Considerations for ADB s New Strategy. A Consultation Paper

Transcription

1 Considerations for ADB s New Strategy A Consultation Paper Strategy and Policy Department September 2016

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3 Road to 2030 Consultation Paper: Considerations for ADB s New Strategy I. Introduction and Purpose 1. ADB is preparing its new long-term strategy leading to The strategy will outline a vision and key directions for ADB s future engagement with its developing member countries (DMCs). It will describe how ADB aligns its support with the Sustainable Development Goals (SDGs) approved in September 2015 and the new global climate agreement agreed in Paris in December A new corporate results framework will be included in the strategy to monitor and report progress on its implementation. 2. The strategy preparation is following a fully consultative process involving ADB staff, Management, Board, and stakeholders from both developing and developed member countries. Extensive consultations with officials, private sector, civil society, and policy and research think tanks are being held as part of this process. 3. The purpose of this short paper is to identify and highlight key strategic issues for consultations with the various external stakeholders of ADB. The consultations will focus on both the what and the how questions pertaining to the new strategy. II. Background: Strategy 2020 and the Midterm Review Action Plan 4. Strategy 2020, the current long-term strategic framework for the ADB, was approved in Strategy 2020 articulated the vision of An Asia and Pacific Region Free of Poverty. It focused ADB s mission on three strategic agendas: inclusive economic growth, environmentally sustainable growth, and regional integration. In order to leverage ADB s regional experience and comparative strengths, Strategy 2020 also emphasized five drivers of change: (i) private sector development and private sector operations, (ii) good governance and capacity development, (iii) gender equity, (iv) knowledge solutions, and (v) partnerships. Under Strategy 2020, ADB would devote 80% of its financing for five core operational areas: (i) infrastructure; (ii) environment, including climate change; (iii) regional cooperation and integration; (iv) financial sector development; and (v) education. 5. A Mid-Term Review (MTR), 2 completed in April 2014, noted the satisfactory implementation of Strategy 2020 and recommended a 10-point program for ADB s strategic and organizational directions focused on: (i) poverty reduction and inclusive economic growth, (ii) environment and climate change, (iii) regional cooperation and integration, (iv) infrastructure development, (v) middle-income countries, (vi) private sector development and operations, (vii) knowledge solutions, (viii) financial resources and partnerships, (ix) delivering value for money in ADB, and (x) organizing to meet new challenges. 1 ADB Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank, Manila. 2 ADB Midterm Review of Strategy 2020: Meeting the Challenges of a Transforming Asia and Pacific. Manila.

4 2 III. Why a new Strategy? 6. The directions articulated in Strategy 2020 and the MTR remain broadly relevant. However, there are several important reasons for ADB to revisit and update its strategy and realign its operations in order to further improve its effectiveness and relevance in the Asia- Pacific region. These include the following: 7. Asia-Pacific s fast-changing development landscape. The development landscape of Asia and Pacific is changing fast. ADB needs to adapt to these changing circumstances. There are, in particular, the following four global mega-trends that are shaping the future of Asian development. It will be vital for the new strategy to consider the implications of these trends and reflect on how ADB s support should accordingly adjust to support sustained growth and development of the region. 3 i. Shifting Economic Power. With Asia having outperformed the rest of the world on economic growth, it accounts for 40% of world GDP (in 2014) compared to less than 30% in 2000, and generates two-thirds of total global growth. Consequently, the balance of economic power is moving back to Asia. Asia is also where rapid urbanization is happening. By 2030, 68% of Asia s population will reside in urban areas. 293 Asian cities will support a third of the growth in global GDP by ii. Accelerating Technological Change: The mobile internet, the internet of things, advanced robotics and other disruptive technologies will exert huge economic impacts globally and in the region. Technological advancement is driving productivity enhancement across countries, firms and industries, but is also leading to some labor displacement as automation of paid activities is increasing. Fundamental changes in business models of companies are taking place, made possible by technological disruption, and the pace of transformation is exponential. iii. Aging: Asia s population is aging, and by 2050, the proportion of population over the age of 65 will triple. Aging will result in slowing down labor force growth in most DMCs. DMCs will need to achieve productivity gains of over 50% to compensate for this slowdown and to maintain economic growth. iv. System-wide Transformation: Four interconnected factors can have profound impacts on Asian economies and societies. First, greater global and regional interconnectedness through trade, finance, and information flows will present unprecedented opportunities (particularly for Asia-Pacific) but will also raise contagion-related vulnerabilities. Second, increasing global volatility will create greater economic uncertainty, could disrupt investment and growth, and dampen employment creation. Third, rising inequality could be detrimental to long-term growth and cause social conflict. Finally, geopolitical instability caused by armed conflict, terrorism, and other related reasons is a potent threat to global growth. 8. Growing diversity of ADB clients. While most ADB DMCs have achieved or will soon achieve middle-income status, they are becoming more diverse in terms of economic strength, development needs and capacities. Upper middle-income countries (UMICs) have emerged in the region with higher living standards and stronger capacities, but they still need to progress further in terms of economic development, social change and quality of institutions to join the ranks of fully developed nations. Lower middle-income Asia is rising but is constrained by remaining poverty; growing inequality; gender disparity; climate change-related and environmental vulnerability and fragility; rapid urbanization; insufficient infrastructure; weak 3 A more detailed summary of the changing development landscape of Asia and the Pacific is in Appendix 3.

