AFRICAN DEVELOPMENT BANK

TO : THE GOVERNORS CONSULTATIVE COMMITTEE FROM : THE BOARD OF GOVERNORS

SUBJECT : REVIEW OF THE AFRICAN DEVELOPMENT BANK' S

CAPITAL RESOURCE REQUIREMENTS (GCI-VI) - FOURTH WORKING PAPER

Please find attached the above-mentioned document.

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AFRICAN DEVELOPMENT BANK

Review of the African Development Bank's Capital Resource Requirements (GCI-VI) – Fourth Working Paper

GCI Task Force Members: T. de Longuemar Vice President, Finance, Chair P. Van Peteghem Treasurer, Alternate Chair C. Akintomide Acting Secretary General A. Batumubwira Head, External Relations and Communications Unit J-B. Bile Office of the Vice President, Finance C. Boamah Director, Financial Control A. Coulibaly Financial Management O. Dajani Office of the Vice President, Finance T. De Kock Division Manager, Financial Management K. Diallo Director, Financial Management K. Gadio General Counsel S. Kayizzi-Mugerwa Director, Operational Resources & Policy P. Kei-Boguinard Division Manager, Financial Management M. Ketsela Lead Expert, Operational Resources & Policy J. Kolster Director, Regional Operations North-A B. Moyo Legal Services J. Ngure Office of the Vice President, Sector Operations III Q.Nworisara-Quinn Office of the Vice President, Sector Operations III H. N’Sele Division Manager, Treasury G. Penn Legal Services T. Rajhi Economic Research J. Singer Lead Advisor, Operational Resources & Policy E. Santi Regional Operations North-A A. M. El missiry Office of the Secretary General M-A. Saraka-Yao Division Manager, Operational Resources & Policy G. Stegmann Office of the President

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TABLE OF CONTENTS

Executive Summary ........................................................................................... 5

1 Introduction ....................................................................................................... 7

2 Revised African Economic Outlook Projections and Updated Impact

Analysis .............................................................................................................. 9

3 Demand for ADB Resources ............................................................................ 21

4 Relevance of the GCI to LICs .......................................................................... 32

5 The Bank's Long Term Strategy ..................................................................... 47

6 Increased Capacity to Deliver ......................................................................... 52

7 Financial Policy Options to Increase Headroom ............................................ 66

8 Alternative Options to Provide Interim Relief ................................................ 69

9 GCI Scenarios .................................................................................................. 71

10 Subscription for Shares ................................................................................... 74

11 GCI-VI Process ................................................................................................ 78

12 Conclusion and Recommendation ................................................................... 79

Annex 1: Basic Data on Middle Income Country Members of the Bank ................. 80

Annex 2: Middle Income Country Profiles ................................................................. 81

Annex 3: Selected Key Reforms and Anticipated Impacts ...................................... 105

Annex 4: Governance, Controls and Safeguards in the Bank ................................ 108

Annex 5: GCI-VI Scenarios ..................................................................................... 111

Annex 6: GCI-V Share Subscriptions Under 4 Step Process .................................. 113

Annex 7: Lessons Learned from GCI V .................................................................. 115

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LIST OF ACRONYMS ADB African Development Bank ADF African Development Fund ADOA Additionality and Development Outcome Assessment AEO African Economic Outlook AFP African Financing Partnership AICD Africa Infrastructure Country Diagnostic AsDB Asian Development Bank ASLC Adjusted Short-Lived Crisis Scenario Bps Basis points CPIA Country Policy and Institutional Assessment DBSA Development Bank of Southern Africa DFI Development Finance Institution DOC Drawn-out Crisis Scenario DRC Democratic Republic of Congo DUC Debt to Usable Capital EBRD European Bank for Reconstruction and Development EIB European Investment Bank EITI Extractive Industries Transparency Initiative ELF Emergency Liquidity Facility EMBI Emerging Market Bond Index EME Emerging Market Economy FDI Foreign Direct Investment FMO Financierings-Maatschappij voor Ontwikkelingslanden FO Field Office GCC Governors’ Consultative Committee GCI General Capital Increase HIPC Heavily Indebted Poor Countries HQ Headquarters IADB Inter-American Development Bank ICA Infrastructure Consortium for Africa ICT Information and Communication Technologies IDC Industrial Development Corporation of South Africa Ltd IFC International Finance Corporation IFI International Financial Institution IMF International Monetary Fund LIC Low Income Country MDG Millennium Development Goal MDB Multilateral Development Bank MDRI Multilateral Debt Relief Initiative MFW4A Making Finance Work for Africa MIC Middle Income Country MTS Medium Term Strategy NCB Non-Concessional Borrowing NPV Net Present Value ODA Official Development Assistance OECD Organization for Economic Co-operation and Development PEFA Public Expenditure and Financial Accountability PPP Public Private Partnership

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PSO Private Sector Operations RMC Regional Member Countries RCUR Risk Capital Utilization Rate TFI Trade Finance Initiative UA Units of Account UST US Treasury WARR Weighted Average Risk Rating WB World Bank

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Executive Summary 1. This document addresses the issues raised during the meeting of the Governors’ Consultative Committee (GCC) on 11 September 2009, to discuss Management’s initial proposals for a Sixth Increase of the Ordinary Capital of the Bank. It also takes into account considerations discussed during consultative meetings with shareholders held in February 2010. In particular it responds to the questions related to (i) the demand for Bank resources by the borrowing member countries; (ii) the expected impacts of the Bank’s continued lending to member countries and the relevance of the General Capital Increase (GCI) to Low Income Countries (LICs) especially in the context of regional integration; (iii) the actions taken by the Bank to improve its institutional effectiveness; and (iv) the interim actions taken and to be taken to provide headroom for the Bank to continue to lend, especially in this period of crisis. This document also (v) proposes options for a capital increase based on a determination of the Bank’s sustainable level of lending; and (vi) makes proposals for the implementation of the agreed capital increase, including ways to ensure participation by all shareholders. 2. Analyses undertaken at the African Development Bank (ADB or the Bank) and the Bretton Woods institutions indicate conclusively that the global financial crisis which began in 2008 has had a severe impact on the development prospects of Regional Member Countries (RMCs). While Africa was starting to make progress following a decade of higher economic growth, the financial crisis altered the landscape. Indeed, it has created challenges for the ADB, particularly affecting the Bank’s ability to carry out its mandate to assist RMCs in addressing these challenges. Also, the Bank has begun implementation of its Medium Term Strategy (MTS), approved in 2009 which specifies actions to be taken by the Bank to become the premier development finance institution in Africa. 3. The Bank has responded to the needs and requirements of RMCs. During 2008 and 2009, this included responses to some high performing countries which came to the Bank for assistance as their partner of choice. The Bank concurrently implemented comprehensive institutional reforms including, improvement of business processes, decentralization, quality at entry, information technology (IT), risk management and taking measures to ensure the achievement of results and development effectiveness. Day by day, these reforms have improved the Bank’s capacity to play its role in accordance with its mandate as provided in its Articles of Agreement and in the MTS. In particular, the Bank has focused its assistance in the four strategic areas of infrastructure, governance, private sector development and higher education as specified in the MTS, while paying due regard to safeguard and other environmental considerations. 4. In so doing, the Bank has demonstrated its expertise and experience in the four areas of focus. It has also demonstrated that its strategic focus is aligned with the priorities of RMCs, and that it has greater understanding of the needs of RMCs and can respond in unique ways that others cannot, including galvanizing and using its convening power to assist in the development of African-based and African-oriented strategies on major issues. Finally, the Bank has played this crucial and important role while working in partnership with, and in a manner, complementary to, other multilateral and bilateral organizations working on development activities in Africa, including the Bretton Woods institutions. 5. Still, the financial needs for the future are huge, especially if RMCs are to deal with the challenges engendered by the financial crisis and to continue on their respective developmental trajectories. On the basis of discussions with RMCs, country level assessments

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as well as an analysis of the economic impact of the crisis, the potential demand for resources from the Bank in the near term amount to UA 8 billion per year over the period 2009-2011. The projected demand for Bank financing is for projects and programs in infrastructure, both public and private, and support required to deal with unexpected budget deficits, higher education and skills development, and private sector development. The demand for infrastructure lending is particularly important as it is needed to redress the infrastructure deficit in countries across the continent. These projects are especially important if regional integration objectives are to be achieved. The Bank also has a major role to play in RMCs efforts to deal with climate change- an area in which its resources and assistance are needed for both the mitigation and adaptation programs to be implemented by RMCs. The Bank must also be in a position to provide assistance to those LICs that were moving towards Middle Income Country (MIC) status but which now require special treatment if they are to achieve their objectives.

6. Based on its increased responsiveness and record delivery as demonstrated in the last year, the Bank is well positioned to take on the task of providing financial and technical support to RMCs. With the introduction of new and innovative products and the strengthening of its institutional capacity, the Bank is poised to deepen its role on the continent and to continue to be responsive to the needs and requirements of RMCs. To do so effectively, it must have adequate resources and financial capacity. In order to stretch the use of its capital, particularly pending an agreement on a GCI, the Bank has redefined the term “usable capital” in the Bank’s Debt Ratio, reviewed its liquidity policy, and introduced contingent callable capital. These have taken into account the absolute need for the Bank to retain its AAA rating. Canada and The Republic of Korea committed to subscribe for additional shares on this basis, permitting the Bank to have adequate headroom to carry out much needed operational lending in the interim.

7. With these short term measures in place, this document presents scenarios that examine the Bank’s financial capacity, both with and without a GCI. It also indicates the sustainable level of lending based on the amount of a capital increase and diverse paid-in ratios. These projections take into account the effect that the various capital increase levels may have on key prudential ratios. It also includes simulations for differentiated paid-in capital by different classes of shareholders, RMCs and Non-Regional Member Countries (NRMCs). More importantly, the document notes that without an appropriate level of capital increase, the Bank would have to make substantial adjustments to its lending program to RMCs. The document also contains proposals to ensure that, to the maximum extent possible, all member countries subscribe to, and pay for the shares allocated to them under the agreed GCI.

8. The document concludes that the financial crisis has seriously affected the development prospects of RMCs and, as such, these countries require the Bank’s financial and technical assistance in the medium to long term. In the last two years, the Bank has been proactive and responsive to the requirements of RMCs in dealing with the economic challenges brought about by the recent food, petroleum and financial crises. This demonstrated capacity to deliver, which is continuously improving as a result of ongoing reforms, now requires an appropriate capital infusion commensurate with the financial needs of its borrowing member countries. In the absence of a timely GCI, the headroom constraints outlined in the document will require the Bank to make substantial adjustments to its lending programs to the great detriment of RMCs. Management therefore believes that it is imperative for the Bank to receive an immediate capital infusion, and in a magnitude consistent with the needs of borrowing countries. Such an action would be consistent with the vital role that the Bank can, and should play, in Africa’s development.

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1. INTRODUCTION 1.1 On 13 May 2009, the Board of Governors, having considered a document on a GCI1 for the Bank authorized the GCC to deliberate on proposals arising from studies on issues pertaining to a sixth capital increase. The Board of Governors also authorized the GCC to initiate consultations with Member States leading, should it be needed, to a plan for a general increase designed to enable the Bank to meet its ordinary requirements in the future. 1.2 On 11 September 2009, the GCC met in Tunis to discuss Management’s proposals2 relating to an increase in the Bank’s capital. The GCC requested further elaboration and more current information on a number of topics contained in the aforementioned document. This document responds to such requests and presents the results of studies undertaken in response. 1.3 Consultative meetings with Regional and Non Regional Governors were organized in February 2010 in Tunis and Cape Town, respectively. Regional Governors unanimously endorsed the proposal for a GCI, recalling that this was the position also taken by Heads of State of the Afican Union (AU) in their meeting in January 2010. Non Regional Governors also reiterated the strong case for a substantial GCI-VI to support a significant increase in lending volumes. 1.4 The Committee of Finance Ministers and Central Bank Governors (C-10) held its fourth meeting in Cape Town in February 2010. It commended the Bank for its timely, effective and efficient response to the crisis and the clear demonstration of its capacity to deliver effectively a higher level of resources and to produce results. It also expressed its full support to the replenishment of its resources. 1.5 The Civil Society Engagement and Consultations Forum organized in Tunis on 1 March 2010 called for the Bank to play a more extensive role in policy dialogue at the country level and increase the analytical and knowledge work to inform the national and regional development policies. 1.6 Short term, medium term and projected long term demand for ADB resources, both sovereign and non sovereign, across all its RMCs is at an all time high far outstripping available resources. Increased and ongoing mobilization of resources to LICs is yielding positive results. Comprehensive institutional reforms throughout the Bank’s operations have greatly enhanced the Bank’s capacity to deliver. The Bank’s response to the ongoing global financial crisis has led to a much quicker utilization of resources than anticipated in the Medium Term Strategy with a breach of prudential limits projected by 2012. The interim measure of contingent capital offered by two Non Regional Member Countries will only delay the breach of prudential limits by an additional year. As a result there is an immediate and urgent need for a General Capital Increase to enable the Bank to maintain its current level of activity beyond 2012. 1.7 Following this introduction, this document presents the revised African Economic Outlook projections and updated Impact Analysis in section 2; section 3 outlines the evolution of demand for ADB resources and the Bank’s comparative advantage and value added in the

1 The Sixth General increase in the Capital resources of the African Development Bank: Issues and Framework 2 ADB/BD/WP/2009/125/Rev.2 entitled GCI-VI Issues and dated 24 July 2009

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international aid architecture; section 4 articulates how a GCI is relevant to LICs; section 5 elaborates on the Bank’s Long Term Strategy; section 6 illustrates how the Bank has increased its capacity to deliver; section 7 presents financial policy options to increase headroom; section 8 lays out alternative options to provide interim relief; section 9 presents scenarios for a GCI; section 10 details the share subscription mechanism; section 11 summarizes the GCI VI process; and section 12 concludes and presents recommendations. 1.8 In addition to the above analyses, and as requested by the GCC:

1. A separate, independent evaluation of the GCI V was circulated to the Board of Directors3;

2. A reputed consulting firm, Oliver Wyman, has reviewed the Bank’s risk management framework and processes, with preliminary recommendations circulated to the Board of Directors; and

3. The Operations and Evaluation Department (OPEV) has undertaken a summary of lessons learned from GCI -V which is attached hereto as Annex 7.

3 ADB/BD/IF/2009/333

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2. REVISED AFRICAN ECONOMIC OUTLOOK (AEO) PROJECTIO NS AND UPDATED IMPACT ANALYSIS 2.1 Overview

2.1.1 The impact of the financial crisis on Africa has been severe and the second round effects in several countries continue to deepen. This is despite the apparent bottoming out of the recession in developed countries and the positive turn in the global economic outlook. While most African countries will avoid recession, growth has dipped significantly for most countries and there are no clear signs of recovery yet. The impact of the crisis has been varied across the continent, with countries heavily dependent on export of oil and metals hit the hardest. While the resource poor and low income countries have not been hit as badly, even a small negative impact on these countries is potentially even more harmful. 2.1.2 The African Economic Outlook, which was released in February 2009 (the “AEO 2009”), laid out the economic outlook for Africa for 20094. However, as the impact of the financial crisis on Africa becomes evident, it is clear that the economic indicators have deteriorated further in line with the rapidly evolving economic situation. This section provides an update to the estimates provided in the AEO 2009. 2.2 Revised Economic Outlook 2.2.1 Although there was a lag in the manifestation of the effects of the global financial crisis on African economies, the negative economic impact began to emerge in the first half of 2009. Africa’s rapid growth during the period 2000 to 2008 was disrupted in 2009 due to a severe external shock caused by the global financial and economic crisis. The underdeveloped financial markets and limited global financial exposure protected most of the Bank’s RMCs from the immediate impact of the crisis in 2008. However, by mid 2009 it had become clear that the impact of the crisis on the economies of RMCs had been considerable. The crisis resulted in a severe external shock to the continent in the form of deterioration of terms of trade, collapsing import demand, reduced capital flows, remittances and aid inflows.

4 The African Economic Outlook and this paper present the outlook for 51 out of 53 African countries. Somalia and Zimbabwe are not included due to lack of data. Basic Data on Middle Income Countries Members of the bank can be found in Annex 1.

Figure 1: GDP Grow th Rates: 2008 and 2009

2008 (actual) 2008 (actual)

2009 (February forecast)

2009 (February forecast)

2009 (October forecast)

2009 (October forecast)

0%

1%

2%

3%

4%

5%

6%

Africa Sub-Saharan Africa

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2.2.2 Estimates of GDP growth have deteriorated further: In February 2009, the AEO projected a growth rate for Africa in 2009 of 2.4 percent. Revised estimates of GDP growth, as of October 2009, project that the 2009 real GDP growth will not exceed 2 percent. This represents a sharp decline from 5.4 percent in 2008 (Figure 1) and close to 6 percent achieved during the period 2005 – 2008. In 2009, the real GDP per capita for the continent will decline for the first time in this decade. The outlook for Sub-Saharan Africa is worse than for North Africa. Real GDP growth is expected to drop to 1.1 percent, down from 2.4 percent projected in February 2009. Variations across the continent are substantial. While the majority of countries have experienced a sharp deterioration of growth prospects, a select few are still projected to have positive growth (Figure 2). The Bank has been at the forefront in providing support to the hardest hit countries. 2.2.3 Other key macroeconomic indicators have also deteriorated since early 2009. Current Account Balance: As a result of curtailed import demand in advanced countries and lower commodity prices, export revenues are expected to halve compared to those of 2008,. The overall trade balance is expected to deteriorate, and in several countries the current account and fiscal balances will also worsen (Figure 3). Figure 3 also shows that most African countries are expected to have a twin deficit (both fiscal and current account deficit). The continent as a whole is projected to move from a current account surplus of 3.4 percent of GDP in 2008 to a deficit of 4.2 percent in 2009. Oil-exporting countries will run a current account deficit of 1.4 percent of GDP, compared to a surplus of 11 percent in 2008, although part of this deficit can be financed by running down accumulated reserves. Hence, unless sufficient FDI and concessional financing is available to cover the deficit, existing foreign exchange reserves, accumulated over several years, could be rapidly depleted.

Fiscal Balance: A continent-wide aggregate fiscal surplus of 3.3 percent of GDP in 2008 is likely to turn into a deficit of 3.7 percent in 2009, threatening expenditures on core infrastructure spending and social sectors and constraining fiscal space. The crisis has affected the fiscal balance through two channels: (i) directly through revenue losses, and, (ii) indirectly through automatic stabilizers associated with slower economic activity. Commodity-related revenues, especially oil revenues have been strongly affected. In several countries, commodity related revenues account for a significant share of government revenues (notably

Figure 2: GDP Growth Rates: Deterioration since Feb ruary 2009

South Africa Namibia Madagascar

Seychelles

Equatorial Guinea

Congo Dem. Rep.

GabonGuinea

Liberia

Botswana

-15%

-10%

-5%

0%

5%

10%

15%

Rea

l GD

P G

row

th

February 2009 forecast

October 2009 forecast

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Angola, Botswana, Chad, Gabon, Republic of Congo, and Nigeria). Oil exporting countries as a group are expected to have a fiscal deficit of 4.3 percent of GDP in 2009 compared to a surplus of 6.8 percent in 2008. Some oil importing countries will also see their fiscal balance deteriorate, with the deficit of oil importing countries as a group increasing from 1.4 percent of GDP in 2008 to 3 percent in 2009.

Figure 3. The return of “twin deficits”: changes in fiscal and current account balances, 20095

Seychelles

São Tomé & Príncipe

NigeriaLibya

Lesotho

Guinea-Bissau

Gabon

Eritrea

Equatorial Guinea

Congo Rep. of

ChadBotswana

Angola

Algeria

-30

-25

-20

-15

-10

-5

0

5

10

15

20

-30 -25 -20 -15 -10 -5 0 5 10 15

Change in fiscal balance (percentage points)

Cha

nge

in c

urre

nt a

ccou

nt b

alan

ce (pe

rcen

tage

poin

ts)

Correl. Coeff. = 0.68

Benin

Burkina Faso

Cameroon

Cape VerdeCentral African Rep.Comoros

Congo Dem. Rep. Côte d'Ivoire

Djibouti

Egypt Ethiopia

Gambia, The

Ghana

GuineaKenya

Liberia

MadagascarMalaw i

Mali

Mauritania

Mauritius

MoroccoMozambique

Namibia

Niger

Rwanda

Senegal

Sierra LeoneSouth Africa

Sudan

Swaziland

Tanzania

Togo

Tunisia

Uganda

Zambia

-17

-12

-7

-2

3

8

13

18

-5 -4 -3 -2 -1 1 2 3 4

Change in fiscal balance (percentage points)

Cha

nge

in c

urre

nt a

ccou

nt b

alan

ce (pe

rcen

tage

poin

ts)

Source: African Economic Outlook database (October 2009) and staff calculations. Currency depreciation: Several African countries experienced a depreciation of their currency vis-à-vis the dollar. The greatest depreciation6 was experienced by the Congolese 5 Negative sign means deterioration in 2009. Both fiscal and current account balances include grants. The change is calculated as a share of GDP (in percentage terms) in 2009 minus the balance in 2008. 6 July 31, 2008 is considered as the benchmark.

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Franc (-47.1 percent), the Seychelles Rupee (-32 percent), and the Zambian Kwacha (-24 percent). Exchange rate depreciation against the US dollar will have a negative impact on debt service burdens for countries that have high external debts. Depreciation also results in increased costs of imported intermediate inputs, with consequences for inflation and employment. 2.3 Varied Impacts of the Crisis Across Countries 2.3.1 Several countries have been unable to avoid a recession: The aggregate GDP growth figures presented above highlight substantial differences amongst the different countries. According to the latest ADB estimates, 6 African countries will face recession in 2009. However an additional 36 countries will also see their GDP growth rates slow down, and in some cases significantly. For example, while Angola is not expected to experience a recession, its real GDP growth is likely to slow down from 14 percent in 2008 to stagnation in 2009.

Prudent macroeconomic policies and improved macroeconomic fundamentals of recent years have helped soften the impact of the crisis and have increased the ability of RMC governments to mitigate the impact on their economies. However, the situation has differed across the continent. Countries that enjoyed a strong fiscal position prior to the crisis used the budget flexibly and in a countercyclical manner. A number of oil exporting countries used accumulated fiscal savings to protect the budget against expenditure cuts and in the process sustained capital expenditures. Fragile and post conflict states in particular, lacked the policy space for countercyclical measures that could expedite recovery.

Income levels: As a group, upper middle income countries are projected to contract by 0.5 percent (un-weighted average), driven by a contraction in output in South Africa, Botswana, and the Seychelles. This constitutes a 5 percentage point decline from their 2008 growth rate of 4.5 percent. Countries in the ‘lower middle income’ range7 are projected to fare better, reaching growth rates of up to 3.8 percent in 2009. Nevertheless, this represents a substantial decline of 2.1 percentage points relative to 2008. Due to their limited integration into the global economy and the relatively better performance in international prices of some agricultural exports such as coffee and cocoa during the crisis, the poorest countries have proven to be the most resilient, and are projected to grow at 3.3 percent, with the smallest decline in growth compared to 2008, at 1.4 percentage points. 4 African LICs (Ethiopia, Uganda, Malawi, and Republic of Congo) are projected to record GDP growth rates of above 5 percent in 2009.

Fragile States: All fragile states, except Eritrea, have been less affected, but have nevertheless seen their growth rate fall. The real GDP growth rate for this group is projected to decline by only 1.2 percent to 2.7 percent. However, these countries started with a lower average rate of growth in 2008, and any slowdown is particularly harmful given the widespread poverty, the risk of policy reversal, and the resurgence of fragility. With the increased risk of policy reversals which could raise poverty levels and aggravate inequality, the financial crisis exacerbated the very causes of conflict which continue to pose a challenge to fragile regimes and governments. Furthermore, the combination of the effects of the financial crisis, high food and fuel prices adds further burden on fragile states, given their

7 With GDP per capita of between $ 786 and $ 3115

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relatively weak macroeconomic fundamentals. This limits their capacity to undertake mitigation measures on their own, and in turn strengthens the case for external assistance. Figure 4 below shows a strong correlation between the pre financial crisis rate of growth of countries and the decline in GDP growth.

Figure 4: Africa: Pre-crisis (2008) real GDP growth and projected (2009) decline

Angola

Botswana

Chad

Congo Rep. of

Equatorial Guinea

Ethiopia

Madagascar

Malaw i

Niger Rwanda

Seychelles

South Africa

Uganda

-17

-12

-7

-2

3

-1 1 3 5 7 9 11 13 15

Real GDP growth, 2008 (annual change in percent)

Rea

l GD

P c

hang

e be

twee

n 20

08 a

nd 2

009

(per

cent

age

poin

ts)

Correl. Coeff.= -0.52

AlgeriaBenin

Burkina Faso

Burundi

Cameroon

Cape Verde

Central African Rep.Comoros

Congo Dem. Rep.

Côte d'Ivoire

Djibouti

Egypt

Gabon

Gambia, The

Ghana

Guinea

Guinea-Bissau

Kenya

Lesotho

Liberia

LibyaMali

Mauritania

Mauritius

Morocco

Mozambique

Namibia

Nigeria

São Tomé & Príncipe

Senegal

Sierra Leone

Sudan

SwazilandTanzania

Togo

Tunisia

Zambia

-5

-4

-3

-2

-1

0

1

2

1 2 3 4 5 6 7 8

Real GDP growth, 2008 (annual change in percent)

Rea

l GD

P c

hang

e be

twee

n 20

08 a

nd 2

009

(per

cent

age

poin

ts)

Source: African Economic Outlook database (October 2009) and staff calculations.

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Key factors that determine the extent of the impact of the crisis include the following:

• Openness of the Economy: Given that the crisis is an external shock, economies that were more open to trade and capital flows such as emerging and frontier markets and oil exporters, have suffered sharper contractions in growth in 2009. A majority of MICs rely heavily on exports of oil or minerals, which prices have been adversely affected by the crisis. South Africa was exposed to the first round effects of the crisis through the sudden slowdown of capital inflows, and the contraction of demand, as was the case in emerging market economies in other regions.

• Resource endowment: Resource rich countries were hit more severely than resource poor countries. Countries that grew the fastest in 2008, mostly oil and minerals exporters, experienced the sharpest fall in 2009. Oil exports by African countries8 to the United States dropped significantly in the second half of 2008, with volumes falling by 75 percent within 6 months. The drop in oil prices significantly affected countries such as Angola and Equatorial Guinea which are heavily dependent on exports of oil, with GDP growth contracting by about 15 percentage points in 2009. Countries such as Botswana, which registered impressive growth rates in the 1990s and 2000s suffered from the collapse in diamond prices. Many resource rich countries have been hit particularly severely because of their undiversified export and production structures.

• Food prices: With the drop in food prices, most food importers experienced a fall in their food import bill. However, some of the benefits from reduced import costs were eroded in the aftermath of the crisis as international commodity prices for a wide range of export products dropped. There has been a recovery in some of the commodity prices such as coffee and cocoa providing relief to a number of LICs. This has lowered pressure on current accounts and household budgets for countries such as Ghana, Cote D’Ivoire, Rwanda, Sierra Leone and Uganda.

• Overseas Development Assistance (ODA): Most LICs are expected to undertake increased public investments in 2009, financed largely by ODA, which will help keep the economies buoyant. The latest OECD Report on Aid Predictability indicates that ODA levels were at their highest in 2008, although the commitments to Africa are lagging behind. Part of this increased ODA is expected to be channelled into increased public investments and will be critical in maintaining public spending levels and offsetting the negative impact of the crisis on LICs. In Burkina Faso for example, about 80 percent of public investment is financed by ODA. If all the pre existing ODA commitments for 2009 are met, public investment will increase by more than 40 percent.

2.3.2 Impact on Banking and Finance Due to the low financial depth and limited integration with international markets, the credit crunch itself played a less prominent role in most African countries. However, some emerging and frontier economies, including South Africa, Egypt, Nigeria, and Kenya experienced the first round effects of the crisis due to their stronger links with the global financial markets.

8 Nigeria, Angola, Chad, Equatorial Guinea, Republic of Congo, Gabon, Cote d'Ivoire, Cameroon and the Democratic Republic of Congo

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Access to trade finance and banking credit lines were substantially reduced, with the region’s trade finance gap rising severalfold.

• With tightened global lending conditions, some emerging and frontier markets were not able to borrow in external markets. For example, Nigeria’s banks had difficulties obtaining trade credit in the United States and Europe. The Central Bank of Nigeria had to provide lines of credit to the affected banks as a measure to sustain liquidity in the economy. More recently, it had to inject additional funds into the industry in August 2009 when five large banks, representing about a third of the country’s banking assets, faced large losses from non performing loans due to excessive lending mostly to the energy sector.

• The stock exchanges of South Africa and Egypt suffered losses similar to those of emerging market economies (EMEs) in other regions in 2008, but have been slowly recovering since the second quarter of 2009.

• Some countries are suffering from the second round effects of the crisis with the

continent suffering from the credit crunch indirectly. Because of falling export receipts, the net foreign assets of the banking sector fell sharply in some countries. The banking sector in Ghana has shown signs of strain, with declining profitability and rising non performing assets, reaching almost 10 percent of total assets in March 2009. However, no Central Bank intervention was needed.

2.4 The longer term impact and risks to the outlook 2.4.1 Real GDP growth rate for Africa is projected to pick up in 2010 to 4.1 percent, fuelled primarily by the global recovery and domestic responses. However, this will remain well below the growth rates achieved in recent years of close to 6 percent. In the longer term, the key question is whether, and when Africa will be able to return to a high and sustainable growth path. Some of the effects of the financial and economic crisis will have a long lasting negative impact on Africa’s growth prospects. 2.4.2 Although cyclical shocks faced by Africa are adversely affecting its short term performance, the current state of Africa’s economy promises a strong recovery that will enhance the achievement of pre crisis level performance. Indeed, the continent has managed to preserve its arduous pre crisis efforts of maintaining macroeconomic soundness, strengthening good governance, economic diversification and regional integration. These are crucial elements that will support sustainable macroeconomic stability in the long-term. 2.4.3 Indeed, these elements should be considered in the context of the global economy that will continue to be driven by the dynamics of the Chinese and American economies - the main trading partners for Africa. This dynamic will continue to be based on the demand of raw materials, particularly oil, which would allow Africa to benefit from higher prices and restore gains in terms of trade. With prudent fiscal policies and gains in terms of trade, African countries could strengthen their positions to revive surpluses in fiscal and external accounts, and push for a revival of foreign direct investment flows. 2.4.4 Thus, it is likely that the overall macroeconomic perspectives of Africa will be akin to pre crisis levels in terms of growth, especially if deliberate efforts are exerted to alleviate the

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adverse effects of demographic shifts and climate change, and harness opportunities associated with successful international trade negotiations. 2.4.5 Focus on reforms and institutions: African governments have so far remained committed to programs of reform. Governments have prudently used fiscal resources and borrowing from both external and internal sources to address the immediate impacts of the crisis. However, a prolonged crisis will strain some fundamentals of the economy, such as quality of institutions, foreign direct investment inflows, savings and human capital with possible long term consequences for growth. 2.4.6 Budget management: The additional pressure from the crisis has forced some governments to cut down on social sector expenditure and public investments. This could lead to a slow down of progress on social indicators and set back progress towards achieving the MDGs. It will also push back the growth in productive capacity and infrastructure development. 2.4.7 The speed and size of the global recovery: While the global recovery has started, there is speculation of a double humped recovery and the risks to the global recovery itself are tilted to the downside. A recovery in global trade and finance is a key factor behind Africa’s prospects. 2.4.8 Overseas Development Assistance: The sustenance of growth in some of the African LICs is critically hinged on delivery of ODA commitments. If there are cuts or delays in delivery of commitments, the growth prospects of these countries will be significantly affected. 2.4.9 The above factors will hurt key drivers of growth, seriously jeopardizing the region’s longer term growth potential and leading to a lower growth trajectory in the post-recovery period. If this happens, the global financial and economic crisis would degenerate into a development crisis. 2.5 Africa’s Response 2.5.1 African countries have adopted a variety of measures aimed at mitigating the impact of the financial and economic crisis, including fiscal stimulus packages, targeted sectoral assistance, capital and exchange controls, setting up of special monitoring units to identify causes and responses to the crisis, and new regulations in the banking sector. Several MICs have applied expansionary monetary policies. In addition, resource rich MICs are also drawing on reserves accumulated over the years for fiscal stimulus spending. 2.5.2 Several African countries do not have adequate domestic resources to fully offset the impact of the crisis. Even in countries where some expansionary policy is feasible, such as Tanzania and Uganda, the key concern is striking a balance between preserving the hard won policy space, and stimulating domestic aggregate demand through short term measures. Spending on stimulus packages, at the expense of poverty-related expenditures on health, education, and infrastructure, may also have undesirable long term effects. The Bank has been requested to support several such efforts. 2.5.3 Reforms aimed at increased domestic revenue mobilization have increased in importance on the policy agenda, but results are likely to take time to materialize. The Bank

17

has also stepped up its support, via efforts such as the Extractive Industries Transparency Initiative (EITI), which promotes revenue transparency in the oil, gas and mining sectors.

