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p. 17 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

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E. Extra-Formula Allocations

1. Postconflict Needs, Disasters, and Emergencies

77. The review proposes that allocations to support postconflict needs remain within framework of the policy, but that the current IDA framework should now explicitly guide these (Appendix 3).⁴² Consequently, decisions on eligibility for postconflict assistance should be made in consultation with international partners. For eligible countries a “transitional support strategy” containing a monitoriable action plan should be developed, identifying the role of ADF assistance and the scope of collaboration with international partners. Management decisions on allocations to support postconflict needs would be based on annual staff assessments of performance, based on IDA’s “postconflict progress indicators”, and country circumstances. A country would normally be expected to return to the normal PBA allocation process within three years, with the possibility of a two-years extension but only in exceptional cases. Per capita ADF allocations to eligible postconflict countries would be expected to exceed the ADF average for a country of the same population size.

78. Decisions on allocations to support disaster and emergency needs will be guided by the Disaster and Emergency Assistance Policy (footnote 29). To the extent possible, disaster and emergency needs will be met through the reallocation of resources within existing programs, and by drawing on loan cancellations and savings. If these prove insufficient, any additional country demands will be met through borrowing against future allocations, or, in exceptional cases, through reductions in other countries’ allocations. No ADF commitment authority will be kept in reserve to meet disaster and emergency needs.

2. Absorptive Capacity

79. Adjustments to allocations may be made on absorptive capacity considerations. Judgments about absorptive capacity cannot be reduced to a simple indicator or scoring system. A broad interpretation of absorption capacity is needed which recognizes macroeconomic (fiscal and debt), allocation and sector, and service delivery dimensions. At each of these levels, there may be institutional, physical and human, or social, cultural and political constraints to the absorption of external resources. PBA allocations may be reduced where analysis points to constraints in any of these areas. However, such analysis should also help guide assistance strategies that aim to relax constraints and expand absorptive capacity. This approach may be particularly useful for weakly performing countries. Care should be exercised in differentiating between absorption constraints for the client and institutional processing constraints.

3. Subregional Projects

80. The ADF IX Board of Governor’s Resolution provides for credits to support subregional projects. These are to be capped at 5% of ADF IX credits.

81. Conceptual and data limitations mean that it is not yet possible to rate the performance of regional programs in the way that country performance is assessed. For this reason, it is proposed that allocations are made on a project rather than program basis. In future, assessments of regional strategies and their record in delivering results would constitute an important basis for allocation decisions. Box 7 summarizes proposed eligibility criteria to guide allocations to support subregional projects. These criteria are similar to those that have been adopted in IDA and in the AfDF but admit a wider class of project. In Asia, some regional projects might occur in just one country, and some might involve cooperation with non-ADF borrowers.

4. Weakly Performing Countries

82. A cautious approach to allocations is needed for “weakly performing countries”, who might face, among other difficulties, external debt servicing problems. But given a coherent "engagement strategy”, aimed at supporting improved performance and expanded absorptive capacity, limited allocations might be provided for key activities. For weakly performing countries, the focus and quality of assistance rather than its volume should be of primary concern. An approach to assistance for weakly performing countries will be further developed by ADB in close collaboration with development partners.

5. Countries on Watch List for Graduation

83. In practice, allocations to Indonesia, the only country currently on the watch list for ADF graduation, have been determined as a set-aside and capped below its normative formula allocation. The review proposes that the revised policy formalize this treatment, and apply a cap to all countries that are being considered for graduation. The level at which resources would be capped would be determined on a case-by-case basis by Management.

6. Exclusions from the Policy

a. Abrupt Changes in Volumes

84. It is proposed that provisions to attenuate abrupt or sharp changes in lending volumes be removed from the policy. This would promote greater selectivity in allocations on a performance and needs basis. Rewarding and creating strong incentives for better country performance and addressing the needs of poor countries is not consistent with an approach that provides historical entitlements. Besides, constraints on changes in country allocations over historical lending could, as before, prove infeasible, as volume allocations depend on an exogenously determined resource envelope, not just on PBA formula shares. It is proposed that the collar be discontinued in ADF IX allocations.

b. Far Reaching Reforms

85. No special allocations for countries undertaking far-reaching reforms occurred during the ADF VIII period. This provision is redundant and might be removed from the policy. Country performance ratings should capture country reform efforts.

c. Triggers

86. It is proposed that assessments of country performance on country specific objectives, so called, “triggers”, be discontinued from the start of the ADF IX allocation period. Implementation has proven costly for borrowers and for ADB, and difficulties have been encountered in ensuring consistent application of performance tests across countries. If no resources are set-aside to fund high lending scenarios, triggers can also obfuscate links between performance and allocations. Budgetary planning for country authorities would be easier if PBA allocations were known with greater certainty, and with a longer lead.

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