. 29. Not surprising, given their large populations, Pakistan and Bangladesh were among the largest recipients of ADF resources in both ADF VI and VII, and in ADF VIII and IX (Figure 3 and Tables A3.4 and A3.5 in Appendix 3). Viet Nam and Afghanistan are two other large beneficiaries of the ADF: Viet Nam, due to a high country performance rating, and Afghanistan as a conflict-affected country due to a large set-aside. Indonesia receives a relatively smaller allocation from the ADF due to its status as a B2 country. The large allocations to the countries mentioned should come as no surprise since all have large or medium size populations. In fact, the PBA formula, although taking into account population and GDP, includes a factor by which the effect of size of the population on allocation is somewhat diminished. The latter is done in order to avoid populous countries crowding out less populous countries. In both 20012008 and the preceding period of 19922000, Bangladesh, Pakistan, and Viet Nam absorbed around 46% of the funds, leaving 54% to be shared among the other 23 countries. Indonesia, Nepal, Sri Lanka, and Afghanistan and Cambodia as new entrants in ADF VIII, absorbed a further 35% of the funds. On a per capita basis, the picture is considerably more nuancedcountries with small populations are generally receiving a relatively much larger share, often even when their GDP is relatively higher. The small Pacific island countries are the largest recipients of ADF on a per capita basis, although the lending programs often cover only one or two loans over any given ADF replenishment period.

20

Twenty-six DMCs were eligible for ADF VIII and 27 for ADF IX this was due to the addition of Uzbekistan in 2005. The number may rise further to 29 when Georgia and Armenia gain access to ADF. 21 These are described in Operations Manual Section A1/OP (issued on 30 May 2007), paragraphs 35. The criteria adopted to classify DMCs are per capita gross national product, and debt repayment capacity.

Figure 3: Percentage of Total ADF VIII and ADF IX Resources Allocated to ADF Countries 22
Sri Lanka 6% Regional 6% Indonesia 5% Nepal 5%
Cambodia 4% Central Asia 6% Lao PDR 2% Mongolia 2% Pacific 2% Bhutan & Maldives 1%

Viet Nam 13%

Afghanistan 14%

Bangladesh 15%

30. There are large variations in the allocations to countries with a large proportion of the poor of ADF countries (Figure 4). The poor are in this study those with a per capita income of $1 per day in purchasing power parity. Bangladesh has almost half of the poor in the ADF countries but receives only 15% of ADF resources. Even when taking into account the OCR allocations to some of these countries, from the point of view of targeting the poor in Asia, the allocation pattern looks disparate. (See Tables A3.6 and A3.7 of Appendix 3 for details.) 31. Due to their economic growth over the years, ADBs graduation policy has rendered some other populous ADF countries ineligible for ADF, although their poor populations remain sizeable. The Philippines became ineligible for ADF in 1999, and Indonesia will most likely reach this stage by 2008. The Philippines had 11.3 million poor in 2005; Indonesia, 14.3 million. Only 113 million (i.e., 18%) of the currently estimated 620 million poor people in the Asia and Pacific Region are in ADF countries (Figure 5), excluding those for which no poverty data are available, such as Afghanistan, Myanmar, Uzbekistan, and some Pacific island countries. 32. When Indonesia graduates, the number will fall below 100 million. However, the number of people living below $2 purchasing power parity per capita per day (at around 500 million) is still significant (i.e., 60%).

Pakistan 17%

Note: Includes pipeline 2007 2008 as of 10 August 2007. Source: ADBs Loan, TA, Grant and Equity Approvals database and Project Processing and Information System.

Figure 4: Share of ADF and Share of Poor in ADF Countries in 2005, Selected ADF Countries
50 48

40

30

Percent

20

17 15 15 13 7 6

16

10

6 5 1 5 4 3

P ak is ta B n an gl ad es h V ie tN am S ri La nk a In do ne si a

ADF Share (%)

% Poor to Total Poor

Note: Poverty data on Afghanistan and Uzbekistan are not available. The ADF share includes the 20072008 pipeline as of 10 August 2007. Source: ADB. 2006. Key Indicators 2006. Manila.

22

Pacific countries include Cook Islands, Federated States of Micronesia, Kiribati, Papua New Guinea, Republic of Marshall Islands, Samoa, Solomon Islands, Timor-Leste, Tonga, Tuvalu, and Vanuatu; Central Asia countries include Armenia, Azerbaijan, Kyrgyz Republic, Tajikistan, and Uzbekistan. Regional = regional ADF operations.

N ep al C am bo di a

10

Figure 5: Number of Poor Living at or below $1/day per Capita, Developing Asia (in millions) 23
People's Republic of China, 175.2

Bangladesh, 41.5

Pakistan, 30.3
Indonesia, 14.3 Philippines, 12.0 Viet Nam, 8.1 Nepal, 6.4 Cambodia, 4.7 Others, 4.6

Uzbekistan, 1.9

India, 339.8

Note: Afghanistan and Myanmar are excluded due to lack of data. Source: ADB Key Indicators 2006.

D.

Importance of the ADF to Countries

33. The ADF is, in most of the DMCs, a very small source of funds when compared on a per capita basis with GDP and some other indicators (Tables A3.8 and A3.9, Appendix 3). The biggest beneficiaries of approved ADF amounts per capita per year have been the Pacific island economies ($36), Maldives ($22), Bhutan ($15), and Mongolia ($11). For all others, the annual ADF-approved amount per capita has been at $6 or less. 24 The situation is, however, somewhat different if ADF approvals are compared with overall government expenditure. Although average ADF approvals per year comprise only 3% or less of overall annual government expenditures, in smaller countries such as Bhutan, Cambodia, Lao PDR, Nepal and Tajikistan it has been 5% 8% in 20012008. In such countries, ADBs policy advice can be held to exert some real influence in government decision making. In Afghanistan, the proportion of ADF approvals to government expenditure in 2005 was exceptionally high (35%). 25 When compared with total ODA, the ADF is a significant source of development aid in several cases and even in the larger ADF countries such as Bangladesh, Pakistan, and Viet Nam. The ADF is a sizeable source of external concessional funding in at least 13 of the 17 Asian ADF countries, aside from the Pacific island economies. In Azerbaijan, Indonesia, Papua New Guinea, and Sri Lanka, the ADF can be held to be much less significant, but access to OCR may increase ADBs influence. Only

23 24

Selected countries; excludes Afghanistan, for which no data are available, and Myanmar. Annual actual disbursements per capita are usually smaller than annually approved amounts. 25 Data on government expenditure may be unreliable. It should also be warned that loan and grant approvals annualized over 20012008 approximate, but may not equate to, actual disbursements, especially if the program is new, such as in Afghanistan.

11 in Solomon Islands and Timor-Leste, may ADF have little leverage, while these countries also do not get access to OCR to compensate for this. E. Sector Distribution of the ADF

34. The sector share distribution of the resources of the four ADF replenishments and OCR loans for the same period and countries is shown in Table 1 (see Table A3.10, Appendix 3, for amounts). Table 1: ADF and OCR Distribution by Sector, ADF Countries 19922008 (%)
Sector Multisector Transport and Communications Agriculture and Natural Resources Education Water Supply, Sanitation, and Waste Management Energy Law, Economic Management, and Public Policy Finance Health, Nutrition, and Social Protection Industry and Trade ADF 19922000 20012008 16.0 19.4 21.6 18.9 18.9 15.7 9.5 7.4 11.7 2.6 6.7 4.7 0.9 10.8 10.3 9.1 6.0 3.9 3.5 2.4 OCR 19922000 20012008 9.3 7.3 14.8 33.1 10.1 3.3 8.7 2.5 24.3 2.9 16.8 5.5 5.2 0.6 11.4 21.6 13.8 7.4 0.4 1.2 ADF and OCR 19922000 20012008 12.3 11.2 17.8 28.5 14.0 7.3 9.0 4.7 18.7 2.8 12.3 5.1 3.3 3.9 11.1 17.6 11.2 6.3 1.4 1.6

Total 100.0 100.0 100.0 100.0 100.0 100.0 ADF = Asian Development Fund, OCR = ordinary capital resource. Sources of Basic Data: Lotus Notes database on Loan, Technical Assistance, Grant, and Equity Approvals; Project Processing and Information System as of 10 August 2007.

35.

The most conspicuous trends are the following: (i) The single largest sector supported by the ADF covers multisector operations in ADF countries (from 16% to 19%), although the sector is smaller in terms of OCR. This may be due in part to increased reliance on holistic, area-based projects, but a more important reason is that a larger portion of the ADF has needed to be devoted to emergency assistance, notably post-conflict operations in Afghanistan and the earthquake response in Pakistan (Table A3.11). When ADF and OCR resources are taken together, multisector operations consume 11% of the total ADB resources, and they have not grown in 20012008 as compared with the period 19922000. Transport and energy operations in ADF countries are increasingly funded by OCR. These are sectors that either generate their own resources for repayment (energy) or enjoy high economic priority (highways) and are not deemed risky. Law, economic management, and public policy operations were small before ADF VIII, but they more than doubled in importance over the period of ADF VIII IX, indicative of more attention for governance issues. OCR lending for this sector grew even faster in the same ADF countries. Although ADF social sector operations grew, health operations declined. This was in spite of ADF IX setting aside a proportion for combating HIV/AIDS

(ii)

(iii)

(iv)

12 and other communicable diseases, which increased ADBs allocations for this purpose significantly (Appendix 4). Health and education operations funded by OCR declined strongly. The growth in number of water supply, sanitation, and waste management operations could not prevent a decline in relative importance of social sector operations, from 19% in 19922000 to 16% in 20012008. This was counter to the human development ambitions of the PRS and the ADF VIII donors report. 36. Sector allocations for Pacific countries are given in Table A3.12, and regional cooperation loans in Table A3.13. More detailed analysis of sector allocations is found in Appendix 3. F. Use of the ADF by Financing Modality

37. The ADF donor reports for ADF VIII and IX did not make specific recommendations for a change to more program-based approaches. There was, however, a general endorsement of more alignment with country systems and priorities. The Paris Declaration, signed by most ADF donors and by ADB in March 2005, reinforced this notion. When disaggregating ADF lending allocations by the various financing modalities of ADB, project funding has diminished in importance from 89% of all funds in ADF VIVII to 77% in ADF VIIIIX. 38. Project Lending. There have been positive changes in the types of projects supported: (i) Sector projects decreased in importance from 18% to 9% of overall lending. Sector projects are often complex due to the widely dispersed locations where works are implemented. The proportion of TA loans in the portfolio increased from 0.4% to 1.7%. These deal mostly with either capacity development or the preparation of detailed design. Breaking up the project preparation process in various stages is in principle positive. The introduction of the Multitranche Financing Facility in 2005 may have led to a decrease in the time taken for project preparation (2% of ADF IX), although the modality was not intended primarily for ADF operations. 26 It is however too early to assess the results of the approach.

(ii)

(iii)

39. Program Lending. Set against reduced traditional project lending, the ADF lending for programs increased from 11% during ADF VI and VII to 23% during ADF VIII and IX, including the pipeline for 2007 and 2008 (Table A3.14, Appendix 3). The number of combined sector programs and project loans (sector development programs) also increased, from 2% in 1992 2000 to 6% in 20012008. Even higher proportions of program lending have been achieved with OCRperhaps indicative of greater capacity in ADF-OCR blend countries. The move to program lending is in part a result of the greater attention for governance in the 2000s, as also stimulated by the ADF donor reports. Program loans total $3.193 billion for ADF VIIIIX. They have been mostly for law and economic management (20%), multisector operations (17%), water supply (15%), finance (12%), and agriculture (12%). A breakdown of ADF program loans by sector is in Table A3.15, Appendix 3.

26

The use of the Multitranche Financing Facility in ADF operations may be limited, as release by tranches may involve longer periods than the ADF replenishment cycle. The modality was originally conceived to deal with reservations held by clients of OCR against commitment charges, charges that are not attached to ADF lending operations.

13 40. ADF Grants. By end-August 2007, this major new modality had been utilized for 41 operations in 13 countries. The number of operations assigned ADF grants is planned to rise to 63 by the end of the ADF IX period. Almost half of the grant operations were in Afghanistan. Other countries that benefited from ADF grants were Cambodia, Kyrgyz Republic, Lao PDR and Nepal. ADF grant approvals in 20052006 totaled $522 millionsomewhat lower than the $315 million annual grant program envisaged at the time of the replenishment. The identification of investments suitable for grants has not been smooth: Some of the operations did not materialize, and thus available grant ceilings were often not utilized, especially in Nepal and in the Pacific. There were delays in programming and processing grant-financed operations. Some grant-eligible countries had lower PBAs, so received fewer grant funds than anticipated. Initially, most operations with grants were dealing with communicable diseases and water supply, but later a larger variety of sectors such as agriculture and roads were assigned ADF grants. The breakdown of grant distribution by sector is given in Table A3.16, Appendix 3. G. Use of the ADF for Economic Growth, Social Development, and Governance 27

41. In ADF VIVII, 57% of the funds available went to loans whose main purpose was stimulating economic growth. This was followed by human development at 24%; poverty reduction, 10%; women in development, 6%; and environment and natural resources, 2%. In ADF VIII and IX, 89% and 68% of the respective loan portfolios were classified as addressing sustainable economic growth either as the first, second, or third theme. This was followed by inclusive social development (50% in ADF VIII and 40% in ADF IX) and governance (22% and 29%). These results are in line with the pillars of the PRS: all operations should address at least one of the three. Figure 6 (based on Table A3.17 in Appendix 3) shows ADF VIIIIX loans by thematic classification. 28 The trend cannot be compared over a longer period of time due to classification differences. Governance has increased in importance as a theme between ADF VIII and IX, and ADB has classified more ADF IX operations as addressing environment and gender. 29 Regional cooperation and integration, a new theme in 2001, doubled from 5% of operations under ADF VIII to 11% under ADF IX. Private sector development operations did not expand under ADF IX, even though nonsovereign private sector lending in ADF countries increased significantly. 30 No targets were set for the new capacity development thematic priority of 2005, but staff classified almost a quarter of ADF operations so far as having a capacitydevelopment theme.
27

ADB has used a variety of classifications for its operations. At the time of ADF VI and VII, ADB classified all loan operations under five so-called strategic development objectives (SDOs): (i) economic growth, (ii) human development, (iii) poverty reduction, (iv) women and development, and (v) environmental protection and natural resource management. Operations could be assigned a primary and, if applicable, a secondary SDO. The classification helped reorient operations toward social sector development, environment, and poverty reduction. In 2001, this classification was replaced by another in line with the 1999 PRS. It dropped poverty reduction as a special theme for operations, as poverty reduction had already been elevated to ADBs overarching goal. This goal would be aided by eight themes: (i) economic growth, (ii) human development, (iii) gender and development, (iv) good governance; (v) private sector development, (vi) environmental protection, (vii) regional cooperation, and (viii) multitheme. In June 2004, this classification was aligned with the three pillars of the EPRS (footnote 11) and the 2001 LTSF (footnote 13): (i) sustainable economic growth, (ii) social development and (iii) governance. The category of multitheme was removed, and a maximum of three themes were allowed for the classification of each operation. A new theme was added: capacity development. ADB subsequently reclassified ADF VIII operations approved from 2001 onwards to fit the new classification. 28 When studying this, it should be kept in mind that ADB has not set quantitative targets for thematic priorities. ADFdonor reports and ADB policies have seldom been more than indicative. 29 Only 2.5% of ADF operations had classified environmental sustainability as first priority. Overall, the number of projects classified with this theme remained almost the same between ADF VIII and IX at 10% and 9%, respectively, and the amounts committed increased from 12% under ADF VIII to 20% under ADF IX. 30 Nonsovereign lending to the private sector in ADF countries increased from $18 million in 2001 to $130 million in 2006.

14

42. This study concludes that economic growth and social development became less predominant measures under ADF IX. 31 A wider variety of purposes has gradually been addressed, pointing both to the likelihood of more appropriate responses to the varied needs of countries and country strategies, and to a less selective corporate ADB program. Figure 6: ADF VIIIIX Loans by Thematic Classification
100 90 80 70 60
50 40 31 22 13 20 12 21 13 10 11 5 24 70 89

Percent

50 40 30 20 10 0
Sustainable Economic Grow th

Inclusive Social Development

Governance

Gender and Development

Environmental Sustainability

Private Sector Development

Regional Cooperation

Capacity Development

ADF VIII

ADF IX

ADF = Asian Development Fund. Note: Includes ADF loans and grants in the pipeline until end 2008 as of 7 September 2007. Source: Project Processing and Information System as of 7 September 2007.

H.

Use of the ADF for Poverty Interventions

43. The PRS led to the introduction of a separate poverty classification for all operations, and an ADB-wide target of 40% of project approvals by amount needing to be poverty interventions. ADB achieved the targets in 2002 and exceeded them in 2003, 32 but the system was nevertheless modified in mid2004 to reflect the recommendations of a review of the PRS. 33 This argued that the target setting was inappropriatethe approach diverted attention from removing the binding constraints to poverty reduction in favor of providing short-term benefits to the poor. The lending target overemphasized the importance of inputs rather than results. The PRS had defined poverty interventions narrowly by including only individual- and household-based interventions, but had not included other possible types of targeting, such as those based on geographic and sector / subsector attributes. Operationally, the review argued that the 40% lending target gave the message that household-targeted operations were superior to nontargeted interventions in reducing poverty. Staff feedback confirmed that it had created an incentive to pursue household-targeted operations at the expense of operations with an indirect but potentially larger impact on poverty reduction. The ADB-wide target provided incentives to include targeted components, at times at the expense of efficiency.
31

The lower number of projects categorized as addressing sustainable economic growth in ADF IX could be in part the result of operations departments choosing to acknowledge a larger set of themes in ADBs operations. The average number of themes per loan rose from 1.8 under ADF VIII to 2.1 in ADF IX. However, if there were really more cases of projects addressing multiple themes, one of which is economic growth, then this would have led to an even higher average of economic growth projects under ADF IX than ADF VIII. 32 Fifty-one percent of all project approvals by amount were poverty interventions in 2003, including 5% core poverty interventions. 33 ADB. 2004. The Review of the Poverty Reduction Strategy. Manila.

15

44. Household-targeted interventions were deemed more complex to design and implement, and thereby raised the cost of preparation and implementation. The EPRS (footnote 11) favored a classification of operations as either general interventions or targeted interventions, but did not prescribe a new quantitative target for ADB. This allowed monitoring of operations that addressed either poor individuals or households directly (as before); certain poor regions within countries; or certain sectors and subsectors deemed to directly address poverty and nonincome Millenium Development Goals (MDGs) 2 to 7 concerning health, primary education, and rural water supply. 45. The abandonment of the ADB-wide poverty reduction target probably led to a less generous interpretation of operations being pro-poor than before, as well as a real decrease in the number of operations having special pro-poor components in ADF IX, particularly in infrastructure projects. The percentage of ADF resources classified as targeted interventions in 20052007 (essentially poverty interventions but following a wider set of criteria) was still 51% higher than the PRS target regarding poverty interventions. OCRs focus on poverty-targeted lending disappeared (Figure 7 and Table A3.18, Appendix 3). Figure 7: ADF and OCR Trends in Poverty Interventions and Targeted Interventions, 20012006 (% of all InterventionsLoans and Grants)
% of loan amount
80 70 60

% of loans

ADF
70 62 51 34 40 68

OCR

Percent

50 40 30 20 10 0 ADF poverty intervention 2001-2003 ADF targeted intervention 2004-2006 OCR poverty intervention 2001-2003 OCR targeted intervention 2004-2006 15 12

Source: ADB databases.

I.

Integration of the ADF and OCR in ADB

46. Due to lack of ADF resources and of continued availability of good investment opportunities, many ADFOCR blend countries are increasingly resorting to blending ADF- and OCR-funded components in operations. The share of blended loans increased from 5% during ADF VI and VII to 13% in ADF VIII and IX. The trend is most conspicuous for operations in the category of law, economic management, and public policy (a rise from 12% of loans being blended in 19922000 to 23% in 20012008). See Tables A3.19 and A3.20 in Appendix 3. It can be argued that the ADF allowed the integration of a wider agenda in the country strategy and programs (CSPs) of B1 and B2 countries. It allowed for more attention to social development and capacity development, goals for which such countries do not always wish to borrow OCR. Increased reliance on blending could help rationalize project preparation and

16 address poverty reduction, capacity development, and non-income MDGs in some countries with large poor populations. J. Allocation of the ADF to the TASF and Allocation of TA to ADF Countries

47. All ADB DMCs are eligible for the TASF, and, consequently, for some of the $210 million ADF IX replenishment of TASF funds for TA for non-ADF countries. In 20012004, 79% of the TASF (not funded by ADF) was assigned to ADF countries, and 76% in 20052008 (including pipeline TAs). The difference is not large and thus it can be concluded that ADF interests have played no role in the allocation of TA to countries. Of the overall TA program over the period 20012008, 80% was allocated to ADF countries between 2001 and 2004, and 81% between 2005 and 2008 (including pipeline TA). 34 The TA program also includes TA funded by the Japan Special Fund (JSF) and other special donor trust funds. 48. The sustainable economic growth theme received the highest emphasis in the overall TA program. This was not different from the pattern for ADF projects and programs. This shows that a basic level of alignment between TA and loan operations was achieved. Forty percent of TA in 20012004 and 67% in 20052008 promoted sustainable economic growth (Figure 8). This was followed by governance (33% and 28%) and inclusive social development (26% and 25%). Gender and development received the lowest amounts of TA funds (2% and 6%). Figure 8: ADF VIIIIX Technical Assistance by Thematic Classification
80 70 60 50 40 30 20 10 0
Sustainable Economic Grow th Governance Inclusive Environmental Private Sector Social Sustainabiliy Development Development Regional Cooperation Gender and Development Capacity Development

67

Percent

40

34 28 26 25 16 21 15 13 14 6 2 26 24

ADF VIII

ADF IX

ADF = Asian Development Fund. Note: Includes technical assistance to ADF countries in the pipeline until end 2008 as of 21 August 2007 Source: ADB Project Processing and Information System as of 21 August 2007.

49. More TA was assigned to economic growth themes in the ADF IX period, in line with the 2004 PRS review (footnote 33) and new instructions of ADBs Medium Term Strategy II (2006 2008) (MTSII) in 2006. 35 This was the opposite for loan- and grant-funded operations in that period. The increase of TA with sustainable economic growth themes in ADF IX could also be attributed to increased theme categorization under ADF IX (2.02 average themes per TA) as
34

Since 2005, ADB ensures that the TASF resource utilized in non-ADF countries does not exceed the TASF amount that is made available through non-ADF sources of funds (i.e., OCR net income transfer, savings/cancellations, voluntary contributions). 35 ADB. 2006. The Medium-Term Strategy II (20062008). Manila.

17 compared with ADF VIII (1.43). Governance was the second most frequent theme addressed. Conspicuous were the increase in TA dealing with environmental sustainability and the rise in prominence of the regional cooperation theme. Much like loan and grant operations, almost a fourth of all TA operations during 2005-2008 were categorized as primarily addressing capacity development, the new priority identified in the EPRS and endorsed by the ADF IX donors. The shifts in TA allocation thus reflected the shifts in ADBs strategic priorities. K. Net Resource Transfers of the ADF

50. Figure 9 presents the trend in net ADF resource transfers from 1980 until 2006, with a projection of rapidly increasing ADF loan service payments until 2015. Unless ADF allocations and especially disbursements increase significantly, the net resource flows to the ADF DMCs may be low in the near future. This would not be conducive to the needed accelerated achievement of the MDGs in the region.

Figure 9: Disbursements in 19812006 and Actual and Forecast Loan Service Payments in 19812015, Present ADF Countries Only
1,600 1,400 1,200

$m n illio

1,000 800 600 400 200

Net resource t ransfer

18 91

18 93

18 95

18 97

18 99

19 91

19 93

19 95

19 97

19 99

20 01

20 03

20 05

20 07

20 09

21 01

21 03

Loan Repayment

Loan Disbursement

ADF = Asian Development Fund. Note: Countries included are Afghanistan, Azerbaijan, Bangladesh, Bhutan, Cambodia, Cook Islands, Indonesia, Kiribati, Kyrgyz Republic, Lao PDR, Maldives, Marshall Islands, Micronesia, Mongolia, Nepal, Pakistan, Papua New Guinea, Samoa, Solomon Islands, Sri Lanka, Tajikistan, Tonga, Tuvalu, Uzbekistan, Vanuatu, and Viet Nam. The transfers are the actual disbursements minus the repayments of principal and service charges ($704.88 million in 2006). Source: Data from ADB Controllers Department.

51. The following countries have had negative resource flows in the period of ADF VIII and IX: Nepal and Solomon Islands in 2002, 2003, and 2004; Bangladesh in 2004 and 2005; and Pakistan in 2003 (Table A3.21, Appendix 3). In most cases this was due to very low disbursement ratios in these years. In the case of Nepal, the deteriorating political situation may have been a factor. Several Pacific island countries were also in this category for 1 year or more: Cook Islands, Marshall Islands, and Tuvalu; in 2005 and 2006, the overall resource flows to these islands were negative. If the present PBAs continue and actual disbursements remain lagging behind the schedules, then new project approvals are likely to be lower than ADF repayments in 2008 for the Marshall Islands, Lao PDR, and Sri Lanka, and they will be approaching the annual repayments in Bangladesh and Pakistan. In the ADF VIII period, net resource flows to ADF countries were $2,486 million: $4,343 million was disbursed, and $1,856 million flowed back as loan service payments. This means an average annual net

21 05

18 transfer of a little over $600 million, even when the annual approvals on ADF stand at over double this amount. III. A. DEVELOPMENT EFFECTIVENESS OF ADF OPERATIONS

Poverty Reduction and the Millennium Development Goals in the Region

52. Asias big strides in economic growth are visible first of all in the graduation of various ADF countries over the years. Since the start of the ADF in 1973, eight ADF countries moved from Group A to B1, six from B1 to B2, and three from B2 to C, while the Republic of Korea moved from Group B in the 1970s to graduated status in the mid 1990s (Table A6.1, Appendix 6). 36 Growth rates have been high in recent years in most of the large DMCs, notably the Peoples Republic of China (PRC), India, and Thailandall three not eligible for ADFbut also in large ADFOCR blend recipients such as Bangladesh, Indonesia, Pakistan, and Viet Nam. As the previous chapter illustrated, extreme poverty has fallen across Asia in both relative and absolute terms. Nevertheless, the differences within Asia and the Pacific remain large. Annual GDP per capita growth for ADF countries was only 3% during 19902005 compared with 6% for ADBs DMCs as a whole. The following countries had GDP per capita growth rates below 4% over 20022006: Kyrgyz Republic, Marshall Islands, Micronesia, Nepal, Papua New Guinea, Samoa, Solomon Islands, Timor-Leste, Tonga, and Vanuatu. 37 A recent report prepared for the Sydney ADF meeting in September 2007 states that 17 countries may not meet a quarter or more of the non-income MDG targets studied. 38 Nine of the ADF countries may in fact miss the targets by 44%-63%. The report states that recent data suggest that deficits may be even higher for non-income MDGs for ADF countries. In fact, the three most populous ADF countries are those with among the greatest deficits: Bangladesh, Pakistan, and Indonesia. The report states that much of the population in the ADF countries still lacks access to essential infrastructure such as all-weather roads, telephone, reliable and clean water supply, and especially sanitation. 39 A recent paper prepared by OED as part of the review of the LTSF, 40 confirms that health indicators and water and sanitation targets appear at risk of not being met, while noting the wide country variation in these and other indicators. Perhaps 500 million people in the current set of ADF countries live on less than $2 purchasing power parity per capita per day 41 (i.e., 60% of the total population). Given that recent studies point to increasing inequality in various ADF countries, 42 there is a prima facie case for continuing and expanding the ADF up to at least 2015 in order to achieve the MDGs. B. Success Ratings of ADF-Funded Operations in the Past

53. The small size of the ADF resources available for each country makes it unlikely that a statistically significant relationship exists, or at least can be established, between economic
36

Hong Kong; Singapore; and Taipei, China were already category C countries in the early 1970s (i.e., not eligible for ADF) and moved to graduated status in the early 1990s. 37 ADB. 2007. Key Indicators 2007. Volume 38. Manila. 38 ADB. 2007. Effectiveness of Asian Development Fund Operations. Manila. 39 See also: ADB, ESCAP, UNDP. 2007. The Millennium Development Goals: Progress in Asia and the Pacific 2006. Available: http://www.mdgasiapacific.org. 40 ADB. 2007. Special Evaluation Study on the Long-Term Strategic Framework: Lessons from Implementation (20012006). Manila. 41 Derived from Chen, S, and M. Ravallion. 2007. Absolute Poverty Measures for the Developing World 19812004. World Bank Policy Review Paper 4211.Washington D.C. 42 Key Indicators 2007 (footnote 37) includes a theme chapter on inequality in Asia. Apart from the PRC, especially ADF countries have been confronted with significantly higher levels of inequality in Asia, such as Bangladesh, Cambodia, Lao PDR, Nepal, and Sri Lanka. Almost nowhere did inequality decline significantly.

19 growth and poverty reduction. An alternative to assess the ADFs effectiveness relies on success rates of ADF operations as established by PCRs and PPERs. Unfortunately, too few such operations have been completed to assess ADF VIII and IX, but long-term trends of ADF success rates can be reviewed. Tables A6.2 and A6.3 in Appendix 6 provide the main averages by decade of project and program approval (1970s, 1980s, and 1990s) by ADF country and sector/subsector. Overall, based on PCRs and PPERs for ADF operations approved in the 1970s, 47% were successful, 51% of those in the 1980s, and 67% of those in the 1990s. 54. Figure 10 shows the 30 year trend for the proportion of ADF- and OCR-funded operations that were rated every year as generally successful, successful, or highly successful, and by approval year batch, up to 19991 year before the start of ADF VIII. The last 510batches of operations shown in the figure were at least in part implemented during the period of ADF VIII and IX; they were, however, all designed and approved in the period before. Although the average project success ratings for annual batches are somewhat variable across the years, upward trends are noticeable for both the ADF and OCR portfolios, with a major development in the last years, namely a converging of the OCR and ADF trends. The degree of convergence achieved is remarkable, given that it was generally believed that ADFOCR blend countries and OCR-only countries had more project management capacity than ADF-only countries. Certainly, governments are more willing to borrow OCR for operations in sectors and agencies with more proven capacity. Various factors could be influencing the converging trend but none of these has been statistically tested in a rigorous sense. One possibility is the effect of a capacity-development process in both ADB and the DMCs, which has lifted the ADF success ratings since the mid1970s. Especially as more agencies that are handling ADF operations have gone into second or third phases with ADB, capacity may have been built up to deal with ADB-specific systems and processes. Another factor may be gradual delegation of project administration to ADB resident missions. Another factor may be that ADF loan operations, which are on average three times smaller than OCR operations, get relatively more attention from ADB staff, and benefit from this. This would then compensate for the lower capacity on the DMC side. Between 50% and 80% of ADF operations evaluated of each approval year are rated as successful or highly successful, a figure that has been traditionally slightly lower than that arrived at by the World Banks Independent Evaluation Group for its IDA operations. 43 The other ADF operations have mostly been rated as partly successful, which means that some but not all objectives were achieved as planned. 44 Whether financed by OCR or the ADF, the operations that were rated as unsuccessful have remained at around 1 in every 12 or so approved (between 8% and 9%). 55. ADB has recently set a performance standard of 80% of all operations rated successful, 45 which has not been achieved for most approval year batches of operations reviewed.

43

By comparison, in 2001 the World Bank reported a 71% success rate for IDA 11 operations (1996-1999), with 46% rated as likely sustainable. (Available: http://www.worldbank.org/html/extpb/2001/develop.htm#three) A recent report indicates satisfactory outcomes for 78% of IDA and non-IDA projects completed between 2001 and 2005 78% of projects in East Asia and the Pacific and for 80% of projects in South Asia. (Source: Independent Evaluation Group. 2007. Annual Review of Development Results 2006. Getting Results. Washington, D.C. World Bank.) The report has additional ratings for sustainability and for institutional development impact, which indicates that a different rating methodology was used from that of ADBs OED. 44 Some operations assessed as partly successful might yet have some major impacts, even when not all of the intended outcomes were achieved (the success rate is based on the stated outcomes). Pakistans hugely ambitious Access to Justice Program, financed by ADB, achieved much with the judiciary, but little with the police. 45 ADB. 2006. 2005 Annual Poverty Reduction Report: Progress in Implementing the Poverty Reduction Strategy. Manila.

20 56. There are some important provisos to the positive trends, which 100 have been discussed 90 more fully in OEDs 2006 80 Annual Evaluation 70 Review: 46 (i) data are 60 lacking for more recently 50 approved operations, 40 since they are still under implementationonly 8% 30 of operations processed 20 ADF Trendline: OCR Trendline y = 0.13t - 2.5t + 56.5 y = 0.13t - 3.8t + 91.7 after 1997 have been R = 0.56 10 R = 0.49 rated 47 (Supplementary 0 Appendix A reviews all 10 PCRs so far Year of Project Approval completed for operations ADF OCR ADF Trendline OCR Trendline approved under ADF Source: OED database. VIII); (ii) there may be a bias towards more positive interpretation of project success in later years, since the more recent ratings rely more heavily on PCRs, which are essentially self-evaluations prepared by ADBs operations departments; and (iii) operations approved in the 1990s that have experienced long delays in implementation and have not been completed are likely to have a lower than average success rating. Thus, the actual improvement in success rates in the 1990s is uncertain. The next chapter assesses a sample of ongoing ADF VIII operations approved mostly in 2001 and 2002. Figure 10: Proportion of Successful Operations, by Source of Funding, 19701999
Successful Projects (%)
2 2 2 2

1972 1973

1974 1975

1976 1977

1978 1979

1980 1981

1982 1983

1984 1985

1986 1987 1988

1989 1990

1991 1992

1993 1994

C.

57. Complementing the success ratings of individual operations, OED ratings of ADB CSPs are an important proxy for overall development effectiveness. 48 Even if individual projects and programs are rated successful, the aggregate impact of ADB operations on a countrys development may be less satisfactory. ADF operations are only one component of success. Other components, such as OCR operations, equity operations, guarantees, TA operations, and policy dialogue outside the context of operations can support or detract from this impact. ADB s partnering, harmonization, and alignment efforts may have an impact. Ongoing operations, not yet assessed in PCRs and PPERs, may be different in nature from those closed and assessed. Also, country program objectives may differ from the aggregate of the objectives of individual operations, and strategies may not be focused or properly operationalized. 58. The ADF itself is clearly only part of a larger package of services that ADB offers to its DMCs. It is part and parcel of ADBs CSP and reinforces, and is reinforced by, the other services. There is therefore a good case for viewing ADF results in combination with the results of these other components. Since 2002, OED has conducted 11 country assistance program evaluations (CAPEs) for countries that have access to the ADF (Table 2). The methodology of
46 47

ADB. 2006. 2006 Annual Evaluation Review. Manila. Of the 10 PCRs, 7 were rated successful, 1 highly successful, and 2 partly successful. But the sample is biased in that a large portion of the operations concern program loans that were closed on schedule. 48 Despite OED recommendations since 2002, ADB does not have a robust results measurement system of key project outputs such as kilometers of roads constructed or megawatts of electricity supplied, or outcomes such as traffic densities achieved or megawatts of electricity consumed by businesses and households.

1970 1971

ADF Country-Level Results

1995 1996 1997

1998 1999

21 such evaluations has been evolving. Some earlier CAPEs rated some but not all the criteria presently in use: relevance and positioning, effectiveness, efficiency, sustainability, and institutional impacts. Other CAPEs made assessments without assigning a success rating. In such cases, this study assigned a rating based on the evidence in the CAPE, and added this to the table. Large ADF countries for which no evaluation has taken place since the start of ADF VIII are Viet Nam and Afghanistanbut the latter country saw ADB operations resumed in 2002; smaller countries without country evaluation were Kyrgyz Republic, Maldives, Tajikistan, and most Pacific island countries including Solomon Islands and Timor-Leste. Nevertheless, the 11 countries reflected in the table jointly represent over 75% of all lending under ADF VIII and IX until 2006. Table 2: Success Rates of Country Programs and ADB Performance; and Proportion of Operations Approved in the 1990s Rated Successful
Criterion Positioning Relevance Effectiveness Efficiency PSUS Likely Sustainability Institutional [PS] PSS S PS [PS] [S] Impacts ADB [PS] S S [PS] S [S] [PS] PS [PS] S [S] Performance End Rating [PS] [S] S PS S [S] [PS] PS [PSUS] PS [S] ADF projects 39 5 10 14 21 15 22 24 9 26 1 (74%) (100%) (90%) (64%) (71%) (73%) (55%) (54%) (11%) (62%) (100%) approved in 1990s rated successful = no discussion, BAN = Bangladesh, BHU = Bhutan, CAM = Cambodia, HS = highly successful, INO = Indonesia, LAO = Lao Peoples Democratic Republic, MON = Mongolia, NEP = Nepal, PAK = Pakistan, PNG = Papua New Guinea, PS = partly successful, SRI = Sri Lanka, S = successful, US = unsuccessful, UZB = Uzbekistan. Note: Ratings in brackets were derived based on discussion in CAPE reports; ratings were provided only when there were no specific ratings given. In Uzbekistan, where the program was new, not all criteria were rated. Sources: ADB Country Assistance and Program Evaluation Reports; OED database of project/program completion reports and project/program performance evaluation reports. BAN 2003 S [PS] [PS] PSUS BHU 2005 S PSS PS PS CAM 2004 S S S PS INO 2005 S PS PS PS LAO 2006 S S PSS SPS MON 2002 S S [PS] NEP 2004 [PS] S [S] [PS] [PS] PAK 2007 S [PS] PS [PS] [PS] PNG 2003 SPS S [PS] [PS] [PS] SRI 2007 SPS SPS PSS PSS [S] UZB 2006 S S

59. Relevance and Positioning. ADBs operations were invariably assessed as relevant to the governments development plans and ADBs own wider corporate priorities. However, when OED assessed ADBs positioning in the country explicitly (Is ADB doing the right things?), the country programs were often seen as covering too many sectors or addressing a suboptimal set of sectors and subsectors, and overlapping with those of other aid agencies. Sector selectivity was missing. ADB operations were sometimes seen as slow in response to changing circumstances, and in responding to windows of opportunities. 60. Effectiveness. The effectiveness of ADBs operations offered a more varied picture in ADF countries, and there seemed to be a very important country factor at play, relating to war and civil strife, political economy, and/or disaster-proneness. In some countries, the project and program outcomes were generally achieved, in others only partly so. The ADF group includes several postconflict countries with recurring violence such as Afghanistan, Nepal, Sri Lanka, and Timor-Leste; a number of transition economies in Central Asia; and some other countries with complex political economy factors, such as Bangladesh and Pakistan. Bangladesh suffered a great deal of political instability and also had devastating floods, as in 2004 and more recently in August 2007. Pakistan has gone through various political systems and crises over the decades.

22 Most aid was stopped in 1998 after nuclear tests, but high amounts became available after September 2001. Pakistan was affected by a devastating earthquake in 2005, which needed a reallocation of ADB funds. The current political situation (end-2007) is unstable. 61. Although the evaluations have indicated that high aspirations in the CSP were often not fully met, the majority of individual ADB operations initiated in many countries in the 1990s were rated successful, with the exception of Nepal, Pakistan, and Papua New Guinea. 49 Ratings for all ADF countries in Table A6.2, Appendix 6 confirm that, for countries not included in Table 2, ratings were similarly varied, with low ratings particularly for operations approved in the 1990s for small countries like Kiribati, Marshall Islands, Samoa, Solomon Islands, Tonga, and Vanuatu. 62. Efficiency. The CAPEs universally assessed ADBs operations as only partly efficient indicating higher than anticipated transaction costs, and inefficiencies on the side of both government and ADB, leading to delays, lost opportunities, and lower than estimated rates of return. However, the CAPEs usually noted that some sectors did better than others. 63. Sustainability. The evaluations usually expressed similar concerns over the likely sustainability of the outcomes, given governments and country contexts not favorable to cost recovery of investments, and operation and maintenance systems remaining deficient. This also affected some sectors more than others. 64. Overall, 5 of the 11 ADF country programs with CAPEs were broadly successful, and 6 were partly successful. This compares with 4 of the World Banks 14 country assistance evaluations conducted in ADF countries between 1999 and 2006 that were rated as satisfactory, 4 moderately satisfactory, and 4 partially satisfactory or unsatisfactory. 50 65. Assessment of ADF Themes in CAPEs. With reference to some special themes and issues that concerned ADF donor reports, it is of interest that CAPEs were relatively positive about strategies and programs dealing with (i) gender strategies, (ii) targeting the poor, and (iii) governance (Table A6.4 in Appendix 6). They were, however, almost universally more critical about operations with the themes of (i) environment, (ii) private sector (lack of synergy between sovereign and nonsovereign operations), and (iii) capacity development (scattered approach). More findings of the CAPEs are summarized in Supplementary Appendix B. 66. Countries Not Covered by Recent Country Evaluations. Of the countries not covered by CAPEs over the period, Viet Nam and Afghanistan stand out due to the size of current ADF operations. Viet Nam is scheduled for a CAPE in 2008; Afghanistan is further off due to the youth of the portfolio. Both countries have recently been the subject of ADB development effectiveness country briefs prepared by the operations departments in the framework of ADBs Managing for Development Results agenda. Supplementary Appendix C summarizes the results reported by these briefs and also for the Kyrgyz Republic, as an ADF-only Central Asian country not yet evaluated. OED plans validations of CSP completion reports for Bhutan, Mongolia, Nepal, Papua New Guinea, and the Pacific countries. OEDs first validation report, for the Maldives, was issued in June 2007. Although the operations departments overall rating was successful, OEDs validation reports was partly successful.
49

If current OED benchmarks of 80% success rates would be used, then only the operations initiated in the 1990s in Bhutan, Cambodia, Kyrgyz Republic, Maldives and Viet Nam could be viewed as successful. 50 Derived from country assistance evaluations posted on the World Bank website. Included are Armenia, Bangladesh, Bhutan, Cambodia, Indonesia, Kazakhstan, Kyrgyz Republic, Maldives, Mongolia, Nepal, Pakistan, Papua New Guinea, Sri Lanka, and Viet Nam.

23 D. ADF Sector/Subsector Results

67. Success Rates by Sector. ADF operations in transport and energy have been rated most highly, and have improved over the decades (Table 3). Education and multisector operations have also done comparatively well, and more than 70% were rated as successful in the 1990s. Water supply and sanitation operations reached ADBs average level of success in the 1990s. All other sectorsnamely finance; health, nutrition, and social protection; industry and trade; and agriculture and natural resourcesdid not reach a 60% success rate in the 1990s, and their historical success rates were mostly lower than 50%. Table 3: Performance of ADF and OCR by Sector, Decade of Approval, and Source of Financing, All ADF and OCR Countries (% of Operations Rated Successful)
Sector (sorted by highest ADF success rate in 1990s) Transport and Communications Energy Education Multisector Water Supply, Sanitation, and Waste Management Finance Health, Nutrition, and Social Protection Industry and Trade Agriculture and Natural Resources Law, Economic Management, and Public Policya Total Asian Development Fund 1970s 1980s 1990s Total (%) (%) (%) (%) 79 74 91 83 68 83 87 79 78 31 78 67 50 62 70 66 14 43 67 50 0 25 29 44 43 57 58 50 45 0a 67 45 47 52 41 0a 57 Ordinary Capital Resources 1970s 1980s 1990s Total (%) (%) (%) (%) 86 76 88 85 89 77 84 83 75 88 93 88 55 82 62 65 74 36 80 67 67 100 71 37 57 50 100 36 68 67 56 44 0a 74 66 64 75 39 0a 70

60 35

47

51

72

63

= no operations, ADF = Asian Development Fund, OCR = ordinary capital resources. a So far, only two projects were evaluated (one each for ADF and OCR). The ADF-funded project was rated partly successful and the OCR-funded one unsuccessful. Source: OED databases.