2.5.4 In low income countries, such as Ethiopia or Sudan, the response may also be constrained by the lack of foreign exchange. Success of support to struggling export sectors will also depend on a healthy global recovery. The stimulus measures should therefore be carefully selected in coordination with international measures. 2.5.5 To prevent the financial and economic crisis from becoming a development crisis, the actions of African policymakers need to be coordinated with, and supplemented by, developed countries, including adequate commitments and timely delivery of financial aid and technical assistance. As growth prospects of both China and India have improved, deepened trade and investment linkages with them could also help Africa recover more quickly. Box 1: Domestic Policy Responses South Africa: The government has set aside a countercyclical fiscal stimulus package amounting to Rand 787 billion (about USD 100 billion) for public investments during the period 2010-12. The South African Reserve Bank eased monetary policy between December 2008 and May 2009, when it cut its policy rate by 450 basis points. Kenya, Tanzania, and Uganda: All raised government expenditure on infrastructure (road and energy projects) in their 2009/2010 budgets by 20 to 30 percent, to sustain economic growth. In Kenya, the Central Bank pursued accommodative monetary policy, including through cutting the policy rate. In Tanzania, the Central Bank increased the growth of money supply by several percentage points. Tunisia: Public investment increased by more than 20 percent in 2009, to compensate for the 35 percent decrease in FDI. Morocco: Public investment is expected to increase from 3.4 percent to 3.6 percent, as the government seeks to sustain growth, support structural reforms, and strengthen sectoral policies. Mauritania: Similar trends are observed, with the government considering raising public investment by 40 percent in 2009 to sustain growth. 2.6 MICs access to International Capital Markets 2.6.1 A review of the current situation in African capital markets indicates that there is currently no confidence that African countries’ access to capital markets will be restored at pre crisis levels or prices, which were an exception rather than the norm, particularly in terms of the low cost of capital. There is also no evidence that the Bank’s increased lending operations may crowd out lending from commercial banks.

18

2.6.2 MIC access to capital markets has improved compared to the height of the financial crisis in Q4 2008 and in Q1 2009. As a general indicator, the Emerging Market Bond Index9 (EMBI) that was at 1.7 percentage points over US Treasuries in 2007 widened to nearly 9 percentage points at the height of the crisis (a yield, or effective rate of interest of over 12 percent) when risk aversion was at its peak and investors avoided this asset class. This spread has recovered to around 3 percentage points as of the end of October 2009 (Figure 5). 2.6.3 Recent improved economic and financial conditions make it likely that MICs will soon start to regain access to the international financial markets that were closed to most of them in 2009. Nonetheless, it remains difficult to predict which countries will regain access, at what price, and whether countries will find it cost efficient to pursue this option. 2.6.4 A limited number of MICs have a history of tapping international capital markets and have thus developed their own track record and investor base in this regard. South Africa is in a league of its own and has tapped its investor base twice in 2009 and once in 2010 (Table 1). However, these borrowings have come at a high cost. In 2007, South Africa could have raised funds for 10 years, at a cost of around mid-swaps10 + 50 bps reflecting the conditions prevailing at the time. The recent bond issuances have been significantly more expensive with the latest issue launched at about mid swaps plus 150 bps.

9 The EMBI Global is a measure of the spread at which international bonds issued by emerging sovereigns trade in the secondary market with respect to US Treasuries. It tracks total returns for US dollar-denominated debt instruments issued by emerging market sovereign and quasi-sovereign entities: Brady bonds, loans and Eurobonds. Currently, the EMBI Global covers 206 instruments (each with a minimum size of USD 500 million) across 37 countries. Africa is currently represented by South Africa, Tunisia, Egypt, Gabon and Ghana. 10 Mid-swaps flat (or plus 0 bps) is equivalent in fixed rate market of LIBOR flat – the rate at which banks can borrow in the interbank market – which can be seen as a transaction with low credit risk. So, for example, mid-swaps plus 50 bps for 10 years can be seen as a very small risk premium reflecting the then prevailing market environment before the onset of financial crisis.

Figure 5: EMBIG Spread

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Jan

07

Apr

07

Jul 0

7

Oct

07

Jan

08

Apr

08

Jul 0

8

Oct

08

Jan

09

Apr

09

Jul 0

9

Oct

09

19

Table 1: South Africa’s recent Bond Issuance

South Africa 10 year bond issue

(amount) 10 year swap spread at

issuance (internal calculation)

10-year CDS11 (bps) Bloomberg

19 May 09 USD 1.5 billion 370 245 26 August 09 (tap) USD 500 million 215 180 2 March 2010 USD 2 billion 190 150

2.6.5 For other MICs such as Egypt, Tunisia and Morocco, and to a lesser extent, blend countries such as Nigeria, that could source funds from international capital markets before the crisis, access still remains restricted but the outlook is improving. If these countries were to issue bonds now, transactions would be possible at a lower price than that at the height of the recent financial turmoil. Table 2 shows the evolution of Credit Default Swaps (CDS) from 2003 to 2009. Undoubtedly one major factor driving the move in CDS levels from 2003 to 2007 was the search for yield that led to a massive tightening of credit spread in the build up to the financial crisis. Additionally, the momentum in compression of CDS levels was aided by favourable domestic developments in these countries.

Table 2: 5 year CDS of African Countries (bps) (Bloomberg)

Country 2003 2004 Pre-crisis June 2007

Crisis March 2009

February 2010

Egypt 348 166 75 650 275 Morocco 281 156 45 335 115 Tunisia 195 114 30 337.5 115 South Africa 149 105 25 524.1 165

11 A credit default swap is a contract established between a protection buyer and a protection seller where the buyer pays a premium to the seller, in exchange for payment in the case of a credit event with respect to an issuer – called a Reference Entity - for example, a default. Since the protection seller assumes the credit risk of the Reference Entity, it is a situation similar to buying the bond of the Reference Entity and therefore CDS spreads are a good indication of bond spreads.

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Box 2: Tunisia – Market feedback indicates that cost of borrowing remains high Tunisia has been a regular issuer of bonds for over a decade. It has issued bonds in the Japanese Yen, US Dollar and Euro bond markets. Its last bond issuance was in August 2007 when it priced a 20 year bond in the Japanese domestic market at JPY mid-swaps plus 75 bps. 5 year CDS levels for Tunisia which had widened to around 350 bps during the financial crisis have now fallen to around 110 bps. In determining investors' pricing requirements for a new bond, the secondary level would provide a reference point for Tunisia. The outstanding bonds are illiquid and as an example, indicative trading spread for Tunisia’s USD bond due 2012 is shown at 150 bps. Market indicative feedback is that a new 5 year bond could be issued at around 160-175 bps over swaps for both the USD and the Euro, while a 10 year bond would cost an additional 20-30 bps12. Rates for bond issuance are thus improving but remain much higher than pre-crisis levels.

2.6.6 Sub-Saharan countries that have issued bonds in international capital markets in the pre-crisis period, such as Ghana and Gabon, have seen their bond spreads fall recently. Gabon’s bond due 2017 has tightened from over 12 percentage points over UST in March 2009 to around 4.5 percentage points over UST as of end October 2009. Similarly, Ghana had issued a 10 year bond in September of 2007 at par to yield 8.50 percent (UST+387 bps). The bond sold off dramatically as a result of the crisis with the yield reaching nearly 20 percent but has seen a significant correction since then with a current trading level of around 9 percent.

2.6.7 In summary, MIC and blend countries’ estimated costs of funds for international bond market issues are moving in the right direction but remain high compared to pre-financial crisis levels. How much further the costs will fall remains open to debate. While the current fall in spreads reflects a return of risk appetite, it also represents a search for high yielding bonds given the current low interest rate environment. Access to capital markets for MICs and blend countries still remains expensive, and current conditions are not ideal for debut transactions, as was noted by Nigeria in early October 2009 when it decided to delay plans to issue a $500 million Naira-denominated bond citing unfavourable market conditions. Countries though remain interested as evidenced by recent announcements from Kenya, Tanzania, Morocco and Angola. 2.6.8 The likelihood of MICs’ cost of funds returning to pre-financial crisis levels is uncertain in the medium term. The financial crisis is likely to lead to a re-pricing of risk and investors may realize that low costs of bond issuance before the onset of the financial crisis were unreasonable and did not fully compensate them for the risk they assumed. In this scenario, bond issuance spreads will remain high in the medium term and some countries may find it too expensive to access the capital markets. Internal factors will also be important, such as how countries are able to manage deteriorating public finances.

12

These are indicative levels and given Tunisia’s absence from the market, precise estimates are difficult to obtain.

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2.7 ADB’s access to International Capital Markets 2.7.1 Following record sub-Libor spread levels achieved for the most part of 2008, Sovereign, Supranational and Agency issuers faced spiralling funding costs during the early part of 2009 as capital markets adapted to their sharply increasing financing needs as well as to the announcement of massive government bailout programs. However, Supranational and Agency issuers were still viewed as being amongst the safest asset class in this challenging environment and were able to access the capital markets with relative ease throughout the year, despite the most testing and volatile conditions. In the last quarter of 2009, the positive market sentiment, underpinned by ongoing improvement in economic outlook and the return of investors’ risk appetite, contributed to the return of Supranational and Agency issuers' sub-Libor funding for short and medium term maturities. This trend has continued, however recent developments in Greece and Dubai have made market trends unpredictable and any future outlook potentially volatile. 2.7.2 For the Bank, and using the 3 year tenor in USD as a case study, this translated into an increase of its funding cost with respect to mid-swaps of about 50 bps between Q3 2008 and Q1 2009 followed by a decrease of 30 bps between Q1 2009, and Q4 2009 resulting in a moderate 20 bps increase overall. Longer tenors cost of funds have moved up more significantly (up to 40 bps for 10 year maturities). However, since the impact of the financial crisis on MICs funding conditions has been more adverse, the cost effectiveness of the Bank’s products remains intact. 3. DEMAND FOR ADB RESOURCES 3.1 Introduction

3.1.1 As outlined in the revised economic update, Africa grew at an unprecedented rate in the previous decade. This rate of growth has been significantly slowed down by the financial and economic crisis. Maintaining the momentum of growth and ensuring that development is inclusive and sustainable will require continued substantial investments in transport, energy, and rural infrastructure, as well as in social sectors. 3.1.2 This section focuses on the demand for Bank Group financing emanating from MICs and blend countries. It also outlines the demand for private sector borrowing from all African countries. 3.1.3 This updates the outline of demand presented in September 2009 and is supplemented by country level assessments13. The Bank’s discussions with RMCs indicate a sharp increase in potential demand for Bank resources in the near term to about UA 8 billion per year over the period 2009-2011. About a third of the demand is for infrastructure, and another third for private sector lending covering all RMCs including LICs. This figure represents “managed” demand; total demand from the private sector far exceeds the resources likely to be available. In 2009 alone total private sector demand amounted to over UA 7 billion. 3.1.4 The demand for Bank financing is expected to remain high in the medium to long term. This is due to the following reasons: (i) the financial crisis has reduced spending on

13 Annex 2 provides MICs and Blend Country Profiles.

22

infrastructure, and huge gaps remain; (ii) economic recovery and endogenous expansion of private sector activity will generate demand for financing, whilst access to financial markets will be both slow to return and expensive; (iii) economic integration and climate change imperatives will continue to require funding; and, (iv) MICs will play a key role in financing and implementation. 3.1.5 These estimates are based on broad consultations with RMCs and are primarily focused on the Bank’s areas of strategic focus. In assessing short-term demand, this section draws on information from direct discussions with governments, projections drawn from national budgets and investment plans, and a survey administered in RMCs on the impact of the global economic crisis on the demand for financing. Of course, country conditions and preferences will vary over time. It should be noted also that RMCs own estimates of demand for Bank financing are conditioned by their knowledge of the limitations on Bank resources. 3.2 Context

3.2.1 Financing to Sustain Growth and the MDGs: MICs are important drivers of growth in Africa, and their performance can have a major impact on their neighbours. This impact is further detailed in Section 4. Long term sustainability in all countries must be based on private sector growth. According to Bank projections, and taking into account debt repayments, new loans and FDI, the external financing needs of the continent will increase to USD 75bn per year during 2009-2011, compared to USD 56bn in 2008. Africa continues to lag in progress towards the MDGs; these alone would require an additional USD 50bn per year. This is close to 5% of Africa’s total GDP and would require a substantial increase from current levels of ODA inflows14 and for more to be in the form of in country investment expenditure. The MDG Africa Steering Group Report - 2008 estimated that public external financing needs to be increased up by USD72 billion per year15 until 2010, in order to achieve the MDGs. Attention will again focus on the MDGs in the run up to the UN high level review Conference in 2010. Box 3: Africa’s Middle-Income Countries (MICs): Helping the poor Africa’s MICs face a number of development challenges similar to those of low income countries, such as creating conducive conditions for sustained growth combined with high unemployment rates and poverty. About 128 million of Africa’s 320 million poor (below USD1/day) live in MICs. A number of African MICs are small countries, some landlocked, others islands, with limited resources, small budgets, and comparatively low social indicators. For instance, basic health services and basic infrastructure remain inaccessible to a high proportion of the population in a number of MICs, such as Botswana, Namibia, and Swaziland where HIV-AIDS affect more than 15% of the population. Without access to additional resources the poor in MICs will remain vulnerable. Improvements are needed in basic infrastructure, connectivity, and the business environment, including for small and medium enterprises. In recent years, MICs have increasingly approached the ADB for financing and for advice. They want to be able to access a range of services and products, and the demonstrated capacity of the Bank to respond has increased the level of demand.

14 Net ODA from Development Assistance Committee (DAC) members, Korea and major multilateral agencies to Africa was USD 35 billion in 2008, according to preliminary estimates, “2009 DAC Report on Aid Predictability”, OECD, March 2009. 15 MDGs Africa Steering Group (2008), “Achieving MDGs in Africa”, New York

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3.2.2 Infrastructure Financing: The Africa Infrastructure Country Diagnostic concluded that Africa’s MICs will need an investment of about 10% of GDP per year16 in infrastructure alone. For LICs, the investment needs are even higher, at about 15% of GDP per year. This necessitates investments of between USD 100bn and USD 200bn per year in Africa, depending on the level of GDP growth over the next decade, of which about 75% is in MICs. This is twice the current infrastructure investment in Africa, which is about 4 to 5% of GDP and leaves a gap of between USD50bn and USD100bn per year. 3.3 Short Term Demand for African Development Bank Financing 3.3.1 The Bank has received increased level of requests for support from RMCs as a result of the financial crisis. Some MICs have sought substantial assistance from the Bank for the first time in more than a decade. This section presents an indication of the potential demand from RMCs, including an examination of demand at sector level, within the Bank’s strategic areas of infrastructure, governance and the private sector (Table 3). 3.3.2 The short-term demand for Bank’s resources as expressed by RMCs is stable and robust: Before the economic and financial crisis, the annual demand from the Bank was strong and was expected to be between UA 5bn and UA 6bn per year. In the aftermath of the crisis, about UA 8bn of demand for financing was directed to the Bank in 2009 and the same figure is projected for 2010 and 2011. This increased demand reflects the worsening of the financing gap for pre-existing deficits, notably in infrastructure and especially power and transport. Given expectations of a slow recovery and return of access to financial markets, this increased financing gap is likely to keep demand for Bank lending high in the near future. This is in line with the analysis of the economic impact of the crisis presented in the previous section. 3.3.3 The projected demand, for Non-Sovereign borrowing accounts for about 36%, split almost equally between infrastructure and industry, and finance. Public infrastructure accounts for 32% and the aggregate share of infrastructure is about 50%. Fast disbursing general budget support and sector support represents about 22%.

16 Africa Infrastructure Country Diagnostic 2009, World Bank, African Development Bank, African Union, Agence Française de Développement, European Union, New Economic Partnership for Africa’s Development, Public-Private Infrastructure Advisory Facility, and U.K. Department for International Development.

24

Table 3: Demand for ADB Resources (UA billion), 2009-2011

2009 Actual

2010 Projected

2011 Projected

Total (2009-2011)

Percentage

Demand for ADB Resources 7.8 8.3 7.9 24 Of which: Infrastructure (public/sovereign) 2.7 2.6 2.4 7.7 32% Programmatic 1.7 1.9 1.7 5.3 22% Non-Sovereign 2.6 3 3 8.6 36% Higher Education and Other 0.8 0.8 0.8 2.4 10% MTS projections 2.2 2.2 2.9 7.3 Demand versus MTS 355% 377% 272% 329%

3.3.4 Infrastructure: Demand for infrastructure financing has increased. Several countries have addressed economic contraction with stimulus packages, with infrastructure investment being a core component. It is estimated that a large portion of short-term demand for infrastructure financing from the ADB emanates from four countries: Nigeria, South Africa, Egypt, and Morocco. 3.3.5 Programmatic lending: Demand for financing in this area has increased markedly, most notably from Botswana, Cape Verde, Egypt, Mauritius, Morocco, Namibia and the Seychelles. The worsened budgetary situation of African countries is expected to persist in the short to medium term. Up to three quarters of the countries surveyed indicate that budget deficits were likely to continue through 2011. The demand for budget and sector support is expected to be about UA 5bn for the period 2009-2011.

3.3.6 Non-Sovereign: Private sector lending is characterized by a large number of stakeholders and potential clients, rapid change in market conditions, and a broad variety of financing sources. The Bank’s Non-Sovereign lending window has received significant increased level of requests for financing which amounted to over UA 7 billion in 2009 alone. However, the Bank has limited capacity in terms of country limits, equity guidelines, and HR constraints and is thus unable to process all these requests: from an initial screening, about UA 2.5 – 3 billion per year is retained as ‘managed demand’ . Demand is split almost equally between infrastructure and other sectors, including mining, industry and finance. In line with the Bank’s Private Sector Guidance Note on Low Income Countries and Fragile States, around 50% of non-sovereign financing is expected to flow to LICs and Fragile States from 2009 to 201117. This includes 40% in direct financing to LICs and 10% in their indicative share of regional operations, which are expected to receive a total of 20% of all non sovereign financing.

17 This includes lending to LICs and Fragile States under Regional Operations.

25

Box 4: Private Sector Lending: Additionality and Leverage effect Reflecting the Bank’s role of catalyzing resources to the African continent, the Bank’s Private Sector Department only selects projects that demonstrate additionality and complementarity. The additionality is independently assessed by an independent unit of the Bank. The complementarity is achieved mainly through co-financing with a range of institutions including other DFIs and commercial banks. It is estimated that for every dollar of private sector Bank financing, four dollars emanate from other sources. Furthermore, the Bank has recently adopted the B-Loan syndication structure whereby commercial banks channel resources to borrowers through the Bank as the lender of record, thereby enabling borrowers to have access to resources that would otherwise not be available. The Bank has also established a collaborative platform of co-financing, the African Financing Partnership (AFP), with the EIB, the IFC, the DBSA, the IDC, the FMO, the DEG and Proparco, whereby one institution coordinates the preparation of projects and investment proposals and the others contribute as co-financiers. At the Annual meeting in Dakar, the declaration of the joint IFI Action Plan for the Private Sector in Africa stated that the US$ 15 billion in crises response pledges of the Group of MDBs/DFIs would be channelled through the use of the AFP mechanism. A significant capital increase would enable the Bank to contribute its own share of the resources pledged under the joint IFI Action plan. 3.3.7 Higher Education and Other: Given the globally recognised role of knowledge and skill sets in promoting economic growth and development, RMCs are increasing their demand for Bank operations in Tertiary Education; Science, Technology and Innovation (STI); and Technical and Vocational Education and Training (TVET).As a result, the Bank has engaged in a process of developing strategic and operational tools to respond more effectively to the requests of RMCs. It is expected that over the period 2010-2012, more than 30 new operations in STI and TVET will be funded in RMCs to help build and equip the necessary infrastructure, create or strengthen national and regional centers of excellence and train the youth for the productive sectors. 3.4 Estimates of Medium to Long Term Demand for Financing in MICs

3.4.1 Demand for Infrastructure Financing by MICs In 2009, the World Bank, in collaboration with the ADB and other partners, undertook the Africa Infrastructure Country Diagnostic (AICD), an ambitious project to analyze the cost for redressing the infrastructure deficit in 24 African countries, primarily based on country level information on various dimensions of infrastructure needs. The study estimated that an average investment of about 15% of GDP per year for LICs and about 10% of GDP per year for MICs would be required to achieve this goal over the next decade.

26

Figure 6 presents estimates of the investment in infrastructure needed under three GDP growth scenarios. It is estimated that MICs need between USD 77bn and USD 153bn per year to close infrastructure deficits in the next decade. About half of the financing will be required for energy, and the rest for roads, water and sanitation and other sectors.

MICs currently spend an average of between 5%-6% of GDP per year on infrastructure development bringing the additional financing gap to about 4%-5% of GDP per year. This is between USD 38bn and USD 75bn per year for the next decade.

3.4.2 Private Sector Financing

• Access to capital is a key constraint to private sector development in Africa, particularly due to shallow capital markets. Before the financial crisis, there was extensive but unmet demand for financing from the private sector in Africa. This was improved to some extent by the expansion of commercial financing in the continent, which was on the rise in the run up to the crisis. Several African companies, notably in Nigeria, Ghana and Kenya had recently issued bonds and credit spreads were at their lowest ever for Africa.

• As outlined in section 2.6, the situation has deteriorated markedly since the onset of the financial crisis. While African countries’ access to capital markets is slowly returning, prices remain much higher than pre-crisis levels. In a number of countries, commercial lenders have withdrawn their services altogether or scaled down financing. The unmet demand for financing from the private sector has in turn increased significantly.

• Several large infrastructure projects have been put on hold or postponed due to a lack of financing, across a range of sub-sectors, including energy, transport and telecommunications. Trade finance has also seen a withdrawal of lenders from the market, with commercial banks unwilling to underwrite guarantees or unable to provide trade credit. Some commodity marketing boards, which previously benefited from revolving credit facilities with major international commercial banks, have had to resort to traditional sources of finance as financial markets dried up.

• As a result of this financial retrenchment, demand for private sector financing from multilateral banks has increased significantly. Several borrowers that were previously able to access the financial markets are now unable to find any lenders. For those who are able to access commercial financing, the cost of the funds is exorbitantly high. As for sovereign borrowers, pricing is an important factor as the high cost of commercial borrowing makes projects financially unviable, thus making the lower- cost borrowing from MDBs such as the ADB one of the few feasible options.

Figure 6: Africa's Infrastructure needs (Annual)

52.8

26.4

22

11

13.2

6.6

0 20 40 60 80 100

MICs (10% ofGDP)

LICs (15% ofGDP)

USD bn

Energy Water and sanitation Others

Total USD 44 bn

Total USD 88 bn

27

3.4.3 Cost of Addressing Climate Change adaptation in Africa

• Annual net economic costs of climate change impact in Africa is very high and is estimated to reach about 2.7% of GDP each year by 2025 (or approximately $40 billion/year). While Africa’s priority is adaptation to these adverse impacts, opportunities exist for mitigation and to develop a low-carbon economy by harnessing the continent’s vast renewable energy potential. However, substantial financial resources are required to address both adaptation and mitigation on the continent

• Estimates released by the Grantham Research Institute and the International Institute for Environment and Development early in 2009 show that in the short term, the adaptation cost for Africa will reach approximately $13-19 billion by 2015. This is estimated to rise to $21–27 billion by 2030. On the mitigation side, the cost of putting Africa on a low-carbon growth pathway with significant emission reductions could amount to $9–12 billion by 2015, including $5–6 billion per year for forestry, $2–4 billion per year for agriculture, and $2 billion per year for the energy sector. The total cost is expected to rise to $31–41 billion by 2030. The Bank’s Clean Energy Investment Framework has estimated that the continent requires a total investment of US$547 billion to attain universal access to reliable and increasingly cleaner electric power by 2030 (this averages out at US$23.8 billion per year).

• The Bank’s indicative pipeline on climate change is about US$10 billion (Table 4). The clean energy portfolio is expanding, from about 11 percent of the total portfolio currently to about 35 percent by 2014, containing a rich mix of solar, wind and hydro projects (Box 5). The Bank’s current clean energy portfolio, if fully implemented, will generate an additional 80,000 MW of electricity. The Bank has also committed substantial resources to support adaptation to climate change in Africa. These include the UA 30 million project to restore the Lake Chad Basin Ecosystem and the UA 32 million Congo Basin Ecosystem mitigation project. Financing requirements for adaptation in the agriculture sector in Africa are estimated at US$ 8.1 billion annually. The Bank's indicative pipeline of projects and programs to support the agriculture sector amount to US$5.3 billion for the period 2010-2014, of which about US$ 2.67 billion is to support adaptation and mitigation initiatives. US$ 1.16 billion is required for water development and water storage and US$409 million for renewable natural resource management.

• Available financial resources from global funds, such as the Adaptation Fund and the Global Environmental Facility, are insufficient to address the challenges of climate change on the continent. The Bank is currently implementing the Climate Investment Funds with the other MDBs, where about US$1.7 billion is allocated to Africa for

(Box 5) Lake Turkana Wind Power Project

The Lake Turkana Wind Power Project is located in northwestern Kenya, near Lake Turkana, a relatively desolate spot without any transmission line networks. The project includes building 365 wind turbines, reinforcing 200 km of roads and bridges which will make it possible to haul them to northeastern Kenya from the Indian Ocean port of Mombassa, and adding an estimated 426 km of transmission lines to connect and supply power to the national electric grid at an optimal point. The reliable, continuous clean power will add an additional 30% to Kenya's current total installed power. The project is forecast to reduce carbon emissions by 16 million tons during its 20-year lifespan. In addition to reliable, inexpensive electricity in rural areas, the project will also provide access to carbon credits, making it possible to use ICT,provide lighting to schools and electricity to health centers, and ultimately create new jobs. The first phase of the project is expected to start providing 50 MW of clean power in 2011. The wind park will be generating 300 MW when it is fully commissioned in 2012.

28

clean technology as well as adaptation. Opportunities exist for the Bank to play a major role in leveraging private sector resources to help address climate change risks in Africa. In this regard, the Bank is developing innovative mechanisms to generate resources for climate change mitigation and adaptation. One such mechanism is the ‘Clean Energy’ Bond that the Bank is about to launch in capital markets to support the development of Africa’s abundant renewable energy potential.

• The funds to be generated through these sources fall short of the needs of the continent. The Bank therefore needs to allocate substantial resources to climate change initiatives, as failure to address climate change challenges will not only hinder the ability to reduce poverty on the continent, but could also reverse the modest gains the continent has recorded in achieving the MDGs.

Table 4: Indicative Pipeline of ADB’s Climate Change Investments

3.5 Lending Scenarios for the African Development Bank

3.5.1 Lending scenarios: The GCI Issues and Framework paper laid out three alternative lending scenarios for the Bank18. These have been further updated as the extent of demand from the Bank in the medium term has become clearer.

• The Medium Term Strategy (MTS) Scenario was approved as part of the Bank’s Medium Term Strategy (2008-2012). This scenario was developed against the backdrop of a positive outlook for the global economy and the international financial markets. It made two key assumptions: an increase in overall demand for financing from RMCs and a

18 ADB/BD/WP/2009/50

Investment Plan

(million US$) % Total

Climate Change: Grand-Total 9992.0

Climate Change Mitigation 5540.7 55.5

Policy reform 519.0 5.2

Knowledge/competency building 48.7 0.5

Hydropower 1750.9 17.5

Wind 798.7 8.0

Geothermal 215.7 2.2

Solar 411.6 4.1

Biomass/Cogeneration 49.0 0.5

Sustainable transport (including biofuels) 1591.2 15.9

Forestry Management 49.0 0.5

Climate Change Adaptation 4451.3 44.5

Policy reform 519.0 5.2

Knowledge/competency building 31.1 0.3 Land Use & Water Resource Management 2672.9 26.8

Infrastructure 131.6 1.3

Urban systems 307.5 3.1

Climate Proofing ADB's portfolio 786.1 7.9

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strengthened position of the Bank. It projects an annual growth in lending of 14% between 2008 and 2012, in keeping with the Bank’s strategic focus of increasing financing in its priority areas of infrastructure, governance, and private sector development.

• The Baseline Scenario19 is based on the assumption that the surge in ADB lending due to the financial crisis will last two years and that the Bank will return to MTS lending levels by 2011. It supplements the MTS lending scenario in 2009 and 2010 with additional operations already approved by the Board of Directors and those expected to be presented in the coming months.

3.5.2 Short to Medium Term Lending Projections: In light of feedback received from the Bank’s Board of Directors, the Bank’s lending program for 2009 has been revised downwards. However, given the strength and urgency of demand from RMCs, this will lead to an increase in the 2010 lending program to accommodate some of the projects which cannot be financed in 2009. Table 5 below provides projections under the two different scenarios for the period 2009-2011.

Table 5 – Short –Term Lending Scenarios (in UA million)

Lending Scenarios for the Short Term 2009/Actual 2010/Projected 2011/Projected

MTS 2,187 2,171 2,890

Baseline Lending Scenario 5,466 4,145 2,890

It must be noted that the Bank’s lending scenarios propose to meet only a fraction of the UA 8bn demand expected each year due to the Bank’s operational capacity constraints and the availability of funds. 3.5.3 Medium to Long Term Lending Projections: The projections reflect the underlying expected demand for loans by member countries, but actual lending will be determined by a range of factors particular to each country or entity. Overall, the Bank’s long term lending growth could evolve in several different ways, depending on various factors. Key among these are GDP growth on the continent, availability of other sources of finance and the lending capacity of the Bank. The long term lending scenarios presented below cover the period 2012 to 2020 (Figure 7; Table 6), and assume a 5% annual rate of growth. This is the ‘managed growth’ scenario with an Average Annual Lending Program for the period 2010-2020 of UA 3.9 billion.

