Q & A on Results-Based Lending with ADB Senior Planning and Policy Specialist, Kiyoshi Nakamitsu
1. What is ADB's Results-Based Lending (RBL) for programs?
RBL is a new ADB financing modality that was approved in March 2013 on a pilot basis for an initial six years. RBL is a performance-based form of financing, where disbursements are linked to the achievement of results rather than to upfront expenditures, as is the case with traditional investment lending. Once approved, RBL programs will be implemented using the borrowing country’s program systems while ADB and our client countries focus more on policy dialogue.
2. Why is RBL important for ADB and developing member countries (DMCs)?
DMCs and our shareholders have asked ADB to reduce transaction costs, response times, and make our program administration more efficient. Slow loan processing and administration means high transaction costs to client countries, high administrative costs for ADB, and lost developmental opportunities. RBL provides an additional tool to better meet these requests while improving development effectiveness.
ADB has been working in the region for about 50 years now and the development finance landscape in Asia is rapidly changing. Countries now have much stronger systems and capacities. ADB also has to adjust accordingly. By using country systems and principle-based approaches effectively, RBL gives our DMCs a stronger sense of ownership of ADB-financed development programs
3. What evidence is there of an improvement in the development effectiveness or success rate of an RBL project?
It is still a bit premature to share any tangible evidence of RBL’s success. However, two early RBLs for Sri Lanka have progressed well so far. Most of the intended results set as disbursement-linked indicators were achieved on a timely basis, using the country’s systems for implementing programs.
4.How is RBL different from ADB’s regular financing operations?
There are a few distinctive differences between RBL and other modalities. When RBL is the choice of financing modality, we and our partners are held accountable for achieving program results, whereas our traditional investment lending mainly focuses on transaction-based inputs, e.g. contact awards/disbursement, that may (or may not) contribute to achieving the intended project objectives. RBL also focuses on strengthening the institutional systems needed for programs to achieve their desired results. Since the disbursement is based on results, rather than individual transactions, RBL also reduces transaction costs for the DMC.
It is often asked how RBL is different from policy-based lending (PBL). The key distinction between PBL and RBL is the driver of the financing need. As a general guide, PBL is intended for situations where the financing need is driven by macroeconomic factors. RBL is intended for situations when achieving results requires expenditure (regardless of macroeconomic circumstances). The RBL policy paper has more details on these differences.
5. ADB is pilot-testing RBL for 6 years from 2013. What key RBL program is ADB currently supporting and what future projects will be RBL-focused?
Any DMC or sector can consider RBL as long as this is a suitable modality for the program, as judged by ADB’s required assessments. Initially, the social sector was keen to use RBL, but staff working in other sectors, such as energy, transport, and urban development are now also processing new RBL programs. The application of RBL to these other sectors generally follows the trends in the World Bank's Program for Results (PforR). As for geographic distribution, the RBLs that have already been approved are for the countries covered by the Southeast Asia and South Asia departments, while ADB’s East Asia, Central and West, and Pacific departments are preparing their first RBLs.
6. What has ADB learned from this pilot program?
RBL is a pilot modality and we are still learning by doing. We have undertaken a number of consultations with ADB staff and DMC clients. There are a few important early lessons.
First, the quality of disbursement-linked indicators (DLIs) is very important. DLIs are used not only for agreed program results and incentives, but also as tools for system improvement (that can be linked with our risk mitigation measures).
Second, fiduciary systems and safeguards assessments are important elements within the overall RBL program package.We cannot use a cookie cutter approach to these assessments but strengthening the institutional systems required for implementing RBL is one of the key features of RBL. We have also been learning a lot from what other institutions (in particular the World Bank and the Inter-American Development Bank) have done with their RBL-like modalities. The World Bank has completed its 2-year evaluation for PforR (the equivalent of our RBL), and we have a lot to learn from this evaluation.
Third, systematic capacity development and information sharing are important. ADB already has many RBL "champions" who have been actively sharing their experiences and best practices. We appreciate those who have been sharing their RBL experience. Our department also monitors any new journals or studies that cover result based financing.
Finally, we want to emphasize that RBL is not a panacea for all the challenges we face. We will still encounter challenges and will need to closely work with our partners during program implementation. However, these challenges will be at a higher level order - such as how to achieve program results and how to improve systems rather than the issues related to inputs at project level.
7. How have developing member countries viewed the RBL scheme? Do they see it as a positive contribution to development or a hindrance?
RBL is still a pilot modality and we will conduct a mid-term review in early 2016. However, RBL is already showing potential to become a great tool, enabling us to better serve our clients and shareholders and make ADB a faster, stronger, and better bank in the region.
Our DMCs generally give positive feedback on the RBL, indicating that the greatest strengths of the RBL modality lie in government ownership, support for institutional strengthening, the use of country systems and the focus on results, which enables high-level policy dialogue and greater flexibility in adopting different approaches to achieve results. Much of the feedback is similar to what the recent World Bank PforR evaluation document has highlighted.
Early challenges we often face are the novelty of the RBL approach, the thorough nature of the assessments, and the lack of examples to follow. To address these concerns, we will continue to provide information and guidance through regular workshops and consultations with ADB staff and DMC clients.