CHANGES INTRODUCED FOLLOWING INFORMAL MEETINGS 1. General The following main changes were introduced following the Informal Board meetings held on December 6, 2007 and the informal Board presentation on 24 April 2008:

Chapter 2: Further analysis was undertaken on the general characteristics of MICs and their specific development challenges.

Sections 3.1 on Operational trends and 3.2 on new products and processes were also analyzed further.

Section 3.3 was updated to include the feedback received during the consultation in Cairo, Egypt on March 11-12, 2008 (also as Annex V).

Annex IV (Experience of Other Development Agencies; previously Chapter IV) was updated and expanded to reflect recent developments.

Chapter IV was restructured to better highlight the actions being proposed, expanding on several topics and adding two sections on Harmonization and Partnership, and Dissemination of Information.

Chapter V (Implementation Plan and Resource Implications) was strengthened and is supported by Annex VI (on the Actions to be undertaken) and Annex VII (the results log frame).

2. Specific issues In response to specific questions from Directors during the informal Board meeting, the following changes were also introduced in the document:

The tone of the strategy now places emphasis on how the Bank can better support the MICs’ development agenda, rather than focussing on expanding the portfolio.

Poverty issues are better addressed, including remaining incidences of poverty.

The improvement in business processes, and targeted training of staff to improve their delivery, has been emphasized as a core element of the strategy.

The flexibility of the Bank’s dealings with each MIC on a case-by-case basis was accentuated, as well as the need for a better dissemination of information.

The importance of promoting competitiveness in MICs was underscored.

The need for joint partnerships in meeting the requests of MICs was highlighted.

The discussion on pricing has been slightly amended.

The creative use of the MIC Technical Assistance Fund for financing a broader range of activities has been stressed stressed.

The need for the private sector to accelerate development was emphasized.

The desirability of a knowledge base to pass on best practices was underlined.

The Bank’s role in providing Advisory services as a stand alone product was introduced; measures to strengthen Staff capacity in this respect are indicated in the Action plan (Annex VI - point 4).

AFRICAN DEVELOPMENT BANK GROUP

Strategic Framework for Enhancing Bank Support to Middle Income Countries

April 2008

TABLE OF CONTENTS

EXECUTIVE SUMMARY…………………………………………..………………………1 I. INTRODUCTION ...........................................................................................................1 II. THE CHALLENGES FACED BY MICs........................................................................1

2.1 General characteristics of MICs...................................................................................1 2.2 Specific development challenges of MICs ..................................................................3

III. BANK PERFORMANCE IN MICs ................................................................................4

3.1 Operational trends........................................................................................................4 3.2 Introduction of new products and processes................................................................5 3.3 MICs’ Perceptions of the Bank’s Services ..................................................................7

IV. THE PROPOSED BANK STRATEGY ..........................................................................9

4.1 Overall approach and rationale ....................................................................................9 4.2 Guiding principles........................................................................................................9 4.3 Sector and Thematic Priorities...................................................................................10

A. Enhance competitiveness of MICs .......................................................................10 B. Deepen private sector investment and catalytic transactions..............................10 C. Invest in regional integration for trade expansion ..............................................11 D. Capacity building and knowledge........................................................................11

4.4 Financial Products and Pricing ..................................................................................11 A. Financial products ...............................................................................................11

4.5 Enhancing Business Processes to Improve Delivery .................................................14 4.6 Harmonization and partnership..................................................................................15 4.7 Dissemination of information ....................................................................................15

V. IMPLEMENTATION PLAN AND RESOURCE IMPLICATIONS............................15

5.1 Implementation Plan ..................................................................................................15 5.2 Organizational and Resource Implications ................................................................16 5.3 Monitoring and Evaluation ........................................................................................16

VI. CONCLUSION AND RECOMMENDATION.............................................................16

ANNEXES

ANNEX I: Selected Indicators and MIC Characteristics ANNEX II: AfDB Approvals by Lending Instrument, 2002 - 2007 ANNEX III: Financial Products available to MICs ANNEX IV: Experience of Other Development Agencies ANNEX V: 2008 Consultation with MICs in Cairo, Egypt ANNEX VI: Summary of Actions and Estimated Timeframe ANNEX VII: Results Log Frame

LIST OF ACRONYMS

ADB African Development Bank AfT Aid for Trade AsDB Asian Development Bank CPS Country partnership strategy CSP Country strategy paper DAC Development Assistance Committee DBSL Development budget support loan EC European commission EIB European Investment Bank EPSA Enhanced Private Sector Assistance ESW Economic and sector work GDP Gross domestic product IDB Inter-American Development Bank IFC International Finance Corporation LIBOR London inter-bank borrowing rate LIC Low income country MDB Multilateral Development Bank MDGs Millennium development goals MIC Middle income country MICTF Middle income countries trust fund MIGA Multilateral Investment Guarantee Agency NSGL Non-sovereign guaranteed loan NTF Nigerian Trust Fund OECD Organization for Economic Co-operation and Development PPP Public private partnership RMC Regional member country SME Small and medium enterprises SNE Sub-national entity UA Units of account UNDP United Nations Development Program UNTA United Nations Trade Association UNICEF United Nations International Children and Education Fund UNHCR United Nations High Commission for Refugees WFP World Food Program WTO World Trade Organization

EXECUTIVE SUMMARY 1. Management has been refocusing the Bank’s strategy for enhancing support to

Middle Income Countries (MICs) in the context of increasing availability of new sources of financing to MICs in recent years. Thirteen Regional Member Countries (RMCs) are currently classified by the Bank as MICs.

2. The economic performance of MICs has been heterogeneous, with some showing high fiscal and trade surpluses while others suffer from large deficits. Oil-exporting countries in particular have seen their financial resources increase rapidly, but this has not made them more competitive globally.

3. The Bank’s competitive position in MICs, both in the area of financial and non-financial activities, has become more difficult in recent years.

4. The new strategy is being developed with a view to deepening engagement with the Bank’s MIC clients using its extensive financial and economic expertise and making it more expedient for the countries to utilize the Bank’s instruments. It aims to make the Bank a favourite partner of MICs.

5. Due to the heterogeneity of MICs, selectivity will be at the country level through CSPs, in which the Bank will closely align itself with its clients’ needs. Bank operations in MICs will accentuate selectivity, focus, and complementarity. They will remain demand driven based on specific country requirements and the Bank’s own internal capacity and resources, as well as the Bank’s comparative advantage in relation to other international financing entities.

6. In particular, the strategy aspires to enhance competitiveness; deepen private sector investment and catalytic transactions; invest in regional integration and trade expansion; and build capacity and knowledge.

7. The new strategy focuses on four key areas of actions: (i) the range and pricing of the Bank’s financial products; (ii) improved delivery of services through efficient business processes; (iii) limited provision of concessional resources; and (iv) advisory services from its comparative advantage in country knowledge and experience.

8. Improving business processes is central to better service delivery to both MICs. Streamlining, increasing speed and flexibility, and reducing financial and transaction costs of Bank loans are essential. A number of important steps are already underway but consistent and effective execution is required.

9. This paper outlines a number of measures and actions to enhance the Bank’s support to MICs.

I. INTRODUCTION

1.1 The proposed strategy builds on the implementation of the Board-approved 2005 task force report “Enhancing Bank Support to MICs”, as well as on various inputs, including from earlier MIC task forces, the June 2006 and March 2008 consultations with MICs in Tunis, Cairo, respectively, and the 2006 consultant’s report on enhancing support to MICs. It also draws on the experiences of other MDBs and bilateral donors, including the deliberations of the October 2007 World Bank Conference on Achieving Development Results in MICs in Washington.

1.2 The paper has benefited from the guidance and comments of the Board of Directors on the Approach paper which was discussed at the informal Board in December 2007. The paper has been prepared jointly by a cross-complex staff team from Policy, Sector and Regional Operations departments, the Chief Economist’s Office, as well as the Private Sector, and Finance Departments.

1.3 Following the introduction, the paper focuses, in chapters II and III, on the challenges faced by MICs and Bank performance in MICs. In chapter IV, the paper puts forward the Bank strategy and elaborates relevant sector themes, while chapter V presents the implementation plan and resource implications.

II. THE CHALLENGES FACED BY MICs

2.1 General characteristics of MICs

2.1.1 Thirteen RMCs are currently classified by the Bank as MICs1. Bank classification of the MICs closely follows that of the World Bank, which is based on Gross Domestic Product (GDP) per capita of at least US$1,060. Management recognizes that the GDP per capita classification masks important developmental issues, which has led to calls for a revision of the classification criteria. While discussions are ongoing on the subject matter and related implications, this document maintains the current classification.

2.1.2 MICs are primarily divided into two geographical areas: North Africa (Algeria, Egypt, Libya, Morocco, and Tunisia) and Southern Africa (Botswana, Mauritius, Namibia, South Africa, and Swaziland), with Gabon, Equatorial Guinea and Seychelles being the others. Among all MICs, there are wide disparities in terms of economic competitiveness, private sector development, and the degree of integration into the global economy (Annex I).

2.1.3 Differences also exist in financial market development and the ease of doing business in each of the MICs. These divergences account in part for wide variations in per capita income (Graph 1), income inequality, poverty levels, investment flows, and growth performance.

2.1.4 The economic performance of MICs has varied, with some showing high fiscal and trade surpluses and others large deficits. Over the period 2002-06, only five MICs registered real GDP growth rates above 5% (Graph 2). Their

1 Defined as those countries classified as ADB only: Algeria, Botswana, Egypt, Equatorial Guinea,

Gabon, Libya, Mauritius, Morocco, Namibia, Seychelles, South Africa, Swaziland, and Tunisia.

2

income levels vary widely, as do their debt profiles, reflecting the recent boom of commodities on international markets. This has allowed some MICs to graduate from LICs status, while still facing a heavy development agenda.

Graph 1: Gross National Income (GNI) per Capita - 2006

3,0305,900

1,3508,250

5,0007,380

5,4501,900

3,2308,650

5,3902,430

2,970

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000

AlgeriaBotswana

EgyptEq. Guinea

GabonLibya

MauritiusMoroccoNamibia

SeychellesSouth Africa

SwazilandTunisia

Mid

dle

Inco

me

Cou

ntry

US Dollars

2.1.5 Oil-exporting countries in particular have seen their financial resources increase rapidly, but this has not made them more competitive. Their competitiveness has lagged mainly because the value added in their manufacturing sectors did not increase. Extractive industries are generally enclaves with weak linkages with other economic sectors2, and limited spill-over effects from growth. However, most MICs did succeed in increasing their services sector’s share in GDP.