Table 6: Lending scenarios for the Medium and Long Term

Extension at 5% growth

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

MTS 2,141 2,890 3,292

Baseline Lending Scenario

4,145 2,890 3,292 3,457 3,629 3,811 4,001 4,202 4,412 4,632 4,864

19 The Baseline Scenario was previously referred to as Scenario 1, and before that was called the Adjusted Short Lived Crisis Scenario (ASLC). Scenario 2, which was previously called the Drawn Out Crisis Scenario (DOC), has been removed from this iteration of the paper.

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Figure 7: Baseline Lending Projections

The Bank's Lending Program: 2009-2020

1000

2000

3000

4000

5000

6000

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Am

ount

(UA

milli

on)

MTS Baseline Lending Scenario

3.5.4 Lending Projections 2010-2020: The immediate impact of the crisis is likely to diminish in the medium term. However, it is reasonable to assume a structural upward shift in the level of Bank lending. This is due to the increased volume of economic activity with resumed growth, the inability of borrowing members to access alternative sources of finance immediately, and the choice made by RMCs themselves reflecting their increased confidence in the Bank as a partner which has demonstrated its capacity to deliver quickly and effectively during the crisis period. 3.5.5 Given the current high level of demand, Management proposes that this position be reviewed in 2015 with a reassessment of the demands on the Bank as against the operational resources available. This would take into account, a number of considerations including progress towards the MDGs, the balance between sovereign and non-sovereign lending, graduation of ADF countries, and the availability of resources from other lenders. 3.6 The Bank’s comparative advantage and value added in the International Aid

Architecture 3.6.1 The Bank has a clear strategic focus aligned with RMC priorities. The Bank’s MTS established a longer term strategic focus in its areas of comparative advantage where it has acknowledged expertise and experience: infrastructure, governance, private sector, and the development of technical and higher skills level. In responding to the economic and financial crisis the Bank has maintained this selective approach. Through investments in these areas the Bank will promote regional integration, support agriculture and food security, adaptation to climate change, and gender equality. It should be noted that the Bank has let others take a lead in social safety nets, increased access to basic education, the provision of balance of payments support, and macroeconomic oversight and monitoring.

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3.6.2 It is mandated to promote economic and regional integration. The African Union (AU) has assigned the Bank responsibility to promote and to financially support economic integration. As an African institution the Bank is uniquely well placed to facilitate cross border dialogue and investment, and in doing so works closely with other African institutions, including the AU Commission, Economic Commission for Africa, NEPAD, Regional Economic Commissions, and Regional Banks. It also has MOUs with the European Commission and the World Bank, and hosts the Infrastructure Consortium for Africa. 3.6.3 It has integrated private and public sector activities across all RMCs. Given the increasing importance of private sector development in Africa, the Bank’s integrated structure adds value by promoting a holistic approach which is responsive to RMC priorities, exploiting synergies between the public and private sectors, and in improving the investment climate. Through instruments such as the AFP, the Bank is taking the lead on leveraging the market skills and knowledge of DFIs to mobilize private sector resources for large scale projects, particularly in infrastructure. 3.6.4 The Bank has demonstrated speed and flexibility in response to the 2008-2009 food, energy and financial crises, through front-loading of resources, the provision of additional resources to budget support operations, the introduction of a trade facility, and portfolio restructuring in order to unlock additional resources. Several fast disbursing emergency budget support programs have made it possible for the Bank’s RMCs to provide rapid counter-cyclical responses and maintain pro-poor spending. This effective response encompassed MICs and LICs using both ADF and ADB instruments. 3.6.5 The ADB is increasingly becoming African countries’ partner of choice. This is particularly true for ADB countries, as shown in recent lending data for the 3rd quarter 2009, which figures indicate ADB as the biggest lender in Africa followed by the European Investment Bank and the World Bank20. The strong demand for ADB resources is also confirmed by the pipeline of both public sector and private sector projects, estimated respectively at UA 3,087 million and UA 2,586 million, and which largely exceeds the projections by other organizations21. This is consistent with the recommendations of the High Level Panel in 2007 that the Bank should aim to become the premier development institution in Africa, a voice for development within Africa and for Africa internationally. This ambition was endorsed by shareholders and remains a key driving factor for the Bank. The trend of increasing demand is also consistent with country led development and the option of countries being able to engage with preferred development partners. 3.6.6 The Bank has a growing role as the voice of Africa in development fora. The Bank’s African focus and character provide it unrivalled access to countries and their political leadership. It has used its convening power to launch a number of important initiatives. For instance, in 2008 the Bank, in partnership with the African Union Commission and the United

20 ADB approvals during the 3rd quarter 2009 totaled UA 713.00 million. The World Bank Group and the European Investment Bank lending to Middle Income Countries1 and African Private Sector totaled respectively UA 330.00 million and UA 484.00 million. ADB approvals for 2009 totaled UA 5,466 million (1). The World Bank Group and the European Investment Bank lending to Middle Income Countries and African Private Sector during 2009 totaled respectively UA 2,133 and UA 1,005 million. Source: WB and EIB websites. [1] 2009 draft annual report excluding HIPC debt relief, equity, grant and guarantee approvals for comparison with WB and EIB. 21 Asset Liability Committee (ALCO), Quarterly Report, III, September 30th.

32

Nations Economic Commission for Africa, convened the first Meeting of African Finance Ministers and Central Bank Governors in Tunis to discuss the impact of the financial and economic crisis. A Committee of Ten was established after the meeting to monitor the crisis and provide analysis and advice. It continues to meet regularly and to contribute African perspectives to the G20, G8 and other international discussions on the crisis. The President of the Bank attended both the London and Pittsburgh G20 Leaders’ Summit. The communiqués issued by the respective Committees testify to the role they want the Bank to play, both as a channel of investment to the continent and in providing advice and expertise. 3.6.7 The Bank is a key part of the international aid architecture in Africa. Complementing its focus on selected strategic priorities, a cardinal principle for the institution is to work in partnership with others. It has continued to build productive partnerships with key multilateral and bilateral organisations in order to maximise the combined contribution to Africa’s development. The ADB is a partner with the World Bank and the IMF, in the HIPC and MDRI processes and is also participating in a joint MDB working group to review the Debt Sustainability Framework. The Bank has also been asked to work with the World Bank, the IMF and the European Commission in implementing the new EU Vulnerability Flex instrument, designed to mitigate the social consequences in the countries worst hit by the crisis. A large number of MOUs have been signed with bilateral and multilateral organizations and the Bank hosts a number of continental initiatives in its areas of expertise. The latter include the Secretariat of the Infrastructure Consortium for Africa (ICA), the Africa Fertiliser Facility, the African Water Facility, and the Congo Basin Initiative. The Bank is also a major participant in the Partnership for Making Finance Work for Africa (MFW4A), supported by 12 bilateral and multilateral development agencies. The increased on the ground presence in many countries permits the Bank to have a close dialogue with its RMCs and to closely coordinate with local donor groups. 4. RELEVANCE OF THE GCI TO LICs

4.1 A GCI will have a strong and demonstrable positive impact on LICs: Low income countries (LICs) will benefit both directly and indirectly from a GCI, through various channels as demonstrated in this section. The Bank has made a determined and conscious effort towards increasing access to resources to LICs, optimizing non- financing services to LICs as well as maximizing the impact of other ADB operations on LICs. • The Bank’s expected lending pipeline for private sector operations (PSO) is at an all

time high with new approvals in 2009 reaching approximately UA 1.2 billion. PSO that benefit LICs today directly or indirectly account for nearly 60% of the active private sector portfolio volume including both national and regional operations. Going forward, new innovative credit enhancement instruments are being considered to offer more operational headroom and offset the generally higher consumption of risk capital needed for PSO in LICs.

• ADB financing to Middle Income Countries (MICs) and to regional integration

operations, through both its sovereign and non sovereign windows, have a demonstrable impact on LICs. Macroeconomic linkages between MICs and LICs are indisputable and are further enhanced by the Bank’s core mandate of regional integration with priority given to regional operations that cut across national borders and benefit all RMCs.

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• The institutional synergy between the ADB’s, non concessional, and the ADF’s, concessional, resource, is being increasingly drawn upon for the benefit of LICs. The increasing use of Public Private Partnerships (PPP) on the continent is a testament to this operational synergy.

• The Bank has been consistently increasing its percentage of net income allocation to

initiatives that directly benefit LICs from 13% in 1998 to an average of 60% over the last 5 years. Going forward, it is proposed to increase net income allocation to development related initiatives, subject to the approval of the Board of Governors.

• The Bank, in coordination with the Bretton Woods Institutions is considering making

some adjustments to its Enclave Policy with a view to expanding the list of projects for which ADF countries can borrow ADB resources.

• As part of the Bank’s Strategy for Knowledge Development and Management (KDM),

capacity building and knowledge dissemination products are being increasingly tailored to LICs.

4.2 LICs and Private Sector Operations (PSO) 4.2.1 Surging Demand for PSO: Responding to growing market demand, PSO have witnessed a remarkable growth in recent years. From an annual approval volume of about UA 248 million (for 6 projects) in 2006, the annual business volume for PSO reached approximately UA 1.0 billion (for 32 projects) in 2008. In 2009, PSO approvals reached approximately UA 1.2 billion for 32 projects. 4.2.2 Growing Emphasis on LICs22 : While pursuing its annual business plan, the Bank in responding to the Board’s calls, has increased the proportion of LICs exposure in its portfolio. In 2007, 27% of the new approval volume was in LICs. In 2008, against a business plan target of 40% of direct investments in LICs, the actual achievement was 42%. Distributing the multinational projects to LICs and MICs, the proportion of approvals for projects benefitting LICs either directly or indirectly as of December 31, 2009 stands at 60%. In terms of volume, annual approvals for direct national projects in LICs have more than doubled between 2006 and 2008, and tripled by the end of 2009. In addition, LICs also benefit from national transactions that appear on the books as MIC operations but in actual fact target investment in LICs (see section 4.3.1).

22 For purposes of this section, the proportion of investments in LICs includes Nigeria, because it is the only Blend Country within the PSO portfolio.

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• The evolution of approvals from 2006 to 31st December 2009 is presented in Figure 8 below. It is worth noting that while the proportion of the generally riskier LICs exposure has been on the rise, the Bank has carefully monitored the impact on the credit risk profile of the entire portfolio, keeping the weighted average risk rating (WARR) around the target of 3.5 through a balancing mechanism with lower risk exposures in MICs and regional operations.

Figure 8: Evolution of Approval Volume Distribution , 2006 – 31st December 2009

0

200

400

600

800

1000

1200

2006 2007 2008 2009

Regional IntermediariesRegional Integration ProjectsDirect MICDirect NigeriaDirect LIC

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• Figure 9 below breaks down the portfolio volume as of 31st December 2009 between MICs and LICs with an estimated 60 % of the investment volume benefitting LICs. Nigeria is highlighted in a separate category given its position within the portfolio as a Blend Country. Also of note is the comparatively large proportion of projects at UA 712 million23 or approximately 19% that directly promote regional integration (see Sections 4.3.1 and 4.3.2 for specific examples).

Figure 9: Breakdown of the Portfolio volume at 31st December 2009in MICs and LICs

Direct LIC,

UA 1.176 bn

Direct Nigeria, UA

508 mn

Direct MIC, UA 774

mn

Sub-regional DFIs

& Regional Fis, UA

220 mn

(~50% LIC)

Regional

Integration

Projects, UA 712

mn (~40% LIC)

Private Equity

Funds, UA 328 mn

(~55% LIC)

Regional LOCs, UA

445 mn (~50% LIC)

23 Global Trade Liquidity Program transaction for Standard Bank is captured under Direct MIC (South Africa)

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The total PSO portfolio has approximately 125 operations amounting to UA 4,204 billion. This includes direct investments in 17 LICs and 1 Blend Country, in addition to 46 regional operations benefitting LICs in general. Figure 10 below presents the geographical distribution of the active portfolio as of 31 December 2009.

Figure 10: Active Portfolio Distribution at 31 December 2009

0.00

4.00

8.00

12.00

16.00

20.00

South

Afr

ica

Niger

ia

Tunisi

aEg

ypt

Guinea

Mau

ritan

ia

Ghana

Senega

l

Mad

agas

car

Camer

oon

Uganda

DR Congo

Djibouti

Zam

bia

Botsw

ana

Ethio

pia

Moro

cco

Moza

mbiq

ue

Côte D

'Ivoire

Gabon

Kenya

Rwand

a

Tanz

ania

Alger

ia

Liberia

Congo

Regiona

l Lics

Regiona

l Mics

Regional Operations

ADF Only Blend MIC

4.2.3 As a complement to the growing emphasis of PSOs in LICs, the Bank has strategically invested in transactions with a ‘pro-poor’ focus. Through its Private Sector Department, the Bank has contributed to the advancement of projects which aim to significantly impact poverty reduction. These transactions help to create employment opportunities in rural areas, develop rural infrastructure, provide access to finance and help to promote health and social development. With substantial development outcomes accruing to RMCs, these transactions can act as a force multiplier in the poorest and most fragile states. The following examples in Boxes 6 and 7 illustrate the poverty reduction impact of select private sector operations.

% of P

ortfolio

3

1

Number of Operations

2 2 2

1

6

1

1 2

3 5

1

13

1

2

2

25

1

4

11

7

7

1

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Box 6: Ghana Oil Palm Development Company (GOPDC) The Ghana Oil Palm Development Company (GOPDC) project involves the expansion of oil palm cultivation. The project adopted the concept of sustainable agriculture with a focus on the production of organic oil palm. It also included the expansion of an existing palm oil mill and palm kernel crushing plant as well as the establishment of a new refinery and fractionation plant with a capacity of 100 tons per day. The expansion project helped to create up to 300 new jobs in farming, milling, and refining operations and further supports up to an additional 1,500 outgrowers and smallholding farmers. Women constitute 50% of the contract employees (1,800 people) and 9% of the permanent workforce (280 employees). Women also benefit from a number of indirect jobs such as setting up shops and small restaurants to cater for the needs of the local population. At the national level, the project creates value added to palm oil products and generates tax revenue for the state and foreign exchange earnings thereby improving Ghana’s balance of payments position. The out-growers’ scheme has helped the rural community to develop and become self sufficient. It has contributed to local development and community empowerment through employment opportunities, electrification, water supply, education, road establishment and maintenance. GOPDC attaches importance to the provision of social infrastructure in communities in and around the project area. For example, a laboratory for diabetes testing was established during 2008 and all staff and their dependants have access to free healthcare. GOPDC also subsidizes medical care for neighboring communities who come to its clinic. The company has also established a nursery and primary and junior secondary schools that employ 20 trained teachers and has a total enrollment of about 400 pupils with a boy: girl ratio of 50:50. Box 7: Advans Bank of Congo (ABC) With a population of 53.2 million, 75% of whom live on less than USD 1 per day, the Democratic Republic of Congo’s (DRC) poverty reduction and development strategies focus on the support of the private sector with specific emphasis on the development of micro and small enterprises. The Bank’s investment in the Advans Bank of Congo (ABC) is an invaluable vehicle to implement its strategy for private sector development and assistance to fragile states. Advans Bank of Congo is a Greenfield microfinance bank established to provide financial services to the low income population of the DRC. At full operation, ABC will provide credit to the poorest segments of the population, including more than 50,000 micro entrepreneurs, with an expected loan portfolio of about USD 26 million. ABC will create direct employment for at least 284 local staff and will add to the tax revenues of the government. It will also contribute to the development of capital markets and will support the growth of entrepreneurship and the private sector.Furthermore, ABC is expected to contribute to the progressive “formalization” of the economy with micro entrepreneurs increasingly able to access basic financial services. ABC serves as an example of a replicable business model of a professionally managed microfinance bank. This will contribute to the development of best practices in the local financial sector. The Bank’s investment in ABC will also help to increase job creation and income generation capacity in the DRC, while playing a positive role in reducing poverty. This intervention serves as an example of the impact private sector operations can have on the poorest segments of the population.

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4.2.4 Going forward: Credit enhancement instruments and Operational Headroom: The Bank’s PSO, in particular those that target the generally riskier markets in LICs, are constrained by the limitations caused by their higher risk capital usage. To mitigate this effect, a number of credit enhancement initiatives either have been developed or are being developed, including the following:

• Credit enhancement and other measures that would help open up more headroom,

including selective selling down of mature loans (where ADB’s presence may no longer be critical for ensuring the achievement of development objectives and/or additionality), the activation of new resource mobilization initiatives such as B-loan syndication and the enhanced utilization of the African Financing Partnership (AFP).

• Innovative credit enhancement initiatives for using a proportion of ADF resources for

guarantee operations in support of PSO. These proposals will be explored with ADF Deputies during discussions for the next ADF replenishment.

4.3 Benefits to LICs from MIC Operations and Regional Integration 4.3.1 Macroeconomic Linkages between MICs and LICs: MICs play a central role as engines of growth, in paving the way for regional integration, as conduits of capital, centers of knowledge and excellence, agents of stability (particularly in regions dominated by fragile states) and as gateways for trade and integration with the global economy. Their growth and expansion of business opportunities have important spillovers on their neighbors. The larger economies in Africa such as Egypt and South Africa play the role of growth and development dynamos for the region around them and provide a gateway to regional integration and global markets for neighboring countries. Consequently, LICs derive substantial benefits from ADB funded operations in MICs. There are numerous examples of Bank involvement in projects in MICs that have a clear impact on LICs. For instance, the Bank provided a $150 million senior loan to the Damietta Container Terminal in the Suez Canal in Egypt for upgrading and expansion purposes. The terminal, located 70km west of the Mediterranean entrance of the Suez Canal links to the world's busiest trade routes. It is helping transform the port into a major trans-shipment hub in the entire eastern Mediterranean. The new terminal within the Port of Damietta is expected to handle some of the largest containers in the Mediterranean and will significantly lower operating costs and sailing time for trans-shipment activities, which in turn will benefit trade in Africa and the rest of the world. The Bank’s recent investment of $ 20 million in the Citadel Capital Fund is another illustrative example and was explicitly structured with a condition precedent that 15% of the Fund be invested in Sub Saharan Africa (Box 8). The Bank has also supplied US $320 million of lines of credit to the Standard Bank of South Africa and Ned Bank in South Africa as intermediaries for on lending to infrastructure and industrial projects in LICs outside South Africa. This clearly illustrates one of the ways in which institutional capacity in MICs is used to promote development in LICs.

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Box 8: Citadel Capital Joint Investment Fund The Citadel Capital Joint Investment Fund is an Egypt based multi-sector fund which aims to make equity investments in Greenfield or Brownfield projects in various sectors across agribusiness, financial services (including microfinance), energy, natural resources, waste management, and manufacturing enterprises primarily in North Africa with select investments in Sub Saharan Africa. As a condition precedent to the Bank’s participation, the Fund managers committed a minimum of 15% of the Fund to Sub Saharan Africa. This illustrates how the Bank’s investment in MICs can have a direct impact on LICs. In this regard, in March 2010, Citadel Capital announced it planned to invest 150 million US dollars over five years to improve the railway line from Kenya to Uganda. Citadel said it had acquired a 17.5% stake in Rift Valley Railways (RVR), which operates 2,000 kilometres of track in East Africa. The rail network which is a century old and has suffered from chronic underinvestment connects Kenya's port of Mombasa to the interior of Kenya and Uganda, including its capital Kampala. Citadel Capital’s investment strategy typically involves originating some transactions in Egypt for subsequent regional expansion into Sub Saharan Africa, primarily in LICs like Kenya, Uganda, Ethiopia, Rwanda, and Burundi. Citadel Capital seeks to invest in national companies which act as a ‘platform’ for regional expansion, leading to enhanced regional integration, increased GDP and government revenues. This growth strategy helps to stabilize the macroeconomic environment of domestic economies, rendering host countries less vulnerable to exogenous shocks. Such regional growth projects support job creation and contribute to poverty reduction. In addition, the active participation and involvement of the Fund managers in the investee companies will lead to effective skills transfer, improved governance, standardized processes, improved competitiveness and operational efficiency in companies operating in LICs.

4.3.2 Regional Integration: Regional integration is one of the Bank’s core mandates and is considered a sine qua non to Africa’s development in all of the Bank’s RMCs. The Bank’s Regional Integration Strategy focuses on two key pillars - infrastructure (energy, transport, ICT and water resources) and institutional capacity building, including for trade facilitation. A regional approach to addressing infrastructure deficits is critical as many African countries are simply too small to address the challenges alone. Regional integration lowers the cost of infrastructure by giving smaller countries access to more efficient technologies and larger scales of production. Regional integration also harnesses the benefits of transboundary development challenges, such as climate change – for example through financing of power generation capacity using clean energy like hydropower stations, wind farms and solar energy as part of efforts to support low carbon growth and adaptation efforts. Capacity building is essential to enable regional institutions to strengthen their role in policy planning, harmonization and advocacy to provide effective institutional frameworks for implementing regional infrastructure and trade activities. Major strides are currently being undertaken throughout Africa to scale up regional economic integration with MICs playing a pivotal role as regional economic hubs, trade facilitators and anchors of regional development. ADB resources partly fill the huge financing gap in cross-border infrastructure operations. Surging demand for such operations, together with the drying up of financing alternatives has made it imperative for the ADB to bolster resources. An illustrative example is the EASSY project, a regional private sector ICT project spanning both MICs and LICs with clear and demonstrable impact on LICs (Box 9).

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ADB funds have also been used directly for private sector operations in LICs, which support regional integration efforts. ADB provided a loan in 2003 of US$ 10m (33% of project value) to Société Djiboutienne de Gestion du Terminal Vraquier (SDTV) to support their concession to develop, design, construct, own, operate and maintain bulk terminal facilities for cereals and fertilizers in the Port of Djibouti. These facilities are helping store and process (unloading/bagging/loading) cereals and fertilizers in bulk form for export to Ethiopia and the sub-region. The concession has helped improve port turnaround time, added value and improved competitiveness, empowered local and indigenous companies and subcontractors for the supply of certain components of goods and services, and created new business opportunities in servicing the port operations and associated logistics. It also provided a reasonable rate of return for its shareholders. Analysis and strategy: In response to increased demand, the Bank is scaling up its analytical and strategy work to ensure greater coherence and focus on delivery of economic cooperation and regional integration. The Bank is managing the Program for Infrastructure Development in Africa (PIDA) on behalf of the AUC/NEPAD. PIDA will establish a strategic vision, and objectives and policy framework for the development of regional and continental infrastructure in four sectors - Energy, Transport, Information and Communication Technology, and Transboundary Water Resources up to 2030, with a prioritized continental/regional infrastructure development programme focused on infrastructure hardware and complementary software, in addition to preparing an implementation strategy and process, including a priority action plan. The Bank is also currently developing Regional Integration Strategy Papers (RISPs) for north, west, central and east / southern Africa. RISPs will identify and prioritize areas for Bank engagement and regional operations over the next three years building on analytical work and the vision outlined in the Medium Term and Regional Integration Strategies. These tools will help maximize effectiveness and leverage the Bank’s resources. A shortage of bankable projects. Well prepared regional projects remain a key bottleneck for delivery of regional infrastructure. The MIC Trust Fund has played an important role in helping undertake upfront work to produce studies and detailed designs, which have helped facilitate cross border projects. The NEPAD Infrastructure Project Preparation Facility (IPPF) also housed in the ADB is designed to assist all African countries, Regional Economic Communities (RECs) and specialised institutions to prepare high quality and viable regional infrastructure projects and programs, develop consensus building and broker partnerships for their implementation. The MIC Trust Fund and IPPF have a critical role in ensuring a good supply of bankable projects.

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Box 9: EASSY Project EASSY is an initiative to construct and operate a submarine fibre-optic cable along the east coast of Africa to connect 20 coastal and land-locked countries to each other and to the rest of the world. The project is expected to have a huge impact on regional economies by helping improve and lowering the cost of ICT services. This will help create employment, promote regional integration and cross-country trade between all the concerned countries of the EASSY, as well as boosting economic growth in the region. The project will run a cable from Port Sudan, Sudan to Mtunzini, South Africa, covering about 9,000 km. The sponsors of the EASSY project are the 29 leading telecommunications operators from Eastern and Southern Africa who make up the parties involved in the construction and maintenance of EASSY. The EASSY Special Purpose Vehicle (SPV) established to receive financing for the project is the Western Indian Ocean Cable Company (WIOCC). NEPAD-Infrastructure Project preparation Facility (IPPF) provided up to US$0.5m for the Transaction Advisor. ADB is providing a private sector loan to WIOCC of up to USD 14.5 million – around 12.5% of the total project cost.

4.4 An Integrated Financial Institution: The institutional synergy between the ADB and the ADF financing windows places the Bank in a unique position to use both concessional and non concessional resources at its disposal for the benefit of LICs and in providing tailor made financial solutions to all its RMCs. The increasingly available resources and integrated synergies within the Bank have been innovatively combined to address the complex financing needs for national and regional PPPs. Examples include the Nairobi-Mombasa Toll Road where the ADB’s private sector window is financing the construction of an important portion of the project.

The Bujagali Dam in Uganda was similarly innovative with power generation undertaken by a private consortium co-financed by the ADB. On the transmission side, support is from ADF resources, supplemented by support from the Japanese Government. The Dakar-Diamniadio Toll Road project is also illustrative of the broader synergies between the two windows of the Bank Group (Box 10). Other examples include the Sasol Natural Gas Transmission Project linking Mozambique and South Africa, the Main One Sub-Marine Cable, the pan-African Rascom Telecommunications Satellite, ADB’s participation in the Global Trade Liquidity Programme and the EASSY Submarine Cable along the east coast of Africa referred to above.

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Box 10: The Dakar – Diamniadio Toll Road Project: An Example of Public-Private Partnerships In undertaking the Dakar-Diamniadio project, a public-private option was pursued by the Government of Senegal as a means of raising private sector interest in co-financing, building and operating the motorway. The Bank Group’s provision of limited ADF resources was a catalyst for government involvement and availability of private investment. This highway is a component of the West African Dakar-Bamako-Ouagadougou- Niamey Road and is a major infrastructure link for the integration of Dakar and its port to the region. It constitutes a vital artery for the decongestion and the economic development of the Dakar area, where nearly 25 percent of the country’s population generates 60% of the country’s GDP within an area equal to 0.3 percent of the national territory. The Toll road will be operated under a 30-year concession, by the Eiffage Company, a private operator. The company has approached the private sector window of the ADB for financial support. Under the terms of the PPP, the private operator will assume 42 percent of the total cost of the motorway (UA 181 million excluding the costs of expropriation, which will be borne exclusively by the government). The Government of Senegal, the French Development Agency and the ADF will fund the balance. The ADF will contribute UA 45 million. The expected benefits of the projects are several. First, part ownership by a private operator will ensure the durability of the infrastructure in the long term. Second, the mobility index in the Dakar area will improve, resulting in more efficient and productive activity and the reduction of poverty due to improved living conditions for several thousand inhabitants. Third, project construction will provide numerous jobs and business opportunities for both SMEs and the population at large. Fourth, more fluid traffic will reduce atmospheric pollution and harmful health impacts. Fifth, reduced government funding will free government resources for spending on other sectors. Sixth, the project will act as a model for other large infrastructure projects in the region that also call for private participation.

4.5 Net Income Allocations to LICs

4.5.1. As Figure 11 clearly indicates, over a period of 10 years, development initiatives have received an increasing percentage of the Bank’s net income allocation, from 13% in 1998 to a peak of 76% in 2007. This is a reflection of the Bank’s strategic priority of increasing resource allocation to development initiatives in its RMCs, and especially to its most needy LIC and Fragile States.

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4.5.2 As summarised in Table 7, the Bank’s net income distributions to date, other than the amounts retained in reserves and surplus, fall under one of the following three categories: Category I: Distributions arising from recurrent undertakings; Category II: Distribution for high priority needs that could not otherwise be met but for which no recurrent undertakings have been made, and Category III: Distributions for activities that are generally unpredictable. Under such categorizations, LICs benefit an average of up to 87% of the total Bank’s net income allocation to development initiatives. Also, since 2003 allocation to LIC related initiatives represents about 60% of the total Bank’s allocable net income.

Table 7: The Bank's Net Income Allocation for Development Initiatives from 1998 through 2008

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Recurrent Undertakings 16 16 16 16 42 115 124 124 101 186 91

HIPC 6 6 6 6 6 6 11 11 22 15 - ADF 10 10 10 10 25 10 46 21 14 109 25 DRC - - - - 13 54 37 67 65 62 66 PCCF - - - - - 45 30 25 - - High Priority but not recurrent - - - - 1 - 15 - 19 51 72

MIC - - - - 1 - 15 - 10 25 10 Invest. Climate Facility* 9 - NEPAD-IPPF 6 - African Fertilizer 5 - FAPA 5 2 African Legal Support* 10 FSF - 60 Unpredictable recovery activities - 3 - 5 10 - 5 15 - 20 - SRF - 3 - 5 10 - 5 15 - - - Food Crisis* - - - - - - - - - 20 - Total 16 18 16 21 53 115 144 139 120 257 163

* Development initiatives funded by Surplus Account.

4.5.3 With demands on net income increasing over the next few years due to multi-year commitments by the Bank to recurrent and developmental undertakings (HIPC, DRC, ADF), Management will endeavor to reinforce the capacity of the Bank to generate additional risk capital to back up the increase in its loan portfolio while at the same time meeting the multi-year LICs commitments.

4.5.4 The recurrent initiatives of HIPC and the ADF are worthy of closer examination. The HIPC initiative has the objective of reducing the annual debt service obligations of LICs to levels considered sustainable. From 1997-2003 the Bank contributed 5% of its annual net income to this initiative with an average of UA 15 million in the last 5 years.

4.5.5 The Bank has consistently made net income contributions to the ADF to replenish resources used for financing operations in RMC, all them being LICs that cannot borrow from the ADB sovereign window. It pledged UA 30 million over the three-year ADF-VIII replenishment period and an additional UA 30 million for each of the ADF-IX and ADF-X

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replenishments. For the ADF-XI period, the amount pledged was increased by 100% to UA 60 million over the three year period of which UA 50 million have already been allocated out of 2007 and 2008 net income respectively.

4.5.6 From 2003 to date, LICs have directly benefited from approximately 60% of the Bank’s net income, with an average annual contribution of UA 130 million. This amount comprises the following annual contributions: UA 20 million to the ADF, UA 15 million to the HIPC initiative, approximately UA 60 million to the arrears clearance of the DRC, and other special contributions to Post Conflict Countries and to the Fragile States Facility.

