AFRICAN DEVELOPMENT BANK GROUP OPERATIONS GUIDELINES OF THE FRAGILE STATES FACILITY (FSF)

Transcription

1 AFRICAN DEVELOPMENT BANK GROUP OPERATIONS GUIDELINES OF THE FRAGILE STATES FACILITY (FSF)

2 ii OPERATIONS POLICIES & COMPLIANCE DEPARTMENT Acronyms and Abbreviations ACW ALCO ALM ADB ADF ADF 11 BWI CB CBO CPA CSP DBSL ESW FSF FSU HDI HIPC IFIs JAS MDB MDGs MDRI MDTF NCB NGO Ops Com PBA PCCs PFM PBL PCCF RBM RD SD WGFS UN Arrears Clearance Window Assets and Liability Management Committee Assets and Liability Management African Development Bank African Development Fund Eleventh General Replenishment of the African Development Fund Bretton Woods Institutions Country Brief Community Based Organizations Comprehensive Peace Agreement Country Strategy Paper Development Budget Support Lending Economic and Sector Work Fragile States Facility Fragile States Unit Human Development Index Highly Indebted Poor Countries International Finance Institutions Joint Assistance strategy Multilateral Development Bank Millennium Development Goals Multilateral Debt Relief Initiative Multi-Donor Trust Funds National Competitive Bidding Non-Governmental Organizations Operations Committee Performance Based Assessment Post-Conflict Countries Public Financial Management Policy Based Lending Post-Conflict Country Facility Result Based Management Regional Department Sector Department Working Group on Fragile States United Nations

3 iii Executive Summary 1. These operations guidelines present the objectives, structure, funding, eligibility criteria and operational orientation of the Fragile States Facility (FSF). They also outline the programming and financing instruments, implementation arrangements and review processes (including the use of fast tracking procedures), and the legal, financial and risk management issues pertaining to the FSF. 2. The FSF was established as an operationally autonomous special purpose entity within the Bank Group following the approval by the Boards of Directors of the Bank Group Strategy for Enhanced Engagement in Fragile States in March The FSF is a financing vehicle with three grant windows: i) the supplemental support window; ii) the arrears clearance window; and iii) the targeted support window. Each window has a distinct allocation that will be carefully segregated and allocated to beneficiary countries in line with the Bank Group Strategy for Enhanced Engagement in Fragile States and the Report on ADF The initial resources of the FSF are estimated at UA million, comprising UA million allocated from ADF-11 and a carry-over of UA million from the PCCF. The FSF remains open to receiving voluntary contributions from ADF members and others, including emerging donors. Financial contributions to the FSF will be disclosed in the Financial Statements of the Bank Group, with the objective of ensuring transparency of the Facility. FSF resources will be managed in line with the Investment Management Guidelines for the Fragile States Facility that take into account the specificities of the three windows. 4. The Ops-Com shall serve as the Management Committee with the responsibility for overseeing the operations of the FSF. Once established, the Fragile States Unit (FSU) will coordinate Bank-wide the implementation of the Strategy for Enhanced Engagement in Fragile States as well as manage the FSF. The operations complexes (Regional and Sector Departments) assisted by FSU, GECL, FFMA and FFCO will be responsible for implementing the Bank s overall Strategy for Enhanced Engagement in Fragile States. Regional Departments will prepare country programming documents, assess the eligibility of countries to the FSF, prepare arrears clearance documents for eligible countries and advise on the expansion of the Bank Group s portfolio in fragile states. Sector departments will appraise, implement and follow up on the entire project cycle of operations in fragile states, include those funded from the FSF. GECL will provide legal advice in specialized FSFoperations, including arrears clearance, while FTRY and FFCO will assist in managing and disbursing FSF resources to beneficiaries. All operations and activities financed with FSF resources shall be approved by the Boards of Directors. 5. The Boards of Directors are invited to consider and approve the proposed Operations Guidelines of the Fragile States Facility (FSF).

4 iv TABLE OF CONTENTS Page Number Acronyms and Abbreviations Executive Summary 1. Introduction 1 2. Objectives, Structure and Funding of the FSF 1 3. Eligibility Criteria and Operational Orientation of the Three Windows 2 4. Programming and Financing Instruments 7 5. Implementation Arrangements and Review Processes 9 6. Financing and Risk Management Issues Conclusions and Recommendation 13 Annex 1 Legal Note on the Fragile States Facility and the Operational Guidelines Annex 2: Funding of the Fragile States Facility (FSF) in ADF 11 Annex 3: Assessment of Country Capacity to Pay for Arrears Clearance Annex 4: Annotated Format for Preparing the Arrears Clearance Document Annex 5: Assessing State Fragility: The Continuum Approach Annex 6: Annotated Outline of a Country Brief Annex 7: Use of Development Budget Support Instrument in Fragile States Annex 8: Terms of Reference of the Fragile States Unit (FSU) Table 1: Programming Instruments for Assessing Eligibility to the FSF

5 1. INTRODUCTION 1.1 This paper sets forth the operational guidelines of the Fragile States Facility (FSF). The FSF was established following the approval in March 2008 by the Boards of Directors of the Bank Group s Strategy for Enhanced Engagement in Fragile States (ADB/BD/WP/2008/37- ADF/BD/WP/2008/10). A key recommendation of the strategy was the transfer of the arrears clearance activities of the Post-Conflict Country Facility (PCCF) to the Fragile States Facility (FSF), with three grant support windows. 1.2 Following this introduction, section 2 presents the objectives, structure and funding of the FSF, while section 3 elaborates on the eligibility criteria and operational orientation of the three grant support windows. Programming and financing instruments are presented in section 4, while the implementation arrangements and review processes are discussed in section 5. Section 6 discusses the financial and risk management issues and section 7 presents the conclusions and recommendation of the guidelines. 2. OBJECTIVES, STRUCTURE AND FUNDING OF THE FSF 2.1 Objectives The FSF is an operationally autonomous special purpose entity established within the Bank Group and will be administered independently of the other legal entities comprising the Group (see Annex 1). The objective of the FSF is to provide a broader and integrated framework through which the Bank can more effectively assist eligible fragile states, especially those emerging from conflict or crisis, to consolidate peace, stabilize their economies and lay the foundation for sustainable poverty-reduction and long-term economic growth The guiding principles of the FSF-support are as follows: i) Enable the Bank to remain engaged in all fragile states along the continuum; ii) Enhance the Bank s support to fragile states, most of which are going through difficult recovery phases; and iii) Make resources available for a multi-year period to eligible fragile states with a high degree of certainty and transparency. 2.2 Structure The FSF is structured into three grant support windows: i) Supplemental Support Window: To supplement the PBA-determined country allocations to eligible post-crisis/transitional countries; ii) Arrears Clearance Window: To assist in the clearance of arrears of eligible countries, thus enabling them to normalize their relationships with the Bank Group and to open up opportunities for such countries to gain access to debt relief under the Highly

