OM Section A3/BP

Issued on 22 December 2004

Page 1 of 4

OPERATIONS MANUAL
BANK POLICIES (BP)

These policies were prepared for use by ADB staff and are not necessarily a complete
treatment of the subject.

PERFORMANCE-BASED ALLOCATION OF
ASIAN DEVELOPMENT FUND RESOURCES

A. Introduction

1. Aid has not always been effective in supporting growth, improving social outcomes,
strengthening governance or reducing poverty. Differences in country policies and institutions
go some way to explaining a mixed record. Usually the benefits of aid are muted if policies are
poor and institutions are weak. Aid is most effective where policy and institutional performance
is strong. In seeking to serve better poverty reduction, the policy on the performance-based
allocation (PBA) of ADF resources prioritizes performance as the basis for allocation of Asian
Development Fund (ADF) resources.

B. The Policy

2. ADB’s graduation policy determines eligibility for ADF resources. For eligible countries
that have access to ADF, the PBA policy defines principles and criteria to guide allocations.
Performance-based allocations are adapted to country needs, as measured by per capita
income and population size. Other things being equal, lower per capita income attracts
additional resources, as does a larger population. Changes in performance exercise the most
powerful influence on changes in allocations.

3. Allocations based on performance and needs may be modified by special country

circumstances and by absorptive capacity considerations. Special circumstances include
postconflict circumstances, disasters, emergencies, and weakly performing countries.
Allocations are also capped for countries on the “watch list” for ADF graduation. Separate
eligibility and allocation criteria guide the allocation of ADF resources to support subregional
projects.

C. The Scope of the Policy

4. The policy:

(i) covers ADF-eligible countries that have access to ADF;

(ii) earmarks separate pools for ADF resources for Pacific developing member
countries (PDMCs) and for all other eligible countries; and
(iii) covers the country allocation of all ADF credits, including grants (eligibility for
grants is guided by the ADF IX Grants Framework).
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1. The PBA Allocation Formula

5. Indicative ADF country volumes (loans and grants) are calculated as the product of an
allocation share and the expected commitment authority of the Fund over that allocation period.
The Treasury Department estimates the expected ADF commitment authority. Country
allocation shares are calculated as:

CASi = ( PIRi1.4 x GRi2.0 x PRi0.6 x Popi0.6 x PCIi-0.25 ) x scaling factor

The indicative ADF volume is then:

ADF Volumei = CASi x Expected Commitment Authority

Where:
Scaling Factor = 1 ÷ Ʃi ( PIRi1.4 x GRi2.0 x PRi0.6 x Popi0.6 x PCIi-0.25 )
PIR – country policy and institutional performance rating
GR – country governance rating
PR – country portfolio rating
Pop – population
PCI – per capita income
i – is country “i”

6. The component performance ratings (i.e. country policy and institutional performance
rating, governance rating and portfolio rating) are derived from country performance
assessments undertaken by country teams. The country performance assessments are
conducted within the framework explained in the operational procedures (OP) section (below).

2. Extra Formula Allocations

a. Postconflict Needs

7. Special allocations to support postconflict needs are guided by the current International
Development Association (IDA) approach for allocating resources to postconflict countries.
Decisions on eligibility for postconflict assistance should be made in consultation with
international partners. For eligible countries, a “transitional support strategy” containing a
monitorable action plan should be developed, identifying the role of ADF assistance and the
scope and nature of collaboration with international partners. Management decisions on
allocations to support postconflict needs would be based on staff assessments of performance
based on IDA’s postconflict progress indicators, and country circumstances. ADF allocations to
support disaster and emergency needs will be guided by the Disaster and Emergency
Assistance Policy.

b. Absorptive Capacity

8. The policy adopts a broad interpretation of absorptive capacity that recognizes

macroeconomic (fiscal and debt) sector, and service delivery dimensions. At each of these
levels there may be institutional, physical and human, or social, cultural and political constraints
to the absorption of external resources. PBA allocations may be reduced where analysis points
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to constraints in any of these areas but only after careful examination of the feasibility of
reducing these constraints.

c. Weakly Performing Countries

9. Within the framework of the PBA, special consideration may be required to sustain
engagement with “weakly performing economies”. In general, a cautious approach to lending
will be needed for “weak performers”, who may face, among other difficulties, external debt
servicing problems. However, given a coherent "engagement strategy” aimed at supporting
improved performance and absorptive capacity, limited ADF allocations may be made available.

d. Allocations for Subregional Projects

10. Eligibility Criteria for ADF Subregional Cooperation. ADF resources for subregional
projects will be made on a project rather than program basis. The following eligibility criteria
must be satisfied.