4.5.7 Other Bank allocations to specialized funds that benefit LICs include contributions to the Fund for African Private Sector (FAPA), the African Fertilizer Fund, NEPAD Infrastructure Project Preparation Fund (IPPF), the African Legal Support Facility, the Investment Climate Facility, the Special Relief Fund, the Food Crisis Initiative, and most recently the African Water Facility. Challenges of future net income allocations 4.5.8 Maintaining a right balance between increasing reserves and direct allocation to development initiatives - Increasing demands on the Bank to provide resources for development initiatives will continue to exert pressure on future net income. There is therefore a need to strike a balance between direct allocation to development initiatives and increasing reserves to enable increased lending volumes to LICs for both sovereign and non-sovereign operations. Income allocation proposals will nevertheless be commensurate with the need to support development initiatives, after a determination of the transfers to reserves necessary to ensure an adequate level of risk capital to support the Bank’s lending activities and portfolio risk. The capital increase scenarios presented in Section 9 assume an average income allocation of UA 110 million per year (or 60% of annual net income) over the ADF-12 period including mandatory allocation to the DRC, recurrent undertaking for the ADF and other allocations to development initiatives, subject to the approval of the Board of Governors. 4.5.9 Needs for adequate equity resources to sustain net income improvement - The level of capital increase and paid-in ratio will determine whether the Bank, subject to the approval of the Board of Governors, could transfer more or less net income to development initiatives instead of its reserves. Subject to available resources, the option of increasing net income allocations for the next 3 year ADF XII replenishment period will be considered. The greater the paid-in portion, the greater the ability to transfer more to development initiatives. Options to increase contributions to development initiatives through broader technical assistance activities (as defined under Article 2 of the Charter) with mainstreaming of the annual work programs and related resource allocations will also be considered. 4.6 Adjustments to the Bank’s Credit Policy 4.6.1 Since 1995 the Bank Group has applied the eligibility criteria of the World Bank to determine which countries are eligible to ADF financing only (Category A), a blend of ADF/ADB financing (Category B) and ADB financing only (Category C). This classification is based on several criteria, key among these being the RMC’s GNP per capita and creditworthiness, and has the overall aim of helping RMC, and especially LICs, balance their

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financial needs and debt sustainability. As an exception to the general eligibility rule described above, Category A countries are eligible to borrow ADB resources for enclave projects which meet strictly defined criteria. 4.6.2 The adoption by the Bank Group in 1995 of the Credit Policy was instrumental in restoring the Bank’s AAA rating. Given its strong role in ensuring the institution’s financial soundness and the comfort this provides to shareholders as well as rating agencies, the Credit Policy is to remain fundamentally intact. The Bank is closely coordinating with the World Bank and the IMF to consider widening the definition of enclave projects eligible for ADB financing. This envisages broadening the eligibility from the current prerequisite of export only driven projects to national projects with a high development impact that can service project loan indebtedness from the income they generate with a securitized payment structure. 4.7 Capacity Building and Knowledge Dissemination Products 4.7.1 In line with the High Level Panel Report that recommended that the Bank strengthen its knowledge and advisory services, the Bank developed a Strategy for KDMs for 2008-2010. The overall aim of this strategy which is currently under implementation is to make the Bank the “Knowledge Bank for Africa”. In this context, a series of new initiatives have been launched to enhance the Bank’s knowledge and analytical work. A new business model for operational knowledge generation and dissemination is underway. Particular importance is given to the regional integration agenda, with five Regional Integration Strategy Papers and seven flagship country reports, with particular focus on national and regional infrastructure, programmed for the period 2010-2011. One such flagship report “An Infrastructure Action Plan for Burundi: Accelerating Regional Integration” has been published and disseminated Bank wide. The Burundi Government proposes to use this Report as the basis for its coordination of infrastructure plans at the consultative Group meeting in Bujumbura in early 2010. The report adds value in particular by providing a concrete action plan to implement the strategies of the PRSP. Other major dissemination of knowledge products are outlined below. 4.7.2 The Bank’s knowledge activities as stated in its KMD Strategy 2008-2012 seek to strengthen the Bank’s visibility and intellectual capacity as a leading voice on regional issues.In this context, the Bank’s knowledge activities in the coming years will focus on developing capacity in RMCs for enhanced policy making, strengthening statistical capacity in both RMCs and within the Bank to foster evidence-based decision making and results measurement, and conducting high quality research to generate a deeper understanding of the development challenges facing the continent. The principles of selectivity, relevance, value addition, partnership enhancement and cost effectiveness will continue to prevail and guide the Bank’s knowledge activities. 4.7.3 A distinguishing feature of the KMD strategy is its flexibility that allows the Bank to swiftly respond to emerging issues requiring policy and analytical guidance to RMCs. To this end, the Bank took the lead and coordinated Africa’s responses to the global financial and economic crisis, through rigorous analysis and policy dialogue, working closely with the African Union Commission (AUC) and the United Nations Economic Commission for Africa (UNECA). The Bank convened the high level meeting of African Ministers of Finance and Central Bank Governors in Tunis in November 2008, which led to the establishment of the Committee of Ten Ministers of Finance and Central Bank Governors (the C-10), with the prime objective of monitoring the crisis and coordinating Africa’s response at various levels.

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The C-10 created an important platform for building an African voice and common position around key issues that fed back into important global processes such as the G-20. 4.7.4 Africa’s common position around key issues were thus channeled to the G-20, including proaction to ensure Africa’s involvement and voice in global reform efforts especially reforms at the IMF and the World Bank. The G20 called for flexible financial instruments by multilateral institutions in support of countercyclical actions in RMCs, and asked the Bank to help reposition Africa to take advantage of opportunities emerging from the crisis by ensuring pro-growth policies that enhance diversification and competitiveness. The Bank also conducted in-depth analyses of key issues relevant for policy making in Africa, including capital flows and capital account liberalization, financial sector reforms, domestic resource mobilization and Africa’s manufacturing sector. This detailed background analysis and policy dialogue created a solid foundation for a high level debate on the crisis at the African Economic Conference (AEC) held in Addis Ababa, Ethiopia in November 2009, a platform created by the Bank, the UNECA and the AUC. 4.7.5 The Bank has also made a significant stride with its flagship publications, such as the African Economic Outlook (AEO), the African Development Report (ADR), the Africa Competitiveness Report (ACR), the Selected Statistics on African Countries, and the Compendium of Statistics on Bank Group Operations. Taking the lead role in 2008 from the OECD in the publication of the AEO, which analyses Africa’s economic and social development annually, the Bank has not only improved the quality of the report but also increased its coverage from 35 countries in 2007/2008 to 50 in 2009/2010. The report is now considered the most consistent and comprehensive analysis of Africa’s economic performance. The AEO website has just won the “2009 Best in Class” award in the Reference Category by the Interactive Media Council. In a similar vein, the 2007 ADR’s analysis of maximizing the benefits of Africa’s natural resources was highly acclaimed and extremely used in policy making. The ADR 2008/2009 on fragile states focused on policymaking in fragile states, while the ADR 2010 will addresses the critical challenge of ports, logistics and trade in integrating Africa into the world economy. 4.7.6 Furthermore, the Bank will also deepen its analytical work on emerging issues such as China-Africa, which will generate pertinent knowledge on how Africa can maximize benefits from China’s emerging market status, through better economic engagement and adaptation of technology and innovation. It will continue with the ADOA assessment of Private Sector Operations so as to ensure that such operations achieve development results, while making sure that they do not crowd out commercial investors. Having reinforced its position as the primary source of relevant and timely data on African development processes, the Bank intends to consolidate and intensify its activities in this area in the coming years. It will also reinforce its statistical capacity building activities in African countries to provide up-to-date data for better measuring, monitoring and managing for development results, as well as the monitoring of progress towards achieving the Millennium Development Goals and other targets set in Poverty Reduction Strategies. The Bank will also strengthen and reinforce its capacity building activities in RMCs so as to enhance the effectiveness of its development operations. In particular, emphasis will be placed on project implementation workshops, public expenditure and financial accountability frameworks, performance based allocation/debt sustainability frameworks and capacity building in fragile states.

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4.7.7 Between 2002 and 2008, the African Development Institute (EADI) undertook 299 activities training and learning activities with an audience of 13,600 people covering 52 RMCs. The Bank has been particularly active in developing systems for the measurement of knowledge by patenting African specific statistical systems, training and capacity building, in addition to Bank project implementation workshops. 4.7.8 Capacity Building Several workshops were organized by EADI in 2008 and 2009 in Public Financial Management for senior civil servants in Fragile States with the participation of 15 RMCs. 4.7.9 Project Implementation Workshops The Bank regularly organizes Project Implementation workshops in LICs and Fragile States to support specific Bank operations. Government officials involved in the management of Bank-funded projects are provided with the knowledge and skill set on how to manage projects. EADI also conducts complementary seminars and workshops in this regard to develop the capacity of these groups of countries to manage the macro-economic environment as a means of attracting investment and stimulating economic growth, including trade negotiation and regulation, integrated water resources management, international financing, legal issues, monitoring and evaluation, scaling up of poverty reduction and results-based Country Strategy Papers (CSPs). 4.7.10 Statistical Capacity Building The Bank has an ongoing Statistical Capacity Building Program with the underlying objective of increasing the reliability of regional poverty indicators, improving the databases and functioning of statistical systems, increasing cross-country measurable data, and harmonizing results measurement throughout Bank operations. This was designed to assist RMCs, especially LICs and Fragile States in addressing data requirements for effective policy and decision making, and facilitating the efficient measurement, monitoring, evaluation and dissemination of results. Phase 1 of the Program has been completed with the establishment of data bases of Purchasing Power Parities that facilitate comparison for 51 countries, and National Strategies for the Development of Statistics (NSDS) in all participating countries. Phase 2 is intended to consolidate upon the gains achieved in Phase 1 including improved country data systems, and better MDG monitoring and results’ measurement. 4.7.11 Going Forward The Bank intends to continue to increase its capacity building and knowledge dissemination products to LICs and Fragile States. 5. THE BANK’S LONG TERM STRATEGY 5.1 MTS priorities will continue to guide Bank activities in the long term 5.1.1 The MTS is an important Bank instrument that has promoted selectivity and focus of activities. The MTS was lauded by observers for helping the Bank to preserve its sector focus, and thus remain relevant and effective in assisting RMCs during the recent financial crisis. The sectors identified as priorities in the MTS will continue to be relevant for the Bank for many years to come. 5.1.2 Infrastructure will remain one of the central pillars of the Bank’s strategy in the long term. The recognition that a vibrant private sector and sustained economic growth are unequivocally linked to well-developed infrastructure further reinforces the criticality of the

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sector. Investment in infrastructure including information technology, electricity, rural roads, irrigation, storage facilities and actions to ensure food security, will create a favorable environment for sustainable growth. 5.1.3 In spite of some success in improving public sector performance on the continent, the agenda is far from complete. Governance and public sector management will continue to engage the Bank. The issue of state fragility continues to be a serious challenge, although cross-border conflicts and civil wars have receded in Africa. A number of de facto states have emerged in the recent past, threatening to reverse the trend toward more peaceful conditions. The Bank aims to take leadership in assisting countries to attain peaceful conditions at home and to ensure a conducive and supportive environment for regional prosperity. 5.1.4 Building Africa’s human and technical capacities will remain a key ingredient of the Bank’s policy thrust. The Bank will pay attention to key global public goods such as the environment, health of the population, regional peace and security, research and transfer of knowledge, to ensure that the institution’s efforts bear fruit. It will not be able to do this alone and developing effective partnerships with others will be key to achieving results. The Bank will emphasize its areas of comparative advantage. 5.1.5 Regional integration is a long term consideration for the Bank. The Bank clearly has comparative advantage in helping African countries integrate economically. It will strive to promote and facilitate regional integration and trade through building roads and energy networks across the continent. The Bank will continue to play a global advocacy role for its RMCs and support important international initiatives for the benefit of the continent as it demonstrated in the recent financial crisis. 5.2 Addressing cross-cutting issues will remain a key challenge 5.2.1 Poverty: Africa’s decade of high growth helped countries to begin reducing their poverty levels. The financial crisis has no doubt increased the number of people in extreme poverty in Africa, particularly in fragile states, reversing this positive trend. Poverty continues to have a strong gender bias. On the whole, countries have only made modest advances toward attaining the MDGs. Therefore, the long term strategic focus of the Bank Group will continue to be on poverty reduction. The Bank will make additional efforts to reorient its allocation to make it more poverty focused to help African countries achieve high and sustained rates of economic growth. 5.2.2 Climate Change: The most important future impacts on the African economy are expected to emanate from the effects of climate change. The vulnerability of Africa’s ecosystems poses the threat of calamitous changes in its weather patterns and on growth and development. The possibility of agricultural stagnation which could affect the population negatively is real. Food security is already an important concern. 5.2.3 The Bank is adopting a mainstreaming approach to addressing climate change, particularly adaptation, into its investment projects. The Bank’s Climate Risk Management and Adaptation Strategy and the corresponding Action Plan have laid out the building blocks to achieving this. The Bank’s challenge will be how to help countries build capacity to address climate change. The scarcity of appropriate climate information compounds this problem. For instance, Africa has less than 13 percent of the minimum number of meteorological stations recommended by the World Meteorological Organization to support

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Development (Figure 12). Where this information exists, the capacity of end-users, particularly policy-makers is severely limited. While the Bank has committed about UA 20 million to support four regional climate centers, there is still the need to substantially strengthen the capacities of all the national meteorological stations, particularly in sub-Saharan Africa. 5.2.4 There will be a need to devise mechanisms to finance the climate proofing of vulnerable infrastructure, development of new agricultural technologies and practices, reforestation, and flood protection. The additional costs of ‘climate proofing’ investment in Africa is estimated to reach $12 to $28 billion/year by 2030. The Bank is committed to helping countries to mainstream climate change adaptation and mitigation measures into broader development strategies and policies. The Bank is currently piloting the development of National Climate Resilient Development Plans in selected RMCs where anticipated climate change impacts are identified and adequate remedial measures are identified and incorporated to reduce their consequences. These plans also identify the nationally appropriate Mitigation Actions for each country as mandated by the United Nations Framework Convention on Climate Change. There is steadily increasing demand from RMCs for Bank support to develop these plans, requiring substantial financial and human resources from the Bank. The ADF and GCI VI discussions will have to consider the huge financial cost associated with climate change.

Figure 12: Number of Meteorological Stations / 1000 Km2

0

2

4

6

8

10

12

14

16

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5.3 The Bank will need to continue with its own internal reforms and capacity building African countries and the international community are increasingly looking to the Bank for leadership in developing the economies of Africa. To expand and maintain this role in an increasingly challenging environment, the Bank will continue to emphasize internal reforms, especially improvement of its operational efficiency and to enhance measures to ensure the highest levels of accountability. Related to this will be the need for robust monitoring mechanisms and the provision of adequate safeguards. This in turn will require reallocation of staff and skills to address the new challenges, not least climate change. 5.4 Innovative approaches to allocating resources to countries will be required 5.4.1 In 2008, before the crisis, the Bank’s risk capital utilization rate was only about 48 percent. The Bank was urged to take on more risk as a large portion of its capital was considered idle. Only a third of the 15 eligible countries were borrowing from the ADB window at the time. During the crisis and beyond, the picture has changed drastically. Currently 15 of the 1624 ADB countries are borrowers; while the private sector in many ADF countries has approached the Bank for financial loans. 5.4.2 Looking ahead, the issue of sustainable commitment of resources to countries will become increasingly important, especially as the large demand for resources from the Bank in the very recent past has imposed constraints on the Bank’s capacity to lend without compromising its prudential ratios as well as its triple A rating. It is estimated that while the anticipated GCI, when finalized, will alleviate the lending constraints for a while it will not enable expansion of lending to a very large extent beyond the figures achieved in the recent past. Innovative approaches will therefore be required to extend the envelope and enable the Bank to continue supporting its RMCs in a sustainable manner. 5.4.3 The Bank is thus considering a number of measures, some having crystallized faster than others. The Bank plans to enhance its catalytic role in attracting financing to Africa. It plans to do this through co-financing partnerships with other international development institutions, notably the World Bank, as well as bilaterals. These partnerships will take the form of burden sharing, with the Bank taking part in initiatives to mobilize private financing, a recent example being the Global Trade Liquidity Program. 5.4.4 The Bank plans to consider guarantees and other credit substitutes as options to direct loans. In this regard, the Bank could exploit its guarantee program, i.e. using the public sector window as a way of catalyzing private lending and private investment, particularly for infrastructure projects. The Bank recently provided a partial guarantee for the Government of Seychelles as an input into a sizeable debt restructuring operation. 5.4.5 The impact on the Bank through the provision of large loans, especially budget support and their quick disbursement has caused concern to shareholders. Going forward, the Bank does not aim to set a strict formula and its policy towards large loans will be flexible depending on the risk associated to the country and the Bank’s own finances. The limit on loan size will depend on the risk category of each country and whether it is a sovereign or

24 Cape Verde recently became eligible for ADB loans.

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non-sovereign loan. Moreover, the decision of the Bank to fund projects in countries with large unused country limits will depend on the need to maintain portfolio diversification and prudential ratios within limits over a longer time horizon. For the riskiest borrowers that have not used their credit limits, however, an additional factor which takes into account the incremental impact of the WARR will be used. This means that in the face of capital constraints, the maximum ceiling on a loan will be determined by risk/diversification benefits based on risk and due diligence assessments. The impact of large loans on the risk capital utilization rate will be a key consideration. 5.4.6 Transferring risk to third parties is also an option that the Bank is considering. It will enable the Bank to transfer excess exposure for some countries to other parties, say a sister MDB, while increasing exposure for countries where it has headroom. The modalities for doing this requires discussion with all concerned parties. 5.5 Results and Monitoring: Issues in the Long term More than ever the Bank is committed to strengthening its contribution to development results on the continent and to reporting more systematically on this contribution. Improved internal effectiveness will allow the Bank to play a greater role in strengthening client countries’ capacity to manage for results. Already, the Bank is stepping into a leadership role on managing for development results within the broader international arena including within the ambit of the OECD and is launching the Africa Partnership Facility on Development Effectiveness aimed at uniting the African voice around key issues related to aid effectiveness and supporting RMCs in their plans towards improved alignment and coordination of aid around national systems. The initiative received strong support from African countries when announced during the latest meeting of the Working Party on Aid Effectiveness in December 2009. The key challenge for the Bank in the near future will be to sustain progress on a largely internal agenda while translating this progress into greater external action for harmonization with partners and to demonstrably improved results for Africa. 5.6 Non-Sovereign operations will increase in tandem with Sovereign operations 5.6.1 The last half decade has witnessed a sharp increase in PSO undertaken by the Bank. From less than UA 200 million in 2004, annual approvals of non-sovereign operations rose to about UA 1.2 billion towards the end of 2009. Increased PSO have been accompanied by a call from shareholders to increase the share of PSO going to LICs, both in terms of volume and geographical spread. This has happened to a large extent. Although the Bank had projected that at least 40% of the volume of new non-sovereign approvals during 2008-2010 would go directly to LICs, the total portfolio benefitting LICs was estimated at 60% by 2009. Progress has also been achieved in terms of geographical diversification, with 18 LICs directly benefitting from PSO by the end of 2009. 5.6.2 However, sustained expansion of these operations in the medium to long term depends on available financing headroom and the institution’s risk appetite given the desire to increase the share of non-sovereign operations that benefit the Bank’s higher risk LICs. As at the end of 2009, the Bank’s non-sovereign portfolio used approximately 22% of the total risk capital with the MTS anticipating that the 40% limit would be fully utilized by 2012 unless there is a GCI. Even with a 200% GCI and 6% paid-in capital, the proportion of risk capital allocated to non-sovereign operations would need to be adjusted upwards at a level commensurate with annual growth levels of the portfolio, the composition of financing instrument (with equity

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participations consuming more than twice the risk capital required for a project loan) and their risk profile. This ratio would need to be higher if the share of operations in LICs were to increase substantially. The adequate amount would be determined after reviews of both the capital adequacy framework and the private sector strategy. However, given the volatile operating environment of the Bank, the increase in the PSO limit should be accompanied by several initiatives to ensure that the risks inherent in these instruments are used properly and actively managed. 5.6.3 Increasing private sector operations over the medium to long term, and ensuring that LICs continue to be significant beneficiaries of new financing, requires a significant GCI coupled with additional measures and innovative instruments for sustaining financing headroom created by the GCI as referred to in Section 4.2.4. In this respect, there is already a proposal to establish some ADF-linked credit enhancement instruments to support PSO in LICs. Selective selling down of assets within the non-sovereign portfolio is also an option for managing risk and headroom. Other feasible avenues for expanding private sector operations whilst ensuring a significant development impact in RMCs will also be explored. 5.6.4 Within an environment of constrained financing headroom, the central element of the PSO strategy will remain the selection and prioritization of transactions so as to maximize development impact. The Bank currently uses the key criteria of strategic alignment, commercial viability, development outcome and additionality/complementarity to select PSO. In future the ADOA framework introduced in 2009 will become a valuable prioritization tool for the Bank in the face of competing uses of risk capital. 5.6.5 There will also be enhanced collaboration between the Bank’s public and private sector windows to deepen complementarities at the country level, especially though PPPs,. This will be guided by more economic and sector work and coordinated programming within the country assistance strategies. Within MIC/blend countries, coordinated country programming will also optimize the allocation of available ADB financing headroom between sovereign and non-sovereign operations. 6. INCREASED CAPACITY TO DELIVER

6.1 The Bank is transitioning to a period of comprehensive and ambitious operational reform, built on a sharper strategic focus, a reinforced mandate, and a strengthened core emphasis on results. The Bank Group’s President reinforced in the MTS, that the key obstacle to achieving the Bank’s mission will be that of delivery capacity and the resource base and that the way to overcome this obstacle is to steadily build internal capacity and reform the Bank’s business processes. To capture the anticipated results arising from this reform, the Bank is putting in place a robust measurement framework which allows both for reporting success as well as highlighting areas requiring additional focus. Realizing a results-oriented culture and scaling Bank impact both upwards (in terms of increased and improved results) and outwards (in terms of decentralization and reach) will be a gradual, iterative process over time. The Bank’s efforts towards improved capacity and better measurement of impact have been focused on the following main areas: (i) Business Processes; (ii) Decentralization; (iii) Quality at Entry and Managing for Results (iv) Institutional Efficiency; (v) Improved Human Resources (vi) Information and Technology services (IT); (vii) Alignment with International Best Practices; (viii) Better Communications (ix) Budget Reforms; (x) Risk Management and (xi) Governance, Controls and Safeguards. Selected key reform actions and anticipated results are summarized in Annex 3.

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6.2 Improved Business Processes 6.2.1 The realization of an effective Operations Committee (OpsCom) and effective Country Teams as central fora to review and discuss country programming, delivery and impact has brought the organizational changes of 2006 and 2007 to fruition. OpsCom is an internal review body comprised of senior Management whose mandate is to sharpen the country focus and strategic selectivity of the Bank’s operations, strengthen the Bank’s internal cooperation and cohesion, and improve its development impact. Since inception, OpsCom has instituted rigorous and systemic changes to the review process, making it both simpler and faster. From January 2008 to June 2009, OpsCom reviewed 187 projects, 39 country and institutional strategies, and 42 policies and formats. This streamlined review process has improved quality and enhanced strategic alignment and coordination across the institution and between the Bank and its shareholders and clients. Furthermore, the introduction of systematic checks and balances has made it possible to identify potential issues early so that they can be addressed in a timely and concerted manner. An evaluation of the review process, including OpsCom’s role and operations, is planned in order to assess its impact on delivery and programming. The lessons learned will also guide the fine-tuning and further improvement of the review process25.

6.2.2 OpsCom also piloted the development of new designs, formats and oversight procedures for Country Strategy Papers (CSPs), Country Portfolio Reviews (CPRs), Concept Papers, Project Appraisal Reports and other critical documents for both public and private sector operations. The CSP format, for example, has been widely praised by Board members and sister institutions as the new business-plan reflection of governments’ National Development Plans. Additionally, private sector operations now benefit from a greater emphasis on effectiveness through the implementation of the Additionality and Development Outcome Assessment process. 6.2.3 Accountability and corporate-level ownership have been reinforced through a comprehensive revision of the Delegation of Authority Matrix, at both the Headquarters (HQ) and the Field Office level. Delegating authority for loan negotiations and signature, loan administration, portfolio management, project supervision and dialogue and communication with RMCs and partners has accelerated project implementation by reducing processing times. The average time elapsed between project approval and first disbursement has been nearly halved, falling from 24 months in 2006 to 14 months as of the second quarter of 2009. 6.3 Consolidation of Non-Sovereign Operations and Capacity Building 6.3.1 Following the rapid expansion of non-sovereign operations, the Private Sector and Microfinance Department (OPSM) entered 2009 with the resolve of functional consolidation and strengthening the management of its business processes. This was seen as critical in order to ensure sustained quality of projects being prepared and in particular to build the capacity to handle the management of the growing portfolio. Measures undertaken include the finalization of the major recruitment effort during 2008 and early 2009 by filling all vacant

25 The Additionality and Development Outcome Assessment framework analyses and groups development outcomes in seven categories: (i) economic performance, (ii) effects on government, (iii) environmental effects, (iv) gender and social effects, (v) private sector development and demonstration effects, (vi) effects on infrastructure, and (vii) effects on macroeconomic resilience.

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senior positions including three at division manager level. Other notable initiatives include the rationalization of OPSM’s divisional structure towards improved sector focus and stronger transaction support, e.g. financial and economic modelling and environmental and social due diligence. 6.3.2 Also, in order to apply full corporate competency on projects under consideration, the team work among Bank units engaged in Private Sector Operations (PSO) (i.e. the “PSO ecosystem”) was structured and formalized into Project Appraisal Teams (PATs). The ADOA evaluation launched by ECON in 2008 is now fully operational providing an independent rating of the “reward” of projects concomitant with the equally independent risk rating provided by FFMA. OPSM now also issues quarterly project status reports for all active projects to keep track of three critical quality dimensions, (i) implementation progress, (ii) sustained commercial viability, and, (iii) achievement of development outcomes. Moreover, a new on-line Business Manual to guide ADB non-sovereign operations across the PSO ecosystem is expected to be in place early 2010.

6.3.3 In an effort to improve PSO and leverage insights from past experience, lessons learned from past projects are now incorporated into new projects by having the portfolio managers systematically included as members in project appraisal teams and these lessons are reflected as footnotes in each project appraisal report. The portfolio management team has been reorganized with three teams managing routine operations (infrastructure, industries and services, and financial institutions), a workouts team for problem projects, and a transaction administration team. The Bank has exceeded the target of at least one supervision mission for each active project in both 2008 and the first half of 2009. In line with the Bank’s decentralization strategy and to provide greater coverage and supervision of projects, 14 local and international private sector specialists have been stationed in the Bank’s FOs and have joint responsibility for monitoring and managing the private sector portfolio. Given the growth in the Bank’s equity investment operations, two private equity specialists have been added to the portfolio management team and are focused on developing and improving the Bank’s private equity strategy and assisting with the management of the existing portfolio of private equity transactions.

6.3.4 These efforts are an attempt to improve the Bank’s capacity to deliver a steady flow of developmentally oriented non-sovereign projects in accordance with sound banking principles in critical areas such as power (including renewable energy), transport, telecommunications, mining, construction materials, agribusiness and financial intermediation to micro and SMEs. 6.4 Decentralization: improved client focus and awareness 6.4.1 The goals of a strengthened, effective country presence through decentralization include greater delivery impact, enhanced dialogue between the Bank and RMCs, greater RMC ownership of their development agenda, better alignment of the Bank’s interventions with country priorities, and closer donor coordination in line with the Paris Declaration commitments. Improved disbursement processes and project performance are also being achieved through decentralized and empowered FOs. The recent independent evaluation of the Bank’s decentralisation effort highlights key achievements and challenges in greater detail26.

26 Independent Evaluation of Decentralization Strategy at African Development Bank: Summary for ADF-11 Mid-Term Review.

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6.4.2 Decentralization is moving forward actively, with 25 FOs27 already opened as of January 2010. These include FOs in MICs which are large borrowers such as Egypt, Morocco, Nigeria and South Africa. To make these Field Offices fully operational, measures for accelerated and tailored staffing, including the redeployment of HQ sector-specific staff, have been put in place. Nearly 90 percent of the 200 Professional-Level international and local field based positions have now been filled or are awaiting assumption of duty. As a result, the Bank is in the process of staffing each operating Field Office with the required core expertise, including country economists, country program officers and sector specialists relevant to the priorities of clients’ national development strategies. This progress, in conjunction with the ongoing additional business processes reforms, is moving the institution from a culture of individual reviews and sporadic supervision to one of continuous dialogue and monitoring. 6.4.3 Dedicated decentralization guidelines and delegation of authority matrices were issued to clarify the relationship between FOs and HQ, and to empower resident representatives and their staff. Continued devolution of procurement and fiduciary service activities to country offices is proceeding with a view to increasing the percentage of projects with procurement authorization in country offices in line with the Accra Agenda for Action. A process is underway to create a decentralized and critical mass of experts comprised of procurement and disbursement officers, supplemented by financial management experts, in selected FOs. This will be a key factor in improving effectiveness with regard to responsiveness and project implementation. As task leadership is increasingly delegated to the field, the focus is shifting towards strengthening task management capacity in country offices by delegating portfolio management and project supervision. 6.4.4 Efforts to improve IT connectivity are being undertaken to facilitate communication and full workflow integration, a sine qua non to successful decentralization. Progress has been made but there is still room for improvement. The connection with HQ is operational in all FOs. Nonetheless, to accompany the increase in staff numbers, the IT framework and infrastructure will require further strengthening to enhance FO service and connectivity. The recently launched overhaul of the entire information systems architecture is the first step towards reaching this important objective.

6.4.5 The decentralization program is well under way both in the field and at HQ. A number of FOs have only recently become operational and are still in the process of fully staffing up. In some countries where the FO has been operational for a longer time, initial results can be measured by the progress made on key indicators. Table 9 shows progress made since 2006 in improving on the ground results. On a more qualitative level, the Bank’s on the ground presence enables the institution to take the lead in a number of coordinating fora and sector dialogues, serving to reinforce synergies between donor interventions and promoting the harmonization of donor procedures. A key challenge going forward will be to mainstream decentralization into the Bank’s corporate culture, promoting a “One Bank” mindset that further empowers and incentivizes staff to support the decentralization process. A decentralization road-map is being developed under the leadership of the Vice Presidency for Regional Operations, in order to chart a way forward.

27 Including planned office in South Africa.

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6.4.6 The Procurement and Fiduciary Department (ORPF) is pioneering the establishment of regional centers for enhanced, decentralized fiduciary oversight. The model consists of procurement and fiduciary services to support project cycle activities being performed by certified procurement and fiduciary specialists at the FOs. These specialists will report to regional coordinators who will be responsible for overseeing the quality and timeliness of decision making of the staff under them, resolving complex issues, coordinating procurement and fiduciary issues in regional projects and ensuring the quality of decision making in FOs. This model requires an adequate number of locally and internationally recruited fiduciary specialists who would then be trained and accredited to carry out their functions. While a lot of progress has been made, there is a need to further accelerate the recruitment process and for an effective linkage between FOs and the regional fiduciary centres. Availability of appropriate and reliable IT systems and the strengthening of task management and disbursement responsibilities in the FOs will also be necessary to ensure the success of this model. 6.4.7 With the presence of a critical mass of procurement and fiduciary experts in the FOs, a majority of decisions will be taken in the field. The HQ will be responsible for providing guidance, monitoring compliance with the Bank’s policies, undertaking independent reviews, handling complaints and resolving complex and high value cases. The delegation of authority matrix for procurement and fiduciary services will transfer decision making for all but the highest value cases to the FOs. It is expected that by 2012, over 90% of all procurement and fiduciary decisions (by number) will be taken by the FO based staff resulting in significant improvement in project delivery and effectiveness. This is expected to reduce the processing time of procurement decisions by over 50% with resulting reduction in project completion periods.