Graph 2: GDP Annual Growth Rate (2006)

0.01.02.03.04.05.06.07.08.09.0

10.0

AlgeriaBotswana

EgyptEquatorial Guinea

GabonLibya

MauritiusMorocco

NamibiaSeychelles

South Africa

SwazilandTunisia

Perc

enta

ge

2 Extractive industries (such as oil or diamonds) are economic enclaves with low value added, as they

tend to contribute relatively little to employment and other economic activities. It is through fiscal policies that the sector’s financial flows impact a country’s economy, as well as the extent to which they spawn related products and services.

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2.2 Specific development challenges of MICs

2.2.1 The MICs, in spite of their status, still face many problems of LICs, viz., low growth and high unemployment; vulnerability to external shocks; and slow integration into the global economy. Like LICs, MICs have to address low-scoring human development indicators, such as poverty (or pockets of poverty) and populations outside the circle of opportunity.

2.2.2 Most of them are still vulnerable to external and internal shocks due to, e.g., political factors, limited product/export market diversification, and environmental conditions. Those MICs with significant financial inflows and windfalls from, for example, high commodity prices in the extractive industries, are challenged in dealing with the large income and terms of trade swings.

2.2.3 As a result, achieving the Millennium Development Goals (MDGs) remains difficult for some MICs. Poverty and income inequality indicators remain deficient; based on the Human Poverty Index for 2004 Botswana and Swaziland are among the world’s poorest countries. The average Gini index for MICs is 51, slightly worse than the average of 46 for Africa as a whole.

2.2.4 While Algeria, Egypt, Tunisia, Mauritius, and Seychelles have already reached some goals, other MICs are lagging. MDGs in health remain a challenge: the HIV/AIDS pandemic in Southern Africa affects more than 15% of the population; less than 50% of the population has access to improved sanitation facilities in Botswana, Gabon, Namibia, and Swaziland; and the under-five mortality rate is far above 100 per 1,000 in Equatorial Guinea and Swaziland compared to only 17 per 1,000 in Mauritius.

2.2.5 Impediments to “doing business” and enabling private sector investment exist among the MICs in the form of weak rule of law and corporate governance; ill-defined land tenure and property rights; inadequate financial market development; ineffective implementation of environmental regulations; and inefficient business processes.

2.2.6 Based on the Global Competitiveness Report 2007/08, the most problematic factors for doing business are: (i) inefficient government; (ii) limited access to financing; (iii) poor work ethic in the national labour force; (iv) inadequate infrastructure; (v) cumbersome tax regulations or high rates; (vi) inadequately educated workforce; and (vii) crime.

2.2.7 When looking at the World Governance Indicators for 2006, the overall index gives a negative score to seven MICs, ranging from -1.23 (Equatorial Guinea) to +0.74 (Botswana). The index categories of corruption, government effectiveness, political stability, regulatory quality, rule of law and voice and accountability are low in most African MICs. Only four Southern African countries (Botswana, Mauritius, Namibia, and South Africa) have recorded a positive score for each of these six indicators.

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III. BANK PERFORMANCE IN MICs

3.1 Operational trends

3.1.1 The Bank Group’s operations in the MICs are overwhelmingly financed through the ADB window, the Bank’s non-concessional lending arm.3 Table 1 shows recent Bank approvals as regards project lending to the public and private sectors, policy based lending, grants, equity participations, and guarantees (details in Annexes II and III).

3.1.2 Between 2002 (when the Board approved the 2001 Task Force recommendations to enhance the Bank’s operations in MICs) and 2007, approvals to MICs have amounted to UA5.8 billion. This represents an annual average of UA974 million. By comparison, during the previous five years 1997-2001, the annual average of loan approvals to MICs amounted to UA730 million.

3.1.3 The growth in lending to the MICs was driven mainly by lending to three North African countries, viz., Egypt, Morocco, and Tunisia. In terms of cumulative loan approvals during 2002-07, North Africa received the largest share (57%), well above the share for the sub-Saharan region.

3.1.4 If these three countries are excluded, the Bank’s new loan approvals to the MICs have actually been declining since 2002.

3.1.5 Although policy based lending has increased in recent years, project lending remains the chief instrument in terms of share of total approvals. Project lending accounted for 73% of total approvals to the MICs between 2002 and 2007.

3.1.6 In terms of sector distribution, the top three areas are infrastructure, finance and the multi-sector category. This reflects a strong demand in the MICs in the areas of infrastructure development, financial sector reform, and public sector management.

3.1.7 During 2002-2007, lending approvals to the private sector amounted to an annual average of UA213 million per annum, with sustained annual increases

3 Although MICs can also access loans from the Nigerian Trust Facility and MIC Trust Fund, disbursements from those sources are small in comparison to ADB loans.

Table 1: ADB Approvals to MICs (In millions of UA)

Financial Products 2002 2003 2004 2005 2006 2007 2002-2007 Project Lending 690 566 417 597 515 1,462 4,247 Public and Publicly Guaranteed

491 360 56 459 245 646 2,457

Private Non-Publicly Guaranteed

199 206 61 138 270 816 1,790

Policy Based Lending 186 177 389 148 411 20 1,331 Grants 5 4 3 6 8 2 27 Equity Participation -- -- 3 35 -- 185 223 Guarantees -- -- -- 7 9 -- 16 Total Approvals 880 746 812 793 943 1,670 5,844

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after 2004. Private sector loan approvals reached UA816 million in 2007, compared with UA61 million in 2004. The support has focused on the financial sector, infrastructure, and small and medium size enterprise development.

3.1.8 Global financing flows during 2001-05 (the most recent period available) to the MICs amounted to US$54 billion from all sources, overwhelmingly from the private sector (73% of the total; Annex IV, Table 1). The largest official donor by far was the European Commission (EC), which, with US$5.9 billion, accounted for 11% of total net disbursements and for 41% of total official net disbursements.

3.1.9 As regards non-lending operations, including Economic and Sector Work (ESW) and other advisory services, Bank staff has been proceeding in good measure to assist MICs. Such work, some of it financed by the MIC Trust Fund (MICTF), included Country Economic Reviews; Competitiveness Improvement Studies; Economic Diversification Studies; Country Private Sector Profiles; and Governance Profiles.

3.1.10 The Bank’s competitive position in MICs, both in the area of financial and non-financial activities, has become more difficult in recent years. The Bank recorded a net reimbursement of US$932 million during this period (while the World Bank recorded a net reimbursement of US$1.8 billion).

3.1.11 In many instances, MICs have accessed the international capital market, which offered less conditional and quicker disbursements of funds than MDBs. In addition, the EC (through the EIB), has provided MICs with blended loans, reducing the cost of their loans.

3.2 Introduction of new products and processes

3.2.1 The traditional financial products of the Bank to support MICs have been project loans and lines of credit. However, in response to changing economic conditions in RMCs, the Bank introduced new lending instruments and financing products. Policy-based lending, in the form of sector and structural adjustment loans, increased rapidly after its introduction in 1987. A list of financing instruments available to MICs is summarized in Annex III.

3.2.2 Management has continued to assess the effectiveness of existing lending instruments, with a view to introducing enhancements as appropriate. Special consideration was given to the need for grant resources, and in 2003, the Board approved the establishment of the MICTF, initially with an allocation of UA1 million from the Bank’s 2001 net income and a UA100, 000 maximum per operation.

3.2.3 In May 2005, the Board approved an increase in the MICTF to UA15 million and an increase in the allocation for a single operation to UA600, 000. Utilization was initially low but has steadily increased over the past two years with prospects for expanded demand.

3.2.4 In 2005, the Board also approved additional measures further enhancing support to MICs, including the implementation of new partnerships with performing MICs that met basic criteria, with a view to streamlining loan conditionality and adapting the Bank’s policy requirements to country

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specificities. Eligibility criteria were defined for performing countries, and policies were put in place, notably regarding involuntary resettlement.

3.2.5 In addition, more competitive pricing and flexible processes were introduced:

Elimination of the commitment fee for all new sovereign-guaranteed loans;

Reduction of the lower limit of the range of the commitment fees for non-sovereign guaranteed operations;

Simplification of loan pricing for sovereign borrowers;

Decrease in the lending spread and elimination of the funding margin for new sovereign loans;

Elimination of the market risk premium for all fixed rate sovereign and non-sovereign loans;

Introduction of more a flexible approach to facilitate the Bank’s involvement in DBSLs, basket funding ,and swaps; and

Reduction in requirements for the publication of Environmental Impact Assessment for private sector projects in MICs from 120 days to 60 days for category I projects.

3.2.6 While the implementation of measures outlined above have resulted in increases in lending to MICs overall, this was mainly attained by large increases in lending to only a few MICs. The Bank still faces substantial internal and external challenges that must be overcome if the Bank is to meet its development objectives in MICs as a group.

3.2.7 The recent situation vis-à-vis Bank resources from MICs can be attributed to several factors:

The Bank’s response to MICs’ requests for assistance has been relatively slow. By not providing its advice earlier, the Bank faces a situation of “fait accompli,” with the country already having chosen its development partners, leaving little room for Bank engagement.

The Bank has not effectively communicated its initiatives and financial instruments internally. Country officers and others dealing with the MICs are not sufficiently familiarized with the new lending instruments, in particular, risk management products, guarantees, and agency lines of lending. Staff is also not sufficiently familiar with resource-based lending and the MICTF.

Coordination with MICs on incorporating the Bank’s offers into their strategic thinking has also been inadequate. In several MICs, staff in the public sector is not sufficiently familiar with all Bank financial instruments.

Furthermore, some of the more advanced MICs have come to regard assistance by MDBs as harming their international credit ratings by introducing an aura of weakness.

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3.3 MICs’ Perceptions of the Bank’s Services

3.3.1 The view of MICs that emerged during the March 2008 consultative meetings in Cairo, Egypt, was in line with the opinions expressed during the 2006 meetings in Tunis. In particular:

There is an important role for the Bank in supporting growth, poverty reduction, and development. The Bank could leverage its financial assistance by utilizing its best practices experience and expertise in addressing the development challenges they faced.

Harmonization of activities between the Bank and other development partners, as well as alignment with country priorities and country systems is not sufficient.

The Bank’s business processes are still too cumbersome—mainly related to rigidities in procurement and disbursement rules and safeguards—resulting in undue delays in project formulation and implementation.