5 3 private sector development; skills, technology and productivity gaps; and weak governance and quality of institutions. Small-island and fragile economies in the region, on the other hand, remain highly vulnerable to economic, environmental and disaster-related shocks and are constrained by geography, small population size, and low institutional capacities. The new strategy needs to recognize this diversity in ADB s client base and prepare approaches that are relevant to the development needs and aspirations of the various country groups. 9. New global development agendas. ADB s support to DMCs has to be aligned with the new international agenda agreed in To this end, the new strategy will need to respond to the SDGs, which represent a broad and ambitious development agenda, and require huge resources, capacities, and political will to achieve. The strategy must also consider the outcomes of the Conference of Parties on Climate Change (COP 21) in Paris, which reached a universal and legally binding agreement to address climate change issues. Finally, the strategy will also need to take into account the outcomes of the Financing for Development Conference in Addis Ababa, which sought to develop credible financing arrangements to implement the SDGs by leveraging both public and private finance. 10. Expanding financing sources. Financial flows from the private sector in the shape of foreign direct investments, portfolio investments, remittances and other sources have grown exponentially and dwarf public sector resources. In addition, new development finance institutions have emerged, including the Asian Infrastructure Investment Bank, the Green Climate Fund, and the New Development Bank, that offer ADB expanded opportunities for collaboration and cofinancing. Strong partnerships with these and other institutions under the new strategy will be vital for ADB to leverage its resources and provide effective and holistic assistance to client DMCs. At the same time, as sources of development financing increase, ADB will need to continue to build its own capacity and improve its products and services to remain a partner of choice in the region. 11. ADB s expanded lending capacity. The significant expansion in ADB s lending capacity starting in 2017, by combining Asian Development Fund (ADF) lending resources with the ordinary capital resources (OCR) balance sheet, will have a substantial impact not only on the scale of ADB operations but also on the nature of ADB s strategic partnerships with client DMCs. The ADF-OCR merger will also require careful consideration of related issues, including the allocation of increased resources along ADB s different business lines; and the implications of the scaling-up on staff and administrative budgets, the organizational structure, and business processes and procedures. Key Questions for Consultations Besides the ones mentioned, what are some other important global trends ADB should take into account in preparing the new strategy? Given the growing client diversity, should ADB pursue differentiated strategies, approaches and business processes for different groups of countries? How feasible and practical is such differentiation in the otherwise unified operational and institutional context of a single institution? Should ADB seek broad overall alignment with the new international development agenda (SDGs, COP21), or be more selective and target only a subset of specific goals and indicators that are related most directly to areas of its comparative advantage? How can ADB best collaborate and cooperate with the new development institutions? How can a lending expansion be best managed given the imperative to improve the quality of ADB projects and results?

6 4 IV. What should be the goal of the new Strategy? 12. Given the changing development landscape of the Asia-Pacific region, growing ambitions of ADB s client countries, and the emergence of the new global development agenda, there is an expectation that ADB, too, must change to remain relevant and effective on the road to Such change could be manifested in ADB s strategic and operational priorities, its business model, engagement modes, policies and processes, and its institutional setup. At the same time, ADB needs to think hard about what features from its existing operating model continue to be valued by clients and should be preserved, and which aspects are no longer needed and can be dropped. 13. In this change process, a key question for ADB is whether the existing vision is still relevant (An Asia-Pacific free of poverty). The vision question is important because it forms the fundamental basis for the overall future strategic direction and operational priorities of the institution. The current vision does not capture Asia and Pacific s key emerging challenges such as inclusion and equity, sustainability and resilience, regional integration, and others. A pursuit of a broader vision may help ADB to better support client countries in progressing on the wideranging and comprehensive mandate of the SDGs. It may also enable ADB to prepare to better respond to an increasingly middle-income Asia and Pacific, where extreme poverty is sharply declining, but where inequality is rising and quality of lives depend on creating jobs and opportunities, building inclusive societies, and creating healthier and sustainable natural environments. With these factors in view, one possible formulation of a new vision could be: A prosperous, inclusive and resilient Asia-Pacific region free of poverty. 14. The pursuit of such a vision leads ADB to attend to three interdependent and complementary strategic agendas: i. Prosperity: will come from sustained economic growth in DMCs through creation of productive assets and enabling business environments. ADB will expand infrastructure investments and support public sector governance and private sector development. It will pay particular attention to: Enhancing competitiveness and promoting innovations, including through better use of information and communication technology (ICT) and disruptive technologies in investments; Creating quality jobs; and Ensuring environment and social sustainability. ii. Inclusiveness: will happen when no one is left behind, and when the benefits of growth are equitably shared. To this end, ADB will strengthen access to services and economic and social opportunities, particularly for the disadvantaged, with a key focus on: Improving gender equality; Deepening social and financial inclusion; and Developing lagging areas and poorer regions. iii. Resilience: is critical to mitigate environmental, economic and social vulnerabilities that hit the poorest countries and the poorest people the hardest. This is particularly important for Asia and the Pacific which is highly vulnerable to both natural calamities due to its geography and habitation pattern as well as economic shocks due to increasing globalization. ADB will help build disaster-related, environmental,