6 2 Indebted Poor Countries Initiative (HIPC) and the Multilateral Debt Relief Initiative (MDRI); and iii) Targeted Support Window: To provide supplementary targeted support for technical assistance and knowledge management that cannot otherwise be provided through the Bank Group s existing instruments and programs to all fragile states Funding The identified sources of funding for the FSF are: the Bank, the Fund, beneficiary countries (in the case of the Arrears Clearance Window (ACW)), and other donors. In this regard, it may be recalled that in the context of the Eleventh General Replenishment of the ADF (ADF-11), State participants authorized an allocation of resources to the FSF of 7.5% of available resources less contingencies (see Annex 2 Table 1). This allocation was confirmed by the Board of Governors of the Fund when it approved the Report on the ADF-11. The FSF remains open to receiving voluntary donor contributions from ADF members and other development partners, including emerging donors. Such contributions could be earmarked for a specific country and use (e.g., arrears clearance, supplemental funding or targeted support) or could be used to support activities under any of the three windows of the FSF. The financial resources contributed to the FSF will be disclosed in the Financial Statements of the Bank Group, with the objective of ensuring transparency of the Facility In the case of the Bank, the Bank may allocate resources to the FSF from its net income, in accordance with Article 42 of the Agreement establishing the Bank. It may be recalled that allocations from the Bank s net income require the approval of the Board of Governors, and such approval is granted during the Annual Meetings of the Bank. Furthermore, between Annual Meetings, the Bank may also authorize an allocation of resources from its Surplus Account. An allocation from the Surplus Account also requires the approval of the Board of Governors, which may be obtained by postal ballot. 1 Another option which may be considered by the Bank is an allocation to the FSF to be included in the Bank s contribution to the ADF-11 or future replenishments Specifically for the financing of the ACW, additional funding sources include (i) the balance of the resources of the PCCF in the amount of UA million (see Annex 2 Table 1); (ii) the contribution of the beneficiary countries; and (iii) the contribution of donor countries provided towards the contribution of the beneficiary country to its arrears clearance. 3. ELIGIBILITY CRITERIA AND OPERATIONAL ORIENTATION OF THE THREE WINDOWS 3.1 Supplemental Support Window Eligibility Criteria: The Bank shall apply a two-stage criteria in determining the eligibility of countries to supplemental support from the FSF (see the Bank Group s Strategy for Enhanced Engagement in Fragile States). 1 See Documents ADB/BD/WP/2007/84/Corr.1 and ADB/BD/WP/2007/84/Corr.1(Guidelines For Distribution from the Surplus Account and the Corrigendum thereto)

7 First Stage Criteria: Assessment of the first stage criteria involves determining: i) Whether a potentially eligible country meets key conditions for consolidating peace and security; and ii) The destruction caused to the economy as a result of the conflict or crisis Issues of peace and security are assessed by establishing whether stakeholders in the potentially eligible country have: i) Signed an internationally recognized Comprehensive Peace Agreement (CPA) or a postcrisis or reconciliation agreement. Key elements, including proposed reforms of the CPA/reconciliation agreement should be analyzed e.g., the demobilization process, time frame for implementing resettlement and reintegration programs, etc. ii) Formed a functional (transitional) governmental authority broadly acceptable to stakeholders and the international community. A candid assessment should be made regarding the composition of the transitional government, whether it has support from the international community and the timetable for holding parliamentary and presidential elections etc Key indicators that will be analyzed to determine the extent of the destruction caused by conflict or crisis will include: i) The decline in the country s real GDP per capita since 1990, which is the base-reference year for the Millennium Development Goals (MDGs). Countries whose real GDP per capita has contracted by 10 percent or more over a period of more than fifteen years are the furthest from reaching the MDGs; and will therefore be in need of enhanced support from the Bank, and other partners; and ii) The ranking of such countries in the UN Human Development Index (HDI) at the time of the assessment. Eligible countries should rank at the bottom quintile of the HDI Second Stage Criteria: Countries meeting the first-stage criteria would then be subjected to a second filter intended to capture their commitment to pursue sound programs to strengthen macroeconomic conditions and improve transparency and accountability of debt and financial management practices. Specifically, the Bank will assess the reform programs (macroeconomic and structural) being implemented by the country with the objective of determining whether such programs contribute to: i) Improving the country s macroeconomic conditions and its debt management practices; ii) Strengthening the country s commitment to pursue sound public sector financial management policies and practices and re-establishing an enabling environment for private sector investments; and iii) Increasing transparency and accountability in the country s public financial management systems Resource Allocation to Eligible Countries: Countries meeting the two-stage criteria will be allocated grant resources to supplement their PBA-determined country allocations. Under ADF 11, supplemental resources for eligible countries are calculated as the average of the best two ADF 10 allocations multiplied by a top up factor; the minimum UA 5 million allocation to each beneficiary will be excluded from the base allocation used to calculate supplemental allocations. A minimum supplemental allocation of UA 10 million and a

8 4 maximum of UA 60 million are set (such limits can be increased thanks to additional voluntary donor contributions, as per para 2.3.1). Supplemental funding will be allocated upfront, and in full, to beneficiaries upon approval by the Boards of Directors A country s supplemental allocation could be combined with its PBA-determined allocation to finance operations, using the standard financing instruments of the Bank. Preliminary estimates for the allocation of supplemental resources during the ADF 11 are presented in Annex 2 (Table 2) Countries Failing to Meet Eligibility Criteria: Supplemental resources potentially allocated to countries that fail to meet the eligibility criteria for the FSF for a period of more than two years could be rolled into the next ADF cycle, reallocated to other countries that qualify for the FSF, or used to support operations in the arrears clearance or targeted support windows. Decisions will be taken on a case-by-case basis and require approval by Boards of Directors. If new countries become eligible to supplemental funding from FSF (pillar I support) during the ADF 11 cycle, financing for these countries may come either from additional voluntary donor contribution or from unused FSF resources at the end of the cycle Eligibility Period: The base period for enhanced support shall be 3 years, with the possibility of continued support under future three-year ADF cycles if country eligibility criteria are met, and is subject to: i) The availability of funding beyond the ADF-11 period; and ii) Satisfactory performance as determined by a formal quantitative and qualitative assessment of the country s performance in the context of targets and benchmarks agreed with the Bank and other partners at the beginning of the first cycle of supplemental funding. The assessment must be approved by the Boards of Directors, along with the requests for future funding Operational Orientation: The Bank s operational activities in fragile states will be consistent with the ADF 11 operational priorities, emphasizing rehabilitation and reconstruction of basic infrastructure, in addition to promoting governance and capacity building Exceptional Support for Countries in Arrears: FSF supported operations would be allowed in the absence of debt regularization in transitional countries with chronic arrears showing a firm commitment to regularize their debts. Examples of such commitment shall include a country: i) Concluding an agreement with the Bank regarding its arrears clearance program; ii) Making token arrears clearance payments to the Bank; and iii) Having a coordinated arrears clearance program with other partners, particularly the Bretton Woods Institutions In such arrangements, which must be approved by the Board of Directors, an eligible country could be allowed to utilize all its supplemental funding to support operations plus a maximum of 50% of its PBA determined grant allocation for capacity building prior to debt regularization, in line with the Bank s proposals for technical assistance.

