AFRICAN DEVELOPMENT BANK GROUP

Transcription

1 AFRICAN DEVELOPMENT BANK GROUP CRITERIA FOR COST SHARING EXEMPTION WHEN FINANCING ELIGIBLE REGIONAL PUBLIC GOODS (RPGs) OPERATIONAL RESOURCES AND POLICIES DEPARTMENT

2 1 CRITERIA FOR COST SHARING EXEMPTION WHEN FINANCING ELIGIBLE REGIONAL PUBLIC GOODS (RPGs) Table of Contents 1.0 INTRODUCTION REGIONAL PUBLIC GOODS DEFINED THE BANK APPROACH TO FINANCING RPGS FILTERING RPG PROJECT PROPOSALS ELIGIBILITY TO GRANT FUNDING AND COST SHARING EXEMPTION IMPLEMENTATION RESPONSIBILITIES ANNEX I : CHECK-LIST OF CRITERIA FOR FINANCING RPGS ANNEX II : PRACTICE IN COMPARATOR INSTITUTIONS... 16

3 2 CRITERIA FOR COST SHARING EXEMPTION WHEN FINANCING ELIGIBLE REGIONAL PUBLIC GOODS (RPGs) 1.0 INTRODUCTION 1.1 ADF 11 negotiations reaffirmed the importance of Performance Based Allocation (PBA), while at the same time yielding a much expanded envelope earmarked for regional operations (ROs) and other investments resulting in cross-border impact. ADF-11 Deputies indicated their strong support for a deeper Bank role in supporting enhanced regional integration. There was also broad recognition that the available finances would be subject to competing priority demands that would substantially outstrip the supply of finance on concessional terms. To this effect and drawing on lessons learnt from the previous ADF cycle, a cost sharing principle1 was introduced to guarantee full ownership of the countries benefitting from resources outside their general PBA allocation. 1.2 Discussions nonetheless recognized the need to waive the necessity of cost sharing for a limited number of projects of Regional Public Good (RPG) nature. Management was thus directed to find an appropriate balance when considering funding for RPGs between, on one hand, full grant funding through the RO envelope with cost sharing exemption and on the other, financing RPGs like standard regional operations, with the embedded cost sharing. There was a broad sense that grant funded cost sharing exemptions should be limited. While no specific targets were agreed, a figure of around 15% of the total RO envelope was considered by some as appropriate.. It was also agreed to review the use of the RO envelope in detail at the time of the ADF-11 Mid-Term Review. 1.3 While the Board has reacted broadly favorably to specific proposals it has received thus far under ADF-11 for cost sharing exemption out of the RO envelope, it has also expressed concern about the clarity and rigor of the criteria being used to select and justify this alternative financing method. The Board therefore requested Management to set out a more clearly detailed set of criteria by which proposed RPGs will be eligible to cost sharing exemption or financed through the same cost sharing principle as other projects included in the pipeline of regional operations presented to the Board. 1.4 This Note outlines a refined Bank Group approach to financing Regional Public Goods (RPGs) projects out of ADF resources. It builds upon and complements the Strategic and Operational Framework for Regional Operations approved by the Board in March Specifically, this note will: Clarify the definition of RPGs; Set out refinements to the existing criteria, comprising a more specific and rigorous checklist of criteria to be employed by Sector and Regional Department Task Teams and Management, as part of improved RPG project screening and selection; and, Clarify the conditions under which grant financing and cost sharing exemption can be requested for RPGs. 1 ADF/BD/WP/2008/16 Strategic and Operational Framework for Regional Operations