The Bank does not pay sufficient attention to each individual MIC’s needs. This translated into the private sector and parastatals not receiving adequate funding, which should be mitigated by a more flexible application of the existing financial products.

Concessional and blend resources are needed to address sector differences in investment returns and the economic and social costs of adjustment to globalization. The MICTF needs to become more flexible and be replenished regularly. Similarly, there is need for greater flexibility of eligible expenditures to cover counterpart funding.

Improvement in the quality and scope is needed for analytical and advisory assistance, including by bundling loans and advice. Staff and consultants should acquire appropriate country experience by lengthening staff assignments on country desks and upgrading and empowering field representatives.

A significant area of added value for the Bank is to serve as an intermediary between MICs and LICs. In this position, the Bank could help channel richer MICs’ financial and technical surplus resources into LICs’ development through trilateral partnership arrangements between MICs, LICs, and the Bank.

3.3.2 As shown in Box 1, during the meeting in Cairo, MICs further specified the context of their interaction with the Bank, highlighting their expectations of future actions.

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3.3.3 More generally, as MICs increase their access to capital markets, they reduce their borrowing from the Bank, mainly because of what they regard as tedious loan modalities. The requirements for fiduciary, social and environmental safeguards, as well as time consuming project preparation and appraisal procedures, increased their cost of doing business. Another factor is the perceived insufficient responsiveness of the Bank to country-specific needs, for instance, tailoring of programs and inadequate country-specific knowledge.

Box 1 - MIC expectations of the Bank 1. The MICs appreciated that the Bank was offering relevant and appropriate financial instruments; had reduced the cost of funds; was progressively using country systems; and had implemented activities under the Paris Declaration, providing a platform for drawing up annual business plans.

2. In moving forward, they highlighted several areas where they would like the Bank to expand its activities:

Enhance its role as a knowledge institution: it can be the most useful by channeling best practices and as honest broker. Stimulating South-South dialogue and cooperation was seen as an important aspect.

Allow more concessional resources for special programmes—including global public goods and meeting the costs of external shocks—which MICs would like to see financed under the MICTF as well as through the Bank’s catalytic role in mobilizing resources from other development agencies;

Bank actions to place more emphasis on enhancing MICs competitiveness and integration into global markets, which should take into account the fact that 16 out of 53 countries were land-locked, with only 21% of the population living within 100 km of the coast (compared with 69% for OECD countries and 42% in Latin America).

Bank to enhance support to science and technology and higher education to generate strong skills needed to make the MICs competitive: training in vocational and technical skills for enterprise development, and improving the quality of universities;

Provide more innovative financing for infrastructure development focused on the private sector in recognition of its prominent role as the engine of growth;

Deepen finance and advisory services to help strengthening domestic financial markets, private sector development and trade, micro-finance for SME promotion, risk mitigation, and financing for innovation;

Better communicate about its financial products, and respond quicker to the MICs’ requests;

Increase the delegation of authority to field and/or regional offices, as well as the number of offices;

Finance reforms that include trade and financial liberalization as well as technical assistance for monitoring and evaluation of the reforms.

Bank to continue to pay attention to the issue of pricing to reflect market conditions.

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IV. THE PROPOSED BANK STRATEGY

4.1 Overall approach and rationale

4.1.1 The proposed strategy aims to make the Bank a favourite partner of MICs, based on a comprehensive approach that combines the following aspects as a package: (i) the range and pricing of its financial products; (ii) improved delivery of services, through efficient business processes; (iii) limited provision, and mobilization of concessional resources; and (iv) provision of advisory services from its comparative advantage in country knowledge and experience.

4.1.2 To that end, the strategy refocuses the role of the Bank in MICs, emphasizing a range of actions to support their efforts in achieving higher levels of growth, address issues of inequality, and reduce remaining pockets of poverty, especially for countries that have graduated to MIC status but are still experiencing problems of LICs.

4.1.3 During the March 2008 consultative meetings, MICs expressed their desire to see the Bank deliver better quality services more quickly. This is a prerequisite for deeper engagement in the MICs and can be achieved as the Bank’s internal capacity and business processes adjust to the needs and interests of the MICs (as well as the LICs). Such a deeper engagement in MICs will occur in step with the Bank’s institutional reform and revision of its business processes.

4.1.4 In responding to MIC needs, the strategy identifies actions for the short as well as medium to long term. Given recent reductions in the spread of World Bank loans (as indicated in Annex IV), a re-evaluation of the Bank’s loan pricing mechanisms is warranted. In that context, the Bank will also review its loan conditionalities with the aim of streamlining them and thereby improve its competitiveness.

4.1.5 The Bank will combine its investment activities with the provision of knowledge and advisory services, including activities in economic, financial, and institutional reforms, as well as responding to technical assistance needs, especially in trade related and sector specific areas.

4.2 Guiding principles

4.2.1 Past experience: In developing this strategy, the status of the implementation of previous recommendations to enhance Bank support in MICs was taken into account.

4.2.2 Country ownership: Bank engagement in MICs will continue to be guided by CSPs. The recently approved changes in the CSP process emphasize country dialogue to identify drivers of growth as well as client needs and encompass shared responsibility and mutual accountability. In this way, the strategy will be able to target individual MICs and form the basis of a tailored business plan at the country level.

4.2.3 Selectivity and complementarity: Bank operations in MICs will emphasize activities yielding the highest value added. The operations will accentuate selectivity, focus, and complementarity. They will remain demand driven based on specific country requirements and the Bank’s own internal capacity

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and resources, as well as the Bank’s comparative advantage in relation to other international financing entities. Due to the heterogeneity of MICs, selectivity will be at the country level through CSPs, in which the Bank will closely align itself with its clients’ needs.

4.2.4 Sequencing of activities: Deeper engagement in MICs will require a careful sequencing of actions, calibrated on the Bank transitioning to greater responsiveness as regards country needs and enhanced business processes.

4.2.5 Partnership: Strong partnerships with the major players in MICs will exploit synergies with private corporations, commercial and other financiers, as well as global funds and development partners to leverage resources for specific financial needs of the different MICs.

4.2.6 Results focus: The strategy is results focused, reflecting the Bank’s commitment to the Management for Results agenda. It identifies and develops measurable indicators and corresponding targets to facilitate evaluation of performance (see Annex VII).

4.3 Sector and Thematic Priorities

4.3.1 Guided by the above principles, Management has identified four critical areas of intervention, through which it will enhance support and increase investment, as outlined below.

A. Enhance competitiveness of MICs

4.3.2 The Bank will foster competitiveness in MICs by:

Investing more in both “hard” infrastructure (e.g. transit systems, power and water, and urban development), and “soft” infrastructure (e.g. regulatory and legal frameworks).

Financing activities that remove obstacles to doing business and enhance the enabling environment for investments;

Supporting reforms that enhance good governance both in the public and corporate sectors, invoking principles of transparency, responsibility and accountability in line with the Bank’s policy on good governance;

invest in higher education and science and technology, to generate strong skills needed to bolster MICs competitiveness: boost training in vocational and technical skills for enterprise development, and improving the quality of universities.

B. Deepen private sector investment and catalytic transactions

4.3.3 To expand its private sector activities in MICs, the Bank will take advantage of its unique position at the interface between the public and private sectors by:

using a variety of non-sovereign guarantee instruments, such as direct investments, equity participation, and working in conjunction with private corporations, financial institutions, and state-owned enterprises;

addressing the financing needs of the private sector, including syndications for PPP operations, microfinance, and a catalytic role in mobilizing resources;

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partnering with other donors including the WB and IFC to support banking and financial sector reforms, primarily of service providers to micro enterprises, rural households, and small and medium enterprises (SMEs).

C. Invest in regional integration for trade expansion

4.3.4 The Bank will scale up investments in cross-border activities that promote integration and trade among MICs, and between MICs and LICs. These include:

Facilitate policy harmonization among clusters of neighbouring states in the areas of macroeconomic policy and the regulatory framework (including customs, business laws, and procurement);

Play a catalytic role in resource mobilization, by syndicating resources for mega projects, including regional development corridors that attract private and public investment4;

Partner with other development agencies to channel their financial resources, project design and management skills, including through Aid-for-Trade initiatives that increase MICs’ market access.

D. Capacity building and knowledge

4.3.5 For MICs to effectively enhance their competitiveness, deepen private sector investments, and integrate regionally through trade, they must build capacity and knowledge. To support this activity, the Bank will:

provide advisory services, particularly in policy formulation, financial sector reform, management of windfalls from natural resource booms, and development of strategies to better address global public goods issues, including clean energy alternatives and carbon market initiatives;

promote knowledge sharing and broker South-South learning to share best practices;

promote building entrepreneurship through intensive executive training programs in-country and/or cooperative-type placements with start-up companies;

broaden and increase ESW activities and build capacity for macroeconomic management to better tackle factors affecting economic development, particularly sources of growth, productivity, and issues of unemployment.

4.4 Financial Products and Pricing

A. Financial products

4.4.1 The strategy proposes to enhance the existing financial products, namely: loans, lines of credit, guarantees, agency lines, equity, and risk management products, by:

4 This has been effectively used for the Maputo corridor, creating opportunities for the surrounding MICs and LICs.

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Maintaining attractively priced loans, reflecting market conditions and price of products offered by competitor institutions;

Offering refined loan guarantees to support partnerships for private investment as well as regional integration and trade;

Increasing multi-year program financing5, and emphasize accelerated processing and minimum tranching.6

4.4.2 To address the problem of resource constraints posed by the restrictive sustainable lending limit, Management has recently reviewed the methodology for determining the Bank’s Exposure Limits for both the sovereign and non-sovereign portfolio. This has resulted in moderate to large increases in the annual sustainable limits for most MICs to accommodate the growing demands of some of these countries in the medium term.

4.4.3 The results of the review lay out clearly the annual sustainable limit for the MICs over the next five years. Moreover, the single country exposure limit for non-sovereign operations has also been increased to be in tandem with the Bank’s increased focus on the private sector.

4.4.4 Management is also taking measures to increase the availability of resources under the Middle-Income Countries Trust Fund, to expand the areas of coverage as well as use the Fund as a catalyst to mobilize additional resources from partner institutions and donors.7 The Board approved the allocation of an additional UA 20 million for the benefit of the Trust Fund, which has now been renamed as the Technical Assistance Fund for the Middle Income Countries.

4.4.5 Box 3 highlights the current main areas of focus for the utilization of the Trust Fund and plans to enhance utilization in supporting MIC country efforts.