7 5 social, and economic resilience in DMCs. From an environmental perspective, ADB will seek to become a regional and global leader on sustainable/green infrastructure finance. ADB will place a specific focus on: Accelerating environmental investments and climate change-related actions for DMCs to meet their intended nationally determined contributions (INDCs) for both adaptation and mitigation; Managing economic shocks, through policy, financing, and adjustment support; and Lessening social vulnerability, through building stronger social safety nets. Key Questions for Consultations Should ADB expand/change its vision or stick to the existing vision? Do the proposed strategic agendas of prosperity, inclusiveness and resilience offer sufficient alignment with the SDGs and the COP21 agreement? Are we missing out on any key agendas? What kinds of innovations and new ideas could ADB introduce to support these agendas? In its operational framework, should ADB pursue a flexible and client responsive approach (given the long-term strategy horizon), or should it pursue a selectivity approach that focuses more narrowly in a few selected sectors with concrete targets? V. What are ADB s value propositions? Where can it make a difference? 15. Amidst the growing sophistication of expectations from DMCs and the fast-changing development landscape, ADB has to clearly establish its own value propositions in the new strategy to maintain relevance for clients. In this regard, ADB s traditional financing role as a development bank remains critical, especially in view of the large development challenges of its DMCs. According to a recent estimate, as much as $29 trillion in financing are needed to address the infrastructure gap in Asia and the Pacific. 16. However, the financing role in itself is insufficient to demonstrate ADB s value-addition for the future for two interrelated reasons. First, there is also a high level of financial liquidity in the market with relatively low interest rates that DMCs with good credit standing can tap into to meet their financing requirements. And, second, ADB s financial assistance is small as compared to total financial flows for development and getting smaller. The proportion of official development assistance (ODA) financing in total external finance for ADB DMCs has gone down to 19% in 2014 from 90% in 2001, owing to the dramatic increase in the share of private flows (private grants, foreign direct investments, export credits and portfolio investments). Within ODA, ADB has only barely maintained its already small share at 0.9% in 2014 from 1% in At the same time, governments, in general have increased their domestic resource mobilization capacity through tax and non-tax sources. 17. Given these changing realities in global development finance, ADB has to reposition itself in two fundamental ways. First, it needs to ensure that every dollar of its own assistance is better leveraged and multiplied to raise more dollars that can go farther in meeting the financing needs of DMCs. And, second, it needs to guarantee that its financing delivers greater or at least as much value for money for the client as the financing available to the client from any other external source. Both of these are complex undertakings and require a fundamental shift in ADB s financing model and operational approach in DMCs.

8 6 18. ADB will adopt the following measures in the new strategy to maximize the value it adds in its DMCs and in the region for greater impact and results: i. Mobilizing and catalyzing financing. ADB will (a) following the ADF-OCR merger, maximize its own financing by optimizing the use of its balance-sheet; and (b) mobilize larger public and private resources over and above its own expanded financing. To mobilize more external resources, ADB can aim to become the leading infrastructure project developer in Asia to develop robust project pipelines that can attract private and public financing. ADB can enter into syndication agreements to bring in finance for key projects and consider taking greater equity stakes in projects. In addition, ADB can raise more external resources through: Generating greater cofinancing; Mobilizing greater private sector financing through expanding private sector operations, public private partnerships, and guarantee operations; Strengthening capital and bond markets to tap private sector resources; and Mobilizing domestic resources through supporting stronger public revenues and improved expenditure management. ii. Facilitating transfer of technology and knowledge. Even when DMCs can tap financial markets, ADB can add value by facilitating transfer of technology and knowledge, and skills and expertise. ADB will increasingly embed modern technology and new knowledge solutions in its project support to increase the value for money clients derive from its financing. To innovate in the development solutions it provides, ADB will: Deepen its efforts to promote use of high level technology in its operations, including greater use of ICT, particularly in infrastructure projects and for support to address climate change. ADB will also support governments in adapting new technologies for efficient and tech-enabled service provision; Work with the private sector through advance market commitments and other means to introduce innovative and breakthrough technologies in DMCs; Emphasize relevant knowledge solutions for DMCs and broker south-south knowledge cooperation; Strengthen knowledge-based operational approaches for integrated and multisector solutions for urbanization. For example, ADB could consider selectively adopting tier-2 cities for their holistic development and accelerated growth. Integrated and scaled-up approaches for food security, social infrastructure, and demography-related challenges including aging and youth unemployment, could also be explored; Proactively support areas and sectors that are critical for the region s sustainable development but which may not always be considered top priorities for investment by individual DMCs for various reasons. Such areas, for example, could include regional public goods, environment and climate change, gender and social protection, and knowledge production and dissemination; Scale-up innovative private sector projects, public private partnerships and transaction advice; and Develop one-stop solutions combining financial, analytical, and advisory instruments. iii. Optimizing regional cooperation and integration (RCI). RCI holds a unique transformative potential for the Asia-Pacific region. ADB has a distinct edge in this