9 The exceptional case for the provision of supplemental support to a country prior to the completion of the process of debt regularization raises the question of moral hazard, by which the Bank s actions could lessen the incentive for debtors to meet their obligations to the Bank Group. Measures to mitigate the moral hazard issues are clearly elaborated in the Bank Strategy for Enhanced Engagement in Fragile States. 3.2 Arrears Clearance Window The objective of the Arrears Clearance Window (ACW) is to provide partial funding for clearing Bank Group arrears, thus facilitating the normalization of the relationships of the beneficiary with the Bank Eligibility: Eligibility for the arrears clearance window is open to countries with chronic arrears with the Bank. The countries concerned must meet the two-stage eligibility criteria of the Supplemental Support Window, and must also: i) Demonstrate respect for the Bank Group s preferred creditor status by servicing new maturities on all outstanding Bank Group loans or at least to the same relative level of debt service paid to other International Finance Institutions (IFIs); and ii) Be eligible for HIPC debt relief, but not yet reached the decision point under the Initiative Burden Sharing Arrangement: A two-tier burden sharing arrangement will apply to the arrears clearance window of the FSF. The two-tier approach will ensure that a beneficiary country meets up to a maximum of a third of its arrears clearance obligations while the FSF (Arrears Clearance Window (ACW) takes up a minimum of two thirds (2/3). Donors are free to make voluntary contributions to assist beneficiary countries to fund their assessed burden sharing obligations or to assist in servicing new maturities until the country qualifies for debt relief under the HIPC initiative Assessment of Country Capacity to Pay for Arrears Clearance: Annex 3 provides a framework for objectively assessing a country s ability to pay for its arrears clearance program. The Bank will undertake the assessment on a case-by-case basis, and in close partnership with other IFIs. The objective of the exercise is to determine appropriate burden sharing arrangements for arrears clearance between the country and the FSF, while also reaffirming the importance of individual country circumstances Processing Requests for Arrears Clearance: The RDs have overall responsibility in arrears clearance in countries falling under their purview. This activity will be coordinated with the Fragile States Unit (FSU), GECL, FFMA and FFCO. The RD, in conjunction with the FSU, must ensure that consultations are initiated with the beneficiary country, its creditors, including the International Finance Institutions (IFIs), regarding the cut-off dates, the agreed burden sharing arrangement, and the timing of the delivery of the Bank s arrears clearance program The process of arrears clearance will include the preparation of a country-specific proposal by the relevant RD using the standardized format presented in Annex 4. The draft proposal shall describe the: i) Status of the re-engagement process; ii) Status of the country with respect to the eligibility criteria for an arrears clearance program;

10 6 iii) Proposed arrears clearance program including the financing plan and preliminary timetable; and iv) Prospects for new assistance to the country with the projected net transfer of resources to it. 3.3 Targeted Support Window The targeted support window provides a limited pool of dedicated grant resources to support operations in fragile states that cannot be addressed through traditional projects and instruments Eligibility: The following categories of countries, as elaborated in the continuum approach in the Bank Strategy for Enhanced Engagement in Fragile States are eligible: i) Countries experiencing marked deterioration in performance; ii) Countries undergoing conflict or in prolonged crisis; iii) Post-conflict/transitional countries; and iv) Countries considered to be gradual improvers (see annex 5) Resources from the window shall be used to finance the following set of activities: i) The secondment program for capacity building (see Bank Group s Strategy for Enhanced Engagement in Fragile States); ii) Service delivery through non-sovereigns, including private sector activities; and iii) Knowledge building and management The Secondment Program i) The secondment program aims at strengthening human capacity in eligible countries by filling critical human resource gaps in carefully selected domains of the public sector, and assisting to provide on the job training to civil servants working with the seconded employees, thus ensuring sustainability of the programme. The support will constitute an integral element of a comprehensive capacity building program, which beneficiary countries should aim to implement with the support of the Bank and other partners. ii) Processing Requests for the Program: The FSU will have the overall responsibility of administering and monitoring the secondment program supported by the FSF. The FSU will prepare a roster or pool of highly qualified and experienced professionals who have a track record of demonstrated leadership, management expertise and hands-on experience in providing development assistance to fragile states. iii) Country-specific requests for secondments shall be made directly to either regional or sector directors in the operations complexes of the Bank. The directors are expected to review the requests together with the FSU for further processing. Appropriate modalities for the implementation of the secondment program will be designed as part of the work of the FSU. iv) Reporting: The FSU will coordinate Bank-wide the secondment program provided by the FSF and will prepare a quarterly Information Note that will be shared with the Ops Com, SDs, and RDs, in the Operation Complexes.

11 Service delivery through non-sovereigns i) Resources from the targeted support window shall also be used to provide service delivery through non-sovereigns, including contracting private sector firms to undertake critical public sector functions, such as accounting, auditing and procurement. UN agencies, NGOs and community-based organizations that are uniquely qualified to manage and implement projects in the social sectors (because of their involvement and knowledge of local issues and community needs) can also be contracted to provide services in needy fragile states. The FSF s support for such activities will be driven by demand and needs, while also ensuring that specific arrangements are in place to strengthen the capacity for service delivery at county-level. ii) The Bank s decision to use non-sovereigns in the implementation of FSF-supported operations must be fully justified in a Board approved country programming document or appraisal report. Non-sovereigns shall include UN Agencies, Non-Governmental Organizations (NGOs), Civil Society Organizations (CSOs) and private sector organizations, including international audit companies or consultancy firms. iii) Resources for the non-staff secondment program or those relating to service delivery through non-sovereigns could be combined with other resources from the ADF to support single operations. For example: a) An infrastructure or social rehabilitation project funded by ADF could request for technical assistance from the Targeted Support Window to strengthen capacity in the sector; or b) A UN agency or NGO could be procured to assist in the implementation of a project funded through a country s PBA-determined allocation Knowledge Building and Management: Resources from the targeted support window shall be used to support Economic and Sector Work (ESW) and to manage knowledge on various dimensions of fragility and post-conflict reconstruction and development. The objectives of such ESW are to enable the Bank to begin articulating its own perspective and building the required capacity for effectively addressing fragility and conflict-affected countries. The FSU will coordinate with regional and non-regional institutions, as appropriate. 4. PROGRAMMING AND FINANCING INSTRUMENTS 4.1 Programming Instruments: The Board of Directors shall approve the eligibility of any country for the FSF on the basis of recommendations made by Management in Country Briefs (CB) (see annex 6), interim or full CSP, Joint Assistance Strategies (JAS), CSP updates or mid-term reviews. The overriding objective of using the country programming documents in assessing eligibility to the FSF is to ensure, right from the start, that the Bank s program of assistance to a country is based on the totality of resources available (i.e., supplemental FSF resources and the PBA-determined allocation). 4.2 RDs shall have the flexibility to choose the programming document that best suits specific country circumstances (see Table 1 below). Flexibility in the choice of programming document is necessary since eligible countries are in different phases of the fragile states continuum. However, generally the:

12 8 i) CBs would be ideal for a) countries which do not have any programming documents because they are under sanctions due to arrears with the Bank, and b) those countries with no national programming document, due to conflict/crisis or c) countries experiencing marked deterioration in performance; ii) CSPs, I-CSPs or JAS would be more appropriate for countries fairly advanced in their post-conflict/crisis transition; and iii) CSP update/mid-term review shall be used in countries with a valid CSP or where the timeframe of the CSP has expired and a new national development strategy (e.g., PRS or Post Conflict Needs Assessment (PCNA)) needs to be prepared prior to the preparation of the Bank s CSP. Table 1: Programming Instruments for Assessing Eligibility to FSF Country circumstances CB CSP (Interim or Full) or JAS CSP Updates/ CSP Mid-term Review Countries under sanctions because of arrears/ countries in conflict or experiencing marked deterioration in performance. Countries with no arrears/no programming document. Countries with valid CSPs/ Countries where the CSP preparation awaits the elaboration of a national development strategy. 4.3 The programming document shall assess the country's situation in relation to the eligibility criteria of the FSF as appropriate, propose the size of the supplemental allocation, identify the priority areas of intervention, and indicate how the FSF-supported program would be integrated with programs being provided by other resources of the Bank. It would also indicate the phasing of the allocations. Flexibility in utilizing allocations would be permitted, with up to 100 percent front loading of the FSF resources. The programming document would also set out the key benchmarks to be agreed with the authorities and which would govern the Bank's performance review. 4.4 Financing Instruments: FSF operations can be implemented using any of the Bank s existing financing instruments (programme and project grants). The Bank s quick disbursing instruments, including the Development Budget Support Lending (DBSL), could be used in operations funded from the FSF. Beneficiaries should, however meet the prerequisites attached by the Bank to the use of such instruments. 4.5 The Bank can, however, provide a closely monitored budget support operation to postconflict/transitional countries with governments committed to reforms, but which have weak or declining revenue base, and where rapid response from the international community is judged as crucial in maintaining the momentum for undertaking reforms and reviving the delivery of essential public services. Such operations shall be fully justified and approved by the Boards of Directors in the country programming document and in the

13 9 appraisal report of the operation. The operations must also be provided in a partnership arrangement and should have: i) Appropriate safeguards and controls aimed at minimizing fiduciary risks in the beneficiary country; and ii) Clear performance indicators for assessing and monitoring progress over the implementation cycle (see annex 7). 4.6 Use of Multi Donor Trust Fund Arrangements (MDTFs): MDTFs have emerged in recent years as key instruments in providing assistance to fragile states, where speed, flexibility, and closer donor coordination are essential for effective delivery of development assistance. MDTFs involve pooling of funding by groups of donors in supporting agreed development objectives. 4.7 A country s supplemental allocation from the FSF can be used to support its recovery programs through the Multi-Donor Trust Funds (MDTFs). Such support should be fully justified in the country programming document. 4.8 Procedures for participating in MDTFs: The Bank will work in partnership with other donors in supporting agreed development objectives in fragile states through MDTFs. Such MDTFs will be governed by a common Memorandum of Understanding (MOU) that will be signed between the participating donors, including the Bank, and the beneficiary government. The Bank Group s operations will be appraised in joint partnership with other donors as appropriate. 5. IMPLEMENTATION ARRANGEMENTS AND REVIEW PROCESSES 5.1 Internal Administrative Arrangements The following internal administrative arrangements will apply for implementing the Bank s Strategy for Enhanced Engagement in Fragile States in general, and operations funded by the FSF, in particular. Operations Committee (Ops-Com): The Ops-Com will serve as the Management Committee responsible for overseeing the operationalization of the FSF. The composition of the Ops Com will be expanded to include i) Director, Operations Policies and Compliance Department ii) General Counsel and Director, Legal Services Department; iii) Director, Treasury Department; iv) Director, Financial Management Department; and v) The Head, Fragile States Unit (FSU) during discussions on programs, documents and operations financed by the FSF from the supplemental resources and arrears clearance windows. Fragile States Unit (FSU): The FSU will coordinate the implementation of the Bank s strategy for fragile states Bank-wide and will administer the FSF. The Unit will further provide supplementary and advisory support to regional and sector departments working in fragile states, particularly with respect to the preparation of country programming documents and in the design and implementation of programs and projects being undertaken by various complexes (see terms of reference of the FSU in Annex 8). The Unit will also:

14 10 i) Actively contribute to the preparation and dissemination of policies, guidelines and procedures on selected operational issues required for the implementation of the Bank s program of assistance to fragile states; ii) Collaborate with regional and sector departments and the Office of the Chief Economist in the identification, preparation and dissemination of the Bank s Economic and Sector Work; iii) Mainstream emerging best practices and procedures of providing development assistance to fragile states; iv) Manage the secondment program and facilitate learning among secondees; v) Assist in implementing arrears clearance program of the Bank in close coordination with RDs, FFMA, and FFCO; vi) Assist in mobilizing additional resources for the FSF; and vii) Represent the Bank in international and regional donor coordination meetings related to fragile and conflict-affected countries. Field Offices (FOs): Staff from Field Offices in fragile states will work closely with government officials and other in-country donors to effectively implement Bank operations, including those financed from the FSF. The role of field offices will include: i) Supervising the implementation of the secondment program and service delivery through non-sovereigns; ii) Undertaking dialogue with government and in-country partners, thus ensuring that emerging best practices of providing development assistance to fragile states (e.g., principles of good international engagement) are mainstreamed into the Bank Group s operations; iii) Effectively participating in the preparation of country programming documents and on the entire project cycle of FSF-supported operations; iv) Assisting in procurement and disbursements, including dissemination of Bank Group policies and procedures; and v) Assisting in undertaking Economic and Sector Work Regional and Sector Departments: Regional Departments (RDs) shall be responsible for preparing the programming documents, advising on the expansion of the Bank Group s portfolio in countries, coordinating ESW, assessing eligibility of countries to the FSF and preparing arrears clearance proposals. Sector Departments (SDs) will be responsible for the entire project cycle of operations, from identification to the preparation of Project Completion Reports (PCRs) for all FSF-funded operations above UA 1 million in value. In conjunction with the FSU, and Field Offices, RDs and SDs will also undertake consultations with the International Financial Institutions (IFIs) and other bilateral donors in

