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p. 5 of 6 BACK | NEXT Introduction New Approach for Cost Sharing and Expenditure Eligibility Proposed Cost Sharing and Expenditure Eligibility Rules Fiduciary Oversight Implementation Arrangements and Resource Implications Recommendations

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

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Implementation Arrangements and Resource Implications

46. Individual departments and offices will be responsible for the application of the new cost sharing and expenditure eligibility policy in respect of projects planned and implemented by them. Regional departments are responsible for processing and reviewing the cost sharing arrangements applied to individual DMCs. In circumstances where interpretation of policy is required, enquiries can be directed to the Strategy and Policy Department (SPD) and the Office of the General Counsel.

47. Under the new OM section,¹⁷ staff instructions would be issued on the development of DMC financing parameters, the financing of selected expenditure types in individual projects, the specific fiduciary arrangements, and other risk-mitigation measures.

48. Country teams, in consultation with DMCs, would develop the new country financing parameters. This work would be an integral part of CSP preparation, although for some DMCs it would be a stand-alone exercise. Irrespective of the context, ADB would work closely with its development partners to determine the parameters. The objective would be to adopt similar criteria and methodologies, and to avoid duplicating assessments. ADB and institutions such as the World Bank would undertake, as much as possible, joint assessments in consultation with DMC counterparts or share the results of work completed by one or the other. This would ensure consistency, accelerate harmonization, and reduce costs for DMCs.

49. Internally, the director generals of the regional departments would be responsible for the launch and coordination of the work undertaken by the country teams in consultation with the DMCs. The director generals also would be responsible for the screening of expenditure eligibility items proposed by project teams under project investment plans. The proposals on new country ceilings would be submitted to management and then the Board of Directors. If the new country financing parameters are defined as part of the CSP preparation, CSP procedures would be followed. If the country financing parameters are established as a stand-alone exercise, the proposals would be submitted to management and the Board as a special memorandum. The memo should contain the financing proposal and a summary of all the support evaluations.

50. The implementation of the new policy would have transitional costs. Internally, policies and procedures will need to be updated, some business practices revised, and staff instructions developed. To ensure the timely implementation of these policies and procedures, RSDD would hold briefings and training for operations staff (including those at resident missions) and staff at key support departments and offices. The one-time cost of these activities is estimated at no more than $50,000. In the medium term, the introduction of simplified and harmonized cost sharing and expenditure eligibility rules would lower administrative costs and associated staff time.

51. If undertaken as part of the CSP preparation, the budget requirement for the assessments needed to support the proposed policy framework would be relatively minor (about $30,000 additional cost on average). This is because country teams already incorporate economists in the CSP preparation, and the macroeconomic variables reviewed coincide largely with the ones proposed. These economists have the experience to evaluate the variables, and to define an aggregate portfolio ceiling. The additions to their terms of reference for these assessments will not significantly increase costs. The extra costs likely would be a function of (i) more time in the field; (ii) acquisition of new documentation; (iii) additional consultations with authorities; and (iv) possibly, in selected cases, hiring the services of a staff consultant.

52. If the establishment of the new country ceilings is a stand-alone exercise (outside the CSP process), the extra cost could range from $70,000 to $80,000 per country, depending on the team composition. Each regional department would determine the most cost-effective format of this exercise and team composition.

53. The new framework might increase project preparation costs. Each new item in the eligibility list would require specific new assessments, most of which could be incorporated into project preparatory TA and staff consultant mandates. The amount would differ from project to project and with each eligibility item. For instance, including and justifying land acquisition in an investment plan will be more costly than including and justifying bank charges. In general, the incremental cost is likely to range from $5,000 to $20,000 per project. More staff time should be allocated to fiduciary oversight arrangements during project processing and implementation.

54. The new policy framework would be effective upon the completion of the staff instructions (3rd quarter 2005). The definition of the country ceilings will await the completion of the proposed macroeconomic assessments. The application of the new expenditure eligibility criteria would be effective upon completion of the staff instructions, which are being prepared.

55. After 3 years of implementation, ADB would review the implementation experience of the proposed new policy, and identify any areas where changes might be required. A performance assessment framework is given in Appendix 2.

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