5 The increase in Bank loan approvals for MICs from 2005 to 2006 (from UA793 million to UA943 million)

was mainly driven by program financing for Egypt’s Financial Sector Reform Program (UA338 million), the biggest single project approved by the Bank Group since its inception,

6 This practice has been successfully used at the World Bank. In the Bank, it was used as a modified version, a tranche release mechanism, which in the end did not reduce disbursement delays from the borrower’s point of view.

7 The Board has approved allocation of additional resources to the MICTIF from the 2007 ADB net income

13

4.4.6 The Bank will continue to seek further concessional resources to blend with ADB investment loans or for direct support to technical assistance activities. Additional sources of funds include the Nigerian Trust Fund (NTF), grant resources from the African Water Facility and funds from initiatives such as the Enhanced Private Sector Assistance facility supported by Japan (EPSA).

B. Pricing 4.4.7 Management proposes to continue periodic price revisions of the Bank’s

products. The key objectives in providing better lending terms and financial products to MICs are to: (i) contribute to the competitiveness of MICs in the global market; (ii) pass on the benefits of the Bank’s triple “A” rating and its current strong financial position; and (iii) remain relevant to this increasingly diverse group of countries with significant needs for large social infrastructure program funding to address pockets of poverty.

4.4.8 In view of the above factors and given that the Bank’s income prospects allow

some flexibility, Management recommend the introduction of a lending margin waiver, to be reviewed annually. This lending margin waiver is initially set at 20 basis points or 0.2%. The waiver will be applicable to all new sovereign guaranteed loans approved by the Board, following the adoption of this decision. This results into a reduction of the lending margin for new loans from 40bps to 20bps, applicable during their entire life. Any future modification of the lending margin waiver will only affect subsequent loan approvals. According to preliminary estimates, the financial implications of this decision would be an average yearly reduction in net income of UA2 million over the 5 year projection period. The net income negative impact rises from UA1 million in 2009 to UA5 million in 2012, approximately 3% of the 2012 projected net income.

BBooxx 33:: EEnnhhaanncciinngg tthhee UUssee ooff tthhee TTeecchhnniiccaall AAssssiissttaannccee FFuunndd

Present guidelines for the use of the MICTF, now the Technical Assistance Fund for the Middle Income Countries, already allow for grant resources to support project preparation; capacity and institutional building; ESW and other country analytical work; and activities that promote the private sector (including building efficient financial systems, better corporate governance, and “other activities that contribute to the strengthening of the private sector”). The Bank is committed to using the Fund more creatively and effectively in additional areas. The Fund will also serve as a catalyst for mobilizing additional resources from other development partners. In that context, it will examine the feasibility of blending concessional resources with ADB loans to specifically address the elimination of pockets of poverty in MICs. To that end, it will consider recommendations by the High Level Panel, which encouraged the search for solutions that are financially more advantageous to MICs. Specific areas envisaged for enhanced uses include the following:

iiddeennttiiffyyiinngg iinnvveessttmmeennttss iinn gglloobbaall ppuubblliicc ggooooddss ((rreenneewwaabbllee eenneerrggyy,, eennvviirroonnmmeenntt,, ccaarrbboonn mmaarrkkeettss));;

ddeevveellooppiinngg kknnoowwlleeddggee bbaasseess aanndd ddiisssseemmiinnaattiinngg bbeesstt pprraaccttiicceess;; ffiinnaanncciinngg ttrraaddee--rreellaatteedd tteecchhnniiccaall aassssiissttaannccee,, ssuucchh aass aassssiissttiinngg wwiitthh iimmpplleemmeennttiinngg tthhee WWTTOO’’ss

AAiidd--ffoorr--TTrraaddee aaggeennddaa;; ffaacciilliittaattee ppaarrttnneerrsshhiippss bbeettwweeeenn ppeerrffoorrmmiinngg MMIICCss ttoowwaarrddss aacchhiieevviinngg tthhee MMDDGGss

14

4.5 Enhancing Business Processes to Improve Delivery

4.5.1 Improving business processes is central to better service delivery to both MICs and LICs. Nonetheless, MICs react more adversely to inefficient processes. Therefore, streamlining, notably increasing speed and flexibility, and reducing financial and transaction costs of Bank loans are key measures affecting all business processes.

4.5.2 Country teams are at the core of strategic development and operational deliberations. This will go a long way toward increasing the Bank’s competitiveness, including with respect to other MDBs. Most importantly, it would move the Bank towards “a new way of doing business”.

4.5.3 A number of important steps are already underway aimed at strengthening the Bank’s delivery performance, which will make the Bank’s products attractive to MICs. These include:

Streamlining business processes, particularly for project development and review, that will reduce internal processing delays and improve focus, quality at entry, and performance monitorability;

Introducing more flexible financing of operations on a case-by-case basis, especially with a view to the needs of the private sector;

Strengthening the focus on results and allowing a more flexible treatment of different country contexts and circumstances in CSPs;

Delegating authority downward and outward to the field offices, which would result in reduced delays and greater staff level initiative in solving problems;

Rationalizing procurement and financial management functions to enhance efficiency and ensure compliance with the Bank’s rules and regulations.

4.5.4 The revised business processes, once fully implemented, will considerably simplify procedures, cut down on redundant steps, and deepen both managerial accountability and delegation of authority. This will reduce inefficiencies, improve quality, and ensure greater strategic focus and coherence. Specifically:

Delays in procurement document processing will be reduced from the current 12-16 weeks to 6-10 weeks;

The revised review process of country strategy papers and appraisal reports has stripped away unnecessary steps and layers of bureaucracy, removed delays and ensured “Quality at Entry”, and has streamlined the different stages of the project cycle ranging from conceptualization to Board approval;

The loan processing and disbursement process are expected to be shorter, so that (a) loan signature will take less than six months, from the current more than one year; (b) loan effectiveness less than 12 months, from up to 18 months currently; and (c) procurement time 8-10 months, from the current 13-20 months.

15

4.5.5 In streamlining business processes, the Bank has paid special attention to sustained training of staff in many areas. To that end, Management is already encouraging key operational and specialized staff to receive targeted training. These efforts will be intensified to build up in-depth knowledge and will include training on procedures for all Bank financing instruments, including the MICTF.

4.6 Harmonization and partnership

4.6.1 In line with the ongoing harmonization and alignment initiative with development partners and MICs, Management will pursue the spirit of the Paris Declaration, with the aim of increasing alignment of aid with partner countries’ priorities and their systems and procedures, and helping to strengthen their capacities while avoiding multiplicity of procedures.

4.6.2 The proposed comprehensive approach will require significant resources, both in the short and medium term. In that context the Bank will implement the various actions under enhanced partnerships with development agencies. Aside from the MDBs, such as the WB and IFC and bilateral donors, other entities should also become involved, such as academic institutions, especially those in MICs, private foundations and Non-Government Organizations.

4.7 Dissemination of information

4.7.1 The Bank will intensify actions aimed at disseminating information on the measures being taken to enhance support to the MICs, including pricing and non-pricing measures related to improving business processes.

4.7.2 In this context various modalities will be employed including the use of road shows and business opportunity seminars; information sessions at international conferences including those organized by other partners; stronger use of published materials including brochures and internet dissemination, with appropriate links to materials relevant to MICs.

4.7.3 Field offices will also be equipped to play a greater role in engaging MIC clients and proving additional information at the country level.

V. IMPLEMENTATION PLAN AND RESOURCE IMPLICATIONS

5.1 Implementation Plan

5.1.1 The successful implementation of the proposals in this paper will depend on well coordinated activities by the various Bank units in the areas of enhancing financial products, implementing pricing changes, and improving business practices.

5.1.2 The activities to be undertaken, with indicative dates of completion and organizational responsibilities are shown in Annex VI.

16

5.2 Organizational and Resource Implications

5.2.1 The implementation of the various activities and measures will have financial and organizational implications, including recruitment and training of staff to enhance the skills mix required for deeper engagement with MIC clients. Other activities requiring financing include enhanced communications with MICs and development partners and the strengthening of field offices.

5.2.2 The organizational and financial implications will be provided after receiving

clear directions on the activities to be endorsed by the Board.

5.3 Monitoring and Evaluation

5.3.1 The strategy will be monitored regularly to gauge its effectiveness, using short-term performance indicators and targets set by Regional Departments. These indicators will provide a self-assessment mechanism, allowing an adjustment of the strategy as evaluation reports show what is or is not working.

5.3.2 The monitoring of the strategy’s implementation will be facilitated by the results framework, attached as Annex VII

VI. CONCLUSION AND RECOMMENDATION

6.1 This paper outlines a number of measures and actions to enhance the Bank’s

support to MICs. 6.2 The Boards of Directors are invited to consider and endorse the proposed

Bank Framework for enhancing support to MICs.

ANNEX I: Selected Indicators and MIC Characteristics

Integration into the global Economy, as measured by:

Country

Gross National Income

(GNI) Per Capita

GDP growth

Fiscal deficit

Current Account deficit

Debt

Global Competitiven

ess Index

Degree of Diversificatio

n of the Economy

(as measured by exports

diversification index)

Depth of Private Sector(as measured by

claims on Private Sector)

Ease of Doing

Business (Rank

among 175 Countries)

Financial Market

Development(as measured

by stock market

capitalization)total external

trade (imports + exports)

foreign direct investment (FDI)

Annual percent

2006

% of GDP 2006

% of GDP 2006

US$ 2006

% of GDP 2006

Index 2006

Index 2005

% GDP 2007

Rank 2006

% GDP 2005

% GDP 2006

% GDP 2006

Algeria 3,030 2.9 13.0 24 8.0 3.9 2.4 13.0 116 72.8 1.5 Botswana 5,900 4.3 -0.2 9 9.8 3.8 1.3 23.2 48 23.6 95.9 2.6 Egypt 1,350 6.6 -9.3 2 29.2 4.1 29.3 45.2 165 89.1 66.3 9.4 Equatorial Guinea 8,250 9.4 25.8 -5 2.7 ... 1.2 3.5 150 … 137.7 19.3 Gabon 5,000 2.0 10.7 24 21.5 … 1.6 11.3 132 … 99.1 18.2 Libya 7,380 4.6 42.1 48 11.4 … 1.2 6.5 … … 109.2 3.5 Mauritius 5,450 5.0 -5.3 -7 13.4 4.2 11.8 78.8 32 41.6 127.8 1.6 Morocco 1,900 3.4 -5.6 0 20.9 4.0 36.2 71.5 115 52.7 82.4 4.4 Namibia 3,230 4.8 2.2 10 21.9 3.7 10.3 60.0 42 6.8 91.9 4.7 Seychelles 8,650 1.5 -2.7 -3 64.1 … 2.4 36.3 84 … 252.2 18.9 South Africa 5,390 4.5 -0.4 -5 19.3 4.4 27.7 85.6 29 236.0 63.1 -0.1 Swaziland 2,430 1.6 -6.3 -2 22.4 … 15.7 27.0 76 7.2 166.3 1.4 Tunisia 2,970 5.8 -3.0 -1 58.0 4.7 31.0 62.3 80 10.0 102.7 10.8 Note and sources : … not available Sources: ADB Statistics Department and various international sources: World Bank, IMF, WEF