4 2.0 REGIONAL PUBLIC GOODS DEFINED A regional public good (RPG) is a good or service or resource whose benefits/costs are shared by neighbouring countries or a group of countries within the region (transnational attribute). The benefits of pure RPGs are non-rival (i.e. one country s consumption does not subtract from the amount available to other countries) and nonexcludable (no country in the region can be excluded from benefiting, except at a prohibitive cost). In reality, most international public goods are significantly, but not wholly, non-rival and non-excludable. Rather than being pure, they are mixed, meaning that they engender a combination of national and trans-national benefits. 2.2 Their production typically requires cross border collective action that engages all (or most) of the members of the spillover group. Exceptionally, RPGs may be provided by one or a few leading nations motivated by a combination of self- interest and broader objectives. 2.3 In practice, RPGs categorization has proved challenging as most RPGs rarely fall precisely within these criteria. This challenge has been recognized by most development institutions which in turn have developed their own selective approach to RPGs financing. 2.4 RPGs may include the knowledge, the regimes, and the standards and rules that are required to address cross-border problems or to engender desirable cross-border externalities; the institutions that monitor and enforce the rules and regimes; and the benefits that arise and are shared indiscriminately among countries (Ferroni,2002). They include projects with clear trans-border properties, such as region wide air transport, river development, rail transport, protection and pest control, flood prevention and control, and support to institutions with region-wide activities (Birdsall,2004). 3.0 THE BANK APPROACH TO FINANCING RPGs 3.1 The Bank's approach to financing RPG projects is spelled out in the Strategic and Operational Framework for Regional Operations Board document. A project can be considered a RPG if, in addition to the standard definition of non-rivalry and nonexcludability, it satisfies the following three conditions: Public dimension: the good is of broad public interest and benefit; a public / governmental entity in each participating country is typically responsible for the regulatory / policy context for the good to be produced and takes part in its production. Regional dimension: the public good can only be effectively produced if every country involved participates and supports, and the development impact to be achieved through countries cooperation is demonstrably superior to what each country could have achieved individually. Bank s role: financing targets the initial stage of the processes for generating the public good, and aims at correcting disincentives that prevent the RPG from emerging or progressing toward the stage of production, such as lack of coordination, aversion to risk, free-rider problem. As such, the project clearly provides support to the countries to address the obstacles that have prevented

5 4 collaboration, up to the point where benefits materialize (or at least become evident) and cooperation becomes sustainable. 4.0 FILTERING RPG PROJECT PROPOSALS 4.1 In order to allow the Bank to promote through catalytic financing a subset of RPGs with exceptional development effect, the following systematic approach is considered: A first filtering stage which will screen all projects for basic eligibility as potential RPGs; A second stage which will rank and prioritize eligible RPG projects; The final selection stage will be based on resource availability and Ops Com final review for inclusion in the list of grant funded projects exempted of cost-sharing to be presented to the Board. ALL PROPOSALS FOR CONSIDERATION 1 st stage : filter with 7 YES/NO criteria Non-excludability Non-rivalry Public Interest and Ownership Regional Dimension Strategic Alignment Catalytic and upstream role Incremental benefit in cooperating 1 Threshold: 75 points ELIGIBLE RPGs: YES for all 7 criteria 2 nd stage : ranking based on induced development effect Projects are ranked within separate categories to determine those projects that ensure greater development outcome. 2 RANKED RPGs: development effect 3 rd stage : selection Subject to resource availability and revenue generation capacity OpsCom discussion for decision on grant funding and costsharing exemption and inclusion in IOP 3 Limited Exceptions Exemption of cost-sharing Full grant funding RPGs funded like all other Regional Operations 1/3 from PBA envelope 2/3 from RO envelope Loan or grant

6 5 STAGE I CRITERIA: Identification of Potentially Qualifying RPGs 4.2 Stage I defines the filtering criteria for inclusion in the yearly indicative pipeline of RO. It spells out in detail the key concepts that define a regional public good under the AfDB framework and these are (i) the Non-rivalry character, (ii) the Non excludability character, (iii) the public dimension and ownership of the good; (iv) the regional dimension of the good and collective action needed to produce it; (v) the need for strategic alignment with the Bank s strategic focus and the regional and continental developmental agenda; (vi) justification for the Bank s involvement in creating the good and (vii) the incremental benefit of producing the good at a regional level. Criterion Sub-criterion Justification Non-rivalry: Public goods are those whose benefits can be enjoyed by The project must demonstrate that the benefits of the project can be enjoyed by one party without (or hardly) more than one country simultaneously, and reducing the availability of these to others (Some examples can be that increased use by one country does not reduce the benefits for any other countries. terms of trade, cross-boundary diseases (animal and human), - shared water resources, crossborder roads). Non-excludability: It is difficult or prohibitively expensive to exclude others (countries/ communities/ regions) from enjoying/ consuming the generated benefits. The project will demonstrate that there is no way that non-participating countries/ communities can be stopped from enjoying the generated benefits because of the nature of the object of the project s assistance. It reflects that the benefits can be enjoyed by one party without (or hardly) reducing the availability of these benefits to others. The supply of a good that will not only benefit the provider country but also others, entails the possibility that any one country may prefer to wait for the other to produce the good and free-ride on those efforts. Public Interest & Ownership: The RPG must be of broad public interest and benefit, and demonstrate ownership by the countries/region benefitting. Typically, a public or governmental entity in each participating country must be responsible for the regulatory/policy context for the good to be produced and take part in its production. The project must demonstrate that: There is either an inter-governmental coordinating body in place or an existing REC to regulate and oversee the function and coordination of the object of support in a proposed project. The inter-governmental body and/or REC has taken steps to ensure the maintenance of the object of support, as well as the resulting level of success. It reflects a critical element of ownership and sustainability and commitment of partner countries and/or REC to maintaining or producing the RPG under consideration