Table 9: Indicators on Improving On-the-ground Results through Decentralization and Harmonization

Indicator Baseline Value 2006

Target Value 2009

Achieved as of

December 2008

Percentage of professional staff based in FOs 5 15 15.4 Percentage of portfolio managed from FOs 0 15 7.4

Percentage of missions conducted jointly (Paris indicator 10a)

19 in 2005

40 in 2010

13 in 2007

6.5 Quality-at-Entry and Managing for Results 6.5.1 With a view to enhancing the quality-at-entry (QaE) of operations and strategies and conducting better results reporting, a new tool, the readiness review was introduced in the review process under the coordination of the Quality Assurance and Results Department (ORQR) established in mid2008. The readiness review, piloted for public sector investment projects in 2009, will be rolled out to all operations in 2010 and similar QaE tools will be introduced for CSPs. A number of initiatives of the Bank’s action plan for quality and results have already resulted in improvements during the 2006-2008 period. In particular, results frameworks in CSPs and lending operations increasingly include baseline data and targets that facilitate the assessment of the impact of Bank financed interventions, project readiness, as gaged by the time elapsed between approval and first disbursement, also improved. Proactive follow-up on the timely production of Project Completion and

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Project Supervision Reports is now in place and has contributed to improved performance in these areas (Tables 10 and 11 below).

Table 10: Ensuring Quality-At-Entry for Strategies and Operations

Indicator Baseline Value 2006

Latest Value 2008

Target Value 2009

Percentage of Country Strategy Papers with satisfactory baseline data at entry

33 38 70

Percentage of operations with satisfactory baseline data at entry

37 50 70

Percentage of budget support disbursed on schedule

55 69 75

Average elapsed time from approval to first disbursement (months)

24 15.8 12

Table 11: Institutional Effectiveness Indicators, Portfolio Supervision and Evaluation

Indicator Baseline Value 2006

Latest Value 2008

Target Value 2009

Instilling a Results-Based Supervision Culture

Percentage of operations formally supervised twice a year

36 45 50

Percentage of problem projects in ongoing portfolios

14 14 10

Percentage annual disbursement rate of ongoing portfolios

18 21 22

Average elapsed procurement time (weeks) 70 58 40 Percentage of projects eligible for cancellation 27 23 15

Enhancing Learning and Accountability Through Evaluation

Percentage of exiting projects with a timely PCR 9 96 45 Percentage of PCRs rated satisfactory (1/) 45 90 75 Percentage of PCRs with gender-disaggregated data (2/)

45 47 n.a.

Key: n.a. = not available; PCR = Project Completion Report

Notes: 1/ Baseline year = 2003-05. Latest value = 2005-07 2/ Baseline years = 2006-07 combined. Latest value = 2008

6.5.2 The Bank acknowledges a number of persisting challenges with regard to the quality and the results orientation of its operations. A more thorough and systematic treatment of gender, environmental and social aspects is often required to improve the design of Bank operations together with enhanced participatory processes. To be of use for actual project monitoring purposes, logical frameworks often have to be simplified and more results oriented with clearly identified indicators throughout the results chain cycle (inputs, outputs and outcomes). Formats for supervision reports and project supervision processes also have to be reviewed to become more evidence-based, results-oriented and supportive of active project management. 6.5.3 The 2007-2008 budget reforms introduced greater devolution of budget management authority to the level of individual managers and strengthened accountability through the monitoring of KPIs. The focus on accountability and results will be further enhanced through the final phase of the budget reforms and the move towards

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Unit of Account (UA) budgeting in 2010. Among other goals, UA budgeting28 aims to further decentralize budget management, providing managers with flexible resources to help them focus on delivery and results. Financial resource management will be further delegated to cost center managers, empowering them to make rational and knowledge-based decisions. When fully implemented, UA budgeting will replace the headcount control policy with budget-based controls (i.e., the fixed cost ratio and a total budget envelope). This, in accordance with work program priorities, will allow for dynamic staff planning to enhance the Bank’s capacity to respond to emerging priorities in a more rapid, flexible and rational manner.

6.5.4 These measures will ensure stronger links between resource allocation and institutional priorities on the one hand, and performance on the other. By maintaining a strong oversight framework, they will also enhance flexibility and devolve resource management to allow for more results-oriented and cost-efficient delivery. 6.5.5 To enhance the quality of Private Sector projects, an assessment of the additionality and development impact (ADOA) of each private sector project is undertaken. A dedicated division has been established in the ECON Complex, which works closely with the Private Sector Department of the Bank. 6.5.6 A separate, independent evaluation of the GCI V has been circulated to the Board of Directors. 6.6 Improved institutional efficiency 6.6.1 The creation of the position of Chief Operating Officer (COO) and approval of the organizational fine-tuning29 designed to improve corporate performance are expected to produce gains in efficiency and further alignment between the corporate structure and reform processes.

6.6.2 Appointed in May 2009, the COO has overall responsibility for monitoring performance with the support of the newly created Performance Monitoring Group. The COO also has a mandate to improve delivery.

6.6.3 The Procurement Unit was upgraded to a full-fledged department that comprises procurement and financial management functions. It was also rationalized to improve services delivery and efficiency for both internal and external clients, with quality control measured at international standards30. The restructuring of procurement and financial management functions has ensured high-quality, rapid and consistent decision making. This accomplishment is also gradually facilitating greater harmonization with other donors and empowering borrowing member countries while ensuring the maintenance of the Bank’s fiduciary responsibilities. The simplification of the procurement policies and harmonization

28 Under UA budgeting, resource allocation will be determined by first identifying the work program to be funded and thereafter translating the work load into the total resource envelope needed to execute the work program. 29 African Development Bank, 2008: Improving Corporate Performance ADB/BD/WP/2008/104/Approved, 15 July 2008. 30 African Development Bank, 2008: The Bank’s Streamlining Procurement and Financial Management Functions – Proposed Process Improvements. ADB/BD/IF/2007/31/Rev.1, 8 January 2008.

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with other MDBs will facilitate joint financing and minimize transaction costs. Box 11: Impact of the Restructured Procurement Function The streamlining and restructuring of procurement and financial management services of the Bank contributed to improved service delivery while minimizing fiduciary risks and enhancing accountability through the following actions: (i) Revising the rules and procedures to reduce administrative and implementation-related burdens; (ii) Restructuring and upgrading the incumbent organizational unit while building a critical mass of well-trained procurement and financial management specialists decentralized at the country and regional levels and scaled up at HQ; (iii) Increasing the use of specialized private sector entities to undertake systematic independent procurement post-reviews and audits for small-value contracts and financial audits; (iv) At the country level, conducting a greater number of diagnostic studies and reviews in collaboration with other donors, thereby strengthening client capacity and facilitating the targeted provision of assistance to borrowers; (v) Delegating adequate procurement clearing authority to procurement specialists commensurate with their level of accreditation; and, (vi) Setting up a Bank-wide quality assurance mechanism to ensure that procurement and financial management functions are carried out in accordance with best practices. 6.6.4 The revision to the Approval Authority for procurement and financial management is a critical piece, well aligned with the practices of other MDBs. With its implementation, it is expected that over 90 percent of procurement decisions will be made at the Field Office level. This should significantly accelerate the implementation of procurement-intensive projects and enhance the development impact of the Bank’s projects. Presently, Bank Group operations face some transactional challenges which can negatively impact projects. The key objective of the Procurement and Financial Management (PFM) streamlining and restructuring exercise was to improve service delivery, while minimizing fiduciary risks, and enhancing accountability. In order to address identified weaknesses, effective PFM functions are being strengthened to improve the responsiveness, quality, integrity, and comprehensiveness of PFM services Consequently, ORPF has taken a series of initiatives, since its creation, to improve the quality and effectiveness of the Bank’s portfolio, which are listed hereunder:

• Revisions to the Bank’s Procurement Rules – Fundamental and substantial revisions of the Bank’s two procurement policy documents were completed and approved by the Board in May 2008 .This represents a major step forward as these are harmonized with those of the World Bank. This will substantially reduce the administration and implementation burdens faced by Borrowers, as well as Contractors, Suppliers and

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Consultants, who for years have had to deal with different procedures, often with respect to the same project;

• Formulation of Instruments: These include the drafting of manuals and guidelines to

help implement the policies by Bank and project staff to ensure consistent application of the rules. These are being undertaken by Consultants and are currently nearing completion;

• Building Procurement Capacity in the Bank: This will be achieved by identifying

gaps in procurement knowledge at the Bank and specifically at the Sector Operations and Field Levels. Utilization of Staff Training and Accreditation to plug such gaps. Simultaneous with the development of instruments, new Bank Staff training materials have been developed and training and sensitization sessions have been undertaken. However, adequate capacity at the FO level is critical and therefore this is being followed by Bank Procurement Accreditation which is currently under preparation. In future, by analyzing data that the Bank’s IT system will generate, and using this and the lessons learnt in continuous further training, improvements in staff capability will be achieved thereby ensuring sustainability at the Bank level;

• Developing a Robust IT System in Support of Decision Making at the FO Level:

This involves improving the quality of data in our SAP database, improving the quality of procurement decisions through the use of collaborative and archived reference material and developing appropriate electronic workflow systems. This will involve increased use of IT to transmit procurement documents and exchange other correspondence, and the use of a Web-Interface for preparing bidding documents. It shall thus no longer be necessary for EAs to forward hard copies of BDs to the Bank, for clearance. The electronic work-flow driven system will automate the internal review process in the Bank - this task has been awarded to a specialized consulting firm;

• Procurement Post Reviews: Devolving greater procurement authority to projects

through a rigorous risk assessment, with parallel greater use of Bank oversight through selective and targeted post-reviews of fiduciary decisions. This will also involve increasing the use of specialized private sector firms or entities to undertake systematic independent procurement post reviews and audits for small value contracts, to ensure compliance;

• Collaboration with MDBs: The Bank continues to collaborate with other MDBs in

the areas of development of Standard Bidding Documents, information sharing and participating in cross-IFI working groups such as for electronic government procurement and sustainability in public procurement.

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6.7 Improved Human Resources to Ensure Better Delivery Capacity 6.7.1 One of the key institutional challenges facing the Bank is its ability to attract, retain and effectively utilize the capacities of qualified staff in order to deliver on its mandate. Accordingly, the Bank is implementing its Human Resources Strategy, which focuses on (i) the recruitment and deployment of high-calibre staff to operations and country/regional offices; and, (ii) a more competitive and rationalized staff Compensation and Benefits Framework. These types of institutional HR reforms require a long-term time frame to take effect, particularly in a dynamic and multicultural environment.

6.7.2 A staff skills survey and general survey have allowed Management to better identify HR and employee expectations. Within the more general context of enhancing corporate services delivery31, ongoing HR reforms will move the centralized HR administration model to a more client and partnership-focused model, enabling the HR department to provide a wider range of services, including strategic planning, career development and advisory services.

6.7.3 The restructured HR function, while still in progress, has already improved the Bank’s capacity to institute the large staff increase approved by shareholders (Table 12). Key staffing needs in the private sector, legal, safeguards, risk management and results areas as well as other areas have been filled with the addition of over 40 relevant experts. This has bolstered the Bank’s effectiveness and the quality of its work. Through a strong recruitment drive, a revamped Young Professionals Program and decentralization of the recruitment process to complexes, the vacancy rate dropped from 15 percent in December 2008 to 8 percent in June 2009 and reached 7.7% in December 2009. A more competitive and rationalized compensation framework32, an online performance evaluation system that has strengthened the link between performance and reward, an improved orientation program for new staff and other innovative initiatives have provided the institution with state-of-the-art tools to manage and optimize the capacity of its growing staff.

31 African Development Bank, 2008: Proposal to Enhance Corporate Service Delivery. ADB/BD/WP/2008/137, 13 December 2008. 32 This framework includes an amended staff retirement plan now applicable to local staff, as well as life insurance, medical coverage and compensation for school fees.

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Table 12: Human Resource Indicators

Baseline Value 2007

Target Value 2009

Achieved as of June

2009

Achieved as of December

2009

Achieving the Capacity to Deliver

Vacancy Rate* (%) 15 5 8 7.7 Total number of Professional-Level staff n/a n/a 1000 1064

Gender balance index for Professional-level staff (%)

22 23 24 26

Field-based Professional-Level staff (%) 9 15 16 29

Operations Complexes Professional-Level staff (%) 45 55 63 61

*Reflects actual staff at post and excludes those awaiting to assume duty

Following up on the results of the first ever Bank-wide Staff Survey in 2007 the Bank has identified the following priority areas: Enhancing the delivery of quality services to external clients Building capacity through enhanced recruitment of more than 750 staff; revision and automation in business processes to improve efficiency; improved learning and development opportunities to create capability; extension of pension and education benefits to FOs; improved benefits package for international staff in FOs; SAP NPO payroll and integration of FO payrolls into a centralised database and improved SRP benefits. Creating an environment of openness and trust to support a high performing organization Introduction of flexible working hours to promote work life balance; decentralization of recruitment to speed up and ensure a higher degree of ownership of the process; implementation of an online performance management system with elements of multi rater assessment; increased staff mobility (over 200 lateral moves) to meet individual and organizational development requirements and introduction of counseling services for staff.

Enhancing cooperation between managers within and across Departments Heightened consultative approach on staffing issues and increased frequency of departmental meetings involving all staff; management development training. Improving rewards and recognition Implementation of a revised compensation framework; approximately 400 promotions including introduction of in situ promotions and dual career path; improved training and learning opportunities including staff scholarships for 15 staff and external training for more than 125 staff. Decentralization of Human resource function A number of reforms have already been concluded such as customized staffing format, delegation of authority and the introduction of the new SAP NPO Payroll system for FOs.

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This was launched in August 2009 and payroll processing is now centrally managed from HQ while the actual preparation of payroll is performed by the FOs. Steps have been taken to harmonize compensation policies between FOs and HQ in a coherent and functional manner including the integration of field office staff into both the pension and medical plans of the Bank. Major parts of the recruitment and selection process including short listing of candidates have been assigned to the hiring departments. In addition, and in line with the strategic thrust towards enhanced decentralization, the recruitment guidelines for locally recruited staff in FO’s has seen a significant reduction in the recruitment lead time for FO’s. 6.8 Improved Technology to Support ADB’s Mission 6.8.1 The institution has embarked on an ambitious technology improvement plan to contribute to streamlined work flows and equip staff with the tools necessary for efficient delivery.

6.8.2 The Broadband Integrated Telecommunication Services project was completed at the end of 2008 and provided a major upgrade to the IT infrastructure. The network was further upgraded through a fibre optic-based infrastructure at the Temporary Relocation Agency, which improved its reliability and throughput and offered a viable alternative to slower satellite-based technology. IT systems will be further improved by the implementation of the recommendations stemming from the report on the IT architecture recently concluded by an external consultant. 6.8.3 The Bank’s Enterprise Resource Planning platform (SAP) will be upgraded to facilitate reporting, support new financial products and provide FOs with a secure disbursement platform and better integration with HQ. Procurement workflows have been revised. The pilot phase currently underway will result in more automated and streamlined processes to be rolled out by the end of 2010.

6.8.4 Finally, the Bank’s revamped website, in conjunction with the communications strategy approved end-2008, has improved the Bank’s visibility, its knowledge-sharing capacity and outreach to its clients.

6.8.5 Notwithstanding these achievements, the full implementation and realization of benefits relating to IT upgrading face significant constraints intrinsically linked to the temporary nature of the Tunis based operations. This situation impedes medium term investments that would provide staff with state-of-the-art systems and work-conducive office space. 6.9 Alignment with International Best Practices 6.9.1 The Bank is an active participant in external and peer review processes, including the Multilateral Organization Performance Assessment Network (MOPAN), an informal network of 15 like-minded donor countries with a common interest in assessing the organizational effectiveness of the major multilateral organizations. The MOPAN approach assesses four strategic dimensions of organizational effectiveness: strategic, operational, relationship and knowledge. The Bank was assessed in 2003, 2004 and 2007 and has been assessed in 2009 along with three other multilateral organizations. The results of the latest assessment will be available in 2010.

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6.9.2 The Bank is also an active participant in the Common Performance Assessment System (COMPAS), which provides the seven participating MDBs and their partners with information on strengths as well as on areas for improvement relating to managing for development results. COMPAS focuses on measuring MDBs’ capacity to apply and improve operational processes designed to achieve on-the-ground results. The responsibility for coordinating COMPAS reporting rotates among members; the Bank coordinated the 2007 report.

6.9.3 Overall, managing for development results performance indicators for 2008 were satisfactory. The Bank fared well in one category (harmonization among development agencies) and was stable in four categories (country capacity to manage for development results, allocation of concessional resources, project management systems, and institutional learning from operational experience). 6.9.4 The Bank’s participation in these best practice exercises helps to promote accountability, improve bilateral and multilateral cooperation, strengthen partnerships and provide guidance to enhance the debate on and improve development effectiveness. 6.10 Better communications 6.10.1 In accordance with the recently adopted communications strategy, the Bank will ensure that all stakeholders are better informed about development issues on the continent and the contribution the Bank is making to Africa’s development. This will include the longer term development needs on the continent, and the impact of the current crisis. There will be better information of the role of the Bank, its policies and operations, how it works in partnership with others, and above all the results achieved. This will enhance the Bank’s accountability to its shareholders. 6.10.2 It will also support the development of the Bank as a voice for development in Africa, a knowledge Bank and a source of expertise, analysis and advice. The communications effort will be appropriately targeted to a range of audiences: regional and non-regional shareholders, other beneficiaries, the media, civil society, as well as to Bank staff. There will be an improved internet portal and web-site.

6.11 Budget reforms: The 2006-2007 Budget Reforms introduced both greater devolution of budget management authority at the level of individual managers and greater accountability through the monitoring of KPIs. Accountability and results focus will be further enhanced through the final phase of the Bank’s Budget Reforms. The final phase of the reform (which is on-going) is the implementation of a strategy and work program-driven Unit of Account (UA) budgeting system, with expanded fungibility and full decentralization of resource management for delivery of work programs, with the objective of enhancing efficiency and accountability.

6.12 Risk Management Capacity: The Bank’s risk management framework and capacity has continuously adapted in response to the evolving needs. All finance and financial risk management issues are currently overseen by the Asset and Liability Management Committee (ALCO) chaired by the Vice President, Finance, while the Operations Committee (OpsCom), chaired by the Vice President, Country & Regional Programs & Policy oversees the Bank’s operations proposals and programs. As part of the recent increase in its lending activities, the Bank mandated a specialist consultancy firm to review its risk management practice with a

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view to ensuring that its risk related governance, processes and methodologies are well positioned and conform to best international practice. Preliminary conclusions of the consultant’s study have been circulated to the Board of Directors and indicate that the current state of the Bank’s risk management is solid for current purposes. It also identified several key areas where improvements are recommended including a re-evaluation of risk appetite to ensure more consistency between strategic goals, risk policy and actions, improvements to the credit approval process and improved framework for management of operational risks. Following the finalization of this review, it is anticipated that action will be taken to strengthen the risk governance structure, improve credit approval process and the management of operational risks. 6.13 Governance, Controls and Safeguards: The Bank has established several entities and functions that ensure that the Bank and its staff adhere to the highest standards of corporate governance and integrity in executing the Bank’s mandate. These entities include the Office of the Auditor General, the Independent Operations Evaluation Department, the Independent Review Mechanism, and the Office of the Ethics Officer. Management is exploring how to further entrench and enhance international best practices aimed at strengthening the independence of these entities including a benchmarking exercise with other MDBs. Further details of these entities and the reforms that Management is considering are provided in Annex 4. 6.14 Disclosure Policy: The Bank’s policy for Public Disclosure of Information became operational in 1998, a year after its approval. The policy was revised seven years later in response to demands from stakeholders and the institution’s own realization that it could benefit from enhanced insight into its operations and related activities, in line with the best practices of the MDBs. However, many MDBs now consider full disclosure of their operations, excepting only issues of personal/private concern as well as those of confidentiality, as best practice. The Bank plans to embark on a thorough review of its disclosure policy in 2010 with a view to greater provision of information to the public. Management feels strongly that this will strengthen transparency and accountability in the institution. It will also enable better harmonization of disclosure policies with other partners. 6.15 Much has been accomplished since 2006 as reforms have been initiated and implemented with the goal of promoting a culture of efficiency and accountability. These reforms have had a noticeable quantitative and qualitative impact on delivery and programming. They have led to a more efficient organization and have enhanced the Bank’s capacity to handle greater volume of operations. These quality improvements will ensure better development results. Several reforms completed recently are yet to yield results. Nonetheless, it is expected that ongoing efforts to achieve and maintain low vacancy rates, to enhance budget flexibility and Management capacity in the Complexes and Field Offices, to make the planning and monitoring of the execution of work programs more rigorous, and to better manage capital projects, will result in higher performance levels going forward. Changing mindsets in terms of decentralization and results through quality will also be key success factors. Management has demonstrated its ability to undertake much needed reforms to guarantee future success, and still strive to extend and deepen the reforms agenda. It can therefore be concluded with confidence that the Bank’s institutional growth and improved business processes have put the institution in a position to increase its development impact through a substantial capital increase. In the coming months and years, the Bank will continue to monitor, test and adjust its reform agenda, as appropriate, to create a more effective and results-oriented institution.

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7. FINANCIAL POLICY OPTIONS TO INCREASE HEADROOM 7.1 In previous submissions to the Board of Governors, Management had indicated that under the Baseline Lending Scenario, previously referred to as Scenario 1, the Bank’s Debt Ratio would breach its maximum prudential limit of 100% in 2009 and its Risk Capital Utilization Rate (RCUR) would breach its limit in 2012. 7.2 Given that the timeline of attaining a GCI might be lengthy and in order to better utilize the Bank’s existing capital resources, Management considered several financial policy options aimed at delivering a modicum of lending headroom that would allow the Bank to increase its support to RMCs while safeguarding the financial integrity of the institution in the period before a GCI is effected. These options however, would not ensure long term sustainability as they might provide temporary relief but will not solve the problem over the longer term.

7.3 The following are some of the options considered: 7.3.1 Redefining “Usable Capital” in the Bank’s Debt Ratio: Under this option it was proposed to expand the definition of Usable Capital as employed in the calculation of the Bank’s Debt Ratio to include the callable capital of non-borrowing members rated A- or better. Previously, only the callable capital of non-borrowing members rated AA or better was included in the definition of Usable Capital.

This proposal was approved by the Bank’s Board of Directors in July 2009.33 Consequently, the current formula for the calculation of the Bank’s Debt Ratio is as follows:

Debt Ratio =

of which:

Numerator: Gross Debt: Total Outstanding Borrowings

Denominator: Adjusted Usable Capital:

(Paid-in Capital) + (Callable Capital of non-borrowing member countries rated A- or better) + Reserves

7.3.2 Review of the Bank’s Liquidity Policy, consistent with emerging best practices and following changes in Accounting Rules by the IASB: In the wake of the financial crisis, regulators around the world and the financial markets are revisiting the definition of liquidity, to assure that only truly highly liquid instruments are included in such definition. Further, recent revisions by the International Accounting Standards Board (IASB) in the rules for the classification and measurement of financial assets, when adopted, would enable the Bank to review its current liquidity policy, particularly with respect to the inclusion of some or all of the investments currently held in the HTM portfolio in liquidity, thereby reducing the Bank’s borrowing requirements and creating additional borrowing headroom. Under the revised rules, the instruments currently in the HTM portfolio may continue to be carried at amortized cost as instruments being held for the purpose of collecting contractual cash flows. However, although the tainting rules (the basis for the current exclusion from liquidity of HTM

33 See Resolution B/BD/2009/18 dated 22 July 2009

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maturing over one year) have been eliminated, the revised rules require an entity to reassess whether certain instruments carried at amortised cost are indeed being held for the purpose of collecting contractual cash flows, if more than infrequent sales are made out of the portfolio. The Bank’s Asset and Liability Management Committee (ALCO) has reviewed the effects of both emerging best practices in liquidity management and the accounting rule changes. Our preliminary assessment is that the application of these changed rules would increase the level of eligible liquidity for the Bank by an amount up to UA 1,900 million, based on the Bank’s current investment portfolio. We are discussing with our external auditors, to ensure consistency in understanding and application of the new accounting rules, particularly with respect to the Bank’s definition of liquidity. An increase of UA 1,900 million in liquidity would change the projected leverage ratio at 31 December 2010 from the current estimate of 95% to approximately 83 %. 7.3.3 Review of the Bank’s Loan Pricing Methodology Income Model While the Bank is not a for-profit institution but rather a development finance cooperative, it is required under the Agreement to apply sound banking principles in its operations. In the context of the Bank’s environment, the application of sound principles implies (i) the pricing of its development assistance products consistent with its development mandate and taking into account the cost of providing these products; (ii) appropriate risk management measures, including due regard to the collectability of loans made; and, (iii) proper management of administrative expenses. The application of these sound banking principles will enable the Bank to protect and grow its resources for the purposes of supporting its development assistance activities. The income model of the Bank should strive to grow the resources of the Bank to the extent required to execute its functions. This entails a careful balancing of the needs of the key stakeholders of the Bank, primarily shareholders, borrowers and creditors and, to a lesser extent, management and staff. For shareholders, the income model should not only support the maximization of development assistance, but also minimize the likelihood of a call on capital. For the Bank’s borrowers, most of whom are also shareholders, in addition to addressing the needs of shareholders, the income model should also assure reasonable pricing of loans, consistent with the not-for-profit nature of the Bank. For creditors, the income model of the Bank should help to ensure the long-term financial sustainability of the Bank. Such long-term financial sustainability is a key basis for the Bank’s triple “A” rating and its ongoing ability to borrow in the capital markets at competitive rates. Sources of Net Income The two principal components of the Bank's net income are the level of its operating income and administrative expenses. Operating income is affected by the pricing of the Bank’s loans, impairment and other credit losses as well as by the overall level of market interest rates. Figure 13 shows the evolution of the Bank’s net income from 2005 to 2009. It indicates that firstly, the interest earned from operations funded with equity has historically been a major contributor to the Bank’s net income. Secondly, the margin from investing the proceeds of borrowings has historically generally not been sufficient to cover both the Bank’s administrative expenses and the provisions for loan impairment, when excluding the impact of loan write-

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backs34. Consequently, and consistent with the very definition of net income as a return on equity, the Bank’s net income is generated mainly from investing its risk capital (shareholders’ equity).

Figure 13: Net Income by Funding Source (in UA million)

221

324 304

228 194

(200)

(100)

-

100

200

300

400

2005 2006 2007 2008 2009

Margin on operations Funded with equity Margin on operations Funded with debt

Administrative Cost Provisions

Net Income

Notes: 1) Margin on operations funded with debt was negative in 2008 primarily due to the impact of marked to market losses observed on the liquidity portfolio (these were partly recovered in 2009); 2) Provisions are normally a cost and therefore their contribution to net income is negative. However, because of the magnitude of write-backs due to arrears clearance it was positive in 2005, 2007 and 2008. The Bank has already undertaken or is currently discussing with the Board certain actions to address the structural issues affecting net income, including: (i) a review of its loan pricing framework; and, (ii) embedding further efficiency in the management of its administrative expenses as per its Program and Budget Framework. Review of Loan Pricing Framework

The review integrates several mutually reinforcing considerations. As a result of its co-operative nature, the Bank charges the same spread for all its sovereign-guaranteed loans. In other words, the Bank does not apply risk-based pricing for sovereign-guaranteed loans. At the same time, such uniform pricing should contribute to build up the year-to-year internal resource generation capacity in support of the growth of the Bank’s development assistance activities (comprising lending and non-lending activities, including contributions to

34 While the schematic breakdown of the net income presented in figure 13 provides an indication of the coverage of the Bank’s total administrative expenses and provisions by the margin income generated by loans and investments assets, it does not provide the full details of the analysis on loan pricing and the coverage of operational administrative expenses by loan income (see Annex 3 of the Board document entitled “Proposal for a revised loan pricing methodology for sovereign and sovereign-guaranteed operations”, Reference ADB/BD/2010/15).

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development initiatives). Further, by contributing to the longer-term financial sustainability of the Bank, loan pricing also helps to assure the Bank’s “AAA” rating, which in turn enables the Bank to borrow funds at highly attractive rates on the capital markets. This will ensure the efficiency of the Bank’s intermediation role.

The Agreement Establishing the Bank (the Agreement) provides the broadest framework for the determination of reasonable pricing. Articles 17 and 18 of the Agreement provide that: (i) interest rates and charges should be reasonable; (ii) the Bank should receive suitable compensation for risk; (iii) terms and conditions should take into account the terms and conditions on which the corresponding funds were obtained; and, (iv) the Bank should apply sound banking principles.

Consistent with such framework and taking into account the nature and mandate of the Bank, Management in making proposals regarding the pricing of loans continues to be guided by the aforementioned principles with the following inbuilt criteria for loan charges:

• Be reflective of the true cost of funding; • Be adequate to cover structural costs associated with the Bank’s operations (i.e.

lending related expenses); • Have embedded flexibility for absorbing average expected losses over the lifetime of

the loan and recover capital costs; • Remain competitive as compared to those of comparable institutions or the market,

and should support portfolio growth; • Be predictable and transparent; and, • Not apply retroactively.

Management proposals of pricing adjustment reflect the logical outcome of the application of these principles within the context of the mutually reinforcing considerations summarized above. The measures proposed may be classified in two broad categories: (i) measures to provide reasonable flexibility to the Bank to adjust to changes in the major drivers of the cost of doing business without compromising transparency and predictability; and, (ii) pricing adjustments to address specific inadequacies in the current pricing structure.

The measures proposed by Management were discussed with the Board of Directors in early February 2010. Based on the Board’s recommendation, Management expects to finalize the review by the end of the first semester 2010.

8. ALTERNATIVE OPTIONS TO PROVIDE INTERIM RELIEF 8.1 In addition to the financial policy options outlined above, some short term measures were considered, in order to provide additional borrowing headroom through an increase in the Bank’s callable capital35. Doing so, would enable the Bank to operate with some flexibility, pending the finalization and effectiveness of the capital increase. 8.2 Contingent Callable Capital

8.2.1 Members of the Bank who are willing and able to do so may subscribe for non-voting callable capital. The benefit of this option is that it can be effected in a relatively short time

35 Subscriptions to the capital stock of the Bank are made of paid-up capital, which are payable over a prescribed period, and callable capital, which is subject to call.

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period, as the Bank would need to engage with fewer shareholders. In addition, this would be a strong signal of shareholder support and commitment to a GCI. 8.2.2 As of January 2010, Canada and the Republic of Korea had committed to subscribe for additional shares of a value equivalent to UA 1.6 billion and UA 194 million respectively. Under the terms agreed upon between these member countries and the Bank, which terms have been approved by the Board of Governors, it is envisaged that the additional shares would be returned to the Bank in four equal annual instalments, commencing on the fifth anniversary of the date the shares were subscribed for. In the event that the Board of Governors of the Bank approves a GCI through which Canada or the Republic of Korea subscribe to additional voting capital stock of the Bank, either country would have the right to return to the Bank all of the additional shares it had subscribed for at the time it subscribes to the additional voting capital stock of the Bank. In the event of a call on the callable capital of the Bank, any of the additional shares subscribed for by Canada or the Republic of Korea that have not been returned to the Bank by the date of such call would be subject to call in the same proportion as any outstanding voting shares, and such additional shares called would no longer be subject to return to the Bank. 8.2.3 This contingent callable capital will give about 12 months’ relief in terms of the breach of the Bank’s prudential ratios. In this regard, it is important to note that this increase in contingent callable capital only helps to increase the Bank’s borrowing capacity; it does not increase the risk bearing capacity of the Bank (i.e. paid-in capital and reserves), which provides the basis for expanding the lending activities of the Bank.