ANNEX II: AfDB Approvals by Lending Instrument, 2002 - 2007 (UA million)

2002 2003 2004 2005 2006 2007 2002-2007

Project Lending 690 566 417 597 515 1,462 4,247 Public and Publicly Guaranteed 491 360 356 459 245 646 2,457 Project Loans 275 175 353 321 245 646 1,905 Sector Investment and Rehabilitation 0 552 Lines of Credit 216 185 3 138 0 816 1,790 Private Non-Publicly Guaranteed 199 206 61 138 270 728 1,095 Project Loans 98 91 0 64 113 88 695 Lines of Credit 101 114 61 74 157 20 1,331 Policy Based Lending 186 177 389 148 411 0 855 Sector Adjustment 82 177 208 50 338 20 475 Structural Adjustment 103 0 181 98 73 2 27 Grants 5 4 3 6 8 1 3 Technical Assistance: 0 0 0 0 2 1 3 Middle Income Countries Grant 2 1 25 Special Relief Fund 5 4 3 6 6 1 25 Emergency Assistance 5 4 3 6 6 1 25 Equity Participation 3 35 185 223 Public Equity - Private Equity 3 35 185 223 Guarantee 7 9 16 Public Guarantees - Private Guarantees 7 9 16 Loan Reallocations - Total Approvals 880 746 812 793 943 1,670 5,844

ANNEX III: Financial Products Available to MICs

1. To increase the flexibility and choice available to its borrowing member countries, the Bank has broadened the range of its financial products during the past decade (see also Box 1):

In 1997, market-based, single currency loans were introduced that allowed borrowers to choose among different currencies (currently U.S. dollar, Euro, Japanese yen and South African rand) and from among three interest rate bases (floating, fixed and variable rate). In 2002, a range of Risk Management Products were offered, allowing borrowers to better manage the financial risks associated with their loans from the Bank and access market-based hedging tools using the Bank as intermediary.

In 2003, guarantees were launched for borrowers who want to access resources from third-party lenders, including the capital markets, aimed at encouraging local currency borrowing, which is relatively cheaper and less risky. The Bank offers two types of guarantees, namely (a) Partial Credit Guarantees, which covers third parties against commercial risks, and (b) Partial Risk Guarantees, which covers third parties against performance risks as it relates to a sovereign government or its agency. Guarantees, when effectively deployed, can be used to encourage local resource mobilization as well as influence sector allocation.

In 2005, the Bank established agency lines of credit, where the credit risk of the borrower is borne by the Bank, while a private financial institution acts as an agent for the Bank regarding a variety of activities, including, but not limited to: identifying projects; appraising such projects on behalf of the Bank; undertaking all of the administrative steps related to disbursement, namely, billing, collection of Bank’s funds, and filing of security; supervising the projects, monitoring the performance of the borrower, and submitting reports thereon; and transmitting repayments of the loan to the Bank.

In the same year, the Bank introduced (i) development budget support loans (DBSLs), through which the Bank finances part of a MICs’ multi-year public expenditure plans on a case-by-case basis; and (ii) non-sovereign guarantee loans (NSGLs) to commercially oriented public enterprises headquartered in the MICs.

2. On a selective basis, the Bank takes residual risk in projects through its equity investments. Such equity investments can take different forms, including common shares and preferred stock, with or without participating features; they are primarily denominated in local currency. The Bank does not assume responsibility for managing the respective entity but closely monitors its activities.

AANNNNEEXX IIIIII ((ccoonntt’’dd)):: FFiinnaanncciiaall PPrroodduuccttss AAvvaaiillaabbllee ttoo MMIICCss PPuubblliicc SSeeccttoorr SSoovveerreeiiggnn GGuuaarraanntteeeedd LLooaannss •• PPuubblliicc SSeeccttoorr SSoovveerreeiiggnn GGuuaarraanntteeeedd LLooaannss aarree mmaaddee ttoo aa MMeemmbbeerr CCoouunnttrryy oorr

ssuuppppoorrtteedd bbyy tthhee ffuullll ffaaiitthh aanndd ccrreeddiitt ooff tthhee MMeemmbbeerr CCoouunnttrryy iinn wwhhoossee tteerrrriittoorryy tthhee BBoorrrroowweerr iiss ddoommiicciilleedd oorr,, iinn tthhee ccaassee ooff llooaannss ttoo mmuullttiinnaattiioonnaall iinnssttiittuuttiioonnss,, iiff iitt iiss gguuaarraanntteeeedd bbyy aa MMeemmbbeerr CCoouunnttrryy oorr bbyy MMeemmbbeerr CCoouunnttrriieess iinn wwhhoossee tteerrrriittoorryy((iieess)) tthhee BBoorrrroowweerr sshhaallll eexxeeccuuttee tthhee pprroojjeecctt..

NNoonn--SSoovveerreeiiggnn GGuuaarraanntteeeedd LLooaannss •• PPuubblliicc sseeccttoorr eenntteerrpprriisseess:: NNoonn--SSoovveerreeiiggnn GGuuaarraanntteeeedd LLooaannss ttoo PPuubblliicc SSeeccttoorr

EEnntteerrpprriisseess ((PPuubblliicc SSeeccttoorr NNSSGGLLss)) aarree mmaaddee ttoo ppuubblliicc eenntteerrpprriisseess tthhaatt mmeeeett ssppeecciiffiicc eelliiggiibbiilliittyy ccrriitteerriiaa,, wwiitthhoouutt tthhee rreeqquuiirreemmeenntt ooff aa ssoovveerreeiiggnn gguuaarraanntteeee bbyy tthhee hhoosstt ggoovveerrnnmmeenntt..

•• PPrriivvaattee sseeccttoorr eenntteerrpprriisseess:: TToo bbee eelliiggiibbllee ffoorr ffiinnaanncciinngg,, aann eenntteerrpprriissee hhaass ttoo bbee pprriivvaatteellyy oowwnneedd aanndd mmaannaaggeedd,, mmeeaanniinngg tthhaatt mmoorree tthhaann 5500%% ooff iittss vvoottiinngg sshhaarreess mmuusstt bbee iinn pprriivvaattee hhaannddss..

DDeevveellooppmmeenntt BBuuddggeett SSuuppppoorrtt LLooaannss •• DDeevveellooppmmeenntt BBuuddggeett SSuuppppoorrtt LLooaannss ((DDBBSSLLss)) eennaabbllee tthhee BBaannkk ttoo ffiinnaannccee ppaarrtt ooff tthhee

MMIICCss’’ mmuullttii--yyeeaarr ppuubblliicc eexxppeennddiittuurree ppllaannss.. BBaannkk GGuuaarraanntteeeess •• TThhee BBaannkk ((gguuaarraannttoorr)) mmaakkeess aann uunnddeerrttaakkiinngg ttoo ffuullffiillll tthhee oobblliiggaattiioonnss ooff aa bboorrrroowweerr ttoo aa

lleennddeerr uunnddeerr aann aaggrreeeemmeenntt iinn tthhee eevveenntt ooff nnoonn--ppeerrffoorrmmaannccee oorr ddeeffaauulltt bbyy tthhee bboorrrroowweerr ooff hhiiss oobblliiggaattiioonnss uunnddeerr tthhee aaggrreeeemmeenntt.. TThhee BBaannkk pprroovviiddeess ggeenneerraallllyy 22 ttyyppeess ooff gguuaarraanntteeeess:: PPaarrttiiaall CCrreeddiitt GGuuaarraanntteeeess aanndd PPaarrttiiaall RRiisskk GGuuaarraanntteeeess..

ANNEX IV: Experience of other Development Agencies 1. Net lending by other MDBs to their respective MICs has, since the early 2000s,

shown slowing trends similar to those experienced by the Bank in some areas (Annex Table 1). In order to remain relevant and competitive in MICs, partner MDBs are also continually adapting their policies and instruments. Specific experiences and measures are summarized below.

World Bank (WB) and International Finance Corporation (IFC) 2. The World Bank began implementing a MIC Action Plan in 2004, partly in response

to increasing net loan repayments by MICs (totalling $1.8 billion during 2001-05; see Annex III). The Plan focused on six areas: clarifying the WB’s role in the MICs, strengthening staff ability, providing knowledge services, expanding risk-management support, supporting sub-sovereign entities, and enhancing partnerships with bilateral donors and other multilateral agencies. Since March 2006, the WB has refined its strategy, introducing 6 strategic pillars (one for MICs) and setting up an internal working group for the MICs in addition to the institution-wide initiative.

3. Importantly, the WB has adjusted its pricing, and the average cost is now LIBOR +

11bps all inclusive, with loans up to 30 years. It also is preparing innovative financial solutions in the form of new risk and asset management tools. These efforts are underpinned by a decentralization of staff in favour of field offices, from 129 to 195 staff in 3 years.

4. In response to MICs’ demand for strong diagnostics, the WB is:

Expanding investment in diagnostics activities Becoming more agile in responding to the fast changing client needs Drawing more upon the MICs’ own capacity Fostering the synergies across the WB group Providing a menu of customized services in recognition of the MICs’ diversity Increasing the focus on inequality, governance and environment.

5. In addition, the WB has made Country Partnership Strategies more flexible by:

Customizing Bank support Providing bundled or unbundled knowledge and other services Offering annual business planning to take account of demand Making them joint with development partners.

6. The WB has signalled that it will take further actions in the following areas:

Reducing non-financial cost of doing business by e.g. modernizing safeguard operational policies

Enhancing knowledge services by better deploying staff and enhancing skills in areas where MICs are seeking support; stepping up South-South cooperation; and providing fee-based services

Increasing the voice of MICs as regards public goods, notably climate change and cities alliance

7. The IFC accounted for 0.5% of total net disbursements to MICs during 2001-05, and 1.8% of net official disbursements. Their activities were concentrated in North Africa,

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which accounted for 90% of their net disbursements of US$258 million during this period. The only country of significant activity outside this region was South Africa.