7 6 Criterion Sub-criterion Justification Regional Dimension (Multicountry involvement): The RPG must involve two or more countries and can only be effectively produced if every country involved participates and supports its production. Strategic Alignment: The RPG must be strongly aligned with the Bank s strategic orientations. The project must demonstrate that: There are at least two countries involved with regards the object of support. The object of support in the Bank s investment is directed to an issue/challenge that is either of a regional and/or global development importance or of national development importance in each of the participating countries (but without crossborder effects). This should be demonstrated through a regionally/globally/nationally validated document (for example the Convergence Plan of COMEFAC outlining the work in the Congo Basin, a UN document agreeing on steps to reduce climate change, SADC gender action plan, the ECOWAS memorandum on Food Crisis, etc.), confirming its importance. In addition, whenever the operations rely on agreements or country protocols, evidence of signature or ratification will be needed to guarantee on readiness for project implementation and avoid unnecessarily tying up scarce ADF resources. The project must demonstrate that the RPG is closely aligned with the: Bank Group s own strategic focus. It is an important measurement of the extent of the regional dimension and the commitment and ownership of participating countries in maintaining or producing the RPG under consideration. It reflects the extent of strategic alignment, selectivity, harmonization and partnerships. Catalytic and Upstream Role: Bank financing targets the initial stages of the processes for generating the public good and the Bank s support aims at correcting disincentives that prevent the RPG from emerging or progressing toward the stage of production, due to amongst others, lack of coordination, aversion to risk and free-rider problem. Incremental Benefit in Cooperating: The development impact to be achieved through countries cooperation is demonstrably superior with positive net benefits to what each country could achieve individually. The project must demonstrate that: The Bank is supporting an initial investment to an object and that by doing so opens the way for further investments. It will, at least, (i) produce effective coordination among the participating countries through the inter-governmental body or REC involved (if any) regarding regional issues; (ii) improve willingness to invest in regional collective action by minimizing risk aversion among certain beneficiaries; and (iii) improve mutual accountability by minimizing the risk of freeriding by certain beneficiaries. The project must demonstrate that: It will produce net positive benefits from the regional and/or national activities. The generated benefits will be higher than those that could be produced by each country without cooperating with the rest. It clarifies the role of the Bank and demonstrates that the project is part of a bigger regional development and integration vision; it also better outlines the Bank s leadership role in the regional context; and in terms of correcting disincentives, it provides clarity on the extent and nature of the problem to be rectified in favour of furthering an improved and accelerated path to achieving developmental impact. It provides the most clear and critical analysis and indication on the level and type of benefit that is expected to be achieved through cooperation.

