Evaluation on Policy-Based Lending: Emerging Practices in Supporting Reforms in Developing Member Countries

Date: August 2007
Type: Evaluation Reports
Subject:
Evaluation
Series: Special Evaluation Studies

Description

Background

Policy-based lending, known as program lending in ADB, entails tranched, fast-disbursing funds and ex ante conditionality. ADB introduced this lending modality in 1978 to address deficits in the balance of payments. In the 1980s and into the 1990s, it was used to strengthen institutional and policy environments. Later, the 1997 Asian financial crisis invited a focus on the causes of the meltdown. Commencing 2001, it has dealt ever more with public resource management. As of end-2006, a total of 184 program loans in 31 countries had been approved for an aggregate $23.9 billion from ordinary capital resources and the Asian Development Fund. Forty-three percent of the total amount supported operations in the finance sector. Programs in the law, economic management, and public policy, and agriculture and natural resources sectors made up 19% and 12%, respectively, of lending. 

Summary of findings

Program completion reports and program performance evaluation reports have been prepared for 101 program loans up to 2006. Of these, 51% were rated successful, 46% partly successful, and 3% unsuccessful.

Factors within ADB's influence that contributed to desired results included

  • consistency of reform outcomes with government reform agendas and priorities
  • sufficient analysis and dialogue
  • well-targeted reforms and policy change consensus among decision makers and stakeholders
  • coherence of program design and policy matrixes
  • focused and manageable conditions that were acted upon before program start-up

Factors within ADB's influence that detracted from results were

  • insufficient consideration of macroeconomic and wider sector policies
  • lack of counterfactual analysis and poorly understood outcomes and policy alternatives
  • complex designs with many tranche release conditions
  • weak implementing agency capacity
  • failure to identify or manage key direct and indirect costs

Other development partners are shifting practices to support of policy reforms where needed. Following a review of its practices in 2001, the World Bank shifted from adjustment lending to a development policy approach. A 2006 Evaluation of General Budget Support by the Organisation for Economic Cooperation and Development recommended a stepwise approach to changes involving sufficient dialogue, conditions that are consistent with poverty reduction support programs, use of a longer term approach, and consistency with country capacity.

Recommendations

A range of good practices and policy and procedural considerations are recommended to improve ADB's program lending performance:

  • Make sure the link between the intended outcome of a program loan and the use of associated funds is clear. 
  • Clarify operational guidance on program lending to encourage country ownership and alignment with partners' strategies in line with the Paris Declaration on Aid Effectiveness.
  • Clarify the use of conditions ensuring judicious use that helps reformers to manage the process, not control it.
  • Continue to strengthen understanding of the results chain in proram lending.
  • Review and consider relaxing the 3-year 20% (22.5% for loans from the Asian Development Fund) moving average ceiling for program lending value to bring it in line with developing member country needs and demands for program lending.

Contents

  • Executive Summary
  • I. Introduction and Approach
  • II. Trends in Program Lending and Performance
  • III. Explaining Results from OED Evaluation
  • IV. Emerging International and ADB Practices
  • V. Findings and Implications
  • Appendixes