Inter-American Development Bank (IDB)

8. Most member countries of the IDB are MICs, and therefore it did not develop a specific MIC strategy. The IDB also experienced a decline in income and has taken measures to recoup its activity levels. It developed a new “business model”, crafted around a country focus, programmatic approach, results/development effectiveness focus, broadening of the client base, and enhanced client responsiveness. The country programs are being based on the country’s development objectives through intensive analytical work and the strengthening/utilization of country systems.

9. To broaden its client base, the IDB has extended its 10 percent non-sovereign guarantee authority to all sectors and projects. Its 2000 lending framework has been expanded with new instruments (19 new instruments were introduced in 2004), and, combined with an updating of its policies and procedures, these instruments have been used to permit flexible lending policies8 and differentiated approaches to country and sector-specific needs. Some instruments carry waivers of IDB policies.

Asian Development Bank (AsDB)

10. The AsDB began exploring in 2004 how it could enhance its support to MIC countries, focusing on three objectives: (i) review the main new challenges facing MICs; (ii) articulate countries’ demands and expectations of the AsDB’s role in meeting those challenges; and (iii) discuss how the AsDB could improve its services to MICs.

11. The AsDB has paid particular attention to the changing roles in their MICs of the private sector, national and sub-national governments, and civil society. Its responses are tailored to country diversity, selectivity and focus in operations, and stronger donor collaboration, aiming to attain results in three broad areas: (i) reducing the cost of doing business with the AsDB, (ii) enhancing and expanding the range of available instruments, and (iii) improving service quality. Thus, in April 2006, its Board of Directors approved the waiver of 20 bps on the lending spread on public sector loans outstanding from 1 July, 2006 to 30 June, 2007, and the continued waiver of the entire 1% front-end fee on all new public sector loans approved over the same period.

12. The Country Strategy Paper (CSP) process is also undergoing reforms and will be reorganized as country partnership strategies (CPS). Other key operational policies, strategies, and business practices have also been, or are being adapted. Under its innovation and efficiency initiative, the AsDB has piloted a number of new products or financial instruments, including the Multi-tranche Financing Facility, Sub-sovereign and Non-sovereign Public Sector Financing, and Local Currency Products. To enhance service quality, the AsDB is strengthening knowledge management and improving human resource management by, for example, using the recently

8 These include: elimination of foreign exchange “matrix”, expenditure eligibility restrictions, and minimum disbursement limits; new lending policies, including E-procurement and decentralized decision-making, local currency facility, reduced lending spreads (10 bps) and credit commissions (10 bps); and fast-track approvals of less complex operations.

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established Learning and Development Unit to revamp the organization’s training program

13. Recently, the AsDB adopted a risk mitigation model, which has led to an increase in income while at the same time lowering problem loans from 38% of the AsDB’s portfolio to 2%. The Bank is moving away from using its resources as the driving force for its interventions, and is focusing on the policy, technical, regulatory, and risk reasons why its lending is not being used. It is using its unique position of honest broker to help MICs modernize their regulatory framework to attract private sector money.

European Commission (EC) and European Investment Bank (EIB)

14. Loans disbursed by the EC are channelled to the MICs through the EIB. The EIB manages an Investment Facility, a risk-bearing revolving facility geared to foster private sector investment in the MICs.

15. In addition to EIB financing, MICs can also receive grants directly from the EC, which are often bundled with EIB loans. This lowers the financial costs and makes borrowing attractive for MICs, in contrast to the Bank and the World Bank Group, which rarely provide blended resources to MICs. This explains the large share of the EC in net financial flows to MICs: US$5.9 billion during the period under review, representing 11% of total net flows and 41% of multilateral net flows. However, like in the case of the IFC, their activities are concentrated in North Africa, which, at US$4.4 billion, accounts for 74% of their net disbursements. Adding South Africa to this group increases the share of those countries to 93% of the EC’s total net disbursements.

16. The EIB’s strategy identifies three pillars for measuring the value-added to its clients: the consistency between each operation and the priority objectives of the EU; the quality and soundness of the project; and the contribution made by the EIB, both financial and non-financial. In 2007, the value added methodology was reviewed in order to improve the consistency and harmonization of ratings across operations and types of loans. As a result, several adjustments (clearer links to country priorities, identification of benchmarks and improved capture of qualitative aspects and of Bank contribution to the project) will be implemented.

Other Development Agencies

17. A review of other development partners’ activities during 2001-05 in the thirteen MICs is described below. These partners include Arab funding agencies, the UN group’s global funds, bilateral agencies, and private sector capital flows.

18. As regards the Arab agencies, their net disbursements to MICs during 2001-05 are, somewhat surprisingly, quite small. The US$33 million they provided accounts for only 0.1% of total net disbursements, despite the fact that they tend to offer loans cheaper than the Bank and approve and disburse them more quickly. They are able to do this by taking over projects when a MIC desists from consummating a loan developed with another MDB, which saves the Arab agencies time in approving the loan and lowers their in-house costs. Also somewhat surprisingly, the Arab agencies

- 4 -

are active in many MICs, not only in the North Africa region. In fact, their top two countries as regards net disbursements are Mauritius and the Seychelles.

19. The UN group9 accounted for 2.4% of net disbursements of multilaterals. Disbursements were rather balanced, with seven MICs receiving between 7% and 19% of their total disbursements of US$351 million. While Egypt and Algeria are the two largest recipients, other important countries include South Africa, Namibia, Botswana, and Gabon.

20. The bilateral agencies have contributed US$10 billion on a net basis during 2001-05, i.e., more than double the amount that MDBs contributed. This points to the importance of bilateral assistance to MICs, and lends urgency to the Bank’s efforts to increase the involvement of other development partners in its financial operations.

21. Private sector flows dwarfed official net financial flows during 2001-05. Among the MICs, only five countries10 received US$36 billion, compared to US$14 billion in net official aid to all MICs. South Africa received the bulk, representing 50% of total private sector investment and originating mainly in the United Kingdom (some US$10 billion during the period). In the North African MICs, which received US$14 billion, or about one-third of the total, private sector investment has focused on the oil sector and construction (notably in the residential and tourism sub-sectors). In addition, privatization reform has attracted much interest from Gulf States investors, especially in the banking sector.

9 UNDP, UNTA, UNICEF, UNHCR, and WFP. 10 South Africa (US$18.7 billion); Egypt (US$8.0 billion); Morocco (US$3.4 billion); Mauritius

(US$3.3 billion); and Equatorial Guinea (US$2.9 billion).

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ANNEX IV - Table I: Geographical Distribution of Net Financial Flows to MICs (Millions U.S. dollars)

2001 2002 2003 2004 2005 TOTAL 2001-05

EU members 1,374 1,808 10,079 15,629 3,793 32,683 Of which: Belgium 827 -359 8 1,652 -999 1,129 France 985 167 1,112 1,373 2,446 6,083 Germany -336 205 584 1,271 -1,722 2 Italy -154 315 183 279 365 988 Netherlands -332 300 684 543 622 1,817 Norway 44 63 1,002 303 21 1,433 Sweden 90 0 190 43 234 557 Switzerland -1 -142 -130 -36 1,015 706 United Kingdom -38 1,465 4,485 9,177 1,237 16,326 Other countries 3,240 2,905 3,258 2,930 4,582 16,915 Canada -64 -71 -44 -156 -45 -380 Japan 839 93 527 -1,122 -697 -360 United States 2,281 2,521 2,585 4,070 5,108 16,565 Other (includes China) 185 362 190 138 216 1,091 Multilateral Organizations 751 401 421 665 1,792 4,030ADB 197 -328 -393 -425 17 -932ADF 14 9 14 23 0 60EC 686 992 971 1,442 1,790 5,881WB + IDA -241 -446 -335 -605 -192 -1,819IFC 19 98 61 89 -9 258IMF -3 -1 -1 0 0 -5UN Group (includes WFP) 64 69 71 70 77 351Arab agencies 1 -6 -3 26 12 33Other 16 14 38 37 97 202 TOTAL of net disbursements 5,365 5,114 13,758 19,224 10,167 53,628 Memorandum items: ADB, as percentage of total 3.7% -6.4% -2.9% -2.2% 0.2% -1.7%ADB, as percentage of multilaterals 26.2% -81.8% -93.3% -63.9% 0.9% -23.1%ADB, as percentage of WB -81.7% 73.5% 117.3% 70.2% -8.9% 51.2% Private flows from DAC countries 2,094 2,098 11,111 16,206 7,873 39,382Other net aid flows 3,271 3,016 2,647 3,018 2,294 14,246 Source: OECD.

AANNNNEEXX VV:: 22000088 CCoonnssuullttaattiioonn wwiitthh MMIICCss iinn CCaaiirroo,, EEggyypptt HHooww ccaann tthhee MMDDBBss bbeesstt ssuuppppoorrtt tthhee MMIICCss??

11.. AA mmeeeettiinngg wwiitthh MMiiddddllee IInnccoommee CCoouunnttrriieess ((MMIICCss)) wwaass hheelldd iinn CCaaiirroo oonn MMaarrcchh 1111--1122,, 22000088 ttoo ddiissccuussss hhooww tthhee AAffrriiccaann

DDeevveellooppmmeenntt BBaannkk ((tthhee BBaannkk)) aanndd tthhee WWoorrlldd BBaannkk ((WWBB)) ccaann bbeetttteerr mmeeeett tthhee nneeeeddss ooff tthhee MMIICCss aanndd eexxpplloorree hhooww ootthheerr ddeevveellooppmmeenntt ppaarrttnneerrss ccoouulldd ccoonnttrriibbuuttee.. TThhee ddiissccuussssiioonnss ffooccuusseedd oonn ccoommppeettiittiivveenneessss,, iinncclluuddiinngg tthhee iinnvveessttmmeenntt cclliimmaattee,, sscciieennccee aanndd tteecchhnnoollooggyy,, aanndd iinnffrraassttrruuccttuurree.. TThhiiss wwaass aa ffoollllooww uupp ttoo aa ssiimmiillaarr mmeeeettiinngg hheelldd iinn TTuunniiss iinn MMaarrcchh 22000066,, aanndd tthhee ccoonnffeerreennccee wwaass aatttteennddeedd bbyy rreepprreesseennttaattiivveess ffrroomm 1111 ccoouunnttrriieess aanndd 77 MMDDBBss..