(i) Only countries that have access to ADF credits for national projects would be
eligible for subregional credits.
(ii) Regional projects that have component activities in countries with ADF arrears
would not be eligible.
(iii) Consistency between the project concept and the regional cooperation strategy,
the section of the Operations Manual on regional cooperation, relevant national
poverty reduction strategies, and country strategies and programs and their
updates (CSPs and CSPUs) must be demonstrated.
(iv) Sources of project benefits must include more than one country and may derive
from complementary national projects, or a single project in a neighboring
developing member country (DMC) with costs allocable to individual beneficiary
DMCs. Where costs are not readily allocable, prior agreement among
participating countries on cost sharing would be necessary for ADB participation.
(v) To demonstrate ownership and commitment, 20% of project costs must be
financed from combined national resources. National ADF allocations may be
used for this purpose. Management may waive or lower this requirement for
small countries, and for countries that do not derive substantial project benefits.
This requirement will be waived for projects or project components that qualify for
grant financing.

11. In the event that eligible demands exceed the volume of resources, Management will
prioritize projects, based on the following criteria:

(i) projects with widely distributed benefits will be given priority;

(ii) projects with a greater percentage of external financing will be given preference
so that best use is made of the regional set-aside and ADF resources;
(iii) projects with components supporting institutional and policy harmonization and
deeper integration and lower cross-border transactions costs will be given
preference; and
(iv) projects that support and consolidate earlier successful regional cooperation
efforts will be prioritized.
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3. Disclosure

12. Public disclosure of ratings information will improve accountability for the use of
shareholders’ funds. From the clients’ perspective, public disclosure will help focus and improve
the quality of dialogue, strategies and operational assistance. Full public disclosure of numerical
performance ratings will begin with the 2005 country performance assessment exercise.

Basis: This section is based on:

ADB. 2001. Doc. R29-01: Policy on Performance Based Allocation for Asian
Development Fund Resources. Manila.

ADB. 2004. Doc. R249-04: Review of the Asian Development Bank’s Policy on
the Performance-Based Allocation of ADF Resources. Manila.

This OM section is to be read with OM Sections A3/OP, A1/BP and A1/OP.

For other background information and references, see:

ADB. 1993. Doc R50-93: Review of the Bank’s Major Financial Policies. Manila.

ADB. 1998. Doc. R205-98: Review of the Loan Terms for the Asian Development
Fund. Manila.

ADB. 1998. Doc. R204-98: A Graduation Policy for the Bank’s DMCs. Manila.

ADB. 1999. Doc. R179-99: Fighting Poverty in Asia and the Pacific: The Poverty
Reduction Strategy. Manila.

ADB. 2001. Doc. Sec.M17-01. The Long-Term Strategic Framework of the Asian
Development Bank (2001–2015). Manila.

ADB. 2003. OM Section B1. Regional Cooperation.

ADB. 2004. Doc. R71-04: Disaster and Emergency Assistance Policy. Manila.

Compliance: This OM section is subject to compliance review.

For inquiries: Questions may be directed to the Director, Strategic Planning, Policy and
Interagency Relations Division of the Strategy and Policy Department.

22 December 2004 Prepared and issued by the Strategy and Policy

Department with the approval of the President.
 OM Section A3/OP
Issued on 22 December 2004
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OPERATIONS MANUAL
OPERATIONAL PROCEDURES (OP)

These procedures were prepared for use by ADB staff and are not necessarily a complete
treatment of the subject.

PERFORMANCE-BASED ALLOCATION OF
ASIAN DEVELOPMENT FUND RESOURCES

A. Introduction

1. This section describes the implementation of the policy on performance-based allocation

(PBA) of Asian Development Fund (ADF) resources.

B. Application of the Policy

1. Country Performance Assessment Exercise

2. Country performance assessments (CPAs) will be conducted annually for all countries
with populations greater than 1 million. For countries with populations less than 1 million, CPAs
may be conducted biennially, unless they are considered eligible postconflict countries or
weakly performing. A CPA should be conducted for all countries under revised criteria and
guidelines in 2005. Ratings for weakly performing countries and eligible postconflict countries
should be conducted jointly with the World Bank and other partners. Joint assessments for other
countries are not precluded.

3. Given their expertise, country teams should conduct and be responsible for the CPAs
and initial ratings. To promote quality assurance and accountability, a narrative record should
support ratings on each criterion. With effect from the 2005 CPA exercise, the World Bank’s
country policy and institutional assessments rating guidelines will be used, superseding those in
Appendix 2 of the 2001 policy.