9 7 area, based on its decades of experience in promoting cooperation and integration in the region. Among other roles, ADB will continue to: Be a primary honest broker for supporting intra-regional, inter-regional and global cooperation; Strengthen connectivity (including ICT connectivity), cross border flows (including digital trade) and competitiveness to harness global market forces; Promote the potential of cities and urban centers to establish multi-modal and multisector economic clusters and corridors; and Expand investments in regional public goods. iv. Supporting policy reforms. ADB has a seat on the policy table in many DMCs based on its credibility as a long-standing development partner. ADB will use this to further deepen policy and institutional reforms in DMCs for strengthening public sector management, enhancing service delivery, mobilizing domestic resources, enhancing capacity of subnational governments, improving state-owned enterprises, and promoting e-governance. ADB will align its support for governance and public sector management with major global compacts, including the SDGs, COP 21, and the Addis Ababa Tax Initiative with proper customization to serve local needs. v. Harnessing stronger partnerships. ADB will use its convening power, financing, and goodwill with stakeholders to mobilize strategic partnerships with local governments, civil society organizations, academia, centers of excellence, and community groups. Such partnerships will help foster innovative development solutions in DMCs by drawing on the best possible expertise and skills available from across the national and regional stakeholder spectrums. To help expand their contributions, ADB will develop approaches to directly engage with non-government partners in TAs and projects. ADB will continue to improve internal management of partnerships, streamline cofinancing processes, and provide more incentives for project team leaders who manage cofinanced projects. Key Questions for Consultations What are ADB s comparative strengths and weaknesses in relation to other multilateral and bilateral development institutions? Do the stated value propositions hold merit, and are we missing on any other key areas of ADB s value addition in DMCs? How can ADB strengthen its credibility and attractiveness as a cofinancing recipient and partner? How can ADB work better with the private sector to connect available market liquidity to bankable infrastructure projects? What can ADB do better in its role as a knowledge and technology transfer institution? What kind of balance should be struck between building in-house technical expertise and forging partnerships to access external expertise in these areas? VI. What should be the principles for ADB s engagement? 19. The new strategy should help ADB maintain and solidify its standing as the partner of choice for developing Asia and the Pacific. To this end, ADB has to position itself to provide effective solutions to challenges in client countries, adapted to their respective local contexts. It

10 8 also has to establish robust engagement principles that are best-suited to achieve the goals of the new strategy. The following key engagement principles will be pursued: 20. Prioritizing poor and vulnerable countries. To realize the vision of a prosperous, inclusive and resilient Asia and Pacific, ADB will continue to prioritize the poor and vulnerable countries of the region, including fragile and conflict-affected situations (FCAS), in its overall framework of assistance and in providing financial and human resources. 21. Allocating resources based on demand. While prioritizing the poorest countries, ADB will promote a demand-based approach for allocation of resources that addresses the development expectations of all its DMCs and invests in areas where ADB can add the most value. Such an approach will also help ADB better support the SDGs that are universal and apply to countries at all stages of development, including middle-income and UMICs. For the latter group of countries, ADB s meaningful and sustained engagement on the SDGs will require introducing greater flexibility in its policy of graduating countries from regular assistance. 22. While adhering to a demand-based principle for allocation of resources, ADB will take into account the absorptive capacity of DMCs as well as their performance in utilizing the allocated resources. The current pricing structure will continue, with the poorest and heavilyindebted countries receiving grant resources, while countries at higher income level accessing market-based lending. Grant resources, however, will be used not just to support countries that cannot borrow; these will also support broader DMC investments in public goods and disaster risk reduction, typical areas in which incentives to borrow are weak and need to be bolstered. The following principles in the allocation of resources will be considered: FCAS countries will need more resources and greater concessionality in lending terms; Minimum allocations for small Pacific island economies will increase over time; Countries in economic crisis will receive greater resources, recognizing that their needs are larger; Set-asides for regional projects and for disaster risk reduction will increase; Greater price differentiation will be considered for UMICs, according to their higher ability to pay; and The share of resources allocated for private sector operations will continue to increase. 23. Differentiated strategies across countries. The distinctions in the criteria for resource allocation across different groups of countries will be part of the differentiated operational strategies ADB will pursue for specific client groups in line with their particular challenges and needs. In general, almost all ADB clients (except possibly for Afghanistan and Nepal) will have become middle-income countries by They will have increasingly higher and more sophisticated expectations of support from multilateral institutions to meet their remaining development challenges and meet the SDGs. The new strategy will provide the broad framework of ADB s support to middle-income countries. Within its overall client base, ADB will spell-out specific strategies particularly for two groups of countries that have clearly different needs and expectations from its support. These are (a) countries in FCAS (even though they may have achieved middle-income status) and (b) UMICs. (a) Fragile and conflict-affected situations. ADB will consider a broader and more inclusive framework for support to FCAS. Consideration will be given to classifying FCAS countries over a spectrum, and not just on the basis of a CPA (country