8.3 Transfer of reserves to paid-in capital

8.3.1 This approach would involve an increase in paid-in capital through the transfer of reserves to paid-in capital, with a corresponding increase in callable capital, thereby providing additional borrowing headroom. The main benefit of this proposal would be that all shareholders will be able to support it as no new cash payment would be required, thereby ensuring full participation by all of the Bank’s members. Nonetheless, this option would not provide the additional risk capital necessary to allow the Bank to respond to the increased demand, nor would it be perceived as a sign of strong shareholder support. 8.3.2 While Management has not abandoned this option, it has not progressed further, given that the various authorization requirements of the Bank’s governing bodies and members make it unlikely that the time taken to implement this alternative would be substantially shorter than that required for a full GCI. 8.4 Restructuring paid-in to callable ratio by increasing the callable portion This option contemplates increasing the callable portion of the paid-in to callable ratio of the Bank’s authorized capital. For example, at present the ratio of paid-in to callable capital is 10.8 to 89.2. If the ratio were adjusted to 9.1 to 90.9, this would somewhat ease the Bank’s debt ratio and expand its capacity to borrow from the capital markets, without imposing a financial burden on members of the Bank. However, this option would have no effect on the RCUR and is unlikely to take less time than would be required for a full GCI.

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8.5 Close monitoring of the Bank’s cash flow requirements and liquidity Apart from the three measures mentioned above, all of which would require the approval of the Board of Governors, Management has and will continue to closely monitor the Bank’s prudential minimum liquidity and cash flow requirements and also to stress test any future cash positions flowing from changes in the portfolio. 9. GCI SCENARIOS 9.1 Management has developed several scenarios that examine the Bank’s financial capacity with and without a GCI. In the first part of this section some scenarios are presented in order to determine the level of lending that the Bank can sustain based on various levels of a GCI, as well as in the absence of a capital increase. Next, the effect on the Bank’s key prudential ratios of various capital increase levels is examined. Finally, the impact of differentiated payment calendars is discussed.

9.2 Scenarios to determine the Bank’s sustainable level of lending 9.2.1 The sustainable level of lending (SLL) is defined as the maximum amount that the Bank can commit annually during 10 years without breaching any of its prudential ratios (gearing, leverage and risk capital utilization rate). For the scenarios aimed at determining the Bank’s sustainable level of lending, the key assumption is that a capital increase, if effective in 2011, will last for a period of 10 years, until 2020, before another GCI becomes effective. This scenario analysis takes into account the contingent callable capital subscribed by Canada and Korea up to the end of 2010 in the case of a GCI, and until 2016 in the absence of a GCI ,and the application of the changed accounting rules resulting in an increase in the level of eligible liquidity (see 7.3.2). Other assumptions include no rating migration in the loan portfolio; administrative costs based on the 2010-2012 3 year budget, and a 3% increase thereafter; distribution of approximately 60% of the Bank’s annual net income to development initiatives; 39% of PSO in annual lending; 40 bps sovereign lending spread; and average WARR of 2.85 from 2011 to 2020 with new sovereign loans rated 3 and new private loans rated 4. 9.2.2 Sustainable level of lending in the absence of a capital increase To assess the impact of a GCI on the Bank’s prudential ratios, it was deemed important to first demonstrate the impact that the absence of a GCI would have on the Bank’s financial resilience. In the absence of a GCI, it was determined that the Bank would have to reduce its annual commitment to only UA 1,230 million from 2010 onwards, in order to maintain the leverage ratio within its limit until 2020. 9.2.3 Having considered the impact of not having a GCI, several alternative GCI scenarios are considered, based on various levels of total increase in authorized capital (between 150% and 300%) and diverse paid-in ratios (between 4% and 6%). Figure 14 below shows the indicative annual lending levels the Bank would be able to achieve under each scenario. 9.2.4 It is important to note that the SLL does not evolve linearly when taking in account the GCI and the paid-in capital. With no GCI the Bank is constrained by the leverage ratio while under all GCI scenarios, the RCUR becomes the constraining factor.

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Figure 14: Sustainable Level of Lending as a function of GCI scenarios

Sustainable Level of Lending6%

5%

No GCI

4%

1,000

2,000

3,000

4,000

100% 125% 150% 175% 200% 225% 250% 275% 300%

Capital Increase

SLL (

UA

Mill

ion

)

9.2.5 In general the larger the capital increase and the paid-in ratio, the higher the sustainable level of lending. In the case of 150% capital increase, the annual sustainable lending level is in a range of UA 2.3 billion to UA 3.1 billion whereas for a 200% capital increase, the Bank could lend between UA 2.4 billion and UA 3.5 billion, depending on the paid-in ratio. It is also important to note that in these scenarios, we have assumed a flat level of lending for the period from 2011 to 2020, whereas in the lending scenarios presented in section 3, the lending level is expected to increase by at least 5% on a yearly basis. 9.2.6 In summary, for a 200% increase in capital with a paid-in ratio of 6%, the average sustainable level of lending for the period 2011-2020 is UA 3,484 million which is approximately 11% below the average lending of UA 3,919 million for the Baseline Scenario for the same period.

9.3. Effect on the Bank’s key prudential ratios of various capital increase levels under the Baseline Lending Scenario. 9.3.1 The Baseline Lending Scenario without a GCI, but factoring in the contingent callable capital provided by Canada and the Republic of Korea and the application of the changed accounting rules, is presented in Table 13 below. The Leverage ratio and the RCUR are projected to reach 100% by 2012 and 2013, respectively.

Table 13 – Prudential Ratios for Baseline Lending Scenario without a GCI

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Lending Program (UA millions) 5,466 4,145 2,890 3,292 3,457 3,629 3,811 4,001 4,202 4,412 4,633 4,864 RCUR 60% 67% 82% 95% 108% 119% 130% 138% 146% 151% 154% 157%

Leverage 85% 73% 96% 106% 130% 138% 161% 175% 196% 216% 227% 238%

Gearing 53% 59% 71% 80% 90% 99% 109% 117% 126% 134% 141% 148%

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9.3.2 Figures 15(a) and 15(b) below illustrate the Bank’s Debt to Usable Capital ratio and the RCUR for the Baseline Lending Scenario under several options of capital increase and for a 6% paid-in ratio. 9.4 The general conclusion is that prior to a GCI taking effect, the binding constraint is the Debt to Usable Capital ratio, whereas after a GCI the RCUR may become a constraint, depending on the level of capital increase. A more complete set of scenarios and a sensitive analysis of SLL with respect to model parameters are presented in Annex 5.

Fig ure 15.a: Debt ratio wit h 6% paid -in Ratio and 8 year enc ashm ent

under different C apita l Increase Scenarios - Bas eline Lending Scena rio

20%

40%

60%

80%

100%

120%

140%

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

150% 200% 300% Levera ge Li mit

Leverage L imit

Figu re 15.b: RCUR with 6% paid-in Ratio an d 8 year encash ment

under different C apital Increase Scenarios - Baseline Lending Scenario

60%

80%

100%

120%

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

150% 200% 300% RCUR Limit

RCUR Limit

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10. SUBSCRIPTION FOR SHARES The following section offers an innovative process for determining GCI-VI subscriptions based on pre-emptive rights and an array of options that would mitigate the financial burden a GCI could impose upon the most economically vulnerable members of the Bank. 10.1 Allocation and Subscriptions of Shares 10.1.1 In accordance with Article 6 (2) of the Bank Agreement, when a GCI is approved, each member has the right but not the obligation to subscribe to a portion of the capital increase that would maintain its pro-rata share in the capital of the Bank equal to the proportion of shares it held immediately before the capital increase. This principle of pre-emptive rights will apply to the allocation of any shares issued under the proposed GCI-VI. However, it is worthy to recall that based on the subscription experience of GCI-V, 20 regional members representing 9.38 percent of the Bank’s total voting power did not subscribe to the shares arising from the capital increase. As a result Management has made some proposals to minimize the incidence of non-subscription to GCI-VI shares as outlined below. 10.1.2 Under GCI-VI, it is expected that all shares issued will be allotted in accordance with the pre-emptive or pro-rata rights of member states. In order to ensure that this happens in as smooth a manner as possible, Management proposes the following four-step process for the allottment and subscription of shares that would be incorporated in the GCI-VI Resolution:

• Step One: Once the Board of Governors has approved the amount of the GCI-VI, Management will write to each member state notifying it of the number of shares it is entitled to subscribe to in accordance with its pro-rata rights. Member states will be given a period of time during which to indicate whether they intend to (i) subscribe to all of the shares allocated to them, (ii) only to a portion of them, or (iii) not to subscribe to any shares at all.

• Step Two: At the end of the period of time specified in the initial letter in Step One, all the shares that have been renounced and any other unallocated shares shall be divided into two pools. One pool will be for RMCs and the other for NRMCs. All members shall then be invited again to indicate their interest to subscribe to the shares from their respective pools within another specified time period.

• Step Three: At the end of this second time period all the shares that were not initially subscribed to in Step One will be allotted to interested members states in each group that have indicated an interest in acquiring more shares in accordance with their pro-rata rights adjusted to sum up to 100%.

• Step Four: In this last step the shares allocated to each member in Steps One and Three

will be combined to obtain the member’s total allocation for GCI-VI. Each member will then be notified of the shares it is entitled to, and will be requested to subscribe accordingly. It is only at the end of this step four that subscription notices will be sent to members requesting them to honour their subscription obligations.

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10.1.3 A similar procedure has been used by comparator regional MDBs and has been effective in minimizing the incidence of unsubscribed shares following general capital increases. 10.1.4 It may be recalled that the share allocation process for previous GCIs was a one step process, whereby shares were allocated to each member in accordance with the member’s preemptive rights. For GCI-VI, the proposed allocation process will entail allocating unsubscribed shares, identified during the subscription period, in accordance with the relative preemptive rights of interested members. For illustrative purposes only, Box 12 below describes the new process is as if it were applied retroactively to GCI-V allocations to regional members.

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Box 12 : Illustration of the workings of the 4-step shares’ allocation process under GCI-V: The allocation process for previous GCIs was a one step process, whereby shares were allocated to each member in accordance with the member’s preemptive rights. The distinguishing feature of the proposed GCI-VI allocation process is that all shares renounced during the subscription period shall be allocated to interested members in proportion to their preemptive rights during the subscription period. For illustrative purposes regarding how the four-step process under GCI-VI will work, the proposed new process is hereby applied retroactively to GCI-V allocations. Step I: Management would have communicated to members the number of shares to which each member would have been entitled to subscribe to pursuant to its preemptive rights, requesting them to indicate whether the member intended to (i) subscribe to all shares allocated to it, (ii) only to a portion of them, or (iii) not to subscribe to any shares at all. At the end of the time period specified, the intentions would have been as in the Table below.

GCI-V Regional Member Subscriptions Shares allocated

Members

Number of Members Number Percentage

Subscribing 33 232,200 83.89

Not Subscribing 20

44,583 16.11

Total 53 276,783 100.00

Source: ADB Subscription Statistics

Step 2: Management would have again informed members that 44,583 GCI-V shares renounced during step 1 were still available and invited them to indicate their willingness to subscribe to additional shares. For the purposes of this example, we shall assume that 33 subscribing members would have expressed the desire for more shares. Step 3: At the end of the time period specified in Step 2, all the 44,583 shares would have been allocated to either all of the 33 regional members or those among them who would have indicated their interest for a second round of subscription based on their pre-emptive rights, scaled up to add up to 100%. Step 4: For the 33 regional members or a subset of them who would have indicated an interest to subscribe to additional shares during Step 3, their GCI-V subscriptions would have been the sum of their subscriptions during Step 1 and the supplementary shares obtained during the second round of allocation in Step 3. Finally, all 33 members would have been notified of their GCI-V allocations and requested to subscribe by the end of the subscription period. The illustrative detailed final subscriptions are presented in Annex 6.

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10.2 Trust Fund: financing the subscriptions of the poorest countries 10.2.1 It is highly desirable that the voice of all African countries be heard at the Bank and that their voting powers are commensurate with their relative economic strength, keeping in mind that under GCI-V, 20 regional members did not subscribe to the shares arising from that capital increase. At the request of some member countries, and similar to the approach used by some other MDBs, Management proposes the establishment of a trust fund, which sole purpose would be to receive donations from countries with relatively strong economies to subsidize the subscriptions of the poorest countries. 10.2.2 It is envisaged that the trust fund would receive pledges from donors, and payments as a lump sum, which would be used to subsidize the GCI-VI subscription costs of eligible LICs, and to pay for part of an eligible country’s GCI-VI allocation. 10.3 Transfers of Forfeited Shares 10.3.1 It is important to note that every effort will be made to ensure that all member countries of the Bank subscribe to and pay the shares allocated to them under the GCI-VI. 10.3.2 Shares which remain unsubscribed following the four-step process described above and shares forfeited during the payment period shall be allocated on the basis of a revised Share Transfer Rules as directed by the GCC. 10.3.3 The proposal for the revision of the Share Transfer Rules will be presented in a separate document for consideration by the Board of Directors and transmission to the GCC at its next meeting. The proposal will include, inter alia, the distribution of unsubscribed and forfeited shares on the basis of the following order of priority: new members, pro-rata to existing voting power of each member, and the participation index. 10.4 Differentiated Payment Calendars 10.4.1 To alleviate the financial burden of the most vulnerable economies, and ensure the highest amount of participation of shareholders, different payment schedules for NRMCs and MICs on the one hand and ADF Countries on the other hand could be considered. For GCI-IV for example, a differentiated payment calendar between RMCs (10 years) and NRMCs (5 years) had been adopted. A similar mechanism between LICs and MICs/NRMCs would assist the former in maintaining relevant voting rights in the institution. Table 14 below shows the paid-in period adopted by our peers and the Bank. Table 14 – Comparative paid-in payment periods Capital Increase Regional shareholders Non-regional shareholders AsDB GCI-VI – 2009 5 years 5 years ADB GCI-V – 1998 8 years 8 years ADB GCI-IV – 1987 10 years 5 years AsDB GCI-V- 2009 5 years 5 years IBRD 5 years 5 years

10.4.2 Scenarios have been run on a differentiated payment calendar between shareholders. The simulations indicate that proposing an encashment period for NRMCs and MICs (ADB-only and Blend RMCs) over 5 or 8 years, while extending the encashment schedule from 8 to 12 years for

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ADF-only countries, marginally affects the sustainable level of lending of the Bank. As illustrated in Figure 16 for a paid-in ratio of 6%, annual commitments would decrease by UA 110 million in the case of a 200% GCI and by UA 80 million in the case of a 150% GCI . Therefore, Management believes that a longer encashment period can be considered for ADF-only countries without affecting the Bank’s sustainable lending program.

Figure 16: Impact of Differentiated Encashment Schedule

on the Bank's Annual Commitments from 2011 to 2020

Amount in UA Billion

3.01

3.37

3.09

3.48

- 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0

150%

200%

Cap

ital I

ncre

ase

Sce

nario

8Y NRMC&MIC/12Y ADF-only 8Y All

10.5 Currency of Payments

10.5.1 As was the case under GCI-V, member countries shall pay their subscriptions in any freely convertible currency. At the time of subscription, Member countries will select one of the following three options for the determination of the applicable exchange rate between the SDR and the currency in which they elect to pay their shares under GCI-VI:.

10.5.2 Option 1 The applicable exchange rate between the SDR and any freely convertible currency will be set as the average of the exchange rates prevailing during the 30 day period ending 7 days before each payment date..

10.5.3 Option 2 For budgetary reasons, some Member countries may need to know in advance, the exchange rate applicable to their capital subscription payment. Hence, at the request of a member country, the Bank will undertake to fix, up to one year in advance of the payment date of the installment, the exchange rate between a specified currency and the SDR. Notwithstanding, the difference between the exchange rate fixed in advance and the exchange rate at payment date will be reflected in the computation of the subsequent installment amount due by the Member country. In other words, shortfalls or excesses will either increase or decrease the subsequent installment amount. Under this scheme, no adjustment will be made on the final installment amount.

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10.5.4 Option 3 A member country electing to pay in any of the currency components of the SDR basket (USD, EUR, GBP and JPY) can elect to have the exchange rate applicable to the payment of its subscription fixed throughout its subscription period. The exchange rate between the SDR and the elected currency will be set at the average of the exchange rates prevailing during the 30 day period ending 7 days before the effectiveness of the GCI-VI resolution. 10.6 Accelerated Payment Management is considering the possibility of providing shareholders the option of accelerating payment of the paid-in portion of their subscriptions by selecting a customized payment schedule. Shareholders will be credited returns generated by investing payments received ahead of agreed subscription schedule. Due consideration will be given to ensure that the Bank does not bear the risks of unfavorable investment returns. 11. GCI-VI PROCESS 11.1 As outlined in the document36 submitted to the GCC, if approved, a Sixth General Capital Increase would be undertaken by the Bank in conformity with the relevant provisions of the Bank Agreement, particularly Articles 5(3) and (4), 6, 7, 9(a) and 29. 11.2 On 11 September 2009, the GCC met to discuss Management’s proposals relating to an increase in the Bank's capital. To facilitate full participation in the consultative process, consultations were held with RMCs and NRMCs in February 2010. 11.3 The next meeting of the GCC will be held in Washington, D.C. on 22 April 2010. At the close of the consultations and its work, the GCC will adopt a report containing its recommendations to be submitted to the Boards of Governors at the 2010 Annual Meetings to be held in Abidjan, Côte d’Ivoire. 11.4 Management will continue to prepare all of the technical material necessary to accomplish the GCI under the guidance of the Board of Directors, and all such work shall be reviewed by the GCC before submission for adoption by the Board of Governors. 11.5 The G20 Leaders at Pittsburgh in September 2009 and the G20 Finance Ministers met at St Andrews in November 2009 and have indicated that they will complete the review of MDBs’ capital “to ensure that they have sufficient resources conditional on reforms to ensure effectiveness, by the first half of 2010.”

36 The Sixth General Increase in the Capital Resources of the African Development Bank: Issues Document #2

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12. CONCLUSION AND RECOMMENDATION 12.1 The developments needs of Africa are enormous and have increased due to the recent global financial and economic crises. This is reflected in the significant increase in demand for financing from the Bank recently, across most of its RMCs. As this paper outlines, the Bank has been proactive and responsive to its shareholders in implementing comprehensive reforms throughout its operations, enhancing its capacity to deliver and mobilizing additional resources for its LICs. Furthermore, its increased visibility and presence on the international stage, its exclusive focus on Africa, coupled with its track record across the continent, have rendered it the development partner of choice for many of its RMCs 12.2 The increased demand for Bank resources has led to a quicker utilization of resources than anticipated in the Bank’s MTS with a resulting breach of prudential limits expected by 2012. 12.3 In order for the Bank to maintain its current and projected level of activity beyond 2012, Management has concluded that there is an immediate and urgent need for a General Capital Increase. 12.4 The Board of Directors is hereby requested to consider this document and to authorize its transmission to the GCC37.

37 Resolution B/BG/2009/11 of the Board of Governors

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Annex 1: Basic Data on Middle Income and Blend Country Members of the Bank

Note for Zimbabwe “*” is equal to 2007 and “**” to 2005. Source: Statistics Department, ADB

Country

Region

Population 2008

GDP per capita, 2008 (USD million)

GDP Growth 2005-08

Net Transfers from abroad (USD million), 2008

Human Development Index (2006) (Rank 179 countries)

Ease of Doing Business Index 2008 (World Bank)

Algeria North Africa 34.4 4,624.92 2.8 2,264.33 0.75(100) 132 Egypt North Africa 76.8 2,160.57 7 9,338.00 0.72(116) 114 Tunisia North Africa 10.4 4,066.70 5.7 199.57 0.76(95) 73 Libya North Africa 6.3 13,982.11 6.8 -1,889.00 0.84(52) (n/a) Morocco North Africa 31.6 2,804.64 5 5,470.68 0.65(127) 128 Nigeria West Africa 151.5 1,430.93 6 3,400.00 0.5(154) 118 Cape Verde West Africa 0.54 3,598.61 8 343.9 0.7(118) 143 Seychelles East Africa 0.087 9,675.44 4.8 51.77 0.84(54) 104 Botswana Southern Africa 1.9 6,046.87 4.5 1,107.23 0.66(126) 38 Mauritius Southern Africa 1.3 7,219.33 4.71 195.36 0.8(74) 24 Namibia Southern Africa 2.1 3,881.08 4.9 1,151.77 0.63(129) 51 South Africa Southern Africa 48.8 5,313.15 4.5 -2,821.21 0.67(125) 32 Swaziland Southern Africa 1.12 2,250.54 3 363.83 0.54(141) 108 Zimbabwe Southern Africa 13.5 353.8* -5.6 171.51* 0.51**(n/a) 158

Equatorial Guinea Central Africa 0.52 29,881.65 8.5 -49.81 0.72(115) 167

Gabon Central Africa 1.4 12,251.92 4 -412.45 0.73(107) 151

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Annex 2: MICs and Blend Countries’Profiles

ALGERIA Background and Prospects: Following a decade of instability, Algeria has enjoyed a number of years of relative peace. The Government has put in place policies for economic consolidation, with a view to enabling larger swathes of the population to benefit from the sizeable oil exploration and allied activities that have transformed the economy in recent years. Like its neighbours in the Maghreb, Algeria has benefitted from its proximity to Europe in terms of markets, and also tourism. The country signed an association agreement with the European Union in March 2002. Poverty is, however, proportionally higher than for other countries at the same level of per capita income—although it is common in countries increasingly reliant on oil exploitation for economic livelihood.

Impact of the Financial Crisis: Growth prospects for Algeria have been revised to take into account the decline in production in the hydrocarbons sector, the drop in demand for hydrocarbons and oil prices, as well as the economic downturn in developed countries. 2008 recorded a growth rate of 3%, however a further decline is expected in 2009 (1.7% instead of the earlier projected 4.1%) and 2010 (3.5% instead of the projected 5.3%). Furthermore, exports are generally expected to decline by about 30%, due to the fall in world oil prices. Indeed, oil prices declined from an average of US$ 99.86 per barrel at end 2008 to about US$ 70 during the second half of 2009. As for inflation, it is expected to drop to 4.1% in 2009 following an increase in 2008 when it reached 4.4%, mainly as a result of the increase in the prices of imported food products. However, the negative impact of the imported inflation was mitigated thanks to stabilization of the real exchange rate of the dinar. Despite the decline in Government revenues as a result of the fall in world demand and prices, Algeria accumulated significant official foreign exchange reserves estimated at nearly US$ 150 billion, which reinforced its external financial position. Thrust of the Bank’s Assistance Strategy: Support to Algeria was premised on the following areas: support to structural/sectoral reforms; infrastructure rehabilitation; private sector development, notably medium-scale enterprises; and support to local development. Overriding the bank’s strategy was to help the country create an environment for economic reconstruction and social rehabilitation following a long period of civil strife.

Demand for Resources for Development: The financial and economic crisis has had no impact on public investment, because the Government has maintained its investment programme of US$ 150 billion to modernize infrastructures and improve availability of housing. Nevertheless, there could be a negative impact on the private sector as a result of the combined effect of the crisis and measures taken recently by the Government concerning foreign private investment which could be seen as restrictive. Algeria intends to carry out a huge investment programme under the 2010-2014 Five Year Plan, comprising several large infrastructure projects in sectors as varied as roads, railway, ports, electricity, and housing. The proposed investment for achieving the set objective will stand at more than 10% of GDP. However, demand for financing will depend on world economic and oil price trends. Overview of ADB support: Algeria has not borrowed from the Bank recently, but was a keen borrower in the past. In the first half of 2000s, it borrowed a total of close to UA 1.8 billion (about US$3 billion) from the ADB.

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BOTSWANA Background and Prospects: Botswana has posted exceptionally good economic performance since independence, largely as a result of good leadership and the discovery of diamonds. It has been fiscally prudent, economically and politically well-managed, and despite its dependence on minerals, it grew continuously for the past four to five decades. However, prosperity has been mixed with surprisingly high levels of poverty. Above all, the country has a stubbornly high rate of inequality, one of the highest in the world. A small population, arid land and monoculture, have limited the country’s opportunities for serious diversification. It is also landlocked making venturing into manufactures for export expensive. However, with its reputation for economic stability and peace, Botswana is becoming an attractive tourist destination. It has also benefitted from tourist visitors to bigger South Africa who wish to see other landscapes in the region. It also has the potential to become a major power supplier in the region.

Botswana is a member of SACU, the customs union embracing a number of countries in the region, but revolving around South Africa. Its currency, the Pula is linked to the Rand, giving it regional stability, but also implying that it has limited flexibility on monetary policy. Botswana faces major environmental and development challenges, typical of an arid country. These include land degradation, water scarcity and pollution. It is embarking systematically on efforts to address these challenges. The country depicts a poorer record in the areas of poverty prevalence, income inequality and health (mainly combating HIV-AIDS) than comparable middle income countries.

Impact of the Financial Crisis: Prior to the financial crisis, real GDP growth averaged 4% over the previous five years. However, in 2008 real GDP growth is estimated to have slowed down to 2.8%, as a result of a decline in mining output. During 2008, the demand for exports remained strong for the first three quarters but drastically declined in the last quarter and in the first quarter of 2009. The economy is now projected to contract sharply by 7.3% in 2009 reflecting a sharp contraction in global demand for diamonds. As a result of a sharp fall in prices, Debswana suspended production in early 2009 and a number of mines were closed. The downturn in the diamond sector is likely to contribute to slower growth in the non-mining sector in the short term, although large public expenditures for several ongoing infrastructure projects should help sustain non-mining growth of 5% in 2009.

The Government has increased both recurrent and development expenditures, in order to mitigate the impact of the crisis, given the exceptional circumstances facing the economy in 2009/10. Initially, the Government intended to spend P27.36 billion (about U$4 billion) on its recurrent budget and P10.56 billion (about US$1.6 billion) on development budget for the 2009/10 fiscal year. During the period 2009/10-2011/12, the government is forecasting a budget deficit of about 10-13% of GDP which will be financed through reserves and external financing. Thrust of the Bank’s Assistance Strategy: . The pillars of the Bank’s country strategy for Botswana during 2009-2013 are twofold: (i) actions to support private sector investment; (ii) removal of infrastructure bottlenecks to enhance competitiveness and growth. Diversification and increased competitiveness are important features of the country’s 10th National Development Plan as well as its Vision 2016. Bank interaction with Botswana will continue to be strategic, with a good mix of lending and economic and sector work.

Demand for Resources for Development: Botswana is in the privileged position of possessing sizeable reserves. However, many of the development efforts that it has embarked on in recent years in the areas of infrastructure development, greater regional linkage and institutional capacity enhancement, will require sizeable inflows of external investment and support to succeed. The

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effects of climate change also need to be addressed. For the latter and to ensure access to safe water for the population and livestock, the country will need to embark on a range of strategies, many without the privilege of previous experience. The country is keen to increase its power production, in a fast growing region but with critical power shortages, and many power projects are currently under study.

Overview of ADB support: During the last CSP period (2004-2008) the Bank concluded a P 300 million bond issue as a means to develop the country’s capital market. This was buttressed by a line of credit to a major commercial bank for on-lending to SMEs. In June 2009, the Government borrowed an unprecedented US$1.5 billion from the ADB for budget support. The Bank is also co-financing the Morupule B power station (600 MW).

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CAPE VERDE

Background and Prospects: Cape Verde is a small island economy (composed of ten islands) which has been able to overcome poor resource endowments to build a rapidly growing economy. It has maintained growth rates that have surpassed those of its neighbours on the mainland. As a result of strong performance and higher per capital income levels, the country is likely to graduate formally to Category B (Blend country), which will enable it to access both ADB and ADF resources. The economy is primarily based on tourism, transport services and commerce. The country has taken advantage of its location vis-à-vis Europe to provide sea transport services. However, within the country (the ten islands) transport is rudimentary and expensive.

The country’s vulnerability to climate change is a major concern. The serious droughts of the mid-1990s in Cape Verde reduced the annual crop by more than three quarters, causing massive famine. Climate change has changed rainfall patterns and lowered precipitation. Low rainfall and previous overexploitation of ground water threaten agriculture and food security.

Impact of the Financial Crisis: The global financial and economic crisis will slow down growth in 2009-2010. GDP is expected to grow by 3.3% in 2009 and 4.4% in 2010, the lowest levels since 2000. As from 2011, an upturn is expected, with a GDP growth rate of 6.6% in 2011 and 2012; however, these projections are far below those before the crisis and in Poverty Reduction Strategy Paper (PRSP) II. According to the IMF, the crisis will in 2009 bring about a 14% decline in FDI flows and 7% decline in tourism activities. The current account is projected to deteriorate, with its deficit increasing from 13% to 14.7% of GDP, before stabilizing from 2010 at 13.9% of GDP in 2010 and 12% in 2011 and 2012. The level of reserves will be affected by the crisis. However, it will stay above 3 months of imports as a result of the decline in imports in 2010 and increase in grants and concessional loans. Inflation, which stood at more than 10% in October 2008, has since fallen again, and is expected to fall to 3.3% in 2009, and stabilise close to 2% by 2011. The Cape Verdean Escudo (ECV) is pegged to the Euro, and the Banco de Cabo Verde (BCV) is unlikely to change its monetary policy. The credibility of the fixed Euro/ECV exchange rate policy is one of the factors of mobilizing savings from immigrants. The financial crisis has significantly slowed down real estate transactions for tourism, particularly in Sal Island, and thereby led to loss of tax revenues for the Government. Thrust of the Bank’s Assistance Strategy: The Bank’s country strategy for Cape Verde has two pillars: (i) Help the country to sustain economic and financial gains. This will touch on capacity enhancement to strengthen public finance management. It will also focus on improvements to the business climate, competitiveness and the promotion of the private sector; (ii) infrastructure development, with focus on transport, energy and water resource mobilization in light of threats from climate change. Demand for Resources for Development: In 2009, the demand for financing is estimated at EUR 20 million. The demand is expected to stabilize in 2010, and may start to decline as from 2011. Bank assistance will focus on budget support and infrastructure development. A series of budget support operations (about EUR 50 million) will be financed over the 2009-2012 period to help the country in overcoming the effects of the crisis and improving its gains in economic and financial good governance. With respect to infrastructure projects, the Bank’s assistance will aim at: (i) supporting the tourism sector, which fuels growth in the country; (ii) increasing electricity production; and (iii) improving the efficiency of the administration and competitiveness of the economy. The projects expected to be financed include: (i) extension of Praia Airport (UA 20

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million); (ii) interconnection, distribution and transmission of electricity in 6 islands (UA 10 million); (iii) access Road to Mindelo Port (UA 8 million); and (iv) building a Data Centre (UA 35 million). It should be noted that the poverty reduction strategy puts the country’s infrastructure development programme at about ECV 48 billion (EUR 445 million) over the 2008-2011 period. Overview of ADB support: Cape Verde’s active portfolio comprises 5 operations. The entire portfolio amounts to UA 17.53 million (about US$ 26million). 30 percent of this is infrastructure.

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EGYPT Background and Prospects: Egypt is a key regional economy, with trade links that stretch throughout Africa. Its economy has performed well and it has been able to diversify into a number of other sectors, and importantly to reduce poverty. Tourism remains a key segment of the economy and recent signs that the decline in tourist numbers was levelling off have raised sentiment as the sector is a source of livelihood for many urban households. Besides, the economy has benefitted from FDI targeted to the region and remittances from Egyptians resident abroad are also significant. However, the Egyptian population is huge and urbanized and the demand for services—notably power, transport, water and sanitation services in heavily populated Cairo—will require considerable private and public investment in the medium- to long run.