4. To ensure cross-country consistency, the CPA working group will review all country
ratings. The membership of the CPA working group will include staff representing each
operations department and nonoperations specialists from the Regional and Sustainable
Development Department, the Economics and Research Department and the Central
Operations Services Office. Since the exercise of judgment is unavoidable, rating adjustments
agreed by the working group should be appropriately recorded. A staff member of the PBA focal
point (see below) will chair the CPA working group and coordinate its activities.

5. The CPA working group will pass recommendations on country ratings to the CPA
“review panel” composed of regional directors general, the Director General of the Regional and
Sustainable Development Department, and the Chief Economist. The head of the PBA focal
point will chair the CPA review panel. If the working group is unable to agree on a country
rating, the CPA review panel will determine a rating. Ratings agreed by the review panel will be
forwarded to operational vice presidents and to the Vice President, Knowledge Management
and Sustainable Development, for final approval.
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6. From 2005, CPAs should be completed by country teams by the end of the second
quarter of each year. The review by the CPA working group and the review panel and the
approval of the vice presidents should be completed by the end of the third quarter. The head of
the PBA focal point may allow departures from this timetable to accommodate joint country
performance assessments with the World Bank and other partners.

7. National authorities should be consulted about preliminary performance assessments by

country teams at the time of country assessments. The views of national authorities on
assessments should be recorded in an aide mémoire. Country teams may disclose preliminary
ratings to national authorities but should explain that these preliminary ratings will be subject to
internal review and possible revision.

8. Final CPA ratings should be shared with national authorities during country programming
confirmation missions and thoroughly discussed at the time of country programming. For
benchmarking and comparisons, average ratings on all criteria for Pacific developing member
countries (PDMCs), Group A and Group B1 countries should be provided to national authorities.

9. The annual CPA report will present numerical ratings on all performance criteria for all
countries that are eligible for and have access to ADF.

2. ADF Allocation Process

10. Country allocations, except those for eligible postconflict and weakly performing
countries, will take place on a biennial basis. The first biennial period will be 2005–2006.
Starting in 2005–2006, PBA commitments and approvals should match within each two-year
period. The following parameters will guide the use of biennial allocations:

(i) All proceeds from loan savings and cancellations will be retained within the
originating operations group.

(ii) At the end of each biennial period, unused country allocations can be carried
forward for a period of 12 months. If still unused, they will revert to the common
pool.

(iii) For countries whose biennial allocation is $40 million or greater, annual
approvals, consistent with the ceiling on the biennial volume, are expected to be
in a range from 37.5% to 62.5% of the biennial volume.

(iv) For countries where the biennial allocation is less than $40 million and the
population is 1 million or more, annual approvals, consistent with the ceiling on
the biennial volume, may be in a range from 0% to 100% of the biennial volume.

(v) For countries where the biennial allocation is less than $40 million and the
population is less than 1 million:
(a) Approvals within the biennial period may vary from 0% to 175% of the
biennial volume. Within these limits, annual approvals are unconstrained.
(b) Unused allocations within the biennial period may be carried forward to
the next biennial period, but not beyond.
(c) Any excess of approvals over allocations in one biennial period will be
deducted from the following biennial allocation.
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(d) Unused allocations at the end of ADF IX can be carried forward for a
period of 12 months. If still unused, they will revert to the common pool.

11. Management will consider funding proposals for subregional projects on a biennial basis,
alongside decisions on national allocations. For the biennial period 2007–2008, proposals
consistent with the eligibility criteria for subregional projects (see A3/BP paras 10–11) should be
submitted to the PBA focal point by the end of the second quarter of 2005. Interim
arrangements (see below) will be needed for consideration of subregional projects in the
biennial period 2005-2006.

12. Allocations for eligible postconflict countries and weakly performing countries will be
determined annually. For eligible postconflict countries, Management will determine
commitments using the current International Development Association (IDA) postconflict
assistance assessments. Operational departments should complete these assessments by the
end of the second quarter of each year, 6 months ahead of the allocation period. Funding
submissions for weakly performing countries should also be completed in the second quarter so
that allocations can be planned 6 months ahead. To the extent possible, disaster and
emergency needs will be met through the reallocation of resources within existing programs,
and by drawing on loan cancellations and savings. If these prove insufficient, any additional
country demands will be met through borrowing against future allocations, or, in exceptional
cases, through reductions in other countries’ allocations. No ADF commitment authority will be
kept in reserve to meet disaster and emergency needs.

