Policy Overview

The second medium-term strategy proposes several adjustments in ADB’s operational model to better align it with the five strategic priorities outlined under Strengthening Strategic Priorities under the Second Medium-Term Strategy (pages 23–26). The most important of these include greater sector focus and selectivity; product and process innovations to enhance responsiveness, flexibility, and efficiency—most were developed as part of the innovation and efficiency initiative; and increased emphasis on portfolio performance, development, and results as part of ADB’s broader effort to manage for development results.

Greater Sector Selectivity

ADB recognizes that it cannot be effective in all sectors and in all countries. Selectivity and focus are important determinants of ADB’s ability to deliver quality development results. The second medium-term strategy identifies core sectors where ADB will focus its operations and build a critical mass of expertise. These sectors have been identified based on their relevance to ADB’s broad strategic priorities, clients’ demand for ADB assistance in these sectors, and ADB’s track record of quality project delivery.

Group I covers core operational sectors where ADB will build up a critical mass of expertise and be a leading provider of financing and expertise. These sectors include road transport, energy, urban infrastructure, rural infrastructure, education, and financial services. Group II comprises sectors for which building ADB capacity is not a priority but which are identified as important for ADB to be able to meet the diversity of needs across different countries. Group II includes agriculture and natural resources, railways, health, trade (related to regional cooperation and integration), law and the judiciary, public finance, and economic management. Group III covers sectors with limited demand and where ADB’s performance has sometimes been poor. Operations in group-III sectors are to be gradually phased out, thereby freeing up resources for focusing operations in group-I and -II sectors. Three of ADB’s most poorly performing sectors (fisheries, livestock, and development finance institutions) are in group III. Group III also includes some sectors where ADB has had success (airports, water transport, and communications, for example), but demand from developing member countries for ADB financing in these sectors is likely to be limited.

This selective approach has been working well so far. For public sector loans and ADF grants, 73% of total approvals in 2006 were for group I, 17% for group II, and 4% for group III.

ADB realigned its regional departments to remove structural constraints identified during the independent assessment of the 2002 reorganization. These adjustments were aimed to ensure greater synergy between country and regional operations by regrouping countries more in line with existing regional and subregional initiatives, strengthen country focus as a result of more balanced workload across regional departments, and optimize the use of staff resources and skills through operational synergy and focus by regrouping countries with congruent development challenges and priorities.

Innovation and Efficiency Initiative

Another important adjustment to the operational model is the introduction of new products and processes to enable ADB to more flexibly and innovatively meet the needs of developing member countries and improve real development outcomes on the ground. Greater efficiency in this regard is required to reduce transaction costs that developing member countries incur by doing business with ADB, including measures to accelerate loan processing. Many plans are already under way as part of the innovation and efficiency initiative.

Launched in November 2003, the initiative focused on the following priority areas: cost sharing and eligibility of expenditures, procurement and consulting services, business processes, country strategies, safeguard policies, and new financing instruments and modalities. These initiatives are now being implemented.

Cost Sharing and Eligibility of Expenditures. On 25 August 2005, the Board approved a new policy framework on cost sharing, expenditure eligibility, and local cost financing for public sector assistance. In the past, cost-sharing limits were fixed up-front and equally for all projects based on the developing member country’s classification. The new policy harmonizes ADB’s approaches and practices with those of other development institutions, including the World Bank. In March 2006, new staff instructions and operations manual sections were issued to provide detailed guidance on the implementation of the new policy.

Under the new policy, cost-sharing ceilings and financing parameters for each developing member country will normally be established in conjunction with the country partnership strategy. Occasionally, the ceilings and parameters may be reviewed and redefined on a stand-alone basis. In both cases, they will be approved by Management and submitted to the Board for information. Until a country cost-sharing ceiling under the new policy is agreed for a specific developing member country, the old project cost-sharing ceiling applicable to the member country will constitute the country cost-sharing ceiling.

Pilot Financing Instruments and Modalities. On 25 August 2005, the Board approved the 3-year pilot-testing of three new financing instruments and modalities: the multitranche financing facility, the nonsovereign public sector financing facility, and the refinancing facility. The innovation and efficiency initiative pilot financing instruments and modalities do not replace ADB’s existing instruments, but rather expand the range of alternatives available in ADB’s portfolio of development finance solutions. They are intended to provide ADB clients and operational teams with additional and flexible alternatives to help finance individual projects and investment programs.