22.. TThhee MMIICCss ffeelltt tthhaatt,, oonn tthhee wwhhoollee,, MMDDBBss hhaadd iimmpprroovveedd tthheeiirr aassssiissttaannccee.. IInn ppaarrttiiccuullaarr,, nnoottiicceeaabbllee pprrooggrreessss hhaadd bbeeeenn mmaaddee

rreeggaarrddiinngg:: OOffffeerriinngg rreelleevvaanntt aanndd aapppprroopprriiaattee ffiinnaanncciiaall iinnssttrruummeennttss;; RReedduucciinngg tthhee ccoosstt ooff ffuunnddss bbyy lloowweerriinngg sspprreeaaddss;; PPrrooggrreessssiivveellyy uussiinngg CCoouunnttrryy SSyysstteemmss;; aanndd IImmpplleemmeennttiinngg tthhee PPaarriiss DDeeccllaarraattiioonn,, wwhhiicchh pprroovviiddeedd aa ppllaattffoorrmm ffoorr ddrraawwiinngg uupp aannnnuuaall bbuussiinneessss ppllaannss??

33.. MMIICCss wweerree llooookkiinngg iinnccrreeaassiinnggllyy ffoorr kknnoowwlleeddggee ttrraannssffeerr rraatthheerr tthhaann ffuunnddiinngg,, aanndd tthhee BBaannkk aanndd WWBB ccoouulldd bbee mmoosstt uusseeffuull

iinn pprroovviiddiinngg iinntteerrnnaattiioonnaall ccoommppaarraattoorrss ffoorr bbeesstt pprraaccttiicceess aanndd aass hhoonneesstt bbrrookkeerrss.. HHoowweevveerr,, iimmpprroovveemmeenntt wwaass nneeeeddeedd iinn tthhee ffoolllloowwiinngg aarreeaass:: AAddddiittiioonnaall ccoonncceessssiioonnaall rreessoouurrcceess ffoorr ssppeecciiaall pprrooggrraammmmeess,, iinncclluuddiinngg aa ssyysstteemmaattiicc kknnoowwlleeddggee bbaassee aanndd gglloobbaall ppuubblliicc ggooooddss;; BBeetttteerr ccoommmmuunniiccaattiioonn oonn tthhee MMDDBBss’’ ffiinnaanncciiaall pprroodduuccttss,, wwhhiicchh sshhoouulldd bbee ccoouupplleedd wwiitthh ffuurrtthheerr iinnccrreeaassiinngg pprroocceessssiinngg ssppeeeedd;; CCoouunnttrryy ccllaassssiiffiiccaattiioonn,, wwhhiicchh rreessttrriicctteedd aacccceessss ttoo ccoonncceessssiioonnaall ffuunnddss aanndd iimmppeeddeedd rreeaacchhiinngg tthhee MMDDGGss;; FFiinnaanncciinngg ccaappaacciittyy bbuuiillddiinngg,, wwhheerree eeffffoorrttss nneeeeddeedd ttoo bbee rreeddoouubblleedd;; AA ssttrroonnggeerr ppeeeerr rreevviieeww ttoo uuppggrraaddee qquuaalliittyy ooff wwoorrkk bbyy ggoovveerrnnmmeenntt ssttaaffff aanndd ccoonnssuullttaannttss aanndd pprroommoottee kknnoowwlleeddggee aammoonngg MMIICCss;; EEmmpphhaassiiss oonn ccoommppeettiittiivveenneessss aanndd iinntteeggrraattiioonn iinnttoo tthhee gglloobbaall mmaarrkkeett;; MMoorree iinnnnoovvaattiivvee ffiinnaanncciinngg ffoorr iinnffrraassttrruuccttuurree ddeevveellooppmmeenntt,, iinncclluuddiinngg PPPPPP aanndd rreeggiioonnaall pprroojjeeccttss,, ffooccuusssseedd oonn tthhee pprriivvaattee sseeccttoorr;; MMoorree fflleexxiibbllee ffiinnaannccee aanndd aaddvviissoorryy sseerrvviicceess;; FFooccuuss oonn kknnoowwlleeddggee aass aa ppuubblliicc ggoooodd:: hhooww ttoo pprroodduuccee mmoorree ooff iitt aanndd ffiinnaannccee iitt.. AA ffeeee ccoouulldd bbee aasssseesssseedd ffoorr aaddvviissoorryy sseerrvviicceess

wwhheenn nnoott lliinnkkeedd ttoo aa pprroojjeecctt;; bboorrrroowweerrss eennggaaggeedd iinn pprroojjeeccttss wwoouulldd ggeett aa pprroo--rraatteedd rreebbaattee ffoorr tthhee sseerrvviiccee;; IInnccrreeaassee tthhee ddeelleeggaattiioonn ooff aauutthhoorriittyy ttoo tthhee BBaannkk’’ss ffiieelldd ooffffiicceess,, aass wweellll aass tthhee nnuummbbeerr ooff ooffffiicceess.. EEvveenn hhaavviinngg aa lliimmiitteedd pprreesseennccee

mmaakkeess aa ddiiffffeerreennccee;; MMIICCss nneeeedd ttoo rreeppllaaccee llooww ppaayyiinngg jjoobbss wwiitthh aa ggrreeaatteerr nnuummbbeerr ooff hhiigghheerr ppaayyiinngg jjoobbss bbyy ooppeenniinngg uupp,, eevveenn iiff tthhiiss wwaass ccoossttllyy iinn tthhee

sshhoorrtt rruunn;; aanndd NNeeeedd aa bboollddeerr ppuusshh oonn ppoolliiccyy rreeffoorrmm ttoo mmaaxxiimmiizzee tthhee bbeenneeffiittss ffrroomm rreeggiioonnaall iinntteeggrraattiioonn tthhaatt ccoouulldd ssuuppppoorrtt tthhee nnaattiioonnaall

ddeevveellooppmmeenntt aaggeennddaa..

44.. TThhee eennssuuiinngg ddiissccuussssiioonnss ffooccuusseedd oonn hhooww tthhee MMDDBBss ccoouulldd hheellpp MMIICCss eennhhaannccee tthheeiirr ccoommppeettiittiivveenneessss iinn tthhrreeee ccoorree aarreeaass:: iinnvveessttmmeenntt cclliimmaattee;; sscciieennccee aanndd tteecchhnnoollooggyy;; aanndd iinnffrraassttrruuccttuurree..

AA ssoouunndd iinnvveessttmmeenntt cclliimmaattee hhaadd ttoo iinncclluuddee aa lleeggaall aanndd rreegguullaattoorryy ffrraammeewwoorrkk ccoonndduucciivvee ttoo ccoommppeettiittiioonn,, ggoooodd ggoovveerrnnaannccee,, ssoolliidd ffiinnaanncciiaall mmaannaaggeemmeenntt,, aanndd aaddeeqquuaattee iinnffrraassttrruuccttuurree..

SScciieennccee aanndd tteecchhnnoollooggyy:: CCoommppeettiittiivveenneessss nneeeeddeedd ttoo ggeenneerraattee bbeetttteerr--ppaayyiinngg jjoobbss,, wwhhiicchh rreeqquuiirreedd ddiiffffeerreenntt eeffffoorrttss aatt ddiiffffeerreenntt lleevveellss ooff eedduuccaattiioonn:: ttrraaiinniinngg iinn vvooccaattiioonnaall aanndd tteecchhnniiccaall sskkiillllss ffoorr eenntteerrpprriissee ddeevveellooppmmeenntt;; iimmpprroovviinngg tthhee qquuaalliittyy ooff uunniivveerrssiittiieess,,

IInnffrraassttrruuccttuurree:: TThheerree wwaass ccoonnsseennssuuss tthhaatt tthhee MMDDBBss wweerree nneeeeddeedd aass ffaacciilliittaattoorrss ttoo ddeevveelloopp bbaannkkaabbllee pprroojjeeccttss,, aasssseemmbbllee ffiinnaanncciinngg ppaacckkaaggeess,, aanndd lloowweerr tthhee rriisskkss aassssoocciiaatteedd wwiitthh tthheessee pprroojjeeccttss.. PPrriivvaattee rreessoouurrcceess wweerree aavvaaiillaabbllee wwiitthh aaddeeqquuaattee pprrooffiittss ttoo aattttrraacctt iinnvveessttoorrss,, bbuutt ggoovveerrnnmmeenntt rreegguullaattiioonnss ddeetteerrrreedd tthheemm..

55.. TThhee BBaannkk iinnddiiccaatteedd tthhaatt ssiinnccee MMaarrcchh 22000066,, iitt hhaadd iinnccrreeaasseedd aassssiissttaannccee ttoo tthhee pprriivvaattee sseeccttoorr;; eennhhaanncceedd ssuuppppoorrtt ttoo

iinnffrraassttrruuccttuurree;; pprroovviiddeedd mmoorree ccoonncceessssiioonnaall ffuunnddiinngg ffoorr tteecchhnniiccaall aassssiissttaannccee;; aanndd rreedduucceedd nnoonn--ffiinnaanncciiaall ttrraannssaaccttiioonn ccoossttss.. FFuurrtthheerrmmoorree,, tthhee BBaannkk wwaass ttaakkiinngg aaccttiioonnss aaiimmeedd aatt::

EEnnhhaanncciinngg ccoommppeettiittiivveenneessss ooff MMIICCss;; DDeeeeppeenniinngg pprriivvaattee sseeccttoorr eennggaaggeemmeenntt;; IInnvveessttiinngg iinn rreeggiioonnaall iinntteeggrraattiioonn aanndd ttrraaddee eexxppaannssiioonn;; aanndd BBuuiillddiinngg ccaappaacciittyy aanndd kknnoowwlleeddggee..

66.. IInn mmoovviinngg ffoorrwwaarrdd,, tthhee BBaannkk wwaass aaddddrreessssiinngg tthhee iissssuueess ooff::

ssttrraatteeggiicc pprriicciinngg ooff ffiinnaanncciiaall pprroodduuccttss;; aavvaaiillaabbiilliittyy ooff ccoonncceessssiioonnaall rreessoouurrcceess;; eeffffiicciieenntt sseerrvviiccee ddeelliivveerryy;; aanndd iimmpprroovveedd aaddvviissoorryy sseerrvviicceess..

