Publications

	Table of Contents
p. 16 of 27 BACK | NEXT Executive Summary I. Introduction II. The Performance-Based Allocation Policy III. Lessons, Issues, and Directions IV. Enhancements to the Policy A. Principles to Guide Revisions B. Country Performance Criteria C. Country Ratings D. Proposed Allocation Formula E. Extra-Formula Allocations F. Disclosure G. Monitoring the Policy H. Summary V. Implementation VI. Recommendation Appendixes

Review of the Asian Development Bank's Policy on the Performance-Based Allocation of Asian Development Fund Resources : IV. Enhancements to the Policy

---

D. Proposed Allocation Formula

72. The proposed allocation formula is shown in Box 6. The formula implies an effective weight of governance of about 50%, compared with 30% in the present policy.³⁶ Policy and institutional performance would account for about 35% of performance related allocations and portfolio considerations for 15%.³⁷ Revisions to IDA’s PBA will reduce the effective weight of governance in its country performance rating from 68% to 66%.³⁸

73. In the proposed formula, performance exercises a much more powerful influence on allocations than before. Performance would have a combined exponential weight of 4, compared to 1.8 in the existing policy.³⁹ Under the current policy, if the performance of the borrower with the largest ADF share were to improve by 10% it would attract about a 13% increase in its allocation. For an identical improvement, the smallest borrower would get about 18% more.⁴⁰ These premiums increase sharply with the new allocation formula: the largest ADF borrowers’ allocation would increase by about 30%, and that of the smallest borrower by close to 45 percent.⁴¹ A 10% improvement in the governance rating alone would increase the largest borrower’s allocation by about 14.5% and that of the smallest borrower by about 22 percent. The proposed formula considerably strengthens incentives for improved performance, particularly on governance criteria.

74. The proposed formula retains the current weight on per capita income, -0.25. Lower income countries would therefore continue to receive larger ADF shares other things equal. The treatment of lower income countries would remain more favorable in ADF than in either IDA or AfDF.

75. For two otherwise identical countries, one with twice the population of the other, the current policy allocates about 19% more in per capita terms to the smaller country. During ADF VII, this premium was around 34%. It is proposed that that the formula be recalibrated so that, at this population ratio, the premium on per capita allocations favoring small country increases to about 30%. To a reasonable approximation, an exponential weight of 0.6 on the population variable achieves this. Even with this adjustment, only small countries that are performing satisfactorily are likely to get increased allocations, given accentuated performance impacts.

76. It is proposed that PDMCs continue to compete for a separate pool of ADF resources on an identical basis to that of Group A and B1 countries. ADF donor shareholders agreed that PDMCs should be allocated the same share of ADF IX resources that they had access to in ADF VIII. Specifically, PDMCs would be allocated a pool equal to 4.5% of ADF resources to support country programs, excluding Afghanistan and Indonesia.

___________________

Back C. Country Ratings	Next E. Extra-Formula Allocations