8 STAGE II : Project Ranking In addition to satisfying all the 7 stage I criteria, a project proposal will be subjected to further screening for purposes of ranking. 4.4 The Bank will offer greater priority on those projects that reflect a higher developmental impact. Stage II will therefore identify the transactions for which waiving the general cost-sharing rule yields greater impact on the continent. 4.5 Given that it is necessary to rank projects in the pipeline over an entire ADF replenishment cycle, the methodology used must take into account the limited amount of information available for projects which have not yet been appraised. It is thus proposed to rate projects based on simple criteria with the objective of measuring the impact along several desired development outcomes as described in the table hereafter. 4.6 Because projects cover a large spectrum of development effects, it is not possible to compare nor rank them, unless they are in the same category. It is thus proposed to rank projects within each of the categories identified in the table hereunder, through a simple rating system. These categories are in line with the ADF strategic orientations. The number of projects retained within each category will then be determined according to the strategic priorities of the institution. Category of Development Effect Enhanced Governance Adoption of sound financial practices Harmonization of governance practices Removal of trade barriers Employment Generation Total number of points : 0 pt for 0 and 1pt for + Rating 0 / + Short explanation Knowledge building Enhanced data collection Dissemination of Best practices Brain Drain Total number of points : 0pt for 0 and 1pt for + Environmental sustainability and Climate change Sustainable livelihoods Capacity building Climate adaptation and climate proofing Total number of points : 0pt for 0 and 1pt for +

9 Category of Development Effect Protection of human health Monitoring outbreaks Limiting contagious diseases Developing new cures or vaccines Total number of points : 0pt for 0 and 1pt for + Rating 0 / + 8 Short explanation Regional Integration Trade promotion Security improvement Private Sector Development Total number of points : 0pt for 0 and 1pt for + Total number of points : 0pt for 0 and 1pt for +

10 9 5.0 ELIGIBILITY TO GRANT FUNDING AND COST SHARING EXEMPTION Low Risk Aversion Incentive for cooperation Incentive for Financing by Country or Private Sector Rival Excludable RPGs Non-Rival Non-Excludable Risk Aversion Cooperation at risk Bank role is critical Waiver of ADF cost sharing rules is required High Development Impact Strong urge for grant fiancing Revenue Generating Capacity Loan Financing Combination of cases Blend financing 5.1 The paper proposes that projects must meet all the stage I criteria. This is based on the justification that the project has demonstrated that it addresses an issue or a product which is a core activity for regional development and integration, and which provides an environment for complementary investments while at the same time will be demonstrating the free riding issue. Stage II criteria will, in turn, help to prioritise the pipeline of the ROs in that the higher the score, the higher it would be on the priority list and vice versa. 5.2 While developing the ROs pipeline on a two-year basis, consideration will be given to regional and sectoral distribution of the RO investments and balance will be sought where possible. In the specific case of the RPGs, experience to date (August 2008) has shown that there is a high demand for such operations which fall within the priority areas of the Bank s vision and strategic directive. Grant resources for RPGs will remain limited. Prioritisation of grant based RPG projects in the ROs pipeline will also be done on the basis of their readiness. 5.3 Cost sharing exemption will be proposed only for those projects which demonstrate the best ranked eligibility to RPGs, as defined by the stage I and stage II criteria, including to Regional Economic Communities (RECs). Moreover, a specific component within a project may also be eligible for grant financing if that component can clearly demonstrate RPG eligibility. However, in the case of the latter, a component within a project may not be eligible for cost-sharing exemption if the implementation of that specific component falls in a loan eligible country, and/or is embedded as having revenue generating capacity. Financing in this case would be through the RO cost-sharing formula. 5.4 Remaining projects, even though qualified as Regional Public Goods would need to be financed according to the general principles layed out in the Regional Operations Framework, i.e. through cost sharing agreements with the recipient countries. 5.5 Lower ranked operations to RECs or for which cost sharing agreements cannot be found would need to be taken out of the RO pipeline or postponed to the next ADF cycle,

11 6.0 Implementation Responsibilities In view of the increased demand for the support and financing of RPGs, the ADF-11 Committee for Monitoring implementation will continuously keep track of the indicative pipeline of ROs qualifying for cost-sharing exemption, as part of its general monitoring and reporting attributions. 6.2 Final RPG selection and case-by-case clearance responsibility lies with the Operations Committee. Upon inclusion of an RPG with cost-sharing exemption to the indicative pipeline of RO projects to be presented to the Board, it is expected that the project will undergo the full review process (i.e. at both Concept and Appraisal stage), regardless of whether the project falls into the b category laid out in the Presidential Directive PD 07/07 or not. 6.3 Annex I, provides a sample evaluation tool that shall be utilized by all task managers as annex to their Project Concept Notes or Project Appraisal Reports. This will provide a common framework to comply with the Board s request for a more rigorous assessment tool.