15 11 order to determine the level of coordination and support required at country-level with a view to achieving targeted results from FSF-supported operations Country Teams (CTs): Under the leadership of the RDs, CTs will ensure that country operations in fragile states, including those funded from the FSF are country-focused and consistent with the overall Bank priorities and policies and are implemented in line with emerging best practices of providing assistance to fragile states. The CTs will also assist in portfolio restructuring, where necessary, and in reporting on results and lessons learnt in the implementation of operations through the preparation of the country portfolio performance reviews. 5.2 Business and Review Processes The Bank will adopt a specialized series of more rapid-response procedures to speed up disbursements and procurement activities. The rapid response procedures will apply across the full range of fragile states, but should be approved, ex-ante, by the Boards of Directors on a case-by-case basis for a specific country or operation. The rapid response procedures shall include the use of: Direct contracting or national shopping; Procurement services of qualified multilateral agencies; Suppliers (for goods) and civil works contractors already mobilized and working in emergency areas; Third party, independent procurement agencies; Sole sourcing of consulting firms already working in the eligible country and which have a proven track record in the provision of technical assistance; Extension of contracts issued under existing projects for similar activities through increase in their corresponding contract amounts; Force Account for delivery of services, where alternate arrangements are not available; Non Competitive Bidding, accelerated bidding and streamlined procedures and application of provisions on elimination, as necessary, of bid securities; Quick-disbursement components designed to finance retroactively a positive list of goods that have been identified as necessary; and Up to 100 percent financing of expenditures needed to implement operations, including recurrent expenditure and local costs, in line with the conditions stipulated in the Policy on Eligible Expenditures for Bank Group Financing, approved by the Board of Directors in March Review Process: The Bank s project and programme review process will apply for quality assurance. 5.3 Monitoring and Evaluation Monitoring of the FSF will be undertaken within the Bank s overall framework and the results matrix outlined in the FS strategy. All operations supported by the FSF will follow the Bank Group s project design for monitoring and evaluation including the use of results based log-frame. Besides, PCRs shall be prepared for all FSF-funded operations above UA 1 million in value (see para 3.1.2).

16 Reporting The FSU will prepare an annual report, which should be reviewed by Ops Com, informing the Boards of Directors about the operations of the FSF. A FSF progress Report shall be prepared and submitted to the Boards of Directors and the Deputies during the ADF 11 Mid Term Review. 6. FINANCIAL AND RISK MANAGEMENT ISSUES 6.1 Financial Management Issues: Resources of the FSF will be segregated into the four subaccounts of the FSF and will be used in accordance with the Report on the ADF 11 (ADF/BD/WP/2008/04), the recommendations made in the Bank s Strategy for Enhanced Engagement in Fragile States and these guidelines. The segregation of FSF resources is essential since the Bank Group s policies prohibit refinancing operations by any institution within the Bank Group. 6.2 The management of the FSF will comply with the Bank s financial processes and procedures as follows: i) FTRY will manage and conservatively invest resources temporarily held in all the four windows of the FSF in accordance with the Investment Management Guidelines for the Fragile States Facility, thus ensuring reasonable returns compatible with the FSF proposed low risk profile. FFMA, under the oversight of the Assets and Liabilities Management Committee (ALCO), will regularly monitor compliance with the investment guidelines and the FSF investment performance. FFCO will periodically report on available resources from each window of the FSF; ii) FFMA/FTRY will ensure adequate segregation of resources of the ACW of the FSF and oversee proper management of funds in the other windows of the FSF; iii) FFCO will disburse resources based on duly completed disbursement requests, provided these are approved by the relevant Departments in line with the disbursement profile agreed with the beneficiary, and subject to the rules and procedures defined in the Bank Group s Disbursement Handbook; and iv) Beneficiaries of the FSF shall ensure that all accounting records justifying disbursements and expenditures are kept for eventual audit by the Auditor General s Department of the Bank. 6.3 Risk Management Issues: All operations of the FSF shall be effectively handled within the framework of the Bank s existing risk management policies and practices. Resources received for all the windows of the FSF will be managed in accordance with the Investment Management Guidelines for Fragile States Facility prepared and approved by the Bank Group s Asset and Liability Management Committee (ALCO). The objectives of the Investment Management Guidelines are to ensure that the capital value of FSF s liquidity is adequately protected and that the FSF has sufficient resources to meet its obligations.

17 13 7. CONCLUSIONS AND RECOMMENDATION 7.1 The FSF will be administered as an operationally autonomous special purpose entity established within the Bank to provide assistance to eligible fragile states. Under ADF 11, the FSF is funded primarily by the ADF, has carry-over resources from the PCCF, and remains open to receiving voluntary contributions from other donors. 7.2 The FSF will provide assistance to eligible fragile states under three distinct windows: i) supplemental support; ii) arrears clearance; and iii) targeted support. Resources in the arrears clearance window shall be adequately segregated to facilitate adherence to existing Bank Group refinancing policies. Decisions on the allocation of FSF resources to eligible countries shall be based on set criteria and should be approved by the Board of Directors. 7.3 A country s allocation from the FSF may be combined with its ADF 11 allocation for financing recovery operations, using standard financing instruments of the Bank. The resources could also be used in MDTFs and for providing closely monitored budget support operations. 7.4 All the FSF-supported operations shall conform to the Bank s financing processes and procedures, and will be disclosed in the Bank Group s financial statements in line with the prevailing international financial reporting standards. The operations of the FSF shall be monitored and progress reports prepared periodically by the FSU. 7.5 Recommendation: The Boards of Directors are invited to consider and approve the proposed Operations Guidelines of the Fragile State Facility (FSF).

18 ANNEXES

19 Annex 1 Legal Note on the Fragile States Facility and the Operations Guidelines 1. Background 1.1 The consistent engagement of the African Development Bank (the "Bank") and the African Development Fund (the "Fund") (the Bank and the Fund, collectively the "Bank Group") in all regional member countries (RMCs) is essential to the fulfilment of the Bank Group s development mandate. However, this has been particularly challenging in certain countries such as post-conflict countries (PCCs) or otherwise fragile states in which operations have been reduced or discontinued. 1.2 In this connection, and particularly to assist fragile states in overcoming their immediate development challenges, each of the Boards of Directors of the Bank and the Fund, in March 2008, approved the Strategy for Enhanced Engagement in Fragile States (ADB/BD/WP/2008/37-ADF/BD/WP/2008/10) (the "Strategy"). The Bank Group, through this Strategy, intends to deepen its development assistance to PCCs by consolidating the lessons learnt, and expanding the scope of its assistance to fragile states, generally (and not only PCCs), as well as increasing the choice of instruments for the delivery of its assistance to include supplementary financing and institutional support through technical assistance, in addition to arrears clearance grants. 1.3 A key feature of the Strategy is the Fragile States Facility (FSF), which is intended to provide financial and technical assistance to fragile states. The Boards of Directors established the FSF, by Resolution B/BD/2008/05-F/BD/2008/03, adopted on 28 March The FSF will function through three (3) windows namely the: (i) Supplemental Support Window (SSW); (ii) Arrears Clearance Window (ACW); and (iii) Targeted Support Window (TSW). Supplemental Support Window: Resources from the SSW will supplement the performance-based country allocations (PBA) to eligible post crisis/transitional countries. Arrears Clearance Window: The ACW builds upon the Bank Group s arrears clearance assistance to PCCs through the Post Conflict Country Facility (PCCF). This window will channel resources to assist in the clearance of arrears, similar to the PCCF, and will expand the reach of the Bank Group s assistance to include fragile states and not only PCCs. Targeted Support Window: Resources of the TSW will provide to fragile states, supplementary targeted support for technical assistance and knowledge management that would not otherwise be provided through current Bank Group instruments and programs.