11 9 performance assessment) score of 3.2 on an in and out basis. For this purpose, factors and indicators of fragility and conflict will be assessed beyond the CPA scores and criteria. Considerations of sub-national FCAS will be emphasized. Special support measures for countries entrenched in FCAS for more than 5 years may be developed. ADB will consider providing risk mitigation support for DMCs that are found vulnerable to fall in FCAS. At the same time, ADB may provide additional resources to support and sustain development performance of turnaround countries. A distinct focus of ADB s support will be to help ignite growth in countries in FCAS (given their low growth environments), including through supporting enabling business environments, promoting access to finance for SMEs, strengthening ICT in development, rehabilitating and upgrading infrastructure, and helping generate skills that have market demand. ADB s support will include efforts at state-building, strengthening capacities, reforming public sector delivery, and improving public sector systems. Community-based development initiatives will be strengthened and civil society engagement will be pursued. ADB will tailor its business processes to cut transaction costs for FCAS countries. This will include shortening of approval processes and greater delegation of project administration decisions. More resources will be provided in FCAS countries for project preparation and supervision and projects could have longer execution timeframes given the limited implementation capacities. ADB will maintain and further strengthen its field presence in FCAS countries. Qualified staff that have the right skills and motivation to work in FCAS will be appointed and trained to deal with and adapt to local contexts. (b) Upper middle-income countries. ADB recognizes UMICs as just not being important clients but also active contributors and collaborators for Asia and Pacific s regional development through the significant spillover effects of their increasing economic stature and influence. UMICs, for their part, continue to value engagement with ADB. They especially consider important the knowledge and best practice, innovation and capacity building support that comes embedded in ADB s assistance. UMICs use ADB resources to leverage additional finance, including private finance, to meet their financing requirements. ADB s engagement with UMICs is premised on harnessing the contributions of UMICs to the development of the region, particularly through three areas of engagement: (i) strengthening their role on regional cooperation and integration, (ii) enhancing their contributions, including finance, to address climate change and challenges of the poorest countries, and (iii) leveraging their capabilities and expertise to share knowledge and best practices with other DMCs. ADB will maintain its country-level support to UMICs in a few selected strategic areas in which they still seek support to overcome their outstanding development challenges. These include: (i) managing climate change and the environment, (ii) fostering regional public goods, (iii) mitigating inequalities and strengthening inclusiveness, (iv) facilitating knowledge cooperation and (v) improving governance and quality of institutions to make the public sector and markets work better.