Multitranche Financing Facility. The multitranche financing facility allows ADB to offer financial resources to clients for an agreed investment program or a set of interrelated investments. These resources may be provided in a series of separate financing tranches over a fixed period. Of the various pilot financing modalities, the multitranche financing facility is the most in demand among clients. From August 2005 to December 2006, 10 multitranche financing facility proposals were submitted to and approved by the Board. Financing made available through this facility amounted to $5.3 billion. As of 31 December 2006, two loans amounting to $360 million had been declared effective.

Nonsovereign Public Sector Financing Facility. The nonsovereign public sector financing facility allows ADB to provide loans and guarantees directly to selected nonsovereign public sector entities, without need for a central government or sovereign guarantee. In the first year since the facility was adopted as a pilot instrument, the Private Sector Operations Department has processed two nonsovereign public sector financing facilities: the National Thermal Power Corporation Capacity Expansion Financing Facility in India and the South Sumatra to West Java Phase II Gas Pipeline Project in Indonesia. In both cases, the clients were state-owned enterprises. Staff instructions and guidance notes for nonsovereign public sector financing facilities were issued on 15 December 2006. They reiterate the policy directive that these facilities should be processed in accordance with private sector operations procedures.

Refinancing Facility. Using the refinancing facility, ADB can restructure the existing debt of public, private, or public–private clients who are burdened by a legacy of inappropriate or onerous financing plans. No refinancing transaction has yet been processed and no concept paper for a refinancing transaction has been cleared. There is potential demand for this type of facility, but two factors continue to affect its uptake: skills mix and ability to restructure financing plans, and tight conditions and criteria for its use. As with nonsovereign public sector financing facilities, refinancing facilities are to be processed in accordance with private sector operations procedures.

As a precondition for the pilot instruments, the independent Risk Management Unit was created in 2005 to evaluate nonsovereign finance transactions. The unit became fully operational in 2006 with respect to credit risk assessment on individual transactions of nonsovereign operations, provision and reserve measurement, credit portfolio management on nonsovereign operations, and market and treasury risk management. The unit reviewed two policies in cooperation with other departments: the loss provisioning policy for nonsovereign operations (jointly with the Controller’s Department) and ADB’s investment strategy and authority (with the Treasury Department). Completing the risk framework for nonsovereign operations will continue in 2007.

ADB also reviewed and revised its major financial and liquidity policies in 2006 to update and align the financial policies and practices with ADB’s business activities and initiatives and to harmonize with best practices. ADB formalized a comprehensive asset and liability management policy framework for managing the financial assets and liability and updated the liquidity policy and investment authority and guidelines.

Procurement and Consulting Services. On 1 January 2005, streamlined procedures became effective for the procurement of goods and services and the engagement of consultants. In February 2006, the Board approved additional amendments to ADB procurement and consulting services policies, which further streamlined the procedures, improved project implementation performance, and responded to borrowers’ demands for more flexibility and modernization in procurement and consultant engagement. The revised policies became effective on 1 April 2006.

Country Strategies and Business Processes. In August 2006, Management approved new business processes to improve the preparation of country strategies and programs as well as project processing of sovereign operations. The improvements will make ADB programming and processing more responsive, relevant, and results oriented by ensuring strategic clarity at the country level and selectivity in operations pipelines, results orientation and operational quality at entry, and procedural efficiency and improvement.

The Strategy and Policy Department, in close consultation with operations and non-operations departments, prepared the operations manual section on country partnership strategy and the detailed country partnership strategy guidelines, which Management finalized and approved in February 2007. The department and the Office of the Secretary prepared templates on the country partnership strategy, partnership strategy midterm review report, and country operations business plan. The entire set of documents was discussed at a workshop conducted on 6–7 November 2006 with staff concerned, including those from resident missions.