68. The variation in success rates across sectors may be due to many factors, the inherent difficulty of operations in certain sectors compared with that of others being one. This is demonstrated by the fact that there is a high correlation with sector success rates of OCR operations. OCR operations approved in the 1990s in the agriculture and natural resources sector and the industry and trade sector were relatively least successful, just like the ADF operations in these sectors. 69. A moot point is whether difference in sector success rates should have implications for ADB. Should ADB indeed focus more on the sectors in which it has traditionally achieved higher success? OED has hinted at this before as a reasonable strategy in a world in which specialization in tasks between an increasing number of organizations is the norm. Public and private aid organizations are still proliferating. However, success in the transport and energy sectors has sometimes been less conspicuous in terms of institutional reform ambitions. Moreover, the World Bank rates transport and energy sector operations also as among the most

24 successful. 51 Perhaps ADBs strengths in these fields are a less significant factor than the lower complexity of infrastructure development in comparison with social sectors, finance sectors, and productive sectors. Positive outcomes in the latter macro-sectors may well depend on a larger series of necessary conditions, and a higher level of supervision. The picture is more diverse at a subsector level, and corporate decisions to specialize will probably need to be based on this level. Even in the traditionally more difficult sectors such as agriculture and natural resources, some subsectors have had more success than others, such as irrigation and drainage and water resource management; and in the finance sector, the microfinance subsector. 52 70. Sector Success as Per CAPE Analysis. Notwithstanding the influence of the sector on success ratings of operations (para. 59), portfolio success has a country bias (Table A6.5, Appendix 6). Only the sectors of transport and communications, energy, and education have been able to do better almost irrespective of country contexts. Successes of transport operations were noted, especially for Indonesia and Lao PDR; and for energy operations in Bhutan, Cambodia, Indonesia, Lao PDR, Mongolia, Nepal, and Pakistan. Transport and energy operations supported by the ADF were often observed to have indirect poverty reduction effects due to expansion of networks in poorer areas. CAPEs have documented the success of education operations in terms of increasing students access to basic education but also to technical and vocational education. The latter has directly benefited poorer students. CAPEs for Cambodia, Sri Lanka, and Uzbekistan reported that success in the education sector was driven by long-term commitment as well as good coordination with other development partners. The Indonesia CAPE noted a 90% success rating based on PCRs and PPERs for 10 education operations. In other sectors, performance was more variable across countries. 71. Aggregate sector patterns were discussed in OEDs 2005 Annual Evaluation Review 53 for a wider range of countries including OCR countries and regions such as the Central Asia region and the Pacific. The infrastructure program was most uniformly successful. The social infrastructure program showed a reasonably positive picture as well. The agriculture program offered the most diverse ratings. The financial sector program proved most unsatisfactory, although there were satisfactory ratings for some countries. 72. Sector Policy Performance. OED has conducted eight SESs on sector policies and approaches since 2000, 54 notably for the large energy, urban, private sector, and health sectors, but also for some subsectors like fisheries, nutrition, agriculture and natural resources research, and small-scale freshwater aquaculture. Four rated the policies using OEDs standard criteria (Table A6.6, Appendix 6). OED rated ADBs work as broadly satisfactory in the energy sector, private sector, urban sector, and health sector, although it argued that the higher ambitions of the urban policy were not met due to lack of resources being reassigned to the urban sector and
51

Available: http://web.worldbank.org/WBSITE/EXTERNAL/EXTOED/EXTOEDARDE/EXT2006ANNREVDEVEFF/0, ,contentMDK:21103318~pagePK:64168445~piPK:64168309~theSitePK:3079226,00.html 52 OED has concluded that ADB should refrain from financing lines of credit in ADF countries. The risk of not achieving satisfactory development results in this area is deemed unacceptably high. Beginning in the 1990s, there was a shift in ADBs operations in the financial sector. Fewer lines of credit were provided to government owned development finance institutions (DFIs). A broader range of products was offered, including program loans for financial sector reform, lines of credit to commercial banks, equity investments in financial institutions, and capital market funds. Based on the available results, the performance of financial sector program loans has been better than that of DFI lines of credit, so this would be the way forward in ADF countries. 53 ADB. 2005. Annual Evaluation Review. Manila. 54 2000. Policy Implementation and Impact of Agriculture and Natural Resources Research; 2004. Selected ADB Interventions on Nutrition and Food Fortification; 2004. Small-Scale Freshwater Rural Aquaculture Development for Poverty Reduction; 2005. ADBs Policy for the Health Sector; 2006. Urban Sector Strategy and Operations; 2006. The Fisheries Policy; 2007. Private Sector Development and Operations: Harnessing Synergies with the Public Sector; 2007. Energy Policy 2000 Review: Energy Efficiency for a Better Future.

25 loss of focus on the sector due to ADBs move from sector primacy to region and country primacy. The policy for the (small) fisheries subsector in ADB was rated as unsuccessful. 55 The evaluations for nutrition, small-scale freshwater aquaculture, and agricultural research did not concern ADF loans as much as TA, part of which may have been funded through ADF contributions to the TASF. These evaluations were very positive, and saw usually high returns to TA operations in these areas. Supplementary Appendix D analyzes the eight sector policy studies in more detail. E. Results by Strategic Development Objectives (19922000)

73. For the present study, the success rates of ADF VI and VII poverty reduction operations are of interest, since they are similar in nature to the core poverty interventions introduced under ADF VIII and some of the targeted interventions under ADF IX. Moreover, many poverty reduction operations under ADF VIVII were implemented in the 2000s, when new policies and business processes were implemented as part of the agenda of ADF VIII and IX. Contrary to the time of the previous OED study of ADF VI and VII operations (footnote 7), a significant number of PCRs and some PPERs are now available for these operations. 74. While only 7% of all ADF VIVII loans had poverty reduction as their primary classification, 34% had this either as the first or second theme, and 29% of the total loan amount included such a theme (over 70% during ADF VIII were marked as poverty interventions, and 51% of ADF IX) (Tables A6.7 and A6.8, Appendix 6). Poverty reduction operations in ADF VIVII proved to do comparatively well, 77% being rated successful so far. Gender and human development programs turned out to be somewhat less successful than poverty-targeted loans. These outcomes demonstrate that poverty reduction operations can be successful when they are not under pressure from ADB-wide targets, and not overly inclusive and hence complex. The difficulty experienced early in the implementation phase of the poverty interventions under ADF VIII (see next chapter) might reflect the incentives for staff to include additional pro-poor objectives and components in the project design. F. Thematic Result Areas Emphasized in ADF Donor Reports

75. Among the special result areas highlighted in ADF donor reports, OED has conducted thematic SESs on (i) capacity development, (ii) the role of civil society organizations, (iii) the role of participation of beneficiaries in projects, (iv) private sector development, (v) managing for development results, and (vi) environmental and social safeguards. OED carried out an initial assessment of regional cooperation and integration as part of an evaluation of the LTSF, and paid more attention to addressing corruption issues in its evaluations after 2004 than beforeanother area of specific ADF donor interest. An area of older ADF interest gender and developmentwas not evaluated over the period, but an evaluation in this area is planned in 2008. Appendix 7 gives references to the evaluations conducted, and summarizes their main findings. The key finding is that in most areas, results improved over the period of ADF VIII and IX, except perhaps the field of capacity development. 76. OED findings point to generally mixed results of ADBs efforts in capacity development through loan components and TA. This study concludes that many factors influence the highly variable results noted, but long-term planning, continuity of interventions, and staff-intensive administration, not always available in ADB, are key factors in improving performance in this area. ADB put in place an action plan in January 2007 to improve TA management, which
55

The 2006 SES found that ADBs fisheries policy had not made a significant difference in guiding ADB operations.

26 incorporates some of these ideas. 56 OED also conducted an SES on the consequences of ADBs regular investment projects for clients capacity in project preparation and implementation. This was done in light of observations made in the 2005 Paris Declaration that many project implementation units (PIUs) might run parallel to regular government structures and thereby erode capacity. Some evidence of capacity erosion of executing agencies (EAs) by externally staffed and temporary PIUs was indeed found but, more frequently, the PIUs that ADB had helped set up were either entirely staffed by the EA or contained a mix of internally and externally selected staff. The concerns of the Paris Declaration regarding the likelihood of substantial capacity substitution were not confirmed, and it was contended that PIUs with mixed staff can be an appropriate implementation tool for the type of large physical infrastructure projects that ADB supports. The study suggested to mitigate adverse effects by adding a capacity development plan with a PIU exit strategy to the projects design. 77. OEDs studies show increased attention to participatory mechanisms in project design and implementation, and the higher success rates of projects also demonstrate that increased participation of beneficiaries in ADB projects contributes to greater success. At least one SES, however, points to the limitations of the approachparticipation in design but not decision making regarding allocation of funds may limit the interest in the approach and its results. OEDs SES of civil society organizations is positive as well, pointing to higher involvement of such organizations in the preparation and implementation of ADB operations and better results. OEDs SES of private sector operations and private sector development points to better results with the former than the latter, and the need for more integration of work of the Private Sector Operations Department in ADB with that of the regional departments. 78. OEDs evaluation of the LTSF (footnote 40) includes a supplementary paper on ADBs work in the field of regional cooperation and integration, which concludes that ADBs efforts have been broadly positive, and should be continued and expanded. More comprehensive studies on regional cooperation and integration and on gender and development will be conducted in 2009 and 2010. OEDs evaluation of parts of the MfDR agenda points to some progress in this field, although so far with mixed results. Although many processes needed for improved MfDR are in place now, staff attitudes need more work. Continued support and leadership by senior management are required, along with changes in ADBs human resource management practices. In 2006, the Regional and Sustainable Development Department reviewed the implementation progress of the 1998 gender and development policy. Much progress was reported, but the areas needing more attention were also outlined, as there remains a considerable unfinished agenda regarding gender equality and development in the region. ADB has stepped up its work on anticorruption since the creation of the Anticorruption Unit in 1999 and its upgrading to the Integrity Division in 2004. More investigations are being held, and more TA is being devoted to capacity development in this area. But results remain difficult to assess. 79. Not addressed specifically in the ADF donor reports, other than as part of the governance and environmental themes, are environmental, resettlement, and indigenous peoples safeguards. OED studies note progress with implementation of projects started in 20012007 in all three areas, and major disasters were not observed. Nevertheless, the studies raise concerns about the sometimes mechanical application of the policies. A one-size-fits-all approach has led to much attention for projects with marginal impacts, whereas projects with bigger risks might have needed more. This increased transaction costs, which runs the risk of
56

ADB. 2007. Integrating Capacity Development into Country Programs and Operations. Medium-Term Framework and Action Plan. Manila.

27 leaving less attention of ADB staff to other aspects of project design, and also of clients shying away from ADB in the case of more challenging projects. G. Performance of Technical Assistance

80. ADB set a benchmark in 2006 that overall TA performance should be viewed as satisfactory if OED rates a minimum of 70% of TA operations as successful. 57 OED produced an SES of the performance of TA in 2007. 58 It found that the success rate for the 551 TA operations that it had assessed from 1978 to 2006 was below the ADB benchmark, at 63%. The SES, however, implies that success of TA operations may have improved over the period of ADF VIII and IX. It assessed 110 completed or substantially completed TA operations approved mainly in 20002004, in Fiji Islands, India, Kyrgyz Republic, Philippines, and Viet Nam. It rates 72% of these as successful, although it acknowledges that there may have been a positive bias from the weight of India and Viet Nam in the sample, which are better performers (and India and Philippines are not currently ADF countries). The SES urges ADB to improve the clarity of strategic directions at the country level, improve its formulation processes, and deal better with implementation issues. Corporate level weaknesses were observed to impact TA performance. For instance, Medium-Term Strategy II (MTS II) had identified priorities for stronger country focus, greater coherence of all ADB activities at the country level, longterm engagement in selected areas in each DMC, and better coordination with other funding agencies. Nevertheless, TA had not been sufficiently leveraged in support of these. This needed improvement. The report observes that changes in ADBs organization of TA operations were already ongoing. The structure of TA financing is changing. Trust funds are now a major source of TA funding (38% of TA funding in 2006), and procedural changes have been improved to speed up consultant selection and procurement, close TA operations, cancel unspent funds, and recycle the savings through ADBs pool of TA funds to finance subsequent TA. The increased use of more flexible TA facilities is under consideration. H. Client Satisfaction Surveys of Executing Agencies

81. Some client satisfaction surveys held recently have provided a useful perspective on ADBs performance. ADB commissioned an ADB Perceptions Survey in 2005, the report of which was issued in October 2006. 59 The survey of over 700 opinion leaders (500 of whom were from DMCs) in 30 ADB member countries was conducted between April and June 2006. The findings were by and large positive. ADB was generally felt to have a positive impact on the countries it serves. ADB clientsopinion leaders with some involvement in an ADB program, project, or research study in the past 3 yearswere particularly positive about ADBs impact and helpfulness. ADB even earned slightly higher marks for being effective than other leading multilateral development assistance organizations. Opinion leaders were particularly positive about ADBs performance in two operational areas: infrastructure development, and promoting regional cooperation and economic integration. At the same time, they made it clear that ADB performance has room for improvement. ADBs procedures and practices were viewed as cumbersome; others noted that ADB does not have enough capacity, or is spread too thin.

57

ADB. 2006. 2005 Annual Poverty Reduction Report: Progress in Implementing the Poverty Reduction Strategy. Manila. 58 ADB. 2007. Special Evaluation Study on the Performance of Technical Assistance. Manila. 59 Princeton Survey Research Survey Associates International. 2006. ADB Perceptions Survey. Multinational Survey of Opinion Leaders 2006. Available: http://www.adb.org/Documents/Reports/ADB-Perceptions-Survey/2006 /default.asp

28 82. OED has conducted various questionnaire surveys in the context of its many studies and CAPEs. Two questionnaire surveys of senior managers of executing and implementing agencies of both ADF and OCR countries are discussed below. One was conducted for the SES on PIUs in 2004, 60 the other for the SES on the urban sector in 2005. 61 Both had good response rates. Both included ADF and OCR operations, and their results allow this study to be specific about client satisfaction with ADF, while also enabling a comparison with responses for OCR operations. The relevant response tables are in Supplementary Appendix E along with notes on the methodology. The following are some highlights. 83. Purpose of ADF versus OCR Operations. The survey of PIUs confirmed a concern of this SES that most ADF operations are viewed as addressing several major outcomes simultaneously(i) infrastructure (re)construction/provision, (ii) policy/institutional/capacity development, (iii) service delivery-oriented activities, (iv) operation and maintenance of infrastructure, and even (v) emergency response. ADF operations are regarded as addressing more outcomes than OCR operations, since more of them also address service delivery and emergency assistance. The notion of complex ADF operations was confirmed by the urban survey, where ADF operations registered more categories of outcomes than OCR operations. 84. Views on Achievements. When asked what the project would achieve, senior project managers in EAs stated each of the following achievements only between 50% and 60% of the time: outputs completed within budget, outputs on time, more sustainable infrastructure or services created, and improved project management capacity. The high number that did not confirm one or more of these achievements in the questionnaire corresponds to some extent to the 3040% of completed operations rated as only partly successful in OED postevaluations. Counterintuitively, however, more ADF operations were anticipated to be completed on time than OCR operations. The reason for this might be that ADF operations invariably have a larger part of their finance arranged through the loan than OCR operations, which often rely to a greater degree on other funds than ADBs OCR. Among the main problems of PIUs was the lack of timely release of funds from their governments; the larger the reliance on such funds, as with many OCR operations, the larger the problems. 62 85. Reported Problems. Other problems for ADF operations mentioned were, in descending order (i) dependence on progress or decision making outside the PIU and EA (major problem for 41% of PIUs, minor for 32%); (ii) lack of staff inside the PIU (major for 16% and minor for 33%); (iii) defective design of the project (13% and 37%); (iv) onerous reporting requirements (6% and 48%); (v) complicated ADB procedures, slow ADB response, or disputes with ADB (14% and 31%); (vi) issues with the division of responsibilities between the PIU and the EA (15% and 24%); and (vii) inappropriate division of responsibilities between the PIU and other agencies (8% and 35%). Of note was the view on the design of the project, regarded as a major problem by 1 in 8 operations, and a minor problem in a further 1 in 3. As with OCR operations, half of the ADF operations were regarded as having a problem with their design. 86. Problems Caused by ADB versus Government. The survey of urban sector project managers asked more detailed questions regarding problems with the role of either ADB or the government. As an indication of ADBs efficiency, the surveys pointed to relatively more problems with government involvement and procedures than with ADB involvement and
60 61

ADB. 2005. Special Evaluation Study on the Role of Project Implementation Units. Manila. ADB. 2006. Special Evaluation Study on Urban Sector Strategy and Operations. Manila. 62 Indeed, on another question, 44% the project offices of OCR projects reported budget coming through late as a main problem of the project, against 20% of the project offices of ADF projects.

29 procedures. Three problems concerning ADB were mentioned by more than half of the respondents: (i) difficult ADB forms and procedures and excessive paperwork; (ii) improper staffing by consultants recruited for the project; and (iii) delays in ADB responses, decisions, and/or approvals. On the other hand, five problems were mentioned by more than half of the respondents concerning government or EA involvement: (i) delays in government responses, decisions, and/or approvals; (ii) lack of effective coordination, or opposition from other agencies; (iii) insufficient government budget made available to the project (or late release); (iv) lack of (qualified and capable) staff to implement the project; and (v) government policies or decisions obstructing and/or delaying project activities. 87. Advantages of Working with ADB. ADF PIUs for urban operations reported the following main advantages of working with ADB (in descending order): (i) more certain/steady supply of funds, (ii) better design of the project, (iii) technical leadership, (iv) good and transparent procurement processes; (v) access to technical advice or operational support, (vi) external quality control/ monitoring by ADB, and (vii) ADBs powers of persuasion vis-a-vis government decision makers. The first factor was quoted surprisingly often (86%), as a predictable and steady supply of funds is a scarce commodity in many ADF recipient countries, and highly valued. Overall, the factors quoted most should not surprise: ADBs experience in handling project design is well appreciated, given that such capacity has remained a scarce good in many countries, and given that ADBs design comes with free preparatory TA. Other assets of ADB, such as technical leadership, the special access to the central government, and the reputation of enforcing transparent procurement, are similarly useful to many senior managers in DMCs, who often have to defend their projects against opposition from other corners, and must make sure that government funds keep flowing to them in time. Lastly, concrete help from ADB during implementation was also frequently seen as useful. All of this was mentioned in spite of frequently registered disappointment in ADBs cumbersome procedures and processes. 88. Recommendations. Main recommendations made by respondents in the two surveys, and in various others 63 were the need for (i) strengthening of resident mission capacity and authority, (ii) closer coordination with other stakeholders, (iii) more support for private sector development, (iv) more vigilance in detecting fraud and malpractice, (v) better delivery of TA, and (vi) ensuring more government ownership of policy reforms and TA. IV. CASE STUDIES OF ONGOING ADF VIII OPERATIONS

89. This chapter presents preliminary assessments of the loan and grant operations funded by ADF VIII and IX, as derived from general country data and from visits to five ADF recipient countries that took place from June to September 2007: Bangladesh, Lao PDR, Nepal, Pakistan, and Viet Nam. Together, the five country programs are utilizing around 60% of all ADF flows over the period 20012008. The findings are subdivided into three areas: (i) overall success of 25 ADF VIII operations studied, (ii) success of poverty-targeting efforts in these 25 operations, and (iii) success of governance-targeting efforts in the 25 operations. Appendix 8 provides general background and country summaries of portfolio performance; Supplementary Appendix F gives summaries of each of the 25 operations studied.

63

ADB. 2007. Country Assistance Program Evaluation for Sri Lanka: Inclusive Development and Conflict Resolution: Major Challenges for the Future. Manila; ADB. 2007. Special Evaluation Study on Resident Mission Policy and Related Operations. Delivering Services to Clients. Manila.

30 A. Success of Ongoing ADF VIII Operations

90. Likely Success of the 25 Operations Studied. This study provisionally rated 14 (56%) of the 25 operations studied as likely successful or better44% were likely successful and 12% highly successful. Forty percent were rated as likely partly successful; one operation (4% of the sample) was rated as likely unsuccessful if implementation did not improve. The number of highly successful operations is more or less in line with the usual number so rated (10%), whereas the presence of possibly only one unsuccessful operation in the sample, regrettable as it is, is lower than the average (8%) in the ADB portfolio of completed operations. It can nevertheless be concluded that the likely success rate of the sampled operations, mostly approved in 20012002, is at 56% somewhat lower than the ADB average reflected in Chapter III (63% overall, and 67% in the 1990s). 64 The lower provisional rate is reflected in the high proportion of operations with design problems, delays, and scope changes (Table A8.2, Appendix 8). Seventy-two percent of the operations were judged to have had minor or major design flaws, although some could still be corrected through scope changes. 91. When analyzing the operations in detail, ADB factors such as frequent staff changes, country factors, poverty design factors, and governance components in the years of ADF VIII have all occasionally had an adverse effect on the likely success rates. Ironically, the Lao PDR, the country with lowest rating in the CPA, performed best in the small sample of operations reviewed. This shows at the very least that projects can be designed in such a way as to avoid political and economic constraints, either by ring fencing; by providing special TA, consulting services, or extra supervision; or by more simple and feasible project design. At best it bears out the finding of OEDs 2006 Annual Evaluation Review (footnote 46) that of all governance factors, political stability was the only one that had a statistically significant correlation with project success (controlling for sectors). 65 The relatively lower success rate obscures the fact that the study rated at least three projects as highly successful: one introducing geo-bags in Bangladesh as a major new method replacing concrete blocks to mitigate river bank erosion; another, an upper secondary education project in Viet Nam; and thirdly, an innovative tourism development project in the Lao PDR. Two of the three demonstrate that ADB can have significant successes in sectors not normally associated with high success rates. B. Success of Special Components Targeting the Poor

92. The case studies confirmed the studys observation that the period 20012004 was one of transition and experimentation, not only in terms of including special poverty components in regular projects, but also the enforcement of social safeguards. 66 Twenty-three of the 25 operations studied were classified as poverty interventions, and 2 of these were classified as core poverty interventions. 67 Special components targeting the poor were identified in 17 (68%) of the 25 cases. Staff responded to signals in ADBs poverty reduction strategy; the ADF replenishment exercises; and comments made by executive directors, Management, and senior
64

As the sample was small, a 95% confidence level of the findings provides a wide band around the average the actual success rate of the portfolio could be up to 17% higher or lower than that measured by the sample. Even if perhaps 73% of all operations will be successful, this rate is only marginally higher than the ADF success rate of 67% for the completed operations approved in the 1990s, and still below ADBs new corporate target of an 80% success rate for projects and programs in 20082010. 65 The following had no statistical relationship: voice and accountability, government effectiveness, regulatory quality, rule of law, and control of corruption. 66 Twelve of 25 (48%) were classified as potentially having effects under the involuntary resettlement policy, close to the average of 50% for ADB in 20012006. 67 The Lao PDRs Vientiane Urban Infrastructure and Services Project and the Central Regions Livelihood Improvement Project in Viet Nam.

31 staff. Six components (35%) were assessed as likely successful, but of an additional five the success was as yet unclear, so the success rate could conceivably go up to 65%. More likely, however, is a somewhat more modest percentage. Another six special components for the poor were deemed likely to be only partly successful. Some of the poverty components were relatively less difficult to organize, such as rural roads in highway projects, fellowships for poor students, and pro-poor or community-based ecotourism. Others proved more difficult, such as community infrastructure in the hinterlands of highways, outreach extension activities for poor farmers in a water management project, livelihood training courses in a nonformal education project, village development revolving funds in agriculture projects, and microcredit for productive investments in urban infrastructure projects. Some had to rely on consultants for design and implementation. Examples included requiring local government departments to organize health and education campaigns in slums, and asking road departments to manage the construction of water supply systems in villages along highways, or to set up a revolving fund and training for income-generating activities. Such special components have higher risks of failure, as they are not the central focus of the project and are outside the EAs mandate and core competency. Thus, the EA feels little ownership of such components. Such ownership is generally a prerequisite for success. Many of the special components constituted projects within projects, and could be successful only when treated as such. However, the concerned ADB division did not always have a suitably qualified staff member available to prepare or supervise these labor-intensive components well. TA or loan consultants are not necessarily adequate substitutes for ADB supervision. The components often needed to involve nongovernment organizations (NGOs) and community-based organizations, but this was not always recognized or planned. In several cases, implementation modes for the special components needed to be developed after the loan became effectivea design flaw. 93. ADB has recognized the inappropriate incentives given to staff in the 1999 PRS, and has adopted a different model of implementing poverty-targeted components in country programs. ADF and OCR operations are now far less likely to include special poverty components if such issues are addressed by government programs or other externally funded projects. ADB more frequently complements loan funded operations with smaller ADB-administered and externally funded projects targeting the poor. ADB may fund such small projects through the JFPR or other ADB trust funds. The separate funding streams and different fund classification of such projects allows them to follow their own time table without pressure from the main project. The projects could be managed by different EAs and administered by relevant staff in ADB. They would also require significant involvement of community-based organizations and NGOs. Overall, this is a welcome development that should reduce the risk of unsatisfactory outcomes. However, ADB continues to face the challenge of making sufficient staff available to adequately supervise design and implementation of more labor-intensive poverty reduction components or operations. Greater use of staff consultants as funded by TA facilities and based in ADB resident missions for the purpose of project administration may be an option, if ADB cannot increase in its regular staffing. Another challenge for ADB is to work out new approaches to aid partnerships. 94. In spite of the difficulties encountered, the sample made clear that, when the operations were well designed, and when political economy factors worked out well, some targeted components could lead to significant benefits for the poor, including their goodwill for the project. A long-standing lesson of OEDs studies is that more complex operations have a lower likelihood of success, so caution is in order when making the project design more complicated in order to become more inclusive of the poor. The observed reduction in numbers of operations classified as targeted intervention since 2005 may point to the likelihood that these lessons have been appliedfor the present at least. The sample registered some significant successes

32 with components targeting the poorand these were often achieved with modest budgets. A small ecotourism component laying out trails in the forest in the Lao PDR helped raise incomes of indigenous peoples significantly in a culturally sensitive way. A special component for small village area improvements around Vientiane was able to mobilize villages very effectively when they were trained in organization and procurement by the Lao Womens Union and dedicated local consultants. Among the five countries studied, Nepal, as a conflict-affected country, had the best results from the poverty targeting approach; conversely, it did not have good results with governance targeting through the program loan assessed in the case studies. This finding may hold a lesson. Very recently, ADB seems to be on a path to make operations oriented primarily to economic growth more inclusive. If staffing requirements are not addressed, the cautions learned during 20012004 need to be reiterated. 95. Appendix 9 provides more discussion of ADBs approach to poverty targeting and analyzes project design changes, based on a sample of 40 RRPs approved before 2000 and 40 RRPs after, concluding that design has become more complex since 2000 (detailed analysis in Supplementary Appendix G). Appendix 9 also reviews some recent studies of the effects of the approach, including a multicountry 2002 SES of perceptions of beneficiaries on poverty and poverty reduction, 68 a 2006 SES of the poverty impact effects of rural roads 69 a 2006 SES of rural poverty targeting strategies in, 70 a rural microfinance impact study in 2007, 71 and a 2007 SES of the JFPR. 72 The 2006 SES on rural poverty targeting concluded that a household or geographical approach might sometimes be appropriate, but reminded ADB and its donors that many of the poor live marginalized lives in less-poor regions, that generating solutions predominantly in remote poor regions might not guarantee the most significant impact on national poverty reduction, and that solutions to persistent rural poverty might require some located outside rural areas. 96. Lessons of the other SESs echoed these conclusions in slightly different formulations: (i) productive projects such as in microfinance are better at helping the entrepreneurial poor and groups with incomes a bit above the $1 a day line; (ii) ADB needs to be careful when earmarking sectors as inherently more poverty targeted than others (e.g., rural microfinance or rural roads, and rural infrastructure sectors); and (iii) targeting of the poor as a strategy for ADB is hampered by human resource constraints as well as lack of solid economic theory. C. Success of Special Components Targeting Governance

97. Twenty (80%) of the 25 operations reviewed had special governance covenants or components, or were program loans supporting reforms and improving governance. The components ranged from funds and other support for the preparation of a comprehensive sector strategy or policy, to support for civil service reforms, corporatization, privatization of government equipment workshops, PBA of funds to municipalities, performance-based contracts for operation and maintenance of government infrastructure, reduction of arrears in tariff collection, the creation of a municipality, and to cross-border agreements. Nine out of the
68

ADB. 2002. Special Evaluation Study on the Impact of Poverty Reduction of Selected Projects: Perceptions of the Beneficiaries. Manila. 69 ADB. 2006. Special Evaluation Study on When Do Rural Roads Benefit the Poor and How? An In-depth Analysis Based on Case Studies. Manila. 70 ADB. 2006. Special Evaluation Study on Pathways out of Rural Poverty and the Effectiveness of Poverty Targeting. Manila. 71 ADB. 2007. Special Evaluation Study on Effect of Microfinance Operations on Poor Rural Households and the Status of Women. Manila. 72 ADB. 2007. Special Evaluation Study on Japan Fund for Poverty Reduction. Manila.

33 20 were rated successful (45%), with 3 more as unclear at this stage (15%) and 8 (40%) as likely to be only partly successful. As with poverty targeting, there are higher risks of failure for such ambitions. While much depends on the quality of project preparation, many projects carry insufficient weight to be able to set in motion changes with countrywide implications. This was particularly true for small components and loan covenants that, in some cases, seem to have been driven more by ADBs corporate objectives and had little real ownership by the EA. Examples are water tariff studies and covenants, and performance-based contracts. ADBs shift to increased program lending is likely to yield better development results in promoting macro policy and governance reforms than adding small components to investment project loans. Program loans typically involve policy dialogue with very senior officials over an extended periodan essential element of building government ownership for challenging reforms. However, the study also documented some cases of well-prepared and well-administered governance components that promoted useful micro changes. For instance, there was a shift to a more demand driven approach to urban infrastructure projects for medium-sized towns in various countries, relying on PBAs that were linked to governance action plans with well-defined targets such as tax collection and the timely payment of municipal telephone bills. The challenge now is for the government to take over this system for its own budget allocations. In another project, there were good experiences with community involvement in contract selection and administration. Overall, when well-designed governance components and covenants are clearly owned by the EA and within their control to achieve, their inclusion in investment projects can be justified, even if the risk of nonperformance remains high. The proviso that sufficient supervisory ADB staff is needed remains valid. 98. Appendix 10 provides a broader discussion of ADBs approach to governance targeting and discusses some reviews ADB has conducted over the years. A recent OED study 73 has suggested that program lending can be improved further with more clarification of its purpose and use. Balance of payments support requires a focus on imports; budget support, a focus on public finances; and development policy support, a focus on the processes and, occasionally, on adjustment costs. This study concludes that ADB has raised the profile of governance in the region through its policy dialogue and that there has been an increase in assistance for governance and institutional development in its operations. Unlike poverty targeting, governance targeting has not diminished in the period of ADF IX. V. PERFORMANCE-BASED ALLOCATIONS AND GRANTS

99. The allocation of grants to fund projects and programs in debt-distressed ADF countries was reviewed in Chapter II. Unfortunately, since ADF introduced grant-funded operations only in 2005, little can be reported as to the effectiveness of these operations, either in terms of their likely success or their effect on external debt. This chapter examines the case for loans versus grants more generally, and reports some views of borrowers. Next, this study assesses the nature of the PBA and examines the evidence that the CPA makes a difference to ADF allocations. A. Loans versus Grants

100. In a perfect world, $1 million of grant aid channeled through concessional loans (grants embedded in a loan as a subsidized or concessional loan) would provide greater benefits to the recipient than $1 million of aid provided as a grant. The reason is simply one of the arithmetic of
73

ADB. 2007. Special Evaluation Study on Policy-Based Lending: Emerging Practices in Supporting Reforms in Developing Member Countries. Manila.

34 finance$1 million of aid in the form of a loan actually means a transfer of more than $1 million in capital, perhaps $2 million, with the grant element being just $1 million. 74 So more or larger operations can be financed from a $1 million grant equivalent concessional loan than from the transfer of $1 million of grants. The reflows emanating are recycled into the next best project, and so the process of concessional lending continues. Grants do not provide reflows. 101. In the real world, defaults will occur on some loans, and so the argument on the superiority of loans over grants is weakenedconsiderably weakened if defaults or rollovers are common. But it is approximately true and provides the rationale for concessional lending such as the ADF, namely: (i) there are good projects in poor countries, where capital is unavailable; (ii) poor countries often cannot borrow from commercial capital markets; and (iii) development banks can identify many good projects and therefore require some repayment in order to maintain flows (reflows). 102. The advocates of grants argue along the following lines: 75 (i) many projects fail, and even good projects generate low rates of return, so loan repayments are chronically problematic; (ii) loans from development banks do not correct a market failure, as most countries are capital constrained for good reason; and (iii) reflows of aid money are small and insignificant in the constellation of ODA. 76 Proponents of grants furthermore point to the effect on the development of the debt burden, the advantage for multilateral banks of no longer having to collect debt repayments, and the improved transparency of the net flow of resources to countries. 77 Some argue that grants encourage countries to manage their financial resources more effectively because, by cross-financing grants with commercial loans, countries can choose the level of finance subsidization they receive. 78 Grants are said to encourage greater integration of the country into international financial markets, while concessional loans can sometimes crowd out private market lending. Critics of concessional lending by specialized institutions believe that this easily leads to defensive lending, i.e., the pushing of new loans in order to finance repayment of older loans. 103. Opponents of grants point out that some research shows that grants have been used as substitutes for tax revenues (at least in African countries). Loans, on the other hand, might induce a drive to increase such revenues. 79 Loans to sectors with revenue-generation capacity might provide an extra incentive for cost recovery. Loans provide more opportunities for multilateral banks such as ADB to be a major development partner, as the policy dialogue can continue over a longer period. Furthermore, loans allow a higher level of engagement with central agencies such as ministries of finance and state banks. Some have argued that converting from loans to grants in debt-distressed countries might provide incentives for poor debt management.

74

A $3 million concessional loan may be thought of as, say, a $2 million loan at OCR rates and a $1 million grant. This is the concept of the grant equivalence of a concessional loan. 75 See, for example, K. Rogoff The Sisters at 60, The Economist, July 22, 2004; and the Meltzer Report on MDBs to the US Congress, 2000. Available: www.house.gov/jec/imf/meltzer.htm 76 However, while reflows may be insignificant in the global aid context, reflows into ADF are now significant. 77 Bulow, J., and K. Rogoff. 2005. Grants versus Loans for Development Banks. American Economic Association Meetings. Philadelphia. Available: http://www.aeaweb.org/annual_mtg_papers/2005/0107_1015_0703.pdf 78 For example, given a grant of $100 and access to unlimited credit at an annual interest rate of 5%, a country could borrow say $900 (to be repaid in equal amortizations over 25 years) to obtain a total volume of $1000 with an overall grant equivalent of 42%. By borrowing more or less, the level of financial subsidization would adjust. However, this argument is valid only when countries have access to such market loans. 79 Cohen, Daniel, Pierre Jacquet, and Helmut Reisen. 2005. Beyond Grants versus Loans: How to Use ODA and Debt for Development. Available: http://www.eudnet.net/download/Jacquet.pdf

35 104. An intermediate view is also held by many development specialiststhat grants are sometimes appropriate, because some countries are unable to take on debt, even concessional debt, and because past projects have failed to yield the promised returns, leaving them heavily indebted. 80 This view acknowledges that (i) there is a probability that countries will default on loans; (ii) this probability varies across countries according to their past history of project implementation and debt management (their performance category in the PBA/CPA framework); and (iii) because of this, one sizeloans or grantsdoes not fit all. Many bilateral donors supporting ADF themselves administer only grant aid, in part on the understanding that the multilateral banks that they support, such as ADB, will focus on countries, sectors, and operations more appropriate for concessional lending. 105. ADF IX includes a grant mechanism in large part to harmonize with IDA, whose 12th replenishment (20032005) included a grant mechanism for the first time. The present study realizes that ADBs commitment to harmonization constrains the scope for change in the nature of the ADF instrument. Nevertheless, donors may wish to consider broader issues such as whether (i) the share of grants to loans in the ADF (and IDA) should be changed, (ii) grants should be extended in purpose beyond debt sustainability, and (iii) an alternative model should be trialed. 106. OED has not embarked on evaluations of grant operations under ADF IX, and is not yet in a position to provide evidence-based guidance on the ideal mix of loans and grants. Only a few ADF-approved grants since 2005 have reached the implementation stage, and ADB only recently approved the policy of providing grants exclusively to eight highly debt-distressed countries. 81 This study noted that some government officials interviewed questioned the 20% volume discount applicable to the PBA when their debt-distressed country receives its allocation fully as grants. Some were concerned about the effect of the status of being a grant-only country. Some officers disagreed informally with the debt sustainability analysis (DSA) conducted by the International Monetary Fund (IMF) and the World Bank. If senior government staff voice doubts about the official DSA, they are unlikely to be very committed to reducing external debt because of the prospect of grants rather than loans from ADB. Grants then will be ineffective as an instrument of debt sustainability. Further considerations regarding grants are presented in Appendix 11. On this basis, the study concludes that the ADF should use caution in turning to grants as a major instrument for debt sustainability. Other instruments may be explored to achieve reduction of debt distress, such as assistance to national debt management systems, higher levels of concessionality of ADF loans, and selective debt forgiveness. Appendix 12 summarizes levels of debt distress of ADF countries, reviews ADB experience on debt sustainability, and provides some recommendations. B. Country Performance Assessments and Performance-Based Allocations

107. The underlying premise of the PBA policy as introduced in ADB, 82 like in other multilateral banks, is that aid is most effective in accelerating poverty reduction in countries where policy and institutional performance are strong. During the negotiations that culminated in the ADF IX replenishment, the system was revised to place greater weight on performance especially in relation to governancein allocating ADF resources. 83
80

See, for example, Center for Global Development. 2004. Grants or Loans? The Full Debate. Available: http://www.cgdev.org/content/calendar/detail/3016/ 81 ADB. 2007. Revising the Framework for Asian Development Fund Grants. Manila. 82 ADB. 2001. Policy on Performance-Based Allocation for Asian Development Fund Resources. Manila. 83 ADB. 2004. Review of the Asian Development Banks Policy on the Performance-Based Allocation of Asian Development Fund Resource. Manila.

36

108. The heart of the PBA policy has been the introduction of a standardized CPA so that the performance borrowers eligible for the ADF can be compared. The CPA was harmonized with the Country Performance and Institutional Assessment of the IDA, which increased the weight of governance indicators in the PBA formula resulting in a large difference in the spread of the PBA across ADF countries. Since 2005, ADB has undertaken an annual CPA exercise for most ADF-eligible countries (for others it is biannual)based on the World Banks IDA template. Since that year, ADB has also used DSAs made by the IMF and the World Bank as part of the CPA. 109. The CPA consists of 11 policy and institutional indicators, which get 35% of the weight in the total country performance rating; 5 governance indicators, with 50% of the weight; and 1 portfolio performance indicator, with 15% of the weight. The 11 policy and institutional indicators are (i) macroeconomic management, (ii) fiscal policy, (iii) debt policy, (iv) trade, (v) financial sector, (vi) business regulatory environment, (vii) gender equality, (viii) equity of public resource use, (ix) building human resources, (x) social protection and labor, and (xi) policies and institutions for environmental sustainability. The five governance indicators are (i) property rights and rule-based governance; (ii) quality of budgetary and financial management; (iii) efficiency of revenue mobilization; (iv) quality of public administration; and (v) transparency, accountability, and corruption in the public sector. It is clear that although only the second category is labeled as "governance, it is also embedded in the first. 110. By examining the allocations of the ADF before 2001, those between 2002 and 2004, and then those between 2004 and 2006, it is possible to gauge the influence of the CPA on actual allocations. Figures 11 and 12 (based on Tables A13.1 and A13.2, Appendix 13) show data on ADF approvals graphed for Group A and Group B1 countries, which have a history with the ADF. Figure 11: Average Annual Approvals for ADF Operations in Group A
1992-2001
200

2002-2004

2005-2006

150

$ million

100

50

0
Nepal Lao PDR Cambodia Kyrgyz Republic Mongolia Tajikistan Bhutan Afghanistan Average*

* Averages exclude Afghanistan, which received no ADF resources before 2002. Source: Asian Development Bank.

37 Figure 12: Average Annual Approvals for ADF Operations in Group B1

1992-2001
350 300 250 $ m illio n 200 150 100 50 0
Pakistan Bangladesh Viet Nam Sri Lanka Indonesia Maldives Uzbekistan Azerbaijan Average*

2002-2004

2005-2006

* Average excludes Indonesia, which had a cap in 2005-2006. Source: Asian Development Bank.

111. In general, Group A countries appear to have been adversely affected by the PBA policy in terms of the volume of resources they received, especially after 2004, when the latest CPA was introduced. Apart from Afghanistan, which has a set-aside, and Bhutan, all of these countries experienced a reduction in their volume of loan approvals after the first PBA policy was introduced in 2001 compared with the 10-year period beforehand. In some countries these reductions were quite substantial: for example, the Kyrgyz Republic received $39 million less on average per year (from $55 million to $16 million); Lao PDR, $23 million less (from $73 million to $50 million); and Mongolia, $19 million less (from $53 million to $34 million). When the revised policy was implemented in 2005 and 2006, there were further reductions. Most notably, Cambodia received $32 million less per year; Lao PDR, $19 million less; and Tajikistan, $13 million less. These countries had relatively low CPA ratings and so there is evidence that the policy has indeed penalized countries with lower policy and institutional performance as recorded in the CPA ratings. However, the allocation process does not appear completely transparent, because Mongolia had a high CPA rating in both 2005 and 2006, yet received on average $5 million yearly less in these years than in 20022004. 112. Most of the ADF/OCR blend countries experienced a small reduction in their average annual volume of approvals for ADF operations after the first PBA policy was introduced in 2001 (Figure 12). However, some larger countries experienced substantial reductions in amounts approved: Bangladesh received $47 million less per year; Pakistan, $68 million less; and Viet Nam, $36 million less. Once the revised policy was implemented in 2005 and 2006 these same countries did much better: Bangladesh received $19 million more per year in amounts approved; Pakistan, $23 million more; and Viet Nam, $85 million more.84 Unfortunately, the CPA ratings before 2005 cannot be compared with those afterwards due to a difference in methodology.

84

The proportion of the overall ADF amounts received by the three went up from 48.7% in 20012004 to 57.8% in 20052006.

38 113. The trends presented are crude, as they are based on the actual loan and grant approvals over the years, and not on the PBA country ceilings, which ADB does not disclose. However, they are confirmed by the analysis presented in the recent ADB paper on refining the PBA. 85 That paper aggregated data on country ceilings between 2002 and 2008, and came to the conclusion that Group A (ADF-only) countries had suffered a decline in allocation since 2002, and especially the poorest among Group A. 114. The two weakly performing countries visited for this study, Lao PDR and Nepal, questioned the decline in their PBA. The Government of Nepal said it needed increased resources as soon as the country would stabilize. The decline in PBA in recent years was regarded as jeopardizing ADBs leverage as a main funding agency. Some aid agency representatives argued the same for Lao PDR, where ADBs work is valued highly and the Government lamented the decline in the role of ADB in the country. ADB has taken note of the problem, and has proposed softening the effects of the PBA on weakly performing countries by adding a system of allocation caps for larger blend countries (footnote 85). But such caps may dilute the supposed incentive of rewarding better performance. ADB has also proposed reviewing the portfolio performance indicator, which has proved to be the most volatile of the various indicators. 86 115. OED earlier voiced concerns about the PBA process (footnote 46) and particularly the high reliance on governance and portfolio performance indicators in it. Although the CPA methodology provides a systematic and formulaic way to measure governance and thus allocate the ADF, judgments are made in the CPAs, which are then converted into numbers, which in turn are used in the ADF-allocation formula. There are two issues here: The first is the subjective nature of some of the numbers generated in the CPA, for instance those on gender equality. To ensure crosscountry comparability and minimize grade inflation, ADB empanels an internal group to conduct a vetting process with all country economists who have undertaken a CPA in that year. This reduces, but does not eliminate, both the subjective nature of the information and grade inflation. Second, it may not be correct to use the numbers in the ADF allocation formula. Assuming sound judgments are made, it is legitimate to use the numbers for the purpose of ranking countries (ordinal numbers), but it is debatable to use them in a cardinal manner, as is done when they are placed in the allocation formula. 87 116. OED has argued that the rationale for the weight given to governance indicators in the PBA can be questioned. Although good governance must improve development effectiveness, little statistical evidence seems to be available that the effectiveness of aid or economic growth is related causally with many of the governance indicators used. The debate over the use of governance indicators is growing, and some question the ability of agencies such as ADB and the World Bank to define and measure these adequately. A recent report by the Development Center of Organization for Economic Cooperation and Development 88 concludes that even the most carefully constructed governance indicators (i) lack transparency and comparability over time, (ii) suffer from selection bias, (iii) should not be used to compare governance across countries, and (iv) do not identify how to improve governance. The present study sees the policy
85 86

ADB. 2007. Refining Performance-Based Allocation. Manila (August). OED has reported its concerns about this indicator, which is based solely on the at-risk status of the projects in its 2004 and 2005 annual reports on portfolio performance, and proposed in its 2006 report a much broader index of implementation progress as a proxy for progress towards impacts and outcomes. 87 For more on ordinal and cardinal numbers in economics, see http://www.unc.edu/depts/econ/byrns_web/ Economicae/Essays/CardOrdinal.htm 88 Arndt, Christiane and Charles Oman. 2006. Uses and Abuses of Governance Indicators. Paris: Development Center of Organization for Economic Cooperation and Development.

