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Cost Sharing and Eligibility of Expenditures for Asian Development Bank Financing: A New Approach

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Introduction

1. This paper proposes the modification of a number of Asian Development Bank (ADB) policies and rules on cost sharing and eligibility of expenditures. Its aim is to establish a new policy framework to determine how much, and what, ADB can finance under its public sector development programs.¹ A new policy framework is essential for ADB to remain an effective, responsive, results-oriented, and hence relevant partner to its developing member countries (DMC). The proposed changes will give ADB a project financing framework that is (i) more closely aligned with the actual expenditure requirements of borrowers, (ii) harmonized with that of other development partners, and (iii) consistent across lending instruments. Simpler and more uniform cost sharing and expenditure eligibility will help reduce transaction costs for borrowers and ADB.

2. This paper is one of several being prepared under the Innovation and Efficiency Initiative (IEI), launched in November 2003.² IEI aims to improve ADB’s business model by removing bottlenecks that constrain its capacity to respond better and more quickly to its clients. One of IEI’s key principles is to promote the harmonization of rules, procedures, and practices with those of its clients and development partners. The proposals and recommendations contained in this and other IEI papers represent important steps toward achieving the objectives and goals of ADB’s strategic agenda.

3. ADB’s Long-Term Strategic Framework 2001–2015 and associated first Medium Term Strategy 2001–2005³ explain the strategic context and functioning of ADB. Both documents call on ADB to respond better to the needs of its DMCs—and of partner organizations—through streamlined and simplified procedures and practices. They also urge ADB to introduce greater flexibility to its structure, skill base, processes, and products.

4. Similarly, ADB’s original Poverty Reduction Strategy (1999) and its recent review in 2004⁴ stress the need for ADB to widen the range of available modalities and instruments, and tailor assistance to the complex needs of poverty reduction in DMCs. In the context of the new global development architecture that emerged following the Millennium Declaration,⁵ ADB has also renewed its commitment to improving development effectiveness by reducing administrative costs to developing countries through, among others, harmonization of operational procedures and practices.

5. To deliver on the commitments made in its strategic frameworks, and contribute to the global commitment on aid effectiveness articulated in the Paris Declaration,⁶ ADB defined foritself an ambitious reform agenda (the Reform Agenda) to enhance its organizational effectiveness and make ADB a more results-driven catalyst for poverty reduction and prosperity in the region.⁷ IEI is a core reform initiative under the Reform Agenda.

6. The policy changes proposed in this paper are broadly consistent with those that the World Bank adopted, and this paper follows closely the rationale and presentation given by the World Bank in its policy paper.⁸ This includes the background to the changes and the list and sequencing of the proposals. This approach makes it easier to evaluate the areas where, and extent to which, the ADB policy framework is being brought in line and harmonized with that of the World Bank.⁹ The two policy frameworks are different, however. Some of these differences will remain, mainly due to differences between World Bank and ADB Charters. For instance, the World Bank can finance up to 100% of a project, while ADB cannot. The paper highlights the differences between the two policy frameworks.

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