Safeguard Policy Update. ADB’s review of its safeguard policies continued. These policies—on the environment (2002), indigenous peoples (1998), and involuntary resettlement (1995)—aim to avoid, minimize, mitigate, and/or compensate for any adverse environmental impacts, social costs to project-affected people, or marginalization of vulnerable groups that might result from project interventions supported by ADB. The ongoing review takes into account two special evaluation studies by the Operations Evaluation Department on the environment and involuntary resettlement. ADB also held consultations with representatives of nongovernment, civil society, and indigenous peoples’ organizations. The review is expected to be completed in 2008.

The innovation and efficiency initiative pilot financing instruments and modalities expand the range of alternatives available in ADB’s portfolio of development finance solutions

Portfolio Performance and Development Results

Another adjustment in the operational model under the second medium-term strategy relates to the enhanced emphasis on project implementation and portfolio performance in the framework of ADB’s institutional results agenda. In assessing the effectiveness of development efforts, attention is increasingly focused on country outcomes, and particularly progress toward the Millennium Development Goals. Consequently, the development effectiveness of the strategy will depend on mainstreaming the results agenda in ADB.

Managing for Development Results. ADB continues to make progress in implementing its managing for development results agenda at the country and institutional levels and through global partnerships. This is in line with its revised action plan for managing for development results for 2006–2008, approved by Management in August 2006.

ADB approved 13 technical assistance projects to help build capacity in managing for development results in its developing member countries. Some of the projects are funded through the agenda’s cooperation fund. A community of practice on managing for development results was launched in March 2006 to help build capacity in developing member countries.

At the institutional level, ADB has adopted a results-based country strategy and program for 11 countries. Strategic planning processes, including the work program and budget framework, the annual report on the poverty reduction strategy, and other policy documents, are now more results oriented. ADB has introduced a curriculum for managing for development results to promote staff learning and development at all levels. Vice presidents now convene regular development effectiveness meetings with department heads to focus on performance and outcomes.

ADB has been active in the global partnership in managing for development results. ADB still chairs the Multilateral Development Bank Working Group on Managing for Development Results and co-chairs the Organisation for Economic Co-operation and Development–Development Assistance Committee Joint Venture on Managing for Development Results. ADB conceived and initiated the first Multilateral Development Bank Common Performance Assessment System Report and worked with many development partners in sharing knowledge and experience in this area.

Strengthening Project Performance Management Systems. ADB’s enhanced project performance management system helps manage projects for greater development results. It outlines a systematic way of designing and implementing projects. The design and monitoring framework, the key element of the project performance management system, is a results-based tool for analyzing, conceptualizing, designing, implementing, monitoring, and evaluating projects. It structures the project-planning process and helps communicate essential information about the project to stakeholders in an efficient, easy-to-read format. The design and monitoring framework can be applied to the analysis and planning of country programs, and sector strategies, programs, and projects.

Operations manual sections on project performance management systems were issued in January 2006 and Guidelines on Preparing a Design and Monitoring Framework was published in March. These guidelines focus on applying the design and monitoring framework at the program, project, and technical assistance levels. The guidelines are being translated into Afghanistan’s Dari language, Mandarin (Chinese), Russian, and Vietnamese. Capacity building for officials of developing member countries, executing agencies, and ADB staff focused on the participatory process in designing a project, stakeholder analysis, problem and objectives analyses, results chains, and analysis of alternatives. The results of the participatory process are summarized and presented in a results matrix format in the design and monitoring framework. Workshops and training programs were conducted for ADB staff and for officials in 13 developing member countries: Fiji Islands, Indonesia, Kazakhstan, Kyrgyz Republic, Lao People’s Democratic Republic, Mongolia, Nepal, Papua New Guinea, Philippines, Sri Lanka, Tajikistan, Uzbekistan, and Viet Nam. In all, 325 officials from developing member countries and executing agencies, 56 consultants, and 376 ADB staff were trained.