39 leverage role of the ADF as important and therefore regards the adjustments that ADB is making regarding weakly performing countries as positive. But these still have the disadvantage of rendering the actual working of the PBA more complicated and thereby obscure to governments. 117. This study notes the differences in the rating and weighting of indicators in the ADB and IDA formulas, leading to different shares in ADF and IDA (Tables A13.3 and A13.4, Appendix 13). For instance, whereas Bangladesh and Viet Nam receive a similar share of the total in IDA for Asia and in the ADF (around 21% and 25%), Pakistan receives a much greater share of IDA than of the ADF (34% versus 22%). For smaller countries, the differences in shares can also be significant. Differences in portfolio performance between the ADF and IDA are not the only reason for this. Around half of all scores of the various indicators in 2005 and 2006 are differentmostly on the order of 0.5 point between 1 and 6, but there are some significant exceptions (Table A13.5, Appendix 13). Because the individual differences often average out, the differences in country performance ratings are nevertheless small between the two. 89 But small differences can still be significant due to the PBA formula. ADB rates governance in Viet Nam higher than IDA does. If IDAs rating would be applied to ADBs formula, then Viet Nam would have obtained 19.9% of the total PBA in 2006; with the ADF rating it received 23.8%more than Pakistan at 21.9% (Pakistan has almost double the population of Viet Nam [Table A13.6, Appendix 13]). Poverty is more highly weighted in the IDA calculation, but the ADF has a larger allowance for small countries. IDA has more leverage than the ADF, as its resources for Asia are about double those of the ADF (Table A13.7, Appendix 13). Both the ADF and IDA have "set-asides and can respond to special circumstances. The consequence is that, with IDA and ADF policies that have the same intentions, and the portfolio indicator being the same or only marginally different, some countries receive relatively more from IDA than from the ADF, and vice versa. 118. This study notes that the CPA is labor intensive and duplicates in large part the IDA assessment in the same countries. During the country visits, some government officers expressed their desire for ADB to commit resources for an action plan to follow up weak areas as identified by the CPA. However, few resources for this were usually available at that stage. 119. This raises the question of whether it is worth the effort and expense to undertake CPA analyses for each country each year. The question is especially relevant when several ADB staff interviewed questioned whether differences in PBA accurately reflected the real differences in governance and performance between countries, rather than the number of reforms and new policies implemented. Smaller countries would have smaller governments and lower capacity to address the needed governance reforms. Some country economists acknowledged that they did not use the CPA in policy dialogue, and observed that there was a lack of transparency between their writing of the CPA and the allocation of the ADF. 90 Country economists questioned the various exceptions and set-asides sanctioned within the PBA (as with the PBA of the World Bank), which reduce the transparency of the systemmore are being considered by ADB in the next replenishment. Country economists observed that sector specialists, especially in environment and health, were unable to contribute to those sections, leaving country economists to provide their best guess. Moreover, the uncertain nature of future allocations as a result of the PBA and particularly the role of governance indicators
89 90

The two ratings are expressed in different scales, so are not readily comparable. This may be due to differences in the views of validating authorities in ADB headquarters and lack of knowledge of developments in other countries, which may lead to higher ratings that are still lower than those of other countries, and thereby the award of a lower PBA.

40 made it difficult for countries to implement longer term macroeconomic programs and investment projects. 91 For instance, a small country with a gross national product per capita of $500 and a population of 6 million would receive a 3.8% allocation of the total ADF with a composite performance rating of 16, and only 1.6% with a composite performance rating of 10; but the difference in composite ratings could simply derive from a 1.5 point difference in the governance rating. Lastly, countries seem locked into decisions made in 2005 as to rating country economic, financial, and governance performance, and it has proved difficult to justify corrections and reward major changes. On the other hand, if the next ADF replenishment is much smaller or larger, all countries will receive less or more, irrespective of last years performance, which seems against the logic of reward for long-term improvements in performance. This leads to mixed signals. For instance, a country with a lower rating than in the year before may yet receive more in the next replenishment period due to a larger ADF pool. 120. This study considers that there are alternatives to the current PBA policy, all less costly and less intensive of staff time. 92 One option is to return to the old method of allocation. Another is to introduce a simplified CPA, less reliant, or even not reliant, on contentious governance indicators. This option would preserve the PBAs principle to not waste funds in weakly performing countries, but would remove the incentive rationale. More weight could be given to the proportion of the poor in the country, weighted by per capita GDP, rather than using the total population and the per capita GDP separately. The portfolio performance indicator would need to be revised (as ADB already plans to do). A third option would be to determine the subset of binding constraints to a countrys development or the effectiveness of aid, and tie allocations to DMC commitments regarding changes in these constraints. A fourth option that ADB could consider is using the World Banks Country Performance and Institutional Assessment to allocate ADF, 93 especially in countries which have much more IDA than ADF resources (most of the countries). ADB would use its own weights in the various CPA categories, and could choose to undertake a CPA-light in years or in countries where the World Bank does not perform an assessment. This would save the institution much staff time and financial resources that could be better deployed elsewhere. 94 It would also be a step forward in the donor harmonization process. VI. A. AID HARMONIZATION, COORDINATION, AND COFINANCING

The Approach to Aid Coordination and Harmonization

121. The donor reports for both ADF VIII and IX paid attention to the need for increased aid coordination and harmonization in the interest of development effectiveness. The report for ADF VIII urged ADB to use the ADF to promote development partnerships using the principles of the World Banks Comprehensive Development Framework, and much closer aid coordination. The ADF IX report put more emphasis on harmonization, urging ADB to harmonize its policies, planning, procedures and operations with those of other funding
91

As the system is based on a total division of net resources, there is much uncertainty about how a country will fare, as it depends not only on their own performance but also on the performance of all other recipient countries. These outcomes, and also the fluctuations caused by potential annual revisions to CPAs and hence allocations, do not appear conducive to planning long-term poverty reduction operations or to improving governance. 92 The DEC disagreed with a similar conclusion arrived at in the Annual Evaluation Review 2006 (footnote 46). 93 The IDA assessment suffers from the same shortcomings as the CPA, but at least ADB would not be paying for the cost of producing it. 94 It is difficult to argue, as has been done, that ADB fiduciary duties require an independent CPA. It is also difficult to argue that ADB would be neglecting its fiduciary duties by using the ratings of a sister agency also concerned about fiduciary risk. While ADB sometimes relies on one country economist to undertake the CPA, the World Bank usually sends a team of up to 15 specialists.

41 agencies. The harmonization of the allocation of ADF with that of IDA, already discussed, was one important such element, others being the increased use of cofinancing and sector-wide approaches, the adoption of government-led poverty reduction strategies as the basis for country programs; and the harmonization of procurement systems, financial systems, environmental and social safeguards, and evaluation systems. The increased use of debt relief and program-based approaches can also be viewed as forms of harmonization. In a wider sense, the size of multilateral aid funds, such as IDA and the ADF, relative to other aid sources can be seen as an important gauge of the level of coordination and harmonization that bilateral aid donors are prepared to pursue. Increases in such aid can be a significant way for donor countries to increase the level of coordination and harmonization of aid. 122. This study reviewed some discussion papers on the utility of aid harmonization and coordination (Appendix 14). It found that, although most saw the need, some also saw limitations. The study cautiously supports the view that the pursuit of harmonization and coordination has merit, but expectations should be realistic. As Michael Clemens of the Center for Global Development argues, 95 the lack of harmonization and coordination may not be the most serious binding constraint to aid effectiveness. The primary determinants of aid effectiveness may lie elsewhere. Beyond a certain point, the transaction costs of aid harmonization might be high and the gains modest. This view was confirmed through a survey of ADB resident mission staff for a 2007 OED study. 96 The staff reported inefficiencies and felt that some of the harmonization work was an added burden with limited benefits. B. Cofinancing and Other Financial Support

123. The proportion of ADF loans that were cofinanced by other aid agencies went up from 17% under ADF VIII to 29% under ADF IX (20052007). Donors contributed a further $889 million (or 16%) to the financing of ADF supported operations under ADF VIII, and $694 million (or 22%) under ADF IX operations in 2005 and 2006. 97 Cofinancing was increasing in spite of the fact that the ADFs own resources were larger under ADF IX than ADF VIII, which would normally indicate less scarcity of funds and hence less need for cofinancing. 124. Apart from direct cofinancing of operations by other donors, there were more indirect forms of financial support by donors, such as TA funds from donor trust funds administered by ADB used in the context of ADF VIII and IX operations, or donor grants attached to ADF loans on ad hoc basis. While the TASF in the period 20052007 was to a significant extent funded by ADF donors, the main examples were the JSF (TA), the JFPR (hybrids of TA and small investment projects), and a range of other funds supplied by bilateral donors other than Japan. The amount of TASF, JSF, JFPR, and other attached grants was $322 million in ADF VIII, and is so far $268 million under ADF IX (2005 to mid-2007). This added a further 6% to the donor funds mobilized, specifically to support ADF VIII operations, and 9% to support ADF IX. Lending from commercial banks and state banks supplementing ADF loans was also on the increase over the period.

95

Clemens, Michael. 2005. Comment on: Arne Bigsten, Donor Coordination and the Uses of Aid. Available: http://www.afd.fr/jahia/webdav/site/myjahiasite/users/administrateur/public/eudn2005/Bigsten_Clemens.pdf 96 ADB. 2007. Special Evaluation Study on the Asian Development Banks Approaches to Partnering and Harmonization in the Context of the Paris Declaration on Aid Effectiveness. Manila. 97 The main reason for the lack of increase under ADF IX may be the absence of one significantly cofinanced program that was approved under ADF VIII the Bangladesh Primary Education Development Program.

42 C. Harmonization of ADB Procedures and Processes

125. An OED study (footnote 96), completed in late 2007, found that ADB has made progress in partnering and harmonization, and with commitments made to the Paris Declaration. There is very extensive practical coordination and partnering between ADB and other funding agencies, more than is officially recorded in ADBs management information systems. That study found an average of seven or eight such activities per country, not including the many cofinanced projects and TA. Most were related to harmonization policy (e.g., harmonization action plans), joint analytical work for country strategies, program reviews, common arrangements, 98 and programbased approaches. Eighty-five percent of the activities included the World Bank; 39% concerned Japanese aid; 34%, the Department for International Development (DFID); and 54% concerned bilateral agencies other than the latter two. By March 2007, ADB had signed 34 memorandums of understanding and letters of intent with various aid agencies. ADB-wide, 17 program-based approaches were approved in 20012007, and 19 more were planned for 20072009. Joint country portfolio review missions had gradually increased in number and now covered 10 DMCs, thereby reducing transaction costs for the governments. Joint country strategy and programming exercises were slowly on the increase as well, cases in point being Bangladesh, Cambodia, and six Pacific island states. ADB staff particularly appreciated the joint analytical work, and this was thought to have benefited country and/or ADB sector policy and road maps. Limited TA supervision and to a lesser extent loan supervision, much still from headquarters, remains a significant constraint on the efforts to synchronize with other development partner missions or respond to government timetables. The study concludes that ADBs involvement in national poverty reduction strategies and harmonization action plans has helped ADB to define its comparative advantage and clarify the rationale for its strategic partnerships. 126. Numerous CAPEs have reported that ADB actively participates in local aid coordination mechanisms through the resident missions. OED is currently contributing to the Organization for Economic Cooperation and Development-DECs joint evaluation of the Paris Declaration. Lastly, ADB has carried out joint country procurement assessments with the World Bank in many DMCs, including the ADF countries Cambodia, Indonesia, Lao PDR, Sri Lanka, Tajikistan, and Uzbekistan. In April 2006, ADB harmonized its consulting services and procurement guidelines with those of the World Bank. 127. ADB was the subject of review in the 2006 Multilateral Organizations Performance Assessment Network (MOPAN) 99 survey, together with two other multilateral development partners. Twenty questionnaires on ADBs performance were collected from nine bilateral agency partners in ADF countries Indonesia, Nepal, Pakistan, and Sri Lanka. Most indicated that they had increased their cooperation with the ADB over the last 3 years by cofinancing ADB operations, by cooperating within the same local coordination mechanisms, and by other means. ADB was seen as a major development partner and interlocutor for both national stakeholders and other development agencies, thanks to its very considerable financial and human resources, as well as its long-standing experience in development cooperation. The MOPAN country teams perceived the quality of ADB partnership behavior towards national stakeholders as follows:

98

These include (i) common operational procedures for project preparation, procurement, and project reporting; (ii) common project implementation units; and (iii) joint support for specific programs with other funding agencies. 99 MOPAN. Austria, Canada, Denmark, Finland, the Netherlands, Norway, Sweden, Switzerland and the United Kingdom. 2006. The Annual MOPAN Survey 2006. Donor Perceptions of Multilateral Partnerships at Country Level. This Survey covers the United Nations Childrens Fund, the International Labor Organization, and the Asian Development Bank.

43 (i) (ii) (iii) (iv) (v) (vi) (vii) ADB plays a central role in policy dialogue with the government; but there is room for further improvement. ADBs performance in terms of capacity development and the promotion of government ownership varies significantly. ADBs technical advice is generally of good quality. There are different perceptions of the ADB role in advocacy. ADB contributes actively to private sector participation in the policy dialogue; less so with regard to the promotion of NGO participation. ADB is active in consulting civil society on its own work. ADB is a strong supporter of PRS processes and is generally well aligned with government strategies but little progress is seen towards alignment with national procedures.

128. MOPAN country teams perceived the quality of ADB partnership behavior towards other development agencies as follows: (i) ADB does quite well with regard to information sharing but there is room for further improvement, in particular with regard to the sharing of information on upcoming ADB missions. ADB plays an active role in local aid coordination activities but could take the lead more often and should do more to avoid overlaps with others. ADB takes harmonization seriously at the level of dialogue with other donors; however, little progress is seen at the operational level. ADB resident missions cannot take any significant decision without referring back to headquarters; however, they are receptive to other agencies views.

(ii) (iii) (iv)

D.

Findings from Five Country Case Studies

129. The study sought views from a range of development partners in the five countries visited regarding aid coordination and harmonization with ADB in the context of the ADF (Appendix 15). The levels of harmonization and coordination achieved varied. In two of ADB's larger clients, coordination and harmonization were more advanced. In Bangladesh, ADB was viewed as coordinating well, particularly with the other major aid agencies active in the country: the World Bank, DFID, and Japanese aid. The four had made some headway towards the preparation of a joint country strategy outcome matrix upon which each could base its own country strategy. This had led to a higher level of coordination of country programs, although these were not formally harmonized. They had assigned lead agencies for a range of sectors, and coordinated on regular basis, although some development partners felt that the joint work on the country programs was yet to make a real strategic impact. In Viet Nam, the coordination had focused on joint preparation, over the last 5 years, of joint portfolio performance reports of the five banks working in the country: ADB, the World Bank, the Japan Bank for International Cooperation, Agence Franaise de Dveloppement, and Kreditanstalt fr Wiederaufbau. The work had branched out into a large number of thematic and sector working groups, and had led to strategic involvement of the government. However, the cooperation had also led to rifts with other partners, who felt that the five were hijacking the development agenda in Viet Nam. 130. Pakistan, the third major ADF country, did not have a joint strategy or portfolio review process. A recent study 100 noted that there was broad donor support for the 2004 Poverty
100

Agulhas. 2006. 2006 Asian Regional Forum on Aid Effectiveness: Implementation, Monitoring and Evaluation. Synthesis Report. Available: http://www.adb.org/Documents/Events/2006/Aid-Effectiveness/Synthesis-Report.pdf

44 Reduction Strategy Paper and evidence of alignment with its core objectives, particularly around economic growth, governance reform, and devolution. However, Pakistan had less of a record on harmonization, with aid agencies tending to operate independently with little coordination at either the strategic or program levels. The political turbulence of the 1990s and the fallout of the war on terror in the early 2000s were considered to have inhibited harmonization and alignment. This was to some extent reversed in October 2005, when the large international response to the earthquake boosted the aid effectiveness agenda, with the government leading efforts to integrate principles of the Paris Declaration into the reconstruction effort. During the country visit in September 2007, government officials reported that a recent initiative in creating an aid coordination and harmonization cell had met with little support from the aid community. 131. The two smaller clients, Nepal and Lao PDR, had not yet reached the levels of cooperation and harmonization in Bangladesh and Viet Nam. In Nepal, ADB had mixed experiences with coordination and harmonization with development partners. There was evidence of competition for projects and lead positions in sectors. It was hoped that recent initiatives in adopting sector-wide approaches in the education and health sectors would lead to broader coordination. This required more support from other agencies. In the Lao PDR, aid coordination had made some progress, but views on this remained mixed. Some of the sector committees created were more effective than others. Most partners interviewed lamented that ADB was losing its lead role among aid agencies in the country, due to the recent downsizing of ADF allocation to the country. 132. One conclusion was that coordination and harmonization had progressed over the years and had led to a variety of cooperation arrangements (cofinanced operations, joint strategies, joint reviews) but had not extended to noticeably increased division of sector operations, except perhaps in Bangladesh. Even in that case, however, as one officer noted, only ADB had shed some subsectors, not the World Bank, which retained double the number of subsector operations that ADB had (and had double the concessional resources). Many advantages were acknowledged, and many smaller development partners appreciated ADBs role, which had enhanced their own role in the country as cofinanciers of important projects. But some felt that aid coordination in general came with too many administrative costs and only limited synergy. E. Aid Harmonization of Country Programming during ADF VIII and IX

133. Recognizing that ADB has limited human resources and that aid fragmentation is continuing, ADBs MTS II for the first time established a system for prioritizing sectors within ADB. Three groups of sectors were defined: one with sectors in which ADB involvement was expected to grow, a second with sectors in which ADB support was expected to remain static but with more reliance on partnerships with other agencies, and a third with sectors where ADB support was expected to be phased out over the longer term. As with country selectivity, sector selectivity can be seen as a method to improve the division of labor and harmonization of programs among major international agencies. This study addressed the question of whether the ADF has harmonized its approach with that of other agencies by increasing the country and sector selectivity of its portfolio of operations. 134. Increasing Country Selectivity. As discussed earlier, the ADF covers most of the DMCs, but certain large countries have so far been excluded from it, whereas others like the Philippines have graduated, and Indonesia is about to do so. On the other hand, some countries have gained renewed access, like Afghanistan. A higher degree of country selectivity increases resources per country and focuses experience, but by and large, the ADF resources available per country have not expanded much since the early 1990s. Therefore, the ADFs policy

45 leverage has also not expanded. This study has, however, argued that the ADF does not cover countries with more than 18% of the poor in Asia and the Pacific. A balance between wide country coverage and increased sector focus within these countries needs to be pursued. 135. Increasing Sector Selectivity. OEDs 2005 report on ADBs portfolio performance 101 assessed the degree of homogeneity in a DMCs loan portfolio. The DMCs with the most clearly focused assistance programs as measured by the Hirschmann-Herfindahl index were, in decreasing order, the PRC with 35 loans in five sectors, India with 32 loans in six sectors, Indonesia with 39 loans in nine sectors, and the Philippines with 27 loans in seven sectors. It is telling that all of these countries are not, or are no longer in the ADF; or are about to graduate from it. OCR-dominated loan portfolios are more homogeneous than ADF-dominated loan portfoliosan obvious reason being that many countries do not wish to borrow OCR for social sector or poverty-targeted operations. Viet Nam, with 33 loans in 10 sectors, was seen as a clear example of an assistance program with no real focusno sector had less than two or more than six loans. This affects ADBs leverage and possibly also ADBs internal efficiency. Other DMCs whose assistance programs received relatively low index values are Cambodia, Lao PDR, Mongolia, Pakistan, and Tajikistan. 136. When the study compared the index for 2006 with that of 2002, the conclusion was that that there has been no discernible trend to more homogeneity in country portfolios since ADF VIII (Appendix 16). Given the primacy of country demand in the selection of sector operations in CSPs over the period, this should come as no surprise. Perhaps the surprising observation is rather that there was no significant increase in the heterogeneity of country portfolios. The increasing goal congestion at the country level played out within sectors, by addition of new themes and priorities (although the number of operations in the sector labeled multisector increased). Nevertheless, this study repeats frequent recommendations made earlier by CAPEs that many country programs would be more efficient and effective if they were more selective in their support of sectors than they have been in the past decade(s). 137. According to the draft of ADBs work program and budget framework 20072009, the current program shows an increasing weight afforded to the sector priorities defined in MTS II 102 for both OCR- and ADF-financed operations. From 2003 to 2005, an average of 66% of allocations went to first priority sectors; from 2007 to 2009, this is expected to increase to 75%. VII. ASSESSMENT AND RECOMMENDATIONS

138. This report has laid out the available evidence for assessments of the relevance, likely effectiveness, efficiency, and likely sustainability 103 of ADF VIII and IX as instruments of aid. These assessments are presented below. The study ends with recommendations. A. Relevance of the ADF to Poverty Reduction

139. This study regards ADF as highly relevant to many ADF countries and their poor populations, as witnessed by continued strong demand from governments for the highly concessionary funds provided, and the good levels of satisfaction with ADB as expressed in
101

ADB. 2005. Annual Report on Loan and Technical Assistance Portfolio Performance for the Year Ending 31 December 2004. Manila. 102 Road transport, energy, education, urban infrastructure (water supply and sanitation, waste management, and urban transport), rural infrastructure (roads, power, irrigation and water management), and finance sector. 103 For more explanation regarding these standard evaluation criteria, see the discussion on page 7 of ADB. 2006. Guidelines for the Preparation of Country Assistance Program Evaluation Reports. Manila.

46 surveys of Asian opinion leaders, EAs, and other funding agencies. Given the ADFs generally agreed upon goal of poverty reduction in the Asia and Pacific region, however, the Fund seems to be becoming gradually less relevant to the absolute poor, an increasing proportion (currently 82%) of whom live in countries that are not or are no longer eligible for ADF support. Many MDGs will not be reached in these countries by 2015, and the ADF will not be able to support their achievement. 140. The redesign of operations in terms of greater focus on pro-poor elements in regular operations in ADF VIII has led to more goal congestion and more complex operations. This was not necessarily problematic in all cases, as poverty is a complex issue and may require complex solutions. However, although the redesign worked out well in some cases, it created new risks in most cases, especially in the context of ADBs limited operational staff to supervise operations and in the face of (sometimes) a lack of EA skills and ownership. ADB cannot always muster the level of supervision that inclusive operations need. ADF IX has appropriately supported the EPRS, which is pursuing more realistic approach to poverty reduction, addressing it more at the level of country programs rather than at the level of individual operations. 141. A similar conclusion of goal congestion was reached for the addition of governance components in regular investment projects, and this conclusion applies to operations under both ADF VIII and ADF IX. However, this study judges ADB as on the right path in terms of growth in program lending and sector development lending. The improving success rates of such operations approved in the 1990s and 2000s vindicate this change in direction. 142. The study notes a risk of unfocused approach to both sectors and themes, but notes that this is a consequence of ADBs response to ADF country demand and ADF donor demand. In the process, less of the ADF could be allocated to some sectors typically associated with poverty reduction and especially the MDGs, such as health and agriculture, and to microfinance. On the other hand, the theoretical underpinnings for positing that these sectors as such address concerns of the poor more than some others are weak. Overall, the approach taken under ADF VIII is assessed as less relevant, and that under ADF IX as highly relevant. B. Likely Effectiveness of ADF Outcomes

143. While success rates of ADF operations approved in the 1990s have seen an upward trend, they may have experienced a decline in effectiveness in the period of ADF VIII. This is assessed as likely due to goal congestion in ADB at the time, leading to higher ambitions, more complex project designs, and more attention to tasks other than project preparation and administration. The transition from sector to country dominance in organization and changes in business processes required much adjustment up to 2006 and may have temporarily affected the administration of the more complex loans and grants. Certainly many of the operations studied during the country missions for this study had design problems and had sometimes encountered years of delay at the start-up stage. The finding was to some extent corroborated by the ratings given by 11 CAPEs to the overall level of success of past and ongoing ADB operations in ADF countries. Several major ADF countries were assessed to perform in the partly successful range. CSPs have varied in quality, as have typical project designs adopted in various countries as well as the quality of policy dialogue and TA programs. The study, however, also notes the importance of country factors. A significant number of ADF countries either are postconflict zones or have experienced political instability. The country factor has played an important role in almost all sectors, except perhaps transport, energy, and education, which have still achieved satisfactory results in most countries. This finding seems to impose some limits on the degree to which improved ADB policy, country assistance

47 programming, and project design can mitigate risks to ADB operations. It may have to be accepted that there is a greater degree of risk associated with the ADF countries as they are now constituted; a 100% success rate of ADF operations should be aimed for but may not be expected. Fortunately, the success achieved in terms of special themes promoted by ADB and the ADF over the past period has been higherthe assessments are positive, especially for outcomes of safeguard enforcement, involvement of civil society organizations in operations, aid coordination and harmonization, and private sector operations. ADB has by and large achieved the ADF ambitions for more focus on governance in DMCs, and the outcomes of program loans are improving. 104 For themes such as capacity development, private sector development, participation of beneficiaries in ADB operations, and MfDR, some progress has been made as well, but large challenges remain. Lastly, client satisfaction surveys still pointed to some significant satisfaction with ADBs supply of funds, project design capacity, and supervision in spite of many surveys for CAPEs registering dissatisfaction with ADB processes and procedures. 144. There are signs that the demands on project design and country assistance programming have lessened after 2004 and 2006, but governance components and covenants still add to project agendas, and attached TA and grant operations require attention from other ADB staff. The impact of the 2004 EPRS and the effect of policy and procedural reforms undertaken in 20042006 may be positive, but this study regards it as too early to assess the effectiveness of ADF IX outcomes. The ongoing ADF VIII operations studied are assessed provisionally as less effective in terms of achieving optimal outcomes. C. Efficiency of ADBs Administration of the ADF

145. This study considers that ADB went through a period of transition and concomitant uncertain and inefficient organization of project design and country planning in 20012004. ADB has not always been able to provide sufficient numbers of technically qualified staff for project processing and administration. Several of the ADF VIII operations studied for this report were delayed for years due to insufficient follow-up, change of project officers, late transfer of administration to resident missions, insufficient project officers at these resident missions, and insufficient authority of resident missions. ADBs portfolio performance in 2004 was the worst in a decade. The study also observes that the situation has improved from 2005 onwards; reasons for this are elaborated in the next section. But there are still some major efficiency concerns. ADBs agenda is still broad, and so is the range of themes it supports overall and in most countries. The range is not very likely to shrink in the near future, but ADB and the ADF would most likely benefit if the range were kept at a manageable level. The range of sectors and subsectors supported in various countries still seems too high. The human resources needed to address the range of themes and sectors can grow only marginally due to ADBs maintenance of a tight budget policy. The PBA policy, although under revision, is still inefficient. The ongoing review of the LTSF may address these issues. Parallel to this ADF study, OED is preparing various evaluative inputs into this review. 105 146. This study rates ADBs administration of ADF VIII as less efficient. Since around 2005, the efficiency has been improving, as a number of important reforms and business process changes are being institutionalized. These are described in more detail below, as they improve
104

ADB. 2007. Special Evaluation Study on Policy-Based Lending: Emerging Practices in Supporting Reforms in Developing Member Countries. Manila. 105 ADB. 2007. Special Evaluation Study on the Long-Term Strategic Framework: Lessons from Implementation (20012006). Manila.

48 the sustainability of ADF IX. The study assesses the administration of ADF IX provisionally as efficient. D. Likely Sustainability of the ADF s Approach

147. By 2003, consistent internal and external criticisms of ADBs efficiency, and ADBs own realization that improvements were needed, had inspired at least 17 reform proposals and various other changes. This study highlights the following 10 introduced as potentially improving the sustainability of ADF administration: (i) EPRS has shed the targeted approach, and MTS II gave some direction in 2006 to corporate sector prioritiesenabling greater focus in building experience and expertise; (ii) the CSP planning and update process was simplified in 2006, and the human resources needed for the preparation of new results-based country partnership strategies and country operations business plans should be less; 106 (iii) procurement and consultant recruitment procedures were updated after 2005, including simplified selection for smaller NGOs; (iv) due to ADBs 2000 Resident Mission Policy, an increasing number of operations are being delegated to resident missions (38% at end-2006); (iv) some aspects of human resource management have improved 107 after a report was issued in November 2004; 108 (v) many operational policy updates have directly simplified operations, such as the policy on supplementary financing of 2005, and a more liberal approach toward cost sharing, local cost financing, and eligibility of expenditures for financing (2005); (vi) some new financing instruments and modalities have been piloted since 2005, such as the multitranche finance facility and local currency loan products; 109 (vii) poverty and social analysis guidelines were simplified in 2005; (viii) new substantive policies were approved, such as the Disaster and Emergency Policy (2004) and the Public Communications Policy (2005); (ix) significant enhancements were made to ADBs loan and debt management products in 2007; and (x) more flexibility is being created in the use of TA, accompanied by an increase in average size and a reduction in number. 148. The approach to poverty reduction under ADF VIII is assessed as less likely to be sustainable, and it was appropriately discontinued after 2004. ADF IXs approach should in principle be more sustainable. Provided that ADB can continue to address issues of internal organization, human resource management, needed staff expansion, and business process reforms, this study regards the approach under ADF IX as likely sustainable in terms of effective poverty reduction.

106 107

February 2007, ADB issued guidelines for Country Partnership Strategies. A relatively large portion of the staff increase during 20062008 was assigned to operations departments. More than 20% of professional staff and national officers are now assigned to resident missions. ADB has reduced average hiring time. 108 ADB. 2004. Independent Assessment of the Effectiveness of the Reorganization of the Asian Development Bank. Diagnostic Report. Manila. 109 Others are (i) the subsovereign and nonsovereign public sector financing facility, (ii) the refinancing and restructuring modality, and (iii) financing syndications and risk-sharing arrangements.

49 E. 149. No. (i) Recommendations The study makes the following 10 recommendations: Recommendation For whom The ADFs size should increase if it is to accelerate the achievement ADF donors of the MDGs. Despite its modest size relative to the massive challenge of development, the ADF can be an effective instrument in achieving the MDGs in a range of countriesif the congested agenda and project administration issues are addressed. The size of the ADF is important, not only for the acceleration of poverty reduction and attention to nonincome MDG concerns, but also to ensure the leverage needed to achieve policy change and governance objectives in weakly performing countries and other DMCs. Increased blending of OCR loans with ADF components to target capacity development may add significant value to the projects in many blend countries. ADF donors should consider the role and credibility of ADF as ADF donors ADB's main special purpose vehicle for addressing poverty and achieving the MDGs in the Asia Pacific region. The ADF currently addresses a subset of countries with only 18% of the poor. Given ADB's graduation policy, this proportion will decrease at the start of ADF X. Some DMCs with large poor populations (notably India, Philippines, PRC and soon Indonesia) are not allocated ADF resources for projects and programs, whereas the ODA per capita they receive is low by comparison. With expanding reflows from earlier ADF loans and new contributions from ADF donors, ADF X may provide an opportunity to address this issue, perhaps through set asides to cap otherwise large PBAs to populous countries. Alternative options are a revisiting of the ADF graduation policy, or the consideration of a third window to provide concessional resources (or transfers of net income from OCR) with financing on terms harder than ADF but softer than OCR to more credit worthy countries that are below the GDP per capita cutoff. An increase in the number of eligible countries should not lead to a reduced allocation to the existing ADF recipients. Critical mass in poor countries is needed for policy leverage. ADF X should avoid goal congestion in operations and in ADB as a whole. The 1999 PRS and the ADF VIII and ADF IX donor reports have broadened ADBs policy aspirations. The unintended effect of the ADF donor meetings may be a very broad agenda of priorities when DMCs are not involved to the same extent. New activities have implications for ADB staffing and human resources, and these are difficult to provide when ADB shareholders have placed strict limits on increasing ADBs budget. The report for the ADF X replenishment should include a small number of feasible priorities and targets that are achievable within available resources, are measurable, and have clear baseline values. The new LTSF should provide further guidance. ADF should support focused operations. A new inclusive growth objective should not lead to overly inclusive project designs; inclusive growth, like poverty reduction, should be addressed at the country strategy level. ADF donors, Board, and Management

(ii)

(iii)

50 No. (iv) Recommendation For whom The ADF needs to be more selective in its support for sectors (and Management within these, sub sectors) in many countries. ADB should continue reviewing sector focus at the corporate level but especially at the country level. Some country programs spread resources thinly, and the operations in some sectors have little critical mass. While past success needs to be studied carefully, low historical success rates should not automatically lead ADF to turn away from sectors with greater challenges in some countries. Creative staffing solutions need to be found if complex operations that are responsive to binding constraints and appropriate to some sectors require more staff input than hitherto assigned. Poverty reduction is an appropriate goal for ADF operations, and Board requires more than direct targeting of the poor in each country. ADB and and ADF IX have already internalized this lesson of ADF VIII. It should Management not be lost. Poverty reduction is generally driven by an appropriate mix of operations addressing inclusive growth and social development. In some weakly performing countries or conflict-affected countries, attention for targeting the poor may be more appropriate, while governance reforms may be less feasible. More effort is needed in addressing the non-income dimensions of poverty embodied in the MDGs, as well as in reducing inequality. In most transition economies it remains important to strengthen the institutional framework to develop a market economy. An ADF geared to poverty reduction and governance is staff Board intensive and needs specialized skills. Poverty reduction and good and governance are challenging goals. Increased demands from stakeholders Management on development effectiveness, due diligence and safeguards, transparency, governance, gender, knowledge management and targeting of the poor require a staff-intensive approach to project processing and administration. An ADB staff expansion is needed. ADB should continue to expand its staff contingent in resident missions, rather than relying on loan or TA consultants posted to PIUs, as the latter often lack authority (and possibly credibility) vis--vis EAs. If this is impossible, more reliance on long-term ADB staff consultants, or on TA consultants posted to resident missions, to assist directly with project administration could be an improvement over the present situation, although it would be suboptimal in the long run, particularly for effective knowledge management. Aid harmonization and coordination remain necessary elements of Management the ADF approach. ADB should continue to pursue the harmonization of aid processes and procedures, taking into account marginal costs and benefits. Coordination of country programs among major donors to increase sector specializations should be the priority, and should complement ADBs move towards less goal congestion. Attempts to advance the harmonization agenda through increased sector selectivity should be accompanied by country-led agreements regarding the division of labor among major aid agencies. ADB should investigate how to reduce the administrative costs involved in forging partnerships and, more generally, the implementation of the Paris Declaration. ADB needs

(v)

(vi)

(vii)

51 No. Recommendation For whom to help governments to reduce their own transaction costs in dealing with ADF donors multiple aid agencies. ADF donors can improve overall aid harmonization by increasing their contribution, as the ADF and IDA modalities are set up in part to ensure this among otherwise more fragmented aid systems. Major governance issues should be primarily addressed through Board and program lending, with agreed reforms being supported by advisory Management and capacity building TA. Specialized TA and capacity developmentoriented loans can be utilized to improve organizational and human resource aspects of governance reforms, and in cases where use of program lending is not suitable or agreed to. Governance components in some investment projects can help build on earlier reforms or demonstrate good practice. Such components should, however, be realistic with respect to prevailing institutional capacity and not clutter the project agenda. ADB needs to be more willing to suspend disbursements if progress on essential governance reforms and capacity building is not being made. This also applies to sector development programs where reforms supported by program components need to take place before the start of the project investment components. ADB should undertake a rigorous analysis to test the validity of the Management various CPA indicators. This exercise should analyze which are binding constraints for development, as well as causal factors for good economic performance, poverty reduction, achievement of other development results, good portfolio performance, and project success. Low average scores for certain countries may need to lead to different aid strategies from those to be applied to countries with high scores, rather than the automatic application of a low PBA. This needs to be investigated better. OED recommended such an analysis earlier (footnote 46), and the DEC later endorsed it. 110 The study should preferably be done in partnership with the World Bank. ADB needs to pursue a varied approach to debt distress of ADF Management countries and not rely mainly on the institution of an ADF grant mechanism. As a first step, ADB should work with IMF and the World Bank to require that all DMCs, within 5 years, have a legal framework regarding public debt and are able to monitor and manage their debt. Some further recommendations elaborating the more varied approach are in Appendix 16. An evaluation should be conducted of the advantages and disadvantages of grants versus loans. This evaluation should be carried out in about 3 years, after ADB has gained more experience with large ADF grants for investment projects and the results are more evident.

(viii)

(ix)

(x)

110

ADB. 2007. Annual Report of the Development Effectiveness Committee. Manila.

52

Appendix 1

ASIAN DEVELOPMENT FUND VIII AND IX COMMITMENTS ADF VIII Commitments ADF IX Commitments/Statements Carry out ADF operations under the general Reducing poverty remains the ADB-wide framework of the Poverty overarching goal of ADF. Goals, strategies, and policies of ADF IX should support the Reduction Strategy: priorities of the global development agenda applied to the needs and conditions of the region. Harmonization with other aid programs should be pursued. There should be a new focus on capacity development. Key recommendations of the Review of the Poverty Reduction Strategy should be implemented. Country ownership is a basic principle: CSPs should be aligned with NPRSs. ADF VIII: resources will focus on pro-poor sustainable economic growthcreating jobs, policies reduce inequalities and facilitate income generation for the poor. Pro-poor growth will be facilitated by assisting (i) the removal of marketdistorting policies; (ii) development of a conducive environment for the private sector; (iii) programs (e.g., microfinance) aimed at increasing income generating opportunities for women and other groups that may be outside the formal labor force; (iv) infrastructure development which can make a considerable contribution to growth through job creation; and (v) promotion of opportunities for selfemployment by the poor. ADF VIII resources will focus on social development. Each country needs to have a comprehensive national poverty reduction strategy. Beyond developing human capital, the aim must be to strengthen social capital, especially for people subject to social exclusion. ADF IX operations and assistance will require, among other things, a continued and sharpened focus on sustainable economic growth. The means are infrastructure development, nurturing of private sector and competitive markets, increasing access to technology and markets, support to trade and development programs, and regional cooperation.

ADF IX operations and assistance will require, among other things, a continued and sharpened focus on inclusive social development. ADF IX will be managed with the assumption that each person should have the right to access basic education, primary health care, and other essential services. A proactive approach will help reverse social and economic discrimination and promote initiatives (e.g., health, education, natural resource management) that meet the needs of previously excluded groups.

Appendix 1

53

ADF VIII Commitments ADF VIII resources will focus on improving good governance. Governance was viewed as a broad based concept intended to encompass all factors that impact on a countrys ability to assure sustained economic and social development and reduce poverty, and donors noted that these factors should be addressed in a manner compatible with ADBs Charter. ADF VIII is an instrument for pursuing private sector development outcomes. The main strategic thrusts of the Private Sector Development Strategy were endorsed. Donors also agreed with the aim to strengthen the rule of law and associated legal frameworks and the application for corporate governance.

ADF IX Commitments/Statements ADF IX operations and assistance will require, among other things, a continued and sharpened focus on good governance. ADB seeks to mainstream good governance into all operations.

In the context of CSPs, ADBs private sector development programs seek to create the enabling environment for high levels of private sector investment in DMCs, including through supportive private sector operations. ADB will increase its support of small and medium enterprises, including where appropriate through microfinance and microenterprise initiatives.

ADF VIII should enable allocation of scarce Communicable and infectious diseases, domestic and international resources to including SARS and HIV/AIDS, human trafficking, and ecological concerns spanning combat infectious diseases and HIV/AIDS. national borders, require sustained regional and subregional cooperation. During ADF VIII, gender, environment, and core labor standards should be mainstreamed. On core labor standards, ADB will, in selected DMCs, assist in the preparation of national compendia. ADB is implementing Core Labor Standards through its Social Protection Strategy, which commits ADB to developing interventions in the areas of labor markets, social insurance, social assistance, schemes to protect communities, and child protection. GAD concerns must continue to be aggressively addressed in all operations. The PRSs thematic issues such as environmental sustainability are viable and should be strengthened during ADF IX. ADF VIII should support regional cooperation The PRSs thematic issues such as regional to achieve prosperity and stability. cooperation are viable and should be strengthened during ADF IX. ADF VIII should be an instrument for combating money laundering and drug trafficking.

54

Appendix 1

ADF VIII Commitments ADF VIII will promote development partnerships using the principles of the Comprehensive Development Framework, and much closer aid coordination.

ADF IX Commitments/Statements ADB should strengthen alignment with national poverty reduction strategies and collaborate more effectively with its development partners. Processes and procedures of development partners should be aligned more closely at the country levels.

ADF VIII resources should be allocated The performance-based allocation policy according to each countrys policy should be strengthened; provision of ADF grants (up to 21%) should also be based on performance. it; the scoring system should increase the effective weight of governance to over 50%. Weakly performing countries should be a development priority. The acute need for basic human assistance in countries recovering from conflict suggests that grant aid could have a beneficial effect in many cases. A separate pool of resources should be maintained for the Pacific DMCs. ADF VIII should reinforce good governance principles (transparency, accountability, participation, and predictability) in ADBs corporate management. ADB should nurture a strong results culture across the organization. ADB will reorient staff incentives to reward achievement of outcomes rather than lending targets. Better internal governance and management systems are needed. ADB needs to address human resource issues, a new accountability mechanism, and empowering RMs.

Better evaluation systems should be ADB will continue to establish a more developed, linked to the planning of ADF results-oriented monitoring and evaluation operations (in particular methodologies, system databases, and indicators). ADB should redesign and strengthen operational processes to support ADF VIII notably to improve quality at entry for key products such as country operational strategies, country assistance plans, TA, and loans. The core of the redesign is to significantly change the processes for country planning, programming, and TA and loan processing. ADB will develop results-based country strategies that are aligned with nationally owned poverty reduction strategies. Donors supported ADBs reform agenda. Two key issues of results management and internal efficiency lie at the core of the ADF IX replenishment

ADB = Asian Development Bank, ADF = Asian Development Fund, CSP = country strategy and program, DMC = developing member country, GAD = gender and development, HIV/AIDS = human immunodeficiency virus/acquired immunodeficiency syndrome, NPRS = national poverty reduction strategy, PRS = Poverty Reduction Strategy, RM = resident mission, SARS = severe acute respiratory syndrome, TA = technical assistance. Source: ADF Donor Reports, as prepared by ADB.

