Allocating ADF-12 Resources

ADF resources are used for three different purposes:

• National country allocations for projects, programs and technical assistance in ADF-eligible regional member countries (RMCs);
• An envelope to finance Regional Operations  in ADF-eligible countries; and
• The Fragile States Facility, aimed at a specific sub-group of ADF countries.

Country Allocations

The resources for country allocations, which amount to 67% of total ADF-12 resources, are allocated to individual countries through a four-step process.

• First, resources are set aside for the Regional Operations envelope (UA 1,150 MM or 20% of total available resources for ADF-12) and the Fragile States Facility (UA 764 MM for ADF-12). Resources are also set aside to ensure a minimum allocation of UA 5 million for the three-year cycle (UA 1.667 million per year) for all countries.
• Second, remaining resources are allocated to eligible countries using the Performance Based Allocation (PBA) formula which has two main determinants:
  
  • Country needs, given by the gross national income per capita and country population; and
  • Country performance, given by the country performance assessment score.
• Third, a discount is applied to all grant allocations, and the discounted amount is partially reallocated among ADF-only countries excl. Fragile States:
  
  • The country-specific financing mix (loans / grants) is determined using the Joint World Bank-IMF Debt Sustainability Framework (i.e. traffic lights)
  • A 20% volume discount is applied to all PBA grants. This is composed of a 14.57% charges-related portion and a 5.43% incentives-related portion. Fragile States are not subject to the incentives-related discount.
  • The incentives-related portion is re-allocated to all ADF-only countries excluding Fragile States, on the basis of the PBA.
• Fourth, debt relief to eligible RMCs under the Multilateral Debt Relief Initiative is deducted from beneficiary countries’ allocations, while resources provided by donors to compensate the ADF for foregone reflows are re-allocated to all ADF-only RMCs on the basis of the PBA.
  At the end of the process, a floor of UA 5 million for the three-year cycle (UA 1.667 million per year) is applied to all final allocations.

Performance Based Allocation Formula

The PBA formula aims to provide a transparent means of allocating concessional ADF funds to ADF-eligible countries. Under this methodology, ADF country allocations are calculated based on

• Countries’ poverty levels;
• The size of their population; and
• Their institutional, policy and project implementation performance. The allocation formula gives country performance the most important role, while population also affects it significantly. Finally, there is a modest bias in favor of ADF eligible countries with higher poverty levels.

A moving average of the Gross National Income per capita (GNI pc) for the last three years is used as an indicator of the country poverty level. The latest available data on the size of the population (P) is held constant during the entire ADF cycle of three years.

The Country Performance Assessment (CPA) captures country performance in terms of:

• Macroeconomic Management, Structural Policies, and Social Inclusion/Equity, as indicated by the simple average of country ratings in Clusters A, B and C of the Country Policy and Institutional Assessment (CPIA Clusters A-C);
• Country performance in terms of Governance (GR), as indicated by the country rating in Cluster D of the of the Country Policy and Institutional Assessment; and
• Country performance in terms of implementation of Bank projects, as indicated by the country’s Portfolio Performance Assessment (PPA). The CPIA score and GR are determined using the CPIA Questionnaire.

Under the current allocation system, performance in terms of governance has the highest weight (58%), followed by performance in terms of macroeconomic management, structural policies and social inclusion/equity (26%) and project implementation (16%).

Determining grants eligibility on the basis of the Debt Sustainability Framework (DSF) and applying the Modified Volume Approach

Grants are available to ADF-only countries. Following the joint World Bank-IMF Debt Sustainability Framework and methodology, each country’s risk of debt distress is assessed and its financing terms determined. The DSF methodology is based on two criteria:

• The institutional strength and the quality of policies to withstand debt distress
• Country-specific debt burden indicators (that is, the NPV of debt/GDP ratio, the NPV of debt/exports ratio and debt service/exports ratio).

Countries are classified by the “traffic light” system - red, yellow, and green – red, indicating high risk of debt distress; yellow, moderate risk; and green, low risk. For countries in the red category, allocations are in the form of grants; for countries in the green category, allocations are in the form of loans; and, for countries in the yellow category, allocations are in the form of 50% grants and 50% loans.
A 20% volume discount is applied to all grant allocations under the ADF-12 cycle. The discount is sub-divided into two parts. A 14.57% charges-related portion is to cover foregone ADF income and administrative charges for grant allocations, while a 5.43% incentives-related portion strengthens the incentive structure in the PBA system by reallocating it to all ADF-only countries using the PBA formula. Fragile states eligible for grants will have their PBA country allocations subjected to the charges-related discount of 14.57% only. These countries will be excluded from the allocation of the incentives-related portion of the volume discount. The grant share of the allocation of each country after the grants-related discount is maintained throughout the allocation process.

MDRI Netting-out

The Multilateral Debt Relief Initiative (MDRI) provides 100% cancellation of eligible ADF, IDA and IMF loans to HIPC countries which have reached the completion point. The entry into force of MDRI in September 2006 introduced an additional step in the allocation process in line with the agreements with ADF Deputies. First, countries qualifying for debt relief under the MDRI see the debt relief that they receive (i.e. their foregone debt service payments) in any given year deducted from their allocation.

Second, resources provided by donors to compensate the ADF for the MDRI debt cancellation are reallocated to all ADF-only countries, using the PBA system. This helps to ensure equitable allocations across eligible countries, and also links the resource transfer to country performance.

Resource Allocation to Blend Countries

Blend countries are those countries eligible for financing from both the ADF (concessional) and the ADB (non-concessional) windows.  Each blend country will receive 50 percent of what it would receive if it were an ADF-only country, subject to the minimum allocation of UA 5 million for all ADF-eligible countries for the whole 3-year cycle (UA 1.667 million per year). The 50% discount is applied to the allocations resulting from the PBA formula, before the application and reallocation of grants- and MDRI-related discounts.