20 1.4 This Legal Note provides clarification and guidance on the legal framework for the creation and implementation of the FSF FSF Legal Structure 2.1 Three (3) options for the legal structure of the FSF were considered 3 as follows: (i) a separate earmark or set-aside within ADF-11; (ii) a new special purpose ADF window for the SSW; and (iii) a new, independent, Fragile States Facility (FSF) to provide resources through the (a) SSW; (b) ACW; and (c) TSW. The third option was selected as the best option after due consideration of the legal and operational issues. 2.2 The factors which weighed in favor of the selected option, which are also discussed in other sections of this legal note, include the need to have an operationally distinct and autonomous facility that functions outside of the framework of the Bank Group s operations. The operational autonomy of the facility is particularly important in light of the refinancing and moral hazard aspects of the ACW; the source of the funding, in the case of the Bank; and the activities and related procedures of the FSF. 2.3 Similar to the PCCF, the FSF will be administered as a trust governed by the general principles of trusts administered by international financial institutions. These general principles are summarized as follows: 4 (i) (ii) (iii) (iv) (v) (vi) the right of ownership of property subject to a trust are divided between the trustee and the beneficiary(ies); a trustee must keep trust property separately from its own property as well as the property of other trusts, and must earmark trust property as such, unless relieved of the obligation by law or the terms of the trust; the trust is not a legal entity in the sense that it is the bearer of rights or the subject of duties; a trustee must not engage in self dealing in administering the trust; a trustee must administer the trust solely in the interest of the beneficiary(ies); in administering a trust, the trustee must use reasonable care and skill and avoid unreasonable risk. 2 In discussing these issues we have referred to inter alia to the following documents: (i) Agreement Establishing the African Development Bank, dated 1963; (ii) Agreement Establishing the African Development Bank, dated 1972; (iii) Strategy for Enhanced Engagement in Fragile States approved in March 2008; (iv) Bank-Group Post Conflict Assistance Policy Guidelines Arrears Clearance Framework adopted on 19 July 2004; (v) Bank Group Policy on Loan Arrears Recovery, dated March 1997; (vi) Guidelines on Development Budget Support Lending (DBSL) dated April 2004; and (vii) Operations Guidelines of the Fragile States Facility. 3 The legal issues raised by the proposed framework are largely the same as those raised in relation to the establishment of the PCCF in GECL has comprehensively addressed these issues in a legal opinion issued at the time of the establishment of the PCCF. 4 Sir Joseph Gold: Legal and Institutional Aspects of International Monetary Systems: Selected Essays. Vol. II (1984) pp870 ff.

21 2.4 In addition to being administered as a trust, the FSF will further have operational autonomy by having its own rules and procedures separate from the rules and procedures generally governing Bank Group operations. The FSF also will be financially autonomous with the total separation of its resources from those of the Bank Group or any other trust administered by the Bank Group. 2.5 Given the financial and in the case of the Bank, institutional arrangements for the FSF (including the creation of an organizational unit and secondment/technical assistance activities), the creation of the FSF required the decision of each of the Boards of Directors of the Bank and the Fund Funding the FSF 3.1 The identified sources of funding for the FSF are: the Bank, the Fund, beneficiary countries (in the case of the ACW), and other donors. In this regard, it may be recalled that in the context of the Eleventh General Replenishment of the ADF (ADF- 11), State participants authorized an allocation of resources to the FSF in the total amount of UA420.3 million. This allocation was confirmed by the Board of Governors of the Fund when it approved the Report on the ADF In the case of the Bank, the Bank may allocate resources to the FSF from its net income, in accordance with Article 42 of the Agreement establishing the Bank. It may be recalled that allocations from the Bank s net income require the approval of the Board of Governors, and such approval is granted during the Annual Meetings of the Bank. Furthermore, between Annual Meetings, the Bank may also authorize an allocation of resources from its Surplus Account. An allocation from the Surplus Account also requires the approval of the Board of Governors which may be obtained by postal ballot. 6 Another option which may be considered by the Bank is an allocation to the FSF to be included in the Bank s contribution to the ADF-11 or future replenishments. 3.3 Specifically for the financing of the ACW, additional funding sources include (i) the balance of the resources of the PCCF in the amount of UA million; (ii) the contribution of the beneficiary countries; (iii) the contribution of donor countries provided towards the contribution of the beneficiary country to its arrears clearance. 3.4 Appropriate instruments will be concluded to document the terms of the contributions to the FSF, in particular the contributions from beneficiary countries. 4. Relationship with the PCCF 4.1 It will be recalled that the PCCF was established in 2004 by the Fund with separate rules and procedures adopted the same year by the Bank and the Fund, for the purpose of clearing the arrears of eligible PCCs, and enabling the PCCs to commence re- 5 See Resolution B/BD/2008/05-F/BD/2008/03 concerning the establishment of the Fragile State Facility, adopted by the Boards of Directors on March 28, See Documents ADB/BD/WP/2007/84 and the corrigendum thereto (Guidelines for Distribution from the Surplus Account).

22 engagement with development finance institutions (DFIs) as well as having a real opportunity to benefit from the HIPCs initiative. 4.2 The FSF is designed to continue the activities of the PCCF, albeit providing assistance to a wider range of countries (fragile states and not only PCCs). In order to legally provide for this transition, and after considering the rules and procedures of the PCCF, the following steps and decisions need to be taken: (i) (ii) (iii) In the context of the adoption of the Guidelines for the FSF, the relevant Resolution to be adopted by each of the Boards of Directors of the Bank and the Fund will also authorize the transfer of the activities of the PCCF to the FSF, under the ACW; The Boards also will authorize the use of the balance of the resources of the PCCF for the activities of the ACW; The Boards will further authorize that the Guidelines for the FSF will be applicable to the ACW, and that the Post-Conflict Assistance Policy Guidelines of the PCCF will cease to be applicable; in particular the rules of eligibility for assistance under the ACW of the FSF will be applicable instead of the rules of eligibility for PCCs under the PCCF. 4.3 The balance of the resources of the PCCF consist only of the contributions of the Bank and the Fund. Accordingly, the Bank Group does not need to obtain the consent of any other donor, prior to the use of the PCCF s resources for the purposes of the ACW. Furthermore, the Bank has no outstanding obligations under the PCCF which may be considered as granting any PCC rights to the balance, and requiring their prior consent to the use of such resources for the activities of the ACW. 5. Financial Management of the Resources of the FSF 5.1 It will be recalled that the Board of Governors of the Bank, by Resolution 15-74, adopted the Policy and Procedure for Loans and Investments. This Policy provides in paragraph 21 that "[t]he Bank will finance only goods and services to be directly incorporated into a development project. Loans will not be considered for the refinancing of existing debts." (Emphasis added). The proscription of refinancing is also disclosed in Information Statements issued by the Bank for its various borrowing transactions. It is stated therein that the Bank "follows a policy of not participating in debt rescheduling or renegotiations and does not permit the making of new loans to provide for the servicing or repayment of outstanding loans with its resources Similarly, Article 15(8) of the Agreement establishing the Fund provides that the Fund shall not engage in refinancing operations. 5.3 The above-mentioned provisions specifically prohibit the Bank and the Fund from engaging in refinancing in the course of their operations. Accordingly, given the 7 The only exception relates to private sector transactions, which at this time form a rather de minimis portion of the Bank/Bank Group Portfolio. In this regard, Article 87 of the Revised Private Sector Operations Policies provides that the Bank may participate in debt relief measures to enhance the prospect of recovery of the Bank s investment.