12 11 ANNEX I : CHECK-LIST OF CRITERIA FOR FINANCING RPGS The AFDB has been asked to play a deeper role in financing regional operations (ROs). Regional integration (RI) has emerged as one of the key pillars of the Bank s strategic orientations. In this connection, the Bank has also been increasingly called upon to support regional public goods (RPGs). The Board and ADF-11 Deputies have discussed the regional operations and RPG issues extensively and requested management to elaborate a coherent framework for ROs and provide specific classification and selection criteria for RPGs. Please rate eligible RPGs according to this set of criteria developed by the Task team. Project Name: Department: Task Manager: Countries involved Regions involved: For each criterion below, please provide bullet-points to evaluate the project. CRITERION SHORT EVALUATION (BULLET-POINTS) Stage I: Non-rivalry: Public goods are those whose benefits can be enjoyed by one party without (or hardly) reducing the availability of these benefits to others. The project will demonstrate that the object of assistance within the project is something whose benefits will be consumed by more than one party and that a provider cannot keep noncontributors from consuming the benefit of that good. Some examples can be terms of trade, cross-boundary diseases (animal and human), shared water resources, cross-border roads. Non-excludability: It is difficult or prohibitively expensive to exclude others (countries/ communities/ regions) from enjoying/ consuming the generated benefits. The project will demonstrate that there is no way that non-participating countries/ communities can be stopped from enjoying the generated benefits because of the nature of the object of the project s assistance.

13 CRITERION 12 SHORT EVALUATION (BULLET-POINTS) Of Public Interest: The good is of broad public interest and benefit. Typically, a public/ governmental entity in each participating country is typically responsible for the regulatory/policy context for the good to be produced and takes part in its production. The project will demonstrate that there is either an inter-governmental coordinating body in place or an existing REC to regulate and oversee the function and coordination of the object of support in a proposed project. As such, the project will demonstrate to what extent the intergovernmental body and/or REC has taken steps to ensure the maintenance of the object of support and to what level of success. Stage II Multi-country involvement: The public good involves two or more countries and can only be effectively produced if every country involved participates and supports its production. The project will demonstrate that there are at least two countries involved with regards to the object of support (5%) and that the object of support in the Bank s investment is something that is either of a global and/or regional development importance and this should be demonstrated through a regionally/globally validated document (for example the Convergence Plan of COMEFAC outlining the work in the Congo Basin, a UN document agreeing on steps to reduce climate change, SADC gender action plan, the ECOWAS memorandum on Food Crisis, etc.) confirming this importance (10%).

14 CRITERION 13 SHORT EVALUATION (BULLET-POINTS) Strategic Alignment: The RPG is strongly aligned with the Bank s strategic orientations and also to continental and regional objectives (i.e RPGs identified as priority operations under NEPAD or REC regional integration plans). Harmonization and partnership will be encouraged by giving preference to co-financing arrangements that promote donor coordination and leverage the Bank s own resources by mobilizing additional funds, including from sister institutions or the private sector. The project will demonstrate that the RPG is closely aligned with the continental and regional development agenda as well as the Bank Group s own strategy, especially with regard to selectivity and sector focus, and harmonization and partnership. Catalytic and Upstream Role: Bank financing targets the initial stages of the processes for generating the public good and the Bank s support should aim at correcting disincentives that prevent the RPG from emerging or progressing toward the stage of production, such as lack of coordination, aversion to risk, free-rider problem. The project will demonstrate that the Bank is supporting an initial investment to an object and that by doing so opens the way for further investments by partners/ RMCs in the regional or national context for specific development impact (to be specifically demonstrated). Under this criterion, the project will also demonstrate that without the Bank s intervention, there is a risk of certain beneficiaries free-riding and not being held accountable. The project will demonstrate that the Bank s intervention will add value to strengthen coordination in the region generally and/or through the intergovernmental body or REC involved (if any).

15 CRITERION 14 SHORT EVALUATION (BULLET-POINTS) Higher Developmental Impact in Cooperating: The development impact to be achieved through countries cooperation is demonstrably superior to what each country could have achieved individually. The project will go on to demonstrate that the development impact (to be specified by the team e.g. poverty reduction, gender equity, human development, etc.) will be increased only if the object of support is addressed within a regional context with the participation of at least two countries (as opposed to national projects).