Appendix 2

55

EXCERPTS FROM THE 1999 POVERTY REDUCTION STRATEGY 1 The 1999 Poverty Reduction Strategy contributed the following statements: (i) All Asian Development Bank (ADB) loans and technical assistance will be expected to contribute to the reduction of poverty. Accordingly, all proposals will contain a specific assessment of their poverty impact, and the logical framework that accompanies each proposal will commence with poverty reduction as its ultimate objective. Projects or programs may (a) be designed to accelerate propoor growth, or (b) focus on poverty directly. In the case of infrastructure investments, ADB will give priority to projects that have greater impact on poverty. This may include locating projects in poor areas or incorporating specific components to ensure increased access for the poor to project facilities or services. Poverty interventions will be designed to disproportionately benefit the poor. Many will be in the social sectors but some may also involve agriculture and infrastructure projects in rural areas, as well as environmental protection. These projects will address underlying weaknesses in policy and institutions while supporting the poor through (a) education, health, or other essential services; (b) creation of income and employment opportunities in locations or among communities where poverty is disproportionately high; and/or (c) mitigating risks for the poor or vulnerable. The defining characteristic of such projects is their concern for beneficiaries: the proportion of poor people among project beneficiaries will be significantly larger than their proportion in the overall population of the country, and in no case less than 20 percent. (ii) Core poverty interventions will be a subcategory of poverty interventions specifically designed to tackle extreme poverty. Such projects will frequently be smaller, slower, more expensive in preparation and supervision, and involve greater risks than other projects, program and lending targets. ADB's desired lending mix will include not less than 40 percent of all public sector lending for poverty interventions. Most of the region's poor live in rural areas and their quality of life lags far behind that in urban areas. [] This [] provides a compelling reason for ADB to reverse its recent drift away from the rural sector. In particular, ADB will give greater emphasis to development of agroclimatic areas that have been bypassed by green revolution technology. ADB will increase its support for human capital development since such investments are frequently the most effective way of breaking the cycle of intergenerational poverty. By supporting efforts to improve policy and institutional arrangements, ADB will help ensure that the poor, especially women, have access to essential social services. Through access to quality basic education and primary health care, the poor will progressively increase their chances of successfully employing their main assetlabor. Improving social protection will

(iii)

(iv)

Taken from: ADB. 1999. The Poverty Reduction Strategy. Manila.

56

Appendix 2

reduce risks and indebtedness that otherwise entrap the poor in a vicious circle of poverty. (v) .. economic growth can effectively reduce poverty only when accompanied by a comprehensive program for social development. Every country needs to have a comprehensive national poverty reduction strategy providing for (a) adequate budgetary allocations for human capital, (b) targeting of basic social services to the poor, (c) removal of gender discrimination, (d) an effective population policy, and (e) social protection.

ADF ALLOCATION DATA

Table A3.1: ADF VIII Loans with Cofinancing, Attached Technical Assistance, and Grants
ADF + Cofinanced Amount ($m) 15 0 881 0 106 115 0 24 0 ADTA funded by TASF ($m) 0.0 0.0 0.0 0.0 0.5 0.0 0.9 1.0 0.0 ADTA funded by Others ($m) 0.0 0.0 0.0 0.0 0.4 0.0 0.0 0.2 0.0 Cofinancing Loan Share (%) 67 0 53 0 25 25 0 25 0 No. of ADF Loans with Cofinancing 1 0 6 0 3 3 0 1 0 Attached Grants from Other Sources ($m) 0.0 0.0 54.3 0.0 16.3 43.0 0.0 0.0 0.0

ADF Loans Cofinancing Amount ($m) 5 0 413 0 80 86 0 18 0

Appendix 3

CoADF ADTA ADF VIII financing Loan No. of Attached No. of funded Attached Attached (20012004) JFPR Attached PPTA Attached ADTA Amount Share by JSF Country ($m) ($m) ($m) (%) PPTAs ($m) ADTAs ($m) Afghanistan 10 33 2 2.0 0 0.0 0.0 0.0 Azerbaijan 0 0 2 1.4 1 0.5 0.5 0.0 Bangladesh 468 47 12 7.6 0 0.0 0.0 0.8 Bhutan 0 0 2 1.2 0 0.0 0.0 0.0 Cambodia 26 75 14 7.8 1 0.0 0.9 1.8 Indonesia 29 75 8 5.0 0 0.0 0.0 1.5 Kyrgyz Republic 0 0 3 2.0 3 1.3 2.2 1.0 Lao PDR 6 75 11 6.1 2 0.0 1.2 0.0 Maldives 0 0 5 1.0 0 0.0 0.0 0.0 Micronesia, Federated States 0 0 0 0 0 0 2 0.8 1 0.4 0.0 0.0 0.4 0.0 0.0 Mongolia 0 0 0 0 0 0 5 3.2 2 1.3 0.0 0.0 1.3 0.0 0.0 Nepal 115 39 155 75 25 4 14 8.0 1 0.4 0.0 0.0 0.4 0.0 33.6 Pakistan 196 112 308 64 36 4 22 9.0 13 6.0 0.0 20.9 26.8 0.0 31.9 Papua New Guinea 19 4 23 83 17 1 2 0.9 0 0.0 0.0 0.0 0.0 0.0 0.0 Republic of Marshall Islands 0 0 0 0 0 0 1 0.3 2 0.3 0.0 0.0 0.3 0.0 0.0 Samoa 0 0 0 0 0 0 2 0.6 1 0.0 0.4 0.0 0.4 0.0 0.0 Sri Lanka 127 123 250 51 49 4 13 10.9 4 0.2 2.2 0.0 2.4 0.0 10.6 Solomon Islands 0 0 0 0 0 0 0 0.0 0 0.0 0.0 0.0 0.0 0.0 0.0 Tajikistan 15 6 21 71 29 1 3 2.3 10 0.2 2.0 1.3 3.5 2.0 0.0 Tonga 0 0 0 0 0 0 0 0.0 2 1.4 0.0 0.0 1.4 0.0 0.0 Tuvalu 0 0 0 0 0 0 1 0.3 1 0.0 0.3 0.0 0.3 0.0 0.0 Viet Nam 177 66 243 73 27 4 14 9.8 5 3.0 0.8 3.8 7.5 0.0 27.1 Regional 0 0 0 0 0 0 0 0.0 0 0.0 0.0 0.0 0.0 0.0 0.0 Total 1,251 889 2,140 58 42 32 138 80.3 49 15.3 7.5 26.4 49.2 7.1 216.8 Total ADF VIII Loans 5,633 193 ADB = Asian Development Bank, ADF = Asian Development Fund, ADTA = advisory technical assistance, JFPR = Japan Fund for Poverty Reduction, JSF = Japan Special Fund, Lao PDR = Lao Peoples Democratic Republic, m = million, PPTA = project preparatory technical assistance, TASF = Technical Assistance Special Fund. Sources: Central Operations Services Office; Asian Development Banks Loan, Technical Assistance, Grant and Equity Approvals database; and ADB projects database website.

57

58

Appendix 3

Table A3.2: ADF IX Loans with Cofinancing, Attached Technical Assistance, and Grants

ADF No. of Loans Attached ADF + ADF ADTA ADTA CoGrants from CoLoans CoADF funded ADTA Cofunded financing Other ADF IX with financing financed Loan by financing No. of by Attached No. of funded Attached Attached Amount Sources Amount (20052007) JFPR CoAmount Share TASF by JSF Others Loan Attached PPTA Attached ADTA ($m) ($m) ($m) ($m) Country ($m) ($m) (%) ($m) Share (%) financing PPTAs ($m) ($m) ADTAs ($m) Afghanistan 47 13 61 78 22 1 2 2.7 0 0.0 0.0 0.0 0.0 20.00 13.2 Azerbaijan 0 0 0 0 0 0 1 0.2 0 0.0 0.0 0.0 0.0 0.0 0.0 Bangladesh 344 141 485 71 29 6 9 4.9 2 0.2 0.0 0.3 0.4 0.0 74.3 Bhutan 0 0 0 0 0 0 3 1.6 2 0.5 0.0 0.0 0.5 0.0 0.0 Cambodia 62 35 97 64 36 2 0 0.0 0 0.0 0.0 0.0 0.0 0.0 0.0 Cook Islands 0 0 0 0 0 0 0 0.0 1 0.6 0.0 0.0 0.6 0.0 0.0 Indonesia 71 52 123 58 42 3 3 3.0 3 3.0 0.6 0.0 3.6 0.0 24.1 Kyrgyz Republic 48 7 54 88 12 1 0 0.0 2 0.6 0.6 0.0 1.2 0.0 0.0 Lao PDR 9 7 16 59 41 1 5 2.5 1 0.4 0.0 0.3 0.7 2.0 4.0 Maldives 0 0 0 0 0 0 1 0.4 0 0.0 0.0 0.0 0.0 0.0 20.0 Mongolia 5 1 6 91 9 1 3 1.6 1 0.0 0.9 0.0 0.9 1.5 0.5 Nepal 0 0 0 0 0 0 1 0.6 1 0.0 0.5 0.0 0.5 0.0 0.0 Papua New Guinea 0 0 0 0 0 0 0 0.0 0 0.0 0.0 0.0 0.0 0.0 0.0 Pakistan 220 115 335 66 34 1 10 4.7 4 3.3 2.0 0.0 5.3 0.0 0.0 Samoa 8 17 25 32 68 2 1 0.4 1 0.4 0.0 0.0 0.4 0.0 17.2 Solomon Islands 10 9 19 54 46 1 0 0.0 0 0.0 0.0 0.0 0.0 0.0 0.0 Sri Lanka 83 231 314 26 74 3 2 1.1 2 0.2 0.0 0.0 0.2 0.0 30.6 Tajikistan 9 4 12 72 28 1 0 0.0 0 0.0 0.0 0.0 0.0 3.6 0.0 Uzbekistan 0 0 0 0 0 0 3 1.7 1 0.2 0.0 0.6 0.8 0.0 3.0 Viet Nam 125 56 181 69 31 3 11 7.9 1 0.3 0.0 7.6 7.9 0.6 8.0 Regional 57 9 65 87 13 1 2 1.4 0 0.0 0.0 0.0 0.0 0.0 0.0 Total 1,098 694 1,792 61 39 27 57 34.6 22 9.5 4.6 8.8 22.8 27.7 194.8 Total ADF IX Loans 3,202 21.6% 93 41% 20% 38% 100% ADB = Asian Development Bank, ADF = Asian Development Fund, ADTA = advisory technical assistance, JFPR = Japan Fund for Poverty Reduction, JSF = Japan Special Fund, Lao PDR = Lao Peoples Democratic Republic, m = million, PPTA = project preparatory technical assistance, TASF = Technical Assistance Special Fund. Sources: Central Operations Services Office; ADBs Loan, Technical Assistance, Grant and Equity Approvals database; and ADB projects database website.

Appendix 3

59

Table A3.3: Size of ADF and OCR as Compared with Government Expenditure, External Debt, and Official Development Assistance
ADF VIII & ADF+OCR OCR IX Loans Annual Loans, 2005 and Average, Government External ODA, b 2001Population Grants 2001-2008 Expenditure, Debt, 2005 2008* ($m) ($m) (million) Countrya ($m) 2005 ($m) 2005 ($m) ($m) 85.9 Group A 4,464 149 577 5,971 15,798 5,419 Nepal 25.3 6.4 741 45 98 1,202 3,285 428 Afghanistan 23.6 1,897 237 677 2,775 Cambodia 13.8 4.7 532 67 801 3,515 538 Tajikistan 6.9 0.4 224 28 438 1,022 241 Lao PDR 5.6 1.6 329 104 54 495 2,690 296 Kyrgyz 5.1 0.0 245 31 498 2,032 268 Mongolia 2.6 0.5 239 30 565 1,327 212 Timor-Leste 0.9 16 2 59 185 Bhutan 0.8 96 12 284 649 90 Solomon Islands 0.5 5 1 106 170 198 Maldives 0.3 0.0 52 7 451 368 67 Vanuatu 0.2 0.1 71 82 39 Samoa 0.2 0.0 73 9 181 656 44 Kiribati 0.1 0.0 10 1 125 28 Tuvalu 0.0 0.0 4 0 16 9 Group B1 402.5 80.3 7,443 20,538 3,498 50,597 85,467 6,507 Pakistan 154.0 30.3 2,418 11,258 1,709 19,569 33,675 1,666 Bangladesh 137.0 41.5 2,152 2,263 552 7,778 18,935 1,321 Viet Nam 83.1 8.1 1,872 5,030 863 14,916 19,287 1,905 Sri Lanka 19.7 0.2 875 1,164 255 5,714 11,444 1,189 Azerbaijan 8.4 0.2 55 799 107 2,330 1,881 223 Micronesia 0.1 0.0 27 5 4 148 61 106 Tonga 0.1 0.0 21 3 55 84 32 Marshall Islands 0.1 0.0 15 4 2 87 101 57 Cook Islands 0.0 8 15 3 8 Group B2 252.1 19.3 1,129 6,991 1,015 56,481 145,156 2,962 Indonesia 219.9 14.3 761 5,974 842 51,845 138,300 2,524 Uzbekistan 26.3 3.5 238 873 139 2,936 5,007 172 Papua New Guinea 5.9 1.5 131 144 34 1,701 1,849 266 Others 7.5 66 8 2,505 3,771 Armenia 4.3 66 8 898 1,861 Georgia 3.2 1,606 1,911 Regional 844 1,324 271 Total 748.1 113.2 13,946 29,002 5,368 115,553 250,192 14,888 = data not available, ADB = Asian Development Bank, ADF = Asian Development Fund, Lao PDR = Lao Peoples Democratic Republic, m = million, OCR = ordinary capital resources, ODA = official development assistance, PPP = purchasing power parity. a Countries arrangement based on the 2005 population per group. b Including pipeline as of 10 August 2007. Sources: ADB Key Indicators 2006, World Bank World Development Indicators Online 2006, and Organisation for Economic Co-operation and Development Statistics report. Poor below $1 PPP a day (million) 13.7

60

Appendix 3

Table A3.4: Comparison of ADF VIII and IX Operations including Pipeline until End-2008, Sorted by Amount under ADF IX
Country Afghanistan Pakistan Bangladesh Viet Nam Indonesia Nepal Sri Lanka Others Total (see below) Others Regional Uzbekistan Cambodia0 Kyrgyz Republic Tajikistan Lao PDR Mongolia Papua New Guinea Bhutan Armenia Samoa Maldives Timor-Leste Azerbaijan Tonga Kiribati Cook Islands Solomon Islands Micronesia Kazakhstan Philippines Marshall Islands Tuvalu Vanuatu Total ADF VIII Amount Share ($m) (%) 487 8.6 1,046 18.6 874 15.5 823 14.6 330 5.9 359 6.4 507 9.0 1,206 21.4 98 0 339 123 105 215 136 31 16 0 14 29 0 42 10 0 2 0 27 0 0 15 4 0 5,633 1.7 0.0 6.0 2.2 1.9 3.8 2.4 0.5 0.3 0.0 0.2 0.5 0.0 0.7 0.2 0.0 0.0 0.0 0.5 0.0 0.0 0.3 0.1 0.0 100.0 ADF IX Amount Share ($m) (%) 1,410 17.0 1,372 16.5 1,278 15.4 1,049 12.6 430 5.2 381 4.6 369 4.4 2,025 24.4 746 238 193 122 119 115 102 100 80 66 59 24 16 13 11 10 6 5 0 0 0 0 0 0 8,313 9.0 2.9 2.3 1.5 1.4 1.4 1.2 1.2 1.0 0.8 0.7 0.3 0.2 0.2 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 100.0 Total ADF VIII & IX Amount Share ($m) (%) 1,897 13.6 2,418 17.3 2,152 15.4 1,872 13.4 761 5.5 741 5.3 875 6.3 3,231 23.2 844 238 532 245 224 329 239 131 96 66 73 52 16 55 21 10 8 5 27 0 0 15 4 0 13,946 6.1 1.7 3.8 1.8 1.6 2.4 1.7 0.9 0.7 0.5 0.5 0.4 0.1 0.4 0.2 0.1 0.1 0.0 0.2 0.0 0.0 0.1 0.0 0.0 100.0

ADF = Asian Development Fund, Lao PDR = Lao Peoples Democratic Republic, m = million. Note: The ADF IX pipeline amount will gradually be adjusted to fit the actual resources available. Sources: Asian Development Banks Loan, Technical Assistance, Grant and Equity Approvals database; Project Processing Information System as of 10 August 2007.

Appendix 3

61

Table A3.5: Comparison of ADF VI-VII Amounts by Country, with ADF VIIIIX Amounts including Pipeline, Sorted by Highest Amount over ADF VIIIIX
ADF VI & VII Approvals (19922000) Amount Share ($m) (%) 2,294 19.1 2,407 20.1 0 0.0 1,825 15.2 1,207 10.1 480 4.0 741 6.2 444 3.7 2,596 21.6 202 594 422 439 20 99 117 56 29 0 0 30 43 19 0 52 10 14 37 4 60 316 32 11,993 1.7 5.0 3.5 3.7 0.2 0.8 1.0 0.5 0.2 0.0 0.0 0.3 0.4 0.2 0.0 0.4 0.1 0.1 0.3 0.0 0.5 2.6 0.3 100.0 ADF VIII & IX Approvals (2005-2007) Amount Share ($m) (%) 1,983 21.1 1,484 15.8 887 9.4 1,380 14.7 670 7.1 551 5.9 529 5.6 452 4.8 1,472 15.6 219 289 194 193 83 164 64 81 22 0 45 42 27 10 10 15 0 5 5 4 0 0 0 9,407 2.3 3.1 2.1 2.0 0.9 1.7 0.7 0.9 0.2 0.0 0.5 0.4 0.3 0.1 0.1 0.2 0.0 0.1 0.1 0.0 0.0 0.0 0.0 100.0 ADF IX Pipeline (mid 20072008) Amount Share ($m) (%) 435 9.6 668 14.7 1,010 22.3 492 10.8 205 4.5 210 4.6 211 4.7 80 1.8 1,227 27.0 625 40 51 46 155 60 67 15 51 66 10 11 0 11 6 0 10 3 0 0 0 0 0 4,539 13.8 0.9 1.1 1.0 3.4 1.3 1.5 0.3 1.1 1.5 0.2 0.2 0.0 0.3 0.1 0.0 0.2 0.1 0.0 0.0 0.0 0.0 0.0 100.0 Total ADF VIII & IX (20052008) Amount Share ($m) (%) 2,418 17.3 2,152 15.4 1,897 13.6 1,872 13.4 875 6.3 761 5.5 741 5.3 532 3.8 2,699 19.3 844 329 245 239 238 224 131 96 73 66 55 52 27 21 16 15 10 8 5 4 0 0 0 13,946 6.1 2.4 1.8 1.7 1.7 1.6 0.9 0.7 0.5 0.5 0.4 0.4 0.2 0.2 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 100.0

Country Pakistan Bangladesh Afghanistan Viet Nam Sri Lanka Indonesia Nepal Cambodia Others total (below) Others Regional Lao PDR Kyrgyz Republic Mongolia Uzbekistan Tajikistan Papua New Guinea Bhutan Samoa Armenia Azerbaijan Maldives Micronesia Tonga Timor-Leste Marshall Islands Kiribati Cook Islands Solomon Islands Tuvalu Kazakhstan Philippines Vanuatu Total

ADF = Asian Development Fund, Lao PDR = Lao Peoples Democratic Republic, m = million. Note: The ADF IX pipeline amount will gradually be adjusted to fit the actual resources available. Sources: Asian Development Banks Loan, Technical Assistance, Grant and Equity Approvals database; Project Processing Information System as of 10 August 2007.

62

Appendix 3

Table A3.6: Aggregate Amount of OCR Lending (Approved and Pipeline up to End-2008) by Country (ADF countries only), 19922008
Country 19922000 Amount Share ($m) (%) 20012008 Amount Share ($m) (%)

Azerbaijan 799 3 Bangladesh 104 1 2,263 8 Cook Islands 15 0 Micronesia, Federated States of 5 0 Indonesia 9,487 63 5,974 21 Kazakhstan 355 2 Lao Peoples Democratic Republic 104 0 Nepal 45 0 Pakistan 1,552 10 11,258 39 Philippines 2,960 20 Papua New Guinea 218 1 144 0 Marshall Islands, Republic of 4 0 Sri Lanka 15 0 1,164 4 Uzbekistan 367 2 873 3 Viet Nam 40 0 5,030 17 Regional 52 0 1,324 5 Total 15,150 100 29,000 100 = data not available, ADF = Asian Development Fund, m = million, OCR = ordinary capital resources. Note: Figures exclude OCR-only countries Peoples Republic of China, India, and Philippines. Includes pipeline to 2008 from Project Processing Information System of 10 August 2007. Sources of basic data: Asian Development Banks Loan, Technical Assistance, Grant and Equity Approvals database; Project Processing Information System as of 10 August 2007.

Table A3.7: Number of OCR Projects by Country (ADF countries only), 1992 to 2008
Country Azerbaijan Bangladesh Cook Islands Micronesia, Federated States of Indonesia Kazakhstan Lao Peoples Democratic Republic Nepal Pakistan Philippines Papua New Guinea Marshall Islands, Republic of Sri Lanka Uzbekistan Viet Nam 19922000 Number Share (%) 62 5 8 31 8 7 51 4 7 25 7 6 20012008 Number Share (%) 3 10 1 28 3 1 33 3 1 11 18 15 2 8 1 21 2 1 25 2 1 8 14 11

Regional 1 1 4 3 Total 122 100 131 100 = data not available, ADF = Asian Development Fund, m = million, OCR = ordinary capital resources. Note: Figures exclude OCR-only countries Peoples Republic of China, Philippines and India. Includes pipeline to 2008 from Project Processing Information System of 10 August 2007. Sources of basic data: Asian Development Banks Loan, Technical Assistance, Grant and Equity Approvals database; Project Processing Information System as of 10 August 2007.

Appendix 3

63

Table A3.8: ADF and OCR Compared with Government Expenditure, External Debt, and Official Development Assistance on Per Capita Basis
ADF VIIIIX Per Capita Share a ($) Per Year 6 4 10 5 4 7 6 11 2 15 1 22 50 14 459 2 2 2 3 6 1 OCR 20012008 Per Capita Share ($) Per Year 0 0 2 6 9 2 8 7 12 GDP Per Capita 2005 ($) 244 234 402 237 396 319 483 345 1,003 677 2,355 1,172 1,547 488 561 596 433 538 1,002 1,182 Government Expenditure Per Capita 2005 ($) 69 48 29 58 64 88 98 217 63 355 221 1,504 306 988 1,357 15,760 126 127 57 179 290 277 External Debt Per Capita 2005 ($) 184 130 255 148 480 398 510 811 353 1,227 377 3,581 212 219 138 232 581 224

Country Group A Nepal Afghanistan Cambodia Tajikistan Lao PDR Kyrgyz Republic Mongolia Timor-Leste Bhutan Solomon Islands Maldives Vanuatu Samoa Kiribati Tuvalu Group B1 Pakistan Bangladesh Viet Nam Sri Lanka Azerbaijan Micronesia, Federated States of 32 6 2,008 1,368 563 985 Tonga 26 1,629 535 825 312 Marshall Islands, 29 8 2,037 1,366 1,585a 889 Republic of Cook Islands 497 928 3,837 Group B2 1 3 892 217 568 12 Indonesia 27 942 236 629 11 Uzbekistan 1 33 532 112 190 7 Papua New Guinea 3 24 643 287 312 45 Armenia 2 13 Georgia 40 Others 1 23 Regional Total 2 40 631 149 327 20 = none, ADB = Asian Development Bank, ADF = Asian Development Fund, Lao PDR = Lao Peoples Democratic Republic, OCR = ordinary capital resources, ODA = official development assistance. a Including pipeline as of 10 August 2007. Note: External debt refers to total debt both outstanding and disbursed, while ODA is total net received from all donors. Sources: ADB Key Indicators 2006, World Bank World Development Indicators Online 2006, and Organisation for Economic Co-operation and Development Statistics website.

ODA Per Capita ($) 63 17 118 39 35 53 53 81 195 113 411 223 181 240 303 8,635 16 11 10 23 60 27

64

Appendix 3

Table A3.9: Average ADF VIII and IX Approvals Per Capita Per Year (Loans and Grants), Compared with GDP, Government Expenditure, and Official Development Assistance Per Capita in 2005
Per Capita ($) Annualized ADF VIII & IX Loans and Grants 36 22 15 11 10 7 6 6 5 4 4 3 3 2 2 2 2 1 1 1 ADF as % of

Country Pacific Maldives Bhutan Mongolia Afghanistan Lao PDR Kyrgyz Republic Sri Lanka Cambodia Tajikistan Nepal Viet Nam Papua New Guinea Timor-Leste Bangladesh Pakistan Armenia Solomon Islands Uzbekistan Azerbaijan

GDP 1,428 2,585 798 475 290 419 322 998 410 224 251 538 638 356 448 602 788 670 681 1,180

Government Expenditure 886 1,504 355 217 29 88 98 290 58 64 48 179 287 63 57 127 208 221 112 277

External Debt 1,279 1,227 811 510 480 398 581 255 148 130 232 312

ODA 419 223 113 81 118 53 53 60 39 35 17 23 45 195

GDP 3 1 2 2 3 2 2 1 1 2 1 1 0 1 0 0 0 0 0 0

Government Expenditure 4 1 4 5 35 8 6 2 8 6 8 2 1 3 3 2 1 0 1 0

Externa l Debt 3 2 2 2 2 2 1 2 3 3 1 1 1 1 0 0 1 0

ODA 9 10 13 14 9 14 11 9 12 12 22 12 6 1 20 18 0 17 3

138 219 431 353 190 224

10 11 411 7 27

Indonesia 0 945 236 629 11 0 0 0 4 ADB = Asian Development Bank, ADF = Asian Development Fund, GDP = gross domestic product, Lao PDR = Lao Peoples Democratic Republic, ODA = official development assistance. Notes: ADF VIII and IX loans and grants approvals include pipeline as of 10 August 2007, annualized for the period 2001 to 2008; per capita GDP computed based on 2005 GDP at constant 2000 US$ and 2005 population. Pacific Islands include Vanuatu, Samoa, Kiribati, Tuvalu, Federated States of Micronesia, Tonga, Republic of Marshall Islands, and Cook Islands. Sources: ADB Key Indicators 2006, World Bank World Development Indicators Online 2006, and Organisation for Economic Cooperation and Development Statistics report.

Table A3.10: Sector Distribution of ADF and OCR Lending 19922008, $ million in ADF Countries Only, Sorted by Largest Amount of ADF in 20012008
ADF 19922000 1,922 2,593 2,262 1,139 888 1,405 312 805 562 106 11,993 546 488 332 13,946 2,547 833 787 15,150 2,175 105 347 29,285 1,274 832 3,677 446 6,330 4,028 5,082 758 3,352 1,395 893 27,144 20012008 2,702 2,640 2,188 1,503 1,441 19922000 1,405 2,239 1,528 1,311 377 20012008 2,140 9,694 961 164 3,343 19922000 3,327 4,832 3,791 2,450 1,265 OCR ADF and OCR 20012008 4,841 12,334 3,149 1,666 4,784 7,604 4,860 2,721 593 679 43,231

Sector Multisector Transport and Communications Agriculture and Natural Resources Education Water Supply, Sanitation, and Waste Management Energy Law, Economic Management, and Public Policy Finance Health, Nutrition, and Social Protection Industry and Trade Total

ADF = Asian Development Fund, OCR = ordinary capital resources. Notes: Figures exclude those for OCR-only countries Peoples Republic of China, India, and Philippines. Includes pipeline to 2008 from Project Processing Information System of 10 August 2007. Sources of basic data: Asian Development Banks Loan, Technical Assistance, Grant and Equity Approvals database; Project Processing Information System as of 10 August 2007.

Appendix 3

65

66

Appendix 3

Table A3.11: Types of Loans Categorized as Multisector, 19922008

Type Emergency Social Safety Net Rural Development Urban Development Others Infrastructure Public Administration Regional - Tourism Poverty Reduction ADF VI & VII $million Share (%) 523 327 708 364 0 0 0 0 0 27 17 37 19 0 0 0 0 0 ADF VIII & IX $million Share (%) 1,360 392 347 262 342 194.5 60 60 27 50 15 13 10 13 7 2 2 1 ADF VI & VII Number Share (%) 19 5 19 11 0 0 0 0 0 35 9 35 20 0 0 0 0 0 ADF VIII & IX Number Share (%) 16 12 8 11 11 4 1 4 2 28 21 14 19 19 7 2 7 3

Total 1,922 100 2,702 100 54 100 58 100 ADF = Asian Development Fund. Sources of basic data: Asian Development Banks Loan, Technical Assistance, Grant and Equity Approvals database; Project Processing Information System as of 10 August 2007.

Table A3.12: ADF VIIX Sector Distribution in Pacific Countries

Sector Agriculture and Natural Resources Education Energy Finance Health, Nutrition, and Social Protection Law, Economic Management, and Public Policy Multisector Transport and Communications Water Supply, Sanitation, and Waste Management Total Amount ($million) 12 16 53 15 15 31 40 106 23 311 Share (%) 4 5 17 5 5 10 13 34 7 100

ADF = Asian Development Fund. Sources: Basic data from Asian Development Banks Loan, Technical Assistance, Grant and Equity Approvals database; Project Processing Information System as of 10 August 2007.

Table A3.13: ADF VIIX Sector Distribution of Regional Cooperation Loans

Amount Share Sector ($million) (%) Agriculture and Natural Resources Education Energy 277 33 Finance Health, Nutrition, and Social Protection 63 7 Industry and Trade 88 10 Law, Economic Management, and Public Policy Multisector 30 4 Transport and Communications 387 46 Water Supply, Sanitation, and Waste Management Total 844 100 ADF = Asian Development Fund. Notes: Regional cooperation loans started in ADF VII. Includes 20072008 pipeline as of 10 August 2007. Sources of basic data: Asian Development Banks Loan, Technical Assistance, Grant and Equity Approvals database; Project Processing Information System as of 10 August 2007.

Appendix 3

67

Table A3.14: Distribution of ADF VIIX by Financing Modality

ADF VI and VII ADF VIII and IX ADF VIIX Financing Modality $million Share (%) $million Share (%) $million Share (%) Project 10,683 89.1 9,940 71.3 20,623 79.5 Credit Line 455 3.8 79 0.6 534 2.1 Sector 2,105 17.5 1,225 8.8 3,330 12.8 TA Loan 46 0.4 232 1.7 278 1.1 Program 1,312 10.9 3,193 22.9 4,505 17.4 SDP 255 2.1 860 6.2 1,115 4.3 Grants 813 5.8 813 3.1 Total 11,995 100.0 13,946 100.0 25,941 100.0 ADF = Asian Development Fund, SDP = Social Development Program, TA = technical assistance. Note: Includes loans in the 2007 and 2008 pipeline (as of 10 August 2007). Sources of basic data: Asian Development Banks Loan, Technical Assistance, Grant and Equity Approvals database; Project Processing Information System.

Table A3.15: ADF VIIIIX Distribution of Program Loans by Sector, 20012008

Amount Share Sector ($million) (%) Law, Economic Management, and Public Policy 641 20.1 Multisector 544 17.0 Water Supply, Sanitation, and Waste Management 485 15.2 Agriculture and Natural Resources 368 11.5 Finance 366 11.5 Education 272 8.5 Industry and Trade 239 7.5 Energy 161 5.1 Transport and Communications 105 3.3 Health, Nutrition, and Social Protection 12 0.4 Total 3,193 100.0 ADF = Asian Development Fund. Sources of basic data: Asian Development Banks Loan, Technical Assistance, Grant and Equity Approvals database; Project Processing Information System as of 10 August 2007.

Table A3.16: ADF IX Distribution of Grants by Sector

Amount Share Sector ($million) (%) Agriculture and Natural Resources 176 21.7 Health, Nutrition, and Social Protection 165 20.3 Transport and Communications 162 19.9 Education 79 9.7 Finance 69 8.5 Water Supply, Sanitation, and Waste Management 59 7.3 Energy 55 6.7 Law, Economic Management, and Public Policy 25 3.1 Multisector 24 3.0 Total 813 100.0 ADF = Asian Development Fund. Sources of basic data: Asian Development Banks Loan, Technical Assistance, Grant and Equity Approvals database; Project Processing Information System as of 10 August 2007.

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Appendix 3

Table A3.17: ADF VIII IX Loans and Grants by Thematic Classification

ADF VIII Thematic Classification (1st, 2nd, and 3rd cumulative) Sustainable Economic Growth Inclusive Social Development Governance Private Sector Development Gender and Development Environmental Sustainability Regional Cooperation Total approved loans ADF IX up to 2008 (with Pipeline) Thematic Classification (1st, 2nd, and 3rd cumulative) Sustainable Economic Growth Inclusive Social Development Gender and Development Governance Environmental Sustainability Private Sector Development Regional Cooperation Capacity Development Amount ($million) 5,029 2,806 1,250 713 729 684 268 5,633 Amount ($million) 5,650 3,340 1,656 2,431 1,675 709 878 2,044 Share (%) 89 50 22 13 13 12 5 100 Share (%) 68 40 20 29 20 9 11 25 Number of Loans 113 56 56 62 22 20 19 193 Number of Loans 72 33 18 29 14 13 7 30 153 Share (%) 59 29 29 32 11 10 10 100 Share (%) 47 22 12 19 9 8 5 20 100

Total approved loans 8,324 100 ADF = Asian Development Fund. Source of basic data: Project Processing Information System as of September 2007.

Table A3.18: Approved Loans and ADF Grants by Poverty Classification

20012003 ($million) Poverty Classification Core Poverty Intervention Poverty Intervention Others Total 20012003 (Number) Poverty Classification Core Poverty Intervention Poverty Intervention Others Total 2004 ($million) Poverty Classification General Intervention Targeted Intervention Total Amount 548 695 1,242 Number 23 68 54 145 ADF Share (%) 44 56 100 Amount 911 180 1,091 Amount 835 2,230 1,326 4,391 ADF Share (%) 16 47 37 100 Number 4 23 18 45 OCR Share (%) 84 16 100 Amount 1,459 874 2,333 ADF Share (%) 19 51 30 100 Amount 171 3,774 1,887 5,832 OCR Share (%) 9 51 40 100 Number 27 91 72 190 Total Share (%) 63 37 100 OCR Share (%) 3 65 32 100 Amount 1,006 6,003 3,213 10,223 Total Share (%) 14 48 38 100 Total Share (%) 10 59 31 100

Appendix 3

69

2004 (Number) Poverty Classification General Intervention Targeted Intervention Total 2004 ($million) Poverty Classification General Intervention Targeted Intervention Total 20052007 (Number) Poverty Classification General Intervention Targeted Intervention Number 99 37 Amount 2,157 1,618 3,775 Number 23 24 47

ADF Share (%) 49 51 100 ADF Share (%) 57 43 100 ADF Share (%) 73 27 Number 31 6 Amount 5,286 649 5,935 Number 11 5 16

OCR Share (%) 69 31 100 OCR Share (%) 89 11 100 OCR Share (%) 84 16 Number 130 43 173 Amount 7,443 2,266 9,710 Number 34 29 63

Total Share (%) 54 46 100 Total Share (%) 77 23 100 Total Share (%) 75 25 100

Total 136 100 37 100 ADF = Asian Development Fund, OCR = ordinary capital resources. Note: Includes blended loans: 6 for 2001, 4 for 2002 and 6 for 2003. Source of basic data: Project Processing Information System as of 10 August 2007.

Table A3.19: Number of Loans Funded by ADF and OCR Mix, 19922008
Total Number of Loans 95 55 45 34 28 11 19922000 Number of Loans with Mixed Funding 8 3 3 1 2 0 Mixed Funds Share (%) 8 5 7 3 7 Total Number of Loans 72 43 53 43 16 25 20012008 Number of Loans with Mixed Funding 8 1 9 4 1 2 12 10 11 9 67 Mixed Funds Share (%) 11 2 17 9 6 8 23 15 12 16 13

Sector Agriculture and Natural Resources Education Energy Finance Health, Nutrition, and Social Protection Industry and Trade Law, Economic Management, and 17 2 12 53 Public Policy Multisector 68 2 3 65 Transport and Communications 69 3 4 93 Water Supply, Sanitation, and Waste Management 35 1 3 56 Total 457 25 5 519 = none, ADF = Asian Development Fund, OCR = ordinary capital resources. Note: Includes 20072008 pipeline as of 10 August 2007. Sources of basic data: Asian Development Banks Loan, Grant, Technical Assistance and Equity Project Processing Information System as of 10 August 2007.

Approval database;

70

Appendix 3

Table A3.20: Amount of Loans Funded by ADF and OCR Mix, 19922008
Sector Agriculture and Natural Resources Education Energy Finance Health, Nutrition, and Social Protection Industry and Trade Law, Economic Management, and Public Policy Multisector Transport and Communications Water Supply, Sanitation, and Waste Management Total ADF ($m) 182 45 230 5 24

19922000 Share OCR (%) ($m) 22 218 5 215 28 482 1 250 3 61

Share (%) 14 14 32 16 4

ADF ($m) 433 50 369 41 35 44 477 602 567 582 3,199

20012008 Share OCR (%) ($m) 14 851 2 30 12 3,784 1 780 1 65 1 15 19 18 18 100 212 2,782 1,332 5,265 2,309 17,408

Share (%) 5 0 22 4 0 1 16 8 30 13 100

145 70 107 19 827

18 8 13 2 100

55 105 113 19 1,518

4 7 7 1 100

= none, ADF = Asian Development Fund, m = million, OCR = ordinary capital resources. Note: Includes 20072008 pipeline as of 10 August 2007. Sources of basic data: Asian Development Banks Loan, Grant, Technical Assistance and Equity Approvals database; Project Processing Information System as of 10 August 2007.

Table A3.21: Net ADF Resource Transfers, 19972006

2001 84,938 5,693 46,416 210 4,360 1,321 55,828 34,605 2,163 5,867 2,247 27,462 30,708 121,185 (5,727) 1,605 (796) 54,093 2,754 (610) 1,144 4,441 2,129 166,537 648,573 728,728 661,758 496,128 645,469 50,697 12,816 76,398 (327) 1,016 718 24,173 37,655 5,593 6,298 1,078 22,671 (2,606) 117,485 (3,987) (1,215) 71,126 13,809 4,138 (40) 6,696 (236) 201,786 47,864 3,339 68,400 (16) 30,079 2,265 22,177 40,533 3,908 3,981 2,415 34,515 (425) (14,184) (4,633) (812) (2,983) 129,368 14,244 5,021 87 3,222 (841) 219,694 (69,879) 5,347 70,865 1,140 28,934 2,315 50,363 31,004 939 738 634 32,538 (17,339) 59,312 (104) (174) (710) 79,663 18,995 (1,258) 10 2,430 (918) 160,800 2002 82,986 2003 54,540 2004 40,483 2005 20,658 500 (12,020) 10,480 76,728 529 37,576 1,362 25,099 47,779 3,664 (48) 1,237 21,134 2,922 92,459 (4,747) (347) 1,164 101,537 25,221 (1,365) 63 (206) (926) 195,016 2006 19972006 63,620 262,287 4,034 4,534 57,330 749,712 2,366 56,709 45,061 496,190 (344) 5,771 67,438 177,285 (102) 8,619 35,760 403,574 49,211 461,893 3,635 22,993 (507) 47,173 1,942 35,910 18,355 326,943 62,451 348,300 56,072 1,033,283 3,310 (12,151) (1,990) (6,170) 2,346 10,684 66,385 769,480 34,051 131,081 (1,458) 14,034 1,136 5,180 (47) 18,276 (1,078) 24,945 139,440 1,732,079 150 150 708,567 7,128,764 19682006 277,903 4,534 3,791,869 87,622 579,982 21,241 671,201 11,958 463,312 796,075 52,319 55,236 36,357 466,888 1,026,768 3,858,729 206,633 57,796 41,724 1,871,668 131,081 39,534 5,180 18,276 40,749 1,808,724 150 16,423,509 Appendix 3

Developing Member Country 1997 1998 1999 2000 Afghanistan Azerbaijan Bangladesh 113,098 146,365 172,940 158,379 Bhutan 6,343 3,392 1,099 5,834 Cambodia 9,746 28,422 24,863 49,291 Cook Islands 2,201 1,719 553 106 Indonesia 10,394 (7,434) (6,355) 11,277 Kiribati (78) (71) (80) 969 Kyrgyz Republic 51,235 42,098 77,822 19,019 Lao PDR 81,672 59,158 38,527 41,749 Maldives 2,495 (83) (20) 699 Marshall Islands, Republic of 9,991 7,753 3,572 9,528 Micronesia, Federated States of 11,308 6,145 4,761 4,143 Mongolia 65,912 29,943 44,475 29,938 Nepal 78,109 84,120 45,897 64,463 Pakistan 185,702 202,207 95,127 117,918 Papua New Guinea 5,154 279 847 (2,543) Samoa (1,480) 2,380 (2,045) (2,092) Solomon Islands (19) 13,117 (979) (456) Sri Lanka 65,965 92,954 67,970 40,419 Tajikistan 9,785 12,222 Tonga 1,582 4,311 1,515 2,158 Tuvalu 2,800 (20) Uzbekistan 460 86 1,194 Vanuatu 9 11,023 5,845 9,938 Viet Nam 145,889 124,068 185,771 193,078 Regional Total 845,228 852,326 774,776 767,211 ADF = Asian Development Fund, Lao PDR = Lao Peoples Democratic Republic. Source: Loan Administration Division, Controller's Department.

71

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Appendix 4

HIV AND AIDS-RELATED ADF LOANS AND GRANTS 1. Attention for prevention of human immunodeficiency virus/acquired immunodeficiency syndrome (HIV/AIDS) was one of the priorities of ADF VIII. The Asian Development Bank (ADB) articulated its priorities in a strategic directions paper, 1 which the Board endorsed in April 2005. The paper recognized that HIV/AIDS is not simply a health issue and cannot be addressed through the health sector alone, as it is fueled by both economic development and poverty and perpetuated by social and cultural sensitivities. At the ADF IX meeting, donors agreed to dedicate its new grant program in part to combating HIV/AIDS and other communicable diseases. 2. As a result, the availability of Asian Development Fund (ADF) grant financing for HIV/AIDS-related operations increased significantly. From $83.5 million in ADF VIII, loans and grants (including pipeline operations) are expected to reach a total of $198 million during ADF IX, with approvals amounting to $164 million as of 31 July 2007. 2 Total grant approvals, which amounted to $140 million, were instrumental in the 96% jump in HIV/AIDS financing from the ADF during ADF IX. The bulk of the operations are in Viet Nam, accounting for 33% of the total, followed by Bangladesh and Pakistan, with 14.2% and 12.8% shares, respectively. During ADF VIII, Pakistan had been allocated the biggest share or 43% of ADF-financed HIV/AIDS operations during ADF VIII, with Cambodia and Viet Nam at 24% each. In addition, over $12.5 million was allocated to this theme in the technical assistance (TA) program in ADF countries, for 13 TA operations. ADB is enforcing the rule that contractors mobilizing large numbers of workers are to address HIV risks. Projects in areas with indigenous peoples generally need to address HIV prevention, although questions have been raised regarding the effectiveness of the measures in practice. 3

1 2 3

ADB. 2005. Development, Poverty and HIV/AIDS: ADBs Strategic Response to a Growing Epidemic. Manila. This is based on a review of HIV/AIDS projects/programs and health projects/programs with such components. ADB. 2007. Special Evaluation Study on Indigenous Peoples Safeguards. Manila.