12 Balancing country and regional lending. As ADB seeks to maximize its support for RCI under the new strategy, the proportion of regional projects in ADB s total portfolio and lending volumes will continue to increase. The financing requirements for regional projects, especially for large flagship projects in transport, energy and other sectors (such as, for example, the Turkmenistan-Afghanistan-Pakistan-India gas pipeline project) can be quite high. While additional resources will be deployed to meet these requirements, ADB will continue to use OCR and ADF set-asides to catalyze innovative RCI operations in existing and new sectors. In addition, ADB will fully leverage its support to generate greater cofinancing for regional projects from both traditional and new development partners and from UMICs. 25. Balancing public and private sector support. There is strong demand from DMCs for more nonsovereign support for private sector projects in infrastructure and other key areas to complement public sector investments. ADB will accordingly ramp-up its private sector operations to respond to country demand and to catalyze greater private resources. ADB will expand its geographic outreach to undertake more private sector operations in frontier economies. In addition to increased private sector participation in infrastructure, including PPPs, ADB may also explore opportunities for increased sector diversification. ADB will deploy more funds into the private sector by expanding its cofinancing operations, increasing its private equity fund investments, and expanding its risk mitigation products. 26. Greater use of country systems. ADB is committed to promote the use of country systems in its operations. The use of country systems is expected to reduce delays in project implementation, rationalize transaction costs, improve country ownership, and strengthen institutions and systems of DMCs to improve service delivery and achieve sustainable development. ADB will support the use of country systems in areas of procurement, public financial management (PFM), and environmental and social safeguards. Policy- and resultsbased lending instruments are already premised on the use of country systems. The strengths of country systems of individual DMCs, however, vary significantly. A uniform approach to promoting the use of country systems is, therefore, not feasible. ADB will pursue a context specific approach for each DMC consistent with the strength of the DMC s systems, capacities, and demand for the use of country systems in ADB operations. Key Questions for Consultations What can ADB do further to become a more effective development partner for countries in FCAS? How can ADB better prepare itself (strategic orientation, positioning, relevance, capacity etc.) to add more value in middle-income countries? Is the approach to seek greater flexibility in the application of ADB s policy of graduation from regular assistance correct? What are your suggestions for updating the graduation policy? How can ADB best balance scaling up private sector operations with considerations of maximizing development impact? How actively should ADB pursue the use of country systems? What conditions need to be in place for ADB to expand the use of such systems? VII. How to strengthen ADB s delivery? 27. Clients seek stronger, faster and better delivery of assistance from ADB. They are interested not just in what ADB has on offer in terms of sector and thematic support. They are, in many cases, even more interested at the scale and pace of ADB s responsiveness, the agility

13 11 with which it provides services, the efficiency of its field offices, and the transaction costs associated with accessing ADB support. Against this backdrop, and in a situation where clients have a growing number of options for meeting their external financing needs, ADB needs: (i) scaled-up financing, (ii) better products and modalities, (iii) stronger business processes, and (iv) improved staffing, skill sets and organization, to remain efficient and effective in responding to clients. 28. Maximizing ADB financing. ADB will ensure that the financing demands of clients are adequately met. With the ADF-OCR merger, ADB is optimizing its balance sheet to expand financing by up to 50% for DMCs and by up to 70% for the poorest countries. As the merger takes effect, ADB will continue to strengthen its policies and processes to ensure the best possible results and outcomes from its expanded portfolio of assistance. Going forward, to further augment its capacity to increase support to DMCs, ADB may seek a general or a special capital increase, when needed. Meanwhile, to create greater fiscal space for increasing lending volumes, ADB will continue to rationalize internal administrative and operational costs and ensure the most effective use of its budget. 29. Improving ADB products and modalities. ADB will continue to innovate on its products and modalities to provide financing instruments that are best suited to address the changing requirements of DMCs. For example, ADB will expand guarantees, syndication, risk transfer, asset management, and blended finance to catalyze greater private resources for development and to promote PPPs. ADB will also attempt to become a leading provider of local currency products in the region. At the same time, ADB will innovate on lending instruments to deepen its engagements with state-owned enterprises and local governments. Existing modalities including equity investments will be expanded and better utilized. The quality of technical assistance and non-lending products will be enhanced to support knowledge and advisory services and to facilitate sharing of best practices. 30. Strengthening business processes. To improve business process efficiency as operations are scaled-up, ADB is undertaking major portfolio reforms, including formulating a new procurement policy, procedures and guidelines. The reforms focus on three areas: (i) reducing end-to-end procurement time; (ii) improving the quality of procurement transactions; and (iii) strengthening delivery systems in DMCs as well as within ADB. With respect to end-toend procurement time and strengthening delivery systems, ADB, among other measures, will strengthen its support for executing agencies in improving their processes, as they account for about two-third of the overall procurement time. With respect to quality, ADB will engage more upfront in procurement aspects during project design as well as introduce new measures such as life-cycle costing of benefits. 31. Improving staffing, skill sets, and organization. To understand and respond to the changing development needs of Asia and the Pacific, ADB will continuously need to upgrade the quality of staff and bring in skills in emerging areas of operational priority. Further decentralizing staff resources and decision-making authority to resident missions will be critical. A key challenge will be to change the corporate culture of the bank to encourage staff to become less risk-averse in exploring innovative approaches even at the cost of failure. In addition, changing incentives to move away from an approval culture in the bank where the gold standard of staff merit is not just the approved lending volume but also how well staff are able to implement and deliver projects will be important. ADB s organizational structure will also be reviewed and any changes deemed necessary to improve the efficiency and effectiveness of the organization will be introduced. Strengthening business continuity and organizational

