through 1991, particularly regarding those approved from 1989 to 1991, when none of the 15 programs was rated successful.19 However, the success rate improved for programs approved after 1991, reflecting the positive effect of initiatives to improve quality, greater experience with the use of a policy-based lending modality, and revision of ADB’s program lending policies in 1996.
Figure 2: Trend in Program Ratings by Year of Approval (% Success Rate Based on 3-Year Moving Average)
BOP = balance of payments.
Source: OED.
Program loans are a more common lending modality in ADF countries than in OCR countries. Nearly 75% of program loans rated (68 of 92) were ADF funded. This is not surprising, as the need for policy and institutional reform is greatest in countries that are eligible to borrow from ADF. The analysis confirms that country factors, such as economic performance, development priorities, quality of governance, and strength of institutions, contribute to the success rates of programs. In all, 67% of the OCR-funded programs have been rated successful compared with 41% of ADF-funded programs. These results highlight the difficulty of formulating successful program loans in ADF countries.
Program lending has been most commonly used in the agriculture/natural resources and finance sectors and has rarely been used in the transport/communications and energy sectors. However, the sector distribution has changed significantly. More than 75% of the 78 program loans approved since 1996 have been concentrated in three sectors: law/economic management/public policy, finance, and multisector. The success ratings by sector and source of funding presented in Table 3 are difficult to compare because of the small numbers of OCR-funded program loans in most sectors. Most agriculture, industry, and social infrastructure program loans were in ADF-eligible countries, and there was no OCR-funded transport program loan. On average, ADF-funded agriculture programs performed poorly (worse than agriculture projects), with a low success rate of 30%; however, from 1995 onward, significant improvements were achieved. The finance sector is the one sector that had a comparable number of program loans funded by OCR and ADF. In this sector, the success rate for ADF-funded program loans (53%) was significantly lower than for those funded through OCR (90%). The disappointing performance of some program lending has been attributed to (i) the absence of government commitment to the principles and concepts underlying the reforms, (ii) the lack of a comprehensive sector analysis prior to the formulation of the policy reform package, (iii) a lack of clarity in program objectives and policy measures and their interrelationships, (iv) inadequate capacity of the executing agencies to carry out the required studies and monitoring, and (v) unsustainable policy reforms. Sometimes, the reform agenda was overoptimistic about what could be achieved during the time frame of the program. Delays in tranche releases were common.
Table 3: Program Loan Performance by Sector and Source of Financing (% of Program Rated Successful, Loans Approved from 1978 to 2002)
– = not applicable.
Source: OED.
The 2006 Annual Evaluation Review also reported on two themes that are consistent with the commitments made by ADB to ADF donors: (i) relating staff incentives to achieving development results; and (ii) factors contributing to project quality, including governance.
Relating Staff Incentives to Achieving Development Results. The 2006 Annual Evaluation Review was the first systematic attempt at ADB to examine staff accountability for project success. It confirmed that ADB’s current formal and informal incentives reward loan processing and approval, with insufficient focus on project administration, project success, or achieving medium-term results. Adjusting ADB’s incentive systems to encourage more focus on project results and success is consistent with commitments made in both the 2004 human resources strategy and the second medium-term strategy. The question is not whether to change the systems, but how to do it.
The present staff performance evaluation system needs to be complemented by a chain of accountability for achieving development results that begins at the top with ADB’s Management and senior staff and cascades down to all staff. Incentives need to be fully aligned with accountability throughout the chain. The 2006 Annual Evaluation Review recommended that ADB explore the feasibility of providing stronger incentives for staff to focus on project quality at entry and on project administration and supervision. Initial work could include an assessment of best practices in comparable institutions and developing indicators for measuring the achievement of development results. ADB’s Management agreed to examine the feasibility of this approach.
Factors Contributing to Project Quality, including Governance. Good governance and the control of corruption have become important parts of the international development agenda. However, the 2006 Annual Evaluation Review concluded that the relationship between governance and development effectiveness is complex and not straightforward. There are many definitions of governance, and there are many measurement problems that make data less than fully reliable. Analysis of the relationship between measures of governance and macroeconomic indicators suggests the following:
• The Asia and Pacific region is the fastest-growing economic region in the world, but governance is weak in many countries according to standard governance indicators.
• Although there is a strong, positive relationship between the level of economic development and governance variables when a worldwide database is used, the relationships are much weaker if only countries in which the per capita gross domestic product is lower than $5,000 are analyzed.
• No significant relationship can be found between good governance and the rate of economic growth from 1996 to 2004. Some countries in the region with relatively good governance had lower growth rates than countries with lower governance ratings.
The analysis of projects approved in the 1990s suggests evidence of a relationship between some of the dimensions of governance and good project outcomes; however, it is not clear how strong or robust the relationships are. Other factors are also important, perhaps more so than governance, in determining project success (e.g., sector, country characteristics, macroeconomic climate, country ownership, capacity of the executing agency). The relationships between good governance at the macro level and project success may be somewhat weaker than is conventionally assumed. It may be that governance issues at the sector level have a more direct bearing on project success.
Subsequent to ninth replenishment of ADF, ADB harmonized its performance-based allocation procedures with those of the World Bank. ADB’s 2004 performance-based allocation policy for ADF resources increased the weight given to governance in measuring country performance from 30% to 50%, although this is still lower than the 66% assigned in the World Bank’s formula. There was, however, no analysis undertaken by ADB that demonstrated that good governance is the key binding constraint for development in all DMCs and that it merits such a high weight in the performance-based allocation formula. ADB has not undertaken a rigorous study that links good governance, as a causal factor, to economic growth, poverty reduction, development results, portfolio performance, or project success.
The 2006 Annual Evaluation Review recommended that ADB undertake such a study. Depending on the results, consideration may have to be given to including sectoral governance variables in the formula or to reducing the weight for governance in the performance-based allocation formula. Benchmarking a country’s governance performance and then rewarding progress in improving governance would be more consistent