Appendix 5

73

ADF SECTOR ALLOCATIONS AND CHANGES OVER THE YEARS 1 1. Transport and Communications. Asian Development Fund (ADF) operations went down from 22% in ADF VI and VII to 19% under ADF VIII and IX (taking into account pipeline operations until end-2008). The gradual drop may be due to more ordinary capital resources (OCR) funded investment being channeled through toll roads to countries that can afford to borrow OCR for their national and even rural roads. Overall, the sector has not shrunk in the Asian Development Banks (ADB) operations. 2. Agriculture and Natural Resources. The large share may indicate the continued perceived relevance in directly tackling poverty, as most of the poor live in rural areas, and productive agriculture investments are generally intended to have a direct effect on employment and incomes. Nevertheless, agricultures share decreased from 19% in 19922000 to 16% in 20012008. 3. Multisector. The share has gone up significantly, from 16% in 19922000, to 19% of all ADF project resources in 20012008. A breakdown is found in Table A3.11, Appendix 3. Emergency assistance loan operations have the largest share at 50% in value and 28% in number of loans and grants. The other half of the fund is shared among the subsectors of (i) social safety nets at 15%, (ii) rural development (13%), (iii) urban development (10%) and (iv) others (13%). 4. Social Sectors. Under the Poverty Reduction Strategy of 1999, the social sectors were planned to grow in importance within the overall portfolio. The share of ADF loans in the education sector grew indeed, from 9% in the ADF VIVII period to 11% in ADF VIIIIX. However, the share of OCR funded education loans went down sharply over the same period and in the same ADF-eligible countries, from 9% in 19922000 to less than 1% in 20012008. In the health and population sector, ADF operations declined from 5% in 19922000 to 4% in 20012008 due to lower comparative advantage of ADB and competition from many other development partners, notably the World Bank, which traditionally has a larger program in the sector in Asia. There were virtually no OCR operations in health over the period. The water supply and sanitation sectors share in ADF, however, increased from 7% in 19922000 to 10% in 20012008 in line with the 2006 Medium-Term Strategy II, which placed greater emphasis on water supply and sanitation as a core business, and the start of the implementation of the Water Financing Program 20062010 to more than double water investment over past levels. In the same period, OCR lending also increased allocation for water from 2% to 11% ($377 million to $3,343 million). The overall result has not been in accordance with the ADB-wide Poverty Reduction Agendathe social sectors share of ADF went up from 22% to 25%, but the OCR share went down from 17% to 12%; overall there was a decline in social sector operations from 19% to 16% of the ADB resource allocation. It could be argued that ADF has supported the Poverty Reduction Strategy in spite of less interest from ADF countries. Governments were increasingly reluctant to borrow OCR for the education and health sectors. 5. Law, Economic Management, and Public Policy. In line with the ADF agenda, the allocation doubled during a 3% share in ADF VIVII replenishments to 6% for the period 20012008. The trend was much more pronounced for the OCR committed to ADF countries
1

Source: OED analysis. See also Table A3.10 in Appendix 3.

74

Appendix 5

over the same periods. Operations grew remarkably, from 3% in 19922000 to 14% in 2001 2008. 6. Finance. Less ADF was allocated to this sector and proportions dropped from 7% from 19922000 to 4% during 20012008. Almost no microfinance operations were processed but many operations included small microfinance components. Specialized projects in banking systems or capital markets all but disappeared from the ADF VIII and IX portfolio. Expansion in this sector under ADF VIII and IX was confined to finance sector development and some housing finance. OCR for the sector was more than halved. 7. Industry and Trade-Related Operations. Very minor allocations were made, consistent with a long-term trend in ADB to concentrate such lending in private sector operations. The proportion went up from 1% during ADF VI and VII to 2% in 20012008, mainly for small and medium-scale enterprise projects.

Appendix 6

75

ADF RESULTS TABLES AND FIGURES Table A6.1: Country Eligibility for ADF since 1973
Economy Afghanistan Armenia Azerbaijanb Bangladesh Bhutan Cambodia China, People's Republic of Cook Islands Fiji Islands Georgia Hongkong, China India Indonesia Kazakhstan Kiribati Kyrgyz Republic Republic of Korea Lao People's Democratic Republic Malaysia Maldives Marshall Islands, Republic of Micronesia, Federated States of Mongolia Myanmar Nauru Nepal Pakistan Palau Papua New Guineac Philippines Samoa Singapore Solomon Islands Sri Lanka Taipei,China Tajikistan Timor-Leste Thailand Tonga ADF I A ADF II A ADF III A Eligibility Classificationa ADF ADF ADF ADF IV V VI VII A A A A ADF VIII A B1 B1 A A B2 B1 C Grad. B2 B2 C A A Grad. A C A B1 B1 A A B2 A B1 B2 C A Grad. A B1 Grad. A C B1 ADF IX A B1 B1 B1 A A B2 B1 C B1 Grad. B2 B2 C A A Grad. A C A B1 B1 A A B2 A B1 B2 B2 C A Grad. A B1 Grad. A A C B1

A A

A A A C C B A

A A A C C B A C A C A

A A A A C C A B A C A C A

C C B

A A A A A C C A B A C A C A

A A A A A C C A B B A A C A C A A A A A B A A B B A C A A C A B A

B1 A A B2 B1 C Grad. B2 B2 C A A Grad. A C A B1 B1 A A B2 A B1 C C A Grad. A B1 Grad. A C B1

B A C

C A C

A A A B B A C A A C

A A A B B A C A A C

A A A B B A C A A C

A A A B B A C A A C

A A A B B A C A A C

B A

B A

B A

B A

B A

76

Appendix 6

Economy ADF I Turkmenistan Tuvalu Uzbekistan Vanuatu Viet Nam ADF II ADF III

Eligibility Classificationa ADF ADF ADF ADF IV V VI VII A B A A A C A B1

ADF VIII A C A B1

ADF IX C A B2 A B1

A A

A A

ADF = Asian Development Fund, DMC = developing member countries, Grad. = graduated, OCR = ordinary capital resources. a The joint application of two criteria (i.e., per capita gross national product and debt repayment capacity) yields the following system of DMC eligibility for ADF and OCR: Group A = ADF only; Group B1 = ADF with limited amounts of OCR; Group B2 = OCR with limited amounts of ADF; and Group C = OCR only. b Officially recognized as an ADB DMC in December 1999. c Papua New Guinea was reclassified from C to B2 on 17 November 2000. Sources: ADB. 2003. Special Evaluation Study of the Asian Development Fund VI-VII Operations. Manila; ADB. 2007. Operations Manual, Classification and Graduation of Developing Member Countries. Manila; and ADB. 2007. Country Classification of Georgia. Manila.

Table A6.2: Average Success Rates of ADF-Funded Projects and Programs by Country and Approval Period, Combined PCR and PPER Ratings
1970s Projects/ Success Programs Rate (%) 4 2 50.0 50.0 5 10 1 10 21 3 15 71.4 100.0 73.3 100.0 90.0 0.0 90.0 9 10 3 10 1980s Projects/ Success Programs Rate (%) 1990s Projects/ Success Programs Rate (%) Total Projects/ Success Programs Rate (%) 77.8 90.0 33.3 90.0

33.3

10 4 5 31 6 3 60.0 45.2 33.3 0.0

70.0 75.0

6 16 8 4

66.7 81.3 37.5 25.0

37 23 26.1 35 2 57.1 0.0

59.5

4 69

25.0 47.8

22 2 3 3 1 4 100 39 7 6

54.5 50.0 66.7 66.7 100.0 50.0 72.0 74.4 71.4 33.3

34 7 15 11 69 16 10 3 1 8 206 97 9 6

67.6 85.7 73.3 63.6 56.5 37.5 30.0 66.7 100.0 37.5 61.7 56.7 55.6 33.3

Group/Economy Group A Bhutan Cambodia Kiribati Kyrgyz Republic Lao Peoples Democratic Republic Maldives Mongolia Myanmar Nepal Samoa Solomon Islands Tajikistan Tuvalu Vanuatu Subtotal Group B1 Bangladesh Cook Islands Marshall Islands, Republic of Micronesia, Federated States of Pakistan Sri Lanka Tonga Viet Nam Subtotal Group B2 China, People's Republic of India 18 11 4 5 61 61.1 36.4 75.0 0.0 39.3 40 24 6 107 52.5 50.0 83.3 54.2 3 24 26 4 16 125 66.7 54.2 61.5 50.0 93.8 67.2 3 82 61 14 21 293

66.7 54.9 52.5 71.4 71.4 56.7

Appendix 6

77

78

Appendix 6

Group/Economy

1970s Projects/ Success Programs Rate (%) 18 38.9 7 25 36.0 15 53.3 28.6 9 9 1 24 11.1 100.0 45.8 25 1 64 24.0 100.0 43.8

1980s Projects/ Success Programs Rate (%) 6 83.3

1990s Projects/ Success Programs Rate (%) 14 64.3

Total Projects/ Success Programs Rate (%) 38 55.3

3 1 3 4 8 11 2 13 20 36.4 50.0 38.5 17 58.8 60.0 0.0 66.7 75.0 62.5

Indonesia Nauru Papua New Guinea Uzbekistan Subtotal Group C Fiji Islands Kazakhstan Malaysia Philippines Thailand Subtotal Graduate Economies Hong Kong, China Korea, Republic of Singapore Subtotal Total 66.7 3 1 31 6 41 1 1 2 133 204 51.0 100.0 100.0 100.0 46.6 269 66.5 1 1 2 606

66.7 0.0 51.6 66.7 53.7

100.0 100.0 100.0 56.9

ADF = Asian Development Fund, OCR = ordinary capital resources, OED = Operations Evaluation Department, PCR = project/program completion report, PPER = project/program performance evaluation report. Note: The success rate (%) reflects the percentage of operations rated successful, generally successful, or highly successful.

Sources: OEDs database; PCRs and PPERs containing a rating circulated as of 31 December 2006.

Table A6.3: Average Success Rates of ADF-Funded Projects and Programs, By Subsector and Approval Period. Combined PCR and PPER Ratings
1970s Project/ Success Program Rate (%) Project/ Program Project/ Program 1980s Success Rate (%) 1990s Project/ Success Program Rate (%) Total Success Rate(%)

13 7 9 3 11 6 49 34.7 22.2 66.7 72.7 16.7

15.4 28.6

26 12 2 8 8 19 6 1 82

30.8 16.7 50.0 37.5 50.0 73.7 33.3 100.0 42.7

9 12 2 6 6 12 3 5 55

33.3 50.0 0.0 0.0 16.7 66.7 66.7 100.0 45.5

48 31 4 23 17 42 15 6 186

27.1 32.3 25.0 21.7 41.2 71.4 33.3 100.0 41.4

0.0

4 2 1 5 1 13 40.0 100.0 30.8

0.0 50.0 0.0

6 2 9

83.3 100.0 77.8

16 4 4 2 3 3 32

81.3 75.0 75.0 0.0 100.0 100.0 78.1

20 7 5 2 14 6 54

65.0 57.1 60.0 0.0 71.4 100.0 66.7

4 6 15 25 13 0.0 11 83.3 60.0 68.0

75.0

8 1 2 13 24

87.5 0.0 100.0 84.6 83.3 18.2

2 4 4 13 23

100.0 75.0 100.0 84.6 87.0

14 5 12 41 72

85.7 60.0 91.7 75.6 79.2

Sector/Subsector Agriculture and Natural Resources Agriculture Production, Agroprocessing and Agrobusiness Agriculture Sector Development Environment and Biodiversity Fishery Forest Irrigation and Drainage Livestock Water Resource Management Subtotal Education Basic Education Education Systems Nonformal Education Senior Secondary Education Technical, Vocational, Skill and Training Tertiary Education Subtotal Energy Conventional Energy Generation (other than hydropower) Energy Sector Development and Reforms Hydropower Transmission and Distribution Subtotal Finance Banking Systems Capital Markets and Funds Finance Sector Development and Reforms Housing Finance Microfinance Pensions, Insurance, etc. Subtotal 1 13 0.0 12 100.0 25.0 9 1 6 1 5 22 66.7 0.0 50.0 0.0 80.0 59.1 33 1 6 1 6 47

24.2 0.0 50.0 0.0 83.3 34.0

Appendix 6

79

80

Sector/Subsector Project/ Program

Appendix 6

1970s Project/ Success Program Rate (%)

1980s Project/ Success Program Rate (%)

1990s Project/ Success Program Rate (%)

Total Success Rate (%)

Health, Nutrition, and Social Protection Health Program 1 0.0 4 75.0 5 60.0 Health Systems 7 28.6 10 50.0 17 41.2 Social Protection Subtotal 8 25.0 14 57.1 22 45.5 Industry and Trade Housing Construction Industry 8 62.5 5 40.0 7 28.6 20 45.0 Small and Medium-Scale Enterprises 2 50.0 3 33.3 2 100.0 7 57.1 Trade 1 100.0 1 100.0 2 100.0 Subtotal 10 60.0 9 44.4 10 50.0 29 51.7 Law, Economic Management, and Public Policy Economic Management 3 66.7 3 66.7 National Government and Administration 3 100.0 3 100.0 Public Finance and Expenditure Management 4 50.0 4 50.0 Subnational Government and Administration 1 100.0 1 100.0 Subtotal 11 54.5 11 54.5 Multisector 6 50.0 26 61.5 47 70.2 79 65.8 Transport and Communications Aviation 2 100.0 5 60.0 7 71.4 Ports, Waterways, and Shipping 5 80.0 5 60.0 2 100.0 12 75.0 Railways 1 0.0 1 0.0 2 50.0 4 25.0 Roads and Highways 3 66.7 16 81.3 25 92.0 44 86.4 Telecommunications and Communication 3 100.0 1 100.0 3 100.0 7 100.0 Subtotal 14 78.6 23 73.9 37 86.5 74 81.1 Water Supply, Sanitation, and Waste Management Integrated 2 100.0 2 100.0 Waste Management 1 0.0 1 0.0 Water Supply and Sanitation 7 14.3 6 50.0 16 62.5 29 48.3 Subtotal 7 14.3 7 42.9 18 66.7 32 50.0 Total 133 46.6 204 51.0 269 66.5 606 56.9 ADF = Asian Development Fund, OCR = ordinary capital resources, OED = Operations Evaluation Department, PCR = project/program completion report, PPER = project/program performance evaluation report. Notes: The success rate (%) reflects the percentage of operations rated successful, generally successful, or highly successful. Categories not counted are those of partly successful and unsuccessful. Sources: OEDs database; PCRs and PPERs containing a rating circulated as of 31 December 2006.

Appendix 6

81

Table A6.4: Quality of Adherence to Some ADB and ADF Themes as per CAPEs, 20022007
CAPE Targeting the Poor Governance Gender Equality Regional Cooperation Capacity Development Private Sector Environment BAN 2003 [PS] [PS] PSS

BHU 2005 [S] S [S] [S] [S] [PS] [PS]

CAM 2004 [S] PSS [S] S PS S

INO 2005 [PS] S [S]

LAO 2006

MON 2002 [PS]

NEP 2004 [S] [PS] [S*]

PAK 2007 [PS]

PNG SRI UZB 2003 2007 2006 [PS] [PS]

[S] PS [S] [S] [PS]

[PS] [PS] [PS] [S]

PS S S PS

[S] [S] [PS]

PS

[PS]

[PS]

[PS]

[PS] [PS] [PS] [PS] [PS] PS PS PS [PS] [PS] [PS] = no discussion, ADB = Asian Development Bank, ADF = Asian Development Fund, BAN = Bangladesh, BHU = Bhutan, CAM = Cambodia, CAPE = country assistance and program evaluation, HS = highly successful, INO = Indonesia, LAO = Lao Peoples Democratic Republic, MON = Mongolia, NEP = Nepal, PAK = Pakistan, PNG = Papua New Guinea, PS = partly successful, SRI = Sri Lanka, S = successful, US = unsuccessful, UZB = Uzbekistan. Note: Ratings in brackets were derived based on discussion from CAPE reports; ratings were derived only when there were no specific ratings given in the CAPE. Sources: ADB CAPE Reports.

[PS] [PS]

Table A6.5: Sector Assessment Ratings in CAPEs, 20022007

Macro Sectors and Sectors BAN
(2003)

BHU
(2005)

CAM
(2004)

INO
(2005)

LAO
(2006)

MON
(2002)

NEP
(2004)

PAK
(2007)

PNG
(2003)

SRI
(2007)

UZB
(2006)

Agriculture and [HS] [S] S PS PS [PS] [S] PS [PS] PS [S] Natural Resources Infrastructure Energy [S] [S] [S] S S [S] [S] S PS US Transport and Comm. [S] [S] [S] HS HS [S] [S] S [S] S US Urban Dev./Housing [PS] [S] S [PS] Social Infrastructure Health, Nutrition, and [PS] [S] [S] S S US [PS] Social Protection Education [S] [S] HS S S [PS] [S] PS S [S] Water Supply/ [S] [S] S PS [S] US S [S] Sanitation Finance Finance and Industry [PS] [S] [S] HS PS [S] PS [PS] [PS] LEMPP S PS = no discussion; BAN = Bangladesh; BHU = Bhutan; CAM = Cambodia; CAPE = country assistance program evaluation; Comm. = communication; Dev. = development; HS = highly successful; INO = Indonesia; LAO = Lao Peoples Democratic Republic; LEMPP = Law, Economic Management, and Public Policy; MON = Mongolia; NEP = Nepal; PAK = Pakistan; PNG = Papua New Guinea; PS = partly successful; S = successful; SRI = Sri Lanka; US = unsuccessful; UZB = Uzbekistan. Note: Ratings in brackets were derived based on discussion from CAPE reports, ratings were added only when there were no specific ratings given. Bhutan ratings were taken from a CAPE summary table with numerical ratings. Except for those on Bhutan and Papua New Guinea, the CAPEs included a sector assessment but not all indicated a final rating for the sector. Sources: OED CAPEs produced in 20022007.

Table A6.6: Ratings of Sector Policies Provided by the SES

Sector (year of study) Relevance Efficiency Effectiveness Sustainability a) Urban Sector strategy S PS b) Urban sector operations S PS Health S Fisheries U PS PS PS Energy S S S HS = no rating, HS = highly satisfactory, PS = partly satisfactory, S = satisfactory, U = unsatisfactory. Sources: Special evaluation studies. Final Rating PS S S U S

82

Appendix 6

Table A6.7: ADF VI and VII Operations in $ Million, Classified by Strategic Development Objectivea
SDO ENV GRO HRDb POVc WID Total HS/GS/S 529.0 4,496.9 1,292.0 1,914.2 487.5 8,719.5 Amount ($million) PS US NR 115.1 11.2 0.0 619.1 28.6 1.0 739.2 0.8 0.0 337.9 3.6 0.0 305.9 0.0 0.0 2,117.2 44.3 1.0 Total 655.3 5,145.6 2,032.0 2,255.7 793.4 10,882.0 HS/GS/S 80.7 87.4 63.6 84.9 61.4 80.1 PS 17.6 12.0 36.4 15.0 38.6 19.5 % Share US 1.7 0.6 0.0 0.2 0.0 0.4 NR 0.0 0.0 0.0 0.0 0.0 0.0 Total 100.0 100.0 100.0 100.0 100.0 100.0

ADF = Asian Development Fund, ENV = environment and natural resource management, GRO = economic growth, GS = generally successful, HRD = human development, HS = highly successful, NR = not rated, POV = poverty reduction, PS = partly successful, S = successful, SDO = strategic development objective, US = unsuccessful, WID = women in development. a Includes both operations classified with a first SDO and/or a second SDO. b Includes operations classified under HRD and HRD/POV. c Includes projects classified under POV, POV/ENV, and POV/WID. Note: See Notes below, regarding classification. Sources: Asian Development Bank databases.

Table A6.8: Number of ADF VI and VII Operations Classified by Strategic Development Objectivesa
SDO ENV GRO HRDb POVc WID Total HS/GS/S 13 92 45 52 13 215 PS 4 23 16 15 7 65 Number US 1 2 1 1 0 5 NR 0 2 0 0 0 2 Total 18 119 62 68 20 287 HS/GS/S ENV 72.2 GRO 77.3 HRD 72.6 POV 76.5 WID 65.0 74.9 Total % Share PS US 22.2 5.6 19.3 1.7 25.8 1.6 22.1 1.5 35.0 0.0 22.6 1.7 NR 0.0 1.7 0.0 0.0 0.0 0.7 Total 100.0 100.0 100.0 100.0 100.0 100.0

ADF = Asian Development Fund, ENV = environment and natural resource management, GRO = economic growth, GS = generally successful, HRD = human development, HS = highly successful, NR = not rated, POV = poverty reduction, PS = partly successful, S = successful, SDO = strategic development objective, US = unsuccessful, WID = women in development. a Includes both operations classified with a first SDO and/or a second SDO. b Includes operations classified under HRD and HRD/POV. c Includes projects classified under POV, POV/ENV, and POV/WID. Note: See Notes below, regarding classification. Sources: Asian Development Bank databases. Notes on the classification of strategic development objectives: 1. A project would be assigned women in development (WID) as primary theme if two thirds of the beneficiaries were women, or more than 50% of the expenditures were targeted specifically to benefit women. It would be assigned WID as secondary theme if it one third of the beneficiaries were women, or less than 50% but more than 20% of expenditures were targeted specifically to benefit women. 2. A project would be assigned a primary human resource development (HRD) theme if it had more than 50% of project expenditure targeted to education, health, population planning, water supply, sanitation, housing, and other basic human needs (but if did not fit the WID criteria above). It would get a secondary such theme if it had less than 50% but more than 20% of such expenditures for human resource development. 3. A project would have poverty reduction (POV) as main theme if its primary aim was to improve access for the poor to income/employment opportunities or human resource development services and either have at least two thirds of the beneficiaries being poor; or have one or more components benefiting the poor accounting for more than 50% of total project costs. A project would have poverty reduction as its secondary theme if its secondary objective addressed the issues discussed above and either had at least one third of project beneficiaries being poor, or one or more components benefiting the poor accounting for at least 20% of total project costs. (This excluded the mitigation of incremental adverse effects on vulnerable groups, since this was already mandatory for all ADB-financed projects.) 4. A project would get the primary theme of environmental protection and natural resource management (ENV) if more than 50% of project expenditures were targeted to protect, improve, or conserve natural and environmental resources. It would get a secondary such theme if it dedicated less than 50% but more than 20% for such purposes. 5. A project would be assigned the economic growth (GRO) theme if it did not meet any of the other theme criteria fully.

Appendix 7

83

THEMATIC RESULT AREAS EMPHASIZED IN ADF VIII AND ADF IX DONOR REPORTS 1. Capacity Development. After Asian Development Fund (ADF) donors endorsed the new thematic priority capacity development in the Enhanced Poverty Reduction Strategy (EPRS) of December 2004, the Asian Development Bank (ADB) instituted a working group, developed a project classification system for the theme, and approved a medium-term strategy and action plan in January 2007. 1 At least one operations department has conducted a major study on capacity development. 2 Results of ADBs capacity development are difficult to measure in a straightforward way. Attempts made however usually lead to the finding that the results of projects and technical assistance (TA) focusing on capacity development have been mixed. This is the finding of both older and newer studies. The Operation Evaluations Departments (OED) 2007 Annual Evaluation Review 3 included a theme chapter on capacity development, and reports no consistent pattern of success across sectors, countries, region, or time. The review reports on OEDs ongoing evaluation of capacity development in four sectors in Cambodia, Nepal and Philippines, which provisionally rated capacity development operations as effective in Cambodia, and more mixed effectiveness in Nepal and Philippines. One lesson is that continuity, of focused interventions and a long-term perspective are crucial. This, however, has not always been achieved. Another lesson is that doing less but doing it better is likely to produce better results. However, even less ambitious capacity development initiatives need to be supported by clear results frameworks, good diagnostics, use of the right mix of modalities, long-term engagement, and an inclusive participatory approach. The achievement of capacity development objectives will also be enhanced by improved staff skills and greater involvement of resident missions. 2. OED studied whether the effects of ADBs project delivery system were helping or hindering capacity development, notably when ADB created stand-alone project offices and hired project management consultants. In 2005, OED completed a special evaluation study (SES) on the role of project implementation units (PIUs), 4 in the context of a key target of the 2005 Paris Declaration to reduce parallel PIUs in externally funded projects (i.e., a special purpose vehicle to manage the project, staffed by the agencys staff and/or staff external to the agency). OEDs PIU SES found that only a minority of PIUs created as a result of ADB funded projects had characteristics that could raise concerns regarding capacity erosion. While 90% of ADB's investment projects were managed by a PIU, 33% used mainly externally staffed PIUs, and around 40% were temporary, to be dissolved upon completion of the project. All others were either more permanent project units, and were staffed mainly by the agency, or had a mix of internal and externally recruited staff. 5 The SES found that most externally staffed and temporary PIUs had sensible reasons for being set up in this way. In ADF projects, 41% of the PIUs reported that capacity gains of PIUs could be significant, given that the staffs prior project implementation experience was small and not geared to new approaches. However, almost 20% of the PIUs for ADF projects felt that their work overlapped with that of their parent agency (as against 31% of PIUs for ordinary capital resources [OCR] projects); and a similar proportion noted that one or more of their staff included government officers that had resigned and joined the PIU as consultants or contractuals. On the positive side, most PIUs felt they served a function in building up project management capacity in the government service, while many also built up capacity in service delivery, organization development, and operation and maintenance of infrastructure. The SES recommended that clients increase the proportion of staff posted to
1

3 4 5

ADB. 2007. Integrating Capacity Development into Country Programs and Operations. Medium-Term Framework and Action Plan. Manila. ADB. 2007. A Study of ADBs Capacity Development Interventions in South Asia. Manila. South Asia Occasional Papers Series No. 1. ADB. 2007. 2007 Annual Evaluation Review. Manila. ADB. 2005. Special Evaluation Study on the Role of Project Implementation Units. Manila. Consultants, contractuals, and government officers deputed from other agencies.

84

Appendix 7

PIUs from within the parent agency, and that the number of temporary PIUs should be reduced by integrating them with the main agencies. The SES also recommended that ADB mitigate the risks of capacity erosion as a result of external and temporary PIUs by adding specific PIU capacity development plans and exit strategies to the design. 3. Civil Society Organizations. OED completed an SES in 2006 on the involvement of civil society organizations (CSOs) in ADB operations. 6 The evaluation did not claim to be representative of the complete range of CSO involvement in ADB operations, but identified lessons and successful examples of CSO involvement. The SES found that ADB spending on CSO capacity building had increased over the years, in line with ADF donor suggestions and ADB strategy. The increased focus on organizational development of grassroots CSOs, such as water users associations and farmers' groups, pointed to a direct relation with the Poverty Reduction Strategy (PRS). Although CSO involvement in ADB operations was seen as increasingly diverse, involvement in strategically important areas, such as policy advocacy, and monitoring and evaluation, was still comparatively rare. The SES found that the concerns of grassroots organizations and beneficiaries might not always be reflected effectively in country strategy and program formulation, despite increased consultations. ADB was found to be weak in involving civil society as partners in implementing ADB governance and anticorruption policies. However, more in line with ADF donor suggestions, the strategy for involving CSOs in implementing gender and development policies was judged effective, particularly in its long-term approach and early focus on institutional capacity building, by supporting appropriate legislation and regulations in developing member countries. 4. Participation of Beneficiaries. OED has conducted several SESs on this theme since 2000, and came up with assessments of varied nature. Some studies stressed the importance of participation of beneficiary and nonbeneficiary stakeholders in project preparation and implementation, and how ADB could and should do more in this field. SESs conducted in 2000 and 2003 noted insufficient participation by stakeholders. 7 More recent SESs noted higher integration of participatory approaches in project design and implementation, as also corroborated by the 2006 SES (para. 81). An SES in 2004 8 warned against mechanically increasing the attention for participation of beneficiaries and nongovernment organizations (NGOs), unless the basic conditions change under which projects are prepared and operate. The SES found that participatory approaches, such as group formation and NGO engagement, had not always improved project performance, because many project interventions were already predetermined at the formulation stage, and principal-agent relations between policy makers, project providers, and beneficiaries could not be changed. In Nepal, for example, the SES noted that a particular project distributed subsidized equipment to processing enterprises as the primary instrument to promote milk marketing. The project provided free training and improved forage seeds to induce group formation, but without understanding the farmers demand, the need for new technology, or their willingness to pay for the training. Consequently, the sustainability of the outcomes depended on the continuity of the service delivery mechanisms created by the project. The SES observed that contracted NGOs left local communities after the expiration of their contracts without leaving significant impacts. In many cases, training and extension services were not continued because of limited financial resources from the government. Overall, ADBs progress in increasing NGO and beneficiary participation has been substantial over the years, but there are signs, similar to those for the
6

ADB. 2006. Special Evaluation Study on the Involvement of Civil Society Organizations in Asian Development Bank Operations. Manila. ADB. 2000. Special Evaluation Study on Participatory Development Processes in Selected Asian Development Bank Projects in Agriculture, Natural Resources, and Social Infrastructure Sectors. Manila; ADB. 2003. Special Evaluation Study on Participatory Approaches in Forest and Water Resource Operations in Selected Developing Member Countries. Manila. ADB. 2004. Special Evaluation Study on the Effectiveness of Participatory Approaches. Manila.

Appendix 7

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enforcement of social and environmental safeguards, of mechanistic rather than measured application. This leads to inefficiencies. 5. Private Sector Development. An OED SES completed in 2007 9 reports satisfactory results for ADBs private sector operations, if less so for private sector development overall. The 71% project success rate for nonsovereign lending in ADF countries exceeded the 64% success rate for ADBs public sector projects. 10 The rating of highly satisfactory was withheld, mainly due to the lack of synergy between public and private sector operations departments. The highest degree of success was achieved in the power and energy sectors, although institutional reform successes were less prominent. ADB had supported the restructuring of the power sector in many countries. Policy dialogue conducted by ADB was successful in mitigating some of the negative financial consequences for private energy sector clients. The SES found that private sector development operations were generally satisfactory in terms of overall financial performance. ADB was successful in stimulating investments through demonstration or transfer of technology. The success of private sector operations was reflected in an increasing portfolio of nonsovereign loans. However, the volume was still low in ADF countries (Table) and concentrated in Indonesia, Pakistan, Viet Nam, Afghanistan, and Lao Peoples Democratic Republic. Weaknesses in the enabling environment delayed private sector development in some sectors such as transport, water, and finance. The SES assessed the success of ADB support for small and medium credit lines issued by government-owned development finance institutions as very low (38%). The SES concluded that generally ADB should not lend to government owned development finance institutions, and any exceptions would need to be strongly justified. Table A7.1: Private Sector Operations in ADF Countries, 20012007
Country Eligibility (ADF IX)a Group A Country Afghanistan Cambodia Lao Peoples Democratic Republic Maldives Mongolia Subtotal Group B1 Azerbaijan Bangladesh Georgia Pakistan Sri Lanka Viet Nam Subtotal Group B2 Indonesia 5 520.20 Grand total 34 1101.29 ADF = Asian Development Fund, OCR = ordinary capital resources. a Group A = ADF only; Group B1 = ADF with limits amounts of OCR; Group B2 = OCR with limited amounts of ADF. Data as of October 2007. b Excludes other complementary loans and guarantees and regional projects. Source: Asian Development Bank records.
9

Investments (number) 5 1 1 1 2 10 3 2 1 5 2 6 19

Amount ($ million)b 83.10 8.00 50.00 4.50 16.10 161.70 21.00 20.53 25.00 210.10 10.36 132.50 419.39

ADB. 2007. Special Evaluation Study on Private Sector Development and Operations: Harnessing Synergies with the Private Sector. Manila. 10 In 19952006, 14 project performance evaluation reports had been prepared by OED, and 31 project completion reports by operations departments. They included 24 reports for projects in current ADF countries.

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6. Regional Cooperation and Integration. OED is in the process of assessing the results of ADB operations in this area as part of an SES on the Long-Term Strategic Framework. It concludes that results and results positioning after 2001 have been broadly positive. A SES of regional TA addressing regional cooperation is planned for 2008, as well as an SES on transport and energy in the Greater Mekong Subregion. Further evaluations are planned for 2009 and 2010 regarding regional cooperation in the Pacific, South Asia, and Central Asia. 7. Gender and Development. OED issued its last evaluation in 2001 11 and recommended that ADB's country strategies and policy dialogue should aim at fostering national and sectoral gender and development policies and removing structural barriers affecting women. In line with the 1998 Gender and Development Policy and the 1999 PRS, the evaluation recommended that gender considerations should be mainstreamed in all operations, and project designs should routinely address gender objectives. Consequently, reports and recommendations of the President (RRP) now include more gender action plans or otherwise effectively mainstream gender considerations. The number of ADF operations with gender as a special theme has grown from 13% in ADF VIII to 20% in ADF IX; the number of TA operations with this theme grew from 2% to 6%. Eighty percent of loans with a gender theme or gender mainstreaming features were funded from ADF resources. Results are difficult to assess due to the absence of a recent evaluation. 12 The Regional and Sustainable Development Department conducted a review in 2006. 13 It found that a number of advances for gender equality and womens empowerment have been made across Asia and the Pacific since 1995. Girls school enrollment, female literacy, womens life expectancy, and economic participation have generally improved. However, the regional trends masked wide differences between and within countries, and gender gaps persisted in access to education, quality health care, employment and business opportunities, political participation and decision-making, personal security, and justice. Regional experience has also shown that economic growth in itself does not necessarily reduce gender disparities, witness for instance the deteriorating sex ratios in the Peoples Republic of China (PRC) and India. Much work remains to be done. The review assessed the impact of gender-responsive loan designs during implementation. Rapid gender assessments were undertaken for 12 loans in four ADF countries. While operations were at various stages, the assessments identified some intermediate results. The most impressive were found in projects that included a detailed project gender action plan linked to the projects main components with clear targets. They were mainly agriculture and rural development projects in which ADBs resident mission gender consultants had worked closely with the EA to develop and implement a detailed gender action plan. The results were deemed more positive than those reported by the 2001 OED evaluation. 8. Managing for Development Results (MfDR). In 2004, ADB made a formal commitment to introducing MfDR following strong expressions of support by ADF IX donors. The donor report stressed that ADB should nurture a strong results-oriented culture across the organization. OED has undertaken a preliminary assessment of the implementation of ADBs MfDR agenda. 14 A more comprehensive evaluation of MfDR outcomes is planned for 2009. The report finds that ADBs progress on MfDR is comparable to that of other multilateral development banks. ADB has developed some policies, procedures, and tools to support staff and the organization as it works towards the full implementation of MfDR. The quality of ADBs design and monitoring frameworks improved significantly in 2005, although quality dropped slightly in 2006. The results of the staff survey and focus group discussions conducted during
11 12

ADB. 2001. Special Evaluation Study on Gender and Development. Manila. OED plans to conduct an evaluation of the Gender and Development Policy in 2009. 13 ADB. 2006. Implementation Review of the Policy on Gender and Development. Manila. 14 ADB. 2007. Special Evaluation Study on Managing for Development Results in the Asian Development Bank: A Preliminary Assessment. Manila.

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the MfDR SES suggest that ADB staff are neither fully engaged in, nor committed to MfDR. The report attributes this to ADBs adoption of MfDR being in a transitional stage. 15 Nevertheless, the weak commitment from professional staff, particularly directors, is a concern. To make more progress in implementing MfDR requires continued support and leadership by senior Management, along with changes in ADBs human resource management practices to align the incentives that govern ADB staff behavior with MfDR. 9. Evidence of More Effort to Address Corruption. The ADF IX donor report emphasizes taking action to address the pernicious effects of corruption on development. Since the issuance of the 1998 Anticorruption Policy, ADB has become more aware of the need to combat corruption. The Anticorruption Unit, created in September 1999, was upgraded to the Integrity Division in December 2004. According to its annual reports, the division has investigated an increasing number of cases. 16 In 2005, ADB adopted a new and comprehensive public communications policy, which gives stakeholders greater and quicker access to ADB documents. Anticorruption approaches are now discussed more openly in country strategies and programs. Anticorruption is one of the three focal areas in ADBs 2006 second governance and anticorruption action plan, which focuses anticorruption efforts at the sector level. Of the 474 TA operations categorized as addressing governance in 20012007, 18 were launched with an anticorruption subtheme; five more are in the pipeline. CAPEs have reported progress in ADBs efforts to address corruption in ADF countries such as Cambodia, Indonesia, and Sri Lanka. Fourteen ADF countries 17 have joined the ADBOrganisation for Economic Co-operation and Development Anti-Corruption Initiative for Asia and the Pacific, and six more 18 have expressed interest in becoming members. 10. Experience with Environmental and Social Safeguards. Safeguard policies, although not emphasized in ADF donor reports, were part and parcel of the wider social, environmental and governance agendas pursued, on the principle that ADB needs to make sure that operations do not cause direct or indirect harm to the environment and people. This study assesses the increasing attention for the application of ADBs Environment Policy, Involuntary Resettlement (IR) Policy, and Indigenous Peoples (IP) Policy as one of the major developments at the operational level in the 2000s. 11. ADB approved its IR policy in 1995 and its IP policy in 1998. Environmental guidelines had existed for much longer than that, although the Environment Policy with major safeguard compliance guidelines was issued only in 2002. As it became clear that not all operations could be expected to be able to directly target the poor, more emphasis was put on ensuring that operations would not impoverish sections of the population, either by reducing their access to land and sources of income, or by negatively affecting their environment, social position, or culture. Procedures triggered by the IR policy were gradually tightened from a focus on resettlement as a result of loss of land needed for a project, to deal with all potentially adverse effects on people from either physical or economic displacement. Staff attention for resettlement issues during project preparation increased, resulting in the proportion of operations with resettlement plans increasing from 20% in the 1990s to 50% in the 2000s. This was in spite of the fact that the nature of the operations supported, or the number of people actually displaced, did not change much. The number of operations with IP plans or specific actions for IP in project plans, also rose significantly, even when the number of operations that carried very concrete
15

The stages identified by the Treasury Board of Canada Secretariat (The Managing for Results Self-Assessment Tool) are (i) awareness, (ii) exploration, (iii), transition, (iv) full implementation, and (v) continuous learning. Available: www.tbs-sct-.gc.ca/rma/account/transmod/tm02_e.asap 16 Available: http://www.adb.org/Integrity/annual-reports.asp 17 Bangladesh, Bhutan, Cambodia, Cook Islands, Indonesia, Kyrgyz Republic, Mongolia, Nepal, Pakistan, Papua New Guinea, Samoa, Sri Lanka, Vanuatu, and Viet Nam. 18 Afghanistan, Lao PDR, Tajikistan, Tonga, Solomon Islands, and Timor-Leste.

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Appendix 7

risks for IP other than related to either resettlement or environmental change (which could be handled under resettlement plans or environmental management plans) were very few, and did not rise either over the years. Procedures triggered by the environment policy were expanded, and the preparation of environmental management plans was made mandatory for all category A and B operations, to deal with issues of environmental and social sustainability. 12. The approach to poverty reduction thus evolved over the period of ADF VIII and IX from adding components or procedures to ensure that the poor shared in project outcomes, to adding components to protect the environment and restore livelihoods affected by operations trying to promote economic growth, particularly for vulnerable groups such as the poor and/or IP. 13. ADBs Regional and Sustainable Development Department started a process to update the three safeguard policies in 2004, and in late 2005, the DEC asked OED to provide an independent evaluation of these policies. 19 This presented an opportunity to take stock of the effects of ADB operations on affected people and the environment, including the mitigation measures mandated under the policies. The environment policy was found to have been effective as a safeguard policy, but the question was raised whether ADB was keeping up with evolving best practice, and whether an increasingly mechanistic application of procedures was yielding optimal results. The IR policy was deemed increasingly effective, evolving from one in which resettlement had been frequently overlooked, especially the effects of loss of access to land on livelihoods. Of relevance to this study was that almost 80% of the resettlement impacts were the result of operations located in PRC, India, and Philippines, which are not or are no longer ADF countries. The IP policy was judged relevant but less effective, as the policy seemed to have offered little added value beyond the IR and environment policies. As it proved difficult to define adverse effects other than those related to resettlement and environmental change (mostly in projects starting in the early 1990s or before), the mitigation measures mandated by the IP policy were regarded as less effective than those of the other two policies. Little evidence was found that operations had caused significant harm to IP in other areas. Rather to the contrary, many operations were found to target the development of the poor and areas with indigenous peoples, such as agricultural, health, or education operations. 14. However, the enforcement of all three policies was deemed less efficient and less likely to be sustainable for both ADB and clients, due to the high transaction costs connected with applying staff intensive and time-consuming one-size-fits-all procedures to the preparation of projects, even if many carried no or only minor, risks of adverse impacts. The studies warned of the likelihood of perverse effects: (i) borrowers no longer engaging with ADB for their more challenging operations, especially since some had gained access to other financing sources; and (ii) ADB staff de facto avoiding financing operations or components of operations that might trigger onerous safeguard procedures. The studies endorsed ADBs initiative to clarify and revise its policies, and suggested that ADB concentrate attention for safeguards during project preparation on more serious cases, and increase its staff resources for resettlement and environment safeguard enforcement during project implementation.

19

ADB. 2006. Special Evaluation Study on Environmental Safeguards. Manila; ADB. 2006. Special Evaluation Study on Involuntary Resettlement Safeguards. Manila; ADB. 2007. Special Evaluation Study on Indigenous Peoples Safeguards. Manila.

Appendix 8

89

CASE STUDIES OF ONGOING ADF OPERATIONS IN FIVE COUNTRIES 1. The performance of the projects and programs included in the sample for this study has to be seen against the broader context of the Asian Development Banks (ADB) overall portfolio performance, and in the five countries where they were located. Against an average disbursement ratio in 2006 of 19% for the entire Asian Development Fund (ADF) loan portfolio, four out of five case study countries did not do very well: Bangladesh had 17%; Nepal, 20%; Pakistan, 17%; and Viet Nam, 18%. Only Lao Peoples Democratic Republic (Lao PDR) did significantly better at 31%, but this may have been in part due to an older portfolio older operations tend to be at a stage where they disburse more quickly. When excluding the usually faster disbursing program loans, then the performance of the four larger case study countries is again slightly below averageagainst the ADB average of 16% in 2006, Bangladesh had 15%; Nepal, 12%; Pakistan, 14%; and Viet Nam, 12%. The low disbursement percentages in 2006 are no exception, as the countries have all had large average implementation delays and average delays in loan closing, as documented by the 2006 Annual Report on Portfolio Performance. 1 Of all larger ADF countries, Pakistan has had by far the longest average delays in loan closing: 3.14 years in 19972001 and 3.24 years in 20022006. 2 2. The methodology for choosing 25 ADF project and program case studies in five countries was based on the following considerations: (i) the five countries include the three with most of the ADF operations approved up until early 2007, the time of the start of this study: Pakistan had 18%, Bangladesh 17%, and Viet Nam 15%; (ii) the need for at least 2 ADF-only countries regarded as weakly performing but with a mature portfolioNepal and Lao PDR; (iii) the need to cover a significant portion of overall operations (the five countries covered around 60% of all loans between 2001 and 2006 in the three ADB regions with most operations overall: Central and West Asia, South Asia, and South East Asia); and (iv) the need for low cost of field work, quick results, and a sufficient spread of types of operations. The five ongoing operations in each of the five countries were selected based on the following considerations: (i) older operations are preferable, since they guarantee a more advanced stage of implementation, (ii) the five cases in each country need to cover different sectors (mainly agriculture and natural resources, social sectors, transport, and energy); and (iii) reachability main executing agencies of the operations need to be in or near the capital or their representatives need to be able to come to the capital for interviewing. This led to selection of the oldest operations on the list of ongoing operations, with deletion of those operations that were implemented by an agency or in a sector that was the same as that of another project on the list of five, or were not easily reachable (the latter was seldom the case). 3. Details of the case study operations chosen are in Tables A8.1 and A8.2. Table A8.1 shows a wide variety of operations in the sample, most of which were approved in 2001 and 2002. Table A6.2 groups some further data on the 25 case studies, as well as provides the ratings given on the range of criteria. In the rest of this Appendix, the basic data for operations quoted can be retrieved from the two tables.

1 2

ADB. 2007. Annual Report on Portfolio Performance 2006. Manila. Solomon Islands exceeded it in 20022006 with an average delay of 4.44 years; the Federated States of Micronesia accumulated delays of 3.32 years; Papua New Guinea came close with an average of 2.7 years delay.