Impact of the Financial Crisis: Driven primarily by private consumption and large-scale foreign and domestic investments, real GDP growth averaged over 7% per year during the period 2006 to 2008. However, the international financial crisis and global economic downturn has resulted in a significant slowdown in Egypt’s economic growth—with real growth in 2009 expected at about 4% in 2009 and 2010. Official unemployment has remained persistently at 8.5%. Net international reserves were US$ 35 billion in October 2008 although this is expected to ease to US$ 31.7 billion by 2009/10 as a result of a drop in export earnings, remittances and receipts from tourism and the Suez Canal. The Egyptian banking sector has remained resilient during the crisis, with no bank bail-out expected, thanks to continual restructuring, consolidation and removal of non-performing loans. FDI is expected to fall sharply to 3.1% of GDP by 2009/10 from a peak of 8.1% of GDP as recently as 2006/07. To date the Government’s main response to the crisis has been a supplementary fiscal stimulus package in 2008/09 of Egyptian Pound (LE) 15 billion (US$ 2.7 billion), focusing on infrastructure development. Egypt’s balance of payments has deteriorated as a result of the crisis and the Government is proceeding cautiously by restructuring the public finances to support medium-term consolidation and boost private investment. With the crisis having disproportionately affected the poor, the youth and the migrant workers, the Government’s financing requirements are expected to remain in the region of 10% of GDP per annum for the period up until 2015. ` Thrust of the Bank’s Assistance Strategy: The Bank’s country strategy (2007-2011) for Egypt has two strategic pillars (i) promoting private sector development through direct support to the sector and via infrastructure and financial sector development; (ii) social protection, through increased institutional support. The Bank intends to help the country address the power deficit, which constrains activities in vital sectors of the economy, including manufacturing, tourism and agriculture. The thrust of the current country strategy is similar to that of the previous programming cycle. The Bank’s strategies follow those of the Government, which focus on employment creation, environmental protection, gender equality and desert land development. Demand for Resources for Development: Government continues to focus on developing infrastructure with particular emphasis on power generation to meet projected electricity demand, rehabilitation of the aging irrigation-related canal and pump systems and promotion of private sector activities. Key projects underway include the Ain Soukhna Power Project (US$ 415 million and the Nuweiba Power Project (US$ 300 million). The financing of is in line with the Bank CSP (2007-2011). However, with the Government keen to compensate for lost revenue under the crisis the Bank is in consultations with the Ministry of Finance with respect to fiscal budgetary support. The Government is also continuing to assess whether to make use of the Bank’s Emergency Liquidity Facility (ELF) or the Trade Finance Initiative (TFI). During the period 2009 to 2010 Egypt’s external resource requirement is expected to rise from US$ 9.37 billion to US$ 10.79 billion. With the country’s debt indicators having improved considerably in recent years (external

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debt is at US$ 32 billion by end-June 2009, less than 17% of GDP) the demand for finance in the medium and long term is projected to rise steadily. A 10% per annum rise in financing infrastructure demand, in the period 2012 to 2014, is considered realistic, as the country’s population continues to grow at close to 3% annually and increased urbanization puts more pressure on the authorities to respond with much-needed infrastructure to support expanding urban areas. Overview of ADB Support: Coming before the global financial crisis, the Bank’s business plan for the earlier part of the country strategy period (2007-2008) was to provide support to the financial sector in order to enhance the activities of the country’s SMEs. In the longer term, however, focus would revert to energy generation—especially power supply to Cairo. The Bank has also plans to extend PBL support to the country.

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GABON

Background and Prospects: Since 2003, Gabon has been implementing a strategy for economic diversification to reduce dependence on oil, which still accounts for over 40% of the economy, 80 percent of exports and for the bulk of Government revenue. It has been noted that the impact of the “resource curse” on Gabon has been particularly severe. Expenditure patterns during the boom years had envisaged continuous flow of oil revenue. They favoured large national projects, subject to import of capital and availability of technical expertise. Other sectors such as manufacturing and agriculture have been marginalized, particularly owing to high cost. The country incurred unsustainable external debts similar to other developing country oil exporters. The benefits of the oil revenues have not reached the poorest in society, leading to poor social statistics, comparable to the poorest low income countries. The new Government has promised a more inclusive approach in the country’s development. Impact of the Financial Crisis: Gabon is estimated to have grown a meagre 2.4% in 2008, compared to 5.6% in 2007. The GDP growth rate is expected to fall to 0.7% in 2009. The crisis is expected to reduce Government revenues. The budgetary balance is projected at 2.2 % of GDP in 2009 as against 11.8 % in 2008. There will be a slight improvement in 2010, with a surplus of 7.5% of GDP. The current account balance is projected at 1.3% of GDP in 2009 as against 16.9% in 2008. The country’s international reserves were estimated at CFAF 1,015 billion in April 2009. Inflation is reported to be on the decline, and is projected to be 3.5 % in 2009 as against 5.3 % in 2008, as a result of a slowdown in demand. The iron ore exploitation programme in Belinga has been delayed pending signs of an upturn on the world market. Thrust of the Bank’s Assistance Strategy: The Bank Strategy for 2006-2010 aimed to improve the effectiveness of public spending, delivery of basic services, and the promotion of basic infrastructure to improve the well being of the poor. Also important was the building of capacities through Bank’s promotion of economic and sector work and provision of advisory services. Furthermore, the strategy emphasized the importance of collaboration with other donors, through a process of systematic harmonization of activities. Demand for Resources for Development: In the long term (2009-2020), the total demand for financing of Gabon is estimated at about US$ 8 billion, or an average of nearly US$ 700 million per year. The demand mainly concerns infrastructure. Overview of ADB Support: The areas in which demand for financing is felt and in which the Bank will intervene over the 2009-2012 period are infrastructure and economic diversification. The major operations concerned are: (i) the River Water Sanitation Project for UA 100 million; (ii) the Road Programme Phase II for UA 68 million; and (iii) the Support Project for Improving the Quality of Higher Education for UA 99.3 million.

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EQUATORIAL GUINEA Background and Prospects: Owing to a rich oil endowment, Equatorial Guinea has one of the highest per capita incomes in Africa. The country has enjoyed double digit growth until recently. However, the rapid growth of the economy, based on oil exploitation, has not yet translated into improved social welfare for the rest of the population. More than 60 percent of the population lives below the poverty line. Still, the country has considerable wealth which can be used to develop human resources and to invest in infrastructure to improve the lives of the people. Impact of the Financial Crisis: As a result of the impact of the financial crisis on the real sector (oil and forestry), real GDP growth is expected to be negative in 2009 at -4.1%, as against the estimated 12% in 2008, according to projections made in October 2009. The economy will remain subdued in 2010, with GDP expected to decline further by 2.6%. The 43% decline in oil exports in 2009 (90% of total export earnings) following the fall in the price of a barrel of oil and the 7.9% decline in timber exports will reduce the current account balance which, nevertheless, will still show a surplus. Consequently, in 2009 the foreign currency reserves, which represented the equivalent of 7.4 months of imports, are expected to decline. Thrust of the Bank’s Assistance Strategy: The Bank’s strategy in Equatorial Guinea has focused on helping to lay the foundation for sustainable development. This touches on issues of institutional fragility, the need for economic diversification and the importance of advisory work based on critical economic analysis. Demand for Resources for Development: Equatorial Guinea had accumulated huge foreign currency reserves in Banque des Etats de l'Afrique Centrale (BEAC) estimated at more than CFAF 100 billion at the end of 2008, which was a sign of confidence. On the other hand, improvement in resource management capacity and project implementation remain a key requirement for Equatorial Guinea, which rather tends to give priority to financing with internal resources. The most significant investments are in the oil and gas sector, and the sector’s output is expected to be either maintained or increased. The social sectors are among the strategic priorities of the National Economic and Social Development Plan (PNDES) of the Government to reduce poverty which affects 77% of the population and strengthen social cohesion. Any adjustments of expenditures are not expected to significantly affect these sectors. The expected upturn in the timber, gas and oil sectors will maintain significant foreign direct investments estimated at more than CFAF 800 billion (about US$ 1.726 million) in 2007. Similarly, the Government continues to invest at least 18% of its GDP (about US$ 3000 million) in its ambitious public investment programme, which is above the minimum of 5% required from MICs. In addition, the financing requirements generated under the scenario (MICs- Financing Infrastructure Demand) will be fully covered in view of the commitments made by the Government under the PNDES and the huge financial reserves of the country. Overview of ADB Support: The Bank intends to finance in 2010 an institutional support operation for agricultural production support structures for UA 35 million so as to create the institutional capacities and technical skills required for boosting the economic diversification strategy.

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LIBYA Background and Prospects: Following Libya’s rapprochement with the West, the country has once again been able to raise its oil production and to attract FDI in large volumes. Although state ownership and control were central to the country’s development strategy in the past, the Government has liberalized the oil sector and a number of leading companies now operate in the country. The country has encouraged external diversification of investments. Libyan-owned companies have important interests in businesses in many African countries. Impact of the Financial Crisis: The impact of the global financial crisis on the Libyan economy is mainly through its effect on oil revenues due to the fall in oil prices. Growth prospects in Libya have been revised downwards for 2009, and real GDP growth is now projected to slow to 1.7%, down from an estimated 4% in 2008. Growth is expected to recover to 4.8% in 2010, reflecting in part the recovery expected in the global economy. Government revenue fell sharply due to lower oil prices, but is projected to increase again in 2010. Libya’s foreign reserves are currently at around 39 months of imports. The trade balance, however, has not developed in Libya’s favour, as the oil price has decreased while demand for oil has remained at about the same level. Libya’s exchange rate is pegged to the SDR, which has served the country well in terms of macroeconomic stability. Inflation is projected to fall to about 5% in 2009 and is expected to moderate further over the medium term. Libya has virtually no debt, so the financial crisis has had little impact on debt sustainability. Since the Bank does not have on-going projects in Libya, there have been no cancellations or postponements due to the financial crisis. Libya has been largely shielded from the crisis, since its banking sector is isolated from the global financial system and most foreign capital is invested in the oil sector, and has thus not been withdrawn. We are not aware of any delayed or postponed investment projects. Thrust of the Bank’s Assistance Strategy: The Bank’s intervention in Libya has been limited to economic and sector work in the past. However, the Bank’s Country Engagement Note approved by the Board in early 2009 indicates that the time is right to engage in further collaboration. This will include co-financing operations, technical assistance to Government agencies in areas of the bank’s comparative advantage, including diagnostic and analytical work and regional cooperation and integration initiatives. Demand for Resources for Development: Given its policy approach and the high oil income, Libya has had little need for direct external financing in recent years. With the fall in oil price, however, the trade balance worsened, while government spending increased. As a result, Libya’s external financing demands are now estimated at US$ 1.86 billion and US$ 2.4 billion in 2009 and 2010, respectively. More of these needs might increase in the future. The country is currently opening up to trade and FDI and needs to improve its infrastructure in all fields (roads, ports, utilities, hotels etc.). Thus, over the next decade Libya’s external resource requirement may amount to over US$ 4 billion per year Overview of ADB Support: Libya has not made use of any of the bank’s lending services to date and is just now engaging in technical cooperation and requesting a number of studies. Bank support to Libya is thus taking off. In recent consultations, the country has discussed the possibility of a project to support a road project linking several neighbouring countries, which the country’s aid agency intends to underwrite.

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MAURITIUS Background and Prospects: Although Mauritius has a small population and is geographically isolated, it has been able to post impressive growth in the past several years. The absence of natural resources in large amounts has helped the country to diversify into manufacturing. Tourism remains an important sector, in spite of the sharp reduction in tourist arrivals during the crisis. However, a number of structural limitations are evident. Human capital endowment is low and relatively high wages for available factors have eroded the country’s comparative advantage. The country ranks highly in the Doing Business index. The governments reform agenda, announced in 2006, is fourfold: consolidating public sector performance, improving trade competitiveness, improving investment climate, and strengthening opportunities for the population Impact of the Financial Crisis: Mauritius has been affected by the global financial crisis. Real Growth is now forecast to decelerate to 2.0% in 2008/2009 down from 5.4% in 2007/2008. The budget situation is expected to deteriorate in 2009 reflecting lower tax revenues and higher spending arising from the fiscal stimulus introduced by the government to try to prop up growth. The current account is expected to widen to 12% of GDP in 2009 due to lower international demand in key sectors, tourism, textiles and offshore financial services. Foreign exchange reserves were $1.8 billion in May 2009, compared with $2.0 billion in May 2008. The crisis has also affected the major investment projects as Shaxi Tianli and Integrated Resort Schemes have been put on hold. Some of the more advanced projects, mostly hotel developments, are being secured and funding would be needed to preserve them. As part of the countercyclical fiscal and monetary policy to cope with the adverse effects of the financial crisis, the Government is implementing a stimulus package amounting to about US$330 million (3.8% of GDP) during 2009-2011 that comprises several major infrastructure projects as well as other measures to support the private sector and provide increased social protection. The package is intended to provide confidence to public and private investment, by fast-tracking already-earmarked public spending projects and new infrastructure programs, and accelerating private sector investment. Thrust of the Bank’s Assistance Strategy: The Bank’s strategy for Mauritius follows closely the country’s own development strategy. It seeks to assist the Government in addressing the challenge of how to continue to diversify the economy, to invest in education and in creating physical infrastructure that can help raise human capital and attract FDI. Demand for Resources for Development: Government continues to focus on infrastructure development with emphasis on transport, health, sewerage and public sector reform.. Planned public investment is estimated at about 14.3% of GDP, with main priorities being, road transport, airport, ports, water, education, power, social protection and urban development. Furthermore, about 20% of this planned public investment will be targeted at the promotion of “Maurice Ile Durable” Initiative, which aims for sustainable development. The Government wants to boost this further by making Mauritius the ICT gateway to Africa. Overview of ADB Support: At the end of 2008, total accumulated assistance from the ADB reached UA 180 million. A total of 26 operations had been approved. In the second half of 2009, the Bank reached agreement with the country to provide further substantial support in the form of general budget support to the amount of US$700 million, over three years. This marked a departure from the small and limited financing requested and provided in the past.

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MOROCCO Background and Prospects: The Kingdom of Morocco has enjoyed high growth rates during the past decade, in spite of persistent drought that has affected agriculture, which still accounts for a significant portion of the economy. However, there are challenges to bringing services and employment opportunities to the widely dispersed population. The urban employment rate is estimated to be as high as 20 percent, although informal or casual employment is common. A national program, National Initiative for Human Development, was introduced in 2005 as a first step in efforts to create an inclusive economic environment and to enhance the living conditions of the people. Proximity to the European Union has provided a lucrative market for agricultural products for Morocco. It reached an Association Agreement with the European Union in 2006. Impact of the Financial Crisis: In view of the gradual deterioration of the country’s balance of trade (deficit of US$ 3.5 billion during the first quarter of 2009) and, consequently the balance of payments as a result of the sharp decline in exports, the foreign exchange reserves could drop in the short term. Since the Moroccan Government has undertaken to: (i) reduce, as much as possible, the impact of the crisis, (ii) pursue and complete ongoing major infrastructure projects, and (iii) attract foreign investments, the demand for foreign financing is expected to increase. Thrust of the Bank’s Assistance Strategy: The three pillars of he Bank’s country strategy (2007-2011) for Morocco are as follows: (i) improvement of the governance system; (ii) development and modernization of infrastructure and enterprises; and (iii) promotion of human development. These draw on the Government’ policy approaches which emphasize modernization of public administration as well of infrastructure, and rapid reduction of social inequalities. Demand for Resources for Development: Despite the international financial crisis, demand for the financing of large-scale national projects and programmes is growing. To date, for the 2009-2011 period, the demand for financing amounts to UA 1,946 million. Most of the selected projects and programmes are in the public sector and shared between infrastructure (55%) --- comprising transport, electricity and water and sanitation sectors --- and the other sectors, particularly policy-based lending and private sector projects. The infrastructure projects form part of the Government’s major projects for the 2008-2012 period and the national energy strategy.

Provisional Demand for Financing 2009-2011 (UA million) 2009 2010 2011 % Infrastructure 346.08 480.00 250.00 55 Policy-based lending 364.67 100.00 24 Private sector 113.70 70.00 200.00 20 Other sectors 1.10 20.00 1 Total 825.55 650.00 470.00

In the long term, the demand for financing will be higher than recorded recently. The Moroccan Government has embarked on the implementation of one phase of the major infrastructure projects (highways, railway, ports, airports, and electricity production) for direct and indirect impacts on economic growth, job creation and improvement of the competitiveness of the Moroccan economy. Furthermore, the Azur project, which aimed at the annual arrival of 10 million tourists in 2010, has been postponed to 2013-2014. To achieve these objectives and others relating to reduction of regional disparities, minimum investments of about 7-8% of GDP will be required.

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Overview of ADB Support: The country strategy paper (2007-2011) indicates that the bulk of support to Morocco will be in the area of infrastructure. The Bank delivered a total of about UA 2 billion (US$3 billion), between 2001-2006, with the bulk going to water and sanitation, transport and energy, respectively. There was also support to the environment, an area of increasing concern in the country. More recently, the Bank has continued to support the country in its priority areas of operation—with emphasis on assisting the Morocco to defray the impact of the crisis.

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NAMIBIA Background and Prospects: The Namibian economy has performed reasonably well since Independence in 1990.The economy depends largely on mining, although fishing and tourism are also important sectors. The country is implementing its 3rd National Development Plan, which will cover the period up to 2012. The Government has also devised a long-term strategy, Vision 2030.The medium to long-term goals for the country include promotion of sustainable growth, employment creation, poverty reduction, reduction of social and gender inequality, economic empowerment and combating HIV/AIDS. Impact of the Financial Crisis: Prior to the crisis, average real GDP growth rate for 2008 – 2011 was projected at about 5.3%. GDP growth rate for 2009 has been revised from 4% to -1.4% as a result of the crisis. The demand for exports has declined largely affecting mineral commodity sales and in particular diamond sales. Diamonds constitute a big component of exports and export prices have declined significantly such that operators had stopped the sales and even production for now. Growth in key economic sectors is expected to decelerate over the next three years as a result of the crisis. The severity of the impact is disproportionately felt in the mining sector. The impact is felt through export prices due to falling demand for exports. Namibia supports a highly open economy with a trade to GDP ratio of about 100%. Job losses are mainly in the mining sector, both in the production and processing segments of the sector. The losses came about as a result of declining demand for mineral exports inducing scaling down, or even halting, production and eventual processing activities. The high oil prices which prevailed during 2008 also exerted enormous difficulties on, among others, the capital-intensive extractive sectors, including the fisheries sector. Thrust of the Bank’s Assistance Strategy: The Bank’s country strategy (2007-2011) for Namibia includes: (i) enhancing the competitiveness of the private sector through infrastructure development, (ii) enhancing agricultural productivity and food security through irrigation technologies. The overall goal is to target poverty and to create employment. Demand for Resources for Development: The 2008/9 budget provided for increased spending on infrastructure development going forward. Financing for additional development expenditure is sourced from revenue from own source as well as additional borrowing. This eliminates potential funding gaps and all planned major public projects are not expected to face funding risks. Namibia’s external financing requirements hover around 6% of GDP which may increase from 6% of GDP to 15% of GDP. Total expenditure as a percentage of GDP is expected to increase from 27.5% in 2007/08 to 35.7% in 2010/11. Though the crisis has adversely affected Namibia’s main export sector, mining. It is expected that in the long term the economy will recover from the crisis and so long term demand for external financing will be much less. Planned projects in the areas of utilities, construction and infrastructure as well as mining are largely on schedule. No large-scale fall out of planned investment is foreseen, although mineral exploration activities have slowed down. Overview of ADB Support: Namibia has not borrowed extensively from the Bank, though a number of discussions have been undertaken in the recent past and a viable project pipeline has been discussed.

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NIGERIA Background and Prospects: Nigeria is the most populous country in Africa (about 140 million) and the largest economy in West Africa. The country’s leaders envisage that Nigeria will have become a major industrial power in Africa within a decade and one of the 20 leading economies in the world by 2020. These achievements will have important regional implications in terms of consumer markets, trade, regional flow of resources and policy coordination. Still, while economic performance has improved in the past few years, the average Nigerian remains poor. Social inequalities have persisted, while the unequal distribution of oil wealth has caused serious disturbances in key oil producing states in the country. However, Nigeria is a big country and although its industries are plagued by production problems owing to inadequate infrastructure, especially power, it exports to most of West Africa. Its financial houses have even gone further a field and can be found in many parts of Africa. Moreover, Nigeria plays an influential role in the region as peacemaker and agent of restraint. Impact of the Financial Crisis: Macro balances have been adversely impacted. Real GDP growth is expected to decelerate sharply from a projected 6.3% in 2008 to 3% in 2009, before recovering to 5% in 2010 in line with the anticipated recovery of the global economy. Lower oil revenues have driven the fiscal accounts and balance of payments into deficits, Oil and gas production continue to be adversely affected by security problems in the Delta valley. Nigeria’s financial and capital markets have also been affected, forcing the central bank to take decisive action to intervene in several important banks. Thrust of the Bank’s Assistance Strategy: According to the country strategy for Nigeria (2005-2009), Bank support is based on two strategic pillars: (i) human capital development, (ii) private sector led diversification of the economy. Demand for Resources for Development: Nigeria is a vast country, with a large demand for infrastructure of all types. The oil industry has special requirements, which have been easier to meet thanks to the participation of partners in the international oil industry. Estimates of what Nigeria needs to finance infrastructure to sustainable levels equal about US$14 billion in the medium term. This amount will increase as the economy becomes more industrialized and sophisticated. Overview of ADB Support: Nigeria has so far confined its public borrowing from the Bank to the ADF window. However, the private sector in the country has borrowed from the ADB window.

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SEYCHELLES

Background and Prospects: Seychelles has achieved a high standard of living and rapid social development in the past decades. It has the highest GDP per capita in Africa and was ranked 50th globally in the 2007 UNDP Human Development Index. Land, capital and human resources are limited, however. The country has not been able to achieve economies of scale in production or diversification. It depends on imports for all its raw materials, finished and semi-finished products, and specialized services. Tourism remains the country’s predominant sector, accounting for 22% of GDP, 30% employment and 70% of the country’s foreign exchange earnings. Fishing (especially tuna) is the second most important sector, contributing 15% of GDP, 97% of visible exports and employing 17% of the workforce.

The country has faced economic challenges in recent years. Growth was low during 2001-2007 at an average of only 1%, mainly reflecting the contraction in real GDP growth in three out of the seven years (2001, 2003 and 2004). Seychelles was among the most indebted countries in the world until recently. It has taken steps to address the issues and bring back its indebtedness onto a sustainable basis. This has involved a comprehensive debt restructuring involving a substantial reduction in the debt service burden, consistent with Seychelles' long-term ability to pay. The Government has established a Public Debt Management Committee to closely monitor parastatal borrowing and a new Public Debt Law to define a legal framework for debt management was presented to Parliament in December 2008.

Impact of the Financial Crisis: The financial crisis has had an adverse impact on Seychelles, especially coming at a time when the country was in the midst of own efforts to negotiate for debt reduction with its creditors. Part of the reform depended on the country’s ability to restructure part of the tourist assets and other parastatals accumulated by government. Lower tourist arrivals make commercialization of the hotels and associated businesses a less attractive option. The crisis also means that the Government’s plans to create employment opportunities will be more difficult to realize. Thrust of the Bank’s Assistance Strategy: In its Interim Strategy for Seychelles the Bank identified a single pillar: “support the creation of a stable and enabling macroeconomic environment.” This derived from lessons that the Bank had learnt from previous engagement with the country, namely that a stable macroeconomic environment, domestic capacity to ensure that it is sustainable and commitment to social protection of the vulnerability are important ingredients of policy. It also follows the Government’s own “Seychelles 2007 Strategy” which emphasizes sound economic management, competitiveness and governance, social equity and improvements to infrastructure, land use and concern for biodiversity. Demand for Resources for Development: Seychelles has been starved of capital in the past few years owing to its debt burden and problem with arrears. It is now taking steps to restructure its debt as well as the economy. It has plans to hold investor conferences, with potential projects in tourism, ports, agriculture and fisheries. Overview of ADB Support: The Bank provided Seychelles with a quick disbursing budget support loan of about US$20 million in 2008 in conjunction with IMF and World Bank. It also helped to launch the debt resolution process sought by the Government.

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SOUTH AFRICA

Background and Prospects: South Africa is the largest economy in Africa. Its influence on the continent has increased since majority rule was achieved in the country. South Africa’s railways and ports serve as conduits for commerce for the landlocked countries of Botswana, Zimbabwe, Lesotho, Swaziland and Zambia. It also provides goods and services for many other countries further a field. Its companies provide financial services and infrastructure in East and West Africa, and they also have a strong presence in the financial sector; its breweries have bought stakes in many leading breweries in many parts of Africa. Crucially, it is also steeped into the regional economy. Its power hungry industries will rely on supplies from neighbours, while demand for its output will require the markets of countries from the neighbourhood and further afield. However, the legacies of the past, including inequalities in incomes and employment opportunities and low education, are yet to be overcome. Inadequate power supply has emerged as the most challenging problem for Southern Africa. Although there were concerns about the power headroom, and policy makers were urged to take action, not much action was taken toward addressing this concern through increased investment in power generation. Moreover, the private sector was not encouraged to participate initially, as the Government underlined big aggregates and economies of scale. In the event, when economic growth reached unprecedented levels in the 2000s, there was not enough power to sustain it. Since power plants take a long time to commission, the energy deficit problems that emerged in the mid-2000s will take time to eradicate. Thus, neighbouring countries with own plans to generate power will have a ready market. Impact of the Financial Crisis: The impact on the overall economy is manifested by the decline in growth rate from 5.1% in 2007 to an estimated 3.1% in 2008, and a decline of 2.1% in 2009. The financial crisis impacted negatively on the demand for South Africa’s exports. Platinum and gold exports have fallen and export earnings contracted by 27 percent between the fourth quarter of 2008 and the end of the first quarter of 2009. Given that the South African financial sector had limited exposure to US sub-prime assets, it has remained robust and so far no bail-out has been necessary. The contraction of the South African economy for the first time since majority rule was achieved has led to labour unrest. It has also had a negative impact on neighbouring countries that depend on remittances from workers in South Africa. Thrust of the Bank’s Assistance Strategy: The country assistance strategy for South Africa (2008-2012) has three pillars: (i) enhancing private sector competitiveness, (ii) partnership for regional integration and development, (iii) knowledge management and capacity building. The approach falls well within the areas emphasized in the Government’s development programs notably the Growth, Employment and Redistribution Programme from 1996. Demand for Resources for Development: Infrastructure spending has been driven by increased public outlays in the short run, part of counter-cyclical expenditure by the government. The government through its parastatals plans to spend around R787 billion (about US$100 billion) for infrastructure development alone, accounting for around 10% of GDP over 2009–2012. Long-term demand for infrastructure financing by the public sector is expected to stabilize at around 4-5% of GDP. A number of projects have been started involving a host of participants. They include port expansion, mining, power generation, airports and railway improvements. Many of the projects have private sector participation or are wholly owned by the private sector. Thus investment overall will be much higher as the private sector embarks on plans to close the power and associated infrastructure gaps.

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Overview of ADB Support: The Bank is geared to support the government in its infrastructure development programs through a number of projects, including a loan to Eskom for the construction of the Medupi Power Project. Other South African parastatals and private companies have also approached the Bank for support.

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SWAZILAND Background and Prospects: In per capita income terms (about US$ 2500 in 2007), Swaziland is richer than many other sub-Saharan African countries. However, it has in other areas of performance not been able to make the transition to a middle income country. Inequality is pervasive as is poverty, especially among the rural population. It ranks close to Africa’s fragile states on the Human Development Index. The unemployment rate at 30% is high and constitutes a major threat to social stability. Unemployment is expected to increase due to retrenchment in manufacturing and of mineworkers in South Africa’s platinum and gold mines. However, Swaziland’s growth prospects are quite good in the medium term. Indeed the shift from agriculture as a major source of income to manufacturing and services is indicative of a transition to industrialization. The African Growth Opportunity Act (AGOA) has been quite beneficial for manufacturing, attracting FDI to the country. Tourism presents and opportunity for growth and diversification. Although entirely surrounded by South Africa, Swaziland’s has access to the sea and there are ready markets for agricultural produce in the urban centres of South Africa. Membership in the Southern African Customs Union (SACU) and pegging the currency to the rand, ensure a certain discipline in economic policy, but also put the country at some disadvantage in terms of economic policy. Impact of the Financial Crisis: Swaziland has seen a decline in growth during the crisis. Real GDP growth is expected to be only 0.4% in 2009, a decline of up to 3% points on recent years. The Government expects a large fiscal deficit, in 2009/10, largely reflecting higher public expenditures and a decline in SACU revenues. South Africa has been seriously affected by the crisis, experiencing a recession for the first time since 1990. The Government has increased capital expenditure by about 31% in 2009/10 as part of its countercyclical stimulus package in response to the global economic crisis. This will enable it to continue implementing infrastructure projects already underway that have greatest impact on economic growth and employment. Although inflation rose sharply to 12.6% in 2008, it is expected to drop below double digits in 2009 and 2010, reflecting favourable developments in food and international prices and in line with developments in South Africa, the source of over two-thirds of the country’s imports. The country’s banks have remained financially sound as their ownership is dominated by South African banks, which have not been seriously affected by the direct contagion of the crisis. Thrust of the Bank’s Assistance Strategy: The country strategy for Swaziland covers the period 2009-2013. It has two strategic pillars: (i) Infrastructure investment to improve productivity and competitiveness, (ii) Enhancing skills delivery and skills development. The Bank sees the issue of competitiveness as critical, especially for a small country with a number of large neighbours. A substantial part of that competitiveness will come from enhanced human capital—making training and skills development important parts of the development strategy. Demand for Resources for Development: In the short to medium term the Government’s emphasis is on expanding the road infrastructure, including a program of tarred and all-weather roads; road maintenance. A tolling system has been introduced on a major highway through a public/private partnership. Other infrastructure projects requiring financing include the completion of the Sikhuphe international airport; laying an optic fibre ring across the country; providing an additional rail link to the new Sikhuphe airport; construction of a Dry Port in Matsapa; building of dams and reservoirs, water supply infrastructure in rural areas, and water treatment plants for Siteki, Lomahasha and Nhlangano; and attracting private sector investment into domestic thermal power generation as well as increasing electricity distribution in rural areas. However, infrastructure bottlenecks continue to constrain private sector development and

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economic growth. Thus, Swaziland will in the long term continue to place emphasis on providing support for infrastructure to foster the enabling environment for business and improve productivity and competitiveness. Swaziland’s financial requirements in the area of infrastructure will increase by 50% between 2013 and 2020 to about US$ 300 million per year. Overview of ADB Support: The Bank commenced operations in Swaziland in 1972. A total of 37 operations have been approved since, with a total commitment estimated at UA 235.45 million (about US$ 350 million). The portfolio had performed above the Bank’s average. Economic and sector work is going to be a key accompanying feature of Bank operations in the country.