14 12 resilience will be an urgent task. ADB s IT system will be made more effective, better integrated, and more user-friendly. Key Questions for Consultations What are some specific areas in which ADB needs to improve its efficiency and effectiveness to become a more responsive institution? Is ADB s current menu of financial products sufficient? What kind of new financing modalities and instruments should ADB consider establishing? Does ADB provide sufficient and quality knowledge support? In what ways can ADB improve its knowledge role? How can ADB best balance transaction costs for DMCs associated with its business processes, while ensuring adequate fiduciary oversight and compliance with environmental and social safeguards? From the perspective of stakeholders, in which areas does ADB need to develop staff skills and capacities to deliver on the Road to 2030? How can ADB improve its organizational resilience? What kind of improvement is needed in the present set-up? VIII. How to better monitor progress? 32. Building on the strong culture of results and accountability established under Strategy 2020, ADB will further improve the tracking of its operational and organizational performance under the new strategy. This will be achieved through developing a new corporate results framework and establishing rolling performance targets under the work program and budget framework. 33. New corporate results framework. With the current results framework expiring in 2016, ADB will prepare a new results framework to monitor progress on the new strategy. The framework will contain new and improved indicators to more effectively track the region s development progress as well as ADB s operational and organizational performance. The results framework will be aligned fully with the SDGs. 34. Three-year rolling targets under the work program and budget framework (WPBF). Given the long-term horizon of the new strategy in the fast-changing regional landscape, it is infeasible for ADB to set concrete operational targets for up to Instead, the WPBF will set rolling targets based on three year operational pipelines, and the targets will be adjusted based on performance and achievement. The aggregated targets will indicate financial resource, staffing and skill requirements that will need to be met to achieve them. Key Questions for Consultations Based on the experience with the current results framework, what particular improvements should ADB endeavor to introduce in the new results framework? Is the approach to have periodically updated rolling targets in the WPBF, as against setting fixed targets for 2030, in the new strategy correct? IX. Next Steps on Strategy Preparation 35. A proposed timeline for the preparation of the new strategy is in Appendix 1. A summary of the perspectives gathered from consultations with DMCs is in Appendix 2. Feedback and inputs received the ongoing stakeholder consultations, and findings of background assessments

15 13 and analytical work, will support the preparation of a zero draft of the strategy by the end of This draft will provide the basis for convening a series of roundtable workshops with independent experts, policy think-tanks and other professionals to obtain their feedback on the proposals included in the paper. A full first draft of the strategy will then be prepared and will be ready in mid Formal board consideration for the approval of the strategy will take place in the first quarter of Appendixes Appendix 1: Strategy Timeline Appendix 2: Summary of Feedback from Consultations with DMCs Appendix 3: Landscape for Asia 2030

16 14 Road to 2030: ADB s New Strategy TIMELINE Milestones Consultations with DMC stakeholders Timeline February August 2016 and continuing Background assessments February November 2016 External inputs on Asia 2030 scenarios June December 2016 Board and Management Retreat September 2016 Consultations with non-dmc shareholders September November 2016 Roundtable discussions with think tanks, academia and other stakeholders on strategy draft Draft strategy paper by the 50th AGM May 2017 January March 2017 Formal Board consideration

17 Appendix 2 15 Road to 2030: ADB s New Strategy SUMMARY OF FEEDBACK FROM CONSULTATIONS WITH DEVELOPING MEMBER COUNTRIES ADB consulted with various stakeholders from developing member countries (DMCs) on the new strategy across the region during February August Stakeholders shared their views and perspectives on ADB s vision, strategic priorities and value addition under the strategy. They also provided important suggestions for ADB to become more responsive, effective and efficient going forward. This note summarizes the key messages from the consultations 1 with (i) senior government officials; (ii) development partners; (iii) private sector representatives and state-owned enterprises (SOEs); and (iv) civil society, academia and think tanks. Government officials from almost all DMCs have been consulted, along with broader stakeholder groups from selected countries on the following dates and venues: o o o o o o South Asia DMCs and Sri Lanka stakeholders, 29 February 1 March, Colombo, Sri Lanka Central and West Asia DMCs (including Mongolia) and Tajikistan stakeholders, March 2016, Dushanbe, Tajikistan Southeast Asia and Viet Nam stakeholders, March 2016, Hanoi, Viet Nam Pacific DMCs and other stakeholders, 6 7 April 2016, Sydney Australia People s Republic of China (PRC) government officials and other stakeholders, June 2016, Beijing, PRC India government officials and other stakeholders, August, Delhi, Jaipur, India I. VIEWS OF SENIOR GOVERNMENT OFFICIALS A. ADB s Vision, Strategic Priorities and Value Addition Vision ADB s current vision is too narrowly focused on poverty reduction and should be made broader to respond to the challenging development landscape for the next 15 years. The vision statement should include references to inclusive growth, sustainable development, and resilience to economic and environmental threats. These areas are all consistent with the new Sustainable Development Goals (SDGs). Strategic Priorities and Value Addition The volume and scale of ADB s financing for DMCs needs to continue to increase significantly in view of their many outstanding development challenges and financing constraints. Given unique situations and challenges, ADB should pursue differentiated approaches by country groups and by sub-regions. For DMCs in fragile and conflict-affected situations 1 Detailed notes of each consultations are available on the ADB website:

