ADB backs more policy-based loans for priority sectors

MANILA, Philippines — The Independent Evaluation (IE) unit of the Asian Development Bank (ADB) is urging the greater use of policy-based loans (PBL) in priority sectors where investment loans are also taken out such as transport, energy and water.

In a new report on the multilateral bank’s policy-based lending for the period 2008-2017, the IE unit stressed that lending for policy reforms is critical to the development of the Asia Pacific region because it encourages borrowing governments to “carry out difficult policy and institutional reforms” while helping them meet budget needs.

The fast-disbursing policy loans are accompanied by technical support from the bank to assist governments in preparing policy actions.

The IE noted that policy-based lending is primarily used in more developed countries that are more capable of developing reforms, but the new evaluation shows that the greater use of policy loans in more fragile countries can “lift overall development in the region.”

“Policy-based lending provides ADB and other development banks with an opportunity to work with countries on reforms to promote economic growth and reduce poverty, so it has a high potential impact,” said IE director general Marvin Taylor-Dormond in a statement. “This type of lending supports governments in Asia and the Pacific, and countries value the policy advice from ADB’s cross-country expertise, based on its work in many countries of the region.”

The IE unit reports to the bank’s board of directors through the Development Effectiveness Committee. Its feedback contributes to the development of ADB’s policies, strategies and operation in the Asia Pacific region.

ADB’s policy lending accounts for nearly 30 percent of its annual loan disbursements. The success rate of its policy-based lending operations has doubled to 80 percent during the 2008-2017 review period compared with the previous decade.

“The evaluation, however, raised concerns on whether the reforms supported tackled the region’s most urgent priorities, and whether the policy actions supported by ADB were in themselves critical for removing constraints to growth and poverty reduction, the overall purpose of policy-based lending,” said IE in the statement.

As part of its recommendations to the board, the unit urges the greater use of policy loans in sectors where investment loans are also undertaken and where ADB has experience in. This is meant to ensure that policy constraints on the achievement of development outcomes, such as increased access to services, are supported by relevant policy reforms.

“ADB makes significant investments in transport, energy, and water to improve service delivery and inclusive growth and it could make greater use of PBL to help unlock difficult policy settings in these sectors. PBL can also be valuable when the development objective requires more than investments in physical infrastructure. Such an approach would make ADB’s investment lending more efficient and sustainable,” said IE.

The IE, however, said the bank must be highly selective in the provision of policy loans as these absorb the bank’s capital and so “increasing the lending ceiling may reduce ADB’s sustainable level of lending in the future.”

“Policy-based lending has the potential to advance the reforms that will be needed to tackle Asia’s many persistent and emerging development challenges,” said evaluation team leader Joanne Asquith, in a statement. “But donor funds in general are limited, so the right reforms and policy actions need to be identified and agreed on. ADB must focus on the critical reforms it wants to influence and countries must be fully committed to implement them.”

ADB’s policy-based lending has grown to $27.1 billion from 2008-2017 through 181 operations. This was almost half of the total value of the loans since the modality was introduced 40 years ago. Since its introduction, almost all developing member countries have had at least one PBL operation.

Of the total PBL operations in 2008-2017, Indonesia, Pakistan, Philippines and Vietnam accounted for 65 percent of PBL approvals.

In the Philippines, PBLs were used for the development of capital markets and introducing reforms in the energy sector, among others.

Last August, the bank approved a new $300 million policy-based loan to the Philippines to support the strengthening of the country’s public-private partnership (PPP) framework.

The bank said the government reforms it supports under the Expanding Private Participation in Infrastructure Program (EPPIP) Subprogram 2 aims to create the enabling policy environment that would allow PPP projects to flourish through public sector expertise and innovation.