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p. 2 of 27 BACK | NEXT Executive Summary I. Introduction II. The Performance-Based Allocation Policy III. Lessons, Issues, and Directions IV. Enhancements to the Policy V. Implementation VI. Recommendation Appendixes

Review of the Asian Development Bank's Policy on the Performance-Based Allocation of Asian Development Fund Resources

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I. Introduction

1. Before the Policy on Performance-Based Allocation for Asian Development Fund Resources¹ was approved in March 2001, Asian Development Fund (ADF) allocation decisions were based largely on country-specific considerations. Although performance played a role in decisions, its influence on allocations was not concerted or transparent. Following adoption of the Asian Development Bank’s (ADB’s) Poverty Reduction Strategy² and evidence that aid had been most effective in accelerating poverty reduction in countries whose policy and institutional performance was strong³, the need to strengthen the link between country performance and resource allocation became apparent.

2. In this context, the performance-based allocation (PBA) policy marked an important departure from earlier practices. The new approach explicitly recognized that in seeking to reduce poverty, ADF resources would be best directed to good performers. In doing so, the policy sought to create incentives for improved performance. In addition to the performance measurement and allocation framework, the policy provided management with an important tool for strengthening development effectiveness through more focused policy dialogue, better country planning processes, and improved operations.

3. This review represents the culmination of an extended examination of the efficacy of the PBA policy and of ways to improve and strengthen it. Starting with the ADF VIII Midterm Review⁴ and moving through the ADF IX negotiation period⁵, extensive discussion has taken place among ADF donor shareholders, borrowers’ representatives, colleagues in the International Development Association (IDA) and the African Development Fund (AfDF), and ADB staff. The review is an integral part of a much broader assessment by the international community of PBA methods across multilateral concessional funds and developing regions. The review both contributes to and reflects an emerging international consensus on ways to promote and invest in better performance in low-income countries and to strengthen accountability for the allocation and use of scarce resources that have significant opportunity costs for both contributors and low-income countries.

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