18 16 Appendix 2 (FCAS), complex issues related to security or fragility must factor into ADB s approach. ADB should explore streamlined business processes for small countries with limited capacity. ADB s poverty reduction agenda continues to be relevant for low-income countries (LICs) and lower middle-income countries (LMICs). Middle-income countries (MICs) suggest that ADB move beyond poverty reduction towards promoting broad-based prosperity and sustainability as strategic objectives for Inclusive growth and equity, particularly greater support vulnerable and lagging areas, and mitigating rural-urban inequality, should continue to be an important agenda for ADB. Upper middle-income countries (UMICs) value continued engagement with ADB, as they seek partnership and support in areas such as regional cooperation and integration, climate change (and climate financing), local currency financing, and non-sovereign support for private sector development. UMICs value ADB s knowledge and policy advice, but emphasize that ADB must continue to strengthen its own expertise and knowledge to ensure value addition for the development agendas for client countries. In addition, ADB should remain cost-competitive given that many UMICs can raise cheap funds from domestic and international capital markets. Views were divided about ADB s sector outreach. Some DMCs prefer ADB to continue to mainly focus on infrastructure development as the core area of ADB s comparative advantage. Other DMCs would like ADB to develop an improved balance in its support and provide more assistance for the social sectors going forward. Many UMICs can increasingly design and finance basic infrastructure investments by themselves. Going forward, ADB should focus on more complex and quality infrastructure projects that have catalytic effects on the environment and pollution control and introduce new and clean technologies. Within the social sectors, ADB should strengthen its assistance for health, education, and social protection. Skills development and vocational training are increasingly important, as creating jobs and increasing labor productivity are major issues for many DMCs. Support for elderly care is also needed in some DMCs. ADB should continue to support environmentally sustainable growth, through an emphasis on natural resources management, sustainable transport and renewable energy. Climate change should be a clear priority for ADB. ADB should assist countries in meeting their climate commitments under the Paris Agreement, in leveraging climate financing, climate-proofing infrastructure, and responding to natural disasters. ADB role in developing the private sector is critical to support job creation and enhancing competitiveness. ADB should explore innovative ways to integrate public and private solutions to development challenges. In addition to strengthening the investment climate, ADB should support businesses, particularly small and medium enterprises (SMEs), through capacity building and improving access to financing. ADB should continue to actively support regional cooperation and integration, including strengthening transport corridors and trade facilitation. ADB should advise DMCs on how to leverage their comparative advantages and promote and diversify their exports base.

19 Appendix 2 17 ADB should adopt a more multisector and integrated approach to development, by balancing infrastructure investments with complementary support, and addressing related challenges in a holistic manner. For example, a tourism development project could integrate aspects relating to urban development, environmental protection, and land use planning. ADB should increase its support for information and communication technology (ICT), in terms of both ICT infrastructure and ICT applications in different sectors. ADB should continue supporting institutional strengthening for DMC government institutions, including through support for improving public financial management and governance. B. Strengthening ADB s Responsiveness, Efficiency and Effectiveness Policies and Business Processes ADB must streamline business processes, some of which are cumbersome and inflexible, and contribute to inefficiencies across the project cycle. Some DMCs consider ADB s processes as being even slower than those of other development partners. ADB s procurement and consultant recruitment processes, while clear and transparent, are also tedious and slow. While there have been some improvements owing to recent reforms, a comprehensive revision in this processes may be necessary, as these continue to be a source of inefficiency in ADB operations. ADB should be better aligned with, and encourage the use, of country systems and processes (particularly for procurement). ADB should differentiate between different borrowers, and tailor processes where appropriate. Project timelines should consider countries internal administrative and approval requirements, and not just be based on ADB s internal requirements. A review of the policy of graduation from ADB s regular assistance is welcome. The graduation policy should be made more flexible. It should go beyond achieving a given GDP per-capita threshold level, and consider unique circumstances and vulnerabilities of individual countries. Technical Assistance and Knowledge Support Some DMCs consider ADB s technical assistance (TA) to be largely supply-driven, lacking ownership and substantive engagement from DMCs. There is particular dissatisfaction with regional TAs. DMCs should become more involved in TA design and implementation and in the recruitment of consultants. ADB should include longer-term capacity development as a component of every project to ensure that DMCs lack of capacity is continuously addressed. ADB should support longterm, on-the-job trainings for government staff in addition to short refresher seminars. ADB should emphasize regional and international best practice in its knowledge work. ADB should establish and better leverage partnerships with centers of knowledge. It should improve its knowledge management, and ensure better internal coordination of its