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TUNISIA Background and Prospects: Tunisia has enjoyed an impressive rate of growth in the past decades, helping it to reach a per capita income of close to US$ 3000 by 2007. The government has pursued a development strategy which has highlighted the importance of human capital improvement and the provision of social services to the broader population. A policy of subsidization of essential good and services has been used as a safety net for the urban and rural poor, while public works projects have also been used to provide urban employment. Importantly, the Government has put emphasis on family planning and the promotion of women. Female representation in public life and the private sector rank among the highest in the region. Partly as a result of these factors, population growth was only about 1.2% in 2008. Economic planning has remained a key policy feature of Tunisia and the Bank’s country strategy for Tunisia coincided with 11th Five-Year Plan (2007-2011). Growth was high in the first year of the Plan, at 6.3%, but fell to 4.7% in 2008, the beginning of the global economic crisis. Inflation remained below 5% in 2008. A key to the country’s success has been the Government’s ability to embark on reform before the issues became too critical and obstructive to growth and development. Social policies have also enabled the maintenance of peace. The poverty rate in Tunisia was 6% in 2000 and 3.8% in 2007. It is expected the poverty MDG as well as many others will have been reached by 2015. Tunisia’s proximity to the European Union has been a blessing, but also a challenge. First, it ensures a good destination for European tourists, and a potentially good market for the country’s produce of manufactures, agricultural products and other services. In these cases, the country faces stiff competition from neighbours and countries from far afield. Structural and sector reforms, including refurbishments to the country’s energy and transport infrastructure, are seen by the Government to improving the countries competitiveness and creation of employment. Unemployment reached 14.2 percent in 2008, youth unemployment is much higher. Impact of the Financial Crisis: The crisis has significantly affected the implementation of the public investment programs. Major construction projects have been cancelled, postponed or slowed down. There have initially been difficulties in trade financing for exporters among the offshore companies. Government is trying to redress these shortfalls through a package of finance. Lower tourism receipts and remittances have put pressure on the external position. FDI is forecast to decrease by 35% in 2009. Government revenue is expected to fall sharply in 2009 leading to deterioration in the budget deficit. However, the Government’s countercyclical stimulus package, adopted in early 2009, targeting domestic demand has succeeded in reducing the impact of the global recession on the economy. However, to return to the growth path of its 11th National Development Plan of over 6 percent, and to tackle unemployment external financing will be required. Thrust of the Bank’s Assistance Strategy: The Bank’s assistance strategy for Tunisia covers the period 2007-2011. It had three pillars (i) the reinforcement of macroeconomic policies and the acceleration of reforms –targeted at enhancing the business environment, (ii) infrastructure modernization and consolidation of the productive sector, (iii) the consolidation of human capital. The bank aimed to be selective during the implementation of the strategy which focuses on raising the competitiveness of the Tunisian economy. A mid-term review of the strategy indicated that considerable success had been achieved, in spite of the onset of the crisis in 2008. Tunisia is the most competitive African country, but employment creation remains a serious challenge.

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Demand for Resources for Development: In the near term it is estimated that the country will need between US$ 7-10 billion of external financing to meet the requirements of its 11th National Development Plan. Tunisia’s demand for finance in the medium to long term is also projected to rise rapidly. The Tunisian Government has drawn ambitious plans to expand and rehabilitate its transport network, and improve other economic and physical infrastructure such as the ports facilities. Government is also targeting partnership with foreign capital in overhauling physical infrastructure in support of its tourism activities, industry and rural development. Tunisian finance requirements for public-funded basic infrastructure alone are projected in the base scenario to increase from US$ 3 billion in 2009 to US$ 4 billion by 2015. Private sector requirements in power and transport are of similar magnitude. Overview of ADB Support: Since 1968, the Bank has approved 99 projects to Tunisia worth an accumulated total of about UA 3.5 billion (US$4.7 billion). The existing portfolio comprises 11 projects worth about UA 860 million, with an average age of 2.6 years. Up to 71% are infrastructure projects. With a rating of 2.7 out of a possible 3, the portfolio is well performing. An important aspect of the Bank’s strategy, emphasized the need for economic and sector work to help boost the Bank’s analytical and advisory role.

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ZIMBABWE

Background and Prospects: Zimbabwe was once referred to as the breadbasket of Southern Africa. Rapid growth, infrastructure expansion and focus on human capital development were key features of the policies pursued by the Government that assumed power in 1980. With a relatively high per capita income, it received blend status at the Bank. However, following a decade of steady growth, the country entered an economic downturn from which it has found it difficult to extricate itself. Since 2000, the economy has declined by half in real terms. Key sectors of the economy, mining and tourism suffered sharp decline and a parallel economy emerged, and the use of foreign currencies became common. The financial system was paralyzed. Hyperinflation effectively destroyed the Zimbabwe dollar; the country now operates with the US Dollar and SA Rand. The economic decline and political confrontation have reversed the achievements of the post-independence decades, especially in social development. A large part of the country’s well educated labour force fled the country. It is estimated that close to 30 percent of the total population is now resident in South Africa and other neighbouring countries. The economic and social consequences of a decade of poor performance are pervasive. Although Zimbabwe once was the breadbasket of the region, it is now a food importer. Its external debt is estimated by the Government at US$5.7 billion.

The regional dimension spurred SADC to broker a political solution and to engage the international community on behalf of Zimbabwe. Zimbabwe’s political parties reached a Global Political Agreement (GPA), followed by the creation of an Inclusive Government (IG) in February 2009. The new Government moved swiftly to produce a Short Term Emergency Recovery Program (STERP). Although the initial results are encouraging, Zimbabwe remains in crisis. The political situation is fragile; much will depend on the ability of the Government to engineer economic recovery.

Impact of the Financial Crisis: Zimbabwe’s crisis has certainly been aggravated by the financial crisis. Being a landlocked country, it imports food and oil through neighbouring countries. The crisis certainly raised the country’s unprecedented inflation to even higher levels. Ironically, it might have forced the Government to see the futility of using the Zimbabwe dollar as a currency in the circumstances. It is difficult to separate the country’s own sharp economic crisis from that of the financial crisis.

Thrust of the Bank’s Assistance Strategy: The Bank’s Strategy for Zimbabwe is anchored on supporting the Government to implement its recovery program. The goal is, however, to help the country reach full reengagement with the Bank and other donors in the medium term. The expected outcomes of this strategy include: a full Bank Country Strategy Paper based on the Government’s medium-term development strategy; full arrears clearance; Zimbabwe’s eligibility under the HIPC initiative; and the resumption of normal Bank operations. The Bank’s leverage in Zimbabwe will not only be financial, but will also include provision of advice and technical support to assist the Government move its agenda forward. A major task of the extended mission and the Bank strategy in this regard would be to work with the Government to convene and coordinate support from other donors.

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Demand for Resources for Development: The Government of Zimbabwe presented the STERP in early 2009 as a prelude to a fully fledged 6-year Medium Term Plan covering the period 2010-2015. STERP had estimated that the country needed about US$8 billion to meet its emergency needs in 2009 alone. This was largely not forthcoming, owing to the difficult relations that Zimbabwe has had with the donor community. The Medium Term Plan (2010-2015) estimates that Zimbabwe will need US$0.5 billion per year in FDI and will need to borrow about US$300 million per year to meet its needs.

Overview of ADB support: Arrears are currently the most important impediment to full fledged support to Zimbabwe by the bank and other multilaterals. ADB arrears clearance will require additional resources, which the Government with assistance from the Bank will solicit from the international community. Currently, the Bank has afield an “extended” mission to Zimbabwe, which has developed capacity building initiatives for the Government. The Bank’s contribution will be focused on the priority areas of statistics, enhancing economic management skills, revenue generation, and strengthening oversight agencies. The private sector has requested for quick disbursing lines of credit. The country has been isolated from much of the international community and International Financial Institutions, and will need support on reengagement. In providing assistance, the Bank distinguishes between the short-term goal of unlocking donor resources to Zimbabwe and the longer-term one of supporting a strong private sector-led economy, capable of meetings its recurrent expenditures from its own taxes

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Annex 3: Selected Key Reforms and Anticipated Impacts

Implemented to date

Area of Reform Key Action Anticipated Timeframe

Business Processes and Organization

Creation of the Operations Committee (OpsCom) and Country Teams

Streamlined review process Improved strategic alignment Increased cross-complex communication Improved oversight of work products (Country Strategy Papers, Country Portfolio Reviews, etc)

2008

Creation of Chief Operating Officer (COO) position

Improved cross-Complex decision making Corporate Strategy oversight

2008

Delegation of Authority Matrix Accelerated project processing time Empowered local management Enhanced country relations

2008

Creation of the Procurement and Fiduciary Services Department (ORPF)

Improved quality standards and service delivery Lower transaction costs and improved harmonization with multilateral development Banks

2008

Decentralization Roll-out of 26 Field Offices with customized staffing

Increased country dialogue and ownership Better donor coordination Elevated role of Bank

25 FOs operational in early 2010

Quality-at-Entry and Managing for results

Creation of the Quality Assurance and Results Department (ORQR)

Enhanced quality at entry of operations 2008

Introduction of the readiness review and quality at entry standards for operations

Enhanced quality at entry of operations 2009

New procedures and guidelines for the timely delivery of Project Completion Reports

Improved portfolio performance indicators 2009

Budget Management Framework

Delegation of resource management to cost center managers

Enhanced flexibility in decision making for optimal use of allocated resources and better results on the ground

2008

Creation of the Strategy and Budget Department (COBS)

Creating a continuum on Strategic planning, Programming and budgeting processes Increased response capacity

2008

Fixed cost ratio to replace headcount controls (at the full UA budgeting implementation stage)

Dynamic staff planning January 2010

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Going Forward

Area of Reform Key Action Anticipated Timeframe

Risk Management Capacity

Definition of the Bank’s risk appetite Common understanding of risk appetite within the institution

4th quarter 2010

Completion of the risk dashboard Better institutional oversight and monitoring of risks

4th quarter 2011

Repositioning of the risk functions Implementation of an enterprise risk management framework and strengthen risk governance

4th quarter 2010

Reinforcement risk management functions through adequate staffing, systems and processes

Strengthen risk capacity 1st quarter 2011

Creation of a new credit committee Greater focus on credit risk monitoring and related issues.

4th quarter 2010

Ensure an adequate capacity to cover increase in investigations and audits.

Enhanced ability to deal with potential increase fraud / corruption issues

1st quarter 2011

Phased approach to strengthen operational risk control functions, resources and tools

Enhanced focus on operational risks and control. Improved reporting on qualitative and quantitative assessment of Operational Risk

on going completion in 4th quarter 2012

Automate the credit risk approval workflow Review of systems, applications, and data integrity for risk management.

Ensure an improved monitoring of the credit approval process More efficient use of IT to improve risk management efficiency

4th quarter 2010 2nd quarter 2011 for the improved IT infrastructure

Business Processes and Organization

Creation of the Energy, Environment and Climate Change Department

Spearhead the Bank’s operations in energy, environment and climate change

2nd quarter 2010

Human Resources

Conducting of the Staff Survey Enhanced Responsiveness to staff views Every 2-3 years Next survey mid 2010

Competitive Compensation Framework and retirement plan

Improved Recruitment and retention 2012, with annual updates

Decentralization of Human resource function

Improved responsiveness to client needs; improved services

Completion of Business Processing, end Q4 2010

Decentralization

Decentralization Guidelines Establishment of Offices in non-regional member states

Empowered Field Office Teams Increased Field Office portfolio management Improve communication, knowledge of the Bank and Africa

90% of all procurement and fiduciary decisions to be taken by FO by 2012 Feasibility study completed by 4th quarter 2010

Quality-at-Entry and Managing for Results

Introduction of the readiness review and quality at entry standards for CSPs

Enhanced quality at entry of operations 2010

Simplified project logframes supported by staff training on the use of logframes Guidelines for the timely delivery of Project Completion Reports

Improved portfolio performance indicators

2010 new logframe and 2011-2012 training Further enhancement in 2010

Revision of project supervision reports Introduction of core sector indicators and pilot results reporting system

Improved results on the ground and capacity to track and report results (outputs and outcomes)

2010

Bank-wide results management framework.

Stronger link between resource allocation and performance

Proposal ready by 1st semester 2010

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Area of Reform Key Action Anticipated Timeframe

MTS Review and Long-term Strategy

Review of the MTS is ongoing. This will inform the preparation of a long-term strategy for the Bank to match its vision as the economic motor and knowledge platform of Africa. Mid -Term Review of the 2008-2010 Business Plan for Private Sector Operations

Clearer view of the long-term priorities of the Bank. Better support to RMCs in areas where the Bank has demonstrated comparative advantage. Improved operational efficiency and effectiveness Streamlined organizational structure Enhanced strategic focus and coordination across the Private Sector Development (“PSD”) Triangle

MTS Review: 4th quarter 2010 Long-term strategy: 2011 Board discussion of the PS Mid-Term Review document by April 2010

Income Model

Develop a comprehensive Income model integrating:

� Loan pricing including the coverage of administrative expenses

� Income Allocation including transfers to reserves and distributions to development initiatives;

� Review of Capital Adequacy framework;

� Effective administrative expense management

Enhance the financial sustainability of the Bank

4th quarter 2010

Integrated Urban Development Strategy

Update Bank’s approach to urban development

An integrated approach to urban development including climate change concerns

3rd quarter 2010

Disclosure Policy

Revision of the Bank’s disclosure policy. Best practices in the disclosure of information to the public.

3rd quarter 2010

Private Sector Development Policy

Draw up a comprehensive policy for the private sector

A coherent guide for Bank’s private sector operations

4th quarter 2010

Energy Sector Policy

Preparation of a policy approach for the Bank in the broad area of energy

Improve Bank’s capacity to treat the complicated issues associated with energy operations

1st quarter 2011

Large Loans Policy

Draft policy guidance on how Bank should approach the case of large loans sought by RMCs

Efficient allocation of the Bank’s financial resources

2nd quarter 2010

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Annex 4: Governance, Controls and Safeguards in the Bank 1 The Office of the Auditor General (OAGL): 1.1 The Office of the Auditor General (OAGL) was established by Resolution B/BD/2005/16. It is responsible for directing and supervising internal audit and anti-corruption and fraud investigation functions. The internal audit function is charged with providing all levels of management with periodic reports, independent and objective appraisals and audits of financial, accounting, operational, and other activities, including identifying possible means of improving accountability, efficiency of operations and economy in the use of Bank resources both internally and externally. The Auditor General is appointed and removed by the President in consultation with the Board of Directors, thus ensuring the independence of OAGL and objectivity in the discharge of its functions. The Office of the Auditor General reports functionally to the Audit and Finance Committee (AUFI) and the Committee on Development Effectiveness (CODE) of the Board of Directors. The remaining functions of OAGL will be strengthened by implementing procedures and processes that are consistent with best practices. Integrity Function

1.2 The Integrity and Anti-Corruption Division, (IACD) is currently one of the divisions of the Auditor General’s Office. It is the main investigative body in the Bank and its overriding mandate is to undertake unhindered investigations into allegations of fraud, corruption and misconduct affecting Bank-financed activities. The review of the current best practices of sister MDBs indicates that the Integrity Function is separated from the Audit Function. Given IACD’s mission to be a proactive and responsive investigation function that handles integrity issues in a timely manner, it will therefore be proposed that IACD be established as a separate organizational unit from OAGL. Management will prepare a separate report on the proposal it intends to make in this regard and submit it to the Board of Directors for its consideration. 2 Independent evaluation of operations (OPEV): 2.1 Independent evaluation of operations, conducted via the Bank’s Operations Evaluation Department (OPEV), helps to ensure quality and efficiency of policies and operations, and to maintaining a focus on good practice and development effectiveness. It helps to ensure that the Bank is publicly accountable, and that it systematically draws lessons from implementation of policies and programs to feed back into decision making at various levels. 2.2 OPEV examines and validates a wide range of Bank activities, including Project Completion Reports and undertakes project-level evaluations on a sample of operations. It also undertakes policy and program evaluations at sector and country levels, as well as thematic studies, for example on internal Bank processes such as Decentralization. OPEV’s evaluations are routinely published on the Bank’s external website, and disseminated electronically and in hard copy, ensuring public access to evaluation findings, conclusions and recommendations. OPEV evaluations are an important component of corporate processes such as ADF reviews. 2.3 OPEV is an active member of the Evaluation Cooperation Group (ECG) established to harmonize procedures, promote joint evaluation and share best practice across the evaluation offices of the MDBs. OPEV has recently been restructured and had its staffing upgraded in order to efficiency tackle an evaluation program which is growing in line with the Bank’s increasingly complex policy agenda and increasing scale of operations.

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2.4 Since 200238, the Bank has progressively increased the independence of OPEV. At present, the Board’s Committee on Development Effectiveness (CODE) approves OPEV’s work program and budget each year and considers OPEV’s reports, which are supplemented by a formal Management Response to evaluation recommendations. Recently, the Board of Directors approved further measures to strengthen the independence of this Department, by approving Management’s proposal that the appointment and removal of the Head of OPEV (which was a prerogative of the President) be done with the concurrence of the Board of Directors.39 3 The Independent Review Mechanism (IRM): 3.1 The IRM was established by the Boards’ Resolution of 30 June 2004 and reports directly to the Bank’s Board of Directors. It has been operational since 2006 with the establishment of the Compliance Review and Mediation Unit (CRMU) to administer the IRM. CRMU currently employs three professionals and two support staff and its Roster of Experts comprises 3 external experts, who are called upon to conduct compliance reviews. 3.2 As of July 2009, CRMU has received four complaints, including for the Bujagali Hydropower and Interconnection project. A further three complaints have been registered in 2009, which are at either problem-solving stage or at an initial response stage. 3.3 This indicates increased awareness about the IRM and its contribution to enhancing the effectiveness of the Bank’s operations. The CRMU has developed an Outreach Strategy for sensitizing stakeholders and civil society about its existence and procedures. The strategy, which is already being implemented, includes reaching project affected people and civil society via printed media and web as well as workshops. It also organizes seminars for Bank staff at HQ and FOs, including sensitizing all new staff about the IRM through the Bank’s induction program. 3.4 As the Bank’s operations increase, especially with financing of larger and complex infrastructure projects, the capacity of the IRM will be enhanced in tandem. CRMU proposes to increase its staffing in 2010 and will continue to monitor its capacity going forward.

4 The Ethics Officer (EO): 4.1 The primary function of the EO is to provide impartial confidential advice as well as guidance to Management and staff on matters pertaining to ethics and conduct of the Bank’s staff in the carrying out of their duties. 4.2 The EO’s duties include clarifying conflict of interest concerns, assisting staff in making full disclosure of such conflicts, and providing guidance on ethical issues involving the Bank’s Rules and Regulations and Code of Conduct. The principal aim is to provide assistance in resolving ethical matters in a manner that contributes to the good governance of the Bank and helps to maintain its reputation for probity, integrity, and impartiality. 4.3 The EO is also responsible for advising and assisting in the development of a framework and guidelines which sets out acceptable standards of conduct as well as the administration and interpretation of the Staff Code of Conduct.

38 See Presidential Directive No. 10/2002 concerning the Operations Evaluation Department 39 See Board of Directors’ Resolution B/BD/2009/11

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4.4 The scope of the EO’s functions is limited to staff members and does not extend to elected officers, who are covered by a separate framework. The EO acts independently of any official, department, office or other organizational unit of the Bank, although, for administrative purposes, the EO reports to the Chief Operating Officer of the Bank.

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Annex 5: GCI-VI Scenarios

Prudential Ratios under Baseline Lending Projections No GCI 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Risk Capital Utilization Rate 60% 67% 82% 95% 108% 119% 130% 138% 146% 151% 154% 157%

Debt to Usable Capital 85% 73% 96% 106% 130% 138% 161% 175% 196% 216% 227% 238%

Lending limit (Gearing) 53% 59% 71% 80% 90% 99% 109% 117% 126% 134% 141% 148%

150% GCI and 4% Paid In Capital 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Risk Capital Utilization Rate 60% 67% 79% 89% 98% 105% 111% 115% 119% 120% 123% 125%

Debt to Usable Capital 85% 73% 55% 61% 74% 78% 88% 92% 100% 106% 112% 118%

Lending limit (Gearing) 53% 59% 31% 35% 39% 43% 47% 51% 54% 58% 61% 65%

150% GCI and 5% Paid In Capital 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Risk Capital Utilization Rate 60% 67% 78% 88% 96% 102% 107% 111% 113% 114% 117% 119%

Debt to Usable Capital 85% 73% 55% 61% 74% 78% 87% 92% 99% 105% 111% 117%

Lending limit (Gearing) 53% 59% 31% 35% 39% 43% 47% 51% 54% 58% 61% 65%

150% GCI and 6% Paid In Capital 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Risk Capital Utilization Rate 60% 67% 78% 86% 94% 99% 104% 107% 108% 109% 112% 113%

Debt to Usable Capital 85% 73% 56% 61% 74% 78% 87% 91% 98% 103% 110% 115%

Lending limit (Gearing) 53% 59% 31% 35% 39% 43% 47% 51% 54% 58% 61% 65%

175% GCI and 4% Paid In Capital 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Risk Capital Utilization Rate 60% 67% 79% 88% 97% 103% 109% 112% 115% 116% 119% 121%

Debt to Usable Capital 85% 73% 51% 56% 68% 72% 81% 85% 92% 97% 103% 109%

Lending limit (Gearing) 53% 59% 28% 32% 36% 39% 43% 46% 50% 53% 56% 59%

175% GCI and 5% Paid In Capital 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Risk Capital Utilization Rate 60% 67% 78% 86% 94% 99% 104% 107% 109% 110% 113% 114%

Debt to Usable Capital 85% 73% 51% 56% 68% 72% 81% 84% 91% 96% 102% 107%

Lending limit (Gearing) 53% 59% 28% 32% 36% 39% 43% 46% 50% 53% 56% 59%

175% GCI and 6% Paid In Capital 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Risk Capital Utilization Rate 60% 67% 77% 85% 92% 96% 100% 103% 104% 104% 107% 109%

Debt to Usable Capital 85% 73% 51% 56% 68% 72% 80% 84% 90% 95% 101% 106%

Lending limit (Gearing) 53% 59% 28% 32% 36% 40% 43% 47% 50% 53% 56% 59%

200% GCI and 4% Paid In Capital 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Risk Capital Utilization Rate 60% 67% 78% 87% 95% 101% 106% 109% 112% 112% 115% 117%

Debt to Usable Capital 85% 73% 47% 52% 63% 67% 75% 79% 85% 90% 96% 101%

Lending limit (Gearing) 53% 59% 26% 29% 33% 36% 40% 43% 46% 49% 52% 54%

200% GCI and 5% Paid In Capital 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Risk Capital Utilization Rate 60% 67% 77% 85% 93% 97% 102% 104% 105% 106% 108% 110%

Debt to Usable Capital 85% 73% 47% 52% 63% 67% 75% 78% 84% 89% 94% 99%

Lending limit (Gearing) 53% 59% 26% 29% 33% 36% 40% 43% 46% 49% 52% 54%

200% GCI and 6% Paid In Capital 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Risk Capital Utilization Rate 60% 67% 77% 84% 90% 94% 97% 99% 100% 100% 102% 104%

Debt to Usable Capital 85% 73% 48% 52% 63% 67% 74% 78% 84% 88% 93% 98%

Lending limit (Gearing) 53% 59% 26% 30% 33% 36% 40% 43% 46% 49% 52% 54%

300% GCI and 4% Paid In Capital 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Risk Capital Utilization Rate 60% 67% 77% 84% 90% 94% 97% 99% 100% 100% 102% 104%

Debt to Usable Capital 85% 73% 37% 40% 49% 52% 58% 61% 66% 70% 74% 78%

Lending limit (Gearing) 53% 59% 20% 22% 25% 27% 30% 32% 35% 37% 39% 41%

300% GCI and 5% Paid In Capital 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Risk Capital Utilization Rate 60% 67% 75% 81% 86% 89% 92% 92% 93% 92% 94% 96%

Debt to Usable Capital 85% 73% 37% 41% 49% 52% 58% 60% 65% 69% 73% 77%

Lending limit (Gearing) 53% 59% 20% 22% 25% 28% 30% 32% 35% 37% 39% 41%

300% GCI and 6% Paid In Capital 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Risk Capital Utilization Rate 60% 67% 74% 79% 83% 85% 86% 87% 86% 85% 87% 89%

Debt to Usable Capital 85% 73% 37% 41% 49% 52% 57% 60% 64% 68% 72% 75%

Lending limit (Gearing) 53% 59% 20% 22% 25% 28% 30% 33% 35% 37% 39% 41%

113

Sustainable Level of Lending (UA million)

vv PIC (%) 4% 5% 6%

GCI (%) 0 1,320 1,320 1,320

150 2,691 2,895 3,093 175 2,825 3,060 3,294 200 2,962 3,224 3,484 300 3,484 3,874 4,265

Sensitivity Analysis for 200% GCI with 6% PIC (in UA billion)

Base Case SLL assumes 39% of PSO in annual lending, 40 bps sovereign lending spread, average WARR of 2.85 from

2011 to 2020 with new sovereign loans rated 3 and new private loans rated 4;

* Average WARR of 3.33 from 2011 to 2020 with new sovereign loans rated 4 and new private loans rated 5;

** Average WARR of 3 from 2011 to 2020 with new sovereign loans rated 3 and new private loans rated 5;

*** Increase in ADB‘s Admin Expenses from 29% to 34% share of Bank’s Group Expenses resulting in average

increase of admin cost of 18% compared to base case

1.98

2.89

3.15

3.513.30 3.40

3.80

1.5

2.0

2.5

3.0

3.5

4.0

WARR of 3.33* 60% Share of

PSO in annual

lending

50% Share of

PSO in annual

lending

WARR of 3** Increase in

ADB Admin

Expenses***

Lending

Spread

Increase of 20

bps

30% Share of

PSO in annual

lending

SLL

in

UA

Bil

lio

n

Base Case SLL of UA 3.48 bn

114

Annex 6: GCI-V Share Subscriptions under 4 Step Process

Regional Members

% of Regional Shares

(Ini-GCI-IV)

Shares Allocated in Step 1

(1)

Shares not Allocated in

Step 1 (GCI-V)

(2)

Relative Reemptive Rights of

Members with Allocations in

Step 1

(3)

Supplementary Allocation in Step 3 (3)*

44,583 (4)

Total GCI-V

Allocation (1) + (4)

1 Algeria 6.308 15,057 7.836 3,493 18,550

2 Angola 1.936 4,495 2.405 1,072 5,567

3 Benin 0.324 751 0.402 179 930

4 Botswana 3.554 8,252 4.415 1,968 10,220

5 Burkina Faso 0.760 1,764 0.944 421 2,185

6 Burundi 0.479 - 1,112 -

7 Cameroon 1.537 3,569 1.909 851 4,420

8 Cape Verde 0.155 - 359 -

9 Cent.Afr. Rep 0.119 - 294 -

10 Chad 0.184 - 501 -

11 Comoros 0.037 - 86 -

12 Congo 0.806 1,871 1.001 446 2,317

13 Cote d'Ivoire 7.501 - 17,417 -

14 Dem.Rep.Congo 2.561 - 6,474 -

15 Djibouti 0.128 - 322 -

16 Egypt 8.522 19,789 10.587 4,720 24,509

17 Eq.Guinea 0.316 89 0.393 175 264

18 Eritrea 0.265 - 615 -

19 Ethiopia 2.650 6,154 3.293 1,468 7,622

20 Gabon 2.521 - 5,854 -

21 Gambia,The 0.221 514 0.275 123 637

22 Ghana 3.393 7,879 4.216 1,879 9,758

23 Guinea 0.760 1,765 0.944 421 2,186

24 Guinea Bissau 0.056 - 129 -

25 Kenya 2.416 5,611 3.002 1,338 6,949

26 Lesotho 0.253 588 0.315 140 728

27 Liberia 0.471 - 1,277 -

28 Libya 6.086 14,132 7.561 3,371 17,503

29 Madagascar 1.079 2,506 1.341 598 3,104

30 Malawi 0.599 - 1,391 -

31 Mali 0.743 1,726 0.923 412 2,138

32 Mauritania 0.518 - 1,203 -

33 Mauritius 1.074 2,494 1.334 595 3,089

34 Morocco 5.507 12,788 6.842 3,050 15,838

115

35 Mozambique 1.049 2,436 1.303 581 3,017

36 Namibia 0.564 1,309 0.700 312 1,621

37 Niger 0.512 - 1,188 -

38 Nigeria 14.792 34,347 18.376 8,193 42,540

39 Rwanda 0.226 525 0.281 125 650

40 Sao Tome & Principe 0.148 - 344 - -

41 Senegal 1.706 3,961 2.119 945 4,906

42 Seychelles 0.110 255 0.136 61 316

43 Sierra Leone 0.506 - 1,223 -

44 Somalia 0.217 - 592 -

45 South Africa 3.497 51,875 4.344 1,937 53,812

46 Sudan 1.074 - 2,892 -

47 Swaziland 0.553 1,283 0.686 306 1,589

48 Tanzania 1.420 3,297 1.764 786 4,083

49 Togo 0.336 - 853 -

50 Tunisia 2.324 5,396 2.887 1,287 6,683

51 Uganda 0.958 1,768 457 1,768

52 Zambia 2.152 4,996 2.673 1,192 6,188

53 Zimbabwe 3.858 8,958 4.793 2,137 11,095

Total Regionals 100.000 232,200 44,583 100.000 44,583 276,783

Source: ADB Financial Statistics

116

Annex 7: LESSONS LEARNED FROM GCI V

The main objectives of GCI-V were financial rather than operational. The main aim was to strengthen the capital of the Bank. It is therefore difficult to draw operational lessons directly from this financial exercise. However, GCI-V was developed during a period when many changes in the Bank Group’s policies and operations were being introduced, and these efforts were closely linked to the financial measures taken in preparing for and implementing GCI-V. Assessments have been made of the various changes made at this time, and lessons have been drawn which are relevant to the Bank’s operational work. GCI-V was adopted in 1998 and became effective in 1999. Preparation of GCI-V coincided with an extensive consultation on the Bank’s operational priorities, drawn together in a paper published in 1999, known as the Vision Statement. This reaffirmed the Bank’s aim of becoming the leading development finance institution in Africa, dedicated to providing quality assistance for poverty reduction on the continent. The Vision was followed by policy reforms which sharpened the Bank Group’s strategic orientation. It also led to a series of organizational reforms, aimed at strengthening and scaling up the Bank Group’s operational and analytical capacities. An independent assessment of these reforms was undertaken as part of a major evaluation of the African Development Fund VII, VIII and IX, commissioned by the Bank’s Operations Evaluation Department (OPEV). The report, entitled “Stepping up to the Future”, issued in 200440. Although the formal focus of the study was on the ADF, the study was in fact comprehensive and reviewed the reform processes in progress across the Bank Group over this period. The study concluded that, in relation to the situation in 2004, the Bank Group faced challenges in seven key areas:

• The centrality of knowledge and the importance of strengthening the Bank’s analytical and knowledge work;

• Selectivity: the need for the Bank to identify its comparative advantage and prioritize its policy goals;

• The importance of economic and sector work and quality at entry and the need to strengthen these aspects of the Bank’s work;

• Results based management and the need to integrate this fully into the Bank’s approach; • Effective delegation and decentralization including an effective presence in RMCs; • Country focus: the need to re-establish clear lines of communication and attention to RMC

interests; and, • The crucial role of monitoring and evaluation in building a learning organization, oriented

towards maximizing impact. These conclusions drew on established good practice in other MDBs and other development institutions. All relate more or less directly to strengthening the Bank Group’s operational effectiveness and results. The Bank’s Board and management recognized the picture presented and accepted the lessons. Over the past five years, the Bank has acted on each of the areas noted above and has made significant progress. Recent evaluation studies indicate that, while there is still room for improvement, the key operational lessons have been taken up and acted upon.

40 Stepping up to the Future: An Independent Evaluation of African Development Fund VII, VIII and IX. OPEV, African Development Bank, July 2004.