ANNEX VI: Summary of Actions and Estimated Timeframe

AREA ACTIONS RESPONSIBLE

UNIT COMPLETION

DATE

1 Financial Products 1. Enhance the use of existing financial products

Sector Departments Ongoing

2. Expand use of financial/ loan guarantees

FTRY 2008

3. Increase use of multi-year program financing

Sector Departments 2008

4. Broaden use of Grants under the MICTF

Sector Departments 2008

5. Expand sub-national entities’

(SNEs) access to non-sovereign guaranteed loans

Sector Departments Ongoing

6. Expand use of PPP for infrastructure/regional operations

Sector Departments Ongoing

2 Pricing

7. Introduce an interest rate waiver of 20 basis points for all sovereign guaranteed loans.

FTRY End 2008

3 Streamlining Business Processes

8. Reinforce measures to increase flexibility and reduce delays

Sector Departments 2008

9. Delegate more authority to field offices

Management/Boards 2008

10. Reform loan processing and disbursement administration

Sector Departments/FFCO 2008

11. Enhance process of review of board documents

Sector Departments 2008

12. Update the procedures for approval of MIC proposals/ fast tracking

ORPC 2008

13. Enhance country programming tailored to country needs

Country Departments 2008

4 Other related actions 14. Scale up country-specific advisory services including capacity building

Sector Departments/ECON 2009

15. Align financing products, lending

instruments, and business processes to clients’ needs.

FTRY/Sector Departments Ongoing

16. Aggressively market the Bank’s

financing products and non-financing activities.

FTRY/Operations Departments 2008

17. Enhance harmonization with development agencies

Sector/Country Departments/ECON Ongoing

5 Strengthen Institutional capacity

18. Enhance Bank capacity for advisory services

Sector Departments/ECON 2009

19. Build appropriate skills mix to respond to MIC clients needs

Sector Departments/CHRM Ongoing

20. Provide training to staff in new procedures and processes

CHRM Ongoing

21. Strengthen capacity at the field

offices level for engagement with MIC clients

Country Departments/CHRM Ongoing

22. Finance specialized consultants where required

Sector Departments/ECON Ongoing

ANNEX VII: Results Log Frame

OBJECTIVES

EXPECTED IMPACT& RESULTS REACH

PERFORMANCE INDICATORS (MEANS

OF VERIFICATION)

BANK’S INDICATIVE TARGET

& TIMEFRAME

ASSUMPTIONS, RISKS, & BANK MITIGATION MEASURES

I. STRATEGIC GOAL

Contribute to sustained growth, equitable development and reduced poverty

Increased economic growth; more even development; and fewer pockets of poverty

MICs’ populations

GDP growth rates (ADB data base);

Gini coefficient (UNDP);

Human poverty index

(ADB data base);

Human Development Index (UNDP)

From 5.2% in 2007 to 6.5%

in 2012; From .509 in 2007, to .400 in

2015; From 25.9 in 2005, to 20.0 in

2015. From .705 in 2007, to .800 in

2015.

ASSUMPTIONS: Regional economic integration initiatives (REIIs) implemented as planned; countries’ economic reforms on track.

RISKS: Global recession and other trade-related shocks; Major external shocks (natural, financial, etc.). Political instability

MITIGATION MEASURES: Increased Bank & other development partners’ support for REIIs and other employment creation activities; dialogue to stimulate effective reform programs.

II. PURPOSE OF THE STRATEGY

More robust and competitive economies of MICs

Increased robust economies of MICs

More globally competitive economies of MICs

MICs’ populations

Global competitiveness

index (rank; World Economic Forum);

Export diversification

index (WB); Total external trade (%

of GDP) (ADB data base)

From 4.09 in 2008, to 5.00 in

2012; From 13.2 (2005) to 20.0 in

2012; From 119% in 2006 to 200%

in 2012.

ASSUMPTIONS: MICs follow through with implementation of enabling economic policies and targeted strategies to reduce the skills/knowledge gaps. Terms of Trade of MICs’ remain favourable

RISKS: Non-availability of private sector investment capital

MITIGATION MEASURES: Bank capacity building support through MICTF and resources from other development partners for capacity building. The MIC Strategy buttresses skills development and knowledge enhancement.

- 2 -

III. INTERMEDIATE OUTCOMES

1. Increased investments in areas that foster increased competitiveness in MICs.

Improved MICs’ ease of doing business through reforms, good governance, and a stronger financial sector.

Government institutions;

private enterprises;

population; Financial

institutions.

FDI (% of GDP) (OECD);

Ease of doing business (rank;WB);

Governance (governance profiles);

Bank claims on private sector (as % of GDP; ADB data base)

From 7.4 % in 2006 to 10.0 % in 2012; From 93 in 2006/7, to 80 in

2012; From -0.18 in 2006/7, to 0.20

in 2012; From 40.3% in 2007, to 50%

in 2012

ASSUMPTIONS: Implementation of necessary reforms to foster

private sector investment, including laws and regulations.

RISKS: Failure to implement appropriate policies.

MITIGATION MEASURES: Bank support through MICTF for administrative

reforms. Effective dialogue

2. Deepened private sector investments and increased mobilization of resources

Stronger role of the private sector as engine of growth

Private sector enterprises;

MICs’

population

FDI (% of GDP)

(OECD); Bank claims on private

sector (as % of GDP; ADB data base)

From 7.4 % in 2006 to

10.0 % in 2012; From 40.3% in 2007, to 50%

in 2012

ASSUMPTIONS: MICs follow through with ensuring environment

conducive to private sector investments; increased partnerships and mobilization of

resources. RISKS: A crunch in international market investment capital Donor fatigue

MITIGATION MEASURES: MIC Strategy includes activities to bolster private

sector investment, and building new partnerships

3. Scaled up regional integration and expansion of trade

increased economic integration and trade among MICs and between LICs and MICs

Populations of RMCs

Changes in # and value of joint operations

(ADB data base)

From 14 (UA800 m) in 2007,

to 20 (UA 1,200m) in 2012

ASSUMPTIONS: Effective implementation of REIIs, especially as

regards North Africa. RISKS: Political and/or military conflicts

MITIGATION MEASURES: Engage MICs in dialogue.

4. Accelerated measures for capacity and knowledge building

Greater capacity and better knowledge bases in MICs

Government institutions; private sector; academia; local NGOs

# of Bank sponsored training courses for government officials;

Bank sponsored seminars for private sector;

From 14 in 2007, to 20 in 2012

From 1 in 2007, to 5 in 2012

ASSUMPTIONS: MICs maintain interest in the programme RISKS: Inadequate concessional resources MITIGATION MEASURES: The Strategy includes mobilizing additional concessional resources.

- 3 -

IV. BANK INSTITUTIONAL APPROACHES

Enhanced use of existing financial products

Ensure attractively priced loans; offer refined loan guarantees; increase multi-year program financing to accelerate processing and minimize tranching

MIC governments

Spread of Bank loans

(FTRY); # of projects using loan

guarantees (Board approvals);

# of multi-year loans

(Board approvals).

From 40 bps in 2007 to 20

bps in 2008, followed by periodic revisions

From 0 in 2007, to 5 in 2012

From 0 in 2007, to 5 in 2012

ASSUMPTIONS: Actions to remain relevant to clients’ needs; Board approval of projects emphasizing loan guarantees and multi-year programs. RISKS: Perverse income effects of lower spreads on loans; lack of interest by MICs in the Bank’s products. MITIGATION MEAS.: Flexibility in pricing Bank products; road show to disseminate information on the Bank’s products.

More creative and effective use of the MICTF in new areas

Greater interest by MICs in the use of the MICTF

Government institutions

# and value of projects financed with MICTF resources (Bank/ Board approvals)

From 2 (UA 1.2m) in 2007,

to 13 (UA 7.8m) in 2012

ASSUMPTIONS: Board approval of projects using MICTF resources in new areas. RISKS: Delays in the design and/or Board approval of

projects using MICTF resources. Inadequate implementation of projects, thereby

wasting MICTF resources MITIGATION MEAS.: Information campaign both for Bank staff and

government officials on how to design projects using MICTF resources.

Enhanced business processes to improve delivery

More interest by MICs to borrow from the Bank owing to more efficient business processes

Government institutions; private sector

Overall # of projects

(Board approvals)

From 29 in 2007, to 45 in

2012

ASSUMPTIONS: Business processes are streamlined as regards speed

and flexibility that reduce no financial costs to MICs.

RISKS: Business processes do not become flexible

enough, and. Interest by MICs in Bank loans is not boosted

sufficiently MITIGATION MEASURES: Road show to inform MICs of new Bank strategy.

Sustained training of staff to scale up in-depth knowledge of Bank business processes and financing products

Staff becomes more knowledgeable and is able to sell better the Bank’s products.

Government institutions; private sector

Overall # of projects

(Board approvals)

From 29 in 2007, to 45 in

2012

ASSUMPTIONS: Staff absorbs the information transmitted in

specially designed seminars. RISKS: Seminars are not designed properly; not enough

staff participates; knowledge is not transmitted to MICs.

MITIGATION MEAS.: Bank provides incentives for staff to scale up their

- 4 -

performance with MICs.

Bank advisory services need to be bolstered

Bank staff is able to provide better in house advisory services

Government institutions; private sector

# of projects containing technical assistance component (Board approvals)

From 0 in 2007, to 7 in 2012

ASSUMPTIONS: Staff absorbs the information transmitted in

specially designed seminars. RISKS: Seminars are not designed properly; not enough

staff participates; knowledge is not transmitted to MICs.

MITIGATION MEAS.: Bank provides incentives for staff to scale up their

performance with MICs.

The costs of the MIC strategy need to be minimized by increasing harmonization and partnerships

Procedures with development partners are harmonized and enhanced partnerships help the Bank reduce its costs

Development partners, incl. MDBs, academia, and NGOs

# of joint projects with development partners (Board approvals)

From 14 in 2007, to 20 in 2012

ASSUMPTIONS: Paris Declaration is implemented and suitable

projects for partnerships can be implemented. RISKS: Delays in the implementation of the Paris

Declaration; not sufficient interest by development agencies in

partnerships. MITIGATION MEAS.: Push for progress in implementing Paris

Declaration. Broader search for development partners beyond the

traditional MDBs, including academia and NGOs.

Proactive dissemination of information to MICs

MICs become better informed about the Bank’s products and processes

Government institutions

“Road shows” to disseminate the information, with involvement of field offices (# of road shows in different MICs)

13 road shows

ASSUMPTIONS: Board approves MIC Strategy and road shows are

organized in MICs. RISKS: Delays in the approval of the MIC strategy; road shows receive little interest by MICs.

MITIGATION MEAS.: The strategy’s actions provide a strong platform on

which to engage MICs, the many actions proposed would spark interest by

MICs in receiving a road show.