Improving Portfolio Performance and Results. The Operations Evaluation Department presented its Annual Report on Loan and Technical Assistance Portfolio Performance for 2005 in September 2006. The main recommendation arising from the analyses is to see that the action plan to improve loan and technical assistance portfolio performance is fully implemented. The action plan was prepared by Management in 2005 in response to the previous year’s report. Seven action plan items were flagged for importance and are being acted upon. These are a closer alignment of staff and budget allocations with specified output deliverables in the work program and budget framework for 2006–2008, provision of career incentives and development for staff involved in project implementation and portfolio management, improvement in the strategic application of technical assistance resources, more accurate costing of actions to complete project preparatory work, revision of project and technical assistance performance report formats to improve efficacy and efficiency, review of the private sector development strategy and private sector operations, and full functioning of the Risk Management Unit.

Assessing Project Quality. The Operations Evaluation Department analyzed successful projects in the group-I sectors identified in the second medium-term strategy as those where ADB’s operations are expected to grow—irrigation and water management, power, water supply and sanitation, education, and roads. Project success rates in these sectors have ranged from 55% to 90%. The analyses found that common factors across sectors contribute to good project performance: strong ownership by governments and executing agencies; continuity of ADB’s involvement; an ability to learn lessons and incorporate them into project design; careful project preparation; strong executing agencies that operate in the right policy environment, are autonomous, and have the necessary human resources, technical skills, and access to adequate financing for project implementation and for operation and maintenance; an ability to identify and solve problems during project implementation; a clear unmet demand for the goods and services provided by the project; use of a participatory approach and involvement of stakeholders and beneficiaries in all project phases; successful institutional impacts; and good performance by consultants and contractors.

ADB’s enhanced project performance management system helps manage projects for greater development results

Improving Country Strategies. Experience in 2005 through early 2006 suggests that the influence of country assistance program evaluations in formulating new country partnership strategies has been mainstreamed. The Board does not normally discuss a country strategy and program until after the Development Effectiveness Committee has considered the corresponding country assistance program evaluation and informed the full Board of the committee’s views based on the findings.

All country strategies and programs discussed by the Board in 2005 and 2006 were reviewed to assess whether the respective country assistance program evaluations had influenced them. In most instances, the corresponding country assistance program evaluation recommendations were used as inputs.

The lessons from the review of the country strategies and programs discussed by the Board in 2005 fall broadly into 10 areas:

• Future assistance should be prioritized based on selectivity and focus, with successful ADB performance in a sector as one key criterion.
• Country strategies and programs should be results based—the lack of monitorable indicators made it difficult to evaluate past strategies and programs.
• Success has been greatest when ADB maintains a long-term involvement in a sector and combines programs of capacity building with investment support.
• Projects and programs using relatively simple designs that are rooted in local conditions are more likely to succeed than complex interventions.
• Steps must be taken to strengthen the impact of the technical assistance used to support policy reform, capacity building, and institutional strengthening.
• ADB should deepen its relationships with broader society as this enhances ownership and often helps achieve better development results.
• ADB should intensify its coordination with development partners and stakeholders.
• Governance, including the need to control corruption, should be explicitly addressed in country strategies and programs, and not just as a crosscutting theme.
• The understanding of corruption and the risks that it has for ADB operations remains superficial in country strategies and programs.
• Failure of project designs to recognize and address institutional weaknesses in implementing agencies early on leads to weak project performance.

Promoting Quality at Entry. An interdepartmental panel reported on quality at entry of ADB projects and country strategies approved during 2004–2005. For projects, the panel said that improvements to overall project quality at entry will occur if particular attention is paid to implementation arrangements, fiduciary matters, risk, and policy and institutional aspects. Regarding country strategies, it noted that thematic country diagnostics are usually comprehensive but that they tend to be descriptive rather than analytical. Sector diagnostics tend to be inadequate or missing. A common problem is that diagnostic work is insufficiently distilled to identify a set of constraints on development, which should provide the focus of ADB’s operations.

In 2007, the Operations Evaluation Department will conduct a special evaluation study on the effectiveness of ADB’s loan-processing system by documenting the experience and insights of ADB mission leaders and officials of developing member countries. The study will identify issues that impinge on the effectiveness of ADB’s loan-processing system, evaluate the system’s effectiveness in screening projects and facilitating incorporation of lessons into new operations, and recommend improvements. It may also explain why the average number of months from fact finding to Board approval has remained constant, at about 24 months, despite the introduction of revised business processes in 2001 (Table 1).