16 Eligibility to cost-sharing exemption Grant resources outside the PBA allocation (i.e. exclusively from the RO envelope) will be considered for those projects which demonstrate superior developmental impact- with respect to economic and social advancement through amongst others, the following: employment generation, trade promotion, security improvement, gender equality and climate change and adaptation. The list of such projects will be determined by the ranking stemming from the rating assessed during the previous stage and endorsement by the Operations Committee. 15

17 16 ANNEX II : PRACTICE IN COMPARATOR INSTITUTIONS Asian Development Bank (ADB) The Regional Cooperation and Integration (RCI) strategy of the Asian Development Bank (ADB) defines RPGs as public goods shared by two or more countries in the region. RPGs form the fourth pillar of the RCI strategy. The strategy identifies six key RPG areas: clean energy and energy efficiency, environment, natural disaster response, communicable diseases, governance, and human and drug trafficking. According to the ADB, RPGs can be provided by (i) coordinated actions to supply RPGs such as clean air, environmental protection, control of communicable diseases, and management of natural disasters; and (ii) dissemination of analysis and research findings in the public domain through publications, workshops, and shared standards. Under the RCI strategy and pipeline of projects for , ADB s support for providing RPGs focuses not so much on funding investment but on (i) supporting regional and subregional policy dialogue and initiatives to protect the environment, control communicable diseases (e.g., avian flu, HIV/AIDS, and SARS), manage the impact of natural disasters, promote clean energy (CE) and energy efficiency (EE), improve governance, and prevent human and drug trafficking; (ii) conducting research on these cross-border issues; (iii) supporting capacity building and institutional strengthening of DMCs to respond to crossborder issues; and (iv) supporting regional partnership building through various regional forums and exchange programs. In other words, it is TA resources rather than investment resources that are utilized for implementation of the RCI strategy on RPGs. The Inter-American Development Bank - Under the Bank Initiative of promoting RPGs, an RPG is any good, commodity, service, system of rules or policy regime that is public in nature and that generates shared benefits for the participating countries and whose production is a result of collective action by the participating countries. The definition spells out the single most important element of the Initiative s RPG concept: the requirement that the RPG be produced by means of collective action among the countries. The collective action concept comprises two basic dimensions: the regional dimension and the public dimension. Not only does the public good need to be regional in nature and generate shared benefits for the participating countries but the solution has to be produced collectively. Moreover, the good has to be produced by institutions that are in a position to guarantee the implementation of the commitments at the national level that result from the collective RPG agreement. These are the public sector institutions that are responsible for the public policy in the area of the RPG. Therefore, the characteristics of a public good within the Initiative s RPG concept are: (i) the demonstration of public interest to produce the good; and (ii) the lack of incentives for the private production of the good. Under the Initiative, financing targets the initial stage of the processes for generating regional public goods in the Bank s borrowing members. The role of the Bank in the promotion of RPGs is to correct disincentives (lack of coordination and Free-rider syndrome) that prevent the RPG from emerging or progressing toward the stage of production.

18 17 The World Bank -The World Bank has had a long-standing commitment to global priorities and region-wide programs. In Africa the thrust of this commitment is through its Strategic Framework for Regional Integration and Cooperation. Pillar III of the strategy focuses on coordinated interventions to provide regional public goods. Within this pillar, Bank assistance is directed to: (a) improving management of shared water resources, (b) raising agricultural productivity (including research and knowledge-sharing on likely implications for SSA of climate change, and assistance in developing mitigation strategies); (c) regional and sub-regional programs to address the cross-border dimensions of malaria prevention and treatment; (d) increased access to HIV/AIDS prevention methods along main transport corridors, and improved preparedness to respond to trans-boundary pandemics, other infectious diseases, and pests; and (e) regional rationalization of research and tertiary education to strengthen regional knowledge assets and technical capacity. In addition, the Bank will aim to explore potential avenues that would enable it to assist with regional dimensions of conflicts and emergency responses. IDA, the concessionary window of the WB does not target RPGs grant financing as a distinct RO envelope feature.