23 arrears clearance activities of the FSF, and to ensure compliance with the prohibition against refinancing operations, it is important that the: FSF be operationally autonomous Resources of the FSF for the financing of its activities should not be taken from the resources allocated to the financing of Bank Group s operations Bank Group, as a further safeguard, would continue with the segregation policy implemented under the PCCF, pursuant to which the resources contributed by a Bank Group entity were not used in the clearance of the arrears owed by a beneficiary country to such Bank Group entity. Accordingly, such resources should not be co-mingled but kept in separate sub-accounts. 5.4 It is, however, important to recall that the prohibition against refinancing pertains to the operations of the Bank Group. Furthermore, the FSF is a special initiative of the Bank Group, independent of the regular operations of the Bank Group. 6. Application of Certain Bank Group Policies 6.1 Given the operationally and financially autonomous nature of the FSF, Bank Group operations policies would not necessarily be strictly applicable to the activities of the FSF but may, however, provide guidance. While these policies should be considered on a case-by-case basis, in the context of the activities of the FSF, certain of them are discussed below Bank Group Policy on Loan Arrears Recovery (the "Sanctions Policy") The Sanctions Policy applies to borrowers and guarantors in arrears on Bank Group loans and prescribes sanctions including the prohibition of: (i) the approval of new loans or guarantees; (ii) the signing of new loan or guarantee agreements; and (iii) the disbursement of the proceeds of any loan. 8 The Policy is applied in the context of Bank Group operations to deter the accumulation of arrears as well as reduce the Bank Group s exposure to financially challenged borrowers/guarantors. The Policy, however, exempts from sanctions certain activities including the provision of technical assistance. 9 It is widely accepted that the principles which have informed the exemptions to the Sanctions Policy are that activities which (i) encourage continued dialogue with the challenged country; and (ii) facilitate the timely resolution of the country s socio-economic challenges as well as the resumption of the Bank-Group s core operations; should continue to be permitted The Sanctions Policy was adopted by the Boards of Directors. Accordingly, it is within their powers to create initiatives which would not be subject to the Policy or to approve additional exemptions. Given the principles which informed the exemptions to the Policy, as well as the operationally and financially autonomous nature of the 8 See paragraphs 2.1 and 2.2 of the Sanctions Policy. Paragraph 2.2 provides that sanctions automatically enter into effect thirty (30) days after the due date of the payment, in the case of the borrower, and fifteen (15) days thereafter, in the case of the guarantor. 9 The Sanctions Policy exempted technical assistance provided through grants from the Fund s Technical Assistance Fund (TAF). The Fund, however, ceased to allocate resources to TAF from the Ninth General Replenishment of the Fund s Resources (ADF-IX), and from that period grant financed technical assistance was exempted, generally. See also the Legal Opinion of the General Counsel, dated June 24, 2005, contained in document ADF/BD/IF/2005/121.

24 PCCF, the Sanctions Policy was not applicable to the PCCF s arrears clearance programs In the case of the FSF, it is important to recall the initial premise that the FSF is a special initiative of the Bank Group, and is both operationally and financially autonomous. Furthermore, its activities are separate from the regular operations of the Bank Group. Accordingly, the Sanctions Policy which is applied in the context of Bank Group operations would not necessarily be applicable. Furthermore, an analysis of the underlying principles of the Sanctions Policy further corroborates the exemption of the FSF from the application of the Policy, as indicated below Consistent with the previous arrangement under the PCCF, as well as the abovementioned underlying principles for exemptions to the Policy, arrears clearance activities under the ACW would not be prohibited by the Sanctions Policy. Similarly, technical assistance may be provided to countries in arrears, under the TSW, and will not be considered prohibited, given the exemption of technical assistance activities and the principles underlying such exemption In the case of the SSW, the Guidelines provide that a country may use all of its supplemental funding and a maximum of 50% of the PBA determined allocation, prior to debt regularization. This upfront use of the supplemental resources as well as PBA allocated resources may be for a wide range of activities including infrastructure rehabilitation and institutional support activities. Grant financed institutional support activities will be exempted similar to the technical assistance activities under the TSW. In this regard, it may be recalled that the exemption of institutional support activities under the Sanctions Policy and specific authorization in the context of the ADF-X, formed the basis for previous institutional support grants for countries under sanctions, such as Côte d Ivoire. Furthermore, the proposed budget support as well as infrastructure reconstruction and rehabilitation activities under the SSW may justifiably be exempted from the Sanctions Policy, given (i) the fact that the FSF is a special initiative, (ii) these activities are essential to facilitating the timely resolution of the socio-economic challenges facing the target countries; and (iii) the activities are essential to the achievement of the objectives of the FSF Bank Group Budget Support Guidelines It is proposed that certain of the financing from the SSW will be provided in the form of budget support. Generally, financing through budget support, in Bank Group operations, is carried out in accordance with the Guidelines on Development Budget Support Lending (DBSL) dated April 2004, and contained in Document ADB/BD/WP/2003/143/Rev.2- ADF/BD/WP/2003/182/Rev.2. The DBSL Guidelines provide that Bank Group assistance using DBSL would be guided by prudence and applied on a highly selective basis, each case evaluated on its merits 10. In addition, the prerequisites for Bank Group funding of DBSLs to RMCs include economic and political stability and strong government commitment, a satisfactory CPIA rating during the preceding year evidencing demonstrable government commitment to reforms as well as a viable macroeconomic and financial medium term framework and fiduciary review. 11 In 10 See paragraph of the Guidelines on Development Budget Support Lending(DBSL) dated April See Section 5 of the Guidelines on Development Budget Support Lending dated April 2004.