13. Based on revisions to the ADF expected commitment authority, significant changes in
country circumstances or performance, and operational considerations, Management may
approve mid-term revisions to biennial ADF commitments. Within the concerned operations
group, increased allocations may also be funded from loan savings and cancellations. Such
revisions would be reported to the Board in an information paper.

14. A timetable of implementation arrangements under the PBA policy is shown in Appendix
1.

3. PBA Focal Point

15. The PBA focal point will be established in the Office of the Director General, Strategy
and Policy Department (SPD). Director General, SPD, will be the head of the focal point, and
accountable for the implementation of the policy.

16. Management decisions on ADF allocations will be made on the basis of

recommendations made by the head of the focal point. To ensure that allocations are consistent
with the institutional capacity to deliver viable projects and programs and countries’ capacities to
absorb them, they will be considered by operations groups’ vice presidents in a “lending review
meeting”. The head of the focal point will chair this meeting and will be responsible for final
allocations submitted to Management for approval.

17. The PBA focal point will support and coordinate the review and accreditation of country
performance ratings. Given that they will be publicly disclosed, there should be full ownership of
the ratings at both operational and broad corporate levels. The focal point will provide
independent advice to Management on the credibility of the ratings and of rating process. Final
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decisions on ratings will rest with operations group vice presidents and the Vice President,
Knowledge Management and Sustainable Development.

4. Interim Arrangements

18. Allocations for the period 2005–2006 will be guided by the CPA completed in 2004 under
the old policy, but will be based on the revised allocation formula and formula weights (see
A3/BP para 5) and the revised criteria for extra-formula adjustments.

19. To facilitate the transition to the new CPA and to provide an opportunity to discuss policy
revisions and disclosure issues with national authorities, the annual CPA exercise planned for
the end of 2004 will be deferred. The first CPA under the revised policy will be completed in the
second quarter of 2005 and new ratings with the revised CPA structure will be finalized by the
end of the third quarter of 2005. The results of the 2005 rating exercise will then guide
allocations for the biennial period 2007–2008.

20. Proposals for ADF IX support for subregional projects for the period 2005–2006 should
be submitted to the PBA focal point by the end of the first quarter of 2005. Management
decisions on funding will be made in the second quarter of 2005. Subject to availability of
resources, later proposals can be considered. This arrangement will apply for 2005–2006 only.

Basis: This section is based on OM Section A3/BP and the documents cited therein.

Compliance: This OM section is subject to compliance review.

For inquiries: Questions may be directed to the Director, Strategic Planning, Policy and
Interagency Relations Division of the Strategy and Policy Department.

22 December 2004 Prepared and issued by the Strategy and Policy

Department with the approval of the President.
 OM Section A3/OP
Issued on 22 December 2004
Appendix 1
Page 1 of 1
IMPLEMENTATION OF THE PERFORMANCE-BASED ALLOCATION POLICY

Activities Frequency Institutional Node Outputs Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun
Country Performance Assessments and Ratings
Country Performance Assessments Annual Country Teams Initial CPA ratings
Interdepartmental, Focal
CPA Working Group Review of Ratings Annual Revised CPA ratings
Point Coordination
Interdepartmental, Focal
Point Coordination and
CPA Panel Review and Vice Presidents’ Support
Annual Final CPA ratings
Approval of Ratings →
Vice President’s
Approval
Special Country Needs and Subregional Projects
Operations Transitional Support
Assessments for Eligible Post Conflict Departments Strategy,
Annual
Countries and Weakly Performing Countries → Postconflict
PBA Focal Point Performance ratings
Operations
Departments Project Funding
Submissions for Funding for Subregional Biennial
→ Proposals
Projects
PBA Focal Point
ADF Allocations
PBA Focal Point
Country allocations and
Allocations of Resources to Support Country →
Biennial/Annual allocations for eligible
Programs, Subregional Projects, and Special ADF Allocation Review
subregional projects
Needs Meeting
PBA Head, Operations ADF Allocation Review
ADF Allocation Review Meeting. Biennial/Annual
Group Vice Presidents Minutes
PBA Focal Point
Final Recommended Allocations for
Biennial/Annual → Approved Allocations
Management Approval
Management
Country Programming Activities
Confirmed Pipelines
Country Program Confirmation/ Country Operations
Annual and
Programming Departments
CSPUs
Ratings Disclosure
CPA Report Annual PBA Focal Point Annual CPA Report

ADF = Asian Development Fund, CPA = country performance assessment, CSPUs = country strategy and program updates, PBA = performance-based allocation
Note: The first full cycle will begin in June 2005 to cover allocations for 2007–2008.