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Table A8.1: Basic Data on 25 Ongoing ADF-Supported Operations in Five Countries

Project IR Date ADF OCR Cofinancing Poverty Thematic Env. Presence of Approval Loan $m Loan $m Amount $m Class. Class. Class.a Class.b of IPP

Bangladesh Post-Literacy and Continuing Education Project 13-Dec-2001 65.0 0.0 12.0 PI HD/GD C C NO West Zone Power System Development Project 17-Dec-2001 198.9 138.7 40.0 PI ECO/GG B A NO Road Network Improvement and Maintenance Project 10-Oct-2002 65.0 0.0 10.0 PI ECO B A NO Jamuna-Meghna River Erosion Mitigation Project 25-Nov-2002 42.2 0.0 0.0 PI ECO/ENV A B NO Urban Governance and Infrastructure Improvement Project 28-Nov-2002 60.0 0.0 0.0 PI GD/GG B A NO Lao People's Democratic Republic Vientiane Urban Infrastructure and Services Project 23-Aug-2001 25.0 0.0 4.4 CPI HD/GG B A NO Nam Ngum River Basin Development Sector Project 11-Nov-2002 15.0 0.0 3.8 PI ECO B C NO GMS: Mekong Tourism Development Project 12-Dec-2002 10.9 0.0 0.0 PI ECO/RC B A NO Northern Economic Corridor Project 20-Dec-2002 30.0 0.0 0.0 PI ECO A A YES Northern Area Rural Power Distribution Project 18-Sep-2003 30.0 0.0 10.0 PI ECO B B NO Nepal Community Groundwater Irrigation Sector Project 26-Feb-1998 30.0 0.0 2.8 PI ECO/PR B C NO Small Towns Water Supply and Sanitation Sector Project 12-Sep-2000 35.0 0.0 0.0 PI HD/PR B C NO Teacher Education Project 24-Sep-2001 19.6 0.0 0.0 PI HD C C NO Governance Reform Program 27-Nov-2001 30.0 0.0 0.0 PI ECO C C NO Road Network Development Project 13-Dec-2001 46.0 0.0 9.6 PI ECO A A YES Pakistan North-West Frontier Province Urban Dev. Sector Program 8-Nov-2001 20.8 0.0 0.0 PI PR/HD B C NO Agriculture Sector Program II 13-Dec-2001 125.0 225.0 0.0 O ECO B C NO Access to Justice Program 20-Dec-2001 106.8 243.2 0.0 PI GG/GD C C NO Reproductive Health Project 20-Dec-2001 36.0 0.0 0.0 CPI GD C C NO 5.0 296.2 0.0 GI ECO A A NO NWFP Road Dev. Sector Program and Subreg. Connectivity 18-Nov-2004 Viet Nam Second Red River Basin Sector Project 13-Nov-2001 70.0 0.0 30.0 PI GD B A NO Central Regions Livelihood Improvement Project 17-Dec-2001 43.1 0.0 16.5 CPI GG B C YES Provincial Roads Improvement Sector Project. 18-Dec-2001 70.0 0.0 0.0 PI ECO B A NO Upper Secondary Education Development Project 17-Dec-2002 55.0 0.0 0.0 PI HD/GD C A/B YES Housing Finance Project 20-Dec-2002 30.0 0.0 0.0 PI HD C A/B NO ADF = Asian Development Fund; Class. = classification; CPI = core poverty intervention; ECO = economic growth; ENV = environmental protection; GD = gender and development; GG = good governance; GI = general intervention; HD = human development; IPP = indigenous peoples development Plan; IR = involuntary resettlement; m = million; MS = multisector; NWFP = North-West Frontier Province; O = others; OCR = ordinary capital resources; PI = poverty intervention; PR = poverty reduction; RC = regional cooperation. a A = operations have significant adverse environmental impacts, B = operations have some adverse environmental impacts, C = project has no significant environmental impact. b A = with full resettlement plan, B = with short resettlement plan, A/B = "to be determined" if with short or full resettlement plan, C = no resettlement. Sources: Asian Development Banks Loan, Technical Assistance, Grant and Equity Approvals database; Operations Evaluation Department's database used for Special Evaluation Study on Indigenous Peoples Safeguards, and Involuntary Resettlement Safeguards; and project performance reports and reports and recommendation of the President.

Table A8.2: Assessments of Case Studies Regarding 25 Ongoing ADFVIII Supported Operations

Loan No.

Country/Project

Approval Date
13-Dec-2001 PS S PS HS S S S HS S S S PS S PS PS PS S PS US PS PS PS PS HS PS yes yes no yes no no yes yes no yes yes yes no yes yes no yes na S unclear S na PS na na unclear US na PS PS PS na PS yes S unclear yes unclear yes S yes yes yes yes yes no yes yes yes yes yes yes yes yes yes no no no yes yes yes S yes yes S no no na yes no na yes S unclear na S PS S S unclear PS na PS PS PS PS PS S S PS unclear na na na yes yes yes unclear yes S 17-Dec-2001 10-Oct-2002 25-Nov-2002 28-Nov-2002 23-Aug-2001 11-Nov-2002 12-Dec-2002 20-Dec-2002 18-Sep-2003 26-Feb-1998 12-Sep-2000 24-Sep-2001 27-Nov-2001 13-Dec-2001 8-Nov-2001 13-Dec-2001 20-Dec-2001 20-Dec-2001 20-Dec-2001 18-Nov-2004 13-Nov-2001 17-Dec-2001 18-Dec-2001 17-Dec-2002 20-Dec-2002 30-Jun-05b 30-Jun-07b 31-Dec-05b 18-Jul-07b yes yes yes no no yes yes no yes no no yes yes yes yes no yes yes yes yes yes yes yes no yes

Original Completion Date Delay has Occurred? Design Problem?

Special Component Good Component Revised Project Poverty Likely Governance Likely Completion Likely a Date Successful? Component? Successful? Ambitions? Successful?

Scope Change?
yes no no no no no no no yes no no no no yes no no no no no yes yes no no no yes

Bangladesh

1881

Post-Literacy and Continuing Education Project

1884/85

West Zone Power System Development Project

1920

Road Network Improvement and Maintenance Project

1941

Jamuna-Meghna River Erosion Mitigation Project

1947

Urban Governance and Infrastructure Improvement Project

30-Jun-08 30-Mar-06 30-Jun-07 30-Jun-09 31-Dec-09

2.5 years 2 years 2 years -

31-Dec-11 30-Jun-08 30-Jun-09 -

Lao People's Democratic Republic

1834

Vientiane Urban Infrastructure and Services Project

1933

Nam Ngum River Basin Development Sector Project

1970

GMS: Mekong Tourism Development Project

1989

Northern Economic Corridor Project

2005

Northern Area Rural Power Distribution Project

30-Aug-06 30-Sep-08 31-Dec-07 31-Dec-06 31-Mar-08

1 year 1.5 year 4 months 2 years 4 months

31-Jul-07 31-Mar-10 30-Apr-08 31-Dec-08 31-Jul-08

Nepal

1609

Community Groundwater Irrigation Sector Project

1755

Small Towns Water Supply and Sanitation Sector Project

1840

Teacher Education Project

31-Dec-04 30-Jun-06 30-Jun-08 30-Jun-07 31-Dec-07 03-Jul-07b 30-Sep-07b

2 years 2 years 1.5 years 1 year 30-Jun-08 -

31-Dec-06 31-Mar-08 -

1861

Governance Reform Program

1876

Road Network Development Project

Pakistan

1854

North-West Frontier Province Urban Dev. Sector Program

1877-79

Agriculture Sector Program II

1897-98

Access to Justice Program

1899

Institutional Development for Access to Justice Project

1900

Reproductive Health Project

2103/04

NWFP Road Dev. Sector Program and Subreg. Connectivity

31-Dec-05 31-Dec-07 30-Jun-10

2 years 2.5 years -

30-Jun-08 -

Viet Nam

1855

Second Red River Basin Sector Project

1883

Central Regions Livelihood Improvement Project

1888

Provincial Roads Improvement Sector Project.

31-Dec-07 31-Mar-07 31-Dec-06 30-Jun-09 30-Jun-08

2 years 2.5 years 2 years -

31-Dec-09 30-Sep-09 31-Dec-08 -

1979

Upper Secondary Education Development Project

1990

Housing Finance Project

ADF = Asian Development Fund, GMS = Greater Mekong Subregion, HS = highly successful, na = not applicable, NWFP = North-West Frontier Project, PS = partly successful, S = successful, US = unsuccessful. Special component for the poorest.

Appendix 8

Program's completion date based on loan closing.

Sources: Case studies conducted by the study team; Project Performance Reports.

91

92 A.

Appendix 8

Bangladesh Case Studies

4. As of end-June 2007, ADB was administering 45 loans in Bangladesh, 9 from ordinary capital resources (OCR), and 36 from ADF. Senior Bangladesh Resident Mission (BRM) staff held that most of these ADF operations were doing relatively well, with the disbursement ratio at 16% up from previous years, although this was still slightly below the ADB average of 18%. In the sample of five operations chosen for review by the Mission, two (the Post-Literacy and Continuing Education Project, and the Road Network Improvement and Maintenance Project) had met with inordinate delays after approval. This, BRM believed, biased the sample of five operations towards more negative experiences. The below-average disbursement ratio in 2006 was viewed as partly due to the circumstance that the Bangladesh portfolio included almost no program loans (there were only three at end-2006; 2% of portfolio value). The higher disbursement rate in 2006 had nevertheless allowed ADB and the country to move out of the situation of negative resource flows of 2004 and 2005. 5. With respect to the five project case studies, this study concludes that ADB made a serious attempt in Bangladesh to increase the level of targeting of the poor in 20012003. Increased attention to governance in the five operations reviewed was most notable in the reform efforts in the energy, urban development, and education sectors, and various attempts to introduce performance management through contracting out options in the road sector. It seemed, however, that some of the large delays encountered were due to apparent rushed and forced pro-poor oriented design connected partly with the more overriding concern to target the poor in each project, and partly with such factors as the reorganization in 2002, insufficient staff and staff continuity over the period, and the transfer of operations from staff involved in processing to staff administering the implementation in BRM. The delays in project implementation regularly jeopardized cofinanced operations (there were many, due to lack of ADF resources), but the adverse effects were mitigated either by the involvement of other aid agencies that were found ready to take over some of the cofinancing burden, or by changes in design that became necessary when the original design proved unworkable. B. Lao PDR Case Studies

6. The study found that the disbursement ratio for the 22 ongoing ADF loans and grants was a healthy 23.5% in 2005, and 32% in 2006this in spite of the fact that only a minor portion of the operations were programs. The upward trend was in part explained by the aging portfolio in the Lao PDR, caused by diminishing ADF ceilings, which have led to fewer project approvals since 2005. Nevertheless, with the exception of two operations counted at risk, 1 progress overall was good. 7. The five operations studied all showed good progress, in spite of the low ranking of Lao PDR in the country performance assessment (CPA). All operations were classified as poverty intervention, and four carried components specifically addressing the poor disproportionately, as the Poverty Reduction Strategy (PRS) recommends. Two of these had been highly successful: (i) the Village Area Improvements Community Infrastructure component of the Vientiane Urban Infrastructure and Services Project, and (ii) the pro-poor Community-based Ecotourism Development Component of the Lao PDR loan in the Greater Mekong Subregion (GMS) Mekong Tourism Development Project. Two others had proved more problematic, although there were still chances of these components becoming successful: the village development fund components of the Nam Ngum River Basin Development Sector Project, and
1

The Smallholder Development Project and the Banking Sector Reform Program.

Appendix 8

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the social action plan of the Northern Economic Corridor Project. The former was not appropriately designed at the start of the project, and is only just starting implementation. The latter similarly had a design that was not fully worked out: proposed clinics were dropped and the water supply program was also cut back. The social action plan and community water supply schemes started implementation late, and are not yet completed. The outcomes are not yet known, and there is some concern that some of the works will prove to be not fully sustainable. The Northern Area Rural Power Distribution Project had no special component for the poor, but was located in a poor area, and was in line with the national policy to give access to electricity to 90% of rural areas by 2020. This project also had made reasonably good progress to date. All five had included components and/or covenants that addressed policy reform/development or envisaged improving governance in other ways. The progress observed was mixed; excellent in the GMS tourism project, good in the Nam Ngum project. The Rural Power Distribution project proved less successful in coaxing Electricit du Laos and the government to reduce the accounts receivable and in addressing some other covenants. The Vientiane project had mixed experiences as well: the main objective of creating a Vientiane Municipality is unlikely to be achieved within the projects life, although there are chances that it will be created just afterwards, in the near future. The Northern Economic Corridor Project had no specific governance ambitions, other perhaps than to produce requisite transit and crossborder agreements by 2005. This target was achieved. However, the covenant that the government would set up and staff three forest checkpoints (to prevent poaching and illegal logging) was not yet fully complied with. Two border check points had been set up, but a third one near the national park was disputed. At the time of the mission, near the end of the project, no solution has been reached. C. Nepal Case Studies

8. ADB approved $529.2 million to fund four grants ($83.9 million) and 17 loans ($445.3 million) from ADF resources between December 2003 and June 2007. The loan portfolio has one credit line, two sector loans, nine project loans, and five program loans. Of the five operations selected for review, four had experienced delays of 1-2 years and the fifth one (the Teacher Education Project) was planning to request an extension. 9. The review concluded that the ADB operations investigated have indeed succeeded in targeting the poor well in Nepal. Attached livelihood components for the poor, women, and disadvantaged groups have all had a distinct impact in Nepal. Factors external to the operations, however, exerted a negative effect on their effectiveness. Frequent demonstrations and strikes held by different groups over the period delayed implementation, along with the insecure working environment in the lowlands. This was putting the projects at risk of only partly achieving their objectives. In one of the reviewed operations the implementation delays had led to a reduction in cofinancing from another funding agency. 2 Despite the challenging environment, all executing agencies had made serious efforts to implement the operations. The more pro-poor and poverty-focused operations such as Road Network Development Project, and the Community Groundwater Irrigation Sector Project were found to perform in fact relatively better. Operations with greater involvement of nongovernment organizations (NGOs) had performed better than those without such involvement. Consultations with NGOs pointed to the conclusion that pro-poor project initiatives built into the design of ADB-supported operations had become accepted by all factions of society, including disgruntled groups in the Terai, which had facilitated project implementation. While a number of partner NGOs had the required institutional capacity to contribute to project implementation (e.g., the Small Towns Water
2

Department for International Development downsized its commitment in the Road Network Development Project.

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Appendix 8

Supply and Sanitation Sector Project), their roles had been rightly limited to social mobilization, providing training, and production-oriented microcredit. Design- and construction-related project activities had been appropriately left to consulting firms. The five operations had booked fewer results in terms of promoting good governance. The Governance Reform Program was not performing very well. There has been some resistance from the side of public institutions in actively engaging qualified private sector organizations in service delivery (e.g., from the Teacher Education Project). This constrained achievement of results. Anecdotal evidence suggests that monitoring and evaluation of governance-type operations (e.g., Governance Reform Program) by civil society watchdogs could have improved transparency and accountability. D. Pakistan Case Studies

10. ADB approved $1.9 billion from ADF resources from 2001 to mid-2007 to fund seven program loans, three sector loans, 20 project loans, and one grant of $5 million. Pakistan portfolio is dominated by multisector and/or multiprovince loans (i.e., with executing agencies in each province) and has a very high amount dedicated to emergency assistance in the context of the 2005 earthquake in the northeast. This makes the portfolio generally difficult to handle. Multisector loans (which included $600 million in emergency loans) accounted for 56.8% of all loan funds, almost three times the average for this sector in ADB overall. This was followed by agriculture and natural resources (13%); law, economic management, and public policy (8.5%); education (5.3%); water, sanitation, and waste management (4.7%); transport and communications (4.4%); health, nutrition, and social protection (1.9%); finance (1.4%); industry and trade (1.2%); and energy (1%). ADBs program in Pakistan often blends ADF with OCR resources; this has been referred to as a process of sweetening by Pakistans foreign aid coordination office. ADB approved $1.537 billion in OCR loans to Pakistan to fund six programs and five projects supported by ADF resources. 11. The review of project documents and discussions with ADB project staff and EA staff revealed that one of the five reviewed operations directly targeted the poor (the Reproductive Health Project), while the other projects/programs targeted the poor indirectly through policy reforms or improved access to markets, services, or employment opportunities. Complex project designs led to some implementation delays. There were also rigidities in consultant recruitment and procurement, leading to substantial delays and the selection of consultants who were weak. The operations were also plagued by fuzzy implementation arrangements, with too many executing and implementing agencies; weak capacity of these agencies; and, more importantly, excessive time taken to obtain the needed buy-ins from provinces in the national programs. In spite of project ratings that are mostly in the partly successful range, Pakistan has achieved considerable progress in instituting a number of reform measures through the Access to Justice Program and creating more market friendly agricultural policies through the Agriculture Sector Program II. E. Viet Nam Case Studies

12. Viet Nams high rating in the CPA and excellent levels of economic growth and poverty reduction are not mirrored in similar excellent results in most of the case studies of operations approved in 20012003, when ADB was very much focused on direct targeting of the poor and on governance issues. In Viet Nam, the enrichment of operations with special components targeting the poor or governance seems to have had adverse impacts on disbursement rates and project duration. Four of the five operations visited for this study had encountered problems or delays, and perhaps three were not yielding all the significant development results that were

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expected at the time of approval (the Second Red River, Central Regions Livelihoods, and the Provincial Roads Improvement Sector Project). More traditionally structured projects, such as Upper Secondary Education Project, are faring much better, and this study expects that it will be highly successful. Weak design, with possibly too high demands made on immediate targeting of the poor, is a main reason for the problems encountered with the four other operations. It proved to be difficult to hire good consultants and nongovernment organizations for such highly demanding ambitions as targeting the poor, capacity and policy development in the various operations investigated. An additional factor affecting the entire portfolio has been the especially centralized decision making in Viet Nam, which hampered the project portfolio until 2006. Since then, the new Decree 131 has allowed more discretion at the ministerial and provincial levels, which is benefiting project management. ADBs Viet Nam Resident Mission has argued that (i) later operations, not part of the case studies, have often had more appropriate designs; and (ii) many operations with problems during implementation may yet turn out broadly successful in the end. No project completed in recent years has had a rating below the level of successful; the same is the case with operations of the other aid agencies reviewed in the Five Banks Joint Portfolio Performance Review of 2007. 3

ADB. 2007. 2007 Five Banks Joint Portfolio Performance Review. Hanoi.

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Appendix 9

TARGETING THE POOR IN ADF VIII AND IX 1. Chapter 2 provides an overview of Asian Development Fund (ADF) allocations, and Chapters 3 and 4 an overview of emerging results. This Appendix elaborates how the Poverty Reduction Strategy (PRS) 1 has been applied, and how the debate regarding poverty targeting evolved in the Asian Development Bank (ADB). It then analyzes project design changes in 20012007 compared with 19922000, and discusses some findings of Operations Evaluation Department (OED) studies related to poverty targeting. A. ADF and the Poverty Reduction Strategy

2. The PRS focused ADB activities for poverty reduction around three pillarspro-poor sustainable economic growth, social development, and good governance. More attention than before, however, was to go to pillars two and three. Four key changes were introduced in ADBs operational strategy: (i) a requirement that country strategies and programs be formulated on the basis of their contribution to poverty reduction; (ii) a commitment to lend 40% for poverty interventions (interventions targeted to households and individuals); (iii) emphasis on four crosscutting priorities: environmental sustainability, gender equality, good governance, and private sector development; and (iv) lending to priority sectors that contribute to poverty reduction. 3. Almost immediately after the start of ADF VIII, ADBs operations departments started investigating how the objective of more direct targeting of the poor could be operationalized further. The result has been in part discussed in the main text: it led to a search for direct poverty reduction projects and the enrichment of project designs not directly concerned with this, i.e., inclusion of special poverty components. It also led to the preparation of many poverty partnership agreements with countries, and later to assistance with national poverty reduction strategies and the alignment of country strategies and programs with these. The Regional and Sustainable Development Department and the Economic Research Department (ERD) investigated the theory of poverty targeting and viable approaches to it. However, the research could not point to a solid theory to guide what sector support or thematic support would give the best results in developing member countries in general or even in particular countries, although a consensus remained that selecting sectors and themes to support was best guided by country analysis and expressed government needs. The June 2004 review of the PRS 2 provided a criticism of the approach adopted, and did away with ADB-wide targets. Instead, it argued that there was a more complex relationship between different types of projects and poverty reduction than assumed in the earlier PRS. The December 2004 Enhanced Poverty Reduction Strategy deemphasized the setting of ADB-wide targets for types of interventions and placed the responsibility for addressing poverty at the country strategy and program level rather than the individual project level. ADBs 2006 Medium-Term Strategy II (20062008) 3 subsequently directed attention to ADBs comparative strengths and core operational sectors, not all of which are associated with direct targeting of the poor. A report published in March 2007 by a panel of eminent persons 4 proposes that the new ADB for the new Asia should gradually change its focus from fighting extensive poverty to supporting faster and more inclusive growth, from economic growth to environmentally sustainable growth, and from a primarily national focus to a regional and ultimately global focus. Poverty reduction would need to continue to be the focus in
1 2 3 4

ADB. 1999. Fighting Poverty in Asia and the Pacific. The Poverty Reduction Strategy. Manila. ADB. 2004. Review of the Poverty Reduction Strategy. Manila. ADB. 2006. Medium-Term Strategy II 2006-2008. Manila. ADB. 2007. Toward a New Asian Development Bank in a New Asia. Report of the Eminent Persons Group to the President of the Asian Development Bank. Manila.

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the low-income and fragile economies, but in countries projected to be become middle-income, basic new challenges should gradually be tackled. The report also says: The concept of more inclusive growth avoids targeting any specific income groups for special treatment and instead focuses on facilitating the participation of those less well off in the expanding market opportunities. Current research by the ERD focuses on the promotion by ADB, through projects and programs, of inclusive growth in a way that reduces inequality. 5 B. Analysis of Project Design Changes after 2000

4. This study analyzed project design in roads, electricity, water supply and sanitation, and agriculture sector development (Supplementary Appendix F). The following changes were noted between operations designed in the 1990s under ADF VI and ADF VII, and those in the 2000s under ADF VIII and ADF IX: 6 (i) ADF operations in roads, energy, and agriculture sector development that were approved between 1992 and 2000 used the terminology of economic growth, state enterprise reform, corporatization, and privatization to describe goals, while operations designed in 20012007 used more the vocabulary of poverty reduction. Operations in agriculture sector development, roads, and electricity became more complex in 20012007, as they had more components and addressed more purposes. In agriculture sector development, there were more project loans in ADF VIII and IX compared with ADF VI and VII, which had more program loans. Most operations approved after 2000 had more components focusing on research and extension, rural infrastructure, sound environmental management, credit, and social development. In the electricity sector, other project components included resettlement, benefit monitoring, and environmental management. In the case of the roads sector, additional components not present in earlier ADF periods included private sector development, governance, human trafficking, HIV 7 awareness, and policy development. In roads and energy, social components also included relevant features of increasing beneficiary participation. Operations became more focused on vulnerable groups. In agriculture sector development, operations were more focused on vulnerable groups without access to basic services such as small and poor farmers, rural women, and ethnic groups. Similarly, ADF VIIIIX water supply and sanitation projects sharpened the focus on vulnerable groups with no access to safe and reliable water supply and sanitation facilities. In the roads and energy sectors, direct targeting of the poor was evidenced in the employment of social surveys and the selection of project sites that focused on populations under certain poverty conditions. Road and electricity projects explicitly targeted poor consumers, households, poor districts, rural villages, and households. There were more attempts in ADF VIIIIX to conduct external monitoring of projects, especially in water supply and sanitation and in transport among the four sectors studied.

(ii)

(iii)

(iv)

5 6

All papers are available: http://www.adb.org/economics/publication.asp Forty reports and recommendations of the President (RRPs) selected were approved in the ADF VI and VII period, and 40 in 20012007. They were drawn from four subsectors, all of which are related to economic growth: roads, electricity, water supply and sanitation, and agriculture sector development. For each of the four, an equal number of RRPs was studied that were approved during or before 2000, and after. Human immunodeficiency virus.

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(v)

Operations attempted to involve more nongovernment organizations (NGOs) and the private sector, particularly in the water supply and sanitation, roads, and electricity sectors, in line with the desire for more accountability in project implementation, compliance with environmental and social safeguards, independent monitoring of project activities, and poverty monitoring.

C.

OED Contributions to the Debate on Targeting the Poor

5. Among the main OED contributions to the debate have been a multicountry study on beneficiary perceptions of poverty and poverty reduction in 2002, a study of the poverty impact effects of rural roads in 2003, a study on poverty exit strategies of the poor in 2006, a rural microfinance impact study in 2007, and a study of the Japan Fund for Poverty Reduction (JFPR) in 2007. Some main findings are recapitulated here. 6. Perceptions of the Beneficiaries Regarding the Impact of Poverty Reduction. 8 This study assessed the impact of ADB's poverty reduction operations undertaken in the realm of agriculture and social infrastructure in the 1980s and 1990s. Relevant data were collected in 2000 in Bangladesh, Indonesia, Nepal, Papua New Guinea, Philippines, and Samoa, all ADF countries at the time. Notably, the study undertook household questionnaire surveys in 40 project impact zones with a total of 10,340 respondents and 134 focus group discussions. Of interest to the present discussion was first of all how the beneficiaries of ADB (i.e., ADF)supported projects described their poverty (Box), and secondly how much they thought was needed to lift them out of their perceived poverty. 7. The conclusions were that the projects investigated had helped substantially improve the household economic situation of about 27% of the beneficiaries. Most were poor, at least by their own perceptionthe average being an income equivalent to $1.9 dollar a day per capita. Only 23% were, however, extremely poor based on the Purchasing Power Parity (PPP) $1-perday measurea fact that the study viewed as disappointing, underscoring the need for ADB to target project beneficiaries more precisely. The percentage was probably similar to the overall poverty rate at the time in the six countries combinedso no special targeting of the poor seemed evident. Nevertheless, the study assessed that ADBs greater emphasis on poverty reduction in the 1990s had made a difference. Projects approved in the 1990s had a significantly higher proportion of beneficiaries attributing improvement in household situation to the projects than those approved in the 1980s, indicating greater poverty reduction impact. In the absence of an accepted benchmark, the study regarded it, however, as difficult to assess whether 27% was a good enough achievement. Given the small benefits needed to change the perception of poverty, the study suggested that there seemed to be much room for ADB to improve on this achievement. Box: How the Poor Define Their Poverty
A survey conducted in six Asian countries in the project areas of 40 projects, all dealing with either agriculture or social infrastructure, asked the question what being poor meant to the people. The beneficiaries gave largely similar descriptions: "live hand to mouth," "do not have three square meals a day," "have many debts," "do not own land," "clad in tattered/worn out/dirty clothes," "dependent upon physical labor," "no regular income earner," "insecure," "live a life of humiliation," "exiled from family," "sense of separation and isolation," "unable to send children to school," "social dependents or beggars," etc. While many descriptions were related to economic position, other dimensions of poverty were also
8

ADB. 2002. Special Evaluation Study on the Impact of Poverty Reduction of Selected Projects: Perceptions of the Beneficiaries. Manila.

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stressed. Beneficiaries descriptions of being "rich" did not require them to make a dramatic leap from being "poor": "have sufficient and good food," "can meet daily needs," "can send children to school," "have enough land," "have higher income," "have better jobs/means of livelihood," "good housing," "possession of car/tractor," "being credit worthy," "have connection to people in power," "have a secure future," etc. The descriptions showed that it did not take a big jump in income for the poor to perceive themselves as rich. The data on income measured by the surveys seemed to confirm this. The average monthly household income of the nonpoor was estimated to be PPP $572, while that of the poor was PPP $316, or a ratio of only 1.8. This ratio appeared quite stable across project groupings. Thus, less than doubling the income of poor beneficiaries from a low base would change their perception of poverty (or at least for sometime as poverty is also a relative concept).
Source: ADB. 2002. Special Evaluation Study on the Impact of Poverty Reduction of Selected Projects.

8. Rural Roads Study. 9 This 2006 OED impact study questioned the widely held notion that rural roads in developing countries will inherently reduce income poverty. In all projects studied, the poor and very poor benefited substantially from rural roads through access to state services, as well as through access of services to the villages. However, economic benefits achieved were clearly different for different socioeconomic groups. The extreme poor benefited less in an economic sense than other groups. Improvements to the primary village network of paths, tracks, culverts, and access routes that reduced the burden of basic household and productive tasks, as well as the increased availability of intermediate modes of transport with larger carrying capacity to collect water and firewood, were deemed likely to have a more immediate impact on the well-being of the poor than improved availability of motorized transport services, which they do not or cannot afford to use. 9. Pathways out of Rural Poverty and the Effectiveness of Poverty Targeting. 10 This 2006 study directly addressed the subject of this chapter, as it took issue with the conceptual problems in poverty targeting as operationalized in ADBs projects. It took another line from the study referred to in the previous paragraph, noting that many conventional projects upgraded isolated rural roads in remote, poor regions without connecting them to growth centers or large road networks; the investment temporarily improved the living conditions for rural residents but did not lift them out of poverty. These regions remained unattractive to private investors even with good roads. Poor roads could therefore be seen as a result rather than a cause of poverty; their improvement was neither a necessary condition nor an effective measure. The study observed that the great majority of the rural poor had risen out of poverty by migrating to areas with dynamic growth, such as in the Peoples Republic of China (PRC) and Malaysiacase study countries; the poor roads in their regions did not restrict their migration. Even in Viet Nam, another case study country, projects targeting the poor had not lifted them out of poverty in the areas visited, although the government generally accurately identified poor communes and registered poor households, and the leakages of benefits to the nonpoor were small. 10. Many ADB projects were thought to have invalid assumptions regarding poverty targeting. The targeting approach was believed to be based on a set of simple assumptions: (i) poor people live in poor regions; (ii) public investment in poor regions leads to poverty reduction; (iii) the solution to poverty reduction in a poor region is within that region. Instead, the study found that (i) many of the poor live in less poor regions; (ii) the location of projects in poor regions does not guarantee their significant impacts on poverty reduction; and (iii) the solution to
9

ADB. 2006. When Do Rural Roads Benefit the Poor and How? An In-depth Analysis Based on Case Studies. Manila. 10 ADB. 2006. Special Evaluation Study on Pathways out of Rural Poverty and the Effectiveness of Poverty Targeting. Manila.

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persistent rural poverty in remote and poorly endowed regions lies largely outside those regions. The narrow focus of targeting projects on those who benefit directly from them was believed to mislead project designers and implementers. The exclusion of nonpoor participants may isolate the poor from the more dynamic actors in the society and from the mainstream of economic growth, and forego the opportunity of employment generation that is often led by the nonpoor. One recommendation was to distinguish the productive poor from those without working capacity; the latter should be taken care of by welfare programs, where targeting is an effective mechanism to minimize leakage of public subsidies to the nonpoor. For the productive poor, project interventions need to be tailor-made to tackle squarely the most binding constraints in the particular project areas. The study concluded that solutions for poverty reduction in poor regions may require public investment in nonpoor regions that are naturally attractive to private investors to stimulate economic growth; poverty reduction projects might even require the active participation of nonpoor individuals or private firms in job creation. 11. Instead of investing a standard package to upgrade rural infrastructure or support agricultural production in all poor regions regardless of their particular causes of poverty, ADB was recommended to require the design of tailor-made interventions based on a thorough understanding of local realities in particular project areas, and to explore alternative interventions that would more likely lead to an effective reduction in rural poverty. 12. Such alternatives might include (i) infrastructure projects in areas with a high potential of generating sizeable employmenteven if they are not poor; (ii) projects facilitating migration or reducing its costs; (iii) projects enhancing rural households access to nonsubsidized loans to facilitate self-employment or employment generation; (iv) provision of low-cost health services to all rural residents to reduce household vulnerability; (v) provision of nonsubsidized emergency loans for rural households to handle shocks and recover from them; (vi) provision of low-cost loans for parents to invest in childrens education, including postcompulsory education, that may effectively break the inherited poverty; and (vii) long-term loans for private investment in smallscale rural infrastructure. 13. Rural Microfinance Study. 11 OED undertook this large impact study to assess the extent to which ADBs Microfinance Development Strategy, as approved in 2000 to help operationalize the PRS, had reduced the poverty of rural poor households and improved the socioeconomic status of poor women. Five projects, all ADF fundedone in the Philippines, three in Bangladesh, and one in Uzbekistanwere selected for in-depth review. An extensive survey was conducted especially for the Rural Microenterprise Finance Project 12 in the Philippines, with over 2,200 questionnaires. Results showed that the project had had a significant impact on the number of microenterprises and the number of persons employed in them, reflecting its design to cater to the entrepreneurial poor. Unfortunately, the projects experiences proved that the ultra poor were not reached with microcredit in spite of the projects ambitions to include them as well. Nevertheless, the focus group discussions held in the three countries indicated that microfinance projects had had positive effects on the status of women, particularly in the household. The main lesson was that planning to reach large numbers of the ultra poor with microfinance alone, channeled to commercial and semicommercial banks, is not realistic. Special programs, probably best handled through NGOs and specialized institutions, are needed to provide the ultra poor with a range of services covering training, health provision,
11

ADB. 2007. Special Evaluation Study on the Effect of Microfinance Operations on Poor Rural Households and the Status of Women. Manila. 12 ADB. 1996. Report and Recommendation of the President to the Board of Directors on a Proposed Loan and Technical Assistance Grant to the Republic of the Philippines for the Rural Microfinance Project. Manila (Loan 1435-PHI, for $20 million, approved in April 1996, closed December 2002).

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and more general social development for the disadvantaged, as well as grants of assets or credits. The study recommended ADB to reexamine targeting approaches and mechanisms and to adopt a more focused and deliberate approach in targeting. 14. Japan Fund for Poverty Reduction. 13 This ADB-administered fund was instituted by the Government of Japan in 2000 with the specific purpose to help implement ADBs PRS through more specific targeting of the poor and through social development activities. By December 2006, 90 grants in 20 countries had been approved for a total of $405 million. The findings are of interest because the administration of this fund offers an alternative and more small-scale approach to the implementation of the ADF. The conclusions of the evaluation were that the JFPR (i) had been successful, as witnessed by a far higher success rate (88%) than that of overall ADB operations (65%); (ii) strongly supports ADBs PRS; and (iii) is valuable as it provides ADBs partners and the public with a visible link and demonstration effect, and is a useful complement to the loan program. The relative success of the JFPR program was deemed due mainly to the following reasons: (i) the small scale and manageability of projects, (ii) the relevance of projects to the real needs of poor communities, (iii) the close involvement and motivation of most project officers, (iv) implementation by NGOs that are highly motivated and close to their communities, and (v) the consequent reduction in rent seeking and bureaucratic inefficiency. High transaction costs in terms of the use of scarce ADB staff resources were also noted.

13

ADB. 2007. Special Evaluation Study on Japan Fund for Poverty Reduction. Manila.

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Appendix 10

TARGETING GOVERNANCE IN ADF VIII AND IX 1. This Appendix assesses the Asian Development Banks (ADB) and the Asian Development Funds (ADF) achievements in terms of promoting good governance in ADBs developing member countries (DMCs). ADB was the first multilateral development bank to adopt a governance policy in 1995, followed by the Anticorruption Policy in 1998, and the Governance and Anticorruption Action Plan (GACAP) in 2000. Improving governance and preventing corruption constitute one of the five strategic priorities in the Medium Term Strategy II issued in 2006, and in 2006, ADB also issued the Second Governance and Anticorruption Action Plan (GACAP II). The importance of good governance to ADB operations is illustrated by the formula for allocating ADF resources among the ADF recipient countries, in which indicators of good governance carry the highest weight (50%). 1 A. Governance in Practice

2. The Operations Evaluation Department (OED) interviewed country officers and regional country economists, and reviewed numerous ADB documents ranging from the strategic to the project to the evaluation level. 2 3. ADBs GACAP 3 recommended that ADB should implement its governance policy by (i) supporting sectorwide approaches to programming, (ii) providing an approach to assisting DMCs with governance, (iii) guiding development of sound governance performance indicators, (iv) determining that country strategies and programs (CSPs) contain a focus on governance, and (v) identifying governance risks and devising mitigation measures. The plan, citing the importance of combating corruption as a vital element of improving governance, also incorporated the four objectives of ADBs 1998 anticorruption policy to (i) support competitive markets and efficient, effective, accountable, and transparent public administration as part of ADBs general work on governance and capacity building; (ii) support promising anticorruption work by DMCs on a case-by-case basis; (iii) improve ADBs dialogue with DMCs on governance issues, including corruption; and (iv) ensure that ADB staff adhere to the highest ethical standards. 4. The policy was reviewed in 2005, and the report being issued in February 2006. 4 The review found that integrating governance and institutional development with infrastructure investments using sector lending and sector development program approaches had become less effective over time. It supported a move to more policy-based lending rather than sector lending and sector development program lending. The review noted by ADBs efforts to strengthen its procurement procedures, and to close loopholes in procurement guidelines. It observed, Inadequate fiduciary and corruption risk assessments at the country and sector levels have, however, reduced the effectiveness of ADBs efforts to deal with corruption.
1

3 4

The country performance assessments use perception variables to measure the quality of governance in five areas: (i) property rights and rules-based governance; (ii) quality of budgetary and financial management; (iii) efficiency of revenue mobilization; (iv) quality of public administration; and (v) transparency, accountability, and corruption in the public sector. One useful assessment, although it considers the entire ADB, not just ADF, is ADB. 2006. Improving Governance and Fighting Corruption: Implementing the Governance and Anticorruption Policies of the ADB: Summary Report, February. Some information presented here is drawn from that report. This presupposes that findings on ADB practices bank-wide are also true for the subset of ADF practicesnot an unreasonable assumption, since there is little distinction between ADF and OCR practices. ADB. 2000. Promoting Good GovernanceADBs Medium-Term Agenda and Action Plan. Manila. ADB. 2006. Review of the Implementation of ADBs Governance and Anticorruption Policies; Findings and Recommendations. Manila.

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The review criticized the governance policy as leading to a too extensive governance agenda resulting in minimal focus, too many small projects of short duration, and staff resources spread too thinly. The review stressed the need for focus and prioritization of governance activities in areas where there is greatest demand from DMCs. 5. In July 2006, GACAP II committed ADB to reinforced procurement procedures and more attention for public financial management, so that ADB could progress toward adopting country systems in its operations. It also committed ADB to zero tolerance of corruption in its own activities, more explicit consideration of corruption in Country Strategies and Programs (CSPs)currently known as Country Partnership Strategies (CPS)updating the code of conduct for ADB staff, independent internal reporting, improved loan supervision and oversight, and training for staff. 6. The present study concludes that ADB has raised the profile of governance in the region through its policy dialogue, and the main text has documented an increase in assistance for governance and institutional development in its programs and projects. Yet, progress in applying of governance dimensions in CSPs appears intermittent and hampered by lack of resources and by only a tentative buy-in by ADB staff. 5 B. Targeting Governance in the Business Practice

7. Although attention to governance issues has moved into the mainstream of ADB activities, some shortcomings still exist in the approach that require further effort. ADB has succeeded in raising awareness of the issue in the region, and governance now has a higher place on many DMCs development agendas than would have been the case otherwise; but more can be accomplished. Drawing on staff interviews, as well as a review of GACAP and GACAP II, an evaluation of governance in various business practices can be made. 8. CSPs and CSP updates were at the heart of ADBs operations from 2002 to 2006, and were designed to focus scarce resources on priorities agreed upon with DMCs. However, the 2006 review found that governance issues were treated briefly and rather superficially in the Current Development and Trends chapter of CSPs. The way in which governance was treated in the sector assessments of CSPs varied considerably, and the analysis that should underpin sector work was often weak. Similarly, sector road maps were often viewed as inadequate, failing to provide clear priorities for institutional development and governance. ADB has paid considerable attention to the completion of some 24 country governance assessments (CGAs) during 20012005, covering (i) legal and regulatory frameworks, (ii) public administration, (iii) public financial management, (iv) judicial system, and (v) civil society. The CGAs often provide good quality background information for ADB operations, but the review found that they appeared to have made little difference in the development of long-term governance and institutional programs and strategies, and were too broad to inform governance and anticorruption questions in a CSP. A perusal of CSPs revealed that CGAs were very infrequently referenced in or appended to CSPs. Usually CSPs dealt with governance issues in three or four paragraphs and did not mention the judicial system or civil society (items [iv] and [v] of a CGA). 9. ADBs country performance assessments (CPAs), particularly those from 2005 onwards, have raised awareness within ADB country teams of the consequences of deficient governance and of corruption for future allocations to ADF recipient countries. When deficiencies in
5

The reports are available on http://www.adb.org/Governance/Review/default.asp

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governance are identified, they lead to lower country allocations in the future, but not generally to capacity building resources and action plans to address these deficiencies. The focus of the Project-Based Allocation (PBA) is not to indicate which areas governance needs to be improved, with a budget and action plan attached, but to reward or punish previous country performance and governance. The PBA is set up to protect ADF from being wasted; it reduces future ADF allocations to countries with bad governance and performance, and expands allocations for countries with already improved governance and performance. While the rationale of demonstrating results before receiving an ADF allocation is a good one, there are occasions when weak governments would like to strengthen governance but cannot budget the cost of doing so. In such cases, the ADF allocation mechanism does not provide for their needs. 10. While the PBA offers an opportunity for engaging DMC governments in dialogue, OED interviews with economists undertaking CPAs demonstrated a wide variety of use of that document. All staff interviewed shared the CPA ratings with the country, but not all used the CPA as an opportunity to engage governments in a deeper discussion on governance. 6 While the subject can be a delicate one to discuss, DMC governments are now aware of the importance placed on that issue by donors, and staff should be encouraged to use the CPA as a basis for more meaningful dialogue. 11. The governance review of 2005 observed that governance-oriented technical assistance (TA) operations are numerous, widely dispersed, small and of short duration. This study included pipeline TA activities up to end-2008 (Tables A10.1 and A10.2). The number classified with an anticorruption theme remained at 1011 between ADF VIII and ADF IX, but the amount doubled, ADBs response to the increasing interest in this subject. The review found that most governance TA operations were stand-alone with an average value of $500,000 and an average duration of 16 months. It was argued that effectively addressing governance takes many years in most countries, and that the variety of short-term TA activities suggested that resources had been diverted from a more strategic and focused approach to promoting good governance. The review was not clear whether the switch was a good use of TA, given its limited duration and the fact that most TA does not lead to a loan. Table A10.1: ADF VIIIIX Number of Technical Assistance Operations in Governance and Anticorruption and Percentage of Share of Total ADF VIII and ADF IX (including pipeline)
Item Anticorruption Governance Total Number of ADF TA Operations ADF VIII Number % Share 11 1 325 32 1029 ADF IX Number % Share 10 1 286 30 957

ADF = Asian Development Fund, TA = technical assistance. Source: Asian Development Banks Loan, TA, Grant and Equity Approvals database.

ADB is now required to disclose PBA ratings and soon may publish the CPA questionnaire findings. When this occurs economists must be prepared to discuss ratings and narrative with country counterparts.

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Table A10.2: ADF VIIIIX Amount of Technical Assistance Operations in Governance and Anticorruption and Percentage Share of Total ADF VIII and ADF IX (including pipeline)
Item Anticorruption Governance Total Amount of TA ADF VIII $ million % Share 5,7 1 184,8 34 551,0 ADF IX $ million 11,4 210,0 763,4 % Share 2 28

ADF = Asian Development Fund, TA = technical assistance. Source: Asian Development Banks Loan, TA, Grant and Equity Approvals database.

C.

Targeting Governance in Operations

12. As discussed in Chapter 4 of the main text, improvement of governance in countries has gradually become the purpose of program loans after a period in which their main purpose was balance-of-payments support. In addition, many projects have specified safeguards against bad governance including corruption, and have added covenants, and sometimes, budgeted components to improve governance through either capacity development or policy/institutional development. Of the loans with governance as a theme, around half have supported public governance covering public financial management, administrative and civil service reform, and decentralization; around one third have covered what was termed financial and economic governance; and 10% have dealth with civil participation. 13. As Chapter 2 of the main text has shown, program lending has been important for implementing the governance policy (Table A10.3). To be successful, sector and policy-based program lending requires sector analysis and a sector development plan. Analysis of program lending policy actions suggests that there is little relationship in the design of plans among loan size, implementation period, and the number of policy actions. Only 35% of program loans were supported by TA loans, and only 33% had grants to support institutional development. Given the critical role of TA in successful institutional development loans, this aspect needs to be addressed. Furthermore, few program loans were backed by sound sector assessments and road maps. Table A10.3: Governance Investments, 20012008 2001 2002 2003 2004 2005
862 271 8 14.0 21.4 48 19.0 16.9 1619 453 17 25.4 37.3 65 20.1 24.5 1406 353 15 24.2 29.7 50 16.0 13.7 868 279 13 22.4 23.2 52 16.4 13.9 876 660 16 27.6 29.3 51 17.1 15.2

Item

2006
2198 466 18 30.5 39.0 41 15.8 10.9

2007a

2008

Governance Projects and Programs OCR loans in $million (rounded) ADF loans in $million (rounded) Number of ADF operationsb Percentage of total number Percentage of total value Governance TA Number of operations Percentage of total number of TA operations Percentage of total value of TA

23 8.4 6.4 26 8.6 26.1

5 3.8 2.6 35 13.7 23.1

ADF = Asian Development Fund, OCR = ordinary capital resources, TA = technical assistance. a Includes approvals as of 31 July 2007 and loans in the pipeline. b Includes projects and programs with governance as the primary or secondary theme (from 2001 to 2003). In 2004, the thematic classification was revised. Starting with this period, a project or program may be classified under a maximum of three themes. Most of these projects and programs are not classified exclusively under governance. Excludes private sector loans. Sources of basic data: Database of Central Operations Services Office; Summary Report on the 2006 Loan, TA, Grant and Equity Approvals; and Project Processing Information System.