25 addition, the DBSL Guidelines provides that DBSLs are not feasible in recent postconflict countries Evidently, certain of the fragile states may not be able to meet the prerequisites set out in the DBSL Guidelines. Accordingly, in order to achieve the objectives of the assistance to fragile states under the FSF, which includes the provision of prompt, predictable, multi-year financing through budget support, certain of the prerequisites for budget support loans and assumptions contained in the DBSL Guidelines would not be applicable for budget support financing under the FSF. Management will, however, need to provide, as part of the FSF Guidelines, the requirements for eligibility for budget support financing under the FSF PBA Allocations It will be recalled that the allocation of resources to countries for operations activities under the ADF-11 is based on the performance-based allocation system. Resource allocations, however, under the FSF are outside of the PBA allocation system. Accordingly, the rule that countries, during the first and second years of the replenishment cycle, may only front load up to 50% of the following year s allocation, would not be applicable in the case of the FSF. Accordingly, a country s full allocation of resources under the FSF may be committed during the first year of the replenishment cycle, based on the needs of the country Procurement Save for the rule of origin requirements in the procurement rules of the Bank Group (limitation of procurement eligibility to only member states of the Bank and State participants in the Fund), other procurement rules are prescribed by the Boards of Directors, and may therefore be varied, waived, or amended by such Boards. Accordingly, the Boards may adopt enhancements to facilitate procurement for the benefit of fragile states, as proposed in the FSF Guidelines. In the case of the Fund, however, an amendment to the rule of origin provision, to open procurement to all countries, whether or not they are members of the Bank or State participants in the Fund, was approved by the Board of Governors during the 2008 Annual Meetings. The process for the acceptance of the amendment is ongoing, and if accepted, the amendment is expected to be effective by the end of this year Approval Authority for the Guidelines for the FSF The proposed Guidelines for the FSF will need to be approved by the Boards of Directors, in light of its amendment of previous decisions of the Boards (PCCF and operations policies) and the fact that the adoption of such Guidelines is within the purview of the functions of the Boards of Directors, given its general and policy nature. 8. Modification and Termination of the Guidelines for the FSF Modifications to the FSF Guidelines will require the approval of the Boards of Directors. The FSF may be terminated by Resolution of the Boards of Directors of the Fund and the Bank. 12 See para. 5.2(i) 13 See Article 15(4) of the Agreement establishing the Fund.

26 9. Conclusion The FSF is a special initiative of the Boards of Directors of the Bank and the Fund. It will be administered as a trust and will be operationally and financially autonomous from the operations of the Bank Group and the resources of the Bank Group as well as other trusts administered by the Bank Group. The FSF will function outside of the framework applicable to the operations of the Bank Group. Accordingly, the policies applicable to Bank Group operations, except otherwise provided, would not strictly be applicable to the FSF. Kalidou Gadio Acting General Counsel June

27 Funding of the Fragile States Facility (FSF) in ADF 11 Annex 2 1. Under the ADF 11, the FSF is allocated UA million, equivalent to 7.5 of UA million, which is the total ADF resource net of deductions for contingencies (see ADF/BD/IF/2008/97). The ADF 11 allocation for the FSF shall be combined with the carry-over resources from the ADB and ADF windows of the Post-Conflict Country Facility (PCCF) in the amount of UA million. Total funding for the FSF at the beginning of the ADF 11 cycle is therefore UA million. 2. Table 1 shows the distribution of resources within the three distinct windows of the FSF as follows: supplemental financing (UA million); arrears clearance (UA million); and targeted support (UA million). All the resources in each of the three windows of the FSF will be managed in separate accounts to ensure adequate segregation. Table 1: Total Funding of FSF in ADF 11 (in UA million) ADF 11 Carry-Over from PCCF Window Allocation Windows Total Resources Supplemental Funding ADF ADB Arrears Clearance Window (ACW) Targeted Support Total Resources Resources presented above for Pillar II differ from those in the Bank Group s Strategy for Enhanced Engagement in Fragile States because they include carry-overs from the ADF and ADB windows of the Post-Conflict Country Facility (PCCF). Table 2 presents preliminary estimates of supplemental allocations to potentially FSF-eligible countries. Table 2: Preliminary Estimates of Supplemental Allocations in ADF 11 Country Supplemental Allocation (UA m) Burundi Central African Republic Comoros Congo, DRC Cote d Ivoire Guinea Bissau Liberia Sierra Leone Togo TOTALS

28 Assessment of Country Capacity to Pay for Arrears Clearance Annex 3: 1 The originally agreed PCCF Burden sharing arrangements incorporated a case by case approach to allow flexibilities in determining burden sharing as between the Bank Group, the donor community and the country itself. On the basis of a review of experience under the PCCF, the Executive Board requested that Management develop a more systematic and quantitative methodology to assess country ability to pay, while also reaffirming the importance of individual country circumstances in determining appropriate final arrangements. 2 This note proposes a revised approach to arrears clearance burden sharing and, specifically, to the assessment of country capacity to pay. The intent is for the indicators presented below to be a framework, a set of guideposts within which Management and Board would exercise judgment on a case by case basis. 3. Under this approach, it will also be possible for other donors to make contribution towards the country portion of the burden share on a voluntary basis Indicators 4. Country capacity to pay: all external arrears / Government Revenues Arrears clearance operations pave the way to debt relief (HIPC, MDRI, Paris Club and non-paris Club cancellations) where an agreed share of the country s debt will be forgiven. Other preferred creditors are also implementing arrears clearance strategies, in close coordination with the Bank. All external arrears captures the amount which must be financed, while Government Revenues captures the financial resources potentially available for that purpose. 5. Ability to generate financial resources: Current Account / GDP This indicator broadly captures the country s present ability to generate foreign exchange resources; it does not depend on the performance of the revenue collection systems in place. 6. Needs and competing demands: GDP / Capita The scale of the poverty challenge also needs to be recognized in considering the range of options available to meet debt and debt service obligations. GDP/capita is the most commonly available aggregate to measure that need. 7. Source of Data Data were gathered from the Bank s Data Platform as follows: Common source, to avoid methodological discrepancies Time series of year of arrears clearance to ensure comparability 8. Composite score computation Thresholds are set for each indicator, to introduce a point system (see table) For each country, points are attributed for each indicator and summed The aggregate score determines the range of country contribution

29 9. Range of Country Contributions Country contributions are set in ranges to allow additional flexibility when circumstances warrant it, while satisfying the comparable treatment requirement for countries with common characteristics. Table: Ranges of Country Contribution and comparison with PCCF operations

30 Annex 4 I. Introduction Annotated Format for Preparing the Arrears Clearance Document II. Context for Re-engagement Socio-economic context and progress in resolving the conflict - brief Assessment of the readiness to re-engage Activities of the IFIs and international community in the country summary of the reengagement programs of the other players including arrears clearance operations and joint trigger for re-engagement. HIPC debt relief perspectives early assessment of debt sustainability and the possible timeline for HIPC decision point. Brief Summary of the country s post-conflict recovery program, including the identified priority areas of support. III. IV. Country Qualification Eligibility criteria Proposed Arrears Clearance Program Arrears to the Bank Summarized analysis of the size and structure of the country s arrears to the Bank Proposed arrears clearance operations description of the proposed arrears clearance program, including sources of financing, conditions, and timetable. Outlook for Resumed ADF Assistance Overview of proposed assistance strategy and the outlook for positive net transfers. V. Conclusion and Recommendations Recommendations proposed grant from the FSF Proposed Annexes Annexes 1 Annex 2: Annex 3: Annex 4: Annex 5: Annex 6: Country Bank Group Debt Service Track Record analysis of all debt payments made by the country from the reference date Country Resource Outlook Balance of Payments analysis Country Debt Sustainability Analysis Analysis of the country s debt structure including arrears Country Arrears to the Bank Country Future Bank Group Debt Service Analysis of the projected new maturities due to the Bank Group Country Arrears Clearance program

31 Assessing State Fragility: The Continuum Approach Annex 5