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14. Success rates of program loans have gone up over the years, and reached two thirds for those approved in 20012004 (Table A10.4), although the number of loans with program completion reports is still small. Analysis of the implementation of program lending reveals several continuing weaknesses: 7 (i) many program loans are too ambitious and complex, and do not allow enough time to achieve their objectives; (ii) DMC institutional development and capacity building are inadequately addressed; (iii) analysis of policy changes often fails to fully describe the risks and mitigation measures; (iv) insufficient attention to policy dialogue results in program loans having a weak sector and country focus; (v) development impacts are often insufficiently identified and monitored; (vi) program designs often fail to fully analyze political processes in DMCs, partly because of a lack of knowledge and/or experience. Table A10.4: Program Performance by Source of Financing and Approval Period (Combined PCR and PPER Ratingsa)
Approval Period 19781986 19871995 19962000 20012004 Total ADF Rated Programsb 14 27 27 6 74 Success Rate (%) 42.9 18.5 70.4 66.7 45.9 OCR Rated Success Programs Rate (%) 1 100.0 7 57.1 15 66.7 4 75.0 27 66.7

ADF = Asian Development Fund, OCR = ordinary capital resources, PCR = program completion report, PPER = program performance evaluation report. a Uses PPER ratings when both PCR and PPER ratings are available. b Includes blend program loans. Source: PCRs and PPERs with rating as of 31 December 2006.

15. In 2007, OED issued an update of its 2001 study on program lending. 8 Endorsing the modality, one of the recommendations was to review and consider relaxing the 3-year 22.5% moving average ceiling for ADF program lending value to bring it more in line with DMC needs and demand for the program loan modality. Another was to reconcile the purpose and use of program modalities. D. Targeting Corruption

16. The CSPs (now CPSs) are the window through which DMC governments can tackle corruption in ADB operations. The review noted that a growing number of CSPs had discussed corruption, showing increased commitment to deal with the topic. But ADB had not yet found a consistent presentation of the issues. The results framework for CSPs did not require reporting on anticorruption measures and the business process framework for preparing CSPs, and the CSP template did not specify how to treat corruption. The 2007 guidelines for the new CPSs 9 call for a chapter on Improving Public Financial Management and Procurement, and Combating, Corruption for Development Management, but ways to treat corruption are not elaborated. However, progress has been made in ADBs involvement with civil society. ADB has become increasingly engaged with civil society stakeholders through consultation and participation in developing CSPs, designing projects, and refining ADB policies. ADB has set up a nongovernment organization (NGO) unit, and its civil society network has been valuable.
7 8

ADB. 2006. 2006 Annual Evaluation Review. Manila. ADB. 2007. Special Evaluation Study Update on Policy-Based Lending: Emerging Practices in Supporting Reforms in Developing Member Countries. Manila. ADB. 2007. Country Partnership Guidelines. Manila.

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ADB also helps DMC governments to involve civil society in project design and monitoring. More accurate corruption risk assessments can be a significant outcome of closer civil society involvement. Corruption is also rated in the CPA and this feeds into the ADF allocation for a country. 17. The review acknowledged that ADB had until 2005 allocated few resources to specific anticorruption operations. Even when a country team identified actions in the CSP, the resources required for implementation were not spelled out. The difficulties were exacerbated by the shortcomings in anticorruption assessmentsthey were deemed too broad and lacking in practical application. When undertaken, information on corruption is at the country level, which means that country teams cannot determine whether corruption is likely to affect a specific ADB project during design or implementation. ADBs new classification system allows anticorruption work to be tagged as a theme, but only two loans and 10 TA operations were tagged in this way during 20012004, and six TA operations during 20052007 (with four more in the pipeline over 20072008). 18. Much progress has been made over the years in related areas that are expected to have an effect on governance and corruption issues in ADB operations. ADB introduced an accountability mechanism, and created an anticorruption unit in 2000; in December 2004, this was expanded into the Integrity Division. The procurement guidelines have changed, and electronic procurement is often allowed. ADB is experimenting more with forms of performancebased contracting, and with involvement of the private sector in public service delivery. ADB has also given much more attention to independent, third-party monitoring of safeguard enforcement and to independent project audits. ADB approved the Public Communications Policy in 2005, which emphasizes transparency of ADBs policies and operations to a wide variety of audiences. There are now strict disclosure rules on a large variety of documents. ADBs project website is continually improving and makes project documents publicly available. More recent project documents do seem to make an effort to elaborate a project-specific approach to anticorruption. These measures are expected to address governance and corruption issues in ADB projects more systematically. Fourteen ADF countries 10 have joined the ADB Organisation for Economic Co-operation and Development Anti-Corruption Initiative for Asia and the Pacific, and six more 11 have expressed interest in becoming a member.

10

Bangladesh, Bhutan, Cambodia, Cook Islands, Indonesia, Kyrgyz Republic, Mongolia, Nepal, Pakistan, Papua New Guinea, Samoa, Sri Lanka, Vanuatu, and Viet Nam. 11 Afghanistan, Lao Peoples Democratic Republic, Solomon Islands, Tajikistan, Timor-Leste, and Tonga.

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ISSUES REGARDING GRANTS VERSUS LOANS IN THE LITERATURE 1. Some indicative statement can be made from the literature, and a policy recommendation can be developed that might provide helpful insights. Some of the findings are inconclusive, though. 2. Do Grants Reduce Debt? Since Asian Development Fund (ADF) grants are provided only to heavily indebted countries with the aim of reducing debt, it is useful to examine the literature to check whether the presumption that grants reduce debt is correct. Research at the global level indicates that grants are often used as a substitute for domestic tax revenue, especially in countries where corruption is high95% of grants were given away as tax giveaways. 1 (This was predominantly in African countries.) In the case of loans, the expectation of future debt repayments may induce policymakers to mobilize taxes or at least protect current levels of revenue collection. The work is not conclusive, and one could argue that poor design of the grant framework has been the cause of failure rather than the grant per se. Alternative designs of the disbursement mechanism would then need to be tried. Nonetheless, the research provides a warning that it is not axiomatic that grants will reduce indebtedness. Although grants may be needed more, they are also more likely to be squandered. 3. Do Grants Promote Growth? Current research is inconclusive as to whether foreign aid helps countries grow. The impact of aid on growth was shown initially to be positive with good policies. Later, when a larger data set was used, the finding was refuted. 2 More recently when aid was disaggregated into grants and loans, it was demonstrated that loans had a more positive effect on growth than grants, in large part because recipients seem to take their fiduciary duties more seriously when assistance needs to be repaid. 3 Finally, attempting to provide a conclusive result to a mixed literature, the most current work concludes that there is very little robust evidence of a positive or negative relationship between aid inflows into a country and growth, whether in the form of grants or loans. 4 This does not mean that grants are ineffective. They may support projects that promote long term growth, such as primary educationprojects whose benefits are difficult to measurerather than projects that promote measurable short- or medium-term growth. But the bottom line is that there is insufficient evidence at this time to draw a robust conclusion on whether grants promote growth. 4. Do Grants Reduce the Volume of Aid? If a larger share of aid is provided through grants via the soft window of multilateral development banks (MDBs), then gross disbursements and income of the MDBs will be reduced if donors do not increase the level of funding. This could reduce investments in large-scale projects in particular. This concern is evident in Asian Development Bank (ADB) policy papers and is clearly reflected in the proposal to establish a hard-term ADF lending facility. 5 An additional concern for the MDBs is that
1

Clements, B. et al. 2004. Foreign Aid: Grants versus Loans. In: Finance and Development, September. Odedokum, M. 2004. Multilateral and Bilateral Loans versus Grants Issues and Evidence. In: World Economy 27 (2):239-63. Burnside, C. and D. Dollar. 2000. Aid, Policies, and Growth. In: American Economic Review 90 (4). Easterly, W. et al. 2004. New Data, New Doubts: A Comment on Burnside and Dollar. In: American Economic Review Available: http://links.jstor.org/sici?sici=0002-8282%28200406%2994%3A3%3C774%3AAPAGC%3E2.0.CO%3B2 -V Sawada, Y., H. Kohama, and H. Kono. 2004. Aid, Policies, and Growth: A Further Comment. University of Tokyo, Faculty of Economics. Rajan, R. and A. Subramanian. 2007. Aid and Growth: What Does the Cross-Country Evidence Really Show? International Monetary Fund Working Paper. Washington D.C. See for example, ADB. 2007. Revising the Framework for Asian Development Fund Grants. Manila.

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grants place them at greater risk of the vagaries of the appropriation processes of donor governments. 6 5. The evidence from examining official flows from 22 donor countries over 19701999 indicates that the higher the share of grants, the lower the gross disbursements. 7 The choice seems to be between a larger level of loans and a smaller volume of grants. But the same study finds no evidence that reflows from earlier loans are being used to fund grants or loans today. 6. Do Loans Provide an Incentive to Push Aid? Observers note that MDBs have a strong incentive to lend even when inappropriate. There are two possible reasons: First, there is a culture of lending where staff are rewarded for gross flows of funds; and second, there is defensive lending, where MDBs provide loans to enable borrowers to repay existing debt. Defensive lending has been identified as particularly evident in Africa. 8 7. Agencies given grants and national aid agencies face pressure to spend money once it has become available or appropriated. Often there are pressures to disburse quickly making it impossible to select and design the best projects. The problem is not whether funds are disbursed as loans or grants, but the incentive structure behind the loan or grant. Both can be pushed, and this incentive needs to be further addressed. Pushing has come about because the gross volume of loans has been seen as a proxy for development and thus an attribute to be rewarded. But it is now clear that the volume of loans is a poor proxy for development. Other measures that better capture the development impact, while more difficult to measure, need to be attempted. The lower the level of concessionality and the higher the interest rate of the loan, the greater the need to push disbursement of the loan. While this incentive to spend leads to rapid decision making, the rush to spend may lead to suboptimal decision making and results. 8. Do Grants Create Free Riding and Moral Hazard? Free riding refers to situations where ADF grants could potentially cross-subsidize other lenders to recipient countries, since the ADF grant, given to ease a countrys indebtedness, gives the country headroom to repay other loan obligations, or lenders to finance other investments. Other lenders get a free ride on ADF. Moral hazard refers to the risk of further indebtedness that loan forgiveness or debt-related grants have on borrower behavior. Observing that loans can be cancelled or that grants are provided to heavily indebted countries, borrowing members have the incentive to overborrow in order to obtain ADF grants. This would require ADF to provide more grants and would undermine the original purpose of ADF grants. 9. While at the conceptual level it is clear that both free riding and moral hazard risks must exist in the ADF grant framework, at the practical level the problems may be manageable if all lenders undertake collective action. All agree not to lend additional amounts to countries where grants are being provided by ADF. Obtaining this agreement is more straightforward in member countries where ADB (ADF) is the only lender or where ADB and the World Bank are the only lenders. It becomes more difficult where commercial banks and noncooperative governments
6

Replenishment of funds, whether grants or loans, are subject to this risk, so the argument really boils down to one of the absence of reflows from grants. While global reflows are an almost insignificant portion of total aid flows, thus undercutting the concern about lost revenue or capital from reflows, at the institutional level this is not true. Reflows are an important part of ADF for ADB. See footnote 1: Gross disbursements are disbursements gross of the aid component. So a $4 million concessional loan would count as $4 million, not as its grant equivalent value of, say, $1 million. Birdsall, N. et al. 2003. Policy Selectivity Forgone: Debt and Donor Behavior in Africa. World Bank Economic Review 17 (3): 409-35.

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are involved. 9 In practice, ADF grant-eligible countries are in or near debt distress and are not attractive clients for commercial lenders. 10 Occasionally a private sector financier may be involved in, say, a one-off large project (an enclave project), often in conjunction with one of the MDBs. In these cases, forging an agreement among the limited number of partners in the project regarding free riding is also possible. In practice, therefore, the concern regarding free riding should be manageable in most developing member countries (DMCs). But some countries that lend, especially through their export-import banks, are problematic in several DMCs. 10. Moral hazard can be managed by imposing an offsetting incentive (a disincentive) to borrowing countries or by securing a commitment from grantees not to use their new-found headroom from a grant to secure additional borrowing. Offsetting incentives are proposed in the ADF IX Alignment paper by reducing the volume of grants compared with the grant-equivalent loan allocation, and by hardening the terms of assistance. Country commitments not to take on additional borrowing have not been proposed nor designed. There may be measurement and enforcement problems when monitoring: How do we know potential new borrowing is additional to borrowing that was planned as part of a development program? And the agreement may need to have sanctions for noncompliance. But the concept may be worth further exploration. 11. There is a trade-off between providing a lower level of grants or hardening as an offsetting incentive and achieving the Millennium Development Goals in grant-eligible countries. Fewer or higher priced financial flows will reduce resources available for the MDGs. In this respect, obtaining a firm commitment from a grant-recipient not to take on additional debt may provide a way to minimize the moral hazard and satisfy both objectives. 12. If grants fail to have the intended impact on strengthening debt sustainability, ADB and the other MDBs will find themselves in a weak financial position in the future. The forgone reflows that grant programs entail are expected to run down the reserves of these banks unless donor contributions significantly increase. Therefore, there is a possibility that if grants do not work, then there will still be the very poor in the heavily indebted countries, but the MDBs will be in a weaker position to offer assistance. 11

Noncooperative governments might be governments that lend primarily for geopolitical reasons rather than for development. Often these loans are in the nature of build-operate-transfer projects and do not show on government accounts. 10 The World Bank is working with the International Monetary Fund to establish a common approach to the Debt Sustainability Framework for which acceptance by the other MDBs and commercial financiers will be sought. When fully developed, this will lead to closer coordination on lending by all creditors and will minimize the free rider problem. See: World Bank. 2006. IDA Countries and Non-Concessional Debt. Washington. Resource Mobilization Department, June 19. 11 Assuming that grant shares continue at 25% of total ADF funding and donor contributions remain constant at $3.5 billion in nominal terms from ADF X onward then the total forgone reflows of interest and principal from grants are projected to reach a cumulative loss of $13.3 billion in nominal terms by the end of 2044. The cumulative loss of interest and principal repayments in 2005 NPV terms is $3.8 billion. The results are sensitive to the sets of assumptions used. The expanded advance commitment authority calculation method is set out in ADB. 2007. Asian Development Funds Long-Term Financial Capacity. Manila.

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OBSERVATIONS ON DEBT SUSTAINABILITY IN ADF COUNTRIES AND SOME RECOMMENDATIONS A. Debt Relief and Debt Sustainability

1. The practice of conducting Debt Sustainability Assessments (DSAs) has been rapidly incorporated into Asian Development Bank (ADB) business procedures in the last few years. ADB is giving technical assistance (TA) and financial support for country debt management. It is also undertaking DSAs for selected countries (such as Bangladesh, Lao Peoples Democratic Republic, and some Pacific island countries) so they have better information to understand and manage their debt. The International Monetary Fund (IMF) and the World Bank have developed a standard method and template for undertaking DSAs and ADB has adopted this framework as part of the country performance assessment (CPA) exercise. 1 DSAs are used to categorize country eligibility for grants or grant/loan blends in the Asian Development Fund (ADF). They are also used to identify debt distressed countries and are part of the weakly performing countries strategy used by ADB. 2 2. Ten countries in the ADF portfolio can be said to be debt distressed and at high risk of default. A further four countries at medium risk of debt distress, and four are judged to be at low risk of distress. ADB has $5.7 billion of its portfolio (all but $31 million is ADF) at high risk of nonperformance, and a further $1.3 billion (all ADF) at medium risk (Table). This amounts to 21% of the value of the ADF portfolio and is approximately equivalent to disbursements being made under ADF IX. That is, in a worst case scenario, where countries are unable to grow out of debt and repudiate the debt owed to the multilateral development banks, ADF would stand to lose an amount equivalent to one entire cycle of ADF.

ADB uses the calculations undertaken by IMF/World Bank. Only in countries where IMF/World Bank do not make the assessments will ADB undertake DSAs. ADB. 2007. Achieving Development Effectiveness in Weakly Performing Countries. Manila.

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ADF Countries at High and Medium Debt Distress and Risk of Default ($ million) Country ADF High risk Afghanistan 782.28 Bhutan 176.06 Kyrgyz Republic 576.00 Lao Peoples Democratic Republic 1,105.44 Marshall Islands 74.13 Mongolia 662.04 Nauru Nepal 2,249.43 Solomon Islands 79.31 Tuvalu 7.82 Subtotal 5,712.50 Moderate risk Cambodia 856.64 Samoa 129.98 Tajikistan 247.44 Tonga 57.79 Subtotal 1,291.84 Total Share of Total ADF Portfolio (%) OCR Total 782.28 176.06 576.00 20.00 4.00 5.00 2.00 1,125.44 78.13 662.04 5.00 2,251.43 79.31 7.82 5,743.50 856.64 129.98 247.44 57.79 1,291.84 7,035.34 21.18

31.00

0.00

ADF = Asian Development Fund, Lao PDR = Lao Peoples Democratic Republic, OCR = ordinary capital resources. Sources of basic data: Asian Development Bank Loan, Technical Assistance, Grant, and Equity Approvals database; Controller's Department.

3. In addition, because their level of indebtedness limits their ability to perform on delivery of government services, these highly indebted countries receive a low rating in the CPA process and accordingly receive a smaller allocation of ADF than they otherwise might. This places additional strains on the country, and it is likely to become a political issue when poor, indebted countries receive negative net inflows from ADF. The next section contains a number of additional observations as based on a brief literature survey on debt sustainability, and reviews ADB experience in this field. 4. A strategy paper, approved in April 2007, commits ADB to paying special attention to weakly performing countries. 3 ADBs work plan and budget framework 20082010 announces a review of the performance-based allocation (PBA) to take into account the needs of weakly performing countries. This study supports this but believes the review should be extended to cover the PBA in its entirety.

ADB. 2007. Achieving Development Effectiveness in Weakly Performing Countries (The Asian Development Banks Approach to Engaging with Weakly Performing Countries). Manila.

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B.

Review of ADB Experience Concerning Debt Sustainability

5. In reviewing the experience of ADB with debt, several findings and conclusions can be drawn: (i) DSAs are useful for helping development member countries (DMCs) understand the extent of their debt and manage it so it does not become a drag on development. In an ideal situation, by continuously monitoring debt levels, indebted countries could better manage debt. A general, best-practice statement on debt for a country would be that the amount of public debt should be comfortably supportable under normal economic situations and would not be a burden under reasonable scenarios of possible economic shocks. Dynamic DSAs capture these dimensions. Many DMCs have inadequate or nonexistent systems in place to monitor and manage public debt. Most have only a vague idea of the full extent of public debt, and some debt is not transparent in public accounts. 4 As far as is known, none explicitly account for contingent liabilities that arise from loan guarantees to state enterprises, private enterprises, or states/provinces. Some have no stated policy on debt, and others have vague and inadequate policy statements without underlying legislation or regulations. Only a very few have a debt management office with an officer responsible for monitoring and reporting on debt. In an environment where public sector skills are limited, policymakers tend to be preoccupied with short-term decision making and dealing with matters of urgency. They have little time to consider longer term problems that may emerge as a result of short-term decisions or inaction. The immediate crowds out the important. Thus, debt issues and borrowing decisions resulting in repayment schedules long into the future receive little attention. Given the performance record of the heavily indebted countries listed here, it is evident that ADB (and other lenders) is (are) going to need to go beyond the present CPA/DSA grant framework to deal with the problems of severe indebtedness. The problem is not going to go away and has not been adequately addressed by institutional lenders under existing initiatives. Some DMCs surveyed have already approached ADB to forgive nonperforming loans. 5 Debt forgiveness and debt workouts will need to be undertaken on a much larger scale to address ADF (and ADB) portfolio issues. This is a serious matter that requires the design of a method to fully address debt and minimize damage to the financial integrity of the institution. 6 Should ADB agree to debt relief, it should do so in coordination with other international financial institutions, preferably within existing debt reduction frameworks. 7 Debt negotiation must not be viewed by countries as an easy and regular source of financing. Not only is there a moral

(ii)

(iii)

(iv)

There are exceptions. For example, Mongolia, Sri Lanka, and Vanuatu have explicit debt policies and debt management offices. Debt management is enshrined in law in Mongolia and Sri Lanka, and such is being proposed in Vanuatu. The loans are nonperforming from the borrowers point of view in that projects have failed to deliver results a failure of design according to borrowers and in part a failure of design according to the Operations Evaluation Department. The shortcomings of having ADF within the ADB financial umbrella rather than a separate legal entity may come to haunt ADB. With defaults or forgiveness, ADBs credit rating may be downgraded, whereas defaults or debt writedowns of the International Development Associationa separate legal and accounting entitywill not affect . the credit rating of the International Bank for Reconstruction and Development Most of the public debt of the smaller DMCs and nearly all of that of the Pacific DMCs is held by the multilateral development banks. A little is held by a few industrial country governments, and even less by commercial lenders.

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(v)

(vi)

hazard if countries seek debt restructuring or forgiveness as an easy option, but forgiving debt may also affect the financial solidity and credit rating of ADB. Staying below recommended debt ratios is neither a guarantee of a future free of debt crises nor a guarantee of future growth. Casual observation of experience around the world indicates that countries have repeatedly fallen into debt distress and suffered anaemic growth following debt restructuring. Other evidence from heavily indebted poor countries (HIPCs) shows that, while debt ratios were reduced by half following debt relief, such countries have since taken on new debt and once again exceed HIPC debt thresholds. 8 Debt ratios are only one indicator in a constellation of indicators of good public performance, and without changes in the framework for borrowing and without stronger institutions, countries are liable to quickly dissipate the benefits of debt relief. There is anecdotal evidence that not all borrowing is being reported to the teams calculating DSAs. Sometimes, no financial transfers are made, as the lender delivers a build-operate-transfer type project; the loan agreement between the lender and the borrower may amount to a rather informal half page document; and the need to show the debt on the governments balance sheet is not obvious to the borrower. Failure to fully account for loans results in a misleading calculation of the DSA. In interviews with ADB economists, there seem to have been instances of ADB staff not being clear about reporting regional loans to the teams undertaking DSAs. Underreporting of any kind seriously undermines the integrity of the DSA, compromises the ADF allocation process, and could ultimately drive a country into debt distress.

C.

Recommendations on Debt Sustainability Issues in ADF Countries

6. Several recommendations arise from the findings on debt that could be incorporated into ADF business practices. While the overarching recommendation with respect to debt is for ADB to encourage DMCs to pursue prudent macroeconomic policies that control borrowing, reduce the effects of external volatility, and accumulate reserves in good times, more specific aspects can be suggested: (i) ADB should work with IMF and/or the World Bank to require that all DMCs, within 5 years, have a legal framework regarding public debt and are able to monitor and manage their debt. ADB is well positioned to play a leading role in achieving this modest goal. ADB could provide TA to train a debt officer, provide model legislation and regulation on debt management, provide examples of best practices for the functions of a debt office, provide standard software for DSA analysis, and assist in establishing a debt office. After 5 years, ADB should require a well-functioning debt office as a condition for further lending. Public borrowing would be transparent, based on specific rules and underlying legislation, and subject to strict scrutiny on its use. Further, borrowing would be undertaken within the context of DSAs. Part of ADB activities would be to provide TA so that governments develop a specific plan to budget the cost of direct and contingent liabilities across the years of liability until they are liquidated. A specific plan should allocate funds

(ii)

World Bank. 2006. Debt Relief for the Poorest: An Evaluation Update of the HIPC Initiative, Independent Evaluation Group. HIPC countries were relieved of $33 billion of debt in 19891997 but have taken on $41 billion in new debt since then.

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(iii)

(iv)

each year to provide the necessary cash reserves. Technical work on the repayment plan would be supported by the debt office. Concessional loans originating from ADB and the World Bank need to be monitored carefully by governments, and ADB has a role to play. The long grace periods before repayments are required appears to have the effect of lulling countries into a false sense of ease regarding repayment. Planning the payoff is difficult, because it is so far in the future. If not managed and provisioned through the entire life of the loan, repayment requirements tend to sneak up and surprise governments. This is especially difficult when a portfolio of loans accumulates over a short span of years and payments become due simultaneously. Some countries may soon be experiencing net capital outflows with respect to concessional lending. This poses a dilemma for ADB. While ADB may be having its loans serviced, such countries still need capital inflows to sustain growth. Several DMCs are, de facto, in debt distress and will be looking to ADB for debt relief. For those countries that fall outside of the IMF/World Bank HIPC umbrella, ADB may be the major creditor and may be the leadand sometimes the only agency holding debt. ADB needs to plan and prepare for this day. Establishing consistent rules to deal with existing and prospective defaults will be a necessary first step.

13. Although situations of debt distress will continue to occur, ADB can be instrumental in reducing their probability over the long term. ADB can use grants, debt rescheduling/writedowns as tools to achieve greater long-term financial stability in the DMCs. By advising DMCs on the need to provision for short-term crises, ADB can assist them to avoid the need for radical policy adjustments. Building foreign reserves or a loan reserve fund could be encouraged.

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PERFORMANCE-BASED ALLOCATIONS

Appendix 13

A.

Country Performance Ratings

Table A13.1: Economic Growth, Poverty Headcount, ADF Approvals, and Country Performance Ratings, ADF Only (Group A) Countries, 19922006

Country

Average GDP per capita growth, 1992-2001 (% pa)

Average GDP per capita growth, 2002-2005 (% pa)

Change in average GDP growth per capita between 1992-2001 and 20022005 (pp) Poverty headcount at $1 a day (PPP) [% of population] pre-2002 Average yearly ADF approvals, 1992-2001 ($m) Average yearly ADF approvals, 2002-2004 ($m) Change in ADF approvals, 1992-2001 to 20022004 ($m) Average yearly ADF approvals, 2005-2006 ($m) Poverty headcount at $1 a day (PPP) [% of population] post-2002 Reduction in poverty headcount at $1 a day, pre- and post-2002 (pp)

Change in ADF approvals, 2002-2004 to 20052006 ($m)

Composite country performance rating, 2005

Composite country performance rating, 2006

Afghanistan

3.3 3.1 3.8 3.6 (1.9) 5.4 (0.1) 0.2 (0.6) 8.2 (8.6) 1.5 1.6 13.3 10.7 17.2 3.1 (8.6) 16.0 13.9 5.9 8.0 1.8 5.6 4 26 0 0 29 (2.4) 4 (2.6) 39.1 23.8 15.3 93 8.2 27.0 18.9 8.1 53 34 88 3 0 34 0 1 37 (0.1) 7 2 (0.3) 31.3 25.8 5.5 73 50 6.9 2.0 0.4 1.6 55 16 (1.0) 34.1 33.8 0.3 58 88 30 (39) (23) (4) (19) (5) (1) (4) 8 0 1 8 (0.2) 7 3 (4)

162

162

200 32 56 16 31 0 28 85 4 0 21 5 0 37

38 29 (32) (1) (19) (2) (5) (3) 1 0 (13) 5 (1) (0)

17.3 10.5 10.7 9.6 11.5 14.2 10.5 18.4 6.1 9.6 11.6 10.0

17.3 11.2 11.5 10.2 8.7 15.4 11.1 18.4 9.4 11.6 11.6 10.5

Bhutan

3.6

Cambodia

4.2

Kyrgyz Republic

(3.1)

Lao PDR

3.9

Marshall Islands

(1.8)

Mongolia

(2.8)

Nepal

2.5

Samoa

2.6

Solomon Islands

(2.3)

Tajikistan

(7.8)

Timor-Leste

0.0

Tuvalu

Average

(0.1)

- = no information available (or no performance rating available), % pa = percent per annum, ADF = Asian Development Bank, GDP = gross domestic product, Lao PDR = Lao Peoples Democratic Republic, m = million, pp = percentage points, PPP = Purchasing Power Parity. Notes: Figures in brackets are negative. Figures in $million are rounded. Sources: World Bank World Development Indicators; ADB Key Indicators (for post-2002 poverty indicator); ADB country performance assessment annual reports.

Table A13.2: Economic Growth, Poverty Headcount, ADF Approvals, and Country Performance Ratings, ADF/OCR Blend (Group B1) Countries, 19922006
Pov. headcount at $1 a day (PPP) [% of pop.] post-2002 Composite country performance rating, 2005 Reduction in pov. headcount at $1 a day, pre- and post-2002 (pp) Average yearly ADF approvals, 1992-2001 ($m) Average yearly ADF approvals, 20022004 ($m) Change in ADF approvals, 19922001 to 2002 2004 ($m) Average yearly ADF approvals, 20052006 ($m) Change in ADF approvals, 20022004 to 2005 2006 ($m) Composite country performance rating, 2006

Country 11 14 0 2 (2) 0 0 2 (2) 1 16 (0) 5 (2) 0 3 9 6 3 15 10 5 .. 4 230 67 17 13 4 2 2 3 0 0 193 59 14 6 8 26 34 8 1 7 144 140 14 8 17 20 (3) 295 227 (68) (5) (3) 8 1 (2) (4) (36) (9) 6 5 (2) 5 4 (2) 1 0 (1) 0 4 0 251 17 82 21 0 41 0 278 66 8 7 1 64 77 12 110 2 0 (2) 1 36 30 6 285 238 (47) 257 19 1 33 0 0 (5) 23 8 (58) (13) (3) 41 0 85 8 11 4 7 0 14 14 2 (13) 13 2 11 0 0 0 0 0

Average GDP per capita growth, 19922001 (% pa)

Pov. Change in Average average GDP headcount GDP per at $1 a growth per capita capita between day (PPP) growth, 20022005 19922001 and [% of pop.] 20022005 (pp) pre-2002 (% pa)

Armenia

12

12.6 13.2 19.3 10.8 11.5 15.4 11.7 13.4 9.5 14.0 9.6 11.4 9.2 10.4 17.4 11.8

17.2 7.2 13.0 19.3 13.1 10.7 15.4 11.7 13.6 9.1 12.9 11.6 11.4 7.5 9.8 16.8 12.5

Azerbaijan 3 4 0 5

(4)

10

Bangladesh

Cook Islands

Indonesia

Kiribati

Maldives

Micronesia, Fed. States 3

(1)

(1)

Pakistan

Papua New Guinea 4 8 2 3

(1)

Sri Lanka

Tajikistan

(8)

Tonga

Uzbekistan

(1)

Vanuatu 6 4

(0)

(2)

Viet Nam

Average

- = no information available (or no performance rating available), % pa = percent per annum, ADB = Asian Development Bank, Fed. = federated, GDP = Gross Domestic Product, Lao PDR = Lao Peoples Democratic Republic, m = million, pop. = population, pov. = poverty, pp = percentage points, PPP = purchasing power parity. Notes: Figures in brackets are negative. Figures in $million are rounded. Sources: World Bank World Development Indicators; ADB Key Indicators (for post-2002 poverty indicator); ADB country performance assessment annual reports.

Appendix 13

117

118

B. Table A13.3: Comparison of Pacific Country Performance Ratings, 2006

2006 IDA CPR IDA a Allocation 0 296652.6734 0 0 14663863.93 1587375.476 765680.8765 1469176.074 174553.1857 0 582717.424 18070843.56 183085.7377 71109.42191 44916.32748 14563.67222 19312.0336 5719.62312 23647.47165 411137.3361 81.1% 8.8% 4.2% n/a 1.0% 0.0% 3.2% 100.0% 0 2.68 0 0 2.37 4.74 1.88 1.82 2.11 0 2.62 9.1 18.4 9.4 4.4 11.4 11.6 9.8 5995265 185583 489228 1029195 102448 10410 215341 773 2266 676 840 2173 1343 1715 2006 ADB CPR 19.3 10.7 8.7 11.7 Population 18027 100551 65383 110985 ADB Allocationb 15174.43281 19381.4398 7924.499232 20866.34884 GNI per capita, Atlas method (current US$) 5946 1234 3002 2379 IDA allocation share 0.0% 1.6% 0.0% 0.0% 44.5% 17.3% 10.9% n/a 4.7% 1.4% 5.8% 100.0% ADB allocation share 3.7% 4.7% 1.9% 5.1%

Comparison Between IDA and ADF Country Performance Ratings

Appendix 13

Country Cook Islands Kiribati Marshall Islands Micronesia, Federated States of Papua New Guinea Samoa Solomon Islands Timor-Leste Tonga Tuvalu Vanuatu Total

ADF = Asian Development Fund, CPR = country performance rating, GNI = gross national income, IDA = International Development Association, PCI = per capita income, Pop = population. a IDA Allocation = CPR2 x PCI-0.125 x Pop. b ADB Allocation = CPR2 x PCI-0.25 x Pop. Note: IDA provides a minimum of SDR3.3 million in share per year. Timor-Leste gets a set aside as post-conflict country. For more information, read the notes page further below.

Sources: ADB Country Processing Assessment Annual Report; online IDA CPRs; and World Development Indicators.

Table A13.4: Summary Table on the Comparison of Non Pacific Country Performance Ratings in 2006
2006 ADB CPR 17.2 7.4 13 17.3 11.2 11.5 10.2 15.4 15.4 11.1 13.6 12.9 11.6 7.5 16.8 Population 3007195 8474402 144345058 647000 14350857 5199756 5765000 336982 2584655 27658148 159002039 19771320 6652000 26540312 84108100 2022005325 13187053.65 IDA a Allocation 24934105.25 35808483.53 406578933 4944012.745 29802862.6 16576091.87 12142772.29 1701629.758 11335027.46 115240529.3 683142419.8 101097070.4 15568228.96 32414815.71 530718342.6 100.0% ADB Allocationb 344072.8561 119756.4874 2832865.456 149633.3327 527205.1033 300718.9792 250646.6566 68348.93899 306142.0718 870426.6013 2926967.901 660988.0015 376573.1613 322259.2769 3130448.825 GNI per capita, Atlas method (current US$) 1928 1854 484 1414 481 491 499 2676 884 291 769 1301 387 610 691 IDA allocation share of total IDA 1.2% 1.8% 20.1% 0.2% 1.5% 0.8% 0.6% 0.1% 0.6% 5.7% 33.8% 5.0% 0.8% 1.6% 26.2% ADB allocation share 2.6% 0.9% 21.5% 1.1% 4.0% 2.3% 1.9% 0.5% 2.3% 6.6% 22.2% 5.0% 2.9% 2.4% 23.7% 100.0%

Other ADF borrowers Armenia Azerbaijan Bangladesh Bhutan Cambodia Kyrgyz Republic Lao PDR Maldives Mongolia Nepal Pakistan Sri Lanka Tajikistan Uzbekistan Viet Nam

2006 IDA CPR 4.62 3.29 2.47 4.35 2.12 2.63 2.14 3.68 3.2 2.91 3.14 3.54 2.22 1.65 3.78

Total

ADB = Asian Development Bank, ADF = Asian Development Fund, CPR = country performance rating, GNI = gross national income, IDA = International Development Association, Lao PDR = Lao Peoples Democratic Republic, PCI = per capita income, Pop = population. a IDA Allocation = CPR2 x PCI-0.125 x Pop. b ADB Allocation = CPR2 x PCI-0.25 x Pop. Notes: Indonesia and Afghanistan excluded from calculation as they receive set-aside from ADF. Comments: Poverty more highly weighted in IDA calculation but larger allowance for small countries in ADF. This can help explain some disparities. Sources: ADB Country Processing Assessment Annual Report; online IDA CPRs; and World Development Indicators.

Appendix 13

119

120

Table A13.5: World Bank and ADB Country Performance Assessments, 2006
Policy and Institutional Rating 4 B. Structural Policies 5 6 7 Governance Rating

Appendix 13

A. Economic Management 1 2 3

Country Ave. 4.2 4.3 3.6 3.2 3.6 3.7 4.1 4.2 3.3 3.3 3.5 3.5 2.9 2.4 3.6 3.7 3.1 3.7 3.9 3.9 2.5 2.5 3.0 3.0 3.0 3.0 3.0 2.0 4.0 5.0 2.5 3.0 4.0 3.5 3.5 3.5 3.0 2.5 4.0 4.0 2.5 3.5 4.0 2.5 2.0 3.5 3.5 3.5 3.5 1.5 2.5 4.0 4.0 2.0 2.5 3.5 4.0 3.2 3.3 3.3 3.4 3.1 3.2 2.5 2.4 3.9 4.4 2.6 2.5 3.7 3.7 2.8 3.9 3.7 3.2 3.4 3.6 4.0 3.4 3.7 3.5 3.5 3.8 3.8 3.2 3.0 3.9 4.4 2.9 2.9 3.6 3.5 3.0 3.8 3.8 3.5 2.5 2.5 2.5 3.5 4.0 2.5 2.5 3.0 3.0 4.0 4.0 3.0 3.5 3.0 3.0 3.0 3.0 2.0 1.5 4.0 4.5 2.5 2.5 3.5 3.0 3.3 2.5 3.9 4.0 3.8 3.5 3.7 3.0 4.0 3.5 4.0 3.0 3.0 3.5 4.0 3.0 3.5 3.0 3.5 3.0 2.5 3.0 3.5 4.0 3.5 3.5 3.5 3.5 4.0 3.5 3.0 3.5 4.5 2.5 3.0 4.0 4.0 3.6 2.5 3.0 3.6 3.0 3.5 3.9 3.0 4.0 3.5 3.5 3.0 3.0 4.0 3.5 3.0 3.5 3.5 3.0 3.0 3.0 3.5 3.5 2.5 3.0 4.0 4.0 3.5 4.0 3.5 4.0 3.5 4.0 3.5 3.5 4.0 4.5 2.5 3.0 3.5 3.0 4.6 3.5 4.0 4.0 5.2 4.5 4.3 4.0 4.2 4.2 4.0 3.5 3.8 4.3 4.2 3.2 2.7 4.0 3.7 3.7 3.7 3.0 4.2 3.3 3.8 3.8 3.7 4.0 4.0 3.8 3.7 3.8 4.5 3.2 3.5 3.2 3.2 3.5 4.0 3.5 3.7 3.5 4.0 4.0 3.8 3.5 3.0 2.0 2.8 2.5 3.0 3.0 2.5 2.8 3.0 4.5 4.5 3.5 4.2 4.5 4.5 4.5 4.0 3.5 4.0 4.0 4.0 3.5 2.5 2.5 2.8 2.0 3.0 4.0 3.0 3.0 3.3 2.5 3.0 2.5 4.0 4.5 4.0 4.2 2.5 3.5 3.5 4.0 4.5 4.0 4.2 2.0 3.5 3.5 4.0 3.0 3.5 3.5 3.5 4.0 3.0 4.0 3.0 3.0 3.3 3.5 3.5 3.5 3.0 3.5 4.5 3.5 4.0 4.0 3.5 3.5 3.5 3.5 4.5 3.0 3.5 3.7 3.5 3.0 3.5 3.5 4.0 4.0 4.0 4.0 4.0 4.0 4.0 3.5 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 3.5 4.0 4.0 1.5 3.0 2.8 4.0 4.0 4.0 3.5 3.0 3.5 2.0 3.0 2.8 3.5 3.5 3.0 2.0 3.5 5.0 3.5 3.0 3.8 4.5 3.5 3.5 3.5 3.5 5.0 3.5 3.5 4.0 4.5 3.5 3.5 3.5 3.0 2.5 4.0 3.5 3.3 2.5 2.0 2.5 2.5 2.5 3.0 3.0 3.0 3.0 3.0 3.0 2.5 3.0 3.0 4.0 4.0 3.0 3.7 4.0 3.5 3.5 3.5 3.0 4.5 3.5 3.0 3.7 3.5 4.0 3.5 3.5 3.0 4.0 3.0 3.0 3.3 4.0 3.5 4.0 2.5 2.5 3.5 2.5 3.5 3.2 4.0 3.0 3.5 3.0 3.0 3.5 3.5 3.5 3.5 4.5 4.5 4.0 3.5 4.5 3.0 3.0 3.5 3.2 4.0 4.0 4.5 3.5 4.5 3.0 3.5 3.5 3.3 3.5 4.0 4.0 4.0 3.0 3.5 3.0 3.5 3.3 4.0 3.5 4.0 3.5 3.0 4.0 3.0 3.0 3.3 3.5 3.5 3.0 3.0 3.0 4.0 3.0 3.5 3.5 4.0 4.0 3.0 4.0 3.0 4.5 4.0 4.0 4.2 4.5 4.5 4.0 4.5 4.0

Armenia

Mac. Mgt. 5.5 Ave. 5.3 Trade 4.5 Ave. 4.0 4.0 3.0 2.5 3.0 3.0 4.0 4.0 2.5 2.5 3.5 3.0 3.0 3.5 2.5 2.5 3.0 2.5 4.0 4.0 3.5 3.5 3.0 3.0 3.5 3.5 2.5 2.5 4.0 4.5 2.0 2.5 3.0 3.0

Fiscal Pol. 5.0

Debt Pol. 5.5

Fin. Sec. 3.5

Bus. Reg. Env. 4.0 Gender Eqty 4.5

C. Policies for Social Inclusion/Equity 8 9 10 11 Equity Soc. Pol. and of Pub. Bldg. Protection Institution Res. Human and for Use Res. Labor Env. Sust. 4.5 4.0 4.5 3.5 Pol. and Inst. Ave 4.5

D. Public Sector Management and Institutions 12 13 14 15 16 Prop. Quality of Trans., Rights and Budg. Eff. of Quality Acct. & Rule-based and Fin. Rev. of Pub. Corr. in Gov. Mgt. Mobil. Admn. Pub. Sec. 3.5 4.0 3.5 4.0 3.5 3.5 2.5 2.5 2.5 3.0 4.0 4.0 2.5 2.5 3.0 3.0 3.5 2.5 2.5 2.5 2.0 2.0 2.5 3.0 2.5 3.5 3.0 3.0 2.5 2.5 3.0 3.0 4.0 4.5 3.0 3.0 3.5 3.5

Ave. 3.7 3.8 3.2 3.0 2.8 3.2 3.8 3.9 2.7 2.8 3.2 3.1 3.2 3.3 2.8 2.9 2.7 2.6 3.5 3.7 3.3 3.6 3.2 3.3 3.2 3.4 2.9 2.7 3.9 4.5 2.5 2.8 3.5 3.3

5.0

5.0

5.5

Azerbaijan

4.5

4.5

4.5

4.0

4.0

5.0

Bangladesh

4.0

3.5

4.5

4.5

3.5

4.5

Bhutan

4.5

4.0

4.0

4.5

3.5

4.0

Cambodia

4.0

3.0

3.5

4.5

3.5

3.5

Indonesia

4.5

4.0

4.5

4.0

4.5

4.0

Kiribati

2.5

2.0

5.0

2.0

3.0

3.0

Kyrgyz Republic

4.5

3.5

4.0

4.0

3.5

3.5

Lao PDR

4.0

3.5

3.5

4.0

3.5

3.5

Maldives

3.0

2.5

3.5

4.0

3.5

4.5

Mongolia

4.0

3.0

3.0

4.0

4.0

3.5

Nepal

4.5

3.5

3.5

4.0

3.5

3.5

Pakistan

4.0

3.5

4.5

4.0

3.5

4.5

Papua New Guinea

4.0

3.5

4.0

3.0

3.5

4.5

Samoa

4.0

3.5

4.0

4.5

4.5

4.5

Solomon Islands

3.5

3.5

2.5

4.0

3.5

3.0

Sri Lanka

3.0

3.0

3.5

3.5

2.5

3.5

Policy and Institutional Rating 4 B. Structural Policies 5 6 7 C. Policies for Social Inclusion/Equity 8 9 10 11

Governance Rating

A. Economic Management 1 2 3

Country Ave. 3.1 3.3 3.2 3.6 3.6 3.5 2.8 2.7 3.9 4.4 4.2 4.0 4.0 3.5 3.1 2.5 3.0 4.0 4.0 3.2 3.0 3.5 3.2 2.5 3.0 3.2 2.0 3.0 3.0 3.0 3.5 3.0 3.5 4.0 3.4 4.0 3.0 3.0 3.0 3.5 2.5 3.0 3.6 3.0 3.0 3.5 3.6 2.5 3.0 3.0 2.5 3.0 2.5 3.5 2.5 2.5 2.5 3.0 3.5 4.0 4.0 4.0 3.0 2.0 2.5 2.5 3.5 3.0 3.5 3.5 4.0 4.0 3.8 5.0 4.5 4.5 4.0 4.0 3.0 3.5 3.3 4.5 4.5 4.0 3.0 3.5 3.0 3.0 3.0 2.5 3.0 2.5 2.5 3.0 3.0 3.0 3.2 3.0 3.5 2.5 2.0 3.0 2.5 2.5 2.5 3.5 3.5 4.0 3.0 3.5 2.5 2.5 2.5 3.5 3.5 4.0 3.5 3.5 4.5 3.0 3.2 3.5 4.0 4.5 2.5 3.5 3.0 3.0 3.0 2.5 3.5 4.0 3.0 3.0 3.0 3.0 3.3 3.5 3.5 3.0 3.5 3.0 3.0 3.5 3.5 3.5 3.0 3.0 3.5 2.5

Mac. Mgt. Trade Ave.

Fiscal Pol.

Debt Pol.

Ave.

Fin. Sec.

Bus. Reg. Env. Gender Eqty. Bldg. Human Res.

Equity of Pub. Res. Use

Soc. Protection and Labor

Pol. and Institution for Env. Sust.

Pol. and Inst. Ave

D. Public Sector Management and Institutions 12 13 14 15 16 Prop. Rights Trans., and Quality Acct. & Ruleof Budg. Eff. of Quality Corr. in based and Fin. Rev. of Pub. Pub. Gov. Mgt. Mobil. Admn. Sec. 2.0 2.0 2.0 2.0 1.5 1.5 3.0 2.5 3.0 3.5

Ave. 2.6 2.9 2.7 3.1 2.4 2.5 3.1 2.8 3.5 3.9

Tajikistan

4.5

4.0

4.0

4.2

4.5

4.0

4.5

4.3

Tonga

3.0

2.0

3.0

2.7

3.0

3.0

4.0

3.3

Uzbekistan

3.0

3.5

4.0

3.5

3.5

3.5

4.0

3.7

Vanuatu

3.5

3.0

4.0

3.5

4.0

3.5

3.5

3.7

Viet Nam

5.5

4.5

4.0

4.7

5.0

4.0

4.5

4.5

Acct. = accountability, ADB = Asian Development Bank, Admn. = administration, Ave. average, Bldg. = building, Budg. = budgetary, Bus. = business, Corr. = corruption, Eff. = efficiency, Env. = environmental, Eqty. = equality, Fin. = financial, Gov. = government, Inst. = institutional, Mac. = macroeconomic, Mgt. = management, Mob. = mobilization, Pol. = policy, Prop. = property, Pub. = public, Reg. = regulatory, Res. = resources, Rev. = revenue, Sec. = sector, Soc. = Social, Sust. = sustainability, Trans. = transparency. Notes: Roman = World Bank, italic = ADB. For calculation of the cluster averages, all criteria are equally weighted within a cluster. Scale: 1 = Lowest, 6 = Highest.

Appendix 13

121

122

Appendix 13

Table A13.6: Simulation of ADF Performance Based Allocation Shares (Based on the ADF Formula), 2006
Policy and Per Capita Institutional Income ^- Population Rating 0.25 (POP)^0.6 (PIR)^1.4 Country IDA / ADF IDA / ADF IDA ADF Allocation Share (Simulated) based Governance Portfolio on ADB amounts Rating (GOV)^2.0 (PRT)^0.6 and ADB formula IDA ADF ADF* WB* (%) ADF (%)

Armenia 2 Azerbaijan 3 Georgia 4 Kyrgyz Rep. 5 Pakistan 6 Tajikistan 7 Uzbekistan 8 Mongolia 9 Bangladesh 10 Bhutan 11 Maldives 12 Nepal 13 Sri Lanka 14 Cambodia 15 Lao PDR 16 Viet Nam Total
1

0.16 0.17 0.18 0.22 0.20 0.23 0.21 0.20 0.21 0.18 0.14 0.25 0.17 0.23 0.22 0.20

7,721.2 8.21 14,262.9 6.6 9,781.8 7.6 10,650.9 6.6 82,317.8 6.4 12,246.9 6.0 28,501.1 5.1 6,987.7 5.5 77,812.0 6.1 3,781.9 6.6 2,044.0 6.1 28,846.6 5.7 23,720.1 5.9 19,453.4 5.4 11,576.5 5.1 56,407.9 6.9

8.33 13.69 14.44 6.1 10.2 9.0 13.7 6.3 7.8 8.4 6.5 10.2 11.6 6.1 6.8 8.4 5.1 5.8 6.3 6.3 10.9 13.0 6.3 7.8 10.2 6.7 14.4 15.2 7.0 12.3 13.7 5.8 10.2 10.9 5.8 12.3 10.9 5.8 7.3 7.8 5.5 7.3 6.8 7.6 12.3 15.2

2.47 1.0 2.5 2.5 2.6 1.7 2.9 2.6 2.9 2.5 1.9 2.6 2.8 2.8 2.5

2.7 2.4 3.5 2.7 23.4 2.6 1.5 1.9 17.7 1.5 0.4 8.1 6.2 3.6 2.1 19.9 100.0

2.74 1.0 0.0 2.3 21.9 2.9 2.5 2.4 21.1 1.5 0.5 6.5 5.0 4.1 2.0 23.8 100.0

ADB = Asian Development Bank, ADF = Asian Development Fund, PCI = Per Capita Income, POP = Population, IDA = International Development Association, WB = World Bank. . Note: PCI and pop for 2006 based on 2005 World Dev. Indicator figures (downloaded 13 October 2006). Sources: 2006. OED calculations, World Development Indicators, Annual Report on the Country Performance Assessment.

Appendix 13

123

C.

Notes on the Comparison of International Development Association (IDA) and Asian Development Fund (ADF) Composite Country Performance Ratings and Allocation Formulas 1. Sources a. World Bank website: (i) How IDA Resources are Allocated: http://web.worldbank. org/WBSITE/EXTERNAL/EXTABOUTUS/IDA/0,,contentMDK:200 52347~menuPK:2607525~pagePK:51236175~piPK:437394~theSi tePK:73154,00.html Summary of the Performance-Based Allocation System for IDA14: http://siteresources.worldbank.org/IDA/Resources/ANNEX1CPIA. pdf World Development Indicators: http://devdata.worldbank.org/ dataonline/

(ii)

(iii)

b.

ADB website: Annual Report on the 2006 (2005) CPA Exercise: http://www.adb.org/ADF/PBA/annualreport.asp

2.

Methodology

1. To make the IDA and ADF composite country performance ratings (CPRs) comparable, each set of ratings was standardized according to the mean and standard deviation across the countries subject to the ADF Performance-Based Allocation (PBA) policy. Only the pool of IDA countries that also receive ADF was taken into account. The cumulative standard normal distribution function was calculated for the standardized ratings this is what is displayed in the summary sheet presented in Tables A13.3 and A13.4. 2. The CPR formulas for IDA and ADF also differ. The formulas are:

ADF CPRi = (policy and institutional rating)I 0.7 (governance rating)I 1.0 (portfolio performance rating)I 0.3 Where (policy and institutional rating) = arithmetic mean of Q1-11 (covers economic management, structural policies and social inclusion/equity) (governance rating) = arithmetic mean of Q12-16 (covers public sector management) (portfolio performance rating) = based on the % of projects at risk IDA CPRi = (0.8 x CPIA i + 0.2 x ARPP i) x Govfact i Where CPIA = (policy and institutional rating) (as above) ARPP = Annual Report on Portfolio Performance based on the % of projects at risk Govfact = (average rating of 6 governance criteria / 3.5)^1.5 Governance criteria are derived from the five criteria in the public sector management Q12-16 cluster D, plus the 3-year moving average of the procurement flag that is an element of the ARPP portfolio rating.

124

Appendix 13

3.

The country allocation formulas for IDA and ADF also differ. The formulas are:

ADF allocation i =CPRi2.00 PCIi -0.25 POPi 0.60 (scaling factor) Where (scaling factor) = 1 i (CPRi 2.00 PCIi -0.25 POPi 0.60 ) PCI per capita income POP population CPR country performance rating IDA allocation i =CPRi2.00 PCIi -0.125 POPi (scaling factor) Where (scaling factor) = 1
i (CPRi 2.00

PCIi -0.125 POPi )

4. However, both ADF and IDA allow for various earmarks to certain recipients. There is an allowance for postconflict countries in both IDA and ADF, an allowance for countries beginning to reengage with the World Bank, an allowance for Indonesia in ADF, and an allowance for the whole Pacific Group in ADF. ADF also lends to some countries not covered by IDA (Cook Islands, Marshall Islands, Micronesia, Timor-Leste, and Tuvalu). IDA compensates for small countries differently from ADF: ADF weights population by the exponential 0.6 in the allocation formula, while IDA places no additional weighting on population in the allocation formula but grants all recipients SDR3.3 million over each 3-year replenishment cycle. IDA also places a much higher weight on poverty in its allocation formula. 5. ADF divides resources among two poolsthe Pacific region pool and the Asia region pool (excluding Afghanistan and Indonesia). In practice, IDA does not share resources in this way. IDA resources are shared among a much bigger pool of recipients, as it provides resources to countries outside the Asia and Pacific region. This simplification does not account for the impact that the CPRs for countries outside the Asia and Pacific region have on the allocation to joint IDA-ADF recipients (through the scale factor). This impact is expected to be minimal, but an alternative method would be to calculate IDA shares for all IDA recipients, and rescale the shares among joint IDA-ADF recipients to total 100%. 3. Results

6. The normalized CPRs for IDA and ADF are in some countries very similar, but in other countries quite dissimilar. Looking at the disaggregated CPRs, there is no systematic cause for deviation between the ratings, but in some situations small differences among the ratings in the public sector management cluster (also referred to as the governance rating by ADB) can be amplified due to differences in the CPR formulas between IDA and ADF. The policy and institutional rating (CPIA) is also manipulated differently between the two formulas, so small deviations between these scores can manifest in more significant changes to the overall CPR. 7. Another cause for deviation is that the portfolio performance rating between IDA projects and ADF projects may differ. Portfolio performance is also incorporated into IDAs governance factor, as it includes the 3-year moving average of the procurement flag (an element of the ARPP portfolio rating). Information on the procurement flag is not published, so this study has not be able to trace how the governance factor is derived and therefore what influence it exerts

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on the overall CPR. Information on the governance factor is not well documented on the IDA website. 8. Differences in allocation between countries in the Pacific Group are large. This is mainly because IDA lends to only 6 of the 11 Pacific countries. However differences in portfolio performance and governance ratings are also causing divergence in allocation through the way these ratings affect the overall CPRs (see above). 9. Among the other ADF borrowers, in addition to divergence in the CPRs causing divergence in the allocation, there is also divergence in the allocations due to differences in the allocation formula. The weighting of population in the IDA formula allows countries such as Pakistan and Bangladesh to do proportionately better in the IDA allocation over the ADF allocation. Despite weighting absolute poverty more strongly, countries such as Cambodia, Mongolia, Kyrgyz Republic, Lao Peoples Democratic Republic, and Nepal that are considerably poor do much worse under the IDA allocation formula than under the ADF allocation formula. The difference in population weighting contributes to this result too. However, it should be remembered that IDA does guarantee SDR3.3 million to all its recipients on top of the PBA.

126

D.

Comparison of ADF and IDA Amounts Approved in Eligible Asian and Pacific Countries

Appendix 10

Table A13.7: ADF and IDA Operations to Countries where both ADB and World Bank Are Active, 20022007 ($ million)
ADF Loan and Grant Approvals As of 31 March IDA Loan and Grant Approvals Total 2002 2007 1,863.0 318.0 2,583.2 79.6 285.9 772.7 227.9 292.4 42.2 124.5 640.4 3,704.0 24.2 1,131.8 213.4 16.5 17.8 85.5 3,163.1 15,586.1

As of Total 31 March 2002 2002 2003 2004 2005 2006 2007 Country 2002 2003 2004 2005 2006 2007 2007 893.5 Afghanistan 167.2 150.0 170.0 228.1 178.2 200.0 302.0 423.0 425.0 480.0 33.0 45.0 Azerbaijan 22.0 20.0 3.0 69.5 65.9 25.0 51.8 105.8 1,259.4 Bangladesh 269.6 246.0 198.9 259.8 255.1 30.0 321.4 554.4 645.9 600.0 461.5 74.3 Bhutan 9.4 27.3 37.6 42.6 7.0 30.0 335.0 Cambodia 100.9 98.3 65.0 43.0 27.8 48.2 81.7 60.0 68.0 28.0 450.8 Indonesia 131.2 74.2 25.0 110.6 109.8 70.5 145.0 55.8 236.4 205.0 60.0 109.3 Kyrgyz Rep. 15.5 32.8 31.0 30.0 15.0 27.8 53.0 71.1 61.0 211.3 Lao PDR 76.0 46.0 27.7 10.0 51.6 44.8 24.7 43.4 105.5 74.0 18.8 Maldives 5.0 6.0 7.8 35.2 7.0 156.9 Mongolia 34.1 29.5 37.1 10.0 46.2 28.7 7.5 18.0 18.3 52.0 433.9 Nepal 60.0 94.0 110.0 169.9 22.6 121.8 207.8 210.0 78.2 1,219.0 Pakistan 276.0 178.0 228.0 394.0 107.0 36.0 800.0 306.5 731.2 500.0 1,182.7 183.7 16.1 Samoa 8.0 8.1 4.5 19.7 584.1 Sri Lanka 160.3 185.3 75.0 117.0 46.5 75.0 285.1 286.7 233.0 220.0 32.0 130.1 Tajikistan 40.3 38.0 22.7 12.0 17.1 40.8 27.0 16.6 41.0 88.0 10.0 Timor-Leste 10.0 4.0 5.0 7.5 10.0 Tonga 10.0 5.9 10.9 1.0 82.6 Uzbekistan 55.0 27.6 20.0 25.0 40.5 1,070.9 Viet Nam 225.0 179.0 176.4 222.3 268.2 593.0 293.1 705.5 733.8 767.7 70.0 Total 1,555.6 1,379.2 1,188.6 1,537.0 1,337.5 113.1 7,111.0 2,355.4 2,272.0 3,349.1 3,382.6 3,770.2 456.9 ADB = Asian Development Bank, ADF = Asian Development Fund, IDA = International Development Association, Rep. = Republic. Note: ADF grants commenced in 2005 only. Sources: ADB Loan, Technical Assistance and Private Sector Approvals database; World Bank Annual Reports and IDA Statement of Development Grants Available: http://www.worldbank.org.

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AID COORDINATION AND HARMONIZATION 1. The Rationale for Aid Coordination and Harmonization. The ADF IX Donor report of 2005 and the 2005 Paris Declaration on Aid Effectiveness are only two of the statements favoring further coordination and harmonization among aid agencies, and their benefits seem obvious enough: reduced duplication of effort by increasing numbers of aid agencies, reduced fragmentation of effort visible in small projects that miss out on both economies of scale, reduced problems of free riders and fungibility of aid, lower transaction costs for aid agencies and recipients, and synergies arising from improved coordination. 2. Bigstens recent paper 1 summarizes the advantages of aid coordination and harmonization. Aid coordination itself is in his view limited by the fact that all aid agencies seek to maximize their aid budgets, requiring them to satisfy their parliament and national lobby groups. This then leads to a need for visible results that can be attributed to particular agencies, even if the development impact of all agencies activities in the aggregate is thereby reduced. Secondly, even if agencies had the same goals, coordination would remain a challenge, arising from different decision-making systems and lack of complete information from all agencies at the same time. 3. Bigsten regards it as disappointing that aid agencies seem not to have moved to forms of aid that make coordination easier. Whereas the proportion of multilateral aid had remained similar over the decades at around a third of all aid, bilateral agencies seem to have moved their aid away from program aid to project aid mainly for social infrastructure, at least up to 2003. (However, there are indications that after 2003, program aid may have risen againin the Asian Development Bank it has slowly risen.) The number of aid agencies has increased rapidly over the last 30 years, faster than the amounts of aid disbursed. Transaction costs have been aggravated by this, and have manifested themselves in a multitude of diverse procedures, different languages and fiscal calendars, duplication of various forms of analytical work, and persistence of some tied aid. Aid coordination costs have been high in some cases, although it is difficult to assess time costs. 2 Studies have also found that aid undermines the quality of the government bureaucracy more severely in countries where aid has been fragmented among the funding agencies. Poor coordination makes it easier for governments to play off aid agencies against each other. Conversely, where historically aid was provided by one or a few agencies, Bigsten argues that the results were better. Examples mentioned are the Marshall Plan after World War II; Eastern European accession to the European Union; and the World Trade Organization, which effected change in the Peoples Republic of China. Bigsten, however, also acknowledges that aid agencies all coordinating and gathering behind a particular aid doctrine may suppress innovation and even lead to disaster if the doctrine proves wrong. 4. Similarly, Easterly 3 has recently criticized lack of aid coordination and harmonization as one of the factors reducing the effectiveness of aid. The few positive results of alignments of funding agency approaches are viewed more as support for the private sector and civil society rather than for state intervention, increased sensitivity of aid allocation to poorer countries, a decline in the share of food aid in overall aid, and a decline in aid tying. Easterly regards most of
1

Bigsten, Arne. 2006. Donor Coordination and the Uses of Aid. February. Available: http://www.handels.gu.se/epc/archive/00004815/01/gunwpe0196.pdf Where studies had been done, these had found that program-based approaches with common basket funds reduced transaction costs as compared with those of projects. However, these same studies were unable to determine whether the management of the funds had improved. Easterly, William. 2006. Are Aid Agencies Improving? Paper prepared for the October 2021, 2006 Panel Meeting of Economic Policy in Helsinki. September.

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the other evidence for alleged improvement in coordination and harmonization as weak, as witnessed by increasing aid agency fragmentation and proliferation, unchanged emphasis on technical assistance, little or no sign of increased selectivity with respect to countries, sectors, policies, and institutions (such as democracy and corruption), and the vicious cycle of adjustment lending and debt relief. These suggest continued repetition of past mistakes of the aid agencies. 5. In a comment on Bigstens paper, Clemens 4 of the Center for Global Development posits that it would be unrealistic to expect too much from aid coordination and harmonization. It should be seen as a minor, not a major, factor in the approach to better development effectiveness. First of all, Clemens sees much variation in aid agency and project congestion in different countries. Secondly, the relation may be different from expected. Clemens argues that countries with more agency congestion should do worse than those with fewer funding agencies. In fact, they have done better in terms of gross domestic product growth and well-known governance ratings. Similarly, countries with more project fragmentation do better. Clemens notes that there seems to be no real evidence of large-scale institutional degradation, as observed by some. In other words, reverse causality has been at work: a large number of donors have a large number of projects in Uganda and Mozambique because they perceive aid to work well there. Clemens concludes that a major lack of coordination at the international or country level has apparently not produced transaction costs that are large enough to change overall aid effectiveness in those countries. He also concludes that the primary determinants of aid effectiveness lie elsewhere.The assumption behind much of the donor coordination literature seems to be that we know exactly what to do to transform Africa from without, if we could only find a way to get along with each other and work together. But we do not know exactly what to do, and we also understand very poorly the causes and consequences of increased coordination. Bold experiments and rigorous evaluation are essential. 6. Clemens describes the wider causes of project and aid fragmentation, and points out that there may be certain incentives and even advantages to perpetuate a lack of real donor coordination. Bilateral donors may be able to raise much less for aid if all aid is channeled internationally. Clemens also asks how the International Development Association (IDA) [or the Asian Development Fund] can coordinate better with bilateral aid, when that aid is given precisely to avoid the real coordination that only giving their aid through IDA can ensure. 7. The conclusions that Clemens reaches may be right at the macro level, but within countries with large numbers of funding agencies, aid coordination and harmonization may well hold some advantages worth pursuing. They may not be large enough to require more attention than they are already receiving, given their transaction costs. Other ways to improve development effectiveness continue to deserve attention, such as determining the right approach to tackle economic growth and poverty reduction, the right kinds of projects and programs, their right design and implementation, or the right system of international tariffs and trade.

Clemens, Michael. 2005. Comment on: Arne Bigsten, Donor Coordination and the Uses of Aid. Available: http://www.afd.fr/jahia/webdav/site/myjahiasite/users/administrateur/public/eudn2005/Bigsten_Clemens.pdf

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FINDINGS FROM INTERVIEWS WITH STAFF OF ADBS DEVELOPMENT PARTNERS IN FIVE COUNTRIES A. Bangladesh

1. In Bangladesh, the Asian Development Bank (ADB) was coordinating well with a number of other aid agencies. ADB had prepared a country strategy outcome matrix jointly with the World Bank, the Department for International Development (DFID) of the United Kingdom, and Japanese Aid. This formed the basis for the four partners own country strategies, and the experience had led to more coordination of the four partners programs than before. Working relations with ADBs Bangladesh Resident Mission were very good for all partners. Some partners felt, however, that the joint outcome matrix had yet to make a strategic impact. This was in part due to the political situation in the country, with a caretaker government. DFID had had no new strategy for the last few years, but was particularly interested in an increased degree of sector selectivity of the various main agencies, with DFID concentrating on governance, services, private sector, and extreme poor/climate change. A higher degree of integration of the partners country operations was deemed possible only if all major aid agencies were fully represented in the country and could take decisions on a day to day basis, without too frequent need for recourse to head offices. 2. The World Bank officers visited viewed progress with harmonization and sector selectivity as dependent upon the government taking on a lead role rather than upon individual aid agencies, and preferably upon the government preparing detailed 3-year medium-term expenditure frameworks and long-term sector investment plans. World Bank International Development Association (IDA) resources, available up to $750 million (Bangladesh does not meet the minimum criteria for International Bank for Reconstruction and Development [IBRD] lending), three times those of ADB, and at better conditions for the government, had not been fully committed and utilized for years, due to governance concerns and bureaucratic hurdles in project preparation and implementation. In 2006, only around $500 million had been committed to new projects. B. Lao People s Democratic Republic (Lao PDR)

3. Aid partners Agence Franaise de Dveloppement (AFD), the World Bank, the United Nations Development Programme (UNDP), and the Australian Agency for International Development (AusAID) were visited. They were generally very satisfied with the cooperation with ADB, and with ADBs role in the policy dialogue with the government. All hoped that ADB would continue as a lead player, and were concerned with reduced Asian Development Fund (ADF) resources for Lao PDR. Among the projects studied by the Mission, AFD had financed parts of the Vientiane project (rather unsuccessfully), and the Nam Ngum Project (more successfully). AusAID, involved with ADB in the education sector, hoped that the Lao Resident Mission would continue to expand its responsibilities so that quick decisions could be made. Most of the agencies visited wanted a gradually increased role for program based approaches in Lao PDR and felt that ADB was lagging behind in this. Progress was also being made with aid harmonization, although slow and uneven. C. Nepal

4. The World Bank had working relations with ADB, but viewed its own country office as more decentralized and empowered. World Bank officers interviewed admitted to some

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competition with ADB due to their wide coverage of sectors, which overlapped those of ADB. The World Bank was moving increasingly towards sector-wide approaches. Officers of the Delegation of the European Commission reported having a good working relation with ADB. European Union (EU) involvement in the country was moving more towards sector support and untied technical assistance. The EU staff did not consider the reduction in ADB funding of projects in Nepal as a good move, as the country needed more resources at the current political crossroad. DFID cofinanced with ADB the Road Network Development Project. ADB administered DFIDs resources for the project, but these had remained largely unused from the first tranche onwards. DFIDs resources were later downsized due the need to respond to the Asian tsunami and due to shifts in the prioritization of aid within DFID. DFID is implementing a separate rural access program with livelihood components targeting poorer performing communities. DFID reported to be cautiously moving to a program-based approach. UNDP officers considered UNDP closer to the World Bank than to ADB. Officers viewed ADBs infrastructure projects as largely implemented on economic merits and were not convinced of the primacy of environmental concerns in such projects. D. Pakistan

5. The joint strategy or portfolio review process observed in Bangladesh and Viet Nam respectively, was not in evidence in Pakistan. A paper issued in 2006 1 noted that there was no crisis in aid relations between the government and its development partners. Aid agencies generally expressed satisfaction with Pakistan as a partner country and with the outcomes of their own projects and programs. However, dissatisfaction was also expressed. The government was critical of aspects of funding agency practices and of some of the agencies along lines similar to complaints in other developing countries. There has been genuine progress in harmonization and alignment in recent years, but few thought adequate progress had been made. Few discernible changes were by either the aid agencies or the government were noted as a result of commitments entered into in Paris. Aid agencies were viewed as divided among themselves by scale of program, in their levels of local enthusiasm for the Paris Declaration agenda, and by the extent to which authority had been decentralized to local representatives. 6. Another recent study 2 noted broad aid agency support for the Poverty Reduction Strategy and Program in Pakistan and evidence of alignment with its core objectives, particularly around economic growth, governance reform, and devolution. However, the study noted that Pakistan had less of a record on harmonization, with aid agencies tending to operate independently with little coordination at either the strategic or program level. The political turbulence of the 1990s and the fallout of the war on terror in the early 2000s were thought to have inhibited harmonization and alignment. However, the large international response to the October 2005 earthquake had provided a boost to the aid effectiveness agenda, with the government leading in efforts to integrate Paris principles into the reconstruction effort at an early stage. However, the government reported that its recent initiative in creating an aid coordination and harmonization cell had met with little support from the aid community.

Killick, Tony, and Qaim Shah. 2006. Improving Aid Effectiveness in Pakistan. Issues Paper for the Pakistan Development Forum 10-11 May Islamabad. May. Agulhas. 2006. 2006 Asian Regional Forum on Aid Effectiveness: Implementation, Monitoring and Evaluation. Synthesis Report. Available: http://www.adb.org/Documents/Events/2006/Aid-Effectiveness/Synthesis-Report.pdf

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E.

Viet Nam

7. The Government of Viet Nam and the main aid agencies were well advanced in following up on harmonization and alignment initiatives. The fifth comprehensive Joint Portfolio Performance Review report showed good progress in resolving differences in aid agency and government procedures and systems. It also shows that many combined aid agencygovernment working groups had been set up. Programs of aid partners were actively coordinated, but a clear division of the work between the main agencies was achieved only in some sectors, notably education. 8. AFD reported to have a special working relationship with ADB. One third of its portfolio was cofinanced with ADB. Ten of the 12 cofinanced projects were with ADB, the reasons being good rapport and ADB projects needing more cofinancing funds than the World Banks. Cofinancing with ADB had allowed AFD to venture into new areas and increase its influence. The World Banks IDA resources were three times higher than ADBs ADF resources; Viet Nam was not yet borrowing IBRD funds. AFD was very supportive of ADBs expanding ordinary capital resources lending, and had also opened a smaller window at the London interbank offered rate. This had indirectly had several positive effects. AFD relied on ADB to prepare projects, which it then cofinanced, as AFDs own funds for project preparation were quite modest, and were used for feasibility studies by the government, which had a low capacity to speedily utilize the funds available. In the past, AFD had parallel funding, as like in the Second Red River Project where it funded particular subprojects in parallel; now it supported complete joint cofinancing. AFD thus saw a trend for more harmonization. AFD hoped that ADB, the World Bank, and the Japan Bank for International Cooperation could harmonize/divide their programs on a subsector basis; with bilateral donors this would be much more difficult, and it should perhaps not be pursued. They could support one of the three big multilateral banks, as required. AFD would like to see ADB move faster into program lending than it is; ADB was seen as a more traditional project financier.

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Appendix 16

HIRSCHMANN-HERFINDAHL INDEX The Hirschmann-Herfindahl Index formula is [n/p]^2 where n is the number of loans a developing member country (DMC) has in each sector, p is the DMCs total number of loans, and the squares of n/p are summed across all sectors. The maximum index value of 1 is reached only if all of a DMCs loans are in a single sector; the minimum index value approaches 0 as the total number of loans increases and they are spread evenly across all sectors. As the value of p increases, it generally becomes increasingly difficult to achieve a higher index, so when two DMCs have roughly the same index, the DMC with the larger number of loans should be considered to have the more homogeneous portfolio. 2002 does not include Azerbaijan, while 2006 does not include Tonga and Vanuatu. Table A16.1: Distribution of Ongoing Loans by Country and Sector in 2002, Sorted by Country with Most Loans
Sector Country Indonesia Pakistan Bangladesh Sri Lanka Viet Nam Lao PDR Nepal Cambodia Mongolia Regional Uzbekistan Papua New Guinea Kyrgyz Republic Tajikistan Maldives Bhutan Marshall Islands, Rep. of Micronesia, Fed. States of Samoa Solomon Islands Afghanistan Cook Islands Kiribati Tonga Tuvalu Vanuatu 1 1 1 1 1 1 1 1 1 1 1 1 4 1 2 1 1 1 5 1 1 1 2 1 2 2 2 1 AG 21 9 10 13 7 5 6 1 3 ED 6 5 4 3 4 3 3 4 2 EN 6 5 8 3 1 2 2 1 1 2 1 1 1 1 3 2 1 3 4 2 3 5 1 2 2 3 2 1 1 1 1 2 1 1 1 1 FI 3 7 1 HL 4 3 1 3 2 2 IN 2 4 LW 4 7 MS 7 5 4 3 3 4 2 4 TC 5 5 7 6 3 4 2 3 1 6 2 2 2 1 1 1 1 1 1 2 1 1 4 1 3 2 2 3 WS Total Loans 58 53 35 34 29 22 21 21 16 13 12 12 10 7 6 6 5 4 3 2 1 1 1 1 1 1 Total Sectors 9 10 7 8 9 8 9 9 7 3 6 7 6 5 5 5 4 3 3 2 1 1 1 1 1 1 Loans/ Sector 6.4 5.3 5.0 4.3 3.2 2.8 2.3 2.3 2.3 4.3 2.0 1.7 1.7 1.4 1.2 1.2 1.3 1.3 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 2002 HHI 0.188 0.111 0.202 0.213 0.139 0.157 0.156 0.138 0.172 0.385 0.250 0.194 0.200 0.224 0.222 0.222 0.280 0.375 0.333 0.500 1.000 1.000 1.000 1.000 1.000 1.000

Total 83 46 36 29 17 17 28 44 52 23 375 10.663 10 37.5 AG = agriculture and natural resources; ED = education; EN = energy; Fed. = federated, FI = finance; HHI = HirschmannHerfindahl Index; HL = health, nutrition, and social protection; IN = industry and trade; Lao PDR = Lao People's Democratic Republic; LW = law, economic management and public policy; MS = multisector, Rep. = republic, TC = transport and communications; WS = water supply and sanitation.

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Table A16.2: Distribution of Ongoing Loans by Country and Sector in 2006, Sorted by Country with Most Loans
Total Total Loans/ 2006 HHI Country AG ED EN FI HL IN LW MS TC WS Loans Sectors Sector 80 Pakistan 13 7 4 8 2 3 10 20 10 3 10 8.0 0.144 47 Sri Lanka 2 5 2 5 2 3 8 5 5 9 5.2 0.147 40 Bangladesh 8 6 9 2 1 3 4 6 1 9 4.4 0.155 37 Viet Nam 10 5 2 3 3 3 3 5 3 9 4.1 0.145 35 Indonesia 6 3 3 3 1 7 10 2 8 4.4 0.177 25 Lao PDR 6 3 2 4 1 1 3 4 1 9 2.8 0.149 23 Nepal 7 4 1 2 1 1 2 5 8 2.9 0.191 21 Cambodia 4 3 3 1 1 2 1 2 2 2 10 2.1 0.120 18 Mongolia 2 2 1 3 3 1 2 2 2 9 2.0 0.123 17 Uzbekistan 5 5 1 1 1 1 3 7 2.4 0.218 12 Tajikistan 3 1 2 1 1 1 3 7 1.7 0.181 12 Papua New 3 1 1 1 5 1 6 2.0 0.264 Guinea 11 Afghanistan 2 2 1 3 3 5 2.2 0.223 10 Kyrgyz Republic 1 2 1 1 2 3 6 1.7 0.200 10 Azerbaijan 1 5 2 2 3 3.3 0.340 7 Maldives 2 1 2 1 1 5 1.4 0.224 6 Bhutan 1 1 2 1 1 5 1.2 0.222 5 Micronesia, Fed. 2 3 2 2.5 0.520 States of 3 Samoa 1 1 1 3 1.0 0.333 2 Tuvalu 2 1 2.0 1.000 1 Cook Islands 1 1 1.0 1.000 1 Kiribati 1 1 1.0 1.000 1 Marshall Islands, 1 1 1.0 1.000 Republic of 1 Solomon Islands 1 1 1.0 1.000 1 Regional 1 1 1.0 1.000 Total 83 51 33 35 17 20 28 69 59 31 426 8 53.3 10.076 AG = agriculture and natural resources; ED = education; EN = energy; Fed. = federated, FI = finance; HL = health, nutrition, and social protection; IN = industry and trade; LW = law, economic management and public policy; MS = multisector, TC = transport and communications; WS = water supply and sanitation, HHI = Hirschmann-Herfindahl Index. Source: Asian Development Bank Management Information System. Sector

MANAGEMENT RESPONSE TO THE SPECIAL EVALUATION STUDY ON ASIAN DEVELOPMENT BANK VIII AND IX OPERATIONS

On 8 February 2008, the Officer-in-Charge, Operations Evaluation Department, received the following response from the Managing Director General on behalf of Management:

I.

General Comments

1. We welcome OEDs Special Evaluation Study (SES) on Asian Development Fund (ADF) VIII and IX Operations. We note the SES assessment that (i) increasing goal congestion under ADF VIII (20012004) may have temporarily stalled in the rising trend of project success over the years, and that (ii) the enhanced approach employed under ADF IX, started in 2005, is more likely to resume the upward trend of project success, although it is early to say. 2. We also note the SES finding that a number of reforms and business process changes 1 introduced in 20042006 have led to such improvements of ADF operations. This SES finding confirms the importance of consolidating our ongoing reforms and change initiatives under ADBs reform agenda. As observed in the SES, the reform agenda was our Managements response to the need for changes for ADB to remain relevant in a dynamic Asia and the Pacific region. 3. Increase of ADF Size. We agree with the SES recommendation to ADF donors that ADFs size should increase if it is to accelerate the achievement of the Millennium Development Goals (MDGs). We believe that a certain critical mass has to be deployed not only to achieve poverty reduction and address nonincome MDGs, but also to ensure the leverage needed to achieve policy change and governance objectives. 4. Usefulness of ADF Grants. The SES casts doubts on the effectiveness of ADF grants. However, we believe that it is too early to make any judgment calls on the usefulness of ADF grant instrument, introduced only under ADF IX, on development outcomes. And given that grants are processed, disbursed and supervised in the same way as ADF loans, it is difficult to see how they would provide fewer opportunities for policy dialogue than loans. Finally, as the SES observes, our grants framework is closely aligned with that of the International Development Association, so that any changes would have to be embedded in a wider reassessment of grants as a development tool. 5. Soundness of Performance-Based Allocation (PBA) System. The SES questions the soundness of the PBA system introduced during ADF VIII. We maintain that the PBA system is the best practice available for achieving the highest level of development effectiveness with the limited resources we have. Like other multilateral development banks (MDBs), we acknowledge that it is not perfect, and we endeavor to fine-tune it as we go along (for example, for the Manila meeting, we plan to present donors with
1

These include the Enhanced Poverty Reduction Strategy, Medium-Term Strategy II, the new Country Partnership Strategy process, the Resident Mission policy, the Public Communications Policy, and new financing instruments and modalities such as multitranche finance facility and local currency loan products, among others.

concrete proposals to attenuate some of the volatility and unpredictability of PBA outcomes). II. Specific Recommendations Recommendation: ADF X should operations and in ADB as a whole. avoid goal congestion in

6. We fully agree that ADB should avoid "goal congestion" in its ADF operations. This objective has already been anchored in the selectivity approach of the Medium-Term Strategy (MTS) II, and is also a crucial component of the Long-Term Strategic Framework (LTSF) 20082020 currently being finalized. Recommendation: The ADF needs to be more selective in its support for sectors in many countries. 7. We fully agree with this recommendation. In the ongoing ADF X replenishment negotiations, donors have for their part supported the need for selectivity and the emerging consensus is that ADF should focus on what it has been doing best over the years, mainly infrastructure projects which will address poverty reduction in an indirect manner through economic growth and job opportunities, and increased access to markets and social services (health services, water and sanitation, and education). Recommendation: Poverty reduction is an appropriate goal for ADF operations, and requires more than direct targeting of the poor in each country. 8. We agree with the SES recommendation that poverty reduction should be the main goal of ADF operations. We also support the SES finding that poverty reduction requires more than direct targeting of the poor in each country. As stated in the SES, we have already internalized this lesson of ADF VIII into our operations. Recommendation: Aid harmonization and coordination remain necessary elements of the ADF approach. 9. We agree with the SES finding that donor harmonization and aid coordination is crucially important for aid effectiveness. We also agree that coordination of country programs among major donors to increase sector specialization should be a priority. However, as the implementation of the Paris Declaration should be, and in fact is, mostly country-driven, an effective division of labor between various actors depends significantly on country-specific circumstances. Recommendation: An ADF geared to poverty reduction and governance is staff intensive and needs specialized skills. 10. We acknowledge this SES recommendation. As part of the Human Resources Strategy (HRS) adopted in October 2004, measures are being introduced to address to ADBs skills mix issues and skills gaps. We have also aligned our skills mix more closely with the priorities of MTS II. Subsequent to the staff engagement survey being undertaken in early 2008 and the adoption of

LTSF (20082020), we will review the HRS with the assistance of external experts and plan for appropriately increasing investment, if required. This review of the HRS will include the staffing issues to implement ADF operations and the specific requirements in resident missions. Recommendation: Major governance issues should be primarily addressed through program lending, with agreed reforms being supported by advisory and capacity building technical assistance. 11. We believe this SES suggestion has to be qualified. The choice of lending modality should be determined on a case by case basis. We note that when a country's budget framework and financial management system is weak, provision of program loans could involve a significant degree of fiduciary risk. Also, one must recognize that governance efforts can also be effectively pursued by focusing efforts on the key sectors in which we deliver investment projects. Investment projects can also help strengthen institutions and capacity at the sector level, as highlighted by the Second Governance and Anticorruption Action Plan. Recommendation: ADB should undertake a rigorous analysis to test the validity of the various country performance assessment (CPA) indicators. 12. We note the SES recommendation. However, although not perfect, the present CPA system is considered collectively by MDBs and donors as best practice presently available. It is not clear if alternative methods cited by the SES, like tying allocations to developing member countries commitments to remove "binding constraints" for development would be less subjective and produce more comparable results across the range of ADF recipients. Recommendation: ADB needs to pursue a varied approach to debt distress of ADF countries and not rely mainly on the institution of an ADF grant mechanism. 13. While the main purpose of the ADF grant framework is to promote debt sustainability, we agree with the SES observation that this instrument alone is insufficient. As the SES notes, countries must have a sound legal framework to monitor and manage public debt in conjunction with sound macroeconomic management to ensure that levels of public debt do not become burdensome. The Bretton Woods institutions are leading initiatives to strengthen debt management, and ADB will coordinate with them to ensure a consistent approach.

DEVELOPMENT EFFECTIVENESS COMMITTEE Chair's Summary of the Committee's Discussion on 15 February 2008 of the Special Evaluation Study of the Asian Development Fund VIII and IX Operations 1. Under the special evaluation study (SES) of Asian Development Fund (ADF) VIII and IX operations for the period 20012008, assessments were made of ADFs efforts to target the poor; the Performance-Based Allocation (PBA) Policy; adding a governance dimension to operations; the grant mechanism; and progress with aid coordination, cofinancing, and harmonization. Summary of Discussions 2. The Committee discussed key areas of the study and considered Managements response to OEDs recommendations. 3. Development Effectiveness Committee (DEC) noted the studys observation that only a small proportion of the poor in the Asia-Pacific region is targeted by ADF. However, some DEC members emphasized that ADF has specific goals that are not directed towards the entire poor population of the region. Some middle income countries have better access to commercial loans and the poor population of these countries is not covered by ADF operations. Some other DEC members believed that ADB should look for ways to support the poor in these countries. 4. Performance-Based Allocation. Management clarified that ceilings and/or allocations of assistance, determined on the basis of PBA, are disclosed to the country through the Board; but not put out in the public domain. 5. DEC noted the studys findings that ADB and World Bank (WB) have different weights and formulas; and that the ratings and weights of indicators in the ADF and IDA formulae lead to different shares in ADF and IDA funds. The study also found that ADBs formula favors smaller population, which leads to greater allocation on a per capita basis to smaller countries. 6. Management noted that while other MDBs have been using the PBA system for a long time, ADBs experience was limited to a shorter period. DEC noted donors emphasis on the need for a harmonized procedure between ADB and other MDBs. 7. DEC noted OEDs recommendation that the issues on governance may be addressed through both program and project lending. However, DEC members cautioned that addressing the governance issue through program lending would only be effective if the country has sufficient capacity. 8. Loans versus Grants. One Board member opined that while grants do not solve debt distress, grants do not compound the distress. One DEC member observed that providing loans to debt-distressed countries is tantamount to giving grants, since the likelihood of loan repayments is low. 9. DEC noted the SESs findings that grants lead to lower volume of assistance to a country, as compared to when loans are provided. The study suggested higher concessionality or debt forgiveness as an alternative to grants.

10. Efficiency of Administration of ADF funds. DEC noted the studys findings that ADF operations are relatively inefficient compared to OCR operations. The study stated that implementation of ADF IX has been more efficient than ADF VIII. 11. DEC expressed concern on the capacity of ADFs costing methods, and suggested that ADB finds ways to estimate total cost to OCR borrowers arising from ADF operations. 12. Goal Congestion. DEC believed that goal congestion is a serious issue in ADF operations. Management agreed and explained that ADB is trying to be selective and more focused on goals to reduce congestion. The ongoing review of the Long-Term Strategic Framework hopes to address this. OED added that ADF IX addresses this issue by delegating specific goals to development partners specializing in those specific fields. 13. Staff Transfers. DEC expressed concern about the impact of staff transfers on project implementation and sought assurance from Management that this would not happen in the future. Management, however, admitted that while assurance may not be given, all efforts would be made to ensure that at least mission leaders stay with the projects during the first year of implementation. 14. Management stated that with limited resources, staff need to be transferred to wherever they may be needed. Further, avoiding staff transfers would deny staff with opportunities for job promotion. 15. Data Classification. DEC viewed that changes in classification make comparison between operations over time difficult. DEC suggested that when the classification system changes, the old data should be re-classified according to the new system to facilitate comparisons over time. Conclusions 16. In conclusion, (i) DEC noted that ADF currently covers only a small proportion (about 18%) of the 620 million poor in Asia-Pacific region. However, many of the countries not covered by ADF have been fighting poverty using other resources. DEC noted that for a resolute assault on poverty in Asia and the Pacific, much more resources, as well as effective ways of utilizing such resources would be needed in the Asia-Pacific region. ADB may have a role to play in this regard. ADF, particularly the newly introduced grant framework, could be an effective way of fighting poverty without adding to the problem of debt distress in the highly-indebted poor countries. There is a problem of goal congestion as noted in the SES. Management assured DEC that the LTSF under preparation will address this issue. DEC noted the recommendation of SES on need for selectivity of sectors in ADF operations. SES clarified the comparability problem over time, because of frequent changes in data classification. DEC wanted Management to re-classify the old data whenever a new classification system is introduced. DEC noted that apart from the direct transfer of OCR net income for funding ADF, there was some cross-subsidization of ADF operations by OCR operations

(ii)

(iii) (iv) (v)

(vi)

(vii)

because of the relatively more staff time per dollar of loan devoted to ADF operations. SES raised questions on the PBA, and the appropriate weights to be attached to governance. DEC noted that the rating and weighting of indicators for ADF and IDA formulas are different. DEC encouraged staff to carry out appropriate analysis of PBA system and weights attached to governance.

Ashok K. Lahiri Chair, DEC